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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.
Operator: Greetings, and welcome to the Ribbon Communications First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Fahad Najam, Senior Vice President of Investor Relations. Please go ahead. Fahad Najam: Good afternoon, and welcome to Ribbon's First Quarter 2026 Financial Results Conference Call. I'm Fahad Najam, SVP, Corporate Strategy and Investor Relations at Ribbon Community cases. Also on the call today are Bruce McClelland, Ribbon's Chief Executive Officer; and John Townsend, Ribbon's Chief Financial Officer. Today's call is being webcast live and will be archived on the Investor Relations section of our website at rbbn.com, where both our press release and supplemental slides are currently available. Certain matters we will be discussing today, including the business outlook and financial projections for the second quarter of 2026 and beyond are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in these forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K. I refer you to our safe harbor statement included in the supplemental financial information posted on our website. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measures are included in the earnings press release we issued earlier today. as well as in the supplemental financial information we prepared for this conference call, which again, are both available on the Investor Relations section of our website. And now I would like to turn the call over to Bruce. Bruce? Bruce McClelland: Great. Thanks, Fahad. Good afternoon, everyone, and thanks for joining us today to discuss our first quarter results and outlook for the rest of 2026. As highlighted on our last earnings call, we ended 2025 with a broadening customer base and increasing backlog, and we continue to expect a much stronger second half with meaningful improvements starting this quarter. Our first quarter revenue was in line with our expectations and consistent with the industry dynamics we outlined back in February, causing us slower than normal start to the year. Visibility into our customers' plans for the rest of the year and confidence in second half growth has improved since the beginning of the year, particularly around the specific areas we highlighted where we were being cautious. Sales in the first quarter were near the midpoint of our guidance but with stronger-than-expected demand in India, particularly with Bardi Airtel, who was a 10%-plus customer in the quarter. This was offset by lower sales than we anticipated the U.S. Tier 1 service providers, which I'll comment on more in a minute. This shift in mix resulted in lower gross margins and earnings for the quarter. When comparing year-over-year, as we expected, sales were lower in both of our segments with Cloud and edge down 8% and IP Optical Networks down 14% in the first quarter. From an end market perspective, the majority of the year-over-year decline was due to lower sales to service providers in multiple regions. Within the Cloud & Edge segment, sales to service providers declined approximately 5% year-over-year, primarily in the U.S. region across a number of smaller customers. Horizon remained a 10%-plus customer in the first quarter. And while voice network transformation activity was lower than we had expected, impacting our first quarter results. Deployment rates are increasing, and we anticipate a much stronger second half in 2027. Expansion into the Frontier footprint remains a significant incremental opportunity. Within the IP Optical segment, sales to service providers in the Asia Pac region were down year-over-year following a strong performance from the region last year. Demand in India was stronger than we initially expected, and we are increasingly confident in our outlook in that region for the year ahead. IP optical sales in Europe in the first quarter were lower year-over-year primarily due to the completion of a long-term support and maintenance contract with a Tier 1 service provider customer, reducing our IP optical maintenance revenue, partially offset by maintenance increases with our growing installed base. Importantly, IP optical bookings in the quarter were strong at 1.5x, indicating a much improved quarter ahead. Within the enterprise market vertical, aggregate sales to enterprise defense and critical infrastructure customers declined approximately 6% in the first quarter versus last year, with lower cloud and edge sales to U.S. government agencies partially offset by increased IP optical business with international defense agencies. Voice network modernization projects with several U.S. federal agencies continue to progress towards full deployment in the coming months. and we expect further capacity expansion and new projects in the second half of the year. These modernization projects are mission-critical to our Department of War agencies as these legacy infrastructures are becoming increasingly expensive to maintain. Consolidated gross margin in the quarter was approximately 300 basis points below our expectations, primarily due to the lower network transformation professional services revenue with elevated service expenses. We believe voice modernization initiatives remain a strategic priority for service providers such as Verizon, and we expect activity to accelerate in the second half of the year. In order to support the increased work, we are deliberately retaining key resources and expertise, even though revenue is lower in the first half. While this decision impacts gross margins and near-term profitability, we believe it positions us well to execute efficiently as volumes increase later in the year. This is a deliberate investment in execution readiness. Adjusted EBITDA for the quarter was negative $8 million, below our guidance range to lower gross profit dollars. Overall book-to-bill in the quarter was 1.1x with IP optical at 1.5x and supporting the increased expectations in Q2 and second half of the year. Now a few more highlights in each of our operating segments. In our IP Optical Networks business, we had a number of key wins in several strategic areas, including in the rapidly growing data center interconnect space, we had 3 new wins across multiple geographies, including Europe, the U.S. and Asia. Two of the projects involve a regional service provider expanding their network to support data center connectivity in their regions. And 1 of the projects is a major biotech company, connecting all of their major data center locations with a new high-capacity optical network. It's great to see our momentum picking up in this crucial high-growth area. Similarly, we had 5 new project awards in the quarter from major energy producers and distributors in countries such as Germany, Vietnam Singapore and Colombia. They are all focused on building of secure, private, command and control networks to keep pace with the critical nature of their business. In fact, 2 of the new 400-gig networks are leveraging Quantum Key Distribution encryption for enhanced security using our Apollo optical transport platform. In Africa, we have received an award for a major fiber network expansion across 3 countries, which we expect will exceed over $10 million with first revenue in the second quarter. And here in the U.S., we now have more than 30 customers who have already deployed our IP and optical products that have been awarded bead grants, where we expect incremental new business once funds are finally distributed. Similarly, in our Cloud Edge segment, we had a lot of activity in the first quarter around several strategic areas. One of the key areas of focus for any enterprise and service provider customers is the adoption of cloud native technologies to lower costs and reduce complexity, whether in their own private data centers or in public cloud. We reached full commercial deployment of our cloud-native SBC solution with a leading service provider in Japan in the first quarter and have a very extensive program underway with a Tier 1 provider in Europe. This is a fundamental shift in how networks are designed and how software is managed and deployed to achieve higher degrees of automation, elasticity and reliability. Public cloud is the ultimate destination for many customers, which is why we've established a new partnership with Amazon Web Services that we recently announced at MWC in February. Our first 2 customers are now live and providing commercial service with our cloud-native SBC running in AWS. This is an important strategic milestone and reinforces our leadership position in cloud native secure voice infrastructure. Over time, we see opportunities to help enable emerging Agentic AI platforms to seamlessly support voice within their application environment. In the enterprise market, the financial services vertical is a key focus area for us, where we are widely deployed across many of the leading banks and insurance companies. Within the quarter, we were excited to further expand our presence and in a new top 20 bank to our customer base in the U.S. as mentioned on our last earnings call, we had significant voice network transformation orders in the fourth quarter, and we are executing against these new contracts. These programs typically convert to revenue over 6 to 12 months or longer on large deployments, which positions us for a strong second half. Finally, we continue to make good progress preparing to launch our new AI Ops and automation platform, acumen with lead customer, Optimum, which we expect to go live later this quarter. We have a growing pipeline of customers spanning a number of different use cases, including mobile and fixed wireless services, emergency E911 services, fiber to the home Internet service assurance and several others. With that, I'll turn the call over to John to provide additional financial details on our results and then come back on to discuss outlook for the second quarter. John? John Townsend: Thanks, Bruce, and good afternoon, everyone. Let's begin with financial results on a consolidated level. In the first quarter of 2026, Ribbon generated revenues of $163 million, a decrease of 10% from the prior year. driven by the factors Bruce outlined and which I will touch on shortly in the segmental discussion. Consolidated non-GAAP gross margin was abnormally low in the quarter at 45.8%. And down 280 basis points year-on-year, primarily due to lower professional services revenue with continued higher costs to support the anticipated ramp in the second half. Non-GAAP operating expenses were $87 million, an increase of $1 million year-over-year, driven by FX headwinds of approximately $4 million, offset by expense savings. This resulted in marginally higher R&D costs. Most of the FX impact was a result of the strong rate shekel. Adjusted EBITDA was a loss of $8 million, a $14 million decrease from the prior year, driven principally by the low revenues and gross margins. Net interest expense in the quarter was $10 million. Quarterly non-GAAP net loss was $8 million, $4 million worse year-over-year, this generated a non-GAAP diluted loss per share of $0.05, which was a decrease of $0.02 versus the prior year. Now let's look at the results of our 2 business segments. In our IP Optical Networks results we recorded first quarter revenues of $63 million, a 14% decrease versus the prior year, which was driven principally by lower sales in Asia Pacific and lower maintenance revenue. Encouragingly, we had stronger IP optical bookings in the quarter with a book-to-bill ratio of 1.5x, underpinning our expectations for improving top line performance as we proceed through the year. First quarter non-GAAP gross margin for IP Optical was 28.4%, similar to last year, but lower than our target level due to the higher mix of India revenues and also fixed cost absorption. We expect this to improve materially in the second quarter and for the rest of the year. IP Optical Networks adjusted EBITDA for the quarter was a loss of $16 million, a $1.7 million higher loss than the prior year driven by the lower revenues. Now on to our Cloud and Edge business. We generated first quarter revenue of $100 million, down 8% year-over-year. Non-GAAP gross margins were 56.8% and down 575 basis points from the prior year, primarily due to lower professional services revenues while carrying higher service costs in readiness for the anticipated second half ramp in voice network transformation deployments. As a result, adjusted EBITDA for the segment was $8 million or 8% of revenue and down $12 million year-on-year on the lower revenues on gross margins. Cash flow from operations was a usage of $22 million in the quarter, resulting from the lower billings and typical seasonal employee-related expenses. Closing cash was $70 million, and our net debt leverage ratio was 2.9x. Total CapEx spend in the quarter was $3 million, and this is in line with our normal run rate. In conclusion, we remain focused on operational execution and cost management and are confident that we will see meaningful growth in the second half of the year, improving both revenue and margins in both segments, which we expect to drive stronger profitability. And with that, I'll turn the call back to Bruce. Bruce McClelland: Great. Thanks, John. As we move forward through the balance of the year, our confidence in the broader setup for the business continues to improve. While first half results remain influenced by customer timing dynamics, the demand environment across our core markets is strengthening, and our pipeline continues to expand. We are making targeted investments in execution readiness that we can capitalize on the opportunities already in front of us. Importantly, we ended the year with solid momentum reflected in the strong bookings over the last 6 months and a healthy pipeline across service provider, enterprise, EMEA and Asia Pac markets. Looking ahead to the second quarter, we expect meaningful revenue acceleration from enterprise and EMEA customers, continued sequential improvement at our major Tier 1 service providers and ongoing strength in India. In the second half, we anticipate growth across practically all regions and broad-based improvement across most of our markets, including a return to higher deployment levels at Verizon. Beyond that, we remain well positioned to capture incremental growth opportunity from increasing traction in key growth pillars of our business. The largest market opportunity continues to be the replacement of legacy voice communication infrastructure within service provider networks with modern cloud-based technology. In addition to the large Verizon project, in the fourth quarter, we had more than $50 million of bookings from more than a dozen service provider customers, where we were replacing legacy voice switch infrastructure with modern software-based systems. These projects will continue for most of the year, and we anticipate a reacceleration of our Verizon program in the second half of the year. In a growing number of cases, customers are choosing to move to a cloud-native technology stack, either deployed in their own private data centers or in a public cloud environment. Ribbon is certainly the technology leader in this area. The second key focus area of growth for Ribbon this year is in the enterprise and government market sectors where we are uniquely positioned with our voice and data portfolio. We expect this to be a very strong segment for us this quarter with a number of large enterprise projects across both our IP Optical and Secure Voice portfolio. Within the U.S. government sector, we have several large voice modernization projects underway where we are heads down the first half of the year, migrating end users onto a new cloud-based platform and anticipate new opportunities and further capacity growth in the second half of the year. Our third major focus area this year is the exponential growth in data traffic and the massive investment in broadband infrastructure. We have a significant number of projects already underway in the second quarter as highlighted by the strong book-to-bill in Q1. This includes several major network upgrade projects in Europe and Africa, further growth in India, large projects in the Asia Pac region and continued strength with defense agencies in Europe. Finally, our Acumen AI Ops initiatives continue to generate strong customer interest with several proof-of-concept discussions progressing well across multiple target use cases and integration of secure carrier-grade voice capability with emerging AI and a genic AI platform is gaining traction. This is an area where Ribbon is uniquely differentiated. Our recently announced partnership with Amazon Web Services is an important strategic milestone and reinforces our leadership position in cloud native secure voice infrastructure. This partnership is already generating increased customer engagement and pipeline activity. Overall, we remain confident in the broader setup for the year and continue to expect stronger performance starting this quarter. Based on the foregoing, for the second quarter, we expect revenue in a range of $185 million to $195 million and adjusted EBITDA in the range of $9 million to $14 million. In summary, the market dynamics we discussed 90 days ago were unfolding as anticipated, and we remain confident in our outlook for accelerating performance in the second half of 2026. Before we open up for questions, I just wanted to take a moment to highlight. We have also made an announcement this afternoon that John will be leaving the company for another opportunity back in the Telecom Services segment. While I'm sorry to see John leave and fully understand his decision, I'm very excited to announce the promotion of Rick Marmurek to the role of Ribbon Chief Financial Officer. Rick has been an important leader in the company for more than 15 years, playing a key role in building our global finance organization. He is absolutely the right person for the job and will help drive the next phase of execution for the company. John, we wish you well on your next endeavor. John Townsend: Thanks, Bruce. And I'd really like to say I've enjoyed my time here at Ribbon. I remain confident that the company has a bright future. And Rick, I know you'll do a great job. Congratulations. Unknown Executive: Thanks, John and Bruce. I'm very excited about this new opportunity and look forward to continuing to work closely with the teams across the business to drive sustainable growth and operational excellence. Bruce McClelland: Great. Well, thanks, Rick. And operator, why don't we now open up for a few questions? Operator: [Operator Instructions] Our first question is from Michael Genovese with Rosenblatt Securities. Michael Genovese: First, let me just say, John, congratulations on the new opportunity. And it was a nice working with you at Ribbon, and just look forward to staying in touch. I guess, Bruce, the question that I'll start with is you seem to have a lot of confidence of improvement in the second quarter. But then the Verizon cloud and edge sounds like it doesn't really get meaningfully better until the second half of the year. Can you just talk more about the timing of Verizon's being stronger in the second half of the year than the first half of the year and just more detail on that? Bruce McClelland: Yes. Mike, and I know what -- John says thank you, by the way, he's with me. So I think you read it correctly. We don't expect a significant increase in revenue here in the second quarter with our top customer although I think the improvement in deployment rates will progressively improve throughout the quarter. The growth in the second quarter is focused in a number of different areas. In particular, we expect a very strong quarter from enterprise customers in North America. We've got a great set of programs there that are both in the cloud edge piece of the business as well as in our IP Optical business, around some of the critical infrastructure deployments we have going here in the North America market. So that's a big part of the growth. And then the EMEA region, both kind of Continental Europe as well as Africa. We're looking forward to a pretty strong quarter. So I think that's where the step-up is coming from here in the second quarter. And then as we get into third and fourth quarter, in addition to growth around Verizon growth relative to the first half of the year, obviously, we've got a variety of different increases expected from U.S. federal market and additional capacity expansions there. Growth in the Asia Pac region and again, even a stronger second half in Europe. So it's pretty broad-based and a nice funnel ahead of us this year. Michael Genovese: Great. Okay. Great. I noticed on your presentation, there is a slide about the number of data centers and rural areas, which I find interesting. But I'm wondering about the correlation between that and it seems like what would be more compelling is not the location of the data centers, but how many are being built by sort of regional service providers versus hyperscalers. So I'm just curious is there a relationship there between the location being rural and the regional service provider. I mean, are we supposed to draw -- like can you just help me drive these conclusions? Bruce McClelland: Yes. I think the correlation isn't so much the regional service providers building the data center it's leveraging the network infrastructure they're putting in place for their fiber-to-the-home and capacity expansions to then pick up additional traffic and interconnect into more regional data centers as they build out into those areas. As you know, I think that's kind of our sweet spot is with the regional operators. And I even mentioned the growing opportunity around bed where funding is available to be able to build out middle mile capacity. And then it's a matter of how do you put as much traffic on that as you can. And so we see that in the North American market. And then we see it in a variety of international markets as well, where the fiber connectivity is coming from an operator or a service provider, not necessarily just dedicated dark fiber circuits. Michael Genovese: Great. And then finally for me before I pass it on. Could you just flesh out more for me the Agentic opportunity and how you guys support that and play into Agentic AI? I'm -- it's a little bit of a newer part of the story. So I'd like to be brought up to speed there. Bruce McClelland: Yes, I think -- I'd like to think of it in kind of 2 different aspects. So 1 is certainly this new platform we're launching called Acumen where we're basically working with our current customers to add an genic AI-driven operations center, if you will, to help them manage their network, create their own agents to be able to automate what today is done in a more human way into a much more automated way. And we're building on top of a couple of different platforms we already have deployed in particular, our analytics platform, which is pretty widely deployed, collecting vast amounts of information off the network and then feeding that into an Agentic layer into a large language model and basically learning different characteristics of the network and being able to take advantage of that. So that's 1 aspect of it. And as I mentioned, we're launching late this quarter kind of commercially with our lead customer Optimum here in the U.S. The second part of how we see an opportunity for us is as the use of Agentic AI becomes more prevalent in enterprises. We think the connection between the user and the Agentic applications will be voice driven. And so there's a need to basically protect that boundary and be able to facilitate the voice traffic similar to what you would do in a Microsoft Teams or Zoom or Webex type application. And so we are able to repurpose our voice platforms into that type of use case and the first launch customers on the AWS deployment that I talked about are effectively using our session border controller in that way to interconnect into their Agentic AI applications. And so we think there's a real opportunity there as new types of Agentic AI platforms are deployed for us to have a play there, again, very similar to how UCaaS platforms are working. Operator: [Operator Instructions] Our next question is from Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Sorry about that. You talked about, hey, a couple of the product drivers for the Q2, the sequential growth in Q2, but I don't know if you talked about that from a segment standpoint, whether you expect a meaningful difference in growth rate by segments you've had book-to-bills in each of them in the last quarter or 2. But any color there and then I can follow-up. Bruce McClelland: Yes. No, good question, Tim. So we expect growth in both segments here in the second quarter versus the first quarter. And as you just pointed out, the bookings over the last 6 months combined have been very solid for us. So we're expecting both segments to be growing. I do believe that IP Optical segment will grow more than the Cloud and Edge segment in the second quarter. As I mentioned, in North America, we've got a number of great opportunities for growth here in various different markets I mentioned. So I highlighted a number of kind of interesting wins in the first quarter that helped build the backlog some around data center interconnect as we start to deploy our new 948 transport, optical transport platform into that market and then a number of critical infrastructure again, kind of a broad range of different customers, Columbia, Vietnam, Europe, Germany. So all of those are kind of contributing to the growth here in the second quarter. I think Cloud and Edge would obviously be growing faster as the Verizon deployments kind of picked back up again, and that will be a key part of the growth into the second half of the year. Timothy Savageaux: Okay. Just as an aside, I just want to check in, those sound like absolute dollar comments, I ought to go smaller. So I want to check on that versus percentages. But the main follow-up question was, if we look at Q1 results, is it fair to look at the year-on-year declines in Cloud Edge. Is that mostly Verizon or not at all? I know they stayed on the 10% list, but I assume they are done pretty good. And then maybe a little more in depth on the IP Optical decline year-over-year in terms -- I guess India was up. So what was the real weakness there? Bruce McClelland: Yes. So 3 good questions. So the first 1 around dollars versus percentages for second quarter, I think from a dollars perspective, the IP Optical business will be up more from a dollars or revenue perspective. And I think that translates probably into a larger percentage increase at the same time. So for -- yes, we don't guide each individual segment, but I think that's the trend we're expecting to see in the second quarter. The question on kind of year-over-year, what was down in the first quarter? Was it Verizon versus other things. Actually, Verizon was perhaps the smallest piece year-over-year from Q1 last year to Q1 this year. It was really actually not 1 specific thing. It was a number of kind of smaller projects that we had with different service providers. I think we were down 5%, 6% in the first quarter on Cloud and Edge. So it wasn't a big drop, and it wasn't 1 individual customer, kind of a series of smaller things. I think in the last question, which was similar around the IP Optical decline. The Asia Pac region in the first quarter, including India was fairly consistent, maybe off $1 million or $2 or something like that, so very consistent year-over-year, with India being the strongest piece of that market for us. So the weaker parts was really around the European market and a little bit in North America as well, but I think Europe was the kind of the largest contributor to the decline in the first quarter. And our business in Europe, in particular, is concentrated with a whole variety of different types of critical infrastructure customers, railways, oil and gas, big in defense. And those projects tend to be project based. You win something, you complete it and then you go find the next program. So it can be a little bit lumpy. As you see now, with the bookings metric, clearly, that was a real positive and sets us up for stronger growth here in the second, third quarter. Timothy Savageaux: And that was my last question actually, talking about that IP Optical, book-to-bill, and you guys highlighted what's happening, data center interconnect-wise, pretty significantly here in the report. Say you gave us an order of magnitude, I think, on this contribution from your big Africa deal. I wonder to what extent do you see either what you've booked order wise or the opportunity pipeline or however you want to term it in terms of additional color, how you would look at this DCI opportunity in terms of materiality relative to either book-to-bill or the overall IP Optical business? Bruce McClelland: Yes. So the data center interconnect space was not a big focus area for us, say, 3 or 4 years ago. We really, as you know, have been very focused on. We can't do everything. So we're focused in on critical infrastructure segment where highly secure, robust capabilities are really crucial. So that was a real sweet spot. And then building out our capabilities around middle mile IP MPLS in the access and aggregation layers of the network, which is 1 of the big strengths in our India deployments. So the third leg in the stool really for us is around data center interconnect, and we kind of started in full earnest last year with the launch of 2 new platforms, our 2700 series which is a very dense aggregation platform for aggregating 400-gig IP clients and the other optical transport platform, which was built for the data center, basically built for enterprise, different form factor, a compact modular flood design that allows us to leverage pluggable optics and -- so those were the 2 new products that we launched last year focused around data center. And so that's allowed us to start to generate wins and kind of grow into that market. Relative to the first 2 markets, it's small for us today, but we've improved our go-to-market to match the new products that have come out, and we do think it's a stronger growth path for us. It's a little hard for us to forecast revenue yet at this point because we're kind of building wins as we go. But I think you'll hear a lot more about it from us in the future. Obviously, there's a ton of spend going into data centers, and we want to be able to go after that market, both through our service provider customers as well as direct into different types of data centers. Operator: There are no further questions at this time. I would like to turn the floor back over to Bruce McClelland for any closing remarks. Bruce McClelland: Okay. Great. Thanks, Paul for -- maybe Russ has squeezed in on the question line, Paul, if you can check with them. Operator: Our next question is from Rustam Kanga with Citizens. Rustam Kanga: Is it fair to say, Bruce, that visibility into the sustainability on the India CapEx side, has improved since last quarter, and that's largely intact now? Bruce McClelland: Yes. On the last call, I talked about really 3 different areas that we were being cautious on around the growth in India around plans with Verizon and others around network transformation. And we feel like we've got better improved visibility. Clearly, the India market is remaining very strong. In fact, it was a it was a catalyst for us to do well in the revenue line for Q1. So I think we're feeling better. I think the enterprise market, both critical infrastructure on our IP optical side, and then large enterprise around our secure voice looks really robust for the rest of the year. And then the final area that I've been just cautious on is around the U.S. federal space. I mentioned we have a couple of large programs that need to get into full deployment, so we can start adding capacity to that. So those were the areas that I think we were more cautious on and feel better about all of those as we sit here kind of 90 days later. Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Bruce McClelland for any closing remarks. Bruce McClelland: Well, great. Thanks for everyone joining us today. Just to reiterate, I guess, the key messages here. We -- as we just summarize, I think we feel like we have good visibility going into the rest of the year, starting with improvements here in the second quarter and look forward to keeping everyone updated. We have a whole slate of investor conferences over the next couple of months and look forward to keeping you updated with our progress. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Good afternoon, and welcome to Landstar System, Inc. First Quarter Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized rip Officer; Jim Todd, Vice President; and CFO, Matt Dannegger, Vice President and Chief Field Sales Officer; Matt Miller, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Todd. Sir, you may begin. James Todd: Thanks, Arlene. Good afternoon, and welcome to Landstar's 2026 First Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement of the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts or forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relate to Landstar's business objectives, plans, strategies and expectations. Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2025 fiscal year described in the section Risk Factors and our other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to equally update or revise any forward-looking information. I'll now pass it to Landstar's CEO, Frank Lonegro, for his opening remarks. Frank Lonegro: Thanks, Jim, and good afternoon, everyone. We are excited to discuss our results this quarter given the overall sense of optimism, many in our network are sharing with us. It was great to spend time with many of our BCOs at the Mid-America Trucking Show in March and to celebrate the success of our agent network earlier this month at our annual agent convention. The tone and positivity I heard from my personal interactions with BCOs and agents of these events was the best I've experienced during my tenure at Landstar, and provides an emerging sense of confidence as we head further into 2026. Before diving into our results, I'd like to thank our BCOs and agents and all of Landstar employees who support them every day. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry. Their adaptability and dedication to safety, security and service for our customers is truly impressed. They are exceptional business leaders and key to driving the continued success of Landstar's business model. I'd also like to thank Derek Barrs, the Head of the FMCSA, who recently appeared at our agent convention and discussed many of the significant initiatives he is leading at the FMCSA. These regulatory efforts are having a real tangible impact on the trucking industry and have been very positive for Landstar. We look forward to continuing our dialogue with the USDOT and the FMCSA in support of these efforts. Amidst our improved operating performance, the 2026 first quarter was not without challenges that required our focus and attention. We are driving to incorporate AI into our business and do everything we can to mitigate any perceived industry-specific AI disintermediation risk. We were pleased to have Jim Applegate and Rick Coro, participating in the Goldman Sachs AI and Freight Forum in Chicago in late March, where they shared our AI road map and several in-flight initiatives across the network. We continue to be encouraged by the level of engagement we're seeing among agents and BCOs participating in our beta programs. That collaboration is already yielding tangible progress across a number of workflows, including customer quoting, carrier negotiations, dispatch decision making, automated tracking, appointment scheduling, network modeling and bid optimization. Importantly, these tools are being developed alongside our agents and BCOs with early pilots already live in production or in advanced testing. Initial feedback [ cost ] to meaningful time savings, higher shipment life cycle throughput and improved visibility across the net, empowering our entrepreneurs to spend more time on revenue-generating and relationship-driven activities. At the same time, we are advancing several AI-driven efficiency initiatives at the corporate level, including our Tier 1 ERP modernization proprietary fraud prevention and detection capabilities, service center workflows, BCO retention models and self-service analytics for operations and customer management. Across both the agent network and in our corporate offices, our focus remains on disciplined deployment and scalable adoption. We look forward to providing additional updates as these initiatives continue to progress. We, like everyone else, are monitoring the news on the geopolitical conflict in the Middle East and the related volatility in energy and diesel prices. We also continue to monitor the potential effect of tariffs and trade policy on our business, including the impact of the recent Supreme Court decision and tariff refunds from the federal government. Tariffs has certainly already impacted freight flows. For example, the 2025 first quarter reflected the desire by many customers to pull forward shipments in an effort to get ahead of potential tariffs. This contributed to a relatively tough first quarter volume comp for Landstar. We will also be closely monitoring any developments with respect to trade relations among the United States, Canada and Mexico this year. Against that backdrop, the Landstar business model performed well with revenue increasing approximately 2% compared to the 2025 first quarter, gross profit increasing approximately 14%, variable contribution dollars increasing approximately 7% and basic and diluted earnings per share increasing approximately 36%. As a reminder, earnings per share during the 2025 first quarter were unfavorably impacted by approximately $0.10 per share related to the previously disclosed supply chain for [ automatic ]. As JT will discuss in more detail during his remarks, the 2026 first quarter also experienced lower insurance and claim cost expense compared to the 2025 first quarter primarily due to the company's ongoing efforts to address strategic cargo test. These efforts help Landstar to achieve both a decrease in the frequency of cargo claims incidence during the 2026 period compared to the 2025 period as well as decreased severity of cargo claims incidence. One consistent highlight in our results remains the strength of our industry-leading unsided platform equipment business. This part of our business posted another strong quarter with an 8% year-over-year revenue increase driven by the performance of Landstar's heavy hauled service offering. We generated approximately $134 million of heavy hauled revenue during the 2026 first quarter, representing an 18% increase over the 2025 first quarter. This achievement reflected a 12% increase in heavy hauled revenue per load and a 6% increase in heavy hauled volume. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives, we are continuing to invest in the foundational work that puts Landstar in a great position to leverage improving freight market conditions. We also remain focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. Turning to Slide 5. The freight environment in the 2026 first quarter was characterized by relatively strong demand from a seasonal perspective and an improving price environment as we move through the quarter. We were encouraged to see the ISM index above 50 for each of the 3 months in the first quarter, a positive sign for our business as readings from the prior 3 years to often reflected a far more challenging economic backdrop. We were pleased to see sequential outperformance in the number of loads hauled via truck and truck revenue per load compared to pre-pandemic normal seasonal patterns. As noted in the press release, we were encouraged to see that overall truck revenue per load increased 6% compared to the 2025 first quarter. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patient and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during the 2026 first quarter, the company returned approximately $104 million to shareholders through our capital return programs. The company returned approximately $82 million in dividends to stockholders during the first quarter and deployed approximately $22 million to share repurchases during the first quarter. And yesterday afternoon, our Board declared a regular quarterly dividend of $0.40 per share payable on June 9 to stockholders of record as of the close of business on May 19. We continue to invest through the cycle in meeting technology and AI solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet and trailing equipment with a particular focus on investment in new van equipment. Turning to Slide 7 and looking at our network, the scale, systems and support inherent in the Landstar model helped to drive the operating results generated during the 20,261st quarter. JT will get into the details on revenue, loadings and rate for load in a few minutes. Safety, is crucial to our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day. and the agents and employees who work to reinforce critical importance of safety, security and service at Landstar. I'm proud to report an accident frequency rate of 0.64 DOT reportable accidents per million miles during the 2026 first quarter, well below the last available national average DOT reportable frequency rate released by the FMCSA for 2021, and slightly better than the 0.6 DOT accident frequency we reported during the 2025 first quarter. The company long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provides a point of differentiation. Our agents are able to highlight the discussions with our freight customers. We remain committed to driving a best-in-class safety culture. I'd also like to take a moment to recognize Landstar's 457 million-dollar agents based on our 2025 fiscal year results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 8. On a year-over-year basis, BCO truck count decreased approximately 2% compared to the end of 2025 first quarter and approximately 40 basis points sequentially. And it is important to note, however, that the 38 BCO truck decline experienced during the 2026 first quarter is significantly better than our experience in other recent first quarters, when on average, Landstar experienced a decline of 365 BCO trucks across the first quarter of 2023, 2024 and 2025. We are also very pleased to see our trailing 12-month BCO truck terminal rate dropped from 31.4% as of fiscal year-end 2025 to 29.5% at the end of the 2026 first quarter. This is a directionally positive trend that we hope to continue in the second quarter. Through the first 4 weeks of 2026 second fiscal quarter, the number of trucks provided by BCO independent contract is approximately equal to the end of the 2026 first quarter. I'll now pass the call back to JT to walk you through the 2026 first quarter financials in more detail. JT? James Todd: Thanks, Frank. Turn to Slide 10. As Frank mentioned earlier, overall truck revenue per load increased 5.6% in the 2026 first quarter compared to 2025 first quarter, primarily attributable to a 10.8% increase in revenue per load on loads hauled by unsided platform equipment and a 5.2% increase in revenue per load on loads hauled via van equipment. On a sequential basis, truck revenue per load increased 0.2% in the 2026 first quarter versus the 2025 fourth quarter. It is an unusual sign for truck revenue per load to be higher in the first quarter than in the immediately preceding fourth quarter as pre-pandemic normal seasonality would typically be expected to yield a 4% sequential decrease and revenue per load in a given first quarter compared to the immediately preceding fourth quarter. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2026 first quarter revenue per mile and unsided platform equipment hauled by BCOs was 2% above the 2025 first quarter, and revenue per mile on van equipment hauled BCOs was 3% above the 2025 first quarter. Delving deeper into seasonal trends, revenue per mile and loads hauled by BCOs on unsided platform equipment declined 6% from December to January was approximately flat January to February and increased 2% from February to March. Importantly, the sequential month-to-month performance as we move through the first quarter when compared against typical pre-pandemic trends suggest growing positive momentum in this aspect of our business. In fact, while the December to January change in revenue per mile in BCO loads hauled on unsided platform equipment underperformed pre-pandemic seasonal trends, January to February's flat performance outperformed pre-pandemic trends and the February to March increase outperformed pre-pandemic seasonal trends. Turning to van freight. Revenue per mile on van equipment hauled by BCOs was approximately flat from December to January, outperforming historical trends. increased 3% from January to February, also outperforming these trends, but decreased 1% from February to March, underperforming pre-pandemic February to March historical trends. Based on preliminary April BCO process revenue for load data, we expect the underperformance experience from February to March to reverse during fiscal April. It should be noted that month-to-month seasonal trends on unsided platform equipment are generally more volatile compared to that van equipment. This relative volatility is often due to the mix between heavy specialized lows and standard flatbed volume. As Frank alluded to, we've been particularly pleased with the sustained strong performance of our heavy hauled service offering. Heavy hauled revenue was up an impressive 18% year-over-year in the first quarter, significantly outperforming core truckload revenue. Heavy hauled loadings were up approximately 6% year-over-year and revenue per heavy hauled load increased 12% year-over-year. This represented a mixed tailwind to our [indiscernible] side of platform revenue per load as heavy hauled revenue as a percentage of the category increased from approximately 33% during the 2025 first quarter to approximately 36% in the 2026 first quarter. Non-truck transportation service revenue in the 2026 first quarter was [ 19% ] or $16 million below the 2025 first quarter, the decrease in non-truck transportation revenue was mostly due to a 31% decrease in ocean volume, which we believe was partially driven by shipper pull-forward behavior during the first quarter of 2025. Turning to Slide 11. We've provided revenue share by commodity and year-over-year change in revenue by commodity, transportation and logistics segment revenue was up 2% year-over-year on a 4% increase in revenue per load, partially offset by a 3% decrease in volume compared to the 2025 first quarter. Within our largest commodity category, consumer durables revenue increased 1% year-over-year on a 7% increase in revenue per load, partially offset by a 5% decrease in volume. Aggregate revenue across our top 5 commodity categories, which collectively make up about 70% of our transportation revenue increase approximately 4% compared to the 2025 first quarter. While Slide 11 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top commodity categories from the 2025 first quarter to 2026 first quarter, total loadings on machinery increased 5%. Automotive equipment and parts decreased 4%, building products decreased 10% and Hazmat decreased 6%. Additionally, substitute line haul loading is one of the strongest performers first during the pandemic and one which varies significantly based on consumer demand, increased 1% from the 2025 first quarter. The decline in automotive, hazmat and building product loadings noted above was partially offset by a 23% increase in electrical volumes, a 17% increase in energy volumes and an 8% increase in government volumes. Even with the ups and downs in various customer categories, our business remains highly diversified with over 20,000 customers, none of which contributed over 8% of our revenue in the 2026 first quarter. Turning to Slide 12. The 2026 first quarter gross profit was $112.5 million compared to gross profit of $98.3 million in the 2025 first 1st quarter. Gross profit margin was 9.6% of revenue in the 2026 first quarter as compared to gross profit margin of 8.5% in the corresponding period of 2025. In the 2026 first quarter, variable contribution was $172.2 million compared to $161.3 million in the 2025 first quarter. variable contribution margin was 14.7% of revenue in 2026 first quarter compared to 14% in the same period last year. The increase in variable contribution margin compared to the 2025 first quarter was primarily attributable to an increase in the percentage of revenue generated from BCO independent contractors. Turning to Slide 13. Operating income increased as a percentage of both gross profit and variable contribution as we cycle the impact of the international supply chain fraud matter in the 2025 first quarter, lower insurance and claim costs in the 2026 first quarter and the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to larger gross profit and variable contribution basis. Other operating costs were $14.8 million in the 2026 first quarter compared to $11.8 million in 2025. This increase was primarily due to increased trailing equipment maintenance costs, increased trailing equipment rental costs and decreased gains on disposal of used trailing equipment. Insurance and claims costs were $35.6 million in the 2026 first quarter compared to $39.9 million in 2025. Total insurance and claim costs were 7.5% of BCO revenue in the 2026 first quarter as compared to 9.3% in the 2025 first quarter. The decrease in insurance and claim costs as compared to 2025 was primarily attributable to decreased net unfavorable development of prior year claim estimates, decreased severity of current year trucking claims in the 2026 period and a decrease in both cargo claim frequency and cargo claim severity, which reflects a significant decrease in expense related to strategic cargo effect in the 2026 period, partially offset by increased BCO miles traveled during the 2026 period. During the 2026 and 2025 first quarters, insurance and claims costs included $4.9 million and $11.4 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $61 million in the 2026 first quarter compared to $61.6 million in the 2025 first quarter. The decrease in selling, general and administrative costs was primarily attributable to the impact of the $4.8 million charge to selling, general and administrative costs during the first quarter of 2025, in connection with the previously disclosed international supply chain fraud matter and a lower provision for customer bad debt, largely offset by an increased provision for incentive compensation and increased employee benefit costs. The provision for incentive compensation was $3.4 million during the 2026 first quarter as compared to $1 million during the 2025 first quarter. Depreciation and amortization was $10.6 million in the 2026 first quarter compared to $12.2 million in 2025. This decrease was primarily due to decreased depreciation on software applications and decreased depreciation on our fleet of trailing equipment. The effective income tax rate was 25.2% in the 2026 first quarter compared to an effective income tax rate of 24.7% in the 2025 first quarter. The increase in the effective income tax rate from the 2025 first quarter to the 2026 first quarter was primarily due to an increased provision for state taxes, the impact of tax deficiencies on stock-based compensation arrangements during the 2026 period and the impact of nondeductible executive compensation on the 2026 income tax provision. Turning to Slide 14. Looking at our balance sheet. We ended the quarter with cash and short-term investments of $411 million. Cash flow from operations for the 2026 first quarter was $78 million and cash capital expenditures were $6 million. The company continues to return significant amounts of capital back to stockholders with approximately $82 million of dividends paid and approximately $22 million of share repurchases during the 2026 first quarter. The strength of our balance sheet is a testament to the cash-generating capabilities of Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and a volatile geopolitical and macroeconomic environment, the company will be providing second quarter financial and operational commentary rather than formal guidance. Turning to Slide 16 and looking at historical seasonality from Q1 to Q2, pre-pandemic patterns would normally be expected to yield sequential increases of 7% in the number of loads hauled via truck and 2% in truck revenue per load resulting in a top line that typically increases by a mid-single digit to a high single-digit change. It should be noted that with respect to the sequential truck volume increase during more recent history, it has been closer to plus 3% to plus 4%. The number of loads hauled via truck in April 2026 was essentially equal to April 2025 on a dispatch basis, while revenue per load in April was approximately 13% above April 2025 on a process basis. As a result, we view anticipated truck revenue per load in April is outperforming normal seasonality while anticipated April truck volumes are trending essentially in line with normal seasonality. Please also note that historically, the company has often experienced a 25 to 45 basis point compression in variable contribution margin from the first quarter to the second quarter, primarily driven by mix, as BCO revenue typically represents a larger percentage of overall revenue in the first quarter of a given year as compared to the immediately following second quarter. We're excited to build upon the positive momentum generated during the first quarter and are energized by the opportunity to support the best network of independent business owners in the transportation space in an environment that after nearly 4 years appears to be turning in our favor. With that, operator, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jonathan Chappell from Evercore ISI. Jonathan Chappell: Frank or Jim, heavy haul obviously doing really well and also in the backdrop of a narrative about unsided platform or flatbed being incredibly strong. but your 1Q volumes were down 2% year-over-year, 2% sequentially, clearly made up some of that in the rev per load. So can you just help us understand, is that market as strong as it's been portrayed? And if it continues to, say, strengthen or build momentum from here, does that start to show up in the loads as well as in the rev per load? Or is it mostly going to be represented in the price side? Frank Lonegro: Jon. So clearly, if we see an incremental uptick in demand, you're going to see it on the volume side. I think everything right now is being supply-induced on the capacity side and getting us higher rates. We do think we've got a competitive advantage in heavy hauled and honestly on the platform side. So when you see those ISM numbers and some of the ITP numbers in the kind of low single digits. We're pretty optimistic about how that's going to play through volumes and rate for us going forward into the rest of the year. And maybe either Jim Todd or Jim Applegate can comment on that. James Todd: Yes, Jon. No, good question. From the heavy hauled side, which did experience year-over-year volume growth, Jon, I would tell you, it continues to be very, very strong, broad-based strength. We had 17 individual heavy-hauled customers grow volumes less by at least 50 loads year-over-year in the 91-day first quarter. And those customers came from wide degree of industries of data center customers, energy, government, machinery, aerospace and defense, I think some of the softness to your point, year-over-year, if you look at some of the commodity categories we called out, building products, automotive, that kind of stuff on the standard flatbed, standard step has been a little weaker. One thing I do want to call out, Jon, from a pricing standpoint on the unsided platform, it's really been a heavy haul mix story, and that continued in the first quarter. but standard platform step deck pricing year-over-year in the fourth quarter was only up 50 basis points. that accelerated the 730 basis points year-over-year. So a meaningful lift in yields on the standard flats and standard steps from a pricing standpoint. Frank Lonegro: And Jim Applegate, you might just want to talk about the designation of heavy hauled as a strategic initiative and the things you guys are doing among [indiscernible], particular area. James Applegate: Yes. This is one of our areas that we really identified as far as Landstar goes, where we do the hard stuff well. This is definitely one of those areas that we can lean in. And we've invested quite a bit not only into leadership. We actually brought in almost a couple of years now, a new heavy hauled leader that's really kind of put his arms around that department, brought in some talent and laid out a strategy that's agent engagement, recruiting BCOs into the model making sure that we have the right equipment to go ahead and handle that those agent opportunities, investing in technology. You name it, we've got initiatives in place to make sure that our agents can be successful. Paired on top of that, we have a dedicated sales and marketing effort. We're really leaning into those markets with messaging and some sales support for our agents to help them grow in those different industries. And I think what's really nice about what JT laid out is the growth is broad-based. It's also a mix of new and existing customers. So we're seeing a lot of new customers come into the fold across the different industries that are seeing success right now. And we're seeing industries even outside of the data centers, you'll start to see oil and gas and some of the other industries that have been historically depressed starting to come back a little bit. So we see this as an area for continued growth, and we've been strengthening up that area over the last couple of years and expect it to continue to be strong for Landstar. Operator: Our next question comes from Scott Group of Wolfe Research. Scott Group: So your rev per load tends to lag industry spot rates by a matter of months, quarter or whatever. We're seeing it play out, do you think, is it realistic to think that we see a meaningful further acceleration from that 13% in April, as the rest of the quarter plays out. And if that's what's happening, how should we think about margin or a margin in a quarter like that. Frank Lonegro: Yes. So fair questions, Scott, as always, thanks. I'll let JT walk you through the sequential pricing through the quarter. I think the month-over-month trends are important to understand, and he's got that detail for you. I think if we look forward, assuming that capacity continues to exit and/or we see demand in a spring lock like we do in many years. If those two things happen, then the obvious impact on [indiscernible] is going to be favorable. I think when you see what JT is going to tell you in terms of January, February and February, March and honestly, March into April, I mean, clearly, we're going to have some level of lag, and we're seeing that come through the numbers. James Todd: Well said, Frank. And Scott, we are seeing above seasonal pricing strength here into April, both on the BCO side and the brokerage side. I would point out from a comp standpoint, last year's second quarter, we got a 320 basis point lift in pricing, and we typically get about 200 basis points. So the comps do step up a little bit as we get into May and get into June. Certainly, from a margin standpoint, I mean, we just printed the first variable contribution dollar increase since, I think, the third quarter of 2022. And if you do some back of the envelope on adjusting 2025 for the international fraud matter. I think the incremental push-through numbers were well above 70%. So that's where we'll be judging ourselves. Frank Lonegro: Obviously, when that comes through it's [ great ], it's certainly easy to drop it all the way down. James Todd: Absolutely right. Yes. And the final point there, Scott, the BCO utilization numbers, we've talked about in the last 3 quarters strong third quarter '25, accelerated in the fourth quarter '25, accelerated further first quarter '26. So we'll look for that trend to continue. Certainly, that has a big impact on the number of BCO loads that capture that rate increase in the second quarter. Scott Group: Okay. Helpful. And then on the volume side, it's interesting. You got BCO volume up 7% and brokerage volume down 9%, what do you think is driving such a big sort of mix difference? Is this -- are the agents or maybe the underlying customer? Are they saying we don't want to go through brokerage anymore and maybe tie this into how you think about like the outcome of this Supreme Court case, if you think this could exacerbate some of this trend between BCO and brokerage? James Todd: I'll give you my view, Scott, and then Frank will add on. I think, the agents are going to sell what they can sell. And certainly, we have some customers that will engage with us only as BCO only, and then cargo fraud environment. I think that has probably ticked up some. But I think it's a function of the agents that are going to market, servicing their customers and the BCOs have just really been stepping up in this rate environment, and we've seen it in the last 8 or 9 months or so. Frank Lonegro: Yes. And I think I'd like Matt Miller to comment a little bit on the BCO environment and all the things you're seeing on the BCO front, Matt. But broadly speaking on your Supreme Court question, I mean we're watching it like everybody else and we'll be prepared whichever way it goes. I think ultimately, Congress probably looks at this as a result of the Spring Court decision, whichever way it goes and tries to make policy legislative rather than through the court system, but we're actively looking at what's going to happen there. And I think what many people we would expect a decision sometime in the June, July time period. But Matt, maybe a little bit on the BCO. Matthew Miller: Yes, sure. I appreciate it. First quarter, typically, the most challenging quarter of the year for us when it comes to BCO truck count. And we finished the quarter, as Frank said, earlier, down 38 trucks. That was a better first quarter finish than we've seen in several years. A 100% of that decline happened in January. So that was followed by a positive result -- net result in February and a positive net result in March. So we're encouraged by the trends that we're seeing in net truck count as well as the trends we're seeing in the net weekly check average going to the BCOs after deductions, which more recently is the highest we've seen since the fourth quarter of and an indicator of improving financial health of the BCOs. In the quarter, gross truck adds were up 2.7% sequentially and effectively flat year-over-year. Gross truck cancels were down 7.8% sequentially and down 23.5% year-over-year. And this marks our ninth consecutive quarter of turnover improvement, where our high watermark on turnover was the fourth quarter of '23 at 41%. And we finished the quarter at 29.5%, just about in line with our long-term average of 29%. As Jim stated, we also saw a very strong BCO utilization in the quarter, up 10% year-over-year. And that comes on the heels of a really strong fourth quarter utilization, which was up 8% compared to the fourth quarter of '24. And then finally, sort of anecdotally, I'd like to add that we experienced strong interest from potential BCOs at the Mid-America Truck Show in March. And I think should we see sustained pricing, that level of interest and sentiment will be helpful for us as we move through Q2. Operator: Our next question comes from the line of Chris Wetherbee from Wells Fargo. Christian Wetherbee: I just want to kind of piggyback on the BCO kind of outlook. I guess, maybe what do we need to see from a spot perspective, have we seen enough, you think, from a spot perspective to begin to actually moved that up sequentially. It sounded like maybe April was sort of net flattish, I think, from what you said at the end of the first quarter was. But maybe you could elaborate a little bit on how we think about maybe that progress is going to trend throughout the rest of the year. Frank Lonegro: Chris, so yes, absolutely. When BCOs see multiple months in a row of sustained rate improvement, the word gets around pretty quick and the percentage pay model is a really attractive one as Matt Miller just mentioned. I mean, he and I were both at the Mid-America Truck Show, which is nickname [ Matt ]. So we were out there. And we have a good spot on the expo floor. And I think we had sort of a record take away there in terms of potential BCO candidates. I would say we have people there that are actively recruiting and people who are willing to say, yes, I'm interested, please follow up with me. I mean that was a bigger number at least that we've kind of kept on record over a bunch of years. So we feel pretty good about the interest. As Matt was just saying a little while ago, we're continuing to see hundreds of ads every quarter, and the cancels are coming down. So what he would tell you is the cancel to [ lead ] the ad. So you see better cancellations and then you see better additions, but I'll let you pick up the thread from there. Matthew Miller: No, I would just echo what you said, Frank. Generally speaking, if you look back in history, as the cancels slow and utilization picks up, word starts to spread and it spreads fast. And so that's what I would say as a takeaway. This is pretty much a leading indicator for us on when ads start to turn. And that first quarter tends to be, as I said, a very challenging quarter, and that finish was pretty strong given the backdrop over the past several years. Christian Wetherbee: Okay. That's very helpful. I appreciate that. And then just maybe one quick one on sort of van demand as we think about loads as we go through the second quarter and I guess, trends from an April standpoint. Any sort of indication of if there is some improvement in various end markets kind of towards the end of the month? Just trying to get a sense of whether or not, obviously, the pricing side is really accelerating here. Just want to get a sense of what your view broadly speaking about demand. Frank Lonegro: Chris, so I think there's a couple of things that happened naturally this time of the year. I mean, building products unlocks on a sequential basis because you're cycling out the January, in the February and you're adding in the May and the June so to speak. So there are certain ones that are much more seasonal in nature Q1 to Q2, which is why you generally get some of the lift on a sequential basis. But then there are things that right now are just not being heavily supported by the interest rate environment. Automotive would be an example of that. But look, I think the demand that we're seeing right now certainly supports rates where they are, but it's more a reflection of where the capacity is. If we happen to get a couple of points of GDP, IDP type growth, when supply is coming down like our chances this year. Operator: Our next question comes from the line of Jordan Alliger from Goldman Sachs. Paul Stoddard: This is Paul Stoddard on for Jordan Alliger. I guess the First question I have is, so is the mix gets weaker with BCOs going into the second quarter. How did the mix in the first quarter compare historically? And as rates are increasing in the marketplace, could we see brokers come back into your network and potentially see more compression happening from the first quarter to the second quarter? James Todd: Yes. Paul, happy to field that one. So if you recall in the January conference call, we did not want to bake in the full variable contribution margin expansion that typically happens fourth quarter to first quarter. There were two reasons for that. One was the utilization number in the fourth quarter was very strong. And two, we did not think winter storm activity would negatively impact loadings. However, when a BCO is down for a week because of storms, we have seen in quarters past and years past where that could hurt from a [ BCM ] standpoint, that clearly did not happen, right? Utilization accelerated further, and we did get our typical or standard fourth quarter, first quarter variable contribution margin expansion. In the scenario that Frank laid out, right, of what's normal from a spring peak standpoint and use round numbers, about a 7-point lift in volume sequentially first quarter to second quarter. I would note the last 2 or 3 years, we've not seen that degree of lift. But if we were to get that it would disproportionately come from third-party trucks, right? Because as much as we'd love to grow the fleet 7% on 8,500 trucks in 90 days, that's just not going to happen. So that's really what drives the historical compression. It's just there's more volume flowing into the network, and we've got to utilize brokerage more. Paul Stoddard: Makes sense. And then I guess kind of a follow-up to the discussion on the Montgomery Supreme Court case. With your unique structure with the BCOs and having insurance already within your model, how does that set you up versus peers depending on how the decision might go? Frank Lonegro: Yes. I mean, I think the insurance tower we have, it covers BCOs while they're loaded. We also have other insurance programs that cover BCO-type and non-BCO-type issues. I think the entirety of the brokerage population is going to have to look at insurance very differently if the decision goes against the industry than they do today. And right now, they essentially look at F4A and say we're immune. And the truth of the matter is if Supreme Court goes against it, they're going to have to get coverage. I think it likely create a situation where your smaller players are going to get priced out of the market because of the cost structure going up. And I think you've got so much fragmentation in our industry on the brokerage side. that may not survive in an environment where you got to have $5 million or $10 million of insurance just to cover our single incident. Operator: Our next question comes from the line of Bruce Chan from Stifel. J. Bruce Chan: Maybe just to start, you've talked about the tailwinds from data center exposures on, I think, at least a couple of calls, and I know that you've got exposure there in several of your end markets. But I don't think you've ever talked about an explicit revenue percentage. Any sense for what that is today and maybe how that's trended versus prior periods? Frank Lonegro: Yes. So it's fine. We're sort of smiling at each other because we were looking at this earlier today. So think about it broadly as a data center ecosystem, and I'll let Jim Applegate handle this one in a sec. But you got to look at it not just at the data center itself, but all new [indiscernible] to it. So it's got to have generators for power, it's got to have batteries for power. It's got to have chillers to make sure that the raised floor is cooled and then it's got all the stuff that goes inside of the data center, but if you can give us a sense of kind of what that business looks like. James Applegate: With our top 100 customers, and we look at this, we look at our exposure, we have 9 of our top 100 fall within directly data center related. It represents about 12% of our total revenue. So from an exposure standpoint, that's what you're looking at. But even if you look at this big build-out and what's been happening and even what's in place today, it's not just the constructing and the actual data center players today. There's real energy needs. There's real kind of side benefits that you get as you're seeing this big build-out happen. So from an exposure standpoint, we feel like it's a limited exposure from that standpoint. And we've got a lot of other kind of side benefits that are happening just because of the macro environment that's been created here. Frank Lonegro: That environment is still growing. And then you have all of the refresh and replacement of all of those things over time. So we're pretty bullish on continued investment in maintenance investment on a going forward basis there. J. Bruce Chan: Okay. Yes, that's super helpful. And then maybe just one final question here on the supply environment. Obviously, we've heard a lot of commentary about regulatory changes I think a few carriers talked about an affected OTR population somewhere in the 15% range. Any sense for what the noncompliant population would be in unsided and maybe how fungible those two populations of drivers are in your network? Frank Lonegro: Yes. I don't know that we have a great read on exactly what that looks like. I mean the interesting thing from a Landstar perspective is we don't have language proficiency challenges. We don't have non-domiciled CDL challenges. All of our folks are professional drivers, average age is 51 years. I mean they suppose to be driving a long time. They are [indiscernible] operators. I mean I can go on and on and on. And I'm sure Matt Miller will have some commentary here, too. But at the end of the day, there is capacity coming out of the environment. It's generally what I believe is coming out of the lower end of the environment, and you're ultimately going to have a much safer and much more professional environment given the work that USDOT and FMCSA are doing. Matt? Matthew Miller: Yes. No, I'd agree. When you think about English language proficiency, the non-domiciled CDLs, the CDL mills, the ELD technology. We applaud the actions of Secretary Duffy and FMCSA administrator, Derek Barrs. And we find ourselves virtually unimpacted with our BCOs because of a focus on safety, security and service. And I think there's more to come here. They're sort of telegraphing if you saw the 60 minutes piece on Chameleon carriers, my suspicion is that's probably the next target, and that just serves us very, very well in the grand scheme of things. Operator: Our next question comes from the line of Stephanie Moore from Jefferies. Stephanie Benjamin Moore: I actually -- I had a question, but I'm going to ask a different one now just based on this prior question. Maybe just for pure visibility here. I guess, maybe just talk a little bit kind of specifically looking at the [indiscernible] law and really just the use of foreign dispatch and administrative services. So I think in the past, you guys have disclosed having some foreign brokerage. So maybe just talk a little bit about that, if that's still the case. I think this was several years ago, so I could be out of date here. But maybe just if you could talk a little bit about any foreign dispatch that you might have. Frank Lonegro: Fair question. All of our agents are U.S. domiciled agents. We do have a handful of agents who do some back office work overseas, but we don't believe we have any exposure under our reading of any of the draft in the [indiscernible] law under the phrase that you mentioned. Stephanie Benjamin Moore: Okay. That's really helpful. Well, then my actual question here. Maybe just talk a little bit about -- as you think about just your -- as you think about this next cycle, if we are in fact at the beginning of an up cycle. Maybe just talk a little bit about how you think Landstar is positioned from a competitive standpoint to maybe gain share or drive better margin and the like, just as we kind of think through investments that have been made over the course of this down cycle, just how you're in a different position on this up cycle versus past? Frank Lonegro: Yes. No awesome question. So a couple of different reads from my perspective. I think on the last conference call, I said it was hard to tell whether or not we were at the beginning of the end or the beginning of the beginning. I feel pretty convinced we're at the beginning of the beginning. As we look at the last few months, and our results would prove that out. I think we've done a lot in the last couple of years clearly designating the strategies and the strategic growth areas that we put forward. You know those as heavy all in U.S. Mexico cross-border and things like that. I think we've done the right work internally to put the right leadership there and the right investments as Jim Applegate, referenced a few moments ago. I think on the BCO side, the work that Matt Miller has done in looking at BCO qualifications and time to qualify and the sort of reduct of orientation and what we call the cabs class. I mean there's a lot of things that are happening there. I think that is showing through in the way that BCOs are sticking with us even in more difficult times at the end of last year, the Q1 numbers in terms of the BCO count looked really, really good. I mean they were 10x better than they were in the last 3 years. So that makes you feel pretty good. I think the work that we've done in working with the regulators over the last year or 2. I think our relationships are a lot closer with USDOT and FMCSA than they've ever been. I think we have the ability to talk with them about the realities of our industry and what needs to be done and they're moving at pace that I don't think any of us have ever seen. I've said an open company a number of times that, we've never had a more favorable administration to the U.S. trucker than we have right now. And again, as I mentioned earlier, it's making it a safer and more professional environment. And I think those are the important things. That's what Landstar has always been about. I mean we are independent owner operators, who are out there doing a great job for us every single day. And those are the folks who are going to win in this environment. There's been a bit of a flight to quality. I mean we're getting bids back that, freight back that we maybe lost on rate over the last couple of years because of safety, security and service and customers wanting to make sure that their loans get there on time and the load is secured and not stolen and the track and trailers are not over turned in the side of the road. I mean those are the things that we're really good at. So I think we're winning in the marketplace with respect to that on the flatbed and heavy haul side, clearly, our numbers over the last 2 years would indicate that we're doing really well relative to that market, and we're going to continue to recruit drivers. We're going to continue to invest in the fleet. We're going to continue to designate the hard things as strategic initiatives, and I look forward to that future. Operator: Our next question comes from the line of Brian Ossenbeck from JPMorgan. Brian Ossenbeck: I just want to see if you can get a little bit more detail on the AI initiatives that you guys listed out here in the back slides, both maybe separate the Landstar corporate for the scale network of entrepreneurs. But maybe more generally, do you feel like you can scale some of these productivity initiatives that we hear about across the industry when you have some of the business, it's a little bit more centralized with either corporate or brokerage, and then you've got agents that are a little bit more decentralized, of course. So I would like to get a little bit more specifics on that, including what's the -- you talked about the CapEx budget here being about AI being about half of the IT capital budget. But what's also running through the expense line there? Frank Lonegro: Good question, Brian. Thanks, good to hear your voice. I think the AI work we're doing, as we disclosed in the Q4 call, those 2 slides are really replicas of what we did in the main deck in the Q4 call, we wanted to put it in there to make sure that everybody had an opportunity to see those that may not have been on the Q4 call. Jim Applegate is the business side of AI. We've obviously got Rick Coro, our CIO, that's on the tech side as we did mention to you a good point. We sort of laid down the expectation that more than half of our capital budget on the IT side will be AI. We met that. My belief is if you in arrears sitting at 12/31/26, it will probably turn out to be more than that as we revisit the other half of the capital that IT spending, just to decide whether or not we truly do need systems versus a top of the existing systems. So I think you'll see that more over time. And certainly, we'll look at a higher expectation as we turn the page into 2027. On scalability and adoption, as I mentioned in my prepared remarks, are clearly what we're trying to make sure we're accomplishing by virtue of, for example, the pilots that we're doing. Jim Applegate to get you into some details there. We're doing very active agent pilots were working with half a dozen or so AI companies that some of those will be, I'll say, household names. Some of them will be more on the startup side. I mean you've got to make sure that you're playing the field a little bit here. They're doing pilots with about a dozen or so of our agents. And therefore, we are in the agent office working on AI, which clearly gives you the replicability across the age environment. There are things that agents do different, but there are an awful lot of things that agents do similarly that have to be part of the shipment life cycle. But I'll let Jim Applegate pick up the... James Applegate: Thanks, Frank. And Brian. I love the way you posed the question separating the corporate from the agent. As you know, corporate is a little bit easier to get your arms around. It's a little bit easier to control with over 1,000 agents in our network. We've got to be a little bit more deliberate on how we go about it, and it's got to be a scalable solution that fits our entrepreneurs, which is really a lot different. I look at the benefit of what Landstar brings to the table, it is our entrepreneurs and pairing our entrepreneurs with technology, I think, is what wins in this market is one for Landstar in the past. We feel in this next run with AI, it's going to help us win even more so with the motivated agents that we have and given the right tools to compete. As Frank mentioned, we have several pilots going on right now. We have 7 active pilots. We're hitting all stages of our shipment life cycle. We started off with 6. [ Now we ] got about 10 stages that we're going to get within the shipment life cycle. And when I say that, those are things like how our agents market sell, how they price how they actually find capacity and manage that capacity, assign that capacity, dispatching that capacity, making sure that they're tracking and tracing those shipments within the network. And we're hitting that right now. We've got about a dozen agents that are in active pilots. And as Frank mentioned, we've got household names, and a lot of new start-ups that we're working with from a pilot standpoint. Those start-ups are going to sit up on top of our technology stack. And we're right now working with our agents to identify the workflows and to implement a agentic AI bots over at the agent office within those different shipment life cycle categories that I mentioned. We've got a lot of excitement right now with the agents that are using it. We're identifying really a lot of the business cases that you hear out in the industry that's applying directly for our agents. We're getting a lot more shipment life cycle throughput. They're doing things faster. They're able to do more, and we're actually seeing more wins as well, too. It's very early on. As far as how that actually deploys across the network, we're going to get to a point where we say, hey, these pilots are done. We're building out our use cases, and we'll identify the right vendors to work with, and they will also identify how we want to go out to the market to [indiscernible] an agent family. And if you really look at it, Brian, it's a little bit different. You can't really push that down into the network. It is more influence and control. So part of our plan is to actively look for agents that are going to adopt that technology, we'll do an assessment and we've got agents that want to grow and they want to use their resources to grow, we'll start with them. We'll do that outreach. We'll get them excited about what we're doing. And then from there, there's a consultation and design that we need to do at each agent office. We need to take a look at their business, the types of customers that they actually operate with and we did design the workflows along with the agentic solutions that we put in place specific for those agents. And then behind that, we're going to be easy behind that. We're going to make sure that we do it safely. We're going to make sure that they have the right resources in place and we're going to be monitoring along the way. Brian, we've done this before. We've done this with our rollout with our different technology tools. We've been doing this since 2014. I don't see it a big difference from what we've done over there, but it's going to be a lot more integrated within our agent offices and is very excited about where we're going. So more to come on that, but thank you for asking the question. I think it's very fitting for us to be able to tell our story specific to Landstar because I think we've got a great story to tell there. Operator: We will take the last question from [ Harrison Beller from Soskiania. ] Unknown Analyst: Great. You guys have talked extensively about the BC capacity dynamics. But your third-party brokerage carrier side, approved carrier count there was down significantly around 20% year-over-year, although up a little bit versus last quarter. Can you walk through what's changed in your carrier vetting and approval process, and then maybe connect that to how you could help decrease your expenses related to cargo theft, fraud and then maybe insurance costs and then tie that into how technology might be helping that expense line as well. Frank Lonegro: Thanks, Harrison. I think you actually answered your own question. You're absolutely right. We have, I'd say, put a higher degree of rigor around vetting our carriers, and it is largely because of the advances that we've made in technology and AI and then some of the relationships that we have with some of our vendor partners and what they're doing to make sure that we have a good understanding of who owns the entity, what is their safety record, whether or not they've involved the double brokering, whether they've been involved in cargo theft incidents like all those things and many more are part of that analysis. I'd say that we probably got religion a little bit earlier than most because we did have [indiscernible] about a year or so ago, we had a tough cargo that quarter. And so we started down that path before many, and even before that, we had started creating our anti-fraud department and putting resources and technology with 1 of our early AI projects. that we deploy to make sure that we could understand what the parameters that will potentially lost load would look like so that we could try to prevent it before it happened. Part of that is making sure that we're doing business with carriers who are reputable carriers. Matt, why don't you pick it up from the... Matthew Miller: Sure. Sure. I appreciate the question. And I would say if you went back in time, we had probably three attributes that we used to determine if a carrier was eligible to be approved our network. And with the advent of fraud and strategic theft and everything that's happened over the past several years, we've invested heavily. We invested in people, stood up a fraud group. We invested in the process and refining that process and we invested in technology. I don't expect that to stop anytime soon. But we continue to add layers upon layers of attributes. We're up to, say, dozens of attributes that we're looking at to scrub that area database to do our best to mitigate to prevent [ detect, ] any sort of anomalies and the tools that we've invested in are proving to be working, as you saw on the first quarter results. But this is something that today is a constant defense, and we're continuing to find ways that we can mitigate against it. It's very sophisticated bad actors out there, so you have to remain vigilant, but the technologies that we're adopting are proving very, very valuable and would expect that sort of rigor to continue for the foreseeable future. Operator: At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks. Frank Lonegro: Thank you. In closing, the management team has been energized by our interactions with our BCOs and agents thus far in 2026. And we are all encouraged by the current pricing environment and what we believe is the strongest heavy haul service offering in our industry. And regardless of the economic environment, the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to capitalize on improving conditions and gathering momentum in freight markets. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2026 second quarter earnings conference call in late July. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time.
Operator: Ladies and gentlemen, thank you for standing by. My name is [ Krista ], and I will be your conference operator today. At this time, I would like to welcome you to the Omnicom's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Greg Lundberg, Investor Relations. Please go ahead. Gregory Lundberg: Thank you for joining our first quarter 2026 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omc.com, you will find a press release and a presentation covering the information we'll review today. An archived webcast will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements. These represent our present expectations and relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2025 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results. And after our prepared remarks, we will open the line for your questions. I'll now hand the call over to John. John Wren: Thank you, Greg, and good afternoon, everyone. Thank you for joining us today. I'm pleased to share highlights from our first quarter as the new Omnicom. Since closing the Interpublic acquisition just before the holidays, we've seen momentum and cohesive growth across the organization. Our steady progress is reflected in our strong financial performance in the first quarter. As you'll recall from our fourth quarter call and Investor Day, we've strategically repositioned our portfolio for growth. As part of the portfolio realignment, we identified planned asset sales and disposition of businesses with approximately $3.2 billion of annual revenue, of which approximately $1 billion was disposed of in the first quarter. Our plan is to sell or exit the remaining assets in the next several quarters. To clarify our focus on the operations that will drive growth we've excluded assets held for sale and planned disposition from our core operations. Revenue from core operations was $5.6 billion in the first quarter, which increased $345 million when compared to Q1 2025 revenue from core operations for the combined Omnicom and Interpublic. Organic revenue growth was 3.9%. We also updated our revenue reporting to reflect our integrated operating model, which is central to driving our growth. Phil will walk through the details of our reporting changes in his remarks. One point I wanted to discuss was the increase in EBITDA performance. Our adjusted EBITDA margin increased 240 basis points to 14.8% as compared to the combined operations for Q1 2025. Our non-GAAP adjusted EPS in the quarter, which excludes after-tax costs for repositioning, dispositions and acquisition, integration expenses and amortization of intangibles, was $1.90 per share, an increase of 11.8% versus Q1 2025. Our solid performance for the quarter was the result of us realigning our portfolio for growth and moving decisively on our integration efforts. By integrating our capabilities upon closing, we merged or sunset more than 20 major agency brands with a long tail of smaller brands. This allowed us to quickly bring together the best talent from across the new Omnicom. Combined with our integrated client leaders and new strategy and growth teams, our efforts have translated into new business wins. In the first quarter, these include IBM, GSK, John Deere, Little Caesars, Acadia Pharmaceuticals and Baileys. We're not just winning new clients, we're expanding our relationships with existing ones. Our integrated approach is making it easier for clients to access all their marketing and sales needs from a single partner. This model has gained traction across a number of our clients, including Clorox, Dyson, Delta, Exxon, Kroger, Merck and Unilever. Our growth from integrated services is helping to diversify our revenue streams and deepen our client relationships, underscoring the strength of our offerings. As we discussed at our Investor Day last month, Omni, our AI-enabled intelligent sales and marketing platform, is connecting our talent, data and services. We've scaled our next generation of Omni across the entire organization in Q1, putting the latest Agentic AI tools in the hands of all of our employees. The new Omni is delivering on multiple fronts, driving stronger media performance, greater addressability and improved measurement, increasing speed to activation and enhancing ROI with Acxiom's Real ID, improving performance across retail and commerce channels and enabling more effective marketing and client outcomes. through deeper integrations with partners like Adobe and Amazon. We also made significant progress to accelerate collaboration across the group. Throughout the quarter, we continued to move into hub building locations, deploy common HR and IT platforms and migrate teams to shared workflow systems. As we look ahead, we will continue to work towards the initiatives we've communicated in our prior calls, including $900 million in 2026 cost reduction synergies and $1.5 billion by mid-2028, $5 billion in share repurchases over the next 12 months, including a $2.5 billion accelerated share repurchase program currently being executed. Through the ASR and open market purchases, we repurchased $2.8 billion of shares through the first quarter. Planned asset sales and dispositions of businesses with approximately $3.2 billion of annual revenue, dispositions with approximately $1 billion in annual revenue have already been completed. We will continue to evaluate our portfolio to ensure we remain positioned for growth. Overall, I'm pleased with how we've executed in the first quarter. Our results clearly demonstrate the significant benefits of the combination for our people, clients and shareholders. While we remain bullish about the combination for the year ahead, we're also mindful of the broader geopolitical environment. The ongoing conflict in the Middle East, which represents less than 2.5% of our revenue, continues to create uncertainty in the region and across the world. As always, we are prioritizing the safety of our people in the region and monitoring developments closely so we can adapt quickly to changes that impact our business. Before I close, I want to thank every member of the Omnicom team for their outstanding efforts. None of this progress would have been possible without the exceptional commitment and hard work of our people over these past few months. With that, I'll turn it over to Phil to walk through our quarterly financial results. Philip Angelastro: Thanks, John. This is our first quarterly report as a new Omnicom with Interpublic's operations included for the full 90 days of the quarter. We started the year with strong performance in revenue growth and cost reduction with a meaningful amount of synergies flowing through to EBITDA, while we continue to invest for future growth. We're making significant progress integrating Interpublic's operations and positioning our portfolio for growth. I will start on Slide 3. We know that there are a lot of moving pieces right now, and we want to make things easy for you to understand. This slide should help. It presents what we call our core operations. Our core operations are comprised of our operating businesses, excluding dispositions and assets held for sale. To ensure it's clear, our main focus in driving the company forward is on our core operations. As we talked about at Investor Day, our core operations are the result of our ongoing strategic repositioning of the portfolio for growth and reflect our sharpened focus on the highest growing, most connected parts of our business. Businesses included in the dispositions and held-for-sale category will be sold in 2026, and they represented less than 5% of our adjusted operating income in the first quarter. And our only priority regarding these businesses is to complete these disposals in a timely fashion. This slide also presents operating income and EBITDA on a non-GAAP adjusted basis, excluding severance and repositioning costs, loss on dispositions and acquisition integration costs. For comparison purposes on this slide, we've included 2025 prior year combined amounts prepared on a similar basis. As you can see, revenue from core operations grew 6.7% in total. Adjusted EBITDA grew $180 million or over 27% and adjusted EBITDA margin increased to 14.8% from 12.4%, primarily driven by cost reduction synergies from the acquisition of Interpublic. We are pleased with this strong performance on both revenue and adjusted EBITDA, and we are on track to achieve our operating plans and targets for the year. Turning to Slide 4. We present our reported results as we traditionally have as well as the related non-GAAP adjusted amounts. This slide presents our reported results, including all entities, core operations, dispositions that occurred during the quarter for the period that they were part of Omnicom and entities that are classified as held for sale. Since these are reported results, the 2025 presentation reflects the prior year results of Omnicom and does not include Interpublic. The center column for each period shows the applicable non-GAAP adjustments. In the first quarter of 2026, we recorded integration-related costs of $59 million, which are recorded on the SG&A expense line. We recorded a loss on dispositions of $34 million, and we recorded severance and repositioning costs of $4 million. When considering the change in operating income on both a reported and adjusted basis, note that it includes $117 million of amortization expense related to the intangible assets acquired from Interpublic, an increase of $96 million compared to 2025. The change in operating income also reflects a $16 million increase in depreciation expense. Below operating income, net interest expense increased to $72 million from $29 million in Q1 of 2025, an increase of $43 million, primarily resulting from assuming Interpublic's debt of approximately $3 billion in Q4 2025. Interest expense in Q1 2026 increased by $60 million, primarily from interest expense from Interpublic, which added approximately $47 million, of which $3 million is noncash interest and higher interest expense resulting from refinancing activity completed during the first quarter of 2026, which resulted in approximately $1 billion of incremental long-term debt. Note, Q1 includes one month of the incremental interest expense from the new debt issuance. Additionally, interest income increased this quarter by $17 million to $47 million, primarily due to interest income earned on higher average cash balances, including cash acquired with Interpublic. Our adjusted tax rate of 26% was down slightly from 26.7% in 2025. For 2026, we expect our annual tax rate to also be 26%. Income from equity investments and noncontrolling interest declined by $4 million in total. Finally, non-GAAP adjusted diluted EPS grew 11.8% to $1.90 from $1.70 last year. Our fully diluted weighted average shares outstanding for Q1 2026 were 299.2 million. Actual shares outstanding at March 31, 2026, were 285.3 million compared to 313.4 million at year-end December 31, 2025, and compared to 196.1 million shares at March 31, 2025. On a year-over-year basis, our share count increased from last year due to shares issued for the Interpublic acquisition, but they also declined as a result of our share repurchase activity, which I will discuss later. Now let's review our business in more detail, beginning with the components of our revenue change on Slide 5. To assist in understanding the drivers of our underlying business, we've included an analysis of our growth beginning with core operations, which excludes businesses that have been disposed of or are classified as held for sale. In the first quarter of 2025 presented on a combined Omnicom Interpublic basis, revenue for Q1 2026 increased by 2.7% from positive foreign exchange rate changes and by 3.9% from organic growth. We expect FX will continue to be positive in 2026. And assuming recent FX rates stay the same, will benefit our reported revenue for the year by approximately 1%. Relative to our traditional presentation in this table, there is no row for acquisition and disposition revenue because there were no acquisitions during the quarter. And as we have noted, dispositions have been removed from the opening balance of core operations revenue. Turning to Slide 6, you can see our core operations revenue by discipline. Presentation of our disciplines has been updated from 2025. As we discussed at Investor Day, the strategic reshaping of our portfolio through the Interpublic acquisition will result in a business with more than half of our revenue coming from the faster-growing integrated media business. Integrated Media includes our media, commerce, data, CRM and consulting and content automation businesses. Revenue from our core operations in the first quarter of 2026 for Integrated Media was approximately 52% of our revenues. And for advertising was 17% Health, 10%; PR 12%; and Experiential & Other, 10%. Q1 revenue growth from core operations was as follows: Integrated Media led the way with very strong growth in the high single digits. PR and experiential and other grew in the quarter mid-single digits. Health had positive growth and advertising was down in Q1. We're not providing detailed prior year combined revenue balances or organic growth by discipline or region because our integration process is ongoing, and we continue to evaluate the portfolio. Slide 7 shows our core operations revenue by region. As we highlighted when we announced the Interpublic acquisition, the transaction gives us greater relative exposure in the U.S., which was 61% of revenues this quarter. Together, the U.K. and Europe were 21%, followed by Asia Pacific at 9%. In Q1, revenue growth in the U.S. was strong and delivered mid-single-digit growth. Europe, Latin America and Asia Pacific were also up low single digits. And the U.K. and Middle East and Africa declined. Slide 8 is our revenue weighted by the industry sectors of our clients. Because the first quarter of 2026 reflects a full quarter of Interpublic, there are some changes worth noting relative to the prior year Omnicom 2025 amounts. The largest changes were the pharma and health and auto categories. There were small changes to our other categories, which moved up or down 1 or 2 points with increases in financial services, retail and services and decreases in food and beverage, travel and entertainment and government. Now please turn to Slide 9 for our year-to-date free cash flow summary. The 70% increase relative to last year was driven by the addition of Interpublic and improved performance in Omnicom's business. Free cash flow definition excludes changes in operating capital, which is seasonal with the first quarter generally the largest use of cash during the year. There's a reconciliation in the appendix that shows the change in operating capital for the quarter was flat compared to the change from the first quarter of last year. For the 3 months ended March 31, 2025, our primary uses of free cash flow included $252 million of cash paid for dividends to common shareholders and another $12 million for dividends to noncontrolling interest shareholders. Dividend payments increased year-over-year as a result of the shares issued for the Interpublic acquisition and an increase in our quarterly dividend payment. Quarterly dividend payment approximates the combined dividend payments made by Omnicom and Interpublic in Q1 of 2025. Capital expenditures were $61 million, higher than the prior year due to the Interpublic acquisition, but at the same overall level relative to the size of the business. Total contingent purchase price payments and payments for the acquisitions of noncontrolling interests were $16 million. Finally, our share repurchase activity for the first quarter was $2.8 billion, excluding proceeds from stock plans of $16 million. The majority of this resulted from our accelerated share repurchase program, which drove a significant reduction in shares outstanding to 285.3 million as of March 31, 2026, a reduction of 28.1 million shares from December 31, 2025. We have significant remaining capacity under our $5 billion total share repurchase plan, and our plan is to complete the $5 billion over the next 12 months or by the end of April 2027. We estimate that relative to our shares outstanding at December 31, 2025, of 313.4 million shares, we will see our share count decline approximately 11% to 12% by December 31, 2026, and that weighted average shares outstanding for the year will decline approximately 8% to 9%. Slide 10 is a summary of our credit, liquidity and debt maturities. At the end of Q1 2026, our gross long-term debt was $10.2 billion. Since December 31, 2025, our debt is approximately $1 billion higher, reflecting the retirement of our $1.4 billion, 3.6% senior notes due April 15, 2026, and the issuance of new senior notes totaling $2.3 billion, including $1.7 billion of U.S. dollar-denominated notes at a weighted average coupon of 4.9% and $600 million of euro-denominated notes at a 3.85% coupon. The maturities range from 3 years to 10 years, which you can see in the maturity chart on this page. Our next maturity is not until July of 2027. Net interest expense is expected to increase by approximately $200 million in 2026 compared to 2025. Of this increase, $13 million is noncash interest. The change is primarily driven by higher interest expense from the inclusion of Interpublic's debt, the refinancing I just described as well as interest on incremental commercial paper borrowings of approximately $10 million and lower interest income on cash balances of approximately $20 million, primarily due to lower forecasted short-term interest rates on invested cash. Please note that the total and net leverage ratios on this slide, which compares the last 12 months ended March 31, 2026 and 2025, reflect the full assumption of Interpublic's debt, but only [ 4 months ] of Omnicom's EBITDA results, including Interpublic. However, at March 31, 2026, we're in compliance with the leverage ratio covenant in our credit facility, which makes pro forma adjustments for the impact of the acquisition. The calculation of total debt to pro forma adjusted EBITDA done in accordance with the definition in our credit agreement results in a total leverage ratio of 2.5x. Our cash equivalents and short-term investments at the end of the quarter were $4.3 billion. Our liquidity also includes an undrawn $3.5 billion revolving credit facility, which backstops our $3 billion commercial paper program. In closing, we completed our first full quarter as the new Omnicom. Our operations delivered solid top and bottom line growth. We are realizing significant cost reduction synergies while investing for future growth. Our balance sheet is strong, and we are deploying capital for the benefit of shareholders in the long run. I will now ask the operator to please open the lines up for questions and answers. Operator: [Operator Instructions] Thank you. Your first question comes from Steven Cahall with Wells Fargo. Steven Cahall: First, I was wondering if you could talk a little more about some of the revenue by discipline. So I was just wondering if we could get some underlying trends or even growth rates, especially of what you're seeing in integrated media versus advertising versus health to kind of understand the trajectories. You talked a lot about those disciplines at the Investor Day. So I would love to understand how they're trending. And then, Phil, I was just wondering if you care to provide any additional update to the adjusted EPS growth guidance. I think the prior guidance is double digit. I mean you said that the share count alone gets you to 8% to 9% this year. So it seems like it's going to be a very, very healthy interpretation of double digit, and we saw some of that in the first quarter results. So I was wondering how we can think about maybe some guardrails around where EPS growth can come in for the year. Philip Angelastro: So I'll give some detail and then John can add some color. But as far as the disciplines go, as I said in my prepared remarks, Integrated Media certainly led the way in terms of growing high single digits. PR and experiential and other grew mid-single digits. Health was positive for the year, low single digits and advertising was down. I think there's an awful lot going on as we integrate all these businesses, and we're certainly pleased with our progress to date and the growth to date. But in terms of additional details with specifics, that's about as specific as we're going to get this early in the year in our first full 90-day quarter. In terms of trends, you want to give some comments, John? John Wren: Yes. Steven, the only thing I would add to what Phil said was -- and I mentioned this in my comments, we remain very healthy in terms of competition, in terms of winning our fair share of new business. And that's great considering we're bringing 2 big organizations together in such a very short period of time. We're functioning very well. But if there's an underlying trend that's out there, it's really clients, especially with the change in the landscape of the industry, clients are becoming more focused on selecting a single provider to take care of most of their needs. And we saw during the quarter that we were able to extend the multiyear contracts with quite a number of clients, and that's a focus that we're going to continue to work on as we get further and further into the year. That gives us security and that gives us a better ability to plan as we move forward. And it's our size, it's our influence that is contributing to all this, not to mention the state-of-the-art investments we've made in terms of Omni AI and the breakthroughs and the contributions we're making there. So that's all I would add to the color that Phil mentioned. Philip Angelastro: Yes. Then I'll answer the EPS question. So certainly, we're pleased in the first quarter. Diluted EPS grew almost 12%. I think as we go through the rest of the quarters for the year, when we talk about double digit, I think at this point, we'd certainly say we expect probably the quarters as they roll out are going to be higher double digits than the first quarter performance. I think at this point, we're going to leave it at that. But we're certainly pleased with the quarter, and we expect good performance to continue on that front. Operator: Your next question comes from the line of David Karnovsky with JPMorgan. David Karnovsky: John, just with the integration, I wanted to see if you could comment a bit more on healthcare and PR. I think these were 2 areas you talked in the past about the scale of combining with IPG and the opportunity going forward. So kind of what's been the experience to date? And what are you seeing generally across these disciplines? And then, Phil, I'll revisit the Investor Day. Also, you guys had provided an expectation of 4% constant currency growth for the core businesses. That was well within the kind of macro volatility we've seen, but just I was curious if there was any update there to give. John Wren: Sure. The healthcare business, the combination of both the size that IPG had as a business and we had a business is extraordinary. We clearly have an incredible amount of talent and representation across the whole pharma business. And what leads that -- lets us attract the best and smartest people and makes us -- every single pharma company has to come and speak to us if they want to do something in terms of their marketing. In terms of PR, PR is a different type of business. We've been able to continue to grow it. In the past, we've been affected by elections, but any negative news is behind us from '25. And so we have good comps coming forward. And I think the only real comments I made is that I'm happy with the performance of those units as we go forward. There's a lot of combination there, too. And there's synergies that are going to come out of probably the PR business more than the healthcare business. But -- so it's all quite positive. It's a very solid contributor to our overall growth, and we expect it to continue that way. Philip Angelastro: Regarding the question on organic growth at Investor Day and the 4% reference, certainly, as I said in my prepared remarks, we're on track to achieve our operating plans and targets, and that would include the organic growth reference as well. So we're not changing that expectation at this point in time, but we're certainly comfortable with what we said at Investor Day. Operator: Your next question comes from the line of Jason Bazinet with Citigroup. Jason Bazinet: I just had a handful of questions around the disposed businesses and core operations. I guess the first one is, why did you decide to sort of focus the [indiscernible] on core operations? Why do you think that's the right way to look at the business? John Wren: Sorry. No, no, you go right ahead. Ask your questions. I'll write them down and then I'll try to answer them. Jason Bazinet: All right. I think and maybe I'm misremembering, you guys gave a rough benchmark of about 10% EBITDA margins for the disposed businesses. And if I'm looking at the Slide 3, which is quite helpful, it looks a bit lower than that. And then third, I was just struck by the disposed businesses, if I'm doing the math right, it looks like they shrink, I don't know, 16% or something like that year-over-year, which is far worse than I would have thought any business would be performing even a bad business to put it that way, that you might be disposing. So those are my 3. John Wren: I mean you could repeat that, the last question, you're talking about the performance of the disposed businesses? Jason Bazinet: Yes, it's just -- it's shrinking much more than I would have thought. Philip Angelastro: Which numbers are you looking at, Jason, because I think -- when you look at the year-over-year -- go ahead. Sorry. Jason Bazinet: $748 million versus $627 million. Philip Angelastro: Yes. So some of those businesses that we're disposing of were actually disposed of. So there was a meaningful -- as we said on the year-end call in February, we had closed on the sale of an experiential business, Jack Morton kind of the day before February 15. So the first quarter in that example, has 1.5 months of their revenue, but it doesn't have the second 1.5 months in the quarter. So the revenues are down because the business was sold. So it isn't a performance, it's just a timing of when the dispositions occur. John Wren: And Jason, I'm glad you asked the question, I really am. What we decided when we closed the transaction and looking at our businesses is which of the businesses that are going to grow, continue to grow and which are contributing a fair margin for the efforts that we're putting in. And the way we developed the initial list of the $3.2 billion of companies that we were going to hold for resale is based upon poor margin performance and unreliable growth and then after we went through that filter, the second filter, which was the governing filter was, is this necessary for our clients? Is this what our clients are asking for? And we reached the conclusion that, no, they weren't. Now there's a number of businesses in there. Some of them not terribly large, but there's a lot of units because we're spread out throughout the entire world. And what we're doing is we're working to dispose of them and if there was another way to get them out of our financial statements, we would. But there isn't. We have to -- until we get rid of them, we have to account for them, and that's why we decided to put them in the columns that are reflected on Slide 3. And we -- maybe we were being a little optimistic or nice at Investor Day when we said the margins for these businesses are 10%. It turns out that the margins of these businesses are probably not 10%. They're probably something less. So the sooner -- and because -- and what was interesting is coming out of Investor Day, you could see that we had not clearly communicated that this distinction that what we're calling core now are the operations that we're planning to focus on and will contribute to the ongoing growth of Omnicom. And the noncore assets that you see will hopefully disappear as we dispose of them throughout the rest of the year. Philip Angelastro: Yes. Well just one other piece of input in terms of the margin. Certainly, the margins will likely vary by quarter. So as we get through the year and we get through this process, the historical reference is what we made. The historical reference was about 10% for that group. We'll see how each of the quarters play out. But certainly, it's a focus of ours to move expeditiously to complete those dispositions. John Wren: I can't wait for the day that you never have to ask me that question, but I do appreciate you asking it. Operator: Your next question comes from the line of Tim Nollen with SSR. Timothy Nollen: I've got a couple actually related to really what a lot of people would think of as your core businesses, which are the media planning and buying businesses and then the creative business. On the media planning, John, you made a brief reference to Agentic AI. And I wonder if you could talk a little bit more about as these LLMs come more and more to market and enable direct communication amongst the various parties in the value chain. And as Omnicom is doing a lot of principal media buying itself, can you more directly go to publishers yourselves in ways that you have not before? And then on the creative side, I just want to push again why the advertising business was down. And I'm wondering if there might be something of a trade-off with production, which I think you hold in your integrated media business, which you said was growing high single digits. Is there maybe a little bit of a trade-off between creative advertising and production? John Wren: There's a couple of very interesting questions. I'm going to answer some of them, and then I'm going to refer to Paolo, who leads our AI work to answer some of it too, Tim. Yes, it's interesting that the quest right now, and I think every major -- there aren't too many major groups that are working on it is looking to have direct -- more direct relationships with the publishers. That is an aim and it's an objective, and it's something actually that we're investing in as we sit here today. When you look at I'd be dating myself if I went back to the Internet days of the '90s, but there's always a messy middle between the client, the advertiser and what they pay for the media and reaching the consumer and a lot of MarTech and stuff, which becomes exciting for a moment or 2 and then fades away. Most of those businesses don't last very long. And there are intermediaries today, they stand between us and the publishers, and they take a toll. And the toll is paid for by the clients and by the industry itself. So that is something you can continue to ask me about in the future because that is something we're clearly working on. The second part of your question, as what happens with the quality, and now I'll turn it to Paolo of our platform in addition to being a common way for our people to communicate to both the clients and to look at problems and the quality of our data gives us more information, data itself doesn't mean too much unless you use it properly. And we have -- we think, the best data at the moment in the industry, and it allows our creative and really smart thinkers to come up with some really different ideas and explore different opportunities. Part of the Agentic revolution and what's going on is it reduces the need for what was previously manual work that was -- or semi-manual work that was required to put together Excel spreadsheets and to do a lot of other things in the simplest terms, and it makes us more productive. And we believe that the contribution that our creative people can make and the contribution that our media cloud size and influence can make will maintain and help grow our profits in certain parts of the business, exceeding any declines that come in because of the automation or efficiencies that we go through. And the quarter proves it. We grew 4% in a complicated world with a company that we've just been together for 90 days. I don't know, Paolo, if you want to add anything to. Paolo Yuvienco: Sure. Tim, I can address the Agentic media buying. So as we mentioned in Investor Day, Omnicom is really leading the charge from our perspective on Agentic media and the Agentic media ecosystem. We're first to market with things like AdCP, which is a protocol that's being defined and being evolved around Agentic media buying. What I also mentioned in Investor Day is that we had already tested the pipes and been able to have money flow through to actually buy inventory available on certain publishers. Since then, we've actually executed real media buys for several clients using our agent framework, doing agent-to-agent buying, which is all in service to shortening the media supply chain, as John articulated. How do we get -- drive higher value for our clients, deliver a greater amount of working media dollars for our clients and ultimately making the entire process more efficient and effective. Philip Angelastro: If you have a follow-up for Paolo on that, go right ahead. Timothy Nollen: Yes. Can I just ask a follow-up then, which is I wonder -- everything you're saying makes sense. I wonder what happens to your pricing models and your ability to price for your services in a world where, as you said, Paolo, the media supply chain is shortening. I mean, are you in a position of strength to leverage to gain better pricing terms for your clients and to -- I mean, so far, you seem to be doing well for yourselves as well. John Wren: Yes. The whole environment expands, Tim, and we will be rewarded as a result of that. And what we're talking about taking out in effect is the lower cost type of efforts, which contribute to our revenue. And increasingly, we're moving towards performance. That's a change, it's ongoing. Nothing is overnight, even though I know everybody likes everything to be overnight. It's not overnight. And the higher quality -- people with a higher quality approaches and reaching more customers and selling more product, and building better brands. That's where we sit. That's where our clients trust us. That's why they buy our products. And as a result, we will get paid a very fair price for the efforts that we put in because we've made these investments. I don't know if. Philip Angelastro: Yes. In terms -- just to close out on the production question, relative to our $23 billion annual base, it's just not a substantial component in terms of dollar value. The key to the portion of the business that's in integrated media is the intelligent content automation business, which is closely integrated with media and our platform. So that's what we were distinguishing at Investor Day. Operator: Your next question comes from the line of Michael Nathanson with MoffettNathanson. Michael Nathanson: I have one for John, Paolo and then one for Phil. John, I've got to date myself. I remember when Interpublic bought Acxiom and I asked you about that strategy of buying Acxiom, and it wasn't the right time for you to buy it. Now it is the second bullet point on the momentum of your company. So what have you found 4 months into owning Acxiom? How has the integration helped you? And how does that give you an edge from maybe where the asset was used previously at IPG? And then for Phil, on Page 14, thanks for all the color. But would you ever put out a core and pro forma operating expense details so we can actually build models that work on a pro forma basis on a core basis, too, on the cost side? John Wren: I can't go back completely to 2018 and remember everything I was thinking, although I'm accused of remembering every number that I see. At Acxiom, I think Interpublic at the time paid $2 billion for the company. 5 years later, I paid $9 billion for all of Interpublic. So I think my waiting paid off from an economic point of view. And -- but most importantly is the -- and this was true then, and it's certainly true now is the quality and the fidelity of the data that Acxiom gathers has not changed in that 5- or 7-year period. They -- because they've worked principally for regulated industries in the finance sector and the pharma sector, their data is not as haphazard as consumer data can be. And it has to have fidelity because there's a lot of laws and regulations that go around it. And so we're able to ingest and use this to develop our Acxiom customer ID methodology, and I'll let Paolo even comment a little bit on that. And it's been a real contributor to our overall efforts. Now if I want to be really fair, we probably weren't ready for it in 2018, but we're certainly ready for it when we bought it now. Paolo Yuvienco: Yes. I would add to that, Michael, that especially now with kind of the proliferation of artificial intelligence and more specifically generative AI and how we've incorporated into almost every facet of the marketing life cycle, the ability for us to actually drive value from that data is greater now than it's ever been. And it is exponentially more powerful for our clients. Philip Angelastro: So just on the specific question, you asked, Michael. Given the size of the acquisition, not every number of schedule related to the prior year data is perfectly comparable. That certainly, we understand, and we're working towards that. We're happy to take any follow-up questions that you have on the detail, certainly offline, no problem. Operator: Your next question comes from the line of Adrien de Saint Hilaire with Bank of America. Adrien de Saint Hilaire: Two of them. Do you have any better visibility on how much proceeds you think you're going to get from the planned disposals? I can see you've fetched $152 million in Q1, but interested in your views for the year. And then maybe for John, in terms of new business, one of your peers seems to have a bit of a revival of late. I'm just wondering if you're seeing a bit of a change in the pricing dynamics? Are you seeing potentially any pricing pressure around those pictures more so than usual? I understand there's always a bit of price pressure around those. John Wren: Sure. With respect to your first question, restate it for me, please, Adrien, just so I answer it properly. Philip Angelastro: I think it's visibility on the pricing. Adrien de Saint Hilaire: On the pricing... John Wren: On the pricing. Yes, yes. No. As you saw, if you looked at our cash flow statements, there was money made on the sale of... Philip Angelastro: Principally Jack Morton. John Wren: Principally Jack Morton. And there's a number of companies that we expect to receive proceeds from the sale of significant number of those units that we're holding in that bucket. There's some that are just disposals. There are things that we have to go through the process because they are very low growth. They've been around for a long time, but they happen to be in some instances in countries where the exercise of going through and shutting them down or paying out the proper severance and things to people cost us money. We've accrued for the downside as best we could. And so we're looking to sell and generate positive cash flow. But I don't think it's going to add to our net income for the year so much as it is it will generate additional cash. Philip Angelastro: Certainly, we have an expectation, but it's really very difficult to estimate what those proceeds are going to be. And we certainly don't want to give you any inaccurate expectations regarding what they're going to be. And when those deals happen and proceeds come in, we're certainly going to keep you updated and let you know. John Wren: And Adrien, after listening to me for years, as I said earlier to our question, I'd love to see these things off of my P&L and not talk about them anymore, but that's not going to make me give them away either. So we're pretty confident that over the next several quarters, we can get through most of them. And we have teams doing this and outsiders. We're focused on new business and growing our business and getting the teams that we brought together functioning in a proper way. So that's why we even call them core assets. That's where most of our focus is. There's a bunch of accountants running around trying to sell these things. And what was the second question? Adrien de Saint Hilaire: Yes, it's on the new business environment. John Wren: Competitive pricing. Yes and I certainly know the ones you're talking about, there's been 2 or 3. Everyone strikes me as if I've just been defeated because I hate losing. And some of it has to do with competitive pricing, but we win more than our fair share, and we'll continue to win more than our fair share. And every loss, there's no such thing that's coming in the second. Believe me, I do a root-cause analysis of why we lost it to try to cure for the next opportunity that we have. So yes, we lost but not much, and I'm not happy about it. Operator: And that concludes our question-and-answer session, and that does conclude today's call. Thank you all for your participation, and you may now disconnect.
Operator: Welcome to the Five Star Bancorp First Quarter Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After today's presentation, there will be an opportunity for those provided with a dial-in number to ask questions. Before we get started, we would like to remind you that today's meeting will include some forward-looking statements within the meaning of applicable securities laws. These forward-looking statements relate to, among other things, current plans, expectations, events, and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the company's forward-looking statements, please see the company's Annual Report on Form 10-K for the year ended 12/31/2025, and in particular, the information set forth in Item 1A, Risk Factors. Please refer to Slide 2 of the presentation which includes disclaimers regarding forward-looking statements, industry data, unaudited financial data, and non-GAAP financial information included in this presentation. Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix to the presentation. The presentation will be referenced during this call but not followed exactly and is available for closer viewing on the company's website under the Investor Relations tab at fivestarbank.com. Please note this event is being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead. James Beckwith: Thank you for joining us to review Five Star Bancorp financial results for Q1 2026. These results were released yesterday and are available on our website, fivestarbank.com, under the Investor Relations section. Joining me today is Heather Luck, Executive Vice President and Chief Financial Officer. Q1 2026 marked another period of outstanding achievement for Five Star Bancorp. Underscored by robust growth across all markets we serve and consistent strong performance. During the quarter, we continued to deepen our client relationships and expanded our presence in key geographies while investing in both talent and technology to support ongoing organic growth. Our commitment to disciplined execution and differentiated customer service was evident in our solid results. Q1 2026 earnings per share increased to $0.87 per share, up $0.40 per share from the prior quarter, with annualized growth in loans held for investment of 14% and annualized deposit growth of 26%. We remain well positioned to capitalize on new opportunities and drive sustainable value for our shareholders, customers, and communities. Financial highlights during Q1 2026 include net income of $18.6 million, up 6% from the prior quarter; return on average assets of 1.55%, an increase of 5 basis points from the prior quarter; return on average equity of 16.73%, an increase of 76 basis points from the prior quarter; net interest margin of 3.7%, an increase of 4 basis points from the prior quarter; and average cost of total deposits of 2.13%, a decrease of 10 basis points from the prior quarter. Our Q1 results were driven by robust loan and deposit growth. Loans held for investment grew by $138.5 million, or 14% on an annualized basis. Total deposits grew by $268.3 million, or 26% on an annualized basis, with non-wholesale deposits up $350.2 million offsetting an $81.9 million reduction in wholesale deposits. This shift reflects our focus on building stable, relationship-based core deposit funding. Our asset quality remains strong, with nonperforming loans representing just 7 basis points of total loans held for investment, a reflection of our conservative underwriting. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter. We remain committed to delivering value to our shareholders. In Q1, we paid a cash dividend of $0.25 per share and declared an additional $0.25 dividend expected to be paid in May 2026. Our total assets increased by $276.9 million during the quarter, largely driven by loan growth within the commercial real estate portfolio, which increased by $116.2 million. Competition has increased, but our loan pipeline remains strong. Ongoing uncertainty surrounding energy supply chains and global economic consequences of the Iran conflict has triggered volatility in interest rates. We believe we are well positioned for changes in interest rates, as approximately 75% of our loans held for investment are adjustable or floating. This gives us flexibility to respond to market shifts and helps protect our earnings in a volatile environment. Our prudent underwriting standards, comprehensive loan monitoring, and focus on relationship-driven lending have contributed to maintaining strong credit quality. As a result, we have a very low volume of nonperforming loans, which declined by $280,000 during the quarter. We recorded a $2.7 million provision for credit loss during the quarter, primarily related to loan growth. The increase in total liabilities during the quarter was the result of growth in interest-bearing and noninterest-bearing deposits, related to both new accounts and inflows from existing customers. Non-wholesale deposits increased by $350.2 million while wholesale deposits decreased by $81.9 million. Noninterest-bearing deposits accounted for approximately 28% of total deposits, an increase from approximately 26% as of December 31, 2025. Approximately 61% of our total deposit relationships totaled more than $5 million. These deposits have a long tenure with the bank, with an average age of approximately eight years. We believe our deposit portfolio to be a stable funding base for our future growth. On that note, I will now turn the call over to Heather Luck for the results of operations. Heather Luck: Thank you, James, and hello, everyone. Net interest income increased to $43.5 million, a 3% increase from 2025, supported by both volume and margin expansion. Our net interest margin improved to 33.7% from 3.66% in the prior quarter, reflecting disciplined pricing and a favorable mix of assets, and interest income increased by $926,000 from the previous quarter, mainly due to a 4% increase in the average balance of loans. The increase in interest income was augmented by a $166,000 decrease in interest expense due to a 10 basis point decline in the average cost of deposits. While the average balance of deposits increased by 5% during the quarter, a 5% increase in the average balance of noninterest-bearing deposits combined with a decrease in the costs associated with deposits resulted in a net decrease in total interest expense. Noninterest income increased to $1.6 million in the first quarter from $1.4 million in the previous quarter, primarily due to an increase in fees from swap referrals and a special FHLB stock dividend recognized during the three months ended March 31, 2026, partially offset by an overall decline in earnings related to investments in venture funds. Noninterest expense decreased by $263,000 in the three months ended 03/31/2026. This is primarily due to the release of a $1 million loss contingency on an SBA loan that did not occur during the prior quarter. This was partially offset by an increase in salaries and employee benefits related to increased headcount to support customer-facing and back-office operations. Our efficiency ratio improved to 38.57% from 40.62% in the prior quarter, primarily driven by the release of the loss contingency. The provision for income taxes for the quarter ended 03/31/2026 increased by $1 million as compared to the prior year, primarily due to an increase in taxable income recognized and a net reduction in transferable tax credits recognized during the quarter of approximately $664,000. And now I will hand it back to James for closing remarks. James Beckwith: Thank you, Heather. Five Star Bancorp's success serves as strong testimony to clients who value our team of committed professionals who provide authentic relationship-based service. We continue to ensure our technology stack, operating efficiencies, conservative underwriting practices, exceptional credit quality, and prudent approach to portfolio management will benefit our customers, employees, community, and shareholders. As we look to Q2, we remain committed to our disciplined approach to growth, prudent risk management, and delivering value to all of our stakeholders. We are excited about the opportunities in our markets and confident in our ability to continually execute on our strategic priorities. Our focus will remain on expanding our presence in key geographies, deepening client relationships, and investing in technology and talent to support our long-term success. We appreciate your time today. This concludes today's presentation. We will now open the call for questions. Operator: We will now begin the question and answer session. To ask a question, those dialed in may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question today is from Evan Kwiatkowski with Raymond James. Please go ahead. Analyst: Hey, this is Evan on for David Pipkin Feaster. Good morning, everybody. I just wanted to start on the Southern California expansion announced earlier. I know it is early innings, but on a high level, I am just curious what you are most excited about for that market and how the team down there has been ramping up so far. I also wanted to gauge your thoughts on potential de novo expansion in Southern California alongside those hires and how you see that market evolving broadly. James Beckwith: Well, thank you for the question. We are very excited about the team that we brought on. We have four business development officers and two support staff. They are very confident, and so far, deal flow seems to be very, very strong from them. It is a lot of fun for us engaging with them in a market which is just substantial—much bigger market than Northern California, as you know—and so the deal flow that we are seeing right now are just great credits, C&I-based, and we are excited about the opportunities that the team is presenting us. In terms of de novo operations or potentials, we have a team in Newport Beach right now and then we have a team up in Los Angeles County and Ventura County. As they continue to mature and develop, the next step for us would be to open a full-service office in those localities. But we want to see substantial growth coming from those teams, and it will help us get to where we want to be ultimately, which is to have full-service offices. Analyst: That is really helpful. Excited to see how that develops. And then maybe sticking on the growth side, originations were really strong during the quarter. I am just curious where that is coming from broadly. Is it more a function of increasing demand in your markets or increasing contribution from existing bankers or new hires? And then maybe just curious where you are seeing the most opportunity for growth within specific segments as well. James Beckwith: It is coming from a lot of different places. Our existing business development people—we now have 46 of them working for the company, but during the quarter it was 42—and everybody is producing. Everybody is doing quite well across our verticals and our geographies. We are seeing substantial growth coming from all the way up into Redding, all the way down to Walnut Creek in the Bay Area, and our ag team also is doing quite well. So we are hitting on a lot of cylinders right now in terms of deal flow and really good relationships that our seasoned professionals are bringing in. I could not really single out one, but maybe on the depository side, our government book has done quite well on growth in relationships. We are excited about that. Our manufactured home and RV folks are doing well also. But it is coming from a lot of different sources, which we are all very, very excited about. Analyst: On the deposit side, it was good to see the growth during the quarter, which allowed you to pay down some wholesale funding. What was primarily driving that, and do you see any opportunities for additional funding cost leverage from here, especially given the prospect of no Fed cuts this year? James Beckwith: Right. We are going to continue to focus on reducing our wholesale deposit book, with a desire to be out of it by 12/31. Hopefully, we will be able to do that more quickly. That is our plan. So that will provide maybe some relief in our interest cost, and it is really going to be dependent upon continuing to push deposits. The value of our franchise, we recognize, is in our deposit base, and we are executing quite well on that in terms of bringing on new relationships. Noninterest-bearing deposits saw substantial growth in Q1, and we hope and expect to see that growth continue. As I mentioned previously, our government banking team has done quite well. That team really covers the entire state. Their focus is on cities and counties, but moreover their focus is really on special districts, and they have done quite well in that space. Their pipelines remain very strong, so we are excited about that. Analyst: That is great. Thanks, guys. Great quarter. James Beckwith: Thank you. Operator: The next question is from Woody Lay with KBW. Please go ahead. Woody Lay: I had a follow-up on deposits. The focus is continuing to pay down wholesale deposits. But if I look over the past year, it is pretty incredible the mix change that has undergone there. Is that being driven by some of these sub-verticals that have allowed you to grow core deposits? Is it new customers to the bank? Is it expanding the wallet of current customers? Would love your take on that. James Beckwith: It is a great mix between deposit flow from existing customers and new relationships that we brought on. Often a deposit relationship—or any banking relationship—takes a while to mature, and so we are seeing some growth coming from the business that we put on in 2025 as those relationships kind of work their way over to us, Woody, and so that is exciting. But also, our first three months have been very strong in terms of new deposit growth and new accounts, so we are excited about that. Again, our government book has done quite well, but our growth in deposits is coming from all different types of verticals. It is very much aligned with our objective to pay down our wholesale book. It is pretty evident what we have been able to do for the last six months with that, and hopefully we will be out of brokered deposits, as I mentioned, by 12/31. We would certainly like to do that more quickly than by the end of the year, and we will see how the second quarter goes. Woody Lay: I would imagine paying down the brokered has been a positive to net interest margin, and we saw the NIM take another step up in the first quarter. How are you thinking about continued NIM expansion from here, especially if cuts are flat, and then the incremental impact that rate cuts could provide? James Beckwith: We do not know how much juice is left in terms of the impact rates will have on our NIM. We are kind of thinking it is settling around where it was for the quarter. But we do expect increases in net interest income to come from growth, and that is our sense right now. NIM might move up a couple of basis points, but nothing substantial like we have seen for the last four quarters. We are settling in on this NIM range of 3.70% to 3.75%. Hopefully we can maintain it there and have net interest income being driven by growth. Woody Lay: On loan growth, it remains really strong. I have heard anecdotal commentary across the industry of some increased competition, especially among bigger banks. Are you seeing that within your footprint? James Beckwith: We have been doing this for quite some time, and competition is always present. We mentioned it in the script—competition is out there. Yes, on good deals, people are fighting for them, and you have to be careful that your growth is spread out amongst several relationships and your pricing is something that you can make money on. We know it is going to be competitive for the best deals, and that is our mindset when we come to work every day. We are winning our fair share—we are not winning everything. If we were winning everything, maybe we are not pricing it right. The function of our growth—what is really driving it—is just the number of people we have, the boots on the ground so to speak, relative to our size. In total headcount, we just have more business development people, so the opportunities that are coming to us are really being driven more than anything else by the number of folks we have in the space. Woody Lay: That all sounds good. Thanks for taking my questions. James Beckwith: You bet. Operator: The next question is from Andrew Terrell with Stephens. Please go ahead. Andrew Terrell: Good morning. I wanted to stick on margin and deposits for a bit. How much of the deposit growth this quarter was related to the government or the special district business line? And I would love to get a sense for where you are bringing on, cost-wise, the incremental dollar of core deposits versus what is rolling off on the wholesale side—pricing-wise. James Beckwith: The growth in our government book in the first quarter was quite substantial, as I mentioned. It is about $189 million to $190 million, so it really drove the overall increases in deposits. Other verticals did quite well also, but that one kind of stands out. Now, that money that came in is really priced right on top of our brokered deposit book, so there is no incremental pickup, if you will, in terms of cost reduction with that money coming in versus having the brokered deposits go away. For some of these counties, that is their liquidity, and we hope to bring on some noninterest-bearing deposits through that process with those relationships, and we have. But a lot of that growth is really coming right at the margin. Heather Luck: And just for reference, to compare the two: our brokered book at the end of the quarter was sitting at about 3.82% for the actual brokered deposits, and the ladder rate is about the 3.80% range. So we are pretty much just swapping dollar for dollar. Andrew Terrell: Okay, makes sense. On the noninterest-bearing deposits—fantastic growth this quarter. Was there anything in the end-of-period figure for noninterest-bearing, which I think was $1.23 billion, that was elevated specifically at period end and has normalized in the second quarter so far, or is that a good base to work off of? I am asking because it is a lot higher than the average. James Beckwith: A couple of things drove noninterest-bearing deposits. One, we do have a title company that is doing quite well—pretty big relationship. Also, with some of our folks in our Newport Beach office, they are bringing on their customer base, which is escrow companies, and all those monies are noninterest-bearing. We expect to continue to see growth in our Newport Beach office from those two folks that we brought on. In combination with that and all the other C&I business we have been doing up and down the platform, that really drove noninterest-bearing deposits. Those two matters kind of stand out. Andrew Terrell: Last one from me: I think last quarter we talked about kind of 10% growth for the year on both sides of the balance sheet. You are pretty close on the deposit side already. Any updated expectations on the pace of balance sheet growth or targets for the year? James Beckwith: We guided pretty consistent with what our plan is, but obviously we exceeded that, which is a good thing. We could probably see maybe 10% to 12% growth on both sides of the balance sheet for the remainder of the year, but we will have to see how it goes. We are excited—our pipelines are pretty robust right now, frankly. With the bringing on of this new team in Southern California, we expect to really drive growth on both sides—both deposits and loans. Their book and their client and prospect base are really very strong C&I operating companies, which will bring in some nice noninterest-bearing deposits. So that is where we are right now on that 10% to 12% growth. Andrew Terrell: If I could ask one last one: normalizing the expense base, it looks like $18.4 million or so for the quarter. Can you update your thoughts on the expense run rate going forward? Heather Luck: You could probably add back $1 million to adjust for the release of the accrual. But if you add about $500,000 to that, we are still consistently falling in that $14.8 million to $15.5 million range, and I think we will stick to that probably for the next quarter or two. Andrew Terrell: Great. Thanks so much. Operator: The next question is from Gary Tenner with D.A. Davidson. Please go ahead. Gary Tenner: Thanks. Good morning. I wanted to ask a follow-up, James, to your comments a moment ago on the Newport office and bringing escrow company deposits. Does any of that start leaning into deposits that show up on the expense line from any kind of earnings credit noise, or are these pure noninterest-bearing deposits? James Beckwith: The earnings credits are pretty robust in that space, and we are not doing anything in terms of earnings credit rate for those new customers outside of what the market rates are. But there will be some expense associated with that based upon those earnings credits. We fully expect that and have planned for it, so it has a cost, to your point, Gary. Gary Tenner: Thanks for that. Also a follow-up on expenses in general. You have been year-over-year expenses up about 20%, first quarter to first quarter, adjusted for that $1 million SBA liability. Obviously you are built for growth. Is the pace of investment changing at all over the next 12 months versus the last 12 months in terms of hires, etc.? James Beckwith: We are investing in the business. We announced this month that we are bringing on—I guess the announcement was five people, but we are actually bringing on six. That is a substantial cost. These folks are not cheap, and we will continue to invest back in the business because, take the Bay Area, we are desirous of being in the South Bay from Palo Alto all the way down to San Jose. We are obviously looking at opportunities there. So we are going to continue to invest. Your question is, is the pace going to be consistent with what it has been in the past? The answer, I think, is yes. Heather Luck: I think we are following what really worked well in the Bay—hiring smaller teams of people and smaller tranches of people. We are starting to do that in Southern California as well, and that has worked really well for us to integrate them into the company. You are going to have some stair-stepping, and we will have some resets each quarter on what our new expectation for expenses are. That likely will happen over the next year or two. Gary Tenner: You have clearly developed a playbook that works for moving to new markets. I appreciate the thoughts on that. James Beckwith: Thank you. Operator: Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. James Beckwith: Thank you. I want to reiterate our appreciation for the trust and support of our shareholders, clients, and employees. The results we shared today are a direct reflection of the dedication and hard work of our entire Five Star Bancorp team, as well as the enduring relationships we have built with our customers and communities. It is our privilege to continue to be a driving force of economic development, a trusted resource for our clients, and a committed advocate for our communities. We look forward to speaking with you again in July to discuss earnings for Q2. Have a great day and thank you for listening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to Wave Life Sciences First Quarter 2026 Earnings Call. [Operator Instructions]. Also, as a reminder, this conference call is being recorded today. I will now turn the call over to Kate Rausch, Vice President of Corporate Affairs and Investor Relations. Kate Rausch: Thank you, operator, and good morning to everyone on the call. Earlier this morning, we issued a press release outlining our first quarter 2026 earnings update. Joining me today with prepared remarks are Dr. Paul Bolno, President and Chief Executive Officer; Dr. Eric Ingelsson, Chief Scientific Officer; Dr. Chris Wright, Chief Medical Officer; and Kyle Moran, Chief Financial Officer. The press release issued this morning is available on the Investors section of our website, www.wavelifesciences.com. Before we begin, I would like to remind you that discussions during this conference call will include forward-looking statements. These statements are subject to several risks and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements. The factors that could cause actual results to differ are discussed in the press release issued today and in our SEC filings. We undertake no obligation to update or revise any forward-looking statement for any reason. I'd now like to turn the call over to Paul. Paul Bolno: Thanks, Kate, and good morning to everyone joining us on today's call. Coming into the year, we outlined our key priorities for 2026, accelerating development of WVE-007, our INHIBNE GalNAc siRNA program for obesity and rapidly advancing our RNA editing portfolio led by WVE-006 for AATD and followed by WVE-008 for PNPLA3 liver disease. Today, I'm pleased to share an update on the significant progress we've made towards these goals. We are rapidly advancing 007, which has the potential to be transformational in the treatment of cardiometabolic diseases, including obesity. Using our best-in-class chemistry, 007 continues to demonstrate a highly differentiated profile. Clinical data, even in a Phase I population continues to demonstrate improvement in body composition with fat loss, importantly, visceral fat loss and muscle preservation, impressive durability with potential for once or twice a year dosing and a clean safety profile. We're accelerating 007 to the next stages of development where we have the opportunity to unlock its full potential across multiple treatment settings, beginning with our Phase IIa trial in participants with higher BMI and with and without diabetes. We are preparing to initiate our Phase IIa trial this quarter as the FDA has recently accepted the multi-dose portion of INLIGHT. Closely following the initiation of our Phase IIa trial in higher BMI participants, we plan to initiate studies evaluating 007 in combination with incretins and maintenance post cessation of incretin treatment. In RNA editing, we continue to lead the field with 006. Clinical data from our ongoing RestorA-2 trial has already demonstrated the potential for 006 to provide a much-needed novel therapeutic option to individuals living with AATD, including generating over 20 micromolar of AAT protein during an acute phase response. It's important to note that these acute phase responses are the drivers of lung damage in AATD. We look forward to highlighting these data during the ATS conference and hosting an investor webcast to share our monthly 400-milligram multiple dose as well as single-dose 600-milligram data. Having already achieved therapeutically relevant AAT restoration with our interim data, we are on track to receive regulatory feedback on a potential accelerated approval pathway in mid-2026. We're also building on our success in RNA editing to advance our next candidate, WVE-008 towards the clinic this year, which has the potential to address the 9 million individuals living with PNPLA3 liver disease. Beyond our lead RNAi and RNA editing programs, we are continuing to push the boundaries of innovation through our bifunctional modality that allows us to both silence and/or edit to treat diseases with a single construct at a single dose. We're also advancing a growing pipeline of new hepatic and extrahepatic candidates. With the substantial progress we've made, we believe we are well positioned and well capitalized to advance our pipeline of transformational therapies for patients. Now I'd like to turn the call over to Erik, who will discuss how we are leveraging our proprietary chemistry and human genetic insights to advance WVE-006 for AATD and WVE-007 for obesity. Erik? Erik Ingelsson: Thank you, Paul, and thank you to everyone joining us on the call today. I'll start with WVE-006, our GalNAc-siRNA editing oligonucleotide or AIMer for alpha-1 antitrypsin deficiency. ATD is a uniquely compelling disease for RNA editing. It's a monogenic disorder caused by a single well-characterized genetic variant in the SERPinA1 gene, which leads to misfolded alpha-1 antitrypsin or AAT protein teredZ-AAT. Healthy circulating AAT turned MAAT protects the lungs during inflammatory or infectious events. ATD is sometimes referred to as genetic COPD for a reason. Without dynamic production of functional AAT, patients are at risk of lung damage and ultimately developing emphysema and bronchiectasis, which is characterized by chronic cough, recurrent infections and shortness of breath. In parallel, Z-AAT accumulates in hepatocytes and causes progressive liver injury and risk of liver disease. By correcting the mutant transcript in the liver, RNA editing addresses the root cause of both the lung and liver manifestations of the disease. Approximately 200,000 individuals in the U.S. and Europe live with homozygous PICV-AATD. It's a devastating disease, impacting the ability of patients to work, play with their children or even walk to the mailbox. Currently, the only approved treatment for AATD is weekly IV plasma-derived augmentation therapy, which carries several limitations. With a fixed scheduled dose, there is no restoration of dynamic response, leaving patients at risk if AAT protein falls too low during an acute space reaction as a result of infectious or inflammatory events. IV therapy is time consuming and often required in patient visits and IV therapy does nothing to lower AAT to address development of liver disease in these patients. RNA editing is designed to restore heterozygous emptT-like phenotype, including AAT production that drives to meet the demand during acute space response. This is a particularly important distinction between RNA editing and the current augmentation standard of care that we continue to hear echoed in our conversations with physicians and patients as there is uncertainty that there is adequate lung protection when patients experience infections between infusions. Such acute exacerbations, the sudden worsening of a patient's respiratory symptoms that often require urgent treatment occurs roughly twice per year on average, even on weekly augmentation therapy. 006 is a highly specific and efficient GalNAc AIMer. Unlike DNA editing therapies in development, RNA editing does not modify DNA and 006 does not require delivery with lipid nanoparticles or LNPs that may be as with systemic and liver inflammation, potentially inducing hepatocellular stress and activating a hepatic acute phase response. 006 also avoids reversible collateral bystander edits and inults, which are associated with DNA editing. With 006, our goal is to recapsulate the emptylike phenotype as it is well established that heterozygous PINC individuals at significantly lower risk of both lung and liver disease. T individuals maintain basal AAT levels above the protective threshold of 11 micromolar, wild-type MAAT above 50% of total AAT and most importantly, they retain the ability to mount a dynamic AAT response during an acute infection. That combination, protected beta levels and meaningful proportion of authentic MAAT and a preserved acute face response is the bar we set for 006 and that we cleared in the interim readout of our RestorAATion-2 trial in the fall. We demonstrated that 200-milligram biweekly dosing of 006 can restore endogenous MAAT protein to therapeutically meaningful levels and reduce mutant AAT correspond. This will lead to improved liver health and potentially even higher MAAT production over time, in line with what we have observed preclinically and ultimately lead to improved lung and liver outcomes in AAT. Crucially, we have shown that 006 reestablishes the body's physiological response to inflammatory stress, something that is not possible with IV augmentation. Now with upcoming data from our 400-milligram multi-dose cohort, we look to continue to recapsulate the MC-like phenyat but at a more convenient monthly dosing interval. Moving on to our INHBE GalNAc-siRNA program for obesity WVE-007. Individuals living with obesity face markedly high risk of a range of diseases such as NASH, type 2 diabetes and cardiovascular disease. Excess body fat, in particular, visceral fat is a key driver behind this elevated risk of disease. Current standard of care therapies reduce body weight through both fat and muscle loss and carry high discontinuation rates, limiting potential for long-term health benefits. An ideal obesity therapy would instead selectively reduce harmful visceral fat, the fat surrounding once organ that is most strongly linked to MASH type 2 diabetes and cardiovascular disease, while also lowering subcutaneous fat and liver steatosis and critically preserving skeletal muscle. Muscle preservation matters. Why? Because muscle sustains based on metabolic rate, glucose disposal and insulin sensitivity. Also it prevents weight regain, mostly from fat, which occurs in the majority of individuals that discontinue increasing therapies. And remember, as much as up to 70% of individuals discontinue incretin within a year. Preserving muscle while decreasing total and in particular, visceral fat is the ideal profile for an obesity medicine and is well established at already a 5% to 10% reduction in visceral fat mass associated with direct health outcomes by reducing risk of multiple preventable metabolic diseases and preserving patient function and quality of life. All these benefits can be delivered by 007's mechanism of action. Rather than acting on appetite, it silences in the knee and lower serum actin, a liver-derived hepatokine that signals adocytes put the brakes on lipolysis. Removing those brakes drives fat loss without calorie restriction and without the muscle loss seen with incretin-based therapies. This approach is also strongly grounded in human genetics as carriers of heterozygous in loss of function variants, nature's own knockdown experiments exhibit a healthier overall metabolic profile, driven by lower visceral fat as evidenced by lower waste-to-hip ratio and lower visceral lose volume as well as downstream effects with lower triglycerides, ApoB and HbA1c and higher HDL cholesterol. These carriers also have favorable associations with liver traits such as ALT, a measure of liver damage and CT1, a measure of liver inflammation and fibrosis and importantly, lower risk of developing type 2 diabetes and coronary heart disease. And as we have said on prior calls, targets supported by human genetics carry a 2 to 4x higher probability of success in drug development. IvenE a textbook example of this opportunity. We chose to target the activin E ligand through IBE silencing over its receptor ALK 7 for several reasons. Turning off protein production in hepatocytes to upstream source with GalNAc-siRNA is the most efficient and durable way to impact this pathway. Also suppressing activin E rather than disabling a receptor that induces signals via multiple ligands across different tissues is a more selective approach with lower risk of unintended consequences. This selectivity is especially important for long-term safety and for clinical translation. CER-07's unique ability to durably suppress IE is driven by our proprietary chemistry and SNAiRNAign. While RNAi is a well-established therapeutic modality and there are extensive human genetic data supporting IBE as a target, we believe our proprietary chemistry distinguishes us from others attending a similar approach. 007 is highly differentiated by Wave's proprietary pheno design, including backbone serrochemistry and PN chemistry, which enhances interactions with AVO2, stabilizes the loaded risk complex and improves liver exposure. This contributes to dramatically improved potency and durability when compared with industry standard siRNA science. Our interim Phase I ENLIGHT data sets from lower BMI, otherwise healthy individuals confirm that this proprietary chemistry and the underlying human genetics are already translating with preservation of lean mass and clinically meaningful reductions in total fat, visceral fat and waster complement after just a single dose. As Chris will discuss further in a moment, we're rapidly advancing 007 into patients with higher BMI and comorbidities in the Phase IIa portion of INLIGHT, where a scientific rationale predicts a larger effect. Activin E binds AP7 on allocytes and visceral fat being the more metabolically active and better pursued mobilizes first, exactly what we have observed in Phase I. Together, this means that we expect both visceral and total fat loss with 007 to be substantially more pronounced in higher BMI participants with more excess fat. To review our clinical progress with 007 and our RNA editing programs in further detail, I'd now like to turn the call over to Chris. Christopher Wright: Thanks, Erik. I'll begin by discussing our recent data and plans to accelerate development of WVE-007. In March, we shared interim data from the Phase I portion of our ongoing in-LI clinical program, placebo-controlled single ascending dose study designed to measure safety, tolerability and PK/PD. Participants were healthy individuals living with overweight or Class I obesity with an average BMI of 32, a population with less fat and lower BMI than those included in Phase II and Phase III obesity studies. The safety and tolerability profile of WV007 remains encouraging, and we continue to observe robust, highly statically significant dose-dependent and durable active E reductions through at least 7 months. This combination of tolerability and durability supports a convenient dosing interval of once or twice a year that may allow for enhanced patient adherence, more persistent fat loss and better health outcomes. Having reached 6 months of follow-up in our 240-milligram cohort, we observed further improvements in body composition following a single subcutaneous dose. This included placebo-adjusted visceral fat reductions of 14.3% well above the established threshold to deliver improved cardiovascular outcomes. Total fat reductions were 5.3% and lean mass was stable. There were also improvements across clinical measures, including a clinically meaningful 3.3% reduction in weight circumference. These results are particularly encouraging given this is a Phase I study of otherwise healthy participants with an average BMI of 32 and no dietary or exercise restrictions. As Erik just spoke to, reducing fat, particularly harmful visceral fat while also preserving muscle is critically important for the treatment of obesity, including overall functional improvement and cardiometabolic health benefits. The current standard of care pushes the limits on high percentage weight reductions, but it comes at a cost of substantial muscle loss. To provide context for our results at this early development stage, we calculated the visceral fat to muscle ratio or VMR, which is a measure of body composition that integrates harmful visceral fat and beneficial lean mass into a single index. Lower VMR is associated with decreased risk of NASH, type 2 diabetes and cardiometabolic disorders. We believe VMR has the potential to serve as a novel composite biomarker as compared to BMI alone that more holistically captures the body composition improvements driven by INHBE knockdown and that may better predict long-term clinical benefit. With a single dose of 007 in our Phase I population, we've already observed a 16.5% improvement or greater reduction in BMR which was more than the 12.2% achieved with weekly semaglutide in BELIEVE and approached the 18.8% observed with vimanrimab. What makes this comparison particularly exciting is that our INLIGHT participants had substantially lower BMI, visceral fat and total fat compared to Phase II or Phase III obesity studies. Clinical experience highlights the importance of baseline adiposity. Early Phase I studies in leaner subjects show modest fat reductions, while studies of individuals with higher baseline obesity demonstrate large clinically meaningful losses in total and visceral fat mass. Early follow-up from our 400-milligram cohort, which included a substantially higher proportion of individuals with lower levels of visceral fat also confirmed that higher baseline visceral fat leads to greater visceral fat reductions overall. Collectively, these data emphasize the impact of baseline body composition on therapeutic effect and support the potential to deliver even more pronounced improvements in body composition in the Phase IIa portion of INLIGHT, given participants higher excess fat at baseline and 007's mechanism of targeted lipolysis. Following the FDA's recent acceptance of our protocol amendment, we remain on track to initiate the Phase IIa multiple dose portion of INLIGHT this quarter. This global placebo-controlled trial will enroll individuals with higher BMIs in the range of 35 to 50 and comorbidities across 2 dose levels, 240 milligrams and 400 milligrams and 2 study populations with and without type 2 diabetes for a total of 4 cohorts of 40 patients each. Assessments in the multi-dose portion are similar to those in the SAD portion with additional inclusion of body composition measures by MRI, liver fat content measured by MRI-PDFF, HbA1c, lipid levels, CRP and muscle function. The design and study population enables enhanced evaluation not only of improved body composition and weight loss, but also informs additional opportunities for 007 in NASH, type 2 diabetes and cardiovascular disease. Participants will be given 2 doses of 007 at day 1 and day 85 and followed for 12 months with the first main assessment occurring at day 85. As Paul discussed earlier, we are also planning to initiate trials evaluating 007 in combination with incretins and as maintenance post incretin this year. We believe that 007's orthogonal mechanism, ability to drive reductions in fat while preserving muscle and favorable safety profile are actively suited to combination and maintenance approaches. Our preclinical data provides compelling support for both use cases. Planning is well underway for studies addressing incretin combination and post incretin maintenance, and these will initiate this year. We also expect to share additional data from the Phase I portion of INLIGHT this year, including data from our 600-milligram cohort, which will further inform the durability of 007. Turning to our ongoing RestorAATion-2 clinical trial of WVE-006 for AATD. We continue to advance this study while engaging with key opinion leaders and patient organizations who are eager to be involved. As we speak to key opinion leaders, there are several aspects of our data that excite them. one, restoring a dynamic AAT response to address acute lung infections; two, decreasing harmful Z protein to address liver disease; and three, offering a safe, well-tolerated infrequent nonintravenous treatment for patients that avoids permanent genetic modifications. We look forward to presenting an expanded data set during ATS on May 18, which includes data from the 400-milligram monthly cohort as well as the 600-milligram single-dose cohort. Continuing to recapitulate our prior interim results with a less frequent dose would strengthen the overall profile of 006 as a differentiated patient-friendly therapy for AATD. In addition, we plan to share from the 600-milligram multi-dose cohort in the second half of this year. Now turning to our second RNA editing clinical candidate, WVE-008 for homozygous PNPLA3 I148M liver disease. This PNPLA3 variant is a well-established driver of NASH pathology. Yet there are no approved medicines that directly address this biology. There are an estimated 9 million homozygous PNPLA3 I148M carriers across the U.S. and Europe who are at a ninefold higher risk of dying from their liver disease compared to noncarriers. With 008, we aim to correct the I148M variant using our leading RNA editing capability, which is expected to restore PNPLA3 activity and lipid metabolism, reversing steatosis and fibrosis and improving liver health. In our upcoming first-in-human study of 008, we plan to leverage previously genotype populations to efficiently identify homozygous I148M carriers, evaluate target engagement with circulating biomarkers and assess early signs of efficacy using noninvasive imaging. We remain on track for a CTA submission in 2026. With that, I'll turn the call over to Kyle to provide an update on our financials. Kyle? Kyle Moran: Thanks, Chris. Our revenue for the first quarter of 2026 was $38.2 million compared to $9.2 million in the prior year quarter. The year-over-year increase primarily relates to recognizing the full amount of revenue associated with WVE-006 as a result of regaining full rights to that program, along with the progression of work in our ongoing GSK collaboration. Research and development expenses were $47.4 million in the first quarter of 2026 as compared to $40.6 million in the same period of 2025. The increase primarily reflects continued investment in advancing our clinical programs, including preparation for the Phase IIa portion of INLIGHT and continued progress across our RNA editing pipeline. Our G&A expenses were $22.1 million in the first quarter of 2026 as compared to $18.4 million in the prior year quarter. This increase primarily reflects costs associated with supporting our expanding pipeline and preparing for the next stages of development. As a result, our net loss was $26.1 million for the first quarter of 2026 as compared to a net loss of $46.9 million in the prior year quarter. We ended the first quarter with $544.6 million in cash and cash equivalents, which we expect will be sufficient to fund operations into the third quarter of 2028. I'll now turn the call back over to Paul for closing remarks. Paul Bolno: Thank you, Kyle. As we look ahead, we believe we are well positioned and well capitalized to continue delivering on our clinical development plans. We are rapidly advancing multiple studies of 007 across treatment settings, which are strategically designed to unlock its full potential in obesity and other cardiometabolic diseases. We're delivering new 006 data in May that will continue to inform its potential to provide a differentiated treatment option to individuals living with AATD. And we are progressing 008 towards the clinic for the 9 million individuals living with liver disease. With our proprietary chemistry translating in the clinic and an emerging pipeline of next-generation candidates, we are committed to translating powerful human genetic insights into potentially transformational RNA medicines for people who need them. We look forward to keeping you updated on our progress. And with that, I will turn it over to the operator for Q&A. Operator? Operator: [Operator Instructions]. We'll take our first question from Joe Schwartz from Leerink Partners. Joseph Schwartz: Congrats on all the progress. It seems like a treatment approach targeting INHBE biology could be somewhat sensitive to baseline patient characteristics. So I was wondering, how are you thinking about optimizing for that in future trial design? Are there any screening or enrichment strategies you could implement to enhance signal detection? Paul Bolno: Yes, Joe, and we appreciate the question. I think first and foremost, in the obesity study, as you point out, is particularly, as Chris mentioned on the study, a mechanism that's driven on hypolysis is excess fat, the requirement to have not just large BMI, but have fat to lose in order to have a reduction in fat, which is typical in most Phase I to Phase II transition. So if we look at the BELIEVE study, we actually haven't updated those who look at the 8-K today on the corporate deck on Slide 24, the realization that as you shift patients from a low BMI, low fat setting to a higher BMI, high fat setting, meaning the shift that you see from where our study started, which is where the BELIEVE patient ended to where the BELIEVE patient started both on semaglutide and bimagrumab. There's an elevation not just in visceral fat, but on the left panel that slide, an increase in total fat. And so when we see those changes, we do expect, as you said, to see that reduction. Now what can we do to actually assure that as we enroll patients in that study that the patients exhibit the phenotype, meaning in an obese study are not just large in BMI, but large in visceral fat and in total fat. And I think there, we've seen pretty consistently that if you use other metrics like weight circumference, allowing comorbidities, those patients do tend to fall into that range. One other opportunity we have to assure this as the study is enrolling is we are, as Chris mentioned, doing baseline MRI imaging on these patients as we start. So we will have the opportunity to look at baseline images to ensure that patients are collecting in that region. Operator: We will take our next question from Steve Seedhouse. Steven Seedhouse: I wanted to ask about the regulatory interactions in AATD and just get your thoughts on if the FDA -- or really just the discussions you've had, if the FDA is looking for specific MAAT levels, if that's part of the thinking here or if like the degree of MAAT increase that would support approval or accelerated approval is going to be more of a review issue. And then I'm also curious if you know yet if the primary analysis in a pivotal study here is going to be more of like a responder analysis on a certain threshold or if it's more of like a mean change in MAT or total AAT in the entire population? Paul Bolno: Yes. No. Thanks, Steven. I'll start and then turn it over to Chris for further comments. But I think one is, obviously, we don't comment on individual interactions, but we will have feedback as we get to midyear. So it's safe to assume we're preparing and engaging in those conversations. I think in general, it's about the dynamic response, right? So it is this kind of shift from -- and based actually on comments that the FDA has made actually publicly, specifically as it relates to AATD and patient meetings, they did refer to AATD as an ideal example of a plausible mechanism pathway, meaning that there's the opportunity that we can see that editing translates these patients from a ZZ phenotype to an MZ phenotype. So I think that we -- as we move past this kind of just threshold concept of what does it take to be an MZ patient, well, greater than 11. But we need to step back and remember that actually, the 11 micromolar, as people discuss that threshold level increasing is one of protein replacement therapy, this idea with a consumptive protein that you need to put more in, in order to have that when it gets depleted during an acute event be there. I think the context of not just Wave, but as we've seen B as well, seeing that when you do edit, you see this restoring of this dynamic response and what is the ability of that dynamic response to actually protect patients. I think those are the best examples of the plausible mechanism meaning if you're at that greater than 11 micromolar and over 50% of that being N protein, then you're in the position that when you have a proportionate CRP or inflammatory response, you can mount that proportionate response in both total protein and in N protein. And that's exactly what we saw. We saw actually, if you model the CRP exposure that we saw, we saw an MZ level response both in total protein exceeding 20 micromolar and over 10 micromolar of protein in that individual. So that dynamic response is what's required being demonstrating the total both on threshold and percent M, we think is important. And those will be the nature of the conversations that we'll be having with the agents. And I'm sorry, the last -- you... Christopher Wright: Last, I think responders versus me and the like. I think those are exactly the types of questions that we'll be engaging with the FDA on the pivotal studies. So more on that as we have those discussions. Paul Bolno: Yes, it's important to note, remember that these patients are coming in with 0 and protein. So the idea that this is all de novo functional from editing to those responses is crucial. And I think the agency has been receptive... Operator: We'll take our next question from Cheng Li with Opp &Co. Cheng Li: Congrats on the update. I'm just curious about the 007 like future clinical path, recognizing the body composition is an important feature for this mechanism. And also you mentioned several measures, including BMR. I'm just curious about which one you think can be incorporated into the clinical trial to support registration that you think has the best chance. Paul Bolno: Yes. I mean I think as Chris mentioned, we're going to have a number of endpoints in this study that independently help us build the cardiometabolic profile. So obviously, we'll have body composition measures anddexXa looking at total fat, visceral fat. We'll have MRI imaging as well. And importantly, MRI-PDFF to look at liver fat. I mean I think that's going to be interesting as these patients would be expected to have increases. In addition to that, as we think about just why when you have -- and I think about Phase I studies where you exclude comorbidities of why you end up seeing this lower level of total fat, but importantly, visceral fat, visceral fat is harmful fat, and it's responsible for a number of these other cardiometabolic risk factors, including diabetes and cardiovascular disease. So one of the opportunities we have in removing the cardiometabolic -- sorry, the comorbidities in addition to allowing patients with and without diabetes is we're going to have the ability to see what's played out in human genetics with reduction in IHIB-E, which is reductions in hemoglobin A1c. Well, that's a registrational endpoint in the treatment of diabetes. We'll be able to look at ratios of triglycerides and HDL in terms of insulin sensitivity, and we'll be able to look at other measures like CRP from an inflammatory standpoint. So it really is important as we think about this study as being able to open up, one, how do we think about the treatment of obesity and what's really important, and we are seeing a big shift, particularly in the last quarter on finally discussions about body composition being what target and what should be targeted for these patients with an ability to tie that to an impactful measurement that will be in the appropriate Phase IIa. And as Chris said, I mean, we'll have a 160-patient study across doses, across disease states that really will let us fully exploit the mechanism and shortly thereafter. So again, accreting the data to where I do think there's a substantial opportunity for INHBE which is in the maintenance setting. This idea that 70% of people can't stay on incretins. And if we think about the therapy for obesity with incretins being like the treatment of hypertension, we're seeing patients who need a lifelong treatment to stay in this range of body composition that they achieve. I think we're also going to have the opportunity as we think about the Phase II studies that we will be initiating the concept of being able to have and lock in, in a maintenance setting an infrequent way of treating patients and preserving and locking in the benefits from a cardiometabolic outcome position that's been achieved with other weight loss therapies. So I think the totality of data that we'll be generating to unlock the full mechanism of is both in this Phase IIa study in the multi-dose, but also in the subsequent studies that we will be initiating. Operator: We'll take our next question from Samantha Lynn Semenkow with Citi. Samantha Semenkow: Just one for me on AATD. I think your explanation around the dynamic nature of the mechanism makes a lot of sense. I just wonder from a competitive landscape, we're seeing the DNA base editors get up to a mean of about 16 micromolar total in MAT. We've seen at least one patient from another competitor go up to 20. Do you think optically you need to achieve some sort of threshold in order to entice both patients and physicians to use an RNA editing approach? Or have you done any market research around this? Just curious your thoughts there on what the actual profile could end up being and how competitive that would be? Paul Bolno: Thank you. And I mean this is where we spent a lot of time with clinicians as again, in preparation as we think about ATS coming. And I think there's a lot of enthusiasm from this community RNA editing. And I say that for a couple of reasons. I mean, one, the idea of being able to -- and we'll talk about kind of the thresholds and numbers in a minute. But I think the most important thing is that if we think about the ability to be able to infrequently redose patients, it's important because over time, the liver does regenerate. And the idea that as these cells that are on a pathway to dying and becoming fibrotic are actually now rescued and saved because you're able to, through editing, deplete protein, take those toxic aggregates out of the liver, restore liver health, those cells are now right to be able to be dosed and have actually correction and actually become productive in their responses and producing healthy M protein. And so as we talk to clinicians, that notion of infrequent repeat dosing is actually viewed as actually favorable as opposed to the risks and potential outcomes from permanent DNA mutations. I think the other thing that as we think about patients who have liver disease and ZZ patients, where they are on the spectrum will have liver disease is the notion of not using LNPs. We have to remember that LNPs activate IL-6 and the CRP immune response and in and of themselves are immunogenic. And if we think about that as being a causing and inducing an acute phase response could also elevate 1 antitrypsin and a protective response to that. And so the notion that in patients with liver disease, we want to avoid things that are going to irritate the liver is also important as we think about the totality of the therapeutic modality that clinicians are thinking about in terms of their treatment of patients. Now while all of that is wonderful, at the same time, what we want to see is the ability to actually drive the correction. And so as we think about the production of protein and what RNA editing is designed to do is entirely specific. So when we talk about protein and oftentimes, these things get inflated with numbers, when we say M protein numbers or M protein percentage, we are talking about purely the actual isoform of AATD. So this is the native M-AAT protein. And as the prior question suggested, that's something we're discussing as part of our regulatory interactions, which is that we make only the native M-AAT protein. We don't create bystanders. We don't create indels. But importantly, those bystander edited proteins have different ranges of function. So we can be assured that the protein we're creating behaves like the native natural protein. So as we kind of shift back to the beginning of your question, which is what's going to be important as we think about this, I think where we've also seen clinicians is not being able to make that switch to thinking about. And actually at ATS, it's going to be interesting because it will be wave on presenting on editing and then there will be the updates on protein replacement therapy. It's really this shift from having to say, well, more is more to baseline because that is a protein replacement narrative that's you have to put more protein in because the patient can actually produce more. And so therefore, it's a race to put more protein in that gets depleted. We'll have the opportunity to continue to say, with editing, you can now create that dynamic response. And as we said, we can create a dynamic response that's proportionate to a CRP response up to 20 when the patient needed 20 and could have easily generated more if the patients needed more. So I think if we think about the range of both total and protein, we are very much convinced that we can create the baseline levels that serve as the biomarker to demonstrate that these patients are able to go out, live a healthy functional normal life and have the appropriate responses to these acute phase events as they happen. And I think one of the most interesting things when we went back and kind of looked at that initial patient wasn't just the spike the patient had that got up to 20, but it was the realization and every went back to those slides that are there on this dynamic response that over the multi-dose, these patients had small elevations in CRP. And what was really compelling is every time they had those adjustments, they were generating an increased response to total protein that met that. So I think by restoring this dynamic response, that's ultimately how you prevent the chronic injury that happens for the 1 to 3 times a year that these patients needed. Operator: Our next question comes from Alec Stranahan from Bank of America. Alec Stranahan: Just a couple of quick ones on the Phase IIa portion of INLIGHT. Could you walk us through how you're thinking about the dose selection given the Phase I portion is still ongoing? And will GLP-1 use be allowed in this population for enrollment? Or is this maybe a population you'll reserve for future studies? And in terms of cadence of data from the Phase IIa, is your plan to share regular interim updates like the Phase I, maybe, say, at the first 3-month assessment following the first dose? Paul Bolno: I'll take the last question and then hand it over to Chris. But in terms of the cadence of data at this point, yes, it's possible that we could deliver the initial, as you pointed out, 3-month time point. We'll give a more concrete update on milestone cadence when the study initiates and as that study launch. But yes, there's a possibility of data as we think about this year. Chris, do you want to take the first question? Christopher Wright: Sure. So in terms of the doses chosen, so this is really based on -- I mean, it is ongoing, but we clearly have interesting data on 240 as well as 400. And so based on the data that we've seen in terms of the level of knockdown, PK/PD modeling and the degree of efficacy that we saw even at 240, we felt that we could move forward in the multi-dose with the 240 and 400 and that these should be the range of doses that are expected to be efficacious also based on the modeling. So it kind of all falls together, modeling from preclinical. So it all kind of falls together from that perspective, and that's how those 2 initial doses were chosen. In terms of incretin in this particular study amendment, it's a monotherapy amendment. So we're not allowing incretence. However, we're in the throes of combination study design, which would include incretN and we'll provide more information on that shortly as well. Paul Bolno: Just to follow up on the last point. I mean, as Chris mentioned, I mean, we do see substantial reductions in the 2 dose cohorts that we're taking forward with very tight ranges between patients. And so I think a lot of what we're going to learn is not just getting more efficacy from that, but the impact of time, durability and which dose is going to allow for the most less frequent interval while not losing any efficacy signal. Operator: Our next question comes from Yun Zhong with Wedbush. Yun Zhong: So the question is on the Phase IIa portion of the obesity study. On the second dose, do you have any expectation on the potential impact on gene and protein expression? And in terms of the clinical outcome, would you expect the benefit to be on durability or the magnitude of fat reduction or both because you're changing the patient baseline characteristics. So I just wonder, will you be able to tell whether that's -- and any potential better outcome will be from repeat dosing or from the more higher BMI or both? Will you be able to tell the difference, please? Paul Bolno: Yes. Christopher Wright: I can just say our the way that it is designed and what we know about the pharmacokinetics and pharmacodynamics, we expect a very substantial knockdown with the 2 doses that would be very persistent over time. So we think that, that's a great approach to identify the right doses and understand the duration better and to optimize our likelihood of efficacy. And then to that point, and you also mentioned it, the patient characteristics are different. And so the dose response could also be slightly different in people that have higher levels of obesity or higher BMIs. And so it's important to look at a number of doses in that context as well. But we would expect that we should see stronger results there, as we outlined earlier in the sense that this is a drug that increases fat metabolism. And so the more you have to metabolize the bigger the effect should be. Erik Ingelsson: Just to add one more thing as well. The design here, the 0 and 3 months dosing is really to accelerate the Phase IIa trial. It's not because we do think we need to give the dose that frequent. So all of our PK modeling indicates that it's once a year or at most twice a year. So it's a way to kind of accelerate and facilitate data readouts fast. Paul Bolno: And to that point, I mean, if you look at our 240, I mean, past 7 months, we're still seeing suppression of activin E. So again, with 400, we expect that to be larger. But you also bring up an interesting question on just -- and I heard you mention genetics. I mean I think we have to go back to the genetics and realize that activin E is a biomarker. Hence, we're able to look at the impact of the reduction on the actual protein biomarker over time. And when one looks at that interaction, there were the discussions that had come up a while ago about diabetes, nondiabetes. And I think the data that has been shared to date doesn't demonstrate that these patients should be different in disposition, whether they have diabetes or not. Actually, the data that was run in that, I think it was an over 300-patient observational study from Alnylam clearly showed that acne correlated with high BMI, insulin sensitivity and truncal fat in nondiabetic patients. So I think the implication here is really that if you can dial back a protein that drives hypolysis, then you're going to see that impact. Now we're going to be able to be in a position where we're going to look at that in different settings. So we'll have it in the nondiabetic setting, the diabetic setting will look at how that plays a role, particularly on endpoints like hemoglobin A1c. So if we think about the implications for broader cardiometabolic disease beyond obesity, we'll be able to look at what happens with insulin sensitivity, what happens with hemoglobin A1c for diabetes and other measurements in lipids and inflammatory markers as we think about cardiovascular disease. So I think the study is really stepping back and letting us look at the broad range of cardiometabolic diseases in those different patient settings. Operator: Our next question comes from Salim Syed with Mizuho. Salim Syed: Congrats on the progress, guys. Paul, Chris, maybe one for us on the data coming out on 006 and ATS. So is it possible to just kind of give us high level kind of what people should expect here or look out for? I mean, obviously, the data that was presented in September of last year, the 200 single and 200 multi, there wasn't much of a dose response or even got to the 40 milligram single that you guys continued progress here with the 400 multi and then we'll be getting 600 single and then I guess, in the second half of this year, 600 multi. So is there any reason here people should be expecting some sort of threshold effect as you break through the higher doses that we get more efficacy? Paul Bolno: Yes. I mean... No, it's a great question. I think if we went back to September, there's actually a dose response if we think about M protein. It went from 0 to like 44% to 65%. So I mean, I think if we think about the context of where patients start and how that builds over time, I think editing can continue to grow. I think with the question of is more going to drive more in the absence of an acute phase response, that's really the distinction that we're separating, which is once you hit a point where you can catalytically edit, the transcripts that are necessary. It's really a function of time. You deplete Z protein, the Z protein continues to come down and clear from the liver, the cells get better. And you should, over time, as we've seen with MZ patients who actually don't have liver disease over their lifespan, they can actually generate more protein. And so I think that notion of correction over time is important. But I think our guidance is we were able to mount a response that could generate a lot of proteins, 20 micromolar if you had the right event. So it's not substrate limited to the effect that people will say, is the enzyme exhausted or there is substrate limitation in the context that if you're not having an acute phase response and the body is not producing or needing to produce protein that it won't produce more. And so I think that's been the example we've seen and others have seen. I think what we're able to do is look at this without the conflation of LNP irritation, which can also create kind of a inflationary signal of inflammation. In a signal where you have GalNAc, you can go directly to the target site, we do see that when you have these elevations of acute phase responses that you can meet those dynamics. So I think stepping back, if we could see that we could produce the same levels, meaning you could create stable levels of very micromolar, we were 13. So edited protein that's M that's above, again, the MZ threshold, so again, above 50% protein and be in a position where you can protect patients from a dynamic response, but now no longer have to deliver biweekly injections to get there, but demonstrate we can do it monthly or less frequently. I think that puts us in a very good position in terms of the regulatory context and ultimately, most importantly, to treat patients with alpha-1 antitrypsin. Operator: Our next question comes from Roger Song with Jefferies. Jiale Song: Also on the INHBE. So understanding you will have a poster at the ADA. So just curious what kind of incremental data we will -- we should expect to see? And then regarding the FDA interaction, have you had any discussion around the 5% is coming to the total body weight reduction versus we can look at a total fat or even visceral fat reduction threshold moving away from the overall body weight given the novel mechanism? Paul Bolno: Thank you, Roger. And I mean, to your first question, yes, we will have a poster at ADA. As it relates to new data cadence, we haven't provided any updates other than 2026, we'll be providing continued updates on 007. To your second question, as it relates to kind of regulatory thresholds and 007, I think it is important that there is a broader range of discussions beyond a flat 5% change in total body weight. Nonetheless, it's why I think Slide 24 in the new corporate deck is important because I think the notion of -- and I know people were kind of trying to think about with visceral fat, it's kilogram.5 k and if you lose that, and everybody is trying to figure out where body weight reduction comes from. But if you look at the parallel side of what happens to total fat in that population, you've got about 48 kilos of total subcutaneous body fat that gets produced that ultimately delivers weight loss. So I don't think we're needing to necessarily have a different conversation around how in a Phase II/III obesity study in patients with excess fat, how you can deliver on that 5% threshold. Nonetheless, I think there is a very robust conversation that we're preparing for with the agency, where I think there's a lot of alignment, particularly in this administration, thinking about the impact of pharmacovisceral fat. I mean there's 2 decades of literature on elevations of visceral fat driving NASH, driving cardiovascular disease, driving diabetes. quantitatively, meaning a 10% change in visceral fat changes outcomes that are clinically. And what do payers pay for? They pay for outcomes. And so as we think about the endpoint of visceral fat reduction as actually being the driver of what makes patients unhealthy, that focus on being able to reduce visceral fat is important. As Chris pointed out, it doesn't -- there's not a lot of complicated mathematics to take BMR and look at the impact of visceral fat and lean mass preservation. There's literature around that. So this is not a new metric of identifying how you can change body composition in a positive way. And very much, we do plan to have a conversation with the agency that specifically focuses on looking at other metrics like BMR and visceral fat as an endpoint, not just to the exclusion of the 5%, but even in addition to that, being able to build in the real impact of improving body composition, which is what's required for the treatment of obesity is important. And I think we all need to remember that obesity is a cardiometabolic disease. And so ultimately, a lot of the endpoints that we're measuring hemoglobin A1c, insulin sensitivity driven off of visceral fat reduction are going to be important. So yes, it will be very much a topic of conversation this year as we think about the path forward. Operator: Our next question comes from Bill Maughan with Clear Street. William Maughan: So I wanted to just mix things up and actually ask about your exon skipper program. While obviously not as massive a market as obesity, it is a fairly near-term opportunity and a potential significant revenue driver, yet there seems to be a bit of a lack of, I guess, emphasis just around discussions around Wave on the exon skipper. So I just wanted to get your most recent kind of thoughts on how big that could be commercially and whether or not there's potential for that to surprise a bit and get a little more credit than it's being given currently. Paul Bolno: Yes. No, thank you for the question. As we think about DMD, I mean, we have delivered a differentiated approach with the clinical data update we gave. As we said, we were in the process of delivering and putting together that studies continuing to get to the monthly dosing regimen, which we believe would be, again, differentiated and required for an NDA filing. So that work continues to remain on track. I think as you also point out, as we think about the opportunities of allocation of capital in terms of building out to commercialization, we have said that we do plan to engage in strategic partnering discussions as it relates to that transition and commercialization. And we continue to look for several things evolving. One, the evolution of the commercial landscape as we look at the product dispositions that are out there and two, the regulatory environment. So I think over the course of this year, there's going to be a lot of opportunities for us to make those assessments in commercial landscape, the regulatory landscape as we can continue to deliver on that pathway. Operator: Our next question comes from Ben Burnett with Wells Fargo. Our next question comes from Danielle Brill with Truist Securities. Our next question comes from Luca from RBC. Unknown Analyst: This is Cassie on for Luca. Congrats on all the progress and a quick one on the competitive landscape for obesity. Your competitor is moving into combination approaches relatively earlier on in development. Could you -- maybe could we take that as maybe signaling that monotherapy alone has inherent limitations in obesity treatment for INHBE? Paul, you already gave some color on this, but do you believe there's a feeling what INHBE alone can achieve? And are you concerned that waiting until Phase II or later to explore combinations may put you in a competitive disadvantage versus competitors already testing combo strategies? Sorry for the long question, but any color would appreciate. Paul Bolno: I think it's a wonderful question because I do think already, if we look at where we were relative to just our Phase I population with our single-dose data, we are competing with visceral fat reductions that were in multi-dose of others, right? And as we think -- including combination. So I think if we think about what we have is differentiated, and I think Eric shared that during his update on the call, our chemistry is giving us a high degree of potency and durability. And if we think about the INHBE target itself, it requires not just potent reduction, but requires stable suppression. And so this notion of being able to keep that target low despite any desire of the body to upregulate it is a key differentiator. We saw that in preclinical data that differentiated us from our competitors where they to do repeat dosing of a GalNAc siRNA to drive weight loss. Remember, these are obese mice. So the mice that we're all talking about in these studies were mice that would be much more representative of your Phase II/III high BMI mice. And what do we see? We saw that if we could give a single dose and suppress activin E, we could see weight loss in that model, driven off of fat reduction, visceral fat reduction, subcutaneous fat reduction. So I think we're seeing strong clinical translation on potency and durability distinction from our competitors, such that absolutely, I think we will see continued fat loss substantially with muscle preservation in this high BMI setting. So I don't think that there's necessarily the ceiling effect as much as it is the treatment effect in the appropriate population. As we said a number of times last year, it was always going to be about treating the patients with the right disease setting, meaning the Phase II/III population of obesity, high fat with the right dose over the right amount of time. So I think we're set up to see that. Nonetheless, I think the power, as you point out, in combinations is very real. So if we stay in the monotherapy, we do believe that, that's going to be a segmented marketplace. We think about the opportunity for -- I think there's nearly 30 million people in the U.S. who are at risk of lean mass reduction who need weight loss. And so as we think about segmentation, I think there is a substantial population monotherapy that's going to need fat reduction without the risk of lean mass loss. Combination nonetheless is a very interesting place to be. I don't think we're losing our lead there. As Chris alluded to, we're actually accelerating the combination studies. And so already at a monotherapy piece, we have a distinction from our competitors. And again, we believe that in combination, we should see a more robust effect by being able to add INHBE onto existing inreatment therapies. And so the opportunities there are twofold. I know on one hand, we tend to think about giving more and trying to drive even more weight loss, importantly, fat loss, which comes from INHBE. I think we've got another distinction, which is the ability, frankly, not to have to kind of push incretin to the edge of tolerability, but being able to think about actually in this environment, particularly as we watch that space evolve, being able to actually have to give less incretin therapy in combination to exert a maximal effect. And so I think there's a big piece on titration where INHBE can add to that combination strategy to ultimately drive profound visceral fat loss, subcutaneous fat loss along and coincidentally with incretin. And then ultimately, where we have generated data uniquely, I think for Wave with INHIBN-E, I think this maintenance setting is actually a wonderful place to be. We were just on calls recently where there's a lot of thought going into what does the evolving treatment landscape look like in a world where like antihypertensive, obesity treatment is now going into a place where you have patients who have BMI reductions. And frankly, now you have payers saying, now that you're no longer meet the BMI criteria, you might need to come off therapy. And so there's actually now discussions on the payer side of saying, actually, you're going to lose those benefits and actually build a maintenance setting. So as that maintenance concept evolves, so what does a lifelong therapy look like that preserved outcomes, I think this maintenance opportunity is pretty substantial for us that if people invest, payers invest in getting to that healthy, stable outcome, how do you sustain that in a way that's going to be tolerable is not going to help drive additional complication side effects, tolerability effects and the potential for now a once to twice a year maintenance therapy is consequential. So I think all 3 settings are set up for us to be uniquely differentiated. And as we said, all 3 studies are pulled into this year and being accelerated. So we'll be generating human data in the right population in all 3 of the settings. Erik Ingelsson: Maybe just to add one more thing. So since this is new biology as well, I think it's important to really try to understand the potential across a lot of ways, and we have so many ways of winning this year, like we're going to look at the 5% threshold for weight loss. We're looking at body composition with a focus on fat loss. We're looking at potential cardiometabolic protection across lipids, HbA1c with diabetes and fat in liver for MASH. And then in addition, the combo and maintenance. There are a lot of opportunities, and we're accelerating. So we're going to get all of that data and starting everything this year. Operator: Our next question comes from Catherine Novack with Jones. Catherine Novack: I just have one on the 006 multi-dose regimen. I guess knowing that successive dosing can push mean max AAT higher, how should we be thinking about mean max AAT achievable with monthly versus biweekly dosing that was used for a multi-dose regimen prior readout? And how do we think about the delta between the single dose and the multi-dose when we're switching to monthly? Paul Bolno: Yes. I mean I think one -- and I'll take the second part first. I think that will be interesting, right, as we look about what's the difference in terms of the on rate, if we think about it between the 200 to 400 and the 600. So we'll have the opportunity to look at what do those kinetics look like as you point out. And then the difference between biweekly dosing versus again, monthly and then the impact on those rates. And I think, again, -- our framing today is that if we assume that we are getting a biweekly 200 to near steady state in the sense that it's not substrate limited, but in the absence of an acute phase response where you're producing more transcript that you're not going to necessarily get more without the benefit of time, right, the ability of cells to clear out the cells to get healthier producing hem. That's going to be the chief driver of seeing those increases. And so we'll be able to look at what happens on the repeat dosing of monthly versus biweekly. But I think that's the big shift in the dosing regimen. I think 600, as Chris alluded to later this year, 600 monthly would give a better sense of keeping the kinetics and the timing of those dosing intervals coupled with dose to get better. But this is really to see can we see that we get to that same steady state, the ability to balance acute phase responses of as much protein as patients need, they can produce, but do that in a monthly I think that's going to be the driver for this next update. Operator: Our next question comes from Whitney Ijem with Canaccord Genuity. Whitney Ijem: I think just to quickly follow up on the last question. I think you've answered it, but just to put a finer point on it, is what you're saying that given the time frame of the next update, we shouldn't necessarily expect to see a dose response on either total or M protein at steady state at ATS in particular, but that dose response could come over time or maybe in the setting of an acute phase response later. Is that the right way to think about it? Paul Bolno: I think the way to see it is when we should -- it is going to be that. We'll see what the driver is of more. But again, I think our demonstration to date, even looking at the early data is we got to more, right? We got to 20 micromolar in the setting of an acute phase response where you actually generate more substrate, more transcript to be edited. So I think at a certain point, there's going to be this concept of steady-state editing where as much transcript is being edited, you can clear Z. I think that's going to be what we clearly want to see as Z protein continuing to come down. And then there's a function of time. And so I think it's more than thinking about dose at the time of what -- how much duration is there for the body over time to clear Z, get healthier hepatocytes that can produce more protein. I don't know if there's... Operator: Our next question comes from Madison Wynne El-Saadi with B. Riley. Madison Wynne El-Saadi: Just looking at the Phase IIa MAD design, I mean, it's certainly looking like a CV MAT versus, say, pure obesity study. I'm curious if -- did the FDA acceptance include any commentary on body comp as a kind of co-primary -- or was it more of a kind of protocol discussion? And then relatedly, what's the magnitude of MRI-PDFF reduction in Phase IIa in lGHT that management would view as supporting a stand-alone MASH development versus, say, a subsegment of the obesity program? Paul Bolno: Yes. I mean I think to your first point in general, I do think it's just important, we can't say this enough that obesity is a cardiometabolic disease. So running a study that fully interrogates the cardiometabolic implications of a target that comes out of human genetics that is a cardiometabolic target. So I think being able to fully extrapolate all of the value of what does that mean for a patient beyond just as you said, at classic obesity, which is the classic studies are looking at weight loss at the expense really of muscle and muscle drives the predominant early reduction in that body weight. So being able to shift the narrative to not just reduction of fat that will be important in the treatment of obesity, but all of the other advantages that come to patients and frankly, are recognized by, again, what payers pay for, which is the cardiometabolic improvement is what this study is designed to elucidate. So yes, we'll be able to look at body composition, and that's part of the endpoints as we said, as part of an obesity study in addition to body weight. But all the important metrics, as you point out, are critical for us because they are all part of the development paradigm here. The last piece is, I mean -- and we've seen this with others and competitors who've done monotherapy reduction of liver fat, and they saw consequential reductions in liver fat that pretty much surpassed other match programs and reduction of again, fat in the liver. So given our potency, durability, given that we wouldn't expect this mechanism to be differentiated, we should see in terms of like reduction in liver fat because of what we're doing, we would expect to see substantial reductions and that target engagement there, reduction of fat on imaging would guide us to say that MASH would be a target to pursue a dependent. Erik Ingelsson: Maybe I add one more thing, and that is that these cardiometabolic risk factors and liver fat are very strongly correlated with obesity and visceral fat. So it's not so much that we're not requiring -- it's not an inclusion criteria. It's more that we're removing the exclusion criteria from the Phase I, which hampered us in terms of looking at those things. So again, we -- just based on the normal distribution of liver fat in this obesity class, we expect that there is liver fat that we can look... Operator: Our next question comes from Michael King with Rodman & Renshaw. Unknown Analyst: This is [indiscernible] on for Mike. Congrats on the updates. Just a quick question on the DMD program. So Novartis was just talking about the drugs they got from Avidity that they're using antibodies to deliver oligos to the muscle. Do you think you have the best tissue penetration you can get with N 531? And how are you thinking about the competitive dynamic as you head towards the NDA filing? Paul Bolno: Yes. I mean I think in general, it's a wonderful question because, again, in the absence of conjugates, if you look at the muscle exposure, our muscle exposure was pretty extraordinary even in comparison to muscle targeted ligand. So when we think about distribution to the tissue without having to add that, that was consequential nonlimiting. And we saw for the first time actually real measurements of muscle regeneration. So when we think about getting into stem cells and regenerating muscle and think about more broadly the platform implications for being able to treat the disease in the muscle, both with splicing oligonucleotide, siRNA and others, we talk about extrahepatic. I think there was not a requirement as we think to have to create the complexity of that to get exposure. So the landscape is something we continue to look at as it evolves. But in terms of being able to access the tissue and what would be required to do that, I think our platform delivers exquisitely muscle.... Operator: Our last question comes from Ananda Ghosh with H.C. Wainwright & Co. Ananda Ghosh: When you look at the genetics of the actin and when you talk to the academic community, one aspect of the biology, which they all stress about is that Iin probably works best in the negative energy balance, which you see when you add actin knockdown approach with GLP-1s, which also Arrowhead has already shown. The question is what happens when you take off the GLP-1s during the maintenance phase when probably the patient energy balance either neutralizes or probably goes to a positive energy balance. Then what happens to those liberated free fatty acids? Do you actually think that you will see a stability in the weight gain? And if you do see where does those 3 fatty acids go, which are liberated when you don't have GLP-1s, in which tissues do they accumulate? Paul Bolno: And probably in the same as they did in the first point, right, when we saw it go to muscle. And if you actually a beautiful experiment that we had run in this was the preclinical data where when you stabilize these obese mice on GLP-1 exactly to your point, their caloric consumption declines dramatically, they lose weight, they hit their steady state. And interestingly enough, and I think it does speak to the mechanism of action when you predose and the timing of that was critical, not after you dose before the cessation to get the on-ramp of active suppression before turning off the GLP-1. When you stop the GLP-1, you actually saw caloric consumption increase in both arms of the study. the placebo arm and the INHBE treatment arm. So again, the energy balance while going up wasn't changed. Now what you did do in advance of putting those excess calories on is actually turn off exactly what the body wants to do and actually what's really damaging in weight cycling with GLP-1s and it's a real problem in patients who chronically come on and off of them is that when the weights regain, it's regained its fat, fat is position in a variety of tissues, and that's unhealthy. And so what we did see is when you actually take the brakes off lipolysis, the body is now not able to store new fat. So you don't see that reaccumulation of fat. What you do see is -- and we kind of see this slight -- much like probably what we saw in the slight increase in the monotherapy arm, which is it goes to muscle. So you end up with the free fatty acids and the muscle, muscle can then actually build. And so we don't expect -- that will be interesting to see whether or not that plays out that people who have actually been losing muscle over time might gain some muscle back when at the same time, but not restore that as fat and hence stay at steady state. So again, as we said on the call, that study is going to initiate this year, we're going to be generating that human data to recapitulate what we saw in the animal model. But I do think if we think about what the best human genetic evidence is for INHBE, it's maintenance. These are people who go over a lifetime without thinking about their caloric consumption and have low abdominal visceral fat, have an improved metabolic profile in terms of risk of diabetes and cardiovascular disease and lipid profile. And so actually the setting where there's the most human genetic data for, and we're excited to run that human clinical trial. Operator: There are no further questions at this time. I'll now turn the call back over to Paul Bolno for closing remarks. Paul Bolno: Thank you for joining our call this morning. We look forward to speaking with many of you later today and during the ATS conference next month. Have a great day.
Operator: Thank you for standing by, and welcome to Enterprise Products Partners LP's first quarter 2026 earnings conference call. Currently, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you'll need to press star 11 again. I would now like to hand the call over to Joe Theriak, Vice President of Finance and Investor Relations. Please go ahead. Joe Theriak: Thanks, Latif. Good morning, and welcome to the Enterprise Products Partners' conference call to discuss first quarter 2026 earnings. Our speakers today will be Co-Chief Executive Officers of Enterprise’s general partner, Jim Teague and Randy Fowler. Other members of our senior management team are also in attendance for the call today. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of '34 based on the beliefs of the company as well as assumptions made by and information currently available to Enterprise's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. And with that, I'll turn it over to Jim. Jim Teague: Thank you, Jim. We got off to a very strong start this year and the business is performing well across the board. In the first quarter, we generated 2.7 billion of EBITDA in a short quarter. This was up 10% over last year. We generated 1.8 times coverage of our distributable cash flow. By any measure, this was an exceptional quarter. The assets we brought online over the past year, including the Bahia NGL pipeline, fractionator 14, and three Permian natural gas processing plants, continued to ramp throughout the quarter. In fact, frac 14 was full on day one. The gas plants were essentially full by mid-quarter, and if you look at Bahia and Shin Oak as a system, they're running at 80% of a combined 1.2 million barrels a day of capacity. Operationally, the quarter was outstanding. We set multiple operating records across the system. With the addition of Midtown West 2 in the Delaware Basin during the first quarter, we set a new record for gas processing plant inlet volumes. We processed 8.3 billion cubic feet per day of natural gas. That was up 7% from last year. We fractionated 1.9 million barrels per day of NGLs. That was up 16%. We loaded 2.3 million barrels per day of hydrocarbons at our docks, up 15%. We transported 14.2 million barrels of oil equivalent per day, up 7%. In total, we set 12 new volumetric records for the first quarter. Those results speak to both the scale of our system and the demand we're seeing across the markets we serve. On the market side, commodity prices were volatile throughout most of the quarter, and we tend to embrace volatility. In January, winter storm firm gave us a strong start to the year. Elevated demand for natural gas and propane created price dislocations across our SFE asset network as producers faced widespread supply disruptions following the sharp drop in temperatures. Our trucks, pipelines, and storage facilities enabled us to continue meeting customer needs despite these challenges, while marketing teams and asset flexibility allowed us to capture incremental value, and this was only the beginning of the volatility we experienced during the quarter. The ongoing conflict in the Middle East and restricted flows through the Strait have driven a substantial increase in demand for all forms of US energy, petrochemicals, and refined products. The supply shock dramatically improved US petrochemical margins, prompting our domestic petrochemical customers to run their units full out. One week before the start of the war in Iran, ethane-to-ethylene cracking margins were about 7¢ a pound. Today, they're 23¢. The ethylene-to-polyethylene spread was 20¢ per pound; now it’s over 45¢. It's no wonder why my former employer’s stock is up over 50% year to date. International demand for US feedstocks is as strong as we have seen in quite some time. The loss of Middle East hydrocarbon supply fractured the Asian supply chain. China's PDHs are, we hear, currently operating at less than 50% of capacity. As a result, Asian petrochemicals have been destocking inventories by consuming derivative inventories. The impact to hydrocarbon markets around the world has been significant, and we see this strong demand continuing through the remainder of '26 and maybe into '27. The demand pull is showing up very clearly in our marine export business. Our crude oil terminals are benefiting as volumes being released from the US Strategic Petroleum Reserve are being directed to international markets. And our ethane and LPG customers continue to line up at our docks for US NGL feedstocks. In the first quarter, we averaged around 70 million barrels per month across our docks, and we expect that strength to continue into the second quarter as we are scheduled to load more than 88 million barrels in April. On the upstream side, we continue to build on the momentum in our system. Producer activity remains constructive in the basins where we operate, and our assets are well positioned to capture volume growth. The combination of strong supply, growing export demand, and new projects ramping into service is creating real operating leverage across the business. We also saw strong contributions from the downstream side. In addition to record product flows, strong margins across our assets, and high utilization at our PDH facilities supported solid earnings and cash flow for the quarter. Our new assets are ramping well and volumes are at record levels. Demand remains strong, both domestically and internationally, and our system is performing the way it was built to perform. We entered 2026 expecting steady production growth and oversupplied markets which we thought would lead to another year of relatively benign commodity prices. This has clearly not been the case. Today, we believe the financial markets are underestimating the potential global supply implications from a prolonged closure of the Strait of Hormuz. Depending on the industry expert you ask, anywhere from 12 to 15 million barrels a day of crude oil, refined products, LPG, and petrochemical supplies are constrained. That is almost half a billion barrels of hydrocarbon supplies off the market every month. Shipping and geopolitical commentators estimate that the earliest the Strait could reopen for normal operations, including vessel repositioning, is July. And that does not account for the time required to repair onshore production and refining facilities damaged in the war. Until global supplies and inventories return to normal, we believe there will continue to be strong international demand for US energy and products. We're also seeing international consumers look to increase purchases of US energy as an avenue to improve the US trade balance and add greater resilience and security to their energy supply chains, given the current disruption of product flows in the Middle East. After the first quarter, we are encouraged by the momentum we are seeing across the business and increasingly confident in the outlook for the year. At the same time, we remain focused on what matters most: operating safely, serving our customers reliably, allocating capital with discipline, and creating long-term value for our investors. With that, I'll turn it over to Randy. Randy Fowler: Thank you, Jim, and good morning, everyone. Starting with the income statement items, net income attributable to common unitholders for 2026 was 1.5 billion, or $0.68 per common unit on a fully diluted basis, which is a 6% increase compared to 2025. Adjusted cash flow from operations, which is cash flow from operating activities before changes in working capital, increased 10% to 2.3 billion for 2026 compared to 2.1 billion for 2025. We declared a distribution of $0.55 per common unit for 2026. This is a 2.8% increase over the distribution declared for 2025. The distribution will be paid May 14 to common unitholders of record as of close of business on April 30. We are on track for twenty-eighth consecutive years of distribution growth in 2026. To our knowledge, this is the longest period of distribution growth of any US midstream company and is an example of Enterprise’s consistency and commitment to returning capital directly to our unitholders. The partnership purchased 3.1 million common units off the open market during the first quarter for approximately 116 million. In addition to buybacks, our distribution reinvestment plan and employee unit purchase plan purchased a combined 1 million common units on the open market for 37 million during the first quarter. For the twelve months ended 03/31/2026, Enterprise returned approximately 5.1 billion of capital to our equity investors. 93% or approximately 4.8 billion was in the form of cash distributions to limited partners, and the remaining 77% were 356 million of buybacks. Our payout ratio of adjusted cash flow from operations was 57% over this period. Since our IPO in 1998, we have prioritized returning capital to our partners, returning over 63 billion through distributions and buybacks. At the same time, we have reinvested capital to build one of the largest energy infrastructure networks in North America. Total capital investments were 988 million in 2026, which included 783 million of growth capital projects and $2.00 5 million of sustaining capital expenditures. In the first quarter, we also received the final payment of 596 million from ExxonMobil for the purchase of a 40% interest in the Bahia NGL pipeline. With the completion of major projects such as the Bahia NGL pipeline and Neches River Terminal, we believe our expected range of growth capital expenditures for 2026 will net to 2.3 billion to 2.6 billion after applying approximately 600 million in proceeds from asset sales already received. For 2027, we expect our growth capital expenditures to be in the area of 2 billion to 2.5 billion. Sustaining capital expenditures for 2026 are expected to be approximately 500 to 80 million. On the fourth quarter 2025 earnings call, we stated that discretionary free cash flow for 2026 had the potential to be in the 1 billion area. Even though our estimate of growth capital expenditures for 2026 has increased by 300 million as a result of investments in two new natural gas processing plants in the Permian, we still believe discretionary cash flow for 2026 has the potential to be in the billion-dollar area and, depending on commodity prices and spreads for the remainder of the year, could be higher. In terms of allocation of capital, as we have said many times, we see cash distributions to partners growing commensurate with operational distributable cash flow per unit. Let me repeat that. As we have said many times, we think distributions to partners will grow commensurate with operational distributable cash flow per unit growth. In the near term, we continue to expect discretionary free cash flow to be split between buybacks and retiring debt. In 2026, we still expect this split would be approximately 50% to 60% in buybacks. As we have said before, Enterprise's buyback program has both programmatic and opportunistic elements. In periods of momentum and volatility characterized by higher equity prices, we may elect not to chase price and instead retain cash in the opportunistic bucket for buybacks in future periods when momentum has [inaudible]. Similarly, in periods when there are significant price dislocations in equity prices, we may elect to pull cash forward earmarked for buybacks in future periods, such as bringing cash forward from 2027 to buy back the partnership units at more opportunistic prices in the near term. Our total debt principal outstanding was approximately 34.2 billion as of 03/31/2026. Assuming the final maturity date for our hybrids, the weighted average life of our debt portfolio is approximately seventeen years. Our weighted average cost of debt was 4.7%, and approximately 95% of our debt was fixed. At March 31, our consolidated liquidity was approximately 3.3 billion, including availability under our credit facilities and unrestricted cash on hand. As Jim mentioned, adjusted EBITDA increased 10% to 2.7 billion for 2026. As of 03/31/2026, our consolidated leverage ratio decreased to 3.2 times on a net basis after adjusting debt for the partial equity treatment of our hybrid debt and reduced by the partner's unrestricted cash on hand. Our current leverage ratio reflects significant investment in the large-scale projects that we recently brought into service, such as the Bahia NGL pipeline, Port Neches Terminal, and Frac 14, and the midstream asset acquisition from Occidental, where the debt is on the balance sheet but the resulting annual adjusted EBITDA generation for these investments is yet to flow into our twelve-month trailing EBITDA number. Our overall leverage target remains at three times plus or minus 0.25 times, or 2.75 to 3.25. With that, Joe, I think we can open it up for questions. Joe Theriak: Randy. Latif, we are ready to open the call for questions. Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Please limit yourself to one question and one follow-up or two questions to allow everyone the opportunity to participate. Please stand by while we compile the Q&A roster. Our first question comes from the line of Theresa Chen of Barclays. Your line is open, Theresa. Analyst: Good morning. Following up on the comments about the uptick for US energy demand in general and US export infrastructure demand in particular, can you walk us through the contract duration profile across your export docks today? Specifically, how much capacity is tied to contracts with near-term expirations that could be recontracted at higher rates? And longer term, how much incremental brownfield expansion capability do you have across your export assets? Tyler Cott: Hi, Theresa. This is Tyler Cott. I'll speak to the NGL exports specifically. I think we've said before, our NGL export docks are contracted around the range of 90%. On LPG, those contracts go through the end of this decade. On ethane, they extend, you know, ten to twenty years depending on contracts, so lengthy duration. We have 10% available for spot capacity in the near term, but long term, we're significantly contracted. Jay Bainey: Okay. And on the LPG side, in particular, given the recent strength in LPG export ARPs, alongside the commissioning timeline for Phase two of the Neches River expansion, can you talk about the incremental earnings uplift or cash uplift from spot cargoes in the interim? And related to this, when do you expect Phase two officially enter service to support your term commitments with customers? Tyler Cott: Sure. This is Tyler Cott again. Our operations team has done a fantastic job expediting a bit in the commissioning of Neches River Terminal. We're still in the process of commissioning it. Began in April, and at this point, we expect to complete commissioning for both ethane and propane sometime in May. In terms of spot utilization and earnings uplift, we really gotta get through the commissioning process here and see what we have. I think an important point to note about our business going forward is we have a significant amount of flexibility. So our spot business will be dictated across different products in terms of what the market needs at a given time. Jay? Jay Bainey: Yeah. Hey, Theresa. This is Jay Bainey. Just on the crude front of that, we've got a pretty wide mix of contract structures. So contracts that last through '28 and '29 and similar for '26, we have about 10% of open capacity. And, yes, I think we're having good conversations about '27. Analyst: Thank you. Operator: Thank you. Our next question comes from the line of Spiro Dounis of Citi. Your line is open, Spiro. Analyst: Thanks, operator. Good morning, team. Wanted to get back to the growth outlook really quickly. Jim, you sound incrementally more positive than when we last caught up. Obviously, a lot has changed. And then Randy, you seem to indicate that your operating cash flow is going to at least sort of mirror the increase in CapEx to keep that DCF/free cash flow kind of stable. So curious if you could give us an update on the sort of 3% growth you guys were talking about for '26 and the 10% growth you were talking about for 2027 on the last call? And as you answer that question, just curious if these two new processing plants are additive to that '27 outlook. Jim Teague: This is Jim. Yeah. I think I said modest in '26 and 10% in '27. I think we'll beat modest. Go ahead. Randy Fowler: I mean, as you think about twenties—sorry. Go ahead. Yeah. Yes. Spiro, I sort of like the point you made in your note that probably modest is a low bar now, and I think you're right. You know, again, it's sort of hard to come in and look at 2026 because, again, that’s just what's the duration of these commodity prices gonna be and the duration of spreads. So really shaping up to be a much stronger year than what we expected. And, again, because we were really coming in and not expecting much benefit at all from commodity or spread and really were relying on our fee-based businesses. So really hard to come in and give much guidance because you don't have much visibility, especially when you come in and look at the futures market, because we don't think the futures market really is representative of what the physical markets could be. So the endpoint is 2026 looks to be a much more favorable year than when we first started. Our commercial guys did a great job in underwriting two more natural gas processing plants in the Permian, which really will come on during 2027. We really did not have those baked into our 2027 numbers at the time, so that would be additive. And then, from the same token, you know, I think we're still in good shape to come in and do meaningful buyback and meaningful debt retirement in 2026, even with CapEx ticking up a little bit for these two new plants. Jim Teague: Yeah. Spiro, I've been around a while, and I have never seen a supply disruption like we're experiencing today. That supply disruption creates a lot of benefits that Enterprise is able to capture. Analyst: Yeah. And that's actually a good segue to the second question. Jim, you also talked about embracing volatility, and I know we go back a few years ago, you used to sort of talk about sort of 500 million or so outsized spread gains you guys would sort of find in any given year; that's been absent for about maybe the last two years or so. Just curious if it sounds like that's back. I don't want to put too fine a number on it, but in the environment you're seeing now, do you think you see a return to that 500 million, and what parts of the market do you see that from, obviously, export being a big one? Jim Teague: I don't know if it’s gonna be 500 million, 600 million, or 700 million, frankly. But I do expect that we're gonna have what you call outsized spreads. Frankly, typically, we have it every year. We just don't know which spread it'll be. Last year was pretty benign and unusual for us. As to what specifically it might be, I'll throw it to Tug. Tug: Yeah. I'll just add, I mean, this first quarter, we had some outsized spreads on natural gas when a storm firm presented some opportunities. But largely, the spreads that we've seen post Iranian conflict, those will come second quarter. Analyst: Great. Helpful color, guys. I'll leave it there. Thank you. Jim Teague: Thank you. Operator: Our next question comes from the line of Jean Ann Salisbury of BofA. Your line is open, Jean. Analyst: Hi. Good morning. We talked about this a little bit at the dinner, Tug, but it seems like international crackers that are running ethane are pretty happy that they do so right now. Has there been any interest in the last couple of months in more international conversions to ethane that could drive the next leg of ethane demand? Tug: Hi, Jamie. Yeah. This is Tug. So, yes, they were happy prior to the conflict, and they're even happier now. I will say that interest and demand we've seen on ethane—and I'll even throw LPG in there—we have quite the appetite for demand prior to the conflict, and I would say we have a similar appetite for demand post conflict. It made sense before, and it still makes sense today. Analyst: That's helpful. And I guess as a follow-up to that question, what's kind of the timeline if a cracker does decide to convert to ethane or take more ethane to the ethane being delivered? What should we expect, like, basically a couple of years for them and you to build that capacity? Jim Teague: That's probably—it’s not overnight, Jeanne. Yeah. And I think your couple of years is probably in the ballpark. Analyst: Alright. Thank you. I'll leave it there. Operator: Thank you. Our next question comes from the line of Michael Blum of Wells Fargo. Your line is open, Michael. Analyst: Thanks. Good morning, everyone. You know, at dinner a few weeks ago, you didn't really think you'd see any permanent shifts in where global buyers are gonna source their hydrocarbons. I thought maybe they'd move more to the US, but you seemed to think that that wouldn't happen. Curious just if you've had any change in your thinking there and, in a similar vein, I think at the time you didn't really think we'd see any reaction from US producers, and I'm curious if you still think that's the case. Jim Teague: Take the second one first. Jay and Natalie, what reaction by US producers? Natalie Gayden: This is Natalie Gayden. I'd say—and Jay can chime in here—I don't know that US producers have done much different. It seems to me that they're staying pretty disciplined. Sure, we see some movement in rig activity to different maybe producing zones or maybe different areas of their—if they have discretionary acreage. But other than that, I'd say they're keeping discipline. Jay Bainey: I'd agree with Natalie. We do hear some conversations from the independents about cadence maybe moving up where they think they can. On our gathering systems, we've seen incremental growth, call it, over the last three months. That could just be anecdotal. Jim Teague: As to the first question, Jean Ann, you know, a supply disruption like we have changes a lot of things. And we're seeing interest from countries, Tug, like India. But, you know, it's a funny thing. We're geographically challenged when it comes to LPG and India. And the question will be, when this is all over and everything returns to normal, do they still wanna lift US LPG when the AG is supposed to [inaudible]. Right now, they're showing a lot of interest. Analyst: Okay. Thanks for that. The second question was just on capital allocation. Randy, appreciate your comments on the 1 billion of discretionary cash. The question is, assuming you're able to realize stronger results this year as a result of the conflict, would you maintain that 50% or 60% allocation to buybacks versus debt paydown, or if that billion dollars turned into 1.5 billion, for example, would the incremental above plan just go to buybacks since your leverage is already within the target? Thanks. Randy Fowler: Yeah, Michael. I like the way you're thinking this morning. Yeah. Michael, I think we would still, in the near term, when we think about 2026, we'd probably still have that 50% to 60% split. You know, 2027 could be a different story, but I think 2026 still probably maintains that split. Analyst: Thank you. Natalie Gayden: Thank you. Operator: Our next question comes from the line of Brandon Bingham of Scotiabank. Please go ahead, Brandon. Analyst: Hey. Good morning. Thanks for taking the questions. I was just thinking about the two new plant announcements in the Permian. And I know it hasn't even really been a month since the update, but just curious what you think the go-forward cadence should be for Permian processing capacity? I believe previously you guys were around one or two a year. With the thought process, do you think we're moving more to a two-plus environment, or just, you know, how should we think about that moving forward? Natalie Gayden: This is Natalie Gayden. I think we're probably trending closer to two. And, obviously, that depends on how GORs shape up, but Corey's showing you that GORs are increasing. That is true. So I'd say we're trending more to two per year. Analyst: Okay. Great. Thank you. And then maybe just shifting over to the global supply-demand dynamics, especially on the demand side. Just curious what you guys are seeing for refined products and crude and what that might mean for your export business moving forward? Jay Bainey: Yeah, Brandon. This is Jay again. Yeah. We've seen volumes leave our dock. I mean, you go back to first quarter last year, think for fourth quarter we were up 70,000 barrels a day on exports. And then add that to the first quarter, that's another 70. With the SPR barrels now looking for second quarter, I mean, we could be well over 1 million barrels a day. Analyst: Okay. Great. Thanks. Operator: Thank you. Our next question comes from the line of Manav Gupta of UBS. Please go ahead, Manav. Analyst: Congrats on the good results. I just wanted to quickly focus on slide 17. It looks like PDH units are operating much better based on that slide. And I think you did do some kind of turnaround on the PDH unit too, and it's been operating better after that. Can you speak to those dynamics, please? Graham: Yes. This is Graham. PDH 2 has been running much better and much more consistent since the turnaround that we had last year. The teams have put a lot of work and worked very closely with our partner, and have resolved a number of the issues that we had, and I'm looking forward to sustained operation of that unit. PDH 1 as well. And we've invested a lot over the years in improving the reliability, and we still have projects that we're working. But I think what you're seeing in PDH 1 is much improved reliability of that unit as well due to the investments that we've made over the last few years in reliability as well. We've got good teams working out there, and we're just knocking down the barriers that we've had over previous years, and good work by those folks out at our Mont Belvieu PDH team. Analyst: Perfect. My quick follow-up is the macro comments you made at the beginning of the call, which were actually very informative. You know, you talked about 15 million barrels of total disruptions, and then Strait probably normally operating maybe only in July. I'm just trying to understand what does this do to the various storage levels of crude, refined products, LPG. Do you think, like, because of this depletion, storage levels could probably take a year or so to get fully replenished here? If you could talk about some of those dynamics, please. Tug: So if we look at the numbers, and I think Jim was pretty spot on with saying around 500 million barrels a month of lost supply depending on who you ask. As he pointed out, it's somewhere between 10 and 15 million barrels a day of lost supply through the Strait of Hormuz. That's crude oil, products, and NGLs. So just take 12 million barrels, for example, multiply that times sixty days. You've lost 720 million barrels through the Strait for global supply. So imagine if we can get back to normal, and let's say we're down a handful of barrels, you're only gonna get maybe 1 million or 2 million barrels above that. So it could take years to get back to where we were before the war. Jim Teague: What we don't know is what's been destroyed or damaged by the war and what it would take to repair that. I mean, we've heard about the strain that Qatar has, but there's still not a hell of a lot of information as to what of their assets have been damaged. Analyst: Thank you so much. Jim Teague: Thank you. Operator: Our next question comes from the line of John Mackay of Goldman Sachs. Your line is open, John. Analyst: Hey. Good morning, everyone. Thank you for the time. Just wanna go back to the 2027 kinda soft guide from the last call. You talked about it a little bit earlier in this one, but I just wanna put a little finer point on it. When you shared that update, were you thinking of '27 being a kind of what had, at the time, thought to be a kinda softer 2026 macro environment or 2025 macro environment where we weren't gonna have a lot of spreads? Or was 2027 meant to be a more kinda normalized environment maybe closer to what you outlined in the fundamentals update a couple weeks ago? Maybe just kinda walk us through the kind of macro behind the '27 piece. Randy Fowler: Yeah. John, this is Randy. I appreciate the question. Yeah. Really, what we were looking at when we saw the potential for 2027 was really just fee-based EBITDA growth. We were in a situation in 2025 and coming into 2026—Jim mentioned earlier that it was really a benign environment for commodity prices and spreads. So, really, the driver was fee-based cash flows off new assets going into service and around the acquisition that we did from Occidental Petroleum, that you'd start seeing those volumes show up on our system at the beginning of 2027. Those are really the drivers. Analyst: I appreciate that. That's clear. Thank you. And then maybe just switching to kind of the broader macro. You have commented a couple of times on this call about the disconnect between the, let's say, paper market and the physical market. Can you talk a little bit more about that and maybe what you think is driving the divergence or what could drive a convergence in that? Tug: Yeah. This is Tug. You're seeing strong physical premiums, for example, in dated Brent, but I really think what we're alluding to is the forward market may not be accurately reflecting what we're seeing in the physical market. It's probably not high enough. Analyst: Makes it sound like you'd expect the kind of futures market to drift up over time even if we get closer to, let's say, some clear resolution in the Strait? Tug: It sure looks like it. It looks like it. Analyst: Appreciate the time. Thank you. Jim Teague: Thank you. Operator: Our next question comes from the line of Gabe Daoud of Truist. Your line is open, Gabe. Analyst: Thanks, operator. Good morning, everyone. Thanks for the time. I was hoping maybe to just touch on the gas side just for a second. Maybe Haynesville gathering. Is there—in the shoulder season now and front month at 2.50—we'll see what happens in the summer, but curious if you're seeing any change in behavior. It does seem like privates build productive capacity to turn on at the appropriate price signal, but curious if you're seeing any change in behavior. Natalie Gayden: This is Natalie Gayden. You're right, the privates—you've seen some rigs or quite a few rigs actually running. And so I think we expect a little bit of a pop on our system in the Haynesville at the end of the year. But, otherwise, it looks pretty steady for the most part. Maybe a bit of growth. I don't know what Corey's got in the forecast, but something like that. Analyst: Alright, Natalie. Got it. Thanks, Natalie. And just a quick maybe shifting back to the Permian as the commercial team tends to win some new business, obviously, basin-wide. But just curious what's most important to producers today? Is it reliability, just given where pricing is; fees; maybe differentiation given your sour gas capabilities? Just trying to frame the competitive dynamics today. Thanks, guys. Natalie Gayden: Well, we always use our integrated value chain to compete, no doubt about that. And then cost of capital and what it takes to build out whatever a producer needs. I will say an established footprint that far reaches into areas of the basin that people are producing in is a competitive advantage because you're already there. And when producers wanna bring on gas in, you know, the next twelve months, you already have a foot in the door, per se. So I would say a mix of all of the things: integrated value chain and just geographical position in the basin. Tyler Cott: I'll just—this is Tyler—I'll just add that Natalie operates a super system out there, which provides our customers a lot of reliability. Analyst: Yep. Understood. Now that makes sense. Thanks, everyone. Jim Teague: Thank you. Operator: Our next question comes from the line of Julien Dumoulin-Smith of Jefferies. Your line is open, Julian. Analyst: This is Rob Mosca on for Julian. On the CapEx revision and the plan FIDs, I would imagine you'd line of sight to these projects when you issued guidance last quarter. Should we interpret this to mean that incremental FIDs, like a new frac, bias 2026 CapEx higher? And is what you have now actually a pretty firm number? And also, maybe if you could provide an update on those commercial agreements you spoke to with Exxon last quarter. Thanks. Randy Fowler: Yeah. The first part of your question, no, our CapEx guide does include anticipated projects that are under development. I won't talk to specifically any unannounced projects, but we do have some projects that are under development that are in that guide. Previously, where we were—we had on the two processing plants that we just announced with the earnings release this morning—we actually had the long lead items associated with that plant in our guide, just did not know when we were gonna come in and actually FID those. And the FID, again, just with the volume growth we've seen in the Permian, came earlier. So that was, if you would, the reason for the increase in the CapEx guide for this year because we'll see some of that CapEx happening late this year. Zach Stray: And this is Zach Stray. On the NGL side, on the fractionation side, you know, Natalie mentioned she's probably up on the upper end of her guidance. So always looking at building fractionators. We'd like to bring on fractionators full; helps the economics. We've got a lot of levers within the system. Honestly, we were probably a little late on 14, but we got a lot of levers. So we'll see if we need another fractionator. And if we do, we'll build one. Not sure what your question is on the Exxon side. But on the downstream agreements I would say that we talked about, I would say a lot of those agreements were just extensions of deals that we already had, and it was just a natural fit while we were in the conversations about Bahia to go ahead and extend those contracts. Analyst: Got it. No. That addressed it. Thanks for that. And for my follow-up, wondering how we should think about the quantum of LPG that could be shipped out of NRT-2 Phase two once it's online relative to the 360,000 barrels per day refrigeration capacity. It seems like you guys might have just one dock there. I'm wondering how contracted that capacity is until the expansion comes online on the LPG side at the end of this year. Thanks. Tyler Cott: Yeah. This is Tyler Cott. I'll just reiterate again that over the longer term, you know, we're contracting around the range of 90%. We have propane contracts that will start to ramp pretty quickly at NRT. And I think as we've said before, we expect NRT to do a good amount of propane in the balance of this year, and that will transition to ethane as our EHT capacity comes online late this year. Analyst: Alright. Appreciate the time, everyone. Operator: Our next question comes from the line of AJ O'Donnell of TPH. Please go ahead, AJ. Analyst: Morning, all. Wondering if I could just go back to some of the comments on damaged infrastructure in the Middle East. I think we saw from Saudi Aramco this morning they're gonna be halting LPG shipments through May. There's been some published price indexes from third-party sources showing that spot loading rates in the US Gulf Coast have been as high as 55¢. I'm just wondering, given that Phase two of Neches River will be up soon, curious how you would characterize that rate and what maybe you're seeing in terms of spot opportunities and how that could affect, you know, the return profile of your two new export projects. Tyler Cott: Yeah. We've seen elevated spot rates. They've been volatile. You know, they've been as high as kinda what you mentioned, and they're off from those highs now. I think, going back to what I said earlier, our system now has a significant amount more flexibility than it did previously. And so we'll respond to what products the markets need and have the highest value with the spot capacity that we have available, those products being ethylene, propylene, LPG, and ethane. Analyst: Okay. Great. Then I just had one more. On the crude business, looking at the Q1 results, could you provide a little bit more detail on the specific drivers behind the lower sales margin and lower transport revenues? Curious, you know, with the higher commodity strip and overall volatile basis spreads that you guys have been citing, is this something that we could see kinda, you know, reverting in Q2 and the rest of the year? Jay Bainey: Yeah. AJ, this is Jay again. You know, in Q1 results, we had a headwind with the Eagle Ford JV renegotiation on some fees there, and then some mark-to-[inaudible] noise. Lower spreads. But you brought up looking forward—the spreads increased, and that really didn't take place until, call it, April business, but your point’s valid. We see it definitely, at least as April looks now, that turning around. Analyst: Okay. Thank you very much. Operator: Thank you. Our next question comes from the line of Jeremy Tonet of JPMorgan Securities. Your line is open, Jeremy. Analyst: Hi. Good morning. Just wanted to come back to some of the commentary that you provided on the macro level. The industry, as you said, I don't think has really responded with a lot of new rig activity. And wondering what you think the industry would need to see in the market to pick up activity, and do you expect us to get there? Jim Teague: What we hear from producers is they're gonna stay disciplined. Natalie Gayden: I think that's true. I mean, they'll stay disciplined. We'll have a few companies that may break out from the pack, but they're private in nature and, you know, don't add a whole lot to the bottom line. So that's what we're seeing. Analyst: Do you see any certain price levels out there in the, you know, the '27 curve that might start to warrant more activity? Or just can't tell that? Tug: Nope. This is Tug. I don't think it's necessarily a specific price. It's probably more focused on the back of the curve being lifted up, and not just next year. It needs to get lifted up from when you're on that. Analyst: Got it. Thanks. And then just wondering for the CapEx backlog as a whole, if you might be able to share how much of that could be allocated to projects that have not taken FID yet. Just trying to get a sense for how that might look. Unknown Speaker: Oh— Natalie Gayden: For 2026? Randy Fowler: Jeremy, that's getting pretty granular. Analyst: 2027 works as well. Thank you. Randy Fowler: Probably for 2027, I would say probably half of 2027 is not spoken for. Analyst: Yeah. That's very helpful. Randy Fowler: Yeah. Thank you. Somewhere between 50–65%. Unknown Speaker: Thank you. Operator: Our next question comes from the line of Keith Stanley of Wolfe Research. Please go ahead, Keith. Analyst: Hi. Good morning. I wanted to clarify on Neches River Phase 2. Would you have contracted any of the LPG shipments on that since it's only an interim service until you switch to ethane? Or is that all spot? And then just wanna confirm the timeline you would switch to ethane. You're required to do that at year-end? Tyler Cott: We do have propane contracts that will be ramping up here at NRT on the flex train. And then as EHT comes online, we'll satisfy contract demand long term at EHT. Ethane commitments are generally driven by when the VLECs arrive; largely, that's later this year and into next year. Analyst: Got it. Bigger picture question as a follow-up. What would you say is the biggest opportunity for Enterprise with the situation in the Middle East and some of the commodity dynamics? Is there any particular business or commodity that you see as most exciting that you'd call out, or things we might not be thinking about? Jim Teague: Frankly, I think ethane has surprised me. The appetite for it—I could see that growing. And another one is we're gonna ship out what, Chris? 3 million barrels of ethylene this month? Chris: That's right, Jim. Yeah. Our ethylene exports over the last couple of months have been really high. Jim Teague: What excites me is how we have broadened the offering across our docks. We're not just an LPG dock. We're not just a crude oil dock. We're a hydrocarbon dock. And I think I'd like to see that grow. We've got our own targets for where we'd like to be. I'm not gonna share, but I like the broadening of the offerings other than a specific project. Randy Fowler: Got it. Thank you. And probably the only thing I'd add to that, just really what—just the improvement in fundamentals for our petrochemical customers has really been a big change, which is good to see for them, and we'll get the benefit from just volumes going through the system. But that's much improved. Jim Teague: Yeah. A healthy petrochemical business is good for Enterprise. And they were running pretty strong before this. What's changed—some are making a heck of a lot of money. Thank you. Unknown Speaker: Thank you. Operator: Our next question comes from the line of Jason Gabelman of TD Cowen. Please go ahead, Jason. Analyst: Yeah. Hey. Most of my questions have been answered. I want to ask about another commodity exposure you guys have around octane enhancement. You know, I think 2022, that business did, and '23, north of 400 million of gross margin. How are those spreads looking right now? Do you see that repeating this year? Jim Teague: And we just now are coming out of a turnaround on our Oleflex unit, and so we're not able to get full capacity. Unknown Speaker: But if— Jim Teague: But we're coming out of that, and we think it's gonna be strong through the quarter. Analyst: Got it. That was it for me. Thanks for the question. Operator: Thank you. I would now like to turn the conference back to Joe Theriak for closing remarks. Sir? Joe Theriak: Thanks, Latif, and thank you to our participants for joining us today. That concludes our remarks. Have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Central Bancompany First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, John Ross, President and CEO. Please go ahead. John Ross: Thank you, operator. Good morning, and thank you for joining us for Central Bancompany's First Quarter 2026 Earnings Call. With me in the room today are our Chief Financial Officer, Jim Ciroli, Chief Customer Officer of Dan Westhues; and Chief Credit Officer, Eric Hallgren. As a reminder, I'd like to point out that the discussion today is subject to the same forward-looking considerations outlined on Page 3 of our press release. Today, we plan to briefly discuss first quarter highlights before opening the line for questions. Before I turn to the numbers, please allow me to share some nonfinancial highlights. In the first quarter, we were humbled to again be named one of America's Best Banks by Forbes as well as the best-performing U.S. public bank of more than $10 billion in assets by S&P Global Market Intelligence. Recognition from such organizations is a testament to the efforts of our nearly 3,000 full-time employees who I'd like to thank for their continued legendary service. With that, let's cover the financial results. For the quarter, Central Bank posted net income of $111.1 million or $0.46 per fully diluted share. Return on average assets of 2.2%, NIM on an FTE basis of $4.36 percent and efficiency ratio on an FTE basis of 45.7%. Relative to the first quarter of 2025, net income increased $16.3 million or 17%. Our asset quality remained consistent with 10 basis points of net charge-offs again this quarter and allowance covered 130 basis points of total loans. We remain encouraged by the continued resumption of growth in our balance sheet with ending loans excluding other consumer of nearly 6% annualized quarter-over-quarter and average deposits up 5% year-over-year. Lastly, capital levels at the holding company remained well above target with approximately $1.9 billion of excess or $7.80 per share. We leaned into capital deployment this quarter by announcing a meaningful increase to our quarterly dividend and repurchasing $32 million worth of our shares, taking advantage of attractive prices and expanded liquidity. We are pleased with these results and appreciate those on the line for joining us for this call. With that, I'd like to open the line for questions. Operator? Operator: [Operator Instructions] And our first question is coming from the line of Manan Gosalia of Morgan Stanley. Manan Gosalia: So it looks like loan yields held up nicely despite rate cuts at the end of last year. I was hoping you can help us with what's going on under the surface in terms of yields, spreads, fixed rate loan repricing, et cetera. Anything that can help us think through the forward look under different rate scenarios given that rate expectations have been moving around quite significantly over the past several weeks. James Ciroli: Yes, happy to, Manan. So this is Jim. So looking at it on a linked quarter basis, as you look at the loan yields, yes, sure, they came down 3 basis points, almost all about was loan fees, just coming off of higher prepayment fees in the prior quarter, which being that we had fewer prepayments this quarter. And I would also note that our loans kind of into the quarter, higher than our average. So we're showing kind of growth momentum coming out of the quarter and into the second quarter. So with fewer prepayments, we kind of like that scenario. What I would say additionally is that we repriced about $400 million in the quarter, and we anticipate about $1.8 billion more for the rest of the pricing when those loans are repricing. They're coming out at like a 5.80-ish type yield. And we continue to see loan opportunities at 300 basis points over similar maturity treasuries. So as those -- as that $1.8 billion reprices in the rest of the year, I think that could provide some upside to where we were in NIM. One of the things I would just point out, as you look at our NIM coming down I wouldn't necessarily focus on the loan yields coming down. They sure -- they came down 3 basis points. But if you look at the deposit side, our deposit costs came down 5 basis points if you factor out the shift higher in public funds that we kind of signaled on the last call. So public funds ended the fourth quarter higher, and we talked about the seasonality there and so seasonality would kind of go sideways during the quarter, i.e., the averages for the first quarter were going to be higher than the averages for the fourth quarter, the linked quarter in public funds. And that's exactly what we saw. And we anticipate that the public funds, you saw those. I'd point out Slide 9 that we added to the deck, but indoor public fund deposits at the end of the quarter, start to come down. So the ending balance was lower than the average balance, and that's exactly what we said on the call last time. Did I cover everything that you want me to cover there, Manan? That was a lot. Manan Gosalia: That was great detail. I really appreciate that. So then maybe just pivot over to the credit side. I see the credit remained broadly solid in the quarter. I guess if I really had to nitpick, 1 question is on the delinquent we've had a couple of quarters where they've edged up a little bit, and it looks like it was driven by commercial. So any thoughts you can give there on what you're seeing and your views on credit overall? James Ciroli: I'll turn to Eric Hallgren, our Chief Credit Officer in a second. What I tell you -- what I'm seeing right now is that we still continue to have a lot of small numbers on our asset quality statistics. And so when you have small numbers, small changes can seem like they're bigger than they actually are. So I think that really what we're looking at in our asset quality numbers continues to be pristine. And just like I said, small changes in that pristine-ness can lead to big percentage changes, but that doesn't necessarily mean anything. Eric, what color can you add? Eric Hallgren: Yes. Thanks, Jim. So the increase, Manan,as you noted, was primarily driven in the first quarter by commercial. That was really concentrated to a small number of markets and largely attributable to a handful of commercial clients. From what we see, we don't anticipate those delinquencies to grade any further and expect resolution here. So overall, we view it as isolated pockets of stress and not indication of systemic weakness kind of emerging as we look ahead for the rest of the year. Operator: And our next question will be coming from the line of Nathan Race of Piper Sandler. Nathan Race: Can I -- just going back to your other comments around some of the deposit flows in the quarter. I'm just curious how you think about working down some of the excess liquidity that kind of weighed on the margin in 1Q and just generally, how we should think about the size of the balance sheet, specifically kind of earning assets is a better jump-off point for the second quarter? James Ciroli: That's a great question, Nate. And I appreciate it because we really worked hard in the first quarter. If you recall, the path of rates it's terribly looking good in earlier parts of the quarter. But at the end of the quarter, where we like to extend duration to is about the 4-year mark with our security portfolio. And near the end of the quarter, we saw rates come up in that part of the curve. And so we stepped up the pace of our buying activity in March, and that continued into April as well. In fact, in April, we're seeing -- we're reinvesting that cash into about a 4.30% yield right now. So we continue to work hard to try to find great opportunities. You know we want to find things that are U.S. government guaranteed or at least sponsored by agencies of the U.S. government. We don't like taking on a lot of convexity risk and trying to deploy that money -- there's a lot of work by our treasury team. And so when the market comes back and where we want it to be, like it did in March and April, we were able to move even more and faster in that environment than we did. Nathan Race: Got you. That's helpful. Maybe changing gears a little bit. You guys are obviously continuing to build excess capital really strong [ clips ] going forward as evidenced here in 1Q as well. So Jim, would -- I'm sorry, JR, I would love to get your kind of thoughts on just kind of your optimism level for an acquisition announcement this year and just generally how conversations are trending. It seems like you guys have the competitive currency to share with potential partners, but would just love some updated thoughts on that front. John Ross: Yes. It's a very understandable question. More than half of our capital is excess, and it is a major focus of ours on a daily basis. Having said all of that, we have no real updates for you at this stage. You can kind of push replay on the comments we made last quarter. And just summarizing those briefly, we do think we're well positioned. We are in active discussions, nothing is imminent. We see everything that's out there, and we'll update you when we have a deal, but until then, we're just going to work really hard on it. So no real updates this quarter for you. Nathan Race: Okay. Fair enough. Helpful. Maybe one last one for me. The payments revenue tends to show kind of a seasonally decline in the first quarter. Just curious if you guys still feel like some of the initiatives you put in place, particularly with Dan and his team are bearing fruit? And do you still think some of the payments revenue projections that you've talked about in the past kind of hold true in terms of kind of a nice ramp over the balance of this year. James Ciroli: We do. I mean yes, I appreciate, Nate, as you noticed the seasonality between Q4 and Q1 really comes off of good quarter in Q4, and it comes down pretty sharply. But when you look at this on a year-over-year basis, what we're seeing is still -- the consumers still spending. So there's no concern from a consumer perspective. And we're seeing nice growth on the commercial side with some of the programs we're putting in place. So I would say, yes, we continue to feel pretty sanguine about that business as we look forward. Operator: And our next question will be coming from the line of Matt Olney of Stephens. Matt Olney: Just want to go back to the deposit discussion. And Jim, you already addressed the moving parts around the public funds and Slide 9 is helpful for that. Any general observations you can share as far as just the competitive dynamics for deposits in your marketplace and kind of what you're seeing more recently? James Ciroli: That's a fair question, Matt, and welcome to coverage on our stock. So looking forward to spending more time with you as well. What you're going to find as you look at us? Is we're out there generally growing deposits at around -- adjusting for seasonality, which we had a lot this quarter. Adjusted for seasonality, we're growing deposits kind of mid-single digits across our markets, but we're doing that through our acquisition campaigns where we're focused on growing checking accounts. So we're focused really on being our borrowers -- or I'm sorry, our depositors' primary checking account. We're focused on primacy overall. And I think this quarter, once you normalize the activity, you can see the growth that I'm talking about in terms of mid-single digits. So we're not really out there competing for the yield-seeking funds. We're out there competing on service, trying to be people's primary checking accounts in the markets that we serve. So I don't think we would be the best to ask the competitive questions. Yes, I think it is competitive out there from what I hear, but that's not really the market we compete in. Matt Olney: Okay. Appreciate the color on that. And then I guess going back to the capital discussion, I think you noted in the prepared remarks you stepped up the share repurchase program this quarter, just over 1 million shares. I guess, help us appreciate your capital allocation strategy and where buybacks come into play? And I think JR already addressed the M&A question. So just put that aside for a second. Just I'm trying to appreciate the -- I think you disclosed that ROIC around 12% based off kind of what you guys think about it. Any more color you can share on capital allocation and the buybacks? James Ciroli: Yes. So one of the things I would point out is that even with the $32 million that we bought back this quarter and we stepped up the dividend we still continue to grow our excess capital number. So from $1.8 billion to $1.9 billion, as JR said, more than half of our tangible book value is excess capital. So -- and when we look at that excess capital and we look at -- we value that roughly at dollar for dollar. I don't know how else you value that. And you strip out and you look at what our core capital is and compare that to any measure you want, trailing 12 months, next 12 months of expectation. Looking at 2027 earnings, we think the stock is still cheap. And if we intend to use that stock in an M&A transaction, using -- having it that cheap is something that we like to work against. We'd like to get that stock a little bit more value to the marketplace. JR, anything you want to add to that? John Ross: No. I mean, to your point on ROIC, we do calculate it. We calculate it in the same way that we look at other bank acquisitions because we think that's a good practice. And we look at several other methods as well. But practically speaking, it's the intuition of bringing a single-digit P/E multiple on a forward basis when you look at the core bank is very attractive. Now obviously, $32 million is a drop in the bucket compared to our excess capital. The one last thing I would add that we were pleasantly surprised with the increase in the liquidity in the stock, which will maybe provide us more opportunities on that front as we go forward here as well. We were a little bit constrained in our initial resolution of the $50 million because we were concerned about impacting the liquidity of the stock. But we've been pleasantly surprised to see a pickup here. Operator: Our next question will be coming from the line of Christopher McGratty of KBW. Christopher McGratty: Jim, on expenses, really good performance in the quarter. Can you speak to sustainability and maybe broader operating leverage expectations? James Ciroli: Great question. Look, I think what you saw on a quarter-over-quarter basis, has that come down a little bit. What I would share with you on the current quarter, we've signaled that we're going to have some additional costs of around $5 million a year in terms of public company expenses when we look at it. The first quarter has about that run rate in it. So the other thing I would share is that we are still in the middle of our core conversion, but during the quarter, we owned capitalized $700,000 of the dollars that we spent. So I think the first quarter NIE is fairly loaded. I think that's a fairly sustainable run rate. There might be a little uptick because we do merit increases in March, but there's not going to be much of an uptick that I would expect. Christopher McGratty: Okay. That's helpful. And if I could go to the Slide 5, the updated rate sensitivity static analysis. I think it was of a touch call it, 100 basis points from last quarter. But the base case shows a pretty good ramp in both years. Can you speak to just broader -- any strategies being contemplated to lock in the margins given higher for longer is seemingly a base case? How we should be thinking about progression of NII as you get a little bit better growth in the loan fee adjustment that you talked about? James Ciroli: Chris, I appreciate the question. I really go back to what I was talking with Nate about in answering Nate's question, I think that one of our biggest opportunities is to continue to invest our excess cash. And because most of the quarter the differential between the 4-year point on the curve, the overnight point in the curve was slight. That's kind of steepen a little bit with an anticipation that we won't have a rate cut until sometime late in '27. And as that environment has improved, we've accelerated our investing strategy to put that excess cash to work. But also having said that, I think the real opportunities come from continuing to grow noninterest-bearing deposits, I think there's still some movement to do on the deposit cost side and managing those down. I'd point out that 90% our deposit base is non-maturity. And so in order to work that down from the rate cuts we saw in late '25 our market CEOs have to go out there every day and try to manually work that count with their depositors. And so it's not something that just mechanically comes down. We still think a low 20s beta is appropriate. But because of that nature of the non-maturity deposits, that's going to take a little while to come in. And then I'd point out the seasonality, too, is we roll out of first quarter with the higher public fund deposits, and that's why we put Slide 9 there, Chris, to help give you transparency on that phenomenon, the seasonality. So as that comes down, like I said earlier, had we not mixed higher in public fund deposits, our cost of deposits would have been down 5 basis points on a linked-quarter basis. And so as we see those public fund deposits come down across Q2 and Q3, I expect that the mix in lower in those costs will continue to benefit on net interest margin as well. Christopher McGratty: Okay. Just if I could squeeze one on the -- like the excess cash. Where does that -- how does that settle in terms of proportional balance sheet over the next couple of years? Like where do you want to run cash to earning assets? James Ciroli: I don't think of it as much that way as I think about -- so it's not necessarily a percentage [indiscernible]. And that's probably [indiscernible] million on the balance sheet. Operator: I'm showing no further questions at this time. I would now like to turn the call back to John Ross, President and CEO. Please go ahead for closing remarks. John Ross: Thank you operator and thank you those on the call for taking an interest in our [indiscernible]. Operator: Thank you for joining today's conference call. You may now disconnect.
Operator: Good day, everyone. My name is Stefan, and I'll be your conference operator today. At this time, I'd like to welcome you to Allegion's first quarter earnings call. [Operator Instructions] At this time, I'd like to turn the call over [indiscernible], director of Investor Relations. Jobi Coyle: Thank you, Stefan. Good morning, everyone. Thank you for joining us for Allegion's First Quarter 2026 Earnings Call. With me today are John Stone, President and Chief Executive Officer; and Michael Wagnes, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Please go to Slide 3, and I'll turn the call over to John. John Stone: Good morning, everyone. Thanks for joining us. The Allegion team has remained agile in a volatile environment and stayed focused on serving our customers alongside our strong channel partners. In Q1, we delivered high single-digit revenue growth, led by the Americas nonresidential business and contributions from acquisitions. In the Americas, performance was in line with our expectations we outlined back in February. In our International segment, top line growth was led by acquisitions, which are on track. However, our Q1 organic revenue growth and margins in International were negatively impacted by an ERP implementation in one of our legacy mechanical businesses. Production rates there have started to improve, and we expect to recover the Q1 shortfall over the remainder of the year. As you'll see on the next slide, Allegion remains committed to balanced, disciplined and consistent capital deployment. And finally, with respect to our outlook for the year, we are raising our reported revenue outlook to 6% to 8% to include the DCI acquisition, and we are affirming our outlook for organic revenue growth of 2% to 4% and adjusted earnings per share of $8.70 to $8.90. Please go to Slide 4. Taking a look at capital allocation for the first quarter, starting with our investments for organic growth. The latest example of this is our next-generation LCN Senior Swing series of auto operators for heavy-use doors across health care offices and other high-traffic environments. Easy to install and upkeep, these automatic door operators self-adjust in real-time to external pressures like wind, allowing smooth, safe and consistent operation while saving the building time, energy and maintenance calls. Turning to acquisitions. Earlier in March, we closed the acquisition of DCI, a West Coast-based manufacturer of holly metal doors and frames, specializing in custom design and quick ship capability. Historically, we've had to rely on our Cincinnati, Ohio, manufacturing facility to serve customers on the West Coast, which extended lead times and drove higher freight costs compared to local suppliers. DCI makes us far more competitive on the West Coast, helping the totality of our Americas nonres business, not just our door offering as customers purchase complete door and hardware packages together. DCI today has a low double-digit EBITDA margin, resulting in limited EPS accretion in the current fiscal year. But the strategic nature of this acquisition gives us significant improvement in serving our customers at a better cost position. I'm confident our execution and pricing discipline will drive higher profitability over time and expect performance to improve moving forward. Moving to dividends. Allegion paid $47 million in dividends in the quarter, consistent with the long-term framework we outlined at our Investor Day last year. We repurchased $40 million of Allegion shares in the first quarter. Our Board also recently approved a new $500 million repurchase program. As we've said in the past, you can expect Allegion to be balanced, disciplined and consistent with capital deployment oriented towards profitable growth and driving long-term returns for shareholders, including share repurchase as appropriate. Mike will now walk you through the first quarter results. Michael Wagnes: Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #5. Revenue for the first quarter was over $1 billion, an increase of 9.7% compared to 2025. Organic revenue increased 2.6% in the quarter, led by our Americas nonresidential business. The enterprise organic revenue increase was driven by price realization, partially offset by volume declines. Q1 adjusted operating margin was 21.2%, down 150 basis points compared to last year, partially driven by a combination of volume declines and mix. Price and productivity net of inflation and investment and inclusive of transactional FX were favorable by $5.3 million. However, this resulted in a 40-basis-point headwind to margin rate in the quarter. I'll provide more details on revenue and margins within each of the regions. Adjusted earnings per share of $1.80 decreased $0.06 or 3.2% versus the prior year. EPS from acquisitions was more than offset by higher tax and interest and other in the quarter. Finally, year-to-date available cash flow was $80.3 million, consistent with the prior year. Please go to Slide #6. Our Americas segment delivered revenue of $809.9 million, which was up 6.9% on a reported basis and up 4.5% on an organic basis. Our nonresidential business increased mid-single digits organically, driven by price realization. Demand for our nonres products remains healthy and spec activity continues to be strong. Our residential business was flat in the quarter, with price realization offset by volume declines as residential markets remain soft. Electronics revenue was up mid-single digits for the quarter, and we continue to see electronics as a long-term growth driver of the business. In addition, reported revenues increased 2.1 points of growth from acquisitions and a slight tailwind from foreign currency. Americas adjusted operating income of $227.4 million increased 2.9% versus the prior year. Adjusted operating margins were down 110 basis points in the quarter. Price and productivity net of inflation and investment and inclusive of transactional foreign currency was favorable by $9.9 million. However, this was a 30-basis-point headwind to margin rate. The transactional foreign currency headwind relates to the prior year benefit of $3 million that we disclosed in Q1 last year, driven by the Mexican peso. Operating margins were also impacted by acquisitions, which were a 40-basis-point headwind. Additionally, volume declines and unfavorable mix were a headwind to margin rates. Please go to Slide #7. Our International segment delivered revenue of $223.7 million, which was up 21.5% on a reported basis and down 5.3% organically. Organic revenue declines were the result of volume weaknesses in our mechanical business, primarily related to the ERP disruptions John discussed earlier. This was partially offset by growth in electronics and price realization. Net acquisitions contributed 15.9% to segment revenue. Currency was also a tailwind, positively impacted reported revenues by 10.9%. International adjusted operating income of $17.9 million decreased 4.8% versus the prior year period. Adjusted operating margin for the quarter decreased 220 basis points. Price and productivity net of inflation and investment was a 210-basis-point headwind, inclusive of operational inefficiencies associated with the ERP mentioned earlier. Additionally, volume declines were a headwind to margin rates, which was mostly offset by acquisitions. Please go to Slide #8, and I will provide an overview of our cash flow and our balance sheet. Year-to-date available cash flow was $80.3 million, consistent with the prior year. For 2026, we still anticipate our ACF conversion will be approximately 85% to 95% of adjusted net income. Next, working capital as a percent of revenue increased in the first quarter due to acquired working capital, which does not impact cash flow. Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.7x, which supports continued capital deployment. I will now hand the call back over to John. John Stone: Thanks, Mike. Please go to Slide 9. One quarter into the year, we are affirming our organic revenue growth outlook of 2% to 4% and adjusted earnings per share outlook of $8.70 to $8.90. We are raising our reported revenue outlook by 1 point to 6% to 8% to include the acquisition of DCI. You can find more details on our outlook in the appendix. While our core demand assumptions are unchanged from our February call, I'll provide some additional details on our view for the remainder of the year. In the Americas, our markets are largely as we expected to start the year, but we're experiencing higher inflation. Based on current conditions, we anticipate an incremental headwind of approximately 1% of COGS from tariffs and other inflation. We expect to offset this on a dollar basis through a combination of price and cost actions. However, given current volatility, we are not updating our organic growth assumptions to include any incremental price at this time, similar to our approach in the first quarter of 2025. Most importantly, we expect this to be neutral to 2026 adjusted operating income dollars and earnings per share. For international, we expect to catch up on production impacts from the ERP implementation during the remainder of the year, supported by existing orders and backlog in that business. Our core demand assumptions are similar to our prior outlook. And beyond the ERP catch-up, it's also important to note that our electronics businesses are a source of strength in the International segment, and we expect these to ramp seasonally through the year. We have not experienced a notable demand impact from the effects of the conflict in Iran and our exposure to the Middle East is negligible. For the organization, we're committed to serving our customers while remaining agile in the current macro and input cost environment. Please go to Slide 10. In summary, Allegion delivered nearly 10% revenue growth in Q1 and deployed capital effectively for the benefit of our shareholders. Before turning to Q&A, there's one more highlight from Q1 that I'm proud to share with you today. Allegion was honored for the third consecutive year with the Gallup Exceptional Workplace Award. This recognizes our team for fostering one of the most engaged workplace cultures in the world. And we are 1 of only 5 companies to earn this award with distinction in 2026. We know highly engaged teams deliver stronger results for our customers, our shareholders and our partners. With that, we'll take your questions. Operator: [Operator Instructions] Our first question will come from Joe O'Dea with Wells Fargo Securities. Joseph O'Dea: Can you hear me? Operator: Joe, please go ahead. Joseph O'Dea: Sorry about that. Getting used to this new format. Starting on the demand side in Americas, it sounds like spec activity largely pacing as expected. But just interested in any color on the time from spec to order, if you're seeing any elongation in that with respect to what you would normally see on spec to order and what you're currently seeing the degree to which tariffs and other inflationary pressure is behind that? And then just related, we have heard some comments around kind of data center crowding out and inability to service other projects because of data centers growing more activity and the degree to which you're seeing any that? John Stone: Yes, Joe, this is John. I'll get started there. And I'd say, like we said in the prepared remarks, spec activity is strong in nonres, might go so far to even call it very strong in recent months. And I'd say it's broad-based. We've got a portfolio and a channel reach that affords us broad end market exposure. So we're seeing broad-based growth on the spec side. Channel checks with our largest customers support that view. To the more detailed points of are we seeing elongation from spec to shovel ready or doors being hung, not really. I don't think that environment hasn't meaningfully changed. But that is the reason why we don't disclose a whole bunch of detail because the line of sight from a spec to revenue for us really depends on the vertical and the project. You could imagine smaller projects or maybe multifamily office renovations for tenant improvements could be pretty quick, something like a very large hospital complex could take a couple of years. But suffice it to say, spec activity has been strong. Channel checks also, we feel, support our outlook. On the question about data centers crowding out other projects, I would feel like not in our space do I see that really as an impact. That being said, I feel good about the position -- the competitive position we've carved out for doors and door hardware in data centers, and that it's a small part of our business, but it has been growing nicely. Joseph O'Dea: That's helpful detail. And then on the tariff side and the 1% of COGS headwind that you talked about, just in terms of how you're addressing that? Are surcharges already in the market? How much of this is price? How much of this is more kind of cost mitigation on your side? And is it primarily tied to the latest kind of tariff changes and the impact that it has from Mexico? John Stone: Yes. I think -- so there's been -- like the last many months, there's been a flurry of changes with respect to trade and tariff policy. IEEPA was declared on constitutional, right on the heels of that Section 122 was implemented. Soon after that, there was a wide range of Section 232 changes. And when you net all of that out, along with some inflationary pressures on fuel in particular, we see an impact -- a net impact of around 1 point of COGS. And think of the playbook we used a year ago. Some pricing actions, it could be surcharges, it could be list price increases, they are not yet in the market and that's why we're not yet updating any organic revenue guide as a result. We'll certainly announce that to the market to our customers first as we work through all of the details there. And as always, there's an enormous amount of details to work through on all the different trade policies. There are some cost actions that we're taking, I think, just normal hygiene for a company our size, and that will contribute. So when you add it all up, we expect to mitigate this on a dollar basis at the adjusted operating income line and net earnings per share. Michael Wagnes: Joe, maybe I'll just jump in and add. If you think about the mix between price and cost, obviously, it's going to come from more pricing than cost actions due to the size we discussed. But similar to last year, look for us to make sure that we're driving that price and productivity to cover that inflation and investment. That's something we've been talking to you for a number of years about. Operator: Our next question will come from Tim Wojs with Robert W. Baird & Company. Timothy Wojs: Maybe just the first question. I guess if I look at North America margins, I was wondering if you can maybe just add a little bit of color on some of the mix puts and takes this quarter. I think it's been a while since we've had kind of a negative mix impact in the bridge there. So maybe just add some color there as to what the drivers were, and how you see that kind of playing out for the rest of the year? Michael Wagnes: Yes, Tim. So if I bring you back to Q1 of last year, we had really strong volume leverage and positive mix. And what that was, it included mix within nonres. And specifically, our nonres business is so much more than just a lock. It's the mix between the different businesses within nonres. This quarter was a little different than Q1 of last year. So it was some negative mix. If you think of the Americas and you take a step back and think of the full year, don't look at -- don't expect to see a headwind for mix for the full year for the Americas. You did have a headwind in Q1, but full year, think of it like most years mix kind of evens out over the course of the year for the Americas. Timothy Wojs: Okay. Okay. So it's mostly product mix on -- within nonres. Okay. Michael Wagnes: It's product mix, yes. Timothy Wojs: Okay. I got you. I understand. Okay. And then I guess how -- to that, like how would you kind of expect margins in North America to kind of sequence through the year? I guess, that mix impact kind of drove it, I guess, a little kind of weaker Q2 than we -- Q1 than what we thought. So just trying to understand kind of how we should expect margins in North America to kind of pace this year? Like would you expect kind of a negative variance in Q2 as well? Just trying to think through those pieces. Michael Wagnes: Yes. As you think about -- let's talk just margin rate for the Americas. As you progress throughout the year -- obviously, in Q2, we do have the peso impact from Q2 of last year. I'll call that to your attention. We put that on the earnings deck of Q2 in '25. But throughout the rest of the year, expect most of the expansion to come in the back half of the year. We'll get better sequentially. You could think of the second quarter as improving from where it was in Q1 versus the prior year, but the Q3 and Q4 is where you really start to see the margin expansion. And then for full year, I'll just add, don't forget, obviously, for each of the quarters, we got to now put in DCI. DCI is going to be a margin rate impact. You could think of it as 30 basis points for a full year. Q1 obviously only had 1 month of activity. The last 3 quarters, obviously, will have 3 months. So those are the 2 items I would call out. But if you think about margin expansion, think of it more in the back half, and part of that is the comp that you're going up against vis-a-vis 2025. Operator: Our next question will come from Tomo Sano with JPMorgan. Tomohiko Sano: Can you hear me? John Stone: Yes. Tomohiko Sano: Okay. In first quarter, the Americas electronics business was up mid-single digits, which is a little step down from the double-digit growth seen in Q4. Could you provide more breakdown of volume versus price contributions for Q1? And any color on what drove the decelerations? And do you anticipate any changes in the growth perspectives after 2Q, please? Michael Wagnes: Yes. Tomo, if you think about nonres, we said in the prepared remarks, nonres was driven by price realization. Just to remind you, Q1 of last year, really strong volume growth in nonresidential. You could think of that at the higher end of mid-single-digit volume growth for nonres last year. So this year, obviously, a little less when you think of volumes. Full year for nonres, expect to see volume growth for the full year in nonresidential. I think that remains a strong market for us like we talked about. And so I think Q1 in nonres, if you think about volumes, part of that is just the comp in the prior year. John Stone: And Tomo, this is John. On the electronics side, yes, mid-single growth this quarter. Look, a year ago, it was double digit, very strong. I think when we still -- when we look over the cycle, if you will, we still see electronics being a long-term growth driver for Allegion. The adoption rates are still increasing and growing. And I think that is providing that point of outgrowth that we expect to achieve. So I still feel good about our position in electronics. We're still rolling out new products, and I think still stand firm that, that's a long-term growth driver for the company. Tomohiko Sano: Just 1 follow-up. There was a commentary that ERP implementation and legacy mechanical business were key headwinds for the International segment in Q1. Were there any execution challenges associated with these factors? How do you view the prospects for recovery in International operations from second quarter, please? John Stone: Yes. It's a very timely question, Tomo. And yes, the ERP implementation was limited to one of our legacy mechanical businesses in Europe. And so while we haven't sized that exact amount, it does explain most of the organic revenue and margin decline in the quarter. I would say, since I've been here in Allegion, we've done a lot of ERP implementations. It's a core part of just investing in the core business. And we've had a lot of very old systems to update. This was one of them. We've never had to talk about this before. Every other ERP implementation has gone very well, this one we've just had a lot of struggles with. As I said in the prepared remarks, very recently, our production rates are getting back on track. And so it's not a demand issue either. The customer orders are there, the backlog is there, it's our execution that needs to improve. And I think it is improving. I do have confidence we will recover the Q1 shortfall over the course of the year. Operator: Our next question will come from Jeffrey Sprague with Vertical Research Partners, LLC. Jeffrey Sprague: John, just picking up on the ERP. So are there any other implementations that you're planning for this year? Have you -- are you done upgrading what you want to do in Europe? And also, just to comment on catching up. I've seen companies before have these snafus and they don't catch it up, right, because you fail to deliver so somebody else fill that void so you can get back to run rate, but maybe not lose -- regain what you lost. So maybe just a little bit more context on that. John Stone: Yes. Jeff, those are very salient points and something we're watching very, very carefully. I would say we have been holding on to the customer orders. We still have more inbound customer orders. We do have a backlog that supports our commentary, and our execution is improving. And so I do feel confident that we'll recover this Q1 shortfall over the balance of the year. It won't all happen like immediately, but it will happen over the balance of the year. I think as I mentioned, we've done a bunch of these implementations over my tenure here at Allegion. We do have more in the works. There are more businesses that do need these system upgrades. And I don't anticipate we're going to have a problem like this again. Jeffrey Sprague: And could you just maybe address also Europe in a little more detail, right? Not a lot of direct Middle East exposure, but Europe is probably most prone to seeing collateral economic damage first from what's going on. Is there any visible change in tone there, business trajectory, orders, just kind of year to the ground, what you're seeing real time in those markets? John Stone: It's a good question. And I'd say, consistent with our prepared remarks, the demand has shaped up about the way we saw it shaping up when we introduced the guide back in February. The big miss was, again, our own challenge with that ERP. So our electronics businesses in Europe still performing well. Our acquisitions in Europe are basically right on track, so feel good about those elements. Like in general, markets are still not super strong and agree they are more directly impacted by the 2 active conflicts, but I think market demand is about how we saw it at the February guide. Operator: Our next question will come from Joe Ritchie with Goldman Sachs. Joe, please unmute your line and ask your question. Okay. We'll circle back to Joe. Our next question will come from Julian Mitchell with Barclays Equity Research. Julian Mitchell: Maybe just based of the commentary around the Americas margins being down year-on-year in Q2 and also the fact that the International catch-up on ERP isn't all coming in the quarter of Q2, should we expect that this year is a bit more back-end loaded than normal in terms of kind of first half, second half EPS contribution? I think in recent years, you have been sort of 47%, 48% of EPS in the first half. Should we think this year is maybe more like mid-40s because of that Americas margin pressure and ERP headwind? Michael Wagnes: Yes, Julian, as you know, we don't really give quarterly guidance, right? So if I give first half, second half, I'm giving an EPS for Q2. I'll just share just a little more from what I said earlier. In the Americas, I wouldn't expect big headwinds on margin rates year-on-year in the second quarter. I just don't expect to see much expansion there, right? So you can think of it as not expansionary. For International, International, I think it's fair to say, second quarter, a little softer versus last year on margin rates. Similar to Q1, we talked about the sequential improvement versus Q1 of '26 will be similar to the sequential improvement you saw in '25. And then you start to see it recover some. If you think of the Americas, though, think of it more, a little more margin expansion in the back half of the year. This is not a massive margin expansion delta, it's more margin expansion in the back half and you know what Q1 was. Julian Mitchell: That's helpful. And then just on the kind of PPII, you had that 40 bps margin headwind in the first quarter kind of total company. How are you thinking about that sort of play out over the balance of the year? I think when I'm thinking about sort of total margins, you've got a volume improvement to margin rate in the back half from easier sort of volume comps so that helps with that margin step up in the second half. But just wondering kind of any puts and takes on PPII, how is kind of pricing playing out and competition and that type of thing, please? Michael Wagnes: Yes. So obviously, you saw the headwinds in Q1. If I break it out between the 2 businesses, similar to what you would expect in margin rates, Americas, expect to see for the full year, right? Our full year PPII, expect to see some margin expansion there, dollar positive. International is going to be a little tougher this year. So at an enterprise level, I expect the total company to be roughly around the Americas for the full year, a little more in the back half than first half obviously. Q1 was poor, second quarter, certainly better than what you saw in the first quarter. And then think about the core business. We expect this business to get back to that core incrementals we outlined at Investor Day, right, the core ex acquisitions and currency of that 35% plus as you think of our business for the remainder of the year. Operator: Our next question will come from Joe Ritchie with Goldman Sachs. Joseph Ritchie: Okay. Great. Moving around just the International segment, right? This is a segment that, historically, you've tried to scale via acquisition. I recognize that you had the issues with ERP this quarter and that impacted it. But I'm curious, like as you kind of think about like does it make sense for Allegion to have an international presence? The domestic business is doing so well. Is there -- does it ever make sense for it to be more of a domestic centric company and maybe it's just too difficult to scale the business internationally? John Stone: Yes. I think probably Q1 earnings call is not the time to have such a conversation, Joe, but I would say one business with an ERP challenge that we haven't had before driving a miss. I don't think such a extreme conversations are necessary right now. I'd say we've been very pleased with the growth we've seen in International. We've been very pleased with the portfolio improvements we've seen in International. The market conditions have been rather soft, but our teams have performed well. And one what I consider a temporary blip on the legacy mechanical side with this ERP implementation, we're going to overcome that. I have confidence there. It's not a demand issue. We've got some operating performance that needs to improve, and we'll improve it. Joseph Ritchie: Fair enough. And then, I guess, just the follow-on is just around capital deployment. Just given kind of like the start to the year from a share perspective, I'm just wondering like how you're thinking about buyback versus M&A at this point? John Stone: Yes, it's a great question, Joe. And I think as you saw in Q1, we did repurchase $40 million worth of shares. And you saw that our Board authorized a $500 million share repurchase program. So I think, that being said, our expectation and your expectation of us should be balanced, disciplined and consistent capital deployment for the benefit of our shareholders. And certainly, we understand where we're trading right now. And I'd say, on top of that, our M&A pipeline is active with good quality, bolt-on acquisitions. So I would say expect us to do both for the benefit of our shareholders. Operator: [Operator Instructions] Our next question will come from [ Reef Judd Rose. ] Unknown Analyst: I just wanted to follow up on the electronics growth in the quarter, just the mid-single digit. I think in the fourth quarter, it was low double, which is what you did through 2025, if I remember right. You're calling out like a tougher comp there. How should we think about that growth through 2026? And maybe just a little bit more color around the deceleration? Michael Wagnes: Yes. I have to apologize. When I answered that previous question, I struggled to hear the question. I answered about the nonres business, so I apologize. With respect to electronics, electronics was really strong for us last year, right? And it was strong in each of the 4 quarters. I expect to see electronics to be a long-term driver of growth for us. We keep on talking about this, including Investor Day. Quarter-to-quarter, it can move around a little. But if you think about electronics for us, think of it as, hey, this is going to be the accelerated growth driver. And over the course of the year, it tends to outgrow the mechanical. We expect that to be the case for 2026 as well. Unknown Analyst: Okay. That's helpful. And then just on the 1% of incremental inflation on COGS, is there any way to parse out how much is tariffs or like incremental 232 versus just broader metals inflation and anything else? And then just the -- you've had a lot of success historically offsetting price. How do we think about the cadence of that through the year? How much of a lag is there between when you start to see the inflation versus when you can raise price? Michael Wagnes: Yes. If you think of our business, we try to manage all cost inputs. So when we talk about it, we talk about pricing and productivity has to cover that inflation in those incremental investments. Tend not to give details by each subsection, just think of it as a total cost inflation number we provided. And then as far as lags, I would say, historically, there is a little lag between pricing and inflation, meaning the inflation could be a little sooner, but it's not enough where I would call it to your attention to change it much. What you tend to find is the cost inflation comes, but it sits on the balance sheet until it gets sold and flush through COGS. So it's not that dissimilar historically. We'll continue to monitor it. And as there's updates throughout the year, we'll just provide you more details. Operator: Our last question will come from Alexander Virgo with ISI Evercore. Alexander Virgo: I wondered if you could just dig a little bit more into the ERP impact. Just what was it that surprised you? What was it that went wrong? And I guess, I appreciate your point that you've implemented many of these in the past and not had to talk about them before. So what is it that, that you're taking away from this to ensure it doesn't happen again? And then if I could just follow up on the electronics side of things. Are you happy that you can get what you need from the perspective of chips and supply chain? Do you have enough buffer? Is it just a case of pricing that will end up coming through there? John Stone: Yes. Good question. So on the ERP, again, it's just a case of a legacy system been in place and highly customized over 25, 30 years, people got very accustomed to it. New workflows just slowed us down in this legacy mechanical business. And people are adjusting to it, people are adapting to it, people are learning and getting better with the new system. Again, as we've turned the chapter into 2Q, I do see our production rates are improving, our demand still supports the outlook, customer orders backlog still support the recovery and our operating performance is giving us confidence that we will recover the Q1 shortfall over the balance of the year. Then shifting over to electronics on the supply chain, certainly with the conflict in the Middle East, we've been watching component supply chains very carefully. Haven't yet seen any major disruption, and I do feel, as a company, we're better positioned with respect to electronic supply chain than we were back in the pandemic time frame. Operator: Our next question will come from David MacGregor with Longbow Research. David S. MacGregor: I just want to go back to the mix question and it was asked earlier. Just in the Americas business, how much of the margin pressures are, you think, resulting from the introduction of more value-oriented products like the Performance Series and the Von Duprin 70 and those products? Michael Wagnes: I don't think it's that, David. It's really the mix. This isn't a case where someone is trading down. This is the mix between the various businesses that we have. And so it's not a case where you're trading from a high price point to a mid-price point offering. It's more of the mix between the various product lines that we offer. David S. MacGregor: So you're not seeing any change in terms of how these jobs are being spec'd in terms of more value orientation? Michael Wagnes: No, no. I would not say that's the case at all. David S. MacGregor: Okay. All right. And just a follow-up, I guess, on the residential business, are you confident that you held market share in that business this quarter? And I guess, what are the strategic options available to you to maybe affect a stronger position versus some of the secular trends? John Stone: Yes. I think, David, on the resi side, for a while now we've been dealing with just a relatively soft end market. We've still seen electronics growth in resi. I think that has been a positive for us and continue to introduce new products in the electronics segment. As you've heard from, I think a lot of companies new build is very soft, aftermarket is probably just treading water. And so overall, the market remains a little bit soft. I think in terms of our share, all the indicators that we watch on, on point-of-sale and other things would indicate, yes, our market share is definitely holding up. Operator: At this time, I see no callers in the queue. So I'll now hand back to the CEO, John Stone, for closing remarks. John Stone: Well, thank you all very much for the Q&A and attending the call today. We look forward to connecting with you on our Q2 earnings call in July. Be safe, be healthy.
Operator: Welcome to Booking Holdings First Quarter 2026 Conference Call. Booking Holdings would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guaranteed of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals or expectations and similar expressions reflecting something other than the historical fact are intended to identify forward-looking statements. For a list of factors that could cause Booking Holdings' actual results to differ materially from those described in the forward-looking statements, please refer to the safe harbor statement in Booking Holdings' earnings press release as well as Booking Holdings' most recent filings with the Securities and Exchange Commission. Unless required by law, Booking Holdings undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. A copy of Booking Holdings' earnings press release is available in the For Investors section of Booking Holdings' website, www.bookingholdings.com. Booking Holdings intends to use the Investor Relations page of its website, ir.bookingholdings.com, to disclose material information for purposes of the SEC's Regulation Fair Disclosure. Booking Holdings encourages investors to monitor this website in addition to other public announcement and SEC filings, our information -- as information posted on that page could be deemed to be material information. And now I'd like to introduce Booking Holdings' speakers for this afternoon, Glenn Fogel and Ewout Steenbergen. Please go ahead, gentlemen. Glenn Fogel: Good afternoon and thank you for joining us today. We began 2026 with solid execution across our global business. Our results this quarter reflect the continued momentum of our long-term strategy and progress in advancing our mission to make it easier for everyone to experience the world. Before turning to our results, I want to acknowledge the current macro environment, including the impact the Middle East conflict is having on travel and recognize the resilience of our employees and partners in the region. Periods of uncertainty, whether driven by geopolitical developments or economic conditions are not new to our industry. We have navigated similar moments many times before, including the global shutdown of travel during the COVID period and more recently, the Russia-Ukraine war, which began in 2022 and the Israel-Hamas conflict, which began in 2023. Each time, while the near-term environment can be difficult to predict and there are immediate consequences to travel volumes, the fundamental drivers of travel demand, the desire to experience the world do not change. People have a deep and enduring desire to explore and connect and that demand has proven resilient over time, generally growing faster than the broader global economy. So we remain focused on what we can control, delivering strong value, reliability and service for both travelers and partners through differentiated innovative solutions. That focus earns trust. It's why customers choose us today and why we believe they will continue to choose us tomorrow, next quarter, next year and over the long term. This disciplined approach was one of the drivers of our performance in the first quarter and it remains the foundation of our long-term strategy. Despite the start of the Middle East conflict at the end of February, our teams delivered a quarter with strong execution and solid results. We booked 338 million room nights, which was in line with our prior expectations and represented 6% year-over-year growth. We estimate that the Middle East conflict impacted our room night and gross bookings growth by approximately 2 percentage points, accounting for directly impacted countries in the region as well as bookers whose travel was affected by the conflict. Excluding this impact, we believe our room nights would have been up by approximately 8%. On a year-over-year basis, first quarter gross bookings of $53.8 billion grew 15%. Revenue of $5.5 billion grew 16% and adjusted EBITDA of approximately $1.3 billion, increased 19%. Finally, adjusted EPS of $1.14 grew 14% year-over-year. Ewout will provide more details on the impact of the conflict on our financial results as well as specific assumptions and implication for our second quarter and full year outlook. While near-term dynamics create some volatility, we view our overall position in the Middle East as a long-term strength and believe we are well positioned for when normal travel demand resumes. Regardless of the current uncertainty, we remain focused on the long term and the factors within our control to drive value. This includes expanding our reach in key markets such as the U.S. and Asia, advancing our Connected Trip vision and continuing to innovate across our GenAI capabilities, each of which I will speak to shortly. Our confidence in these initiatives and our future growth profile is reflected in a capital allocation strategy that we've employed for well over a decade, including the record $3.6 billion in share repurchases we completed in the first quarter. Since 2014, we have reduced our share count by over 40% even after accounting for the dilutive impact of stock-based compensation by opportunistically investing in this long-term vision through our share buyback program. No one is better positioned than we are to understand what our long-term value can and should be relative to market fluctuations on any given day or quarter. As I just mentioned, we have reduced our share count by over 40% in 12 years. Importantly, we have done so at the average price per share of $93, thereby generating significant incremental investment returns for our shareholders by betting on ourselves at the right times and while always preserving and exercising the flexibility to invest in both the organic and inorganic growth of our business. It is a strategy that we are very committed to. The U.S. is an area where we are increasingly seeing our intentional and targeted investments help drive growth. While we are a global leader, as we have mentioned in the past, we believe we have room to grow in this market. As a result of our continued disciplined execution, I am pleased to report that our U.S. room night growth accelerated for the fourth consecutive quarter to the low teens, driven primarily by strong domestic demand. We're also encouraged by the continued momentum of our direct channel in the U.S., which saw double-digit growth at Booking.com. Building a robust direct mix is not something that happens overnight. Growing our direct mix in the U.S. has been a multiyear effort built on disciplined investments in our product, brand and supply, which we believe is positioning us to drive continued progress over time. Furthermore, we saw strength in the U.S., not only in accommodations but across flights, cars and packages. This indicates that travelers are increasingly recognizing the full spectrum of our offerings as we continue to build out our Connected Trip vision. In Asia, we continue to see one of the most compelling structural growth opportunities in the global travel industry. During the first quarter, the region performed well with room night growth in the high single digits, including low double-digit growth for travel within the region. What differentiates our position in Asia is our ability to operate effectively across a highly diverse and complex set of markets. Asia is not one unified region but a collection of distinct countries and cultures, each with its own consumer behaviors, supply dynamics and distribution channels. Our approach starts with a global playbook informed by the reach and capabilities of Booking.com, combined with Agoda's deeply localized expertise across the region. Building on that foundation, we have been investing in localization at the granular level, adapting our product, payments and go-to-market strategies to meet the specific needs of each market. This includes building strong relationships with local supply partners from traditional accommodations like ryokans in Japan, to a wide variety of independent properties across markets such as Indonesia, India and Vietnam, many of which sit outside major urban centers. At the same time, our distribution strategy is designed to meet travelers where they are increasingly spending their time. In many of these markets, that means engaging through social and messaging platforms where we are seeing encouraging traction across channels such as KakaoTalk in Korea, LINE in Thailand and Taiwan and through WhatsApp in India. By combining a global playbook with strong local execution, we believe we will continue to be well positioned for the growth opportunity in Asia over time. Now on to the Connected Trip, which is about making travel easier by bringing more of the journey together in a way that provides more value, lowers complexity and ensures better customer service. We're seeing encouraging progress with more travelers choosing to book multiple parts of their trip with us. In the first quarter, connected transactions, meaning trips that included bookings across more than one vertical grew in the high teens range and represented a low double-digit percentage of Booking.com's total transactions. This growth reinforced our belief that when we reduce friction and provide more value, travelers choose to do more of their business with us. Additionally, we are able to drive more incremental value for our partners as travelers increasingly engage with multiple verticals across our platform. And working with our partners, our vision is to provide personalized benefits within the Connected Trip that provides more value to both the traveler and the partner. Our Genius loyalty program is a key component of this strategy. Unlike traditional programs, Genius is built around immediate relevant benefits such as tiered discounts, free breakfast or room upgrades that apply at the point of booking. We continue to see strong engagement from our higher-tier Genius members who book and return more frequently than non-Genius travelers. Over the last 4 quarters, Level 2 and Level 3 Genius members represented over 30% of our active base and accounted for a high 50% share of room nights, up from the prior year. Given the importance of loyalty and the success of the program to date, we see an opportunity to further strengthen Genius this year. Let me now turn to GenAI, which we continue to believe represents a significant opportunity to enhance both the traveler and partner experience. Our approach remains disciplined and focused on where AI can drive meaningful impact across our products and services, improving effectiveness for travelers and partners, driving internal efficiencies and working closely with leading external partners to ensure we are well positioned in the event that current usage of frontier LLMs for travel discovery and planning becomes more closely tied to direct immediate booking execution. Even more so, I am pleased to highlight some of the current progress we've made on AI initiatives across our brands today. At Priceline, Penny continues to evolve into a more interactive end-to-end AI-driven journey with increasingly advanced shopping and discovery capabilities. It enables conversational search and brings a multiproduct trip together in a single integrated view, including a dynamic travel map. Penny is also becoming more personalized with the ability for travelers to build trips with an understanding of their preferences with recommendations that improve over time. In very early testing from a small sample set, we are seeing a noticeable uplift from users who engage with Penny compared to non-Penny users. At Booking.com, we're introducing additional AI-driven capabilities to support travelers earlier in their journey, including enhanced natural language search and more dynamic inspiration-led discovery features. Smart filters have now been rolled out globally in accommodations and we are beginning to extend and test these capabilities within the cars vertical. A key factor in the Booking.com approach is optimizing the user experience through experimentation and data analysis, a process that we are known for. We are doing this now, bringing together these new AI capabilities in the upper funnel and doing so across verticals. We believe we are making meaningful progress in integrating these elements and we expect to continue building on this foundation over the coming year. As we advance these capabilities, AI is also enabling us to deliver greater value to our partners. By improving personalization and conversion, we can help drive incremental demand while also making partner-to-guest communication more efficient and intuitive, streamlining operations. For example, at Booking.com, agentic service flows for complaints and cancellation capabilities are improving the post-booking experience, reducing customer service contacts and increasing self-service adoption, helping partners operate more efficiently. In OpenTable, we are building on the launch of AI concierge by expanding it beyond answering diner questions into a broader discovery tool, starting with natural language search. We're also developing capabilities to better support restaurant partners through more streamlined operations and actionable revenue-focused insights, including voice-enabled reservation tools and table turnover data that help bring more off-line tables online and support higher utilization and revenue. We continue to embed AI across our operations to drive efficiency, from automating customer service interactions and improving self-service rates to enhancing internal workflows that accelerate product development and decision-making. For example, in this quarter at Agoda, we saw a double-digit year-over-year reduction in customer service cost per booking, driven by AI-assisted automation, helping us reduce costs and operate more effectively at scale. We continue to believe AI-enabled productivity and efficiencies are an area of notable opportunity. Beyond our internal efforts, we're also partnering with leading AI organizations to remain at the forefront of this rapidly evolving landscape and to expand our sources of demand. As GenAI reshapes how travelers discover and plan trips, we are focused on meeting them wherever that journey begins. Our relationships with companies such as OpenAI, Google, Anthropic and Amazon, combined with our disciplined approach, positions us well to capture these emerging opportunities and drive long-term value for both travelers and partners. Last, we believe the strength of our brands and the number of travelers who choose to come directly to our platforms will remain an important differentiator as brand increasingly guides where travelers choose to engage. Our consistent ability to deliver value underpins this dynamic and will continue to differentiate us over time while also helping ensure our supply partners, especially our small and medium enterprise partners are discoverable no matter how people begin their travel exploration and planning process. In closing and taking a broader view, we are reminded that over the long term, we benefit greatly from our large global travel platform, which has notable position in Europe, the world's largest travel market and Asia, the world's fastest-growing travel market. Given this geographic footprint, our results naturally reflect the impact of the Middle East conflict. However, we believe our diversified global portfolio of leading brands and financial strength positions us well for the medium and long term. Looking ahead, our focus remains clear. We are advancing the Connected Trip, accelerating innovation through AI and continuing to invest in the areas we believe will drive long-term growth. While we recognize that geopolitical and macroeconomic uncertainty can create near-term volatility, we have seen time and again that the underlying demand for travel does not go away. With our global business, deep supplier relationships and decades of experiencing leveraging data and technology, we believe that we are set up well to navigate these dynamics while continuing to execute our strategy and deliver attractive returns over time. With that, I'll turn the call over to Ewout to walk through our financial results in more detail. Ewout Steenbergen: Thank you, Glenn and good afternoon, everyone. Before discussing our financial results, I want to acknowledge the ongoing conflict in the Middle East. Our thoughts are with our colleagues, partners, travelers and all who are affected and we are hopeful for a swift and peaceful resolution. I will now review our results for the first quarter and provide our current thinking for the second quarter and full year. All growth rates are on a year-over-year basis, and the reconciliation of non-GAAP to GAAP financials can be found in our earnings release. Now let's move to our first quarter results. In the first quarter, our business was impacted by the ongoing situation in the Middle East, which led to elevated cancellations and a moderation in new bookings in March. The impact of the conflict was also felt outside the Middle East region as we saw changes in broader travel patterns, particularly in transit corridors such as the one between Europe and Asia. We estimate the situation in the Middle East impacted our room night growth by about 2 percentage points and that the impact on gross bookings was similar to room night growth with a slightly lower impact on revenue growth and a higher impact on adjusted EBITDA growth. Excluding these impacts, our first quarter growth rates would have exceeded the high end of our guidance ranges across all key metrics. Our room nights in the first quarter grew 6% or about 8%, excluding the impact of the situation in the Middle East. This compares to our room night growth guidance of 5% to 7%. Immediately following the onset of the conflict, we saw an increase in cancellation rates and lower travel demand, resulting in March room night growth of 1%. We estimate that the impact of the conflict on March room night growth was about 6 percentage points with about half the impact coming from reduced bookings and the other half coming from increased cancellations, which have historically been the highest in the first month after the start of a conflict. While room night growth was most impacted in the Middle East, we also saw an impact in other regions following the start of the conflict. Looking at our room night growth by booker region in the first quarter, Europe was up mid-single digits, including the impact from the conflict on bookers traveling to the Middle East and Asia. Within Europe, intra-regional demand from European bookers was up high single digits, consistent with the fourth quarter of 2025. Asia was up high single digits, including the impact from the conflict on bookers traveling to the Middle East and Europe. Within Asia, intra-regional demand from Asian bookers was up low double digits, similar to the fourth quarter of 2025. Rest of World, which includes the Middle East, was down low single digits. Bookers in the Middle East, including Turkey and Egypt, represented approximately 4% of our global room nights booked in 2025. If we include inbound travel to the Middle East, in addition to the bookers in the region, the Middle East represents approximately 7% of our 2025 global room nights. The U.S. accelerated for the fourth consecutive quarter to low teens growth, driven primarily by domestic travel. We're encouraged by the acceleration we saw in our U.S. direct channel. Our B2C direct mix remained resilient over the past 4 quarters, holding steady in the mid-60% range and consistent with prior year levels. We maintained this performance due to continued growth in direct bookers, offset by the impact of the conflict as the Middle East has traditionally had above-average direct mix and by continued declines in SEO traffic, which is a small contributor to our overall direct channel. We continue to see a higher direct booking rate in room nights received through our mobile apps as well as from travelers in our higher Genius tiers. The mobile app mix of our total room nights was in the high 50% range and the mix of Booking.com room nights booked by travelers in the Genius tiers of Levels 2 and 3 was in the high 50% range. Both of these were up from the mid-50% range a year ago. Our alternative accommodation room nights at Booking.com were also impacted by the situation in the Middle East and growth was about in line with our total room night growth. The global mix of alternative accommodation room nights was about 38% of Booking.com's room nights in the first quarter, which was up about 1 percentage point from last year. We believe that we offer a compelling experience for travelers by seamlessly integrating alternative accommodations, independent properties, global chains and our other travel verticals. Our total merchant gross bookings increased 24% year-over-year in the first quarter. Merchant gross bookings represented about 72% of total gross bookings and this mix increased 5 percentage points versus last year. Our merchant payments platform is a core enabler of the Connected Trip vision, providing flexibility for both travelers and partners while adding incremental revenue and contribution margin dollars to our business. In our other travel verticals, we delivered strong growth despite the impact of the Middle East conflict. During the first quarter, airline tickets increased 28% year-over-year and attractions tickets increased about 25%, both driven by continued growth at Booking.com and Agoda. Connected Trip transactions increased a high teens percentage or about 3x faster than Booking.com's total transaction growth. Our data shows that travelers who book more than one travel vertical with us come back to us more frequently. First quarter total gross bookings increased 15% year-over-year. On a constant currency basis, gross bookings increased about 8%, benefiting from about 1% higher constant currency ADRs as well as higher bookings growth from flights and other travel verticals. The increase in constant currency accommodation ADRs was driven by higher ADRs in Europe and was higher than our expectations to be about in line with the prior year. First quarter revenue grew 16% year-over-year or about 10% on a constant currency basis, benefiting from higher payment revenues. Revenue as a percentage of gross bookings was 10.3%, which was up about 10 basis points versus last year, driven by differences in the estimated impact of the situation in the Middle East on revenue versus gross bookings. Because we recognize revenues at the time of travel, we expect the associated impact on revenue from the conflict will not be fully realized until future quarters. Marketing expense, which is a highly variable expense line, increased 16% year-over-year. Marketing expense as a percentage of gross bookings was 3.8%, which was 4 basis points higher year-over-year, driven primarily by the situation in the Middle East as certain bookings sourced through paid channels were subsequently canceled. We estimate that excluding the impact of the conflict, we would have had marketing leverage year-over-year, helped by improved marketing efficiencies. First quarter adjusted sales and other expenses as a percentage of gross bookings was 1.5%, similar to last year despite an increase in merchant mix as higher payment expenses were offset by increased efficiencies in customer service and a $17 million onetime benefit due to the repeal of Canadian digital service taxes in March. Adjusted fixed operating expenses increased 14% year-over-year and were a source of leverage as a percentage of revenue. When normalizing for both FX and the $53 million in onetime benefits in the first quarter of 2025, constant currency adjusted fixed expenses grew in the low single digits. We remain firmly on track to deliver our previously stated goal of $500 million to $550 million of in-year savings from our transformation program for 2026. During the first quarter, we incurred $25 million in transformation cost, which were almost entirely excluded from our adjusted results. Adjusted EBITDA of approximately $1.3 billion grew 19% year-over-year, which exceeded the high end of our guidance. Adjusted EPS of $1.14 per share was up 14% year-over-year, lower than the growth in adjusted EBITDA as a higher tax rate due to discrete items was partially offset by a 4% lower average share count. This adjusted EPS figure reflects the 25-for-1 stock split that took effect on April 2. Now on to our cash and liquidity position. Our first quarter ending cash and investments balance of $16.5 billion was down versus our fourth quarter ending balance of $17.8 billion. This was primarily due to about $4 billion of total capital return, including $3.6 billion of share repurchases, which was the highest amount of quarterly share repurchases in our company's history and a quarterly cash dividend of $343 million. We also repurchased an additional $355 million in shares to satisfy employee withholding tax obligations. These uses of cash were offset by about $3.1 billion in free cash flow generated in the quarter, which benefited by about $1.9 billion from changes in working capital, driven primarily by the seasonal increase in our deferred merchant bookings balance. We have ample liquidity and a strong free cash flow profile, and we plan to continue to return capital to our shareholders as well as maintain our disciplined focus on optimizing our capital structure. Moving to our thoughts for the second quarter. For our second quarter guidance, we are assuming the direct and indirect impact from the conflict in the Middle East continues through the end of June. Specifically, our outlook accounts for continued fluctuations in travel demand across Middle Eastern inbound, outbound and intra-region routes as well as ongoing disruptions to major transit corridors such as those between Europe and Asia. Given the uncertain macro backdrop, we have begun executing targeted cost management actions, including strictly managing discretionary spend and recalibrating business as usual hiring. As we pull these levers, we remain focused on protecting our strategic investment spend. This disciplined approach ensures we protect our near-term profitability while continuing to fund the long-term innovations that drive our competitive positioning and the long-term value creation of the business. Our guidance for the second quarter assumes recent FX rates for the remainder of the quarter, including the euro-U.S. dollar exchange rate at $1.16. We estimate changes in FX will positively impact our second quarter reported U.S. dollar growth rates by about 2 percentage points. We expect the impact of the situation in the Middle East will be higher in the second quarter than it was in the first quarter as the conflict spans the full quarter, though this is partially offset by our expectation that March had the highest concentration of cancellations, which drove the first quarter marketing deleverage. We currently expect second quarter room night growth to be between 2% and 4% and for gross bookings, revenue and adjusted EBITDA to each grow between 4% and 6%. Turning to the full year 2026. Our planning assumption is that the direct and indirect impact from the conflict in the Middle East continues through the end of June, followed by a recovery in bookings in the second half of the year, reflecting the assumption that the direct and indirect impacts from the situation in the Middle East continues for 4 months or 1/3 of the year and this is followed by a recovery period, we're lowering our guidance ranges at the midpoint. The high end of the ranges for gross bookings and adjusted EPS remains in line with our prior expectations. Despite the variability of the current environment, our full year guidance reflects the resilience of our business model. On a reported basis, our expectation for the full year is as follows: gross bookings to be up high single digits to low double digits, revenue to be up high single digits, adjusted EBITDA to grow slightly faster than revenue and adjusted EBITDA margins to expand between 0 and 25 basis points year-over-year. Adjusted EPS to be up low to mid-teens. To support these targets, we aim to grow revenue faster than both marketing and adjusted fixed operating expenses, while maintaining sales and other expenses as a flat percentage of gross bookings year-over-year. Assuming recent FX rates remain steady for the remainder of the year, we estimate changes in FX will positively impact these full year reported growth rates by about 2 percentage points for gross bookings, about 1.5 percentage points for revenue and by about 1 percentage point for adjusted EBITDA and adjusted EPS. We are mindful that a sustained disruption could introduce broader inflationary pressures, including fluctuations in jet fuel prices, airline capacity reductions as well as weigh on traveler sentiment more broadly. These dynamics can create headwinds across the travel value chain and we are monitoring them closely. However, since these extended impacts on the broader economy are harder to estimate, we have not included them in our guidance assumptions. Our second quarter and full year guidance are based on estimates and the information available to us at this time in an unusually unpredictable environment. In conclusion, we continue to demonstrate solid performance despite a dynamic geopolitical environment. We remain focused on what we can control and are managing the current situation with rigorous financial discipline. And we continue to make strategic investments and technological progress to build a more frictionless and integrated offering for our travelers and partners particularly by leveraging the potential of generative AI-enabled capabilities. While our 2026 outlook is impacted by the situation in the Middle East, we remain firmly committed to our long-term constant currency growth ambition of at least 8% gross bookings growth, 8% revenue growth and 15% adjusted EPS growth for future years. Thank you to my colleagues across the world for their dedication and hard work. With that, we'll now take your questions. Operator, will you please open the lines? Operator: [Operator Instructions] And your first question comes from the line of Kevin Kopelman with TD Cowen. Kevin Kopelman: So I wanted to ask about the Middle East situation. First, could you just clarify for the second quarter, how large you expect the impact to be there kind of on a like-for-like versus that 200 basis points you saw in the first quarter? And then could you give more color into what you're seeing with those impacts? Are you seeing any cautiousness from your consumers outside of the region? Or is it more the actual disruptive effects like you talked about with the flight corridors and cancellations? Ewout Steenbergen: Yes. Sure, Kevin. This is Ewout. Let me give you a little bit more color on those aspects, what we are seeing in the Middle East and what we have assumed for the second quarter. So in terms of the headwind from a numbers perspective, approximately 3 points of headwind in the second quarter. So if you look at our, for example, our room nights from 2% to 4% on a normalized basis, you have to put 3 points on top of that to look at what we would expect without the impact of the Middle East. Specifically, what we have assumed in that number is the following: impact of Middle East inbound, outbound, intra-regional travel, the corridors between Europe and Asia and vice versa and also that ADRs will be slightly down as a consequence of the situation in the Middle East. And we have assumed that this situation will continue from a direct and indirect impact perspective for 3 months, so for the full second quarter. Of course, no one can exactly say how long it will last. Someone may have a different assumption, shorter or longer. Anyone can put whatever you want in your model. But this is what we have assumed in terms of this guidance that we see the impact for the full second quarter and then assume some kind of a recovery in the second half of this year. I would like also to point out to the full year guidance because despite, I think, this impact in the second quarter, it's important to highlight that actually, I would say our full year guidance remains still solid. And if you look at gross bookings and EPS, we're still actually from a range perspective, at the high end, still at the level of the original guidance for 2026. Glenn Fogel: Yes. Go ahead, Kevin. Kevin Kopelman: I was just going to follow up on that cautiousness question. Glenn Fogel: You go ahead, Kevin first. Kevin Kopelman: I was just going to follow up on the cautiousness, if you were seeing any broader kind of cautiousness behavior among your consumers outside of the region. Glenn Fogel: Well, that actually fits very nicely, Kevin, into what I was going to say. Here's the thing. The team has done an incredible great job of trying to come up with our best estimates of the future. And Ewout just said it though, you can have a different view. Many people do, I'm sure. The thing we absolutely are very certain of is, this will end. We don't know when but it will. We do know travel will normalize. Now, how quickly? That also an unknown thing. But we've seen a lot of these crises before. And I've been here since all the way back since 9/11 when U.S. travel shut down. I was here for the financial crisis when travel was greatly impacted as all economies were. I was here when we had short-term things like the volcano in Iceland, shut down European travel for 2 weeks. And I was here for the pandemic, worst travel event since World War II. And of course, we were deeply impacted when Russia invaded Ukraine. We had a big, big business in Russia and impacted the rest of Eastern Europe. And of course, when the Israel-Hamas event happened, that also impacted tremendously. So we have been around this type of crisis before. And I just want to thank our team for how incredibly well they worked with our partners and our customers. Anybody who's been in Dubai at 2:00 in the morning, at that airport knows the huge numbers that are flowing through there. That's a big transit point or many of the actual Middle Eastern airports are big transit points. Those people out of place and what we did to get there, help people be put in the right place, a place to stay, getting them where they needed to do, it was incredible. So a big thank you to them. Now your question is, what's the sentiment now? Well, of course, it depends on where you are. Sentiment for a Saudi person who is thinking about traveling or a person thinking about going to Saudi is quite different than the person in New York who's thinking about taking the kid down to Disneyland, very, very different. We don't know how it's going to end. We don't know when it's going to end but we do know it will end. And I think we all can pick our own guesses at what we think it will be. I wouldn't give anything more detail than that. Operator: Your next question comes from the line of Justin Post with Bank of America. Justin Post: I'll ask on agentic. It seems like some of the big AI companies are kind of moving away from transactions and even moving traffic to apps or more focused on advertising. So just how do you think you're positioned competitively in these AI engines? And are you encouraged or concerned about the changes they're making? Glenn Fogel: We are incredibly excited about the same -- and maybe recall our last call where I mentioned the possibility or belief that some of these players would go towards a performance marketing platform that we thought would be very advantageous to us given the experiences we've been able to deal with at Google and how well that has helped create our company to where we are now, it's, we believe, a good thing. But it's not just the ones who are going to that kind of a platform. It's all the elements of AI that we believe are really helping us and really setting us right for the future. And we've talked about this before about how -- the first thing, of course, is how do we improve our own offerings to our customers using AI, using proprietary data, how are we increasing conversion using that. And our scale really helps us in this area. And it helps us do that personalization as we build out the Connected Trip and using AI is going to make that even better, making it the place for people who they should go to -- they should go to us for the travel. Right now, absolutely, some people are going to go to a large language model first. Fine. And we love the relationships we are building and have built with all of the frontier players where we are involved with them, talking how we can work together to create the best experience for both of us. And we've talked -- you've seen the announcement, you -- maybe you saw the Claude Live advertisement recently where we were right upfront there. Really pleased on that. And the other thing is -- and this is just really good, it's going to increase, I believe, the TAM for overall travel. Nobody knows what the right number is. Maybe it's 35%, maybe it's 45%. Maybe it's going to be higher of people who don't buy their travel digitally but that number is going to go up. And I believe using AI is going to make it easier for people to do that. That's another positive for us. And of course, setting ourselves up includes making our internal operations more efficient. And we're using AI throughout the organization, up, down, all over, making things more efficient. And by doing so, then we have more resources to put into making a better experience for the travelers and our partners, which is also another area where we're seeing great advantages for both of us. So all in all, AI, I believe, is an absolute positive for us, not a negative. I know some people may have misunderstood and thought it as a big threat. I see it much more as an opportunity. Operator: Your next question comes from the line of Mark Mahaney with Evercore. Mark Stephen Mahaney: Okay. I'll ask 2 questions and both of them about the U.S., please. That low teens growth you had in room nights in Q1 was the strongest maybe we've ever seen or it's been a while. And Glenn, you talked about like some success in cross-selling. Just maybe spend a little bit more time on that. Is that something that -- are there -- and I know there's a lot of little things that go into it but are there 1 or 2 major unlocks that really kind of help move that growth rate to somewhat unprecedented levels? And then just getting back on this cautiousness commentary. The question I have -- I think the question out there is, are you seeing softness in travel that's sort of more economically driven, i.e., with rising airfares in the U.S., rising gas prices, are you seeing softness that's not directly at all related to the Middle East but just related to the fact that it's more expensive to fly from New York down to Disney? Glenn Fogel: Mark, so I'll take the first 2 and I'll let Ewout talk a little bit about potential softness in the U.S. He's got some data. He can talk a little bit about that. I got to say, it is just so exciting to see incredible hard work done by so many people here for so long to start seeing it result in really nice growth in the U.S. And Mark, you've heard me talk about the U.S. is an area we're going to invest in. We're spending time, money, people and I've been saying it for some time. And for now 4 quarters in a row, we've been accelerating our growth rate, now low teens. That's just wonderful. It's really nice to be able to say, this is what we're going to do. This is what we're doing and then see the results come out. So I am really pleased. When you look at share, I mean, obviously, you can look at any third party in terms of what was the total growth in the U.S. in terms of the accommodations area, far, far, far below low teens. So we are taking share, which is great. And we're doing it because we're building a better product. We're making people aware of it, doing all the things I said we were going to do. We're doing it and it's helping achieve these kind of results. Now part of it is, this idea, this cross-selling, you say, I say Connected Trip, it's really providing a better way for travelers to do their travel and we're building that out and being able to offer flights in the states. We didn't use to do that with Booking.com at all. Having that ground transportation, having attractions, Look at those numbers, they are pretty good. Now these are not U.S. numbers. These are global numbers but they're still great. 25% for those attractions, 28% for those flight growth numbers. These are really, really solid. And then you throw on the idea as we continue to build out even more things, we're able to do more of the personalization. That's the thing where I really -- my vision has always been treat the customer like they used to be treated when they used to go to the human travel agent back in the day who knew so much about you and offered you up what you really wanted, was able to get you the value that really matched up with what you could afford. That's the thing that we're really working on. And again, it goes back to GenAI, having that kind of technological capability to really bring back to the customer what they want and need, at the same time, enabling those partners of ours to get them what they need, what their incremental demand needs are and being able to put together things, orchestrate in a way that makes it so much better for them too. This is just win, win, win, that third win being us, of course. So I'm just so excited about that and I see a lot more coming. Ewout, you want to talk a little bit though of what we've seen in the States right now? Ewout Steenbergen: Yes. Mark, so what we are seeing in the U.S. travel market in general, a couple of points there. First of all, the high end is remaining strong. But that's what we already have seen over the last few quarters. Really encouraging to see that the lower-end segment is improving. And that has been quite weak, as you know, for the recent past. So what we're seeing there is the booking window is now stable. ADRs are flat and that is really a change because they were down at the lower-end segment for many quarters in a row but they are now flat, although trips are still slightly shorter. So I don't think we're completely out of the woods yet but really much more positive and optimistic than we have seen for a long period of time. In terms of the more recent signals, it's too early to draw any conclusions around it. Yes, we see some prices going up, for example, of airline ticket prices with some of the airlines reducing capacity. How much that ultimately will impact demand is still uncertain. So I can't give you a specific answer on it. But lifting this up a little bit and just from a bigger picture, outside of those areas that we highlighted in terms of Middle East impact, outside of those, actually travel markets globally have remained very healthy. Intra-European travel was up high single digits. Intra-Asia travel was up low double digits. And as we mentioned, our growth in the U.S. was up low teens. So there is very specific areas where we see this impact of the Middle East. But generally, we don't see customers globally being cautious. We actually see outside of those areas that are impacted, actually travel demand continuing to do very well. Operator: Your next question comes from the line of Ron Josey with Citi. Ronald Josey: Glenn, maybe a bigger picture question just on AI strategy and the products. We hear a lot about clearly the benefits from Penny. And I guess, the launch of AI search on Booking for natural language search on hotels. Would love to take a step back and talk to us, do you see these experiences merging? Do you take the benefits from Penny, put them into Booking? Talk to us just about how you see AI tactically sort of improve the user experience across Booking's set of brands. Glenn Fogel: Ron, you did point out 2 of numerous things we're doing to help the consumer using AI technology. And you mentioned Penny, which I'm very excited about, what it's -- what they're doing there at Priceline and you mentioned Booking and you mentioned a little bit about some of the things that -- our natural language search and what we're doing there. But we have so many more things happening. Every single one of the brands, Agoda, KAYAK, everybody is coming up with new things. Maybe you used the OpenTable concierge, great thing, really helping diners and such. Now the key thing is, though, we have people who are working on what is good for them right now but they're always sharing what's working, what's not, what's getting you better conversion or not. And we also had mentioned last quarter, we mentioned we have some other things, some start-up type things going too that will come more to in the future when we're actually ready to do a real launch and give it the publicity that it should have. All these people working together in terms of new learning but also taking different things. And the reason is because we're all so early in this. And the technology is changing so fast, too. This is the best way to ensure that we have lots of our smartest people working on this as hard as they can and be able to come up, boil up what are the best ones. And then we'll make sure to put a lot more resources and efforts into those that are winning. That's the way we've always done it. We've had multiple brands for a long time. Why did we come with that strategy? Because we saw there are different ways to do travel. So we had Priceline to start and then we had active hotels, then we had Booking, then Agoda, then we brought in Meta with KAYAK. These are all similar type results in terms of helping travel but there are different ways to do it. And that's the same thing right now at the stage right now is using different teams, different ways and then consolidate it when we see the best ones. That's the strategy. Ronald Josey: And any insights on maybe early results on conversion rates? I know we've said cancellation rates have improved somewhat. So any insights there would be great. Glenn Fogel: Yes. I mean I mentioned in the script, a very small sample. But we're very pleased about it that we're seeing natural lift in what Penny is doing in conversion. And look, the great thing, again, this is no different than way back in the day when we were first -- one of the first people who came out with A/B testing. And it's so wonderful that the scale we have that enables us to test right away what's working, what's not, what's giving us better conversion, what's a loser and don't do any more of that. That's -- again, it's an advantage you have when you're big and you can afford the resources to put to it and you have enough people coming to visit that you can very quickly get a result. Ewout Steenbergen: And Ron, if I may add to that, we're also looking at other metrics. So it's not only conversion, although we see there, as Glenn was just saying, some very early positive signs. But again, the sample size is still very limited. We're also looking at faster search, shorter path between search and ultimately booking, lower cancellation rates, positive customer satisfaction, more engagement. So many of those data points are all pointing in a positive direction. And more and more of those data points, we are collecting. So for example, we're very happy that for Penny, you now can really book through Penny directly that accommodation or flight. So we are getting now more of those data points as well. By the way, many of the AI travel planning tools that are out in the market are not possible to make that step. So in Penny, now that's possible. So we're collecting more and more data. We're reusing that data. We're learning from the data. We're making it possible. We're sharing it across the whole firm but all of these are very early stage but definitely positive. Glenn Fogel: And you don't have to wait for the next call to see some of the progress. Just keep testing out all the different brands, do it yourself, see the changes as they are rolled out, you'll have a real good sense of the progress we're making by just looking at the actual products. Operator: Your final question comes from the line of Brian Nowak with Morgan Stanley. Brian Nowak: Maybe 2. Glenn, on the public call, in the main remarks, you talked about strengthening Genius this year. Can you just maybe talk to us a little bit how you think about ways in which you want to strengthen the Genius program this year and maybe into '27? Then the second one, just to go back to your very last comment about rolling out more agentic capabilities, making Penny more widely available, expanding the booking agent. What sort of is the main constraint to scaling that for you guys at this point? Is it compute capacity? Is it you need to sort of R&D testing time? Like what is sort of the biggest lift you have to clear internally to scale this out to make it a material driver of the business? Glenn Fogel: Yes. So on the first one on Genius, absolutely something we are working on now. I believe Connected Trip by itself is fantastic. Connected Trip with Genius, superpower. And we need to bring it together and we're working on this, the best ways we're going to bring together Genius in a much better way, down the road, that will create even more loyalty, make people enjoy and feel they got a better value. They're doing a better way to travel using us by putting it all together in a much more cohesive, really holistic way. Now you'd probably like me to give you the details right now and you're probably not surprised I'm not going to do that. But I assure you, when we are ready to roll that out, you will see it, you will hear it, you will know it. That's on strengthening Genius. Regarding rolling out any of these things, whether it be Penny or any of the things, this is always a function of what do we think it is in terms of best-in-class ready-to-roll ready to rock out to as many people or do we want to still keep it somewhat limited, testing it to improve it further, make sure it's all working the exact way it should be, see what sort of problems there could be or not. It's definitely not a compute problem. It's not a sense of cost. It is purely one of the way we always do things. We like to test things. We like to make sure it's working. We don't want to have customers who are unhappy. We want to make sure we're meeting any regulatory issues that we have to deal with. That's one thing I think a lot of people really just don't have a sense of -- there are a lot of rules about AI now, particularly in Europe, now all over. And we have to meet not only the AI rules but also the privacy rules. And then if you're doing payments, kind of make sure that's sitting under there, too, lots of things. So we just want to make sure we do something right. Ewout Steenbergen: And Brian, if I may add to that. But of course, we are very focused on going as fast as we can. Because strategically, think about it in the following way. For us, it's very important to protect customers that are coming direct to us. We want to make sure that they have an experience in our environment that is at least as good as they can get at a generic horizontal agent because in that case, they want to do that with us because they are with a brand they know, they trust, they have the loyalty program with. They know that you can flip it to a booking. If something happens, they can make the update, the changes, you can make the cancellation, you know who you can call, who you can contact. So we have that brand trust, loyalty with the customer. So going as fast as we can so that they can have that experience, that full experience in our environment, is going to be the most important thing to actually not protect the direct channel but further expand the direct channel in the future. Operator: That concludes our question-and-answer session. I would now turn the call back over to Glenn Fogel for closing remarks. Glenn Fogel: Thank you. In closing, I want to thank our dedicated employees, stockholders and most importantly, our travelers and partners whose commitment and support were foundational in our strong execution and solid performance this quarter. While we remain mindful of the current macroeconomic and geopolitical environment, we have navigated similar periods before and remain confident in the enduring resilient demand for travel. We stay focused on what we can control and continue to execute against our long-term vision. Thank you and good night. Operator: This concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you to everyone for joining Robinhood's Q1 2026 Earnings Call, whether you're tuning into the live stream or here with us in person. With us today are Chairman and CEO of Vlad Tenev; CFO, Shiv Verma; and VP of Corporate Finance and Investor Relations, Chris Koegel. Vlad and Shiv will offer opening remarks and then open the call to Q&A. During the Q&A portion of the call, we will answer questions from the audience, which includes institutional research analysts, finance content creators who may hold an ownership position in Robinhood and both institutional and retail shareholders. As a reminder, today's call will contain forward-looking statements. Actual results could differ materially from our current expectations, and we may not provide updates unless legally required. Potential risk factors that could cause differences, including regulatory developments that we continue to monitor are described in the press release we issued today, the earnings presentation and our SEC filings, all of which can be found at investors.robinhood.com. Today's discussion will also include non-GAAP financial measures. Reconciliations to the GAAP measures we consider most directly comparable can be found in the earnings presentation. With that, please welcome Vlad and Shiv. Vladimir Tenev: All right. All right. How's everyone doing? I've been told that this may be the first ever outdoor earnings call in history. Can you believe that? Shiv Verma: Very cool. Vladimir Tenev: Shiv, they told us before we went public that earnings calls aren't going to be very much fun that they're going to be a chore that actually being public wouldn't be very much fun. And I think part of what we're trying to do is improve the branding of being a public company. I think that's going to be pretty important. The branding of it has been very negative, and maybe that's contributing to companies staying private longer and longer and retail shareholders being left out of all those potential returns. So yes, hopefully, you guys find this informative and also entertaining, and we can shift the perception of what it means to be a public company slowly but surely. So we're back at our HQ in Menlo Park, with a growing audience of in-person folks, shareholders and analysts. So thank you all for being here. Before I get into the meat of it of Q1, I want to highlight a historic milestone in our mission to democratize finance for all Trump Accounts, okay? We announced a few weeks ago that Robinhood will be the broker and sole initial trustee for the Trump Accounts under the direction of the U.S. Department of the Treasury. And over 5.5 million American children are already signed up. Over 60 million, 6-0, are eligible. So these children will now experience the power of equity ownership in the U.S. stock market, which we believe is the greatest engine of wealth creation in human history. It's an incredible honor to be trusted by the United States Department of Treasury and to partner with BNY, America's oldest bank, which was appointed as a financial agent to manage the program. And by developing and managing the new Trump Accounts app, we're getting Robinhood technology in front of the next generation of investors, 60 million of them. This is also a new way to extend Robinhood's mission beyond just retail and institutional to helping governments and building a public sector business, which we actually see as a big opportunity and we can really help there. Now our hope and aspiration is that this should be the best technology product that the government has ever built or been associated with. So we're really excited about this. Now let's get to Q1. As a reminder, we're focused on a 3-part strategy. #1 in Active Traders, #1 in Wallet Share for the Next Generation, and of course, our long-term mark, #1 Global Financial Ecosystem. So Active Traders, we want -- if you're an active trader, we want you to feel like you're at a disadvantage trading anywhere besides Robinhood. So using another brokerage or another financial platform, that should be irresponsible and irrational decision. That's the goal. So a few things to highlight there. As we continue shipping great products for our customers, in Q1, we saw record levels across Prediction Markets, Futures, Index Options, Shorting and Margin. So our active traders were very active. We saw double-digit year-over-year growth in equity and option volumes as well. So that's been great to see. Now looking at prediction markets, specifically, we're really spending time getting ready for the Q2 launch of our JV with Susquehanna. This is our exchange Rothera, and that's coming later this quarter. So very excited about that. Now today, Robinhood is the largest retail brokerage firm in prediction markets, and we've been one of the first to adopt a new asset class. Susquehanna is one of the largest market makers. And in the past, up until now, we've been relying on third-party exchanges. With the launch of Rothera, this vertical integration gives us a couple of things. It really gives us end-to-end control of the customer experience, including product selection and pricing. So we'll have more control over what products and what pricing we can offer to customers, which I think is going to be very, very nice. Moving on. Robinhood Social, strong engagement. We've rolled out Robinhood Social to the first 10,000 customers. And what we're hearing is they absolutely love verified profiles. They love verified returns and trades. So if you remember, the value prop for Robinhood Social as opposed to other social media platforms or places where you can chat about your finances, is you have a guarantee that customers have actual skin in the game with real positions and real returns. And it seems like that's proving out. People love that, and we're working to add new requested features on a weekly basis. So these are things like live stock charts, expanded personal profiles, tools to find other traders. And we're also bringing popular creators on the platform. And there's really been strong demand from creators to participate in this network. Second, wallet share. We are building our customers' financial super app. We can see that this is starting to resonate with customers. Across Retirement, Gold credit card, Strategies and Banking, customers added 500,000 funded accounts in Q1 and more than 1.5 million in the past year. And so we're really continuing to broaden the offering beyond just brokerage. I'd give a special highlight to Robinhood Banking. So Robinhood Banking grew 5x since the last earnings. It's rapidly become a leading premium digital banking offering. And I think it's really one of a kind in that category. Over $2 billion in net deposits. Over 125,000 funded customers. And I think most interestingly, a 40% direct deposit rate. Okay, so that's a 40% direct deposit attach rate, which tells us this isn't just an add-on to your brokerage account for keeping your extra cash. People are thinking about this as a primary bank account. So I think that gets me very excited. I know Shiv as well. Gold Card. Okay, Gold credit cards have also surpassed 800,000 customers with annualized purchase volume, APV, of $15 billion. So this is a heavy purchasing card already. The credit performance continues to be strong, and we're on track to surpass 1 million cards and $100 million ARR this year and well before the end of the year as well. Demand for the new Platinum Card, which if you guys saw the Take Flight event, I mean it was very popular. The card is, I believe, the heaviest credit card on the market. So demand for it has exceeded our expectations. We look forward to rolling out in the coming months, and we're responding to initial feedback. So the great thing about this team, they iterate. And I think you're going to see a better product than what was even unveiled. So that's very exciting. Moving on to our third and long-term mark, Global Financial Ecosystem. We're making progress as we expand to different markets around the world. International is picking up, and we approach 1 million funded customers. We plan to launch crypto in Canada around midyear. Remember, this is via our WonderFi acquisition from last year. And we have received in-principle approval from regulators in Singapore to offer a comprehensive suite of brokerage services there. So that's a big deal. Bitstamp continues to win institutional customers gaining market share, and we're enhancing the offering. In particular, there's been a lot of interest in institutional lending. So you're going to see us digging in and doing more there. Across the entirety of the business, we're really turbocharging Robinhood with AI as well. And if you think about the impact of AI on our business, it's actually three different things. So first, we're aggressively leveraging AI to drive efficiency and productivity internally. We've been doing this for a long time, and Shiv will talk a little bit more about the wins we've been seeing there. The second thing, we've been and we continue to give customers access to the highest-quality AI-powered tools. So Robinhood Cortex, which we unveiled about a year ago, used by nearly 1 million customers so far. So this is like AI intelligence throughout the Robinhood app. You can see it in the Stock Digest, and you can now see it in Cortex Assistant, which is our AI assistant within the product. So now that's rolling out. That's rolled out actually to all Gold customers. And so we're putting the financial intelligence coupled with our market data in your pocket. Customers are using it to do portfolio and P&L analysis. They're using it for stock research and stock screening, and you should expect to see it get better and better. I think we really love what we're seeing there. And we're also -- you could tell, last December, there was a step change in the agentic capabilities in these AI models. And of course, we're working to bring the frontier capabilities into your product, and we've been spending a lot of time chiseling what an agentic product could look like. So stay tuned there. And third, and this is an interesting one, AI is affecting the markets and investors. So one of the things that we've been spending a lot of time on is empowering customers to participate in the economic value and the upside created by these AI companies. Now the unfortunate thing has been a lot of them are still private. In some cases, staying private valuations of hundreds of billions. But Robinhood Ventures was built to solve this. And Robinhood Ventures first fund, RVI had its IPO in March. We have a great portfolio of late-stage frontier companies, and we just added OpenAI last week, which was awesome. Now we're also hearing from customers that they want access to emerging AI companies at an even earlier stage. And we've already begun building the initial portfolio for our next fund, RVII, so the second RVI. We're excited to share more soon. But I think part of this is just building the capability now that we've proven out that private markets democratization is a real thing, making it a bigger thing. The aspiration is that if you're a founder, retail should be part of the initial seed capital for your company. And I think once we succeed in this, we could actually move the needle on entrepreneurship in this country and make it so that this is better for entrepreneurs. They can access retail and get even more capital. So taking all this together, the relentless product velocity has driven another quarter of strong business results. Total net revenue grew 15% year-over-year to $1.1 billion. Net deposits were $18 billion, which is another quarter of 20%-plus annualized net deposit growth and our third highest ever. Gold subscribers, 36% year-over-year growth to a record 4.3 million, and that's 16% attach rate relative to the total customer base and 40% of new customers in Q1. So we're seeing customers adopting gold very quickly, and that gets us very energized. Now looking ahead, we've got some great new products to share. So as I mentioned earlier, we've been working hard on extending agentic capabilities into Robinhood Cortex and your Robinhood experience. So you should see some exciting products coming in late May, so that's next month. Plus, we've got a crypto event coming up as well. That's going to be early July in the United Kingdom. We'll be holding -- so that's two things coming up very shortly. We're also holding our annual HOOD Summit for active traders in the fall. And I've been reviewing what's on deck for that one. And I think you'll really like that. So why don't I turn it over to Shiv now to discuss our financials, and then we'll circle back for the Q&A. Shiv? Shiv Verma: All right. Thank you, Vlad. So before we get started on the financials, I wanted to share 3 big takeaways from the Q1. First, as Vlad mentioned, our product velocity continues to accelerate. So we're investing for the long term. We're aggressively leveraging AI across the business, and this is leading products being shipped faster than ever. Second, we delivered another strong quarter of 20% annualized net deposit growth. As a reminder, this is our North Star KPI. It's great to see customers continue to trust us with their assets even with the macro backdrop, which was more challenging at start of the year. Customers remain engaged, they deposit on the platform, and they're rapidly adopting our new products. Banking, as example, as Vlad mentioned. So all this put together, it led to 15% year-over-year revenue growth and 50% adjusted EBITDA margins. And third, big takeaway is Q2 is off to a good start in April. So trading volumes for equities and options are on track to be our highest month of the year and actually our second highest month in history. Net deposits, they're already approximately $5 billion month-to-date. That's great to see. And retirement assets just crossed $30 billion. So really great to see customers continuing to invest for the long term on Robinhood. So let's go to the Q1 results, and all of this is compared to a year ago. So first, revenues grew 15% to $1.07 billion, and this was driven by growth across the entire business. So transaction volumes, they increased with growth in equities and options, and we had a record quarter for both prediction markets and futures. If you look at interest-earning assets, they also continue to grow, and they more than offset the lower short-term interest rates. So really great to see net interest margin grow as well. And then other revenues were up as Gold subscribers reached a new all-time high, 4.3 million subscribers. So really great to see the adoption there. And we also continue to stay disciplined on our costs. So we managed Q1 expenses to be significantly lower than our outlook. So adjusted OpEx and SBC was $607 million, and this included $14 million of costs related to Rothera and Trump Accounts that actually were not included in our outlook. So I looked ahead to the rest of the year, we expect to invest an incremental $100 million into building Trump Accounts with approximately half of these in Q2 as we prepare to launch. As Vlad said, we're super excited for this. So these costs include building an exceptional user experience and actually a brand-new app, also ensuring we have best-in-class customer service and then giving customers access to really great educational content. Importantly, I would also note that our work for Trump Accounts is contracted on a cost-plus basis with a small margin. So we expect revenues to exceed cost for this project. So given this $100 million investment in building Trump Accounts, we are raising our full year 2026 outlook for adjusted OpEx and SBC by equivalent of $100 million, and so our updated range is $2.7 billion to $2.825 billion. So turning to capital allocation. We spent a lot of time here. We've also leaned in on share repurchases to start the year. So, so far this year, we have already repurchased over $300 million or 4 million of our shares, which keeps share count on track to be approximately flat this quarter. And as we've said before, the denominator matters. Additionally, in March, our Board refreshed our share repurchase authorization to $1.5 billion. So this reflects the great confidence and opportunities we have ahead. So looking ahead, I just want to share a few top of minds that we're also thinking about. First, we're going to continue investing for the long term while maintaining our disciplined approach to costs. So customers are responding incredibly well to our new products and our product velocity, as we said, is faster than ever. We believe this combination can deliver outsized growth for years to come. But at the same time, we want to remain disciplined in the way we invest capital. And so we're continuing to underwrite each investment to strong long-term ROIs. Second, we are also increasing our focus on top-of-funnel customer growth. So this is something new again. While we continue to add customers organically, we think there is an opportunity to improve our customer growth rate, both in the U.S. and internationally. So we're starting to allocate more of our investments in capital to adding new customers again while still maintaining our focus on the strong annualized net deposit growth. And this is all in addition to supporting Trump Accounts, which also puts the Robinhood technology in front of the next generation of investors. And third, we're leaning into investments in AI, both in the customer-facing products and internally. So Vlad spoke to a lot of the customer efforts, but we also believe making AI native to our workflows is just as fundamental to winning. So last quarter, if you remember, we shared the 9-figure efficiency benefits we've already generated in engineering and customer support. But we are now giving every team the tools and mandate to adopt AI into their daily workflows to drive productivity while also making the experience of working at Robinhood even better. Today, over 90% of our employees are already using AI tooling in their workflows. That's great to see. And these adoption numbers, they continue to increase weekly. Another example of a data point we watch is commits per engineer. This measures how much code our engineers are successfully deploying into production. It hit a new high in Q1, and it's up 50% since the start of last year as our engineers are leveraging these AI tools to build even faster for customers. So we believe AI has the power to transform financial services for both customers and employees. And as a technology company, we plan to lead that charge. So putting it all together, we believe the opportunities for 2026 and beyond remain massive. Our teams are hard at work. They're shipping great products for customers, but we're also staying lean and disciplined to generate operating leverage for shareholders. And as I said last quarter, our financial North Star remains the same, maximize earnings per share and free cash flow per share for shareholders over time. So with that, Chris, why don't we go to Q&A? Chris Koegel: All right. Thank you, Shiv. For the Q&A session, we'll start by answering shareholder questions from Say Technologies, and after the Say questions, we'll turn to live questions from our audience. And then we'll go to dial-in participants. So the first question from Say comes from Sebastian G. who is joining us live via Zoom. Vladimir Tenev: Sebastian. Unknown Shareholder: My question is around the dividend tracker that you had previously announced. Can you give me an update on the current status of that? Vladimir Tenev: We love our dividend investors at Robinhood. You -- we call them dividend hounds. You're a dividend hound, Sebastian? Unknown Shareholder: I am. I sure am. Vladimir Tenev: Yes. So the short answer to your question is it's in the works, and we're going to be launching it this year. So on track for that. The reason it hasn't been launched already is that as we sat down with our team to think about what we could be doing even more for our dividend hounds, one thing came up. So a lot of them had this complaint that some of the other brokerages pay out their dividends in the morning, but we do it in the evening. So why can't we pay out the dividends a little bit earlier, match everyone else. So we looked into this. And what we discovered was that actually, the dividend record date is up to 2 to 3 weeks before the dividends are paid out typically. And so we saw an opportunity not just to match what everyone else is doing, but to beat it and to give your dividends an average of 17 days or 2 to 3 weeks earlier. And this is like real value. So one of the other reasons why, hopefully, it will be irrational to use another brokerage for your dividend investing than Robinhood. So we got excited about this. We're shipping that. That's live, should be this month. And now our team is turning their attention to making what at this point, given all the questions, needs to be the world's best dividend tracker. So stay tuned for that. And enjoy the early dividends in the meantime. Chris Koegel: Awesome. All right. The next Say question is from Matt S. Unknown Shareholder: Okay. So my top voted question was, will Robinhood have IPO Access to any of the upcoming mega offerings? Vladimir Tenev: Okay. That's a great question. So I have to preface it by saying I can't really be specific with you about what IPOs may or may not be on the platform listed before you actually see it. That being said, in the past couple of years, we've seen a distinct shift where pretty much every major IPO of consequence has been on Robinhood's platform. And in most of these cases, I mean, the founders, the CEOs are engaging with us directly, asking for help with their retail strategy. And there's a big change from when we launched IPO Access, which was back in 2021. We really had to like claw and scratch and ask for favors to get retail these allocations and everyone was telling them, you don't want retail in your IPOs, certainly don't want more than 10% retail allocation. And now we're starting to get the CEOs talking about how they're actually driving larger and larger historic-sized allocations, 20%, 30%. We're starting to get questions about how big is too big? Why isn't anyone doing larger? And I think that's awesome. I think we've helped really change the game, and now retail has a real seat at the table in IPOs. And with Robinhood Ventures, we're driving that even earlier. So I think that's a durable trend. I think it's going to continue. And so you should expect that, that will happen in the future, and we're going to continue to work tirelessly to get the highest quality IPOs and private companies to treat retail as a first-class constituency. Chris Koegel: All right. Thank you, Vlad. That concludes our shareholder questions from, Say Technologies. Now we'll move to Q&A from folks here live in Menlo Park. So the first question goes to Alex Markgraff. Alexander Markgraff: Alex Markgraff from KeyBanc. Maybe a couple of questions, Vlad, just one on Shiv's comment on customer growth. I mean the Trump Accounts effort is obviously one source. But as you think about other sources of customer growth when you're putting some more capital behind it, where does your mind go? Vladimir Tenev: Yes. I mean I think that there's a lot that we could be doing both on the product side, just making onboarding simpler, getting customers to see the value easier, right? And I think a lot of those surfaces since we've, in the past few years, turned our attention more to deepening relationships with customers, getting higher-value customers to get more value. We've been spending a little bit less attention and focus on how to make the top of funnel simpler and easier to get through. And in particular, now we have lots of products, right? So there's lots of things to market, lots of things we can put in front of customers. We really have executed on this vision of building a comprehensive financial services platform. So the challenge now is how do we kind of like organize these things for customers and make them so that we deliver the thing that you're looking for as quickly as possible, not to kind of like clutter the interface and experience. And I think we're also seeing really good impact from our marketing activities. Marketing continues to be a very high ROI for us, and that just gives us more and more levers. Alexander Markgraff: Great. Maybe Shiv, on OpEx. Last quarter, we talked about the profitable growth framework. As you think about the flexibility that showed up in the first quarter around the $607 million. When you look at the rest of the year, maybe help us think about where the flexibility exists on the lower side, if need be to ensure that profitable growth framework? Shiv Verma: Yes, great question. So our North Star is still the same. We want to drive free cash flow per share and earnings per share over the long term. So that means we need to be making investments. So we want to keep doing that, customers responding incredibly well. At the same time, we want to be disciplined. And so we're constantly re-underwriting everything we're doing, making sure it still makes sense and where we want to put our capital. 85% to 90% of our costs are fixed, but a large portion are discretionary. So as a software platform, we're constantly looking at what's the right allocation of resources internally. We also have marketing spend, as Vlad mentioned, we also have some variable costs, even though predominantly fixed. So I feel really good about our outlook. We're still building for the long term. We came in better this quarter, and we're going to continue to monitor it. But I want us to be investing for the long term. And then if we need to, we also have some levers we can pull. Chris Koegel: All right. Thank you, Alex. Now, Alex just had his second child, so we let him have two questions. But for the next -- for the remainder of the question askers, please limit yourself to one question. All right. So the next question is from Dan Fannon. Daniel Fannon: Dan Fannon from Jefferies. So I wanted to just talk more about the health of your customer base given -- and the resiliency given all the market volatility we've seen at the start of the year. And then you gave some comments about April, only mentioned a few asset classes, maybe expand a bit upon outside of just options and equities, maybe crypto, prediction markets, sec lending? Any of the other kind of areas where you're seeing any change in behavior as you go into 2Q versus what we saw in the first quarter? Shiv Verma: Yes. I'm happy to start. Vladimir Tenev: Go for it. Shiv Verma: So our North Star KPI is just net deposits. Like that is our customer is healthy, they're trusting us, $18 billion in Q1 despite was a really tough macro backdrop. If you recall, the start of the year, there was a government shutdown, a software sell-off and then a global conflict. Despite all of that, our customers remain resilient. I think the big difference from a couple of years ago is, one, we're a lot more diversified. So there's a lot of different products that customers are using. We mentioned Banking, for example, Robinhood credit card. We also have Robinhood Strategies. That's our robo-like product that has over $1.5 billion. And so regardless of the macro backdrop, customers are using that. The second thing is we have more active trader tools. So we now have index options, which allows you to go long or short. We also have shorting, which is growing nicely. So for more active traders, they're continuing to remain engaged. On your question on April specifically, really healthy volumes across equities and options, as I mentioned. Prediction markets, it's on track to be around $3 billion and probably our second highest month ever. So really strong engagement there. So everything we're seeing is the customer is healthy. They're engaged, a little bit more activity from the active trader constituency. But the thesis was if you build great products, if you diversify, if you give active traders the tools, they'll be there throughout the cycle, and that's what we've seen thus far. Chris Koegel: Great. Thank you, Shiv. Any other question -- Jeff John Roberts. Jeff Roberts: My question is on prediction markets. How does Robinhood see this industry evolving? Do you see in 2 years it being like a Uber-Lyft-type duopoly? Or is there going to be like 5 or 10 or 15 players? Vladimir Tenev: Yes. I mean, remember, prediction markets happens at various layers, right? So right now, we're kind of -- think of us as a brokerage and then there's a variety of exchanges. And there's sort of the main ones that are in the news and also a lot of the other players are growing their own exchanges, building their own, going through the CFTC registration process. There's probably been over a dozen, probably more than that. So I think we should expect to see some consolidation because, frankly, if you look at all these dozens of new exchanges that are popping up, there's not a lot of differentiation. And I think differentiation really comes down to who has an established engaged customer base and who has a unique advantage with economics. And one of the things I think we're unique with is we've got 27 million funded accounts in the U.S. And through our partnership with SIG to launch Rothera, which is one of the leading market makers in the asset class, we believe that we not only have an advantage with retail, but also institutional as well. So I think the asset class is going to continue to grow. We're very, very early. We're starting to see the beginnings of diversification outside of sports. So that's been increasing. I do think -- and it's hard to predict the exact timing. I don't believe there will be dozens of DCMs in the future. I think there will be some consolidation, and I think we should see that shaking out in the next couple of years. Chris Koegel: All right. Thank you, Vlad. Are there any other people here who would like in person to ask a question? Vladimir Tenev: Don't be shy. Chris Koegel: Okay. Well, then let's go to the Zoom queue. All right. So for those who are joining us on Zoom, please raise your hand to let us know that you'd like to ask a question. So I'm seeing first question is coming from Devin Ryan at Citizens. Devin Ryan: A question I want to dig in on the recent announcement on the Pattern Day Trader elimination. And just get your thoughts on what does that mean for Robinhood, for your customers for kind of modernization and democratization kind of near term? And then bigger picture, how do you see this playing into, I don't know, themes like agentic trading and maybe the ability for customers to trade a lot more than maybe they otherwise would have been able to do? So just love some thoughts on kind of both near term and longer term, what this means for you? Vladimir Tenev: Yes. I think it's fantastic. I mean, this rule -- so for those of you that aren't familiar, probably most are, but pattern day trading rules prevent day trading effectively for customers that have under $25,000 in their account. So when I say vestigial and kind of outdated, it's this old notion that the amount of money you have in your account or your account balance dictates how sophisticated or knowledgeable you are, right? And we've seen that maybe in the past, when we had lack of good information, this was kind of a reasonable proxy, but now we have tons of information, so it makes less sense. Moreover, the way this rule works is if you fall backwards and trip over and become flagged the pattern day trader, effectively, if you want to trade, you would have to churn out of your Robinhood account and go to another brokerage. So it wasn't even -- this follows you around as a customer. It's just on a per brokerage basis. And since we were getting the lion's share of new customers, we felt like this disproportionately affected us. So excited to see it go. This, along with the accreditation rules are kind of like vestigial rules that tie sophistication with account balance, which we think is wrong. And we're excited that there's progress there. And obviously, as you can tell, we're ready to go. The team is excited to go live with the new logic, and I think it's a great step by FINRA to push this through. Chris Koegel: All right. Thank you, Vlad. The next question is from Dan Dolev from Mizuho. Dan Dolev: So great stuff here. Everything sounds really amazing and promising. I was very impressed by the agentic trading commentary. Maybe can you educate us a little bit what you guys are doing? Because if anyone is at the forefront of agentic trading, it is probably going to be Robinhood. So I'm really curious to know what you guys are doing there. I'm sure a lot of people would like to hear that as well. Vladimir Tenev: You caught that in my prepared remarks, right? My preference really isn't to reveal too much about products before we ship them, but we've got a lot planned this year. I mean there's 3 events that I just announced. So we're going to be launching some stuff in May. Then we've got the crypto event in early July. And then we have HOOD Summit that's going to be our active trader event, third annual in the fall. And I just reviewed kind of the docket for that. You can imagine AI agents and putting the best financial intelligence in our customers' hands is going to be a starting player in the starting 5 of most, if not all, of those events. So -- and I should say there's been a lot of noise about this by the industry. I don't think anyone's kind of figured anything out yet. So we're still early, and you should expect us to be not just early, but kind of at the forefront there. Chris Koegel: Great. Thank you, Vlad. The next question is from Steven Chubak from Wolfe. Steven Chubak: And so this relates to just sec lending in particular, and that has remained under considerable pressure, not just for you, but for industry peers as well. At the same time, the outlook here is pretty constructive given both this large slate of IPOs that are coming as well as just above normal retail allocations for those IPOs as well. So given that you've had more of your clients opt in to fully paid sec lending, I was hoping you can contextualize just how meaningful of a windfall this could become. And I'm going to break my own rule. If you could speak to take rate dynamics for 2Q, that would be helpful as well. Vladimir Tenev: Shiv? Shiv Verma: Yes. I'm happy to take this one. Great question. So first on securities lending. As a reminder, this will show up in 3 different places in the financials. First is sec lending net. It will also show up in segregated cash because when customers have securities lending, we get GC collateral back and we reinvest it. It'll also show up in margin interest as customers borrow on margin. So when you look at the financials, what you saw is customers continue to opt in and use the program and fully paid. The margin book continued to grow. What you did see is securities lending net, which is primarily based on the rebates rate was lower. As you mentioned, Steve, that's mainly because lower volatility, lower IPOs in the market, so special rebates was lower. So that's what brought that down. How do we judge the business internally and its health? There's just 2 main things I look at. One, are customers opting into fully paid program; and two, how much assets are opted in. So right now, it's about 25% of customers have opted into fully paid and about 50% of assets. So really healthy adoption, but we also have a long way to go. It's hard to predict what's going to happen on the special rebates rate later in the year. But right now, it's at a low. And if the market comes back or if you see IPOs come back, you could see a rebound there. To your second question, we'll answer it even though Chris said limited to one. So take rates. As a reminder, this is an output metric. We goal on market share and we're winning and everything that we see is that the case. What happens to take rates is when active traders trade more, take rates naturally go down because we have tiered pricing. This is a good thing. It means they're engaged, they're using our products. And relative to a few years ago, we're actually seeing a much healthier adoption of active traders during some of these macro events. So what are we seeing to start the quarter? On crypto, it's about 7 basis points lower and on options, it's about $0.03. However, we're starting to see that rebound in the pickup of April. So again, it's an output metric. We focus on active traders and market share and everything we're seeing is super healthy. Chris Koegel: Thank you, Shiv, for the double header. All right, the next question is from Ben Budish at Barclays. Benjamin Budish: Maybe just tying this into Steve's question on sec lending. Shiv, I'm wondering if you could talk a little bit more about your margin funding. I think it's been a little bit of a source of confusion for investors. You've been moving bank sweep cash over to brokerage cash. I think you've been talking about using some of the sec lending related cash. So maybe just any like modeling help you can give us there? How should we think about your future plans given your margin balances are growing more rapidly would all be helpful. Shiv Verma: Yes, happy to take it. Great question. So on the margin book funding, what you'll notice in Q1 is we moved over $6 billion of cash that was off balance sheet and that was in the sweep program on to free credit balances on to balance sheet to help fund the margin book. No impact to customers. They get the exact same rate, 3.35%, one of the best in the industry. This is more of a back-end accounting change. It also helps, as you mentioned, on the funding of the margin book. This is very common in different brokerages before. So just with the health of what we're seeing, we decided that was the right time. What would I expect for modeling going forward, they'll stay roughly at this rate. About 25% of our free credit balances today is in this. So $24 billion in sweeps and then about $6 billion from free credit balances. It might move a little bit around quarter-to-quarter, but I think that's the way you should look at it. And then most of our free credit balances will continue to be earning the same rate that we do, but this $6 billion will have a smaller take rate more akin to our sweeps take rate now that it's moved over on balance sheet. Chris Koegel: All right. Thank you, Shiv. The next question is from Craig Siegenthaler from Bank of America. Craig Siegenthaler: Great. So I have a follow-up on AI, but not Cortex and not agentic AI. But taking this one step further, where are you in the process of rolling out AI-powered financial advisers? I believe you're working on it. I think you've said before you're in talks with regulators, but can you kind of share a time line with us? Vladimir Tenev: Yes, for sure. So I think when people talk about AI-powered financial advisers, they can mean 1 of 2 different things. One is just specifically advice on what to invest in, right? And that can be a spectrum of things as well, like trading recommendations and allowing you to build trading strategies with that Reg BI compliant capability. It could also mean like robo-advisor services. So for the latter, we have Robinhood strategies. And for some of the work that we're doing on the agentic side, you should expect that, that increases in capability as well in everything that we do, whenever we -- if we do add recommendations, we got to make sure they're in accordance with Reg BI and all of those rules. So we're making progress on those things and with Robinhood Strategies. I think it's the best like deposit money and we invest it for your product out there today under the fiduciary standard. We actually published some returns and historical performance a couple of weeks ago, which looked really good. Now the other thing people mean when they say financial advice is I want help just managing my entire spectrum of financial things, right? And that involves your banking, your spending and budgeting, your estate planning. And we'll have a solution there for you, multiple solutions. So with TradePMR, some people still want humans. And I should point out there's a synergy conference for TradePMR coming soon where we're going to start unveiling some of the things that we've been working with on the human advisor side. I think that's a durable product. We should expect human advisors to be around because that fills a very, very specific need that I don't think AI is quite going to fill in the near term. Then for the other things, we are working on digital self-serve solutions. We ran a pilot for concierge, where we can do your estate planning, we can do your taxes for you. That's been very successful. And through our self-serve offerings, we also have helped customers with their tax preparation. So we're kind of stitching these things together. And you can imagine as we identify more and more of our endpoints, that lowers the activation energy to having Cortex or AI assistant sees everything. But I think, first, our strategy is going to be to make the capabilities available on an individual basis and later to kind of stitch them together for you. Chris Koegel: All right. Thank you, Vlad. The next question is from James Yaro at Goldman Sachs. James Yaro: I just wanted to touch a little bit further on crypto. Maybe just any views on when crypto volumes and prices could stabilize at a high level? And perhaps also just the trends you're seeing across your crypto franchise across client types. And I know you commented on the near-term take rate dynamics in crypto. But maybe just your thoughts on longer term, what your crypto take rate could do over time? Vladimir Tenev: Yes. Maybe I'll hit the outlook, and then you can hit the take rate, Shiv. So when we talk about crypto, I think it's important. I want to get away from talking about the price of Bitcoin or all of the other native crypto assets. Our strategy is to take crypto infrastructure and apply it to assets that have real-world utility. That's why we care so much about tokenization. And you should expect that this is going to be -- I mean, we're at the very beginning of what's going to be a tokenization super cycle. You're starting to see it a little with the stables. You'll see it with stocks as well. And we're going to be at the beginning of that. And I think you should expect that at the crypto event that we're going to have in July, tokenization will be -- will have a starring role. And I think there's a lot of work to do there, but we're still very, very early. So crypto is 2 things. It's like Bitcoin and other crypto native assets, which I can't tell you what the price is going to be in 3 months. Price moves up and down. But what I can tell you is crypto as technology infrastructure is going to be big, and we're investing. We've got Robinhood Chain. We've got Robinhood Wallet. We've got our tokenization initiatives. And I think we're still very, very early. So this is going to play out over many years, and you'll see the next phase of what we've been working on in the U.K. in July. Shiv Verma: Yes. And on the monetization side, a couple of things we'd point you to. First, we are crypto bullish, as Vlad said, but it's less than 20% of our revenue last year, about 18%. So it's an important part of the business, but we've vastly diversified. On the take rate specifically, it's an output metric. It's not something we go on. What we're seeing is active traders remain on the platform, and we're winning market share. And so we're going to continue to invest there. The counterfactual is take rates could be higher, but you wouldn't have had as many active traders. And so we don't want to go on that. As I mentioned, it's a little bit lower in April, but we're already starting to see it rebound. The other thing we're super excited about is institutional. And so we bought Bitstamp last year, the crypto exchange, seeing really healthy market share there. Institutional tends to be more resilient throughout the market cycles, and so we're gaining share there. So everything we're seeing is still healthy, active traders growing in institutional book. And as Vlad mentioned, we're making big investments in tokenization and on the infrastructure side as well. Chris Koegel: All right. Thank you, Shiv. All right. The next question is from Patrick Moley at Piper. Patrick Moley: So Vlad and Shiv, one of the things you guys have done great historically has been in understanding where the puck is going in terms of retail trends, whether that's all coin trading and Dogecoin or prediction markets here more recently. But one, I think the biggest story in my mind in retail trading year-to-date has been in perpetual futures. And I don't know if we've touched on it yet this call. I know you launched crypto perpetual futures in Europe in the fourth quarter. So I would love to get your thoughts or just an update on how that rollout has gone, what adoption trends have looked like. And we've seen volumes kind of explode on some of these on-chain venues like Hyperliquid. So Vlad, would love to just get your broader thoughts on perpetuals as a product going forward internationally? And what are the hurdles to maybe offering that to U.S. customers as well? Vladimir Tenev: Yes, absolutely. The perpetuals product, I'm glad you asked about it because in Shiv's answer to the last question, I was going to butt in and say perpetuals overseas have been doing really, really well. And of course, we've listed those on Bitstamp our exchange and are making them available to EU customers. And we're seeing healthy growth. The product keeps getting better and better. It's a regulated product, unlike some of the on-chain competition, which means that we can't go quite as high on the leverage that we offer to customers, but customers have been requesting and we've been increasing that. So yes, we're doubling down. We've got -- our perpetuals team is working hard, and we see an opportunity to offer even more to customers. Now as far as the U.S. goes, we do need some rule changes to offer perpetuals here. The products that some of the other firms have been offering that they've been calling perpetuals are really just long expiry traditional futures contracts. So you don't quite have perpetual contracts in the U.S. And I think that's actually not an amazing thing thus far because people have been going to these unregulated offshore entities where there's not as much protection, not as many rules. So yes, stay tuned. Of course, we're engaging with the regulators, and we have the ability since we have this product in the EU to roll it out in the U.S. as well. And I do think it's an attractive product for active traders. So we'll definitely be on the front lines of any perpetuals expansion or regulatory [ easenings ] here. Chris Koegel: Okay. Thank you, Vlad. The next question is from Tannor from Future Investing. Tannor Manson: My question is on AI and automation. You guys have been early here at Robinhood, but how has this shifted your hiring strategy? And where are you seeing efficiencies or reduced hiring needs across the organization? Vladimir Tenev: Shiv? Shiv Verma: Yes, happy to take this. So a couple of things I'll point you to. Last year, we said we had $100 million in efficiency, primarily in CX and software engineering. If you look at our volumes last year, they grew about 50% and hiring and customer service was about flat. And so while we didn't need to reduce any hiring, what we were able to do is absorb all of our volumes through the increased productivity, which is great. What we're doing now is we're just shipping faster. So we're still hiring engineers. We're still growing, but we're using the efficiencies to just keep delivering for products for customers. And so that's where we think the big unlock is going to come. But it's not just engineering, as I mentioned. So everybody across the firm right now is adopting AI. They're using in their workflows. We're getting AI pilled. It's been incredible to see. And you're going to see that start to go out in many areas. So marketing is a great example. The team just launched some campaigns that were built end-to-end using entirely AI, which is great. All of the nondeveloper teams are also using them in their workflows. So for us, I think the biggest thing is we can absorb volumes through AI efficiencies, and we can ship faster for customers across many different vectors. Chris Koegel: All right. Thank you, Shiv. The next question is from Brian Bedell with Deutsche Bank. Brian Bedell: Can you see me? I think my video is stuck. I don't think my video is working. Okay. Can you hear my okay? Vladimir Tenev: Yes, we can hear you. Brian Bedell: Yes. All right. Great. Just wanted to just touch on the trading behavior between active and less active traders. So really, the -- as you bring in more accounts and the net deposits continue to really perform very well, how are you seeing the customer mix evolve from those new deposits? So what I'm getting at is to what extent are these more active traders and you're building that book faster than, say, the less active traders? Just thinking about how the different market environments could influence the trading patterns. And then also just on crypto as well, are you seeing a lot of cross currents between those active traders using crypto? Or is that really a separate class of traders? Vladimir Tenev: I mean one of the things that we've been really excited about is the growth in Gold attach rate. So remember, the Gold attach rate of new customers used to be in the low single digits. And now it's 40%. So 40% of new customers that come in end up adopting Gold. And that customer typically then goes into the high-yield offering, which is a great value prop for Gold. So if you remember, if you have Gold, you get interest on your cash on Robinhood with $2.5 million of FDIC protection. You also get interest on your options collateral, which for the active traders is a very, very nice new feature that they've been asking for, for a while, along with just like dozens of other things, right? You've got the Gold credit card, Banking is a Gold-only offering. So we've been -- the behavior we've been seeing is someone comes in a large portion of the time, they try Gold, then they start looking at all of the other products that we offer, and we've been really successful in kind of driving that adoption. And trading might not be a daily use case for most people. I mean some people build up their portfolios, then they kind of trade a little bit less frequently. But some of the other products like your banking, your credit card are daily use case product. And I think we have a huge opportunity in the coming months and years to get more and more of our customers into banking and credit. And then we think that even though the numbers are really good with 800,000 cardholders and 125,000 bank accounts, with a 40% direct deposit attach rate, these are still relatively small numbers. And I think we've got a lot of wood to chop to get more and more of our customers on them. So I think that will be a big tailwind to multiproduct adoption over the next year. Shiv Verma: Yes. In terms of where the deposits are coming from, I think the main way to look at it is just broadly diversified. So as Vlad said, it's going into retirement, it's going to ETFs. It's also going to high-yield cash. It's also going into trading. So it's one of the benefits of being diversified business. That's one of the ways we have the $18 billion net deposits. It's customers using the platform in a wide variety of ways. Chris Koegel: All right. Thank you, Shiv. Thank you, Vlad. The next question is from David Smith at Truist. David Smith: Following up on the discussion about banking. Could you talk a little bit more about the extent to which you see this driving new customer growth as opposed to like ARPU expansion and the levers you see for growth there? Vladimir Tenev: Yes. I think that there is a lot of potential there, and we haven't really tapped it because right now, the way that we've been giving customers banking is we've largely been giving it to Gold Card customers. And Gold Card customers are -- the Gold cards are still -- are largely being driven by existing customers. So it's -- the story has really been getting our existing customers to adopt the Gold Card. Now I think over the next year, you should see it shifting a little bit more from that to getting new customers on board who come specifically for the Gold Card and adopt our brokerage and retirement services as an adjunct to doing that. We've run some experiments there, but there's a whole bunch of things that we'll have to do to make that smoother and nicer that I think we're excited about. So yes, big opportunity. It's been really about proving the economics. And we frankly -- I think despite the fact that some customers wish they could get the Gold Card earlier and earlier, if you look at successful credit card rollouts and the speed with which we're rolling out these cards, this is actually right near the top. Like by all objective measures, if you look at card programs that have rolled out faster than us, they've pretty much gotten into trouble, right? So we're right up there with like fast yet responsible rollout. So we haven't been limited by this at this point. But as we approach -- as we get into the millions of cardholders, you should expect a little bit more top of funnel with the card and banking, which I think increasingly is going to be part of the same package. I mean when you think of Gold Card, you'll think of banking as one and the same. Chris Koegel: All right. Thank you, Vlad. the next question is from John Todaro at Needham. John Todaro: Wondering if we could just go back to Bitstamp for a moment. As you pointed out, it's obviously been quite resilient despite the crypto downturn. You had mentioned institutional lending earlier on the call. Just wondering if you could expand on that or more cross-sell opportunities within that segment to kind of drive some additional revenue beyond crypto trading? Vladimir Tenev: Yes. I mean I would just tell you at the high level, so we closed our acquisition of Bitstamp about a year ago. And one of the first things we did right around our crypto event in the south of France last year was we got together with a lot of our institutional customers for Bitstamp. We had a nice lunch, and it was very eye-opening because I got my notepad out. I was like, tell me all the things that I need to write down, we're going to deliver them to you in record time to make sure all of your volume happens on Bitstamp. And I was expecting all these fancy things, but it's like I just want you to not drop my packets. When I submit an order, I want you to acknowledge. So it's like basic stuff, right? And we just went through. We've been fixing that stuff. Our exchange at first couldn't handle a huge throughput of messages per second. So we were like getting throttled. Things were slow, right? So the engineering team has been doing yeoman's work of fixing all of that. So you're talking about increases in institutional market share and all these things. There's just a lot of low-hanging fruit here, which is what makes us so excited about all the things that we're adding. And this is even before the institutional lending desk upgrades, before all the things that we're doing with perpetual futures. So I think we're at the very beginning. And you should expect telling the customers this, keep giving us the list, we want to earn your institutional business. And I think we've demonstrated that this team can ship. Shiv Verma: Yes. On the institutional lending side, it's actually very simple, as Vlad said, a lot of it is just working capital. So you're not taking credit risk, but a lot of the institutional clients are used to having capital to trade either instantaneously or in working capital needs, whether it's overnight or on the weekends. Given our balance sheet and our technology, we're able to provide that. And so it's another thing that was just a low-hanging fruit that we're seeing really great adoption on, which is another way to monetize, but also grow market share. Chris Koegel: All right. Thank you. The next question is from Amit from Amit is Investing. Amit Kukreja: Congrats on a great quarter. My question is around international expansion. You guys just got the Singapore license, bought a brokerage in Indonesia. Is the plan to kind of expand through crypto offerings, maybe tokenization, then banking products, different promotions to get customers? Or I guess, can you walk us through how do you think of global expansion going into 2027 and what the strategy is to get customers in these different countries? Vladimir Tenev: Yes. So it's actually both. We want to be everywhere with our core products and the core products being obviously trading and eventually banking and spending. So in a few markets where it makes sense and there's like well-established regulatory environments that we can follow, we've gone and gotten full licensure. That's the in-principle approval. In Singapore, you mentioned Indonesia and obviously, the U.K. as well. I also think tokenization, which what we unveiled in the EU last year was like Robinhood, but with the infrastructure being on-chain. So instead of traditional equities, stock token, so tokenized stocks. And I think what that will allow us to do is handle the long tail of -- if we want to be live in hundreds of countries, the tokenized offering will just be a quicker way to serve those customers. And then we can see where we're getting particular traction and where we're going to need to go deeper with more traditional offerings. And typically, what those offerings are is if the jurisdiction has tax wrappers, for example, that we have to build and very specifically build to, it's the tax wrappers. It's also their local exchanges and market centers. So if you want to trade some obscure exchange like Kazakhstan securities, which believe it or not, some customers ask for, then we'll have to do local market-specific integrations. Shiv Verma: Yes. Our simple 2x2 matrix is organic and nonorganic brokerage or crypto. If you go through those 4 boxes, we've actually gone through all of them. Some of them we've built organically through brokerage, such as the U.K. Some of them we've built organically through crypto, such as the EU, and we've also done acquisitions. To Vlad's point, we want to be everywhere. We're indifferent to which way we go. We're going to look at what's the speed to market and what's the best ROI and how do we have the right to win for customers, and then that's going to be the path for how we choose. Vladimir Tenev: Yes. And the line between these is going to get increasingly blurred. So even though EU is brokerage first, we have stock tokens, which gives you exposure -- equities exposure. So I think you'll see that as a trend, too. We'll be getting more and more traditional brokerage assets in tokenized form and delivered to customers around the world. Chris Koegel: The next question is from Ramsey at Cantor. Ramsey El-Assal: I wanted to ask about the Trump Accounts again and just get your thoughts on levels of engagement there and also the degree to which you might have a plan to cross-sell or whether you'll be able to sort of cross-sell some of your other products over time into that base? Vladimir Tenev: Look, I think for us, this is really a long-term opportunity. It's an opportunity to be in front of this next generation of customers and an opportunity to show that we can be a reliable partner to the U.S. government as they're pursuing initiatives, right? And I think that we're proud to be a part of the program. We're not really spending too much time thinking about how this could be done to benefit us. We're instead focused on how we can make the best product that the government has ever been associated with. So with our friends over at National Design Studio, I think we're all just super motivated to make sure this is like one of the best financial products we've ever used. And of course, we're proud of our role as the sole initial broker and trustee. We don't take that lightly. And we want to make sure that we deliver the highest possible quality product that we can. We're very proud of what we're going to do. The best -- we've got some of our best people working on it. And I believe that good things will follow from us doing this as a business. Chris Koegel: All right. Thank you, Vlad. The next question is from Ed Engel at Compass Point. Edward Engel: You mentioned strong April rebounds across equities, options and prediction markets, but did you give an update on how April crypto volumes are trending relative to the past few months? Shiv Verma: Good question. No, I didn't give an update on that. I'd say it's probably more of the same. We are really seeing the rebound in equities options. And as I mentioned, prediction markets around $3 billion, which will probably be our second best month ever. Margin book also continues to grow. Crypto also remains about similar to what it was in Q1 and kind of in that ZIP code. Chris Koegel: All right. Thank you, Shiv. The next question is from Michael Cyprys at Morgan Stanley. Michael Cyprys: I wanted to ask about API connectivity. Just curious how API connectivity is contributing to Robinhood today. I believe you offer it in crypto. Hoping you could elaborate a bit on your API strategy, key use cases, how you see the opportunity set there emerging on a multiyear view? Vladimir Tenev: Yes, it's a great question. Historically, we've been -- we haven't really invested too much in API offerings. I think we've been focusing on building first-party experiences that maximally leverage our strengths of like design and user experience. That said, we're interested in API offerings. I think that now that things are shifting in a more agentic direction, like there's an opportunity for us to be differentiated there. We're a low-cost provider. We have great infrastructure. We have great APIs that we use internally. And I know there have been a lot of projects out there on GitHub and other things where people kind of attempt to reverse engineer in a supported -- in an unsupported way. So there's obviously demand for it. So stay tuned. When we do release something, we do generally try to make it really, really good. And I think this is an area of opportunity. Chris Koegel: All right. The next question comes from Roy from Crossroads, I mean, Dr. Roy from Crossroads. Unknown Attendee: Congratulations on the Trump Accounts. I wanted to ask another follow-up question on that as well, and congratulations on that. You note in the earnings slide deck that it's a new way to extend Robinhood's mission to helping governments, that's plural, and I thought that plural is very interesting to build a public sector business. And so beyond just this specifically with the short term with the Robinhood partnership with BNY and the Trump Accounts, what does that look like as far as that public sector business? Maybe comment on that plural as well. I know you probably can't name individual governments beyond the U.S. Vladimir Tenev: Right. Yes. I mean it's really 2 things, Roy. One is it's not always easy to be a government subcontractor. And we're learning how to do it, right? It's a first thing for us, but there was a long process to get to this point. And I don't know if a lot of other fintechs have made that leap. It's like as a company that's been around for a little bit more than 10 years, it's a big step for us. So yes, I mean, we think there's a number of ways that we could help this country. And I think it's going to be important, right, because there's certainly a lot of disruption coming with AI and with other things. And I think that we're well positioned to sort of help with that. And certainly, people's finances are going to be a key part of that. So yes, there might be other things that we can be helpful with in the U.S. in the future. And also ever since we've gotten involved with the Trump Accounts, we've heard from lots and lots of states, so not even other countries. So it's been states and other countries who just want to do similar things. And our focus has been on just doing this one thing, but we also recognize that once this is successful, I think that it's going to be something that goes all around the world. And of course, I think that's a big opportunity for us to continue to extend our mission. Chris Koegel: All right. Thank you, Vlad. The next question is from Craig Maurer at FT Partners. Craig Maurer: A lot of my questions have been asked and answered. But I wanted to ask about the flurry of states that are speaking out against prediction markets and their concerns there and if that tempers your excitement for that product at all? Vladimir Tenev: Yes. I mean I would love it if the states didn't have concerns, but it's also not -- I mean, it's not irrational, right? This is a jurisdictional dispute. Of course, the CFTC is claiming, and we agree with their standpoint that these are federally regulated products over which they have jurisdiction. And the states -- some of the states have a different view. So we continue to defend our position and think that it would be strange if the states start exerting jurisdiction over federally regulated CFTC products. And this is something that will play out in the coming years. Chris Koegel: All right. Thank you, Vlad. The next question is from Stock Market News. Unknown Attendee: I appreciate you guys for allowing me to ask a question here. Congrats, Vlad and the team on a great quarter. I wanted to ask a little bit more about Robinhood Social. And obviously, we got some of the initial people on to that recently. I would like to hear more about updates about how you're thinking about expanding that and maybe just any findings or updates as you guys have launched that. Appreciate it. Vladimir Tenev: Yes. I mean people really love engaging with other traders in the Robinhood community. The first rollout was actually to HOOD Summit attendees from last fall, which was kind of fun because a lot of the folks had met in person, and we wanted to start it really, really small. And the first pieces of feedback were kind of basic, like I want to be able to see the post that people are engaging with at the top rather than it being chronological, things like that. I want to see who the other traders are that people are engaging with. So the team has really been shipping on a weekly basis. You've seen us knock out more and more things and extend the rollout. And we've extended it to other asset classes as well. So you can see the prediction market trades are on there as well as equities and options trades. And there's a really nice experience that we've built that allows you to trade via the posts as well. So yes, you should expect that to approach general availability in the coming months. We like what we're seeing there. There's obviously a ton to do before this becomes like the world's leading financial and business social media product, but that's the aspiration. We think we have some advantages there with the verification and people really, really care about it in this domain. So plenty more to come. And getting creators on it. So stay tuned for that. Chris Koegel: Great. Thank you, Vlad. So that concludes the Zoom queue. Is there anybody else in the audience who's been waiting after we work through the Zoom queue to ask any more questions. No? Okay. Well, then, Vlad, I will turn it over to you to end the first outdoor earnings call possibly in history. Vladimir Tenev: Where is the Guinness Book of World Records. Invite them to our stuff. Thank you guys very much. Look, I hope you can tell from the presentation, we do a good job to -- like we try to convey this, but we've got a team that's working incredibly hard. The road map just there's incredibly full. There's always more to do. And yes, we're just incredibly motivated to keep shipping for our customers and for all of you. So thank you for being with us on the journey and see you next quarter and at our product events in the coming months. So cheers, appreciate it. And thank you, Shiv. Shiv Verma: Thank you.
Operator: Good day, and welcome to Camden National Corporation's First Quarter 2026 Earnings Conference Call. My name is Lucas, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Renee Smyth, Executive Vice President, Chief Experience and Marketing Officer. Go ahead, Renee. Renée Smyth: Welcome to Camden National Corporation's First Quarter 2026 Conference Call. Joining us this afternoon are members of Camden National Corporation's executive team: Simon Griffiths, President and CEO; and Mike Archer, Executive Vice President and CFO. Please note that today's presentation contains forward-looking statements and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is included in our first quarter 2026 earnings release issued this morning and in other reports we file with the SEC. All of these materials and public filings are available on our Investor Relations website at camdennational.bank. Camden National Corporation trades on NASDAQ under the symbol CAC. In addition, today's presentations include a discussion of non-GAAP financial measures. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release, which is also available on our Investor Relations website. I am pleased to introduce our host, President and Chief Executive Officer, Simon Griffiths. Simon Griffiths: Good afternoon, everyone, and thank you, Renee. Earlier this morning, we reported strong first quarter results with net income of $21.9 million and earnings per share of $1.29. Excluding noncore acquisition-related items from last year, adjusted net income and adjusted diluted EPS increased 39% year-over-year in the first quarter of 2026. We are pleased that these results were near our record earnings reported last quarter, reflecting the continued value generated by the Northway Financial acquisition and ongoing organic financial improvements across the franchise, despite macroeconomic headwinds and the seasonal softening we typically experience in the first quarter. These results demonstrate continued progress against our strategic priorities of growing the franchise, operating with discipline, and adapting our capabilities to better serve our customers and communities. Our balance sheet remains a source of strength, supported by strong and building capital levels, reserves that we believe are appropriately aligned with loan quality and solid liquidity. We continue to maintain regulatory capital well in excess of required levels and internal targets, with our tangible common equity ratio increasing to 7.64% at quarter's end. Our disciplined credit approach continues to deliver strong asset quality with past-due loans and nonperforming assets remaining at very low levels in the first quarter. Although loan growth was tempered this quarter, due primarily to typical seasonality within our markets, we saw continued growth in our home equity loan portfolio, which increased $10.6 million during the quarter. We're encouraged by the continued strengthening of our commercial team with recent key hires already making meaningful contributions. Our production pipeline reflects healthy customer demand across our markets, even as quarterly balances are impacted by payoffs and seasonality. As we head into the spring and summer months, loan pipelines continue to build, reinforced by the talent added to our commercial and retail teams. As we build commercial capacity, we are deepening engagement with small and middle market businesses and positioning Camden National as a primary banking partner for a full suite of lending and treasury management solutions. Our deposit base reached $5.6 billion at March 31, representing a 1% increase from the prior quarter. Given the cyclical nature of our deposit flows, we are pleased with this level of growth in the first quarter as it reflects our continued success with our high-yield savings accounts and recent wins by our commercial and treasury management teams. We are focused on relationship deposits, attracting deposits through service, convenience and disciplined pricing. Our goal is to build long-term customer relationships, not simply pursue rate-driven volume. At the same time, we remain disciplined stewards of our capital. And with strong capital levels, we are focused on balancing reinvestment in the franchise with returning capital to shareholders, including through our recently announced share repurchase program and regular cash dividend. We continue to advance our digital strategy by equipping our bankers with practical, time-saving tools. Our internally developed AI platform, Camden IQ, anchors our AI initiatives, which operate within an established governance framework designed to drive productivity while remaining aligned with our moderate risk profile and value-driven, people-centered culture. Recently, we launched Prep IQ, which delivers a real-time integrated view of customer information across platforms, enabling more informed and productive conversations. Loan IQ, another internally developed tool, further enhances efficiency by streamlining access to loan policy and supporting faster, more consistent decision-making. We're encouraged by the rapid adoption and early benefits of these tools. Expanded use of automation continues to improve efficiency and redeploy capacity toward higher-value customer interactions, supporting our disciplined approach to expense management. Overall, our first quarter performance reflects the effectiveness of our strategy: maintaining a resilient balance sheet, driving high-quality growth and staying relentlessly focused on delivering value for our customers, communities and shareholders. We believe we are well positioned for the remainder of 2026. With that, I'll hand over to Mike to provide additional financial details for the quarter. Michael Archer: Good afternoon. As Simon noted, we had a strong start to the year, delivering solid earnings for the first quarter. And importantly, our financial operating metrics continue to trend favorably, including a reported return on average assets of 1.28%, a return on average tangible equity of 18.17%, and a non-GAAP efficiency ratio of 53.21%. We continue to be focused on growing the franchise and delivering shareholder value. For the first quarter, we reported a net interest margin of 3.24%, which was up 20 basis points year-over-year and down 5 basis points from the previous quarter. The decrease on a linked-quarter basis was driven by lower fair value mark accretion income of $956,000. Our underlying core net interest margin remained stable at 2.92% between periods. As we move into the second quarter, we anticipate net interest margin expansion of 2 to 5 basis points on a core basis. Our current interest rate outlook calls for a slower and more gradual net interest margin expansion throughout 2026 as the likelihood of further Fed rate cuts has decreased. Noninterest income fell on a linked-quarter basis, largely due to normal seasonality across many of our fee income categories, including debit card, mortgage banking and swap fee income. Despite market volatility, assets under administration across our wealth and brokerage business remained essentially flat during the first quarter and were $2.4 billion at March 31. We continue to be focused on growing our wealth channels, and we are pleased to see AUA grow 11% year-over-year and quarterly revenues continuing to grow. As we move into the second quarter, we anticipate noninterest income to rebound to approximately $13 million. On the expense front, noninterest expenses totaled $35.7 million in the first quarter, down 3% from the previous quarter. For the second quarter, we anticipate our expense base to normalize as we benefited from the true-up of our incentive accrual bon payout in the first quarter. And as in prior years, our annual merit cycle and other seasonal costs will be recognized in the second quarter. We are currently estimating a noninterest expense of approximately $37.5 million for the second quarter. Our credit quality across our loan portfolio continued to be very strong at March 31. Nonperforming loans were just 22 basis points of total loans and past-due loans were just 6 basis points of total loans. Net charge-offs for the quarter totaled $506,000 or 4 basis points of average loans annualized, and was the driver of our first quarter provision expense of $553,000. Our allowance for credit losses on March 31 was 92 basis points, compared to 91 basis points at year-end. Given the strength of our loan portfolio and our overall loan mix, we continue to believe we are appropriately reserved at this level as evidenced by a 4.2x coverage ratio of nonperforming loans at quarter-end. Lastly, I wanted to note that our capital continues to rebuild following our acquisition of Northway Financial last year, supporting both balance sheet strength and ongoing capital returns to shareholders. During the first quarter of 2026, our tangible book value per share grew 3% to $30.58 at March 31, which included the repurchase of just over 33,000 shares during the quarter. Through regular cash dividends and share repurchases, the company returned $8.6 million in capital to its shareholders. This concludes our comments. We'll now open up the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Damon DelMonte from KBW. Damon Del Monte: I hope everybody is doing well today. First question, Mike, just wanted to talk a little bit about the margin. Got your comments there about 2 to 5 basis points of core expansion. Could you just talk about some of the dynamics behind that? Is that more on the liability side or is that kind of going to be driven by the expected rebound in loan growth as we progress through the year? Michael Archer: Damon, yes, good question. Yes, primarily on the liability side, as we get into some of the seasonal months, we anticipate some continued benefit there just from normal deposit flows, if you will. We also, as CDs continue to reprice, there'll be some benefits there as that continues to roll. And then I would just say on the derivative front as well, as we get into the back half, we'll start to see some benefit there. Some of our derivatives start to roll off. We do on the asset side, I'd say albeit at a slower pace, new loan volume, certainly, there's an opportunity for us to continue to squeak out some basis points, if you will, just on the earning asset yield. And I would just lastly add there too, Damon, that I think, strategically, one of the things that we're focused on is just redeploying our investment cash flow where we can: one, to optimize certainly funding; but ideally, two, to fund loan growth on a go-forward basis. So lots of pieces there, but I think that kind of summarizes it. Damon Del Monte: Got it. Okay. That's helpful. And then from the fair value accretion standpoint, I think it was like $4.5 million or so this quarter. Is that right? And if so, kind of what's your outlook going forward? Michael Archer: Yes. No, good question. So overall, I think we're about $4.3 million for the quarter. I would still say $4.5 million, maybe a little bit north of that is still a pretty good run rate estimate for us for now. Damon Del Monte: Okay. Great. And then with regards to the loan growth and the outlook there, Simon, heard the call-out on the home equity line doing quite well. Can you just talk about some of the other expectations on the commercial side, CRE and C&I, and kind of what are some of the key factors behind that, driving that outlook? Simon Griffiths: Yes, Damon. I think overall, we see -- continue to see strength across our business. Obviously, there's a lot of macroeconomic uncertainty out there, but I think the underlying continues to be positive. We certainly see on the commercial side, we see some nice momentum, and certainly see businesses wanting to get out and invest. And obviously, as we start to get into the spring/summer months, that obviously kind of comes into focus as they're getting investments, making investments ready for the summer. We see nice momentum around the resi business as well. We talked about home equity, which I think is strong, and continue to see nice momentum on that business as well. So I think overall, it's a positive outlook. And we talked a little bit about in our script around some of the additions we're making, some of the strengthening of the team that we've made in the New Hampshire market. That also is strong. I was out with them a couple of weeks ago, and really excited by the opportunities we're starting to see in the Southern New Hampshire market and the strength of the team there. And I think all these pieces together definitely lead to a positive outlook. Damon Del Monte: So would you kind of expect to get sort of like low to mid-single digit on a full year basis? Is that a reasonable assumption? Simon Griffiths: Yes. That feels reasonable. Obviously, this year, lots going on. But I think where we sit right now, I think low sort of single-digit, low mid-single-digit seems a good range. Operator: Your next question comes from Steve Moss from Raymond James. Stephen Moss: Maybe just starting here on -- or Simon, following up on the new hires in New Hampshire. Just kind of curious the type of talent you're seeing and the opportunity you guys are seeing to hire, and any thoughts on maybe the potential expenses beyond the second quarter, if there's maybe more incremental adds? Simon Griffiths: Steve, yes, we continue to be extremely disciplined, as we've talked about in previous calls with you. Yes, our focus is really on self-funding, reinvesting, providing -- finding efficiencies across our business. So we don't see a material impact to the expense side. Some of those hires are certainly replacing existing positions. We see opportunities, obviously, with some of the southern end markets, there's been a lot of disruption, some M&A, and so we're picking up some great hires from some of those pieces. And I think honestly, they're very attractive to the Camden story. I think they see the opportunity here. We've got a lot of ambition to continue to grow. We've obviously got the Northway acquisition, which I think has provided a great platform. And we're continuing to invest. So we're seeing that opportunity and I think continued at a steady, measured pace, continue to make those investments throughout this year and into next. Stephen Moss: Okay. I appreciate that color. And then just maybe in terms of -- I hear your comments on the home equity and resi stuff. Kind of curious on the commercial loan pipeline, where are you guys seeing pricing these days and what you are expecting there? Michael Archer: Steve, it's Mike. Yes, I mean, I would say, overall what we're seeing is, I would say, on average, deals kind of in that 6% to low sixes on average. I mean certainly, there's certainly a premium, if you will, for credit quality these days, and certainly aggressive in just the market. But we, as we think about loan growth, we certainly want to maintain our discipline there. And that's kind of who we are and who we've been and continue to be. But overall, I would say just on a weighted basis, it's probably closer to 6% at this point, or a little bit higher. Stephen Moss: Okay. Appreciate the color there. And maybe just one last one on M&A here. You've integrated the Northway deal, Simon, and done a good job with it. Maybe just updated thoughts on talks and what you're thinking on the deal front here these days? Simon Griffiths: Yes, I think on the -- you just broke up a little bit there, Steve. But I think you said costs, update on the costs. Is that correct? Stephen Moss: No. On M&A activity and just the thoughts around deal activity post -- now that you've integrated Northway, you're doing -- you've been doing well here with the transaction. Just kind of curious where M&A discussions are and just updated thoughts there. Simon Griffiths: Overall M&A. Yes, we -- I mean, just to continue to recap. I mean, I think Northway obviously went very, very well. We're very proud of the work there. I was out in New Hampshire last week or so, and just seeing just a lot of energy from our clients, from our customers. Just really proud of the New Hampshire teams and the way we're really sort of getting some traction in the markets and excited to be part of the Camden franchise. I think on a look-forward, Steve, we continue to look, we've said publicly, we're certainly interested in opportunities, but it has to be the right opportunities for Camden. We feel like we've got tremendous opportunities on the organic growth front. We're seeing great capital rebuild. We're seeing this has been highly accretive from an income perspective and lots of opportunities there. So we don't feel pressure to make a deal, but we're certainly looking. We've talked about contiguous markets as sticking to our DNA as an organization. And really organizations with a similar sort of footprint and feel and look to Camden National Bank, and a culture that really would assimilate well. So we're certainly open to those opportunities, but not getting pressured and certainly not going to overreach at the same time. So it's a balanced approach, a thoughtful approach and one where we're going to continue to obviously really focus on the core business and driving the performance and continuing that path with top-quartile returns. Operator: Your next question comes from the line of Matthew Breese from Stephens. Matthew Breese: Mike, I wanted to drill into your comment on margin expansion being driven by the liability side. Could you just provide a little bit more color on the areas where you see the most potential for improvement? One thing I was just focusing on was the cost of CDs, the 3.17%, seems like a pretty low starting point to begin with. Where else do you see the opportunities? Michael Archer: Yes. I mean, I think, Matt, as you know, certainly, as we think about second quarter and beyond, I mean part of the opportunity for us is just the remix of our deposit base as we get into the spring/summer season. Generally speaking, I would say, call it, late May, into June, we start to really see some of the seasonal deposits come in. So we fully anticipate that to be the case again this year. No reason to believe that wouldn't be the case. So we certainly see opportunity there. And we also have, as I mentioned, we have some derivatives, I don't know the number off the top of my head here, that are rolling off. But some of those have served us really well over the last few years just given the Fed position today are a little bit underwater. So as we think about opportunity there, there continues to be some opportunity. I think overall, as you think about the funding base, we do think that there's probably that 2 to 5 basis points, is where we can see some margin expansion here in the second quarter. And I think we're -- we feel pretty good that as we continue even with the Fed holding as they are, that as we get to the back half of the year, there could be an opportunity where we start approaching 3% on a margin -- core margin basis. So we do see core margin expansion here over the next few quarters. Matthew Breese: Great. And then for loan growth this quarter, how much of what we saw -- or a bit of the sluggishness on the loan growth front, how much of that was seasonality? How much of that do you think was competition? We've heard a lot about prepays and prepayment. And what gives you the confidence, maybe some color on the pipeline, that will get back into that low to mid-single-digit range for the remainder of the year? Michael Archer: Yes. No, I think -- I mean, we're seeing pipelines build, Matt. I mean, I think that gives us confidence, I think, just on a year-over-year basis, we're seeing it. I think as Simon had mentioned in his comments, we really added some strong talent just across the New Hampshire franchise and really being -- really just activate that this year. It's an incredible opportunity for the organization. At the same time, we've made some nice adds just to our main franchise, in some of our markets that we've been in for quite some time, and we see some upside there. Certainly, on the retail franchise, we've had a nice strategy that we're executing on. We continue to add bankers in that space as well, that are out selling residential mortgages, home equity has been really strong for us, and small business. So I think as we think about our opportunity for low to mid-single-digit growth here on the loan front, I think the reality is, yes, the first quarter is normally sluggish for us. I think we're starting to see the pipelines build. And generally speaking, the back half of the year is kind of where we start to see it typically play out, if you will. But again, all signs point to that at this point. So we still feel like that's a pretty good-range estimate. Matthew Breese: Got it. Okay. And then 2 others for me. One, just focusing on the resi loan category. What's the current breakdown between loans being sold into the secondary market versus held for balance sheet at this point? And when do we start to see that portfolio -- is that a growth category for you or more one that we should think about as stable? Michael Archer: Yes. I would say overall, Matt, we're generally plus or minus 50-50, in that neighborhood. Certainly, quarter-to-quarter, it will -- can move a little bit. But generally speaking, that's kind of how we're thinking about it. I think overall for the resi portfolio, I would say we're definitely thinking about probably slower growth and more relationship-based growth, is what I would say, less just transactional, just in thinking about how we want to position our loan portfolio and balance sheet over time. Certainly, I wouldn't say our expectation is it's flat. But certainly, I don't think it's also growing at the mid-single-digit level that's in the expectation. Matthew Breese: Okay. And then last one for me is just, historically, I don't know if I remember Camden being much of a prolific repurchaser of your own stock. You talked a little bit about that in your opening comments. To what extent might that fit in on a go-forward basis? How much in the way of share repurchase should we be thinking about? Michael Archer: Yes, it's a good question. I would say that we're kind of -- I mean, we kind of talk internally about one of our challenges kind of jokingly, is we generate lots of capital and we have to put it to work, Matt. So I think just in terms of organic growth that we're focused on, positioning our capital level so we can be opportunistic as that occurs, as well as deploying in terms of share repurchase and dividend, I think that's going to play into the mix. I would say on the share repurchase front, again, I wouldn't -- I don't think I could sit here and quote a number of what we're targeting, but we'll continue to be opportunistic. The shares that we did buy over this past quarter, let's say, we saw a dip in our share price. And for us, given the valuation of that, that made sense. So I would envision that we continue to play that out a little bit over the coming quarters. But again, I think it will depend in large part on our share price. Operator: Your next question comes from the line of Daniel Cardenas from Brean Capital. Daniel Cardenas: Maybe if you could give me a little bit of color on competitive factors, both on the loan side and the deposit side, whether they've become more intense or less intense and if competition is rational. Simon Griffiths: Yes. Daniel, appreciate the question. Yes, I would say, overall, we definitely felt a pickup in competition over the last 3, 6 months. Having said all that, I think there's still plenty of room out there when we can demonstrate the tremendous value we can bring around our products, around the value of our people, conversations, advice, treasury and other capabilities. So I think it's -- the opportunities are to be had, but there's definitely a feeling that there's been a pickup in pressure and focus on assets over the last, let's say, 6 months or so. And that certainly showed up in a little bit of the pricing pressure that we've talked about. Having said all that, as I say, I do see lots of positives for the, particularly, New Hampshire and the main markets. You're seeing customers wanting to get out and invest, see great opportunities. And we're having lots of active conversations and seeing that kind of sharpen our pipelines, which is certainly in a good position, I think, heading into the second quarter. So overall, we feel well positioned. I think we're -- the talent we're bringing in as well gives us an added kind of a little bit of a tailwind there and I think gives us momentum. So looking forward to the second quarter and the rest of the year. Daniel Cardenas: Okay. And then I mean, what are your customers telling you in terms of the current economic environment? Are they becoming perhaps a little bit more cautious? Or is it more business as usual? Simon Griffiths: I would say it's a mixed picture. I would say, definitely, consumer spend remains steady. Have a stable outlook in terms of the consumer, which obviously impacts a lot of our businesses. I'd say business investment is certainly measured, but at a positive pace. I was at a business in the Midcoast recently, and they're looking to expand, not slowing expansion and certainly on the front foot. I think we're seeing that across clients. I think there's certainly some pockets of particular strength, Daniel. Certainly, areas like [indiscernible], a couple of other areas just given demographics and other kind of pieces, that we see certainly some momentum there. We don't see AI spend showing up with our customers. It's really on core capabilities, core infrastructure, capital spend that really is where the focus is. And it's a tight labor market, so that's certainly still a factor that plays in the main market, New Hampshire market. So I think overall, it's a mixed picture. Certainly, when we talk to some of our tourism-related, hotel-related kind of areas, they see a certainly decent start, good start to the year in terms of bookings and their outlook for the summer months. How that plays out, obviously, with fuel costs and other factors, is going to be an interesting play. But certainly, Maine does well. It's steady. When there's these macroeconomic pressures or other factors, Maine is always steady, down the middle of the fairway. We don't see the highs of the highs and we don't see the lows of the lows. So we see that sort of solid kind of middle ground and stability. And I think that's going to show up well this year, particularly given obviously, some of those macroeconomic concerns that are out there right now. So overall, a bit of a mixed picture, but generally, I think quite favorable, and I think looks -- sets us up for a good year. Daniel Cardenas: Excellent. All right. And then, what are line utilization rates looking like right now on your commercial portfolio? And then how does that compare to, say, 6 months or so ago? Michael Archer: Sorry, Daniel. So did you say the commercial utilization? Daniel Cardenas: Yes. Michael Archer: Yes. So we're kind of in that 35%, 40% neighborhood. And generally speaking, I know you didn't ask, but the same on the home equity front as well. Daniel Cardenas: Okay. Last question for me, just as I think about fee income growth in 2026, I know Q1 can be a little seasonally soft. But is a mid-single-digit type of growth on a year-over-year basis an achievable objective on the fee income side? Michael Archer: Yes. Yes, I think that's fair, Daniel. Simon Griffiths: I was just going to add that we have a, I think, strong wealth strategy. Obviously, there's a lot of moving parts in the fee income, and there's -- obviously, the consumer fee income is a key part of that. But just generally, we're investing in that business, both in the CFC business and the wealth business. We added a couple of key hires last year, and that's certainly building out some important markets for us. And we're seeing some nice growth. We see, particularly on the CFC side, our brokerage business, we saw some very nice growth last year. And that momentum, I think, will continue this year. And then the wealth business as well, seeing some high single-digit growth there, certainly in the first quarter, and some good momentum. So I think overall, it's a business that is going to add, of course, we have the resi business as well, which is a real core strength of Camden. So those pieces. And then we see some nice fees coming out of the commercial business as well on the swap front. So I think overall, it was a little bit of a soft start to the year. But certainly as we get into the second, third, fourth quarter, I think we can see some momentum from there moving forward. Operator: As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Simon Griffiths for any closing remarks. Simon Griffiths: Thank you for your time today and your continued interest in Camden National Corporation. We truly appreciate your support. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Alexandria Real Estate Equities' First Quarter 2026 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead. Paula Schwartz: Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Joel Marcus: Thank you, Paula, and welcome, everybody, to our first quarter earnings call. With me today are Marc, Peter and Jenna. First of all, as I always do, I want to say a thank you to our remarkable family team for their awesome efforts during a tough first quarter operating environment. And as they know well, we are motivated each and every day by our solemn mission to enable this precious life science industry, one of the most treasured and innovative industries on the face of the planet to discover and bring to patients life-saving and life-changing therapies. And how many of us, friends, loved ones still suffer from the likes of Parkinson's, ALS, pancreatic, colon, breast, et cetera, cancers, dementia to name a few. 2026, we celebrate the 50th anniversary of the DNA and biotech revolution, and we still have addressed less than 10% of human disease. The life science industry is a highly regulated industry dependent upon proper functioning of the 4 key pillars. As we've said before, strong and basic translational research is critical. There remains strong bipartisan support in Washington to fully fund the NIH. There was a great victory this quarter in the defeat of the 15% limitation on reimbursement of institutional indirect costs, which I think will be very, very well both received and implemented over the coming quarters and years. Unfortunately, August 24 (sic) [ April 24 ], the entire NSF, National Science Foundation Advisory Board was fired. Their role is science and engineering advice, kind of a shock. Leadership challenges remain at the NIH and HHS and FDA. Number two, strong innovation, coupled with open and vibrant capital markets. Obviously, we're in one of the -- maybe the greatest innovation time in the history of humankind. On the capital markets, they've been very selective. Private funding has been very solid, but deliberate and discriminating. On the public side, the markets have been open for good data and key milestones, but for most public biotechs in preclinical or in the clinic, which don't have data or milestones to finance off of, it's been a very tough slog. Number three, reliable and efficient regulatory framework, continuing effort to need to reduce time and cost into and through the clinic. The FDA progress has been sluggish. Leadership and staffing pressures have been abundant, and China continues to pressure the industry here at home. Number four, health payment and reimbursement environment for innovative medicines. CMS is actually operating quite well under the leadership of Dr. Oz, but both sides of the aisle are focused on drug pricing. And it's hard to imagine that they haven't figured out an approach to cut out the middleman, which takes 40% to 60% of medicine pricing, which would ease the burden both on the recipients of care and on the innovative drug discoverers. We get often asked about AI in all realms of all industries. And I think it's fair to say that most of you know by now, we've got 37 trillion cells in each of our bodies and AI can support but not replace physical experimentation. Biology is just way too complex at this stage. R&D cannot go fully in silico given the massive complexity of biology. And giving an example, Novartis' CEO, who just joined the Board of Anthropic said, we only understand less than 5% of human -- the functioning of the human body today. And as you know, drug development is very complex from target discovery to hit generation to lead identification to optimization to clinical trials and on to commercialization. And it's pretty clear that the authorities in this area believe AI cannot replace physical experimentation. Most current usage is still document-centric, not biology breaking. Push button drug discovery is overhyped and even native AI companies in this sector haven't proven dominance whatsoever. It's pretty clear that AI is not fully autonomous discovery, but is aimed at compressing time lines and increasing throughput and recovering lost institutional knowledge, and that is all really good. I think most experts believe that AI will have a small impact on real estate requirements and could even see the need for additional dry and wet space as they run experiments designed by AI. Moving to the first quarter, as all of you know, it was a very tough operating environment, but we made very solid progress on our path forward laid out in detail at our Investor Day. Number one was to maintain a strong and flexible balance sheet, and Marc will talk more about that. Number two is to reduce capital spend and funding needs going forward. And I think we're well on our way to refining -- or refining and reducing CapEx in our pipeline. And we've also been fortunate to sign quite a number of LOIs leading to leases, which will reduce the CapEx into the lease statistics as we go forward. Something that is a cornerstone to this year in this reset is to substantially complete a large-scale core, noncore and sales of partial interest disposition plan. We are on track even though the first quarter was relatively quiet, but we fully intend like last year to meet our goal. And I think it's fair to say, and Peter can expound on this when -- during Q&A, the transaction market for life science assets is even better this year than it was last year, and we have a high level of confidence. Four, we want to steadily improve occupancy and increase NOI focused on leasing. The pinch point in leasing has been -- this is one of our lower quarters, but we look to bounce back nicely next quarter. This is maybe the first quarter in the history of the company that I can remember where we didn't sign a single public biotech lease. So that gives you a sense of what the environment is out there. I think it's fair to say in our pre-read, we highlighted the sale, which closed during the fourth quarter, but it's emblematic of the quality and value of the underlying life science assets that we continue to hold, especially on the mega campus. Our disposition of 409/499 Illinois Street in Mission Bay received a record pricing of $1,645 per square foot, the highest ever achieved for lab asset in San Francisco. And by the way, it was 40% occupied. Fair to say that this year, what is critical for us is to continue our path forward. The mega campuses will continue to differentiate us. Our balance sheet will remain strong and flexible. We've worked on continuing to lower G&A. The quality of our assets continues to be outstanding as recognized by our tenants as well as our operational excellence and clearly a best-in-class team throughout. I think finally, fair to say that if you look at our top 20 tenants, 80% of the top 20 tenants are investment grade and -- or large-cap companies, and that's very reassuring. 55% of our total ARR comes from that. And of the top 20, we have almost a 10-year WALT, which is really great. And we have one -- I think, the longest of WALT of -- not WALT, but duration of our debt, and Marc will talk about that. And then finally, 78% of our ARR comes from our mega campus platform, which we've been working hard on. So with that kind of intro to the quarter, let me turn it over to Marc for his detailed comments. Marc Binda: Thank you, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon, everybody. First, congratulations to the entire Alexandria team for the outstanding operational execution of the steps of our path forward set forth at our December Investor Day despite a very challenging industry backdrop, including, first, outperformance on capturing leasing demand in our largest markets relative to our market share. I'll get to that later. Second, positive development and redevelopment leasing momentum with the execution of development and redevelopment leases and letters of intent aggregating 394,000 square feet. Third, focus on improving occupancy with cumulative leasing of vacant space of 1.1 million square feet that we will deliver in September on average. Fourth, continued general and administrative expense savings of $7.4 million compared to the 2024 quarterly average. Fifth, a $366 million gain associated with our unsecured bond tender, which reduced our overall debt; and sixth, significant fundraising efforts with $2.2 billion of dispositions and sales partial interest pending or identified and in process. FFO per share diluted as adjusted was $1.73 for 1Q '26, and we reaffirm the midpoint of our guidance for FFO per share diluted as adjusted for 2026 at $6.40 while tightening the range. Leasing volume for the quarter was 647,000 square feet. The decline in total lease volume was driven by the following: first, as expected, lower renewals and re-leasing space given the 657,000 square feet of key known lease expirations that we anticipated would become vacant during the quarter; and second, limited demand from public biotech with 0 leasing volume in the first quarter a segment of our tenant base, which accounts for 24% of our annual rental revenue. A bright spot for the quarter includes the positive momentum on development leasing with 118,000 square feet executed and another 276,000 square feet of signed letters of intent for existing development and redevelopment space. Looking ahead to the second quarter, we do expect an uptick in total leasing volume of around 900,000 square feet, given the early activity to date. Free rent and rental rate changes on renewed and re-leased space were under pressure in 1Q '26, which reflects the market realities and includes a 48,000 square foot lease at 40 Arsenal Watertown for a 12-year term, which was a significant contributor to the rental rate reduction of about 15% and 15.8% on a cash basis for the quarter. Alexandria continues to dominate in our largest markets. This is a really important takeaway. In our largest 3 markets during 1Q '26, we captured on average around twice the leasing volume compared with our market share of life science real estate. For Greater Boston, we captured approximately 20% of the total leases in the market, which is 153% of our market share. For San Francisco Bay, we captured 30% of the total leases in the market, which is 253% of our market share. And for San Diego, we captured approximately 67% of the total leases in the market, which is 208% of our market share. These stats highlight Alexandria's dominant brand, sponsorship, mega campus quality location and the best team in the business. Occupancy at the end of 1Q '26 was 87.7%, down 320 basis points from the prior quarter, primarily driven by the 657,000 square feet of key known lease expirations, which went vacant during the quarter. We have an additional 747,000 square feet of key lease expirations expected to go vacant in 2026 with approximately 45% of that expected to expire in the second quarter, which should put pressure on occupancy for 2Q '26. For the second half of '26, we expect occupancy to benefit from the 1.1 million square feet of vacant space that has been leased and is expected to deliver in September on a weighted average basis. We updated the midpoint of our guidance range for year-end 2026 occupancy from 88.5% to 87% or a reduction of 1.5%, which was primarily due to a reduction in the anticipated benefit from a range of several potential disposition properties, which have vacant space. Our initial guidance assumed a 2% benefit, and we now assume around a 1% benefit as we no longer expect to sell as many assets with significant vacant space. It's important to highlight that we've had good leasing interest on some of these types of properties with vacant space. Tenants continue to prioritize asset quality, location, best-in-class operations, sponsorship and brand trust, which distinguishes Alexandria as well as our mega campuses, which represent 78% of our total annual rental revenue at 1Q '26. Importantly, this has led to significant occupancy outperformance by Alexandria in the mid to high 80% range across our largest 3 markets compared to market occupancy in the mid to high 70% range for these same markets at the end of 1Q '26. Same-property net operating income was down 11.9% and 11.7% on a cash basis for 1Q '26, which was primarily driven by a reduction in occupancy. Consistent with my commentary on our last earnings call, we expect stronger performance in the second half of 2026, primarily driven by improved occupancy compared with the corresponding prior year period. It's important to also highlight that our anticipated same-property pool also had lower occupancy in the second half of 2025 compared with the first half of 2025, which all things being equal, should help same-property performance in the second half of 2026. We updated the midpoint of our guidance range for same-property net operating income from down 8.5% to down 9.5% or a 1% reduction due to a decrease in the anticipated benefit from a range of several disposition properties, which have vacant space similar to the dynamics I described for the change in occupancy guidance. Despite the current challenges in the life science real estate market, we continue to benefit from a very high-quality tenant base with 55% of our annual rental revenue coming from investment-grade or publicly traded large-cap tenants, long remaining lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases and strong adjusted EBITDA margins of 66% for 1Q '26. We continue to focus on one of the pillars of our path forward, which includes the continuing successful reduction in management of general and administrative expenses. We remain on track with our guidance range of $134 million to $154 million for 2026, which represents around a 14% savings at the midpoint compared to our 2024 benchmark or about $24 million in annual savings. On a combined basis for 2025 and 2026, we expect G&A expense savings of around $76 million in aggregate relative to 2024. And our trailing 12-month G&A as a percentage of net operating income through 1Q '26 of 6% is less than half the average of all S&P 500 REITs over the last 3 years at around 14.3%. For 1Q '26, realized gains included in FFO per share diluted as adjusted from our venture investments were $18 million, and we reiterated our guidance range for realized investment gains of $60 million to $90 million for 2026. Capitalized interest for 1Q '26 was $70 million, which was down around $12 million from the prior quarter. The decline was primarily driven by a pause on construction and preconstruction activities on assets that were sold or designated for sale in 4Q '25. We expect capitalized interest to decline in the second half of 2026 due to a combination of factors, including, first, the completion and delivery of some of our current development and redevelopment projects under construction; and second, the potential for pauses or ultimate dispositions related to land, including some portion of the land with real estate basis averaging $1.2 billion with preconstruction milestones in August of 2026 on a weighted average basis. We reduced our guidance for capitalized interest by $5 million at the midpoint of our range with a corresponding increase to interest expense due to anticipated earlier completion of certain construction and preconstruction milestones and pauses related to several projects in the second half of 2026. We enhanced our disclosures for capitalized interest to highlight construction and preconstruction milestones broken down by year, including the following: first, land with $567 million of real estate basis with preconstruction milestones in April 2027 on a weighted average basis; and second, development and redevelopment projects under evaluation for business and financial strategy of $1.3 billion spread across 5 projects with construction milestones in March of 2027 on a weighted average basis. We continue to evaluate each project individually. If in the future, we decide not to move forward with these projects beyond these construction milestones, capitalization of interest for these projects would cease along with other related project costs, including payroll, which are highlighted on Page 42 of our supplemental package. We have 1.9 million square feet of projects under construction and expect it to stabilize through 2028, which are 77% leased, including around 600,000, which is expected to stabilize in 2026, which is 93% leased. We also have 1.6 million square feet spread across 5 different projects for which we are evaluating the business and financial strategy. I'll walk through the 4 largest. First, 421 Park Drive is located in our Fenway mega campus. This is a ground-up development intended for laboratory use. We expect this project to be attractive to the many nearby institutions. And the outcome for this project will depend on tenant interest, and we expect to have critical construction milestones in early 2027, which we are evaluating. Second, 40 Sylvan Road is located in our Waltham mega campus. We believe this project could be attractive to advanced technology tenants that may find certain elements of the building attractive and may not require a full conversion to lab. This project has critical construction milestones in the second half of 2026, which we are also carefully evaluating. Third, 311 Arsenal Street is located on and is highly integrated into our Arsenal In the Charles mega campus located in Watertown in Greater Boston. We are seeing good activity for this project from advanced technology users, and we recently executed approximately 82,000 square feet of letters of intent with 4 tenants for this kind of use, which increased the lease negotiating percentage for this project up to 28%. And fourth, 3000 Minuteman Road is located in our mega campus along Route 495 north of Boston. We believe this site will be attractive to advanced technology tenants as evidenced by the 160,000 square foot letter of intent we recently signed for a portion of the project. For both 311 Arsenal Street and 3000 Minuteman Road, if we complete these advanced technology leases, we may place all or some portion of these spaces into the operating pool, which may reduce operating occupancy in the near term, but more importantly, will reduce our capital needs and generate near-term revenue upon delivery. We continue to focus on our disciplined strategy to recycle capital from dispositions and partial interest sales to support our funding needs with a focus on the substantial completion of our large-scale noncore asset program in 2026. We expect land to comprise 10% to 25% of the $2.9 billion midpoint of our guidance for 2026 dispositions and sales of partial interest with core, noncore and sales of partial interest to comprise the balance of 75% to 90%. Our guidance assumes a weighted average completion date of August 2026, which is about a month later than our initial guidance provided at our Investor Day. We believe there is strong institutional interest for our core assets at a reasonable cost of capital. And accordingly, we believe that joint ventures for some of our core assets could be a significant component of our capital plan, and we expect to have more details over the next quarter on the mix of dispositions as well as the timing as this continues to evolve. Our team is making good progress with about 80% of the $2.9 billion midpoint for dispositions and sales of partial interest pending or identified and in process. We expect to make decisions on the remaining 20% over the next several months. In early December, our Board authorized a reload and extension of the common stock repurchase program of up to $500 million. Our guidance does not assume any common stock repurchases in 2026 based upon current market conditions, and we're currently prioritizing our fundraising efforts to go towards our existing capital needs before we consider future common stock repurchases. We continue to have a strong and flexible balance sheet. Our corporate credit ratings continue to rank in the top 15% of all publicly traded U.S. REITs. We have tremendous liquidity of $4.2 billion and the longest average remaining debt maturity among all S&P 500 REITs of 10 years. We have reiterated our guidance range for 4Q '26 net debt to annualized adjusted EBITDA of 5.6 to 6.2x. As expected, our first quarter 2026 leverage increased to 6.8x on a quarterly annualized basis, and we expect leverage to come down in the second half of 2026 as we make progress on our dispositions and sales of partial interest. We tightened the range of our guidance for 2026 FFO per share diluted as adjusted with no change to the midpoint of $6.40. We made a number of changes to the underlying assumptions for guidance, which were primarily driven by 2 items. First, we reduced rental rate changes and rental rate changes on a cash basis by 7% and 3%, respectively, primarily for 2 transactions, which include a 48,000 square foot long-term lease completed during 1Q '26 in Watertown to an entertainment studio user and an 81,000 square foot lease completed in April with an exciting growth stage life science company to backfill a struggling tenant located in Torrey Pines, and we continue to focus on capturing demand and meeting the market for the right tenants. Second, our initial guidance assumptions for occupancy and same-property performance included a 2% and a 3% benefit, respectively, for a range of assets that could be considered for sale during 2026. Due to changes in the mix of assets considered for sale this year since our initial guidance, we now have a smaller assumption for sales of assets with significant vacancy. Accordingly, we reduced our outlook for occupancy and same-property performance by 1.5% and 1%, respectively, to reflect an updated assumption that we hold on to more assets with vacancy in part due to good tenant interest on these types of assets. At our Investor Day in December, we provided a guidance range for 4Q '26 FFO per share diluted as adjusted of $1.40 to $1.60 with a midpoint of $1.50. We refined this range to $1.40 to $1.50, which implies a $0.05 decline at the midpoint of the range of $1.45 which is primarily related to a reduction in capitalized interest, as I discussed earlier. It's important to note that while our guidance for the fourth quarter of 2026 implies a $0.05 reduction in the midpoint to the $1.45, the midpoint for the full year 2026 FFO per share diluted as adjusted was unchanged at $6.40 and benefited from later timing on the projected timing of dispositions and sales of partial interest, which was moved back by about a month. In addition, we also provided several key current considerations on Page 6 of our supplemental package that highlight several factors that could have an impact on our results in and beyond 2026, including 1.5 million square feet of lease expirations for 2027 with approximately $97 million in annual rental revenue that are expected to have downtime and which we are closely monitoring. We remain keenly focused on executing the steps for our path forward that we established at our Investor Day, including maintaining a strong and flexible balance sheet, reducing funding needs, substantially completing our large-scale noncore disposition plan, focusing on improving occupancy and NOI and successfully managing G&A, among others. With 10,000 known diseases and limited cures and treatments, the industry has a lot to accomplish, and we continue to believe that life science companies will continue to recognize Alexandria as the market leader with the best assets in the best locations and the best on-the-ground teams to operate these mission-critical research facilities. Now I'll turn it back to Joel. Joel Marcus: Operator, let's go to questions, please. Operator: [Operator Instructions] Today's first question comes from Farrell Granath with BofA. Farrell Granath: I first wanted to address the change in occupancy guidance that you made a commentary about the consideration of those assets no longer being considered for disposition, but the disposition guidance did maintain at the $2.9 billion. So I was just wondering if you could bridge that change what other assets were maybe being considered? Is it more assets that don't have as much vacancy? Or is it land? I'm just trying to understand that mix. Joel Marcus: Yes, Marc? Marc Binda: Yes. So it was a change in the mix. As you said, the midpoint was unchanged. There were a handful of assets that we had been considering for sale that had vacancy that we've seen, in some cases, some good leasing interest from tenants. And so we ended up changing some of the assumptions to other assets that have more kind of stabilized occupancy. The ultimate mix, we gave a broader range this time around of 75% to 90% for both core, noncore as well as joint ventures. So that's really where the change in the mix will come in that component. And we should be able to have more color on what that looks like over the -- I would say, over -- hopefully, over the next quarter or 2. Farrell Granath: And my second question is about the leasing into the entertainment studio for the arsenal lease. Just curious about that type of exit opportunity of reaching the demand that's in the market and maybe being an alternative use. How much of the near-term or line of sight leasing is potentially for this alternate use versus life science? Joel Marcus: Well, yes, Farrell, this is Joel. The entertainment tenant was an existing tenant, and it was a renewal given the fact that rental rates for that type of space have come down in the area. So it seemed prudent to renew a tenant in hand rather than empty out the space and reposition it or whatever. So it wasn't a new use. It was already there. And that's an asset that we've owned for probably 20 years. But I think you see through a number, 311 Arsenal, we've had very good activity with a range of advanced technology companies where we can utilize the space at a less CapEx investment. Rental rates are not as buoyant as lab, but those represent good opportunities. So it really depends on the location, the type of space. It's hard to generalize. Operator: And our next question today comes from Seth Bergey at Citi. Nicholas Joseph: It's Nick Joseph here with Seth. Just given the FDA leadership uncertainty and NIH budget pressures, have you seen any behavioral changes on the private biotech tenant side around expansion decisions or sublease activity or requests for lease modifications? Joel Marcus: Well, on the private side, I think we've said that ventures continue to raise money and deploy that money. They've done it in a much more judicious fashion than during, obviously, the bull market run of the last decade and then kind of a rocket ship of COVID, just given market conditions and the fact that you can't -- some companies can execute an IPO, but it's pretty difficult. But overall, I think that the FDA impact to the private side is really more impactful on the public markets, but they do obviously impact the private markets in the sense of confidence in raising the money. But I don't know, Jenna, any comments you want to make? Jenna Foger: I think that's right. I think overall, FDA uncertainty as far as policy is concerned, changes. I mean, obviously, there are some things that the FDA has tried to do and announce in trying to expedite regulatory review processes and the like, which is hopefully net positive for the industry, but that's not really playing out, as Joel mentioned on the private side just yet. Public are kind of contending with that a bit more. Nicholas Joseph: That's helpful. And then just curious, any changes to the current tenant watch list relative to kind of the past few quarters? Joel Marcus: Yes, Marc, you could comment on that. Marc Binda: Yes. Look, we continue to evaluate tenants really on a kind of one by one, tenant-by-tenant basis. I will say at the beginning of the year or really at our Investor Day, I think we had identified something around $23 million. That number has crept up in terms of a reserve for wind downs or tenant failure. That number today is somewhere in that $25 million to $30 million range. And it's through a variety of -- it's a variety of tenants, both private and public biotech as well as the kind of the ancillary type tenants, the revenue kind of producing tenants that also service those types of tenants as well. Joel Marcus: Yes. I think, Seth (sic) [ Nick ], if you look at the -- just one comment on that. If you look at the current environment over the last, say, year or 2 as distinguished from historical biotech, this is the first time that companies have really more -- or owners have more aggressively, not at the public level, but at the private level, tried to combine companies or wind down companies that they feel that the opportunities for the marketplace just aren't there. And so that's just part of capital discipline and the judiciousness with which people are watching dollars, again, given tight public capital markets. So that's the big change, I think, that we've seen compared to historical. Operator: And our next question today comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: I was looking through some of the disclosure on the 2027 expirations, which were really helpful in terms of -- I think there were some added expirations coming in 2027 versus prior. I guess my question is, as we're sort of putting it all in the blender and you're thinking on a same-store basis, it seems likely that 2027 could be down similar magnitudes as 2026, given it's a pretty similar setup with the expiration level. Is that a fair way to think about it? Or just what breadcrumbs would you provide for that? Joel Marcus: Yes. So I'll ask Marc to comment, but maybe just from a topside view, I think we're not -- it's so early in the year and so much can change. Just look at what changed last year from inauguration through the year was kind I couldn't believe the impact to the industry. It's pretty clear that, number one, we can't give '27 guidance at the moment. And number two, I think we're hopeful, as you see from some of the -- if you call them breadcrumbs, but the movement in leasing, whether it be for life science or alternative advanced technology to be gaining some good foothold there. And I think that gives us hope that we can address some of these. As I said, one of our key elements to the path forward is increase occupancy and hence, NOI. So -- but Marc, any comments you want to make? Marc Binda: Yes. Just that, as Joel said, we're not ready to give guidance for '27. But certainly, you're right that there's some expirations that we expect to have downtime. But a lot of -- the ultimate answer to your question is how quickly can we lease up vacant space, lease up the developments, et cetera, to blend into an occupancy number that makes sense. And a lot will really just depend on where the industry goes and a lot of these kind of macro factors. But we'll continue to lease and I hope continue to outperform in terms of capturing the amount of demand. Joel Marcus: Yes. And a couple of examples that Marc mentioned, 311 Arsenal and 3000 Minuteman are really good examples of that where we were having chronic vacancy and figuring out the strategy that we wanted to go forward, whether it is hold and lease, whether it's reposition, whether it's disposition, et cetera. And I think just those incremental achievements this quarter have been positive. So that just gives you a little bit of the change we're seeing. Ronald Kamdem: Great. My second question was just on the dispositions. It sounds like there's a little bit of a pivot away from some of the more vacant assets. I think you said you're considering JVs now. I guess my question is, is there also a change in sort of pricing expectations? And is there any sort of market concentrations where you're seeing more or less traction? Joel Marcus: Yes. So I'll ask Peter to comment, but let me say, in general, I think any mix, and Marc has kind of given you the mixing bowl and there's a slide in the pre-supp read. It's very dependent upon traction of leasing and where we see leasing progress, especially if we can lease for lower CapEx and get quicker NOI realization, we're going to pivot on that particular asset in a positive way. That doesn't mean that someday we would hold the asset indefinitely, we might choose to sell it. But I think that's been the key driver. But Peter, just a comment or 2 on the transaction market. Peter M. Moglia: Yes. We have just found that there's a good amount of core type capital in the market that's looking for high-quality assets. So we wanted to leverage that. We have found a way to do it through JVs. But I wanted to say that it doesn't mean that our noncore asset sales would suffer through because of that. There's still a lot of people out there looking at those types of acquisitions as well. And everything that we have been marketing has been well received and does have multiple people looking at it. So we got a lot of confidence that we're going to hit our numbers despite the fact that we didn't do much this quarter, although we let people know that early. But anyway, yes, the amount of money from the core side that's coming into the market has really just allowed us to lower our cost of capital overall by doing some of these JVs. Operator: And our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: Joel, you mentioned the FDA and judicious capital markets as being some factors out there in the environment. But just what do you -- are there any other items that you think right now are impacting the demand for space? Has there been any change in sort of like the type of space folks want? Or this is just going to take a while to play out? Joel Marcus: Well, I think the pinch points are a couple of pinch points. One is the turmoil at NIH, which caused a lot of -- certainly impacted us directly in a number of markets. And now that's easing up with the limitation on the indirect cost reimbursement that the NIH was doing and then kind of the NIH going to the hill wanting a reduction in their budget, which I've never actually heard of anybody who would want to do that when the Senator or when Congress on both sides of the aisle are in favor of more or less fully funding the NIH. So that's early-stage stuff. And hopefully, that gets worked out over time. I think there's some good positives there, but leadership is a problem. I think the FDA is a huge problem. Almost every day -- there was just a release today that it looks like they may try to pull an approved drug off the market because the FDA claims that maybe there was some manipulation in data. So almost every day, you're getting a shock effect from the FDA, both at the leadership and at the core level. And I think that's very real because as people think about funding, whether it's preclinical or into the clinic, you've got to be mindful of time, cost and approvability. I think that another pinch point clearly is the capital markets. As I said, public biotech, whether they're preclinical or clinical, can't really finance unless they've got data or a milestone, and that's kind of a killer situation. Zero public biotech leases this quarter to the leading franchise is unheard of. And then I think finally, there is the China effect, which a lot of capital is flowing to China for perceived ease of time frames and cost. I think that ultimately is going to backfire like a lot of offshoring that has taken place because Chinese data is not going to be allowed without going through a pretty rigorous FDA approvability and oversight. But I think there -- a lot of people are trying to get drugs into the clinic in China and then bring them over. And so that certainly impacted, I think, space. So I think all those factors together have made it a much more challenging operating environment. But Todd Young, who's Senator from Indiana has got a bill and an effort to try to curtail some of this craziness with China. It's a little bit about how we offshore autos and steel over the last many decades and then realize that, boy, you can't do that or rare earth minerals, you can't leave them in the hands of a potential adversary. So I think there will be congressional action. It probably will come after the midterms, unfortunately, just because there's so much controversy, but I think it will happen because this is a critical industry, and we continue to lead the world, but the fact is China is a powerhouse and their government has poured immeasurable resources into this while we're kind of in disarray at the moment, which is unfortunate. But I think we'll get our act together here. Anthony Paolone: Okay. That's real helpful. And then just second one on 421 Park Drive. I just -- I didn't quite get what the considerations or what the options were as you evaluate that. So I think there's a little bit of leasing there, but I couldn't tell if there was a change of use or I just was hoping to understand that a bit better. Joel Marcus: Yes. So 421 is a state-of-the-art lab. It is -- we've sold several floors of that on a condo basis to a major institution in Boston and the rest remains for lease or for sale in the sense of a condominium kind of situation. But the NIH 15% kind of brought a halt to almost all demand, certainly in the Boston area and to some extent across the country. Now that, that has been overturned in the circuit courts and the administration has not chosen to fight it. I think the path forward there likely will be institutional leasing or sale of condominium interest. So we're waiting for that to kind of evolve. I don't think we would pivot to another use there likely. I mean it could be office from Longwood Medical Center or the Fenway. There is a huge amount of medical-related office demand there. And so that's a possibility, but we feel pretty good about the future there now that the 15% issue has kind of gone by the wayside. It will just take a little bit of time. Operator: And our next question today comes from Jim Kammert with Evercore. James Kammert: Joel and team, pardon my ignorance, what do you define as advanced technology tenants? And I'm just trying to get a sense of maybe not your tenants, but what would those industries or tenants representatively be? And what would sort of be the tenants of that sort in the market across your 3 primary Boston, San Diego, San Francisco markets? Joel Marcus: Well, a lot of that is secret sauce. So -- but let me say, I think an example, and you guys were just there at Campus Point when you did the tour with us, that campus holds -- primarily, we're delivering the Bristol-Myers West Coast Research headquarters hub. We're working -- we just broke ground on Novartis, and there's a lot of early-stage biotech there. But the campus in addition to being heavily big pharma is heavily advanced technology, 2 tenants really make up maybe 25% of the rent roll there. One is a Amazon. This is not a fulfillment or a distribution. This is part of -- I really can't say what part of Amazon, but it is a very sophisticated and research-oriented part of Amazon, and they've been there for quite a long time. And then we did a build-to-suit on that property. I think we showed you the buildings or the building, several stories of brand-new office for Leidos who does the -- they manufacture the advanced screening technology at airports, et cetera. And then we've built several floors of skiff space below that. So we consider both the Amazon use and the Leidos use as advanced technology uses. So advanced technology is pretty broad. We've been involved in it since -- I mean, we did Google, although Google is not necessarily an office -- or a lab-type tenant, although we've leased to some of their subsidiaries laboratory would be -- advanced technology is a pretty broad definition. But I don't necessarily on a public call, get into how we view this and how we're trying to position some of our spaces because obviously, it's a highly competitive marketplace. But the demand there is large and the funding there is large. James Kammert: Very helpful. And then for second question. As regards to the 4Q $1.40 to $1.50 run rate, does that contemplate at the lower end even $3.7 billion potentially capital recycling or more closer to the midpoint of $2.9 billion? Just trying to square some of our modeling assumptions. Joel Marcus: Yes, Marc? Marc Binda: Yes. Yes, sure. Yes. No, we did bring down that range, Jim, I think at Investor Day, we gave a range of $4 billion to $5.5 billion, so $4.75 billion as the average amount of basis being capitalized for 4Q '26. We brought that range down by about $200 million. So that's kind of where we expect things to fall out. Obviously, things can change, but that's our best guess for now. James Kammert: Okay, appreciate that. Operator: And our next question -- sorry. Joel Marcus: Yes, let me just say one other thing. So Jim, one thing that we've mentioned over and over is for a variety of technologies, we call them advanced, but it's a broad range of technologies. There are needs for highly secure spaces, heavy floor loading capacity, very enhanced HVAC systems, et cetera. There's a bunch of -- I think, even Hallie at quarter or 2 kind of highlighted some of that. So we're particularly interested in that kind of an advanced technology tenant, not just a, say, an office AI kind of tenant, we wouldn't really consider that in the same category. So if that's helpful, sorry. Operator: And our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess just I wanted to go back to that $1.40 to $1.50 run rate. I know you said that was sort of our best guess. But you revised the guide now a couple of times. And I guess I'm trying to figure out like at this point, is that truly the $1.40 bottom? What's maybe the biggest variable in your mind that could push that $1.40 lower? And just to clarify, is that $1.40 sort of the initial run rate going into '27? Joel Marcus: Yes. So I'll let Marc answer that, but I think you have to remember, we give you our best judgment based on facts and circumstances as we know it at the quarter end point in time. And obviously, things change a lot. I mean, imagine what happened first quarter of '26 when the leadership and nature of health and human services changed dramatically with the appointment there last year. So -- and then tariffs came shortly thereafter. So you can only make a best judgment based on this time and space. So we'll update quarterly. But Marc, you can answer the question. Marc Binda: Yes, Vikram, so yes, cap interest is one of those drivers. That's the one that drove the number down by around $0.05 from kind of the last time we updated that number at Investor Day. I mean in terms of areas that we're focused on or risk factors, I mean, the couple that come to mind is we've got to execute on the disposition plan. As Peter said, we're very focused on that and I think are feeling incrementally more confident on our ability to execute there. And then tenant wind downs can sometimes be unpredictable. That number, as I think I mentioned earlier on the call, had grown from kind of a reserve number of $23 million to something closer to $25 million to $30 million, but we've continued to work through that. So those are a couple of things that we're watching closely, but the $1.45 midpoint is our best estimate at this point from what we know. Vikram Malhotra: Okay. Great. And I just want to touch on 2 -- get your thoughts on 2 topics. One more specific, the G&A, sort of given the dispositions that you've embarked on for a while and now perhaps next 2 years, is there simultaneously maybe a relook at G&A to cut that further over the next 2 years, both sort of core G&A, but also performance-based? And then second, do you mind just touching on the topic of AI and square footage needs? There's a lot of debate on is the lab-to-office ratio changing? Is the total square footage potentially changing? But any anecdotes from your tenant base on their use of AI and what that means for future space would be helpful. Joel Marcus: So maybe, Marc, do you want to take number one and then maybe Jenna and I will address two. Marc Binda: Sure. Yes. We've been -- in terms of G&A, we've obviously been focused on really managing G&A very carefully for many years. We had a big reduction last year that had $50-plus million of savings. And we've been highlighting for a while that some of that wouldn't necessarily continue into '26, but still a meaningful improvement. Part of that has been some restructure of the comp plans. There was certainly some forfeited comp for some of the executives last year. And so we -- look, we continue to do what's right for the organization and put people in the right positions to succeed. And so we continue to make sure we got the right people on the bus, and I think we have an outstanding team. I don't know if you want to add anything else there, Joel. Joel Marcus: No, I think it was good. So on AI and square footage, I think it's fair to say that I made remarks in my commentary, and I would add to that. We haven't seen any tenant, not to my knowledge, and I've got pretty good insight into tenants across the portfolio who've come to us and said, gee, we want to reduce because of AI. We just haven't seen that, and we don't have back office space that would be highly susceptible to that. On the other hand, we haven't seen people come to us and say, gee, we're expanding because of AI, and we're ready to do that, generally. I mean those -- it's just too early, and I kind of laid out the experts view of this area, not Joel or Alexandria, but I think what I said in my earlier commentary rings true. But Jenna, from the ground -- on the ground thoughts, comments of what you're seeing there? Jenna Foger: Happy to. Hello, everyone. So as Joel mentioned, we are really not seeing material changes from AI on the ground in terms of tenant demand and the specificity of which they need in terms of lab office ratios shifting at this point, we're just not seeing it. And part of the reason why is because as Joel mentioned, we are still in superbly early innings of AI's impact on drug discovery and development. And Joel mentioned 37 trillion cells in the human body. Biology is so massively complex. And certainly, disease pathophysiology, we just don't understand it enough to apply an AI layer to make it completely autonomous. We're very far from that. So AI certainly cannot replace physical experimentation or validation in a lab. But what we are seeing, and we hope because the opportunity set is so large with 10,000 diseases and only 10% addressed, many of them with not even adequate treatment is that we hope that AI will have value in compressing time lines, increasing efficiencies and reducing costs and really recovering lost institutional knowledge. So that is kind of where we're starting to see AI take place and some of our companies are fully starting to incorporate AI into lab workflows in this lab in a loop type fashion, where they'll generate in silico knowledge and then they will test it in biological systems within the lab. So again, as far as AI's impact -- and we cannot reiterate this enough, in terms of AI's impact on real estate demand and also kind of in the types of states right now, it really remains neutral. Certainly, if AI really does bear the promise of allowing one company to increase the number of targeted experiments that can run at one time, lab requirements may increase. You may have some issues where you have more distributed AI going on. We just don't know yet. But certainly, we're really not seeing a shift. So we really want to get that message across today. Operator: It looks like our next question today comes from Rich Anderson at Cantor Fitzgerald. Richard Anderson: I'll keep it to one question as we're getting long here. A while back, someone asked -- I think it was Ronald who asked about lease expiration activity in 2027. You rightfully said you do not given guidance at this point, but there is, call it, $0.55 of annual revenue related to that 1.5 million square feet. Is it prudent in your mind to -- for us to be assuming the entirety of that $97 million gets put into a delay bucket of some sort as you look to re-lease that space? Or is there progress going to be made now in front of next year such that it may not be that draconian of an event? Joel Marcus: Yes, Marc, I'll ask you to respond. Marc Binda: Yes. Rich, so yes, if you're just talking about those expirations in a vacuum, Rich, we do expect there to be downtime on those particular spaces. Look, we're making good progress. And I think we identified something like 35% or 36% of that, that we've got kind of early negotiations on. So obviously, we're going to try our best to beat the amount of downtime that we guided to there and to try to get revenue as soon as possible. But also, as I said, that also doesn't consider all the other things that we're focused on. Obviously, we're focused on filling vacant space today, in particular, kind of some of these developments with the alternative use as Joel mentioned, and trying to convert things to revenue as soon as possible elsewhere in the portfolio to make up for that, but TBD. Richard Anderson: Okay. Yes. And just real quick for you, Marc. The assets that you are no longer selling that are -- that have some vacancy to them, you're holding on them because you're seeing some leasing success. Is that a result of just the market coming towards you? Or is that a change of strategy for these assets, maybe bringing in tech type tenants? What has changed the narrative on those assets, whereby you're thinking about holding on to them now whereas before you were considering selling them? Marc Binda: Yes. Look, I can give you one example of a property that we had considered as a potential to be sold in San Diego. And Joel kind of alluded to this earlier, if there was ability to get near-term revenue and put in a reasonable amount of capital, we would certainly consider that. And the asset I'm thinking about was a big asset. It was 160,000 feet, and we've got somebody looking at that very closely right now. And it's a nice asset. So I mean, it's really a consideration on an asset-by-asset basis. We didn't -- it wasn't like we just kind of said, okay, well, let's just sell less noncore assets. That wasn't the case. It was really asset by asset, those assets that needed a lot of capital or were, in our minds, noncore kind of not really associated with the mega campuses were definitely assets we're continuing to look to sell if it makes sense. And in some cases, when we saw good activity, we decided to pivot on those. Richard Anderson: Okay. Fair enough. Joel Marcus: Yes, Rich, another good example would be -- and it's in the list or has been in the list over time of under business and financial review, the Minuteman assets north of Boston, we signed a pretty big LOI there. And so that inherently changes less CapEx and quicker time to delivery. That then changes your calculus on what you want to do with such an asset. So it's very driven by -- and in one case, there's life science use. In another case, it's advanced technology use. So it's not one use per se, it's -- really depends on the market. Operator: And our next question today comes from Wes Golladay of Baird. Wesley Golladay: We're now about 5 years past the COVID boom where tenants were funded on weaker science, and you did call out aggressive wind down. So just curious where are we at as far as winding down these COVID era tenants, are we in the late innings? Joel Marcus: That's a hard question to answer the way you framed it. I wouldn't call it COVID era tenants per se. I mean, I think -- and maybe you're just referring to companies that got formed on the prospects of a really super buoyant market or something. But so many of these are really probably too much money flowed to too many deals and -- both on the public and private side so some of those naturally get wound down along the lines that you talked about. But in today's market, the wind downs come from other things too, the recognition that, okay, we're going after a particular disease and it turns out somebody just hit a huge milestone. We feel we can't be first-in-class. We're going to be a follower and do we really want to put -- if I'm a venture person, put our money into that, that's not a frontline therapy. So that's a calculus that comes into a lot of this as well or particular issues with you're seeing side effects or you're seeing this or that. So it's complicated. There are a lot of different reasons, not just, gee, we went after a -- or we just took advantage of kind of silly money during COVID times, and now we're just unwinding it. So it's more complicated than that. Jenna Foger: So I would add I would just add one thing to that. I think Joel's exactly right, it's not that there's a flushing out of COVID companies per se. It's in a capital constrained -- a continuous capital constrained environment where the cost of capital is high, Boards and investors on both the public and private side are being that much more judicious about where they're spending their capital. And if companies don't have a strong line of sight on milestones or certainly they miss those milestones, investors have to make decisions about where to allocate their capital. And so in this environment, that is really what is creating the decision-making of we may wind down a company or we may contract in terms of capital allocation. It's not necessarily all these companies are built over COVID, and now they're being flushed out. Wesley Golladay: Okay, I appreciate that. Joel Marcus: That's a great point. Wesley Golladay: And then you did make the comment about no leases with public biotechs, but maybe you can talk about the pipeline? Are people touring that are public biotechs and are they just a little hesitant due to the macro environment? Joel Marcus: Yes. I think that's probably a 1 quarter blip because I suspect we'll be back there during the second quarter with positive leasing, but it just goes to show that we've never seen that before. And as I say, that's a combination of a lot of factors that I've mentioned. But I think it's a 1 quarter blip. But still, the -- if you look at overall ARR from public biotech compared to the demand, that sector -- and we've said this continually over the last couple of year -- quarters and years, that's the one sector that's most obviously lacking in demand. And the primary reason is they can't -- unless you have good data or a critical milestone, you can't just go to the market and do a secondary offering just to extend your cash runway, really hard to do, both private and public. Operator: And our next question comes from John Kim of BMO Capital Markets. John Kim: On your second quarter leasing guidance of 900,000 to 950,000 square feet, I was wondering how much visibility you have on that? And if you could provide some commentary on how much of that is new versus renewal versus new development? And lastly, how big your leasing pipeline is overall beyond the second quarter? Joel Marcus: Yes. Number one, it's not guidance. It's just an indication based on activity and transaction work, and I don't think we will give any other comments on that at the moment. John Kim: Okay. Joel Marcus: We wouldn't give an indication of general direction unless we felt pretty comfortable, I'll say that. John Kim: Sounds good. On capitalized... Joel Marcus: But until things are done, they're never done, as you know. John Kim: Right. Capitalized interest, your guidance implies $58 million run rate going forward. It looks like you are going to be capitalizing about 1/3 less assets by the fourth quarter. So simple math kind of suggests it would be about $46 million by the fourth quarter. Is that math right? Is that how we should be looking at cap interest as we head into 2027? Marc Binda: Yes. John, our... Joel Marcus: Yes, we're not giving guidance for '27, but Marc will give you some framework. Marc Binda: Yes. Yes, that's right. I mean if you look at the basis today, it's north of $6 billion of basis that we're capping today. And we've said, okay, we think the second half comes down because we've got some big deliveries. There's the one big delivery in San Diego, and then we've got some assets that have got some milestones that are probably going to either be put on pause or in some cases, sold. Some of that's land. And so we gave -- in our supplemental, we gave what we think that basis under capitalization is going to be in the fourth quarter, which was that kind of $4.5 billion or $4.6 billion of basis at the midpoint of that revised range for the fourth quarter. And then we tried to give folks a sense of what -- how much basis is out there that has milestones in 2027. Some of that is land, and we broke that out very carefully in our supplemental. Some of it's land and then some of it is these -- are these kind of 5 assets that we've been highlighting that we characterized it as evaluating business and financial strategy. There are some milestones related with those assets that's in the early part of 2027 that -- those are being capitalized today. The big one is 421 Park. So -- and that will -- we don't know what's going to happen there. It will -- a lot of it will just depend on the demand and how quickly we can lease up that project. But -- so that's about as best as I can frame it for you at this point. Operator: And our next question today comes from Michael Carroll at RBC Capital Markets. Michael Carroll: Marc, I wanted to circle back on those 5 projects that ARE is evaluating for a potential change in the business strategy. Like what are the exact options here? Is it you're going to build it for a different use like advanced technologies? And then if that doesn't work, then you're going to like keep it kind of as is waiting for a better market to pursue those projects. So it's lease it as a different use or hold off until a better market. Are those the 2 options that you're analyzing? Marc Binda: Yes, Michael. So I mean, I think for most of these assets, it is considering whether we pivot away from a traditional lab use to some type of advanced technology use or other interested parties that would find the kind of the nature of those buildings very interesting for other uses other than laboratory. So that's most of the assets. 311 Arsenal Street, we mentioned we've seen some activity there from those types of uses. I think we signed 80-plus thousand of LOIs for that. 40 Sylvan, similar bucket, 3000 Minuteman, we actually did sign a big LOI for a non-laboratory use there. So the pivot -- the potential pivot there is -- on most of those assets is for other types of uses. But as Joel mentioned, we could also consider these as potential sale candidates down the road. 421 was the one that was a little uniquely different than the others, where we could consider condo interest or that asset could go office, I suppose, but it is intended to be a lab building. But all these assets are -- have -- or we've got a little bit of time here, but we're running up on milestones where we would need to make decisions or capitalized interest would turn off. And those milestones are coming up on average kind of early part of next year. Michael Carroll: Great. And then if you do change the scope of those specific development projects, I mean, could that impact your construction budget in 2026? Or is that really the $500 million, I think, that it was highlighted in the supplemental, is that more of a '27 beyond impact just because the investments for these other types of uses would be smaller investments versus life science? Marc Binda: Yes. I think we have a good handle on this year's capital plan, Michael. It would really be more of an item that could impact spending for next year. Operator: And our next question today comes from Dylan Burzinski with Green Street. Dylan Burzinski: I appreciate the commentary so far on sort of the $97 million of vacates in 2027. I guess what we're trying to figure out is it looks like excluding that amount, there's, call it, another 1.536 million square feet of lease expirations. Do you guys sort of have a good handle on that? Is that -- are those likely to renew? I guess what we're trying to figure out is like the likelihood or probability of that $97.5 million moving higher as we get closer to '27. Marc Binda: Yes. Dylan, yes, it's just a little bit too early to tell on what happens with the rest of the expirations for 2027. What we do know now is that, that 1.5 million or the $97 million of rent you referenced that those may have -- or are likely to have some downtime. So it's really hard to predict at this point what the retention rate looks on the balance. I can tell you, at least for this year, we're -- I think at the beginning of the year, at least for 2026 expirations when we carved out the kind of the key lease expirations for '26, we thought we would be somewhere in the 60-plus percent retention rate. But I really don't think we're prepared to kind of comment on where '27 is. Dylan Burzinski: That's fair. And maybe just -- and I appreciate the color on sort of the potential amount of leasing activity that you guys think you'll get done in Q2. I guess as we sort of think about beyond that, is that sort of a good, call it, 3.5 million to 4 million square feet of annualized leasing volume a good amount to sort of use as a run rate? Or -- and obviously, leasing is going to ebb and flow, but just sort of curious how we should sort of think about the pipeline beyond the next quarter. Joel Marcus: I don't think you should assume that, that is a run rate. I think we're in a different time now. So I think the run rate will evolve over time, especially given a more life science/advanced technology mix given the assets. So I don't think you could use that immediately. But I mean, historically, give or take, some amount on either side, $1 million has been a common run rate over time. Whether we get back to that as a run rate, I think time will tell. Operator: And our final question today comes from Jamie Feldman with Wells Fargo. James Feldman: Congrats on getting to the end of the call. I just wanted to take your -- the latest temperature on opportunistic capital looking at the space from the real estate perspective. I think you had mentioned JV is looking a little more interesting. Has anything changed? Or can you give us the update on whether it's global capital, whether it's domestic capital, there's a lot shifting around there in terms of the capital needs across the globe. What's the latest state of affairs in terms of opportunistic buyers into life science? Joel Marcus: Yes, I don't think we want to comment really too much on that. But Peter, you can. Peter M. Moglia: Yes. I would say that it's a combination of both domestic and international capital that is looking at these assets. James Feldman: So would you say the appetite has changed? Or it's pretty much the same? Peter M. Moglia: What has changed is over the last 2 years up until this year, there was really no money looking at core. It was all opportunistic. And for the right reasons, right? I mean we were coming -- we were hopefully bottoming out in the real estate industry and everybody was raising money based on double-digit IRRs. And that's what those funds' targets were, and that's what they had to invest in. Now we have money, how it came about, I don't know, but we have folks that are saying, "Hey, I want good quality, safer assets." And I know I can get a real estate deal that will provide a spread over bonds that I like for the risk that I'm going to take. And so now that, that money is there, and as I said, it comes both domestically and internationally, we're leveraging that to get a better cost of capital overall for our program. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for any closing remarks. Joel Marcus: Yes. Thank you, operator, and thank you, everybody. We appreciate it. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Second Quarter 2026 FICO Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Singleton. Please go ahead, sir. Dave Singleton: Good afternoon, and thank you for attending FICO's second quarter earnings call. I'm Dave Singleton, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing; our CFO, Steve Weber. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison with the prior quarter to facilitate understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many risks and uncertainties that could cause actual results to differ materially. Information concerning these risks and uncertainties is contained in the company's filings with the SEC, particularly in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the company's website at fico.com or on the SEC's website at sec.gov. And a replay of this webcast will be available through April 28, 2026. We have refreshed our quarterly investor presentation with additional content, which is available on the Investor Relations section of our website. We will refer to this presentation during today's earnings announcement. I will now turn the call over to our CEO, Will Lansing. William Lansing: Thanks, Dave, and thank you, everyone, for joining us for our second quarter earnings call. We had a very strong quarter and a great start to the first half of our fiscal year. Based on our results and outlook, we are increasing our fiscal 2026 guidance. We reported Q2 revenues of $692 million, up 39% over last year, as shown on Page 5 of our investor presentation. For the quarter, we reported $264 million in GAAP net income in the quarter, up 63% and GAAP earnings of $11.14 per share, up 69% from the prior year. We reported $297 million in non-GAAP net income, up 54% and non-GAAP earnings of $12.50 per share, up 60% from the prior year. We delivered free cash flow of $214 million in our second quarter. Over the last 4 quarters, we delivered $867 million in free cash flow, an increase of 28% over the prior fourth quarter period. In Q2, we continued returning capital to shareholders through share repurchases, buying back $605 million or 484,000 shares at an average price of $1,251 per share. At the segment level, shown on Page 6, our second quarter score segment revenues were $475 million, up 60% versus the prior year. While B2B scores were the key driver of growth, we also experienced the sixth straight quarter of growth in B2C scores. In our Software segment, we delivered $217 million in Q2 revenues, up 7% over last year. Results included 54% platform revenue growth and a 12% decline in non-platform revenue. Steve will provide additional revenue details later in this call. Last week, we issued a statement on our website in response to the FHFA and FHA update on credit score modernization. We applaud the FHFA and FHA initiative to get FICO Score 10T into the market in the coming months. FICO Score 10T is the most predictive credit score for all borrowers, including first-time home borrowers. FICO Score 10T incorporates rental and utility payment history, enabling more consumers to qualify for mortgages. To support the goal of increased homeownership and bring the benefits of increased competition to the marketplace, we updated our FICO Score 10T performance model pricing in the FICO mortgage direct licensing program from $4.95 per score plus $33 funding fee to $0.99 per score plus $65 funding fee. We anticipate the release of FICO Score 10T data and the time line provided by the FHFA and GSEs. In the last quarter, we added 11 more lenders to our FICO Score 10T early adopter program. As a reminder, through this program, FICO Score 10T is made available for free with the purchase of classic FICO. The 55 lenders in the program account for more than $495 billion in annual serviceable originations when evaluated using 2025 HMDA data and more than $1.6 trillion in eligible servicing. We're moving closer to the go-live dates of our next-generation Cash Flow UltraFICO Score with our strategic partner, Plaid and the FICO mortgage direct licensing our reseller partners. We continue to actively work alongside participants to support testing on both initiatives. As AI adoption accelerates, we recognize the need of stakeholders to weigh the associated opportunities and risks. At FICO, we view AI as a tremendous opportunity that we've committed significant resources to for several years. In the Scores business, AI is limited by strict regulatory requirements on credit underwriting outcome explainability and model governance. In addition, our scoring models are supported by proprietary data access, mainly with the credit bureaus and deep ecosystem integration. Across both businesses, FICO has been issued 137 AI-based patents, which include patents and blockchain technology that are helpful for traceable and explainable decision-making, the type of market-leading innovation that will be in high demand as businesses seek ways to safely deploy AI analytics in highly regulated industries. In our software business, as shown on Page 13, FICO Platform is architected from the ground up to be agentic-by-design. That foundation delivers decision grade analytics, deep domain expertise, and an enterprise platform that clients depend on for precision, consistency, explainability and trust. These principles are nonnegotiable for our primary target market, the highly regulated financial services industry. FICO Platform is the world's leading AI decisioning platform for financial services recognized as such as a leader by Gartner, Forrester and IDC. Its agentic architecture power is a real-time, always-on customer profile engine that delivers hyperpersonalized consumer experiences where every interaction can inform and improve the next. There are over 150 clients globally using the FICO Platform across multiple connected use cases to power their customer experience, business critical operations, risk management and fraud monitoring and prevention. FICO Platform brings together multiple functions within an enterprise in a common operating environment and enables them to operationalize AI at scale to drive real business outcomes. Financially, a substantial majority of our nearly $315 million platform segment annual recurring revenue is driven from FICO Platform. Financially, a substantial majority of our Platform segment annual recurring revenue, approaching $350 million and growing rapidly is driven by the FICO Platform, reflecting years of proven commercialization. FICO transformed 70 years of proven deep domain knowledge into validated expandable AI that powers the most consequential business decisions with that expertise embedded directly into the agents, models and guardrails that operate on the platform. Fico Platform accelerates client innovation by providing clients with the ability to build, test, optimize and monitor decisioning across the enterprise. With FICO AI-guided operations, clients create a self-reinforcing cycle of value generation, reinvesting outcomes back into the platform by enabling additional use cases, driving further value for their businesses. FICO Platform's marketplace and FICO Assistant unlock broader capabilities that compound with scale. Every new model, agent and integration from the ecosystem strengthens the customer profile engine and accelerate consumption of proprietary capabilities across the platform. At FICO, AI is already driving meaningful results today while creating significant opportunities that we are well positioned to capture. I'll now pass it back to Steve to provide further financial details. Steven Weber: Thanks, and good afternoon, everyone. As Will mentioned, our Scores segment revenues for the quarter were $475 million, up 60% from the prior year. As shown on Page 16 of our presentation, B2B revenues were up 72%, primarily attributable to higher mortgage origination scores unit price and an increase in volume of mortgage origination. Our B2C revenues were up 5% versus the prior year, driven mainly by our indirect channel partners. Second quarter mortgage originations revenues were up 127% versus the prior year. Mortgage originations revenues accounted for 72% of B2B revenue and 63% of total Scores revenue. Auto originations revenues were up 13%, while credit card, personal loan and other originations revenues were up 6% versus the prior year. For your reference, Page 17 of our presentation provides 5-quarter trending of our scores metrics. As in the past, our updated guidance assumes conservative score volumes. And to reiterate, we do not anticipate share loss competition in any vertical. Turning to our software segment. Our software ACV bookings for the quarter were $28 million, as shown on Page 18 of our presentation. On a trailing 12-month basis, ACV bookings reached $126 million this quarter, an increase of 36% from the same period last year. With our strong pipeline, we expect bookings in the second half of the year to exceed the first half of the year. Our total software ARR, as shown on Page 19, was $789 million, a 10% increase over the prior year. Platform ARR was $349 million, representing 44% of our total Q2 '26 ARR. Platform ARR grew 49% versus the prior year, while nonplatform declined 8% to $440 million this quarter. Platform ARR growth was driven by both new customer wins as well as expanded use cases and volumes from existing customers. Platform ARR growth includes the onetime Q1 liquid credit solution migration and Q2 CCS migrations from non-platform to the platform. Excluding those migrations, our platform ARR growth was in the mid-30% range. The non-platform year-over-year ARR decline was driven by migrations, end-of-life products and some usage declines. In our CCS business, which contains both platform and non-platform, ARR growth was relatively flat. Our dollar-based net retention rate in the quarter was 109%. Platform NRR was 136%, while our non-platform NRR was 90%. Platform NRR was driven by a combination of new use cases and increased usage of existing use cases. Second quarter software segment revenues detailed on Page 20 were $217 million, up 7% from the prior year. Within this segment, our SaaS revenues grew by 19%, driven by FICO Platform. Our on-premises revenue declined 4%. Year-over-year, our platform revenues grew 54%, driven mainly by the success of our land and expand strategy. Non-platform revenues declined 12%, driven mainly by migrations. As a reminder, our FY '26 revenue guidance reflects an expectation of lower point-in-time revenue throughout FY '26 due to fewer non-platform license renewal opportunities compared to the prior year. From a regional point of view, 90% of total company revenues this quarter were derived from our Americas region, which is a combination of both our North America and Latin American region. Our EMEA region generated 7% of revenues and the Asia Pacific region delivered 3%. Operating expenses for the quarter, as shown on Page 21, were $289 million this quarter versus $278 million in the prior quarter, an increase of 4% quarter-over-quarter, driven by personnel expenses. We expect operating expense dollars to trend modestly upward from the Q2 run rate into the back half of the fiscal year, driven mainly by personnel expenses and marketing for both FICO World and our Scores business. Our non-GAAP operating margin, as shown on Page 22, was 65% for the quarter compared with 58% in the same quarter last year. We delivered year-over-year non-GAAP operating margin expansion of 712 basis points. The effective tax rate for the quarter was 25.7%, and we expect a full year operating tax rate of 25% to 26% and an effective tax rate of around 24%. At the end of the quarter, we had $272 million in cash and marketable investments. Our total debt at quarter end was $3.64 billion with a weighted average interest rate of 5.5%. This includes the March issuance of $1 billion in senior notes due 2034, which used some proceeds to fund the redemption of $400 million in senior notes that were due in May. As of March 31, 2026, 93% of our debt was held in senior notes. We had $265 million balance on our revolving line of credit, which is repayable at any time. We anticipate interest rate expense dollars to trend modestly upward from the Q2 run rate into the back half of the fiscal year. As Will highlighted, we continue to return capital to our shareholders through buybacks, as shown on Page 23. In Q2, we repurchased 484,000 shares for a total cost of $605 million, representing the single largest quarterly repurchase in dollars in FICO history. We continue to view share repurchases as an attractive use of cash. With our recent $1.5 billion Board authorization, strong free cash flow and unutilized revolver, since April 1, we have bought an additional $170 million or 164,000 shares at an average price of $1,040 per share. And with that, I'll turn it back to Will for closing comments. William Lansing: Thanks, Steve. As we approach the start of FICO World 2026, which is going to happen on May 19 through the 22nd in Orlando, we look forward to showcasing our continued innovations. The event brings together customers and partners from around the world to explore how real-time scalable decision-making is transforming consumer engagement. We remain focused on enabling deeper customer relationships through always-on personalization that drives strong business outcomes. The conference also provides a forum to connect with industry experts, share best practices and advance initiatives that drive financial inclusion. We had a great first half of our fiscal year, and I'm pleased to report that today, we are raising our full year guidance as we enter the third quarter. As shown on Page 24 of our presentation, revenue guidance is now $2.45 billion, an increase of 23% versus prior year. GAAP net income guidance is now $825 million with GAAP earnings per share of $35.60, an increase of 27% and 34%, respectively. Non-GAAP net income guidance is now $946 million with non-GAAP earnings per share of $40.45, an increase of 29% and 35%, respectively. With that, I'm going to turn it back to Dave, and we'll open up for Q&A. Dave Singleton: Thanks, Will. This concludes our prepared remarks. We're now ready to take questions. Operator, please open the lines. Operator: [Operator Instructions] Our first question is going to come from the line of Jason Haas with Wells Fargo. Jason Haas: I'm curious to start, Will, if you could talk about the philosophy behind adjusting your pricing model going to the $0.99 upfront. I appreciate some commentary. William Lansing: Yes, absolutely. So that's a step in the direction we've been talking about now for several years. I mean we have historically charged upfront for score. That's the historical way we have always charged for our IP. But what that does is it doesn't spread the cost across the rest of the value chain. And so a lot of the beneficiaries of the IP are not really paying for it. And so we have that cost concentrated upfront. The whole idea behind moving to the performance model was to give us more flexibility so that we could distribute the value -- the monetization of that IP over more players across the chain. And so that's really what we've done. In this most recent move to $0.99 plus a $65 funding fee, the idea was to encourage adoption of FICO 10T because we think that the most powerful thing that we can do is really get FICO 10T established. And obviously, it's already established in the non-performing market, but we'd really like to encourage wide use of 10T. And so this kind of pricing is designed to encourage that. Jason Haas: Great. That certainly makes sense. And then now that VantageScore is available to be used on the conforming mortgage market, do you expect -- what percentage of lenders do you think would shift fully away from FICO to just using VantageScore? Or do you see most lenders, if they are going to use VantageScore, do you see them also pulling FICO during the mortgage process and then submitting the score ultimately that's most favorable to them to the GSEs. William Lansing: I suppose we'll see how it turns out. But if you think about the decision process for those who purchase scores, if they're after the most predictive score, 10T is the answer to that. If they're after price, then I think we have parity, 10T at $0.99 is at parity with Vantage at $0.99. And so on both predictability and price, we think we're highly competitive and frankly, don't see good reasons to switch. Now depending on how the FHFA decides to handle the gaming problem, there may be opportunities for Vantage based on the gaming. And so we'll just have to see how that unfolds. Although our analysis suggests that in a gaming scenario, if there's true consumer shopping for the best rate and the system is going to be gamed in that way, that originators and lenders would wind up pulling both scores. Operator: Our next question will come from the line of Manav Patni with Barclays. Manav Patnaik: Will, for the 10T adoption, obviously, that $0.99 is only available through the direct loan model that you have, DLP model. Can you give us an update on when that's going live, what the feedback right now is with lenders and kind of adoption that you expect there? William Lansing: Yes, absolutely. So there's a few pieces to getting the direct license program live, and they're mostly in place. We're working on the last kind of final details now. So we have 3 of the top 5 major resellers signed up. We are in deep discussion with the other 2 and fully anticipate that all 5 of the big resellers will be able to provide the direct license program. We also see a great deal of interest from the lender community for this performance-based pricing model. So there's a pent-up demand, and we anticipate quite a lot of usage of this model once we get direct up and running. We do still need FHFA final sign-off on having the resellers calculate the score. But we don't anticipate any issues there because the math is identical and the score we've tested and the score calculated by the resellers is the same score as that calculated by the bureau. It's on the same data. It's the same methodology. So although I can't give you a date, I can tell you that we're closing in on it. Manav Patnaik: Okay. And then just in terms of the historical 10T data coming out sometime in the summer, maybe just some help on how that process works? Like will there be another pilot like they're doing now with VantageScore once 10T is out and we're only looking for something realistically in 2027 for both to be ready to go fully live, I guess? William Lansing: Well, the FICO 10T data, as you know, is with the FHFA and the GSEs, and it's up to them to decide when to release it. There's certainly a lot of market sentiment for being able to evaluate 10T and Vantage at the same time. And certainly, by the time the GSEs accept -- truly accept Vantage, I think the market would like 10T to be available as well. So there's some market pressure to get this done, but I don't have the time line. Operator: Our next question will come from the line of Simon Clinch with Rothschild & Co Redburn. Simon Alistair Clinch: Well, I was wondering if you could just cycle back to the question. I think it was Jason asked about the pricing of 10T. And your comments that it's at parity VantageScore. I was wondering if you could talk about the philosophy or like how you think lenders will treat the success fee in that kind of situation and how we should think about that dynamic in that sort of comparison? William Lansing: Well, I think the beauty of the way we've structured this is that mortgage originators and lenders have a choice. They can continue to buy the score the way they always have on a per square basis or if they prefer, they can move to the $0.99 plus funding fee. And the idea there is that it encourages very widespread use of the score in the prospecting phase, in the customer acquisition phase and figuring out who's qualified for a mortgage. And frankly, with the goal of trying to encourage more housing and more mortgages, making the upfront score cost very low is likely to support that. And so it really is up to the lenders, which model they prefer, and we leave it to them. We are -- I've said before, we're largely indifferent as between the 2 models because it's about revenue neutral for us either way. But I think that each model meets the needs of different customers for the score in different ways. Simon Alistair Clinch: Understood. And just as a follow-up to the reseller readiness right now. I mean, I understand we're getting close to go live to come into place. A bit -- I would love to get a bit more color on is just, I guess, sort of what has -- relative to initial sort of expectations, it feels like it's taking longer than expected. And I was wondering if you could talk about sort of what has been behind some of the prolonged process here. William Lansing: I think that some of the expectations were a little on the optimistic side. We certainly didn't think it was going to happen in a couple of months. We thought that it would take a while to put this together. It's a pretty complicated program, not a complicated program, but it's -- there's enough moving parts that require validation and testing that we knew it was going to take some time. This much time, I would say, we actually believe that it would be up and running by now. I would say that we're close and as I said earlier, it's really up to the FHFA to sign off on the calculation of scores by the resellers and then we're pretty much there. Operator: Our next question comes from the line of Surinder Thind with Jefferies. Surinder Thind: Well, just following up on the timing of 10T. Just to understand, is there a sequence of dependencies before the FHFA kind of makes it available in the sense of like releasing the historical data. Obviously, you got to have the systems and everything ready. But are there other things that we should be aware of? Or is it just kind of once the systems are ready, they can release it, whether or not the historical data is available? William Lansing: No. I would say that there are not a bunch of additional things that no one knows about. I think we have to get the 10T data out so that people can test it and then the GSEs have to accept 10T, and that's it. That's all that's required. Surinder Thind: Got it. And then in terms of just switching away. Can you maybe talk a little bit about the outlook for expenses here. I noticed you talked a little bit about incremental scores, marketing expense what should we expect there? And then other than kind of the step-up that's related to the annual FICO World Conference. Steven Weber: Yes. I mean it's not all that material. I mean there'll be some expense. I mean it's not I think you can kind of back into it when you look at our guidance numbers, but it's not all immaterial. But we've got some -- there's some additional personnel expense. We got expenses around FICO World. There's some other types of marketing we're doing. When you see more growth on the software side, that comes at a -- that's not 100% margin either, right? There's cost of goods sold. So you're going to see some expenses there. But none of it's all immaterial. Operator: Our next question comes from the line of Faiza Awa with Deutsche Bank. Faiza Alwy: So first, I wanted to ask about the very strong growth that you saw in mortgage revenue this quarter, up 127%. I think we know about your pricing but it implies pretty strong volume growth. So I'm just curious if you can talk a little bit more about some of the factors there. Steven Weber: Yes. I mean we had decent volume growth. I think it was a pretty good quarter. There was a period of time that where interest rates dropped a little bit. We saw a little bit of an uptick here and I think it's consistent with what you hear from the bureaus as well. So it was a decent volume quarter, probably better than we expected when we gave our guidance. But again, we guide very conservatively because it's really difficult to know what those numbers might be. Faiza Alwy: Okay. Understood. And then just on the software side of the business, again, pretty strong bookings, really strong ARR growth on the platform side. So again, give us some context in terms of what you're seeing there? Are you seeing higher [indiscernible] and I have noticed that you alluded to growth or maybe focusing outside of financial services. And I'm curious if you're sort of thinking your approach there at all? William Lansing: I would not say that moving to other verticals is driving the growth. It's really primarily in financial services. And it's across a wide range of use cases. And we continue to have success. And the model that we've been experiencing just continues to be strong, which is a financial institution will adopt the platform and make it the kind of the heart and soul of the way they interact with their consumer customers and then discover just how powerful it is and then get more utility out of it, the more use cases they put on it. And so it's the land and expand strategy, which we have for that business is working really nicely. And the customers have tremendous satisfaction, and that's driving the growth. Operator: Our next question will come from the line of Jeff Meuler with Baird. Jeffrey Meuler: From an earlier question, it sounds like the answer may be TBD depending upon what FHFA decides to do. And I don't know, do we have to wait for the selling guidelines. But the question is, what's your understanding? Because I think the language is the enterprises cannot accept scores from multiple models. But have they said anything about if an underwriter can pull scores from multiple models earlier in the process? Or is that waiting for the selling guidelines to know the answer? William Lansing: I think that's waiting on the selling guidelines. I mean I can't speak for the GSEs on that. Jeffrey Meuler: Okay. And then do you have any sense of what went into the approval process of the 21 initially approved lenders for Vantage 4.0. Were they asked to apply by FHFA? Is there any sort of like commitment, how intensive of a process it is? Just trying to figure out if that's a meaningful signal or not. William Lansing: We don't really have a lot of detail around that program. Obviously, we weren't invited to be part of it. And so we just don't have the details. It remains to be seen what happens there. Our understanding is a fairly manual process. Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I know you just announced the FICO 10T pricing, but I just wanted to understand what's your pricing strategy over the midterm? Is there still a gap between price and value and as you think about it, how do you think about closing that gap? Would you also consider alternative pricing algorithms, including a percentage of the loan amount for the success fees. So any color there? William Lansing: As you know, we've talked about a lot of different approaches to pricing for our IP. And those are under constant evaluation and study. And the balancing act is, we don't want to shock the market. We don't want to make precipitous changes. In fact, we don't love change. We -- the market works really well the way it is today, and so we don't like change. That said, there is a case to be made for low pricing upfront. There's a case to be made for shifting around the monetization of the IP across more than just the first purchaser. And so we're always evaluating those kinds of things. Our philosophy has not changed. What you see is the first couple of steps in the direction of what we've been talking about for several years now. Ashish Sabadra: That's very helpful color. And then maybe just on the VantageScore LNPA grids, FHFA mentioned that they are taking into account proper credit risk accounting in order to make sure -- and that's why those matrices are different compared to FICO. I was wondering as based on your experience, what are the key credit risk that they would consider when they are designing these matrices? And why should FICO or FICO 10T get a preference? William Lansing: Well, so again, I can't really speak for the way the GSEs are thinking about it. But what we believe is that in these LLPA grids, if you're going to account for risk, there's going to be price differential. There's going to be gaming that goes on. What kind of risks might be accounted for? I don't know how they account for them exactly, but certainly, you could have very different credit default risk for Vantage versus FICO. You could have very different prepayment risk for Vantage versus FICO. As you know, Vantage only goes -- the Vantage data only goes back to 2013. It's never been tested through a full cycle. And so there's a lack of understanding, not for want of trying, but there's just -- the data is not there to understand how Vantage will operate through a full cycle. And so I'm not really sure -- what does that mean? It means that downstream, investors are going to demand some kind of a premium for the lack of understanding around the prepayment risk and default risk. How that gets translated into the LLPA grid, the G fees, hard to say. And then because the pricing will be different for FICO and Vantage, and we guess that sometimes Vantage will have better pricing for consumer and sometimes FICO will have better pricing for consumer. It's going to create some real headaches for the GSEs. So we'll see. We'll just have to see how they solve that problem. Operator: Next question will come from the line of George Tong with Goldman Sachs. Keen Fai Tong: With the direct licensing program, it sounds like you're awaiting FHFA approval. Are there other implementation hurdles they have to overcome among the top 3 resellers that have signed up so far? And can you talk about why the remaining 2 out of the top 5 are taking a bit longer to sign up? William Lansing: I would say that there are not other factors, nothing meaningful. So we're really just waiting on approval from the PSCs and from the FHFA. And then in terms of the 2 that haven't signed, I can't get into the details, but we're very close. Keen Fai Tong: Okay. Got it. And then with respect to your outlook, can you elaborate on what assumptions are baked into your full year guide with respect to VantageScore adoption, the timing of the direct licensing model going live and performance fee adoption? William Lansing: Yes. We anticipate no loss of volume to Vantage in this fiscal year. That's in our -- that's assumed in our guide. We are -- as I said earlier, we're in roughly the same place financially, whether they go with the per score model or the performance model. So it's revenue neutral. There's a little bit of a timing difference because with the performance model, the funding fee would trail the initial fees. So I mean there's some minor differences, but I would say on balance, it's pretty close to a wash between the two. So it doesn't really matter when the adoption occurs. I suppose you could argue that if the adoption of the direct license program is delayed, that's beneficial to FICO in the very short term from a timing standpoint, but we don't think about it that way. Steven Weber: Yes. And we do have some lag built into the guidance based on the assumption that performance model will go live, and we'll have some revenue that's pushed from late this fiscal year and early next fiscal year because again, that the [indiscernible] timing cost described... Operator: Next question is going to come from the line of Alexander Hess with JPMorgan. Alexander EM Hess: Could you start with the 127% year-on-year growth in mortgage? I understand that your rack rate is widely known. Layer on top of that volume assumption is still a bit below. So maybe were there any prior year pricing adjustments have feathered into the present fiscal year. Just anything that might have given that an extra booster is this sort of the rate you guys think you can continue at these volume levels? Steven Weber: Yes. I mean not really. I mean there might be some difference in the unit cost. I mean there's some without getting to a lot of detail that some people are on a little bit lighter rate last year, and we're up to the full wrap rate this quarter. But it's primarily just the new rate and then the additional volumes we saw. Alexander EM Hess: Got it. And then maybe shifting to usage of the FICO score overall. I know there were some remarks about stepping up expenses for the Scores business, introducing the new version of UltraFICO. If you could just talk about your investments in innovation in the Scores business and how that sort of benefits the franchise you guys have there? That would be super helpful. William Lansing: In the scheme of things, the investments and incremental expense is not large, okay? I mean, just to be really clear. That said, we are constantly investing in innovation, developing new scores. UltraFICO is -- although we've talked about it for several years, it is very much on our minds, and we have a plan, which we're going to talk about at FICO World next month. But I can't go into the details now, but UltraFICO is likely to be a pretty significant factor in the Scores business in the future. Operator: Next question is going to come from the line of Kyle Peterson with Needham. Kyle Peterson: I wanted to just start off on software. The platform growth remains really impressive. Bookings are really good. I know the non-platform was kind of ran off maybe a little faster than we expected in the second quarter in a row. But I guess should we expect this trend to continue where the platform growth is accelerating, the non-platform is running off? Or do you think it will kind of return to flattish non-platform and historical platform growth? Just I guess, the moving pieces there would be helpful. William Lansing: It's a good question, Kyle. And we've talked about this in the past. There's -- we have the platform growth, which comes from selling the platform often to customers -- generally to customers we already have, but not necessarily for the same things that they've been doing with us on the legacy side. And so there's new growth in platform, which look like new deals with customers that we know and occasionally with customers that we've never met before. And then there's migration from our legacy applications to platform. And I would tell you there that we are not forcing that migration. We're not even really encouraging that migration because we have our hands full with the growth in the new platform. And so we really leave it to the customer. It's the customer's choice. If the customer comes to us and wants to renew for 3 more years, a legacy application that is working extremely well for them, we are all for it. And it's a highly profitable business for us, and it's good. If they're ready to make the move, we're happy to help them make the move. And so we work on that, too. I think there is a balance there. I think there at some level, there's a bit of migration that happens from the legacy business to the platform business. And so that would explain higher growth on the one side means a little bit lower growth -- a loss of business on the legacy side. But I wouldn't say it's a huge factor. I just think that the two are kind of in balance at this level now. We're not pushing it with our thumb on the scale one way or the other. That may change in the future. But for now, we're very happy with the growth on the platform side. Kyle Peterson: Got it. That's helpful. And then as a follow-up, I wanted to switch over to auto origination Scores revenue. I guess, it did decelerate a little bit this quarter. Obviously, I think the comps are getting tougher, but I want to see at least directionally, if you guys could give a little bit more color on what drove the year-on-year detail between tougher comps, pricing changes in calendar year '26 or any changes in origination volumes or trends that you guys are seeing? Steven Weber: It's really the tough comps. The volumes are not growing as rapidly as they were. The pricing is relatively consistent. The '26 price increase is consistent with '25. I think what you see is that the comps are difficult, and there's probably a little bit of mix shift there in terms of the pricing tiers that some of the lower unit cost pricing tiers have gained the volume from those that are higher unit costs. So there's some of that happening in the auto industry in general. Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Craig Huber: We've talked about this in the past, but can you just update us on your understanding, what's the data show you in terms of what the market share out there is for VantageScore in credit cards, autos, personal loans, and also nonconforming mortgage loans. What's their market share right now and we'll go from there. William Lansing: I guess it all depends on how you measure it because if you ask them, they would tell you they have significant market share and all those things. Near as we can tell, nobody is paying for VantageScores and the bureau send along the VantageScore for free when someone buys a FICO score. So when you see the big VantageScore volumes that Vantage talks about, you should know that they're largely unpaid for. So are they -- is anyone using them? I don't know. Is anyone paying for them? Our sense is not much and so it's pretty hard to triangulate on what their market share is. I mean I think it's trivial is what I would say. Steven Weber: And I think you see that in our numbers, right? I mean if there were -- we were losing market share, you'd see it in our numbers, and you don't see any that. We have to report our results or audited. They don't have that same obligation, so there's a lot of scrutiny on what we produce, and we back it up with actual numbers that are verified. Craig Huber: So just to be clear, if you had a ballpark, you think it might be 5%, 10% market share? Maybe it sounds like not even that... William Lansing: Ballpark, I would call it 2%. Craig Huber: Okay. So then on the nonconforming part of mortgages, you're saying probably the same thing, right, roughly that... William Lansing: No. On the nonconforming part of mortgages, they don't particularly any care at all. Just to be really clear, in the nonconforming market, the lenders use FICO Classic and they use FICO 10T, and they don't use Vantage. Craig Huber: So what's -- all the worry out there about AI, put that aside for a second, all the worry out there that VantageScore is going to take significant share just because of the changes from the government standpoint. The rest of the market here is -- you guys have been -- VantageScores have been going up against FICO for 20 years, right, since 2006. You're telling me it's roughly 2% market share, give or take. William Lansing: We don't know. No one know. Craig Huber: What's going to change, though, but what's going to change here on the conforming mortgage side of things here that they're going to get significant market share. I mean that's the theory out there for a lot of people. What's the case there that you can possibly see? William Lansing: Look, I am not going to make the case for how Vantage takes market share because I think we're competitive on price. We are far more competitive on predictiveness. We have a better score than Vantage. There's not a good reason for them to take any share at all. Craig Huber: Okay. Let me just -- my final question and is why did you lower the upfront fee down to $0.99 from $5 then? William Lansing: Two reasons. One is to be competitive with Vantage and to have a low entry point and encourage widespread use of the score and second, to encourage adoption of FICO 10T. A pretty classic approach to launching a new product is to price it so that people use it. Craig Huber: But again, you're not worried at all that Vantage is going to take any meaningful share from you on the conforming mortgage side, right? That's what you're saying? William Lansing: That is correct. Operator: Our next question comes from the line of Ryan Griffin with BMO Capital Markets. Ryan Griffin: I'm just wondering if you have any feedback to share from the securitization market in terms of reference in light of... William Lansing: Everyone has done their own market checks, and we have to. And I would say that the securitization market is not ready to accept Vantage. It's -- there's some hurdles to be overcome. And so we'll see how that all unfolds. I don't have a lot of insight there. I mean the market is still all FICO. I think something like 20 mortgages have been securitized with VantageScore paper and -- which is obviously less than 1%, less than 0.1% of the most recent securitization. So it's not real yet. We'll have to see how the market reacts. Ryan Griffin: And I know we're getting some data released over the summer from the GSEs. I was wondering what you're expecting that relate the tail and how you think it might validate the predictiveness in FICO? William Lansing: Well, I think that I can't give you a date for when the FHFA will release the FICO 10T data to the marketplace. But we're certainly not standing in the way. We provide the data and we're ready to go. In terms of validating the predictiveness, we have white papers posted on our website that actually analyze FICO 10T versus Vantage and provide insights on credit default risk and prepayment risk and the differences. We qualify 5% more borrowers. I mean there's a lot to see there. That's already been done. But then if you don't believe FICO because it's self-serving, I'd encourage you to look to third-party analysis as they come out because I'm sure they will. And you're going to see a lot of analytic work around this topic in the coming weeks and months. Operator: Our next question comes from the line of Owen Lau with Clear Street. Owen Lau: So the AI disruption narrative hasn't gone away. Could you please talk about why it's very hard for whatever Vantage or a third-party AI platform to come in and create a more predictive credit score, which will be adopted by lenders and consumers if they can offer a lower price? William Lansing: Okay. So there are two different things there. One is AI versus the current credit scoring system. And the second is within that, more predictive. So first, I would say, with respect to AI displacing the FICO score, we have a really well-defined body of law and the fair lending laws, which are designed to protect consumers to ensure that there's not discrimination, ensure that consumers are treated fairly. And that requires compliance with all kinds of things that our scores take into account. I mean just one small example would be red lining, which is not allowed in the United States. Is it a predictive factor? Yes, it's a predictive factor, but it's not allowed. And so you can't use red lining as a factor in a credit score. Well, AI doesn't -- AI would find 100 other ways to get to the same result. And so the regulators are not going to be comfortable with AI making underwriting decisions when they're not explainable when it's a black box, when they can't demonstrate that discrimination is not occurring. So that's kind of the core problem with using AI and underwriting. I mean AI is great in a lot of things. But using it in underwriting, the biggest play is that it's going to get around the rules and regulations of the fair lending laws. Now you're probably aware that FICO scores carry with them 32 reason codes. So when a consumer turn down for credit, they get a letter and/or the line is not increased on a request or whatever, they get a letter, and the letter says, here's why. And that reaches into the FICO score and the reason codes and those reason codes are shared with the consumer. And so there's a level of comfort with the regulators and with the consumer that they understand what's going on. I would also point out that the experiment with AI and some of the black box underwriting that was undertaken several years ago by Upstart ended with the CFPB shutting it down. So I think there's some real challenges, not that it will be this way forever. And we are prepared for the day when AI is appropriate in underwriting. We have patents in the area of explainability and ethical AI. And so I think we're in an advantaged position, but I would not hold my breath. I think that's going to take a long time. And then on predictiveness of the score, I would tell you that our latest and greatest score is more predictive than Vantage. And frankly, more predictive than any other score out there. The only asterisk I would put on that is there are lenders who build proprietary scores on top of FICO, and they leverage their first-party data. And so they have incremental data and they get incremental signal out of that. And so there are some proprietary scores that are really excellent that are most typically developed on top of FICO. Owen Lau: Got it. And then maybe quickly on LLPA, have you heard of any of these 21 lenders received the updated LLPA grid from FHFA for the pilot? And do you have any expectation that when the new grid will be made public? William Lansing: No idea. I have heard nothing, I encourage you guys to keep asking the questions, what's going on there? I think it's a manual process. Operator: Our next question comes from the line of Scott Wurtzel with Wolfe Research. Scott Wurtzel: Just on the guidance, I understand you're still being -- it seems like being conservative on your assumptions regarding volume. Just wondering if there had been any sort of change to your volume assumptions after the last quarter at all? Steven Weber: Not really. I mean, again, we tend to be pretty conservative because, obviously, there's a lot happening in the world. And if we get that number wrong, it's difficult to make that up someplace else, but not really. I mean I think we had a better second quarter volume-wise than we had anticipated when we gave guidance. But we don't necessarily think that's going to continue. So we tend to take the same conservative approach for the rest of the year. Scott Wurtzel: Got it. And then just on the buyback, I mean, the number, $600 million in the quarter was great to see along with the incremental buyback this quarter. Just wondering, I mean, how aggressive do you think or would you guys be with the stock at these current levels and given the capacity that you have? William Lansing: What I can say is what we've said in the past, we're always interested in share repurchase, and we're in the market kind of all the time. And we tend not to be market timers, although we have leaned in much more heavily on an opportunistic basis. I would certainly consider our stock at these levels to be an opportunistic time. Operator: Our next question comes from the line of Kevin McVeigh with UBS. Kevin McVeigh: I wonder if you had any thoughts on, given the current shifts in the regulatory environment, do you feel like that's pretty much contained at this point? Or is there anything else you're kind of focused on as we think about whether it's FHFA or other parts that you kind of continue to manage through from a regulatory perspective? William Lansing: The mortgage market is a $13 trillion market, and everyone takes it pretty seriously, and no one wants to do things that are reckless there. And so everything that happens in that market, you see coming a mile away. And I think that's kind of where we are. I think we know everything there is to know about the way this is unfolding for now. And so no, I don't really see being blindsided by regulatory or other kinds of things in the market. I think we understand how the market is evolving. We understand what the choices are for evaluating credit in the modern market. Will things change if the GSEs get out? I mean anybody's guess when and if that happens, and will things change? We actually don't think they'll change that much. And we think that in a world where the GSEs are private or if they were to lose the guarantee, the emphasis on credit default risk would go up, the interest in credit default risk goes up, and that's advantaged FICO because we have the best score for evaluating that. But again, these are more theoretical and down the road kinds of things. I don't think there's any surprises ahead. Operator: Our next question comes from the line of Curtis Nagle with Bank of America. Curtis Nagle: Most of my questions have been taken, but just maybe, Will, I guess, any stats or detail you could provide in terms of the uptake of 10T within the nonconforming market at this point for mortgages? William Lansing: Yes. I don't have an updated number for you, but it's -- we have underwritten trillion. Steven Weber: Yes. Most of them are running in parallel with Classics because they want to be able to use the latest score and so they run in parallel with each other. Curtis Nagle: Got it. I just -- any running... William Lansing: I think the number is $1.2 trillion. The latest number. Operator: And our last question is going to come from the line of Sean Kennedy with Mizuho. Sean Kennedy: So with VantageScore, I was wondering if you could discuss a bit more about potential adverse selection, how lenders could pull both scores in the beginning of a process that could pick one or the other for the remaining initial results and the implications there for the mortgage market. William Lansing: Yes, it's a good question. I think -- and of course, we don't know how this is going to unfold. I mean it is strong. It's really in the interest of the GSEs and the FHFA to prevent gaming to not have a gaming situation. That said, in a 2-score system, it's almost inevitable. It's kind of structural that one score or the other is going to be more beneficial to the consumer at all times. And so in a world where the systems are in place to use both scores and barring other unforeseen things, there will be some people who pull both scores. And so it may unfold that way. I think to the extent that, that happens, that's not -- I mean, it is technically share loss for FICO, but it's not volume loss. What you're really doing is expanding the market by the second pull. And so it's conceivable that Vantage could get some share that way if they don't solve the gaming problem. But I don't -- again, I don't see volume loss for FICO. Sean Kennedy: Great. And then I was also wondering just with the auto and card key loan growth, if you saw any volume weakness later in the quarter [Technical Difficulty] on the macro. And if you were seeing any consumer weakness there? Steven Weber: Yes. Auto tends to be pretty stable unless there's like a really disruption in the economy. A lot of the volume on the card side is really the banks that are marketing. And if they want to market more, they'll find consumers that will take it off. So -- and that can vary quarter-to-quarter. But so far, we haven't really seen any significant weakness on the volumes. They've actually been pretty good. There's been a little bit of a falloff in the subprime, but it's been picked up throughout the rest of the prime, super prime. So we haven't really seen any... Operator: This does conclude today's question-and-answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Good day, and welcome to the TransUnion 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 Greg Bardi, Senior Vice President, Investor Relations. Please go ahead. Gregory Bardi: Good morning, and thank you for attending today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning, and they can also be found in the current report on Form 8-K that we filed this morning. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items, as well as certain non-GAAP disclosures and financial measures along with the corresponding reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded and a replay will be available on our website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release and the comments made during this conference call and in our most recent Form 10-K, Forms 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. With that, let me turn it over to Chris. Christopher Cartwright: Thanks, Greg, and let me add my welcome and outline today's agenda. First, I will review our first quarter results and updated 2026 guidance. Second, I'll discuss how AI is accelerating innovation across to you and driving higher data usage among some clients. And then I'll pass to Todd, who will detail our first quarter results and provide second quarter and full year '26 guidance. So we started the year very strong, exceeding our first quarter guidance for revenue, adjusted EBITDA and adjusted diluted earnings per share. This is our ninth straight quarter of at least high single-digit organic constant currency revenue growth with 11% growth versus our 8% to 9% guidance. Excluding FICO mortgage royalties, revenue grew 7% and which is also above our expectations. Now U.S. markets grew 14%. Financial Services led the way up 24% or 14% excluding FICO mortgage royalties. We delivered broad-based strength across lending types driven by modest volume growth, pricing actions and sales momentum across both credit and noncredit solutions. Emerging verticals had another healthy quarter growing more than 6% led by insurance and public sector. International revenue was flat organically as expected. Canada and the U.K. grew high single digits and Africa grew 10%, and India declined mid-single digit, slightly better than we'd expected, and we expect a gradual improvement throughout the course of the year. Now strong revenue growth translated into 12% growth in adjusted diluted earnings per share. In line with our disciplined M&A approach focused on highly strategic bolt-ons, we recently completed 2 acquisitions. TransUnion to Mexico extends our global playbook into an attractive market where we now hold the leading position. The smaller acquisition of RealNetworks Mobile division adds complementary messaging capabilities to our leading trusted call solutions. And in addition to completing these acquisitions, we repurchased $25 million of shares year-to-date through April. We have ample capacity under our $1 billion repurchase authorization and expect to increase repurchases over the rest of the year. Our outperformance reflects consistent execution in a relatively stable operating environment. The strength of our diversified portfolio positions us to navigate potential changes in economic conditions. And as a reminder, our customers entered 2026 with cautious optimism. Lenders anticipated loan growth supported by their strong balance sheets, healthy consumer finances and expectations for rate cuts throughout the year. In February, the conflict in Iran added uncertainty about inflation, interest rates and the potential impact on consumers. The 10-year treasury rate in the 30-year mortgage rate are currently 4.3% and 6.3%, respectively, after briefly dipping below 4% and 6% in late February. We continue to monitor market dynamics and potential second order impacts on consumers and customers. To date, we have not observed any change in customer behavior tied to these developments. Through mid-April, volume and revenue trends have remained at or ahead of our expectations. We saw a brief pickup in refi-driven mortgage activity during February's rate debt, followed by a March normalization previous levels. U.S. nonmortgage lending remains healthy. Against this backdrop, we delivered another strong sales quarter, underscoring sustained demand and commercial momentum for our credit marketing and fraud solutions. An uncertain market underscores the importance of our durable growth strategy. We have the broadest, deepest and most relevant solutions portfolio in our history. Our fastest-growing products include trusted call solutions, True IQ, identity-based marketing and next-gen fraud models, which address customer needs across economic cycles. Looking ahead, we expect our strongest ever cohort of new product launches and major enhancements in 2026. While our investments in global AI-enabled platforms position us for cost efficiency and operating leverage. Against this backdrop, we are maintaining our full year organic constant currency guidance, including revenue growth of 8% to 9%. We are balancing first quarter outperformance driven by healthy underlying trends against macro uncertainty and the need to maintain prudently conservative guidance. The increase to the high end of our guidance, $154 million of revenue, $39 million of adjusted EBITDA and and $0.04 of adjusted diluted earnings per share primarily reflects the addition of TU to Mexico. Our guidance approach remains unchanged. If current trends continue, we expect to perform at or above the high end of our range. Alternatively, we expect that we could absorb a reasonable level of market softening within our guidance range. Todd will provide additional details on our guidance assumptions. At the high end of guidance, we expect to deliver our third consecutive year of high single-digit organic constant currency revenue growth and double-digit adjusted diluted EPS growth. Now this consistently strong financial performance underscores the strength and durability of our growth strategy. And as we highlighted throughout our Investor Day last month, AI can enhance that strength and fuel a new generation of growth. Our proprietary and differentiated data assets anchor our competitive advantage as we move into an AI future. Our contributor or credit databases are sourced from thousands of institutions operating under demanding regulatory frameworks. Our industry-leading identity graph combines our proprietary data with billions of dynamic disparate signals in near real time, creating a network effect that powers our marketing and fraud solutions. We power our customers' complex mission-critical workflows with governable, explainable data and deep domain expertise, delivering effective and deterministic outcomes. And these solutions are priced economically relative to the significant value that they provide. Instead, we believe AI is a growth accelerant, enabling us to activate our data to serve our customers more effectively. Already, AI drives tangible growth for TransUnion in 2 ways. First, by increasing demand for our data; and second, by accelerating our pace of innovation. Now let me provide additional context for what we highlighted at Investor Day to explain how these dynamics are converging. From a demand perspective, AI models are only as good as the data we can learn from, and customers are prioritizing the freshest, highest-quality signals. Our powerful and flexible [indiscernible] platform enables customers to integrate our best-in-class data directly into their AI environments. As AI-driven workflow scale, we see customers expand their use of TU's data, shifting from episodic transactions toward more embedded partnerships. For these reasons, our most AI-enabled customers are already consuming more data and adopting innovations faster. While most of our customers are early in their AI journey. Let me share 2 examples of how TransUnion facilitated AI adoption for 2 lenders and then how we scaled our relationship as a result. Now 1 of our most sophisticated fintech customers has embedded AI across underwriting, portfolio management, customer service, marketing and fraud prevention. As these enabled programs scale, the customer expanded their use of our credit, identity and fraud signals within their workflows. Their AI underwriting models also refresh data more frequently, driving higher credit volumes. Their spending with TransUnion increased by more than 60% from 2022 and approaching $15 million in revenue in 2025 and outpacing 50% loan growth and volumetric unit pricing. Also a top 5 credit card issuer has embedded to use data across its AI-enabled governance, risk management, servicing and engagement workflows for its 50 million-plus accounts. These workflows support daily customer engagement and risk triggers rather than periodic checks. As a result, our relationship has evolved from a point-in-time transactional data vendor to a mission-critical, enterprise-wide partner under a multiyear subscription-based contract. TransUnion's revenue with this customer increased by over 20% from 2022 to $20 million in 2025. And despite a decline in new accounts during that period. We see opportunity to deepen its relationship further by cross-selling additional credit in noncredit solutions. Now our next-generation AI power products reflect and drive increased demand for our data. During Investor Day, we highlighted 3 of these solutions, all built on the OneTru platform, these solutions enhance fast-growing products operating at scale, including True IQ, marketing audiences and fraud analytics to enable continued growth. they industrialize in-demand customized analytics into scalable solutions that drive higher data usage and monetization across our portfolio. So first, TruIQ Analytics orchestrator uses Google's Gemini models to streamline advanced credit modeling with natural language prompts. Analytics orchestrator scales the expertise typically delivered in highly effective but ad hoc innovation labs into a self-service solution. This enables customers to build models faster and more frequently with less reliance on our data science teams. We expect analytics orchestrator to increase data usage drive new revenue streams, enable stickier customer relationships. In marketing, we are transforming our static audience segments into curated and outcome-driven audiences by TransUnion built off our identity backbone. We're also providing self-service search and discovery tools that accelerate activation and improve campaign performance. We expect improved efficiency and speed to drive increased consumption of our marketing audiences. And in front, our AI model factory unifies our identity data and advances analytic capabilities to respond to evolving fraud threat vectors. We're launching new fraud models at 2 to 3x faster than previously possible with 10 new models launched in the last 12 months, including our credit washing and synthetic identity solutions. We generated tens of millions of dollars of incremental pipeline from these new fraud models. So in summary, AI will continue to accelerate our pace of innovation and expand the ways customers consume data, supporting durable growth across our solution suites. Now with that, I'll hand it over to Todd. Todd Cello: Thanks, Chris, and let me add my welcome to everyone. I'll build on that overview with first quarter results before providing guidance. Starting with the quarter, we exceeded the high end of our guidance across all key metrics by $41 million on revenue and $18 million on adjusted EBITDA or $22 million and $8 million, respectively, excluding the Mexico acquisition. Total revenue increased 14% on a reported and 11% on an organic constant currency basis led by U.S. Financial Services. Excluding FICO mortgage royalties, organic growth was 7%. Growth was broad-based and aligned with the innovation priorities outlined at Investor Day. Credit, excluding FICO mortgage royalties and fraud, both grew high single digit driven by continued traction in TruIQ, alternative data and trusted call solutions. Marketing Solutions delivered mid-single-digit growth with healthy identity performance. Consumer Solutions grew low single digit including another quarter of double-digit growth internationally. Adjusted EBITDA increased 10%. Adjusted EBITDA margin was 35.2%, down 100 basis points year-over-year. As anticipated, underlying margins contracted modestly in FICO mortgage royalties were a 120 basis point headwind. Our Mexico acquisition contributed 25 basis points in the quarter. Adjusted diluted earnings per share was $1.18, up 12% year-over-year and $0.08 ahead at the high end of our guidance. In the first quarter, U.S. markets revenue grew 14% on an organic constant currency basis versus the prior year. Across all our B2B verticals, we delivered strong bookings and retention rates to start the year. Financial Services revenue grew 24% or 14% excluding FICO mortgage royalties. The environment remains constructive, and we outperformed underlying volumes driven by TruIQ, alternative data and noncredit solutions. Within financial services, credit card and banking rose 5% on stable lending volumes and strength from trusted call solutions. Consumer lending grew 13% and supported by sustained consumer demand and strong FinTech performance. FinTechs continue to perform well with increasingly diversified funding bases and delinquency trends within historical norms. Auto was up 11%, outpacing modest industry volume declines through pricing, share gains and new wins across our solution suites. Mortgage revenue grew 50% excluding FICO royalties, revenue grew 24% compared to inquiries up 7%. Inquiries were slightly better than anticipated, with additional outperformance through pricing and increased adoption of non tri-bureau solutions. Emerging verticals grew 6%, led by another quarter of double-digit growth in insurance -- within insurance, credit-based marketing continues to recover as insurers and pursue profitable growth. Consumer shopping also remains active. We drove new wins and growth across core credit driving history, trusted call solutions and marketing solutions. Across our other emerging verticals, public sector grew high single digits and is positioned for a strong year. tech, retail and e-commerce, and media grew mid-single digits. Communications grew modestly tenant and employment declined modestly but is expected to return to growth over the rest of the year. Consumer Interactive was flat, driven by indirect channel growth and breach-related wins, offset by declines in the direct channel. In international, all revenue growth comparisons are on an organic constant currency basis. International revenue was flat in the quarter, reflecting varied results across our diversified portfolio. Our 2 most developed markets drove outperformance against subdued market conditions. U.K. grew 7%, driven by healthy volumes from our largest banking and fintech customers as well as new wins across verticals. Canada grew 9%, reflecting another quarter of innovation-led growth as well as strong performance from fintechs and insurance. Africa performed well, too, growing 10% with strength across banking, FinTech and retail. Across our other emerging markets, India, Latin America and Asia Pacific, growth was softer, reflecting subdued conditions and timing dynamics. India declined 5%, slightly better than guided. We expect a gradual recovery in consumer lending, supporting mid-single-digit growth for India in 2026. We also continued to accelerate the pace of innovation in India. Most recently, we announced a strategic partnership with the leading Indian telco geo to enable branded calling across its 500 million subscribers as we continue to expand the reach of our leading trusted call solutions globally. Latin America was flat organically with growth in Brazil, offset by modest declines in Colombia and other markets. TransUnion to Mexico which was recorded as inorganic, grew well in the first quarter on the heels of double-digit growth in 2025. Asia Pacific declined 18%, primarily by lapping onetime contracts, as well as softer volumes. Performance across India, Latin America and Asia Pacific is expected to improve in the second quarter and as the year progresses. Turning to the balance sheet. We ended the first quarter with $5.6 billion of debt and $733 million of cash. During the quarter, we funded the approximately $660 million purchase for TransUnion New Mexico with $520 million drawn from our credit revolver as well as cash on hand. As a result, our leverage ratio at quarter end increased modestly to 2.8x. For the remainder of 2026 we plan to continue to execute our balanced capital allocation framework, prioritizing debt prepayment and capital return to shareholders. We have repurchased $25 million so far this year and expect to increase the pace of repurchases over the remainder of the year. We also remain committed to pushing our leverage ratio towards our long-term target of under 2.5x. Before getting into guidance details, I want to reiterate our approach. Even with first quarter outperformance and healthy underlying momentum we are maintaining our full year organic growth assumptions. This reflects our disciplined guidance philosophy and provides flexibility in an uncertain environment. In the second quarter, we are guiding revenue to be between $1.271 billion to $1.283 billion, up 12% to 13%. Acquisitions add 4% and and FX has an immaterial impact on our guidance. We expect organic constant currency revenue growth of 8% to 9% or 5% to 6% excluding FICO mortgage royalties. We anticipate mortgage revenue growing over 30% or 10% plus excluding FICO, compared to a mid-single-digit decline in inquiries. We are guiding adjusted EBITDA to $439 million to $445 million, up 8% to 9%, implying a margin of 34.5% to 34.7%. Underlying margins expand by 20 to 40 basis points, offset by an 80 basis point drag from FICO royalties and a 60 basis point impact from acquisitions. We expect our adjusted diluted earnings per share to be between $1.13 and $1.15, up 4% to 6%. For full year guidance, we expect revenue to be between $5.1 billion and $5.135 billion, up 11% to 12%. Acquisitions add 3.5% and and FX has an immaterial impact on our guidance. Our organic constant currency assumptions are unchanged at 8% to 9% or 5% to 6% excluding FICO mortgage royalties. Our segment level assumptions are also unchanged. For mortgage, we continue to expect growth of 28% or 6%, excluding FICO, compared to mid-single-digit inquiry declines, unchanged since February. While the first quarter exceeded expectations, we modestly lowered volume assumptions for the remainder of the year to account for recent interest rate volatility. Full details on mortgage assumptions are provided in our appendix. We anticipate mid-single-digit international revenue growth for the year, driven by gradual recoveries in India, Latin America and Asia Pacific, following a softer first quarter. We expect adjusted EBITDA to be 1.796 billion to $1.816 billion in 2026, up 9% to 10%. That results in a margin of 35.2% to 35.4%, down 60 to 80 basis points. Underlying margins are expected to expand by 50 to 70 basis points driven by revenue flow-through and remaining transformation savings. This strong underlying expansion is offset by a 90 basis point drag from FICO royalties and a 40 basis point impact from our acquisitions. We anticipate adjusted diluted earnings per share to be $4.68 to $4.75, up 9% to 11%. For other guidance items, depreciation and amortization is now expected to be approximately $640 million or $320 million, excluding step-up amortization from our 2012 change in control and subsequent acquisitions. We anticipate net interest expense of $245 million, up $25 million from February reflecting $20 million related to debt financing for the Mexico acquisition and $5 million from higher sulfur on floating rate debt. Our adjusted tax rate is expected to be approximately 25.5%, modestly better than anticipated, driven by favorable geographic mix of earnings and changes in tax law that became effective in 2026. Capital expenditures are expected to be approximately 6% of revenue. We expect free cash flow conversion as a percentage of adjusted net income to be 90% or greater in 2026 and going forward. Slide 17 reconciles our updated full year guidance relative to February. As shown, the increase is driven by our consolidation of TransUnion to Mexico, with nonoperating items having a net neutral impact on adjusted diluted EPS. While TransUnion to Mexico is accretive to 2026 earnings, it is modestly dilutive to our adjusted EBITDA margins this year. Importantly, the Mexico business operates at margins above our company average. The 2026 margin impact is driven by accounting mechanics rather than ongoing economics. Historically, our 26% ownership was accounted for under the equity method, contributing approximately $17 million of adjusted EBITDA in 2025 with no associated revenue. Following the acquisition, Mexico's revenue is fully consolidated, while only the incremental adjusted EBITDA associated with increasing our ownership from 26% to 94% is additive versus prior reporting. As a result, consolidated margins appear modestly lower due to revenue consolidation despite the business's strong underlying profitability. In addition, during 2026, we will incur onetime integration expenses related to the Mexico and Mobile division of [ Mural ] Networks acquisitions, which we are not adding back to adjusted EBITDA. Our 2026 guidance fits within the context of our medium-term financial framework, which we reintroduced at our March Investor Day. Over the medium term, we expect to deliver high single-digit organic revenue growth, 50 basis points of underlying margin expansion and low to mid-teens adjusted diluted earnings per share growth. This guidance is anchored in our repeatable earnings model and the momentum we are delivering today and not dependent on a recovery in U.S. mortgage or other markets. Our medium-term financial framework reflects our value creation flywheel. Our multiyear transformation is now enabling faster innovation and improved commercial outcomes. We are scaling the business on a common technology and operating platform and deploying AI across the enterprise to drive further productivity. Our scalable growth drives compounding cash flow that we will deploy to fund our growth, optimize our balance sheet and increasingly return capital to shareholders. With that context, I will turn the call back to Chris for closing remarks. Christopher Cartwright: All right. Thanks, Todd. So before closing, I want to provide our perspective on last week's announcement from the FHFA Director and the HUD Secretary. These developments are an important milestone and a 20-year journey to enable competition and modernization in mortgage credit scoring. So as noted by Director Pulte, Fannie Mae and Freddie Mac have begun accepting VantageScore 4.0. Freddie Mac took delivery of VantageScore loans during an operational test and will soon securitize them. The FHFA is expanding this pilot with a group of lenders and the GSEs will communicate pricing guidelines. Additionally, HUD Secretary, Scott Turner announced that the VantageScore will also be accepted for FHA mortgages starting later this year. With the combination of Vantage 4.0 and TransUnion's comprehensive trended and alternative data will expand access to creditworthy consumers and promote affordability while maintaining safety and soundness within the mortgage ecosystem. And we have taken several steps to foster industry adoption, most recently announcing the industry's first 99 [indiscernible] VantageScore 4.0 mortgage pricing. Adoption of VantageScore can drive hundreds of millions of dollars of savings for lenders and consumers. Managed Score also represents an incremental revenue opportunity over time. We plan to support continued score valuation from our customers with free vintage score offered to those customers who purchased the FICO score through the end of 2026. We are also offering customers multiyear pricing for credit reports and Vantage 4.0, providing better pricing certainty to lenders. And more broadly, our actions reflect our belief that effective mortgage underwriting and responsible financial inclusion are ultimately driven by the quality and the depth of the data used. As stewards of data on over 295 million U.S. consumers, we continue to invest in data sets and analytics that support the fairest and the most accurate credit decisions across economic cycles. So in summary, we started 2026 with a good first quarter, growing both our revenue and our earnings by double digits. We've raised our guidance based on our recent acquisitions and anticipate a strong year. We're guiding 8% to 9% organic constant currency revenue growth and 9% to 11% adjusted diluted earnings per share growth. And AI continues to accelerate to use growth reinforced by the dynamics that we highlighted, expanding data demand and accelerating innovation, and we look forward to continuing this conversation in future quarters. Now with that, let me turn it back to Greg. Gregory Bardi: Thanks, Chris. That concludes our prepared remarks. For the Q&A, we ask that you each ask only 1 question so we can include more participants. Operator, we can begin the Q&A. Operator: [Operator Instructions] And the first question will come from Toni Kaplan from Morgan Stanley. Toni Kaplan: And thanks for the comments at the end on the press conference from last week. I wanted to ask a question about that conference. There was a comment made about scrutinizing pricing in the credit bureau industry. And I was hoping you could just maybe talk about you've already sort of provided the $0.99 down from a higher like the $4 level you were originally talking about. And so I guess what are the areas, maybe in particular, on pricing that investors should be thinking of are maybe under scrutiny? Christopher Cartwright: Well, Tony, and thank you for the question. It's an important question. And going back to that press conference from last week, I mean, well, first of all, we're just really excited to see the momentum at the FHFA. And in the GSEs for accepting Vantage 4.0 and the progress in completing the LLPAs and the pricing guides generally. We see strong demand in the market. And so I think you'll begin to see some rapid adoption of that. Yes, we're not entirely clear on what Director Pulte was referring to in his comments. We are following up to try to get clarity on those I think there's a lot of speculation that it could be a reference to the Tri-Merge. And look, I think we've been pretty clear in recent years about the importance of the tri-merge in underpinning the safety and soundness of the mortgage market in the U.S. and ensuring that the potential pool of mortgage applicants that are scored accurately and qualify for mortgages is as substantial as it can be while also accurately assessing the risk that lenders are undertaking that will eventually be passed on to the GSEs and to investors. I mean, in short, the rationale for the tri-merge is that it drives the efficacy of underwriting and financial inclusion because you're getting full access to all of the data that's available for diligence. And I think sometimes, discussions about changing from the tri-merge don't appreciate that credit bureau data is not a constant across the 3 bureaus. We have different furnitures. There have been new lending types that have emerged in recent periods like fintech, financial innovation like NPL and now the bureaus are actively developing alternative data like rental and utility and others, our files have diverged even more. And so using data inconsistently or excluding a report means you'll either be mispricing risk or lowering access for creditworthy borrowers or lowering the hurdles for potential mortgage fraudsters. So we firmly believe Tri-Merge is the gold standard. It's deeply embedded in mortgage underwriting processes. The industry is already digesting a good degree of change, whether it's the early assessment program, and most recently, score competition, which is terrific. And I think this would be an even more substantial change at a time when stability is particularly important as this administration contemplates the IPO of the GSEs. And I think we got to remember that we charge $10 to $12 per report. That is a fraction of closing costs. It's less than 1%. And by pulling all 3 reports, you optimize across all the dimensions of the mortgage process. you can score the largest number of consumers and qualify the largest proportion for homeownership, you mitigate risk, you ensure accurate pricing and you minimize the risk to taxpayers via the GSEs. And ultimately, you ensure that investors who are buying these assets once securitized fully understand the risk management process from which they were generated. So look, we -- look, I know from my own discussion some last week, there's a lot of support in the industry for the tri-merge whether it's legislators or regulators or investors, I think they understand the value of maximizing the diligence on this. So we'll just have to wait and see. And obviously, -- we look forward to further discussions with the director with the FHFA. I think goodness always comes from that, and we would certainly welcome it. Operator: The next question will come from Andrew Steinerman from JPMorgan. Andrew Steinerman: My question is on India. Looking back to the Analyst Day recently, transient outlined to double-digit revenue growth, organic revenue growth profile longer term for TransUnion India. How long would it take to get to that cadence? And what needs to change to get there? Christopher Cartwright: Well, thanks for the question, Andrew. India is a great part of the TransUnion story, and we're super pleased that we own that asset, and it's a wonderful market and a growing economy. But it's an economy that's had a variety of macroeconomics and also regulatory shock in recent years, some of which were exacerbated by the conflict with our and in Middle East and rising energy prices and the like. I think despite that, we have seen some stabilization for consumer lending volume and commercial lending volume, which is helpful. And we're also growing through some kind of onetime exceptional and anomalous stuff. And so we did okay against our guidance in the first quarter. And we believe we now, with this foundation of stability are going to pivot back toward growth and overall, we think India will deliver mid-single-digit growth over 2026. And and hopefully, that gets us back to sustained low double-digit growth and beyond as the economics and the political environment inside should stabilize there. I mean the regulatory environment, not the political environment. Operator: And the next question is from Andrew Nicholas from William Blair. Andrew Nicholas: Chris, in your prepared remarks, I think you made the comment that most of your customers are still pretty early in their AI journey. And so I was hoping you could flesh that out a little bit more. What are you kind of seeing in terms of pace of adoption what's a reasonable time line for some of your customers to get a little bit more ready on that front? And any comments on what would be kind of slowing that or expectations for adoption there? Christopher Cartwright: Yes. Thanks, Andrew. Well, look, I would just -- stepping back, I would say, societally and economically, we're still in the very early innings of AI adoption. I think you've got certain sectors of the economy where the adoption is fairly deep like software development, if you will. Those are the guys that created it. So it's not surprising that they are deeply applying it to their work first. And then I think you've got kind of mass experimentation going on just about everywhere else. I think you're going to see that accelerate as people understand the technology more deeply and its potential across all types of business processes and functions. And if you even here at TransUnion, I mean our developers have been using it for a while. They are dramatically more productive. It's not order of magnitude, productivity increases yet, but it's solid. 30% plus productivity kind of ranging depending on the nature of the development activity. And frankly, it really helped us accelerate the delivery of the OneTru platform and the migration of our products and our legacy technology onto that platform. At the -- at a recent Investor Day, which you attended, you would have seen the true true analytics orchestrator. That is 1 of the most potent applications of AI that we have here at TransUnion, we're using it across our data and analytics organization. We're seeing 2 to 3x productivity improvement that's allowing us to build more models more frequently with greater accuracy than we could previously. And all of the internal use is designed to ready the application, the agent for licensing and usage independently by our clients, which is what I was referring to in my prepared remarks. So look, we're very much in the early innings. But I don't think there's really anything that's going to slow this down. I think the productivity potential and the potential to lower the cost of things that today are very difficult but can become substantially more cost-effective and thus can be consumed in greater quantities, that's what I see happening going forward. Operator: And the next question will come from Jeff Mueler from Baird. Jeffrey Meuler: On the updated pricing guidelines and dedicated Vantage LLPA grid. I guess just have they been communicated to the 21 initially approved lenders? Have you seen them -- if so, any perspective you can provide on what they look like? If not, just when do you expect them, given that it sounds like they're finalized and how important do you think they are to the share shift that you expect? Christopher Cartwright: Yes. Now I'll remind you that for our guidance purposes this year, we didn't assume any share shift. We viewed this year as 1 of learning experimentation and transition. And we're not clear on exactly which lenders are in the initial cohort of 21 and we're not clear on whether the FHFA has communicated the LLPAs to all of them. We know from discussions with the FHFA staff and also from the CEO of Vantage score that the guides are complete and that they're in dialogue with the firms that are in this initial cohort, but I'm not sure about the time frame for public release. mean some of these questions, they just simply have to be answered by the FHFA. But I think the director was very clear and forceful and enthusiastic that they're ready to go they're ready to scale, and he's really excited to push that forward and get competition going. Operator: And the next question will come from Faiza Alwy from Deutsche Bank. Faiza Alwy: I wanted to ask about the contribution of noncredit products to your growth in financial services, particularly outside of of mortgage and sort of what the traction has been there? And relatedly, if you could touch on the -- you alluded to some macro uncertainty likely related to the conflict and that you could absorb a reasonable level of market softening within the guidance range. So I was hoping you could double-click on that because I'm assuming to the extent there is softening, it would impact more of your credit growth. Christopher Cartwright: Let me pull back to lens a little bit and just kind of characterize this first quarter. I mean, obviously, we're off to a good start. We're nicely ahead of expectations, and we're well positioned to deliver a third straight year of high single-digit revenue growth, low double-digit profit flow-through and low to mid double-digit EPS. The strength is really coming out of the U.S. right now. A lot of strength in mortgage, which I know Todd will double click on in the call. Consumer lending also very strong in auto and card off to very solid starts as well. So we're very pleased with that. On the emerging market side, we're right on our plan. This is how we modeled revenue growth for the course of the year. This is a solid start at 6%, and it does position us to achieve our plan of high single digit for the full year. Now obviously, with the conflict in Iran, there are new uncertainties and new pressures on the cost of energy and thus inflation and thus potentially interest rates as well. In February, the 10-year got down to about 4%. The 30-year mortgage was around $6 million -- we got a little disproportionate volume bump because refi was reactivated. That was fairly short-lived, and then we kind of reverted back to the previous levels of volume, which I'll remind you are almost represent a floor now for ongoing mortgage natural purchase activity in the U.S. But -- we like to have a conservative guide, particularly in the early part of the year. We point investors to the high end of the guide. Our goal is to hit the high end and exceed the high end we have a reasonable level of contingency to achieve that, which we will hopefully release throughout performance over the course of the year. And given this heightened geopolitical risk, we just thought it prudent not to flow through the revenue and the profit at this point. Another thing to be very clear on, though, is that through really the beginning of this week, our volumes across all of our credit categories are steady. So we're not seeing really any negative impact on any type of loan volumes at this point. And if we maintain this level of stability and kind of volumes, we would fully expect to deliver at or above the high end of the guidance over the course of the year. This kind of stability and performance, it's also there on the subprime side, drilling into consumer lending, which had a very strong 13% growth rate in the quarter. We've been looking at the level of delinquencies there amongst subprime borrowers. They're holding up exactly as you would expect, solid underwriting practices, small loan amounts, good controls, FinTech players, accelerating their use of alternative data to fully understand risk and so while all of the players in this space expanded their credit box a bit last year and again in the first quarter, the delinquencies are solid. And so we're not really seeing anything problematic at this point. Todd Cello: Faiza, I'm going to go back. This is Todd, to the beginning of your question as it pertains to contribution of noncredit to financial services. So Chris just gave you all the details about what we saw in Financial Services and excluding mortgage, we continue to see stable volumes. But the diversification of our products, we had a couple of three, what I would consider to be outperformers. First, the TruIQ analytics platform continues to perform well within financial services as well as alternative data and then our trusted call solutions has been a winner with our financial services customers as well. Operator: And our next question will be from Manav Patnaik from Barclays. Manav Patnaik: Yes, I guess I just wanted to follow up on the second part of that. Chris, you talked about absorbed a reasonable level of market softening within the guidance range. I was just hoping you could put some parameters on that? Like what is the low end of the range, I guess, imply from some of the volume trends you're seeing today? Todd Cello: So Manav, I'll take that one. Thanks for the question. So I think what -- if you listen back to the prepared remarks, we just continue to see stability within our volumes. And we're happy to print a very solid Q1, where organic constant currency, excluding the FICO mortgage royalty was 7%. But for all the reasons that Chris just went through geopolitically, we just felt it was the right move to not raise the guidance for the beat that we had in Q1. So in essence, what happens, then it's just math. When we look at the growth rates for the rest of the year by us printing a 7 and then maintaining the organic constant currency growth rates, we end up for the full year at a 6% rate. And then when you look at it for the second quarter in the guide, it's also 6% at the high end, which is implying the second half is 5%. So if you believe, which we do, that volumes continue to be stable, we orient you towards the high end of our guidance, that should mean if things stay stable, we should beat in the subsequent quarters. In the event that we don't, I think you'd see that we've built some cushion here and based on keeping the organic constant currency rates. So there is some push in there. But then the range itself at the low end would provide some cover for us. So we're very comfortable with the guidance that we're providing this morning. Christopher Cartwright: Yes. And Manav, as you know, these past 3 years, we've really prioritized stable and consistent delivery at the high end or above in our guidance. That was certainly our posture going into 2026. And just given the uncertainty and given the outperformance, we thought it would be prudent to add a bit more contingency on the revenue and the profit side. And we did it again out of an abundance of caution, not because we're seeing any negativity in our volumes at this point. Operator: And the next question will be from Ashish Sabadra from RBC. Ashish Sabadra: I just wanted to better understand if the Iran conflict is having any impact on the international markets. I was just wondering if you could provide some any color on your conversations with customers or if you've seen any trends softening in those international markets? Christopher Cartwright: Yes. So I think we've definitely covered our views on the U.S. market, and we'll leave that on the international side, yes, there has -- there is more exposure to rising energy prices in the international market. There's been some exposure into India. But early on, the Trump administration is allowing India to purchase Russian oil, which is helping offset some of those inflationary pressures. In the Philippines, which is a great part of our business, but a small part of our business, I think things are particularly difficult. They're highly dependent on imported energy. And there's been a considerable run-up in the prices. And the government there is almost you're running a coved like playbook with energy subsidies going out to consumers and the like. And that was part of the reason why we had a difficult quarter in Asia Pacific although, frankly, the primary driver is just the end of the onetime analytics work that we were doing in Hong Kong to prepare for this transition to the MCRA. We think that's kind of finished and out of the system now. And so the comps improve and the performance is already stabilizing there. But I think that's some flavor for where we're seeing some energy impact elsewhere in our portfolio. Obviously, the U.K. and Europe has more exposure, and we've got a great business in the U.K. We think we're performing really well there competitively. And again, it was another quarter of high single-digit growth. Operator: And our next question will come from Kelsey Zhu from Autonomous. Kelsey Zhu: Could you maybe talk a little bit more about your expectation around VantageScore market share gains and future pricing policy in the mortgage vertical over the medium term? More specifically, Cycle 100's latest pricing model is $0.99 upfront and then $65 at closing. I was wondering if VantageScore pricing could adopt a similar framework of lower cost upfront and then the success via closing? Or is that not something that you're considering? Christopher Cartwright: Yes. So thanks for the question. Obviously, in terms of the pricing model and the pricing levels, there's a lot of options in the medium term. I think TransUnion's position, and I see this reflected in the behavior of our competitors as well, is we just need to get this started, right? We've been talking about price competition since 2006 when the bureaus came together to form the VantageScore. Finally, we've got a regulator that was willing to push this and make it happen. And we have very attractive pricing at roughly $1 per score with no tail, no success fee attached to it, which is which is important to note. And I think in terms of pricing and model, it depends on your perspective and what you're trying to accomplish. The goal of the administration, the goal of FHFA is to reduce borrowing costs and therefore, help home affordability and charging $65 for the score as opposed to just buying at 1 time for $1, that's a material price difference, right? And so we're just focused on the introduction. We're focused on the transition, and we're focused on share gain. But we acknowledge that downstream, we have a lot of optionality. But in the meantime, let's just continue to plow forward here. It's a more modern score, Vantage 4.0. It rests upon a broader foundation of trended credit information as well as alternative data. It's been 2 decades in the making. And we're just excited that competition is here and the playing field is leveled and we're excited to get after it. Operator: The next question will come from Jason Haas from Wells Fargo. Jason Haas: Just wanted to follow up on the strength in mortgage. Can you just talk about what drove the strength there outside of mortgage -- or outside of the FICO score? Todd Cello: Sure. Jason, it's Todd. I'll take that one. So as you probably recall, in the first quarter, we guided for a modest increase in inquiries and 35% growth for mortgage revenues. And we ended up posting 7% increase in inquiries and 50% growth. So the outperformance that we saw primarily pertained to volumes. And Chris spoke to that earlier. In particular, in late February, when the 30-year mortgage rate dipped below 6%, we saw a pretty significant increase in volumes. But as I'm sure you're aware, with the conflict in Iran. We saw an increase pretty immediately in early March of the 10-year treasury and thus, the 30-year mortgage went back up and those volumes dropped back to previous levels. So the outperformance is primarily just related to that dynamic that I articulated. I would say that the pricing assumptions that we had assumed are pretty much held. So there are not much noise there. Other thing I'd highlight as well is that when you think about these moves in interest rates, you see how a drop in interest rate had such a significant increase in a short period of time. If rates were to go up, let's argue the opposite way, it would be a modest negative because we're already near the floor of activity when we're talking about volumes that we haven't seen since the mid-'90s. But when you go the other way and you see a 25 basis point drop it's pretty significant, what the opportunities would be from a volume perspective, in particular, the ReFi population. And we included some slides in the appendix of today's materials. And you can get a sense on one of those slides as to just the population of consumers that would be eligible to ReFi. So the opportunity there is pretty significant. However, we're not there yet, right? So when you look at the guidance for the rest of the year, for the second quarter and for 2026 for the full year, we're calling for inquiries to be down mid-single digits. And again, upside would come if we just see that a little bit of move on the interest rates. Christopher Cartwright: Yes. And I think another element of the mortgage outperformance is that on the prequalification side and on the early assessment side, the volumes that we're experiencing have been favorable to our guidance assumptions. And look, we are solidly into the third year of the early assessment program from the GSEs and just changes in mortgage prequalification practices. And I think it's worth noting that, I mean, look, when you think about tri-merge and potential changes to the system, our data gets consumed primarily because the market participants want to fully understand risk and they want to optimize price. And that particularly matters if you're a lender and you're going to sell on certain mortgages to the GSEs because variances in credit scores per the LPAs can have a material variation in what you can realize for those loans. And so even though in theory, you only have to pull 1 credit report during the prequalification process. We see the industry settling into somewhere between 2 and 3. There are still a lot of players that are pulling 3, and there's a number of players that are increasing the number of poles they do for mortgage because really understanding the risk and optimizing around price matters a lot to their economics and the relative cost of a credit report is small. Operator: Our final question today will come from Scott Wurtzel from Wolfe Research. Scott Wurtzel: Just wanted to ask on TCS I'm wondering if you can unpack some of the drivers of the growth that you saw during the quarter. And just as a kind of related follow-up, I know there's sort of the trusted messaging opportunity as well down the line, if you can talk about sort of your expectations for a time line in terms of productizing that and when we can see that start to contribute to growth. Christopher Cartwright: Great, Scott. So another really strong quarter for trusted call solutions, kind of a [indiscernible] component of our fraud mitigation services. And we think we're positioned for another really strong year there. It is a unique and differentiated offering. It's a very durable offering. And I mean I think you just it underscores that even though we have been in this era of digital commerce analog commerce over the phone is still really important to ensuring the authentication and the safety of various transactions. And we want to extend that to the tech side of things. Increasingly, there's fraud in the SMS channel in the text channels generally and that's why we bought the mobile division of real networks. They've got some great underlying technology. We think it will take us about a year to complete the integration and the productization of that technology. But then it is the perfect complement to all of the business that we've generated and all the market penetration that we've got there. And I think going forward, just the combination of authentication over the phone and over the text combined with all of our digital device behavioral and reputational assets is kind of an unbeatable combination in the fraud space. Todd Cello: And I just want to add some numbers and remind you what we presented at Investor Day pertaining to trusted call solutions. So this was a $27 million product for us in 2021. At the time of the Neustar acquisition, this year, we are expecting it to be a $200 million product at the end of 2026. And in 2028, we expect that to be a $300 million product. Gregory Bardi: All right. Chris, Todd, I think that's a good place to end. Everyone, thanks for the time today, and have a great rest of your day. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks Second Quarter Fiscal Year 2026 Conference Call. [Operator Instructions] I will now turn the call over to Catherine Park, Vice President of Investor Relations. Ms. Park, you may now begin your conference. Catherine Park: Good afternoon, and thank you for joining us today to discuss Starbucks' Second Quarter Fiscal Year 2026 results. Today's discussion will be led by Brian Niccol, Chairman and Chief Executive Officer; and Cathy Smith, Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and the risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q. Starbucks assumes no obligation to update any of these forward-looking statements or information. All metrics referenced on today's call are non-GAAP and measured in constant currency. Please refer to the earnings release on our website at investor.starbucks.com to find reconciliations of these non-GAAP measures to the corresponding GAAP measures and supplemental financial information. As a reminder, the financial results discussed on today's call reflect the consolidation of Starbucks China as our transaction closed after the second quarter. This conference call is being webcast, and an archive of the webcast will be available on our website through Friday, June 12, 2026, and for your calendar planning purposes, please note that our third quarter fiscal year 2026 earnings conference call is tentatively scheduled for Wednesday, July 29, 2026. I'll now turn the call over to Brian. Brian Niccol: Good afternoon, and thanks for joining. I want to start with the headline. Q2 marked a milestone for the business. We delivered growth on both the top and bottom line for the first time in more than 2 years. Consolidated second quarter company revenue was $9.5 billion, up 8% (sic) [ 9% ] year-over-year. Global comps were a strong 6% driven by terrific performance across the business, especially in the U.S., and our consolidated operating margin improved to 9.4%, up about 110 basis points. And as a result, earnings grew year-over-year. Positive comp trends have continued through April, and this gives us the confidence to take up our fiscal 2026 guidance for global comp growth to 5% or better and earnings per share to $2.25 to $2.45. We believe this quarter reflects the turn in our turnaround, but we know there is more work to be done. Our Back to Starbucks strategy is working because we're executing with rigor and focus and the outcomes are showing up in real and visible ways. Thanks to our partners and the craft, connection and sense of community they deliver for our customers. This is Starbucks. Green Apron Service is setting the standard for world-class customer service. We're winning the morning and building the afternoon with great craft and speed across every access point. Our Green Apron partners are creating more moments of connection with every cup served and our support teams are leaner and faster and built around a culture of listening, learning and acting with intention. Our menu innovation is exciting and moving at the speed of culture. The third place is alive and well in every coffeehouse. And soon, the design aesthetic of our cafes will match the feeling you get in them. Our Starbucks Rewards program is more rewarding and there is trust in our coffeehouse leaders to run their business and create community. And the best job in retail keeps getting better. Our brand is showing up in more places and the shine is back on Starbucks around the world. This is the Starbucks we're building. The Starbucks customers deserve; the Starbucks, our partners are proud to call theirs; and the Starbucks, we believe will deliver strong performance quarter after quarter. As shared, we grew both the top and bottom line in the second quarter. So let me break down how we achieved these results. North America led our comp performance with both North America and U.S. comps accelerating to more than 7%, driven by over 4 percentage points of transaction growth. We haven't seen this transaction strength in 3 years. Our U.S. company-operated business grew transactions across all dayparts, with mornings now roughly back to fiscal 2022 levels and we saw broad-based spend growth across all income levels and age demographics. Our delivery business also contributed to both comp ticket and transaction growth in the quarter. We expanded delivery access across our U.S. company-operated portfolio last fiscal year, and it's proven to be a largely incremental revenue stream, growing more than 30% year-to-date across our U.S. company-operated business. International revenues grew nearly 8% (sic) [ 10% ] year-over-year as momentum built globally. Comparable sales increased nearly 3%, and our top 10 international markets, including China, all posted positive comps for the first time in 9 quarters. This combination of sales growth, operating leverage and cost management translated into an EPS of $0.50, up approximately 22% year-over-year. We said we will grow the top line first and margin and earnings growth would follow. Q2 is proof our strategy is working. Starting in the coffeehouse, we focused on continued improvements to staffing, scheduling, technology and leadership to make Green Apron Service work more reliably every day. As a result, in the quarter, customer experience scores continue to rise. Customer service times remained on target even with the greater transaction volumes. And in May, we're rolling out a new feature in our app that lets customers schedule their order pickup time. We expect this enhancement will bring even more order and predictability to mobile order. Since launching the Grow program, which is our simplified coffeehouse reporting and ranking system back in October, the share of U.S. company-operated coffeehouses delivering 4 or more shots has increased over 30 percentage points. This progress reflects clear standards, strong performance and more consistent execution from our coffeehouse teams. The Grow report has become a great new tool to evaluate performance and target improvements and it's helped put us on our way to being the industry-defining customer service and experienced company. Partners felt the difference as well. Confidence on the floor improved with healthy rosters and growing leadership stability and our data shows that coffeehouse leader stability is highly correlated to store performance. In Q2, 80% of our 5-shot coffeehouses had a leader who had been enrolled for more than a year. We also announced new ways for partners to share in our success. During the quarter, we announced we would shift to weekly pay and introduced a new quarterly reward program for baristas and shift supervisors. This program recognizes coffeehouse teams for strong performance across sales, operations and customer service. Looking ahead, we'll continue to strengthen the supply chain behind Green Apron Service. Our focus is on improving costs, availability, flow and accuracy to meet our pace of innovation and support consistent execution as our business grows. Our goal is really simple. If it's on the menu, customers should be able to order it. We're also tackling technology, equipment and process improvements to enable even better craft, connection and speed. Second, our disciplined menu innovation, energized marketing and redesigned Starbucks Rewards program continue to drive demand. Our lean organizational structure is allowing us to innovate and execute quickly. This is already showing up in the pace of our menu innovation in the quarter, which included new bakery items and an elevated bake case, premium Matcha beverages and our 1971 dark roast coffee. It's innovation focused on what customers want, geared for both the morning and afternoon occasion and built for easy execution in our coffeehouses. In April, we launched new energy refreshers and our new mango flavor. Both have exceeded our expectations and strengthened proven $2 billion platform. Customers can now tailor the caffeine level of the refresher with the same ease and flexibility as flavors, creating more reasons for customers to visit later in the day. We'll continue to build on a refresher platform through the year, and even more flavors and blended versions as well. Our upcoming summer menu features innovative drinks and merchandise that build on our iconic platforms and mix is soon to be favorites with returning classics. It's designed around what customers want in both the morning and afternoon. A highlight includes the tropical butterfly refresher with a striking look and refreshing flavor and like other refreshers, it will be available with customizable energy. We believe it's a great way to kick off this summer. Marketing continues to amplify our brand as well. We're back in culture, whether it's major music moments like Coachella, global stages like the Winter Olympics or tech platforms like ChatGPT. We're engaging with customers in ways that feel authentic and distinctly Starbucks and is helping deepen brand loyalty and fuel fandom. U.S. 90-day active Starbucks Rewards membership reached a record 35.6 million with both rewards member and nonmember transactions growing year-over-year. Our new 60-star redemption option has become our most used reward, accounting for approximately 1/3 of all redemptions. And while still early, we've seen a growing number of customers visit 4 or more times a week since launching last month. We've made Starbucks Rewards a growth engine again, positioning it to drive new customer routines, deeper engagement and increased frequency. And that connection is showing up in the brand. Brand affinity continued to rise in the second quarter, reaching 5-year highs in consideration and purchase intent. Gains were led by Gen Z and millennials and more customers now believe their Starbucks purchase is worth it compared to a year ago. This shows what Starbucks continues to become, more visible, relevant and loved. Third, customers are responding to a great coffeehouse experience. Coffeehouse uplifts are driving positive customer feedback and transaction trends, reinforcing the role of the coffeehouse experience in our return to growth. We're investing in that experience at scale with more than 300 uplifts now complete on budget and with 0 closure days. We're accelerating this work over the next 2 quarters and expect to have more than 1,000 uplifts completed in our top 20 markets by fiscal year-end. Our return to growth has also sharpened how we manage our coffeehouse portfolio. The Grow report paired with improving company-wide comp trends is helping us more clearly identify outliers, focus resources and raise standards across the system. We're also applying the same level of discipline to coffeehouse development as we reset our portfolio and begin ramping unit growth. Finally, broad-based momentum across our international markets in Q2 highlighted the strength and resiliency of our global brand. Japan had an outstanding quarter, led by a record sales week over New Year's, robust tourism and strong additions to our menu. And in South Korea, our Aerocano launch in February drove incredible demand with more than 1 million cups sold in its first week. China delivered transaction-led comp growth for the fourth consecutive quarter as Starbucks remained the top away-from-home coffee choice for Chinese consumers. We also completed our transaction with Boyu after the close of our fiscal quarter, bringing together Starbucks globally trusted brand with Boyu's local market expertise to unlock attractive long-term opportunities in China. With a rebased portfolio, the Starbucks China team is eager to step back into growth, with plans to expand Starbucks footprint from over 1,000 county-level cities today to more than 1,500 in the next 3 years. As our International business moves towards a nearly 90% license model, we're simplifying our structure and strengthening how we support our business partners. This puts decisions closer to customers and local markets, and it lets us focus on setting standards and sharing best practices. It's a model built for speed, accountability and scale. Taken together, we're encouraged by the progress we've seen across key markets during the quarter, and we're confident in the role of our international portfolio as a durable growth engine over time. So to conclude, Q2 marked a significant step forward in our turnaround. We delivered growth on both the top and bottom line, reflecting strong execution of our Back to Starbucks plan. Operational discipline is working with labor, throughput and availability moving together and with brand momentum translating into comp growth. Our focus now is on sustaining our momentum and making our results repeatable and durable, all while delivering a healthy cost structure that supports profitable growth. It's how we turn progress into consistent results, and that's how we create long-term shareholder value. This is Starbucks. There is more work ahead and we're focused on it. Our priorities are clear, the organization is aligned, and we're confident in the opportunities ahead. We're building a company that learns as it executes, one that stays close to the coffeehouse, moves quickly to scale what's working and keeps getting better over time. We know the path forward will not be linear, but it is clear the changes we're making and the momentum we're building are starting to compound. I want to say thank you to our partners around the world for the leadership, discipline and care they bring to our coffeehouses every day. You delivered these results, and you should be proud. With that, I'll turn it over to Cathy to walk through the financials in more detail. Catherine Smith: Thank you, Brian, and thank you all for joining today. Our second quarter results demonstrate the progress we're making on both the top and bottom line to support lasting profitable growth in our business. I'm grateful to our partners across our coffeehouses, supply chain and support centers whose commitment and passion are delivering the best of Starbucks to our customers every day. I'll now share our Q2 results and then provide additional insight into the months ahead. Our Q2 consolidated revenue was $9.5 billion, up 8% (sic) [ 9% ] to the prior year. Global comparable store sales grew 6.2%, driven by continued strong performance across both our North America and International segments. As of March 29, we had 41,129-Starbucks in our global portfolio with 11 net new coffeehouses in the quarter. Our North America segment revenues grew 6% in the quarter to $6.9 billion with comparable store sales growing 7.1%. And in the U.S., our comparable store sales growth also accelerated to 7.1% led by transactions up more than 4%. Average ticket grew nearly 3%, driven by a combination of our growing delivery business, beverage mix, our artisanal bakery launch driving greater food attach and the continued popularity of modifications led by our Cold Foam platform. Cold Foam, our leading modifier, continues to grow in popularity, with platform sales up more than 40% in Q2 across our U.S. company-operated business. Innovation across new flavors and the introduction of protein have further strengthened the appeal of Cold Foam, especially among Gen Z. We also believe Free Mod Mondays as part of our new Starbucks Rewards program will continue to support its growth. Our comp performance reflects our strengthening business fundamentals, world-class customer service through Green Apron Service, menu innovation that shows up in a welcoming third place and a strong, relevant brand supported by our marketing and rewards program. This is the Starbucks that drives durable growth. Our 90-day active Starbucks Rewards program grew to 35.6 million members in Q2, up 4% year-over-year. We saw steady member growth from Q1 to Q2, which is a positive shift from prior year seasonal sequential declines. Members are adapting quickly to our new loyalty program. And while early, we're encouraged by the level of engagement we're driving across tiers. Also, since launch, both the rate and volume of U.S. card loads have grown steadily, exceeding our expectations. Overall, our North America store base grew by 25 net new coffeehouses to 18,385 at the end of the quarter. This included 44 net new openings across our company-operated business as well as 19 net closures in our licensed store portfolio. Our North America licensed revenues were roughly flat year-over-year, reflecting these net store closures in the quarter. Notably, U.S. licensed stores returned to positive system-wide comps for the first time since Q1 fiscal 2024. This was led by record airport volumes and growth in other discretionary segments, together with continued recovery in retail and grocery. Moving to International. The segment reported $2.1 billion of net revenues in the second quarter, growing nearly 8% (sic) [ 10% ] year-over-year. International comp sales grew 2.6%, once again led by transactions which were up over 2% in the quarter. As Brian mentioned, all 10 of our largest international markets, including China, Japan, South Korea and Mexico, delivered positive comps for the first time in 9 quarters. Of note, Starbucks China delivered another quarter of transaction-led growth with comps up 50 basis points on transaction growth of more than 2%. On a 2-year basis, comps were stable sequentially versus Q1, smoothing out the timing of the Lunar New Year. Our International store portfolio was 22,744 at the end of the second quarter, down 14 net coffeehouses from Q1. This includes the impact of 55 store closures as part of last September's portfolio decisions. We'll get to guidance shortly. But as we look to the rest of the fiscal year, we're well positioned together with our international licensee partners to return to net unit growth. In Channel Development, our Q2 net revenues grew 38% (sic) [ 39% ] year-over-year primarily due to higher revenues from the Global Coffee Alliance. Our new multi-serve refreshers concentrate which we introduced in North America last quarter is shaping up to be our largest CPG launch in over a decade with strong customer reception and repeat purchase behavior. At the end of Q2, we also launched coffee and protein ready-to-drink beverages, complementing our growing protein platform in our coffeehouses. Moving to margin. Our Q2 consolidated operating margin was 9.4%, improving 110 basis points from the prior year. This was our first quarter of consolidated margin expansion since Q1 fiscal 2024 led by the International segment. International operating margin grew by approximately 790 basis points to 20.3% as the segment continues its broader recovery. As expected, approximately half of our international margin expansion was driven by held-for-sale accounting related to Starbucks China, which temporarily reduced store operating expenses and D&A by approximately $118 million in the quarter. This dynamic concluded at the start of Q3 with the transactions closed. In North America, our Q2 operating margin contracted approximately 170 basis points to 10.2% as our progress on operating leverage and cost discipline continued to partially offset our annualizing investments in Green Apron Service. Our North America margins in the quarter were also impacted by roughly 190 basis points of product and distribution cost increases as a percentage of revenues and greater-than-anticipated legal accruals. About half of the product and distribution increase was driven by innovation-led product mix, and the remaining balance was inflation largely related to tariffs and elevated coffee prices. While market dynamics can change, we expect these tariff and coffee pressures to moderate in the back half of fiscal 2026, especially given recent trends in coffee prices. As a reminder, our results typically lag the market, both upward and downward due to our coffee purchasing and hedging practices. And finally, consolidated G&A in the quarter decreased 5.5% as our organizational streamlining efforts continue to actualize this fiscal year. Our Q2 effective tax rate rose to 27.1%, primarily due to taxes accrued in advance of the planned sale of Starbucks China's retail business. Higher pretax earnings and related permanent and discrete tax items also contributed to the increase. All in, Q2 earnings per share grew 22% year-over-year to $0.50, our first quarter of EPS growth in more than 2 years. Before we discuss our outlook, I'd like to spend a few moments on China. Our previously announced transaction with Boyu Capital closed shortly after quarter end. Beginning in Q3, the retail operations of Starbucks China will be deconsolidated from our financials and will be reported as part of our broader licensed portfolio. We will also cease our quarterly reporting on China stand-alone revenue and comps. In addition, we will make an informational 1-pager available shortly after this call on the quarterly results and supplemental data page of our Investor Relations website. The overall value to Starbucks is anticipated to be more than $13 billion, including the net present value of our licensing economics. As part of the transaction, Starbucks received approximately $3.1 billion in gross cash proceeds before taxes. Prior to closing, we repaid our $1 billion February maturities and expect to deploy the remaining proceeds toward additional debt reduction and ongoing balance sheet management. These actions further strengthen our financial position consistent with our BBB+ Baa1 rating. Our capital allocation philosophy reflects a disciplined approach across 3 priorities: strategically investing in the business, maintaining a competitive dividend and returning excess cash to shareholders, supported by our investment-grade profile. We believe this framework positions us well to invest opportunistically, navigate cycles and create durable value over the long term. Turning to our outlook for fiscal 2026. Our Q2 results highlight the progress we continue to make in our turnaround and momentum we've built around our strategy. From the outset, we've been clear that top line improvement would come first with earnings growth to follow. As our comp performance becomes more consistent each quarter, this growth, combined with our cost savings efforts are starting to show up in margins. Starting at the top of the P&L, we are raising our fiscal 2026 global comp guidance to 5% growth or better, led by 5% or better comps in the U.S. Customer demand trends in our business remain strong today. And while history demonstrates the resilience of our brand through periods of high gas prices, the current macro environment brings heightened uncertainty to our operating landscape and consumer behavior more broadly. Our comp guidance accounts for these considerations. In addition, our guidance now assumes a joint venture licensing structure in China, and in the back half of this fiscal year, we expect our China-related revenues to be less than 20% of what we would have previously reported with China as company operated. As such, we now expect our consolidated fiscal 2026 net revenues to be roughly flat year-over-year. We continue to expect slight year-over-year growth in our fiscal 2026 consolidated operating margins driven by the net effect of a number of factors. First, we expect sales leverage to build over the next 2 quarters as we execute with discipline and advance our cost savings initiatives. These serve as offsets to our investments in our Back to Starbucks priorities as well as other headwinds. Second, as I mentioned earlier, we expect coffee and tariff pressures to start easing as we move into the back half of the fiscal year. Third, our China JV structure is expected to be margin accretive with roughly half of its revenues flowing to operating income. We remain on track with our $2 billion cost savings plan. These are gross savings, which we expect to realize through fiscal 2028, and balanced across product and distribution costs, OpEx and G&A. This year, the impact of our efforts will be most visible in G&A as much of our realized savings across the P&L are being offset by our strategic investments in our Back to Starbucks plan. We continue to expect our consolidated G&A dollars to run below fiscal 2023 levels even after incorporating greater performance-based compensation related to better-than-expected financials. Putting this all together, we are raising our EPS guidance at both ends of the range to between $2.25 and $2.45. China's transition to a JV structure is now expected to be relatively EPS-neutral this fiscal year. While global macro factors can introduce variability in our results, our guidance reflects our current view and confidence in the underlying business. Finally, from a unit count perspective, we still expect to add approximately 600 to 650 net new coffeehouses this fiscal year. We expect International to accelerate its growth over the next 2 quarters to achieve 450 to 500 net new coffeehouses in fiscal 2026, of which China still comprises close to half. We also continue to assume 150 to 175 net new U.S. company-operated coffeehouses this year, and we will continue to assess our existing portfolio as we rebuild our development pipeline. In conclusion, our results this quarter deepen our conviction in the long-term trajectory of our business and our Back to Starbucks plan. Our improving execution, brand relevance and customer experience reflect who we are and the progress we're making. This is Starbucks. Our work isn't done, and we remain clear eyed about our path forward to deliver a stronger future. And with that, we are now ready to take your questions. Thank you. Operator? Operator: [Operator Instructions] Your first question comes from Brian Harbour with Morgan Stanley. Brian Harbour: Yes. I'm curious if you could talk about sort of the -- just the service times. In the past, you've kind of updated us on where you're on average, if we sort of pulled your employees, do they feel like they're kind of hitting targets there? And how do you think that the algorithm changes you made have supported that. And when you add scheduled ordering, how will that further address some of the service time improvements that you've made? Brian Niccol: Yes. So thanks for the question. Obviously, our focus on what I think we've described in the past is 4/4/12. So 4 minutes in the cafe, 4 minutes in the drive-thru and better than 12 minutes for promised times in mobile order pickup is still very much a focus area. And as you mentioned, we're kind of continuing to make, what I would call smart queue smarter queue going forward based on learning with higher transaction levels. And so right now, we've got about 80% of our stores or better hitting the metrics. And we believe as we roll out the scheduled ordering, that's going to enable us to improve our performance, more specifically in the MOP arena because we'll hopefully be able to pull some things out so that we have more predictable orders in the queue. And the other thing that we're working on, too, is just continuing to figure out a lot of people order in mobile or in some cases, in the drive-thru via mobile when they're already on-premise. And so we're learning how to sequence those orders better. So that they get treated correctly, given where they are in proximity to actually the order taking place. So the team is doing a great job on this. We continue to make great progress. And as a result, I think, our customers are feeling -- seen in the cafe and more importantly, getting their orders on time in the right amount of time. And then in mobile order and drive-thru customers are seeing their orders show up on time and again, at the speed requirements that they would hope for. Operator: Your next question comes from Sara Senatore with Bank of America. Sara Senatore: A couple of questions, maybe a 2-part question about the margin, if I could. The -- I guess you mentioned, Cathy, the impact of innovation on part of the cost of goods. I was just wondering if maybe that is something that you anticipate to persist. It seems like the -- in like the increase in the EPS guide was maybe a little bit less than I might have anticipated for such a big comp beat and raise. And I'm just trying to understand kind of puts and takes and in particular, on the COGS line and relative to, I think, some of what you had portended about maybe cost savings to come in future quarters in the supply chain. Catherine Smith: So let me start with the big picture on the EPS raise to our guidance and the implied flow-through and then that will maybe dovetail into the COGS question you had. So we're really obviously very pleased with our continued progress starting on the top line, the success we're seeing both in execution at coffeehouse as well as through the menu and marketing efforts. And so very pleased there. We are seeing also sequentially each quarter the improvements showing up in U.S. company-owned in particular, in North America, as the teams continue to get better and better at scheduling. So we're getting better flow through there on top of our Green Apron Service investments every quarter. But in the macro, we're also cognizant of the macro environment, and we want to make sure we're prudent as we continue to think through the remainder of the year. Obviously, we still have half a year in front of us. So that would suggest a little bit of why you're seeing maybe not as bullish in EPS flow-through given the top line that we're expecting. With regards to the COGS element of that, though, we are seeing first half of this year continued coffee elevation, price elevation year-over-year. It's almost not quite, but I think it's almost $1 a pound year-over-year change. And then the implications of tariffs as they run through our inventory, obviously, both of those we expect to abate toward the back end of the year. So both the coffee prices, we expect to continue to come down and they have a little bit as we -- our coffee always lags coming through our financials. And then the tariff implications we expect to roll through the inventory very quickly. So the back half, we should see better on both of those. So all in, though, really pleased with both the performance on labor and the performance in the menu, and we'll continue to tighten that up, and it will show up in our -- obviously, our earnings flow through in time. Operator: Your next question comes from David Tarantino with Baird. David Tarantino: And congratulations on the progress here. Brian, my question is about the operations improvement that you've seen. It's been pretty dramatic over the past, I don't know, 3 or 4 quarters. And I was wondering if you could maybe opine on how much runway you think the operations improvements alone still have in terms of being able to drive comps? I know it's may be difficult to separate that from some of the other things you're doing. But just perhaps you can maybe opine on that and give us an update on how those original pilot stores of the Green Apron Service model are doing relative to the base, that would be great. Brian Niccol: Yes. Thanks, David. And I appreciate you pointing out that the operation has really improved. Hopefully, everybody is experiencing it. I know I'm experiencing it as I get to visit markets kind of all over the United States and around the world. And the way that we really are tracking this is through our Grow scorecard. So you heard me mention in my prepared remarks, we've got a huge move forward in the number of stores that are achieving 4 shots. And that is really an important piece of the puzzle. But what I would say is pointing to more opportunity to come. We still have close to 40% of our stores where they're not at 4 shots. And so we know what we need to work on. The thing that's great about the Grow scorecard is it gives you clarity on what's working and where we could be better. And so it gives a very simple tool to coach. And it also gives us a very simple tool to recognize for great results, which we're seeing a lot of those examples as well. And then when I look at also just the speed of service and the way we're deploying, you kind of heard Cathy mentioned this, I think we're just getting better at how we're deploying, allocating the labor based on the transaction growth that we're seeing in the business across all these different access points, right? The delivery channel is growing for us in a big way, cafe business is growing, as is our mobile order pickup business. So as we learn about those different experiences and how those transactions are coming back to the business, we have the ability to better deploy and even get better customer experience. And the other thing that I think is really important to point out is we only have done the uplift in about 300 stores. And if you've experienced a store with an uplift, the third place truly is alive, vibrant. Our partners, I think, are really proud of their coffeehouse, and they really take to heart the idea of being the community coffeehouse again. And that's going to ramp up to well over 1,000 stores by the end of this year. And then we've got ambitious goals to get that across 8,000-plus stores in very short order. So we're seeing upside after those uplifts occur, both in the morning and afternoon dayparts. So operationally, I believe there still is a lot of opportunity for us to get more and more performance out of our stores because our partners are going to be the right-sized roster deployed correctly. And then we're going to support them correctly with technology behind the scenes so that the supply chain has the product showing up at the right time for them. And then I think the other key piece of bringing the third place back to life is an opportunity that our customers embrace and ultimately, our partners truly embrace. So I'm really excited about where we are. I mean, we've made tremendous progress over the last 18 months. And if you think about it, it hasn't even been a year that we've rolled out the Green Apron Service model. It will be a year come August. And we're continuing to see those kind of lead stores still lead. And the thing that I love about that is we're learning from those lead stores. So I'm excited about where we are, but I am -- Mike was here with me, I think he'd be excited about telling you about all the things that are still to come in our operating model and what our partners can deliver in being the best customer experience company. Operator: And your next question comes from David Palmer with Evercore ISI. David Palmer: Just a quick model question and a big picture one. With regard to the cost of the Green Apron Service, investments in the quarter versus the year. Any changes in how those investments -- how you're thinking about those investments and maybe just a sense of how it staged through the year there versus the productivity that you're planning for this year? Any sense of that by quarter and how it's phasing through the year would be helpful. And then a big picture one. I know a lot of people are focused on the specialty beverage market. There's forces colliding. There's big traditional QSR players that are getting into the market. There are specialty coffee players that are expanding their beverages. And I'm wondering Brian, if you're looking at this big market as you're executing your initiatives, and obviously, those seem to be working if you have a thought about where this market overall is going. Brian Niccol: Yes, I'll take the last piece of that question, and then I can hand it over to Cathy. But what I think is -- we're seeing is just the reality that more and more customers are interested in drink experiences, whether that's morning rituals or afternoon experiences. And I think you're also seeing customers or consumers, frankly, at all different age cohorts wanting to have a third place experience. And so look, it's almost, I think, a complement to the fact that our refresher business is being imitated in so many places. And what my experience has been is when the category starts being talked about, the market leader benefits. And that's going to be us in this scenario. And I believe the innovation that we're bringing to refreshers, the innovation that we're bringing to coffee, the innovation that we're bringing to espresso is going to continue to position us really well in culture. And it's also going to position us well to lead on kind of the growth side of the category that we're going to continue to see. So I think it's a great sign. It's a telling sign that we're actually responding to what customers want. And I think others are trying to imitate and I think we're in a great place with our scale and with our innovation and the pipeline that we've got coming really across how people want to experience drinks. I hand it over to you, Cathy. Catherine Smith: Yes. And maybe only because it's become my own personal favorite, I'm going to expand on refresher really quickly. What we're seeing is great incrementality as well with our new refresher customizable energy platform. We built on a $2 billion platform. As Brian said, leading position there. We're seeing it show up elsewhere with competitors. But now that we added the customizable energy, we're seeing people take away the caffeine in the afternoon. We're seeing people that weren't energy drinkers in the morning become energy drinkers in the morning with our refresher platform because of the additional caffeine. And so that just showed us that a platform that was already a great and growing platform when we added the customizable energy, it became even bigger and that's become a household favorite at my house. To answer your question on modeling for the cost of Green Apron Service, as Brian said, we'll annualize Green Apron Service in August. We'll start -- it started rolling out, remember, in a couple of like 2-week waves in August. And so we're about the same level each quarter until then. And then obviously, it will come down quite a bit from there. And then on productivity, we watch throughput. Mike and the entire Coffeehouse and Barista team every day are working on that as well. And so we'll continue to get better and better at that, too. Operator: Your next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: Congrats on the quarter. I wanted to ask on the comp momentum, really impressive, especially in the context of the noisy consumer backdrop. Can you give any more color on the cadence of comps as you move through the quarter? And anything that you're seeing in April, given what's going on with gas prices. And then, Cathy, if I could just clarify on the EPS side. Now with the 5% plus comps, I understand you're being a bit more prudent. Can you just help us understand what you would need to see to get towards the top end of the range on the guide and perhaps versus the bottom. Brian Niccol: Yes. So I'll take the first part and then I can hand it back over to Cathy on the second part. The good news is we really saw strength all quarter long. And I kind of go back to what I was talking earlier about when I think David asked a question about operational performance. One of the things that was great that we saw month to month to month is just this improvement in our Grow scorecard performance. You heard me reference how many stores now are achieving 4 shots. I want to make sure everybody understands what I mean by that, which is we're tracking now customer comments. We're tracking throughput. We are tracking staffing correctly. Obviously, these are all things that ultimately you see show up in the scorecard. And if you perform on your sales, your throughput, your staffing, your customer performance and your food safety, the ability to get to 5 shots. And where we've seen kind of a real change in performance is once people get north of 3 shots, 3.5 shots. And so what we did see is operationally, we saw that improve every month. And as we enter or I guess, get ready to exit April, we've continued to see that strengthen our operating performance. And we've also continued to see the consumer stay in the business, consistent with what we saw in the Q2 for our company. So we haven't seen a lot of the macro effects trickle into consumer behavior as it relates to Starbucks. But I think we want to be cautious going forward because we're not sure how this will play out as the issues continue to happen, whether it shows up in gas prices or utilities in other ways or other input costs like fuel costs. So -- but we're excited very much about what we're seeing from an operational performance, how the customer then responds to that great operational performance and then the great work that I think the marketing and menu team are doing to bring relevant drinks, and you'll see us continue to push forward in food to go along with those great drinks. And so I'm really excited about where we are. And I'm optimistic that if we stay the course on executing Green Apron Service, executing the third place experience with all these uplifts and then continuing to support our partners with the right rosters, the right deployment and then the right menu and marketing innovation, we should continue to be rewarded with customers' business in any environment. I'll let you cover the second part. Catherine Smith: On the EPS guide. So what would you have to believe, as you said, we're trying to be prudent given that we still have the macro backdrop that we do. But what would you have to believe? Well, first of all, we start with top line. So we said 5% plus, it would need to lean on the plus. That will obviously help the EPS in the guidance range between the $2.25 and $2.45 toward the top end. Additional things that are contemplated in the back half of the year, we need to see coffee prices abate. Obviously, we continue to take a prudent position there, but we'd like to see those continue to abate. We'll want to make sure we're watching fuel and the implications of fuel, obviously, on our business as we get surcharges, but also on the consumer. And then lastly, we'll continue to tighten up our innovation performance on COGS in particular. And as we do all of those things, that would put us at the top end or who knows what. And so we'll start with top line first. Operator: Your next question comes from Chris O'Cull with Stifel. Christopher O'Cull: Congratulations again. Brian, it was interesting that the U.S. is growing transactions across all income cohorts, including, I guess, lower income, which is a segment that has given most fast food or QSR concepts a challenge even with significant discounting. Why do you think the company has been successful in engaging that cohort. Brian Niccol: Yes. Thanks for the question. Look, this is one of those things I believe what we see with folks is when you give them an experience that they feel is unique, differentiated, special, a little touch of luxury, it goes a long way. And we're seeing that play out with every income cohort. So if you're somebody that's viewing this as your splurge, they're perceiving this as, yes, that was worth it for a little splurge. And then for others, where they're seeing it as they're ritual, we're getting great feedback that we're now performing with the speed and the consistency that they're looking for. When we're seeing the occasions where people want this to be a community connection point, we're being able to show for them on that occasion. So I think this is what we talked about a while ago when I first said, hey, we need to get back to being Starbucks, which is we have to demonstrate for people that it's worth it. And if it's on the low income side where it is seen as a bit of a splurge and it's a little bit of indulgence. And by all means, we need to have those drinks that they want. And then we need to give them the experience where they feel like, you know what, for their hard-hard earned dollars it was well worth the spend. And that's the feedback we're getting. And also, I got to tell you, too, I think, Cathy mentioned this, most recently, with our refreshers work, we're also seeing this play out in a really effective way too with all income cohorts. Where earlier in the morning, you're seeing more of the low-income consumer really adapt to the idea of a higher caffeine refresher. And later in the day, you're seeing some of the higher income people take the caffeine down a little lower, and giving themselves the customization that they want later in the afternoon as it relates to a refresher experience. So we're focused on being a great experience regardless of what income cohort you're in. And I'm really proud of our partners because they are the ones that are executing that coffeehouse experience that resonates with folks where they walk away saying, you know what, that experience was worth it. Operator: Your next question comes from Peter Saleh with BTIG. Peter Saleh: Congrats on a great quarter. I just wanted to ask about the rewards program. I know the changes rolled out in March, so really not that much of a benefit to the second fiscal quarter, yet you did see some growth in the Rewards membership. So hope you could give us a little bit more color on what you're seeing in April? How has that accelerated? And on the flip side, sometimes when you change Rewards programs, there's a little bit of a disruption. Are you seeing a disruption? Or are you seeing an acceleration? Any sort of details around that would be very helpful in April. Brian Niccol: Yes. Thank you. And look, I got to give a lot of credit to our Rewards team. They spend a fair amount of time making sure that this program was executed with excellence. And look, I'm delighted to say our rewards, the amount of people in our rewards program went up. We fully expected there will be some disruption, and we'd have to work our way back through it a little bit. But instead, it was just the opposite. And I got to tell you, I happen to be a reserve member. And even on Saturday, I got my new Black Reserve card. And if some of you are at that reserve level, I encourage you going to the app and order your reserve card, it's pretty cool to get. My wife might have had some envy when mine showed up. But the thing that I think is really powerful in this Rewards Program is we are seeing frequency increase, granted, this is early days. We're also seeing people really take advantage of the new lower kind of stars redemption opportunity, where with 60 stars, you can get $2 off. And the team is doing a great job. And I think it demonstrates you don't have to make our rewards program, a coupon book, which is where I felt like we were when I first got here and we had to stop doing all that discounting. This needed to be about engagement. This needed to be about personalization, and this needed to be about recognition. And that's exactly what you're seeing with our 3 rewards tiers. Now the ability to participate in the Starbucks shop and based on where you are, whether you're black or -- I'm sorry, reserve or green or gold, you even get access to unique items in the merch shop. So I just think the team has hit the ball out of the park on this one. It's early days, but I love the fact that we've already seen more rewards customers jump into the program. And by the way, usually in this quarter is when we usually traditionally see a dip in rewards participation. So we kind of bucked the trend. And then we also rolled out a new program that I feel just has tremendous momentum and a tremendous pathway in front of it for more growth and more engagement. Operator: Your next question comes from John Ivankoe with JPMorgan. John Ivankoe: One of the more difficult things to model is labor dollars per operating week, whether looking at versus '23 or versus '19, considering Green Apron, all the costs, obviously, the additional labor hours and additional people, additional training you put into the store. So really, the question is how -- maybe just kind of directionally how labor dollars per operating week may settle out in the next couple of years, especially given some of the initiatives and programs that your COO, I know, is planning to put in, in the relatively near term. How much efficiency, in other words, could we get out of existing labor hours to potentially use to drive additional transactions? Brian Niccol: Well, let me just on the first piece in regard to like efficiency. I think the way we're going to be more productive is through the ability of driving more throughput with the new rosters and the deployment that we have. We don't see our way forward with cutting. We see our way forward with being creating technology or creating equipment or creating processes to support the labor hours we have in the store to be more productive, meaning more transactions, more throughput. And I think the team is laser-focused on this. We know we have a real opportunity to continue to be better at how we use the Smart Queue system. And we know we have an opportunity to be even better with the deployment. And we also know we've got an opportunity on how we set up the flow, whether it's the cold bar, our food system. And then obviously, I'm really excited about the new Mastrena that we've got coming down the pike where all of a sudden, you're going to be able to get 4 shots done in less than 30 seconds. So I think you're going to see us be able to meet the demand and do it in a way where we're able to drive more throughput, both in peak and in kind of these 15-minute, 30-minute increments that we're tracking. Your other question, we don't actually think about it the way I think you described it, but maybe we can... Catherine Smith: Yes. Let me -- maybe I can add a little bit more color there. So as Brian said, we want to make sure we're supporting our Green Apron partners every time they're engaging with a customer to make that the best and most rich experience. So we're going to continue to invest there. If you're thinking through like hours and rates is the way I think about it, every hour that's a customer supporting -- I mean a Green Apron partner supporting a customer, we want to support that. What we would want to do though is help them to be able to deal with more throughput like Brian described or those non-covered hours, those hours where they're not supporting a customer. If there are things we can do to help our Green Apron partners, eliminate those kinds of tasks, then we would love to do that, and we can do that through technology and other ways, which we're doing. So longer term, total hours, I wouldn't expect to necessarily go down, especially as we continue to drive more and more demand. Rate, it will continue to be the area that we'll want to focus on, some jurisdictions require a rate already, and so we'll be thoughtful there. But I would think about it as kind of focusing on throughput in the covered hours or those hours where our Green Apron partners support our customers and then trying to be as effective and efficient as we can on the hours where they're not supporting a customer. Operator: Your next question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: My question is on the kind of EPS growth algorithm. I think at your Investor Day, the long-term algo you put out there through fiscal '28 pretty much assumed 25%-plus type EPS growth in fiscal '27 and in fiscal '28 to hit your former I guess, what is upwards of $4 target and with revenue being only 5% of that, clearly, the majority of the growth is coming from operating margin expansion. So with that as a backdrop, one, I was just hoping you can talk about the primary buckets of that. I think it's the $2 billion savings and how you kind of see that by year. And then just as you raise, like you just raised your fiscal '26 EPS guidance, should we be flowing that upside through to the former kind of absolute EPS guide approaching again $4, or do you think of that more of just an EPS pull forward of growth and therefore, we should still have that fiscal '28 number kind of as is. Catherine Smith: So Jeff, maybe I'll start and then, obviously, Brian can add anything on. So we're really pleased with the performance we're seeing already and to be able to come in and increase our guidance so quickly even after just giving it at Investor Day. Obviously, it's a testament to our strategy that's working. So we'll stick with that. On your point about op margin expansion, absolutely, that is -- the key to the EPS targets we gave for 2028. And it is -- a lot of it's top line. Remember, about half of it is in top line and the other half is in that cost savings program. The cost savings program is a multiyear program, the $2 billion. You're seeing it probably not as obviously this year because we've got a fair amount of savings, but it's helping to offset some of those investments we're making with Green Apron Service. We're also obviously seeing it come through in some of the near-term G&A work we've done. But you should expect it to come through in '27 and into '28 as well. Some of those things we're working on take a couple of -- a little bit of time to get -- pull it through the P&L, which we're doing. So we've got a robust pipeline. What I can tell you is the number of initiatives have grown since we last spoke. So that's great, and we feel very confident we're on track for the $2 billion program. And then lastly, you asked about flowing it through. I would say we're really not changing our FY '28 targets at this time. It's really early. We have another quarter behind us, let's just keep putting them down. And then at the right time, we'll come back with some different guidance. Operator: And the last question comes from Sharon Zackfia with William Blair. Sharon Zackfia: So I think everyone is really impressed by the operational improvement. And I guess I wanted to drill down a little bit on how you keep the momentum going forward. You touched on this a bit. But are the scorecards fluid, meaning what -- how do you keep those original cohorts improving? Or is it just a matter of muscle memory over time? And then secondarily, I'm sure you studied 2023 from the outside, it looked like everything was good until abruptly it wasn't. So how do you -- and what safeguards have you kind of put in place so that you can diagnose any shortfalls to start to happen operationally to address them really quickly. Brian Niccol: Yes. Look, this is why having, I think, clear standards and using a clear tool like the Grow scorecard is so important. And obviously, one of the things I will tell you is, as we get more and more people close or more and more coffeehouses close to the performance standard, we raise the standard. And I think that is just the reality of wanting to always be world-class. And the thing that I think is really exciting about the Grow scorecard is it's correlating to performance. And then also, it's giving us clarity of what's working and what's not working. And so that's going to be our best tool to understand what's happening in the coffeehouse. So I also think, too, just as an organization, we are much closer and in sync and in tune with our coffeehouse and the customer that's coming into the coffeehouse. So you got to stay close to what's happening from an operating standpoint. You got to have signals like a Grow scorecard, but you also got to be in the coffeehouses, talking to our partners that see what's happening on a day-to-day basis. And I think our team is doing just that. And we will continue to make sure that, that is the case. I was actually just kind of looking at my past 3 or 4 months. And it's great to see how many coffeehouses I was able to visit over the past 3 or 4 months. And there's just -- it's invaluable to be able to be in a store with your partners, with your coffeehouse leader to hear what's working and what's not working. Because we don't have it all figured out. But the feedback I get from our teams is we're moving in the right direction. They love the Grow report, and they love getting the feedback that's simple, actionable and very clear. And so that's probably our best tool to make sure that we don't take our eye off of being a great operating company that's focused on great customer service. But the other key piece for us is whether the consumer is in a tough situation or in a healthy situation. My experience has been if you execute with excellence and you frankly give the customer the best possible experience for their hard-earned dollar, you'll be rewarded with their business. And that's what we're going to stay focused on the things that we can control. Operator: And that was our last question, so I will now turn the call over to Brian Niccol for closing remarks. Brian Niccol: All right. Well, look, thank you, everybody. And thanks for all the questions. Look, I just want to wrap up here, and I want to reiterate what we've accomplished, right? So over the past 1.5 years, we set a plan, right? We built, I think, determined teams to really start working with speed and rigor. And thanks to the dedication of our partners, I think, some smart investments, operational discipline. And clearly, we now have some brand momentum. It's great to see that the company is back to growth. So clearly, we have more work to do. But I do believe you've seen a turn in our turnaround, and I'm really confident in the opportunity ahead of us. Because of what I see just changing across our company. And I want to just share a little fun story. I had the opportunity to visit a coffeehouse in Nashville last week. And so I'm going to be specific here. So the team knows I'm talking about them. I was at Charlotte Pike and 22nd Avenue in Nashville. And I got to tell you, the store was transformed from my first visit about a year ago. When I walked in, all our partners' eyes were up, high energy, couldn't be more excited about providing great customer service. There was a true sense of community in the cafe. I had customers that were sitting on couches grabbing me saying, "Hey, I love the new furniture. I love the new third place experience." And I'd tell you, it was showing up in their performance as well. And I'm happy to say this was a 4.5 shot Grow score, so not just 4 shots, but 4.5 shots. And I'm sure they're on their way to 5 shots. But it was amazing to just see the transformation in 1 year and really the effort that our partners were making to provide world-class customer service. The other thing I want to share, too, is I really do see in our support center that our partners are embracing the accelerated pace of change. And they are really driving forward a lot of work that's making a real difference in the experience that we deliver in our coffeehouses. And I believe our support center is much more focused on the customer. And I believe speed is becoming an advantage as we will start operating with more confidence going forward. So look, together, we really are building a winning culture that makes our Q2 results, I think, repeatable and durable and truly represents what Starbucks is. It's one that's going to get better as we execute, one that's going to stay close to the coffeehouse, one that as we scale things we will scale the things that work and we'll learn from the things that don't, and one that keeps raising the bar for both ourselves and our customers. And I really do believe, Back to Starbucks is demonstrating that we're strengthening our execution. And our execution is now showing up in our results. So our focus will be now on consistency so that today's progress really does become ongoing performance. So again, thank you to our partners really around the world for the care and discipline that they are bringing to our coffeehouses. I want to thank our support centers for the focus that they put on getting the right work done at the right speed. And obviously, I want to thank our customers and our shareholders for your continued trust in the Starbucks business. And I'm sure we'll be talking here in the next couple of months. So have a great day. Thanks, everybody. Operator: Thank you. This concludes Starbucks Second Quarter Fiscal Year 2026 Conference Call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Banco Latinoamericano de Comercio Exterior, S. A. First Quarter 2026 Earnings Conference Call. A slide presentation is accompanying today's webcast and is also available on the Investors section of the company's website at bloodex.com. There will be an opportunity for you to ask questions at the end of today's presentation. Please note today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. I would now like to turn the call over to Mr. Jorge Salas, Chief Executive Officer. Sir, please go ahead. Jorge Salas: Good morning, everyone. And thank you for joining us today to discuss Banco Latinoamericano de Comercio Exterior, S. A.'s results for 2026. I will begin with a brief overview of our quarter, then Annette, our CFO, will walk you through the financials in greater detail. After that, I will come back with an update on strategy execution, some thoughts on the macro environment, and our outlook for the rest of the year. Finally, we will open the line for questions. We began 2026 with a very strong quarter in terms of balance sheet growth while maintaining solid profitability in a highly competitive environment with very tight spreads and wide-open capital markets for LATAM issuers. The main highlight of the quarter was the continued expansion of our commercial portfolio. We reached a record of $12 billion, up 8% quarter over quarter and 13% year over year. This was fully in line with the growth path we have been discussing in previous quarters and supported by the additional capital flexibility provided by the AT1 issuance completed last year. Growth was driven mainly by medium-term transactions across Colombia, Brazil, and Guatemala. On the funding side, deposits once again reached record levels, closing the quarter at $7.3 billion, up 11% quarter over quarter and 25% year over year. This strong performance was broad-based across all depositor segments, with Yankee CDs standing out, surpassing $1.7 billion. This reflects continued client activity, the strength of our franchise, and our ability to continue growing deposits at very competitive spreads, which has also helped support margins in the current rate environment. Turning to revenues, net interest income totaled $70 million, down slightly in the quarter as the balance sheet continues to absorb the full repricing of last year's rate cuts. Latin America has been one of the more resilient regions in a volatile global environment. That has translated into strong liquidity, tighter spreads, and increasing competition. Even in that context, we were able to maintain our net interest margin at 2.34%, supported by disciplined balance sheet management. Strong asset growth, deposit increases, and active liquidity management helped offset pressure on spreads. Fee generation in the first quarter typically runs below fourth quarter levels in our two main fee businesses, letters of credit and syndications, so this seasonal pattern is not unusual. Importantly, when compared with the first quarter of last year, the underlying trend remains clearly positive. We continue to see a healthy pipeline in fees for the second quarter, which is consistent with how activity is evolving. Expenses also reflected the usual seasonality at the start of the year. That said, we do expect expenses to increase slightly over the coming quarters as we continue to execute the investment plan contemplated for the rest of the year. Efficiency levels for 2026 will remain within guidance at roughly 28%. Net income for the quarter reached $56.4 million, return on equity was 14.2%, and our Tier 1 ratio closed the quarter at 17.9%, allowing us to continue supporting growth from a position of strength. So overall, this was a quarter of strong growth and solid profitability despite a more competitive revenue environment. With that, let me now hand it over to Annette for a more detailed review of the financial results. Annette, please go ahead. Annette Vanjorde: Thank you, Jorge, and good morning, everyone. Let me walk you through the financial highlights for 2026. From a financial perspective, this quarter represents a solid start of the year. We continue to grow the balance sheet with discipline while maintaining stable profitability in a lower-rate environment, supported by continued strengthening of our funding mix and solid fee generation despite first quarter seasonality. Starting with earnings and returns, Banco Latinoamericano de Comercio Exterior, S. A. delivered net income of $56.4 million, up 9% year over year and broadly stable quarter over quarter, reflecting the consistency of our core earnings generation. Importantly, return on average assets remained stable at 1.8% even as we continue to grow the balance sheet. This reflects the bank's ability to expand while preserving sustainable profitability. Return on adjusted equity stood at 14.2%, in line with the previous quarter and within our 2026 guidance range, reflecting stable earnings generation. As usual, first quarter results should be assessed in context. The period is typically seasonally softer, particularly for fee income, and this quarter we operated in a lower interest-rate environment, which naturally placed some pressure on spreads and returns. As we will see through today's presentation, despite this backdrop, our first quarter performance reflected the benefits of disciplined balance sheet growth, stable net interest income, continued funding optimization, and higher fee generation compared to the same period last year. Let us now turn to balance sheet growth and commercial activity. The commercial portfolio reached $12 billion, increasing 13% year over year with growth across both loans and contingencies. Within this total, loan balances closed at $9.7 billion, reflecting continued execution of our commercial pipeline, while contingent exposures reached $2.1 billion. The quarter's performance was supported by the execution of a strong pipeline of medium-term transactions, including activity originated through our structuring and distribution team. At the same time, our focus remains on selective origination and efficient capital rotation, with 64% of exposures maturing in less than one year, supporting flexibility, disciplined risk management, and repricing capacity. From a composition perspective, diversification remains a key strength. Country exposures are well distributed, with no single country representing more than 15% of total exposure. Guatemala, Brazil, Colombia, and Mexico remain among our main markets while the overall mix reflects a balanced regional footprint. Industry diversification also remains strong. Financial institutions represent 25% of total exposure, while corporate lending is well spread across sectors linked to regional economic activity and trade growth. Starting this quarter, our commercial exposure includes a small bond position focused on LatAm issuers recorded at fair value through OCI totaling $234 million. This represents a tactical capital deployment tool allowing us to selectively capture opportunities within our existing credit framework while continuing to prioritize loan growth. The fair value OCI classification also provides flexibility to manage dispositions over time, including adjusting exposures as credit or market conditions evolve, consistent with our risk-adjusted returns objectives. With that, let me now turn to liquidity and the investment portfolio. As we continue to grow the balance sheet, maintaining a strong liquidity position remains a key part of our funding and risk management discipline. At quarter end, liquid assets totaled $2 billion, representing 14.5% of total assets, remaining well within regulatory requirements and providing flexibility to support commercial growth while preserving prudent liquidity buffers. The composition of liquidity remains highly conservative, with around 80% placed at the Federal Reserve Bank of New York, and the remainder primarily held with high-quality counterparties and multilateral institutions. The treasury investment portfolio closed the quarter at $1.44 billion, increasing 14% year over year. The investment book remained 96% investment grade, geographically diversified outside Latin America, and short in duration, with an average maturity of approximately 1.5 years. These characteristics make it a strong complement to our liquidity structure, providing earnings support and contingent funding capacity, as these securities are eligible for access to the Federal Reserve Discount Window through our New York agency. Overall, liquidity and investments continue to provide flexibility, resilience, and earnings support as we grow the balance sheet. Turning to asset quality, credit quality remains strong and stable, consistent with the bank's disciplined approach to origination, underwriting, and ongoing monitoring. At quarter end, total credit exposure reached $13.5 billion, with the vast majority remaining in Stage 1, representing 97.5% of total exposure. Stage 2 exposures represented 2.2%, or approximately $300 million, while Stage 3 remained minimal at 0.3%, or around $39 million. This continues to reflect the high-quality profile of the credit book. From a reserve perspective, total allowances reached $112 million, with a coverage ratio of 0.83%, broadly stable compared to the previous quarter. In addition, coverage of impaired credits remains strong at 2.9 times, reflecting a prudent reserve position. The increase in Stage 2 during the quarter primarily reflects our proactive credit assessment of selected exposures in the context of a somewhat more challenging operating environment. Importantly, impaired credits remain stable, and no material credit events were recorded during the quarter. Asset quality therefore remains a core strength of the bank, supported by high-quality exposures, prudent reserve coverage, and continued proactive risk management. Let us now move to the funding side of the balance sheet. We continue to see strong momentum in deposit growth, which remains the foundation of our funding strategy. Deposits reached a record level of $7.3 billion, representing 63% of total funding, increasing both in scale and relevance within our liability structure. Growth was broad-based, driven by corporate, financial institution, and multilateral clients, while Class A shareholder deposits continue to provide a stable and efficient anchor. In addition, Yankee CDs reached a record level of $1.7 billion, further enhancing the diversification and duration of our deposit base. As a result, deposits continue to support balance sheet growth through a more stable and cost-efficient funding structure, which remains an important driver of our ability to sustain margin within our guidance expectations. Beyond deposits, we continue to actively diversify our medium-term funding sources. During the quarter, we executed an additional tranche under our Middle Eastern syndicated loan, alongside other bilateral transactions, further expanding our investor base. More recently, we completed another successful issuance in the Mexican market of roughly $250 million, which was swapped into U.S. dollars at a cost well within our U.S. dollar curve. This transaction reflects our continued access to diversified funding sources as well as our ability to capture attractive opportunities while optimizing our cost of funds. This quarter’s results show continued progress in strengthening the liability side of the balance sheet, improving the quality, diversification, and duration of our funding while reinforcing the role of deposits in supporting both margin sustainability and balance sheet growth. Let me now turn to capital. Our capital position remains strong and well above our target levels, providing ample capacity to support continued balance sheet growth. At quarter end, our Basel III Tier 1 ratio increased to 17.9% from 17.4% at year-end 2025, while our regulatory capital adequacy ratio under Panama's banking framework stood at 14.7%, well above the regulatory minimum. It is important to note that these two ratios are based on different methodologies and therefore do not necessarily move in the same direction quarter to quarter. The Panama regulatory ratio follows a more standardized framework, while the Basel III ratio is more risk-sensitive and better captures changes in the underlying risk profile of our exposures. In the first quarter, the increase in the Basel III ratio was driven mainly by lower risk-weighted asset intensity, reflecting the regular revision of our internal risk parameters incorporating the continued strong performance of the credit book. Looking ahead, we continue to expect disciplined capital deployment through 2026, in line with our broader strategic execution. As capital is deployed, we expect the Basel III Tier 1 ratio to gradually move towards our 15% to 16% Tier 1 guidance range, which remains the appropriate operating level for the bank. Our capital position remains strong and continues to provide ample capacity to support growth while preserving balance sheet resilience. Moving now to net interest margin and spreads, during the quarter, net interest margin stood at 2.34% while net interest spread was 1.69%, reflecting resilient performance in what remains a challenging rate environment. Margins continue to be shaped by several dynamics. The rate cuts implemented in 2025 have had some impact on NIM, while ample market liquidity and strong competition for quality assets continue to pressure loan pricing, particularly in short-term lending. In addition, while loan average balances remained broadly stable, supporting consistent net interest income, most of the incremental balance growth was concentrated towards the end of the quarter. Therefore, the earnings contribution from this growth was only partially captured in first quarter NII, with a fuller impact expected to be reflected in subsequent periods. At the same time, these pressures have been partially offset by the execution of medium-term transactions which contribute to a more stable margin and support overall asset yields. On the liability side, continued deposit growth helps support balance sheet growth more efficiently, reinforcing a more stable and cost-efficient funding structure. Taken together, these factors demonstrate the resilience of our margin performance and the benefits of actively managing both sides of the balance sheet. Let me now turn to fee income. In the first quarter, fees and commissions reached $13.1 million, up 24% year over year despite this being a seasonally softer period for fee generation. Letters of credit and guarantees remain the main source of fees, generating $7.4 million in the quarter. This activity remains closely tied to our core trade finance business. First quarter was affected by seasonality, but we see good momentum as we move to the second quarter, supported by higher transaction volumes and increasing but gradual benefits of our trade platform. Credit commitments and other commissions were another important contributor, reaching $2.7 million, more than doubling compared to the same period last year. This reflects the growing relevance of medium-term transactions and committed facilities within our client offering. Our structuring and distribution team also continued to contribute to fee income, generating $3.1 million during the quarter, supported by two transactions closed in Costa Rica and Colombia. Importantly, this was achieved despite some transaction closings shifting from the first quarter into the second quarter. While fee recognition in this business can vary depending on execution timing, the syndicated loan pipeline remains solid. In addition, client derivatives are a part of our strategy to further diversify non-interest income. We are seeing growing client demand, particularly in connection with transaction execution. The pipeline remains active and, while the timing of individual transactions may shift across quarters, we expect this business to begin contributing more visibly as execution builds over the upcoming quarters. Taken together, fee income continues to show solid growth and increasing diversification, supported by trade-related activity, committed facilities, and structuring capabilities, with gradual contribution from client derivatives as activity builds through the year. To close, let me turn to operating expenses and efficiency. Operating expenses for the quarter were $22 million, reflecting the usual first quarter seasonality while also incorporating the impact of strategic initiatives that have moved into production, including higher depreciation, IT-related expenses, and the talent required to support execution. In that context, the first quarter expense base reflects the operating impact of initiatives already underway. The efficiency ratio for the quarter was 26.5%, remaining well aligned with our full-year guidance of approximately 28% and reflecting the bank's ability to absorb strategic investment while maintaining cost discipline. As we move through the year, we will continue investing selectively in technology, capabilities, talent, and execution capacity required to deliver on our strategic priorities while maintaining a strong focus on operating efficiency. In conclusion, the first quarter reflected disciplined balance sheet growth, resilient margins, strong fee generation relative to seasonal patterns, continued funding momentum, and a solid capital position. With that, I will now turn the call back to Jorge for his closing remarks. Thank you very much, Jorge. Jorge Salas: Let me briefly touch on strategy execution and make a couple of comments on the environment we are operating in. We continue to make good progress on our letters of credit platform. Processing times have consistently come down from almost five hours to about one hour per transaction. This productivity improvement has allowed us to handle smaller tickets profitably and deepen penetration with existing clients as we start to scale the letters of credit business. As outlined in our Investor Day last month, transactional deposits are a key component in the new phase of our strategy. In that sense, we have already onboarded our first correspondent banking client, still in pilot phase, and we are currently working on the second one. We now have the governance in place to incorporate additional correspondent banking clients during the year in a disciplined way. And we continue to see a strong pipeline of interested financial institutions in the region for these services, which we see as very encouraging. Turning to the macro environment, while global geopolitical and financial conditions have clearly become more volatile, our region continues to show resilience supported by healthy fundamentals, stable trade flows, and a positive investor sentiment. The reason is clear: Latin America's direct trade exposure with the Persian Gulf is very limited, and the region as a whole is a net commodity exporter. Higher commodity prices are historically beneficial for Banco Latinoamericano de Comercio Exterior, S. A. Obviously, net commodity importers, mainly Central American and Caribbean countries, will face some headwinds. The ultimate question, of course, is how long will this last? In any case, our view is that this environment reinforces the importance of disciplined lending and highlights the value of our ability to actively adjust regional exposures given the short-term duration of our lending portfolio. So when we look at the year as a whole, our view remains unchanged. The first quarter was consistent with our expectations, and we continue to make progress on the strategic front that supports the next phase of the bank. For that reason, and based on what we have seen so far in the year, we reaffirm our full-year guidance. We do so with confidence while remaining realistic about the competitive environment and the external conditions. We will now open the call for questions. Operator: Thank you very much for the presentation. We will now begin the Q&A section for investors and analysts. If you wish to ask a question, please raise your hand. If your question has already been answered, you can leave the queue by putting your hand down. There is also the possibility to ask your question through the Q&A icon at the bottom of the screen. You may select the icon and type your question with your name and company. Written questions that are not addressed during the earnings call will be returned by the Investor Relations team. Jorge Salas: Our first question comes from Iñigo Vega with Jefferies. Just a couple of comments on two areas. Iñigo Vega: Thank you. Two questions. First, what is your level of concern about the 70 bps sequential increase in Stage 2 loans in the quarter? Second, why are RWAs under Basel III down 2% quarter over quarter when the commercial portfolio is up 8% quarter over quarter? Only RWAs under the Panama framework align with asset growth. Jorge Salas: Yes, thank you, Iñigo. I will tackle the first question on asset quality and I am going to let Annette, our CFO, tackle the capital ratios question. The short answer is we are not worried. Asset quality remains very strong. The Stage 2 increase reflects more of a proactive risk management approach than any deterioration. We are just being more cautious on selected exposures, basically in Brazil. But we do expect normalization rather than deterioration going forward. The cost of risk is consistent with disciplined underwriting, and that, as I always say, has not changed and will not change. Annette, do you want to talk about capital ratios? Annette Vanjorde: Sure. As we mentioned on the call, we follow two different methodologies. One is the regulatory methodology as a bank regulated by the Superintendency of Banks in Panama, and we also, for reference purposes, follow the Basel III Tier 1 ratio. These are different methodologies. The Panamanian regulatory ratio is based on a more standardized approach where exposures are assigned regulatory risk weights based on their category, while the Basel III Tier 1 ratio is more risk-sensitive and reflects more directly the underlying risk profile of the portfolio, including borrower quality, country risk, tenor, probability of default, and other characteristics. This is why these two ratios can move differently in a given quarter. In the first quarter, our Basel III ratio improved despite the balance sheet growth because of lower risk-weighted asset intensity in the portfolio. This reflects the strong historical credit performance incorporated in the regular revision of our internal risk parameters. Also, the Ecuador country upgrade during the quarter impacted the Basel III ratio, as did the quality and mix of the new exposures added to the balance sheet. On the other hand, the Ecuador upgrade is reflected in the Basel III framework but does not have the same impact under the Panamanian ratio. This is one of the reasons why these two ratios behaved differently quarter to quarter. Looking ahead, we still expect the Basel III Tier 1 ratio to gradually normalize toward our 15% to 16% target range as we continue to deploy capital while maintaining ample capacity for disciplined expansion. Jorge Salas: The main point is that growth in assets does not necessarily imply higher capital consumption. Quality and mix are critical. Operator: Thank you. Our next question comes from Ricardo Buchpiguel with BTG. You can open your line. Ricardo Buchpiguel: Good morning, everyone, and thank you for the opportunity to ask questions. I have two. First, as you mentioned in the presentation, you saw a higher concentration of credit transactions closing toward the end of the quarter, which had a negative impact on NIM. It would be helpful if you could comment on what NIM would look like excluding this effect, just to think about the starting point for NIM in Q2. And for my second question, during the quarter we saw strong sequential growth in credit commitments and guarantees on the balance sheet, and yet revenues showed a 14% quarter-over-quarter reduction. It would be great if Samuel could walk us through in more detail how the monetization cycle of this product works and how seasonality plays out throughout the year so we can have better color on this line. Thank you very much. Jorge Salas: Samuel, do you want to talk about the commitments, and then Annette will talk about NII and NIM? Samuel Canineu: Sure. Thanks for the question, Ricardo. I will start with your question on commitments and then talk about letters of credit and guarantees. Commitment fees come from committed but unfunded exposures. That is indeed growing and is in line with the expansion of our project finance, infrastructure, and syndicated loan businesses. For project finance and infrastructure, for example, it is very common that part of the facility amounts will be disbursed not in one go, but rather as CapEx is being deployed. On syndicated loans, those tend to be bigger facilities, so it is common to give the client a couple of months to fund the transaction. These are commitments that will be funded in due time; they will become loans, and the commitment period in those cases is much shorter than the tenor of the actual facilities. Importantly, it generates fees that tend to be 30% to 40% of the loan margin. Finally, and this is very important, the commitments we have are not liquidity backstop facilities, which is a type of exposure that we do not like as they tend to be used when the underlying credit has deteriorated. Bottom line, commitment fees should continue to grow as the project finance and syndicated loan businesses grow. In terms of letters of credit and guarantees, the reduction this quarter versus the previous quarter is mostly in line with seasonality. Certain types of letters of credit are issued more toward the second and third quarters. This is a business that we continue to focus on with more new clients, and we do expect a pickup or return to normal levels as the year progresses. Annette Vanjorde: Ricardo, thank you for your questions. Regarding NIM and NII during the first quarter, as we mentioned, we have been proactively managing our balance sheet on both the asset and liability sides, which allows us to maintain a resilient NIM as we execute through the year. Our current NIM is affected by the rate cuts implemented in 2025. It is also affected by ample liquidity and competition for asset quality in the region, especially in the short-term segment of our lending exposure, and by the fact that some of the balance growth occurred toward the end of the quarter. We expect that growth to be reflected in the upcoming quarter, providing sustainable net interest income. We were able to offset some of these negative pressures by steadily executing medium-term transactions on the loan side, which provide more stable balances and margins, and by the growing participation of deposits and efficient liquidity management. With this NIM of around 2.34%, which remains within our guidance, we feel confident that the guidance for 2026 will remain around 2.30% as we have mentioned before. More importantly, we are complementing our revenues with the growth of fees, as Samuel just mentioned, to make the bank less sensitive to rate movements and provide more stable profitability. Ricardo Buchpiguel: Thank you. That is very clear. A quick follow-up: assuming you get a scenario with no rate cuts not only in Q2 but for all this year, do you believe there is upside risk to the guidance, both in NIM and ROE? Annette Vanjorde: For now, we see that as an upside, although we have seen a lot of pressure on margins. We are already seeing some benefit from higher-for-longer rates; however, these have been offset somewhat by pressure on loan origination yields. It has remained almost a neutral impact overall. Jorge Salas: It is almost a wash. Samuel Canineu: Perfect. Thank you. Operator: Our next question comes from Analyst with JPMorgan. Analyst: Hi, everybody. Thank you for taking my question. I am going to go back to capitalization. Just to be sure, on the decline in your Panama ratio, and also, would this ratio, the Panamanian one, be more relevant than Basel III since your requirements are based on Panama? Those are my two questions. Jorge Salas: Hi, Natalia. Annette Vanjorde: Both methodologies are important to the bank. Obviously, we are a local bank in Panama regulated by the Superintendency, and it is our priority not only to comply with the ratios but to have ample buffers versus the minimum requirements. Our AT1 transaction is based on our regulatory ratio, which we follow and monitor closely. The reason we include our Basel III ratio in all our presentations is to provide a more standardized reference point for investors to compare to other peers in the region. As we mentioned, the methodologies are different and some characteristics of our balance sheet are not well captured by the local regulatory ratio, so using both provides a more complete view. Analyst: Perfect. And then, if you could go again through the reasons for the decline in the Panamanian ratio, that would be great. Annette Vanjorde: This responds directly to the balance sheet growth we saw between the fourth quarter and the first quarter, which was around 8%. The Panamanian ratio is almost independent of country risk and is very neutral to exposures outside Panama, especially corporate positions. It does not differentiate between ratings or whether an exposure is investment grade or not. Those are characteristics that the Basel III methodology does incorporate into the calculation. The Panamanian ratio is more oriented to local banks with larger local exposure. In that sense, Banco Latinoamericano de Comercio Exterior, S. A. is an outlier in Panama—our Panama exposure is less than 5% today. Operator: Our next question comes from Andres Soto with Santander. Andres Soto: Good morning, Jorge, Annette, and team. Thank you for the presentation. My first question is regarding your top-line growth. We saw a strong performance this quarter, and at the same time, you are mentioning a tougher competitive environment. At what point do you believe this competition will make a dent in your loan growth expectations, or do you believe that the risk-adjusted returns you are getting now are attractive and you will continue to grow at the current pace? Or is your growth driven by the new products that you are introducing in your product offering? Jorge Salas: Thank you, Andres. I am going to let Samuel, our Chief Commercial Officer, talk about growth in the lending portfolio. Samuel Canineu: Thanks, Andres. We are very confident we will meet our guidance in terms of growth for the year. As you know, our exposure is very short term, so the landscape can change quarter to quarter. That said, we have ways to mitigate that. On one side, we are building a solid, medium-term, more value-added pipeline, which is the case right now in project finance, infrastructure, and syndicated loans. We are well prepared to continue deploying at the pace consistent with guidance. We have also been working hard to build the pipeline for short-term transactions, which is more affected by the competitive landscape. The way to do that is through our product strategy that we spoke about at our Investor Day, particularly structured trade and working capital solutions, which have been growing at a good speed with a promising pipeline. Last but not least, the increase in oil prices is a good tailwind because part of our short-term exposure finances cargoes, and those cargoes are bigger in size right now. That helps as well. Jorge Salas: Also, Andres, it is very important for us that the quality and durability of earnings is what matters, not just scale. Andres Soto: That is very clear. And connecting this with my question on fees, we also saw strong fees on a year-over-year basis, and I appreciate the explanation that Samuel provided regarding these products being fee-rich and providing those upfront and then on lending down the road. Is the current pace for fee income growth sustainable given the strategy of entering these products such as letters of credit and syndication, or are there any one-offs in the quarter that we should normalize going forward? Jorge Salas: No, there are no one-offs. The first quarter is typically, as Annette mentioned, softer than most in both of our fee businesses. Some transactions shifted into the second quarter, so it is more a timing effect than a slowdown. Fees are up 24% year over year, so the momentum is good. The bottom line is that fees are becoming a more structural revenue component over time. If something nonrecurring comes, of course we will mention it, but we are confident with the guidance on fees. Andres Soto: That is very clear. Thank you. Operator: Our next question comes from Daniel Mora with Credicorp Capital. Daniel Mora: Hi. Good morning, and thank you for the presentation. I have a couple of questions. The first one is, considering that a significant percent of the portfolio is related to oil and gas, do you see any tailwinds or headwinds derived from the conflict between the United States and Iran? Or is there any other sector or country that should be heavily impacted by high international oil prices? I know that you mentioned a couple of points on this matter, but if we can go deeper, that would be great. Thank you. And my second question is, what would be those elements that could take the 2026 ROE closer to the 15% upper band of the guidance, considering that loan growth has been quite strong, NIM, despite pressure, has been defended, and fees, even though the first quarter is softer due to seasonality, continued to grow by double digits, 24% to 25%? Given this strong performance, what could be even better to take ROE to 15%? Jorge Salas: Samuel, do you want to go ahead and talk about the oil and gas–related exposure? Samuel Canineu: It is a great question. On a net basis, it is much more of a tailwind than a headwind. For the more long-term exposure that tends to be linked to E&P investments, we are financing the lowest-cost producers in the region and the most competitive fields. Current oil prices, even if more spot-driven than long-dated forwards, are very positive for them, reducing portfolio risk. On the short-term trade business, typical cargo sizes are higher, so demand tends to be higher—positive in that sense. We do take risk on importers of petroleum products, mostly in Central America. You could argue there could be increased inflation and reduced profitability, but in most cases we are dealing with national oil companies in solid countries. It is more beneficial that we are financing bigger amounts than detrimental in terms of their credit quality. Net-net, it is definitely positive. Jorge Salas: I think the short tenor of our portfolio and the ability to reprice and reposition quickly is key. Our focus is not predicting geopolitics, but managing how shocks transmit into spreads, trade flows, and client risk. We have the ability to do that, and we have been showing that. Daniel Mora: Thank you. And on the second question? Jorge Salas: On upside to ROE guidance, it is a balance between higher-for-longer rates and margin pressures. You have both playing at the same time, and we will see what ends up happening. It is hard to predict at this point. Daniel Mora: Okay, perfect. Thank you so much. Operator: Our next question comes from Analyst with Boer Capital. Has the bank started looking at Venezuela as an opportunity for investment, and what is your outlook for the country? Jorge Salas: It is a good question. Venezuela might represent an upside scenario for Banco Latinoamericano de Comercio Exterior, S. A., but it is not included in our projections as of today. We are very actively assessing the risks and the opportunities. The bank used to be very active in Venezuela in the oil and gas sector and also with FIs and LCs. Venezuela used to represent between 4% to 5% of our total portfolio at some point. Today, our exposure is zero. We know the country well, and it is more a matter of timing on when to go back in. Operator: Thank you. That is all the questions we have for today. I will pass the line back to the Banco Latinoamericano de Comercio Exterior, S. A. team for their concluding remarks. Jorge Salas: Well, thank you all for your questions and your time today. We appreciate your continued interest in our bank. Because the year started in line with our expectations, we remain focused on executing with discipline. Thank you again, and have a good day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Greetings. Welcome to the A10 Networks First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now turn the conference over to your host, Tom Baumann. Sir, you may begin. Tom Baumann: Thank you, and thank you all for joining us today. This call is being recorded and webcast live and may be accessed for at least 90 days via the A10 Networks website at a10networks.com. Hosting the call today are Dhrupad Trivedi, A10's President and CEO; and CFO, Michelle Caron. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its first quarter 2026 financial results. Additionally, A10 published a presentation and supplemental trended financial statements. You may access the press release, presentation and trended financial statements on the Investor Relations section of the company's website. During the course of today's call, management will make forward-looking statements, including statements regarding projections for future operating results, demand, industry and customer trends, macroeconomic factors, strategy, potential new products and solutions, our capital allocation strategy, profitability, expenses and investments, positioning and our dividend program. These statements are based on current expectations and beliefs as of today, April 28, 2026. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially, and you should not rely on them as predictions of future events. A10 does not intend to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise, unless required by law. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-K and quarterly report on Form 10-Q. Please note that with the exception of revenue, financial measures discussed today are on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's website at a10networks.com. Now I'd like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks. Dhrupad Trivedi: Thank you, Tom, and thank you all for joining us today. A10 continued to deliver on our strategic plan centered around the current AI-driven demand cycle, while simultaneously focusing on disciplined execution. Our customers are seeking solutions to address 2 major challenges: accelerating traffic volume and complexity and emerging security threats in the rapidly evolving AI landscape. A10 is well positioned to address both these challenges. We delivered 13.4% revenue growth in the first quarter. This was our third quarter in the last 4 with double-digit growth. On a trailing 12-month basis, we have grown revenue by 12.1% and delivered TTM adjusted EBITDA margins of 29.7%, in line with the rule of 40 we outlined several years ago. During the same period, we have grown service provider revenue by 11% and enterprise revenue by 13%, demonstrating the importance of the strategic shift we have made. A key contributor to our growth is the relevance of our core platform to the demands of AI infrastructure build-out, which create new challenges with greater traffic within the networks. As a result, traffic management is returning to the forefront of build-out plans, and this trend is aligned with A10's history and core expertise. Second, AI is evolving rapidly, creating new threats and expanding the footprint of security concerns. For most of the last decade, A10 has prioritized security advancement in each of our solutions. During this period, we have built a security portfolio that is now directly in the path of AI-driven threat expansion. This quarter, we were selected as a technology partner for a new application at 1 of the most significant AI infrastructure build-outs in our industry. As a result, the customer behind this build-out represents a 5% of total revenue this quarter. The expansion of the customers' commitment to their enterprise applications reflects our focus on and relevance of next-generation networking. Deployment of this scale are time-sensitive and technically demanding, and it required prioritized allocation of product inventory and engineering resources. This was a deliberate choice to support a strategic customer and partner through a time-sensitive deployment window. We believe capturing this opportunity at the right cadence creates long-term value for the business. I also want to highlight that dynamic, I believe, is increasingly important to our story. AI is transforming the distinction between how large enterprises and service providers build their networks. The workloads are the same, the performance demands are the same and security requirements are the same. What this means practically is that a Fortune 500 customer standing up an internal AI cluster is now evaluating the same architectural choices as a cloud provider. A service provider hosting AI workloads for their enterprise tenants is being held to the same standard as its customers' own data centers. We have built our platform for exactly this world, 1 architecture, 1 operating model, 1 security framework across both segments. That is a meaningful competitive advantage as this convergence accelerates driven by AI. Our disciplined operating model balances targeted investment with margin expansion converting growth into profitability and cash while dynamically reinvesting in strategic priorities. We continue to meet our objectives for EBITDA margin, reflecting our ability to reallocate resources based on best business opportunities. This results in consistent revenue and EPS performance. With that, I'd like to turn the call over to Michelle Caron, our Chief Financial Officer, to review the numbers in more detail. Michelle? Michelle Caron: Thank you, Dhrupad. As a reminder, with the exception of revenue, all of the metrics discussed on this call are a non-GAAP basis, unless otherwise stated. A full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website. So let me turn to the results. As stupid noted, Q1 results were aligned with our business model goals and delivered revenue growth of 13.4% to $75 million. Turning to mix. Product revenue was $44 million or 59% of total revenue, growing 22.3% year-over-year with service revenue comprising the remainder. Security led revenue was a strong driver of our product revenue growth and continues to meet or exceed our long-term goal of security-led revenue as a percentage of total revenue. Security remains the dominant revenue driver across our next-gen networking, legacy networking and network security solution areas. Turning to our major verticals. Enterprise customers represented 56% of Q1 revenues, with Americas continuing to outpace overall enterprise revenue growth. While first quarter benefited from timing of large orders, this segment continues to grow above company average in terms of results as well as outlook. Enterprise momentum reflects the combination of our focus on this segment as well as continued strong demand for our next-gen networking solutions as customers prioritize modernizing their infrastructure. Our customers across both segments are aligning on the same underlying requirements for performance, security and scale. From a financial lens, this convergence is showing up in larger opportunities with our enterprise customers. Service provider revenue was 44% of total revenue in the first quarter. Both verticals align with our strategy and reflect the alignment of our offerings with AI infrastructure build-outs. A10 has evolved its solutions to be well positioned to capture this next-gen networking demand while also addressing legacy refresh opportunities as this market transition progresses and customers resume investment while continuing to align the evolving priorities around performance, scale and security. From a geographical perspective, our Americas region represented 67% of global revenue, driven by continued investment in AI infrastructure build-outs. In EMEA, we saw headwinds related to regional conflicts. In APJ, spending remains conservative as customers navigate an uncertain capital environment. We're not losing market share or experiencing competitive displacement, rather customers are extending asset lives and deferring discretionary spend. Q1 operating results reflected our continued investment in our strategic initiatives as well as our financial discipline amidst temporary input cost pressures. Non-GAAP gross margin was 80.6%, in line with our stated goals. Operating expenses were $41.5 million as we prioritized investments in AI facing innovation, next-gen networking and security. Operating margin was 25.2%, resulting in net income of $17.7 million or $0.25 per basic and $0.24 per diluted share. Q1 diluted weighted share count was 72.9 million shares. Operating cash flow and therefore, free cash flow in the quarter was temporarily impacted by the timing of receivables as well as inventory investments. Neither item reflects a change in underlying business fundamentals, and we expect both to normalize over the course of the year. Full year free cash flow expectations remain unchanged, expanding on a year-over-year basis. Adjusted EBITDA was $22.5 million, 30% of revenue, consistent with our business model goals as we balance investment and growth initiatives with our commitments to sustained and expanding profitability. Turning to the balance sheet. Cash and marketable securities were $369.7 million (sic) [ $ 369.8 million ] as of March 31, and deferred revenue was $147.2 million. During the quarter, we paid $4.3 million in cash dividends and repurchased $2.5 million worth of shares, returning a total of $6.8 million to our shareholders. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on June 1, 2026, to shareholders of record on May 15, 2026. The company has $53.4 million remaining on its $75 million share repurchase authorization. As is true for everyone in the industry, we are seeing delivery and cost challenges related to pricing of certain components. We entered this environment with strong supplier relationships, and we will keep evaluating the evolving market and adapt as needed. I'll now turn the call back over to Dhrupad for an update on our 2026 outlook and closing comments. Dhrupad Trivedi: Thank you, Michelle. A10 continues to strengthen its position as a partner of choice to address the evolving traffic and security needs of next-generation networks. The strong financial results, including double-digit growth and solid EBITDA margins validate the strategic investments we have made. As a result, A10 is well positioned in front of multiple durable secular catalyst. We continue to invest to enhance our position across our portfolio while preserving profitability and shareholder returns. We are reiterating our 2026 outlook with 2026 revenue growth within our guided range of 10% to 12% and adjusted EBITDA margins between 28% to 30% and EPS growth of 12% to 14%. In addition, we remain confident and committed to our long-term operating model. Operator, you can now open the call up for questions. Operator: [Operator Instructions] Our first question comes from Gray Powell with BTIG. Gray Powell: Okay. Great. And congratulations on the very strong set of results. It was really good to see the product revenue growth accelerate to 22% this quarter. So I guess my first question would just be, where do you think we're at in the investment cycle around AI. And if you start to see a further acceleration in traffic growth, would you think about prioritizing faster revenue growth over the historical 28% to 30% EBITDA margin framework that you've always talked about? Dhrupad Trivedi: Yes. First of all, thank you, good question. So in terms of, I think, the investment cycle, as I think we have said in the past that we see this as there is a large build-out phase and where we are actually focused with customers is in that phase, but also with customers who will, over time, deploy their own solutions, whether it's around sovereign AI and things like that. So the second part of that cycle, I think, is very early stage, and we expect to see that benefit next few years. The first part of the cycle, I think, is pretty active build out. I don't know how much higher it will go or lower it will go, but it is pretty solid and stable in terms of the significant committed to the build-out and even though the build-out itself takes several quarters, right? So I think we are in the midst of that build-out phase, and we are at a very early stage of where enterprise and other entities will use AI for their own business more directly, whether it's on-prem or cloud or combined. And I think your second question is this correct and appropriate. So we certainly continuously look at that trade-off. And I would say the focus for us is if there are opportunities to grow faster, typically, that also helps in growing EPS faster, right? So I think -- we look at it from a point of view of revenue and EPS being the ultimate top and bottom line. And the EBITDA margin is a reflection of our ability to drive kind of OpEx productivity as well as maintain sufficient margin that the fall-through is good. But absolutely, I think as we navigate the market and if we see opportunities for significantly faster growth while still delivering EPS expansion, we continue to look at those. Gray Powell: That's perfect. And then just my follow-up question, if that's okay. So you called out the large customer win. I'm assuming that hit in the enterprise segment because the revenue growth there really spiked. Is there any additional detail you can give? Like was that 1 of the larger frontier models? And if not, just how should we think about sort of the split between growth in enterprise and service provider going forward? Dhrupad Trivedi: Yes. Yes. No, look, a perfect question. And I think I touched on it very briefly, but that's a great question. So I think, first of all, what we are seeing is that many of our large customers that were traditionally SP or enterprise, right? There is a complication where a lot of our SP customers when they are doing AI are sort of also doing a lot of enterprise applications. And so that's really where that becomes hard to segregate completely. And then enterprise customers are planning to build our own on-prem inference models and build out. So in that case, they look like a service provider, right? So that's the demarcation. And I think this is the case of an existing large customer expanding their deployment. And it's really around an enterprise application, so it's not the DDoS type product. And it's an enterprise application that enables their delivery of AI. Operator: The next question comes from Hamed Khorsand with BWS Financial. Hamed Khorsand: Just for clarification purposes, is it -- was this -- on the accounts receivable build, was it all related to this 1 large project? And did you receive payment for it? Dhrupad Trivedi: Good question. Michelle, you can answer that. Michelle Caron: So this is a calendar event and not a credit event right? So our business fundamentals remain strong. There was no meaningful uptick in our aged receivables or there were no deterioration in our payment behavior. There were no concessions on standard payment terms with any customers. So we see the business fundamentals as favorable. Dhrupad Trivedi: And I think, Hamed, you are correct, we expect it to be in Q2 in addition to the original Q2 -- we expect to action normalize over the course of the next couple of quarters and expect the full year to be on track. Hamed Khorsand: And then just given the growth that you saw in Q1, why the hesitation to keep guidance unchanged if you're growing in excess of 10% to 12%... Dhrupad Trivedi: Yes, I think it's more that we are still in Q1, and I think we want to see the progression through the year. And if we see that momentum continuing in Q2 and beyond, Obviously, we will revisit that. So it's not -- it's just that we are navigating, obviously, things that from a time perspective, right, including supply lead times and cost challenges for some components -- and obviously, our EMEA business has a little impact from some conflicts there, et cetera. So we feel really good about 10% to 12%. And if we see that progress in terms of pipeline growth and execution into Q2. Obviously, we will revisit that on it. So a fair question. Operator: The next question comes from Michael Romanelli with Mizuho. Michael Romanelli: So yes, I mean, in the press release, you guys noted that you're seeing expanded commitments from some of your top customers. Just wanted to dive a bit deeper into that comment. So outside of this large project, like how is business activity across the installed base to kind of get a feel for I guess, the magnitude or size of this and just how business was excluding that large project? And then I have a follow-up. Dhrupad Trivedi: Yes. So I think that the intent of that Michael was really to highlight that many of our existing customers who are service providers or large enterprise are all beginning to allocate more spending and priority to AI, whether it's building it or using it. And so in general, what we are seeing is even if they were buying certain other product categories from us, this is an area of expansion for us, and that's the basis for the government of expanded commitment, right? So it could be a service provider in Europe who is also now doing enterprise or it could be somebody like that as well as an enterprise customer who is now deploying or expanding their AI infrastructure and build out. So it could be any of those kinds of things. Michael Romanelli: Okay. Got it. That's helpful. And then just as my follow-up, you touched on this in the prepared remarks, but can you maybe just characterize demand and business activity across your primary geos. It sounds like some parts of the business are still challenged. Anything worth highlighting or calling out this quarter? Dhrupad Trivedi: Yes. No problem. So I think the -- maybe I'll go in reverse order, right? So we talk about Japan, and that market is if you look at all the macro factors and spending pattern, there is caution with a lot of reasons, right, that they keep siding. And what we see is typically what would have been a spending profile of the large customers there is getting pushed out more to the right -- because it's both ends of it, it's not just being worried about. -- cost or international issues or something. It's also concern around deploying more when there is not that much GDP growth and expecting to recover it, right? So from an ROI as well. So I think we see that as a region where we are very focused on maintaining those customers staying close to them, helping them solve problems now and expect that to come back, but we don't see it imminent, right? It could be later, and we don't know exactly. EMEA, I think, as you can imagine, there's section of EMEA, which is quite challenged with active activity with international news, obviously. And so I think that is part that is not kind of growing well, but we continue to see progress and improvement in our business in core Europe part of that segment, right? So -- but obviously, the Middle East part is a little bit harder right now. And then when it comes to Americas, I think there's obviously categories, right? So we see customers who are leaning more into AI are more optimistic and spending more and are more outward looking towards wanting to be participating in that. On our traditional sort of telco customers, what we are seeing is stability, I would say. So I think it's not where -- it's declining anymore for sure. And it's not growing, but it's very stable right now, right? And it could improve in the future as those customers as well figure out their AI spending and deployment pattern. So -- but we certainly see the spending on AI as being the biggest in Americas or U.S. And I think -- and then EMEA and then Japan, we continue to make progress, including on AI solutions in Japan, but the spending is correlated, obviously, to economy and outlook and we are mostly focused on ensuring customer satisfaction. Operator: Next question comes from Anja Soderstrom with Sidoti. Anja Soderstrom: Congrats on the quarter. In the past, you said that the product revenue is indicative of the services growth, right. But -- and we've seen the product growing quite nicely over the past couple of quarters, but the services has been lagging. What's the lag do we see there? When do you expect the services to pick up? Dhrupad Trivedi: Yes. No, good question, Anja. So I think if you think about it, typically the way the product is sold is when you have product growth in 4 quarters time that contract or support comes up for renewal. And so typically, you would see that in the fifth quarter right after that. Meaning, for 4 quarters, they already are covered. And then at the end of fourth quarter, they have to renew, which goes into the support pool again. And so product growing faster will show up in service improving in 4 quarters later, roughly, right? So that's 1 dimension of it. The second, I think, is I think our renewal rate is fine, very stable. I think, and we continue to manage services with customers. there is sometimes timing fluctuation a little bit because of large contracts and renewal time and early or late collections and so forth. So -- but you are correct. It should be a lead indicator for service revenue growing faster in roughly 4 quarters. Anja Soderstrom: Okay. And then in the past, you also said talked about you're taking shares from competitors. Have you seen any changes to the competitive dynamics recently? Dhrupad Trivedi: Good question. So no, we really have not seen any significant changes since the last quarter or 2. And I think I feel confident in what our trajectory is and what we are doing because if you look at even our peers and even the recent kind of reports or outlook, 10% to 12% is still a little bit north of most of them. So we feel if we continue that and can continue to improve on that as well. we are in a good competitive position. And no -- I would say no real change in the dynamics in terms of the specific landscape here. Operator: Next question comes from [indiscernible] with Craig-Hallum. Unknown Analyst: I'm on for Chris Schwab here, just a quick question on the 10% to 12% reiterated. Is that going to be kind of a step function every quarter? Or is it a stronger second half? And then with that, is that tied to just the continued growth and market share gains? Or is that concentrated on a few customers? Dhrupad Trivedi: No, I think that's a good question. So I think it's a broad market share, obviously. And the reason, I think, Ben, we reiterated this year is because we had our Investor Day subsequent to the earnings call in Q1. So this is not indicative of a new trend where we will be doing that every quarter. This was just reiterating and recapturing in 1 place because we had announced that again at the Analyst Day, right? So -- so that's the objective. And so it's not indicative of us saying we will be guiding every quarter. Unknown Analyst: All right. And then just thinking about I believe you guys said it was 12% was a long-term target. Is there -- with legacy decreasing in the stronger CAGRs, mid-teens even was previously stated at Investor Day, is there any of -- with those mid-teens CAGR and legacy down it -- is there a path to exceed that 12%? Is there anything that you guys think that needs to happen to get there? Dhrupad Trivedi: Yes, sure. No, I think -- so I think the factor is right. I think there's to and we touched upon 1 of the earlier questions. So certainly, if we see stability in demand and supply as we go through the year, we will continue to evaluate. I think certainly, AI spending could be 1 of those factors that helps us improve that in terms of our participation in that spending profile. So that's probably evolving, right? Obviously, -- and the second factor was we had talked about the notion of the mix shift. So as we grow next-generation network and security solutions faster than legacy, we are also automatically exposed to higher growth rate markets. right? So I think through that evolution, I think we had said obviously, right, more than 12% next year and beyond. So I think the mix shift is helpful in being exposed to higher growth market. Second is to the degree that we can get more embedded into AI build-out, whether infrastructure or applications is the second factor, right? And third is, long term, we don't know, but when SP spending resumes more -- to more normal rates, that obviously helps us, right? So we don't need all but we need 1 or 2 of them, right, to be more confident of raising it immediately. Operator: Next question comes from Simon Leopold with Raymond James. W. Chiu: This is Victor in for Simon Leopold. Can you provide some color around the supply chain and kind of memory shortages. You mentioned you observed some impacts around that this quarter. Have you adjusted pricing around this? And if so, how is that impacting kind of the demand dynamics that you're observing? Dhrupad Trivedi: Yes. It's a good question, right? So I think, obviously, as well known, right, the memory is the biggest. There's other component shortages. But and certainly sort of the DDR categories, the most specifically the biggest one. And we have seen the same price increases. And I think it's more than just price increase. It's also lead time and allocation right from the suppliers. So we absolutely see that phenomenon as well, and we are continuously ensuring that on 1 hand, obviously, driving demand, but on the other hand, also trying to do as much as we can to line up enough supply. In the next few quarters, like where it's not expected to get better in like, let's say, 4 quarters, maybe at least, maybe more. So absolutely, we see the same phenomenon. All of us use almost the same 3 or 4 major memory suppliers, right? And we are navigating it the same in terms of securing supply managing costs but also managing our ability to fulfill kind of customer needs. And we'll continue to do that, and I think it's obviously something we have to navigate and there's no -- as of now, when we say 10% to 12%, that is not an area we are worried about, we can achieve that. and we'll continue to work towards improving that and making it not for us. But it is certainly a cost issue. I think as we said in the past, we try to split that with customers as much as we can. And it doesn't always work, and sometimes it does, and we'll continue to navigate that. W. Chiu: Okay. Great. And I think you also mentioned the benefit of timing. You have some large orders. Was that related to that large enterprise order specifically? Or was there maybe some kind of pull-ins that maybe you observed from customers kind of pulling in orders ahead of these shortages? Dhrupad Trivedi: No, no, I don't think it's bad. I think it's not yes, good question. So it's not a question of people kind of overbooking it to book capacity, right? I don't think that's the issue. I think in our case, it's more -- our customers are looking at building out things fast, and we are trying to keep up with them to make sure we get them everything they need. So it's more of that phenomenon versus -- I don't think at least we don't have a concern around double bookings and things like that at all. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Dhrupad Trivedi for closing remarks. Dhrupad Trivedi: Thank you, and thank you to all of our employees, customers and shareholders for joining us today and for your continued support. I am increasingly confident in our strategic orientation with security and AI infrastructure spending patterns. Thank you for your time and attention. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to Enphase Energy's First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead. Zachary Freedman: Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2026 results. On today's call are Badrinarayanan Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2026. During the conference call, Enphase management will be making forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply demand anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax tariffs and supply chain matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badrinarayanan Kothandaraman, our President and Chief Executive Officer. Badrinarayanan Kothandaraman: Good afternoon, and thanks for joining us today. to discuss our first quarter 2026 financial results. We reported quarterly revenue of $282.9 million, shipped 1.41 million microinverters and 103-megawatt hours of batteries and generated free cash flow of $83 million. Q1 revenue included $34.5 million of safe harbor revenue. We exited the quarter with channel inventory above normal levels for both microinverters and batteries. On a non-GAAP basis, we delivered gross margin of 44% and operating expenses of 27% and operating income of 17%, all as a percentage of revenue. Gross margin was above the midpoint of our guidance range. Mandy will cover the financials in more detail later in the call. Our customer service NPS, Net Promoter Score was 82% in Q1, a record for Enphase compared to 79% in Q4. We are laser focused on customer experience for the last few years, and our average call wait time in the first quarter was approximately 1.4 minutes. We have also begun a soft rollout of our Enphase AI assistant in the homeowner app to approximately 100,000 homeowners, and we expect this to expand over time. The AI assistant is trained on Enphase product knowledge, historical service cases and relevant customer support data with access to sales force information, to help answer specific system-specific questions more accurately. It also supports multiple languages, helping homeowners get faster, more intuitive health wherever they are. We expect to pilot a similar AI assistant for installers during this quarter to help them do fleet management in a much more efficient manner. Let's cover operations. In Q1, we shipped approximately 1.39 million microinverters from our Texas and South Carolina manufacturing facilities and booked the associated 45x production tax credits. These U.S.-made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the holiday for the 10% domestic content ITC added. We shipped 49.5 megawatt hours of IQ batteries from our Texas manufacturing facility in Q1. We offer IQ batteries that meet domestic content and [ FEOC ] requirements, helping lease PPA customers qualify for ITC bonuses. Let's cover to the regions. Our U.S. and international revenue mix in Q1 was 83% and 17%, respectively. In the U.S., our revenue declined 23% sequentially, primarily due to lower residential solar and battery demand following the expiration of '25 [indiscernible] tax credits and typical seasonality. Safe harbor revenue increased to $34.5 million in Q1 compared to $20.3 million in Q4. Our overall sell-through declined 48% sequentially as Q4 was elevated by significant demand pull forward ahead of the tax credit expiration. On a year-over-year basis, which better reflects the underlying impact of the policy change. Q1 '26 sell-through declined 18% compared to Q1 2025. Our U.S. commercial microinverter sales more than doubled in Q1 as compared to Q4, driven by positive market reception for IQ9 microinverters. We now serve both major U.S. pre-phase commercial grid types, the 480 volts as well as 208 volts. In Q3, we expect to begin shipping our high-power 548 watts IQ9s microinverter for 480 volts 3-phase systems, which can support solar panels up to 770 watts DC. We also expect to see near-term safe harbor demand from customers placing orders between now and early July. With U.S. manufacturing, domestic content eligibility and [ FEOC ] compliant products, how we believe our commercial business is well positioned for continued growth. In Europe, our revenue increased 36% in Q1 compared to Q4, primarily because selling levels rose towards sell-through levels after we undershipped the European channel in Q4. We are beginning to see green shoots in April with solar and battery activations, up healthy double digits across multiple European markets compared with the monthly averages in Q1. This is being driven by rising power prices and increasing battery adoption. Europe is increasingly becoming a battery critical market. As self-consumption dynamic tariffs and VPP become more important, the company that wins the battery relationship is well positioned to win the broader home energy system over time, including solar, software and VPP. In the Netherlands, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1, as rising export penalties and the planned phaseout of net metering by the end of 2026, strengthened the case for self consumption. In France, the reduction of feed-in tariff is also shifting the market towards self-consumption and increasing the interest in batteries, especially for new solar installations. Our battery activations in France increased approximately 20% in April from the monthly run rate in Q1, a more modest but positive trend. In Germany, our battery activations rose approximately 27% in April, compared to Q1's monthly average. We have approximately 475,000 in phase residential solar system in Netherlands and approximately 400,000 in France, creating a meaningful retrofit opportunity in both markets. We are increasing homeowner events, doing direct marketing to consumers and working with the retail energy providers, along with strong support by our technologies such as power match technology and our upcoming fifth generation battery. We have also built strong inside sales teams and the lead management platform across France and Netherlands in the last 3 months, and we are hoping to convert this demand into revenue with a much higher throughput. Competition remains intense across Europe, particularly from low-cost string inverters and battery providers. In response, we are reducing our distributor list prices for batteries by approximately 10% in May, which follows a 20% reduction for microinverters already implemented from December last year. In addition to this sharper pricing, we are instituting a stronger homeowner demand engine and a more competitive product road map, which includes IQ9 and our fifth generation battery, which is coming very soon. Together, these actions improve our competitiveness today and position us for stronger growth as Europe shifts towards self-consumption, VPP and flexible storage. In Australia, we are bullish on the battery opportunity. Australia is one of the world's most mature rooftop solar market with more than 4 million rooftop solar systems in start which is roughly one in every three homes is already using solar. Battery adoption is now accelerating, supported by the federal cheaper home batteries program, which provides an upfront discount for eligible small scale batteries connected in new or existing rooftop solar. The program is evolving on May 1 to better support rightsized systems and reduce incentives for oversized batteries. We believe this plays directly to our advantages, including our upcoming fifth generation battery which has a stackable and scalable architecture that gives homeowners flexible capacity and the ability to add more over time. Let's now discuss our Q2 outlook. On the last earnings call, we said we expected Q2 revenue to be higher than Q1, driven in part by strong safe harbor demand. In line with those comments, our Q2 revenue guidance is $280 million to $310 million, including approximately $85 million of safe harbor revenue. Since we exited the channel with a high inventory in Q1, we are under shipping approximately $25 million compared to the real demand. At this point, we are approximately 85% booked to the midpoint of our guidance. We expect modest underlying sell-through growth in Q2 as compared to Q1. That said, our Q1 sell-through results and Q2 sell-through expectations are roughly 10% to 15% below our prior view, a weaker start to the year, primarily due to unfavorable weather conditions and TPO financing challenges. We expect to offset some of these pressures in the second half of this year through prepaid lease adoption, which I'll talk about soon, U.S. commercial growth and potential international recovery. For batteries, our guidance is 100 to 110-megawatt hours. We recently lowered our battery list prices to distributors in the U.S. by approximately 12% to 14% in March, supported by the recently reduced reciprocal tariff rates. Combined with our pricing changes in Europe, we expect higher battery sales volumes in the second half of this year. And just to repeat our Q2 revenue guidance anticipates us under shipping end market demand by $25 million in order to correct for Q1's over shipment. Let's talk about safe harbor. We have executed new agreements year-to-date with third-party owners for approximately $843.6 million of product. $89.6 million under the ITC 5% safe harbor method and $754 million under the physical work test method. This is in addition to the 67.7 million physical work test orders secured in Q4. These microinverter orders create two important benefits for in Enphase. First, they secured a significant multiyear volume for our microinverter business. And second, they position us very well for future battery attached sales from 2027 to 2030 when these systems are expected to be installed. These also underscores our strength with the TPO providers. Moving to financing. Prepaid lease adoption continues to build momentum. Prepaid leases give homeowners an upfront -- lower upfront cost today and the option to own the system after 5 years. The TPO initially owns the system, claims the [ 480 ] tax credit and share that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. This lowers the homeowners' effective cost and helps restore the economics closer to the 30% 25 day tax credit era. We continue to support [ Propel ], a TPO led prepaid lease program that exclusively uses Enphase equipment and is being field tested with our loan and distribution partners. The pilot is designed to service the long tail of installers and has expanded from 40 installers at the time of our February earnings call to more than 200 installers to date, across four states. We are now seeing a run rate of approximately 200 net originations per week and are encouraged by early customer adoption trends. It must be noted that the battery attached to those originations is approximately 84%. That's not very surprising because one of the states [ Propel ] is now being piloted is in California. We expect to complete the pilot this quarter and expand the program more broadly beginning in July after validating customer experience, installed execution, which is happening now and financing performance at scale. Let's talk about products, starting with IQ batteries. Our fourth generation IQ battery [indiscernible], delivers a smaller footprint, higher energy density and simpler installation with the IQ meter color. The meter color is now approved by 64 U.S. utilities and growing, covering approximately 34 million customer accounts. In California, the color is approved by all three major investor-owned utilities and the largest customer-owned utility. We believe this gives Enphase the broadest utility approval for print of any major battery provider today. Our fifth generation AC [ corporate ] battery is built from stackable 5-kilowatt hour modular blocks, that can scale up to 30-kilowatt hour. This battery uses 100-amp prismatic cells and target roughly 50% higher energy density than the fourth generation battery and about 40% lower cost. Paired with our power match software we believe it will deliver a compelling combination of performance, flexibility and value for installers and homeowners. We expect to begin pilots in Q3 and begin shipping in Q4. We are also making strong progress on IQ Board, our commercial badly. The first product here is an 80-kilowatt hour AC-coupled commercial battery designed for small and medium commercial markets in the U.S. Our internal estimates indicate that this small commercial market represents an annual opportunity of approximately 1 gigawatt hour. The IQ Board uses 314-amp of prismatic cells in a compact building block architecture and will be even more cost effective. It can scale up by stringing up to 25 units together for approximately 2-megawatt hours of capacity. The platform is designed to support backup, self-consumption shaving time of use optimization as well as VPP participation all managed through Enphase software. We believe IQ Board brings our distributed architecture, our electronics expertise and system level intelligence into commercial storage, giving customers a flexible, high-quality platform for resilience and cost savings. We expect to begin pilots in Q1 '27. Turning to microinverters. We began shipping our IQ9 3-phase commercial microinverter in December, built on our GaN architecture. IQ9 opens up the 480 3-phase U.S. commercial segment for Enphase for the first time, representing a new TAM of approximately $400 million annually. The installer feedback has been strong with customers valuing Enphase quality, our panel monitoring, simpler system design, lower installations, cost and balance of system costs and higher system efficiency. We expect to introduce the higher power IQ9s 3-phase product in Q3, supporting 548 watts of AC power and pairing with this -- pairing with solar panels up to 770 watch DC. We also expect to introduce IQ9 for global residential markets this quarter. Moving on EV charging. We are making excellent progress on our IQ bidirectional EV charger, which is built on our 650 Volt GaN power platform and engineered to work with Model 800 work DC EV architectures. This is a clear example of our ability to move power efficiently and bidirectionally between grid phasing AC and high-voltage DC systems with tight control and protection. The product is especially compelling because it simply pairs with the meter color in the U.S. or a backup switch in Europe, enabling streamlined home backup and VPP participation. We are in advanced discussion with multiple auto OEMs, including two partnership opportunities that are progressing well. We will share more as these discussions mature. We are targeting initial availability in Q4, starting with limited deployments as we complete the certifications, utility coordination and vehicle compatibility validation. So finally, we are excited to announce today the development of our IQ solid state transformer product for AI data centers. AI is driving [ rack ] power from roughly 150 kilowatts to more than 1 megawatt. The industry is moving towards higher voltage DC architectures, including 800 volt DC, as outlined in NVIDIA's white paper last September. We estimate the initial annual U.S. addressable opportunity for IQ SST in AI data centers to exceed 11 gigawatts by 2021, a creating a significant new market for a high-efficiency medium-voltage power conversion. The IQ SST product is designed to convert medium voltage AC directly to low-voltage DC in a single stage, creating the potential to eliminate site car batteries and [ rack ] level backup while improving efficiency, reducing cost and complexity. IQ SST will be built as a distributed modular architecture. It is expected to deliver approximately 1.25 megawatts through a super cluster of 342 power modules with 800 volt DC output for next-generation AI racks. At the core of each power module will be our custom silicon, [ testolasic ] and a high-frequency GaN-based about the power platform which enables precise control, high efficiency and fast response of the order of 1 to 3 milliseconds. This fast response will enable advanced grid functions, improved handling of load and grid transient and support centralized energy storage at the facility level. IQ SST is designed for reliability and serviceability. It is modular includes built-in redundancy and support hot swapping without shutdown. It is also expected to deliver cost and supply chain advantages through fewer components, standard high-volume parts, automated manufacturing and U.S.-based production. Our SST platform will be able to scale from a single 1.25-megawatt [ rack ] to multi-megawatt systems. Supporting multiple grid voltages and extends beyond data centers into other adjacent high-power markets as well. We are now engaged with more than 20 prospective customers and are expanding our partner ecosystem. We have completed product feasibility, built working power modules and converged on the system design. In Q1, we restructured the company to fund SST within our existing operating framework and create room for the strategic program. More than 80 engineers are now working on SST across power electronics, ASICs, software, mechanical design, manufacturing and reliability. As we continue to drive productivity with AI across the company, we are targeting to fund the SST program within our current operating expense structure. We expect a full system demo later this year pilots with customers in 2027 and volume shipments in 2028. We also expect revenue to build over time. but the strategic logic is clear. IQ SST is a direct extension of our core strength in distributed power electronics, custom silicon software-defined control and high-volume U.S. manufacturing. We believe this architecture is the right way to power the next gen of AI infrastructure and our positioning Enphase to lead in this transition. Let me conclude. The market is going through a transition, especially in the U.S. residential sure, but we are focused on what we can control: execution, cost, innovation, financing solutions and customer experience. We are seeing early traction in several important areas. Prepaid leases are gaining momentum in the U.S. Europe is beginning to show signs of recovery. With batteries becoming increasingly critical to the customer decision. In the U.S., commercial solar is starting to ramp, supported by IQ 9 microinverters and our domestic manufacturing position. Our road map is also strengthening. Our fifth generation battery bidirectional EV charger, our IQ volt commercial battery and the IQ9 family of microinverters all expand what Enphase can deliver to homeowners, installers and commercial customers. These products strengthen the core and open new growth opportunities. Finally, we believe IQ SST can give Enphase access to significantly larger end markets. It is a natural extension of what we have built over the last 20 years, reliable power electronics, semiconductor innovation, software intelligence and distributed system design. We believe Enphase is well positioned for the next phase of growth. With that, I will turn the call over to Mandy for her review of our financial results. Mandy? Mandy Yang: Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2026 financial results, as well as our business outlook for the second quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $282.9 million. We shipped approximately 627.6 megawatts DC of micro inverters, and 103.1 megawatt hours of IQ batteries in the quarter. Q1 revenue included $34.5 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install their inventory over more than a year. Non-GAAP gross margin was 43.9% in Q1 compared to 46.1% in Q4. The gross margin was 35.5% in Q1 compared to 44.3% in Q4. The gross margin was negatively impacted by 6.7 percentage points from the sale of our 2025 PTCs, which totaled $235 million and were sold at 93% of its value. This resulted in a discount of approximately $16.5 million, plus approximately $2.5 million of transaction-related fees. [ Reciprocal ] tariffs also impacted our gross margin by 4.3 percentage points in Q1. Non-GAAP operating expenses were $77 million for Q1 compared to $78.8 million for Q4. [indiscernible] operating expenses were $130 million for Q1 compared to $129.6 million for Q4. Safe operating expenses for Q1 included $45.4 million of stock-based compensation expenses, $3.8 million of acquisition-related expenses and amortization and $3.8 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $47.3 million compared to $79.4 million for Q4. On a GAAP basis, loss from operations was $29.6 million for Q1 compared to income from operations of $22.4 million for Q4. On a non-GAAP basis, net income for Q1 was $62.3 million compared to $93.4 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.47 for Q1 compared to $0.71 for Q4. [indiscernible] net loss for Q1 was $7.4 million compared to [indiscernible] net income of $38.7 million for Q4. This resulted in GAAP diluted loss per share of $0.06 for Q1 compared to earnings per share of $0.29 for Q4. We exited Q1 with a total cash, cash equivalents and marketable securities balance of $930.6 million compared to $1.51 billion at the end of Q4. The 5-year convertible notes we raised in 2021 were due on March 1, 2026, and we settled all the outstanding principal amount of $632.5 million with our cash on hand. As part of our anti-dilution point, we spent approximately $18.7 million in Q1 with holding shares to cover taxes on employees divesting, reducing diluted shares by 441,448 shares. We did not repurchase common stock during the quarter as we are prioritizing disciplined cash allocation and preserving flexibility for strategic investments and potential acquisition opportunities. We had approximately $269 million remaining under our share repurchase authorization and remain confident in our long-term business outlook. In Q1, we generated $102.9 million in cash flow from operations and $83 million in free cash flow, including proceeds from the sale of the 2025 PTCs. Capital expenditure was $19.9 million for Q1 compared to $9.7 million for Q4. The increase was primarily due to continued investment in U.S. manufacturing. As of March 31, 2026, after monetizing the PTCs generated in 2025, we had approximately $162.9 million of PTCs on our balance sheet. This includes $108.3 million related to U.S. main microinverters shipped to customers in 2024 and $54.6 million related to shipments in Q1 2026. We elected the rate pay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to extended IRS processing time lines. In March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business. And the intel of this approach is included in our quarterly gross margin guidance. In addition, on February 20, 2026 the U.S. Supreme Court issued a ruling embedded in certain tariffs previously imposed under the International Emergency Economic Powers Act or IEPA. On April 20, 2026 U.S. customs and border protection launched an online portal for companies to submit IEPA tariff refund requests. As of today, we have submitted approximately $50 million of refund claims through the portal. Subject to approval, we currently expect to receive the refund within the next 90 to 120 days. Now let's discuss our outlook for the second quarter of 2026. We saw our revenue for Q2 to be within a range of $280 million to $310 million, which includes shipments of 100 to 110-megawatt hours of IQ batteries. The revenue guidance includes approximately $85 million of safe harbor revenue. We see gross margin to be within a range of 42% to 45%, including approximately 3 percentage points of reciprocal tariff impact. We spend non-GAAP gross margin to be within a range of 44% to 47%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $120 million to $124 million, including approximately $45 million estimated for stock-based compensation expense, acquisition-related expenses and amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $75 million to $79 million. With that, I'll open the line for questions. Operator: [Operator Instructions] The first question will come from Brian Lee with Goldman Sachs. Brian Lee: First one, just on the safe harbor as it's so lumpy here. Can you kind of give us any sense on what the safe harbor expectations are 3Q and then I know you said, Badri, 10% to 15% below run rate you originally expected due to the start of your weakness you kind of give us a sense of where you think core revenue trends are into 3Q and 4Q? Are you going to recapture that kind of volume in the back half of year? Are you any sense on payments from here ex the safe harbor? And then I had a follow-up on the [ FET ]. Badrinarayanan Kothandaraman: So Brian, our safe harbor revenue for Q2, the estimate is $85 million. That's what we said. Your question is safe harbor estimate for Q3. It is difficult for us to estimate right now. But if I were to give you a number that between $40 million and $50 million is what I expect, safe harbor revenue for Q3. And that's my opinion there. Then, yes, I talked about we expect modest underlying sell-through growth in Q2, the current quarter we are in compared to Q1. That said, like what I said, Q1 and Q2 sell-through expectations are roughly 10% to 15% below our view. Weaker start is basically due to the challenges we are seeing in general, [ EPO ] financing and unfavorable weather for us. But what we are very excited about is [ Propel ], which is our prepaid leads offering through our partners. And I gave you some color on the prepaid lease offering. Basically, the last earnings call, I told you we had 40 installers from [ Propel ], now we have, as of last week, we have 200 installers. We still have the same four states because we are disciplined in not entering additional states until we finish the pilot. But our originations have increased at a very, very healthy rate. 200 net originations a week. In fact, I mean, that is a very nice number. That amounts to roughly 90 to 100-megawatt annual run rate if I freeze that 200 as of today -- 200 per week as of today. So extraordinary reception for [ Propel ], and we have to thank our partners to make that happen. So for us, [ Propel ] is something we are very excited about. The other one that I'm excited about is in [ Propel ], our battery attach is 84%. Obviously, California drives a lot of battery attached. So when we expand it to other states, it might be a little bit lesser than that. So we are excited about that because that means for us more megawatt hours very soon. And we expect that in the second half of the year, for sure. Then the other one we talked about is what we are seeing in Europe. We gave you color. In fact, we gave you a lot of color on Europe, saying that what we are seeing in April compared to monthly run rate in Q1. For example, we are seeing our double-digit increases for most of the Europe regions, double-digit percentage increases for most European markets compared with the monthly average that we saw in Europe in Q1. And that's being driven by the rising power prices and increasing battery adoption. In Netherlands alone, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1. In France, that number was 20% in April from the monthly run rate in Q1. In Germany, 27% in April compared to the monthly run rate in Q1. So a long answer to your question is basically we are very encouraged by [ Propel ]. We are very encouraged by the fact that we are seeing some green shoots in Europe. But having said that, the market is fickle right now. You're seeing a lot of dynamics in the market. We don't want to [ answer ] a guess for Q3 and Q4, but this is what we are doing from our side. And I haven't talked about the new products, but we are actively working on four new products. And to be brief, that's the fifth gen battery, the bidirectional charger, the commercial battery as well as the IQ 9 high-power version for commercial. And of course, the big announcement we made is the SST and that one is more a 2028 revenue opportunity. Brian Lee: Yes. No, I appreciate all that color. Maybe just on that last point, the timing for IQ SST 2028, that's helpful. I know you gave a bigger lot sizing for that opportunity. Can you give us a sense of kind of the revenue dollar opportunity for Enphase? And then also, how does the Enphase offering differ from what you're seeing from peers for those that you know actually have the product? Raghuveer Belur: Let me take the second one first. This is Raghu. Brian, so I think we are fundamentally different from at least some of the announcements that we have seen in the market, in that we leverage our 20 years of experience in developing a distributed architecture product. So think about it in a single-stage resident converter, which is what is our core technology that we have dropped since the inception of the company, high frequency design, soft switching, custom [ ASIC ] new band gap devices. We were the first guys in 2008 to deploy white band silicon carbide diodes as an example, now we are doing GaN. So when you are a completely distributed or a decentralized architecture, it enable 342 power modules that ranged in the supercluster really brings a tremendous amount of value. What it does is, for example, you get sub-millisecond response types. And when you have sub-millisecond response time, now you can target how to get rid of the site car completely. So no [ BBU ] or no storage anywhere in the low-voltage system. You can now move all your storage to the medium voltage section via [ BFF ]. We all know this. When you're a completely distributed architecture, you get very, very high reliability. When you have 342 of these devices, we have built in 10% redundancy. So you can achieve very high uptime, and our target there is [ Five9 ] which is very good and serviceability of that device without having to take the entire rack down. We talked about U.S. supply chain and volume manufacturing. It leverages the same platform that already -- that we already have in -- from a manufacturing point of view. And then on the cost, again, people don't appreciate this very much is the technology that we have, the single-stage resident converter we do what's called soft switching, which means that electromagnetic interference or EMI signature is extremely low. We don't have to build big metal and closures to enclose these devices to reduce your EMI. That's why this device is the power module is in a part of polymeric enclosure. So we really drive the cost down. The single-stage power conversion means very few components. We drive the cost down. Of course, we'll price to value, but our costs are going to be very, very low. So very good response time, which means we can target completely eliminating the site card, eliminating the site card means you can replace that with a compute rack, more compute rack means more tokens, more tokens means more revenue. We talked about rail and you have a super cluster of 342 of these power modules, you get architecturally correct redundancy and you get very high reliability, and you can target [ Five9 ] uptime, supply chain, volume manufacturing and, of course, cost. Operator: The next question will come from Praneeth Satish with Wells Fargo. Praneeth Satish: So we've seen some changes on the installer landscape recently, [ Sunrun ] exiting their affiliate channel, Freedom forever, filing for bankruptcy. From what I can tell, neither were really major Enphase users. So I guess do you see an opportunity for Enphase to pick up share as that demand kind of reallocates? And are you seeing any early indications of that today? Or is that something that could play out over the next quarter or 2? Badrinarayanan Kothandaraman: We are not going to talk about our customers. Today [ Sunrun ] as our customer. We have a very good relationship with them. We're not going to talk about that. But on Freedom, we do 0 business with them. So we view that the market will redistribute itself amongst the existing installed base, and we do expect to get our fair share of it. Praneeth Satish: Got it. And then maybe shifting gears to C&I. So I think for Q1, you previously indicated potentially generating around $5 million or so of revenue for C&I. Maybe I missed it, but is that -- can you share where C&I revenue landed in Q1? And then what is your -- what's embedded in the Q2 guide for C&I? And should we expect C&I revenue to increase every quarter this year based on the pipeline that you're seeing? Badrinarayanan Kothandaraman: Yes. We did in Q1 a little more than $5 million. We did in the high single digits. A little more than 5%. Having said that, C&I is a very lumpy business. And at least for us, until we have a nice pipeline established we do expect it to be lumpy. But the opportunity for us is that C&I installers, C&I developers do have a safe harbor window as well. And that safe harbor window will be closing in. They have to make their plans by early July. And for that, we have two things, we have actually three products for that. One is our already existing 208-volt 3-phase product, which is [ IQ80 ], which we have been supplying for some time. The other is our brand new IQ9 and [ 427 ] product, which is what we introduced very recently. The third one, which is coming, and we plan to start shipping in Q3. That product is the 548 watts, even high-powered version. That is suitable for safe harbor, which is because if they are going to be using these later in the years, the panel sizes are going to be even more. Today, for example, the panel sizes are between 595 watts and 650 watts, in the commercial business. It's going to go -- keep going up a little more. So that's why the 548 watch is also exciting. So we're very excited by the C&I business. In general, directionally, we expect it to continuously grow until we establish a pipeline. But in terms of quarterly, it is going to be a little lumpy at the beginning. Operator: The next question will come from Colin Rusch with Oppenheimer. Colin Rusch: Can you talk a little bit about the geographic distribution of where the channel inventories? Is it primarily in the U.S.? Are you seeing some channel inventories built up in the EU as well? Badrinarayanan Kothandaraman: It's mostly the U.S. Colin Rusch: Okay. And then can you talk about the customer maturity with the solid-state transformer, how soon can we start seeing some pilot in that product? And how many customers are you engaged with now in terms of potential testing here over the near term? Raghuveer Belur: Yes. We have talked to of the order of 20 customers or so prospective customers. And I think the most important thing is to get a dental demonstration system ready, which is what we are targeting for this year. Once that's done, the all natural following step, there are enough people out there who want to will be willing to test the system, but we need to get to the demonstration system, which is what we will be ready with this year. And that's what we are singularly focused on. And then followed up by 2027 will be about customer pilots and then 2028 will be about volume shipments. So that's the sequence of events that [ Q4 ]. Badrinarayanan Kothandaraman: We have -- we do have a detailed investor presentation, which is on the website as well as on the SST page. One of the things we'd like to highlight is we started working our team, Raghu and the CTO team, they basically recognize the opportunity that we have in the SST data center space about 9 months ago, and we started working on feasibility 9 months ago. And so since then, over time, we have gradually signed approximately 18 engineers in the company to be working on SST and they're all working full time. We also took the opportunity to think strategically and said, how do we create a lot more room for SST. So we restructured the company in Q1, basically to focus on SST. And you saw focus on assist without changing our operational expense structure. And so we got that done. And then we have worked on the basic power module. Again, you can find a lot of details in the Investor Relations deck as well. We have built the basic power module. We have it functional, and now the next step is to basically put together the full system, which is a lot more complex, and we expect to demonstrate that by the end of the year. Once we do that, the customer engagements are going to be there, and we target pilots -- customer pilots throughout 2027 and volume shipments in '28. Operator: The next question will come from Philip Shen with ROTH Capital Partners. Philip Shen: Badri, you said that the Q2 sell-through was 10% to 15% below expectations. You cited TPO challenges. We've been talking about tax equity pausing and there's just a fair amount of I guess, challenge out there. So I was wondering with the core revenue for Q2 being down to about $210 million, down from $250-ish million in Q1, what does Q3 and Q4 look like? This is a seasonally strong time, Q2 and 3, but this TPO challenge with this tax equity pause, may endure or linger for a bit. So I know you can't guide or you haven't guided for Q3, but I was wondering if you might be able to give us some qualitative color on -- or quantitative on Q3 and Q4? Badrinarayanan Kothandaraman: Yes. I mean at this point, I will tell you what I see, but that's basically like what I told you the last time. That's my opinion. As we said, we expected Q1 sell-through to be around in the $250 million range, and we were 10% to 15% below that number, basically. And so we overshipped approximately $25 million in Q1. That's why I said we ended the channel with a little more inventory than what we would have liked. We are correcting that immediately within 1 quarter itself by under shipping in Q2 by that number. We do expect the native sell-through in Q2 to be a little better than Q1, driven by the usual seasonality. What could surprise us in Q3 and Q4 is the few factors that I just highlighted a few minutes ago. What could surprise us is the [ Propel ] could surprise us. There, we are proceeding with some caution. We are piloting in four states now. We are at a run rate of 200 originations a week, which is a nontrivial number. under originations a week. And that percentage increase on the originations a week is fast. I mean, we are very happy with the percentage increase. We are also very happy with the number of installers. Our vision with [ Propel ] was to give prepaid lease to our long tail of installers. And I won't declare success right now because we are still in the pilot, but it is going in the right direction. [ Propel ] comes with an 84% storage attached. Of course, that's a high number because of California. But that's a very encouraging number for our batteries as well. So that's one vector. The other vector is basically what I talked about in Europe. We talked about the business starting to show some sign strength on batteries in Netherlands, in France and in general, even for solar. So we are already seeing that in April compared to Q1. So that's the second thing. The third one is the IQ battery can see -- of course, the volumes in Q1 were a little light due to the '25 abrupt cut off, but we are making a lot of progress on the IQ battery [ latency ]. We are qualifying and 64 utilities have accepted our major color. And with the [ Propel ] ramping, IQ battery can see will also be ramping with new installers who haven't used in [indiscernible]. So that's that. And then on the small commercial front, I talked about more opportunities in small commercial in terms of -- before the safe harbor window closes I believe the commercial developers are going to need a solution for '27 through '30 -- I mean, '28 through '30. So I expect both steady increase in the commercial business as well as some potential safe harbor in -- which will be shipped in Q3 order hopefully by the end of Q2. So as you can see, there are a lot of moving parts. We see the challenges in the last few weeks, like you correctly pointed out, tax equity challenges, installer bankruptcies, they are never good for the business, but we are not the ones to complain. We try to do whatever we can do. And I think all of these initiatives are something that we'll be working on. Philip Shen: Okay. Secondly, as it relates to a quick housekeeping question. In your 10-Q, you guys had commentary about how you entered into a $30 million secured revolving credit facility with a probably held company. I'm wondering if this might be sole source, the company that you guys do propel with? And then back on SST for a moment, Badri, I think you talked about pricing the value with your low cost structure. Just was wondering if you could share what margins you guys might be targeting for this SST product? Raghuveer Belur: It's very early to tell, Phil, about what our cost is what price and cost is going to be. We have a -- we have a rough estimate of it, but it's way too early to tell. Right now, we are focused on continuing the development so we can get to that customer demo by the end of this year. And we're also investigating because we are using a very similar module to what we already do for solar, we are looking at if there is any IRA advantages here for us as well. So too early to tell. Right now, the focus is on getting this 1.25-megawatt customer demo by the end of this year. But over time, as we get deeper and deeper into the design, we'll be happy to share with you the details. Badrinarayanan Kothandaraman: And on the $30 million line, we are not breaking out in the customer. Operator: The next question will come from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Maybe I should just to pick it up off where Phil left it off. Maybe just to pick up on the tax equity piece and the target. You talked about 200 originations a week. I mean what are you thinking quarter-over-quarter into 4Q, what that target installer partnership would look like? I mean, how many are you pursuing? How do you think about tax equity as a limitation on the [ Propel ] program to ramp? What are the other factors when you think about continuing to get this program up and going, if you can speak to it in those terms. In theory as part of your conscious ramping? Badrinarayanan Kothandaraman: Right, right. yes, [ Propel ] is offered through our partners. So we are working very closely with them. there. Having said that, my wish is to basically get up to a run rate of 500 originations a week by the end of Q4. And that's my wish. Today, we have 200 installers that are using [ Propel ] again, my desire on why we launched [ Propel ] basically, that number should be a healthy multiple of $200 million. That's why we launched. That's one of the reasons us and our partner, distribution partner, we launched this [ TPU ] led program [ Propel ] is because we wanted to bring that access to the long tail installers with an ease of doing business. The tax equity question is a better question for [ Propel ]. We are not going to make any comments on that right now there. Operator: The next question will come from Eric Stein with Craig Hallum. Eric Stine: So maybe just sticking with [ Propel ]. Can you just talk about -- I know you're piloting in four state. I mean what is the limiting factor to expanding that to other states? I mean, is this I mean I would assume when you're talking about piloting it you going hand-in-hand with your TPO partner to installers, educating those installers. I mean in my Am I thinking about that correctly? And what would that time frame be to expand to different states? Badrinarayanan Kothandaraman: Right. It is -- yes, once again, I'm answering on behalf of our TPO partner. So basically, what we want to look at is that entire chain that is -- you want to basically start from originations, you want to look at installations, you want to look at M2 -- M1, M2, M3 then you want to be able to appropriately monetize the tax credits. So that takes time. So therefore -- and the usual time could be from originations to monetization could be 4 to 5 months. And we are still -- that's why we are still in the pilot. All of that needs to execute flawlessly. Ease of doing business for the installers is very critical. We cannot keep changing parameters on the installers. We need to be able to needs to be able to monitor -- I mean, to monetize the tax credits property. Again, I am trivializing there their work. They have a lot of work to do. So -- and we need to prove that the entire chain works properly. And until then, we will not be doing a drop launch, like what I stated. Having said that, what are we piloting for? We are piloting to see if we can support a lot of installers. And the answer to that is yes. Since the last earnings call, at that time, they were 14, now they are $200. The last earnings call, the number of originations is an order of magnitude low. Now it is 200 a week, which is -- and climbing rapidly. So we are closely monitoring it. We are working with our partners. And the moment we are ready to launch. We'll be transparent about it. Eric Stine: Yes. Is it -- I know that you -- that [ Propel ] is one of the things that potentially mean improvement in the second half of the year. But I mean, fair to say that this is much more about 2027 and beyond than potentially positively impacting the second half. Badrinarayanan Kothandaraman: That's right. I think you're thinking about it right, positively impacting the second half and also in 2027. That's right. And don't forget the other things, which are what we do nuts and bolts is basically the Europe opportunity is a big one. We are doing well there, especially Netherlands has picked up steam. France has picked up steam. And there, we are actively doing things. Once again, we are holding two to four homeowner events a week. Each of these homeowner events are attended by almost 150 homeowners each one. And our target for on every event, I told my team every event should at least generate 0.5 megawatt hours. So basically, if you do four events that should generate 2-megawatt hours a week and that should only compound as we go. So we are going to replicate the same thing in France as well, where we have 400,000 installed base. And we are introducing our third-generation battery third-generation battery. The form fact of -- sorry, 5th generation battery. The form factor is very, very small. It's 50% energy density using 100-amp prismatic cells, a 40% lower cost -- our cost -- internal costs, and we expect to translate that into a lower price for our distribution partners. So that's another very exciting product. The other one, I didn't talk too much on the buyback. On the day, we are gearing up for a launch in the fourth quarter. Again, a very simple product, which is along with the meter color, and just the charger of it can provide V2H, which is both V2H, vehicle-to-home resiliency and vehicle-to-grid, V2G. So that's another product. And there, we have two partnerships with North American OEM car providers, which we will announce when we are ready. So that's that. And then, of course, IQ9, we are launching IQ9 residential markets. We have already launched for the commercial market. We are going to introduce higher power higher-powered version. So that business, especially with our domestic content compliance, U.S. manufacturing, all of that is a very big advantage there. That business takes a little time. It's a design in business, and so we expect to make steady progress there. The last one, which I talked about is the commercial battery. The commercial battery, it's a gigawatt hours of TAM, and we are talking about batteries for small and medium businesses, schools, hospitals, churches, small businesses, the gas stations, convenience stores all of those, they typically need battery size anywhere between a 50-kilowatt hour system and 250 to 300-kilowatt hour system. So now basically, we will be able to offer that along with IQ9 on the [ PB ] side, on the solar side, and now we will have 80-kilowatt hour battery, and you can string 25 units of those, you can go up to 2-megawatt hours. So we are extremely excited by that offering as well. So we're doing lots of things, and we expect sequential growth. Of course, it's a turbulent market, but we are controlling what we can. And of course, the IQ SST, which we talked about. Operator: The next question will come from Dylan Nassano with Wolf Research. Dylan Nassano: Badri, I would just love to get your take, I guess, on Europe, just in terms of how durable you think this bump is, I mean, that market went through a boom for kind of similar reasons back in 2022 and it was followed by a pretty severe kind of destocking cycle. So just wondering if you could kind of compare and contrast where we're at today? Badrinarayanan Kothandaraman: Yes. I mean it is anybody's guess. Yes. I shared with you the question and the concern. Last time it was an extended the Ukraine crisis basically led to an explosion of demand this one may be more modest. But nevertheless, we are seeing an increase. I'm not sure how long it will last. But there are some fundamentals there, which is basically batteries are good in general. And Europeans are -- I have to say that Europeans are a little more advanced. And the U.S. here, almost every region is accelerating to a battery-first market. And battery-first pulls everything else, solar, EV chargers, energy management, it puts everything. And what we are going to be doing there is, of course, we are going to get more competitive. We talked about sharper pricing. We already made necessary pricing corrections on microinverters in December. We are making pricing corrections on batteries in May, which is next month. And we already made battery pricing corrections in the U.S. in March. So we are laser-focused on expanding our battery business. I talked about that. In Europe, we are going to go from a third-generation battery to our fifth-generation battery in Q4. And so that will be a massive leap there in terms of cost, in terms of pricing, in terms of installation, in terms of space. So we just did -- one of the things we -- before we finalize our design, it's our practice to show it to installers and get a group of installers and get limited or get some feedback from them. So we did that in the first quarter. We did that in France, in Netherlands, in Germany, and we got a lot of feedback on the battery and mostly very positive. So for us, it is all about batteries there and batteries were pulled through solar and I think we are making the right necessary steps for us to grow through 2026. Operator: [Operator Instructions] The next question will come from Vikram Bagri with Citi. Unknown Analyst: It's Ted on for Vik. I wanted to ask about the guidance for 2Q. It looks like it still includes tariff impact. Are you able just to share how much of the inventory roughly is still impacted by those tariffs? And would there be any interplay between the possible refunds that you may receive on that? And then could you just also talk about the progress being made on ramping the non-China battery cell supply. What's the outlook for that mix? Badrinarayanan Kothandaraman: Yes. The -- in terms of tariffs, like what I said, we do expect -- Mandy said, we have applied sort of $15 million refund and we do expect that to basically the decision and the refund to come within 90 to 120 days. As far as we are concerned on our gross margin guidance for Q2 that basically includes -- there is a benefit for us of a couple of percent, 2% in gross margin due to the change in reciprocal tariff, note that still even now -- all of most of the countries are at 10% right now. So right now incorporated in our current guide is a benefit in gross margin of approximately 2%. And we said in our prepared remarks that this tariff -- the reduction in tariffs helps us to be a little more aggressive on our batteries, and we have taken advantage of that to increase our demand by adjusting the pricing to be a little bit sharper in both Europe as well as the U.S. Unknown Analyst: Got it. That's very helpful. And I have one follow-up. Just going back to the prepaid lease offering, do you have a view on where you think the prepaid lease products could be as a portion of the total TPO market this year? So not necessarily for [ Propel ], but just looking at the market as a whole. Badrinarayanan Kothandaraman: It's hard to say, and my comments should be taken with a grain of salt because we are still in a pilot. And right now, we are at a run rate of approximately like what I said at 200 originations a week, it corresponds to something like 90 to 100 megawatts a year. So that's the number at 200 originations run rate a week. So you can do your math on how does it compare to the [ TP ] market. Operator: [Operator Instructions] Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Badrinarayanan Kothandaraman for any closing remarks. Badrinarayanan Kothandaraman: Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Franklin Electric Co., Inc. Reports First Quarter 2026 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Dean Cantrell. Dean Cantrell: Thank you, Andrew, and welcome everyone to Franklin Electric Co., Inc.'s first quarter 2026 Earnings Conference Call. Joining me today is Jennifer Wolfenbarger, our Chief Financial Officer, and Joseph Ruzynski, our Chief Executive Officer. On today's call, Joseph will review our first quarter business highlights, Jennifer will provide additional details on our financial performance, and then Joseph will make some additional comments highlighting our distribution segment. We will then take your questions. A replay link of the webcast will be archived for seven days and a transcript and audio version of this call will be available on our website tomorrow. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's Annual Report on Form 10-Ks and in today's earnings release. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. All forward-looking statements made during this call are based on information currently available and, except as required by law, the company assumes no obligation to update any forward-looking statements. Earlier today, we published a slide deck to accompany our prepared remarks. The slides can be found in the Investor Relations section of our corporate website at franklin-electric.com. With that, I will now turn the call over to Joseph. Joseph Ruzynski: Thank you, Dean, and good morning, everyone. Thank you for joining today's call. I am pleased to share our results for the first quarter with you all today. Let us move to Slide 3. Our first quarter was a strong one for all segments. Organic growth was healthy across our end markets with volume growth and disciplined pricing across our segments. Our quarter finished with healthy backlogs and order trends as we entered the second quarter. Our balance sheet remains healthy as we look to continue to invest in our strategic initiatives and returns for our shareholders. Our launch of the Value Acceleration Office is off to a great start, with a strong funnel and some good initial returns. If we could move to Slide 4, I would like to look at our performance in terms of our strategic objectives and specifically growth. Our sales were up 10%, and each segment saw volume growth along with positive pricing and contribution from new products, channels, and new customers. Our operating income was up 9% with adjusted income up 17%. GAAP EPS was up 15% with adjusted EPS up 24%. Our adjusted EPS growth in Q1 more than doubled our sales growth year-over-year. This was helped by strong improvements in our income and SG&A productivity. We have worked through some thoughtful restructuring as we align our capacity and production to our regions and markets that are growing, and we work to streamline parts of our business that have grown through acquisition these past few years. We are positioned well for 2026 with a backlog of 10% and a positive book-to-bill as we enter the quarter. If we move to Slide 5, I would like to share our progress on some of our strategic priorities. Our value creation model starts with clear growth focus, and we continue to see opportunities to innovate and serve markets that are seeing good underlying strength. Our dewatering business was driven by 10% growth in the mineral OpEx market, and we are thoughtfully bringing together recent acquisitions in this space, channel expansions, and customer acquisition together to build a great part of our portfolio. In Q1, we launched a great addition to our pressure boosting portfolio with our new VersaBoost product. We are thinking of scale and velocity for new products and our VersaBoost Pro delivers smarter, reliable water pressure with effortless installation and lasting performance in residential markets. These types of launches will help us set a new bar in 2026 and 2027 for new product vitality and revenue. Our margin expansion efforts are on track with our new Value Acceleration Office, launched in 2025. Our funnel is growing, and we expect to solve our biggest growth and productivity challenges with sound governance and speed. We see our office delivering over $15 million in productivity this year with an opportunity to accelerate this as we move into 2027. Our expectation is to deliver over 100 basis points of productivity a year once we ramp up our efforts. We are pleased to see our focused margin improvement efforts in water treatment up 40 basis points and our distribution business up 20 basis points in the full year 2025. This demonstrates that growth and efficiency can work hand in hand. We are expanding our capital deployment for new projects this year and have recently inaugurated our new water factory in Izmir, Turkey, with more focused expansions and regional efforts in India, South America, and Mexico to name a few. We have continued to smartly buy back shares, 120 thousand in Q1, and have continued our dividend expansion in 2026, now at 34 years of growth. Most importantly, on team and talent, a big thank you to Franklin's employees, as our growth happens every day with every customer served. Every problem we solve, growth strategy we execute, and employee we keep safe helps us to grow and to build on our strong culture. Our people and our talent are our bedrock. With that, I will turn the call over to Jennifer to discuss the financial results in more detail. Jennifer Wolfenbarger: Thank you, Joe. Please turn to Slide 6. Our fully diluted earnings per share was $0.77 for the first quarter of 2026 versus $0.67 for the first quarter of 2025. First quarter adjusted diluted EPS was $0.83, a new first quarter record, compared to our 2025 first quarter adjusted diluted EPS of $0.67. The 24% year-over-year expansion in adjusted diluted EPS was primarily driven by the expansion of our adjusted operating income year-over-year. This is a testament to our commitment to expand the earnings power of our business. There were $3.9 million in restructuring costs in the first quarter of 2026 compared to $200 thousand in the prior-year first quarter. Restructuring costs in the quarter are primarily related to structural improvement initiatives across our global water operations. These actions will deliver savings in 2026 and will be accretive in 2027. The effective tax rate was 24.2% for the quarter compared to 25% in the prior-year quarter. The change in the effective tax rate was driven by favorable discrete stock compensation in 2026. Moving to Slide 7, first quarter 2026 consolidated sales were $500.4 million, a year-over-year increase of 10%. The sales increase in the first quarter was primarily due to price and volume growth across all three segments, as well as the positive impact of foreign currency translation and the incremental sales impact from recent acquisitions. Franklin Electric Co., Inc.'s consolidated gross profit was $175 million for the first quarter of 2026, up from the prior year's gross profit of $163.9 million. Gross profit as a percentage of net sales was 35% in the first quarter of 2026 compared to 36% in 2025, a decline of 100 basis points compared to the prior year. The gross profit margin was unfavorably impacted in the first quarter of 2026 by higher material costs driven by the hangover of tariffs. Selling, general, and administrative expenses were $123 million in the first quarter of 2026, compared to $119.6 million in 2025. The increase in SG&A expenses was primarily due to the incremental impact of our acquisitions in the past year. SG&A as a percent of net sales was 24.6% in 2026 and 26.3% in 2025. Without the impact of acquisitions, our SG&A as a percentage of net sales was 24%, an improvement year-over-year of 230 basis points. Consolidated operating income was $48.1 million in the first quarter of 2026, up $4 million or 9% from $44.1 million in 2025. The increase in operating income was primarily due to higher sales volumes in the first quarter. As previously mentioned, there were $3.9 million in restructuring costs in 2026 versus $200 thousand in the prior-year first quarter. These were related to structural improvement initiatives across our global water operations. Consolidated operating income before restructuring was $52 million in the first quarter of 2026, up $7.7 million or 17% from $44.3 million in 2025. The first quarter 2026 adjusted operating income margin was 10.4% versus 9.7% in the first quarter of last year, up 70 basis points year-over-year. Moving to the segment results starting on Slide 8. Global Water Systems sales were up 11% compared to the first quarter of 2025 driven by strong price, favorable currency exchange on sales, and additional volume from our recent acquisitions. Water system sales in the U.S. and Canada were up 7% compared to 2025. The sales increase was led by sales of all other surface pumping equipment up 17%, as sales of water treatment products increased 8%, and sales of groundwater pumping equipment increased 3%. These sales increases were partially offset by lower sales of dewatering equipment, large dewatering equipment down 9% compared to 2025 in the U.S. and Canada. Sales increased 1% in the first quarter due to the positive impact of foreign exchange rates compared to the prior year. Water system sales in markets outside the U.S. and Canada increased 17% overall. Foreign currency translation increased sales by 8% and recent acquisitions added roughly 7%. Excluding the impact of acquisitions and foreign currency translation, sales in 2026 increased in Asia Pacific and Latin America, as EMEA sales were down year-over-year. EMEA sales volume, specifically in the Middle East and Eastern Europe, were negatively impacted by the ongoing conflict in the Middle East. Global Water Systems operating income was $44.4 million, up $1 million versus 2025. The operating income margin was 14%, a year-over-year decrease of 110 basis points. There were $3.9 million in restructuring costs in 2026 in the water segment. Restructuring costs in the quarter are primarily related to structural improvement initiatives across our global water operations. Adjusting for restructuring charges, the water system's adjusted operating income was $48.3 million, up $4.9 million or 11% from the prior year, with operating income margin of 15.2%, up 10 basis points from the first quarter of last year. Moving to Slide 9. Distribution's first quarter sales were $150.9 million versus first quarter 2025 sales of $141.9 million, an increase of 6%. The Distribution segment sales increase was primarily due to higher volumes and price realization. The Distribution segment's operating income was $3 million for the first quarter, a year-over-year increase of $900 thousand. Operating income margin was 2% of sales in the first quarter, an improvement of 50 basis points versus the prior year. Operating income margin increased primarily due to higher sales volume, strong price realization, and solid leverage on SG&A costs from higher sales. Moving to Slide 10. Energy Systems sales in 2026 were $71.8 million, an increase of $5 million or 7% compared to the first quarter of 2025. Energy system sales in the U.S. and Canada increased 3% compared to 2025. Outside the U.S. and Canada, energy system sales increased 29%, primarily in Asia Pacific. Energy Systems operating income was $24.2 million compared to $21.9 million in 2025. The first quarter 2026 operating income margin was 33.7% compared to 32.8% in the prior year, an improvement of 90 basis points. Operating income margin increased primarily due to higher sales volume, solid price realization, and strong leverage on SG&A costs from higher sales. Moving to the balance sheet and cash flow on Slide 11. The company ended the first quarter of 2026 with a cash balance of $80.4 million and with $88 million outstanding under its revolving credit agreement. We used $40.9 million in net cash flows from operating activities during the first quarter compared to $19 million in 2025. The main driver for the change versus prior year is higher accounts receivable of $20 million driven by a year-over-year increase in net sales for the company. The company purchased 120 thousand shares of its common stock for approximately $11.3 million in the open market during 2026. As of the end of the first quarter of 2026, the total remaining authorized shares that may be repurchased is about 700 thousand shares. Yesterday, the company announced a quarterly cash dividend of $0.28. The dividend will be payable on May 21 to shareholders of record on May 7. Moving to Slide 12, the first quarter financial results were in line with our expectations and underlying demand remains. Although our confidence in the outlook is increasing, we are holding our full-year sales expectations of $2.17 billion to $2.24 billion and full-year adjusted diluted EPS to a range of $4.40 to $4.60. This range reflects some uncertainty in our global markets as we further assess macroeconomic and geopolitical outlook. Our outlook does not include a clawback of tariff-related expenditures. We have formally submitted our request and are awaiting a response. Now I will turn the call back to Joseph for some additional comments. Joseph Ruzynski: Thanks, Jennifer. If we move to Slide 13, we want to give a deeper look at our segments these next few quarters. We will share what we like about the businesses we are in and why we are optimistic about our opportunity to profitably grow them. We will start this quarter with a look at our distribution business. As many of you know, we built this segment fairly recently in our history, growing through our strategy of building channel solutions, adding new offerings, and smart acquisitions. It has become a recognized leader in the water distribution and services space along with our strategic partnerships and other leading distributors in the U.S. It has helped us to develop the strongest channel in our industry. This is an important channel for Franklin Electric Co., Inc.-manufactured pumps, motors, and drives, but also brings together leading products in a wide portfolio to serve the residential, groundwater, wastewater, industrial, agricultural, and water treatment markets. This business is now over $700 million with a solid return on invested capital and great opportunities to productively grow. Although we are proud of our 84 branches and 650 OSI locations and wide product portfolio, the real value in this segment is how we help our customers win and how we win with our customers. Starting with how we help our customers win: critical inventory at customer sites enables them to win jobs and deliver with speed, accelerate growth, and invest in strategic initiatives rather than tying up cash in inventory. Our on-site inventory program, or OSIs, couples real-time inventory with efficient replenishment and a continuously learning supply chain. We offer the most unique solutions in the industry and have grown our OSIs from zero to 650 as customers learn how having a wide range of products on their site refilled at the right time, for them to pull as their job requires, can lead to winning more business. For customers that order products from us for their daily business, we have built technology solutions to give them 24/7 visibility with our integrated customer portal, simplifying order placement, viewing invoices, and payments through one single platform. And our ability to help customers win means we work with them on the site during the job planning process to go beyond transactional support and offer value-added services including delivery, on-site support, training, design, and assembly services. How we win with our customers is by assessing their wider needs to ensure we bring the right solutions at the right time. We have grown our business and value to the markets we serve through a program we call cross pollination. As we see customer needs in areas like wastewater or water treatment, we have pulled on our expertise and products within Franklin and partnered with industry leaders to attend the markets that are growing faster. And we are doing it with the efficient service and leading technology platforms we are known for. Being part of the wider Franklin team has allowed us to think about data more strategically from end to end through manufacturing and to our suppliers. Our technology and data to close the last mile, realize operational efficiencies, and to provide the best-in-class customer experience both externally and internally is truly a differentiator. Our distribution segment has grown by adding products, service, technology solutions, and customers. We believe our current progress to grow margins will have the same success, and as we have grown organically and inorganically, we are now realizing the benefits of streamlining our process, leveraging our spends, and creating an efficient footprint. Our margin expansion focus brings with it solutions to better serve through technology and data that benefit all of our partners. Last year, we expanded our margins over 200 basis points, and we improved again in Q1. We feel that growing volume, creating more value to our customers, and margin expansion can work seamlessly together. With that, we will now turn the call back over to Andrew for questions before a few closing thoughts. Andrew? Operator: Thank you. Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment, please. First question comes from the line of Michael Halloran with Baird. Michael Halloran: Hey, everybody. Good morning. Joseph Ruzynski: Morning, Mike. Michael Halloran: So, when I look at the guide and I look at the trends for the remainder of the year, it seems like a pretty prudent approach to guidance. Sequentials seem maybe a little below normal as we work through the rest of the year. Maybe just help me understand what is embedded in guidance from a revenue progression perspective. Is this a conservative thought process given what we do not know? And any nuances by end markets as we think through the rest of the year that you think we should know? Joseph Ruzynski: Good question, Mike. I think what we do not know is obviously what we do not know. We see the quarters on a standalone basis to be positive top and bottom line here through the next three. You are going to see from a sequential standpoint that normal performance, which is obviously a bit more muted given the growing seasons and the weather in Q1 and Q4. But our outlook for Q2 looks robust and looks on track. I think the parts that we do not know, and Jennifer alluded to those in the call, are obviously we have talked before about India and the Middle East and some of these green shoots that we see in some fast growth regions. We are trying to temper some of those expectations, but the underlying business is solid. We feel the market demand is steady. We made a couple comments there on book-to-bill and backlog here as we came into Q2, and it looks on track. So from what we can see, the underlying business looks healthy. Some of those unknowns in terms of ag prices, freight impact from Middle East conflict, some of the new customers that we have been fostering that are affected by those fuel prices or that disruption, those are really some of the unknowns. But the rest of the business read out largely as we expected, and it trends that way here as we go into Q2. Michael Halloran: And maybe something comparable on the margin side of things. Obviously, the energy systems margins in particular were robust in the quarter, and that seems to be even with some of the international mix in there. How should I think about the margin progression through the year? Are you assuming a step down? I understand there are variances quarter to quarter there. And anything in the water side as well that you think should be relevant as we are thinking forward? Joseph Ruzynski: I will give just a couple comments, and I will let Jennifer add. Energy had a great first quarter. We talked about the timing and expecting sequential improvement and year-over-year improvement here as we got into Q1. Q2 is a little bit of a blip for us where we got price out in front of tariffs, so that comp will look a little bit challenged, but Q2 last year was a high amount. The underlying margins, we expect to be strong even with the nice growth that we are seeing around the world for that business, which just shows the underlying strength. If there are headwinds that come from the Middle East conflict and some of the questions about oil and gas, it is a slight tailwind for sure here in the U.S. in that space, and we expect to continue to see that. I think from a distribution standpoint, there definitely were some mixed challenges. It performed as we expected, but some of their faster growing business, we are still working on upstream leverage. We are still working on a couple different things there. But again, good expansion. We expect them to expand; you are going to see that increase here as we get to the mid-quarters of the year. So on track there from a volume expansion standpoint. And then from a water standpoint, we have a number of things we are working on. Jennifer referenced restructuring. Clearly, as we are building factories and there is some work that we are doing there—some adds and some consolidations—we expect that to normalize. There is a little bit of inefficiency that we saw here in Q1. Some of those efficiencies that we are bringing into that business is to continue to work on post-acquisition synergies and barns. You see a portion of that sit in Latin America. But also new factories starting up; there is always a little bit of a problem there exactly. We can see that improvement from a year-over-year standpoint. Jennifer Wolfenbarger: I mentioned in my prior reports that [inaudible] taken back into the first quarter. [inaudible] cleared up either in 2026 [inaudible] opportunities. Uh-huh. And the investment from the [inaudible] would expect to see this. We feel the impact of it to change sort of the [inaudible] for '25 gives you [inaudible] price time for us to [inaudible] they are very, very cold because they are just emergent business. Operator: Thank you. Your next question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Thank you. Good morning, everyone. Joseph Ruzynski: Morning, Bryan. Bryan Blair: I apologize if I missed this detail. I have had some technical difficulty. But what was volume and price contribution in Q1? And if we assume your team is trending toward the high end of the revenue guide—that seems realistic for the time being—what should we think about in terms of full-year volume and price contribution? And how different is that by segment? Joseph Ruzynski: Good question. The performance on volume and price was nicely balanced for us in Q1. If you look at the sales growth, volume was just under 30% and price was just over 30%, with acquisition and FX kind of rounding out those other two as you have seen. From a volume standpoint, we have done a lot of work in terms of leading indicators. You have heard us talk about this the last few quarters: innovation, new products—we like to highlight this—how we are finding those markets that are growing faster. Sometimes it is hard to predict where and when that volume will hit. That being said, Q1 read out largely as we expected. Price is going to be a comparable spread at the higher level here in Q2 as we put some of those price increases in. But we expect volume and price to be fairly balanced throughout the year. So that is at a higher level. Jennifer, if you want to comment at the segment level. Jennifer Wolfenbarger: I would say the caveat there is we continue to see inflation in various pockets, and we will continue to be very disciplined in our price strategy as we see those commodity inflation pressures come through, whether it be on the plastic side or copper. We are going to take the opportunity to pass that through from a price perspective as we have done historically. So I think, Bryan, just last comment: that volume line is one that we are watching closely. Joseph Ruzynski: We are investing in R&D. We are investing in new products. We have been talking about this—channel expansion, making sure that we are out serving in terms of the end market. So we like that as an indicator and a start to the year, that volume number. Bryan Blair: Understood. I appreciate the detail. And, Joseph, you offered a pretty good segue there. In terms of innovation and new product development, I just wanted to level set a bit. What time frame of new product intros do you roll into any vitality calculation? And the $160 million in new revenue by year three, is that a 2026 to 2028 reference? Or in general, what you are targeting on a rolling basis, and then how should we, given current visibility, think about the contribution to water and energy segment growth? Joseph Ruzynski: It is a 2026 to 2028 number, but I would tell you this: we are looking to add to that. We think that there is more that we can do, and we will continue to refresh that number and that outlook. We generally are using a three-year vitality—so products launched in the last three years, contribution to new product revenue. Really, what our team likes is this idea of new product revenue, so we normalize for cannibalization of course, but this is a big focus for us. And when we look at our end markets, that opportunity is going to increase. It is going to increase for two reasons. One is we have acquired some companies. Our ability to add technology onto that and bring those to new markets helps us from a new product to new region. The other is some of those faster growing markets that we reference, like the data center market, and we look at energy infrastructure. Those opportunities for us to launch new products and bring those to market, we think, will help us to accelerate that. So I think the outlook for new products continues to be positive. We are excited about VersaBoost; we just discussed that today. And these are bigger numbers. Our effort has been shrink the funnel but more volume and scale for fewer launches, and then really to pay attention to doing those successfully. And as a last quick comment on those, our expectation is new products are accretive. So it helps us in a number of ways. Operator: Thank you. Our next question comes from the line of Ryan Connors with Northcoast Research. Ryan Connors: Great. Thanks for taking my question. And, like Bryan, I also had some—you were breaking up for a little while there—so hopefully I am not asking something that has already been covered. But I want to touch on dewatering for a bit. You mentioned Australia strong, but if I heard you right, Jennifer, you were mentioning actually softness in dewatering, and specifically mine dewatering. I was a little surprised by that. I mean, I know that we have got kind of a mining CapEx cycle kicking off, expect to see some strength in that large dewatering piece. So can you just unpack that dewatering piece? What is going on in Australia, and then why we are not seeing more of that elsewhere? Joseph Ruzynski: I will just make a quick comment. Global dewatering is a great story for us, Ryan. I think Jennifer's comment was the timing of orders in North America pointed to a year-over-year that was flattish to slightly down. But globally, this is a real healthy space. Australia is a very healthy space. Rest of the world dewatering for us is up 30-plus points. So a smaller base, but we are quickly seeing that global business for dewatering outpace, and we think it will be as big or even bigger than what we have in the U.S. Just to start, the comment was really on U.S. and Canada. Jennifer Wolfenbarger: And we did see some timing impact, and that was more on the fleet piece of dewatering, not necessarily the mining side. Our outlook overall for dewatering for the full year is still growth expected across the globe, including U.S. and Canada. A little bit of timing on the fleet side in Q1 was really what my comment was meant to convey. Ryan Connors: Okay. Yeah. That clears it up nicely. Thank you. And then I wanted to follow up on the question earlier on energy and the margin specifically. It is pretty remarkable. If you look at the quick calculation, energy contributing 13% of revenue and more than a third of operating income. So two questions on that. Thinking big picture and longer term, are we going to top out here, just big picture on margins for energy long term, or is there any scenario where we could actually get north of this kind of pretty amazing low-to-mid 30s type of range? And then strategically, Joseph, how do you think about the fact that a segment that is relatively small in the mix on a revenue basis is becoming such a huge contributor to the bottom line? Just curious what your strategic thoughts are on that. Joseph Ruzynski: I would answer it two ways. I view it as we are okay with that right now. Here are a couple things that have contributed to their income and expansion. One is when we look at transformation, 80/20, and some of the good productivity work that we have in front of us still at Franklin, I would say that energy business, because they really went into the post-COVID hangover with some thoughtfulness, and the leaders there did a great job of really reinforcing that we can operate and operate healthy even when volumes are slightly off. It is a great template and a group blueprint, and we expect you are going to see that read out in the other segments. We have seen it in pockets of distribution and water treatment as we have talked about. Water has a great opportunity there. So I am okay with it as it sits today. You are going to see a better balance, though, out two or three years in terms of margin expansion in the other parts of the business. The other question in terms of is there a high end or a limit to what we see from an energy margin standpoint: I would tell you we are confident in performance at that level. But a few things that have really contributed to their growth, and these are parts of their business that are growing faster, are as they are investing in sensing technology and critical asset monitoring in the grid space. Those are helpful from a mix standpoint. So as their higher margin business becomes a bigger part of just that energy segment, even if we look at growth around the world, even if we look at some of the growth that is maybe lower margin, that is going to outpace it and at least keep us in a real healthy band there in the mid-30s as Jennifer talked about. In terms of what is that opportunity, I would say this: we are working on midterm guidance, and we will share that during our Investor Day. We have not announced the time yet, but stay tuned for that. We still see opportunity to expand further just based on smarter technology from a mix perspective and then, again, a business that has done a great job from a productivity execution here these last few years. Ryan Connors: Got it. Okay. Very helpful. Thank you for that. And then last one from me on kind of a big picture question. Hearing more and more about AI being leveraged in the industrial landscape for pricing specifically—sort of algorithmic pricing strategies for industrial companies, and particularly for industrial distribution. So curious, given your comments there on the distribution business, Joseph: is that something that you are using anywhere in the company, but specific to distribution? Just curious whether that is something you are doing. Joseph Ruzynski: We have a fairly dynamic pricing approach in distribution. I would say it is not embedded with AI where we sit today. We are fortunate to have really intimate business owners. Our regional presidents in that business are looking at competition, the weather, and input costs on a real-time basis and essentially allow us to stay well in front of that. There is more we can do. We have got a lot of great work done in terms of simplifying part numbers. We have got rationalization, and so we can see the same number from coast to coast now. This took us a couple years. We have a great ERP system. And I would tell you we hear the same thing, and we see the same opportunity you mentioned, which is AI can help us take that to the next level to be smart about pricing. We have really done some good work this last couple years. Pricing is one of those elements that has helped them to lift that margin, and we expect to see further margin expansion throughout the year based on smarter dynamic pricing. Operator: And our next question comes from the line of Walter Liptak with Seaport Research. Walter Liptak: Hi. Thanks, guys. Good morning. Joseph Ruzynski: Good morning. Walter Liptak: Some of the comments were breaking up on my end as well. I wanted to ask about the new products that you guys called out—the $160 million. I wonder if you could review for us the data center products, like where your run rate is currently, and what is the expected growth that you think you would be at three years out within that $160 million? Joseph Ruzynski: What we will do is share what part of that commercial and industrial space is data centers here as we get into our Q2 earnings. But I think we have mentioned this before: it is a sub-$50 million business for all products for us today. Where our focus is right now, Walt, is it is simply the fastest growing space for pumps, motors, and drives, not only in the U.S., but around the world. Given our application expertise and the fact that we have built supply chain expertise, that has really been a key focus for us right now—to serve. There is a great set of CDU manufacturers around the world and here in the U.S. that have done a great job putting a space together. We like our ability to respond with speed and velocity. Our first production line—we have been doing this kind of embedded in parts of our business—but a stand-alone production line is going up right now in our big facility here in the U.S. And what we will do is share that outlook in terms of how we see order trends and our expectation in terms of volume growth here as we get into Q3. It is an exciting space. It is a fast-moving space for anyone that follows that market. I think the trends here the last couple years point to a next good three to five years in that space from what we can see, and we will be ready for it. Walter Liptak: Great. And in the first quarter, the water segment had better-than-expected organic growth. Was part of that from data center-related products? Joseph Ruzynski: A small part—not material. I would tell you a couple things that really read out well. One is just our traditional business in residential and ag in the groundwater space had a nice first quarter of both volume and price. We talked about this in our Q4 call where we saw a little bit of a pullback in terms of channel inventory in that RSS or that surface pumping business. That has bounced back nicely. So we made a comment on where we touch HVAC or some of the specific residential markets—those had a nice recovery, not just a sequential recovery, but year-over-year showed some strength. So surface pumping overall was strong in that RSS space. And then, again, that global dewatering business was up for us about 10% even with the blip in North America due to some fleet timing. What is interesting about Q1 there is the consistent strength across those product segments. We are obviously watching places like ag, but it is a more normal year. We do not talk a ton about weather here, but it is a more normal year, so it looks solid. And then the rest of the business, again, a blend of new products, new markets, new customers. They seem to be gaining some traction. Jennifer Wolfenbarger: And I must add a comment regionally. We also performed very nicely across regions. We touched on Australia, which posted really strong growth in the quarter. We started to see some recovery in Mexico—smaller piece of our business, but good to see that. That was depressed in the last couple of quarters. I touched on [inaudible]. Walter Liptak: Okay. Thanks. You broke up a little bit there at the end again. And then the last one for me: the energy segment growth was good this quarter, but it seems like it was driven more on the international side. For 2026, I think some of your competitors are calling out a pretty strong retail fueling market, both U.S. and international. What are you seeing in the marketplace? Joseph Ruzynski: We see the outlook for the U.S., starting there, as good and healthy. Backlog looks healthy. What we are seeing—and I think I have mentioned this before, Walt—is we can see a little further in that business than other parts of our business. If you look at the aged backlog, it points through the summer. Build season looks robust. Globally, that business—the leader, Jay, and his team—have done a really nice job building further opportunities in places like India and the Middle East. Those we are watching a little more closely. We had a good quarter in Q1 in some of those areas where we see faster growth. It looks like Q2 is going to be a little bit slower just based on the global dynamic and how that touches fuel price and some of that investment. Other than that, we are still helping out with infrastructure, so if there is a need for that real time, we do. But the U.S. looks great. It is still the biggest part of our market, and the international prospects are still healthy. If and when the Middle East settles down, our view is out two or three years we have some really nice growth opportunities. The timing of those may be off slightly here this year. Walter Liptak: Okay. Thanks for pointing that out. Operator: Thank you. And our next question comes from the line of Matt Summerville with D.A. Davidson. Analyst: Hi. This is PJ Haliburon on for Matt Summerville. I was just wondering if you are seeing any impact from the updated Section 232 tariffs. Thank you. Joseph Ruzynski: Good question. The updated tariffs really had a fairly neutral impact to us—our business, our products. We did a complete review of that when it was announced earlier in April. In general, no major change there. The tariff news that has come out the last few months for us has been neutral to slightly positive just given the position of our product and where we manufacture it. We are largely an in-region, for-region manufacturer, so that has helped us a little bit to create some stability. We still are doing a little bit of work—including the 232s—of resetting our supply chain, but we expect to see some good progress and to finish some of that work up here over the next few quarters. The latest announcement had a largely neutral impact to us. Operator: I will now hand the call back over to CEO, Joseph Ruzynski, for any closing remarks. Joseph Ruzynski: Thanks, Andrew. Our first quarter was a great start to the year. Our execution for strategy transformation and serving our customers every day was strong. Our growth engine is fueled by serving faster growing markets, innovation, and channel expansion. The leading indicators show us we are working on the right areas. Our productivity path is on the right trajectory with pockets of strength and some great opportunities to accelerate. We are confident in 2026. Despite global challenges and risks, our strategy will give us the avenues to add customers, serve new markets, and increase our productivity throughout the year. We are confident in our strategy. We like the businesses that we are in. Thanks, everyone, and have a great week. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.