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Operator: Good day, and welcome to the Smithfield Foods 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 Julie MacMedan, Vice President, Investor Relations. Please go ahead. Julie MacMedan: Thank you, operator, and good morning, everyone. Welcome to Smithfield's First Quarter 2026 Earnings Call. Earlier this morning, we announced our results. A copy of the release, along with today's presentation is available on our Investor Relations website. Today's presentation contains projections and other forward-looking statements that are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our legal disclaimer on Slide 2 of the presentation for additional information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures please refer to our earnings press release and our slide presentation on our website. Finally, all references to retail volume and market share are based on [indiscernible] data. With me this morning are Shane Smith, President and CEO; Mark Hall, CFO; Steve France, President of Packaged Meats and Donavan Owens, President of North America Pork. With that, I will now turn the discussion over to Shane. Shane? Shane Smith: Thank you, Julie. Good morning, everyone. I am pleased to report record first quarter adjusted operating profit of $339 million and adjusted operating profit margin of 8.9%. Our outstanding results reflect disciplined execution of our long-term strategies, particularly in packaged meats, reinforcing the benefits of our vertically integrated model in a dynamic operating environment. Looking at profit by segment. Packaged Meats delivered operating profit of $275 million, up 4% versus the first quarter of 2025. Packaged meat sales of $2.1 billion increased by 6% compared to the first quarter of 2025. This was driven by volume growth of 3.5%, primarily reflecting the earlier Easter holiday. Excluding the impact of the earlier Easter timing, our volume was still up 1.3%. We also saw a 2.6% increase in average sales price related to higher raw material market prices and disciplined pricing across our portfolio. We reported Package meat segment operating profit margin of 12.8%, which was down modestly from last year driven primarily by the earlier Easter increase in the mix of holiday hams higher raw material input cost and continued consumer caution in the quarter. Fresh Pork reported operating profit of $78 million, with an operating profit margin of 3.9% [indiscernible] strategy. We have reduced the number of internally produced hogs, closed and exited underperforming farms and geographies and successfully lowered our cost structure through improved genetics, heart health and procurement and nutrition savings. Finally, our culture of continuous improvement drove meaningful cost savings during the first quarter. In addition to efficiencies within our segments, corporate expenses were down 11% versus last year. In short, we delivered record first quarter profit led by strong packaged meat segment performance and solid execution across the organization. Our financial position continues to be rock solid. We ended the quarter with liquidity of $3.7 billion and leverage of just 0.4x, providing significant flexibility to support our growth strategies and deliver shareholder value over the long term. Now turning to our outlook for fiscal 2026. We continue to navigate a challenging external environment with the Middle East conflict adding another layer of macro volatility. For us, that flows through higher freight packaging and agricultural input cost. Our experienced team is managing through the same way we have in past cycles. Pricing and mix disciplined spending, productivity initiatives, hedging and contract and procurement actions. The U.S. consumer continues to be cautious, and we are focused on delivering how you add new trend for families. As households make a dollar count, our portfolio of trusted brands provides affordable protein solutions without compromising on quality. Protein continues to resonate with consumers, given its nutritional benefits and versatility. And within the protein complex, port remains competitively positioned. Core Smithfield categories, including lunch meat, bacon, sausage and hot dogs offer accessible everyday protein options that [indiscernible] well with current value-oriented purchasing behavior. Against this backdrop, we believe staying focused on our 5 key strategies will help us grow sales and profitability in 2026 and over the long term. First, in packaged meats. We plan to continue to grow operating profit through ongoing product mix improvements, volume growth and innovation. Improving product mix remains a core margin expansion strategy. We are increasing the mix of higher margin value-added product categories and expanding unit velocity while reducing volume of lower-margin commodity type from categories. A great example of this is converting large holiday hams into products like our Prime Brush launch, which increases units and purchase occasions while expanding margins. [indiscernible] out to 2025, we saw strong momentum in these value-added categories, and that carried over into the first quarter of 2026. During the first quarter, we grew units and market share in our core higher-margin focus areas. For example, we grew units sold of cook dinner sausage by 9% in the quarter, gaining 0.8 points of unit share growth and drive sausage by 10%, gaining 1.1 points of unit share growth. We expect these higher margin categories to continue to deliver strong unit growth throughout 2026. We are capitalizing on the significant opportunity to drive volume growth and gain share across our portfolio. We participate in 25 key packaged meat subcategories in retail, 20 of which are valued over $1 billion. We are focused on driving volume growth through increased distribution and disciplined brand investment. During the first quarter, we increased branded volume share for the 25 categories in total by 16% and gained branded volume share growth of 0.4 points. A key contributor to growth was increased points of distribution, which was up a strong 5.5% versus last year. We also continue to invest in marketing and trade promotion for our brands. One of the top-performing categories was Package [indiscernible] Meat, which grew volume by 11.1%, while the industry was down 6.5%. This led to a more than 1 point increase in our packaged lunchmeat volume share. Smithfield Prime Fresh is one of our most important Packaged lunchmeat brands. We grew Prime Fresh volume by 26% with an 18% increase in points of distribution in the first quarter. Looking ahead, we see continued white space opportunities to grow volume and increase market share in our top 25 categories. As part of our broader growth strategy and in addition to trade promotions, we are increasing investment in television and digital advertising to build awareness and support the long-term growth of our national brands. ,Smithfield, Acreage and Nathan's [indiscernible]. We are also growing volume by delivering what consumers want. A key competitive advantage for Smithfield is our ability to offer a broad portfolio of quality branded products this spans multiple categories and price points. This portfolio strategy allows us to retain consumers within our brands as they trade up and down the value spectrum. Additionally, roughly 40% of our packaged meats retail site privately, which allows us to capture sales if consumers trade out of brands and [indiscernible] private label. Overall, the completion of branded and private label offerings enables us to forge multiyear strategic partnerships with our customers, supporting volume growth across our portfolio. That brings us to product innovation. We focus on introducing new flavors, convenient and easily prepared mills and pack sizes that range from snack sizes to family value offerings. Our new product pipeline for 2026 is robust with losses scheduled throughout the year. For example, in the first quarter, product innovation drove 12% year-over-year volume growth in Armour Dry sausage and more than 22% volume growth in Curl's refrigerated barbecue meats, supported by new snacking formats and globally inspired flavors. Our latest introduction in April was a new Smithfield premium for [indiscernible] lineup featuring 3 bold flavors, including the limited time [indiscernible] Beer broad. We look forward to sharing more new product innovations throughout the year. We've talked a lot about retail, the food service is also an important channel for packaged meats, representing roughly 30% of sales. During the first quarter, we increased food service channel sales by 4% with volume up 1%. Foodservice customers view us as a scaled, trusted provider of high-quality products that can deliver value-added solutions saving time and money. Innovation is a key advantage for us in the food service channel as evidenced by the introduction of 12 new limited time offers in the first quarter alone. Even as food away from home inflation remains elevated, our scale, innovation and value-added solutions are resonating with operators focused on driving traffic and margin. Moving to our second core growth strategy, growing fresh pork profitability. We are focused on maximizing the net realizable value across channels and continuing to improve operating efficiencies. We were executing our strategies to increase fresh pork operating profit in 2026 as follows: growing volume in the retail channel, emphasizing higher-margin value-added case-ready and marinated offerings, expanding adjacent channel opportunities such as pharmaceuticals and pet food. Increasing automation and driving plant efficiency, yield optimization and supply chain savings and optimizing harvest levels across our network, all while remaining agile in export markets. During the first quarter, we grew sales in the retail channel by 3%, with a 6% increase in sales of value-added case-ready and marinated items. We are driving growth in value-added pork through innovation like our February launch of Smithfield Half Longes, featuring several bold flavors while also delivering convenient package size for today's smaller households. In April, we launched our new Smithfield mill ready cuts platform. These slice marinated and premium forecasts delivered globally inspired flavors in minutes and are perfect for today's consumers who want convenience without compromising taste. In short, our new value-added offerings are helping drive mix and margin improvements by meeting the strong demand for nutritious protein at a great value relative to beef and by expanding pork's relevance across multiple cuisines and usage occasions. Like our packaged meat segment, our fresh pork segment is also focused on driving growth in the food service channel, and we can leverage synergies across these 2 segments to optimize our go-to-market strategy. During the first quarter, we grew fresh pork food service channel sales by 27%. This reflects increased sales of value-added categories as well as strong sales of reps, which are a great alternative to more expensive beef. From an adjacent channel standpoint, we are seeing continued interest in the pharmaceutical and pet food channels, and we are capitalizing on that interest. Across our fresh pork segment, our team has been nimble employing the next best sales strategy, maximizing net realizable value and seizing the opportunity of the relative value of pork. Now to our strategy to optimize hog production. We continue to progress toward a best-in-class cost structure in on production and have made great strides. During the first quarter of 2026, we delivered improved operating efficiency on our retained farms. That, coupled with favorable hog and seed markets helped increase operating profit to $4 million from $1 million a year ago. Going forward, our team remains dedicated to realizing additional efficiencies. Over the medium term, we continue to progress toward our goal of producing approximately 30% of Fresh [indiscernible] needs internally. We believe this will provide an optimal balance of assured supply and cost risk management, and we'll continue to improve earnings durability across the site. Across the whole company, we drive a culture of continuous improvement. We have a no stone left unturned approach each year looking for new ways to improve operating efficiency and reduce cost. We expect efficiency savings to again contribute to enhanced profitability in 2026. In our Packaged Meats and fresh pork processing plants, we see further opportunities to employ automation and improve process to increase yields and drive efficiency. For example, we continue to optimize our network by moving dry sausage production from smaller and older East Coast plants to our most technologically advanced and efficient facilities such as Nashville. Our new Sioux Falls processing plant will be the most modern, efficient and largest combined Fresh Pork and Packaged Meat processing plant in our network. We look forward to sharing more information once we have secured final approvals. Across the organization, we are deploying technology to improve efficiency, lower cost and redeploy talent to higher-value activities. And our continued investment in improving supply chain operations is helping us navigate some of the near-term inflation in transportation costs. Finally, we continue to evaluate opportunistic M&A to support our growth strategies. In January, we entered into an agreement to acquire one of our top national packaged meats brands, Nathan's Famous. Our anticipated time line to close the transaction is now in the second half of 2026 due to the impact of the partial government shutdown on statutory deadlines for the CFIUS review process. successfully closing the acquisition will secure our rights to the brand for the long term and we are looking forward to maximizing Nathan's Famous brand growth across the retail and food service channels. We will remain disciplined in evaluating additional complementary and synergistic M&A opportunities to bolster our organic growth. In summary, we delivered record first quarter results led by strength in packaged meats and consistent execution across our vertically integrated model. By continuing to execute our 5 growth strategies, we are successfully navigating a dynamic consumer and geopolitical environment to drive growth in 2026 and over the long term. With that, I will turn it over to Mark to review our financials in more detail. Mark Hall: Thank you, Shane, and good morning to everyone joining the call. As Shane stated, we're off to a strong start in 2026, building on a record year in 2025, and our strong balance sheet and cash flow give us the financial flexibility to invest in growth and competitive dividend and ultimately create value for our shareholders. Turning to the details of our first quarter results, starting with the consolidated results and then a review of our performance by segment. Consolidated sales in the first quarter were $3.8 billion, which was a 1% increase compared to the prior year. The increase was primarily driven by higher packaged meats and Mexico sales driven by strong volume growth which more than offset a $155 million headwind from nonrecurring hog production sales to our joint venture partners in the prior year. Excluding these onetime sales, consolidated sales increased 5% versus a year ago. We delivered record operating profit of $339 million, which was up 4% compared to adjusted operating profit of $326 million in the first quarter of 2025. Adjusted operating profit margin expanded by 30 basis points to 8.9% from 8.6% last year. First quarter 2026 adjusted net income was also a record $251 million, up 11% from $227 million in the first quarter of 2025. Adjusted diluted EPS of $0.64 per share increased 10% compared to $0.58 per share in the first quarter of 2025. Next, our first quarter segment results. Our Packaged Meats segment delivered first quarter operating profit of $275 million, up $9 million from last year and operating profit margin of 12.8%, this was down 30 basis points from last year, driven primarily by the earlier Easter this year, which increased the mix of holiday hams as well as higher raw material input costs and continued consumer caution during the quarter. First quarter packaged meat sales of $2.1 billion increased by 6% compared to the first quarter of 2025. Sales were driven by a volume growth of 3.5%, reflecting the earlier Easter holiday combined with a 2.6% increase in average sales price related to higher raw material market prices and disciplined pricing across our brand portfolio. Excluding seasonal holiday hand sales, packaged meats grew volume 1.3%, underscoring our ability to win in a challenged consumer spending environment. Turning to frac work. For the first quarter of we delivered operating profit of $78 million and an operating profit margin of 3.9%. This was down slightly from $82 million and 4% in the first quarter of 2025. In the first quarter, the industry market spread was favorable, up 7% versus the first quarter of 2025 with the CME lean hog price up 0.6% year-over-year and a 1.1% increase in the USDA cutoff. However, this favorable market spread was offset by lower production volume due to a temporary winter storm disruptions in our East Coast operations as well as lower gross margins driven by lower China export volumes year-over-year. We were able to partially offset these headwinds with our next best sales strategy, including more higher-margin value-added sales in the U.S. retail channel. Fresh Pork segment sales of $2 billion decreased 1% year-over-year. This was driven by volume down 2.6% due to the factors I mentioned, which was somewhat offset by an average sales price increase of 1.5%. Our average sales price increase was above the increase in the USDA cutout, reflecting the benefits of our next best sales strategy. Next, in hog production, we're pleased to report $4 million of profit for the first quarter of 2026, up from $1 million in the first quarter of 2025. This is down sequentially from the fourth quarter of last year, but in line with seasonal norms for hog production. Improved hog production segment profitability was driven by improved commodity dynamics including higher selling prices and lower feed costs and improved operating efficiency on our retained farms. First quarter 2026 hog production segment sales of $769 million decreased by 17% year-over-year, primarily reflecting the onetime initial sale of inventory to our external joint ventures last year in the amount of $155 million. While the average selling price for hogs increased 1%, we saw a 4% or 125,000 head decrease in the number of hogs marketed. Taking a look at our other segment, which includes our Mexico and Bioscience operations. Operating profit of 12 was down $3 million versus the prior year due primarily to softer sales and related losses in bioscience that were partially offset by increases in Mexico. Our corporate expenses came in $3 million or 11% below the prior year reflecting ongoing continuous improvement efforts. And that brings me to our strong balance sheet and financial position. At the end of the first quarter, our net debt to adjusted EBITDA ratio was 0.4x, well below our policy of less than 2x. Our liquidity at quarter end was $3.7 billion, including $1.4 billion in cash and cash equivalents. This is well above our policy threshold of $1 billion despite the first quarter historically being a high working capital period. Due to seasonality, operating cash flows in the first quarter of 2026 were a net outflow of $65 million compared to an outflow of $166 million last year. For the trailing 12 months, cash flows exceeded $1.1 billion. Capital expenditures in the quarter were $88 million compared to $79 million in the first quarter of 2025. More than 50% of our planned capital investments this year are to fund projects that will drive both top and bottom line growth. This consists primarily of various plant expansions automation and improvement projects as we continue to lower our manufacturing cost structure and better utilize labor. On April 21 of this year, we paid a quarterly dividend of $0.3125 per share reinforcing our commitment to return value to shareholders. We expect to pay $1.25 per share in annual dividends this year, subject to the Board's discretion. As we look to the remainder of 2026, we feel very good about the momentum we're carrying forward from a record 2025 and a strong start to 2026. Our teams are executing with discipline and urgency and we see clear opportunities to build on that performance as the year progresses. We're reaffirming the guidance we provided on March 24 and balancing our current view of demand and the macroeconomic challenges stemming from the conflict in the Middle East. There are clearly moving pieces, but our strategies are proven. Our team is resilient, and we've demonstrated time and again that we can navigate challenging market conditions. To do that, we'll stay focused on what we can control, which is operational discipline, strong commercial execution and rigorous cost management. We're proactively managing inflation and volatility across energy, freight, packaging and other key inputs. And importantly, we have multiple levers we can pull in the near term, including pricing mix, disciplined spending, productivity initiatives, hedging and contract and procurement actions to protect performance and keep us agile. Looking beyond the near term, our long-term value creation algorithm remains intact, and our strong balance sheet and liquidity position give us meaningful flexibility. We'll continue to prioritize investments that advance our strategy and will keep returning values to shareholders in line with our capital allocation framework. Taken together, we're confident in our ability to navigate uncertainty protect margins and deliver profit growth through the remainder of 2026. Now I'll ask the operator to open the call for Q&A. Operator? Operator: [Operator Instructions] The first question comes from Peter Galbo with Bank of America. Peter Galbo: Maybe to begin, Mark, I know you don't like to give kind of quarterly guidance, but obviously, you had a nice first quarter. reiterated the guide today. Maybe you can just help us a little bit with some of the phasing elements over the remainder of the year? Anything just to be kind of mindful of as we move into Q2 and over the balance of the year? Shane Smith: Peter, thanks for the question. As I said at the outset, we feel very good about the momentum that we're carrying forward from a record '25 and a strong start to '26. So it's all about execution. And really, we see a number of opportunities to build on the performance as the year progresses. But looking specifically at the second quarter, the macro environment and the consumer remain pressured, but we expect to deliver solid second quarter results. If you look at the segments individually, for packaged meats, we're looking for packaged meats to be broadly similar to the first quarter from an underlying performance standpoint. Year-over-year, I'd say that the comparison is tougher because of the holiday ham timing benefited the first quarter of this year. So that pull forward reduces the second quarter year-over-year profit cadence. On the cost side, we're seeing higher-than-expected input inflation versus last year, most notably for pitch meats in beef and Turkey, and that pressure in supply chain costs that is talked about. So as we discussed at the outset, freight and packaging are areas of focus with diesel volatility really pressuring transportation costs and lagging effect in terms of resin-based packaging, but we're actively mitigating that through price and mix productivity and yield gains and really [indiscernible] part of our DNA in terms of year-over-year cost savings. So I'd say separately on Packaged Meat, we're going to continue to invest in brand and marketing. So year-over-year, we'll be up in brand marketing. It's a targeted approach, and it's ROI driven because it really supports our value-add strategy and our long-term share in these competitive categories that we're in. So I'd say the packaged meats just continues to be resilient and again reaffirm the outlook for the full year based on the performance that we're seeing. In terms of fresh pork, and continue to see strong execution, although we're managing that volatile cost and market environment. But just as a reminder, seasonally, -- the second and third quarter are typically softer than the first and fourth quarters for fresh pork profitability. But I'd say, even with those dynamics and cost pressures, we still expect to export to be modestly up year-over-year, and it's really supported by continued strength in our domestic value-added business. So good performance from Dona and the team as we started the year and expect it to flow through. In terms of hog production, seasonally hog production is strongest in the second and third quarters. working for a strong second quarter, driven by favorable market fundamentals. So we're seeing higher hog prices and comparatively moderate draining costs. But it's also along with the improvements that we've made in our cost structure on the retained farm. So overall, we expect to deliver a solid second quarter and full year results and a number of levers we can pull to manage that volatility as the year progresses. Operator: The next question comes from the line of [indiscernible] Jordan with Goldman Sachs. Unknown Analyst: Just following up on that discussion, seeing if you could comment on the competitive environment you're seeing for packaged meats. How are you thinking about pricing and promotions as we go through the year given the consumer remains value focused. And I guess, at the end of the day, how much does being vertically integrated impact your ability to remain competitive within packaged meats as well? Steven France: [indiscernible], I'll start out by taking that question. So this is Steve Franch. So First, I'll make a few comments as far as Q1, and then I'll get into some of the promotional strategy for the question that you just asked. But when I thought how we started out Q1, our brands are certainly performing well. So in Q1, our branded business was up 1.6% versus last year, and that's compared to the industry that it was actually down 0.2%. So demand has been steady, and it's really coming from consumers who are choosing us because they know the high quality and consistency that they're going to get really every time they buy our product. So we're not trying to manufacture volume through heavy promotions. We've stayed focused on how we -- how our business continues to evolve, and we keep moving away from lower value commodity items and putting more emphasis on to value-added products, so things that we continue to talk about. So Prime fresh, any time favors effort smoked sausage and some of the items that Shane had mentioned in his opening comments. Now that shift didn't happen overnight, but it's been very consistent, and it really continues to show up in our results. So when we think about promotional strategies we're very focused on the quality merchandising. So really going into the quality versus unprobable quantity. So we do see some competitors increasing promoted volume through reduced price points, but that typically a short list, and it doesn't support the long-term health of a brand. So we continue to see improvement with our promoted volume really sold as feature and display, which is for us and for most people, it's really the most impactable promotional vehicle. So when I look at some of the performance from Q1, so our quality merchandising was actually up 2.3 points in Q1, and our promoted volume was up 2.5 points. So when I think about the category in total, the one thing that I think is worth mentioning is on the private label side. So from the industry standpoint, we are seeing an increase in private label share, but it's only in certain categories as retailers invest in their brands. Although I will point out that in Q1, private label volume for the industry declined in 13 categories versus last year. So we're starting to see a little bit of a shift when it comes to private label. It's also worth repeating that our branded volume was up 1.6%, surpassing the industry private label that was actually only up 1% in Q1. And I'll also add that our private label business remains very healthy with our volume up over 5% in Q1, and that's in our total business. So we know our private label business really provides us a key competitive advantage since many of our retailer partners are upscaling their private label offerings. And our participation in both branded and private label really helps us attract and the gain consumers as they move up and down that value spectrum. And that's where we can really manage the promotional strategy between working directly with our retail partners on the private label side of the business while also making sure we get the appropriate promotions to support our brand inside of the business. I would say that strategy is working because we saw share and volume increases, not only on the branded side but also on the private label side of our business in Q1. Shane Smith: And Lee, I think your last question was about vertical integration. Was that correct? Unknown Analyst: Yes. And how it overall supports the packaged meats business? Shane Smith: Yes. I can't emphasize enough the importance of the vertically integrated model now that it's working correctly. And I think you can just look to the past few quarters where, in total, we recorded record profit after record profit while not 1 segment within that has been an individual record. And I think that shows you that the model is working well. When we think about things that we see in volatile environments being profit migration across the different segments, what the model provides us is really a consistency in cash flows and earnings. Now I do think we still are a little overweight in hot production. We still have a goal to get down to 30% that we're working on now. But I think when you look at the hogs that feed into our fresh pork business and then the fresh port raw material that is feeding into the packaged meats business. The way the mall is working today, I think is -- I don't think you can overemphasize enough the importance of having all 3 legs of that stool. Operator: The next question comes from Megan Clap with Morgan Stanley. Megan Christine Alexander: Maybe continuing on [indiscernible] following up on Mark's commentary to Peter's question earlier, in terms of if we're looking for a similar outlook, performance in terms of packaging in the second quarter. It does put a bit more weight on the second half in terms of the embedded profit improvement in the Packaged Meats segment outlook, and understand we'll start to lap some of the higher raw material costs from last year, which should be helpful on the margin line. But at the same time, some of these newer cost pressures related to the Middle East could put in theory be building into the second half, and it does sound like you're confident in managing these costs. But just taking a step back, has anything changed versus go as it relates to kind of your confidence level and where comes in particular, could fall within the guidance range you outlined. Shane Smith: I would just follow -- I'll start and I'll kick it over to Steve. Again, you're spot on in terms of the near-term impacts. And so there's going to be a little bit of a lag and a little bit of pressure in the second quarter, and that's why the guide for the second quarter was what it is. But again, I think that the mitigation efforts and the levers that we are able to pull will turn us back to that growth trajectory that we're looking for in the second half of the year. We have strong strong volume growth, as Steve had pointed out. And again, with the cost containment ends that we have, we feel very good at the second half of the year for packaged meats. Steven France: Megan, this is Steve. So I'll add on a little bit to what Mark is saying. So I'll start off by saying really at a high level, nothing has changed as far as how we feel about the long-term outlook of our Packaged Meat business. Now in the near term, as Mark had already kind of talked through, the environment is still somewhat challenging from a consumer standpoint. So we are seeing households are being certainly cautious with their spending, and we continue to see value seeking behavior really across grocery and also the foodservice channel. So on the cost side, we do expect some really improvement versus last year in raw materials, as we've mentioned before, but we're not assuming a return to historical norms. Now in Q1, raw material costs were higher than last year by $94 million with was certainly a significant increase. So while we're now starting to move in the right direction on some of the raw material costs, the backdrop remains challenging, especially in the beef and also Turkey categories that Mark has mentioned. Our brand certainly had a solid performance in Q1, growing our volume and also share. And really, we plan to continue driving this growth and to support some of the exciting new items that you're going to see on retailer shelves and also the partnerships we have with some of our food service operators, but we do plan on increasing our A&P spend. And in Q1, that spend was up 23% year-over-year. And from a cost standpoint, it's worth noting, obviously, the recent CPI data has showed a meaningful move in energy what certainly matters for us, as Mark has talked about, because of the large impact on diesel and also the resins with packaging certainly has a big impact on the packaged meats business. Now with all that said, I would say given that backdrop and the geopolitical uncertainty, we are planning the business with an appropriate level of conservatism around packaging and also distribution costs. But despite those headwinds, we feel good about how we're positioned. Our portfolio is strong with the brands that we have and also the categories that we participate in. And we also have a meaningful private label business. And we believe that, that really gives us the ability to serve not only our customers but also consumers across all price points. And that flexibility certainly matters in an environment like we're in today, as shoppers move up and down that value spectrum, we're also able to really keep them within our portfolio. Now taking all that into consideration, as Mark had talked about, when you take into account the shift of Easter from where it fell last year in Q2 to Q1, we really look to have Q2 and Q1 look very similar from an overall profit standpoint. And based on a lot of things that Mark had talked about as far as cost mitigations and some of the levers that we have at our disposal, at this point, we're maintaining the call that we have for the outlook for the rest of the year, the $1.1 billion to $1.2 billion. Megan Christine Alexander: Okay. That's super helpful. And if I could just follow up more explicitly on transportation. You talked about near-term inflation and transportation costs. Steve, you just mentioned diesel and freight, in particular, our understanding was that you did own some of your own fleet. So could you just give us a little bit more color just in terms of your exposure, direct exposure to diesel and that your freight and how the contracts work in -- just in the context of, obviously, this is an ongoing and dynamic situation. So any color just kind of think about the next couple of months as things progress and what we should be watching and how that impacts your cost would be helpful. Shane Smith: Megan, this is Shane. I'll talk to that for a minute. So you're right, diesel cost is the biggest near-term impact for us. And we do use a variety of methods from percentage is our own company feet. We use outside fleet dedicated fleet, but we also have been working on Intermodal as well. The only thing I would tell you, as we think about the impact this year is we actually started the transportation network optimization actually back in 2024. And when you look at the miles we drive, we took about 1 million miles off the road between '25 versus '24. We also plan and have line of sight to another 1 million miles that we'll take off the road in '26 compared to '25. Now that was reactionary. It goes really to one of Mark's earlier point. So optimization across all of our network is really embedded in our DNA. So these were things that we were already working on prior to being here today. But again, we've done lane consolidation, adding intermodal. We still look at hedging opportunities for diesel where we can, driving fewer model. And then you couple that with the ability to increase volumes and decrease cost, we feel like we're going to be in a good position as we go through the remainder of this year are in a relatively good position as we go through the remainder of the year. And again, that's the medium-term impact. You look at the long short-term impacts, the medium term, and Mark talked to this is really on things like our resin-based packaging, where we have procurement strategies value engineering processes taking place right now. And then in the longer term, it's going to come down to corn and agricultural inputs and how that hits our production operations later in the year, which, as you know, and we've talked about on earlier calls, we have hedging strategies in place surrounding those input costs as well. So all those things combined, we've taken a really hard look at the guidance that we've given. And we really feel confident in our ability to execute against that this year. Operator: The next question comes from the line of Ben Theurer of Barclays. Benjamin Theurer: Shane, Mark, following up on just the last comment a little bit on the outlook, grain cost and it kind of like [indiscernible] this is going flow through hot production, et cetera, but also the need to potentially invest more in working capital. So we've seen a better improvement versus last year in terms of investments in working capital. So I just want to understand, within your hedging strategies and a little bit of that uptick on the feed cost, how we should think of, a, managing that cost? And then, b, would it potentially does to your cash from operations, just given what it might do to working capital. Shane Smith: Yes, Ben, you can look at the future strip and see how both corn and soybean mill are moving throughout the year, and you can see that they would change. For us, and as you know, we've talked about this before. Some of the initiatives we've taken around feed and grain procurement and haul production from using alternative ingredients, [indiscernible] by products, looking at ways we can use grain elevators across the country grain here really or get grant our hard production operations at a really affordable rate. But it also goes back to the overall and optimization we've done. So we're moving those inefficient farms. We're moving some underperforming geographies and really making sure that the KPIs, we have coming out of our atoms and things like [indiscernible] and PMS [indiscernible] are really at levels that help us absorb some of these changes as we see coming through. And again, you put all those things together, Ben, and it really, again, goes to our ability to look at the guidance that we've given in our production for the year and feel good about that guidance. Mark Hall: I would just add from a cash flow perspective, 2025 cash flows exceeded $1 billion. It was the second highest in our history. And it would have been by far the highest excluding the repayment of our $230 million AR securitization -- or excuse me, monetization. And the business continues to have strong cash flow generation, and it's really attributable to the changes that we've made in our business and the reform in the hog production side of the business and the stability of our cash flow from packaged meats. First quarter is seasonally a cash outflow period for us, and the first quarter of '26 outflows were about $65 million. That was down from an outflow of $66 million in the prior year, and that primarily reflects the earlier Easter this year. But again, as far as cash flow generation, we feel very good about where we're at, even with the potential enough of green costs made in the year. Operator: The next question comes from the line of Heather Jones with Heather Jones Research. Heather Jones: Related to the package needs raw material outlook -- raw material cost outlook. I was just wanted to talk about your confidence level related to those being lower year-on-year on the pork side. And I'm asking because there's been a lot of reports of disease in the industry, but also some underlying expansion. So just wondering how much visibility you have and if your confidence level as for the magnitude of year-on-year relief has changed any since, say, a month or so ago when you reported Q4? Steven France: Yes. Thank you for the question, Heather. So I would say for packaged meats on the cost side, the biggest concern that we have is really not on the pork side of the business. So it's easier for us to manage that. We have good visibility of where we're heading on the work side. But when you look at the beef side of the market and also poultry, I mean, that makes up a sizable piece of our business on packaged meats when you consider some of the products that we make that do have beef when you think about Nathan's hot dogs, smoke sausage and then some on the poultry side, when you think about some of the lunch leads we have and also the growth that we've seen in some of our launches like Prime Fresh. So we're doing certain things on those areas to be able to mitigate some of those costs as far as locking into certain contracts or partnering with certain suppliers. But on the pork side, I'll probably pass it over to Shane he can addrss that. Shane Smith: Yes, Heather. So you mentioned disease. We're hearing the same thing you are of higher disease [indiscernible] trade across the industry. The biggest piece of external information that we look at is the reports that come out of the University of Minnesota. Those most recent reports showed a higher incident rate of both PERS and PDP. But when you contrast that with what the USDA has put out, I think they were calling full production up about 1.4% for 2026, but it is down from about 2.5% in their previous report. So it's -- again, it's hard at this time of the year to have really clear visibility into what's out there. But we are hearing and seeing some of the same things that you're referring to. Heather Jones: Okay. And then on my follow-up was just -- so I wanted to talk about the opportunity for the U.S. with the ASF outbreak in Spain. And so far, we haven't seen really that big pickup in -- all right. I haven't seen it pickup in U.S. exports that would seem to have benefited from that. And I know there's been a big increase in exports out of Brazil. So I don't know if most of that increase is going there. So just how are you all thinking about that and the outlook for the rest of the year? And any help the U.S. might get from that? Donovan Owens: This is Donovan Owens. You're right. there has been some disruption with the ASF aspect coming out of Europe, but it has been largely thus far a nonevent in terms of seeing assess demand on domestic U.S. pork anyway. So I do agree. I think Brazil playing in that market quite somewhat and able to fill in the need there. But there's also, I would say, other areas that are seeing some expected pickups in pork, some capacity and supply that are able to fill in the need in primarily Asia. So right now, I would agree with your comments. I mean, it's not really impactful for the U.S. pork market at this point. Operator: The next question comes from the line of Max Gumport with BNP Pariba. Max Andrew Gumport: I was hoping with rising inflation, if you could discuss your view on consumer sentiment in the U.S. and then how that fits into your outlook for the year? And if you factor than any changes from what you were just expecting a over a month ago for the remainder of the year? Mark Hall: Max, it's Mark. Thanks for the question. Yes, from a consumer standpoint, protein remains a core part of the basket. And we manage, as you know, our portfolio to offer value across price points. So I mentioned our brand and marketing investments, they're really targeted and ROI driven. So it's about supporting loyalty and mix and our value-added strategy while pork continues to be a strong value proposition across the protein space. So at this point, we're not seeing a change that would require a material reset of our demand assumptions. But we obviously continue to watch that consumer behavior closely. Again, our portfolio is built to serve consumers across tiers. We have answers whether it's a mainstream stable all the way up to premium offerings. So we can adjust our mix as households trade within categories. So I think based on prior geopolitical disruptions and driving inflation, it's about the duration of it and the breadth of any such impact that's going to continue to drive inflation up. And that matters more than the short-term spot move. So we're planning for volatility and staying agile. Max Andrew Gumport: Great. And then just as a follow-up, there's been a lot of questions earlier on the call about various forms of inflation, whether it's hitting beef, turkey, whether it's your freight costs or diesel resin packaging, which you gave plenty of color on. I just wanted to make sure is the messaging that you are going to see these higher costs in 2016, your outlook for cost inflation in 2016 has gone up. But you're able to reaffirm the guide because you're also leveraging some of these mitigants that you've talked about as well. Just trying to get more clarity on your outlook for cost inflation for '26 has gone up over the last month or so since you reported 4Q? Mark Hall: Yes. As we discussed at the outset, we have a number of different levers that we can pull. So operationally, we're manning the exposure in the same way we do any volatile input environment. It's about disciplined pricing and mix. hedging where appropriate, as Shane mentioned, it's about procurement timing and contract management and really our ongoing productivity and cost savings initiatives to to help mitigate the impact of inflation. So I'd say, net-net, the situation as near-term input and logistics cost uncertainty, but it doesn't change how we run the business. And again, we have multiple levers to mitigate the impact. In the meantime, our focus remains on execution. It's about service to our customers, cost discipline and delivering against our commitments. So again, we feel good about where we're at with those mitigation strategies and our outlook for the year. Operator: The next question comes from the line of Saumya Jain with UBS. Saumya Jain: So how sustainable is the current outperformance in packaged meats versus fresh pork? Are you seeing more structural share gains or a cyclical trade down behavior? Shane Smith: [indiscernible], is your question about do we see trade down between packaged meats and fresh pork? Saumya Jain: Yes. Yes. Steven France: This is Steve. So I'll start and then I'll pass it over to Donovan. But I would say in total, we don't see a trade down at all. It's typically different consumers and somebody is going to buy fresh pork. They're going to buy fresh poks, they're going to buy a package. They're going to buy package. So a lot of consumers buy both. But they're not typically going to trade down from buying a fresh item and then buying certainly a package segment. So we don't see a lot of trade down. But as far as growth that we're seeing, I would say that sustained growth. So when you think about the overall performance that we saw in Q1, it was a solid performance from a branded standpoint. But also when we look at the strong private label business we have, we also grew the private label business, which both of those outperformed the rest of the industry. So the good thing is, and Donovan can talk a little bit about this, but the strength that we've seen in a package. There's a lot of collaboration between what we do on the package side of the business and also the fresh side of the business. So when you look at some of the categories on fresh, I think marinated is a great example where we participate in those sales calls are working together to promote those items. So a great example would be for -- if we do a family add of packaged items, we're going to incorporate some of those more value-added profitable fresh items some of the marinated strips that are new in the marketplace or marinated core, that's going to be incorporated in that same ad. So when you think about the strength and the success we've had on packaged meats, Fresh Pork is participating in that with a lot of the growth that they're seeing on some of the value-added products, and I'll pass it over to Donovan. Donovan Owens: Yes. Thanks, Steve, and I appreciate the question. But Steve is 100% right as our focus and our most important piece of the Fresh Pork strategy is to continue to grow our value-added footprint within our domestic retail channel. And we're leveraging that strong brand recognition and presence of our packaged meats portfolio that Steve just mentioned, to grow the share in our marinated and case-ready pork product lines. So just a few stats and Steve that Mitch talked about marinated there. In Q1, Marinated Pork volume was up 3.2%, while the industry was down 3.8%. And our case ready pork volume was up in the high single digits, increase year-over-year in Q1. And last but not least, as Shane mentioned in his opening about the success of our food service growth of 27%. All of that is tied together with our package strategy, go-to-market strategy for the Smithfield brand. So I don't think it's a trade necessarily but we're trying to leverage both of our segments here, so it's an and on. So you pick up fresh pork, you pick up Smithfield Fresh Pork along with the Smithfield Bacon. So that's kind of our strategy. Saumya Jain: Got it. And then how are you seeing retailers pushing for future private label penetration? And how would that affect your pricing power more in the long run? Carey Dubois: So I'll touch briefly on that. So obviously, it's -- private label is very important for the retailers, not only on the retail side business, but also on the food service side of the business, so they continue to look at different categories to get involved. So where they see growth in certain packaged categories, they're going to explore that as a potential to put in private label. At the same time, they're also looking at more premium type private label categories to get into them. When they do that, we actually see that as a benefit to us because of the capabilities that we have and our ability to produce high-level, high-quality private label products, and we can do it and provide them the volume that they're going to be needed for some of these categories. So as they get into these categories, we do see some success in private label. But as I mentioned in some of my earlier comments, this Q1 was pretty interesting because they were down in, I believe, it was like 13 categories they were down year-over-year in volume. So I would say that even though private label is very important, it doesn't always work in every category. And obviously, if it doesn't work in those categories, we certainly have our brands, but we've also shown our ability to participate with private label and drive success not only in our branded business, but also in our private label business in the exact same category. Shane Smith: All right. So thanks to everyone who joined our call today. We are off to a great start in 2026, and we believe we're well positioned to deliver long-term growth and increased value for our shareholders. And we look forward to updating you on our progress following our Q2 results. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: [Operator Instructions] At this time, I would like to turn the conference over to Bryan Goldberg, Head of Investor Relations. Please go ahead. Bryan Goldberg: Thanks, operator, and welcome to Spotify's First Quarter 2026 Earnings Conference Call. Joining us today will be our co-CEOs, Alex Norstrom and Gustav Soderstrom; and our CFO, Christian Luiga. We'll start with opening comments from the team and, afterwards, we'll be happy to answer your questions. We will be taking questions today via Slido. Questions can be submitted by going to slido.com, and using the code #SpotifyEarningsQ126. [Operator Instructions] Before we begin, let me quickly cover the safe harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed on today's call in our shareholder deck and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck, in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that, I'll turn it over to Alex. Alex Norström: Thank you, Bryan. Hey, everyone, and thank you for joining us. 2026 is off to a strong start, with performance reflecting solid execution, healthy growth and the kind of engagement trends that give Gustav, myself and the team confidence in building Spotify for the future. In Q1, we saw results that were in line or better across the board. We surpassed 760 million MAU, delivered on the subscriber growth we aimed to achieve, and we saw healthy engagement from existing users, reactivations and new users alike. Since the global rollout of our more personalized free experience, users in key markets like the U.S. are now listening and watching more days per month. Now for a business as established as ours, did I mention, by the way, that we're celebrating 20 years this month, this is an exciting development. And I'll share more about why in just a moment. And we also netted our second highest gross margin ever. All that reinforces this confidence in sustained user and subscriber growth, low churn and then also continued progress on revenue and margin. Now for over 2 decades, we have worked hard to forge strong relationships with our industry partners and the artists and the creators that we support. You've watched these relationship evolved in the last 20 years. but we have never been in a better position to innovate and to grow, thanks to the progress we're making together. So the trust that we have built is rooted in our collective desire to deliver results and expand the overall opportunity. We will have some new things to share on that front soon. We just released our annual report on the health and growth of the industry. It's worth noting that Spotify remains the only platform offering this level of visibility into how the music industry actually works. Loud and clear show that in 2025, we paid out a record $11 billion plus to rights holders while continuing to outpace the growth of others. And year-over-year, we expect that outperformance to continue. Now on top of the streaming success, there's no doubt that artists, songwriters, musicians and fans are just always seeking stronger connections. Song DNA and About the Song were introduced this quarter to pull back the curtain on the remarkable talent behind our favorite tracks and offer more insights into a song. But we didn't stop there. Live experiences are one of the most impactful ways for artists and fans to Connect. So this winter, we took Spotify's most streamed global artist, Bad Bunny, to Tokyo to perform in Asia for the first time in front of some of his biggest super fans. And then we turned around and broadcast that iconic moment to the world. This went beyond the concept. It was a real opportunity to amplify culture. Now all of this drives retention. So let me take a minute to just explain how we think about retention. Importantly, it acts as a proxy for how users value their time on Spotify. And we look at many metrics, but the 3 that drive retention are more days in a month, more [ devices for context ] and more content types or verticals. I've already told you we've been growing today's users' spend with us each month. Engagement really is the lifeblood of Spotify. And I've been super excited to see this expand over the years and now too. Engaging with us then on more devices and also across our 3 content types just compounds this. This is how we grow the lifetime value of users. Users who engage in this way, they stay longer or perhaps never leave. These 3 levers are rooted in our personalization efforts and act to reinforce one another. And AI just takes this to a whole new level. Essentially, we are unlocking your Spotify, your way for 0.75 billion users around the world. Yesterday's announcement around fitness is a natural extension of this strategy. Spotify is already a trusted resource for wellness and fitness. Nearly 70% of premium users work out monthly and our users have created more than 150 million workout standard playlists, with many also turning to prompted playlists for support. So to meet this need more directly, we are launching a fitness hub on Spotify. And as we just announced, this hub features Peloton's premium subscriber content in an ad-free experience. And of course, this content will be a very strong complement to what has already been working, including content like Yoga with Cassandra, [ Jordan Jo ] and [ Chloe Ting ]. I know we continue to talk about our ads business as a work in progress, but the key point is that 1.5 years of rebuilding, the foundation is now in place. Brands have always valued Spotify for its high user engagement, its beloved brand and its high-quality content. But the market shifted with advertisers now favoring biddable buying. We had to evolve to capture that TAM. So we've rebuilt our stack end to end. Now while this creates some short-term pressure, it unlocks a much larger opportunity. And we are making solid progress. Today, Biddable represents more than 1/3 of ad revenue, and it's growing quickly. So with Biddable expanding and also our active advertisers growing, coupled with improvements in our measurement and performance, we can now innovate in the way in new ways the old stack never allowed. This finally lets us better capture the value of our audience. This is exactly how we wanted to start the year of raising ambition. We're now growing at scale, generating significant cash and reinvesting to capture the opportunities that matter the most. What you're now seeing is the beginning of a much larger next chapter, and we're excited to go deeper on that at our upcoming Investor Day with you all. With that, I'll hand over to Gustav. Gustav Söderström: Thanks, Alex. Now I'll pick up a little bit on what comes next, because that's where much of our focus is right now. So if you zoom out, the way we think about Spotify is pretty straightforward. With AI expanding our opportunities, we're building a system that understands our deeply engaged, passionate 0.75 billion users, one that adapts to them and improves the more they use it. It's also increasingly a platform that puts control directly in users' hands, with their ideas, logic and creativity, a platform that's deeply personal, increasingly interactive and evolving from a solo experience into something inherently multiplayer. As I shared last quarter, and more recently at South by Southwest, AI isn't new for us. Machine learning and personalization have long been core to Spotify, from discovery to recommendations. What's changing is what the technology is now allowing us to better understand, develop and deliver: creating differentiation and unlocking a very different experience and a new level of personalization. From our earliest days, Spotify has been a technology company, and we've always seen ourselves as the R&D department for the music industry. And that mindset has helped us embrace new technologies to accelerate product development and create unique value. Combined with our ads plus subscription model, deep expertise in personalization and scale operations, we think this positions us very strongly for the AI era. We're integrating AI across every part of Spotify, accelerating how we build and deliver at a pace we haven't seen before. We're shipping more, faster and with greater efficiency, lowering the cost per feature while increasing the impact. You can see some of the inference costs behind that acceleration in our OpEx. But we have tremendous confidence in what we're building, and I will share more about that soon. IDJ is now used by 94 million subscribers, closing in on 100 million, driving billions of hours of engagement. In this quarter, we've continued to push the boundaries of the user experience with new AI-powered features. As always, early adoption and deep usage is coming from our power users. But what's changed is how quickly we can learn from that behavior, refine the experience and scale it to a broader audience, delivering improvements faster and at a fraction of the historical cost. And all of this benefits LTV. We're particularly excited about [ Taste Profile ] now in beta. It gives users a clear view of how Spotify models they are listening across music, podcasts and audiobooks, and puts them in the driver's seat, allowing them to directly edit and refine their profile. So imagine telling Spotify to include more songs by those 2 artists my kids are obsessed with, or maybe the opposite, actually exclude those 2 artists, or add a classical tab to my home page. This level of nuanced control empowers users like never before. We've also significantly expanded prompted playlist, enabling users to act as their own algorithmic curators. You can write prompts to generate playlist-specific moods activities or cultural trends across music, but now also podcasts. So together, these features point to something bigger, a transition from a world where Spotify recommends things to you, to a world where you can actively shape, guide and interact with our platform, from passive to interactive, from static to adaptive, and from single player to multiplayer. And we think that's really important, not just for Spotify, but for how people experience media. We're already seeing this more interactive, multiplayer Spotify take off with features like Jam, where usage has doubled year-over-year and now exceeds 100 million monthly listening hours. And there is also Blend, Messaging, Mixing and, of course, Wrapped Party. So we're just getting started here. We're well positioned because of our large engaged user base, our deep create relationships and years of investment in personalization and infrastructure scale to arrive at this agentic moment. Together, these create a platform that can take advantage of this moment and unlock entirely new growth vectors that will enable us to climb to new mountains previously unimaginable. This connects to the broad opportunity ahead. We see significant room to grow across users, formats and engagement, and to really expand what Spotify is and come to come over time. We're at a pivotal moment building towards something even bigger. And on May 21, we'll show you why we're so excited about what comes next. So we'll hope that you'll join us there at our Investor Day. Now I'll turn it over to Christian to take you through the numbers. Christian Luiga: Thank you, Gustav, and thanks, everyone, for joining us today. Let me cover the quarter 1 results and then I will provide some perspective on our outlook. Unless otherwise noted, all referenced growth metrics are presented on a year-on-year constant currency basis. Additionally, this quarter, we have implemented a minor reclassification of non-advertising activities from our Ad-Supported segment to Premium. This is to better reflect the performance of our core advertising business. Just for reference, in quarter 1 last year, we [ shifted ] EUR 12 million in revenue, EUR 7 million in gross profit from our Ad-Supported segment to Premium. Any comments on the segment growth rates are on a like-for-like basis. So overall, we were very pleased with how the business performed in the quarter. MAU grew by 10 million to 761 million in total, surpassing our guidance by 2 million. Our growth rate accelerated 12% year-over-year, up from 11% in quarter 4. Outperformance was led by rest of the world and North America where we continued to benefit from our enhanced free tier rollout. We added 3 million net subscribers during the quarter, finishing at 293 million, in line with our guidance. We saw no surprises with respect to price increase related churn following our January U.S. price increase. Total revenue was EUR 4.5 billion, growing 14% year-over-year, which was an acceleration from 13% we delivered in quarter 4. Premium revenue rose approximately 15% year-over-year versus 14% last quarter. This was driven by subscriber growth and ARPU expansion of 5.7% year-over-year. Our Ad-Supported revenue grew approximately 3% year-over-year. Our new automated sales channel continued to grow fast and now represents over 30% of our Ad-Supported revenue in quarter 1. We also saw some continued choppiness in our legacy direct sales channel. While this dynamic will likely continue in the near term, we still expect improved growth in the second half of 2026 as our billable channels continue to scale. Gross margin came in at 33%, surpassing guidance by approximately 20 basis points, which year-over-year -- with a year-over-year expansion of approximately 133 basis points. Favorability versus guidance was driven by better other cost of revenue and revenue mix. Other operating income. The operating income of EUR 715 million was EUR 55 million above our guidance of EUR 660 million, delivering an operating margin of 15.8%. Our outperformance was driven primarily by social charges, which had a positive impact approximately of EUR 49 million relative to our forecast due to share price movements in the quarter. Excluding the non-forecasted associated charge favorability, we came in approximately EUR 6 million above guidance, driven by the gross margin outperformance. Finally, free cash flow was EUR 824 million in the quarter. Performance here was a bit stronger than our typical quarter 1 due to some timing factors, which will likely reverse in quarter 2. On capital allocation, we repurchased $361 million in shares during quarter 1, continuing our focus on opportunistically offsetting dilution from employee equity programs. We also settled our $1.5 billion in exchangeable note, and that was due in March, with cash on hand, rather than issuing new shares. As of the close of the quarter, we had EUR 8.8 billion in cash and cash equivalents and no debt other than lease liabilities. So then if we look ahead into quarter 2, we see continued momentum and healthy global funnel that is -- and are forecasting MAU of 778 million, an increase of 17 million from quarter 1. On subscribers, we are forecasting 299 million for quarter 2 or a net addition of 6 million. This is modestly below the significant outperformance we saw in the prior year quarter, which benefited from items such as favorable adjustment to our iOS app in the U.S. We reiterate our previous statement that we expect another full year of healthy subscriber growth, weighted more towards the back half of the year. We are also forecasting total revenue of approximately EUR 4.8 billion in quarter 2 or 15% growth. This reflects the ARPU increase of 7% to 7.5% year-on-year as we see additional benefit from the recently announced pricing action, partially offset by the lapping of pricing actions last year in the Benelux region. We anticipate the quarter 2 gross margin of 33.1%, approximately 160 basis points above the prior year. Our gross margin outlook incorporates continued strengthening in our core business alongside with the reinvestments into new products and initiatives that we believe set us up well for future monetization potential. Moving to the operating income. We are guiding to EUR 630 million in quarter 2. This reflects the above along with the timing of marketing of our latest features. This also reflects R&D related to strategic AI initiatives that we already drive -- that is already driving engagement. We expect operating expenses to remain at these levels for the next quarter or 2, and we are confident that it will enable healthy LTV returns. Although we do not provide full year guidance for gross margin and operating margin, we continue to expect both to improve in 2026 on a full year basis, with quarterly progression being variable and dependent on the timing of our investments. We also continue to expect meaningful year-over-year growth in free cash flow in 2026, reflecting our improved profitability and working capital profile, while we're also progressing towards a normalized tax rate in 2027. In conclusion, quarter 1 was a strong start to 2026. Revenue growth accelerated and profitability improved as we continue to reinvest our future growth potential. We remain really well positioned to continue compounding growth and profitability. With that, I hand it back to you, Bryan. Bryan Goldberg: Great. Thanks, Christian. And again, if you've got any questions, please go to slido.com, #SpotifyEarningsQ126. [Operator Instructions] And our first question today is going to come from Ben Black -- oops. I apologize, Ben, I just accidentally resolved it. We'll get that question back in the queue. One sec. We're going to go to Rich Greenfield. I apologize. Slight technical issue here. We're going to start with Jessica Reif Ehrlich's question on operating expenses. Q1 had higher marketing cloud and AI spend. Can you discuss the pace of investment for the balance of the year and how you would define a successful outcome for this investment spend? Gustav Söderström: Jessica, this is Gustav. Thanks for sneaking an AI question right at the top there. They usually take longer to get to. So I'm going to take the opportunity. So we did spend a little bit more on OpEx. And the way to think about it is we have not increased our headcount, actually we slightly decreased our headcount, but we are spending more compute per employee. And that is because we're seeing tremendous return in terms of productivity. We talked about accelerating our ability to ship products already during the late fall; that has only accelerated since then. So we're simply doing much more, and we're getting a very good return on that investment. But as we ship more features, in order to get the true return on that investment, we also need to tell our users about those features, which is why we're seeing some more sales and marketing spend as we market these features to users. But the way to think about it is we see tremendous opportunity here. I usually make the analogy to in 2009 when the iPhone came out and the App Store came up, and believe it or not, I was actually here back in 2009, so I lived through that. It was a time of tremendous opportunity. Some people sat around and waited. Spotify did not, we took the opportunity. And we drastically accelerated first our conversion to Premium and then our free user growth. We think this opportunity is as big or possibly bigger. So we're taking that opportunity. But we are very diligent and very disciplined about those investments. So we are seeing these returns. I talked in my prepared remarks about the DJ closing in on 100 million users. Also something we released only 4 weeks ago, Song DNA, is now up to 52 million users, in just 4 weeks. So we are seeing the kind of growth and return on these future investments that we want to see. Obviously, we think that usage is a good proxy for retention and retention is a good proxy for revenue long term. Bryan Goldberg: Okay. Our next question is going to come from Rich Greenfield on the state of the ads business. Growth is still slowing after the meaningful investments in ad tech in 2025 and absorbing the impact from changes to podcast advertising for Premium subs. Why is increased engagement not translating to accelerating ad revenue growth? Alex Norström: Rich, my friend. This is Alex. I hope you're doing well. I just wanted, before I expand on the question, I do want to just mention to Jessica. We do -- we -- you should check out Prompted Playlist, global campaign just came online yesterday. It's just a terrific campaign that explains how basically we give you back more control over your Spotify with us using AI. And this is a good point to sort of back up what Gustav just said, it's out there in a while right now and it's performing. So let's get back to the ad business. The ad business, Rich, has been seeing very steady progress more recently. But if you take it back 1.5 years or 2 years almost, we observed that there was a gap. What was the gap? Well, essentially, we saw us missing out on a TAM where people were putting a lot of money. And this time was programmatic, it was automated sales and it was biddable exchanges. And the decision we made back then was a pretty tough one because we had to essentially rebuild the entire stack. And we did that knowing that we would face a bunch of short-term pressure, but that it would unlock meaningfully a much bigger market for us in the long term. Now that transition is done. So now it's about execution. It's about patience. And really, what you have to believe for this is to work out for us are a couple of different things. But mainly, it's whenever we have seen increased time spent on Spotify, and quality time to boot, right, then -- and then there's a gap to monetization, typically, that gap will close. It's a question of time, whether it's like you're thinking about it as like advertising as a category, whether it's inside the company, the gap will close. It's just a matter of time. The other things you need to believe in is that really this rebuilt new stack that we have, it actually gives us more opportunity to do new things that we couldn't do before. And obviously, that our measurement and performance shows that Spotify delivers as a brand. What hasn't changed, I'll end with that, is that advertisers, they come to Spotify, marketers, they come to Spotify for 3 different reasons. Our beloved brand that they want to associate themselves with, our high user engagement and also, of course, our high-quality content. Bryan Goldberg: Okay. Our next question is going to come from Benjamin Black on gross margin. First quarter Premium gross margin was very strong despite only 1 month of U.S. pricing. Can you highlight some of the key drivers of the outperformance? And also dig a bit deeper into the 2Q gross margin guide. Could you talk about the investments you're making that may be weighing on gross margin upside? . Alex Norström: Benjamin, Alex here. I was looking forward to answering this question, but I don't know what Bryan did there when he sort of hit it. But it's now back up again, I was happy to see that. I mean it's cool that you called it out because both Gustav and Christian are very pleased with the gross margin progression, not just for this quarter but also consistently in the last 2 years. And really, the underlying reason for this is a very healthy core that actually spans both music and podcast and audio books. Now Christian [indiscernible] as far as going forward, I think the important thing is to understand how we think about gross margin. And like Gustav said, this is a time of tremendous opportunity for us. And the muscle that we've built during the past 3 years -- actually even 4 years, is that we think about reinvestments using cost of revenue, using gross margin in a very disciplined way. We do that. We try to strike a balance between that and margin progression. And again, I think we have a pretty good track record of striking a good balance between these 2 things. Christian Luiga: Should I just give you a little bit more flavor on the second quarter gross margin guide as you asked about that. I mean we do have a very strong growth [indiscernible] and we do invest in the same time on the base -- on the top of our core that is going really well. And that we do in quarter 2 in smaller, minor investments in different things. And some of them you will you will see today and some of them you will see when we get to Investor Day, and some of them you maybe will see later. But it's a good flow we have right now, and we are very disciplined and working very hard in our weekly bets board to actually update ourselves to see what we want to do. Bryan Goldberg: Okay. Our next question is going to come from Doug Anmuth on AI products. Can you update us on your progress towards new AI products that would empower users to create new content and enable derivatives of existing music? What are the hurdles to launching these products? And do you expect that they would impact your cost structure or margin trajectory in any meaningful way? Gustav Söderström: Doug, this is Gustav. I'll take this. I'll talk about this a little bit before. So for now, I'll mostly reiterate how we actually think about this opportunity. The way to think about it is that the generative market, for example, for music is really 2 things. It's net new music, which is happening at scale and quickly increasing the catalog. And that, we think, is good for a company that aggregates content, because it makes the recommendation prompt even more important. I think it's worth thinking about, I just mentioned, reveal my age here, saying that I joined Spotify in 2008. When I joined, I think the music catalog was about 2 million tracks, and now something like 250 million tracks. So the growth of the catalog is not new. We think it's going to keep increasing. And that means that the recommendation prompt gets more important for consumers. But what we think there is a unique opportunity is that, right now, existing creators are largely left out of the AI opportunity altogether. Many creators are using AI to make new music, but existing creators cannot join. That's because the copyright problem is much more complicated to [ solve well ] and the attribution problem of who should get paid what is much harder. But we love hard problems. So that's the problem we want to go after. We want to take this opportunity to existing creators as well, with derivatives of existing IP. So as I've said before, we have the capabilities and technologies we need. We are the right company to solve this problem. And we think that existing creators should participate in AI just as well as new creators. Bryan Goldberg: Okay. Our next question comes from Justin Patterson on productivity. We're seeing many companies wrestle with headcount investment versus rising AI costs. How is Spotify approaching this problem in gauging employee productivity? . Gustav Söderström: Yes. So this is Gustav again. Thank you, Justin. I kind of mentioned this, I snuck this point in before, but I'll reiterate that we are seeing tremendous productivity growth. You can translate that into different things. You could translate it straight into cost savings and cut headcount, which some companies out there are doing. The other thing you could do is to say we're going to be roughly the same amount of people. We're just going to do more. The third thing you could do, which you also see many companies doing is saying we should invest like crazy because there's so much opportunity. Right now, we're going for the middle approach. We're keeping our headcount roughly flat and just doing much more, shipping more value to consumers. And then on the question on how we measure this. You have many proxies on the way. So one proxy for this would be something very technical, like pull request, what amount of code is getting written, and maybe better proxies, how much we actually ship. We have something called DODs, definitions of done, for any feature that we build. So how many DODs are getting done? How many bets do we have on this bets board that I think Christian mentioned and I talked about before. And all of these keep increasing. And they're increasing several times. They're not increasing 10%. They're increasing -- they're doubling, that kind of increase. So we're seeing all of these metrics. Now we are starting to see these things ship. And as I mentioned, with things like Song DNA [indiscernible] starting to see them translate into usage. And usage, as Alex mentioned, is a really good predictor of retention, and retention is a predictor of revenue. And as Alex mentioned as well, we have 3 different modes of monetizing features. There is the free tier, where you can maximize the reach, we are one of the world's largest subscription where you can bundle things. And then as of recently, we've also shown that we can do top-ups like within audiobooks, which we are very excited about the progress on and the numbers that we are seeing. So we feel very good. What I'm trying to convey is that we are diligent and disciplined, but we are not sitting around waiting for this opportunity to go past us. We are taking the opportunity. So that's where we are right now. Alex Norström: And just to give a little bit of historical flavor on that, I just want to add and remind us that, some years ago, we did a resizing of the organization. And since then, as you've seen, we haven't increased our employees, and we have been very diligent in keeping the overall platform stable. And as of last quarter, we decreased with 65 people. So it's not like we are growing people and doing that, and we haven't done that -- we haven't done that for 3 years. It's been a very disciplined approach to this. Gustav Söderström: I think, yes, Alex here is probably too humble to state himself, so I'll say it for him, Alex is actually the one who set this plan about 3 years ago to get Spotify to be profitable, and we've been executing on this plan. So we are very diligent with our cost. Alex Norström: Thank you. That wasn't planned, giving me that much praise. It's both of us, of course. It's both of us. Bryan Goldberg: All right. Our next question is going to come from Deepak Mathivanan on our Ubiquity strategy. You have integrated Spotify and leading AI applications already, ChatGPT last year and Claude more recently. Can you talk about what type of traffic you're seeing and how consumers are using Spotify in AI applications at this time? And how are AI applications helping KPIs such as MAUs and time spent? Gustav Söderström: It's really all about AI today. That's great. So we are -- there are a few ways to think about this. As you know, Spotify has had a few core pillars, one being [ freemium ] and other being personalization and the third being ubiquity. So one way to think about this is [ just ubiquity ]. Spotify was always going to be everywhere, right? This has been a counter strategy to some of our competitors who favor their own ecosystems. So this goes for ChatGPT, Claude, et cetera as well. We just want to be wherever users are. And so that's a simple way to think about it. And I also mentioned that we track usage and engagement and costs very diligently, and we are seeing what we want to see. In terms of the type of traffic, it depends on the future, but what Alex mentioned upfront is we have, for the first time in the Spotify history, this ability for users to actually tell us in plain English or actually whatever language they want, what they want. We were always guessing. Old-school machine learning was a statistical activity based on clicks and streams. Now people are telling us in English that they're going for a run and they want this BPM and that cadence and so forth. So we're getting this treasure trove of data that we are capturing, training on it. And this builds a unique advantage for us. I talked last time about the large personalization model, which is a model that we're training from based on open source models. But it's trained on our proprietary data. This is not something that we rent from someone. This is something we're building in-house. And the casual name for the large personalization model is a taste model. Why is that important? It is because it turns out that taste is actually not a fact. It is an opinion, and it differs between people, between markets, between use cases and activities. So that is the kind of usage that we were hoping to see in Prompted Playlist in IDJ, and that's exactly what we are seeing, very advanced usage that is giving us a type of data we never had before. And now we're just heads-down serving those use cases better than anyone else. Alex Norström: Let me jump in on the action here a little bit, Gustav. So you -- I think it's important that you're hearing Gustav say this and I say sometimes about how we think. I think as a general approach, it's good for us to explain to you how we think about things so that you can understand how it applies to other things as well. I think when Gustav said earlier on -- in response to another question that when the music catalog grows and when our content platform grows in volume, it's always been good. It's good for users, it's good for the industries that we're in and so on. But then the second thing that happens is something we've also said for a long time, and Daniel broached this many times in these calls, that we optimize for the long term, and we talk about optimizing for lifetime value. So how do you bridge these 2 things, with an ever-increasing catalog of content and lifetime value? Well, it turns out that the #1 reason for why people actually engage more with Spotify is personalization. And how we track that is if AI increases engagement for us, it generally means that it increases personalization for us, right? And increased personalization engagement, to Gustav's points, are going to lead to -- well, they are going to be the best proxies for the increase in retention that we're going to see over time with these investments. And if that happens, then we know that that will eventually translate to a longer lifetime value, which in turn translates to more enterprise value. So that's how we think about the investments. Bryan Goldberg: Okay. Our next question is going to come from Eric Sheridan on operating expenses. Can you frame the key platform and product initiatives that are driving incremental operating expense trends? How should investors think about the trajectory of operating margins going forward? . Gustav Söderström: I'll start with them, and then Christian can talk about the trajectory. So I've kind of mentioned it already in terms of the OpEx spend, that it's a mix of increased compute, not increased headcount, and sales and marketing, to make sure that we capture the value of the features that we're now launching. To give you a bit more detail in what do we mean with compute, well, it's a few different things, actually. One is just using things like code, codecs, et cetera, to accelerate our development pace, and building some proprietary systems around that. I talked a little bit about [ Honk ] last time. I have many more exciting things to talk about if you guys want to go there, that we are doing. But that's just one type, accelerating our productivity of writing code. But then as I also mentioned briefly, we are training rather large models in-house, because we have lots and lots of unique data that no one else has. For example, the large personalization model, which is not something that you can rent or buy off the Internet. You literally need 700 million plus people every day using the platform to be able to say what is trending in a certain region in India right now. So a lot of it is training -- or some of it is training cost, and that's upfront. And we'll capture that value when those products roll out. And some of it is this direct productivity in terms of development costs. So think of part of it's strategic investment, part of it as a productivity investment. Alex Norström: Yes. And when we see product market fit with the features that we launch, it just leads to an opportunity for us to talk more about it, meaning we can start telling compelling marketing stories around it to scale it even further, on top of this healthy core that we have. It's all about awareness and [indiscernible] and part market fit. Christian Luiga: And what we highlighted, and I did in my script, was that the next 2 quarters will be a little bit elevated from this. And we do have a different pattern on our launches this year of products, and that's what Alex talked about. And the R&D, of course, is extremely important for building the tech stack that we are delivering to our customers. So I just want to say with that also that what we did say and we reiterate is that the operating margin will improve year-over-year. Bryan Goldberg: All right. Our next question comes from Justin Patterson on the new free tier. For Alex and Christian, how are you judging the higher cost of the free tier versus subscriber conversion and your LTV framework? How does this compare to your expectations when rolling this out last September? Alex Norström: All right. Justin, good question. I'll start and then Christian will fill in. So you heard me in the remarks saying that we, in particular, pay a lot of attention to the number of days in a month that users spend on Spotify. So I'd much rather someone spent many days in a month rather than many hours per day. Of course, you would want both, but if you have to prioritize, it's the many days in a month. And really, we -- internally, we talk about it as the lifeblood of our system. And if you look back on the development of the free tier, the new more enhanced free tier that we launched, I can't remember, is it a little bit more than a year ago now, we have seen consistently that the free tier users have increased in the active days in a month. Now what does that mean? Well, we've had this consistent increase for many years, basically from like '21, '22, '23 and so on. But when we launched new improved free tier globally, we saw this just step change, which essentially means that people are liking the free tier much more, right? It's satisfaction and more usage and more days in a month. So that is always going to downstream lead to more subscriber conversion and eventually lifetime value. I mean it's just blown up my expectations fully since we launched this last summer. Christian Luiga: So just chiming in. I guess you also have then read the numbers and maybe a little bit surprised that, in the quarter, was one of the few times we've had a negative development on the year-over-year gross margin on the ads business. But that is really coming back to the great engagement we have, and the engagement is driving more content cost right now than the income on top line. But the beauty in that and the healthy thing with that is that, of course, that means that we will be able to monetize that as we go into the future quarters and that will be then a positive push going forward. So that is really a short-term issue. Bryan Goldberg: Okay. Our next question is from Rich Greenfield on fitness. Fitness will undoubtedly drive increased video engagement on Spotify, particularly on TV screens. How does this impact your video ad business? And how should we think about the cost impact you will bear within the Premium business from adding this content? Alex Norström: I know you love your TV and Apple TV, Rich, so hopefully, we'll see you using Spotify pumping iron in front of the TV or maybe doing some stretching. You should think about this launch as a launch in fitness that basically is something that's happening organically already on Spotify. This is something we're doubling down on. And much like we did when we launched podcast at first and also audio books, we saw the behavior organically happening on the platform. And if you think about the TAM here, the demand here, in our research, we have this staggering number that says that 70% of our premium users actually train or work out or go to the gym or do yoga every month. And you can also see it in the numbers, hundreds of millions of playlists are being created to do yoga, to go to the gym and so on and so forth, right? So this is us doubling down on that trend. And little did we know when about 1.5 years ago when we launched [ SBP ], the ad-free video experience for Spotify Premium users, we saw a lot of fitness in structures and fitness creators just, unprompted, upload a lot of videos to Spotify. And if you think about it, this is really what we do, right? This is -- we use our platform to bridge the demand between creatives, like a fitness instructor, and users. We connect them using our trimodal economic engines like ads, subscriptions and top-ups. And we do that between creatives. And this is what we're seeing with fitness right now for us. So we do look forward to this expanding even more. And I'll just give you the highlight of how I'm using it. We're seeing some tennis content come online. I play tennis, not that I'm very good at all, but I still play a lot. So when I'm sort of gearing up for a bit of a tournament, then, it's an amateur tournament, then I'll see recommendations in the future coming up with podcast videos telling me how to stretch and relax before I go into that week. Maybe there's some instructional videos that tell me how to improve my [indiscernible] backhand. Maybe I'll get an audio book recommendation on how to think about tennis playing. So this is really something that we're happy to invest in. This is a demand trend that's happening right now in Spotify. Bryan Goldberg: All right. Our next question comes from Jessica Reif Ehrlich on ARPU. Have you seen anything unusual in subscriber reaction to your recent price increase? And could you talk about tools for further ARPU expansion from here? Alex Norström: You saw us increase price around the world at -- in the last quarter of last year. And then you saw us increase in the U.S. in this most recent quarter. No surprises at all for us. Christian Luiga: [indiscernible] tools, I mean how do we feel about increasing ARPU over time? I mean I think one of the things we have talked about is when you bring engagement and more verticals, you can actually monetize on that. But on top of that, I think we've proven with the model with audio books and top-ups, that that is a way to bring more monetization on our platform from our subscribers. And we continue to look at those kind of elements. Gustav Söderström: I'll just jump in here. Alex talked a little bit about us explaining how we think. And I think one useful model to think about, not just Spotify, actually all consumer products, is that people talk about averages, your average usage and so forth, but almost nothing is an average. It's almost always a [ power law ]. You have a long tail of users who use something a little and then you have a head of people who use it a lot. And so Spotify always had the business model to capture the long tail, which requires a free tier, and to capture a bunch of the averagely engaged users in premium. But until we launched audio books add-on, we didn't really have a tool to capture the head, the people who want to read for hundreds of hours a month. We had a clear theory that we could capture the entire [ power law ], but we haven't proven it to ourselves until recently. Now we have those 3 tools. So we feel very good about just getting more usage on the platform and use these 3 tools to monetize it. Bryan Goldberg: Okay. Next question from Steven Cahall on AI music. Does Spotify believe in an AI music creation tier? And if so, what are the sticking points with content partners and how might it be priced to Premium users? Gustav Söderström: Yes. So this is Gustav. I've touched on this a little bit. What we do believe in is that there is there is a lot of opportunity out there for creators who want to use AI tools, but there is an opportunity that no one is addressing right now for existing artists. And we really want to address that part. We don't think existing artists should be left out of AI. We think that may actually be the most interesting part of music. If you look at other industries, existing IP is actually the most valuable IP, not the least valuable. But because of our AI music works right now, that is not addressable. That's the problem we want to solve. We think there's a big opportunity for creators and for Spotify and for investors there. And so we think that there's a big opportunity to expand the music catalog, and that is obviously good for us, but we think there is also a big opportunity for existing artists that isn't addressed yet. Bryan Goldberg: Okay. Back to Benjamin Black with another question on fitness. Yesterday, you announced a partnership with Peloton. Could you highlight the strategic rationale? And also, could you talk about the cost structure or this deal? And how does this compare to audio books or the Spotify partner program spending? And is it reasonable to think that monetization will follow a similar strategy to audio books back in 2024/2025? Alex Norström: Benjamin, good question. I like our partnership with Peloton. Although we don't talk about the specific deals, you know that, I can let you know that this is content that's ad-free. It's high-quality content that normally resides within subscriptions, that retail at a much higher price. So we're putting that on Premium inside the fitness category. And so your question is like how does this compare to audio books? Well, in that sense, it actually is similar to audio books and [ SBP ]. Bryan Goldberg: Okay. A question from Maria Ripps on advertising. Higher engagement among ad-supported users is clearly a positive. What needs to happen for that engagement to start translating into gross margin tailwinds? Alex Norström: I think just to continue the work on the study progress that we've had so far with the new ad stack, getting not just more programmatic ad sales on top, which is growing very, very fast right now, but also sort of looking holistically at the whole system, including direct sales. Christian Luiga: I just want to reiterate that the quarter 1 gross margin that we had was a very small one in that was a short-term issue. And we reiterate which we have said now for 6 months that we see that the second half of 2026 is where we see the growth picking up. And I think -- I just want to say that again, and again, as it was some kind of a lot of questions around it today that we have said that quite for a long time now that is the second half where you see the progress coming through. Bryan Goldberg: Okay. We've got another question from Doug Anmuth on tiering. You've recently shifted tiers to feature and product sets in a handful of markets, essentially enabling good, better and best versions of Spotify. What have been the early learnings with this move? And how could they apply to more mature or established markets? Gustav Söderström: I love that you paid attention to this, Doug. This is one of my personal favorites. It's, like you said, it's very, very early and I can't say much about it. But the early indications is that when we deploy these types of value proposition frameworks, we do see a structural increase in ARPU. But it may be too early to sort of talk about specifics just now. Alex Norström: We're positive about it. Bryan Goldberg: Okay. Our next question comes from Sean Diffley on conversion. How should we think about the conversion of free-to-paid sub in 2026 relative to prior years given the enhancements to the mobile free tier? And how much of the increase in marketing spend is related to this versus other features that are on the [ app ] now or coming later this year? Alex Norström: Maybe Gustav can comment on other features on the app and so on, but I'll start by responding to your first question there. I've said it many times before, engagement and really the free tier is the best leading indicator to how our system spins. And by that, I mean, if you have more engagement and if you have a free tier that's thriving, that's growing fast, then that will eventually translate to more retention, to someone converting over to subscriptions, and thereby also generating lifetime value for the company. Gustav Söderström: And in terms of the spend, it's spread among many features. We are trying to market the features that are differentiated. A lot of them are focused on the Premium tier, maybe more so than on the free tier. The free tier is sort of selling itself because it's free. Bryan Goldberg: All right. And our last question today is going to come from William Packer on AI. Investor concerns over AI disruption have increased. Could you outline the key moats for Spotify that limit the risk from, one, stand-alone low-cost, free AI music alternatives; two, large platform peers that offer free AI music services; and three, competition from AI-first alternatives, which integrate label content? Gustav Söderström: Yes. This is Gustav. Thanks, William. So there's a bunch of questions in here. I don't really like the word moats. I think there are fair advantages possibly that you've earned because you worked really hard. So some of our fair advantages are that we have about almost 20 years of listening history. And so I touched on this before, some of the things in the world are facts that can be easily commoditized by LLMs, such as the capital of Texas or something. Other things are not so easily commoditized. And it turns out luckily for us, taste is not easily commoditized because it's not a fact, it's an opinion. It differs between people, it differs between regions, it differs between people in those regions and use cases. And on top of that, it changes weekly, what is called right now and what is culture. So for this reason, we do invest quite a lot in something like our large personalization model, basically our own taste model. We use a bunch of third-party services, but not with our core data. We're turning proprietary models for that. So I think that will give us a lot of well-earned advantage in terms of serving our users better. And I think it's a very durable one. Because if you theoretically said that someone could somehow snapshot all our user data, all 700 million-plus users, that -- they could train a model on that and then that model is pretty useless after about maybe 2, 3 weeks as culture moved on. So we actually think it's very sustainable, and you need to be at scale to keep these models valuable. So I feel pretty good about that. Then to get to your second and maybe third question, stand-alone low-cost, free AI music alternatives. I think you may be thinking about what's happening in China with services like soda. And I think it's important to remember that it's a different market in a fundamental sense. The Chinese market basically gated on content between free and paid. And what happened was because of AI, that paid gate got challenged. Spotify has never gated on content. And in most of the Western markets, the services are not gated on content. So we just don't have that same risk. That doesn't mean that we don't think we could actually benefit from AI, as I've said during this call, both in terms of size of the catalog, but also in terms of serving existing creators. Bryan Goldberg: All right. Great. Thanks, everyone, for the questions. I'd like to turn the call back over to Gustav for some closing remarks. Gustav Söderström: All right. Thanks, Bryan. So this month marked our 20th anniversary actually, 20 years of building what once seemed impossible, innovating for the greatest artists, creators and authors, and shipping the best and most valuable experience for the world's most passionate and engaged fans. And there is still a lot more to come from us. So we hope that you'll join us for upcoming Investor Day on May 21 in New York. We can wait to show you what it all means for the next chapter of Spotify's growth. So we hope to see you there. Thank you, everyone, for joining. Bryan Goldberg: Okay. And that concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks, everyone, for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
perator: Good morning, and welcome to the Hilton 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 Mr. Charlie Ruehr, Vice President, Corporate Finance and Investor Relations. You may begin. Charlie Ruehr: Thank you, Chuck. Welcome to Hilton's First Quarter 2026 Earnings Call. Before we begin, we would like to remind you that our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to [Audio Gap] financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then review our first quarter results and discuss our expectations for the year. Following the remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris. Christopher Nassetta: Thanks, Charlie, and good morning, everyone. We certainly appreciate you joining us today. Before we begin, I'd like to acknowledge all those impacted by the Middle East conflict, and I'd like to thank our team members who adapted very quickly and continue to provide extraordinary hospitality during this difficult time. We remain hopeful for a swift resolution. Turning to results. We're pleased to report a great first quarter during which strong RevPAR and net unit growth drove top and bottom line results above the high end of our guidance. Performance was driven by strengthening underlying demand trends along with ongoing System-wide share gains. Our industry-leading brands, strong commercial engines and powerful partnerships continue to differentiate us from the competition, while a culture of innovation fuels additional growth opportunities. All of this, coupled with our asset-light fee-based business model, positions us to continue producing significant free cash flow and driving meaningful shareholder returns. In the quarter, we returned more than $860 million to shareholders and we remain on track to return approximately $3.5 billion for the full year. For the first quarter, System-wide RevPAR increased 3.6% year-over-year, driven by broad growth across all chain scales, brands and segments, as well as sequential monthly improvement throughout the quarter in the U.S. In the quarter, business transient RevPAR was up 2.7%, representing a 4-point step-up in demand from the fourth quarter when adjusting for day of week and holiday shifts driven by improving midweek demand across all chain scales. Leisure transient RevPAR was up 3.5%, driven by concentrated spring brake demand that enabled strong rate growth. [indiscernible] was up 4.3%, driven by growth in company meeting and convention demand. We continue to see healthy underlying momentum for group supported by strong growth in corporate lead volumes. As we look ahead to the second quarter, we remain encouraged by a continuation of demand trends that we've been observing since late 2025 and now through April, but we do expect some headwinds related to the Middle East. For the full year, we expect improving performance in the lower and mid chain scales with RevPAR strength continuing to move downstream from luxury and upper upscale toward a more balanced convergence demand shape or what I have been calling a C-shaped economy. This trend should be most evident in the U.S., where supportive tax and regulatory policy, expected lower interest rates, increased private sector investment in AI and the AI complex and ongoing public infrastructure spending are benefiting the middle and lower income consumer and driving broader demand growth. As a result, for the full year, our System-wide RevPAR growth expectations are now 2% to 3%, factoring in a range of scenarios for the Middle East conflict and recovery. For the year, we continue to expect group to lead, followed by business and leisure transient. Turning to development. During the first quarter, we opened 131 hotels totaling over 16,000 rooms representing our second strongest, first quarter for hotel openings in our history. Our Luxury and Lifestyle brands continue to expand around the world, comprising 20% of total openings in the quarter. Earlier this month, in Morocco, we proudly opened the Waldorf Astoria Rabat Sale kicking off 2026 with another key addition to the Waldorf Astoria portfolio, which now includes 40 trading hotels worldwide with more than 30 in the pipeline. Additional Marquee Waldorf openings in 2026 will include the Waldorf Astoria Admiralty Arch in London and the Waldorf Astoria Kualalampur in Malaysia. Within Lifestyle, our Curio Collection recently surpassed 200 trading hotels with notable openings in the quarter, including the newly built Monarch San Antonio and the converted hotel here on Alexandria, Old Town Virginia. We also expanded our Lifestyle footprint globally with the debut of Motto in Brazil. In Europe, this week, we will open a Home2 Suites in Dublin, Ireland, which marked the European debut our Home2 Suites brand, one of our strongest performing brands in the portfolio with more than 800 hotels open and over 750 in development. This positions this brand for extended rapid growth and allows us to capture even more demand from this important region. Conversions represented 36% of openings for the quarter across 10 brands and dozens of countries, ranging from flagship Hilton openings in Malaysia, Vietnam and Thailand, The Spark openings in France, Canada and the U.S. Following our Apartment Collection by Hilton brand announcement earlier this year, we now have our first 2 converted properties in Atlanta and Salt Lake City, accepting bookings for this summer. Conversions overall are expected to be up on a nominal basis in 2026 across every region, demonstrating the performance our system delivers to owners. Despite the current macro uncertainty, signings and starts continue to have momentum. During the quarter, we announced multiple new signings across geographies including 4 new brand signings in Turkey, 2 LXR signings in Japan, the debut of Motto in Australia and France and the debut of Tapestry in Germany. In India, we signed a strategic agreement with Royal Orchard Hotel to open 125 Hampton Hotels in the market, which puts us on track to exceed 400 hotels in the market in the coming years and reaffirms our commitment to expanding in this key emerging economy. We continue to build out our presence in the fast-growing and expansive region of APAC ex China, where approvals, openings and new development construction starts were all up double-digits in the first quarter. Globally, we now expect new development construction starts to be up over 20% for the year with the strongest growth in the U.S. and EMEA, signaling continued developer confidence and a strong desire to have hotels open in conjunction with a rebounding RevPAR environment. Our pipeline now stands at a record 527,000 rooms and includes brand [indiscernible] in more than 25 new countries with Hilton representing only 5.5% of global hotel supply and over 20% of rooms under construction, we have tremendous opportunity to grow our market share from here. As we look ahead, we expect that our robust global pipeline strength in conversions, construction start momentum and industry-leading brand premiums will support sustained net unit growth of between 6% to 7% for the full year even with the current geopolitical uncertainty. Innovation across our entire business is a core competency, and when deploying new technology, we're focused on broad impactful use cases to enhance the guest experience, deliver value to owners and empower team members. As we advance our strategy, we're leveraging AI to embrace, the new ways customers are discovering and engaging with our brands, working with leading partners, including Google, ChatGPT and Anthropic, all while remaining focused on strengthening direct loyalty-driven relationships and maintaining discipline in how we manage distribution. Building on this, earlier this quarter, we deployed an Anthropic-powered platform for customers to dream and shop called the Hilton AI Planner, this LLM powered tool combines our incredibly rich property content with vast information about local venues and activities to allow customers to search for and tailor an experience that is unique to their interest. The AI Planner enables guests to spend more time dreaming within our native environment which should drive incremental demand across our portfolio as customers book with us more often and more quickly. We're just getting started on how technology can customize the customer experience, and the Hilton AI Planner is one great example of how we are delivering our signature Hilton Hospitality and enhancing the Dream Shop Book and stay guest journey. During the quarter, we were proud to once again be recognized as the top-rated hospitality company by -- on the Fortune and Great Place to Work list of the 100 best companies to work for in the United States, marking our 11th consecutive year earning this distinction. We also continue to be recognized for our world-class culture globally, receiving Great Place to Work honors in 17 countries, including 7, #1 ranking. Overall, we are very encouraged by the strength of the demand environment across all our brands. We remain confident that our powerful network effect, industry-leading RevPAR premiums and fee-based capital-light business model will continue to drive strong operating performance, net unit growth and meaningful cash flow, enabling us to return an increasing amount of capital to shareholders. Now I'll turn the call over to Kevin to give you a few more details on the quarter and expectations for the full year. Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, System-wide RevPAR increased 3.6% versus the prior year on a comparable and currency-neutral basis. Growth was driven by broad growth across all chain scales, brands and segments as well as sequential improvement throughout the quarter in the U.S. Adjusted EBITDA was $901 million in the first quarter, up 13% year-over-year and exceeding the high end of our guidance range. Out-performance was predominantly driven by better-than-expected System-wide RevPAR growth. Management and franchise fees grew 10.4% year-over-year. For the quarter, diluted earnings per share adjusted for special items was $2.01. Turning to our regional performance. First quarter comparable U.S. RevPAR increased 3.4% driven by group growth trends continuing from the prior quarter, broad business travel strength and leisure demand from a concentrated spring break. For full year 2026, we expect U.S. RevPAR growth to be at the high end or above System-wide guidance. The Americas outside the U.S., first quarter RevPAR increased 4.4% year-over-year, driven by strong demand across all segments and continued strength across the Caribbean and South America. For full year 2026, we expect RevPAR growth to be in the low to mid-single digits. Europe, RevPAR grew 6.9% year-over-year led by growth across all segments. Continental Europe's strength related to the Winter Olympics and other regional event-driven demand. For full year 2026, we expect RevPAR growth to be in the low to mid-single digits. In the Middle East and Africa region, RevPAR decreased 1.7% year-over-year as strong early quarter performance was offset by weakness following travel disruptions from the conflict across the Middle East. For full year 2026, we expect RevPAR to be down in the mid- to high teens as a result of the ongoing conflict in the region, and we expect the biggest impact to be on second quarter performance. In the Asia Pacific region, first quarter RevPAR was up 9.1% in APAC ex China, led by Australasia RevPAR growth and extended Chinese New Year and other regional events. RevPAR in China increased 1.3% in the quarter, driven by business segment recovery, but offset by continued pressure in group from softer convention and company meetings activity and leisure due to weaker inbound travel. For full year 2026, we expect RevPAR growth in Asia Pacific to be low single digits, with RevPAR flat in China. Turning to Development. As Chris mentioned, for the quarter, we grew [indiscernible] 6.3% and now have more than 527,000 rooms in our pipeline. We continue to have more rooms under construction than any other hotel company with approximately 1 in every 5 hotel rooms under construction globally slated to join the Hilton portfolio. We expect to deliver between 6% to 7% net unit growth for the full year. Moving to guidance for the second quarter, including the impact from the Middle East conflict, we expect System-wide RevPAR growth to be between 2% and 3%. We expect adjusted EBITDA to be between $1.015 billion and $1.035 billion and diluted EPS adjusted for special items to be between $2.18 and $2.24, both impacted by the significant Middle East RevPAR decline and several onetime and timing items that are unique to the second quarter year-over-year comparison. For the full year, we expect RevPAR growth of 2% to 3%, driven by strengthening underlying fundamentals across chain scales and segments and factoring for a range of scenarios for the Middle East. As a result, we expect adjusted EBITDA of between $4.02 billion and $4.06 billion and diluted EPS adjusted for special items of between $8.79 and $8.91. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of $0.15 per share during the first quarter for a total of $35 million. Our Board also authorized a quarterly dividend of $0.15 per share for the second quarter. For 2026, we expect to return approximately $3.5 billion to shareholders in the form of buybacks and dividends. Further details on our first quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chuck, can we have our first question, please? Operator: Our first question will come from Shaun Kelley with Bank of America. Shaun Kelley: Chris, obviously, a big notable change in the U.S. demand dynamics. So hoping you could just unpack that a little bit for us. Our math gets us to probably nearly a 200 basis point increase in your outlook from where you were at the beginning of the year. So could you just walk us through that and maybe elaborate a little bit on your comment around C-shaped economy? Are you actually seeing some evidence of that convergence as we get here into April? Or what gives you that confidence to kind of make that statement? What are you seeing that's getting you excited about the business? Christopher Nassetta: Thanks, Shaun. I think that's a great way to start with the Q&A because it's the biggest question out there. If you go back, I can have team fact check me, but if you go back to like midyear last year, I was very much of the mind that I saw, if you lifted up above a lot of noise that there were some really good fundamental things happening from a macro point of view in the U.S. economy that, to my mind, sort of had to eventually translate into higher growth rates. Now I will admit that certainly in the third quarter, as we reported, while I said that, I also said we're not seeing the green shoots or a whole lot of evidence of that yet. But then again, Mike (sic) [ Shaun ], if nothing I've been consistent, in the fourth quarter, I repeated in my view that we were -- that we had to start to see what I sort of made up on my own instead of a K, a C economy where you see convergence of the lower end, the middle class, mid-price segments in our industry moving up. And in the fourth quarter, we started to see a little bit of evidence of that. Now I would say that were in the first quarter and looking into Q2, where we have part of the quarter behind us, obviously, in the sense of April, we have very good sight lines into May, we're seeing it, right? And we're seeing what to me was inevitably on its way, but it takes time for these things to sort of deep into the economy. So I said it in my prepared comments and at the risk of taking too much time here, but I do think it's the most important question and answer, what's driving it? Well, I think what's driving it is a number of very big picture things that are going on. One, forget for the moment the spike in energy prices and oil because of the War in Iran and, I mean, broadly, structurally, particularly in housing, you have inflation coming down. And as a result, broadly, again, not in this exact amount, broadly, rates have come down. And I think there -- next you can debate how fast when second half of this year, first half of next year. But I think there's a broad understanding that particularly if we get the Middle East stuff sort of settled down, you're going to be in a lower inflationary environment, and it will allow the Fed to continue to bring rates down to stimulate the real economy, which is what they're trying to do. Here in, obviously, one of the most deregulatory environments in, what I can remember in modern history. And that means financial services, energy, you name it across the spectrum that you have a broad regulatory deregulatory regime. And that -- in addition to that, in the backdrop, because of the bill that was passed last year, you are in a multiyear position where you have very, very business-friendly tax attributes, right? And that's very hard to get done. It's certainly not going to get undone during this administration. And let's be honest, when you look at it historically it takes a lot even with change of administration to get that kind of sweeping tax policy change. So I think you have a number of years in running room and favorable tax policy. And then like I'll state the obvious. You have a lot of investing going on in America. Where is that investing? Obviously, AI, all the AI companies, the whole AI complex around it, data centers, energy, it's like one of the -- it's like great race. People are spending money like crazy in and around that. You have infrastructure, which I've talked about for a number of quarters, buying your infrastructure bill, $1.6 trillion, very little of which percentage wise has been spent. The CHIPS Act to reshore critical manufacturing. Again, $800 billion, very little of that is spent. Why? Because it takes time to get these things like land, permits, build. So these things, they take a number of years to sort of seep into the system. But I think you're starting to see it. The best evidence of that, if you go back and there's -- the correlation sort of got obtuse or broken apart during COVID like a lot of things. But for a long spans of time, the highest correlation, 95%-plus over a very long span of time. The correlation and demand growth of the hotel rooms has been growth in RFI, nonresidential fixed investment. Sort of like we've lived in crazy ville, post-COVID where you have all the swirling stuff going on, hard to understand. But to me, over the long term, that is exactly what is going to drive the business. And that's exactly what's going to drive the mid-market of the business, all that investing in nonresidential fixed investment that takes the middle class getting in the game. And if you look at those numbers, they've been moving up and they're perennially bad at forecasting an RFI from my experience. But the actual numbers being reported are moving up. And my guess is the next several years, they're going to keep moving up. And as they do, you're going to see this convergence. With all of those things going on, you're going to see this convergence. By the way, if that's not enough, I mean I know it's a whole different topic of displacement and everything that goes with AI, but AI is also going to provide one of the greatest productivity booms. I mean, it's going to be equal to or bigger than the Internet productivity boom, and yes, there are people, there's winners, there's looser's, need to retrain and shift and re-skill people, all of that stuff, we won't get into today with the limits of time, but there is no world where economically, it's not advantageous to have productivity gains. Like there is no world, there is no time in American history where big productivity gains weren't matched with big economic growth. So I sort of put all that together, and I feel like, okay, it's happening, like I want it to keep happening. We don't -- I want to be thoughtful about like we're talking about a little bit of fourth quarter and the first quarter and now looking into the second quarter. And I don't want to overcook it, but all of those things I've been thinking, I think, are happening, and I think it's now showing up in our business, and it makes me feel good that we could be in a time frame, honestly, where -- I love it when we're sitting around at this very table every week talking about performance. And every time we talk, it's getting better, right? And that's what's been happening for a while, for weeks and weeks. It's getting better. Like -- so as we look further out in the year with the visibility we have here in the U.S., it feels better. So reality is we gave guidance to the Middle East. I'll leave that to somebody else to ask, creates some uncertainty, but I think you can make an argument that we are being reasonably conservative with our full year guidance. Operator: Next question will come from Dan Politzer with JPMorgan. Daniel Politzer: I suppose I'll take the bait on the Middle East there. Can you just remind us what the exposure in terms of EBITDA or fees across your businesses there? And how do you think about the Middle East dynamic and disruption there flowing through to the other regions of your business throughout the course of the year and impacts the U.S. outbound travel? Christopher Nassetta: Sure. Middle East is about 3% of the business. So you'd say, "All right, it was not that bigger part of the business." But like Q2, you see that is impacted by a few things, some onetime stuff that Kevin mentioned from last year, but it's also impacted by the Middle East. I mean the Middle East for Q2, which is when we think it will probably be most dramatically impacted. If it's 3%, it could be down 50% or something like that. You guys could do the math. That could be 1.5 points on System-wide. So whatever guidance we gave you, if the Middle East we're doing what it normally does. It wouldn't be -- which had been running in the high single digits, low double digits now for a quarter minus 50% you flipped that around it in Q2, you would be above where you were in Q1. So even though it is a small percentage of 3%, when you get in very large numbers, small percentage of a large number becomes a decent-sized number. Having said that, we are already -- I mean I don't know where this is all going to play out. I'm looking down outside my window to Washington. We'll see. I don't know. I suspect there will be an off-ramp eventually just given a lot of things, politically and otherwise in the not-too-distant future. Things have already settled down a bit. I mean we are already starting to see, again, in my weekly around this table, when I'm getting reports, certain markets within the Middle East that are some of our bigger markets are starting to sort of stabilize and move up. I mean, they're still quite impacted, but they're getting better. And so what we tried to do in our guidance was, again, on the margin, be a bit conservative and thinking about a range, like in the first quarter, we think it was probably 30 or 40 bps something like that. And in Q2, I just gave you the metric, it's probably 1.5 points. For the full year, it's probably 0.5 point to 1 point impact depending on what you think the trajectory will be. And at the lower end of that range and thus at the lower end of our overall guidance range, I think what we've assumed is it stays pretty bad and that there is, in fact, some knock-on impact to your question. There's some knock-on impact on other markets. We've seen a little bit of that, a little bit in India, particularly Bangalore, a little bit in the Seychelles and Maldives because of transit through Dubai, but not a lot of knock-on impact, but we've assumed if it stays really bad, there'll be a little bit more. And then obviously, on the upside that you continue to things stabilize and you continue to have recovery but not necessarily a super v-shaped recovery just sort of grinding back up through the rest of the year. So again, my experience, I'm sad to say I've been doing this long enough. I've had to live through stuff like wars and pandemics and like whatever else it feels like. And so I feel like in this moment, we're trying to be responsible with you all in telling you we're giving you a range of outcomes that we think are rational, if anything, probably on the conservative side as they should be. In terms of -- I mentioned it on the development side, only about 2% of our deliveries for the year are coming out of the Middle East. But those are important deliveries. We do think things will slow down a little bit there. It's so early in the year. We don't know. And so again, that's why we I think -- but for that, we probably would have been telling you we're in the upper half of our 6% to 7% range. But because of the Middle East and potential for supply chain knock-on in other parts of the world, we feel like keeping the range where it was, was more appropriate. Again, I mean, you could say we're being too conservative, whatever, but I mean war is war. There's a lot of possible outcomes. We've tried to frame it around those and be thoughtful about it. Operator: Your next question will come from Stephen Grambling with Morgan Stanley. Stephen Grambling: I appreciate all the color on the macro. As we look at some of the actions outside of RevPAR, particularly the launch of the Select brands. Can you elaborate on how this compares to a typical brand agreement? And what are some of the guardrails for what brands you'd be willing to include going forward? And if I can just sneak one more that's related on, does this launch change the way you think about either the marketing or system funds allocations or even M&A? Christopher Nassetta: No, to the last part of that. Let me -- but so I'll answer that. That doesn't change any of that. I mean the way to think about Select is like anything we bring into the system, the first step is quality, does it add to our network effect? Is it is it a swim lane or a brand that we think our customers want, that has the quality that we have promised to give our customers and then we think it will create a benefit strengthening to our network effect. That's always the first filter. So we -- if it doesn't meet the criteria of like we already have something on top of it or we don't like the quality. We're not doing it. And by the way, we've had dozens of opportunities in Select that you don't know about because we haven't done them. This is -- we've done one. I suspect there will be others. I don't know how many they'll be because we're super stringent on what we would do. And so the way to think about it, and the hotels a great example is like. It's a great smaller brand. They've struggled to really -- customers love it. The quality is good, and they have a real following, but they've had a real problem without having global scale and all the network effect that we have and the ability to invest in technology and all those things at the level we do to sort of make it work the way they wanted to work. And so -- that was a unique opportunity for us to say, we love it. Our customers, we did a lot of work. We think our customers like it, will resonate well. The quality is good. And importantly, we're entering the agreement with, that is consistent with the way we would approach any franchise agreement. This is a franchise relationship with them. We are getting -- and if you look at the -- I know there's been a lot of noise out there, but if you -- there's a ramp involved like a lot of our larger multiunit franchise deals. But if you look at a run rate basis, this is very consistent in how we charge for license fees, system fees, all of that, and it is on a fee per room basis, very consistent with the product in that category. And so the difference is it's just a little unique brand. And so like -- could you do it somewhere else? Yes, you could say like what's [indiscernible] that and like doing it as a tap or whatever. Well, Hotel is a good example. It's unique. It doesn't fit in TAP for Curio. It's its own thing. And so we didn't want to try and like we want to have we don't want to have cognitive dissidence with our customers as we bring things into the system, and we like the brand. We wanted it to stand on its own, but we want to do it in the right way. We want to get paid paid for the effort and we want it to be something our customers really think enhances the broader system. And so there'll be others. I'm sure we're working on a bunch of others, but I said like turndown ratio is very, very high. Obviously, the appetite for folks that have small brands, I think, is quite high in an environment where we have this much scale and the ability how we work with all the intermediaries, the dollars we can invest in our commercial engines and technology. It's -- I think we have a real competitive advantage. That's why the average market share of our brands is so high and much higher than our competitors. And so increasingly, little micro brands around the world, I think not all of them, but some are figuring that out. And we've been talking to a bunch of them. Do I suspect some others will come into the fold over time, but we'll be hyper disciplined about it. Again, quality the brand works, fits in our ecosystem, and we get the fees per room are good. And we get paid for the efforts. Operator: The next question will come from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I wanted to go back to the AI and kind of technology side of things. Obviously, things are moving very, very quickly. You mentioned you launched the Hilton AI Planner. But I guess just now another quarter into things, how do you think about what the kind of real opportunity set here is, long term, both obviously on the OpEx side of things internally, but then as you think kind of bigger picture externally from the distribution side of things also? Christopher Nassetta: Yes. I mean we talked about this, I think, at fairly good length on the last call and it's obviously an important question. And given the amount of time we're spending on it and everybody is, it would be fair to say it's worth addressing. I would say you're right, a lot of effort going into it by everybody certainly by us. Things are moving very quickly. I would say as every day goes by, we're learning and iterating and thinking and doing different things and working with different partners in different ways. And I think the opportunity gets more not less interesting I know that's what you'd expect me to say, but I believe it to be true. I think the three buckets of how we think about it, haven't really changed. I think we think about this as a means to create -- to use our scale as a weapon and creating efficiency, which we think can translate into being more efficient at how we go to market and how we deliver for our owner community and more effective. And yes, that could benefit our P&L, too, but really, the largest part of our system cost really relates to the part of the system we manage on behalf of owners. So every time we can be more effective and more efficient in the world, it can translate into benefits for our owner community who need it and want it and deserve it. Our project Rise this year was in part enabled by work that we're doing in this bucket, if you will. And so I'd say we're early days, and I think you have huge opportunities to think about systems and processes across what is a very big global company, to continue to garner efficiencies but most importantly, to be much more effective, be able to move quicker, add hotels, ramp them quicker just because we take great systems but antiquated systems, and we hyper modernize those. In the second bucket, you heard me mention, we're working with a bunch of the folks out there, Gemini and OpenAI, we're going to be opening our app within their environment in the next couple of weeks, talked about our AI Planner in our environment that we did with Anthropic and Claude. We're working with everybody, and while it's moving fast, there's a long way to go. And so I do increasingly feel really good about what the opportunities for us are. I mean if you think about it at a high level, if you look at the quality using the U.S. market as an example, if you look at the quality hotel market in the United States, we're over 25% of the market. I think that puts us in -- and we are the only ones with that 25% of the market that can control rate inventory availability, period, end of story, nobody can get it, unless we give it to them. In a world where you have a more competitive environment, there are a bunch of debates who's going to win, who's going to lose. That's not for us to judge. I think they're probably going to be more -- there's going to be more than one winner. That's why we're working with everybody. But we realize the asset we have in the system and the control of the system, given our scale is really valuable that effectively, people really do need us if you're going to have -- you can't be missing 25% or 30% of the quality inventory in the U.S. and have something that's a real full offering. And so I like where we sit. It's complicated. It's fast moving, there's risks, but we're approaching it very much in the form of a partnership with all of the counterparties that are developing these technologies. We want to show up with all of them. And in the end, I do believe as a result of the great work they're doing and a result of discipline on our side, that there's real opportunities to create more efficient, more effective distribution. They sort of just has to be if we're smart about it, and we intend to be. And then the last bucket AI Planner is, in fact, part of it. And if you think about when we have a stay experience people are with us, your customers, we have all sorts of opportunities to like equip our team members now with all the information we have with technology in the palm of their hands to deal with problems to customize the experience. And we're testing and learning in the stay experience with really cool things that really revolutionize the stay. But we also, a lot of the engagement we have with our customers is digital. Think about when they're dreaming, booking, planning, post-day. And so -- and they're not with us. And so that's about trying to make sure that the approach we have digitally with folks is utilizing all the best thinking and technology to create a very engaging experience so that, yes, when they're with us, they have the best day experience in the business, and that's why they want to come back -- but when they're not with us and these other steps of the customer journey, they feel equally good about our ability to give -- to satisfy their needs and to customize at mass scale. And so again, all this stuff, I mean, we're doing things. We talked about it, you can go play with the AI, the Hilton AI Planner or Stay Planner, it's early days, but we're doing super important foundational work. And the last thing I'd say is our tech stack and it's not by happenstance is very advanced. So many years ago, COVID, like turned it to a time war, but pre-COVID, so probably 8 or 9 years ago, we made the decision to really completely blow up all our legacy architecture and make sure that our core systems and otherwise were cloud-based open source, micro services driven, which means totally modern tech stack that has like incredible agility and agility and the ability to have control. So it's a system built on certain elements of table stake sort of technology, it might build off an existing platform. But where we customize and modify it, it's things we own and control. And so it gives us, we think, a really unique ability to be agile and do things for customers that are going to be unique that others that are going to be with monolithic providers can't do. And so that was a very purposeful decision to my tech team. They're extraordinary and leading that effort over a bunch of years. And I would say it just puts us in a really good position in the world we live in, where AI is coming and you have all this opportunity. But if you don't have the flexibility and agility of a tech stack, it doesn't really matter because sort of like the machine stops. So that I'll leave it at that. We could talk AI all day, and we do around here, talk about it a heck of a lot, but that's probably enough for today. Operator: Your next question will come from Steve Pizzella with Deutsche Bank. Steven Pizzella: Just wanted to follow up on the expectation for conversion to be up in 2026 across every region. Do you think this is a new normal for conversions moving forward? Or will we revert back to a more normalized conversion level versus new construction mix? And is there anything to think about from a fee perspective, longer term, if conversions continue to be a greater portion of the fee mix moving forward? Christopher Nassetta: I don't think there's any material impact on the fee side of it. So answering that first. I -- this year, we're going to tick up, as I said, last year, we were like 36%. Current forecasts are we're trending a bit above that, probably 38% to 40% in the latest numbers. I mean there's a lot of moving parts under the year, for the year. But we think we think it's going to be up modestly. I actually -- I think the math of it is such that on an absolute basis, I don't think you're going to see a big drop off, in conversions. As a percentage of [ nug ], I do think you will see it moderate over time, but that's because you've been in a world where construction starts haven't really gotten back to pre-COVID levels. And that will happen and is happening. It probably happens this year. And as you start to have that happen over the next 2 or 3 years, and new construction grows in an absolute sense, I think the percentage will decline. I don't think it will ever go back down. I mean, we peaked during the -- great recession in the low 40s. We're sort of back there now. It went as low as the high teens. I don't think we're going to be in a world where it's high teens. I mean when it was high teens, let's be honest, we had 1 brand, 1.5 brands sort of like Hilton and DoubleTree when it went. Now we've got a dozen brands that are really a dozen or more brands that are really good candidates for conversion. So I think you're probably sort of permanently in the 30% to 40% range. I'm making that up. But I mean, directionally, if you did the math on new starts, I think you're sort of permanently in that range. Operator: The next question will come from David Katz with Jefferies. David Katz: Thanks for taking my question. I know you said you'd like to sort of leave the AI discussion right where it is. But I wanted to ask something just a little more industry level, if that's okay, which is -- it's obvious that you're making great progress in working at terrific speed. Outside the industry, not talking about competitors or peers, right, there is sort of an independent track that's going on, and there's also an OTA environment that's also, I assume, moving as fast as they can. How do you envision those dynamics sort of playing out? And do we evolve into kind of a different industry landscape in that regard? Or are you just running your race and luckily not paying a ton of attention to what they're doing? Christopher Nassetta: No, no. We, of course, are paying a lot of attention to what everybody is doing. I I do think on the margin, it will look a lot like it does over the next 5 years from now, it will look like -- a lot like it does today or it has looked. I think on the margin, though, if we do our job, I think AI allows us, as I said, that be more efficient and more effective. What we did that is, code for continuing to build more direct lines to our customers. I mean that's where we have a terrific relationship with the OTAs, and we do a certain segment of our business with them. And I suspect we will for a very, very long time. But I think our ability -- our control of our inventory, our ability to customize the experience in unique ways, it being a more competitive environment where there isn't just one winner in search probably when it's all said and done. I think that puts us in a position where we -- it gives us an advantage relative to what we've had to continuing to build more direct business. Now 80% plus of our business is already direct. So we've had a fair amount of success in doing that. But I think on the margin, it helps in that regard. But I go back to where I started. I don't see that the whole system changes in a material way anytime soon. Operator: Your next question will come from Robin Farley with UBS. Robin Farley: My question is not about AI. Just looking at results, fantastic results, and I think that full year RevPAR rates higher than the market was expecting. I am curious, last quarter, you had a slide that showed that 100 basis point raise in RevPAR would be 100 basis point raise in EBITDA. And it looks like it's maybe sort of more like a 50 basis points raise in EBITDA. Your G&A didn't change. Just anything else you would call out in that sort of flow through to EBITDA from the race? Kevin Jacobs: No, Robin, I think -- look, I think the rule of thumb we would use and maybe the 100 basis points was a little bit of rounding and I think we've actually updated that more recently. The rule of thumb we do is about $25 million or $30 million of EBITDA per point. And so we raised our guidance -- our RevPAR guidance by 1 full point. So if you think about that as being typically $25 million to $30 million, the things that are going on there is you just have the impact of the Middle East with a little bit of IMF and a little bit of FX, which caused us to raise the midpoint by [ 20 ] instead of, call it, [ 25 ] at the low end of the range. So that's the way to think about it, and it's not more [indiscernible] than that. Operator: The next question from Brandt Montour with Barclays. Brandt Montour: So back to demand, you sound really good on group business. That was that was sort of the downside surprise for the industry last year, obviously, with tariffs. And just sort of curious, when you think -- when you look out and expect group to total lead, are you actually seeing in the year, for the year group bookings materialize better than planned? Or is it really just sort of easy comps that give you that confidence? Christopher Nassetta: No. I mean we're seeing real lead volumes and bookings in line with the forecasting we have. And atmospherically in the discussions that our sales folks are having broadly about sentiment in that space and the corporate space, for that matter, are much better, quite good. So they get -- I think, listen, people are feeling better when they're spending more -- they need to move more, they need to aggregate people more, and we're seeing it show up. The booking position supports it, the leads more than support it. Operator: Next question will come from Trey Bowers with Wells Fargo. Raymond Bowers: Just getting back to [ NUG ], to the extent that the disruption in the Middle East might might cause some impact on 6% to 7% growth this year. Is that just some of the either conversions or new builds kind of fall out of the system or the expectation of you were not at the high end of that range for this year. Would most of that fall into 2027? Christopher Nassetta: It's just timing. We don't -- we're not concerned that anything is falling out of the pipeline, or conversion opportunities are drying up. It's just like there's a lot going on over there and some people have slowed construction, they've slowed decision-making on conversion deals that we're working on. So I don't think we feel like any of it really ultimately falls away. I think it's a question of when it gets done. And it's early to say. By the way my team says -- our team says it's picking up by the day, like Saudi Arabia, sort of isn't missing a beat, UAE, a little bit more disrupted, Kuwait, Qatar, much more so because the issues there have been more dramatic. So really, -- it's not like one monolithic area. It's country by country. And so we're watching it carefully. But I think it's -- I don't think these are things that like disappear. I think it's just a function of -- it may push a quarter or 2. Operator: The next question will come from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just to stick on that theme. As you think about your share of rooms versus much larger share of rooms under construction. What markets do you feel like that disconnect opportunity is biggest? Basically, what geographies offer the best share gain opportunity as you look out maybe over the next 5 years? Christopher Nassetta: Well, there are a lot of them, I would say -- I mean, where we have what we call inside the company's springboard work, which is where we see sort of the disconnect in terms of demand for our products and what is a relatively low existing base of hotels. So I would say India being first and foremost, I mean we think easily, it's a 10x or 20x sort of opportunity. We have whatever, 40 hotels in India. I mean with the deals like when we announced today, we sort of have 400 in and around the pipeline or under development. So India is definitely one. Southeast Asia is another where we have a big presence, but we think the opportunity is to be 3x or 4x the size that we have. [ Cala ], the broader [ Cala ] environment. We've got a big presence of 300 hotels, but we think we could be easily 2x or 3x that size. KSA, we have 25, 30 hotels. We think we can easily be 4x to 5x that, probably even more as well as other parts of the Middle East. Obviously, the Middle East, we just talked about, there's some challenges, but in part because I'm always an optimist, but I do think one way or another, this will settle down, and there's a lot of momentum underlying travel and tourism in the Middle East that I think will pick up pretty quickly when you get to the other side of this conflict. So I mean -- and I shouldn't forget Africa, where a huge population, what is -- we've been there for many, many decades, but have a relatively small base and a huge opportunity. And so yes, the reality is we've got 27 brands. And if you look at the average number of brands that's deployed in any market, I think it's like 4 brands with 27. So even where we have more density, there's a tremendous amount of network yet to build and thus growth and then the markets I just covered, I would argue and almost all of them other than maybe [ Cala ] where we have 300 hotels. The others were in sort of our nascent stages. The brand is well known. We performed really well. We've had a presence in a long time. But relative to the populations and the demand base, we're just getting started. So that's why we get really excited when we think about -- I get the question, well, how long can you grow 6% or 7%? And my view is a long, long time, simply because the world is a big place, populations all over the world need to be served. They're all -- in most of the markets I just described, there way underserved relative to any of the other more mature markets. And yet our brands do well there. Customers recognize us, and it's an opportunity to really build a powerful network effect, in many of those places. Operator: Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for any additional or closing remarks. Please go ahead. Christopher Nassetta: Thanks, everybody. As always, we appreciate the time. As you can tell, there's a lot going on in the world. There's no question about, the Middle East is not helpful. But 75% of our business is still driven out of the U.S., and we have seen really nice uptick in performance driven by a really nice uptick in demand across all segments. We think that is sustainable as we look out for the rest of the year and beyond. And so notwithstanding everything going on in the world, we feel really good about our ability to drive top line, drive unit growth, obviously, the free cash flow that we need to drive and keep returning capital as a serial compounder. So we feel great about the business. Look forward to catching up with you after the second quarter to give you the update on everything going on. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rush Street Interactive First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, April 28, 2026. I will now turn the call over to Kyle Sauers, president and Chief Financial Officer. Please go ahead. Kyle Sauers: Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2026 earnings release. It can be found under the heading Financials Quarterly Results in the Investors section of the RSI website at rushstreetinteractive.com. Some of our comments will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not statements of historical fact and are usually identified by the use of words such as will, expect, should or other similar phrases and are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We assume no responsibility for updating any forward-looking statements. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. We will be discussing adjusted EBITDA, which we define as net income or loss before interest, income taxes, depreciation and amortization, share-based compensation, adjustments for certain onetime or nonrecurring items and other adjustments that are either noncash or not related to our underlying business performance. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is available in our first quarter 2026 earnings release and our investor deck, which is available in the Investors section of the RSI website at rushstreetinteractive.com. For purposes of today's call, unless noted otherwise, when discussing profitability, EBITDA or other income statement measures other than revenue, we're referring to those items on a non-GAAP adjusted EBITDA basis. With me on the call today, we have Richard Schwartz, Chief Executive Officer. We will first provide some opening remarks and then open the call for questions. And with that, I'll turn the call over to Richard. Richard Schwartz: Thank you, Kyle, and good afternoon, everyone. For the first quarter, we generated record revenue of $370 million, up 41% year-over-year, and a record adjusted EBITDA of $60 million, up 81% year-over-year. Our continued momentum demonstrates the strength of our casino-first strategy, the effectiveness of our operational execution and the powerful momentum we're building across our business. We're scaling revenue off a much larger base at very strong growth rates while improving profitability at about double that pace. The casino-first approach continues to be a fundamental differentiator of our business model, a business model focused on online casino as our primary value driver, with sports betting and poker serving as important complementary products. This strategic choice delivers meaningful advantages in player economics. Our casino players engage more consistently, demonstrate higher lifetime values and exhibit superior retention characteristics. These structural advantages compound over time, creating a virtuous cycle that drives both growth in revenue and profitability. Our player base expanded dramatically during the quarter, extremely impressive results from our teams. Monthly active users in North America grew 46% year-over-year to 296,000, while Latin America MAUs increased 54% to 543,000. In our North American online casino markets, specifically, MAU growth reached 62%, eclipsing the 51% growth we just experienced last quarter. We've now seen an accelerating year-over-year player growth in these markets, each of the last 4 quarters demonstrating the powerful underlying strength of our business. We also achieved record first-time depositors this quarter, beating our previous record set in each of the last 2 quarters by a wide margin. The combination of record new player acquisition with improving marketing efficiency creates a powerful dynamic that will drive our business to new heights. We're filling the top of the funnel faster. We're doing it more efficiently than ever, and our retention remains strong. Customer acquisition and retention efficiency continues to be a key pillar of our success. Our brand awareness is increasing, which gives us a meaningful advantage in acquiring players at favorable rates. This isn't about any single initiative. It's the result of systematic improvements across customer acquisition strategy, product and user experience, loyalty programs, data analytics and customer service. This quarter, we estimate we grew market share sequentially by around 90 basis points in the North American online casino markets where we operate. Our established markets continue performing well, and we're seeing the benefits of our relentless focus on player experience and operational excellence. The consistency of these results across both mature and newer jurisdictions validates that our approach is working well. Latin America also delivered exceptional results. In Colombia, despite navigating a complex regulatory environment, we posted our fastest MAU growth in the past 4 quarters. The strategic approach we took throughout 2025, absorbing the tax burden through increased bonusing rather than passing cost to players, has proven to be an effective decision. Our commitment to our players and retaining their trust has positioned us well for 2026. As discussed in our prior earnings call, the Constitutional Court suspended the emergency decree of 19% VAT on GGR in late January. Furthermore, there was another positive development earlier this month, whereby the Constitutional Court determined the 19% VAT to be unconstitutional, and therefore ruled that no tax was to be imposed under that decree. In mid-March, a new emergency decree was implemented that imposed a temporary 16% tax on GGR. This new emergency decree and associated tax decree will also undergo a new and distinct review by the Constitutional Court during the coming months. The result of all this is that the original temporary 19% tax that was determined to be unconstitutional was not applied to us. Therefore, during the first 2.5 months of the first quarter, we had no additional taxes. Moving forward, we have assumed that we will have a new temporary 16% tax from mid-March through the end of the year when considering our raised guidance. Turning to Mexico. This market continues to ramp nicely and to be more meaningful for us, both from a revenue and profitability perspective. Along with increasing brand awareness, we're seeing strong player acquisition, excellent retention metrics and healthy growth and profitability. The competitive environment remains favorable, and we're gaining share by delivering the superior player experience that has made us successful in other markets. We have grown revenue by over 100% in each of the last 4 quarters and remain excited about the long-term opportunity and a substantial size of this growing market. Looking ahead, we are getting closer to launching Alberta. The regulator has set July 13 as the launch date. This represents a significant expansion opportunity for our business. As Kyle will also cover, our increased revenue and EBITDA guidance now includes the impact of the Alberta launch for the back half of the year. We expect to begin investing in marketing and brand building ahead of our launch in Alberta. This will occur in the second quarter, and Kyle will have more details. With each new market launch, we build on and improve what we've learned in prior launches. Here, we're taking a deliberate, measured approach to market entry, focusing on building a sustainable business with strong unit economics. This disciplined approach has served us well in other markets, and we're confident it will drive long-term value in Alberta as well. As we look to the remainder of 2026 and beyond, I'm incredibly excited about the opportunities ahead of us. We're operating from a position of strength with momentum across our business, a clear and focused strategic road map and the operational capabilities to continue executing at a high level. We're continuing to invest in product innovation, technology enhancements and geographic expansion while maintaining the financial discipline that has long characterized our approach. We believe that this balanced strategy positions us to continue to deliver sustainable growth and increasing profitability over the long term. Our first quarter performance and the momentum we're seeing across the business gives us increased confidence. We remain focused on delivering exceptional player experiences while creating long-term value for our shareholders. With that, I'll turn it back to Kyle to discuss the financial details. Kyle Sauers: Thanks, Richard. Let me walk through the details of our exceptional first quarter performance. Record first quarter revenue of $370.4 million represents 41% year-over-year growth, a significant acceleration from the growth rates we delivered in 2025 and our fastest growth rate in over 4 years. This performance was driven by strong execution across all aspects of our business, with growth accelerating throughout the quarter. Adjusted EBITDA reached a record $60.2 million, representing 81% year-over-year growth and over 16% margins. This profitability expansion demonstrates the operating leverage in our business model as we continue to scale. Gross margins came in at 35.7%, an 80 basis point improvement year-over-year. Our marketing efficiency continues to improve. Marketing expenses in the quarter were $46.2 million, an increase of 19% year-over-year and representing 12.5% of total revenue, which compares to 14.8% of revenue in the year ago quarter. Our disciplined marketing spend, combined with record player acquisition levels, demonstrates the competitive advantage we're building within player acquisition channels and our cost to acquire players, which, again, are the lowest they've been since we went public over 5 years ago. G&A for the first quarter was $25.8 million or 7.0% of revenue compared to 7.4% in the prior year period. As forecasted, we are increasing our investments in our people and technology in 2026. But nonetheless, we achieved leverage over the G&A line during the quarter. The foundation of our financial success is our exceptional user acquisition and retention performance. As Richard mentioned, our user growth this quarter was really impressive, hitting another new record for first-time depositors. In North America, our MAUs of 296,000 demonstrated growth of 46% year-over-year, and online casino markets in North America grew a notable 62% year-over-year. And in Latin America, MAUs of 543,000 grew 54% year-over-year, demonstrating the brand awareness and customer loyalty we're building in these markets. North America ARPMAU was $317 in the first quarter, down 14% year-over-year. Given the record volumes of new players we're adding to the platform, the trend of declining ARPMAU is both healthy and anticipated. New players initially generate lower ARPMAU than our established customer base, but they represent new high-quality player cohorts that we're acquiring at very attractive levels. The key is that we're acquiring these players efficiently and retaining them effectively, which positions us for strong long-term value creation. In Latin America, our ARPMAU for the first quarter was $54, up 51% year-over-year, largely driven by faster growth in Mexico, which has higher player values than our other Latin American markets and the removal of the VAT bonusing in Colombia which we incurred in 2025. This validates the strategic approach we took throughout 2025 and demonstrates the underlying strength of our Latin American business. Breaking down our performance by product and geography, we saw continued strength across all segments. In the first quarter, online casino revenue grew 39% and online sports betting revenue grew 47%. Regionally, revenue in North America grew 26% in the first quarter and revenue in Latin America grew 134%. Our balance sheet remains strong with $331 million in cash on hand as of March 31, and we still have 0 debt on our books. During the first quarter, we did not repurchase any shares under our $50 million share repurchase program. Based on the strength of our first quarter performance and our improved visibility into the remainder of the year, we are raising our full year 2026 guidance. We now expect revenue to be in the range of $1.49 billion to $1.54 billion, representing year-over-year growth of 31% to 36%. At the midpoint of $1.515 billion, this represents a $115 million increase from our initial 2026 guidance and 34% year-over-year growth. This is a meaningful increase from the guidance we offered in mid-February. So where is this coming from? In order of impact, as we mentioned earlier, we grew iCasino market share substantially in North American markets during the first quarter. This outsized growth had a positive impact on Q1, but also sets us up well for the remainder of the year. And our significant growth in North American iCasino users supports that confidence. Next, while we had a lot of confidence in our growth prospects for Latin America heading into the year, that entire market continues to outperform both in player growth and top line revenue. In the first quarter, we also benefited from better sports outcomes in both North America and Latin America. Lastly, we have included in our guidance the Alberta launch expected in July, which will add some modest revenue in the back half of the year. Turning to profitability guidance. We now expect adjusted EBITDA to be in the range of $230 million to $250 million, representing year-over-year growth of 50% to 63%. At the midpoint of $240 million, this represents a $20 million increase from our initial 2026 guidance and 56% year-over-year growth. This is a 9% increase in our EBITDA guide and reflects the benefits of all the reasons I mentioned for raising revenue guidance, plus the benefits of the new temporary tax in Colombia being a bit lower than the prior 19% temporary tax that was overturned, and partly offset by significant investments planned for Alberta and modestly higher marketing spend and G&A costs than expected earlier in the year. Even with these plans for increased spend, at the midpoint of our guidance, we do expect to get meaningful leverage over marketing spend and modest leverage over G&A as well. It's worth noting that our EBITDA guidance raise would have been closer to $30 million without the effect of our Alberta investment now being included in guidance. This will be a 14% increase over our previous guidance. Our first quarter results demonstrate the strength of our business model and our ability to execute. We're growing rapidly. We're growing profitably, and we're doing so in a way that positions us well for sustained success. The continued momentum we're seeing across player growth, marketing efficiency and profitability gives us confidence in our ability to deliver on our raised guidance and create long-term shareholder value. So with that, operator, we're ready to take questions. Operator: [Operator Instructions] Your first question comes from the line of Dan Politzer with JPMorgan. Dan, your line is now open. Please go ahead. Daniel Politzer: I wanted to touch first on the MAU and monthly active users in North America. I mean, it's been a pretty impressive acceleration over the last 5 quarters there, the 46% growth this quarter. Can you just talk about who these customers are that you're acquiring? Are they from different platforms? Is there a different demographic? Are they concentrated in 1 state versus another. It's just -- it's obviously pretty impressive growth. So just better understanding, I think, would be helpful. Kyle Sauers: Yes. Thanks, Dan. I'll take that one. We are very pleased with the progress there. And I'll point out that the growth in markets that have iCasino in North America are actually growing faster than the total numbers that you mentioned. So we've been really pleased with that. We're filling the top of the funnel faster than we ever have, 3 straight quarters of record first-time depositors. The players we're acquiring, look -- I mean, if you look at our average revenue per monthly active user, while that's come down a little bit in recent quarters, that's because we're diluting it so much with these new players. New players that may not be around for a full month, new players that are getting bonusing when they start out and take longer to build value over time. So I'd say the players look a lot like the ones that we've acquired before. Surely, there's some additional kind of casual player base that we're adding, but we're seeing only modest lowering of the expected long-term value in all these new players that we're bringing on. And it's coming from a bunch of different channels. Our marketing team just continues to optimize where we spend, what the messaging looks like and continuing to track a lot of players. I think one of the benefits for us, even though we're growing much faster than the industry is, there's a lot of players who still don't know who that BetRivers is in North America. So there's a lot of opportunity for us to go after players who maybe haven't played iCasino before, but also played with some of our competitors and give them a shot to play on one of the best platforms, if not the best platform that's out there. Daniel Politzer: Got it. That's helpful. And then just turning to Alberta, I think that you mentioned, I think it was implied, about a $10 million launch cost or EBITDA impact in the year. Can you talk about, I guess, what you're underwriting there in terms of market share? Is it predominantly going to be iGaming? And then just maybe talk about expectations for the competitive environment. Kyle Sauers: Sure. So we expect it to be competitive, just like Ontario has been competitive. It also has incumbent great market operators that all the new entrants like us will be dealing with. I don't think we want to put a market share bogey out there just yet. Ontario, which has been a great market for us, We've grown really nicely. We're taking share there, but we're still relatively small in the scope of the entire market. that's probably a good target for us early on. But I'll also say we've had a lot of lessons operating in Ontario, and we think we'll do really well launching in Alberta. Operator: Our next question comes from the line of Bernie McTernan with Needham. Bernard McTernan: Great. Maybe just to start, just piggybacking on the question on the strong MAU growth. What customer acquisitions channels are working in particular? Is anything performing better? I know you brought in a Chief Marketing Officer not too long ago. Just the fact that we continue to see nice growth here on a sustained basis, just want to see what's working. And then I have a follow-up. Kyle Sauers: Yes. Great. And yes, we did bring in our first CMO a couple of years ago now. We've added a lot of great talent to the team, supplemented the great people we already have there, both in North America and Latin America. So they're doing a fantastic job. I'll say we're trying a lot of different channels, trying a lot of different things. And clearly, it's working really well. The ones that are working exceptionally well, I'm not sure that I want to highlight that on a public call, though. Bernard McTernan: Fair enough. And then I wanted to ask on just the World Cup, just any -- I'm assuming that you will see the impact greater in the financials in LatAm over the U.S., but just -- any commentary on what's contemplated in the guide would be helpful. Kyle Sauers: Yes. So without being super specific on exactly what's in the guide, we have built in some upside from the World Cup and the extra games that will be played because it's largely incremental to the whole soccer calendar for the year. But I think we're -- so we're very excited about that. We're very excited about the player acquisition that comes along with it. So hopefully, that will turn into a bigger impact than what we've modeled and what we've guided to. So that could be exciting. I'll say -- I think one point of it. I referenced it'd be interesting. The [ Copa ] America in 2024 that summer, we saw our monthly active users in Colombia increase by an average of 170% year-over-year in June and July, which is the 2 months where that event happened. So that was a big driver of the future growth for us in Colombia. So we're hoping for a great World Cup, a lot of engagement from new players and existing players, but also sustained growth in our player base afterwards for both sports and for iCasino. Richard Schwartz: If I could just add that this is a unique World Cup and that is taking place in 3 countries, and all 3 of them are countries where we operate. And we're excited that it's less than 45 days away from the first match, which will open up on June 11 in Mexico City, a great market where we're operating in Mexico is going to play a host game. So I think there's a lot of excitement because of that. But also the time zones for all of our players in the Americas will be the same time zones that are awake, which is rare compared to how it's been about several World Cups even over in Europe or the Middle East, even. So I think this is a chance for us to really capture a large amount of interest from bettors in these markets because we know it expands the pie of recreational users who we can then cross-sell, as Kyle just said, to casino. Operator: Our next question comes from the line of Jordan Bender with Citizens. Jordan Bender: I want to touch on the comments around your [ macro ] in Colombia and the fastest you've seen in the last 4 quarters. You kind of talked about what you're doing and what's going right there. But can you maybe just kind of tell us or explain like what the exit rate is in the country kind of exiting the VAT tax? And do you think that you're gaining overall share just based off on the adjustments that you've made to the business model in recent quarters? Kyle Sauers: Yes, sure. So we talked about it in the prepared remarks, but we're very pleased with how the strategy we used last year to kind of combat that, the deposit tax on the players. And we had a lot of extra bonusing, which was a little painful in 2025, but it served us really well and because we treated customers the right way. So the business grew at a handle GGR player count base really nicely last year. And we're seeing more of that flow through to the net revenue line this year because there's less of that bonusing. We have increased our marketing spend in Latin America. So that's been certainly impactful on growing the player counts down there and having a faster growth. There's not -- in any of the Latin American countries, we don't have good reported data from the regulators. It would be really hard to imagine that we are not taking share in all 3 of those markets, given our performance. So we're pretty confident that, that's happening. Jordan Bender: Great. And then just sticking with Colombia, that's clearly been a standout market for you guys over the last couple of years. Are you seeing similar MAU growth, engagement monetization trends in Peru and Mexico at their point in their life cycles similar to kind of what you saw in Colombia in early days? Kyle Sauers: Yes. So I'll say it this way. So Mexico is ahead of Colombia in terms of where we were this quarter relative to the launch date and then comparing that to Colombia versus our original launch date down there. So we're ahead in Mexico from that perspective on this quarter and in aggregate since launch. Now Mexico is a larger market. So I think we've got a much bigger opportunity there potentially. And then in Peru, it's probably a little bit behind where Colombia was post launch. But all of them still growing really, really nicely and we're very excited about. Operator: Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital. Ryan Sigdahl: If I look at industry eye casino growth in the U.S., well, continues to be very durable and strong, if decelerating a bit. Your growth is accelerating. You're doing that despite disciplined spend. Many of your competitors are still there aggressively spending. I think I ask this every quarter, but I'm going to ask it again. I guess, how -- it feels like things are getting easier for you guys with accelerating growth when it feels like it's getting harder for everybody else? Kyle Sauers: Yes. So thanks for the comments. I wouldn't say it's getting easier, Ryan. I think our teams work really hard and really smartly. I do think we're doing a lot of things much better than we were a year ago or 2 years ago, but that doesn't mean that there's not a lot of things we can keep doing better. But it is -- I think we've said it all, and there's probably no new answers from your question last time. We're acquiring players faster. So more of them coming in to fill the top of the funnel. We're doing it at lower rates per player. And retention is still really, really good. We try to be really fair with bonusing and we're trying to continue to optimize that, make sure that players are getting a meaningful experience with their bonusing and promotions, but again, an area we can continue to optimize. And just the whole life cycle and journey for a player from the time they hear about us to the time they start playing on our industry-leading product, we try to make it as great of an experience for them as we can. And then obviously, we've got a great customer service team that takes care of the players because there's always going to be issues that you have to deal with. Richard Schwartz: Ryan, I would add a couple of things. One of our goals is to create a fun and fair experience for our players. And when you consistently see their feedback to us, whether it's to our customer service team or in their public comments on our apps in the app store, that they themselves without knowing that that's our strategy, when they repeat themselves that you guys are fun and fair and fast, things that they care about, that just reinforces that we're delivering the experience and meeting the expectations or hopefully exceeding them. I think a lot of this comes from an ideation process of having a lot of insights from the consumer, really understanding the audience, having the technology capabilities to deliver leading experiences that are new to the industry, not just here in the Americas but globally. And then delivering experiences that are differentiated for the player that they enjoy enough to sustain their play with us versus others. So I think it's just a consistency of leading having the confidence to build new experiences. Our team is tremendous at understanding how to translate insights into products that the user wants to play. And of course, making sure the service element is always there to remind those players that we're thoughtful living company that's really treating players fairly. Ryan Sigdahl: Well done, guys. For my follow-up question just on Colombia. Constitutional Court declared that there needs to be a refund mechanism for the VAT collected in 2025. Curious if you think you guys will be entitled to refunds, if you're able to quantify that? And if you're able to provide any kind of additional detail on that process? Kyle Sauers: Yes. So I think you're referring to payments that would have been made in 2026 related to the 19% emergency VAT that was declared right at the end of December. So there is -- the court did -- had suggested that, that money needs to go back to operators that have paid it. We did not pay any of that VAT into the system from the 2026 19% tax that was ultimately deemed to be unconstitutional, so not really relevant for us. Operator: Our next question comes from the line of Mike Hickey with StoneX. Michael Hickey: Richard, Kyle, congrats guys. Amazing quarter. Great start to the year. Just curious on Mexico. It seems like you're having a tremendous amount of success there. And the market, of course, looks like to be about nearly 10x Colombia. You're already a top 5 share position in the market, but I think your probably overall share is still pretty small given that. I think 1 operator has the majority of it. So just curious, the competitive dynamics that you're seeing in Mexico and your ability, you think, over time to take meaningful share in that market? And how big, obviously, the World Cup can be in sort of supercharging you to that point? Because it seems like on paper, given the success in Colombia, you could do 10x the business in Mexico. Richard Schwartz: Mike, I'll start and maybe Kyle will add in a little bit. We really like Mexico for the opportunity to really differentiate on the casino side. I think a lot of the players there, especially the largest market share, operators really historically focused on sports and has more in their DNA than they do casinos online. So we're very excited to be able to continue to invest in all the things that are necessary to show those casino players there. Don't forget, that country has a very large legacy retail casino marketplace that we'll be able to leverage those players to help deliver this experience online that is, I think, superior to what you typically would see. So from that standpoint, we are leaning in on our casino experience, naturally relying on the sportsbook to acquire customers during high-profile events such as [ Copa ] America that Kyle referenced in the past, but also more exciting for the upcoming World Cup that I mentioned will be opening up in on June 11 in Mexico City. So I think the competitive situation there really favors a casino-first operator like us, and we're continuing to try to make sure we do all the little things necessary to deliver the type of experience, not just from the casino experience, but all the little local localizations you need to constantly improve upon to ensure you're staying current with the latest state of the technology that you need to reduce friction for the players in that market. Kyle, did you have something to add on? Or you could... Kyle Sauers: I won't hear title. But I'd have to say something. No. I don't think I'll react to your [ 10x ] just yet, give us a little time, but I'll remind you that we started later than others did in Colombia. We came into a market that was already existing, and we've secured ourselves as the #2 operator in Colombia and growing really quickly. So we're certainly optimistic that Mexico can bring really good success over the coming years. Michael Hickey: Just a quick follow-up on at and I think you teased us before about maybe looking to open a new market in LatAm. Just curious, your appetite this year or next year to do that still? Richard Schwartz: Yes. We have mentioned in the past, we do continue to see a broad set of attractive growth opportunities across Latin America. We are actively progressing those efforts. I think we're -- given our strong performance in existing markets, which -- the 3 countries that we're operating cover a population of 220 million people, we still have the flexibility to be deliberate and pursue those opportunities with discipline, which is what we're doing. So we still have opportunities. We're continuing to advance those opportunities, but we're not ready to share anything at this point in time. Operator: Our next question comes from the line of Jed Kelly with Oppenheimer. Jed Kelly: Great. Just on North American ARPMAU. Is that entirely being driven by just the accelerating users you're seeing? Or is that the decline in ARPMAU is also being driven by the way you're bonusing? Kyle Sauers: I want to make sure I'm understanding the question. Mike -- or I'm sorry, Jed, you're asking if the decline in the value of the player is in North America is just because of bonusing of new players? Jed Kelly: No. Is it due because you're seeing just an accelerating of users, and those first-time users are causing the faster than -- is that -- or is it -- is there something else you're doing in the bonus? And I'm just wondering about the ARPMAU trends you can speak to. Kyle Sauers: No. It's largely a factor of new players coming in. We added 60% year-over-year in iCasino markets, which is where most of our focus is. Any one of those players might be coming in, in the last part of a month. That goes into that average calculation of the value they're providing. Most players have negative value early on in their life cycle because they're moving through the bonusing that we give them. So that's the largest factor there, a great problem to have. We're certainly not going to grow player counts 60% year-over-year forever. So as that slows down and the players that we're bringing in are maturing, retention improves with those players that stay around longer, we'd expect that number to move back up over time. Jed Kelly: Got it. And I think you said earlier that you're seeing pretty favorable CPAs. Is that being driven more by what your marketing team is doing, maybe around AI and certain investments? Or do you think some of your competitors might be focusing on other product launches coming up? Kyle Sauers: Yes. So it's a good question. I don't know that we've seen a big change in the competitive intensity for the marketing assets that we're going after. Obviously, any one competitor might ebb and flow with what they're doing. Could some of them be allocating marketing dollars someplace else, certainly towards new market launches and pulling away some place? I suppose that's possible. I don't think that's as much of it as it is. Our team is doing a great job. We continue to improve the player journey. So it's not just about getting people to show up to the app store. They got to download, they got to register, they got to go through KYC. It's got to be easy for them to get a deposit on the platform. So all of that, it seems so simple, but it's pretty complicated, and our team does a great job, and we're making it better and better. So there's a lot of different things involved. But I think probably the competitive intensity for marketing assets is not a big driver in all that. I think it's more about what we're doing. Operator: [Operator Instructions] Our next person to ask a question will come from the line of Zach Silverberg with Wells Fargo. Zachary Silverberg: Just one on Mexico. So there was an article that stated that a couple of your competitors had their gaming license blocked during the quarter. What are you seeing there post this event? And is it an opportunity to kind of take share from those operators? Richard Schwartz: Yes. Sure. Zach, yes, that 365 in [ Metanor ], the 2 of the operators that you're referencing, but they actually, I think, have their license closed earlier than this quarter. And so I think there are absence from the market, both were meaningful market share contenders. And so I think their exit from the markets certainly have helped us to acquire some customers from them that previously maybe weren't aware of our brand and they didn't know who we are. . Certainly, I think in both those cases, though, there are companies that are primarily, I think, stronger in sports. So what I said earlier about us being a casino-first operator still holds true. And we think competitively with an environment that we're continuing to kind of be able to grow our casino player volumes. And as we know, those players tend to generate a larger revenue per active user and ultimately, the type of player engaged, higher-level player engaged with the type of players that we like and are very strong at retaining. So we feel pretty strong about the market opportunity there, and it certainly has helped us to have those 2 operators out of the market. Zachary Silverberg: And just for my follow-up. [ Next ], in Colombia, excuse me, there's an election coming up in a few weeks. Is there anything you guys are looking out for there? And anything you guys are handicapping to the election in terms of the future outlook of the 16% consumption tax? Kyle Sauers: Yes. Thanks, Zach. Certainly, we're watching it very closely. There's the initial round here coming up in a few weeks, and then the final election will be in June. So we are watching it closely. We're not handicapping it necessarily. Certainly, there's an opportunity there. We talked earlier about the 16% tax, that it's -- there's a mandated constitutional review of the emergency decree that allow that tax to be put in place and then also a review of the tax itself. And then another opportunity for that to be relooked at would be the next administration that comes into office and how they view the emergency decree, assuming it doesn't get overruled, how they view that decree and the associated taxes. So potential opportunity for upside for us there. Operator: Our next question comes from the line of Joseph Stauff with Susquehanna. Joseph Stauff: Richard, I was wondering if you could comment on maybe the state of product parity for iCasino. I think it's fair to say for OSB, it everyone is sort of approaching some level of product parity versus each other. I'm wondering -- your observation, obviously, you've always been front-footed about product development. Have others caught up in terms of offering jackpots, offering bonus spins? What's your assessment of the industry today? Richard Schwartz: Well, it's a big question, Joe. I'll try to answer it efficiently with that. We continue to sort of lead away our opinion on creating innovative features. And while others are investing more resources the casino experience, largely, we've seen things that are very me too is what -- how I would describe it, where everyone kind of just copies each other. And if someone offers a free-to-play game as part of the promotion, when you first register every day, everyone does the same thing. People improve the lobby, everyone improves the lobby. Those are real simple things ultimately to improve upon, but they're still important and valuable, but I would say that it's sort of a mass mentality are sort of doing the same improvements in the same area. So I referenced the lobby, I referenced the free game, I referenced the jackpots. I think we were one of the first ones to have a site-wide jackpot across all of our products. Others are doing some jackpots that are site-wide, but our execution, I still think is more interesting for a player than the others are, and I won't get into the reasons why. But I think we have good insights into what values we're delivering and why we make the decisions that we do. I think what validating ultimately is the app scores in the store. We are the highest rated app in the store, a 4.9 out of the 5 being the highest level, which is rare to achieve from a casino app, largely because a large number of players are already going to -- you can't penalize them like a casino operator on the basis that they lose playing the -- after they may not feel like it was a experience that was positive for them, where it's not like a sportsbook app, primarily where the better makes, that's based on skill and ultimately doesn't really blame the operator if they get the outcome wrong, whereas in the casino world, it's a little bit different. So the fact that we have such a high score on the app, I think it's very validating to the quality of experience we offer. And as I've shared before, we've been building this technology since 2012, modernizing it along the way, constantly bringing new experience to players. So it's not just 1 or 2 things that we have built, but we've built dozens of features that are still unique to the industry. And it takes a long time to build it, and it's hard to build. Even if you know they're going to try to copy something, it's hard to get the copy to reflect the quality of experience that we have built. So we feel pretty strongly that we have those nice moats around our product experience in the casino space. And having said that, we're always pushing the limits and we're never going to be satisfied and we're constantly looking to improve. And we have lots of opportunities to get better, and that's what our team is focused on. Joseph Stauff: And do you think those higher app scores, is that a function of your retention engine and mechanics and capabilities? Or is it a variety of factors, including, say, product depth and so forth? Do you think the retention capabilities that you have really are, say, a difference maker versus, say, other iCasino products that are out there? Richard Schwartz: I think what's different about us or what's unique for us is from the very beginning from day 1 and when I started the business, the #1 goal was to retain customers. It was less about acquisition. It was more about how to deliver an experience that offers the same quality and quantity of high-quality games. But how can we create differentiation and experience that drives users to prefer to play with us over other apps they may be playing with? So ultimately, when you do little things right, you pay attention to the details and you get the customer service team doing a great job as our team does, combined with the innovative experience that's unique for the players. Ultimately, you encourage greater retention, which delivers the kind of results that we're seeing. So I think it's really just a matter of paying attention to details. They all matter. And as I said in the prepared remarks, every thing we do is systematic across all parts of the journey, and all the touch points where you interface with the customer matter. And if we are constantly improving each of one of those, paying attention to every detail along the way, you ultimately end up with experience to come together, and the players notice it. And we think that's a big part of why a large percentage of our players prefer to play with us, we believe, versus other apps for the also other accounts, but are probably playing at the same level that they play with us. Operator: [Operator Instructions] Our next question comes from the line of Chad Beynon with Macquarie. Chad Beynon: Wanted to ask about Virginia, given your current OSB license and the fact that Rush Street land-based gaming has a property there. From what we've heard, it sounds like there were a lot of constituents that were in favor. Obviously, it didn't get across the goal line. But wondering if you think the progress that was made there sets Virginia up for higher likelihood in '27? And if you guys would have interest if that opened from an iGaming standpoint? Richard Schwartz: Well, great. Thanks for asking that question because it definitely would be a very exciting market for us, and we are very interested in that opportunity. We remain focused on expanding online casino into a large number of states that have shown recent interest, but Virginia being a key example. We view Virginia as a real opportunity. It's encouraging the legislation progressed as far as it did this year, with versions passing both the Senate and the House. And so it's a market that we have -- we're working with -- collaborating with our peers. And it seems like a really exciting opportunity potentially for us in the next year. In addition, as we noted in our prepared remarks, we are advancing plans to bring our platform to Alberta. So we have plenty of exciting things happening in the next couple of months. But we are viewing Virginia in partnership with our -- the land-based property, Rivers Casino there was a great opportunity for us. Kyle Sauers: And maybe I would just add to that, Chad, just to think about the opportunity there, maybe not to put exact numbers around it, but not dissimilar in size from a Michigan. Unclear exactly how many licenses they'll be. But that's a market where we started off with mid-single-digit share, and we've grown it to high single-digit share over time. And we did that with a lot of brand awareness or any brand awareness when we launched and no access to a strong database of players. So we have some real advantages in Virginia that we haven't had in a lot of other markets. So it's very exciting for us as that moves along. Chad Beynon: Okay. Great. And then lastly -- and this is probably assumed based on your user growth that we've talked about throughout the call. But prediction markets. I guess, 1 of your -- 1 of the other digital operators said that CPAs had increased. They didn't grow users as much as you guys did. So is it safe to say that you're just not seeing any pressure -- or you're not seeing significant pressure from CPA standpoint or just from a user standpoint? And do you think that could potentially change as some of these production companies just develop their technology throughout the year? Kyle Sauers: Yes, I think it's fair to say that we haven't seen -- from a marketing asset, CPA, we haven't seen pressure from those entrants. I think a lot of that is that we're searching for different types of players, and we're searching for them in different places. So I don't think that's impacted our business. And certainly, you said it, but it's with our CPAs going down being the lowest they've been, that's probably a pretty good indication of that. Operator: Our last question comes from the line of David Katz with Jefferies. David Katz: I wanted to just finish off with a discussion on sort of flow-through and aspirational margins. Obviously, not in any kind of a time or guided way. The increase in guidance on the revenue side of $100 million and EBITDA around 20, just I think begs the question of where do you think an aspirational flow-through level could be? And do you have sort of margin targets out there in the future that you're able to talk about with us? Kyle Sauers: Yes. So on the longer-term margins, we still think that we can get to kind of low to mid-20%. And obviously, that means we're going to have some decent flow-through over the coming years. We need a couple more markets -- high casino markets in North America likely to get to that point and have them mature a little bit. On flow-through in general, we look at 2026, let's say, at the midpoint of our guide, flow-through is very solid at kind of mid-20%. A couple of things to keep in mind that because of the deposit tax and that associated bonusing going away in Colombia from last year, but with this new tax on revenue, which impacts our gross margins, we've got a bigger improvement in revenue than we do in operating margins in Colombia. So that impacts that metric a little bit. And then I think maybe you alluded to this, but adding Alberta to our guidance, both a little bit of revenue, but also all of the launch costs impacts that as well. We don't expect Alberta to be profitable in 2027. Having said all that, I'll also point out that we've -- we're always trying to consistently outperform our expectations. So we're going to continue to strive to do that. Operator: There are no further questions at this time. I will now turn the call back to Richard Schwartz for closing remarks. Richard Schwartz: Well, thank you for joining us today. We look forward to updating you on our progress when we share our second quarter results in the summer. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon, and welcome to the Werner Enterprises' 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 Mr. Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please go ahead, sir. Chris Neil: Good afternoon, everyone. Earlier today, we issued our earnings release with our first quarter results. The release and a supplemental presentation are available in the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay later today. Please see the disclosure statement on Slide 2 of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. On today's call with me are Derek Leathers, Chairman and CEO; and Chris Wikoff, Executive Vice President, CFO and Treasurer. I will now turn the call over to Derek. Derek Leathers: Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today as we cover our first quarter results and the state of the market. In summary, market fundamentals are improving, and we are seeing a positive trajectory in our own numbers, which we'll get into shortly. Throughout this extended freight downturn, we have taken measured steps to position Werner for profitable long-term growth through our operational excellence and our commitment to safety and service. Executing on these priorities, we have actively managed our portfolio to make the business more resilient, differentiated and optimized across market conditions. We are leaning further into dedicated and other specialized solutions, including Expedited and Cross-Border Mexico as well as asset-light offerings in Logistics. More specifically, in January, we expanded our Dedicated offering through the acquisition of FirstFleet, adding scale, density and exposure to more resilient customer verticals, including grocery and food and beverage. At the same time, we also restructured our One-Way business to create a more balanced and higher producing network that is now set to deliver improved profitability. And in Logistics, Intermodal and Final Mile are seeing strong momentum. As a result, Werner is better positioned to capitalize on an improved market. So far, the recovery in rates has been largely supply-driven as capacity continues to exit at an accelerated pace due to regulatory enforcement. As the supply and demand dynamic tightens, we are seeing rate lift and early positive momentum in the bid season. We expect pricing gains to continue with more meaningful improvement in the third and fourth quarters. Taken together, these actions, including our FirstFleet acquisition, One-Way restructuring and yield improvements have strengthened our business and provides a line of sight to earnings growth this year. Turning to Slide 5 to discuss our first quarter highlights. Since acquiring FirstFleet, we have taken a thoughtful but active approach to integration, prioritizing continuity while moving with intent to enhance value. We are retaining the majority of FirstFleet's management team and all drivers while aligning around a shared culture of safety, service and innovation. FirstFleet customers have been receptive with a 98% renewal rate across 2/3 of the portfolio addressed to date. We have strong visibility into the remaining 1/3 and expect a similarly strong retention. Our integration of FirstFleet is progressing ahead of schedule. At 3 months end, we have already realized over $1 million in savings and have implemented actions representing over $5 million of our $6 million synergy target for the current year. We remain confident in capturing the full $18 million in cost synergies mid next year, which we expect will improve FirstFleet's operating margin by approximately 300 basis points. We are already seeing revenue synergies, including accelerated fleet start-ups, project opportunities and increased backhaul. While still early, these efforts are enhancing customer value and improving returns. Top line metrics show positive inflection with strong improvement in Dedicated revenue per truck per week and One-Way Trucking revenues per total mile. Contract renewals are progressing well. Customers are accepting higher rates and supporting adjustments where needed to dedicated driver pay. Our dedicated customer retention, including FirstFleet, has climbed to 95% closer to our historical trends. The result of our One-Way restructuring is showing early gains with first quarter miles per truck up 6% over prior year despite significant disruptions from winter storms and revenues per total mile increasing 3.6%, our strongest pricing inflection in over 3 years. Strong execution of these initiatives led to One-Way revenue per truck per week increasing 9.6%, reflecting the combined effect of our restructuring and pricing actions. Pricing in the quarter departed from seasonal trends as Q1 rates typically declined sequentially after peak season. However, rates were flat sequentially, a pattern we have not seen in the last 10 years. One-Way Truckload revenue per total mile benefited from a smaller, more targeted fleet, intentionality to replace less profitable freight, stronger spot rates and contractual rate increases secured through bid season. In Logistics, higher spot rates drove an increase in purchase transportation costs and pressured gross margins in truckload brokerage. The margin pressure is mostly transitory as contract rates are reset, and we saw improvement throughout the first quarter. We expect continued improvement in truckload brokerage margins as bid season progresses, along with widespread implementation of higher contract rates. And lastly, I want to highlight our team's relentless focus on safety and cost discipline. In Q1, our DOT preventable accident rate per million miles was down an impressive 45% year-over-year. Excluding FirstFleet, insurance and claims expense was at its lowest quarterly level in over a year. We also continue to lower our cost to serve through technology and disciplined execution. Total operating expenses, excluding gains, insurance, fuel and purchase transportation, were down by 5% year-over-year, and our Logistics division serves as another proof point of tech-enabled savings. Truckload brokerage operating expenses declined over 25% for the 2 years following the move to EDGE platform and with relatively stable volumes. Our asset business is now in focus. Building load assignment, equipment management and planning capabilities takes time but is ramping. We expect all aspects of asset execution to be functional later this year. Moving to Slide 6, our plan to position the business for long-term growth and generate earnings power remains focused on 3 overarching priorities: First, driving growth in core business, which includes growing our Dedicated fleet, increasing One-Way production and rates and expanding TTS and Logistics adjusted operating income margin. Despite Q1 typically being the most challenging in the year, progress continues on these fronts. Our Dedicated fleet is growing with end-of-period tractors up 46% year-over-year with the addition of FirstFleet. Within our organic portfolio, we've increased exposure to new verticals like technology and aftermarket auto parts. Our pipeline of opportunities coming out of Q1 is strong. On a year-over-year basis, Dedicated revenues per truck per week increased steadily, driven by the value customers place on the high service and reliability and scale as capacity tightens. In One-Way Truckload, we realized significant improvement in miles per truck. We are securing mid-single-digit increases in One-Way bids. Spot rates are higher, and we can be more selective with freight choices given a better supply-demand backdrop. And Truckload Logistics margins improved every month in the quarter as contract rates reset and exposure grew to higher spot market pricing. Second is driving operational excellence, which we are executing on by maintaining a resolute focus on safety and service, continue to advance our technology road map, embedding cost discipline throughout the organization and realizing efficiencies and synergies from acquisitions. We've taken out approximately $150 million of cost over 3 years and continue advancing our technology transformation. For some perspective on how our technology investments are beginning to translate into tangible results. We've centralized all loads into a single unified platform, achieving full network visibility, which is enhancing our ability to optimize, balance, improve yield and reduce cost to serve. This integrated foundation has been a key enabler of our One-Way restructuring efforts over the past 2 quarters and positions us for continued margin expansion. Building on that foundation, we are increasingly leveraging AI and automation to drive operational excellence across the network. This includes improving load planning and network design, increasing the speed and quality of tender acceptance and automating routine workflows that historically required manual intervention. We're also seeing benefits in area like maintenance, coordination and back-office execution where automation is reducing downtime, improving asset utilization and allowing our teams to focus on higher-value activities. From a customer and safety standpoint, we are deploying real-time technology to provide immediate visibility into events such as weather-related shutdowns. While these actions can temporarily impact productivity, they enhance safety outcomes and help mitigate longer-term risk and insurance costs. Importantly, our approach to AI is disciplined and ROI focused. We are not pursuing technology for its own sake. We are prioritizing use cases that solve core operational challenges, improve returns and scale across the enterprise, supported by a strong governance framework. While AI adoption has been more visible in asset-light brokerages, Werner stands out as a second wave winner among asset carriers given our significant technology transformation and a unified EDGE TMS platform. We're rolling out AI in phases, driving efficiency today and enabling growth over time. Later, Chris will provide further details on our final priority of driving capital efficiency. Cash flow for the quarter was up meaningfully year-over-year, and our capital allocation remains focused on fueling growth and shareholder value. Before Chris discusses our financial results in more detail, let's move to Slide 7 to provide our current market outlook. Capacity exits continue at an accelerated pace, driven by regulatory enforcement and carrier bankruptcies. Higher fuel prices is another more recent headwind for struggling carriers and long-haul truckload employment has fallen below pre-COVID levels. As a result, further capacity attrition is likely. Defying typical seasonality, spot rates remained elevated in Q1 and throughout April. We expect seasonal improvement throughout the year as capacity attrition continues. With rate lift currently more supply side driven, any demand improvement is likely to trigger even greater market momentum. While household balance sheets remain strong, the consumer continued to face a mix of puts and takes, including tax refunds, fuel prices and interest rates. Regardless, the consumer continues to remain selective yet resilient, which bodes well for our mix of retail being more concentrated in nondiscretionary items and discount and value retailers. Lean retail inventories position demand to play a larger role early in the recovery. While trade policy may impact restocking timing, nondiscretionary replenishment provides a buffer against near-term volatility. We expect used truck values to improve later in the year. Increased supply from enforcement is likely offset by OEM manufacturing constraints, aging fleets and higher-priced 2027 engines, supporting demand for high-quality used equipment. With respect to driver availability, we anticipate a tightening market for high-quality drivers. Werner is well positioned as a preferred employer. Our Dedicated division offers predictable roles with frequent home time that attracts top-tier drivers. With that, I'll turn it over to Chris to discuss our first quarter results in more detail. Christopher Wikoff: Thank you, Derek, and good afternoon, everyone. We'll continue on Slide 9. All performance comparisons here are year-over-year unless otherwise noted. First quarter revenues totaled $809 million, up 14%. Adjusted operating income was $11.9 million and adjusted operating margin was 1.5%. Adjusted EPS was $0.02. Adverse weather early in the quarter and rapidly increasing fuel prices in March negatively impacted EPS by approximately $0.05. Consolidated gains on sale of property and equipment totaled $3.8 million, up from $2.8 million in the prior year period. Turning to Slide 10. Truckload Transportation Services total revenue for the quarter was $594 million, up 18%. Revenues net of fuel surcharges increased to 16% year-over-year at $516 million. TTS adjusted operating income was $14.8 million. Adjusted operating margin net of fuel was 2.9%, an increase of 250 basis points. The year-over-year improvement was driven from lower insurance and claims expense for our legacy business, accretive results from the addition of FirstFleet, profitable improvement in One-Way Truckload and higher gains from the sale of used equipment. Our fleet metrics are on Slide 11. TTS average trucks totaled 8,454 for the quarter, a 14% increase. Note that FirstFleet trucks were in the average for 2/3 of the quarter as the transaction closed at the end of January. The TTS fleet ended the quarter at 9,040 trucks, up 1,940 or 27% sequentially. Truck additions from FirstFleet were partially offset by normal seasonal declines in Dedicated and fewer One-Way trucks, which we expected from our restructuring efforts. Our One-Way average fleet size declined 19%, while total miles were down 15% as miles per truck improved 6%. Within TTS and our Dedicated business for the first quarter, trucking revenue net of fuel was $372 million, up $93 million or 33%. Dedicated represented 73% of TTS trucking revenues, up from 64% a year ago. At quarter end, the Dedicated fleet was up 2,230 trucks from where we started the year, a 46% increase from year-end with the addition of FirstFleet. Dedicated average trucks increased 32% year-over-year and 28% sequentially, with FirstFleet contributing for only 2/3 of the quarter. We experienced normal seasonal sequential change in the Dedicated fleet. Dedicated represented 78% of the TTS trucks at quarter end. Dedicated revenue per truck per week rose 0.8% this quarter, though impacted by the addition of FirstFleet in the mix. On a stand-alone basis, Werner's legacy Dedicated fleet delivered a 1.8% increase, while FirstFleet growth and revenue per truck per week exceeded 4%, therefore, on a pro forma basis, with FirstFleet included in the prior year baseline, growth would have been approximately 200 basis points higher or near 3%, reflecting solid pricing momentum across the combined dedicated fleet. In our One-Way business for the first quarter, trucking revenue net of fuel was $136 million, a decrease of 12%. Average trucks declined 19% to 2,122 trucks. Sequentially, the fleet size contracted 11% and was down 264 trucks. Revenue per truck per week increased 9.6% due to higher rates and better production. Miles per truck increased 5.7% despite winter weather and revenues per total mile increased 3.6% and empty miles decreased 40 basis points year-over-year and 60 basis points sequentially. As a reminder, the strategic restructuring of our One-Way Truckload business was designed to enhance profitability by maximizing production and mitigating unprofitable freight. Our actions are complete, and One-Way operating margin improved in the quarter. We expect further benefit as we realize a full quarter of these changes in Q2. Logistics results are shown on Slide 12. In the first quarter, Logistics revenue was $196 million, representing 24% of total first quarter revenues. Revenues were flat year-over-year but declined 6% sequentially as we focused on yield management in a margin pressured environment where purchase transportation costs accelerated more rapidly than sell-side rate renewals with our customers. Truckload Logistics revenues, which represented 72% of total logistics revenues decreased 4% on 9% lower shipments, partially offset by 5% higher revenue per load. The revenue per load improvement was from disciplined pricing and load acceptance, but more than offset by higher purchase transportation costs, reducing gross margin by 90 basis points. Intermodal revenues accounting for roughly 17% of the Logistics segment rose by 18%, driven by a 22% increase in load volume, partially offset by a 3% decline in revenue per load. Final Mile revenues, which comprise the remaining 11% of the segment increased 8% year-over-year. Logistics adjusted operating margin was negative 0.4%, a 70 basis point decrease driven by lower volumes and gross margin pressure, which we expect to improve going forward as we adjust sell-side rates. Let's review our cash flow and liquidity on Slide 13. We ended the first quarter with $62 million in cash and cash equivalents. Operating cash flow was $89 million, up over 200% year-over-year and up over 40% sequentially. Similar to a low CapEx quarter to begin 2025, our first quarter CapEx was a modest $2 million. Net CapEx for the trailing 4 quarters is 5.6% of revenue. First quarter free cash flow was $87 million or 10.8% of total revenues. Total liquidity at quarter end was $513 million, including $62 million of cash on hand and $451 million of combined availability under our credit facilities. We ended the quarter with $932 million in debt, consisting of $54 million in assumed low-cost capital leases from the FirstFleet acquisition and $878 million on our credit facilities. Debt increased $180 million sequentially as a result of the acquisition and is up $292 million from a year earlier. Net debt increased $282 million year-over-year. Covenant defined pro forma net leverage at the end of the quarter was 2x, including pro forma synergies and trailing 12 months of FirstFleet results. We continue to have a strong balance sheet, access to low-cost capital and no near-term maturities in our credit facilities. Let's turn to Slide 14. When it comes to broad capital allocation decisions, we will remain balanced over the long term, strategically investing in the business, returning capital to shareholders and maintaining appropriate leverage. With the acquisition of FirstFleet, our focus in 2026 will be on integrating the business, gaining momentum on realizing $18 million of targeted synergies and enhancing value. On Slide 15, let's review our guidance for the year, which includes FirstFleet. We are reaffirming our full year average truck fleet guidance range of up 23% to 28%. Availability of quality drivers has been an increasing challenge more recently as a symptom of an improving macro environment. The dedicated pipeline is strong, and we expect TTS truck growth as the year progresses. Our full year 2026 net CapEx guidance range remains between $185 million and $225 million. Dedicated revenue per truck per week increased 0.8% year-over-year and was closer to 3% on a pro forma basis. We are updating our full year guidance from a range of down 1% to up 2% to be flat to up 3%. We have been successful in securing low to mid-single-digit increases in contract renewals for both our legacy Dedicated fleet and the FirstFleet business. One-Way Truckload revenue per total mile guidance for the second quarter is up 1% to 4%, muted by the ongoing mix change following the restructuring completed late in the first quarter. Our effective tax rate in the first quarter was 24.9% before discrete items. We are maintaining our full year 2026 guidance range of between 25.5% and 26.5%. The average age of our truck and trailer fleet at the end of first quarter was 2.9 and 6.3 years, respectively. Regarding other modeling assumptions. We continue to expect the net interest expense this year will be between $40 million and $45 million. We anticipate stable used equipment demand and resale values through 2026, given OEM production constraints and the evolving regulatory backdrop, that will be an incentive towards high-quality used assets. Our anticipated gains on sale of used equipment and revenue-generating assets for the year remains in the range of $8 million to $18 million. With that, I'll turn it back to Derek. Derek Leathers: Thank you, Chris. We believe Werner is better positioned today than we have been in prior cycles. We have used this downturn to make the business more resilient, improve the quality of our portfolio and strengthen our ability to convert an improving market into stronger financial performance. We are encouraged by the progress we are making across the business, including Dedicated growth, FirstFleet integration, One-Way improvement, Logistics margin recovery, technology implementation and continued cost discipline. While there is still work ahead, we believe the foundation is in place for earnings improvement to build as the year progresses. With that, let's open it up for questions. Operator: [Operator Instructions] And today's first question will come from Chris Wetherbee with Wells Fargo. Christian Wetherbee: I guess maybe could we just start, Derek, just on sort of the take on the market broadly. I know you've given us some perspective here, but I know the business is evolving a little bit more dedicated, a little less One-Way. But as we think about sort of generally speaking, bid season, what do you think sort of the pricing environment is offering now as you look kind of across both pieces of the business? Derek Leathers: Yes, Chris. Obviously, the 2 parts of the business function a little differently. But if I just start at the macro, we're seeing ongoing largely supply-driven constraints that are continuing to gain momentum as we get deeper into the year. Coming into the early part of the quarter, clearly, it was a bit of a bit abnormal that spot rates held up as well as they did coming out of peak season. They've grown from there. I know there was a lot of noise about what was weather-related versus other. And I think the timing and duration has shown that it was well more than weather. Those capacity exits are only ramping at this point, both through enforcement as well as still some final fallout, if you will, from the freight recession we've lived in, in the last couple of years, all of which sets us up during bid season. On the One-Way side, we've talked about mid-single-digit rate increases early in the Q1 bid season. Clearly, momentum is growing from there. It's hard to be specific because every customer situation is different and how it fits into our new restructured network lands differently. But the expectation would be further strengthening from here as we look forward on One-Way. In Dedicated, that's the stable part of the business. It held up well during the downturn. It has lots of upside as the market continues to strengthen. I would start first with the strength of the pipeline of new opportunities, which leads to our ability to be very selective to bring the right opportunity in the right geography at the right price. On incumbent business, renewal rates are increasing rapidly, and those are coming with price relief. Those customers also now probably more so than before in a tight market, really covet the service levels and the confidence that comes with Dedicated capacity. So we're going to continue to push on the Dedicated side to get both the price relief we need as well as increased selectivity in what is otherwise a very robust pipeline. So as I look out, I think the builds from here and the bid season with the quarter of the business basically repriced in the first quarter, is still ongoing and Q2 is the largest pricing activity of the year. And a lot of that will obviously implement late Q2 and into Q3, but I'm optimistic from where we sit today. Christian Wetherbee: That's great. And then maybe just one quick follow-up on FirstFleet. Obviously, now you have it in beginning to roll through the numbers. Can you give us a sense of how the integration process has gone and your kind of thoughts around what we might see from a contribution perspective, whether it be on an earnings basis or a profit basis, margin basis as we think about the rest of 2026? Derek Leathers: Yes, I'll probably keep part of it somewhat general. But on the integration, I'll start with when and outlook at the scoreboard. We're excited about the fact that we're ahead of schedule on the integration. We're ahead of schedule on the synergies. We've implemented and realized $1 million of the $6 million in year synergies already. We've identified and actioned $5 million of the $6 million. Both of those numbers are ahead of schedule. We've confirmed and revalidated our $18 million assumption, and those are all just cost synergies. And so that's going well. Culturally, probably going better than that. The team is who we thought they are. The customer base is who we believe they to be in terms of both the potential for cross-selling as well as acceptance of Werner as part of the solution. So we're going to continue to stay close to it. I'm excited at this point with how it's gone thus far. And the renewal rate is probably one of the best scoreboard metrics to point to with 2/3 of the 2026 renewals already being in the books with a 98% retention rate. I think that speaks to the value that the customers also see with a broadened portfolio brought to bear as well as the longevity and the quality of FirstFleet and the underlying asset it represents. Operator: The next question will come from Ari Rosa with Citigroup. Ariel Rosa: Derek, I was hoping just to start, you could give us some thoughts on the ability of Dedicated to capture upside in the cycle inflection. I know you have long-term relationships with a lot of your customers. Does that mitigate to any extent the ability or the desire to kind of push rates when we see rates -- spot rates comping up double digits, but you mentioned some of the contract rate increases being a little bit more modest than that. Is that intentional? Or is that just a function of we're early in the bid cycle and we could see upside from here? Derek Leathers: No, I think a better way to think about it is, Ari, is that Dedicated, it is really a truer version of a partnership. It's us working with the customer collectively to move service-sensitive goods at scale with pretty high driver involvement. You put all that into the mix. And what it really means is that the way we achieve the upside in a tightening cycle just takes a little bit different form. As they continue to grow and the market is tighter than it was a year ago, we see Dedicated fleet additions across multiple fleets within Dedicated. Those fleet additions come at a higher contribution margin than the existing or incumbent trucks that are already in place. Fixed costs are largely already spoken for, and we're just simply able to add truck count. So that doesn't show up in rate per mile, but it certainly shows up in profitability. We're also able to increase backhaul and be able to fill more empty lanes, and that benefits both the customer and us. So everybody wins, but we are able to bring more money to the bottom line. And then selectivity at the front door. I talked about that a couple of times now, but extremely robust Dedicated pipeline right now. And so our ability to be selective and make sure we're looking for kind of overlapping synergies with existing fleet, strong driver domicile areas, places where we can share assets and do so in efficient and creative ways where the customer benefits, but so do we. All of that only happens with the long-standing relationships that come with Dedicated. And then with Firstfleet, in particular, it just created a significant amount more density across certain geographies in our network that allows everything to kind of have a bit of a multiplier effect. So we're excited about the upside. We've proven it in other up cycles that Dedicated wasn't the anchor that people believed it to be. We're going to have to go out and prove it again. And while I understand the concerns, we just simply view it as a different method by which we need to leverage the up cycle, but the outcomes have the ability to be similar. Ariel Rosa: I appreciate that, Derek. So just as a follow-up and kind of in line with that comment, is there a good way to think about what the upside could look like? Or maybe you could speak to how we should think about margin potential at mid-cycle? Derek Leathers: Yes, sure. I mean we've talked for some time that even at the depths of the freight recession, Dedicated still remained a high single-digit type margin profile. It won't be thought long before we're back into the double-digit range. And that's really where Dedicated needs to be based on the capital intensity, the service expectations, all of the work and design that goes into building these fleets. And mid-cycle, you can expect that, that's going to look obviously more like mid-double digits. But a lot of work to do to get there. And again, with the integration of FirstFleet, their margin profile was, call it, roughly half of ours, but the synergy targets that were identified closes a large portion of that gap, and that's before we start realizing revenue synergies and cross-selling opportunities. So there's a lot to do, but we know where the bodies are buried. We know what the work is that needs to be done, and we're actively executing on it right now. Operator: Your next question will come from Daniel Moore with Baird. Daniel Moore: Pretty solid quarter, particularly given weather and fuel. I just wanted to clarify, Chris, I think you said both weather and fuel were about a $0.05 impact. That's my first question. And then I was hoping to get a little bit more color just on the pace at which the book renews over the course of the year. Derek, you mentioned, I think, 25% in the first quarter. The second quarter was the heaviest quarter, but maybe if you could provide a little more context on that. And then just recognizing that in a normal world from April to June, we do see, and I think we're all hoping and expecting that we'll see some seasonality this year relative to last year, which was largely absent. What do you think that means for rates in 2Q and 3Q? That's kind of it. I appreciate it. Christopher Wikoff: Dan, this is Chris. A lot packed in there. Let me just first start with fuel and weather. You're correct, approximately $0.05 the majority of that being from weather, call it, $0.03 to $0.04. That's really based on productivity that we lost during that storm. When you think about winter storms that we had in the same period, but a year ago, we would call this year just at the initial impact being much greater. I think we mentioned on our last call that at one point in time, we had 50% of the fleet that was parked and off the road. That was pretty significant, not something that we've really seen before in our history. Now the duration of the storm was shorter. So we were able to get those trucks back on the road and moving more quickly maybe than we could prior year. So that was about $0.03 to $0.04 relative to weather and then call it $0.01 to $0.02 from the fuel impact. As you know, we can pass a very high degree of fuel volatility on to the customer through the fuel surcharge. So it's really more about timing and volatility that is within any given week given that we have those weekly Department of Energy resets. So some short-term pain, not necessarily expecting that in the second quarter, more of a cash flow impact. Obviously, the lag there to collect on that fuel surcharge. I would just note that as we grow in more of a Dedicated mix where those are round trip paid miles, just as that mix grows, there's less exposure to that fuel volatility. Chris Neil: And Dan, in terms of effective dates, from a One-Way perspective, I think Derek referenced about 1/4 of the One-Way business was repriced and effective, I should say, was effective in the first quarter. Most of that, though, is late in the quarter. We have just over 1/3 of that One-Way business then that comes in, in the second quarter. Another fourth in the third quarter and the remainder in the fourth quarter. In terms of Dedicated, that's a little bit more even throughout the quarter, at least our legacy fleet. From a first fleet perspective, they had a little bit more in the first half of the year. And as we said, we're working through that and have had really good results with retention so far. In terms of seasonality with spot rates, clearly, spot rates are elevated. They've been elevated. They did not act seasonally at all through the first quarter and have remained elevated here in April. And I think our expectation, at least our base case at this point would be that they act seasonally here now through the rest of the year. So we're not expecting a decline. You have road check week that's coming up here in a couple of weeks, which typically provides a bounce. And so our expectation would be that spot rates would continue to lead contract rates. There continue to be good opportunities to take -- to capitalize on those freight choices and those freight options while continuing to service our customers with commitments that we've made. Operator: The next question will come from Jordan Alliger with Goldman Sachs. Jordan Alliger: I just wanted to come back to the Dedicated for a second. I think you had mentioned that the pipeline is pretty strong. I wanted to see if we could go a little bit more there. I mean, are you seeing the issues with truckload capacity, driver concerns, et cetera, pushing up that pipeline or quicker closing of that pipeline? Like there seem to be an acceleration at this point in terms of those trends? Derek Leathers: Yes, Jordan, I'll take that. I mean it's a little bit of both, but I do want to point out that one thing we're not going to do is lose our discipline on what really is Dedicated. So you see a lot of capacity Dedicated fleet proposals hitting the market during times like this, where they're really just a continuous move over-the-road type fleet that's not actually dedicated closed loop, short-haul, return to home. And we're going to be very selective on that. If we were to entertain some of those opportunities, we'll largely run those in our One-Way network versus putting those into Dedicated. But that's certainly part of it. Quicker to close for sure, when you get into a tighter market, the ability to implement and for somebody to be willing to make a change to secure a portion of their supply chain in a high service, high capability kind of backdrop is something that they're a lot more open and excited to. And so we -- I think it's a little bit of both of those things. A lot of it is just we've been building this pipeline for some time. We've done some reorganization within the sales force. We've got some new leadership involved as well. And all of that is kind of coming to fruition. And so I think there's a flight to quality, which is part of it. I think our bigger density with the acquisition of FirstFleet and the larger overall scale of our presence out there in the market is certainly part of it. So it's a long list of things, but the encouraging part really is just the size and scale of the opportunities in front of us and our ability to make sure that we're picking where we can win, where we know we can serve, where we know both us and the customer are going to be excited about the outcome and the ability to improve the financial state along the way. Operator: The next question will come from Scott Group with Wolfe Research. Scott Group: So rev per mile was up 3.6% in Q1. Your guide 1% to 4% for the quarter. So for second quarter despite pricing accelerating. I'm just -- I want to understand that a little bit more. Is this just some of the mix changes with the restructuring? And so is the offset maybe lower rev per mile, but a lot higher miles? I don't know, maybe rev per truck is the right way to think about it, if you have any sort of thoughts or color. Derek Leathers: Yes, Scott, the short answer is you're spot on. That's exactly what it is. As part of the restructuring, as part of the redesign of the One-Way network, there's a pretty significant mix change going on. There's a lot of short-haul congested type loads that were taking place in the network that are not part of the mix anymore when you do a year-over-year comp. And so that's diluting, if you will, the impact of the actual underlying rate increases. There's no other story there that's really it in its totality. Mid-single digits is what we were seeing in Q1. That needle being pushed higher as we get into Q2. But we really had to do some digging and some analysis to understand the impact of mix, and that certainly plays a role in it. So I believe you're thinking about it the right way. Chris Neil: Scott, I would add on to that, that our length of haul did increase almost 6%. So that's reflective of the mix change that Derek mentioned. And then to your point, looking at both rates and miles from a revenue per truck basis in One-Way, a 9.6% increase year-over-year, fairly significant and reflective of the efforts there. Christopher Wikoff: And not to pile on, Scott. But I would just add also to that, that fundamentally, we have talked several times about the One-Way restructuring all being aimed towards profitability improvement. We did see even in a seasonally low quarter with winter storm distractions, we did see profitability improvement in One-Way as a result of these actions, which we didn't get the full quarter benefit from. Scott Group: Yes. So maybe to that point, we've got the full quarter coming of that benefit in Q2, pricing is going up, full quarter FirstFleet. I think like in a world where rates are improving, you typically see, I don't know, 2 to 3 points of margin improvement 1Q to 2Q. Could it be better than that? I mean, I guess, it feels like we should be on track for a sub-95 OR in Q2? And I don't know -- I know you don't like to give a lot of guidance, but do you think this sets us up to get back towards like a low 90s OR by the end of the year? Christopher Wikoff: So you're right in terms of we won't get too specific in guiding you on a quarterly basis, Scott. But you're correct on some of those tailwinds and those things that would contribute to second quarter relative to first quarter. So full quarter of first fleet accretion and benefit, full quarter of those one-way restructuring benefits, along with rate lift from yield management, renewals, higher spot exposure and the like. Derek Leathers: Yes. We just balance that with the reality, Scott, that we still have a conflict in Iran. We still have -- we're tweet away from a new tariff potentially. And so there's certainly some disruptions that are out there on the horizon that cause us to have some pause. But from a macro perspective, big picture, there's certainly some tail -- there's wind in the sail right now, and our job is to go out and execute against that. Operator: The next question will come from Jason Seidl with Cowen. Jason Seidl: A couple of quick things. One, I wanted to sort of touch base on the comment you made in the presentation on driver availability. What are your thoughts on when we might potentially see driver pay hikes this year? And do you think they'll be sort of within more normal seasonal trends or might be above seasonal trends sort of given the tightness in the marketplace? And then maybe you can provide some color on the brokerage side of the business. Obviously, Q1 provided a squeeze with the way spot rates were going. I wanted to know how we should think about margins on that segment going forward. Derek Leathers: Yes, Jason. So on the driver side, a couple of notes there. With 78% of our trucks in Dedicated, it's a great starting place to be when you think about a driver market that's clearly tightening. Those are the best jobs for drivers to get. They're getting them home nightly, weekly, multiple times a week, depending on the fleet. Pay in those jobs is directly built and reflective of the work involved. And so we have a really good feel on what it takes for a driver to stay in one of those fleets. And where there's a gap or where there's more tightness in a particular geography, it's a one-on-one conversation with the customer about essentially their drivers on their fleet. And so the ability to get rewarded from the customer in order to make sure all the trucks are seated, while never easy, is certainly a very understood fact, and it's something that we've worked through already on several accounts within Dedicated this year, and we'll continue to work with others as we go forward. You couple that with the fact that we have our own integrated school network, providing very high-quality drivers into the fleet on a weekly basis. It puts us in a better position from a relief valve perspective. And then a robust experience hire program here at Werner. We're seeing application counts go up as the tightening of this market takes place. One of the underlying realities is because it's supply-driven, it's tightening through both -- it's tightening through enforcement issues, but also financial outcomes. And so there's a lot of struggling fleets out there still that really couldn't quite get all the way through this dark period. And so those drivers are looking for safe havens in places where they know their [ checkle ] cash. As we go forward, we will be selective. We will look at it very carefully and make decisions where we believe that investment is the right move to make. But I'm pretty proud overall of where our driver pay stands today. We've got a really good, strong group of tenured drivers, both at Werner and FirstFleet. Combined, we have over 1,000 accident-free million-mile drivers going down the road on any given day and over 2,500 drivers between our 2 fleets that have over 10 years' experience at either FirstFleet or Werner. So there's a good stable middle to the fleet composition. But we'll stay close to it. I think we're in a better position than most. And as the market continues to evolve, I will be all for a tighter driver market going forward. If that's the case, it really sets us up to provide even more upside opportunity through the cycle. Jason Seidl: Makes sense. On the broker side? Christopher Wikoff: I think... Derek Leathers: The brokerage side, yes, I mean, that's a story that I think has been well told already by many. But clearly, Q1 is an inflection quarter. There's buy-side pressure out there as this enforcement continues to take hold. And although we don't broker loads to the types of carriers that are faced with a lot of this enforcement action, it's still an open marketplace. And so everybody has got more choices and more options. Pricing has driven up. And so we saw some margin compression. I'm proud of the cost reduction work we've done, which helped mitigate a lot of that, what would have otherwise been kind of worse news. And we're going to continue to look for productivity gains and cost enhancements throughout our logistics business. But most importantly, we're going to be actively resetting those sell-side prices as we go forward. Our spot exposure will grow over the course of the year as will the resetting contract pricing that too will move up. And you saw that in Q1 with a 5% increase in revenue per load across logistics, and we'll continue to work that as we go forward. Operator: The next question will come from Ken Hoexter with Bank of America. Ken Hoexter: So you noted some pricing actions that you were taking. Derek, I just maybe just clarify a little bit in terms of -- are you -- I want to understand your answer to Ari's question before. Are you shifting how you lock in the dedicated contracts? Are you changing terms? I just want to understand how you're shifting that. And then my question is on -- given the software you were talking about, should we see empty miles shrink? Is that not a factor for dedicated versus over the road? Or what does it allow you to address in either the cost or efficiency gains on the network going forward? Derek Leathers: Sure, Ken. Yes, in Dedicated, despite the fact they're multiyear contracts, we have indexes and various functions by which price can be raised on a yearly basis. But outside of that, at any given time, just even with multiyear contracts, you've got large swaths of Dedicated coming up for renewal. And as we're renewing those fleets, we're having robust conversations with the customers about the state of the industry and what's happening out there with capacity. And we're able to reset those -- the price components at that time. As it relates to the other mechanism or lever to pull, which I talked about, which was incremental trucks being added into those fleets, it's not that they're necessarily priced at a different rate. They just have a different cost because a lot of the original fixed cost of setting that fleet up is already in place. So they have incremental margin contribution. And to your empty miles question, clearly, there's a backhaul opportunity in front of us. that was much more challenged a year ago, not just in rate on every one of the backhauls you haul, it will now be at a higher price number, but also the frequency by which you can fill backhaul lanes in a market that's more tight, it allows you to eliminate empty miles and really with the revenue share program benefit both the customer and our bottom line. So it's kind of a good news item all the way across, and there's no signs on the horizon to point back to some of the prior questions we received that normal seasonality isn't around the corner. And if so, the market only further tightens from here. Ken Hoexter: Yes. And does it allow you to address the other costs and efficiency? Like is it -- you talked about the synergy gains. How about the costs that you can take advantage of in your own network? Derek Leathers: Well, clearly, part of the synergy gains when we standalone or we give stand-alone first fleet numbers, those are what we think we can do there relative to the increased density, better ordering, better truck, trailer, tire purchasing, fuel, et cetera. But there are synergies on our side, too. I mean -- and those are more just really reaping the same benefit of that additional density and frankly, larger purchasing power across the entire fleet. So yes, there's opportunities to continue to mitigate costs, but it's still an inflationary backdrop overall. I mean the macro is still inflationary. And what we have to do is continue to work as we go forward to mitigate as much as that as possible by finding and extracting more OpEx savings through our tech journey increasing productivity as we now have all of the freight into one visible network. And we're able to, for the first time, really start contemplating asset sharing and things in ways that we couldn't do previously. Now that's early innings. We've got some work to do, but that is a major part of the 2026 road map. Operator: The next question will come from Richa Harnain with Deutsche Bank. Richa Talwar: So Derek, I wanted to get your perspective on where you think we are in terms of overall capacity attrition and due to better enforcement that's occurring, you mentioned also just the prolonged freight recession pushing capacity out. Maybe diesel prices, too, have talked to you all about that. You're making it difficult for the smaller carrier to compete. Do you think we're still in the early innings of capacity cleanup? Or do you think there's a lot more to come? And how do you get comfortable that these capacity declines are stickier as rates continue to improve, maybe we see more capacity creep? And then Derek, you also mentioned a lot of work needs to be done to get back to that double-digit margin range for Dedicated. Is it really just rate repair that's the lion's share of that? Or is there more you and the team need to do or maybe the market needs to give you that's better demand to get you back to that sort of level? Derek Leathers: Thank you, Richa. Really good questions. On the -- I guess I'll start maybe in reverse order. On the Dedicated front, I don't know that it's particularly difficult. It's just a process that takes some time. Again, we're not far off from those type of numbers as we sit today. We're getting increases in Dedicated. We're seeing the ability to have higher selectivity in new fleets entering the market. So all of those things are really setting up well for us to be able to kind of grind it out, if you will. It's not going to be an aha moment. It's going to be more everyday execution, everyday focus, making sure that we keep the truck seated and that we exceed the customers' expectations. As it relates to the -- where we at on the capacity attrition, obviously, it's hard to have a perfect crystal ball, but I will say this, I see no slowdown in the enforcement actions. And if anything, there seems to be sort of a drumbeat of increased face and increased understanding of how widespread some of the coloring outside the lines really was. And so as we track a lot of things, one thing I would point you to is long-haul trucking employment data would show that it's now below pre-COVID levels for the first time and actually all the way back to 2017 type levels. That's an interesting stat just to keep an eye on and for us to kind of monitor. We know enforcement started with really kind of muscling it at the scales, at the officer level. And now it's taken a more tech-enabled approach to looking and scanning for things that look to be inappropriate. It's also gotten wider. And so as they expand enforcement to include schools, to include the actual licensing process as they expanded to now even this week, they've rolled out some more increased border enforcement relative to B1 cabotage issue. And again, that's early innings. So I think there's a lot more where that came from. And yet, we have a macro backdrop where the consumer is more resilient right now than maybe I would have expected at this point. There's some potential in the back half, we see some interest rate reductions. We've got residential housing still kind of on the sideline mostly. But at some point, it's got to pop if we see some interest rate reductions. So the demand side of the equation still looks to be in a good place. And our portfolio mix is more nondiscretionary than it's ever been with the acquisition of FirstFleet. So it is all kind of need to have and need to have now type stuff that we haul predominantly across the portfolio and often in the discount end of the spectrum. And so all that positioning, I think, looks pretty good. And if we see some normal seasonality and demand inflection, I think it just adds a little more fuel to the fire as we go forward. Operator: Your next question will come from Tom Wadewitz with UBS. Thomas Wadewitz: So I wanted to see if you could talk a little bit about inflation and how much of a kind of headwind that is to what seems like a setup for quite a bit of potential margin improvement. I think you probably had a couple of different sources of inflation has been a headwind to margin. It's not just a challenged rate environment the last couple of years. And so do you need some of that to ease in order to get the traction on the margin side? Or just how do you think about that as a factor in maybe the pacing of margin improvement you can get in TTS? And then I had one on the brokerage side for you as well. Derek Leathers: Yes, Tom, thanks for the question. I mean, look, when you look at the component costs or the components of the bulk of our cost, you're talking about trucks and trailers and tires. Our tech journey is certainly expensive. There's a lot of money that we're investing into the fleet to make sure it's refreshed in a good place. I will point out that while the fleet is a little bit older than maybe what some have been accustomed to, it's also a lot more Dedicated than it was back when we had a slightly younger fleet. So we like the current positioning, but none of the asset choices are really getting any less expensive. And so that's why we have to continue to work on the OpEx side of the equation to make sure we're focusing on productivity and gains through technology. A lot of the tech spend up until this point, we still have some decent amount of duplicative spend where we're both managing our old systems and our new system. That largely sunsets by the end of this year. And so that's exciting to think about as we go into 2027 with a clean tech stack with enhanced capabilities and now improved data structure so we can really lean into some of the benefits of AI and some of the data type work that comes along with that. So it's going to be -- again, it's -- it may not be sexy because it's a lot of very difficult execution moments to compile as we go through the remainder of the year. But the road map looks solid. We're staying the course, and I'm pretty excited about our ability to do things like what we've seen in logistics, but across the rest of the portfolio as we get the tech journey kind of further along than where it sits today. Christopher Wikoff: Tom, I would just add to that. Thomas Wadewitz: I was just going to say how does that net out. Like does the pace of inflation moderate in '26 versus what you've seen in the past couple of years? Or it's better to think it's kind of a similar pace of inflation? Christopher Wikoff: I don't think we're seeing inflation up and down the P&L as we were in the last couple of years, but that's not to say it doesn't exist. Derek mentioned some of those categories where there's still more elevated inflation, some of the equipment and parts, some in employee benefits, insurance premiums, although our increases have been, I think, modest relative to the rest of the industry. So inflation is there. That's something that we're mindful of, and we're in an environment where our customers are mindful of it as well. And we're seeing more shipper openness and acknowledgment, particularly on the Dedicated side, where there's some driver pay increases, there's other inflationary factors that need to catch up as those contracts renew. I would also mention, we talked a lot about cost savings over the last 3 years, $150 million of cost takeout over that time. During this downturn, that's been largely to combat inflationary pressures, but it's largely structural, sustainable. So we'll get some lift as we hold the line on that lower cost profile, but we see rate increases, we see demand lift and some higher contribution margin as we see top line growing. Thomas Wadewitz: Yes, that's great. Just one on brokerage. I know you've invested a lot in systems and just want to see if you could offer some thoughts on how that manifests for carrier selection and safety. It seems like a lot of focus on that given Montgomery, but it's like, well, you can buy cheap and have maybe a lower bar on filtering carriers or you can filter the carriers more and maybe you don't get as good purchase transportation. And I guess wondering kind of how you think about that and where maybe you think you are on the spectrum? Derek Leathers: Yes, Tom, I haven't been accused to being on the spectrum a few times. But as it relates to brokerage, we've invested heavily in qualification tools. And so when I think about our carrier selection, carrier qualification and the robustness of its ability to kind of weed out bad actors. It's a point of strength. It's always an ongoing battle. I think the level of fraud and some of the things going on out there was larger than any of us fully probably recognized. But to your point, there is a major decision coming down the pipe. And so we're not backing away from our commitment to further fortifying that selection process and further strengthening and making it even more rigid, if you will. And it shows up some like with -- if you look at our volumes, our volumes were fairly muted year-over-year, but a lot of that is because we are being very selective and trying to eliminate the really bad day and do the best we can to put our freight in the hands of folks that are qualified, competent and capable. And if they are all those 3 things, that does come at a price. And that's okay, and we need customers to recognize the quality of that product. Some do, some don't. And so you work with those that do and you kind of pass on those that don't. And I think that's going to be an ongoing trend as this year plays out and certainly one that could accelerate pending the court decision. Operator: And the last question for today's call will come from Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Maybe, Derek, just in terms -- we've heard about hair follicle testing for a while. I guess the rules are actually written, but still sitting somewhere not really, I guess, codified or put into action. So as we think about the additional regulatory levers, not necessarily enforcement of existing laws, I guess this one will be bringing out one and maybe putting into practice. I know yourselves and others do a lot of this already, but curious to think, I guess, first, if you think that this could be actually something we see come to pass under the current administration? And secondly, if so, what's relative timing and impact from your perspective? Derek Leathers: Yes, Brian, great question. We have been, in fact, as you mentioned, we hair follicle test every driver coming into the fleet. We are a strong proponent of hair follicle testing. It's a much more accurate, much more long-lived test and a much better way to make sure America's roadways are safer. I do believe this is an administration. It's been sitting, as you probably know, on HHS' desk for a long, long time. It's been vested off and some of the efforts to further that into law or further the implementation, I should say, of hair follicle testing is gaining some traction. There's also more on the sort of saliva or wet testing they talk about, which is also more accurate. I, for one, hope that we go to an industry standard of hair follicle testing because I think it does eliminate a great deal of bad actors from being behind the wheel of the truck. We know when we made that transition, hair follicle testing was 10x more likely to show a positive than urine analysis. Today, I can't give you current stats because everybody knows we hear follicle test. So nobody comes here or applies or tries to work here if they are a user because they know that they're going to be tested. And so it's hard for me to give you current stats. But historically, every fleet that's converted has seen a significant uptick in failures. That, coupled with some work the administration is already doing on kind of furthering the journey, if you will, once you're in the drug and alcohol clearinghouse to have to prove that you've been through the program and that you're clean before you retake the road will be yet another leg to the enforcement stool of many legs that we've talked about today. So I think enforcement is going to still be kind of the word of the year. And I think you're going to see more of enforcement of existing regulations and/or implementation of ones that have been delayed for way too long, and we are proponents of all of the above. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Derek Leathers for any closing remarks. Please go ahead. Derek Leathers: Thank you, Chuck, and thank you all for joining us today. Our first quarter results clearly validate the actions we've taken during this prolonged freight downturn to structurally improve Werner. The FirstFleet integration is ahead of schedule. Our One-Way network is finding its stride and our technology investments are driving real efficiency gains. We are now a leaner, more agile organization. As market fundamentals improve, our scale and diverse solutions give us a significant competitive advantage, positioning us to accelerate our earnings power. None of this progress is possible without our people. Thank you to our customers for their continued trust and an especially big thank you to our Dedicated drivers and associates, including our newest FirstFleet family members for their relentless dedication to safety and service. I want to thank you all again for your time today and for your continued interest in Werner. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Celestica Q1 2026 Financial Results and Conference Call. [Operator Instructions] I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Matthew, please go ahead. Matthew Pallotta: Good morning, and thank you for joining us on Celestica's Q1 2026 Financial Results Conference Call. On the call today, we have Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the second quarter of 2026, our 2026 annual outlook and anticipated trends in our industry and their anticipated impact on our business. These are based on management's current expectations, forecasts and assumptions as of April 27. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expected stations and their potential impact as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We have included in our earnings release found in the Investor Relations section of our website. a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars all per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison. Let me now turn the call over to Rob. Robert Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We kicked off the year with solid results in the first quarter as revenue surpassed $4 billion with adjusted operating margin of 8%, a new high for Celestica. This performance drove adjusted EPS of $2.16 for the quarter, which exceeded the high end of our guidance range. Our awarded backlog and the opportunity pipeline with both existing and new customers are the strongest they have ever been during my tenure as CEO. We continue to see exceptionally strong and accelerating demand from our hyperscaler customer base complemented by a steadily strengthening outlook in our ATS segment. This momentum underpins our expectation for sustained growth in both revenue and adjusted EPS throughout 2026, while our outlook for 2027 has strengthened compared to just 90 days ago. I'll discuss our latest 2026 outlook in a moment, but first, I'll hand it over to Mandeep to walk through the Q1 details and our Q2 guidance. Mandeep, over to you. Mandeep Chawla: Thank you, Rob, and good morning, everyone. Revenue in the first quarter was $4.05 billion, up 53%, just above the midpoint of our guidance range, driven by very strong demand in our CCS segment. Our non-GAAP operating margin was 8.0%, up 90 basis points, driven by solid margin improvement in both of our segments. Our adjusted earnings per share was $2.16 in the first quarter, exceeding the high end of our guidance range and an increase of $0.96 or 80%. Moving on to some additional metrics. Adjusted gross margin was 11.3%, up 30 basis points driven by improved mix and strong productivity. Our adjusted effective tax rate for the quarter was 19%. And finally, strong profitability and disciplined working capital management led to an adjusted ROIC of approximately 50%, up more than 18 percentage points versus the prior year. Moving on to our segment performance. Revenue in our ATS segment for the quarter was $806 million, flat year-over-year and higher than our guidance of a low single-digit percentage decline. The performance was driven by higher revenue in HealthTech offset by tougher comps due to previously communicated portfolio reshaping in our A&D business and softness in capital equipment. Our ATS segment accounted for 20% of total company revenue in the first quarter. Revenue in our CCS segment was $3.24 billion, up 76%, driven by very strong growth in both our communications and enterprise end markets. The CCS segment accounted for 80% of total company revenue in the first quarter. Revenue in our communications end market increased by 69%, better than our outlook of low 60s percentage growth primarily driven by strong demand and ramping programs for our 800G networking switches across our largest hyperscaler customers. Our enterprise end market revenue was higher by 101% and driven by the planned ramping of a next-generation AI ML compute program with the hyperscaler customer. This result was modestly lower than our outlook of 100 high-teens percentage increase as the timing of the planned ramp was partially gated by select component constraints. Our HPS business generated revenue of $1.7 billion, representing growth of 63% and accounted for 42% of total company revenue. The growth was driven by ramping 800G switch programs with multiple hyperscaler customers. Moving on to segment margins. ATS segment margin was 6.0%, up 100 basis points, driven by improved mix and higher profitability as a result of our portfolio optimization activities. CCS segment margin in the first quarter was 8.6%, an improvement of 60 basis points, driven by strong mix and operating leverage from higher volumes. During the first quarter, we had three customers that each accounted for at least 10% of total revenue, representing 35%, 15% and 15% of revenue, respectively. Moving on to working capital. At the end of the first quarter, our inventory balance was $2.67 billion, a sequential increase of $485 million and higher by $885 million compared to the prior year as we support significant growth in our CCS segment. Cash cycle days during the first quarter were 55, representing an improvement of 14 days versus the prior year and 6 days better sequentially. Turning to cash flows. We generated $138 million of free cash flow in the first quarter. Our capital expenditures were $230 million or 5.7% of revenue, an increase of $135 million sequentially and $193 million versus the prior year. Consistent with our prior communication, our full year 2026 capital expenditure guidance remains unchanged at approximately $1 billion to enable significant growth in our CCS segment. This investment is supported by awarded programs and our increased level of visibility to a multiyear capacity alignment with our key customers. At the end of the quarter, our cash balance was $378 million, while our gross debt was $719 million, resulting in a net debt position of $341 million. We had no draw outstanding on our revolver at the end of the quarter. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.6 turns an improvement of 0.1 turn sequentially and 0.5 turns versus the prior year period. As of March 31, we were in compliance with all financial covenants under our credit agreement. Subsequent to the end of the quarter, we amended our credit facility, increasing our revolver by $1 billion to $1.75 billion. In addition, we received more favorable terms regarding certain covenants and interest rates and the maturities of both the Term Loan A and revolver were extended to 2031. The upsize revolver on the amended facility, along with our cash balance, provides us with more than $2 billion of available liquidity and which we believe is sufficient to meet our current operating needs. During the quarter, we repurchased approximately 73,000 shares for cancellation under our normal course issuer bid at a cost of $20 million. We continue to be opportunistic with respect to share repurchases. Now moving on to our guidance for the second quarter of 2026. Second quarter revenue is projected to be between $4.15 billion and $4.45 billion, representing growth of 49% at the midpoint. Adjusted earnings per share are anticipated to be between $2.14 and $2.34, representing an increase of $0.85 at the midpoint or 61% growth compared to the prior year. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin is expected to be 8.0%, which would represent an increase of 60 basis points. We anticipate our adjusted effective tax rate for the second quarter to be approximately 21%. Finally, let's review our revenue outlook for each of our end markets. In our ATS segment, we anticipate revenue to be up in the mid-single-digit percentage range, fueled by program ramps across our HealthTech and industrial businesses alongside strengthening market demand driving a return to growth in our capital equipment business. In our CCS segment, we expect revenue in our communications end market to grow by approximately 50% and driven by ongoing hyperscale ramps in multiple 800G programs, complemented by continued strength in 400G programs. In our enterprise end market, we expect growth of approximately 130%, supported by the continued ramp in an AI ML compute program with a hyperscaler customer as well as ramping volumes in storage. With that, I will now turn the call back over to Rob to provide an update on our 2026 annual financial outlook and additional color on the latest developments in our business. Robert Mionis: Thank you, Mandeep. Driven by the continued strengthening of our demand pipeline and enhanced visibility as we progress through the year, we are raising our full year 2026 annual financial outlook. We are raising our revenue outlook from $17 billion to $19 billion, representing very strong growth of 53%. This latest outlook reflects accelerating demand in the second half of 2026, fueled by production ramps for awarded programs. We are also raising our outlook for adjusted EPS and from $8.75 to $10.15, which, if achieved, would represent growth of 68%. Included in our forecast is an adjusted operating margin outlook of 8.1% higher than our previous outlook of 7.8%. Finally, we are reaffirming our free cash flow outlook of $500 million which fully incorporates our $1 billion in planned capital investments in 2026. This outlook represents our high confidence view for 2026 and while the supply environment remains highly dynamic, our outlook is informed by a measured assessment of component availability. Building on my earlier remarks, our longer-term customer demand outlook has continued to solidify over the past 90 days, bolstered by additional new program wins and enhanced forecast visibility. We expect to grow revenue by over $6.5 billion in 2026 based on our latest outlook. And now we expect to grow revenue significantly more than this in 2027. As the year progresses, and our visibility continues to improve. We will continue to update our outlook. Now moving on to our businesses and beginning with our CCS segment. Based on our latest 2026 annual outlook, we now anticipate approximately 70% revenue growth in our CCS segment. Even as demand across our customer base remains exceptionally strong and continues to accelerate the unprecedented growth throughout the data center ecosystem has created a tighter supplier environment, effectively pacing our growth. As we navigate extended lead times and supply chain constraints for certain advanced components, we view our overall demand as durable and cumulative, underpinning our sustained growth runway as supply and capacity aligned through the second half of 2026 and into 2027. Moving on to our end markets. In communications, accelerating volumes from the ramping of multiple 800G Ethernet switch programs are driving very strong and sustained growth. In addition, we are expecting to begin mass production on 1.6T switch programs with two hyperscaler customers, which will contribute to additional growth in the second half of the year. During the quarter, we also secured two important new program wins, further bolstering our networking demand pipeline into 2027 and 2028. First, we announced in March, we are collaborating with AMD on the design and manufacturing of a scale-up networking switch for the Helios rack scale AI architecture. This collaboration leverages our leading-edge Ethernet networking expertise to support deployments of the Helios platform. Development is in progress, and we expect initial units to be available by year-end. Additionally, we have secured a landmark program award for the design and manufacturing of a 1.6T, co-packaged optics Ethernet switch with a hyperscaler customer. This win serves as a critical validation of our ability to execute complex next-generation networking designs at scale. We expect mass production to commence in 2027. Within our enterprise end market, the growth outlook remains very strong into 2027. As anticipated, volumes for our next-generation AI ML compute program with a hyperscaler customer continue to scale through 2026. We continue to expect a strong momentum to sustain in 2027, supported by the launch of mass production for our digital native rack scale program as well as higher demand from our hyperscaler programs driven by ramps in next-generation platforms. Moving on to our ATS segment. We are increasing our full year revenue outlook which now calls for mid- to high single-digit percentage growth. The strengthening growth outlook relative to prior quarters is bolstered by a reacceleration of customer demand in our capital equipment business, as the market forecast for wafer fab equipment spending is strengthening in the second half of 2026 and into 2027. We also continue to expect solid growth in both our Industrial and HealthTech businesses. supported by new program ramps. We are also very encouraged by the strengthening margin profile of our ATS segment portfolio as we see the benefits of our strategic portfolio reshaping activities. We expect that these dynamics, along with improving operating leverage will continue to lead to stronger segment margins as we progress throughout the year. The fundamentals and visibility supporting our long-term demand outlook through 2026 and into next year are stronger than ever. The intensifying need for leading-edge AI compute and networking infrastructure is driving an unprecedented level of customer demand. Today, as we scale our global operations to meet this accelerating demand, our primary focus remains on execution. We are confident that we are incredibly well positioned to execute and deliver on the growth opportunity in front of us. With that, I will now turn the call back over to the operator to begin with the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe for the first question, you did mention the next-generation programs that you have with your enterprise customer on AI ML compute programs and there's been a lot of discussion around share. So maybe if you can just dive a bit into what you're seeing relative to your market share with your customer on that front, particularly on these next-generation program. And what level of visibility are they providing you, particularly as the demand sort of increases on that front? Are they looking for additional vendors or suppliers to help them with that ramp? And I have a follow-up. Robert Mionis: Samik, yes, based on the long lead times that there is for silicon these days, the visibility that we have into next-generation programs is quite long. And we are supporting that customer on all the future generation programs, ones in production now and [ Savola ] in the pipeline to start ramping in subsequent periods. We haven't seen a significant change in market share shifts or things along those lines, and we continue to execute well. In the first quarter, by the way, it met that you asked, we did have a little bit of a component issue relative to our AI ML compute issue. It wasn't a demand issue. It was actually a material supply issue. That has been resolved and will be catching up in subsequent quarters and the program remains on track. Samik Chatterjee: Got it. Got it. Interesting. And maybe for my follow-up, the announcement of the win around the CPO Ethernet switch. Just trying to get a bit more visibility in terms of what it means in terms of your content related to maybe a sort of a typical 1.6T switch, what does the content for Celestica look like? And what would be the margin profile? And what are you seeing in terms of engagement beyond this one hyperscaler that you won in terms of CPO ethernet switches? Robert Mionis: Yes. Good question. So this is not just another switch award. We actually believe it's the first major production scale deployment of co-packaged optics using Broadcom Tomahawk [ 6 Davidson ] module and designing that directly into our system. And winning this award validates our multiyear investment in developing this capability ahead of the market. We talked about that in the last call. . The transition to 1.6 requires managing unprecedented dermal and signal integrity challenges. And the fact that we're able to do this further demonstrate that we've actually moved up the value chain and we are now a sophisticated codesign partner for the most advanced hyperscalers. It also sets us up well for the 3.2 adoption where we think this will kick in. So we think, at this stage, the game, we're a market leader in terms of margin profile, because of the high value add, this will be on the higher end of what we typically do. Samik Chatterjee: And are you seeing more hyperscalers interested beyond this one hyperscaler that you won? Robert Mionis: I think each of the hyperscalers will have their own adoption for CPO. Some are choosing to do CPX before CPO. But at the end of the day, we'll think the major adoption will be at the 3.2, that T note. Operator: [Operator Instructions] Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: You talked about the CCS revenue growth of 70% for 2026 and the 2027 outlook getting better relative to the last 90 days. I was wondering if you could talk a little bit about your 2027 CCS revenue growth expectations relative to where you guided us last time? And any way to size or help think about the order contributions from some of the key programs that you mentioned between scale [ Helio ], CPO and digital native. Mandeep Chawla: Yes. Mike, it's Mandeep here. Yes, thanks for the question. Look, we're very pleased with the accelerated growth that we're seeing across the business. And we have no indications right now that it's slowing down. When we're looking at that we shared. We're growing by about $6.5 billion this year, and we think we're going to grow significantly more than that, which means the floor would be somewhere around [ 25.5 ], but we do see revenue higher than that. And that's on programs that we've won. As you know, we're seeing really great networking dynamics this year. 400G continues to be strong. 800G is accelerating materially and we're ramping -- we're seeing some contribution towards the back end of the year from the 1.6T programs. When you start looking at 2027, 800G demand continues to be strong. 1.6T now ramping across the programs that we've already started plus additional programs that will be coming online. And then we have the very large program, the rack scale system that we're doing for the digital native customer. And then in addition to that, as Rob talked about, on the AI ML compute programs, we're continuing to see strong growth, including next-generation programs. And I could go on with other things as well. But with the programs that we've won with the material that we are in line to secure with the capacity that is coming online, we have strong confidence in 2027, and we'll give more specificity around the number as we go through the year. Operator: Your next question comes from the line of Tim Long with Barclays. Timothy Long: Yes, I was hoping you could talk a little bit about the HPS business off to a pretty good start, about $7 billion in the quarter. I'm curious if you can talk about kind of the progression of the [ HPS ] business. I know that's been part of the CapEx increased investment is more [ HPS ] as well. and particularly into next year, I think some of the -- I think all three of these large programs the digital native AMD and CPO should be HPS as well. So if you could just give us a little color on how you see the glide path for that piece of business and the mix . Mandeep Chawla: Great. Tim. Look, the HPS business and specifically, the design work that we're doing with our customers is really underpinning the majority of the growth that we're seeing, a significant portion of it. You've already mentioned a few of them. We're seeing very good traction on the switching side, the CPO program that Rob just talked about is an HPS program. 1.6T programs are predominantly HPS as well as our [ 800G ] and 400G programs. And so we have a very strong competitive position when it comes to networking. As we grow this digital native program into next year, it really starts to extend ourselves into compute as well. And all of this is underpinned by investments that we're making. You'll notice that our R&D spend is up materially, and it's where we want it to be. We have about 1,350 design engineers right now that's much higher than we had this time last year. And by the time we end this year, we're going to have even more. And the benefit of that is that they're working on not this year's program, so they're really working on programs for next year and the year after. And so because of the programs that we've been winning in the pipeline that we have, we're very comfortable making the investments that we are in R&D, which is specifically HPS. Operator: Your next question comes from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: Two questions for me please. First, as you think about the drivers for upwardly-revised outlook for 2026 and 2027, I was hoping you could bucket the relative growth drivers between some of the new switch programs versus the AI servers. And how that might influence your margin trajectory throughout the balance of '26 and '27. Mandeep Chawla: Karl, I'll get started and Rob can feel free to add on for anything that I may miss. Look, as we look into 2027, what we are seeing right now is very strong growth coming in particular from CCS, although ATS will also be growing. I'll just quickly touch on ATS because often we missed it on the call. It's a very nice performance that's underway right now in ATS, which is a return to growth and strong margins, and that's really being underpinned by capital equipment. Capital equipment, we believe now is turning into a very nice cycle where there is a very strong order book from our major customers, and that will take us through this year and next year. So ATS will be contributing to the growth, but the growth is overwhelmingly been driven by CCS. And it is being driven by both communications and enterprise. We're not going to put the details yet. Again, more to come. But yes, just to talk about the specifics a little more. On the enterprise side, we are growing a new storage program that we've just launched and is in ramp. We have the AI ML compute program that is going strong through this year and then the next-generation program, two programs to be specific, are going to be ramping in '27. And then on the networking side, as we talked about, we have a couple of 1.6T programs that are coming online towards the end of this year, and then we have a lot more that are coming online next year. And then we never want to look excited this digital native win, which is a completely integrated RAC system, which has compute and networking in it, highly complex, not easy to do. at scale, and that will be entering production next year as well. And so those are really driving the growth across CCS. Robert Mionis: And I would just add, Karl, that in terms of 1.6T we have 10 active programs. They'll be ramping heavily in 2027. On top of that, 800G remains strong. And as Mandeep mentioned, we have the digital native. We have the [ Helios ] lots of new programs. and also our AML compute program that has very strong end customer demand for those programs that will end up ramping very nicely into 2027 as well. So overall, a very strong demand environment in 2027. Operator: [Operator Instructions] Your next question comes from the line of Mehdi Hosseini with Susquehanna Financial Group. Mehdi Hosseini: One follow-up on [indiscernible] project. To what extent -- actually, can you size the opportunities associated with [ Helios ] over the next 18 months? And to what extent some of those opportunities are now embedded into your kind of year 2026 revenue target? Robert Mionis: Yes. With respect to [ Helios ], the program is in development right now, and we'll be shipping samples this year. We view the overall market as a multibillion-dollar market. And as we get into next year, I think revenue will probably be based more by silicon availability than by end market demand. At this stage of the game, things are on track with the development and it has a lot of market interest . Operator: Your next question comes from the line of David Vogt with UBS. Please go ahead. David Vogt: So just maybe, Mandeep, have a question regarding the revenue ramp versus the trade-off on gross margin. So obviously, TPU sounds like it was capacity constrained this quarter, and that's going to ramp stronger as we go into Q2 and the second half of this year, and it certainly sounds like strength in calendar '27. How should we think about the gross margin progression of the business, particularly with TPU ramping? And also the -- what sounds like a really strong start to the D&C relationship potentially in the second half of this year into next year? Mandeep Chawla: Yes, David. Look, we're pleased that we saw gross margin expansion in the quarter on a year-over-year basis. We think that the gross margin dynamics that we're seeing are a play in a similar way. there are going to be mix impacts along the way. But we definitely are looking to maintain, if not grow our gross margins as we go forward. Two things I'll talk about. The first one is that longer term, there are some headwinds on the gross margin side, and it really has nothing to do with pricing because we're not -- we have capacity is at a premium. Our execution is a real differentiator. And so we have choice on where we apply our focus. And so we're not giving up price in the marketplace. But the reality is, is that there's some input costs that are going up materially, whether it be memory or whether it be silicon. And so those are some headwinds that we're working through on the gross market side. But more specifically, what I'll talk about is the operating profit we're seeing very nice operating leverage right now in the company, and we think that there's more opportunity in front of us as well. We're pleased to be able to raise the full year to 8.1%. That's up from the [ 7, 8 ] that we had just 90 days ago. It's a reflection of mix, but it's a reflection of operating leverage because we've been very disciplined on the operating expenditure side. And although we are very pleased to make investments along the way to fund growth. And so as you look into 2027, there will continue to be an opportunity on, I would say, operating leverage, and we are very focused on ultimately translating that to EPS growth. We are a management team that is very focused on long-term sustainable growth in EPS. And so the levers that are being pulled are driving that outcome. Operator: Your next question comes from the line of George Notter with Wolfe Research. Your line is open. George Notter: I guess I wanted to come back to the CPO when the [indiscernible] announced here, is that an existing customer for networking infrastructure? Or is that a brand new customer? And then also, I'm wondering if it's an existing customer, is it likely that, that cannibalizes an existing revenue run rate for you? And then anything you could say about the potential size of that deal would be great. And then also, you said 2027 would be the ramp. Is it any more specifics there? Is it early '27? Is it late '27? Any help would be great. Robert Mionis: George, yes, it's an existing customer. We have multiple 1.6T that's going up. And with respect to timing, this will be second half of 2027. Operator: Your next question comes from the line of John Shao with TD Cowen. John Shao: So regarding Google's new border fly architecture for TPU [ VA ], could you maybe talk about implication to your business? Do you see an ongoing trend towards more complex data center interconnect. And as a result, you're going to be there to benefit as ODM. Robert Mionis: Yes. As the architecture becomes more critical and as our hyperscale customers continue to innovate, what's becoming more and more evident is that systems levels, manufacturing, design is becoming more and more important for these customers, especially in liquid cooling, advanced rack scale infrastructure, thermal management, so these customers are looking for us to continue to innovate with them and design with them on multiple nodes moving forward. So we're pleased to be able to continue to support them as they continue to innovate and advance their architecture through all the versions that you mentioned. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Rob, I wanted to come back to the supply commentary. You characterized the environment is highly dynamic, and it sounded like there was a specific issue around AI ML in Q1. So I'm just wondering if you could maybe expand on how you're thinking about supply relative to the guidance and the demand dynamic as you think about both Q2 and the second half of the year, are there caps on sort of what you're able to see is a broader base than the AI ML program that you talked about for Q1. Any detail on that would be helpful. Robert Mionis: Good question. We are experiencing more component shortages now than 90 days ago, two main factors. One is the demand really continues to grow. -- as a result of the suppliers are a little bit behind on adding capacity. The good news is that all of our key suppliers are currently in the works of adding capacity, and we expect the situation to improve the constrained commodities right now on allocation are custom silicon and memory. That's probably not a news flash view. We are seeing challenges in and PCBs, the 40-plus layer ones, power components, optical components. The positive news is that we have commitment from all our applies to secure the outlook that we just gave. So we think the outlook that we just gave factors always in, we think it's prudent, we think it's conservative. And that's why we marked it as high confidence. We have capacity in '26 coming online ourselves also in 2027. So if things continue to improve in the back half of the year. We'll have the opportunity to get it out the door and also into next year. But we think we factored it all in, but it is more constrained now than it was 90 days ago. and the lead times are extending. And one last positive thing is, with the extent of lead times, we are getting unprecedented visibility from our customers and item demand. So that's actually a very positive thing for us as we do long-term planning. Operator: Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: Rob Mandeep, you're projecting strong growth for next year. I think you said significantly more than $6.5 billion year-over-year in fiscal '27. How should we think about free cash flow in that context? Looks like you did not take up the free cash flow guide for fiscal '26. What are some of the puts and takes impacting free cash flow for fiscal '26 and '27, and how should we think about the working capital as you see this strong growth? And just another clarification, I think, Rob, the AMD opportunity as the scale-up opportunity, but as the one you announced in the press release that the switch CPO switch is a scale-out opportunity, can you help us size how much of that $6.5 billion plus growth next year is from scale up and scale out and which is a longer-term opportunity. Mandeep Chawla: Ruplu, I love you because you find a way to find two questions in one. That experience talking there. . Planning to let Rob talk about some of the program specifics that you brought up. So Look, we're very happy that we were able to raise the revenue outlook for 2026 by $2 billion and yet maintain our free cash flow outlook of $500 million. And then just as a reminder, that's including funding $1 million of CapEx. The balance sheet is incredibly strong. But we are -- we believe we are very disciplined when it comes to capital allocation we'll assess our needs as we go through -- as we get closer to '27 and as the forecast starts to solidify. But I'll say just a few things. Again, the balance sheet is very, very strong. We have ample capacity to target to use it as we need to. We're very comfortable investing to support customer growth. But one thing you'll know is that we will always remain very disciplined. And so we are a free cash flow focused management team. But at the same time, the growth is really unprecedented right now. And so if that requires additional funding, we have no hesitation to do that. Robert Mionis: And regarding scale up versus scale out, correct, the CPO win is scale out and the heliostat or a scale-up opportunity. We are have been very strong on scale-out as you noted. So we view scale up as a huge opportunity. But frankly, we're supporting both very strongly in our system-level architectures. Operator: Your next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: Back to the component constraints. I think if we look back to the supply constraints of the pandemic, [indiscernible] took a lot of share because of its execution, its relationships. And so I'm curious if you'd see the current issues as strengthening your hand competitively? And then I was wondering if you could talk about relative impact on compute and networking or if it's relatively a similar supply chain impact? Robert Mionis: Yes. One of our key strengths is execution. So once we get the parts and securing the parts, wherever it happens to be in the quarter, we're able to execute that at scale very quickly. So in the land of a very dynamic supply constraints, we do advance planning very well. And typically, we gained share through that environment because we find that peers or competitors have a hard time executing through turbulent times. So that is an opportunity. We haven't necessarily seen that as yet as a result of the supply chain constraints. But frankly, the constraints are just starting the thick of things right now, I think it will get better or at least more dynamic as the year gets long. And with respect to compute versus networking, so on the networking side, it's not very memory-centric. So there the constraints are really around PCBs or silicon, but we think we have a good handle on that. On compute. It's all about memory, but our customers have very strong presence with the main memory suppliers, and we have secured at least in the near term, what we think we need to do to support our customers. Operator: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please go ahead. [Operator Instructions] Your next question comes from the line of Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Just you mentioned unprecedented visibility, long-term visibility? And then also you mentioned in the slide deck capacity alignment with customers. Can you elaborate on both of those? And specifically, what's fundamentally changed to give you far better long-term visibility in the past? And is there anything contractual that gives you better visibility than you may have had in the past? Robert Mionis: Yes. I would say a quarter or so ago, our key customers, the main hyperscalers had very, very strong demand. They loaded in the system just to try to figure out where the constraints would be. At this stage of the game, I think the entire supply chain knows where the constraints will be and we've aligned our physical capacity with our supply chain capacity with our CapEx plans. And that's the current state that we're in. And because the lead times are very long, specifically custom silicon lead times are so long, we've not just done this for '26 or '27. We're actually dipping into 2028 and actually booking awards right now that ship into 2028. So the unprecedented visibility is really just making sure that we're on in long-term material supply with long-term capacity agreements. And a lot of the orders that we're placing supported by our customers are NCNR. So there are contractual terms protecting us through ups and downs. So we feel very comfortable in our long-term growth trajectory at this stage of the game. It's all about execution, and that's what we do very well. Operator: Thank you for your question. Your next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: Thanks, and good morning, everyone. So I wanted to ask about the switch ramps in the second half of the year. I'm wondering if they are coming in as expected or have some of them been pushed into 2027, which gives you the higher confidence in that year. Can you just talk about the dynamics between '26 and '27? Robert Mionis: I would say the switch ramps that are coming in the back half of the year are going as planned. In the back half of the year, we have two customers ramping 1.6T and several more coming online in 2027. We've secured the silicon that is required to complete the development processes. And we also have commitments to support the ramps and 800G remains very strong throughout the year. So things are going as planned on the networking side. Operator: Thank you for your question. Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: I was just wondering if you could give us some updated thoughts on capital intensity and the outlook for CapEx beyond this year. Obviously, you've got a lot of new program awards and some new wins. Should we expect CapEx to ramp up beyond that $1 billion that you laid out for this year in 2027. How are you thinking about additional capacity that you need to put in to support these new wins? Mandeep Chawla: Mike, it's Mandeep here. So $1 billion of CapEx this year, as you're aware, we will be doing that or more next year. And I think the way to think about it right now would be I'm just going to give you a rough number of $1.5 billion as a placeholder for now. And we're very comfortable with that. The way that -- to build on the comments that Rob had shared just recently, we're having very long-term conversations with our customers, A, as it relates to supply because we need to get in line on their behalf and lead times have extended in some cases, beyond a year for certain types of materials, but then really around capacity. And the majority of our capacity investments right now are in Southeast Asia, Thailand specifically and in the United States, and I would say, Texas specifically. And we have a number that are going to come online this year. We have some that are coming online next year. And then there's other ones that we're evaluating still. But that's the support growth in 2028 and 2029. And so when we make our capacity decision, it's tied to a business case. The side to program level specifics. It's tied to programs that we are winning or we intend to win by the time we make that decision to go forward with the CapEx. And if the business cases are strong, strong ROI strong paybacks. And so when you when we continue to have business cases like that brought forward, we don't hesitate to invest. And so right now, I would say we will see an elevated level of CapEx spend into 2027. And we'll take 1 year at a time. Operator: [Operator Instructions] Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Sorry about that earlier. With respect to your large digital native customer, is that still on track to ramp in early 2027? Or has there been any change in the coming today? Robert Mionis: Yes, that's still on track where sample systems this year and production should start in the first quarter -- late in the first quarter next year, that is on track. We've been having very close meetings with all of our key suppliers at to make sure we've secured the material across the supply chain and things look very positive at this stage of the game. Operator: Thank you for your question. There are no further questions at this time. I will now turn the call back to Rob Mionis for closing remarks. Robert Mionis: Thank you all. Thank you for your support and for joining us this quarter. We have great momentum across our business, and we look forward to updating you on our progress next quarter. Have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Rithm Capital First Quarter 2026 Earnings Conference Call. Please -- please note this event is being recorded. I would now like to turn the conference over to Emily Hoke, Deputy General Counsel. Please go ahead. Emma Bolla: Thank you, and good morning, everyone. I'd like to thank you for joining us today for Rithm Capital's First Quarter 2026 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; Nick Santoro, Chief Financial Officer of Rithm Capital; and Baron Silverstein, President of NewRez. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Capital website, www.rhythmtap.com. If you've not already done so, I'd encourage you to download the presentation now. I would like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. With that, I'll turn the call over to Michael. Michael Nierenberg: Thanks, Emma, and good morning, everyone, and thanks for joining us. I'm going to open my remarks and go a little bit into the credit markets for a minute and then we'll get into the supplement, which has been posted online. Baron Silverstein will cover the mortgage company. Peter Brindley will cover Elior, which was formerly known as Paramount, we rebranded the real estate company last night, and we're excited about that, and Peter has a lot of great stuff to discuss. So for the company, another solid quarter for our company, demonstrating the power of the franchise. Activity levels across the board were robust. The firm, as we stand today, is extremely well positioned to take advantage of market dislocations as the combination of geopolitical risks and private credit headlines give us the opportunity to deploy more capital across the firm in both the ABF and credit space. As market participants pull back, this will play to our advantage. The majority of our capital in our asset management businesses with institutional partners. As a firm, the exposure we have to software remains low. It is important to note, we have not seen any notable DQs in our credit exposure across the firm. We do not see systemic risk in private credit. From our seat, this is a sentiment-driven dislocation that will play into our ability to look for opportunities in the credit space. When you look at direct lending, 80% of direct lending sits in institutional drawdown funds. Systemic risk care will be contained. Large BDC portfolio is present in software. While saying that, defaults in the largest BDC and sponsors sit below the 5-year historical average of 1.1%. While saying all this, what's the opportunity for Sculptor and Crestline, we're structured to take advantage of dislocations. It's that simple. While saying all of this, when we think about dislocations, markets have rebounded. S&P is at all-time highs. Securitization markets remain robust, and there's lots of demand everywhere for ABS products. During the quarter, we did $2 billion of securitization, and we see a consumer that remains healthy, particularly in our mortgage company as we look at the 4 million customers that we service. In our Paramount portfolio, which is, again, now called Delacour, leasing activities are excellent, and Peter will speak to that. New York City is now roughly 93% leased in San Francisco on fire as a result of the AI boom and the need for office. San Francisco saw the strongest quarter of activity since 2019 and before. Availability declined by 600 basis points year-over-year. On the Paramount portfolio, the team did a great job in '25. They leased approximately 1.75 million square feet, 76% or 75% of the activity was in New York City with the rest in St France. So before I go into the supplement, I want to lay out Rithm our companies and how to think about us. As everybody knows, we started the company in the spring of 2013 at Fortress we started with $1 billion of permitting capital. And since then, we've created the following: $8 billion of permanent capital all raised in the public market, $110 billion plus of assets $60 billion managed for third parties. That's our asset management business. We have a $50 billion balance sheet that not only supports our operating companies also supports our asset management business. We have 1 of the top 5 mortgage companies in the United States. We started that from scratch in 2018. We have 4 million customers, as I pointed out before. We own one of the top construction/residential transition lenders in the U.S. known as Genesis Capital. We're the fourth largest owner of office in New York City. And again, that's through the acquired Paramount Group, which once again was rebranded to core and we paid north of $6.5 billion of dividends. So what does all this mean? And where are we going? We'll continue to lead with performance, grow relationships with our LPs. Perform as expected and do all we can to increase our value prop for our public equity holders. You heard it before, and you'll hear it again that some of the parts in our view, is much greater than a whole. Now I'll refer to the supplement, which has been posted online. I'm going to start on Page 3. So when you look at the firm, we have really, what I would say, 5 core operating businesses or really Sculptor and Crestline, our 2 asset management divisions couldn't be more proud, I couldn't be more excited where we sit today with both of those very complementary strategies, different One is basin for worth, one is based in New York City, as you know, with global offices everywhere. Assets managed approximately $60 billion with more funds being raised daily. Eliqor, formerly known as Paramount, Class 8 owner-operator of offices in New York and San Francisco. Peter will talk to that business is doing great. NewRez, our mortgage company, again, number three, in total unit service in the United States, including the large money center banks and a top 5 U.S. mortgage lender. Baron will speak to that. And then Genesis Capital which is our residential transitional lender. It's also a large multifamily originator, and I'll speak to that in a little bit. and then you have Rithm, which is obviously in the investment portfolio and at the REIT level. Page 4 for the quarter, what I would say is, as expected, $0.51 per diluted share when you look at our $28.6 million in earnings, 17% return on equity. GAAP net income is always going to be noisy due to hedges moving in and out as we hedge up our MSR portfolios. $57.8 million of GAAP net income, $0.12 per diluted share and a 4% return on equity. Book value, we ended the quarter at $7 billion or $12.51 and -- when you think about it, we paid $0.25 in dividends, effectively, we've grown book value quarter-over-quarter net-net. And that's truly a testament to our team as we think about the macro strategy and the markets in general. Dividend yield, 10.5%, $0.25 per common share in cash and liquidity, we ended the quarter at approximately $1.3 billion. When you look at the quarter end review and we think about Rithm as and management, which is the so-called parent -- we deployed over $2 billion in corporate credit, ABF investments over and in ABF investments -- in the scope to Real Estate Fund V, they've committed $1 billion in the first quarter loan in 2026. Keep in mind, coming off a great successful fundraise of $4.6 billion on their latest fund. Great brand, great track record and a great business for us. Sculptor had gross inflows of $600 million, ending the quarter with $37 billion of -- when you look at Crestline, overall performance terrific, outperforming our initial underwriting, grew management fee revenue by 16% year-over-year in the first quarter of 26%, and we'll continue to grow that business as we see the opportunities in the credit space. Genesis Capital, when you look to the bottom left, best quarter in history Keep in mind on this business, we bought from Goldman in '22. At the time we bought this business, they were doing $1.7 billion of total loans for the entire year. So we did $1.6 billion in the first quarter. We added 118 new sponsors. P&L looks great and credit performance remains strong. We will not sacrifice production for credit, so we're on the same page. Newrez mortgage -- mortgage company servicing portfolio ended the quarter approximately $850 billion. That includes third-party funded volume of $15.5 billion, generated $274 million of pretax income with a 19% annualized operating ROE in the first quarter. And then on the investment portfolio, robust run our non-QM business. We originate quite a bit there in the mortgage company. We did $2 billion securitization. During the quarter, we invested $3 billion in different mortgage assets that includes non-QM and residential transition loans, and we also purchased $140 million of home improvement loans under our flow agreement with upgrade in the total purchase since Q3 to $667 million. When we are looking at the platform again [indiscernible] we're growing areas where we means will add teams, not businesses because we're extremely happy where we sit between Sculptor Crestline and now known as LCR as we grow our real estate presence. So when you look across the board, where everything in credit, where everything in the multi-strat business, on the real estate side, there's roughly $11 billion of AUM in the house. And in asset-based finance, I would expect us to grow that significantly with our third-party partners globally. When you look at the sculpture business on Page 8, again, we couldn't be more happy where we sit today. We're 2.5 years in total AUM $37 billion, most importantly, performance. We are going to lead with performance. We're not going to leave with AUM. We have a fundamental belief that you could only deploy so much capital into the markets when the markets give you the ability to create, what I would call, alpha or outsized returns. That's how we view the business. So while all of us want to grow AUM, we need to lead with performance first, going to be more proud of the team could have been more proud of the business and really excited where that business is going to go. Crestline, Arena Asset Management business, which we closed on in December of 25 and total AUM rough a little under $20 billion, a ton of investors across the platform. I was just in Tokyo 1.5 weeks ago meeting with both Crestline and Sculpture investors at a conference -- in Asia or in Tokyo, we have 15 different LPs invested in the -- in both the Crestline platform and the Sculptor platform. So real global brands the teams do a great job when you look at this business, we are well positioned to take advantage of any dislocations in the market today, investment performance. If you look to the bottom left side of the page, Capital Solutions, 13.5 net since '22, direct lending 12 and change net since '23. So overall performance is very good. I mentioned earlier about software, only 7% of invested assets are classified in software. As we look to Elicor, I'm going to turn it over to Peter, who will give you some color on the real estate business And then after that, I'll talk about Genesis and then Barenwill take the new risk portion. Peter? Unknown Executive: Thank you, Michael. Paramount Group, as Michael just now said, it's become Elior properties come on Page 11, a new name and a new identity but a continuation of the same commitment to operating Class A real estate in New York and San Francisco. This new chapter reflects our intention to leverage the operational strength of the Licor team and the financial strength of Rithm Capital to further enhance our trophy quality portfolio ensuring that we continue to outperform and attract the world's leading companies. Companies in both New York and San Francisco are choosing to elevate the quality of their real estate to enhance collaborative culture, energize their teams and drive productivity it is among the most pronounced trends in our 2 markets. The quality of our portfolio, coupled with our planned significant investments will ensure we continue to attract the most discerning companies across a variety of industries well into the future. This rebrand is an acknowledgment of the evolution of the workplace and signifies a renewed commitment to delivering a leading workplace experience. 1 where world-class amenities are integrated into our buildings, resulting in a best-in-class differentiated experience for our tenants. This is a story of continuity and acceleration. The Elicor properties team is energized and working hard to execute on our exciting plans. Turning to Page 12. Elicor property highlights. Elicor owns, manages and operates high-quality, centrally located Class A office properties in New York and San Francisco. The portfolio is managed by a senior leadership team with deep knowledge of our markets and a track record of success. Elicor is a vertically integrated platform with in-house expertise in all facets of the business, including leasing, asset management, acquisitions, property management, redevelopment and financing. Since the acquisition on December 19, 2025, we have identified operating efficiencies to increase our annual management company EBITDA by approximately $40 million. Elior's portfolio consists of 10 core assets totaling 9.9 million square feet. The core portfolio is currently 85.7% leased at share with an average in-place rent of $90 per square foot at share and a weighted average lease term of 8.4 years at share. Key highlights include leasing. Year-to-date, we have executed leases and have leases pending on more than 360,000 square feet across the New York and San Francisco portfolio with weighted average initial rent of $94.64 per square foot, 14.9% higher than our weighted average initial rent in 2025. Capital Markets, Rithm acquired the portfolio for $585 per square foot an increasingly attractive basis given the recent transaction activity in both New York and San Francisco. JV opportunities. Earlier this year, we launched a JV process on 1301 Avenue of the Americas a 100% leased Class A asset located in one of Midtown's best-performing core submarkets. Financing. Subsequent to quarter end, we closed a CMBS financing on 1325 Avenue of the Americas on a cash-neutral basis, extending the portfolio's current loan maturities while ensuring a well-laddered maturity profile. We also engaged on the refinancing of 31 West 52nd Street. Lastly, we are moving swiftly to execute on our growth-focused capital improvement strategy, which includes the repositioning and amortization of 4 key assets, 2 in New York and 2 in San Francisco, which we expect will drive significant rent growth and occupancy gains in 2026 and beyond. Turning to Page 13, Elicor Properties leasing highlights. As Michael mentioned, in 2025, we leased more than 1.7 million square feet, our highest annual total on record. A significant percentage of our 2025 leasing velocity occurred in New York, where we are currently over 92% leased at share and the balance in San Francisco. In 2026, a significant percentage of our leasing activity year-to-date, including both leases signed and leases pending, is occurring in San Francisco, predominantly with leading technology and entertainment companies as well as leading law firms. At quarter end, our New York core portfolio's leased occupancy was 92.1% at share, up 470 basis points year-over-year. initial rents in New York year-to-date on leases signed and leases pending is 4.2% higher compared to 2025 as leasing fundamentals continue to improve across the board in Midtown Manhattan. Our plan is to make significant improvements at both 1633 Broadway and 712 Fifth Avenue. 1633 Broadway is among Manhattan, one of Manhattan's largest buildings our intention is to transform the lobby, infuse a second floor amenity space with a signature bar and event venue, a 200-seat conferencing atrium on the 17th floor and Plaza and elevator upgrades. At 712 Fifth Avenue, we intend to create a hospitality-driven amenity offering commensurate with the trophy quality of the building, more details to come. At quarter end, our San Francisco core portfolio's leased occupancy was 59.1% at share, driven largely by a couple of known move asset, One Market Plaza and One Front Street within the past year. Year-to-date, we have approximately 280,000 square feet of leases executed or pending, which equates to approximately 70% of our San Francisco leasing velocity in 2025. The strengthening tailwinds in San Francisco, coupled with our growth-focused strategy will drive continued leasing velocity and occupancy gains in our San Francisco core assets this year. Our plan is to make significant improvements at both One Market Plaza and One Front Street. At One market, we are redesigning the atrium and the entire ground floor experience, infusing a state-of-the-art conferencing center, fitness facility, Atrium bar, 7-floor Skybar executive lounge and a rooftop deck. At One Front Street, we are totally reimagining the lobby with a cafe, a bar, restaurant, the second floor amenity space with a gym, conferencing a private lounge, and we will also be fully modernizing the elevator system in the building. We are moving quickly to execute on our key objectives and look forward to updating you on our progress. Michael Nierenberg: Thanks, Peter. By the way, a good sales pace by Peter for -- if anybody is looking for space. We've got a lot of really good stuff going on I'll now talk about Genesis. In my opening remarks, record quarter, $1.3 billion. What I would say is the business when you think about the noise coming out of the administration around build to rent and there was an article, I believe, in -- the Wall Street Journal that I read this morning that discusses how some of the builders are actually pulling back. And I think there's roughly $3.4 billion of commitments that are on hold as a result of some of the new proposed bills that are either being passed or have been passed as it relates to developers needing to not only build these units, but then having to sell them in 7 years. As a result of that, you are starting to see projects on hold. You're seeing the SFR market at a standstill. When you look at our business, the Genesis business today is roughly 35% to 40% multifamily origination. And I think what you're going to -- I know what you're going to see from us as we go forward, a lot more production in the multifamily space. We are going to grow that. At some point, we'd like to grow that around our asset management business. So we look forward to that. When you look at the business, it's been a great one for us. We expect to do something between call it, $6.5 billion and $7 billion of production this year. The P&L on that when we bought the business in '22 was -- I think it was, what, roughly $45 million to $50 million or something like that. This year, we should do something between $150 million and $175 million of EBITDA. So it's been a great business. But like I said, we won't sacrifice credit in leu of production. When you look at as we go here, there will be some opportunities, in our opinion, in the so-called RTL space. there'll be some opportunities in the housing market as we see some of the single-family rental operators get out. We have a very portfolio that we've been selling down to retail. We've got a couple of thousand homes there. But I do think there's going to be some dislocation there you're seeing in some of the equity prices and some of the larger institutional holders in that business. With that, I'm going to turn it over to Baron, who will talk about new res, we'll touch on the investment portfolio, and then we'll open it up for Q&A. Baron Silverstein: All right. Thank you, Michael. Good morning to everybody. Starting on Slide 18. New res had another great quarter. First quarter pretax income, excluding mark-to-market of approximately $274 million, which is up 10% quarter-over-quarter and delivering a 19% ROE for the quarter. The results were driven by our disciplined origination strategy higher servicing fees and despite interest rate volatility, higher recapture and lower amortization. And this performance continues to show the power of our platform and our ability to drive consistent earnings. On Slide 19, a just a quick highlight and just given the size and fragmented nature of the mortgage and home ownership market, we believe there is significant runway for scale technology-first operators like Newrez. Since the inception of our platform, we have grown our originations market share 8x and our servicing market share 6x, positioning us, as Michael said, as the third largest service run the fifth largest originator. And as we continue to deliver on our strategy of making home happen, we continue to grow with our client base overall. On Slide 20, we're highlighting our 2026 strategy with a focus on driving returns through revenue growth and a reduction in operating expenses. Our revenue growth is focused on maximizing overall customer lifetime value through the expansion of our partner base, continued product innovation and homeowner retention and that's shown in our consumer recapture rate and continued growth in our third-party servicing franchise. Our expense initiatives are laser-focused on harnessing technology to deliver operating leverage. Our cost per loan, which is already almost half of industry average, we project an additional 15% reduction from our current run rate. In executing on this growth up and spend down strategy is going to continue to deliver for our shareholders. Turning to Slide 21 in our originations business. Funded volume came in at $15.5 billion, which is up 31% year-over-year but lower than last quarter due to seasonal and interest rate factors. However, we continue to drive growth in our higher-margin direct origination channels, consumer direct and wholesale, which comprised 37% in Q1 '26, up 75% year-over-year. And while market competition continues to pressure gain on sale margins, we maintain pricing discipline, did not chase market share and margins were contained within our historical 4-quarter range. We also had a very busy quarter of new product launches. Quick flows refinance application or wholesale Express home equity offer streamlined title, cryptomortgage and medical malls. And most recently, our Freddie Mac Vantage score pilot demonstrating our shared commitment to responsibly expand access to home ownership and reduce cost to borrowers. On Slide 22, we continue to build on our proprietary AI functionality, which is an end-to-end intelligence system, enabling our originations platform, allowing us to capitalize on our operational efficiencies. Our partnership with HomeVision is ahead of schedule with our first codeveloped tools being implemented by the end of this quarter. All of these platform investments will continue to improve our operating leverage, driving further efficiencies in loans per FTE capacity and turn times. And finally, moving to Slides 22 and 23 regarding our market-leading servicing platform, we continue to grow our capital-light fee-based third-party servicing business with 5 new clients and $22 billion in new loan boarding. Our owned MSR portfolio continues to perform well as delinquencies remain stable quarter-over-quarter and the FHA delinquencies flattened as we normalize the impact of the new FHA modification guidelines. Regarding Valin, we're on track for the transition to their operating system in early 27 and the magnitude of these benefits are moving to an AI-native and modern servicing technology solution cannot be overstated. We expect to materially improve our processes and workflows, providing us a significant competitive advantage through our operating flexibility. And it will also be a significant benefit to any and all servicers who choose to move to Valid. Once we're fully operational, we're estimating total annual expense savings in excess of $65 million or a direct cost per loan reduction of 15% to $93. So I continue to believe our business is the best positioned as it ever has been, and I look forward to sharing the next chapter of the Newrez grow store. Back to you. Michael Nierenberg: Thanks, Baron. Just wrapping up here on the investment side, probably 1 of the more active quarters we've had in a while, quite frankly. As I pointed out earlier, we did for non-QM securitizations totaling $2 billion. The one thing I would say is this doesn't include some of the other things we're doing around certain funds that we've launched where we have flow products going in from some of our origination businesses, and we expect that to continue and to grow as we go forward here. During the quarter, $3 billion of investment, $1.4 billion in non-QM loans, $1.6 billion in RTL. I pointed out earlier about the upgrade flow agreement. How we purchase more loans in the quarter. So overall, investment activities remain what I would say, despite all the the headline risk and the noise robust. What you're going to see from the firm as we go forward, hopefully, real growth in the ABF business under the Sculptor brands and and some of the other and Crestline brands. And again, just staying quite frankly, true to our core knitting and where we can create an edge in the marketplace, that's where you're going to see us grow. But again, as we look forward, we're not going to sacrifice we're not going to sacrifice credit for AUM growth, and that's going to be our common theme. So with that, I'll turn it back to the operator, and then we can open up for some Q&A. Operator: [Operator Instructions]. The first question today comes from Crispin Love with Piper Sandler. Crispin Love: First, Michael, I appreciate your comments that you're not going to stack price credit for AUM growth. But can you just can you discuss the fundraising momentum in the asset management business and the outlook there, Sculpture and Crestline what you're seeing from institutions and then on the BDC private wealth side of those businesses, just all the noise out there? Michael Nierenberg: Sure. So what I would say on the I mentioned before, and this is a little bit of old news, the real estate group at scope to just raised $4.6 billion and probably one of the largest successful fundraises in the real estate space, I would say, in a long time. When we look at the core competencies, and this is where I'd like to think that we have an edge, whether it be a scope during you look at the overall track record and at what we've done at Rithm and then at Crestline, we're going to leverage the core competencies of what we do. So for example, when I look at the ABF space, we launched an evergreen fund in the third quarter, with one of our warehouse partners, which is performing extremely well. The -- and that's backed by some of the production stuff that we create, whether it be in Genesis or whether it be in Newrez. When you look at Sculpture's track record around ABF, it's -- quite frankly, it's unparalleled. We'll be out with new funds there. here in the short run. When you look at the credit performance overall as a firm and whether it be at Sculptor and/or Crestline, the credit performance has been very, very good. We don't see any real deterioration in any of the names that we actually hold within any of the funds. And I do think it's important to note when you look at the so-called noise in the private credit markets, a lot of that has been driven by retail. So while everybody wants these evergreen funds that -- where you theoretically have liquidity, we know when the world turns sideways or the markets get dislocated, there is no liquidity or very little liquidity. And I think one of -- I cited this this morning, in the documents, it says you could have 5% redemption. So when these products are marketed and it depends on who the underlying fund manager is. But when you look at the underlying markets and you have something that says in a document redemption limits, there's a reason that happens because if you think about it logically, if Mr. & Mrs. Smith want to take out $1 from their -- whether it be their BDC or their credit fund, and Mr. Mrs. Jones don't want to take out a dollar. Why should Mr. Mrs. Jones getpenalized because someone else needs liquidity and you have to liquidate a good position. That's why I think in a lot of these documents, you have these caps. Now while saying that, I think it's an education process. There's been a lot of stuff that's been distributed retail. The good news for us is we don't have a ton of stuff through retail. The bad news for us or actually, the good news for us is as we go forward, I think the market is learning. We don't think this -- as I pointed out in my opening comments, this is not systemic risk, and I think there's a huge opportunity for us. The other thing I would say is that it is very, very difficult to deploy the -- we're not going to be Blackstone or Apollo or 1 of the largest managers. We're going to grow, hopefully, and we're going to grow through performance. But when you look, it's very, very difficult to create alpha when you have to deploy the sheer amount of capital that a lot of the large asset managers have. Kudos to them, they built great businesses, but it's very, very difficult to deploy that kind of capital. As it relates to the BDCs, roughly, I think the numbers are 20% of the BDCs have software exposure. I pointed out in my earlier remarks, we haven't -- while the headline risk is dramatic. And if you go back to '21, when interest rates were 0, and you think about companies that were lent money at 20 times revenue, not EBITDA, revenue and now you have AI kind of taken a center stage, I think it's going to take time to play out. We don't really know how that's going to play out. As you think about the software industry, I think software that's mission-critical to businesses are going to be the winners. There's going to be a bunch of losers right now, when I look at our business, we feel really good. As we think of capital formation here at the firm, we're trying to simplify our business, Sculptor is going to be our asset management business. We have Crestline, which we closed, which is another division of asset management. They do different things. And now the teams are working together. And hopefully, we're going to raise a lot more capital. But again, that capital is going to be based on our ability to create alpha relative to the peer set that's out there in the marketplace. And that's what gets us excited. So I would say, armored and upward, and the business feels really, really good to us. There is noise that's going to create opportunity because when you think about the credit markets and you have a 5-year treasury, for example, at 4%, the high-yield index is 3.25%, 350 unlevered returns in that business are now 7.5%. Debt looks very, very attractive to us. And the last point I'll make and then turn it back to you is when you look, get its above equity. The S&P is at an all-time high, something is not adding up here. So we'll see how it all plays out. But we feel really, really good where we are from an asset management standpoint, where we're going with that division and how we're going to create more FRE and hopefully turn the tide on the overall valuation of our public equity. Crispin Love: Great. I appreciate all the color there. That's a good segue to my next question because just one pushback that I get from investors is that, that rhythm has become more complicated. You're definitely diversified but in a lot of areas, the results have been strong, but some investors may just move on to a simpler story. So first, what's the response to that? And then just second, what are the key ways that you're looking to simplify the business and the story overall to trade closer to that sum of the parts level. Michael Nierenberg: One is we need to grow our FRE in our asset management business. And that is a big focus, right? So with -- obviously, part of that will come with AUM growth. Part of that will come with synergies. And that really is going to be a driver. So as we create more FRE, the asset management business can then get separated from the broader REIT. So when you think about it, we have really 2 main divisions in our operating business. One is the mortgage company, which we again, another simplistic thing, everybody wants you to take it public. I'm not sure that it's the best time to do that. Obviously, you looked at 1 of our peer -- one of the pure mortgage companies, their stock, when you miss earnings and the stock goes down by in a day is no investor wants to be in that position. So you can simplify by taking the mortgage company public, breaking out the asset management business, you have Genesis, which is going to continue to grow. But what you're going to see in some of these businesses is more third-party relationships because the one thing that's different today than where we were a couple of years back is that the adoption of ABF as an asset class for third-party LPs has never been greater. And there's a reason for that, right? So you've seen a little bit of rotation at a private credit into what we'll call real assets. In the ABF space, you have assets that are kind of think about almost like hard assets where the cash flow is backed by these hard assets, or you're going to see more and more capital deployed there. But overall, like the REIT is still the REIT. If I had my [indiscernible], we paid out $6.6 billion of dividends over -- since we started the company in '13. 50 million shares, that's about $13 a share. You didn't pay out, I think, I don't have my calculator in my head, but I'll try. Anyway, if you think about that, $13 plus 10%, it gets you to a mid-20s stock price. I think part of the challenge is as we continue to maintain REIT status and pay this dividend, which we have no intention of changing right now, growing the asset management business has to be job 1, thinking about simplifying the mortgage company story and Baron and the team have done a great job there. But I think AI and I think Baron is a little bit shy about the amount of money that we're going to save there. But I do think the mortgage industry is going to change dramatically. So I think telling the story around the mortgage company, telling the story around the Asset Management division -- the REIT is not going anywhere. As you know, we just did the Paramount deal. We're going to bring in third-party relationships there. And it's really one of the things we're very focused on how do we grow earnings. Right? If we could grow in and create more growth businesses, that will help us because we have all the pieces we need at this point. But again, when I hear you, Crispin, part of the challenge is how do we simplify the story. But I think the bigger asset managers, I would argue, are not any more simple than we are. I'd argue they're more complicated. So I think as we continue to get lumped into the REIT space, people who think we're complicated. If we go into the asset management space, I think we'll be less complicated. Operator: Next question comes from Bose George with KBW. Bose George: Actually, on the -- switching to the mortgage side, your gain on sale margin on the wholesale and correspondent was down a little bit. retail was up. Was it mix doing some of that stuff? Or were there trends in the quarter that are worth calling out? Baron Silverstein: I do think it's -- it is a little bit of a mix. I also think there's some competitive pressures overall with respect to non-QM. I also think when you look at our performance in Q4, especially on the wholesale side, we definitely had a good quarter going into Q4, and I think we just basically normalized back to margins as to where we landed in Q1, in a lighter origination volume you would expect that things would normalize. Bose George: Okay. Great. That makes sense. And then just quarter-to-date, any changes in book value to call out? Nicola Santoro: No, Bose. We're essentially flat. Operator: The next question comes from Doug Harter with BTIG. Douglas Harter: Hoping you could talk a little bit more about Elicor and bringing in third-party capital just in kind of reducing the capital commitment down to kind of what you talked about at the time of the deal announcement. Michael Nierenberg: So we closed a deal on, I think, December 20 or December 19. So we're 1 quarter in. Peter, Peter alluded to it, we've created, I think, $40 million of savings in 3 months. So we're very proud of that. And the conversations we probably had, whether I tell you it's 100 or more LP discussions since we've acquired the portfolio. What I would say out and Peter mentioned, we're out with a potential JV partnership on 1301, we have a JV relationship with Blackstone on one market in San Francisco. We have a JV relationship with another party, Beacon on one of the other assets in San Francisco. We'll continue to either do JV relationships, which you'll see us quite frankly, create gains. But I think for now, it's really how do we operate the company I wouldn't be shocked if at some point, we bring it back out in the public markets. I think it's a little bit too soon to do that. That could be a real capital raise as we think about creating external management fees around certain things. So I think it's all TBD. But over the course of the next kind of 9 months or 8 months through the year, it's likely we'll do some JV relationships third-party LP relationships on the assets. Douglas Harter: Got it. And kind of given your view on commercial real estate, is it -- are you considering kind of deploying additional capital into your 2 target markets? Or is that mostly going to be through kind of the property enhancements you talked about? Michael Nierenberg: I think it's both. In the business and we've gotten asked this question in the past, why did we see this deal. When you have the ability to acquire what we think are great assets at cheap prices, you do it. And I think it's that simple on this portfolio, on Fifth Avenue and Sixth Avenue, great operating team who we've unleashed, quite frankly, today relative to where the company was positioned before we acquired the company. Peter and his team have done a great job. That's how you make the money. By keep assets at a very attractive value and these are quality assets. They're not mid-block, they're on the big avenue. So we're super pumped about this one. Operator: The next question comes from Marisa Lobo with UBS. Ameeta Lobo Nelson: Just moving to Genesis. Looking at construction loans are about 52% of that book. As tariffs are pushing up labor and material costs, are you seeing any stress on individual projects? Or how is underwriting change there? Michael Nierenberg: Our underwriting box is always pretty tight. I don't think that's any different than where we've been overall since we've acquired the company. I will tell you listen, I'm like everybody else, if you look at consumer sentiment, I'm a little bit nervous. I mean you go out and you buy a sandwich, it's $15. So you have to watch out for, I think, overall, the state of the consumer some of the noise out of D.C. makes it gets you a little bit concerned as you think about the so-called build-to-rent space. I think seeing the article in the journal this morning, I think, is a positive as the administration will like, hopefully, peel back some of those -- some of the thoughts that you have there. But overall credit, we're extremely diligent. The gentleman that runs that business for us is CleneroSmith, does a great job by background. He's a bank credit officer. So it's not just to grow volume, it's to grow volume in a meaningful way with a tight credit box. We do a lot of different things that I think a lot of the other folks in that space. and we'll maintain discipline around credit. The portfolio, I think, is 3% is the delinquency numbers. And when you think about the average advance rate they're typically well below the industry. So we feel really good about where we sit there right now. But there's been no real change. But from a risk standpoint and a discipline standpoint, there's been no deviation to grow origination in lieu of credit. Ameeta Lobo Nelson: And looking at the new origination yields of 9.5%, down from 10.1% in Q4 -- is this a function of a mix shift or tighter spreads in the market? Michael Nierenberg: So a little bit -- everything is a little bit more competitive, as I pointed out earlier, there's huge demand for ABF products. This is one of the things that falls within that bucket. While saying that, you have points in and points out and you got different types of fees. So overall, the unlevered yields are still, give or take, about 10% and when you look in the securitization markets or we put them into funds in securitization, you're looking at well into the double digits on a net-net basis. So we feel -- we love that business right now. Operator: The next question comes from Trevor Cranston with Citizens. Trevor Cranston: When you guys look at the proposed capital rule changes for banks, do you think that has any impact on their participation in the mortgage market or the servicing market? I guess, I was particularly curious about how you think that impacts the correspondent channel of Newrez. Michael Nierenberg: It should help the MBS market, quite frankly. You got the basis in and around 105 basis points I think the type we saw pre the conflict in the Middle East was about 90%. That was the type we get out to 125, 130. Historically being a mortgage bond trader myself. I think stuff seems fair to cheap here. I wouldn't be surprised that the banks come in. I think some of this depends on the ministry -- the new Treasury Secretary that's not Treasury Secretary, the new Fed share that's going to come in and wash when he gets selected. He's a little bit more of an inflation hawk, and we were talking last night about you have a massive deficit in the U.S. It's roughly $40 trillion. So they're going to have to continue issuing a lot of a lot of securities to fund that deficit. The question is, is that more in the front end and the back end, I think the other thing that probably some of the banks CIOs are thinking about is inflation. You saw this morning in the U.K. I'm looking at bond yields of north of 5%. You look today, the front end of the treasury markets in the 380s, 10-year treasuries is now 4.35%. So I think some of that will play into what the banks do. But overall, I would think with easier bank rules and the banks having a ton of cash from their deposits, you're going to see them come back into -- or they're in the mortgage market, but I think you'll see them acquiring more. On the servicing side, don't no. I mean honestly, I think it's -- they're -- one of the -- a couple of the money center banks already have been involved in that space for a while. I think that could continue we just have to be disciplined about how we originate loans and make sure we're not doing something for market share versus actually making the money to which was Baron's earlier comments. Trevor Cranston: Yes. Okay. That makes sense. And then you mentioned briefly the kind of decline in valuations in some of the public mortgage companies that are out there over the course of this year so far. Are you guys seeing any sort of M&A opportunity associated with that? Or are there any platforms you think that have maybe gotten cheaper that might make sense as a sort of add-on to the existing platform? Michael Nierenberg: Historically, our M&A around the mortgage company space has been where we think we could acquire cheap assets as part of the overall acquisition. When you look at the company today, we don't need anything new. So when you look, I think there's, give or take, 10,000 people, including contractors at the mortgage company, Baron and the team are focused on getting really efficient when you look at the adoption of AI and some of the partnerships that we've set up as a company. I don't we don't have any to buy another mortgage company. If there is a mortgage company that's out there that's cheap, there's not that many left, quite frankly. When you look [ Rocketick ] acquired Mr. Coupe, which we built at Fortress, we built new res. There's this is not that many out there that are independent now. You have United Wholesale, but overall, I think we don't need anything more. Operator: The next question comes from Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just one on the Newrez side of the business and the potential benefits from AI and efficiency moves there. It looks as if in 2026 you could potentially expect some increased productivity around loan processing. Do you expect to see some of these benefits materialize over the next quarter or 2? Or is it mainly weighted towards the latter part of 2026. I just want to get a little bit more color around the benefits there. Baron Silverstein: Yes. On the origination side, right, we talked -- I talked a little bit about Home Vision and our partnership there. So that is going to be -- you're going to see those materials -- those benefits materialize coming into the second half of the year, right? Our initial product launch is ahead of schedule and our we hope to have those tools in place really going into the third quarter. Kenneth Lee: Got you. Very helpful there. And just one follow-up, if I may, just around the Crestline business and realizing that most of the clients that you're serving are from the institutional side. Wonder if you could just talk a little bit more about color you're seeing around institutional investor demand for direct lending. What are you hearing from clients more recently? Michael Nierenberg: It's interesting. When I was in Asia with Keith Williams, who runs Crestline, people -- there's still a lot of demand, what I would say, for direct lending. While saying that, I think that's more institutional based. You are seeing a little bit of rotation. Obviously, with headline risk, if you're a retail investor and you're not in the markets every day. I think if you could rotate out, that's probably some of the stuff that you'll see go on over the next quarter or so. But in general, we have all kinds of different funds in the market and capital formation continues. We have to lead with performance. If we're that heavily weighted to software and you sat down with an -- and you said, well, our software exposure is 20%, they may say like, I don't really want to do this. I would say that the background of Keith and the team at Crestline and they go back to 25 years of -- and a lot of the folks in that very direct -- same direct lending space, whether it be the folks at Sixth Street or there or at Crestline come out of the old Goldman model. So we feel really good about it, and I think you're going to see more capital being raised around direct lending and they'll continue to do that. Operator: The next question comes from Henry Coffey with Wedbush. Henry Coffey: The flip side to the complexity issue, and we all talked about that a lot, is that there's always 1 business that does well and another that maybe doesn't do so well. But combined, you always end up at a nice spot. Can you -- if you look at your different businesses, Michael, can you tell us who not to pick on anybody, but how do you rank in terms of who's really knocking it out of the park right now? And which businesses are facing legitimate headwinds? Michael Nierenberg: I would say -- and I don't want to sound like we're the -- I don't want to tell everybody we're always the best in everything. But overall, I think everything is performing extremely well. The real estate business, the Paramount or now known as Elicor portfolio is great. The team there. We're so excited to be working together with that team. Baron there's nobody in our organization that worked harder than Baron other than me. Baron works his tail off and Baron and his leadership team do a great job around the mortgage company. Clint and the Genesis team continue to put up great results in the asset management business, I think it's just getting started. We're at $60 billion now. And again, it's not an AUM rate, we have to perform. So when everybody asks, what else do we need or what's next? There's really nothing that's next unless we think we're going to create an edge in -- for our LP base and -- so I think and then the investment portfolio Rithm, Charles orentino and the team do a great, great job. So -- and we're all working together a long period of time. We love where we sit in the ecosystem, the -- if there's anything that kind of bothers us, it's the overall valuation of the so-called sum of the parts. But in general, I think all the businesses continue to perform really well. Henry Coffey: More pedantic. When you look at the P&L and the EAD calculation, is this pretty much the way the business is going to look with some improvements in efficiency. It's just sort of the new overhead level? Michael Nierenberg: No, I think we're always looking at overhead. We're always looking at ways to become more efficient. EAD needs to grow, and that will grow -- hopefully, grow as we -- as the asset management business grows and we get more efficient. But we're always looking at headcount, we're was looking at ways to become more efficient the mortgage company. I think the mortgage company does about $4.5 billion of revenue, something in that range. When you think about it, if we net give or take about $1 billion-ish, there's a lot of room to actually get more efficient there. And I think it's not just people wise, quite frankly, it's process-wise, it's processes. And I think you're going to see that with AI changing the mortgage industry. So we're excited about that. But in general, we look at everything. Asset management fees should grow over time as we continue to perform for our clients. Henry Coffey: $87 million in depreciation, is that the new run rate? Or is there some new extra items in there? Nicola Santoro: Henry, that's a little bit higher than the run rate. That includes both the indoor portfolio as well as loco. So as we sell down the indoor portfolio, you could expect that number to come to around $60 million, $65 million a quarter. Michael Nierenberg: And the indoor portfolio, just for everybody's netification, that's our single-family rental business. As I pointed out, we have a few thousand units or a couple of thousand units, and that continues to get sold down retail. Operator: This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks. Michael Nierenberg: Thanks for everybody dialing in. Thanks for your questions. Thanks for your support. We look forward to updating you on another quarter here in the near future. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and one. I will now like to turn the call over to Bill Grant, Senior Vice President of Investor Relations. You may begin. Bill Grant: Thank you, Bailey. Good morning, everyone, and welcome to the Ventas, Inc. First Quarter 2026 Results Conference Call. Yesterday, we issued our first quarter 2026 earnings release, presentation materials, and supplemental information package, which are available on the Ventas, Inc. website at ir.ventasreit.com. As a reminder, remarks today may include forward-looking statements and other matters. Forward-looking statements are subject to risks and uncertainties contemplated in such statements. A variety of factors may cause actual results to differ materially from those. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas, Inc. website. Certain non-GAAP financial measures will also be discussed on this call, and for a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental information package posted on the Investor Relations website. And with that, I will turn the call over to Debra A. Cafaro, Chairman and CEO of Ventas, Inc. Debra A. Cafaro: Thank you, BJ, and good morning to all of our shareholders and other participants. I want to welcome you to the Ventas, Inc. first quarter 2026 earnings call. Ventas, Inc. continues to drive growth and outperformance as a leading participant in the longevity economy. We are already into our fifth consecutive year of double-digit annual growth in our senior housing operating portfolio, or SHOP. Even more exciting, this year represents a new and positive inflection point when demographic demand jumps and growth remains elevated for over a decade. Our business and team have been built to meet this moment and seize the unprecedented opportunity for multiyear growth and value creation. With SHOP as our engine, Ventas, Inc. is now a $6 billion S&P 500 company with a portfolio of over 1,400 properties serving a large and growing aging population. We have developed a unique brand that stands for delivering for stakeholders and winning together. Our excellent first quarter results and improved full-year outlook demonstrate our competitive advantages, the impact of our differentiated platform, strong execution of our one-two-three strategy, and our momentum. In the quarter, Ventas, Inc. delivered 9% year-over-year growth in total same-store property NOI and normalized FFO per share. SHOP NOI grew over 15%, and U.S. occupancy increased 370 basis points, fueled by broad-based demand and our Ventas OI initiative. Accretion from senior housing investment activity further contributed to our growth in the quarter, showing our strategy in action. And notably, our liquidity reached record levels and our financial position continued to strengthen. Based on our first quarter results and our confidence, we have improved our outlook for the full year, increasing our mid guidance for FFO per share by $0.03 to $3.86 per share, led by SHOP same-store growth of 16%. As a result of our strategy and execution, we have already grown senior housing to over 60% of our business, and our communities now serve nearly 100 residents. In a large and highly fragmented sector where most operators run 10 or fewer communities, our platform gives us unique advantages to drive outperformance at scale through data and experiential insights. With our collaborative approach, Ventas OI also attracts many experienced operators who want to manage our communities and benefit from Ventas, Inc.’s aligned approach, people, and platform. And we are just getting started. In the investment market for SHOP, we have an outstanding private-to-public arbitrage opportunity. We have already closed $1.7 billion of attractive senior housing investments this year and over $6 billion since 2024. Our number one capital allocation priority remains U.S. SHOP communities that meet our strategic framework and can deliver unlevered IRRs in the double-digit to mid-teens range at pricing below replacement cost. Interestingly, because there is significant existing and new investor interest in senior housing, for all the obvious reasons, we are seeing more owners and potential sellers bringing assets to market and engaging in conversations with us about transacting. This trend is expanding our pipeline significantly. We are confident in our ability to capture more than our fair share of desirable deals because of our momentum in the market and our competitive moats. We have now increased our 2026 investment volume guidance to $3 billion. We are focused on increasing our SHOP business organically and externally to drive our forward enterprise growth rate and serve the nearly 70 million baby boomers who start turning 80 in 2026. In the next five years alone, this group will grow nearly 30%. Yet, in the first quarter, senior housing construction starts totaled only about 1,500 new units, and total senior housing communities under construction remained at historic lows. With at least a three-year start-to-finish development cycle, these favorable demand-supply trends provide our advantaged platform with compelling and durable tailwinds. The Ventas, Inc. team is unified and enthusiastic about outperforming at scale and the multiyear growth and value creation opportunity ahead. We are excited about our improved outlook for 2026 and the setup for the coming years as we pursue our mission to help people live longer, healthier, and happier lives. With our unique brand standing for commitment to each other and our stakeholders, we are in it to win it together. In closing, I want to recognize our admired colleague, Pete Bulgarelli. Pete is retiring after an extraordinary four-decade career in commercial real estate and eight years leading our OMAR business with excellence and integrity. On behalf of all of us at Ventas, Inc., I thank Pete, and wish him every continued success and happiness. With that, I am pleased to turn the call over to Justin. Thank you, Debbie. J. Justin Hutchens: I am pleased to join you today to discuss another strong quarter of execution in senior housing, reflecting continued momentum across both organic performance and external growth in our SHOP portfolio. I will start with SHOP performance, then provide updates on our active asset management and the full-year outlook, and conclude with investments and capital deployment. Starting with SHOP, the first quarter results reflect both strong market fundamentals and sharp execution across the portfolio. In the first quarter, SHOP same-store NOI increased over 15% year over year, kicking off our fifth consecutive year of double-digit NOI growth. This is driven by a powerful combination of occupancy growth, pricing strength, and operating leverage, and increasingly supported by the Ventas OI initiatives we are deploying with our operators. Occupancy continues to be the primary driver of performance. Same-store average occupancy increased 310 basis points year over year, reaching 90.4%. Performance this quarter was particularly broad based, with so many operators contributing to our success there are too many to name. The results in the U.S. portfolio were especially strong, where same-store occupancy increased 370 basis points year over year and outperformed the NIC top 99 markets by 150 basis points. On pricing, RevPOR increased 5% year over year, reflecting strong in-house rate increases that are running at nearly 8%, as well as continued improvement in street rates across geographies, operators, and product types. Operating expenses increased 5.8% year over year, which was largely driven by higher occupancy levels and winter storm-related costs. Net-net, NOI grew over 15% year over year, and we delivered meaningful operating leverage, with NOI margins expanding 170 basis points year over year to 30% and incremental margins at 50%. As we continue to deploy our active asset management, we are executing in close partnership with our best-in-class operators and with a talented and recently expanded Ventas SHOP team that is driving performance at the unit, community, and portfolio level. Across the portfolio, we are focused on community-level execution alongside our operating partners, supported by the continued evolution of Ventas OI. We are deploying targeted initiatives, including refresh CapEx, price-volume optimization guidance, and a sharp focus on sales culture, with the ultimate goal of achieving zero lost revenue days in our highly occupied communities. We are also implementing unit-level sales strategies supported by boots-on-the-ground site visits from our team. And we are doing it in collaboration with operators, delivering strong revenue and NOI growth while ensuring the senior living value proposition is realized for residents and families through the care, services, and peace of mind provided in our communities. This combination of active asset management and structural demand tailwinds has led us to increase our 2026 SHOP outlook, including same-store NOI growth of 16% at the midpoint, up from 15%. This is driven by a higher expectation of occupancy growth of approximately 300 basis points, which is leading to increased revenue growth expectations of approximately 8.75%. As we have discussed previously, the key selling season runs from May through September. While we enter the season in a favorable position because of the first quarter strength, our success during the key selling season will determine the full-year outcome. Looking ahead, there is real momentum building for us to expand on several key fronts. Over recent years, we have made intentional strategic moves to ensure Ventas, Inc. stands ready to harness the growing surge in senior housing demand. Because of those efforts, we are confident that we will continue to drive solid organic growth fueled by ongoing increases in occupancy and the operating leverage we are achieving across the SHOP portfolio. And with our U.S. communities averaging about 87% occupancy, there is still significant runway for us to continue to drive outperformance. Importantly, the strength we are seeing in SHOP performance gives us confidence to continue leaning into external growth. Turning to investments, 2026 is off to an excellent start as we execute our external growth strategy with focus and intention. Year to date, we have completed $1.7 billion of high-quality senior housing acquisitions in the U.S., building on the fast start we saw in January. On this activity and our outlook for the remainder of the year, we are increasing our senior housing-focused investment guidance from $2.5 billion to $3 billion for 2026. While there is heightened interest in senior housing investments as additional capital flows into the sector, Ventas, Inc. remains competitively advantaged. Notably, of the $1.7 billion of investments closed year to date, more than 90% were relationship-driven, over 60% were sourced off-market, and more than 40% were completed with repeat sellers. Since 2024, we have now completed over $5.7 billion of senior housing, adding more than 17,000 units to the SHOP portfolio. These investments have been carefully selected to closely align with our right market, right asset, right operator framework, and they are performing in line with our underwritten expectations. We are buying communities that enhance portfolio quality, are located in attractive markets with strong demand growth, are insulated from future supply risk, and deliver low- to mid-teens unlevered IRRs. Our investment strategy and team are focused on senior housing investment opportunities with different combinations of growth and yield that can produce attractive risk-adjusted returns. For example, earlier this month, we completed a $540 million acquisition of the Revel portfolio, which represents a value-add lease-up opportunity at scale. This investment consists of newly built luxury independent living communities located in affluent, high-growth markets across the Western U.S. With average in-place occupancy in the mid-70% range, the combination of the newer assets, high-barrier markets, and significant embedded occupancy upside creates a highly attractive growth profile. This portfolio was acquired at a significant discount to replacement cost, even with its quality, scale, and amenity set. The seller elected to retain a 25% interest in the portfolio to share in the strategic and financial benefits of implementing Ventas OI initiatives across the portfolio to drive unlevered IRRs in the mid-teens. Transactions like this underscore the advantages of scale, relationships, operating expertise, and decisiveness in today’s market. Excluding the Revel transaction, our remaining senior housing investments completed so far in 2026 are expected to generate a 6.9% year-one NOI yield and low- to mid-teens unlevered IRRs. These investments also allow us to expand our operator relationships. Our Ventas OI platform provides the capabilities to manage multiple operators at scale, enabling us to retain strong in-place operators and support their growth. Looking ahead, we plan to continue to pursue attractive senior housing investments that combine durable in-place cash flow, embedded growth, and attractive risk-adjusted returns. In closing, we are encouraged by the performance of the SHOP business in the first quarter and excited about the opportunities ahead. We are executing from a position of strength with strong organic growth, compelling external investment opportunities, and a long runway for value creation. With that, I will turn it over to Bob. Robert F. Probst: Thank you, Justin, and good morning, everyone. I will cover three areas this morning: first, our financial results for Q1; second, our balance sheet and capital activity; and finally, our updated outlook for 2026. Starting with our overall enterprise performance, we delivered a strong start to the year led by over 15% same-store cash NOI growth in our SHOP portfolio. Normalized FFO for the first quarter was $0.94 per share. Up 9% year over year, driven by total company same-store property-level growth of nearly 9% and accretive senior housing investments. Our outpatient medical and research portfolio, or OMAR, delivered 2.4% same-store cash NOI growth, led by outpatient medical growing 3.1% year over year. Occupancy in outpatient medical reached almost 91% in the first quarter, a 50 basis point increase year over year that marks the seventh consecutive quarter of occupancy growth. Our triple-net segment grew same-store cash NOI by 1.6% in the quarter, benefiting from the 35% Brookdale cash rent escalator which went into effect 01/01/2026. Triple-net results are in line with our expectations and supportive of our confirmed full-year guidance for the segment. Turning next to our balance sheet, our balance sheet continues to strengthen as a result of organic SHOP growth and equity-funded senior housing investments. Net debt to EBITDA improved to 5 times at quarter end, a 20 basis point sequential improvement, with further improvement expected through the balance of the year. Liquidity is strong, with $5.5 billion available at the end of the first quarter, providing Ventas, Inc. with significant financial flexibility. Our investment momentum has continued into 2026. To fund this growth, we raised approximately $2.4 billion of equity designated for 2026 investment activity, including $800 million settled during the first quarter and $1.6 billion currently available through forward equity sales agreements. Given our encouraging start to the year, we are improving our outlook for 2026. We now expect normalized FFO per share to range from $3.82 to $3.89, or $3.86 at the midpoint, a $0.03 increase from our prior outlook. Bridging from our prior guidance midpoint, the $0.03 increase is driven by stronger organic property performance led by SHOP and accretive senior housing investment activity, which together contributed a $0.04 per share increase. These favorable items are partially offset by $0.01 from the higher forward interest rate curve. We are also increasing our total company same-store cash NOI growth outlook to nearly 10% at the midpoint, resulting from a 100 basis point higher SHOP midpoint of 16%. A more fulsome discussion of our guidance assumptions can be found in our Q1 supplemental earnings presentation posted to our website. To close, we are very pleased with our start to 2026. The first quarter reinforces the strength of our organic performance, the durability of senior housing demand, and the embedded growth profile of our portfolio. With that, I will turn the call back to the operator. Operator: Thank you so much. At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. Your first question comes from the line of Julien Blouin with Goldman Sachs. Your line is open. Julien Blouin: Yes, thank you for taking my question. Just wanted to touch on the $540 million Revel investment. In your view, what had driven the underperformance of that portfolio, keeping it in the mid-70% range? And then as we think of how Ventas OI plugs in there, what are the lowest hanging fruit that Ventas OI can allow you to improve, and what are some of the longer-term gains that the platform gives you? And more generally on the current transaction environment, how would you describe the current level of competition and capital chasing transactions? Are you seeing a lot more bidders showing up when you are participating in more widely brokered opportunities? And are you starting to see that reflected in some of the cap rates? Have you changed your expectations at all on the cap rate front for the rest of the year? J. Justin Hutchens: Great questions. I will step back and give a little history and then some of the attributes of the acquisition and the opportunity ahead. This is a portfolio that was built by Wolff Company, which is a large multifamily developer with a very long history based in Scottsdale. They entered the senior housing sector with this really exciting development because it is a resort-like independent living product that would appeal to a very active senior in a highly amenitized, luxury setting. At the beginning, when they entered the space, they used third-party management. When they got into it, they realized they were probably better off setting up their own platform, so they set up Revel, and that was a slow start. Now they have a team that is very talented across the board. One of the reasons they wanted to work with Ventas, Inc. is the Ventas OI platform and the ability also to stay in this joint venture so they could participate in some of the upside. What we like about it is the quality of the assets is really high, we are buying below replacement cost, and we see significant operational upside. Our team and the Revel team are already on the ground, and we are seeing pretty immediate sales upside. We are catching that portfolio at a time where it has good momentum already. We are facing a forward market that has 1,200 basis points in net demand over the next few years, so we are playing into tailwinds as well. Put together, it is a really exciting, high-growth investment opportunity in really high-quality assets, sourced completely off market, and it should generate really good returns for us moving forward. Stepping back on the broader market and competition, we just updated our investment guidance to $3 billion, the highest we have had in three years, during a period where there is more interest in the sector. There are clearly new investors: a wide variety of PE, both large and small, owner-operators, other REITs, institutional capital. Even with that, we raised guidance with high confidence because of our competitive moat: the Ventas OI platform; the ability to manage operators at scale in a highly fragmented sector, now up to 44 operators; no financing contingency; very high liquidity; and an excellent track record of execution. Year to date, 90% of investments are relationship oriented, 60% off market, 40% repeat sellers. The pipeline is growing. On cap rates, I mentioned previously there was a drift down from the 7s into the 6s. We printed around a 6.5% all-in, including the Revel deal, and 6.9% without. Looking at the rest of the year, we are expecting high-6s moving forward, with a mix of value-add and high-performing communities with upside. Even though cap rates have drifted down a bit, our IRRs have remained solid, driven by Revel and other value-add opportunities that are delivering growth. Operator: Your next question comes from the line of James Hall Kammert with Evercore. Your line is open. James Hall Kammert: Justin, I think you mentioned expenses were 5.8% this quarter, if I am not mistaken. Generically, how much of that would you say is recurring food and labor versus temporaries like sales commissions or weather? J. Justin Hutchens: It was total expenses at 5.8%. A lot of it was weather related. We had a little bit of volume impact. The full-year guide is 5.5%, and that includes the weather-related expense in the first quarter, but also some volume impacts throughout the rest of the year. Robert F. Probst: The principal driver to the OpEx guide from 5% to 5.5% is volume, Jim. James Hall Kammert: That is helpful. And how does Ventas, Inc. educate its senior housing residents regarding that expense dynamic vis-à-vis probable price increases? Do you think residents understand that? Debra A. Cafaro: Jim, good morning. One important point to start the conversation is that the labor market has been pretty constructive, and that is important given that we do hire caregivers to take care of the residents. J. Justin Hutchens: The other point is really the value proposition that the residents are realizing. There is a wide variety of reasons they engage with us: safety, socialization, peace of mind, ease of living, amenities, and the care delivery in assisted living and memory care settings. If you are delivering services and care the right way and engaging with residents and families in a way that builds and maintains trust, the value proposition is well understood, and the price discussion is understood as well. There is certainly an active dialogue between our operators and the residents around the cost of service and care delivery and the prices we charge in association with that. James Hall Kammert: Appreciate it. Thank you. Bill Grant: You bet. Operator: Your next question comes from the line of Nicholas Joseph with Citi. Your line is open. Nicholas Joseph: Thanks. It is Nick Joseph here with Seth. In terms of your comments on increased competition or more interest in the sector, in your prepared remarks you mentioned that supply and construction starts are still very low. At what point are you starting to see capital, as cap rates compress and interest rises, move into development, particularly given your comments on acquisitions versus replacement costs? I know there is still a gap there, but are we getting closer to some of that capital becoming interested in starting new supply? And then on asset sales, given the strong transaction market and interest, what is the opportunity from the Ventas, Inc. portfolio side to recycle any senior housing assets to harvest value and redeploy into other opportunities? J. Justin Hutchens: Another really good question. We are still 20% to 40% off in terms of where rents need to be for most developments to pencil. When developments start to be delivered or you see starts announced, it is most likely going to be a very high price point product that is disconnected from the existing market such that the underwriting “works” for that niche. Across our markets, we see 20% to 40% higher rents needed to support new supply. That does not mean there is no interest from potential capital, operators, and developers. Given the fundamentals are so strong and the demand outlook is so incredibly strong, it makes sense we will need new supply at some point, but it still does not seem near term. On recycling, each year we have a small amount of targeted dispositions, usually a few hundred million dollars. There is always some in senior housing. A key part of our strategy is ensuring we are in the right markets with the right assets. If we see anything that does not support the growth profile we are targeting, we will introduce it to the market as a sale. We have been doing that consistently over the past several years, and we will continue to look for that bottom part of the portfolio to sell. Operator: Your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open. Vikram Malhotra: Good morning. Thanks for taking the questions. First, going back to the Revel deal, can you give a bit more flavor as to why occupancy has not picked up and their positioning of the portfolio in terms of product mix? Is it a price point issue, a labor issue, or unit mix? What could get you trending higher over the next year or two? And secondly, is it time for Ventas, Inc. to maybe use the fund it already has or create a new fund to monetize certain core higher-occupancy senior housing or maybe some life sciences, where you could perhaps get fees and promotes? J. Justin Hutchens: Good question. There is no structural issue like studios in a one-bedroom market mismatch. This investment was well built for the type of resident they are trying to serve. When you visit, you do not see many residents in their apartments—these are very active communities with a significant focus on health and wellness, fitness, and education around those topics. There are social events, music, activity at the bar in the afternoons—it is a great environment. They have done a great job introducing a product that will work and be popular. Many locations are already proving out stabilized occupancy, but a lot of the newer product is still in lease-up. We will target those communities and work with the team in place that has generated some momentum to improve sales execution. There are also price sophistication opportunities we can bring through the Ventas OI platform. Debra A. Cafaro: Vikram, this is Debbie. We do have a Ventas investment management business that includes an open-end fund and some other vehicles. With all the interest in senior housing and with Ventas, Inc.’s competitive advantages and brand, we are well positioned to continue to try to expand our footprint in senior housing in a variety of ways, which could include additional vehicles. Operator: Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open. Austin Wurschmidt: Good morning. Justin, the incremental margin within the SHOP segment has remained around the 50% level, which I think you previously assumed in initial guidance. Has anything changed relative to what is assumed in the revised guidance? And given occupancy within the same-store pool is now above 90%, when do you think you could start to see that incremental margin improve into the 60% to 70% range or better? Also, you reiterated that the May to September key selling season will determine how the year plays out, but you did increase occupancy guidance given the lack of seasonality you saw in 1Q. How much of that occupancy guidance increase was specific to 1Q versus flowing through a better outcome through the balance of the year? J. Justin Hutchens: The incremental margin has been around 50% for years, running that journey from the mid-80s to 90% occupancy. Guidance assumes it remains in the 50s this year. In our portfolio, communities that are 90%+ occupied and had flat occupancy year over year deliver a 70% incremental margin. We still have a group of communities in lease-up—our U.S. portfolio is only 87% occupied—so many communities are delivering occupancy growth. Our goal over time is to get as many communities into that flat, high-occupancy category as possible. On occupancy guidance, the key selling season has not even started yet. We have optimism heading into it because of the strong start, and you should think about the strong start driving the increase to approximately 300 basis points for the full year, with a lot of execution left during the most important part of the year. Operator: Your next question comes from the line of Michael Albert Carroll with RBC Capital Markets. Your line is open. Michael Albert Carroll: With seniors housing occupancy now above 90%, does it make more sense for operators to push for higher rates as opposed to when occupancy was in the low 80% range? Does the improved occupancy level allow these operators to be a little bit more aggressive in their operating strategy? J. Justin Hutchens: I would remind you we are 87% occupied in the U.S., so we see our opportunity very much as volume driven. We are happy to see good performance from both occupancy and rate, which is delivering the approximately 8.75% revenue guide for the full year. Everything is contributing to the revenue growth and the improved outlook, however volume remains the number one focus. We do know when you have higher-occupied communities there is better opportunity for price performance, and we see that in our portfolio, but the primary opportunity is to continue to drive occupancy in the U.S. Debra A. Cafaro: Right, and that is what sets up the multiyear growth and value creation opportunity from organic growth in SHOP—the rate and occupancy working together to deliver outperformance. Michael Albert Carroll: And circling back on potential developments, have there been interesting development opportunities across your desk that you are willing to pursue, or is it still mainly focused on acquisitions at this point? J. Justin Hutchens: We are certainly focused on acquisitions. We are in our third year of a very successful run acquiring communities that are accretive in year one and have a growth profile supporting low- to mid-teens unlevered IRRs. The pipeline has grown, and we are executing on it. That is our first priority, along with continuing to drive organic performance across the SHOP portfolio and improving performance in the communities we already own. Development opportunities may come in the future, but that is not our focus at this time. Operator: Your next question comes from the line of Wesley Keith Golladay with Baird. Your line is open. Wesley Keith Golladay: Good morning, everyone. Back to the Revel portfolio—looking on the website, A Place for Mom looks highly rated. What is the game plan? Is it really leaning into Ventas OI given the [inaudible] operator, more data, advice on pricing—how near term is the opportunity? Will their portfolio be ready for the key leasing season? And when you look at the pipeline, is this a unique opportunity, or do you have similar value-add deals coming that could deliver nice growth within a few years? J. Justin Hutchens: It is absolutely ready for the key selling season. These are well-constructed, resort-like communities that will be very competitive. Early in discussions with Wolff, it became clear that the combination of great communities in high-demand markets, a newly reinvigorated and talented management team, and the Ventas OI platform—which includes our data analytics and boots-on-the-ground approach already underway—sets us up to create value together. The biggest opportunity is to continue to drive sales, and price and volume always work together, so we will bring our expertise in both areas. On whether this is unique, we have had a number of similar value-add opportunities already—just smaller. This is the first at scale, and we are excited about it. We have other value-add opportunities in the $3 billion pipeline and look forward to delivering accretive investments with growth. Operator: Your next question comes from the line of Juan Carlos Sanabria with BMO Capital Markets. Your line is open. Juan Carlos Sanabria: Good morning. On seniors, there have been press articles about operators being able to charge entrance fees and maybe generate some revenue off waitlists given tight markets. What is your approach, and how might that contribute to the 100% occupancy goal or zero-days downtime? And second, on development or supply, curious on the appetite to structure something with a preferred or mezz component where you could earn a return during buildout or lease-up—historically you have not done U.S. development in seniors housing. Is that of interest, given some leading operators have talked about development? Debra A. Cafaro: It starts with the value proposition. This is a private-pay, consumer-driven business that people choose for the security it offers them and their families. That is encouraging, especially with the demographic demand accelerating and remaining elevated for a long period. Justin can speak to management of communities as they go up the curve in occupancy. J. Justin Hutchens: You mentioned entrance fees—I will reframe as community fees, which have been part of industry pricing for many years. In more competitive periods, they would be reduced or waived; in this period of increased demand, they are going up. We are seeing higher community fees across our portfolio. We are also starting to see waitlists form. We have had them for many years in Canada—our longest waitlists are in Quebec—and we are starting to have some in the U.S. There are certainly deposits required for waitlists, and in some cases you can charge to be on a waitlist. We are at the front end of that, but demand and the value proposition are very appealing, which has supported better pricing. On structured development capital, there are structures we can utilize that make sense, and with the right opportunity we can underwrite returns, and we have partners qualified to do that with us. It is just not a big area of focus for us. We are focused on acquisitions that are accretive and deliver low- to mid-teens unlevered IRRs. So yes, there is a way to do it, but that is not where we are focused at scale at this point. Operator: Your next question comes from the line of Farrell Granath with Bank of America. Your line is open. Farrell Granath: Hi, good morning. First on the increase in cash G&A—you mentioned adding staff on the SHOP platform. Are there any other contributing factors or initiatives going into that figure? And on the rollout of Ventas OI, is that fully with all your operators currently on your SHOP platform, or is there an additional rollout we should expect? Robert F. Probst: On cash G&A, as we mentioned in February and as you see in the first quarter numbers, we are investing behind the business. We are growing and scaling the platform and investing behind that—people, process, technology—in order to accelerate growth. We continue to believe that growth in cash G&A will be in line with the growth of the enterprise. We remain focused on efficiency and effectiveness, and the first quarter is representative of the plan. J. Justin Hutchens: Ventas OI is fully integrated. If you are new to us, there is a period of time that has to pass before you are fully integrated, and we have a number of newer operators that have joined us in recent months. But this is a fully integrated platform across all of our operators and geographies, primarily in the U.S., combining our data analytics platform with experiential insights delivered through boots-on-the-ground site visits with our operators. Operator: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Your line is open. Richard Anderson: Thanks. Good morning. Great quarter. Early on, Debbie, you said you are seeing increased engagement to do deals with Ventas, Inc. I am curious why anyone would be a motivated seller with everything starting to happen here—it is not like they are getting 5 caps and getting paid for the opportunity set going forward. What is in it for people to be a seller today beyond Revel? And along those lines, do you think there will be more in the way of JV-type deals you will have to accommodate to continue to grow? Debra A. Cafaro: Good question. It is true more people are bringing assets to market, building our pipeline and giving us a great opportunity set. Sellers come in different varieties: private equity, holders with limited-life vehicles or holding periods that have been extended over the last couple of years who want to achieve returns and recycle capital; we see some debt maturities. When assets get into our hands, they are likely to perform better. We may have better returns than the seller could if they held on, given our advantaged platform. This is a very difficult business to run on a one-off basis or at small scale. We are building a platform to outperform at scale. Those are some of the reasons. J. Justin Hutchens: On joint ventures, the Revel deal is a strength-on-strength JV to create value. In any investment, we look for alignment. We found it there through a JV. Most of our senior housing investments are done through aligned management agreements, helping us be on the same page with operators from day one. The rest of our expected investment activity is 100% equity by Ventas, Inc. Richard Anderson: A follow-up—many REITs and others are going after this opportunity. Everyone is sort of standing on the same side of the boat, and eventually the boat tips. Do you see an opportunity where buyers today may be necessary sellers a couple of years from now when development comes back and rents move closer to support new supply? Debra A. Cafaro: I agree, and the reason is about the expertise and data necessary to do well in this business. Some new entrants will find it more challenging and will likely be sellers, because you really have to know what you are doing. Justin has decades in the industry, and we have spent five years building this platform. It is differentiated and effective. Without that, it is harder to succeed. That should give us more opportunity over the next couple of years. Richard Anderson: Okay. Great. Thanks very much. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Your line is open. Michael Goldsmith: Thanks for taking the questions. Sticking with the Revel investment, it sounds like you have done some smaller lease-up or unstabilized acquisitions in the past. This one is clearly a bit bigger. Are you more willing now to be a buyer of these types of properties? If so, is that driven by the improved backdrop or something else? And can you provide an update on the Brookdale transitions—how those 45 assets are trending? Are you in line with your expectation of realizing $50 million of upside, and what is the timeline? J. Justin Hutchens: From the beginning of this investment run which started in 2024, we have been focused on unlevered IRRs in the low- to mid-teens, and we have been delivering that through a variety of senior housing investments. Value-add opportunities are great because they support more growth, and Revel hits the mid-teens on unlevered IRRs. There are other smaller opportunities like that we have done, and others in the $3 billion pipeline that will be closer to mid-teens as well. You are really pulling two levers to get there: the going-in year-one yield and the expected growth profile over time. On the Brookdale transitions, the 45 communities were transitioned late last year and earlier this year from our Brookdale lease to our SHOP portfolio. These are large-scale communities in high-demand markets—tailwinds we are playing into. They require additional investment to be competitive. We will have completed by next month a majority of those investments. The CapEx deployment is on track. All five operators are fully integrated into the communities and are getting a handle on the operation, focused on the key selling season. That is going as planned. We viewed 2026 as the year to put the pieces in place, and 2027 and beyond as the NOI growth opportunity. Back in 2024, NOI run rate was around $50 million, and we anticipate doubling that over the next few years. We have put the pieces in place to get started on that process. Operator: Your next question comes from the line of Michael Lee Stroyeck with Green Street. Your line is open. Michael Lee Stroyeck: With bidding getting more competitive, particularly within high-quality, well-stabilized product, have you seen meaningful declines in your win rates within that subsector? And a separate question: you have highlighted growth in operator count over the years. Philosophically, how do you think about operator count—what are the gives and takes of greater operator diversification, and do you expect your operator count to grow or contract from here? J. Justin Hutchens: Interestingly, our win rate has been pretty consistent. The pipeline is bigger, and with a consistent win rate, that is why we raised investment guidance. Yes, there are exceptional deals that go for aggressive cap rates, but we have been able to exploit our strengths and track record and maintain confidence in our ability to execute. Win rates stay high also because many deals are off market and bilateral in nature. On operator count, the sector is fragmented—most operators have 10 or fewer assets, and the larger ones are usually around 100 or less. If you are going to invest in the space at scale, you need a platform that can accommodate multiple operators. We focus on operator selection criteria: strong local market focus and reputation; expertise in the product type; experienced talent; a management team that can create value and deliver great care and services; a culture that measures and improves customer and employee satisfaction; and managers who can deliver growth and do repeat business with us. Engagement with Ventas OI has become a competitive advantage. We like the advantage of having more operators. We are at 44 now, and as we continue to grow in senior housing, we believe you must have a platform that can handle multiple operators. Operator: Your next question comes from the line of Michael William Mueller with J.P. Morgan. Your line is open. Michael William Mueller: For the U.S. portfolio, what are your current thoughts on where your AL and IL occupancy should be able to max out over time? J. Justin Hutchens: That remains to be seen. We have had outperformance in IL occupancy growth. Debbie mentioned the demand profile, and we are really just getting to the point for our business as the baby boom population starts turning 80 this year. Assisted living also has really strong demand. We think both IL and AL have strong demand and will probably surpass previous industry highs. Our goal is to outperform. We would expect both categories to be well into the 90%. Debra A. Cafaro: Justin is a big believer in zero lost revenue days—he will not be happy until every room is happily occupied by a happy resident. J. Justin Hutchens: Keyword is happy. If you are delivering best-in-class care and services, then people should live with us. We will do our best to deliver on that. Operator: Your next question comes from the line of Nicholas Yulico with Scotiabank. Your line is open. Nicholas Yulico: Thanks. Back to Revel—you gave the stats on an average of six years old and mid-70% occupancy. Can you give a feel for the vacancy—Is it concentrated evenly or more in recent deliveries? And for you, Debbie, we have spent most of this call on senior housing—you are having operating success and expanding the portfolio, but SHOP is 56% of NOI. How are you thinking about the rest of the portfolio—outpatient medical, research, IRFs, LTACs, health systems—which are not adding to your growth rate or multiple? Is there opportunity to JV assets or sell them, and what would trigger reducing exposure there? J. Justin Hutchens: Vacancy is more in the recent deliveries. There are a handful stabilized, and the more recent deliveries have the most upside. We looked at the track record of the early developments and their lease-up once the new management team was in place, and we anticipate leveraging that approach combined with Ventas OI to deliver more occupancy growth where we have vacancy. Debra A. Cafaro: When we developed our one-two-three strategy in 2023, the focus was on growing SHOP organically and externally—that is one and two. Number three is driving performance across the portfolio. We have been successful executing that strategy: SHOP has delivered a fifth year of double-digit NOI growth, and we are adding over $6 billion of investments in SHOP, making it a much larger part of our portfolio. Senior housing itself is over [inaudible] percent, and by definition, the other parts of the portfolio are becoming a smaller portion overall—that is part of the strategy. As for actions, we have shown a willingness over time to take actions to modify the portfolio when we think it will create long-term value, and we are open to that. Right now, our focus is on growing SHOP organically and externally, and we are devoting our efforts there with great effect because we think it is creating value for stakeholders. Operator: Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open. Ronald Kamdem: Two quick ones. On pricing, I know the RevPOR guide was unchanged, but where did operators put through increases this year versus last year? How do you think about new versus renewal pricing and where you can push? And on acquisition mix, a couple of years ago you were more focused on stabilized assets. With this Revel deal and maybe others, is there more of a shift to taking on a little more lease-up risk given better growth and your conviction in getting those portfolios filled? Debra A. Cafaro: The revenue guide increased to about 8.75%. Justin will comment on in-place increases. J. Justin Hutchens: We have had another good year—around 8% all-in on in-house increases. In January, where half the increases take place, it was around 7% last year, so we have seen improvement. Moving rents are favorable as well. As demand continues to pick up and occupancies go up, we would expect that to continue. Still a lot of occupancy upside though, so it is volume first and then price opportunity down the road. On acquisition mix, our focus has been to use the right market, right asset, right operator framework to determine investments. If you get the markets right and have competitive assets, you are well positioned. From there, we find the right operator—whether keeping in place or transitioning. We overwhelmingly keep operators. We then target double-digit to mid-teens unlevered IRRs. We have delivered low- to mid-teens unlevered IRRs over the past few years across a wide variety of senior housing communities, including some value-add opportunities. Revel is bigger and serves as a case study. We anticipate repeating that playbook. Operator: There are no further questions at this time. I will now hand the call back over to Debra A. Cafaro, Chairman and CEO of Ventas, Inc., for closing remarks. Debra A. Cafaro: Thanks, Bailey, and thanks to all of you for joining us today and for your interest in Ventas, Inc. as we drive forward on this multiyear growth and value creation opportunity. We look forward to seeing you in person soon. Thank you. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avidbank Holdings, Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Thank you. I would like to introduce the presenters Chairman and CEO, Mark Mordell; Chief Financial Officer, Patrick Oakes; and Chief Operating Officer, Gina Thoma-Peterson. You may begin your conference. Gina Thoma-Peterson: Good morning. Thank you for joining us today for the Avidbank Holdings, Inc. first quarter 2026 earnings call. Before we begin, let me remind you that today’s call is being recorded and is available in the Investor Relations section of our website at avidbank.com, along with our earnings release and presentation materials. Today’s call contains forward-looking statements, which are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. Those statements are intended to be covered by the safe harbor provisions of the federal securities laws. For a list of factors that may cause actual results to differ materially from expectations, please refer to our earnings release under the heading Forward-Looking Statements, as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release. With that, I would like to turn the call over to our Chairman and CEO, Mark Mordell. Mark Mordell: Thanks, Gina, and thank you all for attending our Q1 earnings call. We appreciate your interest as well as your support. As we stated in the release, overall, we are pleased with what we have accomplished not only for Q1, but more certainly what we have done over the last several quarters in putting ourselves in a more profitable metrics situation. I am not a big believer in seasonality, but as far as first quarters go, this was a pretty good quarter for us. We usually have some pullback and shrinkage, and we were able to grow loans by about $25 million, and our core deposits were reasonably flat. Although Patrick is going to give you more metric information, and we are going to follow it up with some questions after that. At this point, I would like to turn it over to Patrick to go through the quarter, the high-level metrics, and then we will open it up for questions. Patrick Oakes: Thanks, Mark. Good morning, everyone. Let me start with the headline numbers. In the first quarter, we earned net income of $9 million, or $0.84 per diluted share. That was up from $6.9 million, or $0.65 per diluted share in the fourth quarter. Return on assets improved to 1.46% from 1.12%, and return on average equity increased to 12.7%. Turning to the balance sheet, as Mark said, loans grew $24 million in the first quarter. That was driven mainly by a $26 million increase in non-owner-occupied CRE loans, partially offset by a $9 million decline in C&I balances due to higher payoffs and paydowns. Overall, loans are up $332 million, or 18%, since March 31, 2025. Deposits also moved higher, up $13 million in the first quarter, and they are up $270 million, or 14%, since March 31, 2025. We reported a net interest margin of 4.38% in the first quarter, up 25 basis points from the fourth quarter. Loan yields were essentially flat, and our interest-bearing deposit costs came down 20 basis points. As a reminder, the fourth quarter included a $726 thousand interest reversal on nonperforming loans, which reduced our margin in the fourth quarter by 12 basis points. In the first quarter, we also had the benefit of a special FHLB dividend, which added about 4 basis points to the margin. During the first quarter, we did see some upward pressure on our cost of interest-bearing deposits. The average cost for the quarter was 2.98%, and the spot rate was 3.03% at March 31. The provision for credit losses was $1.4 million in the first quarter, down from $2.8 million in the fourth quarter. Net charge-offs for the quarter were $2.8 million, or 52 basis points of average loans, primarily driven by the charge-off of two C&I credits. Nonperforming loans declined $16.3 million, or 75 basis points of loans, mainly reflecting the payoff of a construction loan and the charge-off of those two C&I credits. Noninterest income was $1.5 million, compared to $1.8 million in the fourth quarter. We saw higher core banking fee income, including service charges, FX, and credit card income. That was offset by lower warrant and success fee income and fund investment income. On the expense side, noninterest expense totaled $14.1 million, up $231 thousand from the fourth quarter, mainly due to higher credit-related legal and professional fees. We also saw another improvement in our efficiency ratio, which came down to 50.4%. Salary and benefits were flat at $9.6 million. Lower salary and bonus expense was offset by higher payroll taxes and benefits expense, along with fewer capitalized loan origination costs. We added three people in the first quarter, bringing total headcount to 154, and we expect to hire additional bankers in the second quarter. Book value per share increased to $26.33, and Tier 1 capital increased to 11.39%. During the quarter, we repurchased 25 thousand shares at an average price of $27.69, for a total of $693 thousand. The effective tax rate for the quarter was 27.5%. That included a discrete tax benefit related to equity award vesting, and we continue to expect the tax rate to be in the mid-28% range for the remainder of 2026. With that, Mark, back to you. Mark Mordell: Thanks, Patrick. As you can see, we have had a lot of improvements in our profitability metrics, which we mentioned earlier. At this point, I would like to open it up for questions, because that is what is really on your mind. So please, Operator: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Andrew Terrell with Stephens. Your line is open. Andrew Terrell: Hey, good morning. I want to start off asking a question around the SaaS exposure in venture lending. I appreciate the commentary you put in the presentation. It is about $165 million of exposure, it looks like. Can you talk about the review you conducted in the quarter? There are a lot of headlines out there now. Maybe sum up for us what the conclusions around this review were. If you could talk about any reserves specifically against this pool, whether you are worried about loss content, and then how should we think about your interest in this space—software specifically—going forward? Are you pulling back the reins a bit, modifying underwriting standards? Just want to run the gambit on the SaaS exposure. Mark Mordell: From a 30,000-foot view, we did a deep dive and looked at where we were exposed. We are finding it is not just SaaS; it is how companies are dealing with AI. A lot of SaaS-based companies with a good space have been utilizing AI or starting to utilize it more in their business plan in order to compete, and those companies are going to be at the top end of the food chain. Companies that are not adapting are going to be more suspect as we go forward. If they are not able to get the funding that is necessary because their metrics are off and their platform is not going to be as competitive as anticipated, those are the ones we are concerned about. Patrick can get into some detail of how much dollar exposure we have, but what we found is that the vertical integration of AI and the SaaS model is really where we want to be. Those are much more specialized in workflow versus the horizontal type, which is more broad based. It does not mean one is necessarily better than the other, but one has a little more legs at this point. We have done a strong analysis and talked to VCs. Are there going to be additional losses embedded? I do not know. When we are talking about early-stage investing, it is really whether we are going to let their cash balances cross over their loan balances. It gives us another factor we have to monitor months ahead before that cash approaches their loan balance, so we know if we need to pull an investor abandonment clause or something of that nature, whether we are going to let them borrow, or let that cash cross over. We are being pretty critical of that from a credit perspective across the board. Patrick, any additional color? Patrick Oakes: As you can see from the schedule we provided with the breakdown we did with the venture group, it is really the horizontal segment—the smaller, more general piece—that I think is the most concerning in terms of whether they are going to be able to raise funds going forward. That portfolio is small. There are two loans in there that are either criticized or classified, about $4 million total. In fact, one of those is cash-flow positive. So far, the portfolio is doing well. The concern is what is going to happen six to twelve months from now. Between our bankers, the investors, and everybody else, everyone is on this and tracking it quite closely. Andrew Terrell: Great. It sounds like there is an important bifurcation of horizontal versus vertical. Within the vertical space, you are still going to be lending and forming new relationships, picking up new clients in that specific vertical. So no change there, just still being critical and diligent from a credit standpoint. Mark Mordell: Everyone is looking at it a little bit differently in terms of new fundings. There is a lot more funding going into the AI space in the venture community at this point. New fundings could argue for a very strong model going forward because they start off integrating AI. Some companies that are two to four years old are needing to pivot and have needed to pivot months or quarters ago to be more competitive, given the explosive growth AI has had. It all pours into the underwriting for everything we are looking at. It is similar to what we have done for the last several years: how viable are these early-stage companies, what is their burn, and how strong is their business plan. We do have some legacy credits, and we are monitoring those closely. Andrew Terrell: On the margin, you outperformed a bit this quarter even normalizing for the FHLB special. It sounds like maybe some deposit cost pressure into period end. Relative to that 2.99% interest-bearing cost and the 3.03% spot rate, where are you bringing on new deposits on a weighted average basis, and general expectations for the margin as we move forward? Patrick Oakes: I wanted to highlight the 3.03% spot because we are a growth bank, and we are having to put some deposit costs on at a higher level than we would like at this point, which is probably in the low 3% range on average. Hopefully we can drive that down over time, but right now we want to grow deposits. I would assume cost of interest-bearing deposits will stay above 3% at this point. Could it creep up a little? Potentially, short term. That will take the margin down a little bit from where it is today. Loan yield I am not as worried about. Andrew Terrell: I think that loan yield would be relatively stable. Patrick Oakes: It could go up or down a few basis points with loan fees and mix changes, but you will see the margin move down a little here. One other factor to keep in mind: DDA was probably a little bit high at 33.1%. We had some clients bring in money late in the quarter that moved to the DDA account. That change has moved into April, so I would not count on DDA remaining as high as it is today. That is a little bit of pressure too. Hopefully we can keep it in the mid-20s, but it is probably a little elevated. Andrew Terrell: Yep. Okay. Great. Thank you for taking the questions. Operator: Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Analyst: Hey. Good morning. This is Adam Kroll on Matthew Clark, and thanks for taking my question. Mark Mordell: Hello. Good morning. Analyst: Maybe we could get your updated thoughts on loan and deposit growth expectations for the year. I think your previous target was in the low double-digit range. Has that changed at all, and what are you hearing from your borrowers given some of the macro uncertainty? Mark Mordell: We did experience a little softness in the quarter in terms of people making decisions and fundraising, but I do not think our outlook has changed. We are looking for low double digits going forward. We have some work to do on the deposit side, as Patrick mentioned, but we feel pretty good about the overall pipelines across all verticals for loans. In terms of deposits, we have a strong pipeline, but timing is more of an issue because fundings are taking a little longer. People are doing a little extra diligence. There is geopolitical noise out there, which is constantly out there, so I do not know why that should be more of a factor this quarter than historically. Our outlook has not changed. We are built for growth and expect low double digits for the year. We do have some work to do on the liability side of the balance sheet. Analyst: Got it. Appreciate the color. Switching to expenses, they were really well managed during the quarter. How are you thinking about a 2Q run rate and overall growth for the year? Patrick Oakes: We have been doing some hiring. Mark can talk more about that. We added in the first quarter and more in the second quarter, so that will put a little pressure on expense growth, along with merit increases and some other items. The variable here is personnel expense. It was roughly $9.5 million; I could see that creeping up closer to $10 million for the quarter when you factor in everything. We did have a little bit higher legal and professional fees that could come down a bit to offset some of that, but expenses will definitely be up in the second quarter. Hopefully, that is all investment in growth. Mark Mordell: With the successful IPO we had, our profitability metrics trending well, and our long-term plan to scale, we will likely add more bankers this year than we have in the last several years. We brought on three in Q1, and we will probably have two to four more in Q2 and more after that as we look down the road. There is opportunity out there and some consolidation, and we will take advantage of it given our overall business plan. Analyst: Got it. Thanks for taking my questions. I will step back. Mark Mordell: Thank you. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Your line is open. Analyst: I wanted to follow up on the SaaS conversation and broaden it to the larger venture lending business. SaaS is a big part of that business, but what are you seeing in the pace of venture investment into startups at this point? Have you seen much diminution of that flow, and how does that impact both the venture lending and potentially the capital call business? Mark Mordell: As far as venture lending goes, it has gained a lot more momentum over the last couple of quarters. Everyone is doing the necessary homework because nobody wants to throw good money after bad. New fundings are at better valuations than for companies that are two or three years old. The question is can they pivot, and do they need to pivot? VCs and entrepreneurs are looking at it analytically. When this kind of transition or disruption happens, they decide to pick their horses. We monitor everything monthly—growth and metrics—and if they are not on plan, we know ahead of time and have those conversations. Like any time a vertical gets really hot, which AI is, there is more money going into AI-based investments than most anything else right now. We just need to use solid judgment across the board for new investments and be ultra-critical on existing investments. We need to determine whether they have an opportunity for new funding or are going to die on the vine, and whether we are going to let cash cross over our loan balance. That is our only savior at that point—not to let them borrow and to sweep the account if necessary because investors are not going to continue to support the company. Analyst: Thank you for that. I am sure you would have flagged this, but I want to confirm the $3.1 million construction loan that paid off in the quarter. There was no related interest recovery or benefit from that, correct? Patrick Oakes: Correct. We had everything that was owed to us on that one. Analyst: Okay. Thank you. Operator: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Timothy Coffey with Brean Capital. Your line is open. Timothy Coffey: Thank you. Good morning, everybody. Mark Mordell: Morning, Tim. Timothy Coffey: Mark, to follow up on the SaaS discussion, parsing through the loans and deposit data, it looks like the SaaS portfolio, both vertical and horizontal, has loan-to-deposit ratios somewhere around 45%. The total venture portfolio is somewhere around a 30% lower deposit ratio. Historically, has the SaaS segment always been around that 45% ratio? Patrick Oakes: What I hear from our bankers is these companies are still getting funding, but at a slower pace than previously. It is similar to 2022, where rounds of funding shrink a little and not get as much. Funders are being a little more careful, especially in some of the horizontal areas. It is probably a little less than historically. We could run that analysis; I have not done it, but that would be my gut. Mark Mordell: When there is a little stress in a vertical, they tend to spoon-feed rather than give two years of runway, which you see in a less concerning vertical. Companies are getting funded, but it is more metric based. They may fund for the next four to six months instead of two years, see where they end up, and whether they are getting necessary traction. That is typical in market disruption. That is why we are taking a closer look at these 60-plus accounts and watching them very carefully. Timothy Coffey: It sounds like I should follow up next quarter to see how things are playing out. Probably the next couple of quarters. Patrick Oakes: Yes. I will mark that down. Timothy Coffey: Mark, as you talk to clients in the technology and venture space, do you sense any material slowdown in planned IPOs or takeout activity? Mark Mordell: The IPO market has been quiet at best for a period of time. M&A, given some of the disruption, is slowing down until people figure out what is viable and what is not. There will be a lot of companies looking for soft landings that will find a soft landing. When there is this kind of disruption, people are cautious because some feel there will be more opportunities as stress rises in the marketplace, as opposed to getting too far ahead of it. We will continue to monitor the overall space like we do, but with this disruption, we have to pay attention to where money is flowing and what is happening from an M&A perspective. The IPO market is not something we are focused on at this point. Timothy Coffey: Appreciate that color. As you look to add bankers, are there specific geographies or business lines you are looking to support? Mark Mordell: The overall feeling is the same: the bankers we are adding will be more in the business lines than in real estate. We do a good job in commercial real estate and construction, but those two verticals require fewer employees than business lines like venture, traditional C&I, asset-based, sponsor, and search. You will see more bankers added in the business lines of our overall strategy because we feel that adds more to our franchise value. Timothy Coffey: Okay. Great. Patrick, a question about the margin. Coming into the quarter, we were looking for margin in the fourth quarter to be somewhere around 4.20% to 4.25%. Does that still seem reasonable given all the puts and takes discussed today? Patrick Oakes: It is probably going to be below that 4.30% we just printed—maybe around 4.25%, in that general range. Hopefully, we can stay above 4.25%, but I would guess in the 4.25% to 4.30% range. There are moving pieces to it, with deposit costs being the biggest one. Timothy Coffey: Alright. Those are my questions. Thank you very much. Patrick Oakes: Thanks, Tim. Operator: Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Matthew Clark: Hi, guys. Maybe just to follow up on credit quality. Could you provide some additional color on what drove the increase in criticized loans during the quarter and if there is any concern there? Mark Mordell: We are always concerned about credit. The biggest increase was a criticized real estate loan, which drove that up. We think it is a money-good loan. It is performing, but there are concerns about a near-term tenant vacating. It is a low loan-to-value relationship, and we think we are going to get through it. The main reason for the increase was a relationship that needed to be downgraded that consisted of two buildings in the South Bay. Matthew Clark: Got it. Appreciate it. Thanks for taking my question. Operator: There are no further questions at this time. I would like to turn the call back over to the presenters. Mark Mordell: Again, we certainly appreciate everyone’s interest and support, and appreciate attending our Q1 earnings release and earnings call. We look forward to following up with a solid quarter for Q2. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Cheri Ellison, Investor Relations. Cheri? Cheri Ellison: Thank you, Ben. Good afternoon, and thank you for joining Clearwater Paper's First Quarter 2026 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the first quarter of 2026 were released shortly after today's market close, along with the filing of our 10-Q. You will find a presentation of supplemental information, including a slide providing the company's current outlook posted on the Investor Relations page of our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP financial information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note Slide 2 of our supplemental information covering forward-looking statements. Rather than reading this slide, we incorporate it by reference into our prepared remarks. With that, let me turn the call over to Arsen. Arsen Kitch: Good afternoon, and thank you for joining us today. I'll begin my comments with a brief overview of the first quarter. I will also provide some perspectives on industry conditions and outline the actions that we're taking to navigate the current business environment. I'll then turn the call over to Sherri to walk through the financial results in more detail and discuss our outlook. Let's start with the highlights from our first quarter as well as a few updates from April. Our shipment volumes were up 5%, which was more than offset by lower market pricing, resulting in net sales being down 5% compared to the prior year. We increased share in a highly competitive market environment with continued growth in foodservice. Adjusted EBITDA for the quarter was $2 million, slightly above our guidance of breakeven. This included approximately $15 million in weather-related impacts at our mills earlier in the quarter. Our team effectively navigated difficult operating conditions with a weather event in the Southeast. We minimized costs, protected our assets and were able to service customers with minimal disruptions. This quarter, we launched Velora, a new lightweight folding carton paperboard brand that is engineered to compete with imported FBB. We restructured our Cypress Bend, Arkansas facility, resulting in a reduction of approximately 20% of roles at the mill. We're planning to run the mill at reduced operating run rates until industry conditions improve. This action will drive an expected cost reduction of approximately $8 million to $12 million on an annualized basis. Our Lewiston, Idaho union ratified a new 4-year labor agreement. This agreement combines competitive wages and benefits for our employees with significant additional flexibility in how we can operate the mill. Finally, we received $17.5 million in additional representation and warranty insurance proceeds during the first quarter for a total of over $40 million. We continue to pursue claims against $50 million of the remaining policy limit. Let me now provide some perspectives on industry conditions and the impact on our business. SBS shipments were nearly flat in the first quarter of 2026 versus the first quarter of 2025, outpacing CRB and CUK, which declined by around 3%. SBS shipments are forecasted to grow by 4% in 2026. We believe that at least part of the strength can be attributed to lower imports and substitution effects as SBS is now the low-cost paperboard substrate on a per square foot basis. SBS is highly versatile with diversified end-use applications ranging from high-end folding cartons used in pharmaceuticals and cosmetics to food service items for at-home or QSR consumption. From a supply perspective, we started the year with industry capacity substantially exceeding demand by more than 10%. With recent changes in industry capacity, including our restructuring of the Cypress Bend mill, we now believe that the excess industry supply has been reduced by approximately 50%. RISI is forecasting additional net capacity reductions by the end of this year, resulting in industry operating rates of around 90%. As we've stated previously, margins should start improving to historical cross-cycle averages with industry rates exceeding 90%. Bleached imports were down by 12% in 2025 versus 2024, driven by higher tariffs and a weaker dollar. European producers are facing additional cost pressures this year with higher energy, chemical and transportation costs driven by the conflict in the Middle East. RISI is forecasting total bleached imports to decrease by an additional 12% in 2026 versus 2025. In terms of our business, we're experiencing solid demand with stability in folding carton and strength in foodservice, particularly in cup and plate. Backlogs across our paper machines are strong, and we are sold out on extruded products such as cup and polycoated folding carton. With our mill restructuring, we have customer demand to run full across our 3 mill network for the remainder of the year. While we're seeing some positive signs of both demand and supply, current industry operating rates are driving margins that don't produce the necessary cash flow or returns to reinvest in our capital-intensive assets in the long run. In fact, we believe that today's margin levels are resulting in negative operating cash flow after the CapEx that's required to maintain these assets. This is simply not a sustainable position for us to be in. Against this backdrop, we remain focused on controlling what we can control while anticipating a recovery in industry conditions. First, we're continuing to drive costs out of our business and focusing on operating our assets efficiently. Second, we're protecting share with our strategic customers by delivering the right combination of quality, service and cost. And third, we're looking for ways to recover the increased costs that we've experienced, including the most recent impacts from the Middle East conflict. Let me provide a bit more context on our actions at Cypress Bend. We reduced roles at the mill by about 20% and improved the mill's cost structure by an expected $8 million to $12 million per year. We're prepared to run and reduce production rates until SBS industry conditions improve or we invest in other capabilities such as CUK. Cypress Bend remains a well-invested and cost-competitive mill that provides us with the optionality to grow in the long run. It also provides our customers with North America's largest independent paperboard mill network with capabilities to produce a full range of SBS products. In total, we are now focused on producing and profitably selling approximately 1.2 million tons of SBS across all 3 of our mills versus our stated capacity of around 1.4 million tons. In addition to the industry oversupply that we're facing, we're also experiencing significant cost pressures on certain chemical wood and diesel costs because of the conflict in the Middle East. Altogether, we're projecting $3 million to $5 million of quarterly headwinds from these cost increases until the conflict is resolved and global supply chains have returned to normal. With these additional cost headwinds and due to our sold-out position in our cup business, we have revised our previously announced price increase on cup and other extruded products to $60 per ton effective in May. This increase impacts approximately 70,000 tons of our extruded business not tied to the RISI price index. The rest of our cup and extruded business, which is approximately 150,000 tons, will move within a couple of quarters of any change to the RISI price index. We see momentum in our cup business, while we continue to face a highly competitive environment in our non-extruded grades such as folding and plate. We announced a $50 per ton increase on these grades in March, but we found implementation to be challenging given our industry's current oversupply position. We believe that our margins on these grades aren't sustainable in the long run, and we'll continue to look for ways to recover the cost pressure that we faced over the last couple of years. Before I turn the call over to Sherri, I'd like to briefly update you on our strategic initiatives to further build and diversify our product portfolio. We have successfully launched a new lightweight paperboard product line called Velora. We believe that Velora will compete effectively with FBB and support a wide range of general use packaging applications. While we believe that this type of product has a place in the market, it is not a replacement for a high-quality SBS offering. We continue to evaluate our CUK investment decision as we navigate current industry conditions. The engineering work is complete with an estimated investment of approximately $60 million and an execution time line of roughly 12 to 18 months. As a reminder, this project would take place at our Cypress Bend, Arkansas mill, and we would target 100,000 to 150,000 tons of CUK volume with this conversion while maintaining our ability to produce SBS. In addition to our focus on lightweight SBS in CUK, we are evaluating opportunities to add CRB to our product portfolio. We believe that offering a full range of paperboard substrates positions us to better meet the needs of our independent converter customers and expand our share of their overall paperboard spend. With that, I'll turn the call over to Sherri to discuss our first quarter financial results in more detail and provide an outlook for the second quarter. Sherri Baker: Thank you, Arsen. Turning to our first quarter financial performance. For the quarter, we reported a net loss from continuing operations of $13 million or $1.29 per diluted share. Our results include $17.5 million of insurance proceeds. Net sales were $360 million, down approximately 5% compared to the first quarter of 2025. Higher shipment volumes were more than offset by lower SBS market pricing. Adjusted EBITDA was $2 million, slightly above our guidance, which contemplated breakeven performance. As Arsen mentioned earlier, the weather event at our Augusta and Cypress Bend mills impacted EBITDA by approximately $15 million in the quarter. SG&A as a percentage of sales remained below our target range of 6% to 7%, reflecting continued cost discipline. We believe that this is best-in-class in our industry. The conflict in the Middle East is putting pressure on chemical, wood and transportation costs. As Arsen mentioned, we believe that these additional costs will be in the $3 million to $5 million range per quarter. Oil-derived chemicals have experienced increased price volatility and transportation costs have been impacted by higher fuel prices. We are working to mitigate these impacts through targeted pricing actions and operational productivity, but these dynamics remain a near-term headwind to margins. We will continue to monitor developments closely and provide financial updates as appropriate. Let me also provide an update on the insurance recovery related to the Augusta acquisition. As a reminder, we obtained representation and warranty insurance with a $105 million limit through multiple insurers. We identified certain matters that were not consistent with representations made to us at the time of the transaction and notified the insurers of these breaches. In the fourth quarter, we received an initial settlement payment of $23 million, including approximately $6 million related to direct operating costs occurred in 2025. In the first quarter, we received a second settlement payment of more than $17 million, of which approximately $6 million relates to direct operating costs incurred in Q1 of fiscal 2026. As of March 31, approximately $50 million of the policy limit remains. We are actively pursuing the recovery of the remaining claim amount with our insurers, and we'll provide updates in future quarters. Turning now to our outlook. For the second quarter, we expect adjusted EBITDA in the range of breakeven to negative $10 million. This is being driven by our planned major maintenance outage at our Lewiston facility, which will have a direct cost of $22 million to $24 million. In addition, we expect $5 million to $7 million of higher input costs, including the impact from the Middle East conflict. Partly offsetting those headwinds will be benefits of our cost reduction initiatives and seasonal uptick in shipment volumes. Our full year assumptions remain as follows: revenue of $1.4 billion to $1.5 billion, flat to modest shipment growth, approximately $70 million carryover impact from 2025 market-driven price decreases, excluding the effect of recent pricing actions or future RISI price index movements. productivity gains, including carryover from 2025, offsetting 2% to 3% of input cost inflation. Major maintenance outage costs of $45 million to $50 million, consistent with 2025. Please note that the Cypress Bend outage has been moved from Q2 to Q4 of this year. Approximately $6 million of benefit related to the Cypress Bend restructuring, capital expenditures of $65 million to $75 million, targeted working capital improvement of $20 million to $30 million and SG&A maintained towards the lower end of our target range of 6% to 7% of sales. Importantly, we believe that we have a path to breakeven or better free cash flow for the year. This includes impacts from the cost actions that we are taking, insurance recoveries, a tax refund that we are expecting and reductions in net working capital. As Arsen mentioned earlier, we are focused on controlling the controllables even as we work through a challenging industry environment. Let me wrap up with a few comments on our balance sheet. We have ample liquidity available to us and are managing to keep our overall debt levels relatively flat. Our 2020 notes go current in the second half of 2027, while our ABL goes current later this year. It is our intent to extend or refinance both instruments before they go current. We are in active discussions with our banking partners, and we'll provide an update in the coming quarters. With that, I'll turn the call back to Arsen for closing remarks. Arsen Kitch: Thank you, Sherri. I'm proud that our team has continued to maintain its focus on running safely and effectively while reducing costs across the business. We are a lean and agile company, which is an advantage regardless of what part of the industry cycle that we're in. We have taken important steps to improve our performance, including restructuring the Cypress Bend mill, implementing pricing actions and advancing our product portfolio diversification. In closing, I'd like to summarize our key priorities for the balance of this year. First, we will continue to focus on operating efficiently and reducing costs. Second, we will protect share with our strategic customers. Third, we're taking actions to be cash flow neutral this year. And finally, we're planning to refinance or extend maturities on our existing debt. I remain confident that this cycle will turn. Over time, we believe we will return to cross-cycle EBITDA margins of 13% to 14% and generate more than $100 million of annual free cash flow. Most importantly, we will continue to make decisions that drive long-term shareholder value while supporting our customers, employees and the communities in which we operate. Thank you for joining us today. We'll now open the call up for questions. Operator: [Operator Instructions] Your first question comes from the line of Sean Steuart with TD Cowen. Sean Steuart: Arsen, I want to start with the Cypress Bend restructuring. So you're cutting roll production 20% but the indication was you don't expect any overall impact on shipment volumes, which I suppose implies you'll be adding volume at the other mills. I guess the question is, should we consider this to the extent of Clearwater's supply response to a difficult market environment? And if that's the case, I guess your assessment of the overall industry cost curve, you referenced what RISI is forecasting for capacity cuts through the remainder of the year, your impression of how steep that cost curve is and how quickly the supply response could arrive? Arsen Kitch: Yes. Thanks, Sean. There's a couple of questions in there, so let me try to tackle them all. So at Cypress Bend, we've reduced our roles at the mill by 20%, so headcount and other and open roles in addition to other costs. So that should drive $8 million to $12 million of annual savings at the mill. We intend to run the mill at reduced operating rates until industry conditions improve. We are -- given that strategy, we have about 1.2 million tons of volume that we're comfortable with. And at this point, we have about 1.2 million tons of annual production that we're comfortable with after taking this action. So we're now going to be focused on ensuring that we produce that 1.2 million tons and we sell it profitably to our customer base. So given that change, we believe that we're fully utilized for balance of the year. In terms of broader industry changes, if you look at the first half, the actions that have taken place have reduced production or capacity by 280,000 to 300,000 tons. And if you recall, we stated that this industry is oversupplied by 500,000 to 600,000 tons. So we think that's about 50% of that oversupplied. The industry is forecasted to grow by 4%, which should add a couple of hundred thousand tons of demand and imports are forecasted to come down by 12%, which is probably going to be another 50,000 tons or so. So if you pull all those things together, RISI is forecasting a 90-plus percent utilization or industry operating rate by balance of the year, which should put us on a path back to a recovery. Sean Steuart: Okay. Okay. I think I get that piece of it. Second question is for Sherri. On the free cash flow bridge commentary, I think I understand the insurance piece of it. But you mentioned the tax refund coming. Can you give us perspective on how much that will be and specific quarterly timing there? Sherri Baker: Yes. So the overall for the full year would be $27 million to $28 million, of which we received $4 million in the first quarter. So you've got roughly $23 million remaining for the balance of the year. Sean Steuart: Okay. And one last question, Sherri. The debt rating downgrade from Moody's, does that have any real bearing on your interest -- your borrowing costs effectively right now? Or is it more subject to future credit facility negotiations, that type of thing? Sherri Baker: It would be the latter. It would be more applicable to any future refinancings. Operator: Your next question comes from the line of Matthew McKellar with RBC. Matthew McKellar: First for me, I think you mentioned $3 million to $5 million per quarter of input cost pressure until the conflict is resolved. Is that essentially a comparison of where costs are today versus where they were in February? And does that embed any potential recovery against higher costs that I think you mentioned, whether that be through price or other mechanisms? And if you could speak to what those might be, that would also be helpful. Arsen Kitch: Yes. No, good question. So first, yes, it is a sequential comparison. So it's versus where we were at, call it, a month or 2 ago before the conflict started. There's really 3 buckets of cost. Number one is chemicals. Number two is transportation, diesel. And the third one, maybe a little surprising was wood. We think approximately 20% of wood costs actually have to deal with transportation to get the wood out of the forest. So we are seeing some cost pressure on wood as well related to higher diesel costs. So yes, $3 million to $5 million sequential. In terms of recovery, listen, we're focused on cost reductions. So the Cypress Bend restructure should deliver about $2 million a quarter of cost reduction sequentially. As I mentioned on the call, we're also -- we're in the process of implementing a $60 price increase on our extruded products and our extruded products are polycoated. So they use more chemicals than non-extruded products for the polycoating. So there we're facing some unique cost pressures on those grades. And we're also sold out on those grades. So I think between the cost reduction in Cypress Bend and the price increase, we are attempting to recover at least some of that cost increase. Matthew McKellar: Great. That's helpful. Then just a quick one on Velora. Could you just help us maybe understand how that fits into the product portfolio? Are you seeing that uptake from customers who had been on FBB so far? And where would your expectations be in terms of what share of your folding carton and foodservice volumes that product would eventually represent? Arsen Kitch: Good question as well. So we -- I view Velora, like as you'd imagine, it's another tool in our toolkit to work with our folding carton customers. They're obviously -- they're participating in bids and specs with their customers. So we want to put another tool in their toolkit. It is a grade that includes mechanical pulp. It is a lightweight grade. It is not a replacement for SBS, but it's meant to compete with FBB. So if our customers' customer is looking at a lightweight FBB product, we have a solution for them. It is not incremental growth. It will take up some of our existing SBS capacity, and we haven't sized it yet in terms of number of tons. We don't expect it to be a large number in the near term. We'll monitor it and see what the uptake is and then we'll figure out what -- how much capacity to allocate to it in the long run. Operator: Your next question comes from the line of Mike Roxland with Truist Securities. Michael Roxland: First question, what has the customer response been to the $60 per ton price increase on the extruded products thus far? Arsen Kitch: I think we're still working through it with our customers. I'm not prepared to comment on feedback yet. I think the important point that I raised during the call is we're facing unique cost pressure on those grades because they're polycoated. And the second piece, we are sold out. So our backlogs on those products are well beyond what we normally see with our customers. So we think between those 2 variables, I think we have a very strong case to implement this price increase. Michael Roxland: Got it. Were the backlog just as strong a couple of months ago? I mean if I heard you correctly, and I apologize if I didn't, I mean with another price increase, I think, targeting March which you now pushed out, maybe it's one of the same and if not, so my apologies. But were backlogs the same a couple of months ago, if we're talking about the same price increase? And if not, why do you think the conditions warrant? I mean I understand the wars, you have increasing costs, but why would customers be willing to do it if they're also stretched themself with that? Arsen Kitch: Yes. So I think our original price increase back in March was $50 on folding and $60 on cup. This is a revision. We are at $60 across extruded -- all extruded products, which includes some polycoated folding carton as well as polycoated cup. And yes, our backlogs on those grades have grown, and we're actually -- we're pressured on how to satisfy customer demand at this point. So they've grown since then and costs have also grown. So that's -- so it's a bit of a revision from what we talked about back in March. Michael Roxland: Okay. Got it. In terms of CUK, it sounds like you mentioned the engineering work is now complete. It requires investment $60 million with the time line of 12 to 18 months. I mean, can you give a sense as to whether you're willing to -- like what would get you over the hump to pull the trigger and move forward with producing CUK at Cypress Bend? And secondly, what optionality you have also with CRB? And where would you be looking to do that as well? Arsen Kitch: Yes. Good questions, Mike. So on CUK, I think, frankly, it just has to do with the balance sheet and cash flows at this point, right? It's a $60 million investment, when we're working very hard at this point in the cycle to remain cash flow neutral. So it's a matter of allocating the capital and the cash, which at this point, would have to borrow. So that's the CUK decision. I think -- we think it's a good project. We think we have a place in that part of the market. It's just figuring out the right time to make the call. On CRB, as you know, Mike, SBS mills would have a difficult time converting to CRB given the differences in the back end of the mill. So it's a matter of either looking at M&A in the long run or looking at some additional partnerships or supply agreements or something along those lines to get some CRB into our portfolio. So that's -- the CRB one around M&A, I think that's a longer-term thinking because, frankly, right now, we're focused on ensuring that we have a strong balance sheet to get through this part of the industry cycle. Michael Roxland: Got it. I appreciate that, Arsen. One, just a quick follow-up. So even with respect to CUK, $60 million is probably unlikely given that you don't want to stretch -- you would not -- I would assume that you would not want to stretch your balance sheet any further given the fact that there is still risk in SBS and a lot of uncertainty with respect to how this excess capacity is going to be absorbed, right? So I mean in other words, the conversion to CUK is probably unlikely in the near term as well because you don't want to stretch yourselves further. Arsen Kitch: I think we're going to keep reviewing it. We think it's a good project. I think $60 million right now is a bit of a stretch. So we're going to look really hard to see how we can get CUK into our portfolio. At this point, we have an engineer a project. Frankly, we're pushing the team to figure out what other paths we have to create CUK to make CUK in our facilities maybe spending less than $60 million. Michael Roxland: Got it. And one final question, I'll turn it over. Just -- I know you're pretty constructive on maybe the conditions getting better by the end of the year, you're citing RISI. If market conditions remain challenging and let's say the biggest player refuses to do anything further with respect to cutting capacity, what else can be done or what can you do from a portfolio perspective? Arsen Kitch: Listen, Mike, I'm not going to try to speculate what we would or wouldn't do. I think right now, we focused on a few actions. So we talked about price. We talked about cost reductions. We did the Cypress Bend restructure. I think in the long run, we'll continue to assess our cost structure and our assets to make sure that we're in a good spot. But I think we're optimistic that we're seeing enough green shoots for a recovery in our corner of the market and our industry here as we progress through the year. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon, and welcome to the Seagate Technology Fiscal Third Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President of Investor Relations. Please go ahead. Shanye Hudson: Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our March quarter results on the Investors section of our website. During today's call, we'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable efforts. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q as well as the supplemental information all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. [Operator Instructions] With that, I'll hand the call over to you, Dave. William Mosley: Thanks, Shanye, and hello, everyone. Seagate delivered a very strong March quarter. underscoring both the durability of demand and the leverage in our model. We grew revenue 44% year-over-year, achieved record gross margins, more than doubled non-GAAP operating income and generated one of our highest ever levels of free cash flow at close to $1 billion. Momentum continues to build for our Mozaic HAMR-based platforms with 2 of the world's largest CSPs now qualified on our 4+ terabyte per disk product. For both of these customers, qualification timelines were in line with PMR products, underscoring the maturity of the platform, and our team's outstanding execution as we work to meet customers' accelerated demand requirements. Our strong Q4 guidance issued today demonstrates our growing conviction in the business and future opportunities. As we look ahead, we see Seagate now entering a period of structural growth. Our belief is rooted in 3 pillars. First is the sustainability of rising storage demand. AI-enhanced applications are accelerating data creation, expanding retention and increasing reliance on historical data sets for advanced reasoning, extending beyond cloud data centers to the enterprise edge, these trends require storage solutions that deliver cost and energy efficiency at scale, making high capacity hard drives essential to modern data center architectures. Second is our strategic technology roadmap. Anchored by the Mozaic platform and HAMR innovation, we are delivering critical technology breakthroughs at the right time to support our customers' rising demand now and into the future. Third is our proven strategy focused on converting demand into profitable growth and value creation. Our build-to-order model enhances demand visibility and supports pricing and supply discipline. Our HAMR-based product roadmap enables margin expansion as we scale. And our capital allocation framework enables us to leverage our earnings growth and cash flow generation into strengthening our balance sheet and enhancing shareholder returns over the long term. The combination of these pillars, robust market demand, a proven technology roadmap and disciplined operational execution is already driving performance ahead of the financial targets outlined at our analyst event a year ago. The progress we have made gives us confidence to significantly increase our annual revenue growth target from the low to mid-teens, to a minimum of 20% over the next few years. This confidence is reinforced by the strength of the current demand environment shaped by ongoing momentum from cloud investments. The March quarter marked our tenth consecutive period of revenue growth from cloud customers, who have committed hundreds of billions of dollars in infrastructure CapEx investment to support their own long-term growth in AI transformations. Using Remaining Performance Obligations, or RPO, as a proxy for future revenue potential, the top 3 global CSPs alone have nearly doubled their RPO to staggering $1.1 trillion, a clear indicator of sustained growth ahead. Assurance of reliable supply is our customers' highest priority, particularly for nearline products, which accounted for close to 90% of total Exabyte shipments in the March quarter. We have Exabyte scale supply agreements in place with nearly all major cloud and hyperscale customers, with nearline capacity almost fully allocated through calendar 2027. At the same time, we are finalizing build-to-order contracts with these customers through the end of fiscal 2027, which defines specific configuration and pricing. Our value-based pricing approach enables customers to plan with confidence, while contributing to sustained profit growth for Seagate. And we are actively engaged in strategic planning discussions now reaching into calendar 2028 and beyond. Today, AI sits at the center of nearly all customer demand conversations. We are in the midst of an inference inflection where compute infrastructure is shifting from periodic training to becoming engines that continually generate mass capacity data. Leading AI chatbots now handle billions of user prompts daily, each consuming and producing multimodal outputs that fuel an unprecedented surge in data creation. Agentic AI pushes this even further, transforming sporadic engagements into autonomous workflows that continuously ingest inputs, generate reasoning and store durable outputs that are dramatically increasing data intensity and long-term storage requirements. AI is amplifying demand across existing applications such as video, where large cloud providers are integrating AI into platforms to boost user engagement and revenue opportunities, driving new video creation and the need to store it. We believe demand will further accelerate as AI applications move beyond the data center into the physical world, powering manufacturing systems, autonomous vehicles and robotics. These physical AI deployments generate massive data streams from sensors, cameras and telemetry with a single autonomous vehicle producing up to 4 terabytes per hour. A portion of this data is reused for simulation, validation and retraining with retention requirements stretching 5 to 10 years to meet compliance standards. These inference-based applications are creating a growing need for both cloud and local storage. We have started to see interest from sovereign and neo cloud data centers for our enterprise nearline drives and system solutions. To manage these intensifying workloads, cloud and edge data centers deploy storage tiers that work in concert to optimize performance, cost, energy efficiency and data durability. Hard drives are critical to these modern data center architectures, delivering scalable capacity along with energy and cost efficiencies that form the foundation of the mass data storage tier. Seagate's proven product portfolio makes us well positioned to address this broadening opportunity set. Our technology strategy prioritizes aerial density innovation over increasing unit volumes to address rising demand. Leveraging our technology strengths, we provide the most capital and manufacturing efficient path to scale, while delivering improved cost and power efficiency per terabyte for our customers. This approach supports our goal to supply data center exabyte growth in the mid-20% range. Our Mozaic 4+ platform is a prime example. As our second-generation HAMR-based product, Mozaic 4, can deliver up to 44 terabytes per drive, over 30% more capacity compared to the first-generation Mozaic drives, which we achieved with the same number of disks and heads with minimal change to the bill of materials. Mozaic 4 also incorporates our internally designed laser and integrated photonic circuitry into the recording head. This innovation enables high-volume, extreme precision manufacturing that enhances our ability to increase drive capacity and cost efficiency. We began revenue shipments from Mozaic 4 in late March, and based on current ramp plans, we expect Mozaic 4 to represent a majority of our HAMR exabyte shipments exiting calendar 2026. We have shipped millions of HAMR-based drives, highlighting our ability to engineer with atomic-level precision and then integrate that innovation into high-volume exabyte scale. We work closely with customers to ensure our technology roadmap aligns with their future storage capacity and performance needs. Customer feedback consistently indicates that tiered storage architectures and software solutions meet their performance needs over the next few years. Capacity scaling remains their top priority, and we are executing the plan. Our Mozaic 5 product development is progressing well to plan to deliver capacities at 50 terabytes with qualification shipments targeted for late calendar 2027. These drives leverage our advanced photonics expertise, internally designed laser and mature 10-disk platform to extend the aerial density capabilities. This approach offers customers a predictable path for addressing their future exabyte growth needs as well as upgrade the storage capacity of their installed base, while using the same power budget and lower space and the momentum we've seen in qualifying Mozaic products continues to validate this approach. Today, the vast majority of HAMR supply is allocated to cloud and hyperscale customers. However, as production scales. We expect to leverage 4 and 5 terabyte per disk capabilities to produce cost-efficient, lower capacity products for enterprise data centers and edge IoT applications. This unified platform approach will simplify our product portfolio and enable manufacturing, supply chain and cost efficiencies to deliver strong economics for Seagate over the long term. In summary, Seagate is entering a period of structural growth, powered by durable demand, increasing adoption of our Mozaic-based products and continued execution against the strategy designed to drive margin expansion, cash flow and long-term value creation. I want to thank our global team for delivering another strong quarter and recognize our suppliers, customers and shareholders for their ongoing support. With that, I'll turn it over to Gianluca. Gianluca Romano: Thank you, Dave. Seagate posted very strong results for the March quarter, exceeding our expectation for revenue, operating margin and earnings per share, while setting new profitability record that reflects sustained data center demand. Additionally, we further strengthened our balance sheet by retiring $641 million in gross debt and achieved free cash flow margin of 31%. Revenue for the March quarter was $3.1 billion, up 10% sequentially and up 44% year-over-year. We achieved non-GAAP gross margin of 47%, up 180 basis points sequentially, and we expanded non-GAAP operating margin by 560 basis points sequentially to 37.5%. Our result in non-GAAP EPS was $4.10, up 32% quarter-over-quarter and 115% year-over-year. We shipped 199 exabytes in the quarter, up 39% year-over-year. The data center market accounted for 88% of exabyte shipments and 80% of revenue, with strong demand contribution from both global cloud and enterprise customers. We shipped 175 exabytes into the data center market, up 6% sequentially and 47% year-on-year. Data center revenue increased even faster over the same period, up 12% sequentially and 55% year-on-year, totaling $2.5 billion. Cloud makes up the vast majority of data center revenue and capacity shipments. We are focused on renting Mozaic to address growing cloud customer demand. In the March quarter, we shipped Mozaic drives for revenue to 75% of the leading global cloud customers, and we remain on track to complete qualification with the remaining 2 customers in the current quarter. In the enterprise OEM data center market, we saw a notable sequential revenue increase, reflecting growing deployment of AI application, along with renewed demand for hybrid and tier storage architectures. This proven strategy widely adopted by cloud and hyperscale customers, provide scalable and efficient infrastructure solutions across all market conditions. Our edge IoT market made up the remaining 20% of revenue at $612 million, up 2% sequentially. In the client and consumer markets, high supply and higher NAND cost offset the typical seasonal demand slowdown in the March quarter. Moving on to the rest of the income statement. Non-GAAP gross profit increased to $1.5 billion, up 23% quarter-over-quarter and 87% compared with the prior year period, growing roughly twice the rate of revenue. Non-GAAP gross margin expanded to 47% in the March quarter from 42.2% in the prior period. This improvement reflects continued execution of our long-term pricing strategy, along with improving product mix. Together, this drove a mid-single-digit increase in year-over-year data center revenue per terabyte. We expect this trend to continue, supported by a strong demand environment. Non-GAAP operating expenses were in line with our expectations at $296 million or 9.5% of revenue. The combination of higher revenue and expense discipline enabled us to achieve our long-term target earlier than originally planned. As we effectively execute our strategy around advancing areal density, supply discipline and pricing, we delivered a 30% sequential improvement in non-GAAP operating profit to $1.2 billion or 37.5% of revenue. Other income and expense were $62 million, reflecting lower interest expense on the reduced outstanding debt balance. We expect other income expense to remain relatively flat in the June quarter. Non-GAAP net income grew to $934 million, with corresponding non-GAAP EPS of $4.10 per share based on tax expenses of $171 million and a diluted share count of approximately 228 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet. We invested $151 million in capital expenditures for the March quarter or roughly 4% of revenue year-to-date. We expect capital expenditure for fiscal year 2026 to be inside our target range of 4% to 6% of revenue, with investments aimed at the ongoing transition and ramp of HAMR-based products. Free cash flow generation expanded significantly to $953 million, up 57% from the prior quarter, representing our highest level in over a decade. We expect free cash flow generation to improve further through the remaining quarter in calendar '26, supported by sustained demand trends, operational efficiencies and capital discipline. Cash and cash equivalents increased to $1.1 billion at the end of March quarter with ample liquidity of $2.4 billion, including our undrawn revolving credit facility. During the last quarter, we recorded approximately $191 million to shareholders through dividend and share repurchases. We also retired $641 million in debt including over $600 million of exchangeable senior note due 2028 using cash on hand. Our resulting gross debt balance was approximately $3.9 billion, exiting the March quarter. Year-to-date fiscal 2026, we have reduced gross debt by approximately $1.1 billion. Net leverage ratio improved to 0.7x based on our adjusted EBITDA of $1.2 billion for the March quarter, up 28% quarter-over-quarter and more than doubled year-on-year. We expect the net leverage ratio to continue declining as profitability and cash generation increase, while we plan to further reduce debt. I'm pleased to share that Fitch recently upgraded Seagate credit to investment grade, recognizing our strengthening balance sheet and profitability expansion. Turning now to the June quarter outlook. Despite rising geopolitical tensions, including the ongoing conflict in the Middle East, we do not currently expect material impacts to the business. Our teams acted quickly to mitigate supply and logistics disruption, and we will continue to monitor this dynamic situation. Underlying demand fundamentals have not changed. AI is reshaping data into a strategic asset, accelerating our customers need for storage capacity at scale. We see strengthening exabyte demand and continue to execute our Mozaic product qualification alongside our pricing strategy. With that as a context, we expect June quarter revenue to be in a range of $3.45 billion, plus or minus $100 million, which represents a 41% year-over-year improvement at the midpoint. Non-GAAP operating expenses are expected to be approximately $295 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to be in the lower 40% range. Non-GAAP EPS is expected to be $5 plus or minus $0.20, based on a tax rate of about 16% and non-GAAP diluted share count of 231 million shares, including estimated dilution from our 2028 convertible notes of approximately 3 million shares. Our financial performance and guidance demonstrate our focus on profitable revenue growth, alongside a product strategy designed to capture the significant opportunities ahead. Combined with the visibility gain through our customer agreements, we are confident in delivering quarterly revenue growth and margin expansion through fiscal 2027, positioning Seagate to enhance value for both customers and shareholders over the long term. Operator, let's open the call up for questions. Operator: [Operator Instructions] Our first question today is from Erik Woodring with Morgan Stanley. Erik Woodring: Congrats on the results and guide. Dave, I was wondering if you could go a bit more into the detail on specific tailwinds to HDDs from Agentic AI? And I guess, meaning like the broad tailwinds to HDD storage demand for multimodal models and physical AI is pretty clear, but it's less clear exactly what parts of the Agentic workflows are ripe for HDD. So I guess my question is specifically how does Agentic AI benefit HDD demand? And does that have any impact on how you think about that mid-20% nearline exabyte CAGR you provided at Investor Day a year ago? William Mosley: Thanks, Erik. Yes, we are picking up confidence because of some of these new applications. I think it's important to realize that some of the applications, while important, are fairly small data applications, some drive enormous data sets. And so when I think about Agentic AI, I think about frequently asked questions, you're -- rather than just periodically querying something you're doing as part of workflow. And when you do that, you may actually reference enormous data sets to draw your conclusion and you may actually create new data that needs to be propagated out in the world to the extent that that's unstructured data, video data, that's where it's actually hitting the storage tiers fairly hard. So not entirely related to mass capacity storage, but we're starting to see a lot of this pick up. Operator: The next question is from Asiya Merchant with Citigroup. Asiya Merchant: Great set of numbers here. Congratulations. If you could just talk a little bit about cost reductions, pretty impressive year. You guys are on the second-generation Mozaic now. How should we think about these cost reductions? And if you could just update where you think you would be for HAMR? I think you said majority of them exiting, I think, fiscal '26, if I heard that correct. But if you could just update us on where you are with the HAMR targets and the blended cost reductions we should expect as you ramp into the second generation? William Mosley: Yes. Thanks. That's one of the reasons we try to change as little as we can, platform to platform. It just -- it derisks the product transition, but it also allows ourselves and our suppliers to leverage all the installed base as well. So we're trying not to change as many parts as we possibly can. Obviously, there are technology changes. Most of those are under our control and that Heads and Media. But right now, because of the momentum that we're seeing with the HAMR roadmap, we're seeing that we can get more aerial density for fairly small changes inside of our portfolio. Most of it affects the laser and the photonic circuitry and the material set on the Media like we talked about. So all of this is not netting out to much of our bill of materials change and therefore, we're getting a lot of the cost leverage. Gianluca, do you want to expand on that? Gianluca Romano: Yes. I'll say, if you look at our last several quarters, the cost reduction was coming from mainly 2 items. One is for sure the mix going to higher capacity drives. And second was the full utilization of our manufacturing. When I look into the future, of course, now we are full. So that part maybe will not be so important in terms of cost reduction, but our mix change continued to be very fast. We are going faster than what we were thinking on the transition to HAMR. And now that we have second generation HAMR now, we have a very good increase in terabytes per unit. And of course, this is the driver, not adding more below material to the hard disk, which is the main driver for the future cost reduction. Shanye Hudson: And I think, Asiya, your second question was around where we stand in terms of HAMR. Dave had mentioned on the call that we would expect towards the end of this calendar year for Mozaic 4 to cross over with Mozaic 3 and then we remain on track for overall HAMR exabyte crossover at that time as well. Operator: The next question is from Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe on the pricing side, pretty strong price increase, both on a year-over-year and quarter-over-quarter basis here. I know you sort of expect these pricing trends to continue. But just trying to think through why shouldn't we see pricing maybe accelerate a bit as more new contracts come into play as you go through sort of end of 2026 into 2027, why shouldn't sort of -- how should we think about pricing? And why should it sort of accelerate more as more new contracts come into the P&L from here on? William Mosley: Yes, thanks. The first way I think about it is what is the true demand and I think the demand is rising to your point, further out in time as we roll out of one LTA and into the next, then the market demand dictates what the economics. We talked about this a little bit in the prepared remarks about when we set exact capacity configurations, what products are qualified with what customers and therefore, what price. As we've been rolling forward, though, we have the ability to -- just a few more drives out of manufacturing or whatever. So we can always test what that demand is and the demand keeps going up. And so we're seeing what the market price, if you will, is. Our goal still is to try to lock in with our customers and give them predictability so that they have a great economics plan to build their data centers out and we know what we're going to get paid for, for what we start in our factories. Gianluca Romano: Yes. We have now finalized our build-to-order for our fiscal '27. So we see how the pricing is trending, how, say, there are no changes to our pricing strategy. We are continuing to execute the strategy that allowed us to increase profitability for the last 12 consecutive quarters. And based on those orders that we have now finalized in terms of mix, in terms of pricing, in terms of volume. We said that for the next 4 quarters or for the entire fiscal '27, we are confident in saying that we have a good opportunity to increase our profit and our revenue sequentially through the fiscal '27. Operator: The next question is from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I guess another question on Agentic AI. And particularly as you think about the need for large-scale data lakes and overall demand for persistent memory, is this changing perhaps your product structure roadmap. I know you announced a partnership with NVIDIA. Curious how this is augmenting kind of your product roadmap? And also does this change kind of your thinking around supporting demand via only aerial density improvements? William Mosley: Yes. It's an interesting question, C.J. I think architectures still are largely driven the same way they were a couple of years ago, which is -- and we said this before, our customers want more capacity per spindle and that's our highest priority. And so we're still racing on aerial density exactly to your point. There are a lot of conversations about performance tiers. Can we get a little bit more performance out of the drive. And so for example, we've talked about this in the past. We had stacked actuator designs in the past. We've shipped millions of those drives in the tens of exabytes range for performance tiers, and we can certainly pull those designs back down off the shelf. But I would still say, while those discussions are happening, the biggest driver for us is get more capacity per drive. Gianluca Romano: Yes. On Agentic AI, you need historical data for agents to reason, and you need to store that data for compliance. So we see those huge benefit to our business. Operator: The next question is from Wamsi Mohan with Bank of America. Wamsi Mohan: So you generated almost $1 billion in free cash flow, so over 30% plus free cash flow margin in the quarter. And given your view that you're entering a new era of structural growth, how should we think about how you're going to deploy this cash beyond sort of the next 12 months where I think you said you're going toward higher that. And a quick clarification around pricing. When you say you have pricing locked in for fiscal '27 how much of the capacity for fiscal '27 has pricing been locked in? And how much is sort of floating at the moment? Gianluca Romano: Yes. We said the vast majority of our nearline capacity is allocated during the next 4 quarters. So of course, it's not 100%, but it's a very high percentage. On capital allocation, in the last few quarters, we have focused a lot on reducing our debt, especially our convertible because somehow that would have created even more dilution. We still have about $400 million of the convertible which is open, but we will probably address this quarter or next. So a little bit of a reduction in debt and then I would say the majority will probably go to share buybacks. Now we are active already today in the market, and we will probably do more in the next few quarters. William Mosley: Yes, Wamsi, I would say that last year, we were focused very much on working capital and just getting the supply chain back healthy again from what we went through. Now to Gianluca's point, we have to take care of some of the debt that we have. And I think the next place that we go to exactly to your point, is back to where we were before, which is returning value to shareholders. Wamsi Mohan: The next question is from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: Dave or Gianluca, on the mid-20% exabyte growth, are you just increasing capacity per unit or are you actually increasing the units of Head capacity? William Mosley: Yes. I would say capacity per unit is where our focus is. If you think about it, and a lot of people get this wrong in -- when thinking about hard drives, it's a very complex supply chain with many different suppliers coming in. And then there's our critical components that we control, but they have very long lead times, not just for the capital to build more, but also for the product itself when it's inside the machines. And so therefore, it really needs to be well orchestrated in our supply chain. It's not like just plugging in a few more machines to get more capacity out. Our people are very much focused on increasing the aerial density, the amount that comes out of the entire fleet, that's the way we believe gets the most exabytes into the world. And if we took those people off and had them make more parts to your point, we would probably net-net fewer exabytes over the next few years. So we're very focused on with the technology innovation that we see coming in front of us continuing to drive those efficiencies. The customers benefit from those with energy efficiency and efficiency and scale as well. So this is in concert with our customers. This is the way we're driving and trying to be as aggressive as we can. Gianluca Romano: I'll say the move to the second generation HAMR now is giving us the opportunity to continue to grow and to achieve a target CAGR that we discussed about a year ago. And then after the second generation, we will have the third generation that Dave was mentioning in the prepared remarks, that is not too far in time from now. It's basically at the end of next calendar year, we will be already in call with a 50 terabyte drive. So that is our strategy and all based on technology transition and automating units. Operator: The next question is from Mark Newman with Bernstein. Mark Newman: Congrats on the great quarter. Just wanted to double-click on pricing. It seems like on my math, your pricing per exabyte seemed to accelerate a bit something like mid-single digits Q-on-Q. And I wanted to understand, is that more from -- is that more because you had a higher portion of new contracts signed this quarter versus previous quarters? Or was it just that the magnitude of the price increase on new contracts has gone up. I guess the reason for this question is we're just trying to get a sense of if this magnitude of price increase is going to continue every quarter going forward. Or was this because you had a number of new signed and so perhaps it was a bit higher than normal. I really appreciate any kind of clarity you can give on the pricing dynamic? Gianluca Romano: Yes. We are not changing our pricing strategy. So as I said before, we have executed this strategy for a long time. And we are continuing to do the same. Every quarter is different, depends on how many new contracts we have in the quarter. Depend a lot from the mix also, how we move customers from one product to the next. But in general, say, there are no changes in how we address our pricing strategy. So we have done that for many quarters. And as I said before, we have the same trend for the next 4 quarters for the entire fiscal '27 and possibly even for longer. Operator: The next question is from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could just maybe frame for us a little bit with a little more precision as we look out, say, towards the end of fiscal '27. Given your pricing visibility, would you characterize your price per exabyte growth year-over-year in those -- for those longer-dated orders as sort of up low, mid or high single digits year-over-year? Gianluca Romano: Yes, we probably don't guide so far in time. So as I said before, every quarter, we'll be a little bit better and we expect revenue improvement. We expect profitability improvement. A big part of the profitability improvement is coming from pricing, but is also coming from the change in mix and the reduction costs that the 40 terabyte HAMR drive will give us. William Mosley: Yes, Jim, that's the way I look at it is there's new products coming, higher capacity products and then we said this in the prepared remarks as well, the ability to address some of the lower price bands, if you will, with better products, fewer components in them with -- that's what aerial density provides us, and that's the way we think about it. So fundamentally, it will still come down to demand as we play out through '27. To the extent that we can get up the ramp faster than we think on yields and get the scrap down and be able to address other people through completing the customer qualification. That product is very -- that allows us to get into those other markets very aggressively. And I think that's where we're focused. And then whatever the ultimate demand is, we don't know, but we think it's pretty high relative to our supply as well. So we'll continue to negotiate with customers to give them predictability and they'll determine what the price is. Operator: The next question is from Amit Daryanani with Evercore. Amit Daryanani: I just have a question just on gross margins. And if I think about the Analyst Day, you folks talked about 50% incremental gross margin, seems like a while back that happened. You posted doing 70% plus pretty consistently. I'd love understand, is this outperformance kind of driven by pricing or mix or shift to HAMR. And then importantly, is 70% incremental sort of the right framework to have as we go through the fiscal '27 model? William Mosley: Yes. I think -- I'll let Gianluca talk quantitatively here, but I think that the strong demand is something that we -- even we weren't focusing on a year ago to your point. And we've executed really well against that, maybe even better than I thought we would. We're pushing aerial density really aggressively and the team has done a great job. Gianluca Romano: Yes. No, we have executed better than what we were planning a year ago from different drivers. Now I say pricing was a little bit better. This was a mix transition, a little bit faster. So now we can leverage more on the 40 terabyte drive. So I'll say, yes, I'm looking at what we have done in the last few quarters, and I don't see a reason why we should not do the same in the future. But of course, every quarter is different. So let's see what we can achieve. Amit Daryanani: Congratulations on the nice trend. Operator: The next question is from Aaron Rakers with Wells Fargo. Aaron Rakers: Maybe I'll stick with the P&L kind of similar to Amit. When we think about the model you framed out at the Analyst Day, I'm curious, as we look into fiscal '27 and given variable comp dynamics, how do we think about operating expenses? I think your prior target was to kind of maintain roughly 10% OpEx to revenue. Clearly, we're now breaking through that. So I'm curious of how should we think about the OpEx trajectory going forward? William Mosley: I would say, think about it as relatively flat. Obviously, if we see the need to go invest more for the technology to drive the technology even further we can. But right now, I think our team is doing very well, and we have a fairly big OpEx portfolio that we can readjust priorities inside of. So I think the way I think about it is relatively flat. Gianluca Romano: Yes. Just to be sure, flat on a dollar basis, not as a percentage of revenue, as we discussed also in prior quarters, and as Dave said, this is a good level for us. And if we need to do something, we will do it. But right now, we don't see the need. Operator: Next question is from Timothy Arcuri with UBS. Timothy Arcuri: I just wanted to clarify exactly what the message is on units. I know you and your peers stopped giving us units a few quarters back, but there was a big Head supplier that did report last night. Again, it heads up 40% year-over-year, and they specifically indicated that its demand from the U.S. HDD guys. So I know maybe some element of it is that you want to prioritize internal Head capacity for HAMR. But how does that fit with the idea that you're not growing units? Or are you, in fact, beginning to grow units because of some of these new demand drivers stacks? William Mosley: So first order, Tim, no, we're still not growing units. I mean, inside of the mix, there may be more heads inside of the drive, right? So the average number of heads per drive, which we don't talk about very much, may be increasing. It's not 20 heads, which isn't the highest capacity drive that we have yet. And there's still quite a bit of the low capacity drives that are serving customers that are very important to us. So as we look across that blend, probably more Heads and Media going into the average drive is the way to think about it. The total number of units is not really increasing. And I don't think it will, unless we see a resurgence at the edge. And so -- and that may be over a long period of time. Gianluca Romano: Yes. As you know, Tim, HAMR cycle time is a bit longer than PMR. So we use a little bit of PMR heads just to keep the units as they are today. Otherwise, the units will actually go down. Operator: The next question is from Karl Ackerman with BNP Paribas. Karl Ackerman: You spoke about how the Mozaic 4 platform will command 70% of your HAMR shipments by the end of fiscal '27. But how quickly might HAMR exceed half of your total exabyte shipments? I ask because it seems to support favorable capital intensity. And as yields improve on HAMR, it seems easier and more economical for you to replace lower capacity data center edge hard drives with HAMR has in Media. Gianluca Romano: Maybe let me clarify those percentages. Now what we said is we will achieve 70% of exabyte, nearline exabyte built on HAMR drive by the end of calendar '27, actually by fiscal '27, sorry. And by the end of this calendar '26, we said the majority of HAMR exabyte, so inside the HAMR exabyte will be 40 terabyte drives product versus the 30 terabyte in for that we were building before. So those are the percentages. William Mosley: But still a quite aggressive ramp on Mozaic 4+. To your point, I think the other way to think about it is our wafer fab is relatively full. And so therefore, everything spoken for, we're making sure we do that blend just right. We're not leaning too hard into the Mozaic 4 because some of the other product families are still doing quite well and needed for various customers. Operator: The next question is from Vijay Rakesh with Mizuho. Vijay Rakesh: Just a quick question on the margins. Obviously, very solid margin pickup in the quarter and the guide. Just wondering if there's a way to look at it on what's the impact from HAMR mix versus utilization or price? And how does this change with the Mozaic 5, I guess? William Mosley: Yes. I think as we continue to go up the curve and we can hold the line on new piece parts in the bill of materials, like we talked about before, leverage as much technology that already exists. I think that's where we get the best cost leverage. And again, the technology in the Heads and Media was fundamentally enables all of this. So we're -- that's why we're investing very heavily. We get more exabyte output as well, and that will help drive margins. I think when you think about a 3-terabyte per platter, a 4-terabyte per platter or 5-terabyte per platter drive, that value into the data center is enormous. I mean, its space efficiency, efficiency on all the parts around it for -- on a per terabyte basis and then obviously, power and things like that. So the customers lean very hard into those things, and that's why we -- that's giving us great visibility. And as we drive that without adding too much incremental cost, I think that's why our margins are expanding. Operator: The next question is from Steven Fox with Fox Advisors. Steven Fox: Congrats on the great quarter. I was just curious if this latest inflection point has anything to do with what seems like a rising cost differential between HDDs per gigabyte and NAND? And if it doesn't, right now, could it in the future sort of help for a future inflection? William Mosley: Thanks for your question, Steve. I say this all the time, NAND is a great technology. It has many niches that hard drives are not in. So it's -- and we need those niches to continue to grow because they serve data markets, either on the ingest side or on the consumption side as well. But in the storage tiers that we largely talk about inside the data center, I don't see the architectures changing very much. If anything, because of the economics of what's going on right now, people are coming back to hard drives and saying, what more can you do? And I think that was referenced to some of the earlier questions on the performance side, is there something else that hard drives can do inside of their tier to make sure they're improving their performance. Again, we get driven very hard to just get more exabytes out. And I think the architects understand this really well. And I see these architectures pretty sticky for a long, long time into the future. Operator: Next question is from Ananda Baruah with Loop Capital. Ananda Baruah: Dave, I wanted to ask you, just going back to your remark a little while ago about using HAMR to go down to lower capacity points. Is Mozaic 4, is that sort of the model that gets you to go down to 20 terabyte HAMR? And if so, like at what point of the Mozaic 4 ramp do you think that you guys might have an opportunity to do that? William Mosley: Yes, we had originally talked about it, Ananda, in that context, Mozaic 4 20 terabyte, if you will, would be 5 disk. I think the demand for Mozaic 4 at the high end is so high right now that as we look forward, I don't think you'll see very many of those, but we'll see how the market plays out over the next 3, 4 quarters. Mozaic 5 obviously changes the economics again. And at some point, we're going to be able to readdress those markets in a very cost-efficient way. Gianluca Romano: Yes, I would say now in theory it is a great strategy. The problem we have is demand is so strong in the public cloud that we don't have enough volume to also implement this lower capacity base -- strategy based on the 4 terabyte per disk. So again, possibly, we will address a little bit later out in time. Ananda Baruah: Yes. So the economics are so attractive at the higher end that it's not worth doing yet. Got it. Operator: The next question is from Tom O'Malley with Barclays. Thomas O'Malley: Reach in DPR, there's been a lot before here on the pricing and the contract side. But just if you look at the NAND industry and potentially DRAM as well, you're hearing more about potential prepayments over the course of the contract life. Are you guys seeing that in the market? And would you ever consider this as new contracts come up over the coming years and demand continues to grow just given your production footprint? Would that be something you would consider in the future? Gianluca Romano: Thank you, Tom. I would say right now, our free cash flow is very strong. So we are not looking at prepayment in particular. I think we are mainly focused on predictability of the shipments and on optimizing our pricing strategy. Now I don't exclude that in the future, we will maybe implement prepayments. But so far, we have not focused on that part. William Mosley: Yes, Tom, we've really been going for demand predictability. And the customers have to drive through important architectural transitions themselves. We have to drive through the product transitions. We have to make sure all that's synced up. And so that predictability is top of mind for us, not necessarily any other economics. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. William Mosley: Thank you, Gary, and thanks to everyone who joined us on the webcast today. We're excited about the strong March quarter and the accelerating momentum building for our Mozaic technology platforms as we enter this period of structural growth. We'll keep executing with discipline to expand margins, drive cash flow and build long-term value creation. Thank you for your continued support. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the Invesco Ltd.'s First Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question and answer session. This call will last one hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today's call is being recorded. Now I would like to turn the call over to Gregory Wade Ketron, Invesco Ltd.'s Head of Investor Relations. Gregory Wade Ketron: Thanks, Operator, and to all of you joining us on the call today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Ltd. is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcasts are located on our website. Andrew Ryan Schlossberg, President and CEO, and Laura Allison Dukes, Chief Financial Officer, will present our results this morning and then we will open up the call for questions. I will now turn the call over to Andrew Ryan Schlossberg. Andrew Ryan Schlossberg: Thank you, Gregory Wade Ketron, and good morning to everyone. I am pleased to be speaking with you today. Before we review this quarter's results, I would like to reiterate our strategic priorities and our key performance drivers as highlighted on slide three of today's presentation. These strategic imperatives focus our efforts, guide our decisions, and provide a clear framework for navigating a rapidly evolving asset management landscape. Our strategic priorities remain grounded in a simple conviction. Regardless of broader market conditions, geopolitical events, or cyclical, structural, or fundamental headwinds, executing against these priorities will leverage the best of Invesco Ltd., accelerate our key areas of opportunity, and drive profitable growth. And that is exactly what we are seeing in our business. Profitable organic growth is paramount. As such, we are focusing on high-demand, scalable investment capabilities like fixed income, and delivery vehicles like ETFs. We continue to drive value through our expansive global footprint with a significant and unique Asia Pacific presence, including a hard-to-replicate Chinese JV, and a strong performing and growing EMEA business. Together, these regions represent nearly $700 billion of our client AUM. We are also well positioned to generate increased value in our private markets business where we have a strong institutional heritage in real asset and alternative credit strategies, which we are now leveraging as we bring those products into the faster growing wealth management space. These existing Invesco Ltd. strategies are being augmented by our recently announced partnerships with Barings and LGT Capital. Each of these relationships is progressing well, and we look forward to updating you on developments with additional product launches later this year. We also continue to sharpen our focus and accelerate innovation across products and vehicles such as active ETFs, SMAs, models, customized solutions, and digital assets. We are seeing momentum build in each of these areas and have launched several new products and partnerships this year already. Our progress on strategic priorities also includes continued strengthening of our balance sheet and efficient capital deployment, including returning a portion of it to our shareholders through increasing common share repurchases and dividends. We continue to prioritize the intersection of market size and secular change where Invesco Ltd. is uniquely positioned to drive growth in the highest opportunity regions, channels, and asset classes. This is the guiding principle by which we measure opportunities, deemphasize when needed, and focus resources to drive growth across the organization. We will continue to execute with discipline, allocate capital and resources accordingly, and measure progress against our key performance drivers indicated on the far right-hand side of this slide. So let us turn to slide four and take a look at how our efforts translated into asset flow results in the first quarter. Markets had strong momentum coming into the quarter, but ultimately gave way to heightened volatility as geopolitical uncertainty, sharp moves in energy prices, and changing interest rate expectations weighed on public markets. It is in this type of operating environment that the benefits of our broad, scaled, diversified global platform are most evident. With elevated volatility, money was in motion, and clients continued to entrust Invesco Ltd. with significant capital across our global product set. Net long-term inflows were $21.8 billion, marking the eleventh straight quarter of net inflows and representing annualized organic growth of 4%. It is also worth noting that we generated $11.6 billion in global liquidity inflows and we ended the period with over $200 billion in AUM. We continue to be encouraged by the breadth of our overall growth. We had solid positive flows across several dimensions, including in many of our strategically important investment capabilities, across each of our three regions, in both our active and passive strategies, and across wealth management and institutional channels. The Asia Pacific and EMEA regions again produced very strong net inflows with 17% and 8% annualized organic growth, respectively. We also saw our strongest quarter of active net inflows with nearly $15 billion generated around the world. Additionally, institutional demand has remained strong, our fifth consecutive quarter of annualized organic growth in excess of 5%. So let me spend a few minutes clicking into growth drivers in each of these investment capabilities. Starting with our ETF and index capability, where we continue to meaningfully scale and diversify our platform to meet evolving client demand. Our ending AUM stood at a record $638 billion, or over $1 trillion including the QQQ. We had nearly $19 billion of net inflows during the quarter, or 11% annualized organic growth. Within our ETF range, we garnered net inflows across a diverse set of products, both equity and fixed income. Our equal-weight S&P 500 delivered record net inflows and we saw strong demand for QQQM from investors with long-term horizons. We continue to see strength in S&P quality and momentum lineup as well. We remain focused on innovation in the ETF space as we launched four new active ETFs this quarter, strengthening our market position in this high-demand segment as investors continue to use the ETF wrapper to access active equity and fixed income strategies, particularly in more volatile market environments like we are seeing today. We have built a robust active ETF platform currently managing over $20 billion in assets, which increases to more than $35 billion when you include index strategies implemented by our active teams. With our QQQ fund conversion on December 20, we had a full quarter of the fund’s flows included in our results. The fund continues to attract good demand, but after multiple quarters of very strong inflows, we ultimately had net outflows this quarter. This reflected normal rotation and profit-taking as investors broaden exposures amidst the more volatile market environment. However, with abating market volatility in April, we have seen strong demand and net inflows return for this flagship product. Let me take a moment here to address the recent developments that Nasdaq has expanded its licensing to allow two additional U.S.-listed ETFs to track the Nasdaq-100. First, we see this as an evolution of a highly successful benchmark reflecting the global importance of the Nasdaq-100, where we dominate with our flagship QQQ fund, which is one of the world's most actively traded ETFs and a core exposure vehicle globally for the Nasdaq-100. As you know, QQQ's position is supported by unmatched liquidity with tight spreads, deep options and derivatives markets, and a very large and broad institutional and retail investor base. These critical characteristics, coupled with the immense brand recognition that is synonymous with Invesco QQQ, a one-of-a-kind and a large marketing spend, and positive client outcomes built over 25-plus years, minimizes the dependence on being the sole licensed product from an index provider. Our installed base is tough to erode, and it has been proven that switching costs are higher than assumed, with taxes being a major factor. By example, the introduction of our own QQQM expanded the Nasdaq-100 ecosystem without cannibalizing the QQQ. Nasdaq has historically been selective in how it has licensed the Nasdaq-100 index, and that selectivity resulted in the QQQ being the primary U.S.-listed ETF tracking the index for decades. Nasdaq has publicly reaffirmed its commitment to our QQQ innovation suite as a cornerstone of their Nasdaq-100 ecosystem. Further, Nasdaq's licensing for these new Nasdaq-100 exchange-traded funds is consistent with our QQQ at eight basis points, meaning any competitor fund will pay the same amount and the existing licensing agreements are not impacted by these filings. Our relationship with Nasdaq remains strategic and long-standing. To put a fine point on it, our installed base, where we have built a dominant, entrenched position over decades, will be difficult to displace. More so, we believe that the attention will create an increasingly large pool of assets behind this important benchmark. Let us move on to fundamental fixed income, where we garnered a very healthy $3.7 billion in net long-term inflows, or 5% annualized organic growth, with strong attribution across geographies and channels. This only considers the narrower view of our fundamental fixed income capability. Looking more broadly at the asset class across all of our investment capabilities, that net flow number jumps to $14 billion with the inclusion of our related ETF and China-based fixed income assets. Momentum in our fundamental fixed income capability was broadly driven by institutional inflows into investment-grade products, as well as fixed income SMAs, where we continue to see strong demand. Our entire SMA platform, which also includes a portion of equity assets, now stands at $37 billion in AUM. We have one of the fastest growing SMA offerings in the United States wealth management market, generating an annualized organic growth rate of 19% this quarter. Moving on to the China JV, we produced another exceptionally strong quarter, demonstrating that we are well positioned in this market. We reached a record high AUM of $142 billion and delivered $8.7 billion of net long-term inflows, or a 31% annualized organic growth rate. In a volatile global market environment, the China JV demonstrated the benefits of its diversified platform. Looking at the quarter as a whole, net inflows continued to be driven by fixed income plus strategies, which have now reached $40 billion in AUM on our JV platform. We have developed a diversified product lineup in our China JV designed to meet varying client risk appetites, and we like the position we have built and the opportunity it presents long term. To support this growth during the quarter, we launched 14 funds with total AUM of $2.5 billion, mostly aligned with the growing demand for balanced and equity ETF strategies. Shifting to private markets, we posted $400 million of net inflows driven by direct real estate. The asset class has gained momentum, led by INCREIF, our real estate debt fund for the U.S. wealth management channel, which continues to gain scale, and our U.S. core plus real estate equity fund, which is seeing strong institutional engagement. Assets in INCREIF with leverage now total $5 billion after a little more than two years in the market. This is one of the fastest ramp-ups in the wealth channel for a commercial real estate credit product and is a reflection of how our innovation mindset is helping drive our results. Additionally, we continue to prioritize private markets product development for the defined contribution channels around the world. During the quarter, we launched the Invesco Core Plus Real Estate Trust, which is a collective investment trust designed to provide U.S. defined contribution plans access to private real estate. Among the first of its kind, this CIT introduces institutional real estate capabilities that support the long-term needs of defined contribution investors. We launched this fund with a mandate from a large U.S. corporate institutional investor as the anchor client, marking a significant win for our business. Our real estate net inflows were modestly offset by net outflows in alternative credit, which were exclusively driven by our bank loan products. BKLN, our industry-leading ETF, experienced redemptions of $400 million in Q1, instigated by the technology-led sell-off. However, the fund remains well scaled and positioned in the market. Regarding the market dynamics in private credit at large, the headlines are oftentimes drowning out the fundamentals and conflating various products. Invesco Ltd.'s alternative credit platform, built around broadly syndicated loans, CLOs, and disciplined direct lending, had zero software exposure, showcasing the diversified nature of the platform that is designed precisely for environments like this one. From a product standpoint, it is important to note that we are not in the BDC space. We have dry powder, diversification, and extensive experience. For managers with their discipline, this volatility may ultimately prove to be an opportunity. The growth potential in private credit has not fundamentally changed, and manager selection remains key given the wide dispersion in the sector. The current turbulence has not impacted our long-term views, and we believe we have a very favorable position. We are excited about the prospects in private markets, organic growth opportunities amplified through our innovative partnerships with Barings and LGT Capital to further penetrate the wealth management and defined contribution markets. Moving on to multi-asset capabilities, we also had strong long-term net inflows driven by our institutional quantitative equity strategies, which generated $4.7 billion of net inflows during Q1. Finally, in fundamental equities, U.S. value equities turned to net inflows during the quarter, which was matched by continued positive net flows in global, international, and regional equities. Clients in Asia Pacific and EMEA drove ongoing momentum in these markets, headlined by our Global Equity Income Fund, which remains the top selling retail active fund in the Japanese market. This fund posted net inflows of $3 billion during the quarter, rapidly growing to $23 billion in AUM, while generating a very favorable net revenue yield for Invesco Ltd. Despite these positive fundamental equity flow highlights this quarter, we did remain in net outflows of $2.4 billion overall in the segment. This included the expected $1.2 billion in net outflows from our developing markets fund, albeit a significant moderation from recent history. However, it is important to highlight that our overall fundamental equity outflows this quarter were the smallest we have seen in nearly nine years. On a gross sales basis, we had our best fundamental equities flow quarter since 2022. Moving on to slide five, which shows our overall investment performance relative to benchmarks and peers, as well as our performance in key capabilities where information is readily comparable and more meaningful to drive results. Investment performance is key to winning and maintaining market share regardless of overall market demand, and achieving first quartile investment performance remains a top priority for Invesco Ltd. Overall, 46% of our active funds are performing in the top quartile of peers on a three-year time horizon, with nearly half reaching that bar on a five-year basis. Further, over 70% of our active AUM is beating its respective benchmark on a five-year basis. With that, I will take a pause and turn the call over to Laura Allison Dukes to discuss the quarter's financial results, and I look forward to your questions. Laura Allison Dukes: Thank you, Andrew, and good morning, everyone. I will start with the first quarter financial results on slide six. Assets under management held up well against market volatility in the first quarter. While volatility drove a $42 billion decline in AUM for the quarter, we were able to mostly offset this with continued strong net long-term asset inflows of $22 billion and $12 billion of net liquidity inflows. AUM at the end of the quarter was $2.2 trillion, nearly the same level as the end of the fourth quarter. Average long-term AUM, which included a full quarter of the QQQ, reached nearly $2 trillion, an increase of over $400 billion, or 26% over last quarter, largely due to the QQQ. Average long-term AUM is up nearly 50% over the same quarter last year due to the QQQ, as well as organic growth of 6% over the last four quarters and higher market levels. While we did see market weakness that negatively impacted our AUM levels later in the first quarter, we subsequently saw a strong rebound as markets have recovered so far in April, with both key domestic and global equity indices up and bond indices holding at recent levels. This has led to our AUM growing into the $2.3 trillion range more recently, an increase of over 5% versus quarter-end, with growth across nearly all of our capabilities, led by ETFs and the QQQ, and, to a lesser degree, fundamental equities, the China JV, and fundamental fixed income. Net revenues, adjusted operating income, and adjusted operating margin all showed significant improvement from the same quarter last year, while adjusted operating expenses continued to be well managed. This drove 500 basis points of positive operating leverage and a 300 basis point operating margin improvement year over year, with operating margin improving to 34.5%. Adjusted diluted earnings per share was $0.57 for the first quarter versus $0.44 for the same quarter last year, a 30% improvement. Our focus on strengthening the balance sheet continued during the quarter as we redeemed a $500 million senior note that matured in January. Finally, we increased the amount of common share repurchases in the first quarter compared to prior quarters, buying back $40 million, or 1.6 million shares. Also in February, our Board authorized an additional $1 billion in common share repurchases. Moving to slide seven. Net revenue yield increased over the fourth quarter, largely due to the QQQ reclass to fee-earning, partly offset by the impact of the divestitures that occurred in the fourth quarter. Client demand continues to drive diversification of our portfolio, with strong growth in lower-fee products such as ETFs and fundamental fixed income capabilities, while the demand for higher-fee products such as fundamental equities, particularly global equities, has been weaker. This has resulted in a more balanced AUM, which better positions the firm to navigate various market cycles, events, and shifting client demand. We have seen the impact of the asset mix shift moderate over the last year, resulting in a more modest decline in the net revenue yield and, more recently, approaching a degree of stabilization, or an inflection point, we experienced in the first quarter. To provide context, the net revenue yield was 22.9 basis points for the first quarter, and the exit yield at the end of the first quarter was 22.8 basis points. The future direction of asset mix shift will dictate the net revenue yield trajectory. Turning to slide eight. Net revenue of $1.3 billion in the first quarter was $155 million higher as compared to the same quarter last year. The increase in net revenue was largely from investment management fees, mainly driven by higher average AUM and the reclassification of QQQ to fee-earning. Operating expenses increased $69 million versus the same quarter last year, mainly driven by higher employee compensation and marketing expenses. Employee compensation was $43 million higher than the same quarter last year, largely due to a factor that we noted on our prior call. We made incremental changes to our retirement eligibility criteria for long-term awards that will result in a timing change in how retirement-related expenses will be recognized going forward. This resulted in a $33 million increase in compensation expense in the first quarter. Marketing expenses were $21 million higher due to the marketing associated with the QQQ now being recognized in marketing expenses upon reclassification. The hybrid investment platform implementation costs were $12 million in the first quarter, in line with our expectations and prior quarters. The incremental operating expense associated with AUM that has been moved onto the hybrid platform was $4 million in the first quarter. We continue to make progress in implementing the hybrid approach with expected completion by 2026. Regarding the hybrid investment platform cost for 2026, we expect one-time implementation quarterly costs to continue in the $10 million to $15 million range per quarter going forward, with the push to have implementation completed by year-end. As we transition more AUM onto the platform throughout the year, the incremental expense related to AUM on the platform will build towards $10 million per quarter later this year. Expenses associated with the platform may fluctuate quarter to quarter due to timing. Looking ahead to the impact the hybrid investment platform will have on operating expenses in 2027 and beyond, we expect the cost base to be at least $60 million in calendar year 2027, excluding the implementation costs that will roll off after 2026 when the project is complete, with run-rate savings that should build as 2027 unfolds. We will provide further updates as implementation progresses. Regarding the overall operating expense outlook for 2026, with the impact of the divestitures and the QQQ-related marketing expenses now in our expense run-rate, we expect operating expenses for 2026 to be in the $3.275 billion range under flat markets from the higher April AUM level that we indicated is in the $2.3 trillion range. We still believe that our operating expense base is approximately 25% variable in relation to changes in net revenue. The effective tax rate for the first quarter was close to 24%. For the second quarter, we estimate our non-GAAP effective tax rate will be in the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items. I will wrap up on slide nine. We continue to make considerable progress on building balance sheet strength and improving our leverage profile. In January, we redeemed the $500 million senior notes that matured. We did end the quarter with $1.1 billion drawn on the revolving credit facility as expected, driven mainly by repurchasing $500 million of preferred stock in December and the senior note redemption in January. The benefits gained in financing these transactions through the credit facility are a lower floating interest rate and flexibility to pay down the facility as cash flows beyond our capital priorities allow without prepayment penalties. We expect to reduce the amount drawn on the revolver as the year progresses. Leverage ratios in the first quarter ticked up very slightly due to the higher balance on the credit facility, but we expect the ratios will improve the remainder of this year as we reduce the amount drawn on the facility and simultaneously grow EBITDA. We also continued common share repurchases in the first quarter, increasing the amount repurchased to $40 million, or 1.6 million shares. We intend to continue a regular common share repurchase program going forward as we target a total payout ratio, including common dividends and share buybacks, to be near 60% for 2026. And as I noted previously, our Board authorized in February an additional $1 billion in common share repurchases. We will continually evaluate our future capital return levels in line with our capital priorities. To conclude, the strength of our net flow performance and diversity of our business continued despite a volatile market environment, and we delivered strong revenue growth as a result. This, combined with well-managed expenses, delivered significant operating leverage and a sizable improvement in our operating margin over the prior year. We will also continue making progress in building a stronger balance sheet throughout 2026. We are committed to driving profitable growth, a high level of financial performance, and enhancing the return of capital to our shareholders. We will now open the call for questions. Operator: Please press 1. You will be announced prior to asking your question. Please pick up your handset when asking your question. To withdraw your request, please press 2. And one moment please for our first question. Our first question comes from Brennan Hawken with BMO Capital Markets. You may ask your question. Brennan Hawken: Good morning. Thanks for taking my question. Would love to start on the Qs. Andrew, thanks for that color and the case study with the QQQM. I think it was really helpful in contextualizing. Now that you have managed QQQ in the new structure for a while, what is a reasonable expectation that we could have for securities lending that you might be able to generate from that product? Andrew Ryan Schlossberg: Yes. Hey, thanks, Brennan, for the question. Securities lending is definitely something we have eligible for the QQQ. Given the size and the concentration of some of those positions, the opportunities are there, but they are not super large. We will continue to evaluate ways, but we do not see that as a huge opportunity. Brennan Hawken: Okay. Fair enough. And then, Andrew, I was hoping to maybe take a step back and ask a bigger, picture question. 2025 was an eventful year for Invesco Ltd. for sure. We had the first preferred paydowns, the QQQ restructuring, notable callouts. When you turn the page and look at what you would like to achieve in the coming years, what are some of the strategic priorities that investors should be thinking about? Andrew Ryan Schlossberg: Yes, thank you. We did get a lot done last year in 2025. I think it really set Invesco Ltd. increasingly on a course for continued future growth, a much improved balance sheet, and ability to return capital to shareholders. We do still have a lot more to do and execute against. I think there are four principal areas that we are focused on to continue the organic growth we have been seeing and hopefully accelerate it. One is the enormous shift in personalization that is going on around the world, but in particular in the wealth management channels, and then even more in particular in the United States. We feel like our $1 trillion ETF platform really sets us up well as that personalization theme continues. The growth in our SMA platform has been exceptional, and we view that as another winner in the personalization and tax optimization theme. Lastly, we have a models business that we are going to lean into even more. All of those things around personalization matter. We think the demand for income is not going away around the world, and as I highlighted in our remarks, we continue to grow quarter after quarter exceptionally. We have an over $700 billion platform that spans geography and all duration. As you see income needing to be generated in different formats, whether that is ETFs or SMAs, we will be there to participate. Another area is the flow growth expectations that we have because of money in motion, demographic shifts, and the like in Asia and in Europe in particular. We have been seeing outsized growth there and we continue to have a really favorable position with now something like a third to 40% of our AUM out in those markets. We have been talking about private markets into wealth management, but I think the less discussed industry-wide has been the opportunity in retirement and defined contribution, not just with some of the things happening in the United States, but what is happening around the world for wealth and DC for private markets. Then, of course, technology and what it is going to do to innovate and move at a different pace. All those things are opportunities we have been leaning into, and we are going to lean into even more in 2026. Brennan Hawken: Thanks for taking my question. Thank you. Operator: Thank you. Our next question comes from Daniel Fannon with Jefferies. You may ask your question. Daniel Fannon: Thanks. Good morning. Allison, I appreciate all the comments around expenses for this year and some of the savings into next year. But I was hoping to get a little bit further in terms of detail as we think about this year and as it progresses, maybe the sequential changes or other things to think about to get to that $3.275 billion as we exit 2026? Laura Allison Dukes: Sure. Let me see if I can give you a little bit of color. The $3.275 billion, again, I will make sure that is clear, is based on that AUM level of around $2.3 trillion towards the end of April. That is kind of all things being equal, and we do not consider market in any of that. Thinking about that, I would say, to start from a compensation standpoint, our target has historically been in that 38% to 42% range. This year, we are expecting to be in the middle of that range. So maybe that gives you some idea around compensation as a percent of revenue and what that could look like. Keep in mind the seasonality that we have in the first quarter. We noted some of that seasonality already in terms of the change in our retirement provisions and what that did in terms of the acceleration of long-term awards—about $33 million in the quarter. We always have about $10 million of seasonality in payroll taxes in the first quarter. We think about compensation-to-revenue on a full-year basis, not quarter to quarter. Hopefully, that gives you a little bit of color. I gave you some of the context around the hybrid investment platform, and we think implementation will continue in that $10 million to $15 million range per quarter, maybe trending towards the higher side as we get closer and closer to full implementation by the end of the year. The incremental cost of running the platform—we noted that is $4 million in this quarter. We think that will be fully phased in to about $10 million incremental by the end of this year. And then, of course, marketing—you have the QQQ fully in this quarter, so there is not a lot of change there. There was a lot of noise coming out of the fourth quarter, but the first quarter is relatively clean with the exception of the seasonality. The only other thing I would point to is just a reminder that we are entering into our partnership in the Canadian business. We expect that to close with CI at the end of the second quarter. That is a transition of about $19 billion in AUM, and that has a modestly negative operating income impact for the third and the fourth quarter of this year. That will be a loss of operating income to the tune of $5 million to $10 million per quarter, which we expect to improve over time as we continue to execute the subadvisory relationship with CI and grow that relationship overall. The guidance I gave is inclusive of Canada. It is inclusive of everything I just mentioned. Hopefully, that gives you a little bit of color and context underneath the full expense guide. Daniel Fannon: Yes, that is helpful. Thank you. And then just in general for the industry, you are seeing shelf space on platforms like Schwab or other third parties getting more expensive for ETFs and other products. Can you talk about the economic impact you see as you think about this year and next in terms of operating on some of these third-party distribution platforms? Andrew Ryan Schlossberg: Maybe I will start, and Allison can add to it. We do not want to comment specifically on any discussions with any particular wealth platform. But what I can say is that platform fees as a whole—we always look at them as the value of the distribution and the growth that they provide. Industry-wide, it is logical that as continued vehicle shift happens from mutual funds to ETFs, we are going to see overall mutual fund platform fees decline, and an element of this shift in some ways is going to go to other product types. But all of that said, any new platform fee— Laura Allison Dukes: Dan, did you catch the rest of Andrew's answer, or do we need to go over that one again? Daniel Fannon: It cut out about midway through, I think. Andrew Ryan Schlossberg: Alright. Let me start at the beginning a little bit and make sure everybody caught it. I definitely do not want to comment specifically on any one particular wealth platform. But what I can tell you is that we look at the value of distribution and the growth provided. Industry-wide, there has really been a vehicle shift going on that we are all familiar with from mutual funds to ETFs. It is logical that you are going to see overall mutual fund platform fees decline, and an element of that is going to shift to some other product types. New platform fees that we would consider are really going to be focused on new assets, not assets that are on the platforms today. We are also going to have to account for the composition of the ETF and the relevance of the legacy services that are very much associated with mutual fund sharing that do not exist in ETFs, and then, of course, the overall cost of ETFs in general. There is a lot to look at when this is discussed. But all of this said, to your specific question, we do not see this having a material impact at all. We will continue to evaluate any changes case by case at the firm level, at the product positioning level, for outcomes we expect with clients, and also long-term economics. Daniel Fannon: Great. Thanks for taking my questions. Andrew Ryan Schlossberg: Thanks. Sorry about the technology. Operator: Thank you. Our next question comes from Glenn Paul Schorr with Evercore. Your line is open. You may ask your question. Glenn Paul Schorr: Hi. Thanks very much. Hi, Andrew. Curious if we could drill down a little bit more on your non-U.S. platform. You saw the growth; you talked about the growth in both Asia and EMEA. But maybe we could drill down on assessing the durability of it by getting you to talk about what changes or additions you have made on the product lineup and distribution investments that you are piecing together as we think about growth going forward. Thanks. Andrew Ryan Schlossberg: Yes, thanks for the question. As I mentioned, the non-U.S. profile has just continued to go from strength to strength over several quarters. It has always been a legacy strength of Invesco Ltd., but the acceleration has been meaningful over the last few years. Part of the testament to our strength is that we have been in those markets for decades. We never left the markets when there have been challenges, and that longstanding nature is really critical. We are also pretty focused on the markets in both Asia and EMEA that we choose to compete in. In Asia, China, Japan, Southeast Asia, and parts of Greater China are all huge priorities for us, and we have made them those priorities. In a market like India, we chose to enter into a JV through the partial sale that we made last year. Product development is critical. We continue to innovate. I mentioned some of those innovations in China. The strength we are seeing in global equity is innovation we put in place in Japan five, six, seven years ago that is starting to pay off the last few years. The distribution is really strong and diverse; it cuts across institutions and private banks. In EMEA, same kind of thing. The slower overall growth in the industry and in the economies in parts of Europe and the UK—we are not seeing it necessarily flow through into our business. We are taking advantage of some real secular changes that are happening with regulatory reforms in the UK and more emphasis on retirement in those markets. We are winning really meaningful mandates in parts of fixed income that are very solutions-oriented. We continue to see growth in that ETF platform where we planted seeds over a decade ago, plus distribution in those markets is really strong and diverse. They continue to be places where the long-term applications we put in place, coupled with the investments we continue to make there, position us well. We believe that these markets have outsized growth in terms of asset flow and money in motion for demographic reasons and the regulatory and societal topics that I mentioned before. We are really uniquely positioned, and so we are going to continue to focus there. Glenn Paul Schorr: Thanks for all that, Andrew. Maybe one quickie that goes hand in hand with that is I think I saw an article this week on a potential QQQ on the international side. It got me thinking it was like bottled water—you are like, wow, how did I not think of that before? Just curious on where that is in development and how you are thinking about the rollout and marketing plan. Andrew Ryan Schlossberg: Yes. We extended the Q lineup last year in Hong Kong, and this year it is going to be in Japan. That is just one of the innovations that we are putting forward. QQQ is a very important ETF and product for us. We are also putting other extensions around the ETF business out in Asia, both last year and this year. The Qs will be a big flagship in those two markets, but it will be the start of even more to come with ETFs in Asia for us. Laura Allison Dukes: I will just underscore the marketing behind that, starting over a year ago, has been significant. Getting back to some of the earlier comments, the brand awareness around the QQQ extends far beyond the United States. It is deep across Europe, and now across Hong Kong and soon to be Japan. We put quite a bit of firepower behind that and feel very good about our competitive positioning there. Andrew Ryan Schlossberg: I mean, we often talk about the QQQ in and of itself, but the broader ecosystem around the QQQ is something like $550 billion of AUM around the world. That is what we call our innovation suite, and we will continue to look for extensions globally. Glenn Paul Schorr: Okay. Thanks for all that. Appreciate it. Operator: Thank you. Our next question comes from Alexander Blostein with Goldman Sachs. Alexander Blostein: Thank you. Good morning, everybody. Just another one around the competitive dynamics in Qs. And also, Andrew, thank you for the color and the background there. I guess the question is less about the back book and more about the forward growth algorithm if competition starts to become more intense. When it comes to fees, anything you would be willing to share in how you would potentially respond if competitors come in at a lower price point, or does the product have enough competitive moat around it to sustain the current fee structure? Andrew Ryan Schlossberg: Yes. Just to be super clear, the eight basis point index licensing fee that we pay for the funds is the same index licensing fee that others will pay. We have a contract around that. The fee differentials that could get put on these funds—we will look at when those funds get launched. I really want to emphasize what I was saying in the prepared remarks: the way that ETF owners look at this is a total cost of ownership. That includes the tightness of the spreads and the liquidity. What we have learned over time is that marginal fee rate differences at the headline level oftentimes do not relate to changes in people's conviction around where to invest. I also would not underestimate at all the 25-year history and the brand recognition that has had hundreds of millions of dollars invested in it over the last couple of decades. We are synonymous with it. Of course, we will pay attention and make sure we remain competitive, but I think some of those extra facts really give us confidence. Alexander Blostein: Yep. Totally. That makes sense. I wanted to ask a question about China. Really good growth there now for a couple of quarters; those markets seem to be coming back more and more. As you look at your pipeline of additional new products, what does that look like today? And is there enough there to move the needle on the blended fee rate when it comes to that bucket as a whole for you? Andrew Ryan Schlossberg: Thank you. As we have been saying over the last couple of years, because of the growth and the maturity of the platform and because of our leadership, we have a very full product line. That does not mean we are not continuing to innovate. Much of the flow from the last several quarters has come from our existing products; that really was not the feature several years ago. This quarter, as an example of continuing to innovate, we launched 14 new products, mostly in ETFs and balanced funds, and those products generated $2.5 billion in flows in the quarter. Still, 75% of the flows came from our existing product line. Fixed income plus has been the key driver—remember, that is kind of like a balanced fund in American terms—and it is a precursor, we think, for people continuing to get more interested in the equity markets. As they graduate into the equity markets and gain more confidence—these are retail Chinese investors—into their domestic market, we have a product line that is really well set to take advantage of that. We will continue to innovate. Laura Allison Dukes: Relative to the fee rates in China and the range that we see there, as that market continues to evolve and as it continues to be very fixed income and fixed income plus heavy, as Andrew noted, the fee rates of products we launch tend to be slightly lower than the range that we disclosed in the presentation as to where the fee rates are running right now. What I would point you to is the fact that the margins continue to improve there. As we continue to evolve that market and it matures—and the fee rate caps that went in several years ago that you will recall kind of totally washed through—the market becomes more and more mature, and the fee rates start to look a lot more like fee rates around the world. As there continues to be real strength and demand for ETFs, as opposed to mutual funds, you see the expected fee rate being a little bit lower than it would be for a mutual fund. We see fee rates just slightly lower; it would not surprise me if that continues to compress a bit over time, but I think our margins have been in the high 50s to low 60s. That is a good proof point to look to in terms of the strength of the overall platform. We have a very scaled business, a very hard-to-replicate business, as we said, and we have the opportunity now to continue to innovate with products across the fee spectrum. As demand continues to evolve and perhaps as they start to move more into equities—which right now is not a market where the uptake in equities is very high—perhaps you would see fee rates move. It is going to be very much a mix shift story over time but with really strong margin. Alexander Blostein: Great. Thank you for all the detail. Operator: Thank you. Our next question comes from Brian Bertram Bedell with Deutsche Bank. Your line is open. You may ask your question. Brian Bertram Bedell: Great. Thanks. Good morning. Thanks for taking the questions. Maybe just back on the QQQ, another angle on this. Can you talk about the institutional usage versus the retail usage? It is very different dynamics, obviously. You mentioned, Andrew, the really powerful liquidity that you have in the QQQ product. What is the thought around potentially in the future having different price points for institutional versus retail flavors of the QQQ? And on the marketing budget, I think Allison, the latest guidance was $80 million, something in the midpoint of that $60 million to $100 million range. For the marketing budget, is that still the same? It sounds like you are mixing that a little bit more towards international growth in terms of the marketing spend. If you can comment on that. Andrew Ryan Schlossberg: Great, thank you. Let me start, and Allison can pick up. With the first part of your question, QQQ is well owned institutionally, and it will continue to be a focus for us. Every single one of our hundreds of salesforce members carry the QQQ in their bag, so to speak. They are going to continue to do so. We think demand in the institutional market is growing, not only here in the U.S. but around the world. There is access to it with people owning it in the U.S. We also have a UCITS version of it where institutions can own it on that core platform. Then some of the things I talked about earlier where we are listing it into those couple of Asian markets—there are plenty of places for institutions to own it. A lot of times, these are not institutional buy-and-hold investors; these are institutional traders that are using it to take a position. But increasingly, as buy-and-hold comes, we will be there to participate. In terms of your question on price points, not possible in the ETF space per se, but separate accounts that invest in the QQQ index are things that we have today. Those could be at different price points for individual institutions, and that is something we capture and can continue to capture over time. Laura Allison Dukes: As it relates to the budget, yes, the same guidance that was out there in the proxy that was filed last summer—that it is fully discretionary. We expect marketing to be in a range of $60 million to $100 million. It is fully in our run-rate today, so you have the full marketing run-rate inclusive of the QQQ in the line item for the first quarter, and we expect that to be pretty consistent throughout the year. There may be a little bit of timing differential quarter to quarter, but for the most part, that is pretty much the range that we expect for both the QQQ and our entire marketing budget. In terms of the mix between the United States and the rest of the world, that has been in the run-rate now—even when marketing was classified somewhere else—we have been spending quite a bit of marketing money outside of the United States in marketing the QQQ. We expect to continue to do so as we see demand. We have the flexibility to choose to market how we want, where we want, and what we think is best for the product. We feel very good about the opportunities we have from here. Brian Bertram Bedell: That makes sense. And then just one modeling question on the ratio of servicing and distribution fees to average AUM, and also third-party distribution expense relative to average AUM. It looks like on the servicing and distribution revenue side, it went down to a little less than six basis points from seven in 4Q, and then the expense went up to around 12 basis points from 11 in 4Q. I suspect this is the dynamics around the QQQ adjustments, but I did not know if there was anything one-time-ish or seasonal in those numbers. Do you think those ratios—that relationship—is a good run-rate to be modeling for the rest of the year? Laura Allison Dukes: The relationship I would point you to is third-party plus distribution fees divided by management fees. That is your best relationship to look to given the pass-through nature of some of those third-party and distribution fees. Consistent with the guidance we gave last quarter, we expect that to be in the 22% to 23% range with the full impact of the QQQ going forward. This quarter, it was 22.7%, and we expect that relationship of 22% to 23% to hold with the full impact of the QQQ. The one thing I would point to as you see some of the quarter-over-quarter noise in the service and distribution fees is yes, we had the reclassification change with the QQQ marketing coming out of service and distribution fees and going into marketing. It also came out of third-party contra-revenue. The other thing to note in service and distribution fees in the first quarter is you had a little over $11 million reduction related to the sale of Intelliflo. This being the first full quarter without Intelliflo, you saw that have a negative impact on service and distribution fees, but also, importantly, an even higher magnitude, better impact on expenses. As that was the operating income headwind, it is now a bit of a tailwind that is fully in the run-rate from here. Hopefully, that helps with the relationship on the third-party and distribution fees. Brian Bertram Bedell: Yep, very helpful. Thank you. Operator: Thank you. Our next question comes from William Raymond Katz with TD Cowen. Your line is open. You may ask your question. William Raymond Katz: Great. Thank you very much for taking the question. I got disconnected from the call, so I apologize if some of this was already asked. Coming back to expenses—Andrew, I hear a lot of good things around incremental margin outlook, non-U.S. scaling nicely, seems like all the kerfuffle on the QQQs is not really that bad at the end of the day. The expense guide you gave today is very good in terms of incremental margin. Can you give us an update on how you are thinking about the intermediate- to longer-term opportunity for margins at this point in time? Laura Allison Dukes: Sure, Bill, I will take that. You continue to see the operating leverage that we are generating quarter to quarter, and we feel very good about the momentum behind that. Given the work we did last year and the simplification of our portfolio—really focusing our efforts on the higher growth, higher profitability aspects of our portfolio and the conversion of the QQQ—we have a lot of momentum behind that. We feel like we have the opportunity to continue to generate positive operating leverage. There will be some seasonality quarter to quarter. You saw a little bit of seasonality as you always do in the first quarter, but absent seasonality, we think there is pretty significant momentum. We said all along we needed to get the margin back to the mid-30s on a path to high-30s, and we feel like we are starting to see mid-30s here. Now we have our sights focused on how we get back to the high-30s, and we feel good about the momentum behind that. We will continue managing expenses in a really disciplined way. I am glad you found the expense guide helpful today. We know there has been a lot of noise with the divestitures. We think we have a fairly clean outlook from here. It is really important to note that underneath that, we are investing in the firm—not just through the hybrid investment platform. We are looking at constant opportunities where we can invest, drive productivity, and drive efficiency, really with an eye towards scale and positive operating leverage. It is a collective effort across our management team, and we think it is really going to deliver the momentum we need to get the margin back to the high-30s. Andrew Ryan Schlossberg: To add to Allison's comment, the areas where we are seeing the greatest growth and we expect to continue to see the greatest growth—ETFs and China, just as two examples—scale well. We will continue to see that growth translate to strong profit growth. William Raymond Katz: Great. Thank you, Andrew and Allison. As a follow-up, one of your peers earlier in the quarter described the retail opportunity shifting to after-tax return as a focal point. I think you have mentioned that in some of your commentary. Could you expand on that? How do you see Invesco Ltd. positioned as we move from pretax to after-tax? And is there anything in the legislative area or in the tax code that could potentially impair the opportunity to migrate to after-tax returns? Thank you. Andrew Ryan Schlossberg: We agree. The after-tax return focus of individual investors has always been there, but it has been heightened. A lot of the tools that are available now to individual investors have increased, and those were the ones I was mentioning earlier. We are really well positioned to compete in those, and they are areas we will continue to invest behind to grow. Specifically, ETFs have that feature built in—being very tax-aware and tax-efficient. We are a major player, as you know, and we will continue to build out the active side of that ETF business. SMAs have been the other way that people have played that. You have seen our growth; we now have nearly a $40 billion platform. A major feature of that is tax optimization, and we are really winning in fixed income there, which has been smaller historically in the industry. Model portfolios are taking hold and are going to be another way for people to tax-optimize. This is largely a feature in the United States. To your question about regulatory changes, there is nothing that we see specifically on the horizon. Individual investors are speaking with their wallets by being hyper-focused here, and we think that is a good thing for Invesco Ltd. William Raymond Katz: Great. Thank you very much. Operator: Thank you. Our next question comes from Benjamin Elliot Budish with Barclays. Your line is open. You may ask your question. Hi, good morning, and thank you for taking the question. Just one for me this morning. I appreciate the clean expense guide, so at risk of upsetting that, I just wanted to ask: you have narrowed and trimmed the portfolio a little bit—Intelliflo, the India JV. As you look across the business, is there anywhere else that might make sense to trim and continue to focus, or are you happy with the set you have right now and we can continue to enjoy this cleaner expense guide? Benjamin Elliot Budish: Thank you. Laura Allison Dukes: The only thing I will point back to—and I said it earlier in my comments—is just a reminder that our partnership on the Canadian business is set to close at the end of the second quarter. That is about $19 billion in AUM. That was all built into my expense guidance, but that is a part of it. There is a modest negative impact to operating income of about $5 million to $10 million per quarter that will improve over time as we grow that subadvisory revenue. Beyond that, in terms of our overall portfolio and profile, we feel like we have done a lot of hard work in simplifying where we operate, and we think we have a lot of opportunities to grow from here. I do not know that there is a lot more pruning to be done. We are in a lot of the high-growth markets where we want to be, and we have a well-set group of investment capabilities as we have been talking about today. We are very well positioned to continue to grow from here. The simplification efforts are going to continue to focus more than anything on remixing our expense base, being really disciplined behind that expense base, continuing our efforts around the balance sheet and improving our leverage profile, and improving our capital return. I hate to say it is all blue skies from here—it will not be. What we are doing is making sure we are built to operate in any environment and create the momentum and the leverage we need behind that, and we feel good about the efforts that are already underway. Andrew Ryan Schlossberg: The only thing I would add—and this maybe takes it back to the beginning of the call where we really emphasized our strategic focuses—in addition to the headline things that we did last year around repositioning the portfolio, divesting, and reinvesting, we have really simplified the company over the last few years. We have one fixed income platform now around the world, one equities platform around the world, one private markets platform around the world, and we have clarified for the organization how to operate in a simpler, cleaner way. That allowed us to be able to do the things that we did last year. It is just an example of the benefits from it. To echo what Allison was saying, now we can put even more of our focus on growth. Andrew Ryan Schlossberg: Operator, we have time for one more question. Operator: Thank you. That question comes from Craig Siegenthaler with Bank of America. Your line is open. You may ask your question. Craig, your line is open. You may ask your question. Thank you. He is not responding. We will go ahead to Michael J. Cyprys with Morgan Stanley. Your line is open. You may ask your question. Michael J. Cyprys: Hey, thanks for squeezing me in here. Just a question on AI. I was hoping you could update us on how you are using AI across the organization today, what use cases have been most impactful so far as well as some of the key learnings you have had, and how you might quantify any of the benefits that you are seeing. As you look out over the next couple of years, can you talk to some of the steps that you are taking to further embed AI throughout the organization and how you are thinking about the longer-term opportunity set and benefits? Thank you. Andrew Ryan Schlossberg: Yes, thanks—an important question. We are treating AI across the firm as a way to accelerate capabilities that we have today. It has been a focus of augmenting the teams that we have and applying it in data analysis, things like content creation, and creating operational efficiency. One of the main things we have focused on the last year or two has been investing in tools for all of our teammates—the 7,500 people that we have around the world. Not just investing in the tools, but in education and how to apply them to process adoption across AI and GenAI. It gets applied to large-scale applications and to people's BAU. We estimate that close to 80% of our employees, in some way, shape, or form, are using these tools every day in their business activities. To your specific question about big use cases, they are either in use or in development across the entire company, with an emphasis on enabling outputs. We have use cases in the investment process and around client growth—things like investment research aggregation, sell signal adaptation, performance analytics, client communications—all those sorts of things. We are really trying to couple that with all the things that our clients expect from us, which is to protect their data and to protect the integrity around it. We are moving fast but cautiously, too. Michael J. Cyprys: Great. Thank you. Operator: At this time, I will turn the call back over to the speakers. Andrew Ryan Schlossberg: Thanks, Operator. In closing, we are pleased with the continued strong results this quarter. As we discussed, we advanced several strategically important investment capabilities and vehicles, with many reaching record assets under management. We did this with discipline, focus, and the benefits of scale, and we are generating meaningful operating leverage and improving margins. We will continue to stay focused on our highly defined growth strategy with an emphasis on relentless execution, client-focused innovation, and teamwork across the firm. Thanks, everyone, for joining the call today. Please reach out to our Investor Relations team for any additional questions. We appreciate your interest in Invesco Ltd. and look forward to speaking with you all again very soon. Operator: This concludes today's conference. We thank you for your participation. At this time, you may disconnect your lines.
Operator: Thank you for standing by. The conference will begin shortly. Until such time, you will hear music. Thank you, and please continue to stand by. Good morning, and welcome to Crown Holdings, Inc. First Quarter 2026 Conference Call. Your lines have been placed on a listen-only mode until the question and answer session. Please be advised that this conference is being recorded. I would now like to turn the conference over to Mr. Kevin Charles Clothier, Senior Vice President and Chief Financial Officer. You may begin. Kevin Charles Clothier: Thank you, Elle, and good morning. With me on today's call is Timothy J. Donahue, President and Chief Executive Officer. If you do not already have the earnings release, it is available on our website at crowncourt.com. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and our SEC filings, including our Form 10-K for 2025 and subsequent filings. Earnings for the quarter were $1.56 per share, compared to $1.65 per share in the prior-year quarter. Adjusted earnings per share were $1.86, up 11% compared to $1.67 in the prior-year quarter. Net sales for the quarter were up 13% compared to the prior-year quarter, reflecting a 5% increase in global beverage can volumes, $234 million from the pass-through of higher raw material cost, and $74 million from favorable foreign exchange. Segment income was $405 million in the quarter, compared to $398 million in the prior year, reflecting higher beverage can shipments in Europe and Asia Pacific, partially offset by lower volumes in Brazil and lower cost recovery in North American beverage. Second quarter 2026 adjusted earnings per diluted share are projected to be in the range of $2.10 to $2.20 per share, and full year is projected to be $7.90 to $8.30 per share, with a $0.05 headwind in the second quarter and a $0.10 headwind for the full year due to the conflict in The Middle East. The adjusted earnings guidance for the full year includes net interest expense of approximately $355 million, exchange rates at current levels with the euro at 1.17 to the dollar, a full year tax rate of approximately 25%, depreciation of approximately $330 million, noncontrolling interest expense of approximately $145 million, while dividends to noncontrolling interest are expected to be $110 million. Share repurchases are expected to be approximately $600 million. We maintain our 2026 full year free cash flow guidance of approximately $900 million after $550 million of capital spending to support our growth projects in Brazil, Greece, Spain, and India. The company's net leverage was 2.7 times at the end of the first quarter, reflecting seasonal working capital build. The company expects year-end net leverage to be approximately 2.5 times, in line with our long-term target. With that, I will turn the call over to Tim. Timothy J. Donahue: Thank you, Kevin, and good morning to everyone. As Kevin just discussed and as reflected in last night's earnings release, the company had a firm start to the year with earnings per share up 11% over 2025. Global beverage unit volumes were up 5% in the quarter on the back of strong demand across Europe and Asia Pacific. When coupled with 3% North American food can volume growth, that offset volume declines in Brazil and higher input costs in North America. The conflict in The Middle East continues to create volatility across energy, transportation, and direct materials such as aluminum and coatings. The biggest direct impact to Crown Holdings, Inc. has been in The Middle East where religious tourism has been significantly reduced and some customers have not been able to export. Although Crown Holdings, Inc.'s March month shipments in The Middle East were up 19% over the prior year as our operations in Saudi and Jordan supported the UAE, all Crown Holdings, Inc. plants remain operational with adequate supplies of materials, although for safety purposes we have curtailed operations in Dubai from time to time over the last two months. As Kevin just discussed, we have included a full year $0.10 per share headwind with $0.05 a share in the second quarter and $0.05 a share in the second half to account for increased costs related to ocean freight, energy, and direct materials. We are also mindful of building inflationary pressure on consumers, although can demand remains strong globally owing to its many favorable characteristics. Turning to the operating segments, in Americas Beverage, sales increased by 16% in the quarter primarily reflecting the pass-through of higher material costs. Unit volumes in the Americas were up 1% to the prior-year first quarter, with North America up 1% and Brazil down 5%. Income was down about 10% in the quarter, in line with expectations, owing to volume mix effects, Q1 cost timing, and higher cost inputs not recovered through our contractual pricing formula. We do expect the deltas to the prior year to narrow significantly in the second quarter. The aluminum beverage can market in North America is steadily growing across multiple categories due to new product launches and convenient packaging. We expect strengthening demand into what should be a very tight can supply situation this summer, with our current full year growth estimate unchanged at 2% to 3%. In Brazil, we forecast second quarter volume to be down with the full year showing modest volume growth. European beverage volumes advanced 7% in the quarter with growth noted throughout Northwest and Southern Europe and the Gulf States, leading to a 28% increase in segment income. Capacity remains tight across Europe, again leading to what should be a very tight can market this summer. As previously discussed, we have two expansion projects underway in both Greece and Spain to support future growth. Income in Asia Pacific advanced 10% in the quarter on the back of 17% unit volume gains. Growth was notable across Vietnam, Cambodia, and China as results from our commercial adjustment strategy combined with recent cost reduction programs begin to bear fruit. Volumes across Transit Packaging held up well during the first quarter with equipment, plastic strap, and film offsetting most of the declines in steel strap and protective. Margins were down compared to the prior year as input cost inflation ran ahead of our price recovery. We do expect to begin to recover cost inflation in the second half of the year. First quarter volumes in North American food cans advanced 3%, and when combined with better results in food closures and beverage can equipment, income in Other increased $18 million in the quarter. So just to recap before opening the call to questions, global beverage volumes advanced 5% in the quarter, and demand looks to remain strong for the balance of the year despite inflationary pressures on consumers, in what should be very tight market conditions across both North America and Europe. Food can volumes up 3%, following 5% growth in the prior-year first quarter. Earnings per share up 11% to $1.86. We returned in excess of $250 million to shareholders in the first quarter, and in the last five quarters have repurchased approximately 6% of outstanding company common stock. The balance sheet remains strong. Cash flow is significant, which will allow for the continued return of value to shareholders. And with that, Elle, I think we are now ready to take questions, please. Operator: We will now open the call for questions. Please press star and then the number one. Please unmute your phone and record your name and company name clearly when prompted. These are required to introduce your question. To cancel your request, please press star and then the number two. Our first question will be coming from George Leon Staphos of Bank of America. Sir, your line is open. George Leon Staphos: And congrats on the progress so far. Did the supply chain issues as they were building give you any volume opportunities? You pointed to in the release that you were able to leverage your network globally. All your peers have global networks too, but did any of that make for maybe some extra volume that you were not considering to start the year if some of your peers were having issues elsewhere? And then the volumes have been very strong. You talked about it being tight into the summer, and that is terrific. Having said that, you are coming off tough comps already. We had very strong growth in the fourth quarter. Are there any factors out there that would suggest maybe there is a little prebuying going on in terms of this volume demand? And then I had a follow-on. Timothy J. Donahue: Okay. So let me address the first question, George. I think we feel pretty confident that the answer to your first question is not yet. That is, if there is going to be a tight raw material supply situation vis-à-vis the aluminum supplier fire that is causing some aluminum disruption to some of our peers, if there is a benefit to that, we have not seen that as of yet. I think what I would characterize is that this was always going to be, I believe, a tight summer situation in both North America and Europe, notwithstanding the North American aluminum outage. We are all global. Well, you know, careful how I say this. I do not mean this in the way it is going to sound. We are the only ones that are really global, George, in that we have a fairly large Asian footprint that we can supply and support other regions from when need be, and we will see that into the second and third quarter depending on the length of the Middle East conflict and the Strait of Hormuz blockage where some suppliers cannot ship to India. We will pick up some cans into India from our operations in Southeast Asia. So that will occur potentially in Q2 and possibly even in Q3. That would be one area. When we talked about leveraging the global network, it is more towards reflecting on the immediate circumstances and danger that was present in the United Arab Emirates and specifically in Dubai where there is Crown Holdings, Inc. and one other can manufacturer, amongst a whole host of manufacturing companies, that were threatened with drones and missile strikes. So we were able to leverage from the other operations in The Middle East and, obviously, were able to reroute and redirect aluminum supplies from Asia and/or The Middle East or European suppliers in and out of The Middle East to other locations. So that was the basis of that comment. And since I just spoke for so long, you are going to have to remind me of your second question. I apologize. George Leon Staphos: No worries, and I should have mentioned I hope everyone is safe both at Crown Holdings, Inc. and your suppliers with what has been going on in The Middle East. The question was: look, volumes have been strong for a while. Volumes are strong in the first quarter, up 5% globally. Any concerns on your side that this is prebuying? Why or why not? And then I had a follow-on that I will piggyback. Timothy J. Donahue: It is hard to know. The North American market, George, as well as we do—you have covered the space as long as we have been at Crown Holdings, Inc.—the customers keep absolutely zero inventory. They basically receive deliveries from us, and they go right into the can washer, into the filling line within minutes. We have fifteen-minute delivery windows that we are expected to deliver into so they do not get shut down. So I do not think there is a lot of prebuy because they do not keep a lot of inventory, and they have got direct delivery right to the store. In Europe, could there be a little prebuy? Maybe with some of the beer customers, but again, the soft drink side is not keeping a lot of inventory. And the growth in Asia has been—if we just take a step back and talk about Asia real quick—the growth there has been mid- to high-single-digit for the last several years. We elected not to participate in that for reasons surrounding the value. We got our cost structure where we want it. We think we have the lowest cost structure of any producer in Asia, and we think we are now well positioned to afford us a different commercial strategy, and that is what you saw in the first quarter. So I do not think there has been any prebuy. I could be wrong, and there could be some on the margin, but nothing large enough, George, to move the needle. George Leon Staphos: Okay. A quick one, and I will turn it over just to be fair. On Signode, any green shoots at all? You suggested that the margin was a function of timing of pass-through relative to your cost inputs, and we will take that at face value. You are seeing some pickup in volume, but when do you expect we are going to see, along with green shoots, a pickup in margin there? Because that is ultimately trapped earnings at some point that could leverage to the benefit. Anyway, I will turn it over there. Thanks for the time. Good luck in the quarter. Timothy J. Donahue: Thanks for the question. January data looked pretty promising. Although I saw consumer sentiment the other day—I do not know if it is University of Michigan or who publishes it—but it was just dreadful, and I think the last two months have been bad, and I think we are at the lowest level ever is what I read the other day. Having said that, volumes have held up fairly well on the commodity side, although there has been some margin squeeze. And on the equipment and tools side where the margins are much higher, there has been volume loss over the last couple of years. Now in the month of April, we have seen order inflows at much higher rates, 10% to 20% higher than this time last year. That typically takes about ninety days for it to manifest itself into delivery. So we are hopeful. I do not tell you that because I am promising you anything, but if we are looking for a green shoot, orders received in the month of April look promising across equipment and tools. So we are hopeful for a stronger third and fourth quarter. Operator: Thank you. Our next question will be coming from Philip H. Ng of Jefferies. Your line is open. Philip H. Ng: Hey, Tim. You mentioned the bev can market is going to be quite tight in the summer months in North America and Europe. Certainly, there are some supply chain dynamics at large. How comfortable are you in terms of meeting that demand if the market comes in a little better than, call it, low single-digit growth in the U.S. as well as Europe? Give us some context of your ability to potentially meet that demand. Timothy J. Donahue: Only because it is early in the year and, as I said, we are mindful of the inflationary pressure building on the consumer, we have left our growth expectations for volume in North America at 2% to 3%. We certainly have some room to do a little better than that. I would like to wait to see how the second quarter unfolds and how the consumer reacts to what they are faced with, which is higher energy costs across the board, whether it is their home heating and electric bill for air conditioning and/or their gasoline bill. So we can go a little bit above 2% to 3%, but let us be clear, Phil, we have limitations as well. We, like every other can supplier, have a limited amount of capacity and if the market goes gangbusters—which it feels very strong now—when you look at the categories over the last fifty-two weeks, with the exception of beer in cans—beer is only down 1.1%—every other category is up low- to mid-single-digits with the exception of energy, which is up almost 20%. So it feels like the consumers and then our customers, recognizing that the consumers favor the positive characteristics of the can, that things are really positive for the can right now. But we do have limitations, but we will do our best to sell every can we can at the right price and satisfy the market. Certainly contract customers come before spot customers. Philip H. Ng: The reason why I asked is because your volumes for 1Q looked a little muted. Certainly, you have tougher comps in Brazil. But it sounds like you have the runway to support that demand. As we think about how the year unfolds in March and April, how have trends actually been trending, whether it is North America, Europe, and Asia, Middle East? There is a lot of uncertainty on the macro front. Timothy J. Donahue: We got off to a slow start in January. The month of March, I think, was the highest shipment month ever for the company, which is surprising that it happened in March, not like a May month. Yesterday was our highest shipment day ever in the history of the company. This is North America. So things are pretty firm right now. March was a strong month, and April is going to be maybe not as strong as March, but April typically is a soft month, and it is going to be a strong month. Brazil, we had a pretty difficult comp. I think we were up like 11% last year in the first quarter in Brazil. And not to place too much on the comp, I do think conditions in Brazil are different than conditions in North America right now. I think the Brazilian consumer is not as resilient as the North American consumer. So post-Carnival and getting into their winter months, we will see how the market in Brazil reacts and hopefully, the Brazilians and the Mexicans go deep into the tournament. We are pulling for both the Mexicans and the Brazilians to go as deep as possible. That will be really positive for can demand in both of those countries and even among the Hispanic and broader Latino population across the United States. Philip H. Ng: Got it. And one last quick one for me. You talked about how, just given some of the supply chain in Asia, that could be an opportunity for you shipping into places like India. Certainly, that could be uplift on demand. Is there anything we should be mindful of in terms of cost associated with that? Is that something you just pass on to the consumer and that would be accretive to EBITDA and EBITDA margins? Or how should we think about that opportunity that could be a good guide in 2Q and 3Q? Timothy J. Donahue: If you sell more cans, you are going to make more, right? You are going to make more earnings, more EBITDA. Percentages move around a little bit, as you know, with the pass-through of higher material costs, so you always have the denominator effect. But if there is an opportunity for us to ship 50 million to 100 million cans into The Middle East from Thailand and/or Cambodia to Vietnam, and the customers need support, we are ready and able to do that. Philip H. Ng: Thank you. Appreciate the call. Timothy J. Donahue: Thank you, Phil. Operator: Thank you. Our next question will be coming from Ghansham Panjabi of RW Baird. Your line is open. Ghansham Panjabi: Yes, thank you. Good morning, everybody. Tim, just going back to commodity costs—obviously a big increase in oil and aluminum and much of everything else the last couple of months. It sounds like you are still embedding a pretty intact volume outlook for 2026, apart from what you called out in The Middle East. But last time we had inflation a few years back, it was very tough for your end markets in the developed markets in particular. So what gives you confidence on the implied resilience this go-around? I know there is some distortion with the World Cup, but then the emerging market consumer, I would have to imagine, is much more sensitive to fuel prices, etc. So just going back to the question on confidence on volumes. Timothy J. Donahue: The big inflation that we have right now is principally in North America and it is opposed to the Midwest premium. We do not see that level of inflation in Asia and Europe. But your question is a good question. It is why we left our volume expectation unchanged from what we provided to you in February. We are always mindful of this, and you are right—2022. Kevin and I went back, and we looked at it. The big shock then was there was a rapid increase in LME from, let us say, $2,500 to $4,000 a ton. The LME has been more or less bouncing around $3,200 to $3,500 right now. It has been really the Midwest premium that has kind of been the proxy to absorb the tariffs. But having said that, as you have said and as we have said earlier, pressure on the consumer from broader inflation and specifically energy-related inflation is there. But what we see right now, what we are feeling right now, what the customers are asking for right now—at least through the end of the second quarter—it does not look like it is going to slow down. Now if your question is could we have a shock like we had in 2022, anything is possible. It just does not feel like it is going to happen this year. Ghansham Panjabi: Okay. Got it. And then for the nonreportable segment, the step function in profitability—was there anything one-time-ish that drove that? I know you called out strength in beverage can equipment and also North American food cans. And then finally, on India, can you just frame how big the market is from a unit standpoint and your current position in context of the greenfield capacity you announced? Timothy J. Donahue: The market is roughly 4 billion to 5 billion units and growing 15% to 20% per year. We supply very little into the market right now. We used to, before there were can plants there—we supplied almost the entire market from Dubai—but we have very little supply other than what we are shipping in now from Asia to cover some of the Middle Eastern supply, and then we are adding 2.2 billion units over a couple of years here, with a large customer under contract already, so we feel pretty good about that market. On nonreportable, beverage can equipment—we tripled the income in the quarter compared to last year, albeit off a lower base. Food cans again, as I said, growing 3% and utilizing more capacity, and we had some new capacity brought on over the last several years. So utilizing that new capacity in a really balanced mix among seasonal vegetables, non-seasonal human food, and pet foods—pet food making up 40% to 45% of our mix nowadays—so a really good mix. And then food closures—surprisingly, closures performing quite well among nutraceuticals, other nutrition drinks, and some human food. If you think about condiments and jar lids, things like that. Could there have been some minor one-offs? Maybe a handful, if even that—not that much. Operator: Our next question will be from Christopher S. Parkinson of Wolfe Research. Your line is open. Christopher S. Parkinson: Great, thank you. Given all the moving parts in Asia over the last few years, and I know you have dramatically improved your operating base, can you just give some insights on how you think about the sustainability of the inflection on a go-forward basis? It seems like there are still some mixed results on a country-by-country basis, but I would love to hear your perspectives. Thank you. Timothy J. Donahue: I do not know that we have any mixed results on a country-by-country basis. Volumes were strong throughout the segment, particularly strong in Cambodia, Vietnam, and China, as I mentioned. We have a number of large customers that we are partnered with—some in joint ventures, some not in joint ventures. As I said in February, we agreed among all of us here at Crown Holdings, Inc. that we were going to, on a new commercial adjustment strategy, go out and grab more volume, and it seems to have worked. There has been a fair amount of consolidation among the Chinese beverage can suppliers. So it does appear that there is a slight firming in China right now, and we will see how that progresses. There has been growth in Asia for the last several years. We have elected by and large not to participate in that because it was at prices that we said were not worth participating. That has changed a little bit, and so now we are participating again. Keeping in mind, we make 16% to 17% operating income. It is a pretty healthy segment for us. So I am always puzzled when people say they are disappointed when we are making 17% in the packaging industry. Most packagers would like that. So that is a division that we have high hopes for and continue to support, and we think it will continue to be a really good asset for the company into the future. Christopher S. Parkinson: Great. And just as a follow-up, obviously you have gone through your expansions in Brazil, Greece, Spain, India. At the same time, it seems like the developed market side of it—the U.S. and broadly in Western Europe—still seems pretty tight. Are there any other aspirations in terms of adding additional lines that you are considering? Is now the right time? Do you foresee others kind of taking the progress just given the constructive S/D through the end of the decade? Any quick perceptions on that? Timothy J. Donahue: As you rightly point out, with Greece and Spain we have some Western European expansion. Obviously, that is not Northwest, but it is Western Europe. In Brazil as well. North America—I guess your question is probably most specific around North America. At this time, we do not see the need for Crown Holdings, Inc. to expand capacity in North America. That obviously could change depending on the market and specific circumstances, but for the time being, no. Operator: Our next question will be from Analyst of Raymond James and Associates. Your line is open. Analyst: Hey, Tim, Kevin, Tom. Good morning, everyone. On Americas segment income for 1Q, could you help parse out what was the function of lower volumes in Brazil versus weather in North America versus general inflationary pressures? And on those inflationary pressures, how does 2Q compare to what you saw in 1Q in Americas? And how quickly are you able to offset those raws pressures with regards to freight, energy, or coatings? Timothy J. Donahue: You are generally well aware of the formula price we use, using PPI as a proxy to recover our nonmetal costs on an annual basis. And PPI has been somewhat benign. The PPI adjuster has been somewhat benign over the last couple of years. So a little bit of a building pressure that perhaps last year we skirted away from it, but this year it kind of caught us. We kind of knew this was going to get us this year. You have got labor—labor goes up every year. You have got the coatings—the coatings fellows are facing pressure all the time, especially right now with the Middle East crisis. Warehousing costs for us in the first quarter of this year were about a handful or a touch more only, as we try to warehouse more cans early on to meet what we expect to be strong summer demand. We had a little timing situation whereby we used some Chinese metal in some locations, and the Chinese government in January or February removed the VAT refund on exported aluminum. So we had one or two months comparison this year that we did not have last year. And then as you point out, the mix—depending on the customer and depending on the size of the can—the profit mix in Brazil sometimes is a little better than the profit mix in North America. So it is a whole bunch of things, and to the second part of your question, as we said in the prepared remarks, we will significantly reduce the delta between last year and this year in the second quarter. Maybe not fully, but it certainly will not be $26 million. Analyst: If you want to quantify, was there a certain amount in 1Q from January-February winter cost headwinds? Timothy J. Donahue: Not going to quantify anything. I would tell you that January volumes were down about 6%, and I think February volumes were up a few percent as well. So it was a tough few weeks in there where we had difficulty transporting. We had difficulty getting our own people to factories. Analyst: Makes sense. Thanks again, Tim. And if I could sneak one more in—Kevin, share repurchases, I think you said $600 million. I believe it was $650 million before. Any change there? Is that future CapEx in regard to India—just some more dry powder? Anything that we should consider? Kevin Charles Clothier: No change. The number is approximately $600 million. We have a little room to go higher than that. It was just putting a number out there, so no change. Operator: Our next question will be from Anthony James Pettinari of Citigroup. Your line is open. Anthony James Pettinari: Good morning. With the $0.10 hit from The Middle East, is that primarily hitting your Europe segment where I guess those assets sit? Or is it sort of spread across the company? And then, is there any kind of assumptions around—you talked about ocean freight, energy, direct materials—those costs staying at current levels, maybe the conflict resolving at some point and then maybe coming down or maybe going up further? Any color you can give around the assumptions? Timothy J. Donahue: Most of it will be in the European segment. Depending on ocean freight, we could have a penny in the Americas business as we bring metal into parts of the Americas business from China. And certainly ocean freight as it relates to the Asian business because we do move cans and materials around Asia as well. And then energy—if you think about diesel and some of the industrial gases, LPG, LNG, etc., into Asia—many of the markets are subsidized. There is little impact to us. There are some markets that are not subsidized. So we have forecast a bit of a headwind in Asia—maybe a penny or two in Asia as well. Anthony James Pettinari: And just generally, directionally, do you expect these costs to maintain at current levels towards the end of the year, or some relief? Timothy J. Donahue: I think your leading assumption is probably correct, that even if the conflict resolves itself, we are going to see elevated costs for some period of time. We are working on plans right now to minimize the cost and/or share cost with customers. Your assumption is correct. Costs will remain elevated for some period of time. They will ultimately fall back depending on demand and industrial activity, but we, like you, expect them to remain elevated. Anthony James Pettinari: That is very helpful. And then just one quick one on nonreportable. You obviously had a really strong 4Q/1Q in North American food cans. As you look to the second half, do those comps get tougher? Is there anything from a timing perspective we should be mindful of? Timothy J. Donahue: I do not think there are any notable customer wins on the food can side or the closure side. We have two customers that are growing. So if they have wins, and because they are Crown Holdings, Inc. contract customers, we, by default, get their win. Second quarter, I think we expect earnings in Other to be up, and maybe the comps get a little bit more difficult in Q3 and Q4. You are not likely to see the big outperformance in Q3 and Q4 that you see in Q1 and then a little smaller in Q2. Operator: Our next question will be from Anojja Shah of UBS, sitting in for Joshua David Spector. Your line is open. Anojja Shah: Hi. Good morning, everyone. We are seeing fertilizer prices increasing quite significantly this year, right ahead of planting season. What does that mean for the pack season this year? Do you think that means they will plant less and have less of a yield this year? Timothy J. Donahue: They will plant as much as they think they can sell, and they will plant as much as what the demand from the retail or the wholesale markets tell them that they have to plant. To be honest with you, I do not know if they hedge fertilizer or not. I do think we are going to see a stronger period of food can and at-home consumption here as inflation begins to pull up the consumer. As President Obama once said, maybe it is time people start eating their peas again—one of my favorite lines from President Obama. I do not think that our customers will necessarily plant less. They are, by and large, much healthier over the last decade. Consolidation has helped them do that. They are broadly specialized among certain kinds of vegetables, soup, pet food. Pet food—fertilizer has little to do with pet food. So I do not think they are going to plant less, no. One thing I would say is if you are hearing that in the market, follow the cattle cycle. The cattle cycle is at a seventy-five-year low, principally because of drought conditions in the Midwest. So when we talk about human food versus feed grains and feedstocks, there could be a difference in how much feedstock is planted versus human stock. Anojja Shah: Thank you. And then switching over to Mexico. It looks like your volume was pretty strong in Q1, which is a little surprising because they just put that second sugar tax in. Maybe we could get an update on what happened in Mexico in Q1 and then what you are expecting for the rest of the year. Timothy J. Donahue: Mexico was up about 4% in the first quarter. Kind of expecting a flatter year, to be honest with you. We will see how the year goes. Both glass and metal did well, with cans up 4%. But we are currently modeling Mexico flat year over year. Anojja Shah: And the sugar cap? Timothy J. Donahue: We are mostly a beer supplier in Mexico. Anojja Shah: Thank you. I will turn it over. Timothy J. Donahue: Thank you. Operator: Our next question will be from Arun Shankar Viswanathan of RBC Capital Markets. Your line is open. Arun Shankar Viswanathan: Great, thanks for taking my question. I guess, apologies if I missed this, but maybe you can offer your thoughts on the tariffs and the potential impact, especially the 232 tariffs. I know that the Midwest premium has already kind of increased the cost of the can, but any further impacts you expect here? And then also on the steel side, are there any impacts there that would potentially impact food and aerosol? How do you see that playing out as far as demand? Timothy J. Donahue: Other than the Supreme Court striking down some of the Liberation Day tariffs, 232 and 301 are largely unchanged. Demand remains pretty strong in both food cans and beverage. I do not see any near-term impact. Tariffs generally—my feeling about tariffs is they are not helpful. It is a distortion. The administration is picking one industry over several other industries to be a winner. If they think we are saving 300 jobs at a steel mill, they are putting at risk 50,000 jobs across a whole host of other industries. So not helpful. It is what it is, and we dealt with this in the first Trump administration, and we will deal with it again. It is poor policy by any measure. But I do not think he is going to listen to a CEO of a can company. We soldier on. The good thing for us is that the food can still offers the best bargain, the best benefit, some of the highest nutrition levels of any packaged food or fresh food to the consumer—especially in times of inflation—so we feel good about the product and the product line we are in. And on the beverage can side, I think by and large, younger generations are embracing the can. My father’s generation was a can drinker. I was a bottle drinker, and now my kids are can drinkers, and they are the drinkers of the future. There are a lot of things to like about the beverage can, and I think the consumers are grasping that. We have not seen any near-term nor do I see any long-term damage currently as it relates to tariffs. Arun Shankar Viswanathan: As a follow-up, where are you on the PPI in North American beverage? I know there may be a drag from that this year, but does that subside and maybe reverse next year, especially given some of the inflation that we are seeing? And does that mean you could grow low-single-digit volume and then segment income maybe be above that just given a reversal of PPI? Timothy J. Donahue: Let us say we hope you are right. I think it is really early to talk about next year. We are only in Q1. So I am going to pass on that. Operator: Our next question will be from Analyst of Deutsche Bank. Your line is open. Analyst: Could you just remind us how pass-throughs are designed in your contracts? How long are the lags? How much are pass-through? And any hedges that you may have on the portion that is not passed through? Thank you. Timothy J. Donahue: Generally—because it is not the same in every region of the world—but in the big markets, we have total pass-through on LME, premium, and conversion of ingot to can sheet. So on metal, think about metal as passed through. Many of our customers elect to hedge aluminum, but we pass through. For passing nonmetal costs through on an annual basis, we pass through a percentage of the PPI index and/or CPI, again depending on the region of the world. Not a perfect proxy for our costs every year, but it is designed to capture some of the increase. We do pass through freight and energy across many contracts. But nonfreight, nonenergy—if you think about labor, which goes up every year, and then other direct material costs like coatings, and other system costs like warehousing—from time to time, the PPI is either more or less than our actual costs. This year, our actual input costs are a little higher than the formula we had January 1. Analyst: Got it. That is helpful. Thank you very much. And, in terms of capital allocation, you mentioned really no change this year. As we look out further, do we expect any changes in terms of CapEx? You have greenfields that you are planning. Any changes in buyback plans as we look further out? Timothy J. Donahue: We have the great fortune of being in a packaging company—being in a can company—and we have the great fortune of having a portfolio of businesses that generates a lot of cash flow. Your hope and our hope is that we are not foolish with that cash flow. We are going to invest to grow our business from time to time, and where we have greenfield and/or brownfield opportunities, we look to do that to support our customers' growth objectives. Beyond that, currently, beyond our own capital needs, as we declared, we are going to pay a dividend, and we are going to buy back shares. Kevin Charles Clothier: As Tim said, the first thing we are going to do is invest in the business. After that, we are going to pay the dividend, which we just increased. And then with remaining cash that is left over, we will repurchase stock. We will do it somewhat on a program basis, but also when we feel that there is good value, we will be opportunistic and buy a little more within each of the quarters. Our plans have not changed. On a long-term basis, we will average somewhere around $500 million of capital a year, which gives us plenty of money to pay the dividend and buy back stock. Operator: Our next question will be from Michael Andrew Roxland of Truist Securities. Your line is open. Michael Andrew Roxland: Thank you, Tim, Kevin, Tom, for taking my questions. Tim, not trying to beat a dead horse, but just wanted to grab your thoughts on consumer elasticity. You mentioned the consumers have been resilient thus far, but it does sound like some of the larger CPG customers are planning to raise prices this year. And obviously consumers are, as you mentioned, contending with elevated costs. How do you think about consumer demand in the next twelve months relative to possibly higher prices from your customer as well as increasing costs to consumers? Timothy J. Donahue: There is only so much the consumer can absorb before they have to start making choices. One thing they are not going to do is not put gas in their car because they have to get to work. So we know the choices that they have to make first before they buy packaged goods. Fortunately for us, people have to eat and drink. And as I said earlier, canned food offers, by and large, the best value for a family to prepare nutritious food on a daily basis. So we are always concerned about demand, but we are less so concerned about that. On the beverage can side, you start making choices: you do not go out to dinner so much; maybe travel is lower. Looking at the price of airfares these days with jet fuel, maybe people do not travel so much, and they stay closer to home. Generally, we do much better with consumption when people stay closer to home. It does feel, as we sit here today—we are equally as mindful as you are about the pressure on consumers—but as we sit here today, it feels like we are going to be into a very strong summer. Michael Andrew Roxland: Thank you for that, Tim. Then just one quick follow-up. You mentioned you are working on plans to mitigate costs and/or share costs with your customers. Can you provide any more color around what those initiatives are—surcharges and the like? Timothy J. Donahue: I do not want to discuss too much of what our strategy and/or plan would be in that regard, but there is a limit to how much any company or anybody within a supply chain can absorb. Depending on how long costs stay elevated and how elevated they are, there are different conversations that need to be had. That is all the point meant. Operator: Next question will be coming from Jeffrey John Zekauskas of JPMorgan. Your line is open. Jeffrey John Zekauskas: Thanks very much. You talked about catching up to higher raw material costs in your transit business. Do you buy much polyethylene in that? Polyethylene prices in March maybe were up $0.10 a pound, and in April, maybe they will be up $0.30 a pound. So there seems to be a rising dynamic there. And for Kevin, in cash flows from financing activities, there was an other net use of cash of $107 million. What was that, and are there any positive offsets to that later in the year? Kevin Charles Clothier: I will address the financing item. That $100 million—actually a little bit less than that—related to our North American securitization program. At the end of the year, as we sell receivables, we end up collecting more on the receivables that we sold. As a result, we have to repay the bank. I fully expect that amount to basically reverse itself and be closer to zero by the end of the year. Timothy J. Donahue: To your first question, Jeff, you are right—there are rising input costs over the transit business. We do not have a lot of resin-based businesses within transit. We have some resin-based, not a lot. But there are rising costs everywhere, whether it is steel, paper, resin, and we just have to do a better job of maintaining and expanding margins in the business. Jeffrey John Zekauskas: Okay. Great. Thank you very much. Timothy J. Donahue: Thank you. Operator: Our last question will be coming from Edlain S. Rodriguez of Mizuho. Your line is open. Edlain S. Rodriguez: Thank you, and good morning, everyone. Tim, you talked about the potential impact on the consumer because of inflation. Where do you think you could see the most impact? Is it in Southeast Asia where this could probably come under a lot of pressure? Is it in Europe? Where do you think you could see the most impact? Timothy J. Donahue: The markets you would expect would first be markets like Brazil, Mexico, maybe Southern Europe, maybe parts of Asia, although there is so much growth in Asia right now that it feels like we are going to grow through this in Asia. The only thing I worry about in Europe—I do not know how big the tourism season will be in Southern Europe this year. Airfares are really high. People are stretched anyway. Do they postpone the European vacation or not? We will see. But everything—the demand we have right now in Europe is extraordinary. You do not see us letting up. We probably, at the beginning of the year, would have expected mid- to higher volumes in Europe for the year—maybe we have haircut our assumption to 4%—but we are still expecting growth, and 4% might be too low as well. Things are pretty firm. Brazil feels like there is a weakening right now, and they have some elections. We will see how the market reacts. It is also wintertime, so it is hard to gauge it. We will see if the World Cup bolsters it. In Mexico, we had a pretty strong start to the year principally in beer, and we will see how that holds up, although we are expecting a flatter performance in Mexico. As Ghansham pointed out earlier, four years ago—even in North America—the consumer bought at higher prices across the board when inflation shot up. Could we see that again here in North America? We could, although conditions feel really firm right now, and it just does not feel like we are in the same place as we were in 2022. Edlain S. Rodriguez: Thank you for the color. That is all I have. Operator: Once again, that concludes today's conference. Thank you, everyone, for participating. You may now disconnect, and have a great day.
Operator: Good morning. Thank you for joining The Sherwin-Williams Company's review of first quarter 2026 and our outlook for the second quarter and full year of 2026. With us on today's call are Heidi Petz, Chair, President and Chief Executive Officer; Ben Meisenzoll, Chief Financial Officer; Paul Lang, Chief Accounting Officer; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by accessing Newswire via the Internet at sherwin.com. An archived replay of this webcast will be available at sherwin.com beginning approximately two hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under U.S. federal securities laws with respect to sales, earnings, and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open up this session to questions. I will now turn the call over to Jim Jaye. Jim Jaye: Thank you, and good morning to everyone. The Sherwin-Williams Company delivered strong sales in a quarter characterized by heightened global uncertainty and persistent demand softness in most end markets. Our growth investments and ongoing new account and share-of-wallet initiatives continue to yield results, as sales exceeded guidance on a consolidated basis and in all three reportable segments. Consolidated sales grew by a high single-digit percentage inclusive of a low single-digit contribution from the Suvenil acquisition. Reported gross margin expanded by 90 basis points inclusive of a dilutive impact from Suvenil. This was the fourteenth quarter out of the last 15 quarters we have delivered year-over-year gross margin expansion. Against a challenging prior-year comparison, SG&A increased by a mid single-digit percentage. Excluding the anticipated headwinds from our non-annualized acquisition of Suvenil, non-annualized operating costs and depreciation related to our new buildings, and foreign currency translation that we anticipated to unfavorably impact our SG&A as a percent to sales by approximately 100 basis points. Our full-year guidance of a low single-digit increase in SG&A remains unchanged. Adjusted diluted net income per share in the quarter increased by a mid single-digit percentage, and adjusted EBITDA increased by a high single-digit percentage. Net operating cash improved by 200 million dollars driven by an increase in net income and working capital being a lower use of funds. Our full-year guidance for adjusted diluted income per share remains unchanged. We continue to execute our disciplined capital allocation strategy in the quarter by returning 773 million dollars to shareholders through share buybacks and dividends. We ended the first quarter with a strong balance sheet and a net debt to adjusted EBITDA ratio of 2.5 times. Let me now turn it over to Heidi who will provide some color on first quarter segment performance before moving on to our outlook and your questions. Heidi Petz: Thank you, Jim, and good morning to everyone. I want to begin by thanking our more than 64,000 employees for executing our strategy in what remains a very challenging operating environment. We are continuing to deliver reliability, consistency, and solutions for our customers at a time when these are more valuable than ever. Our differentiation continues to widen the gap between The Sherwin-Williams Company and our competitors as evidenced by our strong top line and robust new account growth across the business. Looking at our segment results in the first quarter, I will begin with Paint Stores Group, which grew by a mid single-digit percentage. Price mix and volume both increased by low single-digit percentages, with price mix increasing more than volume. Effectiveness of our January 1 price increase is trending slightly better than expected. Our protective and marine team continued to deliver impressive growth for us, as sales increased by double digits versus a high single-digit comparison. It was the seventh straight quarter of high single-digit growth in this business. In the commercial business, sales increased by mid single digits in what remains a choppy market reflecting our very targeted and ongoing share gain efforts. These efforts are also evident in residential repaint, which returned to mid single-digit growth in the quarter. Low single-digit growth in property maintenance was encouraging, while demand in new residential remained very challenging as we anticipated. Segment profit grew by low single digits with segment margin basically flat. We opened 21 new stores during the quarter and, as planned, closed 27, or about half a percent of total PSG stores. As we have done for decades, we continually assess and optimize our store portfolio to drive profitability, strengthen operational flexibility, drive improvement in return on net assets employed, and ensure we maintain the highest level of service for our customers. We still expect to open 80 to 100 new stores for the year. Consumer Brands sales exceeded our expectations driven by high-teens growth from the Suvenil acquisition. Price mix and FX both increased in the low single-digit range, and volume decreased in the mid single-digit range. Group sales excluding Suvenil increased by low single digits driven by high-teens growth in Europe and high single-digit growth in our Latin America business. Softness persisted in North America where sales decreased by low single digits. Adjusted segment margin increased driven by the strong top line with flow-through of 34.3%. In Performance Coatings Group, sales increased slightly above the mid single-digit range we expected, with growth in every division and region. These results reflect the strong new account growth focus we have spoken about over the last year as demand in our underlying core business is still declining in some end markets. Volume in the quarter grew by low single digits, acquisitions were slightly positive, price mix was flat, and FX was a tailwind. Automotive refinish sales increased by a low-teens percentage driven by high single-digit volume. The growth was broad based with sales up by double digits in all regions, providing further evidence of the value we are delivering in this end market to win new business. Packaging continued its strong performance as sales increased by high single digits against a high single-digit comparison. General industrial, coil, and wood also delivered solid growth. Group sales expanded in all regions, including double-digit increases in Asia Pacific and Europe. Adjusted segment profit for the group increased by mid single digits and segment margin was flat. Higher incentive compensation related to the strong year-over-year sales along with the significant FX headwinds drove segment SG&A higher, resulting in muted flow-through. These same dynamics, in addition to our non-annualized new building costs, also drove SG&A higher within the administrative segment. The slide deck accompanying our press release this morning provides more detail on second quarter segment results. Now moving on to our guidance. The assumptions we provided in our January call and slide deck largely remain intact. What has not changed is that our customer feedback as well as the indicators we track continue to signal little support for meaningful recovery in most end markets. What has changed is the Middle East conflict, which has added further complexity and uncertainty in navigating the macro landscape. Our team has repeatedly demonstrated its ability to manage through crises, most recently during the pandemic and the U.S. supply chain disruption to name just a few. I am highly confident we are well equipped to manage through this newest challenge and continue supporting our customers at the highest level. Let me provide some perspective here. First, we expect to see some negative impacts on demand from recent events as the year progresses. It is difficult to predict the magnitude at this time given the highly fluid nature of the situation. But I will remind you that this is our fourth year in a row we have been operating with the benefit of getting no help from the market. We know we are operating in a share gain environment, and we will continue to be very aggressive here. We see opportunity in uncertainty. We will continue to support our existing and new customers by being the most reliable and consistent business partner in our industry. From a raw material perspective, our first objective is certainty of supply. The good news is that over 80% of our consolidated revenue is in North America. The majority of raw materials for these sales are sourced in-region and remain largely insulated from supply disruptions tied to Strait of Hormuz volatility. In areas such as Asia Pacific and EMEA, where supply could become more challenged, we are managing risk closely. Our focus over many years on building strong relationships with strategic suppliers versus transactional ones is a competitive advantage and should continue to serve us well. In terms of raw material price/cost dynamics, costs for oil, natural gas, and key petrochemical feedstocks, such as propylene, have inflated and remain volatile. As we have previously indicated, sustained inflation in these commodities typically takes about a quarter or two before we begin seeing an impact in our P&L. Specifically, we would expect to see these inflating costs impacting us more materially as we move through the second quarter and into the second half of the year. Our industrial business is seeing inflationary pressures first, starting in APAC and EMEA and to a smaller extent in North America. More recently, we have started to see the inflationary impact in our North and South American architectural businesses. This leads us to increase our full-year raw material inflation outlook to the range of up low to mid single digits. In this environment, we continue to focus on securing incremental volume balanced with appropriate and decisive pricing and cost-out actions that allow us to maintain the products, services, and supply solutions which drive productivity and profitability for our customers. In terms of pricing, we are out across the business with incremental targeted actions by customer, geography, and end market. As a result, our expectation for consolidated price/mix for the year increases to the high end of our low single-digit range. We are actively working to limit these increases for our customers by accelerating meaningful and aggressive cost reduction actions. At the same time, we expect continued volatility in the raw material environment as the year progresses, and we are prepared to implement additional increases if necessary. The slide deck issued with this morning's press release includes our expectations for consolidated and segment sales for 2026. Our consolidated sales and earnings guidance for the full year are unchanged, so our deck outlines some adjustments in the mix of volume, price, and FX. The deck also contains other details you may find useful for modeling purposes. The Sherwin-Williams Company remains well positioned to outperform the market. We are highly confident in the clarity of our strategy and, importantly, our team's deep experience and ability to out-execute in this environment. We remain deeply focused on the success of our customers, while continuously assessing and adapting to market conditions and controlling what we can. Whenever there is uncertainty and disruption, there is significant opportunity to demonstrate what makes The Sherwin-Williams Company so unique. This concludes our prepared remarks. With that, I would like to thank you for joining us this morning, and we will be happy to take your questions. Operator: We will now open the call for questions. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from John McNulty with BMO Capital Markets. John McNulty: Yeah, good morning. Thanks for taking my question. Maybe a question on the price and cost dynamic. It seems like on your pricing commentary, it sounds like it is a little bit more surgical than maybe you have taken in the past and a little more customer specific or very end market specific. I guess given the global cost pressures that we are seeing, why is it sounding maybe a little bit more surgical than usual and maybe a little bit less of a full across-the-board type price move? Can you help us to think about that? Heidi Petz: Yes, John. I will start, and I will hand this over to Ben here for some color commentary. I do want to emphasize that this is an opportunity. We have operated through so many different types of cycles where volume is clearly key, and the discipline of the team to know when and where to go with pricing is on clear display. You see it in our first quarter results. But I want to take a moment before I hand this over to Ben. I said this in our prepared comments: it is a credit to our 24,000 employees globally that are operating belly to belly with customers and have that intimacy so that when we do need to take pricing, we have high credibility that it is absolutely out of necessity. I will hand it over to Ben to give some comments on a more surgical approach. Ben Meisenzoll: Hey, good morning, John. Just to add to what Heidi said here, I think one place to anchor is that we have more than twice the pricing now in this new guide than what we had in the original guidance that we gave you in January. And it reflects, if you think about the phasing by the regions, we know that Asia Pacific is maybe more impacted right now. That is going to impact EMEA. North America comes later. You also have the phasing where industrial is impacted sooner than you would have architectural. That is because a lot of the solvent pricing that you would expect you see first. Even the way that we buy is a variable here. You think about we are like 50/50 between contractual and spot buying. More of our architectural business is on a contract, and so you would expect on the industrial side you are going to see more of that spot buying where you have a more varied range of raw materials. These are all things that have gone into how we thought about the pricing here. And Heidi is absolutely right. We are going to monitor and watch. We are going to work with our customers. We are also really early in the year still, and so we have a lot of opportunity if our base case does not play out the way that we think. We are going to have that ability to go out and get additional pricing. And lastly, we always talk about it as balancing price with the right volume, and as we look at some of the competitive opportunities, we are not looking for all volume. That is an opportunity that we want to make sure that we do not forget about here. Operator: Thank you, John. We do ask to please limit yourself to one question. If you have any additional, you may reenter the queue by pressing star one. Your next question for today is from Duffy Fischer with Goldman Sachs. Duffy Fischer: Yeah. Good morning, guys. Just a question on cost. If you could kind of break that down a little bit where you have seen the increase and, you know, going from kind of low single digits to low to mid, what is that based off of vis-à-vis spot prices? Do you think that we put in the peak already for a lot of, you know, the VAMs, the propylenes, all that kind of stuff, and they are starting to roll over, or do you think they will continue to go up? And then just some help on what that increase is vis-à-vis what you think the market is going to show us over the several months. Jim Jaye: Yeah. Good morning, Duffy. It is Jim. I would say where we are seeing the most pressure, as Ben mentioned, would be more on the industrial basket. So you are seeing that in the solvents and resins, those petrochemical-based commodities. Propylene drives about 75% of our basket, and that pricing is up because of the Middle East. It is forecasted maybe up 50% more through the rest of 2026 related to those disruptions. The solvents are elevated as well. Epoxies, I would say, as well. TiO2, for the most part, has not elevated as much yet. I think we have talked, Duffy, offline about the sulfur dynamics coming out of the Strait of Hormuz. The good news is we are not really buying sulfate TiO2. I understand it is a global market, but we are more on the chlorinated side, so I think that is important. The other thing I would say is, again, Heidi mentioned in her remarks, over 80% of our sales are in North America and the vast majority of our raws that we are buying come from that region. So from a supply perspective, we feel very good. And the contractual buying that Ben mentioned, the way we buy, is also helping us navigate these initial headwinds. And thanks for the question. Operator: Your next question for today is from David Begleiter with Deutsche Bank. David Begleiter: Thank you. Good morning. This is a small thing. On your guidance for raw materials, you removed the term “select commodity inflation” from the prior quarter slide deck. Help us with what that meant and why that was removed? Thank you. Jim Jaye: Yeah. I will take that one, David. I think when we talked about it earlier in the year, we just wanted to make sure that people were indicating that tariffs were part of it. We wanted to say, hey, commodities were moving a little bit as well. We just took that off now because it is very obvious that the commodities are moving upwards. So I would not read much into that. And thanks for the question, David. Operator: Your next question is from Christopher Parkinson with Wolfe Research. Christopher Parkinson: Great. Thank you so much. Heidi, you mentioned we have been consistently in that share gain environment over the last several years. Can you just give us kind of a quick update, given the current dynamics, on how you are thinking about gross spend, how you are thinking about net new store openings and closures? Just any dynamics that you could help us think about not only 2026, but also the trajectory which you still see for 2027 and 2028 would be particularly helpful. Thank you so much. Heidi Petz: You bet. Good morning, Chris. You know, there is a lot of volatility obviously in the macro, but there is also a lot of volatility in the competitive environment. I also said in the prepared remarks, that is absolutely our opportunity. You are going to hear us talk about this jump ball environment. And so in this economy and in this competitive landscape, we are going to be extremely aggressive in making sure that we continue to take more than our fair share of volume. I will point to a couple examples here, and then I will come back to the stores and your second question. If you look at our res repaint segment, we are up mid single digits in a flat to down market. Focusing on a lot of these share gains, we see in interiors increasing some bidding activity. We are going to take advantage of that. We see the exterior backlogs are very healthy. We are going to take advantage of that. Our team has been out laser focused. Justin Bins and the stores organization are committing to aggressive new account activity. I would tell you it is the strongest we have seen in a long time. So even though there is some slowing in the market, our teams are out chasing square footage, earning business with these contractors every single day. I would point to our commercial segment. We are outperforming. There are soft completions, and yet we are up mid single digits while completions are down double digits. Again, some good bidding activity out there. We see some positive signals that there is uptick with office tenant improvement. Some modest uptick in multifamily starts that will not benefit us for at least 12 to 18 months. But we are up year over year all four quarters of 2025 and 2026 because we have been completely focused on demonstrating value with these contractors. Let me take a moment and give you a bit more by segment. If you look at our property maintenance, we are up low single digits here in a market where turns and CapEx were both under pressure. So we continue to be laser focused on how we can add value. Even in the DIY space, we are up mid single digits in stores. That premium DIYer is holding up a bit better than that value-conscious DIYer that prefers a home center environment. Our protective and marine business: seventh straight quarter of being up at least high single digits. It is all share gains. And so we are going to be relentless in being very targeted on our strategic investments as we are obviously very focused on taking cost out on the admin side. But to your point on stores, it is going to be a continued disciplined process of looking at our portfolio. Ultimately, we are going to be driving a focus on return on net assets employed. It is incumbent upon us that as we are looking at that portfolio, as we have done for decades, we are going to make sure that we are driving profitability and strengthening our flexibility and our agility. As we see migration and changes in the competitive landscape, we are going to be very thoughtful in chasing that volume. Operator: Your next question is from Ghansham Panjabi with Baird. Ghansham Panjabi: Yes. Good morning. On the 2026 guidance, I think initially you had volumes up low single digits for your original expectation and then it seems like now it is guided towards low single-digit decline. Is the delta just your reflection of what you think the market will do the rest of the year just given this sequence of events? And then what are the offsets as it relates to the intact earnings expectations on the plus side? Thank you. Ben Meisenzoll: Hey, Ghansham. On the volume piece, yes. I mean, you heard us talk about a lot of the stronger price that is coming through. We recognize that with some of the inflation that there is going to be a likely demand impact. And so I think what you see in our guide, keeping it full year in that same range, it is how we get there that is very, very different. We expect maybe volumes to be a little more muted. And you think through the consumer sentiment numbers. I mean, we have seen lowest levels on record even going back to GFC and COVID, we have seen prints that are much worse than that. Some of our guidance is baking in some of the expectation on that volume being softer there. And again, as we talked about on the prior question, price is obviously an offset to that, and that helps us get to that same kind of guide for the full year. Operator: Your next question for today is from John Roberts with Mizuho. John Roberts: Thank you. The current administration has turned its attention towards housing affordability. Do you see anything in the proposed actions that you think could help out the end markets materially? Ben Meisenzoll: Hey, John. We have been monitoring, obviously, a lot of what they are doing. We agree that affordability is a big part of the equation. We have talked pretty openly that we thought rates were maybe going to be the first indicator that could drive additional unlocking demand, then affordability and consumer confidence. That may be more at the forefront. Our opinion is that we would like to see some more of the supply opportunities versus some more of the gimmicky demand. You have seen the 50-year mortgage. You have seen the “Trump homes.” You have seen some of these other maybe shorter-term unlocks. What we are looking for in some of these policy changes would be how do you get local governments working better with the federal government to open up land that makes it more cost effective for the new homebuilders to lower their costs. That, I would say, has a trickle-down effect to the affordability piece for the consumer who is buying the home. We welcome, obviously, any of the unlocking of affordability-type mechanisms, and we are watching that closely to see how we should be reacting and be ready to act when you do see something. Operator: Your next question for today is from Vincent Andrews with Morgan Stanley. Vincent Andrews: Thank you, and good morning. Could you talk a little bit about the margin improvement in Consumer Brands? And I guess from a couple of different lenses? One, should we think about that as a base level? Typically, I believe those margins go up in the middle of the year. So will they be improving sequentially? And then was there any reallocation of costs among the three segments? I recall in prior years, sometimes at the beginning of the year, you have changed the cost allocation of, you know, the paint supply from Consumer Brands into the other two segments. Thank you. Ben Meisenzoll: Hey, Vincent. On the first part of your question, the margin improvement in Consumer Brands that you saw, a lot of that is coming from our global supply chain efficiencies. We have talked many quarters about a lot of the simplification and continuous improvement culture that team has, and we continue to see benefits there. If you remember the second half of last year where our production was lower than what we had called out the first half of the year, that team is getting lean in a lot of different ways. That is a big part of what you see in the improved margin there. You also have some opportunities where our price mix has been a little bit better. You think about premium gallons improving in that segment and maybe a little bit of price ahead of some of the things Heidi and I have already talked about with inflation. So you see that there in that part of it. There is no reallocation. I know back in 2023, we talked about how we had that fixed cost allocation between the businesses. Nothing here. You should expect to still see low-20s margin in this segment as we have talked about. Operator: Your next question for today is from Mike Harrison with Seaport Research Partners. Mike Harrison: Hi. Good morning. I was hoping that we could go back to pricing. It seems like maybe the realization that you are getting on that 7% increase from January 1 is a little bit better than you had initially thought. And I am curious at this point, have all of those conversations with customers taken place and the pricing is what it is, or are there still some conversations yet to happen? And in terms of potentially needing another increase in response to what is going on in the Middle East and higher raw material costs, has the window passed to announce a price increase ahead of this year’s paint season, or would you be willing to break tradition and go with a mid-season increase if that is what is necessary or if you see competitors doing that? Thank you. Heidi Petz: Yeah, Mike. Good morning. I will start with—this is kind of a two-part question. The first part of your question relative to the January increase: yes, the realization is better than we expected, and yes, all of those conversations have happened and are out there. As it relates to has the window passed, or how do we think about maybe more of this turbulent environment? We have done this in the past. In fact, I did this when I was running stores. When you are in a more volatile environment, what we are not going to do is go out with a big increase in the middle of the season and announce “effective immediately.” But what we might do—if we need to go out with price, we will go out with price—in the middle or the beginning or the end of the season, but we will do it the right way. We will sit down with our customers. We will make sure that they are prepared so they are not stuck absorbing this, and we can work with them to get those into their bids. We will do it very methodically. But let me be very clear: if we need to go again, we will go again. Operator: Your next question for today is from Greg Melich with Evercore ISI. Greg Melich: Hi. Thanks. I would love to dig a little deeper on the gross margin expansion in the first quarter, I guess the 90 bps. And what it would have been without the Suvenil degradation? And if you think about going forward, do you think gross margins could be up each quarter this year, year on year? Or does that volatility mean there could be some quarters where it contracts year over year? Thanks. Ben Meisenzoll: Hey, Greg. You know, we have not been calling out the specifics with Suvenil, but I could tell you that it is a multi-basis-point level up. We would have been over a 100-basis-point improvement without Suvenil in the quarter. And then as you look forward to prior quarters, you do normally see our gross margins increase into the selling season as our sales improve and we get better cost/margin dynamics. There could still be a little bit of lumpiness. We have talked about—even with our midterm gross margin target—that it is not a straight line up, that it is a little bit lumpy. But we would expect that we continue to get a little bit of expansion there. Obviously, all the things that we are trying to manage through with the Middle East conflict and the raw materials, that plays into it as well. But if, again, you look at the normal phasing quarter by quarter, you should expect us to see improved gross margins as we go into spring and summer selling season. Operator: Your next question for today is from Arun Viswanathan with RBC. Arun Viswanathan: Great. Thanks for taking my question. I guess I was a little bit pleasantly surprised by some of the volume comments and performance across a couple of your businesses. So maybe in PSG, still very strong, I guess, or relatively solid resi repaint. Do you see that continuing? And then in PCG, better-than-expected performance out of refinish and general industrial and coil turning around. Do you see those continuing as well? Thanks. Heidi Petz: The answer is absolutely we see those continuing. And, Arun, I will point to res repaint—just a little bit more color on that. It is the actions that we have taken over the last three to four years that help. The Sherwin-Williams Company has never been better positioned. I would tell you we are better positioned now than even the turbulent last two, three, four years. The controllables mindset: residential repaint—this is an area where we are bringing really important innovation forward and technologies to help job site productivity. For example, we just launched a product system called Emerald Symmetry, which is our best performing interior product that we have ever produced. These performance characteristics are putting our contractors in a position to get on and off job sites faster. The secondary benefit of something like this is it happens to be zero-VOC, a plant-based interior coating. So it helps us on a number of fronts. We are taking the time to make sure that we are setting our contractors up for success, and when we do that, we get rewarded. To your point on some of the important businesses in PCG—this does not happen by chance. We talk about success by design. You mentioned Refinish. We have very strong momentum here. We are up double digits in every region. We are getting price in, and I think that is a demonstration of a clear value proposition that customers are really understanding. There are a lot of dynamics certainly within the industry that we watch closely. But what we do not do is sit back and wait for the market to correct. We are out chasing new business aggressively. Our direct install continues to grow double digits in the quarter, so there is a lot of runway in terms of future share gains there. Packaging—another fantastic example. We are up high single digits. The global beverage market is up low single digits. The global food market is flat to down low single digits. So if it tells you that we are up high single digits, what we are doing is working. Coil, general industrial, and wood all have really positive stories. The coil business—we are up mid single digits, and that is despite a lot of softness tied to the North American commercial/residential construction, tariff uncertainty. The teams are out aggressively hunting. GI is another great example. General finish heavy equipment—they are both up double digits. We are out trying to offset core erosion and core softness there. And industrial wood being up low single digits despite the correlation to residential there—there are soft residential end markets that impact wood furniture, flooring, and cabinetry. Despite that backdrop, the team is out chasing. Here is the punch line: we are building new muscle. And I do expect that we will continue to keep our foot on the gas and take share. Operator: Your next question for today is from Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: Yes. Thank you, and good morning. I had a clarification and a question. On the clarification side, Ben, I think you made a comment that the price embedded in today’s guide is more than twice what you had included last quarter. I guess the clarification was, is that all to do with the January 1 increase and the realization against that, or have you implemented incremental pricing since the onset of the war on March 1? And then just my question is on raw materials. You are ratcheting the guide up a little bit, although, frankly, not as much as I might have thought. So wondering if you could just talk about the quarterly cadence of that. I think you are a majority LIFO company, so maybe you can speak to the accounting flow-through and the assumptions that you are making on duration of the conflict there? Thanks. Ben Meisenzoll: Hey, Kevin. To clarify on my price comment from earlier, that is on the consolidated pricing. That would have been everything that we did in January with stores, and everything new that we have done since then. You see in our guide that we took up our pricing in Performance Coatings Group. It goes back to the comment we made—industrial, with all the more solventborne-type raw materials, with the international locations, that is where we are seeing it first. That kind of phases into your second question of how you see the raw materials flowing through. In our updated guide to low to mid on a full year, you have to expect that in the first half of this year, even as we have some of the deferrals, you do not see it as much in the first half. You are going to see it heavier in the second half. And as you exit the year, you are going to be at the higher end of that up low to mid single digits. We are managing that closely. As I mentioned earlier, we have enough price with what we see right now for what that inflation is. If the baseline changes, as Heidi mentioned, we are willing to go out and work with our customers to implement new pricing. There is plenty of time in the year to do that, and so that is how we are going to manage that. Operator: Your next question is from Josh Spector with UBS. Josh Spector: Yes. Hi. Good morning. To go down a similar line of questioning as Kevin: it is surprising to hear that at the exit rate you are talking about the high end to low to mid single digits on raws. I mean, we have math out there that says you could see raws up 20% in that range, and that seems more consistent with some of the competitor price increases that are out there. So I do not know if due to your North America exposure you would say that inflation is substantially less, or if how you are buying those raw materials and maybe some of the contracts either give you more protection for this year, so this is more of an early 2027 inflationary event that you would see, or if there is something that gives you more permanent kind of protection against some of that. Can you talk about that a little bit and help us understand maybe what is going on that is different for you guys versus some of your competitors? Ben Meisenzoll: Josh, I cannot comment on how our competitors buy, but I can tell you—with, and Heidi called out, our strategic relationships with key suppliers—our procurement is maybe tighter than some of the others. We are using that as a strategic advantage so that we are not having to maybe pass as much price to our customers as some of our competitors might have to do right now who are not advantaged because of the way that their contracts are set up. We do have a number of spot buying arrangements. We are not seeing the exit rates in that 20% range that you are seeing. And again, I think you alluded to the mix of our business, the architectural and the industrial. That probably has some impact on that. And then again, I will point back to 50% of our business on contract. That is an advantage for us right now. Operator: Your next question is from Analyst with Bank of America. Analyst: Good morning, everyone. Heidi, you talked a bunch about the packaging. It has been brought up a few times, and clearly the numbers are really good. As we move into next year and we lap some of these regulatory shifts, how much of what you are accomplishing now is because of that catalyst? Do you expect you can continue to outgrow the industry this much, or would you expect growth to shift closer to that low single-digit level that the industry is kind of growing at? Heidi Petz: It is an interesting question because I think based on our preferred technology and our position to be ready for a lot of what is coming—you know, I am sure the European Food and Safety Association’s ban on BPA is scheduled to take effect in Q2 of this year—and we are at the very front edge of that. So there is a nice tailwind there. It is going to continue to drive a lot more customer conversions, certainly first half this year, well into the back half and into 2027. I can tell you with confidence that no one is better positioned to ride that. So we do expect to see some significant wins here. Jim Jaye: And, Matt, just to add to that, that conversion to the non-BPA—Europe you called out—but really if you look at Asia and LatAm, there is still a lot of room to run in those regions as well. And thanks for the question. Operator: Your next question for today is from Chuck Cerankosky with Northcoast Research. Chuck Cerankosky: Good morning, everyone. Could you talk a little bit about what you are looking at in terms of the mortgage environment, household formations in North America for the remainder of this year? Jim Jaye: Yeah, Chuck, it is Jim. I think in terms of the mortgage rate environment for this year, we are not expecting it to move a whole lot. I think Ben referenced—if you dial back a year or so ago—we were putting a lot of emphasis on rates getting below that six number. I think that would help. But certainly, it is more about affordability as well. And it is sort of this triangle that we look at of rates, affordability, and incomes. We need all three of those to work in sync, if you will. In terms of where we go from household formations, it has slowed a little bit, but it is still a pretty healthy rate, and we expect that to continue. I would also point to—as we have talked about many times, Chuck—the structural deficit that is out there in terms of we have underbuilt for a long period of time. Even if household formations do slow a little bit, there is tremendous pent-up demand that has to happen. Whether that is single family—if it does not come through that way, it is going to come through in multifamily. People have a need for a place to live, so we are well positioned on that multifamily side as well. Heidi Petz: One piece I would add to that, Chuck: because of the depth of our position with a lot of these national homebuilders and exclusive partnerships, I do believe we will be uniquely rewarded as this pent-up demand starts to soften, because it is what we do right now in these partnerships. We said this on the supplier side. It is true with our customers. We want to be the strategic partner that is helping them solve for simplification, helping them solve for cycle time. The work that we are doing now—while it is masked in the market—when starts to move, I think we will be uniquely rewarded for that. Operator: Your next question for today is from Patrick Cunningham with Citi. Patrick Cunningham: Hi. Good morning. I just wanted to unpack the lower Performance Coatings sales volume guide. Have you seen any evidence of weakness quarter to date in order books or any indication that there was perhaps some pull-forward in March? And conversely, we have seen some fits and starts on stable to expansionary industrial activity, particularly in the U.S. Have you seen any areas of more positive underlying market growth? Heidi Petz: No, I would not say that we are seeing any material shift there in terms of orders or timing from a pull-forward standpoint, but I will hand this over to Ben to give a bit more commentary on guidance. Ben Meisenzoll: I think one way to think about it is we know that there is going to be this gap in feedstocks. You have had boats that are on the water 60 to 90 days from the start of a conflict, and so at some point, Asia and Europe are going to feel the squeeze a little bit more than maybe what they are seeing right now. I think what you see in our guide is a pretty realistic view that there is going to be an inflection point where getting those feedstocks is going to be tougher. That could have, obviously, a greater inflationary impact on the business there. We feel—as one of the big global companies—we are going to be able to get our customers’ product. It may come at a higher cost, so you may start seeing some people waiting for prices to come down, and that could have an impact on demand. That is really what you see in our guide that has that there. I will call out—we have started to look at inflation not as an uncontrollable headwind but a variable we are actively managing. You start to see that with how we are looking at each of the different regions and that realistic view and our confidence for how we are going to support our customers. Operator: Your next question for today is from Analyst with Jefferies. Analyst: Hey. Good morning. This is Kevin Especk on for Laurence. Just in Performance Coatings, given the macro uncertainty, how would you characterize customer behavior? Are you seeing confidence around production schedules or more short-cycle ordering and hesitation to commit to longer-term orders? Thanks. Heidi Petz: There is probably a mix if we are honest. On balance, I think there will be some prudence and people waiting to see where cost of capital is, but there is also a lot of confidence in the backlogs and the pipelines, and so it is really a mix across the board. But I think it is a portfolio. Importantly in that, while we would love for all segments to be up at all times across PCG, the reality is that we are going to be very focused on where the market is and make sure that we are best positioned for that run-up. We are going to continue to do what we do. Carl Jorgengrud in that organization runs with a very strong sense of agility and urgency, and you are seeing that play out right now. I think our strategy is clearly working. What we said we would do, we are doing it, and we are doing it better than we even thought. That is a result of that strategy. Operator: Your next question for today is from Analyst with Loop Capital. Analyst: Good morning. This is Zach Pacheco on for Gareth Shmois. Just another quick one on customer behavior. Do you get the sense of any prebuy taking place due to inflationary increases where customers are trying to lock in supply, or is this not really something you are seeing at this moment? Thanks. Jim Jaye: We are not seeing that in this moment. Nothing material. Heidi Petz: We are not at all concerned on that. Operator: Your next question is from Mike Sison with Wells Fargo. Mike Sison: Hey, good morning. Nice quarter. Heidi, it just feels like U.S. architectural paint demand in the U.S. has been structurally impaired. If this continues to the end of the decade, how do you think about strategy in this environment for even longer than we are seeing it? And then just curious on your 2026 full year, your sales guide for Paint Stores Group. Are we kind of tracking toward that down low single digits given how the housing market is shaping up this year? Heidi Petz: So, Mike, two-part question. I will take the first part on demand and then hand it to Ben for guidance. I would not use the word “impaired.” I would say “under pressure.” But you can imagine when we are sitting in our conference rooms and boardrooms, we are looking at every scenario, including softer for much, much longer. I can assure you that we do have a whole host of multiple levers that we look at and contemplate. We do not want to have to pull some of those, and so we are going to do what we said we would do: control the controllables. We are going to look at this as a jump ball environment. There are a lot of gallons available and up for grabs right now. If I point to res repaint—you know this well—this is an area where not only do we continue to take share, but it is the area where we have the most share to gain. Even in this environment, we are going to continue to outperform the market, and we are going to compensate for some of that core softness. Ben Meisenzoll: Yeah. Mike, I will add to that. As far as our full-year guidance for Paint Stores Group, it remains aligned in that low single-digit range. You do not see as many of the variables changing as maybe you saw with some of the other segments. I think that is a barometer of confidence for us in how we are assessing the business there. But as we have talked about already, we will continue to make the right selling investments there. There could be different mix by the different segments that Heidi has walked through, but we feel pretty confident about our continued opportunities, especially with all the share gains that we have been after in Stores Group. That is why you see the guide remaining where it is at. Operator: Your next question is from Analyst with Berenberg. Analyst: Hello, good morning, and thank you for taking my question. I am interested in two areas where Sherwin has taken market share: refinish and the EMEA decorative market. What is it that Sherwin has to offer in refinish that its competitors do not? Is the aggressiveness on pricing something that has happened here? And any comments that you can give on EMEA deco as well? I think Sherwin has a relatively niche position in the UK and one or two other markets. Thank you. Heidi Petz: Thanks. On the refinish side, I will take you—not to make this a history lesson—but I think context is really important here. If you look at the acquisition of Valspar a few years ago, you leverage the best of both. We have combined not only our controlled distribution platform with our automotive business and everything that we have to offer with the subject matter expertise of our reps that are embedded in these customers' body shops. Then you layer in, with Valspar, the waterborne technologies that we have been able to bring together, and we really have created kind of a best of both in terms of the value proposition. Ben Meisenzoll: On the Europe sales, Europe benefited from a reporting mix impact this quarter. Certain immaterial resin sales we had previously reported as part of Performance Coatings Group are fully integrated and reflected in our global supply chain, which is reported here in our Consumer Brands Group. So do not read too much into the much stronger reported sales. If you look at the core sales of Consumer Brands Group in Europe, it grew by more of a mid single-digit percentage if I exclude that resin classification. Similar to what we have seen in Europe, with the challenging environment, DIY being a more challenged part of the segment, I think you see that playing out here. Thank you. Operator: Your next question for today is from Jeff Zekauskas with JPMorgan. Jeff Zekauskas: Thanks very much. Is it fair to say that your architectural paint price increase happened at the very beginning of the year, but there have not been architectural increases since then? But in your industrial businesses, you have increased prices later in 2026. And I was wondering how much that might be—what those price issuances were? And then secondly, your description of raw materials—you said that 75% of your raw materials are related to propylene, and you said that propylene was up 50%. So would not that mean that your raw materials are up 37% to 38%, if you ignore timing? Ben Meisenzoll: Hey, Jeff. I am going to take this first part here. I will let Jim answer the question about raw materials. The pricing phasing—you are right. Yes, our architectural price that we went out with in January, the intention before the conflict was that is the price that we needed for the year. If you go back to our initial raw material guidance of up low single digits for the year, we built that initial pricing based on that assumption that we made at that time. As you can imagine, we have a lot of architectural customers who are on contracts, so we have other points throughout the year. We have talked about our effectiveness getting better throughout the year as you hit those certain milestones where we are able to get more pricing. But yeah, you are right. A bulk of that comes at the start of the year. Industrial historically has been all throughout the year at different times based on business needs, based on what the raw material basket is doing. I think what you have seen post–Middle East conflict—we have had to go out and reassess in all parts of the business. Even though there is not an announced general increase for Paint Stores Group, as we try to manage through cost-out and other simplification efforts, there might be some spotty other areas where we are able to get price without doing a full launch. Similarly with the industrial business, as you can imagine, in Asia and Europe where you have got pricing that has got to be 20% or higher to cover where you have the bigger part of the inflation happening, our teams are out by the business unit and geography getting coverage where they need. Again, that would be bigger on industrial in APAC and in EMEA. There are still industrial impacts happening in The Americas, and so there is pricing that is going out there on the industrial side. But I think, as we have talked about on a couple of different questions and even in Heidi’s opening remarks, being very surgical in trying to find where we can take that price without having to be generic because we realize right now in this inflationary environment we do not want to put volume at risk. You have to do that maybe to a stronger degree than you normally would see us do. And our confidence is that being very thoughtful about chasing volume in this environment—with the right programs, we are trading these contractors up because of the ability to get them on and off job sites faster, the ability for less touch-up required. They are willing to pay a premium for that even in an inflationary environment because 85% of their cost is labor. We are being very thoughtful to get the volume, and it has to be the right volume. Jim Jaye: And then, Jeff, on your question about propylene, I would give you a couple things to think about. The 50% that I mentioned is a forecast of where it could go perhaps over the rest of the year. We will see how that plays out, and as Ben mentioned here, we will be out with price if we need to. The other thing I would say is, as you know, we are not buying propylene. We are buying the things that are derivatives of propylene. Those do take some time to flow into our basket, and we will be ready again if we need to go out with additional surgical price increases. We will be prepared to do that. And thanks for the question. Operator: We have reached the end of the question and answer session, and I will now turn the call over to Jim Jaye for closing remarks. Jim Jaye: Yes. Thank you, Holly, and thank you again, everyone, for joining our call. And special thanks to our employees for their hard work in delivering a really solid start to our year. I think Heidi said it well. Our strategy is clear. It is working, and it is not changing. We are continuing to focus on providing our customers with solutions that make them more productive and profitable. You can count on us. We are going to continue executing at a high level, focusing on winning new business, and controlling what we can. I will close with a reminder: our 2026 financial community presentation is coming up in Cleveland this year, September 24. You will have an opportunity to see our investments in our new global headquarters and our global technology center. We are excited for all of you to experience that and see how that is moving the needle forward for us. So thanks again for your interest in The Sherwin-Williams Company. As always, we will be available for follow-up calls. Hope you have a great day. Thank you. Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to Itron, Inc.'s First Quarter 2026 Earnings Conference Call. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will then hear an automated message advising that your hand is raised. Today’s call is being recorded. I will now hand the conference over to your speaker host, Paul Vincent, Vice President of Investor Relations. Please go ahead. Good morning. Paul Vincent: And welcome to Itron, Inc.'s First Quarter 2026 Earnings Conference Call. Thomas L. Deitrich, Itron, Inc.'s President and Chief Executive Officer, and Joan S. Hooper, Senior Vice President and Chief Financial Officer, will review Itron, Inc.'s first quarter results and provide a general business update and outlook. Earlier today, the company issued a press release announcing its results. This release also includes details related to the conference call and webcast replay information. Accompanying today’s call is a presentation that is available through the webcast and our corporate website under the Investor Relations tab. Following prepared remarks, the call will open for questions using the process described. Before Thomas begins, a reminder that our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors that were presented in today’s earnings release and comments made during this conference call, as well as those presented in the Risk Factors section of our Form 10-Ks and other reports and filings with the Securities and Exchange Commission. All company comments, estimates or forward-looking statements are made in a good-faith attempt to provide appropriate insight to our current and future operating and financial environment. Materials discussed today, 04/28/2026, may materially change, and we do not undertake any duty to update any of our forward-looking statements. Now please turn to Page 4 of our presentation as our CEO, Thomas Deitrich, begins his remarks. Thomas L. Deitrich: Thank you, Paul. Good morning, everyone, and thank you for joining our call today. Itron, Inc. had a solid start to the year. Our first quarter results were ahead of expectations due to strong execution from our teams and some first-half projects progressing ahead of schedule. Turning to Slide 4 for the highlights. Revenue of $587 million, adjusted EBITDA of $92 million, non-GAAP earnings per share of $1.49, and free cash flow of $79 million. Turning to Slide 5. While project timing provided a modest tailwind in Q1 revenue, we anticipate the first half to be consistent with our initial guidance. Overall, the pace of ongoing field deployment of grid-edge technology is well aligned to our expectations with no material constraints for labor or materials. The adoption of flexible and intelligent solutions is accelerating and that is translating into durable, compounding growth over time. Our Outcomes segment grew 22% year-over-year. Total company annual recurring revenue at quarter end was $400 million, up 28% due to strong organic growth plus our recently acquired Resiliency Solutions segment. More broadly, the size and scope of the opportunity funnel remain outsized from historical levels, driven by the age-out of existing infrastructure and new requirements. Grid modernization is inevitable, and we are confident in the multiyear structural investment to add intelligence to the grid, but we also understand the market we serve. Our customers continue to work in a complex environment balancing global uncertainty, affordability concerns, resiliency imperatives, and growing demand variability. We are confident our product portfolio addresses these disparate needs across electricity, gas, and water systems with flexible implementation models that are well aligned to the specific needs of our utility customers. Turning to Slide 6. Our first quarter bookings were $476 million, bringing the total backlog to $4.4 billion at quarter end, in line with our expectations. The quarter included several notable wins. We advanced a strategic grid visibility program with Duquesne Light Company. This engagement reflects the growing demand for distributed intelligence and grid-edge computing as utilities modernize their networks to improve reliability, resilience, and operational efficiency. Importantly, this program highlights Itron, Inc.'s abilities to deliver an integrated, first-of-its-kind solution that brings together smart devices, software, and communication to support next-generation grid operations. Additionally, an existing customer that is deploying a safety-enhanced meter program has expanded their development of Intelis StaticCas endpoints. Intelis technology offers numerous safety enhancements, which include automatic and remote shut-off capabilities, as well as reliability and efficiency features that benefit the utility and the consumers they serve. More broadly, this activity is a perfect example of the unique value that Itron, Inc.'s multi-commodity platform creates for customers and benefits our shareholders through diversification across electricity, gas, and water verticals. The integration of our Resiliency Solutions segment is on track and the team is already contributing meaningfully. In worker safety, we established a new contract with a major U.S. electricity utility. The customer required a best-in-class system to protect thousands of field workers at the job site, leveraging intelligent workflows and real-time hazard recognition. The digital construction management team extended a contract with a large natural gas pipeline customer, a strong signal of the customer value of deploying our platform. These are only a few examples of the kind of mission-critical problems that Itron, Inc. is uniquely positioned to solve. As a result, our backlog profile continues to evolve in quantity and quality. Outcomes and Resiliency Solutions combined now represent 25% of total backlog, and that share is growing. The reason we are winning is straightforward. We help customers make one investment dollar do more. Our solutions are designed to create multiple opportunities for value across the useful life, deepening relationships, expanding our installed base, and generating durable recurring revenue streams. With that, I will turn it over to Joan to walk through the first quarter financials in detail. Joan S. Hooper: Thank you, Thomas. Please turn to Slide 7 for a summary of consolidated GAAP results. First quarter revenue of $587 million was above our outlook range due to an acceleration of certain first-half project deployments. As expected, revenue was down versus last year, primarily due to the timing of large Networks projects. Gross margin was 450 basis points higher than last year due to favorable mix and operational efficiencies. GAAP net income of $53 million, or $1.18 per diluted share, compares to $65 million, or $1.42, in the prior year. The decrease was due to higher GAAP operating expenses related to the two recently completed acquisitions as well as lower interest income. Regarding non-GAAP metrics on Slide 8, adjusted gross margin of 40.7% increased 490 basis points versus 2025. Non-GAAP operating income of $84 million and adjusted EBITDA of $92 million both increased 5% year-over-year. Non-GAAP net income for the quarter was $68 million, or $1.49 per diluted share, versus $1.52 a year ago. The year-over-year decline was due to lower interest income, partially offset by higher operating income. Free cash flow was $79 million in Q1 versus $67 million a year ago. The increase was primarily due to lower tax payments. Year-over-year revenue growth by business segment is on Slide 9. Device Solutions revenue decreased 9% on a constant currency basis due to the expected decline in legacy electricity products in EMEA and the timing of projects in North America. Network Solutions revenue decreased 14% on a constant currency basis due to the timing of large deployments. Outcomes revenue increased 20% on a constant currency basis driven by higher recurring and services revenue. Our new segment, Resiliency Solutions, which includes the Urbint and LocustView acquisitions, contributed $16 million of revenue in Q1. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q1 non-GAAP EPS of $1.49 per diluted share decreased $0.03 year-over-year. Operating income contributed an increase of $0.05 per share, but this was more than offset by the negative impact of lower interest income at $0.13 per share. Lower tax expense had a positive year-over-year impact of $0.01 per share, and FX, share count, and other items had a positive impact of $0.04 per share. Turning to Slides 11 through 14, I will review Q1 segments compared with the prior year. Device Solutions revenue was $124 million with adjusted gross margin of 35.4% and operating margin of 29.7%. Both margin results are segment-level quarterly records. Adjusted gross margin increased 540 basis points year-over-year and operating margin was up 550 basis points due to favorable mix and operational efficiencies. Network Solutions revenue was $351 million with adjusted gross margin of 40.8% and operating margin of 31.4%. Adjusted gross margin increased 390 basis points year-over-year due to favorable mix and operational efficiencies, and operating margin was up 260 basis points. Outcomes revenue was $96 million with adjusted gross margin of 41.7% and operating margin of 23.3%. Adjusted gross margin increased 250 basis points year-over-year due to a higher margin revenue mix, and operating margin increased 510 basis points due to higher operating leverage. Resiliency Solutions had revenue of $16 million, adjusted gross margin of 73%, and operating margin of 27%. Turn to Slide 15 and I will review liquidity and debt at the end of Q1. Total debt was $1.61 billion, and cash and equivalents were $713 million. Our cash balance declined approximately $300 million versus year-end 2025, due to the net impact of the January acquisition of LocustView, the February issuance of $[inaudible] of zero-interest convertible senior notes, the March $460 million repayment of the company’s 2021 convertible senior notes, the February share repurchase of $[inaudible], and free cash flow generation of $79 million during the first quarter. As of March 31, net leverage was 2.4 times. Now please turn to Slide 16 for our second quarter outlook. We anticipate Q2 revenue to be within a range of $560 million to $570 million, which at the midpoint is down 7% versus last year. As previously mentioned, Q1 benefited from an acceleration of first-half projects. Our current view of 2026 is consistent with our thinking when we set the annual outlook back in February. We anticipate second quarter non-GAAP EPS to be within a range of $1.25 to $1.35 per diluted share, which at the midpoint is down approximately 8% year-over-year after normalizing for the tax rate and the level of interest income. Now I will turn the call back to Thomas. Thomas L. Deitrich: Thank you, Joan. Utilities today are managing energy and water systems under increasing strain. Those systems were not designed for the complexity created by distributed energy resources, increasing industrial and AI-driven demand, resource scarcity, and escalating weather volatility. At the local level, electricity distribution networks are often significantly underutilized, and our customers draw an important conclusion: while investment in new generation and transmission is essential, the fastest electron available to them is the one they already have. Itron, Inc. solutions unlock time-to-power using existing capacity by working with the right data and the ability to act on it. Itron, Inc. serves as the intelligence layer for our customers, delivering multipurpose networks, analytics, and applications that give grid operators the visibility to optimize their distribution infrastructure. Industry data suggests utility distribution spending will continue to grow at least through the end of the decade. We believe this represents a durable structural trend and that modernization will benefit consumers while reducing waste across the system. I am encouraged by our team’s strong execution this quarter. The operating environment remains volatile, domestically and globally, and that volatility creates risks. We have built a more resilient business and are delivering consistent results through these crosswinds. Our focus is unchanged: backlog quality, recurring revenue growth, margin discipline, cash generation, and above all, ensuring our customers are successful with every engagement. Itron, Inc. is well positioned for a multiyear grid buildout that has already begun and is expected to continue for years to come. Thank you for joining us today. Operator, please open the line for some questions. Operator: Thank you. To withdraw your question, simply press 1-1 again. Please stand by while we compile the queue roster. Our first question coming from the line of Noah Kaye with Oppenheimer. Your line is now open. Noah Kaye: Thanks so much. You know, first, just hoping to get a little bit more color on what drove the acceleration of project timing in 1Q. And then you were very helpful in noting the first half as a whole is kind of consistent with what you had assumed in February. What the guidance had implied in February was a pickup in the back half. So can you help us think through what might be impacting the step down in run rate in 2Q and then what might account for a pickup in the back half of the year? Joan S. Hooper: Yes. Let me start, and then a timing comment. We did mention in our prepared remarks that Q1 was better than we had guided to because of an acceleration of projects from the first half of the year. It was primarily in the Network business, but also a little bit in Devices. If you take the combination of Q1 actuals with the midpoint of our Q2 guidance, it is actually slightly higher than what we would have expected back in February—slightly higher on revenue and actually higher on gross margin, EBITDA, and EPS. So the first half is shaping up as expected. Regarding the back half, yes, we knew the year would be more end loaded when we entered the year. We talked about it on last quarter’s call. What would drive an uptick in the second half are project deployments primarily in Networks. Certainly Outcomes continues to grow; we would expect that. Same for Resiliency Solutions. Devices is roughly flat. So that growth is going to have to happen from Networks deployments. Thomas L. Deitrich: I would add just a bit on the operational side of things. What we saw in Q1 was no constraints when it comes to supply chain. Material was fine, labor was fine, customer deployments were ticking along quite nicely, and that led to some of the overage that you saw in the Network space primarily. Turns were at the level that we expected. We went in, and I think we even commented on this in our previous call, that turns were expected to be a little bit higher, and indeed they were. So all in all, the market was well aligned to our expectations within the normal push and pull where some of the Network deployments were moving a little bit faster. Noah Kaye: And then, Thomas, you mentioned the outsized funnel. I wondered if you could give us a little bit more commentary on the behavior patterns you are seeing now among customers. In particular, DOE recently provided a list to Congress of grid projects that seem to be reinstated under the SPARC program. Maybe talk a little bit about potential impact from that as you look at the bookings trajectory over the course of the year. Thomas L. Deitrich: Sure. Maybe a broad-brush view on the market, then the specifics on the SPARC program. On a vertical basis, Water in Europe continues to be strong, above historical levels. Water in the U.S. is a little bit slower; that is a smaller segment for us overall, so where our strength is in Water continues to perform well, and you see that primarily in the Devices segment, which is punching a little bit above its weight—more pushing $120 million-plus rather than the $100 to $110 million level where we had sort of anchored expectations. On Gas, North America is particularly strong. There is more than 5x the number of endpoints that are live at the moment on the Gas side; that is much higher than historical levels and absolutely a bright spot. Electricity is strong in Asia Pacific and in line with expectations in North America. There is a lot of activity in the press with some of the early movers in the electricity space really coming back into the marketplace for activities in, let us call it, back ’26 into 2028. Across the board, we see strength in Outcomes and Resiliency Solutions—Outcomes up 22% year-over-year, ARR up 28% year-over-year. We feel really good about that part of the strategy playing through. Our portfolio really aligns to the way the market is operating these days. We have the ability to work with our customers depending on what pressures they may have—whether regulatory oriented or particular resiliency needs—we have the tools in the toolbox to help them. On government funding, you are correct: some time ago, some of those GRIP projects were put on hold or “canceled.” There are still some state attorney generals that are suing over those cancellations. But by and large, most of the activities are being replaced now with this new DOE program called SPARC, which clearly is part of that electricity market view I just described. In general, we have not seen any cancellations even when projects were put on hold. Customers need to do these things; they were not discretionary. It was only a question of how they would work through all of the things going on in the marketplace. So we feel very good about the inevitability of intelligence in the grid, and we are very well positioned to benefit over the years to come. Operator: Thank you. Now next question coming from the line of Ben Kallo with Baird. Your line is now open. Ben Kallo: Just adding on to Noah’s question there, as you think about that TMG, Thomas, and I know it is hard to predict, could you give us your thoughts about next year and the original targets you laid out at the Analyst Day and anything that has changed, plus or minus, since the last time you updated us? And I have a follow-up. Thomas L. Deitrich: Absolutely. I would say there is no change from how we commented on things in our prior earnings call. We are very much ahead of those 2027 targets when it comes to gross margin, EBITDA, cash flow, and EPS. Revenue is probably toward the low end of that range, as we commented before. Nothing has changed in the market that would pull us away from that view. The large opportunities that were part of my color commentary to Noah’s question really give us the view as to what the market looks like. This buildout of the grid and infrastructure in general is absolutely structural. It is inevitable. It will happen over the years ahead, and we are in a position to benefit from it. Ben Kallo: Following—zeroing in on that 25% backlog for Outcomes and Resiliency—could you talk about how much of that is recurring revenue? Because if I add that up with your current recurring revenue, you could get to a big number, depending on what you assume. What percentage of that 25% is actual recurring revenue versus services? Thomas L. Deitrich: Our Outcomes segment generally runs somewhere between two-thirds to three-quarters recurring revenue. That percentage probably drifts northward over the years ahead. Resiliency Solutions—the vast majority of it is recurring revenue overall. The only caution I would give you is that the backlog number we quote is a multiyear backlog. It usually plays out over a three- to four-year timeframe depending on the mix of projects. All in all, our portion of business that is recurring revenue continues to grow—ARR at $400 million at the end of the quarter, up 28% year-over-year—still very much on track for that growth to continue in the quarters ahead. Joan S. Hooper: And just to clarify, recurring revenue can include services revenue as well. It is not just software. Ben Kallo: Right. Okay. Got it. And last thing, on the acquisition front—because multiples for software-type companies are coming down—how do you think about your capital allocation? Joan S. Hooper: Our first priority in 2026 is the successful integration of Urbint and LocustView. Things are on track, but we have additional work to do to integrate systems and things of that nature. That is our first priority. We will opportunistically look at other things that come our way, but we are not actively going to seek something to buy in 2026. We do feel good about our balance sheet and our ability to act on something if it comes along. Operator: Thank you. Our next question coming from the line of Martin Malloy with Johnson Rice & Company. Your line is now open. Martin Malloy: Good morning. Thank you for taking my questions. First question was on the recent acquisitions, Urbint and LocustView, and if you could give us some perspective on progress in terms of revenue synergies with your wide customer platform—being able to sell through some of those services—any anecdotal evidence about how that is going would be helpful. Joan S. Hooper: I would say that the results to date have not really included any synergies per se. What you are seeing in our Resiliency Solutions is the businesses we bought from Urbint and LocustView. Certainly over time we would expect the ability to drive synergies, but we are really trying to ensure in these early days that we are not getting in the way of them running their business. We have not spent a lot of time trying to build synergies; we want to get all the integration and the plumbing in place before we start doing that. So everything you saw in Resiliency Solutions is the businesses we bought, with no contribution from Itron, Inc. Martin Malloy: And with your commentary about pipeline and confidence in the customer need for your solutions, could you talk about book-to-bill and when that might trend back over one? Thomas L. Deitrich: The pipeline is at or very near all-time records. That buildup of pipeline we saw over the last year to eighteen months shows no signs of cooling. We feel very good about the opportunities and our portfolio positioning. Bookings in the Networking space are inherently a bit lumpy. They move around quarter to quarter depending on the size of individual projects. A large project is generally a three- to four-year effort, which yields lumpiness. Outcomes and Resiliency Solutions are a bit more normalized, and the same with Devices. We still feel great about where we are portfolio-wise and will look to capitalize on the inevitable growth in the marketplace in the quarters ahead. Operator: Thank you. Our next question coming from the line of Scott Graham with Seaport Research Partners. Scott Graham: Hey. Good morning. Thank you for taking my question. I know you do not update your full-year guide until the second quarter, but T&D spending is expected to be up double digit this year, and your organic guidance is minus 4% to flat, which implies an uptick in the second half of the year. How are you feeling about that uptick right now, Thomas? I know your pipeline of opportunities is increasing, but that does not necessarily translate to the second half of this year. Is it possible that second-half sales could be down given the TTM book-to-bill being below 0.9? Any color would be helpful. Thomas L. Deitrich: We expected the year to be back-half loaded; that was part of the initial guidance. The first half, as Joan commented earlier, is in line to slightly better than where we set our view. Nothing has changed in the marketplace. Second-half guidance definitely implies an uptick in the rate of Network deployments. You saw even in first quarter how that can happen pretty quickly, and we are well positioned to continue to do that. We think we have supply chain flexibility and labor flexibility to make it happen. We will support our customers, but first half ahead of expectations is already a pretty good place for us to anchor our view for the year. Scott Graham: Thank you. Staying on the second half, I want to make sure I understand what is going on with the backlog and how purchase orders being written against that backlog are shaping the second half. In prior quarters, you talked about having a booking in the backlog, but only writing a smaller purchase order because the utility was focused on high bang-for-the-buck near term versus out-years. What type of risk is inherent in that to your thinking that second-half sales will be up, relative to that chopping up of purchase orders? Thomas L. Deitrich: A few things to consider. We expected turns business to be higher, and that is what we continue to expect. But the real needle mover is Network deployments for the second half of the year. In general, there is backlog there; it just needs to be converted based on the timing of deployments, and that is something we work with our customers on an ongoing basis. You can see how these things tend to move through the pipe quicker—you saw that in our first quarter results. When projects start to go well, everyone gains confidence and you can accelerate deployments. The table is set for it to happen, and we will work with our customers to make sure we support our portion of the program. Operator: Thank you. Our next question coming from the line of Bobby Sulphur with Raymond James. Your line is now open. Bobby Sulphur: Hi. Thanks for taking the question. I was wondering if you could talk about the definitional differences between RPO and backlog. And then on the gross margin front, is there a good way to handicap what you have been calling out as customer mix benefits for a couple of quarters—what the customer mix benefit is in gross margins versus what the ongoing recurring gross margin of the business would be? Joan S. Hooper: Sure. RPO appears in our revenue footnotes in our 10-Ks and 10-Qs. It starts with the total backlog that we report and backs off contracts that have a termination-for-convenience clause. Often the termination for convenience is governed by regulatory bodies, meaning the contract has to be structured that way. So at any given quarter, the mix of contracts in backlog will dictate how much is backed out to get what we call a net 606 backlog, which you refer to as remaining performance obligations. Importantly, we do not use that to forecast revenue. We use our full backlog because those contracts, while some may be cancelable, nobody ever cancels. If you look at our historical backlog, you have not seen big adjustments for cancellations. It really is a function of the 606 literature on revenue, and it affects our 606 revenue models, but does not impact how we look at revenue flowing into the P&L. So we use the gross backlog, which is also in that footnote. Thomas L. Deitrich: On gross margin, what you saw was the last of some of that pre-inflation backlog rolling out. Recall a couple of years ago inflation spiked and we had some contracts priced pre-inflation with limited flexibility on pricing. That is now fully played through and has helped the margin profile as we knew it would. All of the self-help over the years with factory consolidation and portfolio pruning is showing through, and I am proud of how the team has handled demand levels, managing cost structure, and ensuring material availability. So Q1 gross margin was a bit ahead of expectations based on really good execution. Relative to our 2027 targets, Devices will be materially ahead; Networks maybe toward the upper end of the range; Outcomes will depend on mix as we scale; and Resiliency Solutions is clearly strong on gross margin and, as it scales, will pull the company average upward. Bobby Sulphur: If I could just ask a clarifying question on Devices’ gross margin—when you say it is ahead, does that mean better than your original expectations, or should we assume it goes back to the previous long-term target? Thomas L. Deitrich: Good clarification. It is ahead of those 2027 targets, and we believe it stays at roughly the level it is at now. There can be quarter-to-quarter variation, but the last couple of quarters are more the level that business can operate. Operator: And I see one question just came in coming from the line of Joseph Osha with Guggenheim Partners. Your line is now open. Joseph Osha: Hi. Yes. Thank you. To follow up a bit on the previous question, you pointed out, Thomas, Resiliency is gross margin accretive. It is a high-growth business and growing into that operating cost footprint. I assume there is a lot of R&D there. Can you give us a sense as to when Resiliency might be getting closer to the corporate average at the operating margin level? Thanks. Joan S. Hooper: I can try to answer that. Not specific on numbers, but as we commented on the February call, Resiliency Solutions was immediately accretive to Itron, Inc.'s revenue growth and gross margins and EBITDA, dilutive to 2026 EPS due to less interest income, but on an operational basis accretive in 2026. By the time we are into 2027, it is completely accretive on an EPS level. Operationally, what drags them today is just a higher operating structure, which they will grow into. We are encouraging continued R&D spending and platform buildout. Joseph Osha: Would it be fair to say that, simply at the percentage level, it will take them a while to grow into that higher R&D budget, even though it is accretive as you point out? Joan S. Hooper: Over time, we will look for synergies in R&D across all segments. It is hard to give a precise answer on when the R&D percentage goes down and operating income percent goes up, but we certainly expect them to scale, and we believe these were two attractive acquisitions that we will execute on according to plan. Operator: Thank you. I am showing no further questions. I will now turn the call back over to Mr. Thomas Deitrich for any closing remarks. Thomas L. Deitrich: Thank you, Olivia. Thank you, everyone, for joining our call today. We look forward to updating you again next quarter. Operator: This concludes today’s conference call. Thank you for your participation and you may now disconnect.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell First Quarter 2026 Financial Results Call. [Operator Instructions] It is now my pleasure to turn the call over to Baird Radford, Executive Vice President and Chief Financial Officer. You may begin. Unknown Executive: Good morning, and welcome to the Omnicell First Quarter 2026 Financial Results Conference Call. On the call for Omnicell today are Randall Lipps, Omnicell Chairman, President, CEO and Founder; Nnamdi Njoku, Executive Vice President and Chief Operating Officer; and myself, Baird Radford, Executive Vice President and Chief Financial Officer. This call will contain forward-looking statements, including statements related to financial projections or performance and market or company outlook based on current expectations. These forward-looking statements speak only as of today or the date specified on the call. Actual results and other events may differ from those contemplated due to numerous factors that involve substantial risks and uncertainties. For more information, please refer to our press release issued today, Omnicell's annual report on Form 10-K filed with the SEC on February 26, 2026, and in other more recent reports filed with the SEC. Except as required by law, we do not assume any obligation to update any forward-looking statements. During today's call, we will discuss some non-GAAP financial measures. Full reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are included in each of our fourth quarter 2025 and first quarter 2026 financial results press releases. Our results were released this morning and our financial results press releases, including these reconciliations, are posted on our Investor Relations section of our website at ir.omnicell.com. For our call this morning, Randall will begin with an overview of our first quarter 2026 performance and strategic priorities. I will then review our quarterly financial results and our updated outlook for 2026. We will then open the call for questions. With that, I turn the call over to Randall. Randall? Randall Lipps: Thank you. Good morning, everyone. We started 2026 with solid execution in the first quarter, delivering results at the high end or above our previously issued Q1 2026 guidance ranges across all key metrics, which we believe reinforces the durability of our business model. Total revenue for the quarter was $310 million. Non-GAAP EBITDA was $45 million and non-GAAP earnings per share was $0.55. We believe these results reflect the continued momentum across our core businesses, disciplined cost management and our ability to execute as we continue to advance toward our goal of achieving the vision of autonomous medication management. We continue to see constructive demand environment, including meaningful competitive conversion opportunities. Health Systems appear to be increasingly reassessing incumbent solutions that may have struggled to deliver consistent reliability, scalable service and enterprise-wide interoperability. As customers prioritize these key factors, along with efficiencies from moving medication workflows, particularly in environments facing ongoing staffing and cost pressures, we believe Omnicell is well positioned to serve as a long-term platform partner. As a reminder, our strategy is anchored in driving autonomous medication management as we seek to deliver improved outcomes across the patient care journey. We are operationalizing our strategy through the 3 tightly connected priorities. First, expanding our market presence across inpatient and outpatient pharmacies and patient care settings. Second, scaling predictable reoccurring revenue and advancing OmniSphere, our cloud-native medication management platform. These 3 core priorities reinforce one another. Expanding our footprint and increasing interoperability across care settings is anticipated to increase the scale and breadth of the medication workflows we support, which should provide a broader foundation for enterprise-wide automation and standardization. Increasing reoccurring revenue will give us the visibility and confidence to invest intentionally improving products and accelerating innovation with AI. Execution on this priority is evident through our growing Specialty and Consumables business. Finally, OmniSphere is the unifying layer that is meant to bring our enterprise offerings together, connecting devices, data and workflows on a single secure platform. The OmniSphere platform is designed to shift medication management from reactive manual process toward guided and increasingly autonomous workflows. We believe OmniSphere will enable our customers to unlock clinical capacity, enhance safety and compliance and drive more predictable operational and financial outcomes. We're seeing this play out in recent customer decisions as large and complex health care organizations increasingly select Omnicell to support medication management holistically. For example, health care providers within the U.S. Department of Veterans Affairs, continue to expand their use of Omnicell solutions as they seek to support more standardized streamline medication workflows across their organizations. These deployments span central pharmacy and point-of-care solutions, IV workflow and inventory optimization services, reflecting what we believe is a system-level focus on reliability, efficiency and enterprise visibility across the patient care journey. Similarly, a major academic medical center in New York recently chose to expand its Omnicell footprint across multiple facilities, extending our central pharmacy and our point of care solutions as they strive to enhance safety, improve operational consistency and support enterprise-wide standardization. A Rhode Island-based health system selected our pharmacy dispensing services as a thought to support safety and efficiency in pharmacy operations as part of our broader effort to modernize and standardize medication management across the system. As these enterprise relationships deepen and broaden, we're seeing a national expansion of reoccurring revenue streams tied to the installed base, which should improve our financial visibility and support continued investment in engineering and advanced analytics to deliver the value-added products and solutions that address customer pain points. We're also seeing strong engagement across outpatient and specialty pharmacy settings. A health system in Southern Missouri recently partnered with Omnicell Specialty Pharmacy Services as it worked to enhance clinical outcomes and improve the patient experience, while supporting the growth of the specialty pharmacy program. We find this engagement reflects the same enterprise mindset, customers leverage Omnicell not for technology but for the services and expertise that they're intended to extend medication management beyond the acute care settings and create more predictable recurring value over time. We're grateful for the trust our customers are placing in us to solve their critical medication management challenges. For those new to the Omnicell story are taking a renewed interest in our product offerings, we formally introduce Omnicell Titan XT, our next-generation automated dispensing system at ASHP late last year. Titan XT is designed to combine proven and reliable option with enterprise-level data and workflows and is built on our HITRUST certified cloud platform, OmniSphere. Together, this offering is intended to deliver enterprise-wide visibility, guided workflows and a modern infrastructure developed to support large complex health systems. Importantly, Titan XT represents a meaningful step as we advance toward autonomous medication management and is one step on the journey to connect every patient care area and pharmacy location with OmniSphere. Since introducing Omnicell Titan XT, we've been encouraged by customer engagement and feedback. Customers are responding positively to potential opportunities for meaningful workflow efficiency improvements including reductions in manual card filling activity, improved visibility into inventory expirations and time savings across nursing and pharmacy operations. Additionally, customers are embracing the backward and forward compatibility planned to be offered by Titan XT and OmniSphere as it enables them to plan and execute a migration to our next-generation platform at a pace that works for them. As we've noted previously, Health Systems capital approval cycles remain multi-quarter to multiyear activities, announcing Titan XT in late 2025 was intentional, giving customers time to incorporate the new platform into their long-term planning. Our expectations around installed base refresh facing are unchanged. We anticipate modest incremental Titan XT revenue in 2026. With initial hardwareship is planned to begin in the second half of the year, followed by a phased rollout of OmniSphere functionality in the first half of 2027. More broadly, customers are moving towards platform partners who can help them transform medication management end-to-end. The focus is on integrated standardized workloads across the full medication cycle to improve safety, efficiency and cost. We believe this shift plays directly to our strengths and supports deeper, long-term partnerships. In summary, we began 2026 with solid execution, disciplined financial performance and a clearly defined platform road map. While we remain mindful of evolving macro environment uncertainty and capital spending dynamics, we are confident in the durability of our business model, and the long-term opportunity ahead to modernize medication management. Well, with that, I'll turn it over to Baird to walk through our first quarter financial results and outlook. Baird? Unknown Executive: Thank you, Randall. We started 2026 with focused execution in the first quarter, delivering at the high end or above our first quarter guidance, reinforcing our confidence in our business model as we have kicked off the transition from XT to Titan XT in OmniSphere. We believe performance in the quarter reflects solid execution across our portfolio, coupled with strong cost management and some spend shifting into the second and third quarters. Total revenue for the first quarter was $310 million, representing 15% year-over-year growth and finishing at the upper end of our previously provided guidance range. This year-over-year growth was primarily driven by steady execution within our points of care connected devices revenues as well as continued growth in our recurring revenue streams. As a reminder, we are expecting revenue to be more linear in absolute dollars rather than year-over-year percentage growth rates as we progress through this year. Product revenue was $175 million, up 20% year-over-year. This growth is driven by the strength in our Connected Devices portfolio in both North America and international markets. Service revenue was $135 million, increasing 8% year-over-year with growth driven again by strong performance from our Specialty Pharmacy Services. From a profitability standpoint, for the first quarter of 2026, GAAP earnings per share was $0.25 compared to a loss of $0.15 per share in the first quarter of 2025. Non-GAAP earnings per share in the first quarter of 2026 was $0.55 compared to $0.26 in the prior year period. Non-GAAP EBITDA for the first quarter 2026 totaled $45 million compared with $24 million a year ago. Our strong profitability performance in the first quarter reflects disciplined cost management and improved operating leverage. For the first quarter of 2026, non-GAAP gross margin was approximately 46% compared to 42% in the first quarter of 2025 and 44% for fiscal year 2025, driven primarily by favorable mix and execution improvements across both product and services. As a reminder, we performed the software upgrade at customer sites that provided a headwind to the first quarter of 2025 and full year 2025 gross margins. Turning to the balance sheet. Cash and cash equivalents totaled $239 million as of March 31, 2026 compared to $387 million a year ago. The year-over-year change primarily reflects the repayment of $175 million of principal amount of debt that matured in September 2025 as well as the repurchase of approximately $78 million of common stock during 2025. Free cash flow was $39 million in the first quarter of 2026 compared with $10 million in the prior period and $18 million in the fourth quarter of 2025. Before turning to guidance, I'd like to briefly connect our first quarter performance to the broader operating context for 2026. We exited 2025 with a healthy backlog and improved revenue linearity driven by enhanced customer scheduling and coordination. These same dynamics supported our first quarter 2026 results and are anticipated to continue to provide greater predictability as we move through 2026. We also exited 2025 with strong competitive pipeline activity and we remain positive about our competitive positioning exiting the first quarter. The introduction of Omnicell Titan XT and the OmniSphere platform has increasingly shifted customer conversations towards enterprise-wide standardization and longer-term platform planning. While we think this reinforces the long-term opportunity ahead, it also reflects multiquarter to multiyear nature of health system capital approval cycles, which is an important consideration as investors think about pacing in '26. Since the introduction of Omnicell Titan XT, we've had constructive conversations with many customers around Titan XT and OmniSphere. Early feedback from customers have experienced demonstrations of our new Titan XT and OmniSphere software and workflows has been very positive. Customers are highlighting the DynamicRestock capabilities with guided workflows that are designed to simplify pharmacy technician tasks and reduce time spent on cabinet restocking. Customers are also noting that streamlined medication retrieval workflows for nurses will likely reduce the time the nurse spend looking for patient mezz that should free up more time for care at the bed side. During the first quarter of 2026, we booked our initial Titan XT orders, consistent with our expectations. Turning now to our outlook for the second quarter of 2026 and fiscal year 2026. For the second quarter of 2026, we expect total revenue to be in the range of $307 million to $313 million. Within that total, product revenue is expected to be between $174 million and $177 million and service revenue is expected to be between $133 million and $136 million. We expect second quarter 2026 non-GAAP EBITDA to be between $37 million and $42 million, and non-GAAP earnings per share to be in the range of $0.40 to $0.48. This outlook reflects continued evolution across the business, typical seasonal patterns within services and our expectation that the increased revenue linearity we saw in late 2025 continues through 2026. For the full year 2026, we are maintaining our previously provided guidance for product bookings, ARR and total revenue, while increasing our guidance ranges for non-GAAP EBITDA and non-GAAP earnings per share. For full year 2026, we anticipate product bookings in the range of $510 million to $560 million. Given the timing of our Titan XT announcement and our customers' multi-quarter to multiyear capital approval cycles, we continue to anticipate that the full year 2026 product bookings will be weighted toward the back half of this year. Total revenues are expected to be $1.215 billion to $1.255 billion with product revenue between $690 million and $710 million and service revenue between $525 million and $545 million. Year-end 2026 annual recurring revenue, or ARR, is expected to be between $680 million to $700 million. Non-GAAP EBITDA is now expected to be between $153 million and $168 million compared to previous guidance of $145 million to $165 million. Non-GAAP earnings per share are now expected to be between $1.80 and $2 compared to $1.65 to $1.85 previously. This guidance includes our updated estimate of approximately $12 million of tariff-related costs impacting the P&L in 2026. As a reminder, tariffs remain fluid and we continue to closely monitor. Our guidance also assumes an estimated non-GAAP effective tax rate of approximately 15%. Before concluding, I'd like to provide additional context around several assumptions underlying our full year 2026 outlook. As Randall outlined, our 2026 product bookings outlook reflects where we are in the XT life cycle. As we discussed at the time of the Omnicell Titan XT and OmniSphere announcement last December, 2026 marks the 10th year of use of earliest XT cabinets, which were first shipped in 2017. While we believe the potential benefits of Titan XT provide a significant long-term replacement opportunity, health system capital budget approval cycles typically span multiple quarters to multiple years. Launching Titan XT in late 2025 was intentional, allowing customers sufficient time to incorporate our new offering into their planning cycles. We continue to estimate the total replacement cycle opportunity to be in excess of $2.5 billion. That said, it is important to remind investors that the XT installed base today is younger than XT series installed base was at the time of the XT launch, which may create near-term pacing considerations. This dynamic may be offset in part or whole by the expanding value of the nursing and pharmacy technician workflows, supply chain management and data analytic capabilities we are building into OmniSphere. These collective factors are reflected in our 2026 product bookings guidance. As shared previously, we also expect revenue linearity to remain in place throughout 2026, which is anticipated to result in a quarterly revenue profile that is more muted in terms of quarter-over-quarter dollar movement and experienced in historical patterns from prior years. From a cost structure perspective, our full year 2026 guidance reflects a continued focus on balancing long-term value creation with probability. At the midpoint of our full year 2026 guidance ranges, non-GAAP EBITDA is expected to expand by more than twice the rate of revenue growth, while continuing to fund innovation, development and customer experience initiatives. In closing, we are pleased with our start to 2026. With disciplined execution and a clearly defined platform road map anchored by Titan XT and OmniSphere, we believe Omnicell is well positioned to drive sustainable, profitable growth in 2026 and beyond. With that, we'll now open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Stan Berenshteyn from Wells Fargo. Stanislav Berenshteyn: I wanted to get an update on the retail segment. I was wondering if you can offer some color as to EnlivenHealth, how's that progressing? Do you continue to see headwinds related to the footprint within the Retail Pharmacy segment. . Nnamdi Njoku: Stan, this is Nnamdi here. Thanks for the question. So just to give you a sense of what's happening there. Our team just returned from one of the major conferences NACDS, and -- what I will say is the mood in the room there was really with the major players. Looking forward, there's been a lot of challenging that have happened in that space in the last couple of years, but it seemed like there was some sense of stability and looking forward. Now it doesn't mean those challenges are getting muted. But what they are reporting back is that those key players are looking forward and the volumes there continue to increase, and it seemed like the tone in the room was really about how to deliver on those growing demand at the lowest cost. And that's where we see our Enliven solutions really playing a role there. Omnichannel communication, patient engagement solutions. So we're really just focused on engaging our customers in a way that is delivering value for them to meet that growing demand, but also continue to drive cost down with regards to how they serve their customers. So what I will say in summary is it's been a challenging time in the retail segment. I think that challenging sort of dynamic continues to play out. But there's been some sense of kind of looking forward with regards to just trying to figure out how to meet the growing demand that's out there. And we're just focused on just partnering with them to be able to deliver on that. Operator: Next question comes from the line of Jessica Tassan with Piper Sandler. Jessica Tassan: Congrats on the great results. Do you guys just mind kind of articulating the sources of gross margin upside on the product side in 1Q and on the services side and the extent to which you expect those sources of gross margin upside or the gross margin upside to be durable versus kind of transitory? . Randall Lipps: Thanks for the question, Jess. In terms of gross margins, we did see 46% total non-GAAP gross margin in the first quarter. It compares to 42% a year ago in the first quarter and 44% for last year. A couple of things contributed to that. First, on the product side, we saw favorability in the product and customer mix in our connected devices. And on the service side, we lap the investments that we were making during the course of 2025 in field-based software upgrades at our customer. So those 2 vectors are contributing to that performance. What I would say is that margins will continue to fluctuate from period to period. And last quarter, in the fourth quarter, maybe we're a little bit at a lower end. This feels like we're maybe a little bit at the upper end in the near-term cycle. So I don't want to call this the new ceiling or new floor. But I think we'll continue to see small fluctuations from period to period based on that mix. Operator: Your next question comes from the line of David Larsen with BTIG. David Larsen: Can you also talk about the key care impact that it did go for good on public hospital team volumes on active pursuits. Unknown Executive: Awesome. Thanks, David. You were a little faint on that, but it sounded like the tightened environment and the market conditions around the acute care environment. Nnamdi Njoku: David. So what I would say right out is it's a great time to be in medication management. As you know, the 2 main players there have rolled out new offerings and customers are reassessing the incumbent solutions. As we also look out there, technology is advancing and really giving us the chance to deliver on consistent reliability, scalable service, enterprise visibility. So it's pretty favorable out there in terms of being in this space today. So following our December announcement, we've been out there engaging customers, it's been very favorable. We continue to build our pipeline. I'll point to a couple of things that we're hearing from our customers as we have those conversations. The things that are really landing well have to do with looking at sort of system-wide visibility. So when you think about these complex health systems, the ability to centrally manage user management and devices across the health system in a standardized way is resonating as we have those conversations. The other thing that we're also seeing out there is the ability to sort of have a migration flexibility is also giving us a chance to really engage health systems as they expand, particularly those health systems that have a newer fleet. So the ability to have a mixed fleet environment and manage that migration is going really well. And then we've also talked about the workflow benefits with guided workflows and some of the things that we're really trying to address around operational variability. And in an environment with labor constraints as well, that's really landing well with those guided workflow conversations. So in a nutshell, it's a positive response we're feeling out there. We're investing in our commercial go-to-market approach, making sure we have the demo equipment out there to give customers a chance to really experience the solution that we're rolling out. So we're very encouraged by the discussions that we're having. We just continue to engage customers in that dialogue and to build the pipeline. Operator: Next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: Randy, a follow-up on the product bookings. The guidance there was unchanged, but I wanted to look a little bit underneath the hood. And I think you said the installed base refresh assumptions are unchanged. As you think about your customers and your prospects as they think about going for XTExtend versus Titan XT, are you seeing any increase in cancellations for XTExtend and maybe more customers looking toward Titan XT. Would love to get a sense of anything within there is different than your expectations a quarter ago. And then as it relates to the product bookings guide or conversations with customers, really has anything changed over the past 3 months? Randall Lipps: That's absolutely a great question because it has changed because now there's more optionality for customers and customers who may have been just leaning into an XTExtend extent to upgrade their current systems are now saying, well, maybe I should use Titan XT. And how do I feather that in. With it coming out, the hardware coming out at the second half of this year and the software coming out, the next part -- first part of next year. And so the conversations have people reevaluating their configurations and their strategies to acquire the equipment. And I think you're right, probably less people are less interested in the XTExtend package and more interested in how to deploy and when to deploy the Titan XT. So it's definitely making the conversations and the size of the deals, upsizing the size and how that, of course, involves some people have to go back to capital committees and get one and rejuggle that a little bit. But it's all really positive. It is -- and people know that when you deploy technology, you want to deploy it once for a long time. So particularly, these health care systems would rather wait and get the best result than do it twice in 5 years or something like that. So we kind of knew that would happen. Operator: Our next question comes from the line of Bill Sutherland with StoneX. William Sutherland: I was curious as -- particularly as these deals that you're in discussion about get larger. What -- Baird, you've talked about the likelihood that you'd start to look into leasing and -- or some kind of financing opportunities with -- in certain situations. So I'm wondering how that's progressing for you guys. . Unknown Executive: Yes. We continue to find that it's an important offering for us to provide to customers. There are customers that are trying to line up their cash flows in line with our operating revenues, and there's others that are looking at it through a capital purchase lens. And so continuing to offer both has been helpful and constructive in conversations. And I think it's leading to what we believe is a really nice pipeline of activity, both existing customers and competitive opportunities. And so having that in our portfolio has been quite useful. Operator: Your next question comes from the line of Scott Schoenhaus with KeyBanc. Scott Schoenhaus: I guess a follow-up there. You just mentioned the pipeline in your prepared remarks, the strength of your pipeline, but you mentioned the competitive conversions here. You talked about the workflow enhancements in the technology. I think that's better than your competitor out there. Your competitor also has a Class II FDA recall in the market. Maybe just talk about what's embedded in your bookings guidance on the competitive conversion side and where you see this going over the next 12 months? Because there seems a clear opportunity here in the marketplace that you haven't had in the last replacement cycle that could be significant. . Randall Lipps: Yes. Thanks for the question, Scott. Yes, we definitely are -- are excited about the moment that's present, having a new product in the market space is one thing, but also knowing that there's a large group of opportunities out there where customers, ours and our competitors' customers, will have to make decisions about their path forward. As we think about the assumptions that were based into the bookings, it's important to remember that we've been taking share over an extended period of time. And what that may do is vary a little bit from year-to-year. But over time, we've consistently been able to increase our market share. So we've built that assumption into our guidance. And what you see is a modest increase year-over-year and competitive wins assumed in our guidance. Operator: Our next question comes from the line of Matt Hewitt with Craig-Hallum. Matthew Hewitt: Congratulations on the strong start to the year. I guess sticking along the competitive conversion commentary. Obviously, market share, you guys are growing it there. But I'm just curious, are you seeing an increase in demand from these new customers to sole meaning we would expect over the course of this year into next year, the number of sole-sourced hospitals or systems has increased because of some of these competitive dynamics? . Nnamdi Njoku: Matt, thanks for the question. I would say, just reflecting on the engagement that we're seeing out there, I don't know that we're seeing a material shift in the volume of sole-source agreements. If you recall, most of the ways that we engage with our customers here, we tend to get into those types of arrangements with them. particularly these large customers. So I don't know that there's a material shift on that front. But we are pretty encouraged with just the volume of activity we're seeing out there. And as we start to progress some of these to the contracting stage, we'll see something out there. But at this point in time, I'm not sure that there's a signal there I can point to that's a material change. Randall Lipps: Yes. Matt, the only thing I'd add on to that is that for our customers, the importance to them of having a reliable cabinet is something that they really enjoy about working with Omnicell. And when we think about the innovation culture at the company. That does play into the continued dialogue with customers about how we are helping meet their evolving challenges in the pharmacy. So as a thought partner and as an innovation partner, those are 2 things that really end up in these conversations pretty heavily. And although not changing, but worth mentioning. Unknown Executive: Yes, let me add one comment to that. I do think there's a bigger portion of our bookings coming from competitive conversions as we move into the future. And some of those deals may be sole sourced, usually a big provider does look at doing sole source. But it's just where we are in the dynamic of some of these very large whales, how long it takes to get those contracts in place, I think it's what I will comment. But I think for sure, we're in a fantastic market with a lot of competitive activity. I mean we just the other day, had to double or maybe even more triple the amount of demo equipment out there just because there's so much demand for people to see the product. Operator: And our final question comes from the line of Gene Mannheimer with Freedom Capital Markets. . Eugene Mannheimer: Congrats on the good quarter and outlook. Your initial fiscal '26 EBITDA guidance provided back in February was a little bit muted. As I think about that, and I think you cited some planned investments, it appears that some of those shifted out of the quarter. Baird, and maybe you can elaborate a little bit on what those are and when they -- when we might expect to see it land? Unknown Executive: Thanks for your question, Gene. Yes. I -- as a follow-up to Jess's question about gross margins, we did land at 46% in the quarter. It's a little higher than we've seen over the course of the last several quarters. So maybe a little bit higher than normal. In terms of shifting out of costs, we had some places where we had the flexibility to keep the operating activities on track, not put us behind. But to shift a little bit of money out into Q2 and Q3. So I would expect to see some operating expense increases as we move into those periods. But I think the most important part is that we've really focused internally on the spend discipline and trying to reach the right balance between the long-term growth needed and profitability in the business. And in the first quarter, we did see early signs of those initiatives starting to take traction. And what you see is us gathering and putting some of that additional belief into the remainder of the year. So overall, I think it's a positive quarter, and it's a positive outlook as we move forward. And that's what we reflected in the guidance update. Operator: With no questions in queue. I will now hand the call back over to Randall Lipps for his closing remarks. Randall Lipps: Well, thanks for joining us today. We're really excited about where we are and just this point in the history of medication management, just a wide availability in the market to make some serious changes. And we're excited about the innovations we're bringing on our platform that's empowered by AI or enterprise agents and new robotics and world models, all these things are helping to drive us toward in the autonomous pharmacy in an accelerated fashion, which is as you all know, has been at the tip of our tongue for quite a while. So we're starting to see that come into the view, it's exciting customers and it's even exciting, of course, to our employees who are the best automation team in health care. So we appreciate you guys. So thanks for joining us today, and we'll see you soon. Cheers. Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Christopher Jakubik: Good morning, everyone. This is Chris Jakubik, Head of Investor Relations at Kimberly-Clark, and thank you for joining us. I'd like to remind everyone that during our comments today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures during these remarks. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.Kimberly-clark.com. With that, I will turn it over to Mike for a few opening comments. Michael Hsu: Okay. Thank you, Chris, and thanks to everyone for joining us this morning. Our first quarter results underscore the strong progress we're making towards creating a company unlike any other in our industry today. Our Powering Care growth engine is enabling Kimberly-Clark to continue building industry-leading base business momentum. We are delivering differentiated science-backed innovation in all rungs of the Good, Better, Best ladder. In the first quarter, innovation helped fuel our delivery of solid organic sales growth with volume plus mix growth increasing to 3%. This builds on 2 consecutive years of broad-based volume plus mix growth. We're building market share across our key focus areas of Baby Care, Women's Health and active aging and with a second quarter launch late that's 1 of our most active ever across the categories and markets where we compete. Our supply chain team continues advancing our commitment to deliver the best product at the lowest cost. We generated another quarter of industry-leading productivity, enabling us to continue investing for impact. Our fast lean operating model is making us more agile, navigating external turbulence. It's also helping us continue to bring the best of Kimberly-Clark to the world with speed and efficiency. We're still in the early innings of our potential, and we're well positioned and continue accelerating our virtuous cycle of value creation. We look forward to seamlessly plugging Kenvue?brands and businesses into our proven durable operating model. We're ready to raise the standard of care for billions of people around the world and deliver generational value for shareholders. I'm very proud of our teams for their passion and dedication as we work to make our bold ambition a reality. And with that, I'd like to open the line for questions, operator. Operator: [Operator Instructions]Our first question is coming from Dara Mohsenian of Morgan Stanley. Dara Mohsenian: First, maybe just a clarification on the full year guidance, obviously, we're seeing commodity pressure today, oil stays with now above $100 a barrel, that's not officially in guidance nor is the mitigating actions. But Nelson I was just hoping you can walk us through the range of potential actions you would take to help offset any pressure on full year earnings if oil stays up here, maybe rank order how you think about pricing versus productivity versus flex on ad spend? And just conceptually, do you think it's realistic, you can offset most of that if oil stays up here, understanding it's very volatile. And then Mike, if we can drill down a bit I did want to delve more into the pricing side in North America. We've obviously seen a pretty promotional industry environment the last couple of quarters. At the same time, you're generating very healthy volume growth on your portfolio within that environment and now we have this unexpected cost ramp up externally. So just a lot of moving pieces, and I was hoping you could help us understand strategically how you plan to manage pricing in North America given all those factors. Michael Hsu: Okay. Thanks for the question, Dara's a lot to unpack that. Let me kind of give you kind of the overall framework of how we think about it, and then I'll ask maybe Nelson can give you some of the details about how we'll process it and also -- and maybe ask [ Russ ] to click in on some of your questions about pricing. But I'd say, overall, that I feel like we're making great progress creating a new kind of health and wellness leader. And we're really encouraged by the strong base business momentum we're seeing. 3% volume mix in the quarter builds on I think sorry, ninth or tenth quarter of solid volume mix growth. And so we feel great about that. And the important thing, I think, as you kind of embedded in your question is that, that volume mix growth is being driven by innovation, right? And we're not renting that through promotion. The promotion is supporting the innovation. And so that's kind of the big deal for us. On top of that, we feel like our supply chain is in full swing and generating industry-leading productivity, which we feel great about. And that enables us to reinvest back in the quality and the marketing of our brands. So I think we're feeling good about our underlying base business momentum. I'd say the environment promises to remain turbulent, but we're going to remain agile and disciplined. We've been through a number of these things over the last -- well, in my tenure in this role, right, if you go through COVID and a few other wars, unfortunately, and other commodity or input cost situations. So we've had a lot of experience navigating a lot of different disruptions, including this quarter. And I'd say, overall, our process is to remain very disciplined. And 1 concept that we've felt very important is PNOC or pricing not a commodity input cost discipline. And we expect that to be at least neutral over time, and we're going to leverage all the tools that we have to make sure that we continue to do that. And so I think the key thing for us is we have a lot of levers to pull in terms of how we're managing our cost profile, which Nelson is going to talk more about right now. But I also say having that discipline on pricing net of cost is an important concept for us. Nelson Urdaneta: Yes. Picking up where Mike left Dara, a few things. As we look at the overall input cost inflation for the year and what we have factored into the outlook, and I think it's important to bring up the last 2 years. So for 2024, 2025, we faced right around $200 million of input cost inflation. As we got into this year in January, that was really flattish all in. So we were staring at about a flat input cost inflation outlook. And with the latest data and information that we've got, let me unpack what's in the outlook and what we've yet to build into the outlook, including the mitigation actions, as you stated. So for the second quarter, a couple of things. As we stated in the prepared remarks, we're going to be facing around a $20 million top line impact from the California DC fire, which for North America would be in the 70 to 80 basis points of headwind in the quarter. Then in the bottom line, we expect to have in the second quarter around $50 million, stemming from the inflationary impacts that we're seeing as a result of the Middle East war. And some of the impacts related to the LA DC fire, which as you stated, we expect to recover that in the second half of the year. If we look into the back half of the year, and we assume that oil prices remain at around $100 per barrel on average, we will be facing potentially gross incremental input costs of around $150 million to $170 million. We've not built this into the outlook because there's a lot of moving pieces as we speak, but we have also not built in any potential mitigations, which our teams are currently working through as we roll through the different scenarios. It's important to highlight that we, as Mike said, have instituted this philosophy of pricing net of costs, over time, neutral. And this is really embedded in our integrated margin management process, which ensures that over time, we expand margins, and keep on track with our plan stated our Powering Care plan rollout back in March of 2024. As such, we have several levers in there. First one, revenue growth management. Second one, a very strong pipeline of productivity initiatives. We've delivered 2 years of 6% gross productivity back to back. And this first quarter of the year, we're already at 6%, and our plans are to deliver for the full year 6%. The pipeline is very rich. We're making significant investments in the North America supply chain with the $2 billion announced a few quarters back, and that's progressing as planned. And then lastly is the whole strategic relationships with our suppliers in terms of pricing contracts as well as hedging programmatic elements that we've put in place. I'd also remind everyone that we've got a solid track record over the last 4 years of recovering any input cost inflation and actually expanding margins. If you look at 2023 through 2025, we expanded both gross margins and operating profit margins beyond the levels prepandemic. So we're confident in our ability to cover all these input costs over time. And again, we will be back with more news in our next earnings call. Michael Hsu: Sorry, I'm keeping track for you. So sorry, if our answers are a little full, but I'm going to ask Russ to comment on the promotional environment. Russell Torres: Yes, sure. Thanks. Dara. So I would say, just underscoring what Mike said that growing volume and mix profitably while maintaining PNOC discipline really is the key focus for us. And innovation is really the key to that. And specifically within North America, if I were to just double-click on that, you were asking about the promo environment. I would say that our overall pricing was in line in the first quarter, as you saw. And in fact, our overall weighted average promo intensity in North America is down versus pre-Covid versus category levels. And that's because we're focused on driving innovation. You will see innovation tick up when -- sorry, promotion tick up when we have an innovation agenda that's really strong because we're trying to drive trial, and that's exactly what you're seeing in diapers right now. We are using more promotion to drive trial. And we talked about that in the fourth quarter. We promoted Snug & Dry. We have a great innovation there that drives softness in our new absorbent core and we're pleased with the results there. We've seen household penetration and velocities up on that post promotion. And we've also shifted some investments across channels with surgical programming to ensure -- our loyal huggies buyers can find us after the recent distribution change, as we talked about in the last call in the club channel. But I'd expect that to normalize as we go through '26. And the bottom line is in North America diapers, our '25 promo was below category for the year, and it's below 2019 levels. So just to give you some context. Operator: Our next question is coming from Peter Grom of UBS. Peter Grom: Great. Thank you, operator, and good morning, everyone. So you updated your outlook for category growth to 2.5% versus 2% previously. Can you maybe just unpack that a bit more what regions or categories are you seeing a stronger performance, and then I think in the prepared remarks, you noted stronger category growth in North America, call it, I think it was 3.3% though, do you think that's a realistic run rate moving forward? Or do you think we could see a bit of a step back just given more uncertain operating backdrop. Michael Hsu: Okay. Peter, I'll start, and I'll ask Russ to weigh in here. I would say we're very encouraged by the resilience of our categories and the impact of our commercial programming. I'd say, notably, North America categories rebounded strongly in Q1. That was driven by some shifts in timing of competitive promotion activity, particularly and I think in the paper categories, but also -- you may recall in Q4, I think the categories had slowed down to just under 1 point. And that was really related to, I think, some things that happened in the year ago, port strikes and all this other stuff that happened. And so we're cycling that. But as we got into the end of the year, we're still a little unclear whether the slowdown was going to be endemic to the category or it's a one-off? And it turns out -- it looks like having cleared the quarter with a strong kind of increase in the category and in our organic, I think we feel like that was a one-off. And so I think our outlook for the year on a rolling 12 months, it's like 2.5% across our categories globally is what we have, and that's kind of the way we're looking at it. And so we feel good about the progress. Russell Torres: Yes. And I'd just add, I think Mike, you said it well. I'd just add, we aren't really seeing any large-scale shifts in consumer buying behavior. And we are still seeing consumers under pressure, but that's not a new dynamic. And so we're -- I think our trailing 12-month weighted average category growth is around 2.5%, and we don't see a reason for that that to evolve too much. And there are some puts and takes, as Mike mentioned, with respect to specific dynamics, but hopefully, that helps. Operator: Our next question is coming from Javier Escalante of Evercore. Javier Escalante Manzo: Thank you, operator. My question is on the merged entity. Mike, you laid out a new organizational structure. If you can help us understand it better. So how will it help restore growth Kenvue?while preserving the competitiveness of the core stand-alone Kimberly-Clark. What are the biggest changes that you made? And if you can explain how you see those working. And also finally, on the combination, if you can give us updates on the completion of the joint venture with [indiscernible], you may have some of it in the prepared remarks, as you can expand on that? And also, what is the status of the approval for the merger. Michael Hsu: Okay. All right. There's a lot to unpack there. I'll try. You can remind me, [ Ravi ] if I'm missing something -- let me start with -- after working on this since November, I would tell you for me and our team, and I think the team on both sides, the Kenvue?view side and the KC side, I would say, for all of us, even more conviction in the growth potential of the company that we're about to create. Kenvue?is going to report their first quarter results in early May, and that's consistent with their typical timing. So I'm not going to -- I'm not going to have your prejump that. But I will say, we've been working through kind of in our preparation for integration planning, some category reviews, Nelson, Russ and I with the Kenvue?teams. And I would say our view is that the recent challenges, although widely reported have been largely executional, and we don't see them as being structural. And in fact, there are pockets or more than pockets of strong profitable growth throughout the company. I would say a lot of that's been overshadowed by a few notable large challenges. I would say, primarily North America skincare, North America Oral Care has been a challenge and some of their business in China. So I think those are notable. But I would say, if you look at kind of how we've structured the management team, I think the management team and the combination of both KC and Kenvue?players reflects, I would say, the strong performance that I observed in the businesses on both sides. The other thing I'll say is Kirk and that management team at Kenvue? have taken some strong positive steps. And we're confident that Kenvue?will improve this year. And 1 of the moves they did make was adopt their operating model, and they announced that change back in February. And I would say it's very consistent with our kind of market-centric balanced matrix approach to operating. So I think we're very encouraged with kind of the progress on their side and also in the integration planning. And then as you kind of raised, I'm very pleased with that we've been able to assemble what I would view as a world-class team to create the preeminent health and wellness leader. And I think roughly, the bench from both sides is about 50-50. So the leadership team composition reflects strong talent that reflect -- that exist within both organizations. I think there's a great blend of market experiences, functional capability and technical expertise. And we felt like it was important to retain kind of the knowledge and leadership of what's working and also retain the strong institutional knowledge that exists in both companies. And like I said, I think if you look at the composition of the leadership team, it also reflects the strong performance in some of the Kenvue international markets. And so I'm pretty bullish on kind of what this team is going to do together. I will tell you, the operating model is going to be very market-centric but also leverage global scale. The culture, I think, will be ownership, speed and competitiveness. And I think that dovetails well, as I mentioned earlier, with what Kenvue has been doing. So maybe I'll -- I know I said a lot there. And Javier, I think Russ has got some comments as well. Russell Torres: Yes, I was just going to pick up on what Mike was talking about around execution. I think that really has been something we've been building and strengthening at KC for many years as those who followed us know both in terms of how to drive growth, but how to drive productivity and SG&A efficiency. And by the way, doing all those at the same time. So we've been basically taking that approach and applying it to the synergy process. We now have over 40 integration teams that are working on planning the combined company post close to build the future of the company to drive the synergies and ensure we can operate effectively together. And that process, I would say, is going very well. I've been very impressed with the actions that Kenvue?has been taking recently, Mike talked about in their base business and what they're bringing to the table for how we're looking at the future together. And we are seeing very good line of sight to synergies in all areas, COGS, I'll just give 1 quick example, their product is pretty small and dense. And so therefore, they tend to weigh out their trucks and ours is bulky and light, and we tend to cube out trucks. And so we're shipping to the same places, let's put them on the same truck. And there's actually quite a lot of value there. And SG&A, lots of examples we could highlight beyond just duplication we're really looking at it as an opportunity to leverage the combined scale to work differently, and that's simplification of the systems environment, SAP in, application rationalization consolidating processes, accelerating global business services using AI, lots of things there. And on the revenue side, we're really excited. I think there's tons of opportunities in distribution and leveraging commercial capabilities like e-com, all of which require getting the execution fundamentals in place, and that's really what we're emphasizing. And we're not waiting for the close. We are working on those things, as Mike mentioned, I know Kenvue?is working on them in their base business hard, and so is KC. So we feel like we're pretty well positioned to hit the ground running. Javier Escalante Manzo: Go ahead, Mike, just like a high-level thought. Do you think that part of these execution issues on the Kenvue?side had to do with the fact that the demerger from J&J at a time of a great deal of retail changes both in the U.S. and China? Do you think that, that's what led to underperformance. Michael Hsu: I don't think I can -- I know enough to comment on that, Javier, right? But all I'll say is running these kinds of businesses is hard. There's a lot of things that add up to being, what feels like small decisions end up having big impacts. And so that's why as I met with some large investors, and that's the question I asked, which is why does quality of management matter so much? It's because these are arcane businesses that have a lot of operating and running rules and they can be very difficult and things that feel small, like small inconsequential decisions end up having at times a big impact. And Nelson, and Chris and I saw plenty of those are craft back when we were at that company back in those days. And so -- so I wasn't there for that, and so I won't comment however here, but I would just say doing this is hard and making sure that you're kind of lined up correctly across all fronts of operating a business is really, really important. Operator: Our next question is coming from Lauren Lieberman of Barclays. . Lauren Lieberman: I was hoping you could just talk a little bit about the shipment timing that you mentioned in the prepared remarks on North America because it's category growth has accelerated. I don't recall if you guys use Nielsen or Sarcoma, but the Nielsen trends, including Costco, your business grew 5% and you reported in sub-Q. So just if you could discuss kind of in what categories, in particular, you're seeing those headwinds. Is it an inventory kind of correction? Or is it something that is timing related and kind of picks up in 2Q? Nelson Urdaneta: Yes. Sure, Lauren. So a few things. As you say, scanner data consumption data very strong. And as we've seen in many years, many quarters, there's always going to be some noise within the quarter between shipments and consumption. The key is really consumption. And looking into North America consumer specifically, as you point out, consumption was ahead of shipments by around 200 basis points, and trying to piece through the entire noise, I'd say, trade stocks inventory is not really the big thing there. It's more having to do with the fact that we had very strong activation programming in the first quarter, which started in January. So we had some shipments that came through in December, and that kind of anticipated what we went through. And that had to do a little bit with what you're seeing there and the difference. I think it's also important to highlight that as we think of the second quarter, we do expect organic sales growth to be slightly below Q1. And 2 things to keep in mind on that end. The first 1 we're going to have the strongest comp versus 2025, in which for total enterprise last year, we grew about 4%, and in North America, volume was actually 5%. And again, that goes back to the quarter-on-quarter can be a little noisy. And in last year's situation had to do with the fact that we had a series of product launches, particularly in baby and child care, which drove strong shipments in the second quarter. And then the other bid for the second quarter is we're going to be having a little bit of a headwind from the distribution center fire in California, as Russ had mentioned in his prepared remarks, that will be around $20 million or 70 to 80 basis points for the North America segment. But as we go into the second half, we expect that organic growth to actually accelerate because some of these noise elements we don't project. Lauren Lieberman: Okay. Is my line still open? Nelson Urdaneta: Yes, yes. Lauren Lieberman: Oh, cool. Okay. Awesome. So for her asking myself a question. Okay. So the operating profit headwind that you talked about for 2Q, which largely reflects the incremental inflation and also some of the pressure from the DC fire. So you've included that, let's call it, roughly $50 million for 2Q, you've held the guidance for the year. So what are the mitigating impact for the inflation you'll feel in Q2 specifically? And then if you're handling it that way for 2Q, why not, let's just call it, like complete the plan for the full year to talk about whether or not how you're going to be offsetting because the 6% productivity rate, while super impressive, you're already at that level. So I don't feel like -- it doesn't strike me as an easy task to up that rate of productivity to deal with this incremental $150 million to $170 million of potential pressure in the back half. Michael Hsu: Laura, maybe I'll just say 1 thing. Nelson is ready to pounce. But the 1 thing I will say is that the underlying assumption we're making is that we know what the cost impact is going to be. And we don't really feel like we know that yet. It's early. It's -- we know what it is today. We don't know what it's going to be tomorrow or through the balance of the year. And so that's kind of why we're kind of keeping the cards a little close to the best. Nelson Urdaneta: But building on that, Lauren, I mean, 2 things. As you say, the $50 million for the second quarter, we feel pretty confident we can maneuver through that. So that's not something that, again, we're bringing up as a major, major situation because it's not. As a reminder, we're about 80% covered in the entire cost basket between contractual arrangements, programmatic hedging and other items we're doing. . We've got the full set of toolkits within our integrated margin management approach. And it starts with the philosophy of pricing net of costs. And if you think about that toolkit, it includes revenue growth management. It includes the productivity. And yes, 6%. We're already at that level, but we've had quarters that have been ahead of 6%. We have a very strong pipeline of initiatives and our team is not sitting still as we're going through this. The reason why we didn't get into what would the specific mitigating actions be for the second half is that the teams are actually working through them today. We are having sit-downs with all of our suppliers, where force majeure or surcharges are being enacted. We're sitting down and renegotiating and opening up contracts as need be. We're looking at price pack architecture. And we're looking at all other elements of the toolkit. As I said, in the last 2 years, we faced about $200 million of incremental costs. And if you add up what we sort of estimate right now, and it's a point in time, plus the 50, you're right around that level. So again, as Mike said, we want to take the time to do this right. We want to see where things kind of settle because it's moving by the day. And we'll do what's right. We'll continue to invest behind the innovation and to do revenue growth management, it takes a little bit of time, but it's something that we know how to do. We've done it in the past, and it's going to be part of the toolkit. Operator: Our next question is coming from [ Anna Lizzul ] of Bank of America. Anna Lizzul: I was wondering if I could build on Lauren's question, Nelson, if you could comment, I guess, on the pacing of the top and bottom line as we move through the year, with both the impact from the distribution center fire in Q2? And then as you were mentioning, the other impacts down the line of oil and raising input costs. On the margin side, if you could talk about maybe the impact between Q3 and Q4, that would be really helpful. Nelson Urdaneta: Sure. A lot to unpack there, Anna. But let me kind of give you a little -- start with the top line. So as we mentioned, strong start to the year at the 2.5% organic growth as we go into the second half, we do -- the second quarter -- pardon me, -- we expect to be slightly below that for the reasons I explained in the prior question, largely with lapping the strongest quarter of last year at around 4% organic growth. North America volume 5% and obviously, the $20 million headwind that we'll face because of the distribution fire in California. But heading into the second half, we've got an acceleration in top line, and that's what's embedded in our outlook for the full year at this stage. As we look at the bottom line, a few things to unpack. First, we expect overall margins to actually pick up as the year progresses. We had in the first quarter, an expansion of gross margin sequentially versus Q4, and gross margin versus the prior year was slightly down 60 basis points, but that was largely expected because we are at the last full quarter of an impact from our exit of the private label contract in North America. Heading into the second quarter, third quarter, fourth quarter, we're largely going to lap that, plus -- and we expect gross margins to actually be expanding on a continuous basis for the balance of the year based on the outlook of what we have today. On operating profit margin, we expanded operating profit margins again this quarter by about 20 basis points, partly driven by the 90 basis point improvement year-on-year, from overheads, overhead of 13%, 90 basis points lower than the prior year. And we're getting good traction on delivering the full $200 million or exceeding it in savings as part of our Powering Care program. And we expect for the balance of the year to continue to see expansion in operating profit margins. For the full year, we expect gross margin, operating profit margin to expand both in the vicinity of 70 to 80 basis points. So that's largely a construct of what we see between the following quarters and the first quarter for both top line and margins. Operator: And our next question is coming from Robert Moskow of TD Cowen. Robert Moskow: I just wanted to test the overall theme of the call here that the business is truly resilient to all of these unexpected cost headwinds because when I look back to 2025, you had the tariffs was the big unexpected factor. And even though tariffs were mitigated for the full year, you still had to lower your profit guide for 2025. So when I'm looking at the 2026 number, the $150 million, $170 million is actually higher than what the tariff headwind ended up being. So I'm just trying to figure out how nervous to be about the ability to offset that much cost. Michael Hsu: Yes. I mean I think, Rob, I'll give you a little bit of historical background, and maybe I'll ask Nelson to comment. I would say, again, -- if you look at our recent history, back in 2022 and 2023, the business took on, I think, $1.6 billion of additional costs and $1.7 billion consecutive years. And so I'd say what we're looking at here is a fraction of that, right? And so I think what happens -- those were like all-time high I would say, inflation super cycle for us. And while the costs haven't receded, we've been able to manage through that cycle with discipline on this pricing that net of cost impact, right, or commodity impact. And so -- so I'd say at the level we're talking about, we feel like the business should be able to operate and manage through things, we'll let you know. And certainly, I think 1 of the reasons why we're hedging a little bit here is because we don't know what the costs are going to be. We know what they're going to be as of today or what the outlook is as of today, but it's still kind of a moving target. But I think our thing is I think since the 2022, 2023 period, I think we've developed much stronger cost management capability, which is why we're delivering industry-leading productivity. We've been really enhanced our RGM or revenue growth management, discipline. And so we feel good about our capability. And then the other thing I will tell you is we feel very bullish about the base business, right? Our organic growth being driven by a rebounding category, but also, hopefully, you saw in that presentation, the fact that we were up in 95% of sales weighted markets on share in North America and 84% in international. I think we feel great about that. And just to give you a comparison on the old metric that we use, which is just a pure count of cohorts, we're up in about 80% -- a little over 80% of cohorts, right? And so I think we feel good about the momentum of the business. Operator: Our next question is coming from Edward Lewis from Rothschild & Co Redburn. Edward Lewis: Just a couple of questions from me. Just be interested to hear how -- if we think about the good, better, best, how you're performing on those is good doing better than better or is better doing better than best? Just interesting to hear some commentary around that. And then I look at the international business, you called out good share gains in some of the markets. Just wanted to sort of get a sense check for how you're feeling about those markets given what's going on in the straight and the concerns people have about the impact and particularly in sort of the Southeast Asia region from the slowdown in shipping or in, I guess, in tankers coming out of the strait. Any update, any commentary there would be appreciated. Michael Hsu: I'll ask Russ to comment on the good, better, best. But I will say, unfortunate situation that we're operating in yet another region with another conflict. And so number one, Ed, I'll tell you thankfully, all of our people and employees have been safe and operating through this. And so -- and they been really kind of working overtime to make sure that we continue to kind of operate the business while keeping everybody safe. I will say business and performance has continued to be robust, especially in international markets. I think in multiple markets, strong double-digit growth. Interestingly, especially in Southeast Asia, our [indiscernible] business was strong double-digit growth, share up significantly. Russ, you may want to comment -- but the thing I'll also hit is in developed Asian markets like Korea, we're seeing a baby boom. So I think births were up 6.5% last year in 2025. And so the category was up 20% in Korea, where we have over a 60% share. So that's pretty meaningful for us, Ed. And so I think we're feeling very good internationally. And Russ you may want to comment a little further and then the good better best. Russell Torres: Yes, I agree. We've seen a lot of strength, especially in Southeast Asia, as Mike talked about, also India, Australia, kind of across the board. So we haven't yet seen a significant impact on the strait impacts yet. It's not to say that it wouldn't happen, but we're feeling pretty good right now. In terms of the Good, Better, Best question, I would say the premium side of the business remains healthy and it's continuing to grow, and it's the key to category growth. The consumers with higher incomes have remained resilient. And then on the good and the better, we're not seeing any specific patterns. I think what it comes down to is the strength of the value proposition to the tiers. And that really is what's winning. I think consumers are getting more choiceful for their money. I would note that, for example, in personal care, the penetration of private label continues to fall overall. And what's winning is the branded value propositions that are offering compelling value for money and those aren't necessarily in the lower price tiers. They're more of the mid-priced tiers. They're just providing a great proposition in consumers, especially in our categories are willing to pay. So that's our focus is to have the winning value propositions in all the tiers and let the consumer choose what's most appropriate for them. So we haven't seen very significant shifts into the good tier if that's kind of where you were going. It really depends on the specifics. Michael Hsu: Yes. I think Ed, interestingly, I think what's driven our growth over multiple years is the premiumization or kind of improving the product quality at the premium tiers and driving positive mix. And that's been consistent for the past, I would say, 7 years for us. I think what's changed is that it's not a pivot. It's just that we're applying the same approach to the value tiers. And so interestingly, we did in North America was bringing some of our best product technology from China and implemented it first in the value tier. And it will eventually go to all our products here in the U.S. But again, I think the fact that I think, as Russ says, we're bringing our best product at every run of the good, better, best ladder is kind of the real core strategy for us. Great. If we could take 1 more question? Operator: Our next question is coming from Chris Carey of Wells Fargo Securities. Christopher Carey: So I just kind of tend to wrap up a couple of key concepts explored on the call. Just number one, just -- I've gotten a decent amount of questions on the commodity outlook and mitigation as could be expected. But I thought I would just ask it this way, right? Like at the Investor Day, you had talked about changing your ability to confront different commodity cycles. Can you just give us a sense of how you feel differently right now, whether that's the time lag when commodities hit your P&L, that's the mix changes from portfolio adjustments. How are we different today versus, let's say, the last commodity cycle? And then secondly, just on the conversation around PNOC. I think embedded in some of your comments is the prospects of potentially looking at pricing? Or I think, Nelson, you said that RGM takes time. So maybe RGM is a potential lever here do you think that incremental pricing or incremental RGM could disrupt some of the volume improvement that you've been seeing, which is partly helped by some of the demand building activity that you're doing? Or do you think that you can continue to deliver volume if you were to kind of lean in a bit more on price or RGM, if you want to control PNOC if inflation stays higher, so appreciate those 2. Michael Hsu: Okay. Chris, let me start. Nelson is going to want to weigh in here on the commodity kind of management, but let me just start with the -- I would tell you, in my tenure, everything has changed about commodity management since we've been here. And I think I think in the past, I think we used to let things flow quite a bit. I think -- and I think I may have mentioned this, Chris, as we kind of looked at what was like holding the stock back, it was kind of the earnings volatility, and when you look at what's driving earnings volatility, it was input cost volatility, right? And so we -- with Nelson coming in, we made a very conscious effort to kind of reduce the volatility of input costs by using all available techniques to do that. And you can see that in terms of how we buy and how we contract, but also in some of the partnerships that we've developed over time. And so we feel very good about the progress we've made. And hopefully, I think the facts are that the beta on the input cost volatility has reduced significantly in the last 5 or 10 years. And so -- but Nelson, you may want to comment on. Nelson Urdaneta: Yes. And just building on that, Mike. And Mike mentioned it before, -- when I joined, we were going -- we were getting into the second year of the heightened inflation related to COVID. That's the second year in which we faced $1.7 billion of costs. And as I've said in some of the calls and in some of our investor meetings, we learned from that. We developed a lot of muscle around risk management over the last few years. We've instituted not just programmatic hedging but also strategic relationships with suppliers that allow us to have more visibility into costs and allow us to have flex to manage through the whole process. Before four years back, we would probably been talking about a different number today. But given what we've instituted on that end, this allows us to be able to manage any shocks much better. The other bid, and it's not the commodity itself, but it's how proactive are we on the rest of the toolkit. And that's why we refer to the pricing at a cost philosophy and the integrated margin management approach which is a philosophy that we've been embedding in the organization. It's very different. We're managing end-to-end. We're measuring the team's end-to-end, and that leads to different outcomes. And that's why our level of confidence in being able to manage through these cycles is much better at this stage, Chris. Michael Hsu: Yes. And then I'll mind you, we're not in previous cost shocks, but I think we're in much better position than we were, let's say, 5 or 10 years ago. . Great Okay. All right. Well, thanks, everybody, for joining us. For analysts that have further questions, Investor Relations will be around all day. So thanks very much, and have a great day. Operator: Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the CECO Environmental First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Marcio Pinto, Vice President of Corporate Integration and Investor Relations. Marcio Pinto: Thank you, Josh, and thank you for joining us today on the CECO Environmental First Quarter 2026 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer; and Peter Johansson, Chief Financial Officer. As a reminder, we're covering CECO Environmental's first quarter 2026 earnings results on a stand-alone basis. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings, as we have noted in our presentation legal disclosures. As always, we will leave time at the end of the call for analyst questions. And with that, I'll turn the call over to Todd Todd Gleason: . Thanks, Marcio, and good day, everyone. We are off to a strong start to 2026, and I look forward to sharing our progress. As always, I would like to thank Team CECO for your ongoing commitment to deliver for our customers and, of course, driving such strong results. Please turn to Slide #4, and let's discuss some of the key takeaways. Starting on the left side of the slide, we delivered another strong quarter with numerous financial records, headlined by tremendous orders, which increased our backlog to new levels. Revenue and EBITDA results were solidly in line with our expectations and position us nicely for the full year with strong continued momentum. Speaking of momentum, we don't just expect our second quarter to set new records for orders. We know it. The month of April alone is already higher than the record we just set in Q1. I will expand on this more in a few minutes. Even with the backdrop of uncertainty related to the Iran war and modestly higher inflation, we are raising our full year 2026 outlook, not inclusive of Thermon. Our growth trajectory remains robust, and we have nice visibility to our revenue and margin profile in our record backlog as well as larger-than-ever sales pipeline. This is our second guidance raise this year, and we are pleased to highlight our continued high performance. On the right side of the slide, we note the continued progress we are making with respect to the Thermon transaction. We remain on track for a Q2 close, and our current expectation is sometime in early June. Representatives from each company are working together on integration items and preparing for post-closing activities. We remain highly confident in the $40 million cost synergies we previously outlined, and we are evaluating additional opportunities as well as attractive commercial synergies. The combination is bolstered by each company's strong momentum and continued growth outlook. The combination into CECO Environmental will create a leading diversified global industrial company, and we are very excited to demonstrate the power of this combination. Additionally, over the past number of weeks, I've had the chance to meet hundreds of Thermon employees. The Thermon operating culture is very similar to how our businesses and operational teams function. And similar to CECO, I am incredibly impressed by their energy, their passion and market knowledge. Across the board, Thermon is a great company and will make for a very powerful combination. Now please turn to Slide #5, and let's review financials in a little bit more detail. This summary slide captures the main highlights for our first quarter, record backlog, record orders, strong revenue delivery and accelerating earnings. Our backlog is at its highest level ever, now over $1 billion, up almost 72% year-over-year. Revenue growth of 17% and adjusted EBITDA growth of 46% speak to our high-performance results. Our sales pipeline has grown to over $7 billion, which is the outcome of focused investments to best position our portfolio, the addition of diversified talent, the introduction of new commercial programs, our expanded global reach and our passion to advance market-leading engineered solutions. Now please turn to Slide #6. In the quarter, we continued our bookings momentum with orders of $449 million, an increase of 97%. To put that in perspective, we booked $221 million more in orders this year than we did in Q1 last year. That $221 million would have been a record on its own about a year ago. And when I joined CECO in 2020, we were averaging about $90 million a quarter. We have come a long way since then, and I believe we're just getting started. Speaking of just getting started, while the power super cycle has been in the headlines for over a year, CECO's participation is starting to hit its stride and gain further momentum. In the first quarter, we had several very nice orders servicing this power generation market. We are also seeing strong activity in natural gas infrastructure, semiconductor sectors, electronics in general, industrial water and U.S. industrial reshoring. We believe these markets remain attractive for the medium to longer term. And don't just take my word for it. As the right side of the slide highlights, and as I already mentioned, in April alone, we already booked over $400 million in new orders. That's almost $200 million more than we booked in all of Q2 2025, which at the time was a record. Yes, our April bookings alone is already larger than our just announced first quarter record of $449 million. Included in this April number is our largest ever order. This one in the range of $300 million, which also serves the natural gas power generation market as we provide advanced emissions and noise abatement solutions. These are exciting times at CECO. And with our growing pipeline, we are bullish for our full year orders and backlog, which we believe will drive strong double-digit sales for a very sustainable period. And before I hand it over to Peter, let's move to Slide #7. To be brief, we are raising our full year 2026 guidance again. Our updated revenue outlook now expects sales to be between $940 million and $1 billion. It is exciting for us to highlight an outlook that includes sales of $1 billion for the first time ever. The midpoint of our revenue guidance now calls for organic sales to grow approximately 25% for the full year. We are also increasing our adjusted EBITDA outlook to $120 million to $140 million. The midpoint of this outlook calls for an approximate 44% EBITDA growth and 170 basis points of margin expansion for the full year. We continue to grow -- excuse me, we continue to invest in growth while delivering sustainable margin expansion and utilizing the results of nice volume leverage. And with the recent implementation of 80/20, coupled with our ongoing excellent operating excellence programs, we are making meaningful progress and expect more margin expansion ahead. I will now hand it over to Peter, who will go into more detail on our financial results. Peter? Peter Johansson: Thank you, Todd. Good day, everyone. Thank you for joining Todd and I for CECO's First Quarter 2026 Earnings Call this morning. Please turn to Slide #9, and I will provide more color on CECO's financial results for the quarter. CECO started 2026 with very strong results on most of our key metrics, continuing the momentum we built throughout 2025. We finished the first quarter with a record backlog of $1.035 billion, up 72% versus prior year and 31%, equivalent to $242 million sequentially. Backlog has now increased for 11 consecutive quarters and has surged upwards in the most recent 6 quarters, each delivering greater than $200 million in orders across a wide and highly diversified range of end markets, including power generation, liquefied natural gas, midstream gas transport and treatment, hydrocarbon processing, semiconductor and electronics and industrial water applications. First quarter orders were $449 million, a company record, representing a 97% increase over the prior year period or a book-to-bill of approximately 2.2. On a trailing 12-month basis, bookings reached $1.286 billion, a 71% increase over the prior trailing 12-month period, representing a book-to-bill of nearly 1.6. Revenue in the first quarter was $206 million, an increase of 17% year-over-year, reflecting a strong start to the year following CECO's record revenue quarter in the fourth quarter of 2025, which delivered $215 million. Revenue in the quarter overcame headwinds from the sale of the Global Pump Solutions business, which represented $14 million of revenue in the first quarter of 2025, a sale which closed at the quarter's end last year. On a TTM basis, revenue was $804 million, a record for any 12-month period in company history, up 32% or $195 million. Quarter 1 is typically CECO's seasonally smallest revenue quarter in the year. And with our growing backlog and strong opportunity pipeline, we are confident to deliver sequential revenue increases throughout 2026. Gross profit for the quarter and for the trailing 12 months increased 3% and 27%, respectively, on higher volumes. Margins, however, did experience contraction in quarter 1, which was anticipated given last year's sale of the higher-margin but nonstrategic global pump business, combined with the revenue timing of lower-margin jobs booked in early 2025. We expect margins to improve in the second quarter and trend back towards our target gross profit margin level of 34% or greater as we progress throughout the year on improving volume mix dynamics on more recently booked large projects and new projects with faster revenue recognition profiles and improved cost cases. Adjusted EBITDA was $20.4 million in the quarter, an increase of 46% versus prior year for a margin of approximately 10%, a nearly 200 basis point improvement over prior year. First quarter adjusted EBITDA far surpassed any prior Q1 in company history. For the trailing 12-month period, adjusted EBITDA was $96.7 million, representing a margin of 12%, an increase of nearly 160 basis points, continuing the consistent trend of margin expansion toward our long-term goal of mid-teens adjusted EBITDA margin. A large part of the improvement came from lower operating G&A expenses as volume from large projects starts to be realized and the initial benefits from our Wave 1 80/20 projects. Corporate G&A spending was lower, reflecting the benefits from cost management actions taken in the middle of 2025. Please now turn to Page 10 for a quick look at how backlog is trending. Backlog growth continues to accelerate on a sequential basis with a book-to-bill in the quarter of approximately 2.2x, resulting in a record for any quarter ending backlog. Backlog, which reflects future sales has now increased nearly fivefold since the end of 2021. This sustained strong orders performance when combined with our continued success in converting our growing $7 billion opportunity pipeline to new orders, underpins our 25% plus top line organic revenue growth for 2026. Orders in the quarter benefited from strong activity in natural gas power generation and industrial water applications, and this trend has continued into early second quarter. And we now expect to deliver another record quarter that will drive our backlog level even higher. Now please turn to Page 11 for a look at adjusted EBITDA and margin trends. With the delivery in quarter 1 of $20.4 million of adjusted EBITDA, the trailing 12-month period has reached $96.7 million of adjusted EBITDA and a 12% margin, both company records. We have expanded our TTM adjusted EBITDA margin steadily since 2022, a trend that we expect to continue throughout 2026 as we continue to target reaching a mid-teens adjusted EBITDA margin for stand-alone CECO. And we expect to cross the $100 million level for adjusted EBITDA very shortly. SG&A spending was down 14% or $7.5 million in the quarter on a year-over-year basis, reflecting an 800 basis point improvement as a percentage of revenue. This result overcame increased spending on seasonal items, including the payment of cash bonuses and sales incentives on our growing order base. For the remainder of 2026, we will continue to utilize the resources of our newly formed business transformation office and operating excellence teams to extend the deployment of our 80/20 strategy across more of CECO and to deliver incremental material sourcing and project execution benefits. Now please turn with me to Slide 12 for an update on cash flow and indebtedness. Quarter 1 cash flow for CECO is seasonally down to start the year, and this year was no exception. In the first quarter, we consumed approximately $16 million of cash, in line with 2025 on lower sales and order activity. Working capital was a headwind in the quarter as contract assets and customer AR grew while we executed against our growing backlog and issued substantial billings for milestones achieved in the quarter that we expect to collect in the second quarter. We also incurred material costs and cash expenses related to the Thermon transaction. Cash flow would have been in positive territory, except for a customer payment of nearly $20 million that was delayed but already received here early in the second quarter. We expect cash flow in the second quarter to revert back to a positive state, benefiting from billings in the first quarter, and we've already begun receiving large cash payments in April. Capital expenditure in the quarter was largely driven by our ongoing ERP implementation initiative, which we expect to be essentially completed by the end of 2026. Gross debt at the end of the first quarter increased by approximately $43 million from year-end 2025 as we used our revolver facility to finance the growth in working capital and expenses related to the Thermon transaction. Net debt increased by $31 million as our quarter ending cash balances grew by approximately $12.5 million, resulting in a comfortable quarter end leverage ratio of 2.3x, a modest increase of 1/10 of a turn from year-end 2025 as our leverage ratio also benefited from the increase in our trailing 12-month adjusted EBITDA delivery. During the quarter, we amended our credit agreement to increase financial capacity and liquidity and to improve certain covenants in support of CECO's continued strategic investments in organic growth and our programmatic acquisition strategy. We have now up to $975 million in committed funds on our amended credit agreement comprised of $740 million of revolver capacity and $235 million in a delayed draw term loan. With a Q1 ending 2026 gross debt of $252 million, we have $723 million in additional capacity to fund the cash portion of the Thermon acquisition and to use for further organic growth investments and working capital needs post closing. That concludes my review of CECO's first quarter financial results. I will now pass it back to Todd for wrap-up and final remarks. Todd Gleason: Thanks, Peter. Before I close, I want to share some additional thoughts and updates on the Thermon acquisition, a historic transaction for CECO and a major step forward in our strategic transformation. Please turn to Slide 14. The addition of Thermon will meaningfully extend CECO's leadership in industrial, environmental and engineered solutions by adding Thermon's established position in process heating, heat tracing and temperature management, creating a world-class industrial solutions platform with robust multiyear growth trajectory and a very strong and stable financial profile. This combination brings together 2 highly complementary businesses, creating opportunities to accelerate growth and expand accretive capital deployment. Bruce Thames, Thermon's CEO and I are aligned in our enthusiasm for the future of the combined company and our respective teams. We expect the combination of CECO and Thermon will create a stronger enterprise, one that is well positioned to be a Rule of 30 or Rule of 40 company. By driving strong double-digit growth and producing enhanced operating margins, we believe we can achieve these levels and sustain very high performance. With our healthy balance sheet and robust free cash flow generation, we can accelerate shareholder value creation across a range of options. I'm excited to continue to lead the combined company with an estimated $1.5 billion in current run rate sales and with tremendous growth and synergy opportunities to take this much higher. I look forward to welcoming key additions across the leadership team as well as Board of Directors. We have a lot to do. We have a lot of value to create. Now moving to Slide 15. Before we open up the call to questions, we'll conclude with this. CECO is very well positioned for today, very well positioned for tomorrow, and we believe our sustainable operating model makes us uniquely positioned for the long term. The combination with Thermon bolsters our portfolio with additional injection of leading businesses and great talent. More to come as we work towards a Q2 transaction close. Extremely proud of our team and all they do to serve our global customers. The first quarter is just another indication of our fantastic leadership and balance. With 97% orders growth and 17% revenue growth, we continue to demonstrate our investments pay off as we add installed base and advance our market positions. And finally, while this might be the final quarter as CECO stand-alone ahead of the combination with Thermon, we are once again pleased to raise our full year guidance. The visibility we have in our strong backlog and robust sales pipeline is truly unique and gives us a lot of confidence in the year ahead and years to come. We'll now open the line to questions. Operator? Operator: [Operator Instructions] And our first question comes from Aaron Spychalla with Craig-Hallum Capital Group. Aaron Spychalla: Maybe first for me, good to see the pipeline grow to $7 billion plus even with the strong activity. Can you maybe talk about the drivers of that? And then on Power Gen specifically, last quarter, you talked about a $1 billion to $2 billion kind of medium-term pipeline with visibility beyond that. Can you just maybe give an update there? It really seems like order sizes are starting to pick up. Maybe touch on just delivery time lines of some of these orders and then the supply chain ability to kind of meet everything that seems to be really accelerating for you. Todd Gleason: Yes. Thanks, Aaron. So the $7 billion, it's actually about $7.3 billion, I think Peter would say, of sales pipeline. Just to remind you and I guess, the audience, the way we calculate our sales pipeline is actual job pursuits, order pursuits opportunities that we see booking in the next 1 year to 2 years. We kind of average it at around 18 months, but some of the projects might be a little further out. So we don't include things that are beyond that. And then obviously, they work through the funnel to a win-loss opportunity in the current quarter. And so we've been growing the sales pipeline steadily through a range of investments as well as geographic reach and how our markets have been performing, which have been growing for the last few years. When I joined CECO in 2020, our sales pipeline was closer to $1 billion, $1.5 billion. So to be at $7 billion, I think, really speaks to this intentional expansion of how we look at our markets geographically, how we look at our markets industrially, and that's going to continue. Look, we've been pretty consistent. The -- to get that sales pipeline to greater than $7 billion, the investments are required, the expansion into new markets organically and inorganically is required. And we benefited from those investments. But look, we're also certainly benefiting from the tides rising in some of our most important markets. Natural gas power, natural gas infrastructure. So power generation writ large is a headline that everyone sees. That's been a significant driver and has certainly probably added about $1 billion to our pipeline over the last few years alone. And not all of that's in our $7 billion, where we're seeing more that we just haven't put in yet because it's a little further out, but we're in conversations about how that power generation market is expanding. And then we have ebbs and flows. We have some markets that 1 year are fantastic, but then they pull back a little bit the next year. This year, we're looking at still continued strong growth in all things, electrification and digitization. And Thermon has a very large focus themselves on digitization as well as decarbonization, which ties into the electrification theme. So we're very unified and thematic focused on where we see the market. Semiconductor expansion is sort of ripping at the moment as well, and we're well positioned for that in industrial air specifically. Industrial water is a market that we've been investing to expand into, and that might be approaching $1 billion of our pipeline now, where a few years ago, it was very little. So we continue to see just very strong themes across the reshoring U.S. market of industrial, all things digitization and electrification. Semiconductor, like I said, is certainly growing. And then look, I think we're just hitting our stride on some of the larger power projects as it relates to emissions and noise abatement and heat management and gas separation. So look, these are big markets that continue to want to get larger, and we're just participating very nicely in them. Aaron Spychalla: All right. And then maybe just -- I mean, as these are substantial backlog and pipeline, just comfort with the supply chain and just ability to meet everything? Todd Gleason: I think that's been one of our more important investments, Aaron, also that we probably don't highlight enough or as much. In order for us to secure some of these larger orders, including jobs that we've won over the last few years and certainly even over the last few quarters, you don't do so without a great supply chain and great partners and a series of redundant capabilities in fabrication and in supply chain. And so we've invested in our teams and our capabilities. Dan Berman and his team at sort of the corporate operating excellence group is continuing to go out and look for sourcing savings and additional sort of redundant supply chain capabilities and really do a great job with logistics and quality. And then across all of our businesses in our Thermal Acoustics and emissions management all the way through, they're constantly out validating new supply chain partners in North America, in East Asia, Southeast Asia, the Middle East, et cetera, India. And so we have a lot of visibility to our supply chain, which gives our customers more confidence in us maybe than in some of the competition because we've invested heavily in that effort. And so look, I think it's a really important question. We have nice visibility to our ability to secure the materials. Certainly, there's inflation out there. We do as smart a job, I feel is out there to aggressively prebuy or to lock in rates. And sometimes that prebuy shows up sort of negatively in our cash flows, but it's the right transaction for us because it protects margins for the long term. And so look, it's -- I would give Peter and the team in finance. Like I mentioned, the Dan Berman and his team, Martin and Tim Shhippey and their teams in our businesses, I could rattle off a dozen names where our project managers are working closely with our supply chain managers. But we're getting out ahead of this. We did this a year ago. We did this 6 months ago. Again, we could probably continue to sort of geek out on this topic, to be honest with you, because this is one of our major muscles as a company is the supply chain visibility. Aaron Spychalla: Good to hear. And then maybe last for me, just on the Middle East business. Can you kind of talk about impact there that you might be seeing or not? And then just any thoughts on timing for some of the larger water opportunities that you've been targeting there? Todd Gleason: Yes. Look, it's obviously an uncertain time and market in the Middle East. There have been certainly some impact to how our teams can travel and navigate and work on certain projects in the region. We don't have a tremendous amount of projects that were tied to our '26 performance that are in the region. We do have some very attractive programs in our pipeline that have been paused a bit until probably the second half of this year. We're opportunistic in thinking that this conflict can be managed in that period of time. But in our guidance, we have already accounted for any of those impacts. Obviously, our first quarter orders of $450-ish million. Our second quarter is already at $460 million. We're not even through April yet, speaks to the strength of our markets even with some pauses that are happening. in the Middle East with respect to some of these larger projects that we're -- that we still feel well positioned for. There will be a rebuild in the region to some extent when it all starts to, we think, stabilize. And there's uncertainty. Right now, we're navigating that uncertainty, and we'll keep everyone posted on sort of what -- just like the rest of our peers in the market on what we're seeing. But we feel comfortable with our guidance and our outlook. And by the way, we look forward to being at your conference, Aaron. Operator: Our next question comes from Gerard Sweeney with ROTH Capital. Gerard Sweeney: So a question on the power side. Obviously, it's great. I'm just curious, when do you get brought into some of these projects? So what I'm looking at is some of the turbine manufacturers saying they're sold out to 2029, et cetera. But if you're brought into the projects later in the cycle, that actually gives you visibility out to 2030, 2031 plus. I'm just curious as to how that all plays out. Peter Johansson: Jerry, we begin work with our large gas turbine customers, the engineering firms and the OEMs years before we receive an order. We're today receiving negotiating, working through technical configuration questions for orders that will deliver in 2029 and 2030. We essentially are done for the 2027 and 2028 installs. Now we're working on '29, '30 and beyond. So we're 3, 4 years [indiscernible] ahead of -- we have visibility. Now the interesting sideline to that is the repowering activity, which is taking an existing facility and updating it and upgrading it. That is something that happens much faster. It can happen in months generally not more than a 12-month conversion. That is not something that we typically are involved in years in advance. That happens really quickly. I would say Entergy is going through a program of updating every single one of their combined cycle plants. That was a unique case where we actually had a 3-year MSA in place to support them over an extended period of time, but that's a rare instance. Gerard Sweeney: Got it. Okay. And then obviously, you talked a little bit about margins, 80/20, et cetera. But even on the power side, hearing that some of the project pricing is going up. That pricing doesn't always flow through to margins, obviously, for inflation and other reasons. But obviously, lots of demand. How much does pricing play into maybe your margins -- margin expansion? Or is it more just keeping it steady with inflation and other aspects? Peter Johansson: Price for us is a lever to increase margins. We work with our large customers to ensure that we're capturing the most value on the project that we can. As it relates to natural gas power generation and the duration of the projects themselves, we include estimates in our pricing, in our cost case that accommodate or assume some level of inflation. We also have in our contracts with our customers, escalators that if we have in excess of inflation, we can return back to that client and ask for recovery. There are 2 commodities today that are probably most impacted, and we do a very good job of managing through that. And that is the catalyst, which is utilized in emissions treatment applications and specialty steels. Operator: Our next question comes from Rob Brown with Lake Street Capital Markets. Robert Brown: Congrats on the strong quarter. I guess just wanted to dig in a little more on the industrial water side. You noted that as an increasing pipeline strength. Is that a -- I guess, to what degree is that a market kind of trend versus just your expansion in that market and activity? And how do you see that playing out? Peter Johansson: We -- it's probably more our participation and entrance into the market. That said, I do -- we do see that there's a lot of investment in infrastructure, industrial water expansion in various geographies. I don't know that it's certainly a better market than potentially a few years ago. And we're not in a position, much like maybe Veolia might be able to say something about a 10-year trend. We're relatively new, although a number of us have decades of exposure and experience with water. It's not always on this industrial water side that we're talking about. And so look, our -- the businesses like Kemco and others that we've acquired, I think they'd say it's a healthy market right now and that they like -- they feel good about their organic growth and our organic growth in those businesses we've acquired. But it's really our entrance into some of the larger industrial water, produced water, water treatment side, where we can now do sort of very medium to large-scale complex skid solutions. And it's that investment for us to enter into that market that we feel that there's the opportunity. So we're confident it's growing. I wouldn't want to make a market call on that. I don't feel like we have the data to support how we would view this market over a long term. But we do see a lot of new investment in various geographies. Todd Gleason: Rob, there's two core trends that drive a lot of the demand in industrial water. The first is water scarcity. Water scarcity drives water providers, particularly to raise the water tariffs on industry, thinking they're a lot less susceptible or a lot more elastic to price increases. And as industry is experiencing those price increases on water, they're looking to do two things, cut down on the water they use and reuse as much as possible. It's the reuse trend that we're benefiting from as well as working with them to design less thirsty solutions in their processing applications. So we see 2 opportunities on industry that benefit us. And we do a lot of work in what you might call water scarce regions, North Africa, the Middle East, Southeast Asia, which are in even greater need of being more rational in their use of water. Robert Brown: Okay. Great. And then on the commercial synergies that you had -- I guess, as you've gotten into the Thermon acquisition work, have you -- what's sort of your sense of the commercial synergies? Are you feeling more confident there? And I guess just talk about commercial synergy opportunities you see? Todd Gleason: Yes. We're certainly very confident that there's attractive commercial synergies. We really haven't put a number around it yet, Rob. We want to wait until we have combined with Thermon. Our teams that are working on this, both formally on the integration to start to really put together a detailed program to assess and consolidate what a commercial synergy could look like. They're just getting started, and I wouldn't want to front-run the process a little bit. And then separately, we are now identifying already products that when we go out to bid on some of our projects that include heat trace, include immersion heaters, include other controls and other sort of solutions that Thermon is a leader in and has a very attractive both solution and product offering. Now we can certainly think about in the future once we're combined, incorporating a joint sales effort. We can't do that right now, obviously, but we can certainly start to assess and get proposals from Thermon where we may have not done so before as a supplier, and we've already started those activities where we've won some large projects that include some of their products, and we've reached out, and we've received separate proposals to now bring Thermon into the approved vendor process and approved bid process. So we're already seeing the millions of dollars of opportunity because there's -- we're an industrial company, they're an industrial company and our solutions and their solutions are often found in the exact same footprint of the same projects around the world. So there's going to be no shortage of opportunities for us here, Rob. If I were to say, can the combination add a couple of points of organic growth? I believe so, yes. We just want to provide the market, you and others with a more detailed analysis of what that looks like after we've combined and started to issue combined company outlook guidance and updates on our cost synergies as well as what we will introduce as updates on our commercial synergies. And until we really have that analysis done, I don't want to put a number around it. But it's -- we're growing -- there's no shortage of confidence and our teams are enjoying getting to know each other, including when we see each other at certain industrial conferences, I know our teams against each other at the Boiler conference, for example, and quite enjoyed comparing notes on the industry and how we can work together in the future. So there has already been a lot of gelling of ideas and thoughts. And when we combine, we'll have a much better answer for this question, but it's a positive number. Operator: Our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: Congrats on the fantastic quarter. So obviously, the power gen-related jobs have been fantastic. But I was just curious to hear more broadly, where are the next 2 biggest areas of strength for current orders? And maybe any context or thoughts of how that would evolve going forward? And any perspective of how that's evolved over the past couple of quarters? Todd Gleason: I'll start with an answer of 1 or 2, and then I think Peter can either sort of provide more context on those or give his perspective. Look, we're in a very positive market-leading position across a diversified set of industrial categories. So the good news is I have more than one answer. But I would say, and we've already said that the sort of the digitization and electrification of things is such a powerful theme. I'll highlight semiconductor expansion and investments as no doubt, a very strong market. And so that for us is most, if not all, but mostly industrial air, where we have some exciting opportunities that are included in our backlog that we booked, but in our sales pipeline. So I'll say semiconductor, without hesitation, looks like a very good market for the future -- for the foreseeable future. And in our industrial air business, we like how we're positioned there. And certainly, recently, we've seen powerful earnings from Intel and others. So I think it speaks to -- we're not alone in our view of that market. Industrial water is the other one that while we are seeing certainly a little bit of pause in some geographic regions, mainly the Middle East, those projects aren't going to go away. And we're well positioned for those projects, and they're meaningful for us in the future. And that diversification is also meaningful. You've heard me say, Bobby, to you when we've spoken, but -- and so this has been over many, many quarters. As we look forward to CECO 2030, when we look forward to CECO 2030, we believe industrial water is a major piece of our portfolio, and we're getting after it. And the market is there for us. So while we're talking about power as we should, and we're talking about power generation and natural gas infrastructure, which we should, there are major themes that we're going to take advantage of, and we're well positioned to do so organically over the next few years. So those are the 2 that I'm most excited about in the moment is semiconductor and industrial water. I think Peter probably has a view of gas infrastructure and some other markets. I'll let him expand. Peter Johansson: The natural gas infrastructure whole value chain is also a very -- a market of strength globally. Natural gas is the transition fuel, and it looks like that transition is going to be longer than anyone anticipated. From wellhead to consumer, there's a lot of points along the way where CECO Technologies, including from our Peerless and Profire brands and Thermon themselves have large roles to play in ensuring that natural gas gets delivered in a clean, dry and energetic manner. It isn't a day that doesn't pass when there isn't a new project, new pipeline, new spur, new consumer project being announced or highlighted. And we stand with Peerless and 100 years of experience in that market as a principal and critical supplier to those customers. And as we look at other opportunities around the value chain and things we can do together as Thermon and SECO, that's an area of commercial opportunity we continue to explore and expect to find real benefits from. Todd Gleason: And you don't have a -- I don't -- I've only been in the industrial space for 30 years, so maybe I need a little more experience on this comment. But you don't have a 2.2 book-to-bill without a number of end markets that we've invested in to achieve that. And especially when last year's book-to-bill in the first quarter was extremely large. I remember off the top of my head, but whether it was a 1.3, 1.4 book-to-bill. So we're not talking about easy comps here. We showed it on the slide. Last year's first quarter was up 50%, 60%. This year's first quarter bookings is up 97%. -- mathematically, and you've got calculators to prove this out, that just means our future sales growth looks when I say double digits, it's a layup to be double digits when you have a book-to-bill of 2.2. And so it's not just power for us, it can't be just one market. It's a diversified -- and we have some markets that are still recovering a little bit. Automotive and Europe geographically are sort of still navigating through some difficult times. And so look, there's some industries and some markets that aren't attractive at the moment in terms of their growth, but we still like where they're going to come out. And when they come out, we'll be positioned for them. Robert Brooks: That's super helpful color. I really appreciate it, Peter and Todd. And then just kind of switching back to the merger and talking to some investors since the last print, I don't think folks appreciate enough how Thermon will extend the windows of conversations with customers that you currently are having and how they should also benefit from your own internal network that spans across those dozens of industrial end markets that they have been trying to break into. So just with that in mind, could you expand on this a little bit? Todd Gleason: So yes, thanks, Bobby. Look, whether the market understands it or not, our customers understand it. When I say the market, whether the investment community completely appreciates it, they're a leader. Bruce, Tom, the leadership team, the business leaders within Thermon, they have decades of understanding how to navigate and grow into diversified end markets. Thermon has done a very, very solid to a very tremendous job of diversification. And they do that because they're a leader. And they've done a great job of introducing new products, their controls capabilities, which helps them to secure more opportunities. Us leveraging that and their great relationships with their customers to bring us in to cut to the conversation is in front of us. Their introduction of medium voltage products is starting to gain traction. We have a lot of relationships with customers that we can introduce into that market of medium voltage. So they've invested in new products, and they're learning where the market opportunities are. We may have some of those relationships and market opportunities that we can just help accelerate. Our ability to understand supply chain alternatives is something that they can benefit from in terms of growth and how we've invested in international expansion where they want to invest in international expansion. So -- we have excess capacity. We have excess resources to go after and do more advanced, faster capabilities that they want to utilize and leverage. Their very attractive investment in their liquid load bank for data centers is an area that we can utilize and understand how they're breaking into a new market and where can we participate in those things. So again, when we talk about commercial synergies, you hit it on the relationship. When you're a leader in a space and you've got good relationships, you can introduce new solutions more sustainably because you already have a trust factor, you're already on the approved vendor list. You already have negotiated how you can get into that market with reference sites, et cetera. So there's already a comfort. And Thermon has done the same thing. So we're going to easily be able to understand that better when we're a combined company, but we're already excited about what we're hearing. Operator: Our next question comes from Jim Ricchiuti with Needham & Company. James Ricchiuti: Just in the interest of time, I just had one question. Just as you mentioned, probably the last quarter for stand-alone CECO. And given where we're starting the year with gross margins, it sounds like you're expecting fairly significant improvement as you go through the year, mix volume play a role. But can you talk a little bit about stand-alone CECO from a gross margin improvement as you go through the year? Can you maybe help us understand how we drive margins higher? Is it something you see in the backlog? Peter Johansson: Yes. There's 3 factors, Jim. There's -- when we talk about volume and mix, we're really referring to is the timing difference between when cost hits the income statement and when revenue is recognized. Upfront in a project as we're getting started, we realize a number of engineering expenses, work with our suppliers, setting up the programs and projects within the -- or the subprojects within a large project, but we recognize very little revenue. We start to start -- but the cost case is growing. And then as we get in second quarter, third quarter of a project, revenue recognition begins to accelerate. And so when you think about volume and mix, we had projects that we booked last year where we were doing work in the first quarter where we hadn't recognized all the benefits from the revenue. So that's one lift. Second lift will come from the margins of projects that we booked in the fourth quarter last year and the first quarter this year that are at higher margins. The second -- or the third impact, will be from the efforts we're making to continue to improve our G&A cost footprint and the efficiencies we're going to generate from continuing to integrate acquired entities. All of those activities will result in getting back on track and heading towards the 34% or greater target. Now it won't happen all in one quarter, but the full year outlook is near that target range. Thank you, Jim. What I would point out, though, Jim, I think it's the EBITDA delivery operationally is going to continue to improve from a margin standpoint, even with the large project volume and mix aspects, they come with little to no additional fixed cost. So the operating expenses, what I call operating G&A for those larger projects actually are accretive relative to the business that they're replacing or the business that came before it. And so that's an important component of looking at EBITDA growth and ultimately cash generation. Operator: Our next question comes from Joseph Giordano with TD Cowen. Christopher Grenga: This is Chris on for Joe. You had cited early benefits from 80/20. And I just was curious what specifically was in Wave 1, if you could discuss that and how we should expect benefits to kind of split along gross margin improvement versus SG&A leverage over the next few quarters? Peter Johansson: So 80/20 is a new concept at CECO. We began the implementation in the fourth quarter with our diagnosis and our work plan development. And we launched formally across two of our smaller businesses, both recently acquired. And they are now, I'd say, probably 1/4 of the way into their implementation. There's a number of different projects inside of each of those deployments. And we handle them in a separately by business. So about 10% of CECO's revenue today has been covered by our initial wave or call Wave 1. That will expand in this quarter -- has expanded this quarter and we'll be by end of the summer, somewhere around 20%, 25% of CECO revenue being touched by the 80/20 implementation across the company. That is something that we will accelerate as we develop our internal expertise and we develop subject matter experts internally that can carry the ball forward for us, and we'll grow that penetration across the portfolio by the end of this year, but certainly through 2027. The benefits have been split to date. Generally, they have come from the G&A side. We have had a little bit of gross profit improvement. But as we've looked at customer and product simplification and the zero-up aspects of what we're doing in 80/20 -- in the 80/20 toolbox, they're really focused on getting the organizations that are now deployed with 80/20 rightsized and focused on the priority customers and products. Christopher Grenga: Great. I appreciate that detail. And with the Section 232 expansion and revisions earlier this month applying to full customs value, is there -- or could you talk about any incremental margin or backlog sensitivity for CECO, especially on projects booked prior to that revision, net of any pass-through clauses or sourcing actions that you're taking there? Peter Johansson: We haven't identified any material impact from the change in the tariff posture. Our operating model is to source and fabricate and deliver in region to avoid a majority of any cross-border flows. Very little comes across the border that's tariff. So for instance, if we're delivering to clients in Asia, our suppliers and our fabrication activities go on in Asia. Same in the Middle East and India, same in Europe. In North America, we work with Canadian suppliers. But for the most part, the clear majority of those goods across the border are covered under USMCA exemptions. Operator: I would now like to turn the call back over to Todd Gleason for any closing remarks. Todd Gleason: Thanks. Well, thanks for the questions and the interest in our information today. Again, thanks to our global teams that are delivering incredible value to our customers as we continue to protect people, protect the environment and protect our customers' investment in their industrial equipment. We look forward to being active at a handful of investor conferences in the second quarter as well as speaking with some of you today and over the next few weeks with respect to our results. I couldn't be more excited about the pending combination with the great team and organization that is Thermon, and we will keep everyone updated on that as we go forward. And with that, we'll go ahead and close today's call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us and welcome to Kilroy Realty Corporation Q1 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We will now hand the conference over to Douglas Bettisworth, vice president of corporate finance. Douglas, please go ahead. Douglas Bettisworth: Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, Jeffrey Kuehling, and Eliott Trencher. In addition, Justin Smart and Robert Paratte will be available for Q&A. Please note that some of the information we will be discussing during this call is forward looking in nature. Please refer to our supplemental package for a statement regarding the forward looking information on this call and the supplemental. This call is being webcast live on our website and will be available for replay. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights, Eliott will provide an update on our recent transaction activity, and Jeffrey will discuss our financial results and provide you with our updated 2026 guidance. Then we will be happy to take your questions. Angela? Angela Aman: Thanks, Doug. And thank you all for joining us today. Over the last several quarters, fundamentals across our West Coast markets have meaningfully improved. As return-to-office momentum has intensified, space rationalizations by large users have abated, and the artificial intelligence ecosystem has created considerable new business formation and growth, all contributing to a resurgence in space requirements from rapidly scaling new companies and well-established players alike. Recent tenant behavior, both within our portfolio and across the markets in which we operate, points to a constructive dynamic around technological change with companies seeking to utilize AI to enhance their growth and augment their talented team, rather than automating simply to manage costs. Against this backdrop, our team's disciplined execution drove our strongest first quarter leasing results since 2017, with total productivity of approximately 568 thousand square feet, more than double our first quarter performance last year, positioning us to increase our full-year average occupancy guidance by 25 basis points at the midpoint. Importantly, leases signed but not yet commenced now represent nearly $78 million of contractually obligated annualized base rent to be realized over the coming years, providing significant visibility on future growth. To hit on a few highlights across our regions, in San Francisco, the epicenter of the AI innovation ecosystem, market conditions continue to tighten, as first quarter leasing exceeded 3 million square feet, more than 10% above pre-pandemic quarterly averages, resulting in the third consecutive positive quarter of net absorption and positioning us well to capitalize on broad-based demand across our Bay Area portfolio. In the San Francisco CBD, we have seen significant momentum at our assets in the South of Market, or SoMa, submarket. At 201 Third, our lease rate improved from 26% at year-end 2024 to over 80% this quarter. We have successfully captured demand from a wide range of growing tenants, including both larger format users such as Tubi and Harvey AI, and a variety of smaller format users. As you may recall, in 2025, Harvey AI leased 93 thousand square feet at 201 Third, before signing a 62 thousand square foot expansion this quarter, with occupancy occurring in April 2026, just one month following lease execution. This significant expansion occurring within one year of the original lease execution speaks to both the impressive growth trajectories we are seeing for a number of rapidly scaling AI companies and also to the discipline that they have generally employed with respect to their real estate decisions, taking space only when necessitated by the current needs of the business. In addition, our team has captured outsized market share at 201 Third through the deployment of a creative and disciplined spec suites program, with all five of our recently constructed spec suites leased by completion. We are also thrilled to be experiencing strong demand across other core Bay Area submarkets. At Crossing 900 in Downtown Redwood City, we completed a 27 thousand square foot direct lease with a current subtenant during the quarter, generating an increase in cash base rent of more than 40%, underscoring the depth of demand for high quality, well-located space in this transit-oriented, walkable, and well-amenitized submarket. In Seattle, the strength we have seen in Bellevue over the last several years continues, optimally positioning space we recently recaptured for near-term releasing and rent upside. In addition, the momentum we discussed last quarter in the Denny Regrade submarket further accelerated, benefiting our recently repositioned project, West 8th. Following approximately 74 thousand square feet of new lease executions at West 8th in the fourth quarter of last year, we are pleased to announce an additional 76 thousand square feet of new leases signed at the project year to date, including a 43 thousand square foot lease with General Motors signed in the first quarter and a 33 thousand square foot lease with SoFi, signed in the first few days of the second quarter. With additional tenant discussions underway, we have good visibility into the future pipeline, reflecting the strength and competitiveness of this asset as the recent renovations and enhanced amenity offerings continue to resonate with tenants and position the property to capture a meaningful share of growing market demand. In Los Angeles, leasing activity within our portfolio has improved meaningfully over the last year, with trailing twelve-month productivity up approximately 66%, reflecting both a continued gradual improvement in the overall market and the significant portfolio repositioning work that we have done in LA over the last two years. Of particular note within the region, Arrow in Long Beach is seeing a pickup in tour activity, as the local market begins to experience a resurgence in defense and aerospace requirements. Blackwelder in Culver City is seeing an acceleration in activity from a wide variety of users, including technology and AI companies. And Maple Plaza, a recent acquisition in Beverly Hills, is continuing to experience strong, broad-based demand from the financial services and media and entertainment sectors, notably surpassing our original expectations. In life sciences, KOP2 continues to outperform the broader South San Francisco market, as the project's purpose-built life science space and top-tier amenitization offerings resonate with decision makers who are showing a higher propensity to execute than they have at any time over the last several years. Subsequent to quarter end, we executed a 38 thousand square foot lease with Olema Pharmaceuticals, bringing the project to 49% leased. The future pipeline remains robust as we evaluate opportunities to complete the remaining lease-up of our multi-tenant building while also engaging with several large-format users for the remaining full-building opportunity, which represents the most compelling offering within KOP phase two, featuring premium views and the most prominent location within the project. Turning to capital allocation, during the first quarter, we continued to raise attractively priced capital through dispositions of non-core and non-strategic assets, with a long-term goal of enhancing the durability and growth profile of the company's cash flow stream. During the period, we sold two office properties, Kilroy Sabre Springs and Del Mar Tech Center, both in San Diego, for aggregate gross proceeds of $146 million. In both cases, these assets benefited from the consistent demand we have seen across markets from owner-users for well-located, high-quality real estate, driving a highly efficient execution for our shareholders. Subsequent to quarter end, we closed on the sale of our two Hollywood residential assets, Columbia Square Living and Jardine, for aggregate gross proceeds of $[inaudible], resulting in year-to-date operating property dispositions of approximately $350 million, exceeding our original full-year goal. Residential sales followed the implementation of a holistic asset management strategy for our residential portfolio through which we recognized significant margin expansion, resulting in a materially better valuation at the time of disposition. Following the transaction, our residential exposure is now limited to One Paseo Living, which we view as a core long-term holding given the asset's significant synergies with the retail and office components of the broader One Paseo campus, where we continue to achieve record-setting commercial rents. With proceeds from our first quarter dispositions, we elected to opportunistically capitalize on recent capital markets volatility, repurchasing approximately $73 million of stock at an average price of $30.80 per share. And in April, we fully redeemed the $50 million tranche of private placement notes scheduled to mature in July. Looking forward, we will continue to explore opportunities to harvest attractively priced capital from our existing portfolio while exploring the full range of redeployment alternatives available to us. In last night's release, we also announced the formation of a joint venture to develop a premier, substantially pre-leased Class A office asset in Downtown Redwood City, one of the strongest submarkets in the entire Kilroy Realty Corporation portfolio. This complex transaction was a long time in the making, requiring substantial effort and coordination across our platform, with our partner and with the project's anchor tenant. 1900 Broadway, which is fully entitled for a 250 thousand square foot office project, is located just blocks from Kilroy Realty Corporation’s highly successful Crossing 900 asset, which has remained 100% leased since delivery in 2015. Over time, we have consistently captured meaningful rent growth at Crossing 900, releasing over 80 thousand square feet since 2023, with cash rent spreads up nearly 60%. Concurrently with closing on the venture, we executed a 20-year lease with a top-tier global law firm for 145 thousand square feet, representing approximately 60% of the building, at the highest rates ever realized in the Kilroy Realty Corporation portfolio. Since closing, we have experienced strong inbound interest from a wide range of high-quality tenants, and we look forward to updating you on our progress as the project advances. Eliott will cover project costs, estimated returns, and timing in a few moments, but I would note that substantially all of our equity investment in this project has been prefunded through the land parcel sales that are currently under contract. Before turning the call over, I want to provide a few comments on the Flower Mart project. As Jeffrey will touch on in a moment, we have revised our expense capitalization assumptions for Flower Mart to reflect continued capitalization through the fourth quarter of this year. As we previously stated, we are working with the City of San Francisco to redesign and reimagine the Flower Mart project while maintaining and building upon our current approvals. In addition to seeking flexibility to develop a broader mix of uses, we are also looking to amend the existing development agreement and create a special use district to provide relief from certain planning code requirements, the specifics of which are still under discussion. The city, which has been a constructive and valued partner in this process, has suggested an alternative approach to analyzing and documenting the changes in the special use district, which we believe will ultimately increase our long-term flexibility and optionality, though the alternative approval process will take additional time. We now expect the process to be completed late in the fourth quarter and would assume that expense capitalization ceases at that time. We are highly convicted that the path we are pursuing at the Flower Mart will result in the best possible outcome for shareholders, and as always, we will continue to update you as the process unfolds. In conclusion, I want to thank the entire Kilroy Realty Corporation team for an incredibly busy quarter across nearly every facet of our business. Your efforts are creating meaningful value for all of our stakeholders, and I am grateful for your continued energy and enthusiasm. Eliott? Eliott Trencher: Thanks, Angela. Over the last several months, the capital markets have demonstrated continued momentum as buyers recognize the inflection in fundamentals and the positive impact AI is having on our market. As a result, transaction size is increasing and asset quality is improving. For example, the Transamerica Pyramid in San Francisco recently traded for $1.05 thousand per square foot, the first time an institutional property has eclipsed the $1 thousand a foot level in that market since 2022. Kilroy Realty Corporation continues to be an active seller, and during the quarter, we closed on $146 million comprised of the previously announced Kilroy Sabre Springs at $125 million and Del Mar Tech Center sold in March for $21 million. Del Mar Tech Center is a 40 thousand square foot building in the Del Mar submarket of San Diego, and at the time of sale, the building was roughly 50% leased with a weighted average remaining lease term of one year. We remain big believers in Del Mar Heights and are still the largest owner in the submarket, but selling this property made economic sense. Additionally, last week, we closed on the sale of our two residential towers in Hollywood for $[inaudible]. As many of you know, these towers were developed by Kilroy Realty Corporation as part of our Columbia Square and On Vine projects, and the layout of the campuses allows the residential to be separate and distinct from the neighboring office properties. We determined these buildings would be good sales candidates given the lack of synergies with the office as well as the depth of demand for high-quality apartments. Before bringing the properties to market, we spent time ensuring the operations and structure were optimized to facilitate a sale and maximize proceeds. The cap rate on all sales announced year to date averages in the mid-single digits. As a reminder, in addition to the operating property sales, we have $165 million of land sales under contract, with roughly half expected to close late this year or early next year. We continue to evaluate additional opportunities to sell or repurpose non-strategic land. Turning to acquisitions, as Angela mentioned, we closed on a joint venture to develop 1900 Broadway, a 250 thousand square foot project in Downtown Redwood City that is already roughly 60% pre-leased. 1900 Broadway is adjacent to Downtown Redwood City’s restaurant row, making it one of the most walkable and amenitized properties in the area and worthy of premium rents. Kilroy Realty Corporation was uniquely positioned to take advantage of this off-market opportunity given our deep market insight, strong local relationships, and proven development acumen. These factors gave our partner, Lane Partners, and our anchor tenant, Cooley, confidence in our ability to bring this deal together. We intend to break ground next year, and Cooley is expected to take occupancy in early 2030. The total anticipated cost for the project is $330 million to $350 million, of which our share will be 97% upon completion. Stabilized yields are expected to be in the low to mid-9% range. Before turning the call over to Jeffrey, I think it would be beneficial to summarize the substantial disposition progress we have made over the last two and a half years. As private capital returned to the office sector, Kilroy Realty Corporation meaningfully ramped up sales efforts with a total of roughly $980 million of land and operating properties completed or under contract. We have talked about individual transactions in detail on prior calls, but in total, this demonstrates the private market is open and functional and can be a source of attractively priced capital if executed thoughtfully. We elected to redeploy a portion of the sales proceeds into four high-caliber infill, amenitized, multi-tenant investments totaling roughly $765 million, which includes the full cost of building out 1900 Broadway. This capital recycling gives us a more diversified and sustainable cash flow stream while also making the portfolio more amenitized, walkable, and supply constrained. As a result of being a net seller of roughly $215 million, we were able to use a portion of the savings to pay down debt and opportunistically repurchase stock. We are proud of the progress made to date and intend to keep making the next best capital allocation decision one step at a time. With that, I will turn the call over to Jeffrey. Jeffrey Kuehling: Thanks, Eliott. Before turning to results, I want to highlight two disclosure enhancements this quarter aimed at providing investors with better visibility into leasing performance and how executed activity translates into future results. First, we have added a leasing spread calculation focused on space vacant for less than 12 months. This aligns with how most of our peers present spreads and better isolates true mark-to-market activity; our historical calculation remains unchanged and is presented alongside the new metric. Second, we have expanded our disclosure regarding signed but not commenced leases, which currently totals over 1 million square feet and nearly $78 million of contractually obligated annualized base rent. This disclosure highlights the embedded growth already in place and provides greater visibility into the forward trajectory of the operating platform. Turning to our financial results, FFO for the first quarter was $0.91 per diluted share. With respect to occupancy, as a reminder, KOP2 entered the stabilized pool during the quarter, impacting reported portfolio metrics. As a result, portfolio occupancy ended the quarter at 77.6%. Excluding KOP2, first quarter occupancy would have been 81.5%, down only 10 basis points despite our previously communicated first quarter move-outs. The dispositions of Kilroy Sabre Springs and Del Mar Tech Center completed during the quarter had no impact on overall reported occupancy. Cash same property NOI increased 1.8% in the first quarter, driven by lower bad debt expense and contributions from net expense settlements, restoration fee income, and other property income. These positive impacts were partially offset by detraction from base rent despite a marginal increase in overall occupancy, reflecting free rent periods from certain new tenants in the portfolio. On the leasing front, activity during the quarter resulted in GAAP spreads of negative 10.6% and cash spreads of negative 16.8%. Those spreads were driven primarily by two leases in San Francisco, both of which involved space that was vacant for longer than 12 months. Importantly, these were capital-light transactions that generated attractive net effective rent outcomes. These two leases were partially offset in the quarter’s reported spreads by the lease Angela previously mentioned at Crossing 900 in Redwood City, which not only generated the highest net effective rent of the quarter in our operating portfolio, but also delivered significant positive cash and GAAP releasing spreads. Leasing on space vacant for less than 12 months performed well, generating positive GAAP spreads of 19.2% and cash spreads of 5.2%. Turning to guidance, last night we increased our 2026 FFO guidance by $0.21 at the midpoint with a new FFO range of $3.49 to $3.63 per diluted share, reflecting improvement in our core portfolio and platform operations and updated timing assumptions on Flower Mart expense capitalization. With respect to Flower Mart, as Angela discussed, we are now assuming that expense capitalization will cease late in the fourth quarter. At that point, a little less than $1 million of quarterly operating expenses and real estate taxes along with $7 million of quarterly capitalized interest will begin impacting earnings. This change increased guidance by approximately $15 million to $16 million, or $0.14 per share, and it was reflected in the capitalized interest in development guidance provided last night. Cash same property NOI growth is now expected to range from 25 to 125 basis points, representing a 150 basis point increase at the midpoint from our prior range. This increase is driven by two factors. First, in April, we received a $5.9 million settlement related to the 23andMe bankruptcy, which fully resolves our economic interest in that process and contributes approximately 90 basis points to NOI growth. Second, strengthening fundamentals in our core operations, driven primarily by improving net expenses and increased average occupancy, contribute an additional 60 basis points to growth. We also raised the top end of our operating asset dispositions guidance range to reflect our progress to date. We moved decisively, closing dispositions earlier than anticipated and recycling capital into compelling investment opportunities, including $73 million of opportunistic share repurchases and prudent debt repayment. Looking ahead, and as Angela and Eliott noted, we will continue to take a balanced, disciplined approach to capital allocation, seeking opportunities to create value for shareholders while prioritizing balance sheet strength and financial flexibility. With that, we are happy to answer your questions. Operator: Thank you. We will now open the call for questions. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. And if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Manas Ebek from Evercore ISI. Your line is open. Please go ahead. Manas Ebek: Perfect. Thank you. And just wanted to say thanks, in the beginning, for the additional disclosures in the supplemental. It has been very helpful. My question was for Los Angeles and San Diego to see if you could maybe elaborate a little bit further on the leasing demand that you see there and how far along we are here on the recovery. Obviously, we understand, and it is great to see how positive San Francisco has responded recently. Robert Paratte: Hi, Manas. I will continue on the theme that Angela mentioned. Across the entire company portfolio, we are seeing an increase in activity, including tours, proposals, and done deals, and Los Angeles is no exception. In Q1, we signed 24 deals in LA, and we are seeing quite a bit of activity at our Long Beach project and Maple Plaza, and we are starting to see a pickup in activity at Westside Media Center on the West Side of LA and one of our other assets here. Our pipeline continues to grow in the LA market. Following on the 24 deals I mentioned, we have more deals that are in the pipeline and leases actually, but we are not going to quantify all that until they are done. It is improving, and again, I would say this across our entire portfolio: we are seeing a continued flight to quality. It is a world of haves and have-nots, so the recovery is not the same for all owners or all properties, and we are benefiting from having these high-quality assets in LA, San Diego, etc. At Nautilus, which I will really focus on because that is our newest acquisition, we had 400 thousand square feet of tours since January 1. We have several tenants that are looking to grow in the project, and we continue to entertain tours and the other normal activity that goes with leasing, and we could not be happier with that. The amenities are really showing well now. Now that it is spring, everything looks great at the site, so very happy with that. At Kilroy Center Del Mar, we are seeing an exceptional amount of activity. Our spec suite program there is really paying off as it is in other markets like Austin, and we are going to continue on that front, being very strategic in bringing spec suites to market but providing what the market wants. Operator: Thank you for your question. Your next question comes from the line of Anthony Paolone from JPMorgan. Anthony, your line is now open. Anthony Paolone: Great. Thank you. My first question is on 1900 Broadway and wondering if you could talk about the expected yield you expect to make on that and where rents need to be for the unleased space to achieve it? Eliott Trencher: Tony, in my prepared remarks, I mentioned that we are expecting stabilized yields in the low to mid-9% range. We have leased 60% of the building and have a good rent comp for where market rents are, so if we replicate that, we will be in really good shape. Angela Aman: I would also emphasize, as we have discussed about 1900 Broadway, it is really just a few blocks away from our Crossing 900 asset, where we have leased 80 thousand square feet over the last couple of years at rents that are up on average 60%. We have a lot of data points in the market in addition to the Cooley lease that point us to where rents should be in this market. As Eliott mentioned in his prepared remarks, 1900 Broadway is adjacent to restaurant row in this submarket, so it is highly walkable, highly amenitized, and really should command premium rents as we saw in the transaction that has already been executed. We are excited about having additional supply to lease in what has been and continues to be one of the strongest submarkets in the entire Kilroy Realty Corporation portfolio. Anthony Paolone: Okay. Thanks for that. And then just maybe I missed this, did you give a cap rate on the two resi sales? Eliott Trencher: We gave cap rates for all the sales that we have done to date, which were in the mid-single digits. The resi sales were around the 4% range. Operator: Thank you for your question. Your next question comes from the line of John Kim from BMO Capital Markets. John, your line is now open. John Kim: Thank you, and thanks for the new disclosure. On the signed leases not commenced, I was wondering what was driving most of the leases, 86% to net leases. I know that KOP2 is a big part of that, but assuming 1900 Broadway is as well, it would suggest the yield on that could be closer to 13% versus 9%. I am wondering if I have my math right and if there is any conservatism in that number. Angela Aman: There is not much to point to in terms of why the population of signed but not commenced is skewed so much to net leases. It really is just a mix issue and the properties and markets that make up the signed but not occupied pool at this point in time. On the yield, I would just reiterate what Eliott mentioned in his prepared remarks and in response to the last question: stabilized yield on this project, we think, is in the low to mid-9% range. We think it is very compelling. There is going to be good growth at this project over time as well, again in one of the strongest submarkets in the Kilroy Realty Corporation portfolio, so we feel like the development upside here is worth what is a relatively small amount of leasing still to complete at this project. John Kim: Okay. And at Flower Mart, I know you talked about extending the capitalized interest. What is the possibility that you keep development going forward? I know that you are committed to One Paseo, and this looks like this could be another mixed-use development with a big multifamily component. Just wanted your latest thoughts on the Flower Mart as far as keeping it as a development project. Angela Aman: We are watching the San Francisco market really closely as well as how things evolve in addition to where we are able to take the process we are going through right now in terms of design and entitlement flexibility and optionality. There is still a lot for us to sort out as we move through this process, and we have time as this process continues to unfold to watch what happens with both commercial and residential rents within the City of San Francisco. We are committed to making sure that whatever we do in terms of next steps in 2027 and beyond at the Flower Mart project maximizes value for shareholders. Prior to the pandemic, the company had a very strong plan to develop this on the commercial side. We are exploring a broader mix of uses that would allow us, as you mentioned, to add more residential into the project. We need to see how the market continues to evolve and what the project ultimately looks like to decide what the optimal execution path is. Maintaining a lot of flexibility and prioritizing optionality is a way to create additional economic value at the Flower Mart. Operator: Thank you for your question. Your next question comes from the line of Seth Bergey from Citi. Your line is now open. Seth Bergey: As you think about the revised disposition guidance, what would get you to the higher end? Are you just evaluating the depth of the buyer pool and any changes you have seen in terms of demand for assets? And then are there any submarkets you would look to exit within that revised disposition range? Eliott Trencher: The revised disposition range at the low end implies that we stop with what we have done to date, and then we have about $150 million at the high end of the range beyond what we have done. That clearly has some room to execute, and our approach is going to be consistent with what we have talked about in the past, which is if we can find compelling opportunities, then we are going to pursue them, and we wanted to reflect that with an adjustment to the disposition range. There is not a particular market or submarket that we are focused on exiting. We are really just looking for the way to maximize proceeds on good execution on assets that we think are going to be mispriced given our forward-looking view. Angela Aman: I would add to echo some of what Eliott mentioned in his prepared remarks: in addition to healthy demand that we have seen over the last couple of years, particularly from owner-users looking to acquire assets, we have really seen a resurgence in institutional demand and interest across our West Coast markets. Where there are opportunities, as Eliott just mentioned, to take advantage of that renewed demand for West Coast commercial assets, we want to make sure we allow ourselves enough room within the guidance range to be able to capitalize on that. Seth Bergey: And then I think in the prepared remarks, you mentioned AI and technology as a demand driver for some of the LA submarkets. Do you think LA will have a spillover effect from San Francisco and be a large component of recovering that market? Or how do you quantify the impact that AI can have on a market like Los Angeles? Angela Aman: We are not suggesting it is going to be a huge driver of demand in the LA market. We have certainly seen a lot more San Francisco-native or AI-native companies leasing space particularly in the Pacific Northwest, where there is a much larger resident talent pool in the tech sector. We have certainly seen the spillover benefits in that market. We are seeing some of it in the LA market. It is pretty concentrated in a few specific submarkets—Culver City in particular. It is interesting to note that we are seeing some of those tenants pop up. It is great from a marginal demand standpoint, but we are seeing much broader demand, even in markets such as Culver City, across different industry categories as well. Operator: Thank you for your question. Your next question comes from the line of Andrew Berger from Bank of America. Andrew, your line is now open. Andrew Berger: Sounds like the first quarter was a very strong quarter for leasing. Could you talk a bit about where the pipeline is today and if there is any way to quantify how big it is going forward? I think last quarter you said it was up about 65% year over year. Robert Paratte: Andrew, the change in San Francisco is so dramatic over the last 12 to 18 months that it is actually hard to pinpoint the pipeline because it continues to grow. To add some color to what Angela was talking about with the three consecutive quarters of positive absorption, there were 13 deals done in Q1 over 100 thousand square feet, and that is a very big number for the city. Another really important note is that 5 million square feet of availability has been absorbed since its peak in mid-2025, and that is very meaningful because that availability rate was really the headline that had everyone concerned. A third point that is really important is that these deals—both the 100 thousand square feet plus and other parts of that 3 million square feet—are expansionary, and that is also a very positive indicator. You look at our deal with Harvey, for example, where they took an additional 60 thousand square feet. The pipeline for us keeps growing. Our team has done a terrific job at 201 Third, as Angela pointed out. We are focused on 360 Third and 303 Second. We are talking to folks about 345 Brannan. So SoMa was the strongest submarket of the San Francisco market, and Kilroy Realty Corporation is a direct beneficiary of that because that is where all of our assets are. We are poised and ready to start executing, and things are looking really good; the momentum, not only for us but others in the market, is quite strong. Andrew Berger: And it sounds like speed to occupancy is becoming more important. Can you talk a little bit more about this? How much of the comments around speed to occupancy are related to AI-type tenants versus tenants more broadly? And you mentioned spec suites—can you talk a little bit more about which markets you are leaning into spec suites more and what type of results that is creating for your leasing teams? Robert Paratte: I will use the Olema example. They are in two different spaces in San Francisco. One was a space that was not current or modern enough for their needs. The other is a space where they got pushed out by an AI company, and so that created an immediate need for space, and we were ready to execute on that because they are taking a portion of our spec labs and to-be-built space. That is a very good example of what is happening. You either have rapidly growing AI companies that organically need space, or others are getting displaced by larger AI companies. One point I would raise about San Francisco is that the FIRE category was quite active in Q1—venture capital, banking, and finance. San Francisco is really hitting on all cylinders from both the traditional as well as technology front. In terms of our spec suites strategy, it is case by case and market by market. If we have a spec suite or two in a building and they have not leased, we are not going to build more until we have activity on that, and we have been really judicious about how we apply it. The markets where we have seen a lot of traction with spec suites are clearly San Francisco, Seattle, Austin, San Diego, and parts of LA. Angela Aman: It has been an interesting dynamic. At 201 Third, we built out five spec suites on one floor with some shared common space and a conference center, and having all five leased before we had completed construction was really telling in terms of where demand is, particularly in the submarket with earlier-stage companies and the degree to which they are prioritizing speed to occupancy. In markets like Austin, as Rob mentioned, we have seen a similar dynamic over a longer period of time, where every time we begin building out the spec suites, we have a different level of interest than we had from pure shell conditions. We have tried to be thoughtful and disciplined about how we are building out spec suites, both to make sure we do not get over our skis on specific sizes as market demand may shift and to make sure that we have inventory at these projects at all times. As they get leased up or as we see incremental interest, we are prepared and willing to lean in and replicate success from earlier phases of the spec suite program. Across most of our markets, it has been highly effective and has driven both a higher lease rate and faster occupancy commencements over the last couple of years. Operator: Thank you for your question. Your next question comes from the line of Nicholas Yulico from Scotiabank. Nicholas, your line is now open. Nicholas Yulico: Thanks. I had a couple questions on specific buildings. In terms of West 8th, I know you have had a lot of leasing traction there. Can you talk a little bit more about the dynamic of taking market share in Seattle versus pulling tenants that are maybe looking at Seattle and Bellevue? And then secondly, on 360 Third, San Francisco, I think you have an expiration there, a little over 100 thousand square feet this year. If you could talk about the traction on that and remind us when that expiration is. Robert Paratte: On West 8th, two factors are in play in terms of the absorption we have done. Both SoFi and General Motors are new to market. What really played into that is the renovation that we did at West 8th and the traction that we have built with Databricks and other tenants in the market. This part of town, Denny Regrade, right on the edge of the traditional CBD, is where people want to be. It is where the talent is either living or very close by, and it has the type of amenities tenants want. That is causing that absorption and what we are able to capitalize on. In Bellevue, we expect to see, but we have not yet seen, a direct correlation between higher rates in Bellevue and more absorption in Seattle. Most tenants are pretty focused on being in one or the other, but over time we may see some tenants flow from Bellevue to Seattle. At 360 Third, we do have that expiration coming up. We have been marketing the space. We have had conversations with larger tenants over 100 thousand square feet and others around 50 thousand square feet. We are focused on the asset. The proximity of 360 Third between the Bay Bridge and BART and Muni is really strategic for a lot of companies—that is why it did well in the past, and we expect the same going forward. Jeffrey Kuehling: Nick, just to clarify, the 360 Third expiration is a little over 100 thousand square feet in Q2. Nicholas Yulico: Okay, thanks. And that is a known vacate? Jeffrey Kuehling: Yes. Nicholas Yulico: Okay. Thank you. And then just a question on DIRECTV. Any latest thoughts there on a renewal possibility? If it is not a renewal, I think you were contemplating some other uses for the asset or a potential sale. Any thoughts there? Robert Paratte: I do not want to give too much color, but DIRECTV is a possibility. We have some other activity. The project is really well amenitized with terrific outdoor spaces and landscaping, and we have been pushing the marketing of that. We do have some conversations going on. Angela Aman: Remember, it is only a little less than 50 thousand square feet in the 2026 expiration pool. A larger portion of that lease does not expire until 2027, so we have time to work through that. Operator: Thank you for your question. Your next question comes from the line of Blaine Heck from Wells Fargo. Blaine, your line is now open. Blaine Heck: Thanks. I was hoping you could talk more specifically about the forward leasing pipeline at KOP2. How much of the demand is for spec suites versus larger spaces? Anything you could tell us about tenant profiles, and whether the mid-5% yield forecast is still intact? Robert Paratte: The pipeline is similar to what we executed on in Q4 and Q1—basically life science focused, primarily and almost exclusively. The tenant ranges in size down in South San Francisco right now: the bulk are probably 10 thousand to 50 thousand square feet—that is probably 50% of the demand in the market—and there are quite a few. There are over four requirements over 100 thousand square feet in the market, and there are some significantly above 100 thousand square feet. As Angela alluded to, we are working on filling the rest of Building F, which is our multi-tenant building, and we are in conversations on the vacant building, which is the most prominent of the three buildings on the campus and really has terrific signage opportunities and prominence for tenants that want that. Angela Aman: We confirm the yield expectations we shared last quarter in the mid-5% range. Those are still fully intact. Blaine Heck: Great. Thank you both. Then switching gears to capital allocation, can you give us an update on your thoughts on share repurchases going forward, just given where the stock is trading? How do you think about their attractiveness relative to acquisitions or development? Angela Aman: What we have demonstrated over the last couple quarters is a desire to make sure that as we think about capital allocation, we are prioritizing balance sheet strength and flexibility and employing a balanced approach. You have seen us be active on acquisitions going back several quarters. You saw us this quarter pair operating property disposition proceeds realized during the quarter with debt repayment for a balanced approach and execute share repurchases, just like we told you we would, in a leverage-neutral or deleveraging way. We continue to see good value in the stock. We also appreciate the significant capital markets volatility, especially in our sector, and we want to keep enough financial flexibility to step in when we see periods of significant dislocation. As discussed earlier, we increased operating property disposition guidance. The land sale proceeds we have already announced are earmarked for 1900 Broadway and that is effectively fully funded from an equity standpoint. Additional operating property disposition proceeds will be available for balanced redeployment based on how we see the full set of alternatives at that point in time. Operator: Thank you for your question. Your next question comes from the line of Brendan Lynch from Barclays. Your line is now open. Brendan Lynch: Thank you for taking my questions. You have managed our expectations on churn this year. Maybe you could give us your current expectations on the retention rate for the remaining 740 thousand square feet that are set to expire. Angela Aman: Going back a couple of quarters, when that pool was larger—probably around 1 million square feet—we expected the vast majority of those lease expirations would be move-outs. If you go back two years and look at what was in totality in the 2026 pool, which was about 2 million square feet, we did successfully renew a number of those spaces early during 2025. The blended retention rate on that initial almost 2 million square foot pool of 2026 expirations was about 40%, maybe a bit better than 40%, relatively in line with historical pre-pandemic averages. That said, when we look at the lease expiration schedule right now for 2026, there are a few opportunities to work through some renewals, but they are reasonably limited. From a reported retention standpoint, you will also begin to see us renewing early some of the 2027 expiration pool, so it is harder to tell you exactly in any given quarter what the reported retention rate will look like. For modeling, the bulk of the 2026 remaining expirations will be move-outs. Brendan Lynch: Thank you. And are you still anticipating that occupancy troughs in the second quarter? Angela Aman: Yes. Given the pace of move-outs—you can see that on the lease expiration page—Q2 is by far our biggest move-out quarter during 2026. That is our current expectation. Operator: Thank you for your question. Your next question comes from the line of Upal Rana from KeyBanc Capital Markets. Your line is now open. Upal Rana: Thank you. On dispositions, do you anticipate elevated dispositions or being a net seller to continue into 2027? Or will 2026 be the bulk or the tail end of it? Eliott Trencher: It is a little too early to talk about 2027. The way we have approached dispositions to date is to be flexible and dynamic, look at what the market is telling us, take those signals, and do what we think is in the best interest of shareholders. We gave guidance on what we thought dispositions would be to date in 2026. We executed beyond that and we are adjusting, and we will continue to take that approach. To the extent that we still see appealing opportunities, we will continue to sell, and if not, we will not. Angela Aman: That is the right way to frame it. This has been an opportunistic exercise. I would not frame it as how much we have to sell. Especially when you think about what we did during the quarter and what we announced last night in terms of the residential sales—those were have-to-sell transactions only in the sense that there was a real opportunity to raise very attractively priced capital on behalf of our shareholders, and we took advantage of that. We will continue to be opportunistic as we evaluate the disposition pool, prioritizing balance sheet strength and flexibility and making the company’s cash flow stream more durable and faster growing over the medium to longer term. Upal Rana: Great, that was helpful. And then, Angela, you mentioned Maple Plaza seeing strong, broad-based demand. Could you provide more detail there and any update you could provide on Beverly Hills broadly? Angela Aman: We have seen great traction there overall. The lease-up and our retention experience with respect to some tenants we had originally underwritten to vacate has been much better than we expected. Demand is from a broader mix—media and entertainment, financial services, professional services—not overly tied to any one sector. We are encouraged about the momentum we are seeing there and the long-term potential for Beverly Hills overall. Eliott Trencher: On the capital side, all that we have seen in the market since we acquired has reaffirmed that capital really wants to be in Beverly Hills. We have seen a wide array of capital focused on Beverly Hills, and we feel really good about when we bought the building. Robert Paratte: We are really happy with the leasing momentum we have. We are leading the market right now at Maple Plaza. There is a lot of media, private wealth, and financial services demand, as Angela pointed out. In cases like Maple and at 201 Third, you start building momentum in leasing and that attracts other activity. We have worked hard since taking the project over to improve the lobbies and landscaping, and it is showing well. We are really happy with the rental rates; based on underwriting, we are exceeding underwriting in all cases. Operator: Thank you for your question. Your next question comes from the line of Tom Catherwood from BTIG. Your line is now open. Tom Catherwood: Thank you. Maybe, Rob, starting with you: from a lease strategy perspective, over the last year or so, you have put some tenants into shorter-term leases with the hope that some could grow into more space or convert into longer-term leases. For some of the demand that you are talking about today, are some of those shorter-term leases actually converting longer term? Robert Paratte: Some are, but a lot of it is also a trend in the market as tenants are willing to commit with conviction—meaning longer-term leases. In the case of Olema, it is a longer-term lease, and in some other cases, it is a short-term deal that we have extended. We are hitting it on both fronts. Angela Aman: Specifically in the San Francisco CBD, where we have talked about this trend being most pronounced, the execution with Harvey this quarter underscores why we thought it made sense to do that original deal last year. It was a shorter-term deal with very little capital spend, reusing existing improvements left over by the prior tenant—very positive NER but shorter term. The reason they wanted flexibility was not that they wanted out at the end of the term; they did not know their full space requirements and wanted flexibility to meet growth objectives. Where we have worked with tenants and gone a little shorter term, it has been with a view to accommodating their future growth. The Harvey example—leasing 93 thousand square feet last year and another 62 thousand square feet this quarter—speaks to why that strategy in certain submarkets and for certain tenants has been highly effective. Tom Catherwood: Perfect, that was exactly what I was looking for. And then, Angela, as you work through a revised program for the Flower Mart, is there a potential outcome where capitalization carries beyond December, or is that more of a hard stop? Angela Aman: At this moment in time, we feel that is a pretty hard stop, with a view to finishing the revised design and entitlement process with the city—getting to the point where we have more flexibility around the mix of uses and greater ability to phase the project. Once we complete that, we are waiting for demand to be sufficient in the market at rents that will justify new construction. Right now, we think there is a gap that would necessitate us stopping capitalization probably late in the fourth quarter of this year. We are watching the San Francisco market closely. There are very few large contiguous blocks of high-quality space remaining available. It is a low probability, but not a 0% probability, that there is something demand-driven and actionable as we get into 2027. Right now, I would say it is a low probability, but not 0%. Operator: Thank you for your question. Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is now open. Caitlin Burrows: Maybe just a follow-up on Flower Mart. If you were to stop capitalizing in 2026, put a pause on the project, and then resume whether it is six months or multiple years later, would full capitalization come back, or would you then start capitalizing on the incremental spend? Jeffrey Kuehling: In the event that we do have a great outcome where we can start capitalizing in the near future, it would be on the full accrued balance. It would not be just the marginal spend. It would be the same rate that you are seeing today. Caitlin Burrows: Got it. And then maybe back to the leasing pipeline today versus a quarter ago. Do you think the leasing pace of over 550 thousand square feet is sustainable, or what is required to meet the low versus high end of the occupancy guidance this year? Robert Paratte: I would love to be in the prediction business, but I can just tell you that the demand we are seeing is real, and all of our teams are busy. I could not be happier with our whole leasing team and the people that support them in getting these things executed. We are really busy, and more to come. Operator: Thank you for your question. Your next question comes from the line of Dylan Burzinski from Green Street. Your line is now open. Dylan Burzinski: Hey, thanks. Not to ask you another question geared toward predicting anything, but going to do so anyway. Things continue to be firing on all cylinders in San Francisco. Do you have any sense for how far behind LA and then the Seattle CBD is relative to what you are seeing in San Francisco and the broader Bay Area? Angela Aman: In the Pacific Northwest, Bellevue has been very strong for the last couple of years. Availability has continued to compress and rents have performed very well. That market feels very tight right now. Over the last couple of quarters, our assets in Seattle—not in the downtown core but in Denny Regrade/South Lake Union—have definitely seen increased momentum. With roughly 150 thousand square feet signed over the last couple of quarters, we feel like there is a lot more momentum in Seattle, from very high-quality tenants and a broader mix of uses. LA feels like it is gradually improving, and I would candidly admit that improvement is gradual. The improvement in our pipeline and executed productivity has been due to both that gradual market improvement and the significant portfolio reallocation work we have done within LA over the last couple of years. Our portfolio is better positioned to capture what has been a slowly improving market in LA. There are pockets performing better—Arrow in Long Beach benefiting from a resurgence in defense and aerospace up through the South Bay, including El Segundo. LA will be a broader aggregation of industries moving in the right direction, and we are cautiously optimistic, but it will be a step behind. Dylan Burzinski: That is incredibly helpful detail, Angela. I appreciate it. One more: as you look at lease expirations next year, I think they are largely Q1-weighted if we exclude the DIRECTV lease expiration in 2027, which sounds like it is in flux. As you reach out and get a sense for renewal possibility for next year, are tenants more receptive than they were coming into 2026 and 2025? Angela Aman: We have a couple of things going for us in 2027. It is a considerably smaller expiration year than 2026 was a year ago. The largest expiration next year is AT&T/DIRECTV, which is a fourth quarter expiration. Outside of that, the pool is very granular—nothing above 100 thousand square feet and only one lease between 50 thousand and 100 thousand square feet. We are beginning some of those conversations. We have expirations happening in some pretty strong markets where we are already having conversations either about renewal or significant interest from potential backfill tenants. We need to keep our heads down and execute as it relates to the 2027 pool. The overall size and granularity of that pool outside of AT&T/DIRECTV is encouraging. Operator: Thank you for your question. Your next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is now open. Michael Carroll: Thanks. I wanted to circle back on Rob’s comments regarding the leasing pipeline. Has that pipeline continued to build and grow? Is it bigger today than it was at the beginning of 2025? Robert Paratte: Absolutely. It continued to grow throughout 2025, and the pipeline is increasing now. There is a pending transaction that is relatively significant that is going to happen in SoMa probably in Q2—not with us—but it is another indication that the market is thriving and SoMa is on a tear right now. The real upswing started mid-2025 and picked up steam for the rest of the year and into Q1. Michael Carroll: And is the volatility that you are highlighting mainly driven by the San Francisco market? Are tenants getting taken out of the pipeline because they are leasing space, or are tenants delaying decisions or finding it hard to quantify their space needs? Robert Paratte: On the positive end, it is hard to pinpoint because literally every week there is new demand coming from tenants. Angela Aman: And significant demand—larger format tenants. The size of the pipeline is up materially year over year, and we have also seen an increase in average size requirements, with more tenants between 50 thousand and 100 thousand square feet. You have seen that in the execution stats as well. The pipeline being marginally up over the last quarter or two while we have had substantial executions is a really good sign. Robert Paratte: The last thing I would say, Michael, is that rolling twelve-month leasing totals have returned to historical averages in San Francisco—about 9 million square feet. That gives you more color on the pipeline. Operator: Thank you for your question. Your next question comes from the line of Peter Abramowitz from Deutsche Bank. Your line is now open. Peter Abramowitz: Thank you. Most of my questions have been asked, but one on software tenants in the portfolio and potential tenants. Could you give some color on the tone of conversations with software tenants these days, particularly in the Bay Area? It seems so far this year that the equity markets are pricing these companies as if there is an existential threat to their business. What is the tone of conversations with them, and have there been any meaningful additions to the sublease market from that portion of the portfolio? Angela Aman: Going back several years to the height of the pandemic, software was a category where we saw some of the largest blocks of sublease space. Thankfully, many of those blocks have been spoken for. While it might look one way on the lease expiration schedule, we have a much more granular tenancy within some of that space and tenants that we believe—especially in San Francisco—have a high likelihood of renewing or going direct with us down the road. A lot of that headline impact has already been felt in the portfolio and was felt several years ago. That space was successfully re-leased in many circumstances. I am not aware of any conversation we have had in the last six months where the tone from those tenants has changed in any material way. Robert Paratte: I agree. We have software companies we are talking to that need more space. The news is national, but on the ground we are not seeing pullbacks—rather increased demand. Operator: Thank you for your questions. There are no further questions at this time, and this concludes today’s call. Thank you for attending. You may now disconnect.
Operator: Thank you, everyone, for joining the Ecolab Inc.'s First Quarter 2026 Earnings Release Call. At this time, all participants will be in listen-only mode. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Andy Hedberg, you may now begin. Andy Hedberg: Thank you. Hello, everyone, and welcome to Ecolab Inc.'s first quarter conference call. With me today are Christophe Beck, Ecolab Inc.'s Chairman and CEO, and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter results, are available on Ecolab Inc.'s website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the risk factors section in our most recent Form 10-Ks and our posted materials. Also, refer you to the supplemental diluted earnings per share information in the release. With that, I would like to turn the call over to Christophe Beck for his comments. Christophe Beck: Thank you so much, Andy, and welcome to everyone joining us today. We had a great quarter with accelerating momentum across our portfolio. And I know oil prices, energy, and supply are top of mind for most; it is not for me. In 2022, commodity costs were up 50% and our margins post-cycle went further up. Today, commodity costs are up 9%, and we have all the tools to address this within one quarter, done the right way for our customers. As I sit here today, I feel very good about the year, how we are managing a complex environment, and I feel even better about where we are going next. What matters most for me today is to keep the organization focused on growth, to supply our customers seamlessly anywhere around the world, and to support our teams, especially those operating in the Middle East. In a complex environment, our teams are staying very close to customers and supporting their operations without any single disruption, because what we do is almost always mission critical to them. And when something is mission critical to our customers, it becomes mission critical to us too. That means supplying reliably, solving problems quickly, and delivering the outcomes they count on. And it is working. We would never ever let the customer down. That commitment is what drives the consistency and the strength you see in our results. Now, turning to the first quarter, we delivered once again a very strong quarter with adjusted diluted EPS growth of 13%, right in the middle of our range. Momentum strengthened across the business as organic sales grew 4%, driven by continued strong value pricing of 3% and volume growth that accelerated to 1%. We expanded operating income margin, reflecting the disciplined execution across our global portfolio and the strength of our One Ecolab approach, which brings together service, expertise, and breakthrough technology at scale. Momentum continued to strengthen across the portfolio, led by our growth engines, which, by the way, have close to no exposure to energy costs. Global High Tech and Digital grew more than 20%, driven by strong demand tied to digital adoption and the ongoing AI wave. Life Sciences accelerated to 11% growth, led by bioprocessing, where sales more than doubled. We have been investing in talent, capabilities, capacity, and breakthrough innovation in this high-growth, high-margin business for quite some time. And today, these efforts are clearly paying off—and we are just getting started. We expect Life Sciences’ growth to continue its double-digit momentum and operating income margin to expand toward our 30% target over the next few years. And finally, Pest Elimination delivered a strong quarter with 7% growth, reflecting strong share gains from our One Ecolab growth initiative and, naturally, our new Pest Intelligence offering. Our core portfolio also performed very well. Institutional strengthened, with solid growth across restaurant and lodging customers, more than offsetting somewhat softer market trends. Specialty gained share with 9% growth, driven by innovation that helps customers optimize costs. Food & Beverage outperformed its end market again, growing 5%, supported by strong execution of our One Ecolab approach, and Light Water delivered steady growth too. We also made progress in smaller parts of the portfolio that have been a bit under pressure. Collectively, the performance in Paper and Heavy Water stabilized as we supported them with new business and innovation. Overall, our growth engines are accelerating, our core performance is strong, and businesses that had been under pressure are turning the corner. Together, this continues to shift our portfolio towards higher-margin, higher-growth end markets well aligned with our long-term strategy. We also delivered solid operating income margin expansion this quarter. Underlying gross margin was steady, as strong value pricing offset commodity cost inflation. Reported gross margin was slightly lower due to a short-term impact from recent M&A and higher commodity cost inflation. However, the M&A impact was favorable to our SG&A ratio and, as a result, largely neutral to our operating income margin. Underlying SG&A productivity improved meaningfully as we continue to scale our unique digital and AI-native capabilities, resulting in strong SG&A leverage year over year. As a result, organic operating income margins expanded by 70 basis points to 16.8%. We expect operating income margin expansion to improve in the second half of the year as pricing accelerates, and we remain very confident in delivering on our 20% operating income margin target by 2027. Looking ahead, the operating environment remains dynamic. But we are ready. We remain focused on growth opportunities while we keep managing a complex global environment. The conflict in the Middle East is one example. It has driven sharply higher global energy costs, creating additional pressure across the supply chain. And in moments like this, customers turn to us as their partner of choice to ensure secure supply, exceptional service, and solutions that help reduce operating costs. We take decisive actions to absorb cost pressures wherever we can. However, the magnitude of energy cost increases requires additional action to ensure reliable supply, which is why we quickly implemented an energy surcharge. This is an approach we have used successfully before, focused on delivering incremental total value for customers that exceeds the total price increase. We know it works for our customers, and we know it works for us. As a result, the second quarter will be a short transition period. Commodity costs are expected to increase high single digits starting in the second quarter, and we expect those costs to remain high through the end of the year. Surcharge benefits will build through the quarter following implementation on April 1. With this, higher commodity costs will impact second quarter EPS growth by a few percentage points. However, underlying performance remains on track and within the targeted 12% to 15% range. Importantly, we expect to already fully offset the dollar impact from higher commodity costs as we exit the second quarter, as pricing continues to accelerate and volumes continue to grow. We expect organic sales to increase 6% to 7% in the second half of the year, helping to stabilize our gross margin during that period. And that is net of OVIVO. Ex-OVIVO, gross margins would be up 70 to 80 basis points in the second half. In other words, we will be fully offsetting the significant rise in commodity costs and its impact on earnings and margins in just a few quarters. As a result, we expect EPS growth to strengthen in Q3 and Q4, resulting in unchanged full-year expectations. We therefore continue to anticipate adjusted diluted EPS growth of 12% to 15% this year, excluding short-term impact from the pending CoolIT acquisition. As discussed earlier, CoolIT financing and non-cash amortization are expected to have a short-term impact on adjusted EPS in the second half of the year. Following the close, the impact is expected to reduce quarterly EPS by approximately $0.20. Importantly, underlying EPS growth remains unchanged. Beyond the short-term impact this year, we expect EPS growth including CoolIT to accelerate back into the 12% to 15% range, as contributions from this high-growth, high-margin acquisition accelerate and amortization from the Nalco acquisition rolls off. What is even better, the impact of our growth engines on Ecolab Inc.'s global performance is accelerating as we scale them. This is especially true for Global High Tech, where AI is driving significant new demand for circular water management and high-performance cooling. By bringing CoolIT and OVIVO together with our Global High Tech water business, we are building a $1.5 billion powerhouse that will help fuel Ecolab Inc.'s next phase of growth and margin expansion. As AI accelerates the buildout of global digital infrastructure, customers are prioritizing uptime, cooling performance, and reliable water management while driving massive increases in compute power with lower energy use and near net-zero water footprint. Our circular water solutions deliver exactly that—from ultra-pure water to produce the most advanced chips, to 3D Trasar connected water to support power generation, and now direct-to-chip cooling to cool the chips. OVIVO expands our ultra-pure water and end-to-end microelectronics offering in a business expected to grow at a mid-teens rate this year, supported by a strong pipeline tied to fab expansions and increasing water circularity needs. Our pending acquisition of CoolIT builds on this momentum, adding a scaled direct-to-chip liquid cooling platform and positioning Global High Tech with an integrated, service-led cooling solution for high-density AI data centers. And here is more good news: CoolIT has shared with us that they are off to a very strong start in 2026, with first quarter sales growing well ahead of the 30%+ we discussed on the acquisition call. Demand for leading liquid cooling technologies continues to rapidly accelerate. Together, these two businesses have the potential to add a couple of points of high-margin organic sales growth to Ecolab Inc.'s total growth as they scale and capture more of this huge and fast-growing high-tech market. In closing, we delivered a strong quarter with accelerating top-line momentum, continued margin expansion, and double-digit EPS growth in a complex environment. Our near-term outlook is strong and consistent. Growth momentum continues to build. Our portfolio is shifting towards higher-margin, higher-growth markets and is much less exposed to energy cost. Our team is executing at a very high level. We are well positioned to deliver another year of strong performance in 2026. We remain confident in the long-term trajectory we built in. Thank you for your continued trust and your investments in Ecolab Inc. I will now turn it back to Andy for Q&A. This concludes our formal remarks. Operator, would you please begin the question-and-answer period? Operator: Thank you. We will now open the call for questions. We ask that you please limit yourself to one question so that others will have a chance to participate. If you have additional questions, you may rejoin the Q&A queue. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. If participants are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question. Analyst: This is Sam Kotswurman on for Tim. Thanks for taking our question here. In your outlook, I think you shared you expected gross margins to stabilize in the second half, which is quicker than I think investors may have been expecting. I imagine that is because of the decision to implement your surcharge pricing pretty quickly when this conflict started. But can you help us understand how this fits into your goal of reaching a 20% operating income margin in 2027, including the impact that the CoolIT system acquisition will have? Christophe Beck: Thank you, Sam. As mentioned before, I know most of you have these energy costs and oil prices top of mind. For me, that is not the case because we have been here before, and we have learned to master this very well. As a reminder, commodity costs in 2022 were up 50%, and as you remember, margins went further up post-cycle. Here, we are talking 9% up as we see it in Q2, and we are expecting such to stay high till the end of the year at least. I am expecting that six to twelve months. We are expecting in Q2 to get the dollars back as we exit Q2, and then, as you said, to get gross margin to stabilize in the second half including OVIVO. If you exclude OVIVO, as mentioned, gross margin would be up 70 to 80 basis points, which is our traditional run rate, which is in line with our model. So operating income margin will be even better because SG&A is going to keep improving during that time. When I am looking at the math of pricing and DPC and commodity cost, basically, as you know, 30% of our DPC is roughly impacted by energy cost while growing 9%. That is the gross impact of inflation out there, while it is 2.5% that we need to compensate, and that is why your 5% to 6% pricing in the second half brings us to a place where margins are stabilized at the minimum, and that is obviously including OVIVO as well. Underlying, we improve even further. But as mentioned before, my priority is making sure that the organization stays focused on growth, which means perfecting our core businesses and building our new growth engines on High Tech, Life Science, Pest Intelligence, and Digital, which today or tomorrow with CoolIT would represent 20%+ of our company, which is really good news because these are high-growth businesses in very natural growth industries, high margins, and have low to no dependency on energy cost supply as well. If I put it all together, a second half that is going to be so-so to good in gross margin, SG&A that is going to be favorable, means a stronger operating income and EPS delivery. If I look at 2027, including CoolIT and including as well the roll-off of the Nalco acquisition amortization, my objective for 2027—very early to talk about a year from now—is that we have a really good chance to be within our 5% to 7% top-line growth and, for sure, to get to the 12% to 15% earnings-per-share growth in a pretty solid way. Operator: The next question is from the line of Manav Patnaik with Barclays. Please proceed with your question. Analyst: This is Ronen Kennedy on for Manav. Thank you for taking my question. Christophe, could you please help us understand the base macro scenario embedded in the guide? Does it assume a broadly stable demand environment with modest improvement, or does it contemplate an already cautious customer posture given the higher energy cost, geopolitical uncertainty, etc.? And given the backdrop and your comments regarding not necessarily having the higher energy costs and oil prices top of mind, is there a macro sensitivity, or is it just a function of your internal execution levers like pricing, productivity, and mix? Christophe Beck: It is 90% execution. We live on the same planet as everybody else, obviously, but that is why our assumptions are pretty conservative with this 9% commodity inflation in the quarter and expecting it is going to stay till the end of the year and probably into next year as well. From a demand perspective, we are expecting 1% volume growth in the second half. Q2 is always a little bit harder to define in detail as it is a transition quarter, but I look at the second half and feel good about the 1% growth. This is our assumption; this is not my plan. We want to accelerate both volume growth and pricing, so in that range of 5% to 6%, as I mentioned before, you end up with 6% to 7% top-line growth for the second half. That is the assumption for pricing and the assumption of 9% on commodity cost as well, and adding this 1% volume. There might be some pluses and minuses in terms of demand around the world, but for me, controlling what we can control, the fact that our growth engines are doing really well—collectively, they are growing 12% at high margins—our new business is at record levels as well. I feel really good about that. Our core business is in very strong and steady growth performance, and our underperformance areas have stabilized—Paper and Heavy Industries as well. Bring it all together, between our assumptions and controlling what we can control, by focusing on growth and managing performance at the same time, we end up in a place where the second half is a little bit better than we even thought a few months ago. I feel good about where we are going. Operator: The next question is from the line of Ashish Sabadra with RBC. Please proceed with your question. Ashish Sabdra: Thanks for taking my question. Very strong growth in High Tech, 20%+. You talked about CoolIT also growing really above that 30% growth in Q1. I was wondering if you could also talk about OVIVO—how that is tracking compared to your expectation? If you could talk about the cross-sell opportunities of OVIVO with core offerings in High Tech, and also as you are thinking about cross-selling once the CoolIT acquisition closes? Thanks. Christophe Beck: Thank you, Ashish. Global High Tech is going to become, most probably, our strongest growth engine in the near to long-term future. Together with Life Sciences, we have two amazing growth engines for the future of our company, really focused on industries that are growth industries, high-margin industries, and very little dependent on any energy impact at the same time. It is a combination of sweet spots that I really like. In High Tech, when you bring everything together—our legacy business, OVIVO, CoolIT—you get to a business of $1.5 billion that is growing 20% to 25% or more at high margin. We are exactly where we wanted to be strategically: we want to be the partner of the industry to help them produce better outcome chips or data compute with low to no water usage, which is a big issue for most of those industries socially as well around fabs or data centers. This is exactly what we are doing. With OVIVO, in microelectronics, we will move from 5% water recycling to north of 95%. It is absolutely game changing for fabs. Keep in mind, by 2030, 17 new fabs are going to be opened—that is roughly one a month—and OVIVO has the most advanced technology to recycle water at ultra-pure levels. Something that is really interesting with OVIVO is that the quality of the ultra-pure water has a direct impact on the yield of the chips manufactured, which is game changing for the microelectronics industry—great for chip performance and yields, and at the same time, reducing by 95% the net water usage. On the other hand, CoolIT—you're all familiar with the uproar around data centers and water impact— with our end-to-end technology that we are going to bring to the market, data centers are going to have the water footprint of a large car wash. Humans in the data center use more water than the data center itself—just to showcase a bit of the power of that technology. It is the first time in my career that I see on both fronts customers coming to us because they know there is not enough capacity to supply everyone, and we have the two best technologies for microelectronics and data centers. Customers want to jump the queue in order to gain share in their own industry. CoolIT, as mentioned, first quarter of the year well north of the 30% that we were planning—it is a very good problem to have. I think it is going to be a great story for all of us, and OVIVO will be in the mid-teens type of growth. It is a longer-cycle business—building fabs takes more time than building data centers—but the backlog at OVIVO is way higher than what we had thought because of all the reasons I mentioned. I think we bet exactly on the right things that will pay off short and long term. Operator: Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question. John McNulty: Maybe just shifting tack to One Ecolab. Sales growth, you called out noticeably above the core. Can you highlight how much better it was than the core? And do you have any ways to further accelerate the program now that you have been running on this program for a couple of years now? Christophe Beck: Yeah, John. It has been a bit less than two years, but it has been a very good story. The most obvious outcomes are, on one hand, Food & Beverage United, where we are bringing food safety, hygiene, and water together. You see the results—F&B has been very strong, 5% growth in a major multibillion business in an industry that is not growing. Consumer goods are not exactly growing fast at the moment. F&B United has been North America only so far; we are expanding around the world, and that will extend the impact on that very promising business. Second is our largest customers—our top 35 (top 20 and emerging 15)—those are growing quite a bit faster than the average of the company because of One Ecolab. And last but not least, technology—we are at the forefront of any industry in how we are using it. Our savings in performance have been remarkable while keeping our teams confident that we will focus most of our attention on growth while we drive performance at the same time. Early on the journey, but we see the pace picking up, which is exactly what we wanted in a complex global environment. Operator: Our next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question. David Begleiter: Christophe, on CoolIT, can you help us with the $0.20 of dilution in Q4? And what is your expectation or forecast for dilution in 2027 from CoolIT? Thank you. Christophe Beck: Thank you, David. Let me pass it to Scott, and by the way, it is $0.20 per quarter in the second half, as we described in the release and on the acquisition call, and it is going to neutralize in 2027. Scott? Scott Kirkland: Hey, David. As we talked about about a month ago when we had the CoolIT call and as Christophe said, the $0.20 per quarter this year—again, because the close date is not known exactly yet—so the per-quarter impact will depend on the close. Excluding CoolIT this year, we are going to deliver the 12% to 15% as Christophe talked about. Then there is the $0.20 reduction this year. As we think about 2027, the roll-off of the Nalco non-cash amortization really offsets the incremental non-cash amortization from CoolIT. That is why we feel very good next year about staying in that 12% to 15% range from an EPS growth perspective. Christophe Beck: Which adds to the top line, which is why we did those two investments, by the way. OVIVO and CoolIT are both going better than expected; they are adding a couple of points on the top line as well. It is an acceleration on the top line aiming at this 5% to 7% for the overall company and strengthening the 12% to 15% earnings-per-share growth as we enter next year. These are the objectives that I have and that we build towards. So far, things are going really well on both fronts. Operator: Our next question comes from the line of Seth Weber with BNP Paribas. Please proceed with your question. Seth Weber: Hi, guys. Good afternoon. Wanted to ask about the Life Sciences business, the strength in the organic growth. Is this the step change that we have been waiting for? I think, Christophe, you mentioned that double digits is in the near-term foreseeable future, but can you help us contextualize how this business is going to react once the new capacity comes online? And what type of operating leverage should we expect to see in the intermediate term in this business? I know you have the 30% number long term, but if you are growing double digits, how much leverage can we see on the margin side there? Thank you. Christophe Beck: Thank you, Seth. The short answer is yes—this is the performance that we were looking for and have been building towards. I am very pleased with what the team has done internally—getting capacity, quality, systems, platform R&D—everything together to get Life Sciences to the performance we planned. It was 11% in the first quarter. We are building a double-digit growth business all-in—this is where we are and where we will stay—and the idea is to grow even faster with operating income leverage getting close to 30%. I want to keep investing behind that business, so in the short to mid-term, we might be in the mid-20s as we keep building, like the plant that we are going to open in the second half of the year, which will unleash even more capacity. I have no doubt we will get to 30% because it is all impacted by investments. As a reminder, our bioprocessing business, which is the core of our business, grew north of 100% in the first quarter. This is very encouraging. It is not going to be every quarter the same, but the steady growth will be very strong. We need more capacity—a good problem to have. We are the fastest-growing business in the Life Sciences industry right now, and I think we will stay that way with a smaller, agile, innovative team. I am very happy with what the Life Sciences team has done. Operator: Our next question is from the line of Chris Parkinson with Wolfe Research. Please proceed with your question. Chris Parkinson: Chris here—obviously there is a lot going on in terms of raw materials over the next two quarters. But in terms of your 2027 CMD margin targets, it seems like you are well ahead in certain cases, and in line in others. Could you walk us through the intermediate to longer-term puts and takes of those targets and specifically how you are thinking about any newer dynamics across Institutional markets as well as the impending ramp of Life Sciences? Thank you. Christophe Beck: Thank you, Chris. I feel really good with where we are heading, but let me have Scott answer that question first, and I will build on it. Scott Kirkland: Thanks, Chris. As Christophe said, we are very confident in the margin expansion we are delivering and the path to 20%. Over the last few years, we have delivered north of 500 basis points of operating income margin expansion and feel very good about delivering 19% this year—that is 100 basis points year on year—and then there is 100 basis points left to get to 20% next year, which we feel very good about. As Christophe said, the surcharge is going well, Q2 will be a transition quarter, and we feel very good about the second half gross margin. In addition, as part of that confidence, we talked about the business mix where higher-growth, higher-margin businesses—Global High Tech, Life Sciences, Pest, Digital—are also supporting that confidence in 20% by 2027 and in our longer-term algorithm of 100 to 150 basis points per year through 2027. Christophe Beck: To build on that, as I have shared many times, I am really focused on beyond the 20%. For me, 20% is a given next year. Institutional Specialty is already north of 20%. Life Sciences, underlying, is north of 20% as well before the investments we are making. Pest Elimination is north of 20%. Most of Water is as well. We know exactly how to get north of 20%. The question is: what is next? I will share with you as soon as I have a clear, solid view, but it is going to be quite a bit north of 20%. When you think about OVIVO and CoolIT joining us, that is on top, with businesses growing really fast at very good margin. I feel really good about 20% for next year—90% of my focus is on what is next post-20% to keep growing company margins. Operator: Our next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question. Vincent Andrews: I wanted to talk more about Global Water and the margins. In the quarter, there were three dynamics going on: the OVIVO acquisition; you called out some raw material inflation, which I suspect hit you pretty hard in March, which you obviously could not price right away for; and then the stabilization of the headwind of the softer sales in Heavy Water and Paper. But you called out an upper single-digit operating income growth decline, which I would have thought would have helped the percentage margin. Maybe you could unpack the margin performance in Global Water, the decline, and how those three different buckets contributed to it, and how we should think about it over the next couple of quarters? Thank you. Christophe Beck: I will pass it to Scott, but generally here overall Water was flat in terms of operating income growth—down roughly 0.5% in Q1. If you exclude Paper and Heavy Water, Water has been growing top line mid-single digits and operating income high single digits. Generally, Water is doing really well, excluding Paper and Heavy. We are working on these two, but honestly most of my focus is on the growth part of Water. The combination of Most of Water getting better through higher-growth, higher-margin businesses like Global High Tech will get us to a much better place very soon, and at the same time, getting the underperformance in Paper and Heavy Water stabilized and improving. We have reached the bottom for these two businesses. The combination of both will lead to good results for the second half in Water. I am not worried in Water. Scott, anything you would like to add? Scott Kirkland: The only thing I would mention as well is on OVIVO. As we talked about for total company, there is a geographic mix between gross margin and SG&A, but not a material impact to operating income margin. There is a little bit of that geography in the Water business as well. As Christophe said, we feel good about the business; the operating income growth excluding Paper and Heavy is very good, and we expect Water operating income to aggressively accelerate throughout the year. Operator: Our next question is from the line of Patrick Cunningham with Citibank. Please proceed with your question. Patrick Cunningham: The Specialty division within I&S—pretty impressive organic growth. In an environment where you see weaker foot traffic and a consumer highly sensitive to wage inflation, is most of your growth coming from deeper penetration of digital suites and productivity tools versus traditional chemical volume at this point? Christophe Beck: Patrick, the short answer is yes. It is mostly focused on solutions that help customers get the job done at a lower cost because they use less labor and fewer natural resources—energy and water—and it is working very well. When we think about the One Ecolab approach, we have a great example in F&B United, and we have a great example in Specialty. It is a business of standard at scale and performance at scale. The way the team is approaching large quick-serve and fast-food companies is to help them understand where the best performance is—what is the best restaurant in terms of guest satisfaction, cost, and environmental impact—and to scale those solutions across the system around the world. Those customers are used to and welcome that approach. They are mostly franchised, so we have the opportunity to influence every unit anywhere around the world the same way. This is a huge upside for those customers, and you see it in the results—growing 9% at the type of margins we have in this business is quite remarkable. Last, the beauty of the Institutional Specialty business is that wherever the consumer goes based on economic development, we will capture them somewhere. It can be a luxury restaurant, mid-scale, or quick-serve—we are there. Margins are very similar. We are extremely well positioned wherever the consumer eats because people are going to keep eating. If they do not go out, they buy from food retail, which is doing really well, explaining why Institutional Specialty is such a steady, stable, strong business with high margin: it is a great offering for customers to drive their own performance around the world, and for us, it drives huge stability and consistency. Operator: Our next question is from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question. Shlomo Rosenbaum: Christophe, I was hoping to get a little more detail on what you meant that Paper and the basic industries are turning the corner. Is the growth getting better? Is it that you have not seen any more paper mills closing? What is going on with the metals side of it? Are we going to see those businesses get to flat this year? Give us a little color because the other parts of the business are already running in the range you want, and these are the ones pulling you down below that range. Christophe Beck: The whole company—if you exclude these two—is growing 5%+ top line, so we are in a very good place. Water is also in that range with good volume growth as well. But like any company, there are a couple of kids that need special care because they are in older industries that are growing less fast. The short answer is they have stabilized. We have not been impacted by closures anymore in the last three to six months, which is hard to mitigate because when a factory closes, there is not much you can do. We see stabilization. If it gets slightly positive in the second half, we will be fine. This is what the team is heading toward; I feel pretty good we will get there. To be very honest, this is not where I spend my time. I spend my time on the 80% of the company that is doing extremely well, building those new engines at the same time. I want to be absolutely growth-focused, driving operating income leverage while we manage those businesses that are struggling a bit more. As I look at the second half, I feel these two are going to get to more positive territory. Also, they have good margins—not great—but pretty good. They are not destroying value for the company, which is most important. So 80% doing great, north of 5% top line without these two. With these two doing better, it will help the overall performance continue in the second half and in 2027. Operator: The next question is from the line of John Roberts with Mizuho. Please proceed with your question. John Roberts: Thank you. Is your inflation higher on raw materials, or is it higher on your CapEx? Because you purchase a lot of equipment that has metals and plastics contained in it. Christophe Beck: John, it is mostly on the commodity raw material side of things. Logistics as well, because logistics costs are going up—shortage of drivers, fuel costs—traditional stuff we are used to. On what you call CapEx, which is more technology equipment, there is some inflation, but nothing dramatic. It is not energy-related. Nothing to see there. Operator: Next question is from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question. Jeffrey John Zekauskas: Thanks very much. Christophe, you said that CoolIT is growing a lot faster than 30%. Is it growing 50% or 70% or 60%—can you quantify that? And secondly, when you think about competing in the data center markets in direct-to-chip technology, does the competition emphasize water treatment chemistry, or is their direction more equipment-based? How do you see your competitive status and offering water treatment technology in the direct-to-chip area? Christophe Beck: Jeff, great question. Actually, the true growth—you have not even mentioned it in the numbers you listed; it is even higher. To be honest, it is close to the triple-digit range, which is pretty cool. But I want to also mention we have not closed that acquisition—just to be clear—we need the regulatory approvals. It feels good so far that it should happen sometime in the third quarter, depending on us. Exceptional performance from those guys. I have met many customers—customers want what CoolIT does more than anything. You are familiar with a few others out there; they are doing well—one starting with a “V” is performing nicely and has a good backlog. This is the case for CoolIT as well. Generally, great growth trajectory. It is not going to be a straight line to heaven forever; we will see how that goes. The biggest challenge we have is to build enough capacity to feed the growth—great problem to have. First time we see customers trying to jump the line to get services from what CoolIT can provide. On the second part of your question: as you know, I do not really care whether products are industry-based or technology-based or service-based or digital-based. What we are offering to data centers is ultimately higher uptime at lower water usage and better power performance. This is the outcome we promise. The fact that we can go from low to zero net water usage is game changing. You are familiar with the uproar around data centers and water usage; what we do solves that problem—this is a big deal for the hyperscalers—while enabling more advanced chips that require direct-to-chip cooling. We are exploring various models; they are all recurring in a typical Ecolab Inc. manner. That is the way we scope the business as we get together with our services, 3D Trasar optimization of water and power cooling, coolant—which is by design a recurring product—and all the technology that comes with it. Every time a new generation of chips comes in, you change systems for direct-to-chip cooling: new cold plates, new coolant, and as power demands go up, you change the CDUs as well. It is inherently a recurring business. Operator: The next question is from the line of Matthew DeYoe with Bank of America. Please proceed with your question. Matthew DeYoe: Christophe, thank you, and thanks for addressing that. One of the concerns we hear from investors on the CoolIT deal is it does not feel like a consumables business. Two to backfill on this. One, the $0.20 per-share dilution per quarter—is that math based on the 30% sales growth that you had been laying out there, or is that reflective of the near 100% sales growth that it is currently looking at, or does that matter over the near term? And then how R&D-intensive do you expect CoolIT to be? Presumably, the technology changeover could be pretty rapid, and cold plates and things like that are not really a core competency of Ecolab Inc. I know you have 3D Trasar, but maybe not so much this architecture and infrastructure stuff. Christophe Beck: A few things, Matt, and then I will pass it to Scott. Generally, the base case is the 30%+ growth we talked about—that is the base assumption and what we knew back then. Anything better will help us, obviously. On R&D and knowledge, I would like to remind you it is a water business because direct-to-chip cooling—the next technology—is to get towards water. Even the coolants we offer today are not water-based, but water-based are the best heat transfer coolant we can imagine. Then you get all the challenges to work with water: scaling, fouling, corrosion, especially at lukewarm temperatures for the latest chips. This is a business and technology we have mastered for a very long time—mastering water at higher temperatures, mastering heat transfer. We are the leading cooling company. For 80 years, we know thermal management really well. We have a lot of R&D here. CoolIT is super strong in R&D as well. Add the 3D Trasar technology that we will bring together—CoolIT plus 3D Trasar technology becomes the new Ecolab Inc. offering for customers the moment we close. It is going to be game changing for customers. I feel really good in terms of R&D and expertise. It is a typical one-plus-one-equals-three, which is exactly where we wanted to be. It is a water business, removing heat, which is what we have done for 80 years in other industries and now in this new industry. Scott, do you want to add anything on the EPS impact? Scott Kirkland: One thing I would say, Matt, on EPS is we think this is a very high-growth, high-margin business, and that 30% sales growth is over the next few to several years. In the earlier years, with that averaging, it will grow faster. We like what we see; we see growth accelerating. I still think that $0.20 is a good base case to have once we close, per quarter, and then we will adjust from there once we get hold of the asset for the second half of this year. It gets neutralized in 2027 because of the Nalco amortization rolling off at the same time—almost perfect timing. Operator: The next question is from the line of Mike Harrison with Seaport Research. Please proceed with your question. Mike Harrison: Hi. Good afternoon. Hoping I could ask a question on the Pest business. In terms of the digital and smart connected traps that you are rolling out, can you give us a sense of what percentage of customer locations are using those new traps? Maybe give a little more color on the timing of that rollout, and when you might expect to see margin benefits as you get better efficiency from your sales and service force with those new traps. Christophe Beck: Thanks for that question, Mike. I love that business, and I love it even more moving towards Pest Intelligence. We have roughly 700 thousand smart devices implemented so far. As you know, it has been driven by the largest retailer in the world with whom we developed that proposition. It is working extremely well—resulting in close to 99% pest-free environments with much better service because 95% of the time we were spending in the past checking empty traps is now transformed into value-add, which means selling more new accounts. The plan we have is that in the next three to four years, the whole Pest Elimination business is going to be a Pest Intelligence business. It is not a straight line—we have to make sure everything works well. We are going to reach probably 1 million connected devices by the end of this year and keep ramping up in the next few years. That will impact growth, retention, and performance for our customers, and yes, it will impact our margins. So far, it is working really well. We have a great team and customers are thrilled. Operator: Our next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question. Laurence Alexander: Afternoon. As you think about the surcharges and the pricing traction you have, and how that has changed over the years, is your percentage value capture across your portfolio increasing, or is it a matter of delivering more value while capturing the same percentage? And as you think about those dynamics, are the newer businesses where you prefer to focus your time right now—do they have a higher value capture level relative to the value created for the customer than some of the older legacy Ecolab Inc. businesses? Christophe Beck: Laurence, it is something we perfected over the past four to five years. We always do it in a way that is beneficial to our customers. We make sure that the total value delivered to our customers is north of what we are capturing in price. Not every business is created equal—biotech manufacturer versus Pest Intelligence in a retailer versus Food & Beverage for a brewery—it is very different, and we do it thoughtfully. Over the last five years, we have not lost customers doing it. Margins went up, retention remained strong. When we talk about the surcharge, it provides a framework for our teams and our customers to understand where we are going. In some places around the world, you have more; in others, less. In some businesses, it goes straight to structural pricing. It is working really well. As I said earlier, this is something we master really well. I am not worried about it. This is an execution play. Our teams are doing it the right way, and we are going to be fine. We will keep sharing our progress, but so far it is going really well. Operator: Our next question is from the line of Andy Wittmann with Baird. Please proceed with your question. Andy Wittmann: Great. Thanks for taking my question. It seems like the achievement of the energy surcharges will be important for the second half ramp. Given that, Christophe, as you look at the total customers that you expect to approach with the energy surcharge versus how many you have approached today and who are aware this is coming, can you help us understand what percentage have been approached and are aware, and how many are still to go for the balance of the year to achieve your ultimate target? Christophe Beck: Thank you, Andy. Everyone is impacted—no exception. It is 100% of our customers, 100% of our businesses, and 100% of the countries we operate in. It is not an easy task—we have operations in 172 countries and 40 different industries—but it is the third time we are doing it. We started April 1, so it is a few weeks back; it is progressing very well. The mechanics are there, the systems are there, the tracking is there. I know every week where we are on pricing overall. That is why I feel good with the progress. The objective is to be mostly done by late Q2, early Q3, while we keep building on structural price. Ultimately, all the surcharge is going to be converted to structural as quickly as we can, and in some businesses, it goes straight to structural—Institutional being one of them. The mechanics are there; we can go faster and with more confidence than in the past because, maybe unfortunately, we have become really good at it. Operator: Our next question is from the line of Jason Haas with Wells Fargo. Please proceed with your question. Jason Haas: Was curious if the conflict in the Middle East has had any impact on any of your end markets in terms of hitting your customers' confidence in any segment? Thanks. Christophe Beck: Yes, but the Middle East is a pretty small business for us—it is a few hundred million. It is critical for the customers there, and that is why we take it very seriously—do not let any customer down. There is no customer location that we have left; we are there helping them, especially in difficult times. Some units were closed for reasons we are familiar with. It is immaterial, and we want to do things the right way for our customers and teams. Our customers trust us to be with them. Most importantly, our competition has a very hard time supplying and serving those customers—great opportunity for us to gain share. It might impact slightly our volume growth in Q2. Honestly, I do not care because it will help us in the second half as we build new shares in the Middle East. Q2 is a transition quarter, but customers love that we share in the toughest times. It is working well. I am proud of what the team is doing there, and it always pays back after those phases are behind us. Operator: The next question is from the line of Josh Spector with UBS. Please proceed with your question. Josh Spector: Good afternoon. Thanks for squeezing me in. I unfortunately am going to continue to ask on the price-cost side. It is a little odd to me that you are talking about high single-digit raw inflation in 2Q—that is coming quicker than I would have anticipated—and then you are not really saying that it is going to increase through the rest of the year, which most other companies are expecting. What is different or unique there? And, two, your ability to ratchet up that surcharge automatically if inflation goes to mid-teens from the high single digits—is that baked in, or is that something that has to be retriggered by you? Thanks. Christophe Beck: We buy a lot of products—over 10 thousand—so the basket is very broad and pretty stable. The increase started in February, impacting the second quarter because of inventory timing. We expect 8% to 9% commodity cost increase in the second quarter. I am not thinking it is going down. I think it is going to be flat to up, to your point. We are accounting for that. We can manage it in how we buy, how we save cost, and most importantly how we price. It is impacting about a third of our commodities—not everything. We are pretty well insulated. In the extreme case where things change completely, we will go to the next level of energy surcharge. We did it in the past; we know exactly how to do it. Our customers are familiar with those discussions. This is not something I spend a lot of time on. Our teams master it extremely well; they have had the opportunity to do it a few times with our customers. Do not forget that we are providing more cost-savings value to our customers' operations than what we are asking them to pay in price. That is why surcharges get into structural price and why customers stay with us. This is not high on my priority list because I know it works, customers are familiar with it, and we will master it whatever happens in the market. Eighty percent of my focus is to grow the company while we manage that and many other things happening in the world at the same time—this is just one of them. Operator: The next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question. Kevin McCarthy: Yes, thank you for taking my question, and good afternoon. Christophe, I would appreciate your updated thoughts on the subject of SG&A leverage. It looks like you were able to decrease your ratio of SG&A to sales by 130 basis points in March. Is that a reasonable trajectory to think about for the next several quarters? Maybe you could provide some updated thoughts on what you are doing productivity-wise and the effect of acquisitions on that ratio as we model the company going forward. Christophe Beck: Thank you, Kevin. I will pass it to Scott. As I said before, the whole price/surcharge/delivered product cost topic is not high on my agenda, and SG&A leverage is not high on my agenda either. Not because it does not matter, but because it is very well mastered. We know how to manage price and DPC. We know how to manage SG&A through technology. We are clearly at the forefront of AI in our organization, and it is delivering great results. These two things are well mastered while we focus on growth. Scott, color on SG&A? Scott Kirkland: Thanks, Kevin. Really good productivity on SG&A in Q1—down 130 basis points. We are getting the benefit of One Ecolab, and we are launching digital and AI programs. There is some shift, as I mentioned before, between gross margin and SG&A from M&A—primarily OVIVO. In the first quarter, that accounted for 20 to 30 basis points, but still driving 100 basis points underlying, which is above our long-term target for leverage of 25 to 50 basis points. On a full-year basis, I expect SG&A leverage to be around 80 basis points, including some benefit from OVIVO because of the geography between gross margin and SG&A, but the underlying is above our long-term 25 to 50 basis point target because of fast sales growth and great productivity. Over the long term, we still feel very good about that 25 to 50 basis points. Operator: Our final question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question. Scott Schneeberger: I am going to touch on Light Water. You saw some solid sales in the first quarter, expecting that again in the second quarter. Do you expect transportation and green energy, which were cited, to remain the primary drivers going forward? What is driving those verticals? Is it just a few large projects, or is it a structural formation that is being created here? Christophe Beck: Light Water is doing quite well. Transportation is one of them. What we do for them is ultimately better paint while using much less water and creating much less waste. It is a great offering for the most advanced car manufacturers around the world. They like the idea of better products at a lower impact and lower cost. This is something we have built over the last two years. It is working really well with great technology. The Korean manufacturers in solar panels—totally different industry but interesting—are close to semiconductor-type manufacturing. This is something we mastered quite well in some places around the world, and it is growing nicely. The last part in Light Water is what we call Institutional Water—hotels and public buildings, office buildings—air conditioning water management, Legionnaires’ disease management—and those are working well. We used to be more in that business going one unit by one unit. Now we are working with large real estate companies around the world and facility management companies because they like a standard performance implemented anywhere around the world that drives cost down and environmental impact down at the same time. I like what I am seeing in Light Water; performance keeps getting better and is going to keep improving as we move forward into the year, which is a really good story. Since it was the last question, just to wrap up and recap a few things: we had a very good start of the year with strong momentum driven by what we like the most, which is growth. That is exactly where we want to be in a world that is quite complicated. Our new engines are doing extremely well—High Tech and Life Sciences are driving growth dramatically, in good ways, at high margin, with very low impact from energy costs. I have full confidence in our team in managing margins—both the price/DPC equation and SG&A. These are not priorities to me as the CEO because I can count on the team to deliver as they always have. I feel really good that 2026 is going to be a great year for the company—both top line and bottom line. Looking ahead, the new engines we have with CoolIT and OVIVO—top line and bottom line performance—are putting us in a very unique position to serve this industry; the same with Life Sciences. That is why I think 2027 is going to be an even better year for us—a strong 2026 and an even stronger 2027—which is what I have been committing to you for quite a while. Every single year, we want to make progress toward that ambition, and we are getting there as we enter next year. I feel really good and even better about where we are going. Thank you so much for attending the call today, and I will pass it back to Andy. Andy Hedberg: Great. Thanks, Christophe. That wraps up our first quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thanks for your time and participation. Hope everyone has a great rest of your day. Operator: This concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.