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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.
Richard Simonelli: Hello, everybody, and welcome to the CoStar earnings call for Q1 2026. Thank you all for joining us. Before I turn the call over to Andy Florance, CoStar Group's CEO and Founder; and Chris Lown, our CFO, I'd like to review a few of our safe harbor statements. First of all, certain portions of the discussion today may contain forward-looking statements. The company's outlook and expectations are based on current beliefs and assumptions. Forward-looking statements involve many risks, uncertainties, assumptions, estimates and other factors that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's press release issued today and in our filings with the SEC. All forward-looking statements are based on the information available to CoStar Group on the date of this call. CoStar Group assumes no obligation to update these statements, whether as a result of new information, future events or otherwise. Reconciliations to the most directly comparable GAAP measure of any non-GAAP financial measure discussed on this call are shown in detail in our press release issued today, along with the definitions for those terms. The press release is available on our website located at costargroup.com under Press Room. Please refer to today's press release on how to access the replay of this call. Remember, one question during the Q&A session, so make it a good one. And with that, I'd like to turn the call over to our Founder and CEO, Andy Florance. Andy? Andrew Florance: Thank you, Rich. Thank you for joining us today. I want to start with 3 things. First, this was an exceptional quarter. We delivered our 60th consecutive quarter of double-digit revenue growth. Our adjusted EBITDA doubled, and we're on track for the highest full year adjusted EBITDA in CoStar Group's history. Second, the Homes.com investment is delivering exactly what we said it would. Member agents are generating extraordinary returns on their subscriptions. Consumer engagement on Homes AI is multiples of conventional residential search, and Homes.com is the fastest-growing residential portal in the United States. I'll walk you through the evidence later in the call. Third, the activist distraction is behind us. With the noise gone, we have more focused energy than ever to spend on what matters, growing EBITDA. Let me take you through the numbers. First-quarter 2026 revenue grew 23% year-over-year. Q1 '26 adjusted EBITDA of $132 million doubled year-over-year and came in 26% above the midpoint of our guidance. After a record 2025 for annualized net new bookings, we started 2026 stronger still. Q1 net bookings of $67 million were up 20% year-over-year. We expect productivity to build over the year, particularly from the sales reps we hired throughout 2025. Our commercial business generated $472 million of revenue in Q1, up 15% year-over-year with adjusted EBITDA of $161 million. CoStar revenue was $330 million -- $331 million, let's get that extra million in there in Q1, with annualized net new bookings from our core CoStar product up 16% year-over-year. CoStar users grew 22% year-over-year to 317,000. Sales to brokers and tenants were especially strong with broker sales up 29% and tenant sales up 27% year-over-year. CoStar NPS was 69, and our quarterly renewal rate was 92%. CoStar rent benchmark launches this summer. Drawing on our proprietary lease database and public records, it will be the industry's only net effective rent benchmark product, giving landlords, occupiers, investors and brokers visibility into starting rents, effective rents, TI allowances, free rents and escalations across U.S. markets. CoStar new homes is in development with Phase 1 planned for Q2. The module tracks new residential construction from planning through delivery and serves homebuilders, mortgage bankers, retailers and retail center owners. It integrates builder feeds, drone imagery and other data sources to deliver insight into housing supply, demand and market trends. CoStar debt solutions, formerly CoStar lender, had a strong quarter with net new bookings up 26% year-over-year as the business crossed $100 million in revenue. Debt solutions now serves over 500 financial institutions across the full lender spectrum, including banks, private lenders, debt funds and regulators. Debt Solutions is on track to launch CRE debt benchmarking in the second half of '26 with CRE loan origination workflow following in Q1 of '27. The final product will be a full workflow solution to originate and underwrite a loan. Our first release will focus on seamless delivery of property details, peer properties and market information. We launched a client advisory committee with over a dozen institutions to shape the loan origination road map, deepen understanding of how AI is reshaping their workflows, and strengthen product-market fit. Across the platform, debt solutions is actively building these AI-enhanced workflows. CoStar U.K.'s growth accelerated in Q1 with revenue up 25% and net new bookings up 44% year-over-year. This growth was supported by the release of new land registry lease modules that gave clients authoritative effective rent data sourced from government records and the recollapse of one of our primary competitors there. CoStar Canada revenue grew 22% year-over-year. We released multifamily analytics coverage for Montreal in Q1. CoStar France launches in Q2. We will cross-sell into the 32,000 French CRE professionals who already subscribe to news and information from our Business Immo acquisition, accelerating adoption as we build the only pan-European CRE data and analytics platform. In CoStar Australia, we are rapidly building proprietary property data with our local research team now approaching 100 people. We expect to launch CoStar and LoopNet in Australia in Q3 and Q4. Real Estate Manager added AI lease abstraction capabilities to the Visual Lease platform this quarter, and we will extend these capabilities to CoStar Real Estate Manager later this year. Customers are eager to bring this best-in-class capability into the lease management and accounting workflows to save them a lot of time and hassle. We're also deploying multiple AI agents internally to accelerate customer onboarding, support enablement and the automation of repeatable professional services work. In Q1, STR launched profitability benchmarking, supporting more than 150 detailed data points across a hotel's P&L. Customer interest was immediate with 750 hotel subscribers submitting data to unlock the functionality. Building participation at scale is critical to future monetization, and this early engagement reinforces the long-term value of the investment. LoopNet generated $85 million of revenue in Q1, up 16% year-over-year. Paid listings rose 10% year-over-year in the U.S., 35% in Canada and 63% in the U.K. Last month, after more than a year of successful testing, we rolled out asset-based pricing across all U.S. markets. LoopNet advertising is now priced to match the size of the asset and the value LoopNet delivers to listers. Early results have been really outstanding. At the high end, the volume of silver listings sold at $300 or above per month grew 650% from February to March. At the low end, listings sold below $40 grew over 1,100%, opening up an entirely new category of inventory and bringing in smaller advertisers who could not justify the higher price points for one size fits all that we had before. We expect this to drive more listings, more traffic and more revenue. LoopNet's European revenue grew 17% year-over-year following last year's launch in France and Spain, we're seeing the network effects of being the first and only global commercial real estate marketplace. Average monthly unique visitors on LoopNet Europe more than doubled to over 900,000, up 102% year-over-year. Crucially, these users are not just searching their home countries, they're searching globally. We will extend this network effect as LoopNet launches in Australia, Germany and other markets. Our Australia CRE marketing platform, commercialrealestate.com.au grew 10% year-over-year on a pro forma basis, driven by higher depth revenue, improving depth penetration and higher average revenue per listing. That commercial unique visitor audience was up 129% year-over-year in Q1. Subscription revenue for Matterport was up 19% year-over-year. Enterprise momentum built through the quarter. New enterprise accounts in March were up 31% year-over-year, and direct sales were up 16%, supported by a healthy and expanding pipeline that continues to build into Q2. Matterport has become a critical point of differentiation across CoStar Group. It drives engagement, lift conversion, and generates valuable proprietary data. Integration is proceeding exceptionally well across Apartments.com, Homes.com, LoopNet, CoStar, Domain. Matterport is already a key component of Homes AI and will unlock huge future AI innovation all across CoStar Group. Matterport Exteriors with X-ray now in alpha lets users virtually remove a roof or floor of a virtual building to see the building's interior in the context of the yard, the neighborhood. That's a real estate marketer's dream. We've also released a number of new innovations with strong use cases in architectural engineering construction, facilities management and manufacturing. BizBuySell revenue was $8.8 million in Q1 with broker subscriptions reporting 2,300 -- with broker subscribers, I'm sorry, reporting 2,345 completed sales transactions of businesses representing $2 billion enterprise value, 59% of which involved commercial real estate. We're rapidly turning BizBuySell into a true end-to-end transaction platform with integrated financing, 3D tours and document sharing, now driving over 24,000 buyer profiles and 15% broker adoption. Residential revenue was $421 million in Q1, up 32% year-over-year. Adjusted EBITDA improved by $56 million, and we expect the Residential segment to reach profitability in Q2 2026. Apartments.com generated $312 million of revenue in Q1, up 10% year-over-year, the 15th consecutive quarter of double-digit revenue growth. Apartments.com delivered 220 million highly engaged renter visits, 370,000 tours and 300,000 applications submitted directly on our platform to apartment owners alongside 40 million Matterport tours. Our monthly renewal rate held at 99%. Apartments.com brand media impressions nearly tripled in Q1, up 189% year-over-year to 1.7 billion. The longer we invest in our brand on behalf of our clients, the more efficiently we deploy that investment. A clear example, our first-ever co-branded Super Bowl commercial with Homes.com aired on February 8, reaching 126 million viewers, the highest peak viewership in U.S. media history. Combined with our industry-leading SEO and SEM, these efforts continue to produce the most qualified audience of apartment seekers on the Internet. According to Google, overall rental search demand remains soft. Even so, comScore data shows Apartments.com network unique visitors up 3% year-over-year in March. Zillow unique visitors were down 5% year-over-year and Zillow's expanded rental network, Zillow plus Realtor plus Redfin, was down 3%. Zillow has now seen unique visitors decline year-over-year for 15 consecutive quarters. Let's make that 15 consecutive months, not 15 consecutive quarters. I was just sort of picking up the 15 consecutive quarters of double-digit growth we had. Our sales force conducted 185,000 quality meetings in Q1 for Apartments.com and achieved an outstanding NPS of 89. In Q1, Apartments.com introduced Smart Search, our natural language search feature and the first AI-powered voice search in multifamily. Smart Search lets renters search the way they speak, packing every detail and even multiple locations into a single query. Results are faster, more detailed and dramatically more efficient. The early metrics are really strong. Renters who use Smart Search spend 94% more time on site and view 63% more listings. Ahead of the June Apartmentalize trade show that NAA hosts, the big show of the year, we will launch Apartments AI, our pioneering conversational search experience built on the same technology powering Homes AI. Apartments AI will more deeply engage renters and continuing delivering best-in-class advertiser ROI through the industry's highest quality leads. We will also highlight Homes.com's expanded rental capabilities and the value-add to Apartments.com at that same Apartmentalize. Apartments.com leads the industry on price transparency. Any property can now display complete all-in monthly price with all the extras reoccurring one-time required fees with a prominent badge alerting renters. Six states already require this sort of transparency and the FTC just concluded its public comment period on similar rules. Matterport continues to be a true differentiator for consumers on Apartments.com. We now have approximately 250,000 3D tours in the platform, including over 1,500 Matterport 3D Exteriors that give prospective renters an immersive 360-degree view of the entire community. In Q1, renters spent 46% more time on listings featuring a Matterport and those listings generated 56x more tour requests per listing than listings without one. It's an amazing stat. Homes.com revenue grew 58% year-over-year to $26 million in Q1. We are on pace to hit our stated 2026 net investment target of $550 million in homes. And what that investment is buying is becoming clear in the data. Membership growth and monetization are both accelerating. We added over 4,300 members in Q1, up 205% from Q1 of '25. We now have 35,175-agent subscribers with 76% of them on annual contracts. Net new bookings were $11 million in Q1. March annual revenue run rate reached $106 million, up 92% year-over-year. Our trailing 12-month average ARPU is $287. We are now seeing clear quantifiable evidence that Homes.com business model is working and that our subscribers gaining an extraordinary return on their investment. We analyzed the first 11,400 Homes.com members and compare the commission earnings in the 12 months before joining Homes.com to the earnings in the 12 months after they became a Homes.com subscriber. The findings are striking. On average, a Homes.com subscriber earned $36,400 more in commissions in their first year as a member. Against an average annual subscription cost of just $3,400, that's an 11x return on their investment. In the same time period, our members saw commissions grow 16%, while the average non-member saw their commissions decline. The ROI is even stronger for the agents who need it most. Agents who have had earned $50,000 or less in the prior year earned $58,000 more after joining. Pre-membership earnings were $26,000 on average, and that jumped to $82,000 on average. There are hundreds of thousands of agents in this earnings cohort. Agents in the $50,000 to $100,000 bracket earned $41,000 in commissions after joining. Agents in the $100,000 to $150,000 bracket earned $38,000 more once they became Homes members. These numbers almost certainly understate the value. The benefit extends beyond our 12-month analysis window, and we exclude the significant rental marketing value members generate through Homes.com and our syndication to Apartments.com. Based on these results, we will raise subscription fees for new customers on May 1 and evaluate a measured potential renewal increases. For CoStar Group as a whole, this is the fastest organic revenue build we've ever achieved for a new product, and we hit these revenue levels faster than our U.S. competitors did at their start. Our NPS is 41, an excellent score after just 2 years and still improving. Homes.com subscribers paid to promote 260,000 active listings in Q1, representing 8.7% of the nearly 3 million homes for sale in the U.S. In 2025, the Homes.com network grew nearly 2.1 billion views and 108 million average monthly unique visitors. We achieved a healthy balance across SEM, SEO and direct traffic, allowing us to optimize SEM for quality leads, not just quantity. The result is better traffic and more engaged visitors. Organic traffic to Homes.com was up more than 100% year-over-year in every month of the quarter and March specifically up 119% year-over-year. Homes.com was featured across major cultural moments in 2026, including the Oscars, the Olympics, the Super Bowl, March Madness and many other, driving over 3 billion impressions in Q1. Our new March ad showcased Homes AI in action, and I have received more positive feedback on this campaign than any of our prior Homes.com campaigns. In March, average annual session duration hit an all-time high, up 26% year-over-year and bounce rate hit an all-time low, down 29%. Homes AI is the engine behind this engagement search. AI users run nearly 4x as many searches, favorite 7x as many properties and submit 7x as many leads. In April, time on site reached 18 minutes for AI users versus 4 minutes, 32 seconds for non-AI users. Put plainly, when consumers experience Homes AI, they spend roughly 4x longer than they do on conventional residential search. This is precisely the dynamic that precedes meaningful consumer share shift and is exactly the proof point we expected our AI investment to produce. In March '26, we significantly expanded our relationship with eXp Realty, the largest residential firm by transaction size in '25. The new partnership lets eXp's 3000 agents prominently display premarket coming soon listings on Homes.com. You may recall we partnered earlier with eXp Commercial in December '24 when they became a major subscriber to CoStar's information and analytics. We've been integrating Apartments.com with Homes.com since early 2025. Last year, Homes.com rentals drove over 10% of Apartments.com's traffic, making Homes.com, Apartments.com's largest syndication partners. This combination produced nearly 650,000 paid single-family home rental listings in '25. Paid single-family rental listings in Q1 2026 grew 33% year-over-year. According to comScore, Homes.com is now the fastest-growing rental site in the U.S. For Google Analytics, Homes.com rentals visits grew by 13 million versus Q1 of 2025, making Homes.com our most powerful platform for reaching the single-family rental market. Over 214,000 independent owners now use our rental tools, and we expect that number to raise materially as we extend the full Apartments.com feature set into Homes.com. We're continuing to improve the experience for renters who search on Homes.com. By the end of 2026, every tool available on Apartments.com will be available on Homes.com, letting independent owners rent their house, condo or townhouse across both platforms. At the end of August 2025, we began selling marketing on Homes.com to new homebuilders. In the 8 months -- first 8 months, we generated $3.3 million in annualized net new bookings with the run rate accelerating each quarter. Q1 alone delivered $1.5 million. We have signed data feed agreements with 663 homebuilders looking to reach the Homes.com audience. These feeds now cover roughly 75% of all production new home activity in the U.S. These feeds provide a better consumer experience to home searchers on Homes.com and are a foundational building block to power a valuable new homes information product within CoStar. So let me pause to speak briefly to the elephant in the room. The activist campaign over the last year did weigh heavily on Homes.com sales and potential partnerships. Real estate leaders were reading a steady drumbeat of negative coverage. Nonetheless, we made durable progress through it. With that distraction now behind us, we can now apply even more focused energy to accelerating Homes.com revenue and the revenue in every other business in the portfolio. Land.com revenue grew 8% year-over-year and net new bookings hit a record, up 126% year-over-year, boosted by replacing a regionally targeted site-specific ad with a county-targeted network ad format. Inventory tripled and ads sold quadrupled. Domain Australia delivered a strong Q1 with sustained elevated audience volume, strong uptake of premium products and disciplined cost control. Recent investments in product technology research and photography are now producing tangible outcomes and Q1 revenue was $68 million. The Australian market is highly cyclical and Q1 is always seasonally soft, which is reflected in overall sequential down revenue. Year-over-year, however, core Domain Residential revenue did grow 11%. We delivered EBITDA growth despite all the significant investments we're making. In addition to expected normal seasonality, we did also discontinue revenue from SPA ads on the Domain portals because it was not materially profitable and significantly distracted from the value of home sellers -- the value home sellers receive when marketing on those sites. CoStar Group's technology capabilities are already benefiting Australian customers. Domain site improvements are dramatically increasing traffic. Monthly unique audience averaged 8 million across the quarter with March hitting 8.4 million, the second highest month on record. Total users reached a high of 21.9 million, up 47% year-over-year and listings grew 28%. Domain launched Matterport in Australia this month, bundling immersive technology into premium listing packages and giving agents and vendors meaningful savings on traditional photography. The launch generated significant positive media coverage. Q1 was another strong quarter for OnTheMarket. We closed it with our 23rd consecutive month of positive net new bookings. Total time on site was up 16% and page views up 24% year-over-year, driving a 23% year-over-year increase in leads. OnTheMarket now has 17,500 estate agents and new home developer customers on site, the highest in its history. OnTheMarket has eclipsed Zoopla as the U.K.'s #2 portal by inventory and now has more new home listings than Rightmove. The growth was accelerated by signing the Connells Group, the U.K.'s largest estate agent with over 80 brands and more than 1,200 branch locations. Our OnTheMarket sales team is delivering real value for customers. NPS came in at a solid 46% for the period. In Q2, we'll continue building AI search functionality as we progress towards integrating OnTheMarket into the Homes.com software environment in 2027. In closing, I want to acknowledge our outstanding management team. The breadth and depth of expertise across this company is what makes everything you've heard today possible. There's a lot of it. I am very grateful for what they bring to this company. I also want to thank our Board of Directors, our leadership expertise and counsel for outstanding through what was at times a noisy year. We are well positioned to deliver against every objective we've set and to unlock large digital real estate opportunities ahead of us. To our shareholders, thank you for your continued support. The data this quarter across CRE across apartments, especially across Homes.com confirms one thing. The strategy is working. I've never been more confident in our plan to deliver double-digit revenue growth and significant earnings expansion through 2030 and beyond. At this point, I'll turn the call over to our CFO, Chris. Christian Lown: Thanks, Andy. In the first quarter of 2026, we delivered $132 million of adjusted EBITDA, doubling the adjusted EBITDA from the first quarter of 2025 and $17 million above the high end of our guidance range. The outperformance in adjusted EBITDA was primarily due to lower personnel costs from cost-saving efforts as we continue to find efficiencies from AI, personnel and other expense initiatives. 1Q '26 revenue was $897 million, which was 23% higher year-over-year and toward the high end of our guidance range. Organic revenue growth was 10% for the quarter. Commercial revenue in the first quarter was $472 million, an increase of 15% year-over-year and a 7% organic growth rate. Our commercial brands delivered revenue in line with the guidance we provided on our February earnings call. CoStar revenue grew 9% to $331 million, driven by strong double-digit international growth. The year-over-year increase was driven by both volume and price. LoopNet revenue was $85 million in the first quarter, a 16% increase year-over-year or an 11% organic growth rate. The year-over-year growth was attributable to an increase in paid listings from our continued focus on selling silver ads. Other commercial revenue was $56 million in the first quarter of 2026, up 81% compared to the first quarter of 2025. The year-over-year increase is primarily attributable to the inorganic contribution from Matterport, which has performed well since the acquisition with subscription revenue growth of 19%. Residential revenue in 1Q 2026 was $425 million, a 32% increase over last year's first quarter and at the high end of our guidance range. Organic growth for Residential in the first quarter was 13%, with double-digit growth contributions from Apartments, Homes and OnTheMarket. Increased volumes were the catalyst for organic growth in the first quarter. Commercial adjusted EBITDA was $161 million in the first quarter of 2026, a 34% margin and above the high end of our guidance range. Similarly, Residential adjusted EBITDA was also better than our guidance range, coming in at negative $29 million. CoStar posted positive net income and adjusted EPS of $0.23 per share for the first quarter of 2026, both considerably higher than our guidance. Our sales headcount at the end of March was 2,090. Homes.com reps make up our largest sales team, consisting of 570 individuals. Apartments.com is the next largest sales force with 520 reps with CoStar at 475 reps and 225 at the LoopNet team. For Homes.com reps, we are focused on driving productivity and efficiency in 2026. With our other brands, we will be adding reps throughout the remainder of the year, given the significant opportunity that still exists across all our brands, and we expect productivity to ramp as our new sales reps mature over the coming years. Our contract renewal rate has held consistently at 89% for the past 7 quarters. Customers who have been subscribers for at least 5 years have an impressive 95% renewal rate. Subscription revenue on annual contracts was 73% of total revenue for the first quarter of 2026 compared to 71% during the fourth quarter of 2025. As a reminder, Domain does not operate using annual subscriptions. Net new bookings for the first quarter were $67 million, a 20% increase from the first quarter of 2025. In 2025, we completed our first share repurchase program, buying back $500 million worth of stock or 7.1 million shares. We subsequently announced a $1.5 billion buyback program in January of this year. Throughout the first quarter, we repurchased 11.4 million shares for $505 million, the majority of which was purchased through an accelerated share repurchase plan. We expect to repurchase an additional $195 million worth of shares during the remaining 9 months of the year, bringing our total cash outlay for share buybacks in 2026 to $700 million. For the second quarter of 2026, we expect revenue to range from $922 million to $932 million. This range represents an 18% to 19% increase over the second quarter of 2025 or a 10% organic growth rate at the midpoint. Commercial revenue is expected to grow between 7% and 9% to a range of $479 million to $484 million. We expect Residential revenue of $443 million to $448 million, an increase of 32% to 34% year-over-year or 12% to 14% organically. Adjusted EBITDA is expected to range between $160 million and $180 million, representing a margin of 17% to 19% or roughly 700 basis points higher than Q2 2025. Commercial adjusted EBITDA is expected to be between $160 million and $170 million, a margin of 34% to 35%. Residential adjusted EBITDA is anticipated to be positive in Q2 2026, ranging between breakeven and $10 million. Our adjusted EPS guidance for Q2 2026 calls for a range of $0.27 to $0.30 per share on 409 million weighted average shares outstanding. For full year 2026, we are reaffirming our previous revenue guidance range of $3.78 billion to $3.82 billion, a 16% to 18% annual growth rate. Commercial revenue remains at a range of $1.955 billion to $1.975 billion, and the Residential revenue range remains at $1.825 billion to $1.845 billion. Based on the strength of the first quarter and the expectation of continued personnel expense efficiencies, we now expect adjusted EBITDA to range from $780 million to $820 million. This is an increase of $30 million at its midpoint and a full percentage point increase in margin. Our adjusted EPS range is also increasing for the full year. The accelerated share repurchase program in the first quarter retired more shares than we had forecast and the previously mentioned expense reduction initiatives are primarily driving our guidance increase to adjusted EPS. Our new adjusted EPS guidance range is $1.32 to $1.39, an increase of $0.09 at the midpoint. I will now turn the call back over to the operator for questions. Operator: [Operator Instructions] And our first question comes from Ryan Tomasello with KBW. Ryan Tomasello: Two-part question on bookings. First, was the $67 million of net new in line with generally what you were expecting for the quarter? And then second, there seems to be some variation in how we find investors are translating bookings into revenue growth expectations, given our bookings don't underpin 100% of the company's revenue base. So Chris, I was hoping you could walk us through how you think about the appropriate math there around the percentage of bookings-driven revenue and how that translates to the level of bookings needed to achieve your low to mid-teens revenue growth targets embedded in your financial framework. Christian Lown: Yes. Thanks, Ryan. So -- sorry. Thanks, Ryan. So a couple of comments there. First, as you heard from our comments, we reaffirmed our guidance range for revenue and increased our EBITDA guidance, so broadly in line with what we're looking for from a net new perspective and from a revenue development perspective. And your second question is a detailed question. So let me sort of think about it. Let me try to break it down this way. Today, around 15% of our revenue is non-subscription, then that increased as a result of the Domain and Matterport acquisition last year. We are currently, if you look at our guidance, currently expecting revenue to grow around $550 million at the midpoint of our range and around 40% of this increase is from acquisitions or non-subscription revenue growth. Therefore, the remaining growth is around $330-ish million, which is the revenue driven by net new. So that is what '26 represents. But I think then you're rolling forward to sort of '27 and '28. And I think a couple of building blocks there to think about. If you assume the non-subscription revenue growth is sort of in the low double digits, that results in subscription revenue needing to grow by around $1 billion in total between '27 and '28. I think what's important to note is during that period, we're expecting meaningful significant growth out of Homes.com meaningfully faster than our other brands with our other subscription businesses also growing in the low double-digit range along with the other group, which is consistent with our historic growth. Remember, timing has a big impact here, obviously, when these bookings happen and how that rolls into revenue. So I think those are sort of the building blocks. I also think most importantly is we are committed to delivering on the adjusted EBITDA targets we set out for 2028 and 2030. And this can occur in a number of ways. We can deliver it through our 15% revenue CAGR, which we're very committed to. We can overachieve our revenue targets and invest in additional growth opportunities, which would continue to promote additional longer-term growth. Or finally, we can rationalize costs if revenue growth is less than 15%. Importantly, and as Andy mentioned on his call, we are fully committed to our stated Homes.com net investment number. We're well on track to hit that number this year, and we gave you guidance through 2030, and we will hit those numbers. Our primary focus at CoStar today is to drive revenue, to drive EBITDA growth and margin expansion through 2030 and beyond. But I think that, Ryan, gives you the building blocks to start thinking about your question. Operator: Our next question comes from Pete Christiansen with Citi. Peter Christiansen: Really good script this quarter, guys. A lot to like, and I appreciate the transparency on a number of fronts. That said, I want to dig into bookings again a little bit here, and particularly apartments pricing. You showed some really good rooftop growth last quarter, and we know that you're winning back some share there and some of that share has been lower-priced opportunities. But also thinking about the competitive dynamic, how that's changed and maybe that's shifted the mix shift on tiering of ads there. Just wondering if you could give us a sense of what has been generally the pricing impact and maybe how that might be impacting overall bookings production? Andrew Florance: I would comment on one thing that I think I commented on last quarter. I would comment on one point that I think commented on last quarter. There -- we picked up a lot of rooftops from Rent.com. So as they -- as that whole thing went the way it went, there was an opportunity to do that. That became a primary focus for our sales force to go after those rooftops when they were in transition. And so they put a lot of effort into that. That's a once in a decade opportunity to try to do a share shift. And the nice thing is we weren't buying those from anyone. We were just winning them in the organic market. Now those advertisers had been with ApartmentGuide, Rent.com through a bankruptcy and through a degradation of a business over several different -- several years. So it tend to lean towards lower ARPU rooftops, often lower rental rates, smaller unit counts, that kind of stuff. That drove our -- that has driven for several quarters our rooftop revenue ARPU, whatever, down somewhat. I'm not seeing -- unless Chris has got a different view on it. I'm not seeing a major shift in levels or depth advertising. The thing that really struck me was these folks coming out of Rent.com were lower end -- very important customers. They just happen to have more budget properties. Operator: Our next question comes from George Tong with Goldman Sachs. Keen Fai Tong: Sticking with Apartments.com, the revenue growth moderated sequentially to 10% year-over-year. What would need to change to drive a reacceleration from here? Or do you think this is the right long-term run rate growth for the platform? Andrew Florance: I think the thing that reaccelerates revenue growth is our target continued growth in the sales force to -- we have -- as the revenue gets bigger and bigger, you need to have more salespeople to deal with the revenue opportunity. There's clearly plenty of open opportunity out there. We are still relatively early in penetrating the opportunity. I think Homes.com presents an important strategic opportunity that it can grow more traffic. It's already our biggest syndication partner into Apartments.com. It allows us to strengthen our single-family presence there and draw renters in from multiple angles and multiple perspectives. So I think that -- I think we can continue to improve on the current growth rate. And I think we still remain significantly competitively advantaged. Do you want to add anything to that, Chris? Christian Lown: No, that's great. Operator: Our next question comes from Alexei Gogolev with JPMorgan. Alexei Gogolev: Both you and Chris mentioned the sales productivity ramp. So with the headcount additions across the sales organization, what are you seeing in terms of ramp times or quota attainment, maybe some productivity by cohort? And how does that inform your hiring pace for the rest of the year? Andrew Florance: It would vary by brand. So I think we're seeing CoStar accelerating productivity per rep. And I thought it was interesting to see that the broker sales, tenant sales are up in CoStar. That's generally an indication of improving commercial real estate market conditions and more robust selling opportunities. On Apartments.com, as your revenues have grown and you need to keep growing the sales force to match, they're handling even a 99% monthly renewal rate, they're handling a larger absolute cancellation level. So you need to keep growing that sales force and actually grows productivity as you grow the sales force. On LoopNet, we definitely want to continue to grow that sales force. The asset-based pricing will increase productivity for sure. But you have a relatively large base of revenue compared to the size of the sales force. And then -- and again, ROI across all those sales forces is very solid. I would say with Homes.com, you are still dealing with a very risky sales force. I mean it's unprecedented to have that many salespeople with that little tenure given the fact that we really just launched that group a year or so ago. I am spending myself a bit of time -- more time now that I've got a little more free time on my hands with our sales force and feel like we're making some good headwind in improving sales force productivity -- headway improving sales force productivity. It feels good to be back in there working on sales force productivity, and I see a lot of opportunity to improve sales force productivity. With a group like the Homes.com group, we are going to be continuing to grow our sales force in the field because we're seeing higher productivity in the field salespeople than we do in the centralized sales force. We're also seeing high sales productivity with our new homes advertising salespeople at Homes.com. And then -- but I am also optimistic that we're going to see productivity improvements with our inside sales team with Homes.com. So the growth in that group is really field and new home sales where the numbers are pretty good. And then I am working on bringing up the core inside group, and I think we're having some success there. Christian Lown: Andy, the only thing I'd add is that it's important to realize that we really started on this journey to increase our sales force roughly about this time last year. And so there's been pretty significant increases in sales force across all of our brands and then they all came at different times. For instance, LoopNet recently added a lot of salespeople to get to the number I talked about. And so while we do an incredible job tracking the cohorts. We look at their evolution. We track them on a 6-month, 12-month, 18-month cohort basis. So we see the development that we want to see. But it is important to note that really, we started on this journey basically about a year ago and it accelerated through last year. And we feel good about that productivity and cohort development, but this does take time to get them up to full productivity. Andrew Florance: I believe the number for Apartments.com is at year 5, they're twice as productive as they were at the end of year 1. So that is something where they -- it's a -- it is like a multiyear scale up. And some people enter at a really high level. Some people scale up through a couple of years. Operator: Our next question comes from Stephen Sheldon with William Blair. Stephen Sheldon: Just wanted to follow up on the sales kind of capacity and productivity topic. I guess, high level, what has changed, if anything, in terms of where you'll deploy incremental sales resources over the rest of the year and into next? Are there certain areas of strength where either by segment or geography where you're maybe pushing the pedal more? Are there -- on the flip side, are there any areas where productivity maybe isn't progressing the way you'd expect where it could make sense to cut back and -- or potentially shift into other areas? So I guess from here, where -- what's changed in terms of your plans for incremental sales capacity investments? Andrew Florance: Sure. And I hope I gave you a good brain dump of all the things we're thinking about there. Again, I'm seeing -- and I'll run through a couple of different parts there. I'm seeing really good results with our new homes salespeople. The folks are going out and dealing with major homebuilders and giving them enhanced exposure on Homes.com. Those folks are very productive. We will grow that at a measured pace because you don't want to slam too many people into a segment at once. We are seeing -- we are going to invest in adding 50 more folks or so into our field sales for Homes.com because those field sales folks who can actually have one-on-one meetings, show up at open houses, show up at brokers' offices are more productive than the people in the inside sales work. We are going to do that in batches of 5 cities at a time. So we might hire up 8 people in Washington, Dallas, 3 other markets, stabilize it, have an RD in each market, do the next round. We would likely prioritize our marketing spend SEM investment around those markets where we're building that field sales team up. We've always felt that the field sales team through time would be the most productive for Homes.com. And then I'm actually enjoying working a little bit more with the inside sales team, making sure that they've got the right value propositions, improving their pitch. And we believe that we've got the right number, but we want to tighten the pitch the service and the pricing, frankly, I think the product is currently underpriced. When I look at the kind of benefit these folks are getting when they get the marketing benefit of Homes.com, we're not charging enough. And we need to be bolder about that pricing because we're delivering enormous value. On the Apartments.com group, I would like to see our field sales team continue to grow at a measurable pace. The field sales team with Apartments.com is consistently the most productive. And then with LoopNet.com, I'd like to see that field sales team keep growing at an incremental measured pace because again, their headcount is too close -- is not quite adequate as a ratio relative to their growing revenue base. And I think with Ben focusing on the asset-based pricing effectively now, I think that there's a lot of opportunity there. We are growing the Matterport sales team. That will -- and again, we're doing that in measured batches of probably 20 at a quarter, something like that. So we're not -- we're holding our productivity up. But it is nice to be back in the game and spending more time on sales than on other things. Christian Lown: Yes. And the Matterport comment was a great one because it's such a huge opportunity given the limited sales force we had when we acquired the company. So we've really put in place go-to-market TAM strategies, et cetera, and we're expecting great things out of Matterport sales force over the coming years. Operator: Our next question comes from Jeff Meuler with Baird. Jeffrey Meuler: Can you just help put the sequential trends in net bookings the last few quarters in context? This is the third straight quarter of sequential decline in the net bookings number. And if you started picking up the pace of hiring a year ago, I would think that productivity would be building over the last year. And I get it, Q2 '25 was a good quarter, but this quarter is still quite a bit below what it was in like Q1 of '23 before you launched Homes than when you had a much smaller sales force. So I know you're getting a million questions on sales productivity. I think we're struggling to understand it. Christian Lown: Yes. I'm not sure the angle. I understand, obviously, we started putting out the quarterly total bookings, and we thought it was important for people just to see the trends. Obviously, there's variability. As you said, last year, we had a very, very interesting situation right in the first quarter, it was deemed weak. The second quarter was great. So there's some variability, but I think we feel really good about the opportunity set, the underlying productivity we're seeing out of the sales force and should really start to -- the flywheel should really start in the second half of next year. And so I think we feel really good about the productivity. I think the hiring was a meaningful amount across our brands, and that creates a little bit of lag effect, but I think we feel good about the direction. Andrew Florance: And I think we have the same conversation every first quarter. It's like a groundhog day. So our first quarter tends to be a little lighter. Our second quarter is always tends to be our strongest. So when you talk about 3 quarters down, well, second quarter is our strongest. Remember, as I mentioned, that Apartmentalize. We enter -- that's a huge bookings opportunity for the Residential segment. And we enter that this year with incredibly strong product with Apartments AI, Homes being a major contributor. Our product teams have been pushing aggressively to make sure that we have a bunch of new rental features in Homes.com, and we'll enter that in a strong place. But you're still dealing with, again, you don't have very many folks with more than a year of experience at Homes.com. So it's still a relatively junior sales force. It won't be a junior sales force in 2, 3 quarters. It will start to move into post-rookie status. Operator: Our next question comes from Curtis Nagle with Bank of America. Curtis Nagle: Okay. Great. So just in the press release, you cited some pretty strong numbers in terms of engagement and number of agents coming on from Homes.com right now kind of near term, how is this translating into revenue momentum within the segment? Could you comment on that? Andrew Florance: Sure. So I would say the most important thing when you look at translating into revenue momentum is now that we have about a year or so with this -- and we -- I guess we had 10,000 users in the Q1, Q2 of '25. Now we're up to 35,000. We have a lot more information on how the product is impacting their earnings, and the results are phenomenal. So that gives me comfort that we can actually begin to bring the ARPU up pretty materially and that we'll have growing productivity with that group, and you've got good synergies with Apartments.com and their productivity. So all of that is why we have the confidence that we are building revenue momentum. Curtis Nagle: Okay. Not to belabor a point, but it's obviously top of mind. Would you be willing to provide bookings guidance for 2Q just at a minimum, so we don't continue to see such a mismatch between external expectations and investor expectations? Christian Lown: So bookings is a number we've never guided to. There's only, I think, 2 or 3 of you actually put out a bookings number. I think if you look at it back historically, you see variability in quarters. Last year, Q1 2025 was 18% of bookings for the full year. So you look at these different elements, but we provided booking numbers for Homes.com because we want to increase transparency. We want people to understand the investment, what's going on. But getting into guidance around bookings is not something we're going to do. Andrew Florance: And again, remember, bookings are up 20% quarter-over-quarter. Christian Lown: Year-over-year. Andrew Florance: Year-over-year. Operator: Our next question comes from Surinder Thind with Jefferies. Surinder Thind: Andy, can you maybe just talk about the decision or the pricing strategy in Homes.com at this point and the idea of raising pricing for new members on May 1. Just why not maybe wait a year? Obviously, the metrics are very supportive of that pricing action, but just maybe to build the user base further or help us understand the timing there. Andrew Florance: Well, I think we can do both. I think we can grow the user base and capture more of the value. So particularly in the folks who are earning under $250,000 a year, and agents earning under $250,000 a year, there are many, many of those agents. I'm looking at the close rates for the folks who are well trained, who have the upper half of Homes.com salespeople and the close rates are extremely high. It feels like they're north of 50%. And once you get to that higher close rate, you start to feel that you need to bring the price up. I just -- I think that there is room to recognize more value and at the same time, continue to keep the same growth and possibly accelerate the growth in the number of members. There are a couple of places in looking at the different cohorts of agents and profile of agents. There are a couple of areas limited that will probably bring the pricing down a touch. But in the biggest bulk of cohorts of agents, we're leaving too much on the table. We're providing a lot of value. And I think we can push price and keep headcount growing -- and keep member count growing. And we'll play with it in each of the cohorts to optimize it, but I feel pretty good about that right now. Operator: Our next question comes from Brett Huff with Stephens. Brett Huff: Thanks for the ROI stats on Homes.com. That's super helpful and something we've been focused on. My question is on Matterport. We've been feeling that, that's a really big underlying structural kind of piece of the business that's underappreciated. Can you talk a little bit about -- you gave us some great stats on lingering on the site and things like that. Can you -- and so it's clearly just a great enhancer to all of the products that you have. But can you talk balancing that and how you price it and distribute it just to improve the product generally? And then also talk a little bit about Matterport as a function or a module of data that's going to help you differentiate and remain sort of on the edge of proprietary data? Because I kind of heard both of those themes, and I'm wondering if there's a pricing -- given trying to maybe do both of those, how do you think about pricing and distribution of that? Andrew Florance: Okay. So in pricing and distribution, I mean there are a lot of elements there. So in pricing, first of all, if I go from the last question backwards, part of my thinking around bringing the price up a bit in the Homes.com is a core value proposition there is the Matterport's and the exterior 3Ds we build and then the floor plans we build. That delivers a lot of value. I believe there's -- and you've heard the conversion stats when people have a Matterport, they're getting 30x the views, they're getting 54 -- Apartments getting 54x the tours. So we -- there's a part of the Matterport pricing that's actually embedded in a monthly subscription fee or a monthly advertising fee for either Apartments or for Land or for LoopNet or for Homes.com. So you can recognize a little bit of pricing value there with Matterport. With Domain, it's a little bit different. There, we are using Matterport to get people to upgrade to higher depth level advertising. And so you're getting price appreciation, but you're actually giving them value. So effectively, you're selling a Matterport when you do that, and there's a lot of that going on, and we're getting a very favorable response to that in Australia. A big change with Matterport is when we acquired Matterport, they were very focused on the mass subscription of low-end accounts using the iPhone as the capture device. We actually feel that the professional user of Matterport, the real estate agent, the leasing company, the architectural engineering construction company is the biggest part of the market, and they want speed of capture, quality of capture. So we are refocusing folks towards a more aggressive price point on the Matterport Pro3 camera and then a higher SaaS subscription price for regular users. So we're pulling the hardware down and focusing more on the SaaS subscription side. And that's sort of a razor and razor blade strategy. We are working aggressively on the Matterport Pro4 camera. I know there's an engineering team meeting right now in Mountain View on reviewing the final specs on that. So there, it's -- you have more SaaS revenue, slightly higher price points, lower hardware revenue. And then the pricing is reflected in across the board in the subscription rates or advertising rates of LoopNet, Apartments, Homes and Land. In terms of competitive differentiation, very excited about that. I mean I described the X-ray function. It doesn't do it justice. The ability to do what our team is -- our brilliant team is doing, which is produce these Gaussian splats that make an exterior model that allows you to see the neighborhood, fly around the house. And then as you approach the house, the walls disappear and you move into the house or as you approach that, as you fly a synthetic drone, a virtual drone towards the house, the ability to take off the roof and look into the second floor, pull it up and look into the first floor. The ability to do the side-by-side comparisons in AEC, we have a very robust product road map right now that will continue to differentiate us. And we don't feel that there's anyone really keeping up with our innovation pace or development pace. And the earnings call sounded a little bit like a Matterport earnings call because it sort of came up in every other thing I said. But to the credit of the development team and the leadership team at Matterport, they're leaning into facilitating success in all of our products with that differentiating technology. It's good stuff. Operator: Thank you. I would now like to turn the call back over to Andy Florance for any closing remarks. Andrew Florance: Oh my gosh. Well, I'd like to thank everyone for joining us on this first quarter earnings call. I look forward to reporting our progress in the second quarter earnings call. Thank you very much for joining us. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to S&P Global's First Quarter 2026 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to investor.spglobal.com. [Operator Instructions] I would now like to introduce Mr. Mark Grant, Senior Vice President of Investor Relations and Treasurer for S&P Global. Sir, you may begin. Mark Grant: Good morning, and thank you for joining today's S&P Global First Quarter 2026 Earnings Call. Presenting on today's call are Martina Cheung, President and Chief Executive Officer; and Eric Aboaf, Chief Financial Officer. We issued a press release with our results earlier today. In addition, we have posted a supplemental slide deck with additional information on our results and guidance. If you need a copy of the release and financial schedules or the supplemental deck, they can be downloaded at investor.spglobal.com. The matters discussed in today's conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our Forms 10-K and 10-Q filed with the U.S. Securities and Exchange Commission. In today's earnings release and during the conference call, we are providing non-GAAP adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management. The earnings release contains financial measures calculated in accordance with GAAP that corresponds to the non-GAAP measures we are providing and the press release and the supplemental deck contain reconciliations of such GAAP and non-GAAP measures. The financial metrics we'll be discussing today refer to non-GAAP adjusted metrics unless explicitly noted otherwise. As noted in the press release and slide, financial guidance provided today assumes contributions from Mobility for the full year and excludes any impact from anticipated stranded costs. The company expects to update adjusted guidance to exclude Mobility and institute GAAP guidance upon completion of the spin. I would also like to call your attention to certain European regulations. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should contact Investor Relations to better understand the potential impact of this legislation on the investor and the company. At this time, I would like to turn the call over to Martina Cheung. Martina? Martina Cheung: Thank you, Mark. We are pleased with the results that we achieved in the first quarter. Revenue increased 10% year-over-year or 9% on an organic constant currency basis. Revenue from our subscription products increased 6% year-over-year. We saw even stronger growth in our market-driven businesses this quarter with Ratings and Indices both showing remarkable resilience. On a trailing 12-month basis, we delivered 140 basis points of margin expansion, and increased adjusted diluted EPS by 14% year-over-year in the quarter. We demonstrated a continued commitment to disciplined capital allocation returning $1 billion to shareholders through share repurchases in addition to our cash dividends in the quarter. We delivered these results in an incredibly volatile and dynamic operating environment, making clear progress in each of the 3 pillars of the strategic vision we outlined at our Investor Day. While we're pleased with the innovation, execution and results that we delivered in the first quarter, we acknowledge the macro uncertainty that has increased in recent months. Even if conflicts are resolved quickly from this point, we expect it to take some time for supply chains to return to normal. In recent months, the geopolitical and economic backdrop has shifted and become substantially more challenging for many of our customers. The conflict in Iran has shocked energy markets and supply chains. This has led to much higher energy and commodity prices while also elevating volatility. The longer the duration of this conflict, the broader and more severe the impact on global supply chains and markets across sectors. This quarter, we also saw private credit navigate increased scrutiny, wider spreads and elevated redemptions. We expect strong growth in private markets over the medium term, but this growth will require increased transparency from data and benchmarks, which is an important area of focus for S&P Global. Throughout all of this, the pace of technology innovation has only accelerated. Clearly, the markets are reacting quite aggressively to new AI frontier model headlines, shifts in diplomatic initiatives and the unpredictability of the current environment. That manifests in volatility across the global markets. We've seen broad dispersion in the performance of different sectors of the equity markets, elevated volatility in equity and commodity markets and shifting expectations for central bank actions. Despite the turmoil in the macro environment, issuance was resilient. Billed issuance increased 14% year-over-year in the first quarter, primarily driven by strength in investment grade. Investment grade benefited from hyperscaler investments in AI infrastructure. Notably, even without the hyperscaler issuance, investment grade delivered healthy growth in part benefiting from several large M&A transactions. Growth was partly offset by a high-teen decline in bank loan volumes as we lapped a very difficult compare in the first quarter of 2025. We saw spreads widen slightly in the quarter as a reaction to uncertainty around AI, private credit and geopolitical conflicts. Over spreads are still below historical norms. While first quarter billed issuance was above our initial expectations, Much of the outperformance was driven by hyperscaler issuance that our original guidance assumed would be spread more throughout the year. Our full year expectations for the debt markets are largely unchanged. Everything we see reinforces our vision for the company, and our priority remains on executing our strategy. We are committed to our mission to advance essential intelligence by advancing our market leadership, expanding into high-growth adjacencies and amplifying enterprise capabilities and AI. Customers are coming to S&P Global with increased urgency for our differentiated data and benchmarks. Insights and tools to make timely and informed decisions in this rapidly evolving operating end market environment. For instance, we saw record revenue and attendance at CERAWeek, the premier global conference addressing the intersection of energy, finance, technology and geopolitics. This year's conference hosted a record 11,000 attendees and more than 2,300 companies from over 90 countries. We are helping our clients make sense of and manage the spike in volatility. We posted record-setting revenue in Global Trading Services and Energy and record quarterly average daily volumes for the S&P 500 Indices. We are also advancing our leadership as we help our customers unlock the potential of AI. As we discussed at our Investor Day, we are deploying AI native solutions and tools like ChatAI and Document Intelligence for those seeking speed and scale on our platform. For those who want to build their own AI-enabled or Agentic solutions, we are increasingly making our data accessible via standard protocols like MCP. We've seen meaningful enhancement to the value that our products are creating for customers. More than 1/3 of our CapIQ Pro users engage with the AI features we've launched, including ChatIQ and Document Intelligence. We also saw tremendous growth in the usage of S&P Global data in the quarter. In March, we shared that nearly 150 customers across the Market Intelligence and Energy divisions, were interacting with our data through AI applications like Claude and Copilot. We now have more than 300 customers under contract or in trial periods for Kensho-LLM-ready APIs. In addition to the rapid growth in customers, we are seeing large increases in the volume of data that's consumed directly via API calls from customers and through these platforms. For instance, in the first quarter, the volume of API calls made by our customers was more than 5x the volume that we saw just 1 quarter ago. Volumes doubled month-over-month just from February to March. We can see early indications of this translating into economic benefits. ACV growth among customers who use our AI solutions is outpacing growth from other customers by a wide margin. Growth in Market Intelligence is 30% higher among AI customers compared to others and growth among AI customers and Energy is double the growth rate among other customers. Chief Client Office customers are also actively seeking the deep expertise of our in-house Kensho team. 25% of these clients are engaged with our Kensho Labs Technologies to explore opportunities to leverage our technology and data to help solve their most challenging problems. All in, our approach to leveraging AI in S&P Global Products and S&P Global data in AI platforms is resonating with customers in a meaningful way. While it will take some time to see exactly how this manifests in our financial results, we are confident that the value we create for our customers is increasing and the economics will reflect that over time. At our Investor Day, we provided a breakdown of the revenue that S&P Global generates based on different categories of our data, benchmarks and workflow tools. We noted that less than 5% of total revenue comes from undifferentiated data. Even within Market Intelligence, undifferentiated data contributes only 12% of revenue, but we wanted to share the full breakdown of the division here. Advisory, Consulting and Events constitute about 11% of Market Intelligence revenue and our workflow tools, which include a portion of Capital IQ and all of Enterprise Solutions constitute about 37%. Our proprietary and curated data includes proprietary data based on our intellectual property as well as curated contributory and reference data. For our curated data, perhaps the biggest challenge in replicating some of these data sets like Compustat and SNL is the means by which we aggregated these data sets to begin with. Often, employees would have to physically scan and paper documents in local offices. While some of that data may be publicly available, many of these types of data sets are only available in digital formats from S&P Global. Importantly, Market Intelligence is also the distribution platform for our Ratings content through RatingsDirect on Capital IQ Pro and RatingsXpress. Contributory data sets include products and data like Visible Alpha and With Intelligence. We also have reference data in this bucket, which is based on intellectual property owned or co-owned by S&P Global like the Global Industry Classification Standard, or GICS, and LoanXID or LXIDs. We also generate unique proprietary data from our events, including our private market events. With Intelligence team collects insights through engagement with LPs that help GPs target more accurately based on fund, strategy, sector and regional capital commitments. This unique insight is available through our intentions and preferences data set. One important point is that we have attributed the revenue from Capital IQ across 3 categories: benchmarks, workflow tools and undifferentiated data. While many of our customers would likely attribute less value to the undifferentiated data, we wanted to take a conservative approach to this analysis. That breakdown is important because it highlights the multifaceted value proposition for Capital IQ Pro. When we talk about Capital IQ Pro, many investors often focus on our core platform or desktop offering. However, CapIQ Pro's value to our customers extends far beyond the desktop to the data, business logic and tools that are housed within the platform. As I mentioned earlier, we are deploying AI native solutions and tools for those seeking speed and scale on CapIQ Pro, including ChatIQ and Chart Explainer. These features are already driving customer engagement, and we expect many of our customers will continue to consume our content and data primarily through an integrated desktop solution. Other customers will have an interest in interacting with our content in their own AI environments and in third-party productivity tools like Claude and ChatGPT. Much of our data is accessible via model context protocol or MCP, and other standard protocols to customers in these environments. Our branded custom business logic and calculation engines as well as many of the tools that exist in Cap IQ Pro will integrate with platforms like Copilot and Claude. Our customers are on their own AI journeys, and adopting these new platforms in different ways, depending on urgency, comfort level and regulatory sensitivity. We will continue to invest in new ways to create value for our customers, including delivery through MCP and agent agent protocol, to ensure that customers can access our data and tools where they need it. And as usage increases and use cases expand, we expect to align the economics with the value we create through price. In the first quarter, we saw a great deal of innovation, including new products, new features and new services for our customers. Within Market Intelligence, we continue to make progress in the private markets with our partnership with Cambridge Associates and Mercer. In our Energy division, we just wrapped up the best CERAweek we've ever had. We unveiled our new AI native Upstream product for data and insights called CERA Titan. As we've discussed with you previously, we are in the process of completely revamping the Upstream business within our Energy division. 70 customers were able to demo the new platform and feedback was overwhelmingly positive. We immediately saw an increase in leads and sales pipeline for Upstream Data & Insights. And one large strategic customer was so pleased with the new platform that we were able to close a large renewal with a meaningful increase in contract value. In addition to improving our Data & Insights solutions, we also announced in a separate press release that we have signed an agreement to divest the software portfolio in our Upstream business, and we expect that to close in the second half of 2026 or early 2027. This allows us to more tightly focus our efforts on the proprietary Data & Insights within Upstream, and we believe this will allow us to make faster progress towards returning Upstream to sustained positive growth. We continue to innovate within S&P Dow Jones Indices with the launch of iBoxx U.S. Treasuries Index, as the first major index available as a native digital asset on a blockchain. We also launched an additional tokenized S&P 500 Index on blockchain in partnership with Centrifuge, and we launched S&P Link in U.S. and Europe senior debt indices. We continue to focus on decentralized finance and fixed income as strategic initiatives and are excited about the slate of new products coming to In Ratings, we raised the first esoteric ABS issuance backed by Bitcoin as we continue the innovation leadership in digital asset finance that we started in 2018. As we continue to execute our strategy, we are pleased with the results we're delivering for our shareholders with strong revenue growth and margin expansion in every division. With that, I'll hand it over to Eric to walk through the quarter's financial results and the guidance. Eric Aboaf: Thank you, Martina, and good morning, everyone. Starting with Slide 16. We delivered strong first quarter financial results with 10% reported revenue growth, 9% organic constant currency revenue growth and 14% growth in adjusted diluted EPS. This performance underscores the durability and resilience of our business even amid a period of elevated geopolitical and economic disruption. Reported revenue growth of 10% includes the acquisition of With Intelligence, which closed in the fourth quarter, offset by the divestitures of EDM and thinkFolio in January as well as modest tailwind from FX. Adjusted expenses increased 8%. As Martina mentioned, we began to see volatility in macro risk increase in late February and continue through March. We reacted quickly to make sure we were measuring expenses effectively allowing for better first quarter margins in every division than we had anticipated when we gave initial guidance. Strong growth and disciplined expense management combined to deliver 100 basis points of year-on-year margin expansion to 51.8% and 12% growth in adjusted operating profit. Excluding OSTTRA from the prior year period, our first quarter 2026 margin expansion would have been 160 basis points. Turning to our divisions on Slide 17. Market Intelligence revenue grew 8% and organic constant currency revenue grew 6% in the first quarter. Subscription revenue increased a solid 6%, both on a reported and organic basis, driven by strong renewals and net sales across the franchise. Subscription growth included a 50 basis point headwind from the timing of revenue recognition that we expect to reverse in the back half of the year. Onetime revenue and volume-driven revenue grew 18% in aggregate in the quarter. This was partly driven by the acquisition of With Intelligence and partly by the rebound of volume-driven activity. Data Analytics & Insights reported revenue increased by 11%, driven by our first full quarter of revenue from the With Intelligence acquisition worth 6 percentage points as well as solid 5% organic growth driven by market data and valuations, Cap IQ Pro and Visible Alpha. Enterprise Solutions reported revenue grew 3%, reflecting the divestiture of EDM and thinkFolio in mid-January. The business has delivered very strong organic growth of 14%, with double-digit growth across all major product lines. We've also included an additional slide in our supplemental deck to provide a breakdown of the workflow tools in our Enterprise Solutions segment, most of which benefit heavily from S&P Global data and strong external networks. Credit and Risk Solutions revenue grew 6%, driven by strong subscription sales of RatingsXpress and RatingsDirect. Market Intelligence's adjusted expenses increased 7% year-over-year driven by a full quarter of expenses from the With Intelligence acquisition as well as an unfavorable FX impact, higher compensation expense and long-term strategic investments, partially offset by the impact from the recent divestitures, including the sale of EDM and thinkFolio. Market Intelligence delivered 80 basis points of operating margin expansion to 33.6% in the quarter. Now turning to Ratings on Slide 18. Ratings revenue increased 13% year-over-year, exceeding our internal expectations for the quarter. Growth was strong across both transactional and non-transactional revenue streams. Transactional revenue increased 15%, driven by strength in investment grade, supported by a number of large hyperscaler or M&A transactions in the first quarter. Transaction revenue from governance, high-yield and structured finance also grew in the quarter but was more than offset by the weakness in bank loans due to a high teens decline in billed issuance. Private markets revenues were up over 25%. Non-transactional revenue grew 11%, driven primarily by higher annual fee revenue. We were also pleased by our growth in issuer credit ratings or ICRs, and Rating Evaluation Services or RES in the quarter. adjusted expenses rose 8%, reflecting higher compensation costs and continued strategic investments in our people, technology and product development. This contributed to the division's 160 basis points of margin expansion to 67.8%. Now turning to S&P Global Energy on Slide 19. The conflict in Iran has brought considerable volatility and uncertainty to the Energy markets that has persisted into the second quarter. Some of the Energy customers in the Middle East have experienced a direct impact to their facilities and many are facing supply chain and/or distribution disruptions. Even in this environment, Energy revenue grew 7% this quarter as we benefited from very strong events revenue, and we saw a spike in value-driven transactional activity. At the same time, the conflict weighed on other parts of our Energy division, including our subscription revenue. Sanctions continue to be a headwind as well as we've called out in recent quarters, but the conflict in the Middle East is pressuring clients and could lead to slower growth in the coming quarters. As Martina noted earlier, amid this uncertainty, our customers are turning to S&P Global for Data & Insights only we can provide. CERAWeek in Houston hit new records and online, the number of user queries in our Energy platforms, ChatAI feature more than doubled quarter-over-quarter. Energy & Resources, Data & Insights and Price Assessments grew 7% and 6%, respectively, driven by strength in petroleum gas, power and renewables. The sanctions we discussed last year drove a 100 basis point headwind to Energy & Resources and 140 basis points headwind to Price Assessments. Advisory & Transactional Services revenue increased 15%, driven by strong growth in conference and training revenue as CERAweek delivered record-setting attendance and revenue. We also posted close to 30% growth in Global Trading Services or GTS amid elevated energy market volatility. Upstream Data and Insights revenue declined 5% in the quarter. driven by the absence of a prior year onetime fee. We continue to streamline this business line and refocus on the areas of proprietary Data & Insights, as Martina mentioned. Our transformation is on track, including the realignment of the sales teams and the debut of our upgraded client platform at CERAWeek, which already has sparked strong customer interest. We're pleased with the team's progress, but given heightened Energy market volatility and uncertainty, we still think it could take several quarters before these management actions drive growth in Upstream. Adjusted expenses grew 4%. Our teams in Energy did a particularly good job moving quickly to keep expense growth low to preserve margins during a volatile period. The expense growth we did see was driven by higher compensation costs and unfavorable FX impact as well as ongoing investments in growth initiatives. First quarter margin expanded by 120 basis points to 49.3%. Now turning to S&P Dow Jones Indices on Slide 20. Revenue grew by 17% with double-digit growth across all business lines. Revenue associated with asset-linked fees grew 18% in the first quarter. This was driven by year-over-year equity market appreciation and net inflows into products based on S&P Dow Jones Indices. As we've noted before, in periods of heightened volatility, we often see slower flows and higher priced indices like sector, factor and thematics and higher flows in lower price indices like the S&P 500. That was the case in the first quarter as well, and that mix shift drove a modest decline in average realized price year-over-year in our asset-linked fees business. Exchange-Traded Derivatives revenue was up 18%, driven by strong volumes, particularly in SPX, which continues to demonstrate the natural hedge we have in this business during times of geopolitical and macroeconomic disruptions. Data and custom subscriptions continued to benefit from our focused commercial efforts over the last several quarters posting its third consecutive quarter of double-digit growth. Revenue increased 12%, largely driven by new business growth and end-of-day contracts. Adjusted expenses were up 13% year-over-year, driven by higher compensation costs and investments in growth initiatives. Indices operating profit grew 18% and and operating margin expanded 90 basis points to 73.8%. Now turning to Mobility on Slide 21. Revenue grew 8% in the first quarter, underscoring the mission-critical nature of the division's products with high single-digit growth in both dealer and financials and other and a modest tailwind from FX. Customers continue to rely on CARFAX's unique data and solutions, driving strong subscription growth despite a complicated environment for automotive OEMs. Dealer revenue increased 9%, benefiting from momentum in new customer growth at CARFAX and automotiveMastermind. Manufacturing revenue grew 5%, driven by subscription growth and increased discretionary spending. Growth was partially offset by softness in recalls and OEM marketing related products. Financials & Other grew 8% as the business line continues to benefit from underwriting volumes and commercial momentum. Adjusted expenses grew 5%, driven by advertising and promotional investments. Mobility's operating margin expanded 150 basis points year-over-year to 40%. Looking forward, we remain on track for our planned separation of the Mobility business, including completion of the spin mid-2026. We will file our Form 10 publicly this quarter, and the Mobility Global team is excited to be hosting their Investor Day in New York City on May 12, ahead of the launch of its equity roadshow. We also plan to launch a public debt offering for Mobility at some point this quarter, targeting an investment-grade rating. As a reminder, from a financial reporting and guidance perspective, S&P Global will continue to fully consolidate Mobility Global in our financial statements and 2026 guidance until the separation is complete. Upon completion of the spin, we intend to provide recast financials for the 4 quarters of 2025 and any 2026 periods reported adjusted to exclude Mobility's contributions along with other relevant adjustments as outlined at our Investor Day. We also expect to issue updated 2026 guidance at that time, excluding Mobility. Now shifting to our outlook, starting with Slide 22. I'd like to review the key macroeconomic assumptions that underpin our guidance, which takes into account the current geopolitical environment. The conflict in Iran has led to the largest energy shock since the 1970s and counterbalance what was previously a broadly favorable economic environment for business. Our current outlook assumes the situation stabilizes by the end of the second quarter, but we acknowledge the risk of a protracted conflict. We assume 3.2% global GDP growth, including 2.2% growth in the U.S. We also assumed 3.2% CPI growth in the U.S. We expect near-term energy client demand to remain suppressed given our expectation for ongoing market uncertainty. Should the conflict persist longer or escalate, we could see more significant direct headwinds, particularly in our Energy business and significant indirect headwinds in our market-sensitive businesses depending on equity market reaction and credit market conditions. We continue to see favorable market conditions for issuance in 2026 even though we now only expect 1 rate cut in the U.S. We also entered the year with encouraging maturity walls as we discussed on our fourth quarter call, and we are encouraged by the growth of announced M&A. As Martina mentioned, some of the strength in issuance in the first quarter was driven by front-end loading of hyperscaler issuance relative to our initial expectations. Given both the outperformance in the first quarter and the more modest expectations for Q2, we do not expect to see acceleration in Ratings revenue growth in the second quarter. We continue to expect Ratings growth to moderate in the third quarter before turning negative in the fourth quarter as we lap prior year highs. This leads us to our updated guidance for the Enterprise on Slide 23. At the consolidated level, we are reiterating our guidance for organic constant currency revenue growth in the range of 6% to 8%. We're also reiterating our guidance for 50 to 75 basis points of margin expansion in 2026 excluding the impact of OSTTRA. Our adjusted EPS guidance is also unchanged at slightly higher expected interest expenses offset by lower share count due to the additional repurchases we now expect. As you can see on Slide 24, our division guidance is also unchanged with the exception of our Energy division. Given the external environment, particularly the impact of the Iran conflict and the energy disruption on both the demand and supply side, we currently expect to deliver organic constant currency revenue growth in the range of 4.5% to 6%, 1 percentage point lower than the previous guidance. Importantly, our guidance assumes that the current elevated level of disruption in the energy market persists through the second quarter. The supply chain disruptions would not fully be resolved until later this year. For our Indices business, our full year guidance is unchanged. However, the underlying assumptions have been adjusted to reflect the current market dynamic. Our guidance now assumes equity markets roughly flat from current levels and low double-digit growth year-over-year in ETD volumes. We also wanted to provide some directional color for the second quarter. In Market Intelligence, we expect some acceleration in subscription revenue, given what we're seeing in customer traction and sales pipeline. We expect that to be offset somewhat as growth in nonsubscription revenue normalizes. In Ratings, we will be lapping the disruption caused after Liberation Day last year, which creates a favorable compare. We expect growth to remain strong, but we do not expect acceleration in 2Q. We do expect investment grade to continue to represent a higher mix of issuance compared to historical averages, particularly if we continue to see elevated hyperscale CapEx driving large volumes in the second quarter. For Energy, the macro disruption has a concentrated impact in the second quarter, and we have already seen that impacting our near-term sales pipeline. We expect revenue growth in the second quarter to fall slightly below the guidance range for the full year before reaccelerating in the second half. We will be monitoring the sales motion, customer health and macro environment closely and managing expenses throughout the year to ensure we are preserving margin. For Indices, we expect continued robust growth in the second quarter before growth decelerates in the second half given the tougher compares in 3Q and 4Q. For Mobility, we expect growth to accelerate slightly from the first quarter levels with stronger growth expected in the second half. On second quarter margins, we expect margin expansion to be above the enterprise full year range for Ratings and Indices, slightly below the range for Mobility and Energy and within the range for Market Intelligence. This is largely due to the timing and quarterly phasing of expense recognition as we were very disciplined in our approach in the first quarter. Our full year expectations in each of these divisions are unchanged. Lastly, we want to provide an update on our capital plans for the rest of the year. As you know, we have a target gross leverage range of 2 to 2.5x trailing 12-month EBITDA. Given the expected loss of Mobility EBITDA, our current leverage of 2.3x will naturally increase to 2.4x at the end of the year. However, we expect to issue approximately $2 billion in debt at Mobility in conjunction with the spin. Proceeds are expected to fund a cash payment to S&P Global, which we would expect to use for a combination of incremental share repurchases and some debt reduction. Given the strength and resilience of our business and our confidence in its long-term profitable growth, we believe the current share price reflects an attractive opportunity to increase our repurchases from the expected 85% of adjusted free cash flow to at least 100% or to roughly $4.5 billion for the year. With that, let me turn the call back over to Mark for your questions. Mark Grant: Thank you, Eric. [Operator Instructions] Operator, we'll now take the first question. Operator: Our first question comes from Toni Kaplan with Morgan Stanley. Toni Kaplan: Martina, thanks for the color on what you're doing with regard to the AI distribution channels. I was hoping that you could expand on how you're thinking about the partnership strategy with the large AI players? Are you building SMP, MCP apps on the platforms? Or you just plan to continue to provide the data through the MCP integrations and the APIs? And maybe if you could just talk about the monetization model and directional economics between the different distribution channels. Martina Cheung: Toni, thanks for the question. And the quick answer to the first part of that around MCP applications is, yes, that is our intention. I think we're going to be very thoughtful around how we build those applications and for what, particularly. This is one of the reasons why we wanted to highlight the value that exists in the workflows in Cap IQ Pro today, for example, it's not just the data. It is the standards, the business logic as well as the tools and all 3 of those will be part of that strategy. The first step to doing that has actually been the announcement of the S&P Global plug-in, which was announced in line with the Claude for Financial Services announcement in the first quarter. And that's essentially a series of agents that teach AI agents within the platform, how to actually conduct specific tasks for data, AI-ready data that the client might be licensed to. So maybe to give you an example, one of our buy-side clients working with Kensho was looking at our financial data via at AI-ready API and Kensho helped them to understand how to use the plug-in to perform tasks like creating tearsheets or creating earnings calls previews. And as a result, the clients liked it so much that they actually canceled their existing provider and went with our data and plug-in even though it was about 20% more expensive. Now look, it's early days. Obviously, we just launched that in Q1, but I think it's an interesting signal for how clients are testing the value of our IP, whether it's our logic, our standards as well as our data in the context of these providers. Now the point I would make on monetization is that we are really thinking about monetization through the lens of enterprise value. So as you know, we don't do seat-based licensing. We don't do usage only. We track usage, channels, the value we create and a number of other metrics as part of the discussions that we have with our clients on value and price accordingly. And that's going to be true for plug-in. It's going to be true for MCP. It's going to be true for AI-ready data as well. And we're seeing clients who are quite interested in the value that we bring through all of that. Perhaps maybe one other example I would provide is in the quarter two financial clients who are just subscribing to our data at renewal, were opting to get that data available in an AI-ready format. And were willing to pay in the range of 35% to 45% on the renewal increase to get the AI access. So again, early days, but some very strong signal here around the monetization from an enterprise value standpoint. Thanks for the question. Operator: Our next question comes from Faiza Alwy with Deutsche Bank. Faiza Alwy: Martina, I wanted to follow up on the same topic. On Slide 11, where you talk about Market Intelligence data differentiation. I'm curious how would you -- when we look at workflow solutions, how would you attribute sort of the value of the proprietary data versus sort of the software component of the workflow tools here. Martina Cheung: Thanks for the question. So with regards to workflow, you'll see a lot of these products embedded in our Enterprise Solutions business. And there, we operate many mission-critical software and workflows for our customers. These would be workflows that are scaled, require robust controls, risk management, and compliance layers and really require a lot of intervention through our managed services to make sure that they're continuing to deliver. And so there's very much a mission-critical nature to many of these. There are several of them that actually function as networks for industry groups, not just for an individual client. And so there, we would see perhaps the Wall Street office, for example, or ClearPar in that category, and again, serving not just a client, but the benefit of it being derived because it is actually informing a whole ecosystem. And in many cases, the value that our clients get from these tools is a function of some of the proprietary content that we embed in the tools. A good example there would be the loan reference data that is provided through Wall Street Office. And so we think of it more as the value that we are bringing to the clients through the workflow tools and the importance and criticality of those systems to clients very, very critical processes. And that's one of the reasons why we continue to see good growth in these tools across Enterprise Solutions as well. Thanks for the question. Operator: Our next question comes from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: In regards to MI, the subscription growth is expected to accelerate in 2Q. I was just wondering if you could unpack that some more what's driving it? How much of it is driven by AI products, key client office or any other color that you've been providing? . Eric Aboaf: Ashish, it's Eric. We've seen very good performance in the first quarter as we've started the year in MI. And we just expect that to continue to build. Subscription revenue growth was in the 6% range. We feel good that, that will continue to build. But we had very good performance that augurs well for the coming couple of quarters. Net renewal rates are up 100 basis points or so. Pipeline has been building January to February to March. Our average deal size is up, our net sales are up. So we see good underlying indicators across that franchise in a number of ways. And we think that will just build during the course of 2Q, 3Q and 4Q and deliver the full year guidance that we expect in a nice way. Thank you for the question. Operator: Our next question comes from Scott Wurtzel with Wolfe Research. Scott Wurtzel: On the Market Intelligence margin, just wondering if you can maybe help contextualize how much of the margin expansion that you're seeing is being driven by efficiency gains associated with AI. Eric Aboaf: Scott, it's Eric. Margin expansion has come in nicely in MI in particular, in first quarter. We were careful with the external environment. Starting late February, we -- the Iran conflict started. We're careful about our discretionary spending. And so you saw particularly strong performance in MI as well as our other 4 divisions as we just carefully thought about pacing expenses through the year. More broadly, if you think about margin expansion in MI and other divisions, it's really a combination of factors. There's certainly a set of AI benefits that we're getting as we think about our data operations, which is a big part of MI. We see emerging progress or I think I'd say good progress in software development activities that are AI-driven with all the new tools available to it. And then we see the continued kind of classic productivity tools being effectuated in MI as the team there is really driving a combination of top line and bottom line. So we're feeling comfortable about the margin expansion for the full year. We feel like we got off to a good start. And we just see with AI, a set of tools that become stronger and stronger and more and more valuable to us as we continue to deliver margin and earnings growth quarter after quarter. Operator: Our next question comes from Curtis Nagle with Bank of America. . Curtis Nagle: Just a really quick one for me. Just if we go through, I guess, how to think about the balance of transaction, non-transaction growth within the Ratings business for the rest of the year? And I guess just for the first quarter, what drove a pretty notable spike in the non-transaction numbers. You have to get answer that. Eric Aboaf: Curtis, maybe I'll start on nontransaction. We had good growth in annual fees as the franchise continues to to be viewed very favorably by our clients around the world. And then our CRISIL revenues, which are booked there, which have a mix of different factors, performed very, very well in the first quarter, which we were pleased with. So a couple of good tailwinds, and we expect some of that to to generally moderate in the coming quarters, but we think it will help contribute to our full year revenue guide. Martina Cheung: And Curtis, I would maybe just add that we -- you may recall when we gave our guidance back in February that we mentioned we had prudent and moderate expectations for hyperscaler issuance within the year. And a good part of that was that we didn't assume that all of the announced CapEx was going to be debt financed. And as we looked at the amount of hyperscale issuance in Q1, we believe that there was some pull forward there relative to our expectations for hyperscale issuance. And this is one of the reasons why we are continuing to maintain our expectations for billed issuance for the full year. Thanks for the question. Operator: Our next question comes from Manav Patnaik with Barclays. Manav Patnaik: I was hoping just going back to the workflow conversation, you could help us just appreciate the strategy in Energy where you're selling the workflow businesses and focusing in data, like how would those workflow brands different than the ones you were talking about in MI? And as a quick follow-up, just I think there were like 7 or 8 different brands, I think you're selling in Energy. I was just hoping you could help us size that for our models? Like how much are you getting selling to SLB. Martina Cheung: Manav, thanks for the question. Maybe to start, the size of that is about 25% of Upstream revenues. And that software portfolio, as you mentioned, is actually quite varied and quite distinct. And so one of the reasons that really informed our decision there is that we think SLB is a very good partner on that. And as part of that decision to divest, we also have a new distribution partnership with SLB that we are quite excited about as we close that. And so what I would focus on maybe is the 75%, which is highly differentiated and unique proprietary content. Maybe just to give you a sense for what is here we cover from basin to reservoir subsurface and geoscience data, including seismic surveys as well as in logs and spatial data. Some of the stuff that is particularly useful for our clients is Vantage asset valuation data that covers over 17,000 global upstream and gas assets. And we also have very, very unique benchmarking performance content that is based on contributory data and it allows operators to actually do peer-to-peer performance data, and is highly valued. This data actually goes back over 30 years, covering about 80,000 wells globally. There's a lot more to that. And one of the things that we're super excited about is actually creating Titan that we talked about in the prepared remarks that sits on top of all of that data and provides the workflow for our clients to really interact with that data more seamlessly. This is something that our clients have been asking us for, for many years. And the overwhelmingly positive feedback that we got when we use CERAWeek for that soft launch was just really very encouraging. And we were able to close one client already just on the demo of the new tool because those clients are very, very aware that our data is the highest quality and most unique out there. And so Upstream more broadly, I would say, we look to our broader revenue transformation there. We look to the full hard launch of Titan later this year. and are very excited about the progress that we're making there as well. Thanks for the question. Operator: Our next question comes from Alex Kramm with UBS. Alex Kramm: Just I think -- I don't know if I missed this, but one of the things you changed in your guidance was also the I guess, acquisition and divestiture contribution on Market Intelligence. It's a small change, but just wondering if I missed it, what changed there? And maybe related to that, With Intelligence, now that you've owned the business for a little over a full quarter. Just wondering what kind of underlying growth rates you're seeing and any on how that asset is performing? Eric Aboaf: Alex, it's Eric. Let me just summarize. As you noticed, the organic versus reported revenue contribution really has 5 deals, 3 of which are quite large, both divestitures and acquisitions. You've got EDM and thinkFolio being sold, you got With Intelligence coming in and 2 other small ones. And so what we just did was updated the contribution from the net effect of those 5. It's primarily driven by a modest change in revenue recognition. But as we step back, we're quite pleased in particular With Intelligence. As we said in our last call, we closed that early and even more quickly than we had thought. The team has really been digging in deeply and beginning to focus on all the synergies, both expenses and revenue in particular. And as we've said when we announced the deal, we expect high teens revenue growth in With Intelligence with some upside as we go 1 year to the next just because there are so many opportunities to redistribute that content across our franchise and really leverage the depth of the proprietary and the contributory data that Martina referenced earlier. Thanks for the question. Operator: Our next question comes from Owen Lau with Clear Street. Owen Lau: So following up on the AI Upstream data platform Titan, it's still in beta testing version. But could you please talk about your go-to-market strategy and the revenue model of this product? Is it going to be a subscription-based model or consumption-based or a combination of the two? Martina Cheung: Owen, it's Martina. Thanks so much for the question. It's going to be a subscription-based model. And in terms of the broader go-to-market strategy, I think the team was able to really effectively leverage CERAWeek because we have so many clients in town to be able to do our launch and get this into the minds of so many of our customers. And so we're excited about this. And the official hard launch for the product is going to be a little bit later this year. And as I mentioned, just to say again, the experience there is very comprehensive, bringing together so many of these unique data sets that we have, and it's powerful enough that one of our clients renewed with a very large uptick just on seeing the demo. Operator: Our next question comes from Jeff Silber with BMO Capital Markets. Jeffrey Silber: You highlighted the wars impact on the energy sector. I'm just curious, hopefully, this war is going to end soon. What do you think the impact would be on the other businesses? When should we start to see a rebound there? Eric Aboaf: Jeff, it's Eric. The impacts on the energy business, as we described, are quite direct, right, because customers are affected that slows down decision-making. And obviously, we need to help customers focus on their core business. In the other divisions, it's really a question about how expectations around the conflict evolve, what sort of macroeconomic and, I'll say, economic disruption we see globally and also region by region because that's going to affect equity price levels, which have an impact on our asset under our asset-linked fees. It's going to affect potentially credit markets and the flow of issuances in different market segments. So I think the indirect effects for the time being has been relatively small. The question is, does the conflict resolve itself in the coming months? Or does it drag on? Because the longer drags, it create more uncertainty and a wider range of outcomes. So in general, there's a range of factors. We're trying to be careful and prudent. You saw some of that in our patterning of our expense spend that we feathered in carefully in the first quarter to create some additional margin expansion. And we're just being vigilant about the effects and staying close with our clients and making sure we support them across our various divisions. Operator: Our next question comes from Andrew Steinerman with JPMorgan. Andrew Steinerman: Eric, it's Andrew. What was the organic ACV growth in the first quarter for MI? And then also remind us on the Ratings side, if S&P includes bank loan repricing transaction and billed issuance or not and how it impacted first quarter. Eric Aboaf: Andrew, it's Eric. Thanks for the question. On MI, we saw good ACV growth in the first quarter. It was right around the level of subscription growth, which we showed at 6%. And I think in line with the last couple of quarters. And then in terms of repricing for bank loans, that's not included in that line. Operator: Our next question comes from George Tong with Goldman Sachs. Keen Fai Tong: Can you talk a little bit more about the latest trends you're seeing in the private credit markets and how much S&P Ratings revenue you expect to come from private credit? Martina Cheung: George, it's Martina. Thanks for the question. Well, this is an area that we've seen very strong growth in over several years now. And in fact, we ended full year 2025 at the enterprise level was north of $600 million in revenues in private markets. As I mentioned in my own prepared remarks, Ratings Private Credit grew 25% off a decently substantial base. Remember, we've been investing in this area for several years, and we made sure that we have the analytical capacity expertise and the appropriate methodologies here. So it's an area that we are, I would say, cautiously optimistic about over the very immediate time frame just given some of the stresses on the sector that we mentioned. But we started this year with those potential stresses in mind. We didn't necessarily assume there was going to be huge growth in middle market CLOs, for example, we assumed that there would be some softness in BDCs. And so far, we're seeing the trends play out as expected. And then, of course, if you take a step back and you look at what we're doing in the broader Market Intelligence and Index strategies around private markets, all of what we're doing is geared towards giving LPs and GPs performance data and benchmarks and data and analytics to assess how these investments are trending as well as how LPs are thinking about shifting allocations, et cetera. And we are seeing a lot of demand for that data. Maybe just to give you two additional examples. During the quarter, we launched one of the first -- we launched the first tranche of the data from our Cambridge Associates and Mercer partnership focused on private credit and infrastructure. And there's a lot of interest in that data because of its contributory nature. And we also integrated With Intelligence, the first tranche of With Intelligence documents into Cap IQ Pro, which again has stimulated quite a bit of interest because it enables GPs to really look at and target LPs based on their allocation strategies. So overall, I think, look, at this point, whether it's our Ratings, our performance data at the fund level, deal level, et cetera, and the analytics, there is a really big need and a lot of interest in what we're providing here. Thanks for the question. Operator: Our next question comes from Craig Huber with Huber Research Partners. Craig Huber: I wanted to ask about AI efficiencies at your company. To the extent that you can give us some more examples of how AI internally is helping you guys be more efficient across your various sectors, including outside of the MI division? And also, Eric, I wanted to ask your 50 to 75 basis points expected improvement, excluding OSTTRA, how much ballpark do you think AI efficiencies is actually helping that number? Martina Cheung: Craig, thanks for the question. Let me start, and then I'll hand over to Eric. I would say that we have been tackling AI by looking at some of our largest strategic processes across the company. And so at our IR Day, for example, we mentioned four particular areas that we were focused on, including our Ratings analytic workflows, our research workflows in Energy and in Market Intelligence as well as our technology and data workflows. And these comprise roughly around half of the resources that we have at the company. And so if you want to think about areas outside of maybe some of the more obvious areas like the data organization, we can see tremendous capacity expansion within Ratings, for example, where they have been a very early adopter of AI as part of augmenting analytical capacity and making sure that our analysts can do more high-value things like thought leadership and additional research. And so we're really leaning into this. We have announced you will see the joining of Firdaus Bhathena as our Chief Technology and Transformation Officer. And Firdaus really as part of that is looking at how we will scale AI and other technologies like quantum and blockchain so that we can actually get the full benefit around the Enterprise. And he will also look at this transformation program that has started with these four strategic processes and make sure we're scaling it out to the rest of the organization over time. Eric, I'll hand over to you. Eric Aboaf: Craig, I'd just add, AI is just beginning to have some positive impact on margin. I'd say beginning because, remember, AI is just a continuation of machine learning tools and a wide range of capabilities that we've used and leveraged across our processes. I've talked at length about the enterprise data office and what we do in data operations. And so I'll say the predicate to the the new LLM tools have aided the margin expansion over the last year, some into this year. But I think the upside from the broad adoption of Frontier models is just beginning. And really will have an impact in '27, '28 and in the future years as they get expanded into a wide range of these strategic and important processes that we operate and will be helpful in that regard. Thanks for the question. Operator: Our next question comes from David Motemaden with Evercore. David Motemaden: Just a quick one on how clients are accessing your content maybe a little bit to Slide 12. You talked about usage through your own solutions like ChatIQ and then also through the Frontier large language models. Are you seeing any meaningful differences in usage patterns or engagement with your data across those two broad channels today? And I guess I'm wondering, as adoption scales, where do you see the balance between direct delivery through your own solutions and third-party large language models ultimately settling out? Martina Cheung: David, it's Martina. Let me start, and then I'll hand over to Eric as well. This is something, obviously, that we're spending quite a bit of time thinking about. And I would start with our customers and what they're telling us and basically the types of deals that we are signing with our customers. So if we start from that perspective, there's a spectrum, if you like, along the very large number of users of our products in this area in Capital IQ Pro. It ranges from customers who will persist in using the integrated desktop over a period of time. And this is for a variety of reasons. It can be because they prefer to have us do the hard work for them in terms of integrating the AI capabilities and it can also be because they may look over time at the cost of adopting some of these models and prefer to have us manage that for them at scale, which can provide efficiencies rather than having them do that bespoke work themselves. We will also have clients who will do both. And so we see that already. We have one large global bank that signed an extended contract with us in the first quarter. It included expanding the usage of the Desktop Capital IQ Pro to additional users around the organization. And it also included increasing licensing for AI use of several of our data sets. And the bank actually made our data sets the standard on their own internal LLM, and so this is an example of where Capital IQ Pro will continue to be used alongside LLM model consumption within our clients. And I would say that, that is the majority of the conversations that we are having. Now will clients look to just use their in-house LLMs? That's potentially a scenario that we could see play out over a period of time. We're ready for that. And in that case, we think our data becomes even more valuable because our data is required to really get the full benefit of using these channels. As I mentioned earlier, we will use the plug-in option, and we will also use MCP applications to make sure that we can continue to improve the user experience for clients that want to use these third parties. And all of this really is very consistent with how we have thought about partnering with third-party channels for many years now, and it's why we talked a lot about flexible distribution back in our IR Day. Maybe Eric, do you want to talk a little bit about how we're seeing the usage evolves? Eric Aboaf: Yes. Let me just give you some examples. On the direct usage side, right, where clients are using our platforms and within our platforms, usage continues to build very substantially. I described in our Energy core platform, AI queries are up 2x in iLEVEL, the automated data ingestion through AI is up 2x. And so seeing very significant increases, which we're monitoring in our minds, that's the way clients are gaining value. At the same time, in the -- through the LM channels, the frontier models, the models that our clients have. As we said earlier, call volume is up very significantly, literally 2x from February to March, 5x from December to March. And so again, we're seeing the value that clients are seeking in our data and proprietary offerings that they're looking for. And then what we find is where there's more usage, there's more value over time, that will create economic benefits and opportunities for us. In the clients that have been using our AI tools and availing themselves of those in MI, we're seeing a couple of hundred basis points higher retention rates. In Energy, over 500 basis points of higher retention rates because, again, usage is value for clients. They get more benefits, and that helps us drive the overall economics of each of our businesses across the range of channels that we provide. Operator: Our next question comes from Jason Haas with Wells Fargo. Jason Haas: Can you just clarify on the ACV growth? I think you said that it was 6% in the quarter. I believe the past couple of quarters is 6.5% to 7%. So did it decelerate? And if so, what drove that? Because the commentary on revenue side optimistic for the rest of the year. So I just wanted to follow up on the ACV point. Eric Aboaf: Jason, it's Eric. I said the ACV growth was in line with subscription revenue growth, which was around 6%. I think we've quoted over the last 5 quarters, 6% to 6.5%, 6.5% to upper 6s percent. So it's in the range. There's always going to be a little bit of volatility. But what we see is that the underlying drivers are moving in the right direction. We're feeling good about net sales, net renewals and so forth across MI. And so we see this as a good outcome for the first quarter and expect that to build momentum into 2Q, 3Q and 4Q. Operator: Our next question comes from Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: I just want to get a better sense as to how you are thinking about the Ratings revenue through the year? I know you gave the cadence, but in aggregate, from the change in the geopolitical environment, like is there an aggregate any change over -- in the way that you're thinking about Ratings revenue for the year? Or is there would you say there's more risk to what you're -- what you've been assessing. And then also, if you don't mind just quantifying the Ratings evaluation services, what was the growth you said it was healthy. I think you quantified it somewhat before in other quarters in. Has that changed at all in terms of the growth rate of that business, it's usually a precursor to additional issuance? Martina Cheung: It's Martina. I'll take the question here. I think the -- ultimately, as you know, obviously, we didn't change our guidance for the full year for billed issuance and for Ratings. And I think the -- look, the thing that we're watching is this kind of end-of-2Q resolution, right? So we haven't necessarily seen any direct impact on Ratings revenue. But if we were to see GDP growth coming down, much broader sector shocks around the world, that's a scenario where we could see some weakness in the environment. And I think maybe to your question on RES, we had a good quarter in RES. A lot of that was driven by M&A assessments from issuers, but strong performance there overall. Thanks for the question. Operator: We will now take our final question with Jeff Meuler from Baird. Jeffrey Meuler: Just looking out past the Iranian conflict thinking about your Energy business, how do you expect it to be impacted by the energy complex build-out associated with the data center and AI infrastructure build-out. Just any specific products that you'd expect to benefit any new customer type opportunities. That's it. Martina Cheung: Jeff, thanks so much for the question. I think this goes back to 1 of the things that we really highlighted at our Investor Day around Energy expansion. There's a tremendous amount of additional growth that will be projected in demand for energy as well as demand for critical minerals. And our data is really quite unique across these various different areas and gives us a true opportunity to work with clients around the world to help them understand forecasts for renewables, forecast for hydrocarbons, the trade-offs between both as demand increases, et cetera. And so we're seeing great opportunities, not just in the -- some of the ones that we've been talking about within Ratings, for example, on data center issuances, but we also saw increased issuances from utilities. In the power sector in Ratings. We see demand for additional scenario planning around power and utilities in the Energy team, and we've seen particular demand in the Energy team's unique insights and data on critical minerals. And so these are all areas where we would expect to see additional demand over time. Thanks for that question. And in closing, I'd like to thank our people for delivering such a strong quarter. Our mission of advancing essential intelligence is now more relevant than ever as we help our clients navigate the uncertainties in this environment. And we're making really great progress against our strategy and are exceptionally well positioned and excited about our opportunity to drive value this year and beyond. We really appreciate you joining the call today. Thank you. Operator: That concludes this morning's call. A PDF version of the presenter slides is available for downloading from investor.spglobal.com. The replays of the entire call will be available in about 2 hours. The webcast with audio and slides will be maintained on S&P Global's website for 1 year. The audio-only telephone replay will be maintained for 1 month. On behalf of S&P Global, we thank you for participating and wish you a good day.
Operator: Good morning, and welcome to the Galaxy Digital First Quarter 2026 Earnings Call. Today's call is being recorded. [Operator Instructions] I would like to turn the conference over to Jonathan Goldowsky, Head of Investor Relations. Please go ahead, sir. Jonathan Goldowsky: Good morning, and welcome to Galaxy's First Quarter 2026 Earnings Call. Before we begin, please note that our remarks, including answers to your questions, may include forward-looking statements. Actual results could differ materially from those described in these statements as a result of various factors, including those identified in the disclaimers in our earnings release or other filings, which have been filed with the U.S. Securities and Exchange Commission and on SEDAR+. Forward-looking statements speak only as of today and will not be updated. Additionally, we may discuss references to non-GAAP metrics, the reconciliations of which can also be found in our earnings release. Finally, none of the information on this call constitutes a recommendation, solicitation or offer by Galaxy or its affiliates to buy or sell any securities. With that, I'll turn it over to Mike Novogratz, Founder and CEO of Galaxy. Michael Novogratz: Yes. Good morning, everyone. Listen, first quarter crypto prices down on average of 25%, you can see our headline number, certainly, isn't what we'd like to be delivering quarter after quarter. All that said, I feel pretty good about the business right now. And so you come into this earnings call, and I thought, well, let's break it, down data centers and then crypto and give you just how I'm seeing it from the CEO perspective, right? Every Monday morning, I look at my to-do list in the Data Center business, and it has 4 buckets, right? Are we delivering on time and on cost? That's not an easy feat. But so far, our team is doing an awesome job. We delivered our first data halls. We're on schedule. More than half of the data centers around the country can't say that. And so we feel pretty good about the team down in Texas and the hard work they're doing. And so that's in check, right? The second is we've got to finance Phase II and then Phase III. The financing markets are open. I was hoping we would have the definitive deal details today, trust me, that will come in a very short order, we will have Phase II financed. Our partner, CoreWeave, we've their credit spreads have come in, the financing markets are pretty robust right now. And we're looking at a few different options. Part 3 is we have this 830 megawatts that we were granted recently tenant for that, right, that would take a lot of stress off of me and derisk this company even further. We're in conversations with a lot of big people you can guess who they are. That process, Chris will get to the dynamics of it later. My sense is that's probably going to be a second half of the year process as we get closer to 2027, the stress around 2028 power will pick up. Right now, most of the hyperscalers are focused on this year and next year and just getting the power they need. And finally, new projects that we've been looking at circling around, same answer. Hopefully, in the not-too-distant future, we're announcing a pretty cool one. And so stay tuned. I don't have anything specific to tell you today. But in each of those buckets, I'm not sweating. I feel good about where we are, I feel good about the progress we're making. And I feel good about the future after that even. And so I can give a big check on the Data Center box. Then I flip to Digital Assets. As I said earlier in the year, I think this is a transition year for the crypto business at large, not just at Galaxy, but globally. And what I mean by that is, we are going from a very speculative business where if you were being crash, you would say, is the crypto casino to a technology that is going to be used in industry all over the world. And you're seeing that pickup in an accelerating fashion, right? Every trade by organization is working on their version of that infrastructure. They need a wallet, they need custody. And so we have an infrastructure business that's doing great stuff right now, is engaged in all kinds of conversations. Again, I'm not going to announce anything today, but stay tuned. We will we've got some announcements that are coming soon. deals that roughly are done, just aren't at the announcement stage. And -- but that business is going to keep on growing. And for the world, it's important, right? When you want to understand what's really happening as we're tokenizing equities, tokenizing privates, tokenizing mortgages, tokenizing currencies, right, this is void that the United States projects its power around the world. If you want to think about the real use case of crypto, it has always been the rest of the world more so than the United States, right? Here, we've got great financial services accessible to most Americans. But there are 5 billion, 5.5 billion people that, that's not true for. And so you're going to see the big brands being sold to places like Paraguay and Bhutan and Cambodia all over the world, where people have access to our financial services. And that part of what needs to happen is the Infrastructure Bill in D.C., the CLARITY Act. That's got a really important 6 weeks. I still believe it gets passed. There's a few obstacles, right? [ Thom Tillis ], who's a friend of mine, and he's a tough son of a gun; he has been digging in. Him and the President are not on the best of terms. And so he's pushing pretty hard on the ethics piece of this thing. I do think they'll get through that. It's important for both the Republicans, who campaigned on it to get this build on; and for the Democrats who don't want to have to campaign on it to get it done. And it's important for America. And so I think once that gets done, you're going to see a further acceleration in that build-out, and it's also going to help crypto prices. Bitcoins, which is the bellwether, first quarter, we had a pretty severe sell off all the way to 60,000. It feels like that has -- that will be a tradable bottom for this part of the move. We bounced up to 80. Now I think we're trading 76, 77. I don't see big clean exploding in the near term, but it might. And so I think you're going to have some wood to chop through 80, 85. Once you get through that, the next stop is 100. And if you break that, then it's all price discovery. And so it's not my prediction that we break that 100 this year. You're going to need a few things to happen. Mostly that will be an easing central bank. And given the war in Iraq, we've got some pretty ugly inflation prints that are going to come through the pipeline -- I'm sorry, the one Iran, pretty bad inflation points that will come through the pipeline. And so I don't think the Fed does anything but sits and watches I know Kevin Warsh, is a real believer in the productivity miracle that is coming from AI. One thing I was pointing out to the guys here is all of this wild acceleration we're seeing in AI is mostly being done on the infrastructure that already existed. Campuses like Helios where we're delivering the data centers, it's still not really -- we deliver the data center support. They then take another 2 to 3 months to build out the insight for final customer use. And so it's really not until this time next year when the next phase of power comes into powering AI. And so the AI revolution is just starting, and its impact on inflation and its impact on productivity, Its impact on how the world changes. And so I think the Fed will be cutting rates by the end of the year. I think that will be very supportive of a broad crypto prices. One thing I'd point out is that prices were around 20%. Volumes in trading markets were roughly down 20%. And here at Galaxy, volumes were flat. And so it's for the first time we really started to see a decoupling of our business from the price, and that's very promising. If I could see that 4 quarters in a row, I have a big grin on my face. The balance sheet lost money as crypto prices were down, but we way outperformed what we would have done if we had not a cut some positions and also shifted a lot of our Level 2 exposure to Hyperliquid, which is one of the tokens that I talked about. We've been a supporter mostly because it's got an economic model unlike many of the other tokens, which were more association tokens. And I think Hyperliquid is a good way to look at what the future of crypto is going to look at. And so again, the headline numbers weren't what I want. But I feel really good about the two businesses, both how we're doing in the macro over backdrop for both of them. And what that will pass it on. Anthony Paquette: Great. Thanks, Mike, and thank you, everyone, for joining the call today. I'll start by walking through the consolidated financials and the balance sheet and then dive into the digital asset operating businesses in more detail. before turning it over to Chris for an update on Data Centers. As Mike mentioned, Q1 was a challenging quarter for Digital Asset prices with total crypto market cap declined roughly 20%. While that impacted our reported results, our operating businesses continue to perform and we reach an inflection point at Helios as we started to come online. For the first quarter, we reported a GAAP net loss of $216 million or a loss of $0.49 per share and firm-wide adjusted EBITDA of negative $188 million. These results were driven primarily by unrealized mark-to-market losses on our balance sheet, Digital Assets holdings, with the Treasury & Corporate segment reporting an adjusted gross loss of $140 million in the quarter. Firm-wide operating expenses, excluding rose transaction costs and the impairment of Digital Assets were approximately $147 million in Q1. Down 7% quarter-over-quarter, driven by lower professional fees and a decrease in compensation expense. On the operating business side, our Digital Asset segment generated $49 million of adjusted gross profit, roughly in line with Q4 results despite broad market weakness in Q1, as Mike mentioned. I'll provide more detail on this performance in a few moments. In Data Centers, our financial results remain de minimis in Q1 as we work through the final stages of construction and commissioning for Phase 1 at Helios. As mentioned previously, revenue will begin ramping in Q2 as we deliver data halls under our CoreWeave lease agreement. As a reminder, these are 15-year contracted cash flows at approximately 90% average lease level EBITDA margins entirely uncorrelated to Digital Asset prices. As that revenue comes online, it will begin to meaningfully diversify our revenue and earnings profile in the coming quarters. Turning to the balance sheet, we ended Q1 with approximately $10 billion in total assets, down from $11 billion at year-end, driven by the decline in Digital Asset prices. Total equity capital was $2.8 billion with roughly 60% allocated to our operating businesses. This mix will fluctuate quarter-to-quarter. But as previously noted, we expect this year of capital allocated to our operating businesses to continue increasing in the coming quarters, driven primarily by the ongoing build-out in Helios. Within Treasury & Corporate, we have approximately $1.4 billion of net Digital Assets and investments, down 19% quarter-over-quarter, primarily reflecting market appreciation. During Q1, we repurchased 3.2 million shares of our Class A common stock for $65 million under our previously announced $200 million share repurchase authorization. This amount more than offset dilution from equity-based compensation awarded in 2025 and brought our quarter end share count to approximately 390 million basic shares outstanding. We view share buybacks as an attractive use of capital when we see meaningful disconnect between the stock price and the intrinsic value of the company, and we'll continue to use them in a disciplined manner, consistent with this philosophy going forward. Cash and stablecoin in balances were approximately $2.6 billion at quarter end, roughly flat from year-end. We will continue to manage our balance sheet with discipline, balancing investments while maintaining sufficient capital and liquidity, including for the potential repayment of $445 million of exchangeable notes maturing in December of this year. Now turning to our operating results, starting with digital assets. Q1 reflected in a more challenging market backdrop as we talked about with Digital Asset prices down quarter-over-quarter and a corresponding softening, trading volumes and on-chain activity. Against that backdrop, our Digital Asset segment delivered $49 million of adjusted gross profit, roughly flat quarter-over-quarter. In a sequentially weaker environment, this stability reflects how the composition of the business has begun to shift, Recurring fee revenue and transaction income continue to scale across the platform, and this pace will hold up better in quarters where volumes and prices do not. We also tightened operating expenses during the quarter, narrowing the adjusted EBITDA loss by roughly 1/3 from Q4. In a volatile industry, how we manage the business in challenging environments matters just as much as how we perform in strong ones. The Global Markets business delivered adjusted gross profit of $31 million, up 3% quarter-over-quarter, with Digital Asset trading volumes holding steady, as Mike mentioned, even as the industry-wide activity declined more than 25%. We're adding new trading clients at a steady pace and the mix is shifting with the growing share coming from traditional asset managers and hedge funds, reflecting the ongoing convergence of digital assets and traditional finance. On the lending side, our average loan book declined approximately 20% quarter-over-quarter, driven by digital asset price appreciation, modest client deleveraging and roll-off of 2 larger loans. Since then, we've added new clients and originated new loans while further diversifying our counterparty base, which will continue to support a more durable loan book going forward. A quick update on GalaxyOne, where we're quietly continuing to build momentum. We recently launched Solana staking at 0% commission and will be opening the platform to business accounts in the coming months, expanding the user base and addressable market. GalaxyOne is still early, but we see a meaningful opportunity to continue layering in capabilities that integrates trading, yield and asset management into a single unified experience. Turning to Asset Management, we delivered adjusted gross profit of $18 million and ended the quarter with approximately $8 billion in assets on platform. In Asset Management, we generated $69 million of net inflows during the quarter, underscoring the durability of our platform against the soft market backdrop. Flows were broad-based across both our ETF platform and alternative suite, reflecting continued institutional demand for access to digital asset ecosystem and confidence in our ability to manage through volatility. Subsequent to quarter end, we secured a new $75 million investment mandate, one of the largest single client inflows in our history. Our [ SMA ] and managed account business continues to grow as an increasingly important part of our overall platform, and we see a clear path to further expansion through 2026 as client appetite for bespoke mandates remain strong. In addition, on May 1, we will be launching a new fintech hedge fund focused on the convergence of traditional financial services, blockchain infrastructure and emerging technologies. This is thematic we've been operating within at Galaxy for nearly a decade and one we believe gives us a differentiated edge as investors. We've seen this space at all firsthand, we understand how these businesses are built and we're able to underwrite opportunities with a level of conviction that comes from being both operators and longtime participants in the ecosystem. This approach is consistent with how we're building the asset management platform, focusing on differentiated strategies that align with where we see long-term capital formation and innovation across the digital asset ecosystem. On to digital infrastructure solutions, as Mike mentioned, we spent the past 8 years building institutional-grade infrastructure to support our own operating businesses. And what we're seeing now is a shift where the largest financial institutions are preparing to move on to blockchain-based rails and are coming to Galaxy as a partner in that transition. Institutions need foundational infrastructure to operate in a tokenized financial system. That includes wallet and custody technology that enable secure 24/7 movement of digital assets as well as the ability to deliver financial products in a way to integrate with their existing systems. This isn't limited to banks or traditional asset managers, it's every institution that touches a digital asset that is now trying to determine what infrastructure they need in a tokenized world. Whether it's trade settlement and clearing collateral management, corporate treasury or fund administration, all of that has to be re-architected for a digital-native environment. So when we think about the total addressable market, it is not niche, it's the entirety of the capital markets across the front, middle and back office, all of which ultimately needs to be rewired. Against that backdrop, institutions are looking for partners with the technical capabilities infrastructure and expertise to support that transition, capabilities we at Galaxy have been building for nearly a decade. We are now taking those learnings and productizing our digital infrastructure platform into a B2B model through white labeled solutions, bespoke integrations and custom infrastructure to meet institutions where they are in their adoption cycle. This spans powering staking infrastructure for leading asset managers to developing wallet custody and private key architecture for financial institutions and service providers. Once we're embedded at the infrastructure layer, we're able to provide a set of services where we have real competitive strength that includes acting as a liquidity provider to enable their clients, access to crypto markets, delivering fund and investment products and providing lending and financing solutions. As we expand this business and deepen those integrations, we expect a continued shift in the composition of our revenue. Over time, our results should become less correlated to the underlying price of digital assets and increasingly driven by the pace of institutional adoption and utilization of the infrastructure itself. These are not short-cycle engagements. Winning and growing these mandates requires time, integration and a high degree of trust. We've been investing in these relationships for a long time, and we're seeing that begin to translate into tangible opportunities, which we're excited to build on in the quarters and years ahead. Stepping back, the regulatory environment is continuing to develop. Institutional adoption is accelerating, and the pipeline of opportunity across our digital asset businesses is extremely robust. Q1 was a difficult quarter from a market standpoint. But the most consequential developments in digital assets don't happen in price, they happen in infrastructure, regulation and institutional adoption. Before I turn it over to Chris, I want to touch on our Q2 preliminary performance. So far in Q2, we have seen an improvement in digital asset prices and overall activity. This has translated into a strong start to the quarter for Galaxy, with second quarter-to-date adjusted EBITDA estimated at approximately $90 million through last Friday. With that, let me turn it over to Chris. Christopher Ferraro: Thanks, Tony. The lights are on at the Helios campus. We've delivered the first data hall to CoreWeave, and I would call that the most significant milestone this business has hit since the day we signed the lease. Not long ago, this was a Bitcoin mining facility. Today, it is a live operational AI data center with power distribution, cooling and network connectivity. That's a credit to the team on the ground in Texas and here in New York. This is the single most important derisking event this business has experienced. We now have a track record of delivering on time and on budget, not a projection. That distinction matters when you're sitting across the table from a prospective customer or capital partner. We've proven we can take a site from concept to operational data center at hyperscale, and that credibility is opening doors. We remain on track to deliver substantially all of the 133 megawatts of critical IT capacity for Phase I by the end of Q2. Our client, CoreWeave, has indicated that it expects a multitrillion-dollar investment-grade public company to be the end user for their GPUs at our Phase 1 Helios facility once the clusters are operational. Turning to Phase 2. We've made meaningful progress on the greenfield construction for the 260 megawatts of incremental critical IT capacity. Site work, concrete and steel are advancing on the new data center buildings, and Phase 2 data hall deliveries are on track to commence in the first half of 2027. On Phase 2 financing, we're seeing strong demand for financing the build. Our focus is on maintaining a capital structure that gives us the flexibility to scale without overleveraging the platform, and we expect to have more to share on Phase 2 financing in the near term. Turning to leasing the available 830 megawatts, the demand environment for large-scale HPC capacity remains very strong. Every major participant in this market has capital available and is racing to lock up future capacity, and we're seeing that firsthand in the quality of the conversations we're having. We are in active discussions with a select group of potential customers. A lease of this scale, multiple years and billions of dollars of contracted revenue requires extensive diligence, bespoke structuring and careful negotiation. We've been through this process before, and we know what it takes to get it right. The compounding value of picking the right partner and the right structure is enormous, and that is worth us being deliberate about. From our seat, 830 megawatts of approved front-of-the-meter power in ERCOT is a one-on-one asset. And the responses from potential customers evaluating the opportunity reinforces this view. Importantly, though, we are not waiting on commercial structure to be finalized to proceed on development. Consistent with our approach throughout the initial Helios build, we've begun procuring critical infrastructure for the 830-megawatt development. Specifically, we have placed deposits and issued purchase orders on main power transformers and circuit breakers for the first phase of that development and have secured capacity for the balance of long-lead electrical infrastructure. Lead times for this equipment stretch to multiple years. And steering supply early has been core to our development basis and scheduled forecasts. A brief update on the evolving ERCOT regulatory framework. In mid-March, ERCOT published a draft rule, PGRR145, which establishes a base load category for projects with a 2028 energization date. Projects in that category are not subject to restudying batch 0. Eligibility requires two things: Valid completed interconnect studies and a signed interconnection agreement with the utility. Our interconnection studies were completed on January 15, and our service agreement is already executed. We satisfy both requirements to be eligible for baseload within batch 0 based on the current draft. I will note that PGRR145 is still in draft form and could change. We're tracking it closely and are in active dialogue with ERCOT and our advisers. But as we read it today, nothing in the current draft indicates a deferral, and we are certainly not treating this capacity as speculative. There's still a lot to develop at the Helios campus, but scaling beyond [Audio Gap] we continue to evaluate a deep pipeline of opportunities across the U.S. We're being highly selective. Not every megawatt is worth pursuing. And we're only going to transact on sites where we have conviction in power availability, land suitability, development timeline and customer demand. Several of those sites have progressed to LOIs, and we expect we will be discussing our multicampus portfolio within this year. The Helios campus is the foundation, but the vision is a multicampus, multicustomer platform built the same way, one disciplined step at a time. We spent the better part of 2 years building this business, and now that foundation is operational. Phase 1 is delivering. Phase 2 is under construction. We have 830 megawatts of approved incremental capacity with active customer conversations underway. We have an additional 1.8 gigawatts progressing through the ERCOT study process and a growing pipeline beyond that. We've proven that we can execute. What lies ahead of the Helios campus and beyond is an opportunity of extraordinary scale, and we're just getting started. I'll turn it over to the operator for questions now. Operator: [Operator Instructions] The first question comes from Peter Christiansen with Citi. Peter Christiansen: Great to be a part of the call. I'm curious on the financing side as it relates to data centers here. I mean fully stabilized lease hyperscale deals are seeing tightening spreads. But I guess, the rating agencies have been calling out syndicate financing for large deals being potentially get strained. Just curious if you're seeing the same. And how are you thinking about that on your go-forward financing strategy? Christopher Ferraro: Yes. So I would agree with the comment that financing for stabilized assets in the space has started to tighten. That's definitely true. The -- what I would say is prior to maybe 6 months ago, the market was split and/or pretty heavy towards bank syndicates financing, more traditional project finance style financings. The high-yield bond market has definitely stepped in, in a big way over the last few months and has taken a lot of the market share from the larger bank syndicates, which is good because it's a much more distributed base of investors with much more flexible pools of capital rather than a traditional bank that's looking to either hold and syndicate sort of prescriptive project financing, We've pretty much seen -- things could change, but we've pretty much seen spreads tighten across the board, and that's come from a peak of sort of concern around build-outs, CapEx budgets, credit quality. And spreads have come in pretty significantly. And so the rating agencies have come through and they've started to rate a number of issues that have come out either at or above the underlying credit levels, which sort of takes into account the fact that folks like us are actually building long-lived, durable infrastructure. Even though we have a tenant who has their own credit quality, those assets live beyond any tenant deal and a repurposeable et cetera. And so we're actually -- we're pretty constructive right now about the opportunities for financing cost and beyond relative to where the market even was a few months ago. Operator: The next question comes from Patrick Moley with Piper Sandler. Patrick Moley: Yes. On the additional 830 megawatts at Helios, Mike, you mentioned that there was maybe some deals that were getting done but nothing ready for an announcement yet. I'm -- just to kind of level set, is it safe to say that this is not an extension of the current agreement with CoreWeave, but in fact, separate tenants? And then is there anything you can add on... Michael Novogratz: I think you missed -- either I misspoke or you misheard me. What I was saying is on the 830, we're engaged in lots of conversations. And then on new projects outside of Helios, we are -- as Chris said in his remarks, we're LOI stage. And hopefully in the distant future, we'll have things to announce where we've got actual locked-up projects. And so that's separate from Helios, which has always been our goal to have a multicampus business. And so hopefully, by the time we're on next quarter, we're talking about that with much more detail. Christopher Ferraro: Yes. And just to add on to what Mike said, Patrick, to get a different angle of the question you're asking, the -- in addition to a multicampus strategy, we are very focused on a multi-tenant strategy as well. And so I think it's very fair to assume that we're always talking to CoreWeave because they're our biggest partner in the business today. But the customer conversations we're having extends pretty far beyond just CoreWeave. And I would expect our decision-making around the 830 is going to take into consideration the fact and the importance of having a diversified exposure client base across all our assets. Operator: The next question comes from James Yaro with Goldman Sachs. Unknown Analyst: I'm speaking on behalf of James Yaro. My question is, what is the risk appetite among your crypto trading clients? And when do you expect it to stabilize or inflect as crypto prices have appreciated now? Michael Novogratz: That's a good question. Listen, like I said in my remarks, volumes across all of crypto trading was down, call it, 25% on average last quarter. We felt good that we were flat. I think you need a few catalysts. What was nice is that what you saw broadly selling from old school, old holders of crypto that drove the prices down and who came in was retail, retail through ETFs and retail through buying micro strategies, equity, which then translates into Bitcoin buying and other crypto. When Bitcoin stabilizes and trades up, the rest of crypto does better. And so you've got places like Morgan Stanley, who have moved into the space in an aggressive way and have their whole sales force now pitching a fairly large allocation of Bitcoin as part of their portfolio. And so I think what we're seeing is this transition from people that held crypto for 5, 10, 15 years. taking some profit, selling some of theirs, and that's being replaced by a broad retail buying base. We've seen a couple of sovereign funds come in and buy as well or add to positions. And so I would be lying here and say if it's more muted than had it been in previous years. There's more excitement in AI equities, in crude oil around the war. And what we're seeing is crypto infrastructure is now being used to also trade those. And so you're seeing perpetuals, which was a crypto innovation, being brought to equity markets. And so the broad, big-picture theme is this infrastructure and what goes along with it will be very supportive to the whole space, but it's not necessarily short-term demand for -- you name the token. If it's Solana, Polkadot or Ethereum, right? That demand is less, less exciting right now, a little bit more muted. Again, cutting rates and the CLARITY Act passing probably gives that a kick. But what we've always seen in crypto is what really drives crypto is price. And so again, we're basing, once we get moving, people will find all kinds of reasons to get excited. Operator: The next question comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: I wanted to build in quickly through the approval process in ERCOT and the batch process that as I understand, it will be starting this summer. Can you just touch on two things? First, any clarification to make sure that the recently approved 830 megawatts isn't subject to any part of that batch process or review of the batch process? And then, can you give us an assessment of where you think you are or what you may need to do to gain incremental approvals as part of that process for additional capacity and what that time frame may look like? Christopher Ferraro: Sure. So let's start with -- we have two pieces right today at Galaxy, Our originally 100 megawatts that's already leased, let's focus on that first. There's nothing in the current regulatory landscape that we see that puts that capacity at risk. We have a fully executed service agreement, complete interconnect studies, Phase I is live, and we're delivering power to it. Next, the 830 megawatts approved earlier this year, we're equally confident in that. I think in my comments, we talked a little bit about the draft PGRR145 rule which sets baseload category for projects that are not subject to restudy, not subject to looking at. And it's very clear to us and it's been communicated as such that the 830 megawatts that was approved is part of that baseload capacity to be for batch zero, meaning not part of -- meaning it's the base case for all new power being studied. We had our studies approved in January. We had an interconnect agreement with the utility. So that -- as it's drafted today and as far as we can see any potential iterations of that draft is covered. That leaves us with today what we expect could be up to an additional 1.8 gigawatts. That 1.8 gigawatts for us is what's in question from a timing perspective. And I think the best I can give you on that today is ERCOT is still working through the specifics on what they think the new batch process is going to be and therefore, which parts of our 1.8 gigawatts would fit into potentially being looked at as new studies in batch 0 or new studies beyond batch 0. So that's probably the best I can give you today. Operator: The next question comes from Bill Papanastasiou with Chardan Capital Markets. Bill Papanastasiou: Congrats on the recent progress at Helios. I just wanted to dig a bit deeper on potential lease economics. How could they look at -- for the uncontracted capacity relative to the CoreWeave deal? Should we expect similar headline metrics? Or do you think it would be more aligned with other deals that we've seen by some of your peers? Christopher Ferraro: So that is a very good question and it's hard to answer it directly because there's a bunch of different factors, right? So when we originally signed the CoreWeave deal, CoreWeave was -- actually, when we entered negotiations, CoreWeave was still a private company and there was a very different credit quality than at least on the headline than when we signed it today. So credit quality is a very important element to any economics to get signed with any counterparty. And the way we think about it is while a headline dollars per kW per month rent rate is an important metric, sort of the net after financing cost spread capture of any deal we signed for us is probably more -- is more important. And so you have this balancing act between headline monthly rent revenue versus that minus financing costs, which you're going to be very clearly will be tied to what kind of tenant we have. And so the market -- now in the interim, a number of deals have gotten done. And while the headline numbers with regards to their rent versus ours, are lagging, meaning like our headline rent number with CoreWeave is a standout in the market. We're pretty constructive that on an after-financing cost basis, the economics to us, both on a dollar and on an IRR basis to build for this next capacity, is going to be equally attractive. And so that's just a framework for the way we think about the opportunity set and how we would strike a deal in the things we consider. Operator: The next question comes from Devin Ryan with Citizens Bank. Devin Ryan: Question just on trading activity. And if we were to just assume the CLARITY Act passes, let me just get some thoughts around what you think will happen with trading volumes? And Mike, I heard obviously the comments around price and trading kind of going together. But as we think about just the demand for some of the kind of the further out layer 1 and layer 2 beyond the top 10 or 20, seems like demand has dried up quite a bit. And so I'm just curious, whether you feel like that's cyclical just because of risk appetite is not there or maybe secular because there's just not a lot of activity happening on those blockchains and so maybe we consolidate activity to a smaller number of large blockchains and that's good for maybe institutions, but maybe not as good for kind of the speculative retail piece. So just curious kind of how you see things playing out post CLARITY does pass. Michael Novogratz: I think my answer is going to tend towards the latter setup that you had. Listen, I think CLARITY will bring more and more institutions in, and those institutions will come in some set of direct trading desks to compete with us in Bitcoin and Ethereum and some of the other big majors, people getting more comfortable with the neobank that will have a broader selection of -- neobank wallet structure that people are pushing a broader selection of tokens. But I think the bigger idea here is that as you turn Wall Street on, you turn a selling machine on and it starts with Bitcoin and Ethereum, and those things have generally propped up the whole industry. The big transition we're seeing as we move using crypto infrastructure, it's happening at the same time where there are so many other avenues for people to speculate, right, the explosion of sports betting, online gambling, sports betting, prediction markets, even Mean coin trading. In some ways, I don't think you'd ever saturate people's desire to gamble, but there's a lot more on offer than just Polkdot tokens. And so those tokens need to, those ecosystems need to find a way to be more relevant. We've seen it with Hyperliquid. It's a perfect example of great technology, a tight team. But mostly an economic model in the token, that lets people feel like they're participating in the economics of the underlying ecosystem, not just having association with the ecosystem. And we have an entire hundreds of tokens that really were mostly association tokens, and that was mostly because of the regulatory environment. And I think those tokens are going to either have to restructure or they're going to slowly, slowly have less and less participation from both retail and the broad community. It doesn't mean they all will die because if there's a community that cares about it, they'll keep pouring in resources and trying to bring in more people. But we're going to go through this transition where I would hope and think in 5 years, most tokens that are out there are more than just community tokens. Operator: The next question comes from Edward Engel with Compass Point. Edward Engel: I appreciate all the clarity, comments on ERCOT's new load approval process, and I know this is still being finalized by them. But I guess from a timing perspective, I mean when do you think you're going to have more clarity on where some of your pipeline stands within either batch 0 or 1 or beyond that? Christopher Ferraro: Yes. Right now, the best visibility we have is around June, which is what indications are that both ERCOT will start to narrow in on their process for the batch interconnect study framework, at which point, we're sort of doing all the background work and ready to engage with that [ post taste ] once that comes through. So a couple more months from now towards the mid of the year. Operator: The next question comes from Benjamin Sommers with BTIG. Benjamin Sommers: I know you guys mentioned a little bit about expanding the total addressable market for GalaxyOne. But I guess just kind of curious, I know it's still early days, but what's kind of been the most, I guess, used features of this platform? And what's kind of drawn -- what do you think has gone most investors draw into this platform so far? . Christopher Ferraro: Yes. So there's a decent amount going on there. I think we have been more -- we were surprised. Actually, crypto trading has been the largest use case so far, which is a little counterintuitive because there are a lot of existing crypto trading platforms out there today. And our capabilities on that front are lagging today, although we're working very hard to both expand coin coverage adding staking, which we just did in the last quarter for Solana, and we're going to -- we'll follow up with the rest of those stakeable assets very soon. But crypto trading use case has outperformed expectations. Cash products are performing okay, lagging a little behind. The next step we're focused on, we're exciting about is sort of tying it all together by offering really financing solutions for individual consumer users that allow consumers to basically leverage their entire portfolio together to increase buying power in a thoughtful and safe way. And so our product deliveries today outside of the moonshot stuff, which we're very focused on iterating on, is around creating an entire wallet effectively that a consumer can own all of their assets, cash, equities, crypto and beyond; and thoughtfully increase their buying power without taking outsized risk. So yes, that's the GalaxyOne stands today. Operator: The next question comes from Martin Toner with ATB Cormark. Martin Toner: The revenue number was a nice one, given how difficult crypto markets were in Q1. Is the business becoming less cyclical? And is Galaxy to be able to do better in some of these weaker crypto markets? . Michael Novogratz: Your lips to God's ears. If we could do that 3 quarters in a row, I'll have more confidence to say it's less cyclical. This was a a promising quarter in that the trading desk stayed flat to quarter-on-quarter when overall revenue went down 25%. And and our balance sheet was well positioned. Again, we were in Hyperliquid and had less of other [ L2s ]. We have a little less big than we normally have, et cetera. And so if you're just looking at Digital Assets business, that's our goal, is to make it less cyclical. What you're going to see in the second half of the year as we'll make some announcements about the infrastructure business, which is certainly going to be less cyclical and help in that, right, relative to crypto trading. And then if you take Digital Assets and you combine it with the Data Center business, which I try to keep those things separate in my head, so we don't take hard-earned money in one and funs stuff willy-nilly and the other, right? We're going to try to be very thoughtful in both businesses and where we deploy capital. But overall, Galaxy will be less cyclical to crypto in a big way just because of Data Center earnings 12 months from now. But even within the Digital Assets business, our goal is to become less cyclical. And I think that's going to happen. But I'm not going to declare any kind of victory for at least 2 to 3 more quarters. Operator: The next question comes from Joseph Vafi with Canaccord. Joseph Vafi: Maybe you could touch a little bit more on real-world assets tokenization strategy. I know you mentioned both the wallet custody. And Mike, you just kind of talked about infrastructure. It seems from my seat, at least, this is kind of a bigger trend than pretty much anything else in the ecosystem right now. And just just a little more color on how it evolves, how you exploit the strategy. Christopher Ferraro: We would agree with you around the size of the direction of the trend line and the size of the total addressable market now being up into the right and larger than we've actually ever seen in our existence. Historically, Galaxy has been building technology products and services that we've been offering to largely institutional clients for most of our -- directly to largely institutional clients and buyers with a more recent step into more consumer-focused product offerings. What we're seeing on the tokenization -- I'll say, tokenization large, but really it's digital infrastructure to support bearer instrument tokenized assets, is a demand from the business side. What people would have considered to be the biggest looming concern for Galaxy is institutional business being bank competitors. We've seen the demand for those theoretical bank competitors be limit up for partnering with Galaxy to either buy or implement and use as a vendor, Galaxy's technology so that the financial system itself can build out the digital infrastructure and stitch it all together, so it actually works so that end users can seamlessly store value, transfer value, et cetera. And so the organization opportunity, we have been obviously tracking very closely. Our purchase of GK8 back in -- late 2022, early 2023 was one big step. A handful of smaller acquisitions we've made with great talent, engineers, technology on staking, liquid staking, other digital infrastructure has been a sign of us seeing it coming. We didn't really know in our heart of hearts where the market was going to land in terms of our market opportunity. It's crystallizing pretty fast now. And the market opportunity for us to build infrastructure for what everyone would have thought was going to be our biggest competitors might now become our biggest customers. And so we're very excited about that. That's where the real opportunity we see sits today. And I think Galaxy is best positioned to actually be the partner that the large financial legacy companies need versus some of our other competitors who are either highly undercapitalized, don't have the brand, don't have the trust in their staying capacity or have chosen to really be a vertical stack that's competing directly with those institutions. And so the landscape for our opportunity to really take advantage of the opportunity, it's pretty attractive. And that's -- we've sort of retooled the team, retooled our go-to-market to take advantage of that now. Operator: The next question comes from Chris Brendler with Rosenblatt. Christopher Brendler: I thought the Digital Assets business was was pretty resilient, given market conditions. But the one area that I thought was a little weaker than I was expecting was lending. Does it reflect decreased risk appetite? Is it asset price sensitive? Just a little color on the decline in lending. We love to see how that's being managed in this environment. Christopher Ferraro: Yes. Look, I think we have a pretty consistent and strong trend line in the lending business overall throughout our entire history. I think the #1 KPI is that we don't lose money, we don't lose our money, we don't lose shareholder money, we don't lose client money, counterparty money. We -- this was one of the first times in a while we saw a pullback I think it's pretty natural, given that a large percentage of our book is always denominated in crypto prices, we've either lent or borrowed crypto assets. that when you see a couple of repeated quarters in terms of -- including the last quarter with crypto prices down mid-20s for your notional U.S. dollar balance of your lending book to see some impact. While we'd love to keep the book growing all the time, when clients -- when prices are down and clients themselves are derisking, it's probably also smart to follow that trend, see a little bit of pullback, derisk your book and then rebuild. And so there was a couple of things. Crypto prices is down when a percentage of your book is exposed means your U.S. dollar notional by definition, should follow that. We also had a handful of large, very low-risk loans that were in the book that rolled off, which is just natural roll off. And so when you're sort of picking period quarter-end number and pegging it and looking at the health of the business, like having those roll off and then post subsequent to quarter, rebuilding the book and adding more diverse client base is pretty a pretty natural progression. So from my perspective, there's nothing to read into that other than we are continuing to grab market share, we're very happy to, for a period of time, sort of allow the deleveraging and the derisking to happen naturally. But our #1 goal of building a bigger, larger resilient borrowing pool of clients while being pretty aggressive on limiting downside risk. So we're very constructed in the business. That's one of our specialties. I think the opportunity set not of just building a bilateral lending book with institutions, but expanding that to pretty nascent early markets on chain, for example, is a wide open opportunity set for us. And so where we can grow the book smartly, the cone of that opportunity is a lot wider than what we worry about on the downside from a shrinking of the business. Operator: And the final question will come from John Petersen with Jefferies. Jonathan Petersen: Great on financing Phase 2 and maybe refinancing Phase 1, I'm curious, 1 of your peers earlier this year was able to restructure their debt with CoreWeave with a kind of an ultimate parent guarantee from the IG-rated hyperscaler that was actually using the compute, just curious, if you have a sense maybe that's something about restructuring Phase 1 when it's completed or construction financing on Phase II, if that sort of solution is part of any of the negotiations that could help on debt pricing? And if I could sneak in a follow-up. Do you guys have any updated thoughts on splitting the Data Center business from the rest of the company? Christopher Ferraro: Sure. I'll take the first one to start. I would answer that pretty succinctly in that all options are on the table. The market has been -- is pretty nascent. And the deck chairs of the largest companies in the world are shifting always pretty fast in the direction of own more compute, reduce the cost of owning more compute. And so we don't observe what you observed lightly and ignore it. Our approach to that is going to be pretty firm in terms of -- we know the value of Helios. We have a very attractive economic deal with a great partner today. To the extent we do, there is an opportunity to do something along the lines you're suggesting we're going to do it with a clear eye towards net present value to shareholders being equal or better on a risk-adjusted basis with clients. For Phase 1, I'll just reiterate my comment today that CoreWeave has stated that our end tenant in that facility is going to be a multitrillion-dollar IG public company. And so having -- knowing that, that's the anchor in our first facility gives us and should give investors as well as our financing partners there. a lot of derisking and a lot of comfort level there. On the second one, on splitting the business or the potential of it, no update on that. Our posture on that is the same as it's always been. It is from a management time and focus perspective, myself, Mike, Tony, the whole crew are equally focused on building both businesses, we're involved in building both businesses. We do recognize the capital structure and the capital needs of both businesses. And the earnings potential and visibility are very different. And so the -- today, they aren't natural synergistic businesses. but we're not convinced that that's not true in the future. And so we're going to continue to build both businesses and evaluate what the opportunities are when the time is right. Michael Novogratz: Just to put an exclamation point, Chris said, if you think about even the growth of where these businesses are, end of the year, we have a convert that rolls off. Helios actually is Phase 1 at least is fully cash flowing and Phase 2 is getting started. And so it's probably more of a debate for us around the end of the year than it is today. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mike Novogratz, Founder and CEO of Galaxy Digital for any closing remarks. Michael Novogratz: Yes. guys, we appreciate your time today. It is a beautiful day in New York. I usually give a weather update at the start. Just want to reiterate, like we're optimistic on both businesses. We've got 700-plus people here working very hard every day. We understand we're in an environment where AI is changing every company in ways that they hadn't dreamed of 2 years ago, and we are engaged with that trend as well. And so I think the world is at an AI revolution, and we plan on riding that wave and paddling our canoe as fast as possible in what will be choppy waters because this is a pretty disruptive technology. But like hang on to your seats is the broader macro view. And thanks for your time. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Eliza Henson, Manager of Investor Relations. Eliza, please go ahead. Eliza Henson: Thank you, and good afternoon. Welcome to Stride's Third Quarter Earnings Call for Fiscal Year 2026. With me on today's call are James Rhyu, Chief Executive Officer; and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. A reconciliation of these measures is provided in the earnings release issued this afternoon and can also be found on our Investor Relations website. In addition to historical information, this call will also involve forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to several important factors as described in the company's earnings release and latest SEC filings, including our most recent annual report on Form 10-K and subsequent filings. These statements are made on the basis of our views and assumptions regarding future events and business performance at the time we make them, and the company assumes no obligation to update any forward-looking statements. Following our prepared remarks, we will answer questions you may have. Now I'll turn the call over to James. James Rhyu: Thanks, Eliza, and good afternoon, everyone. I'd like to start off with an update on the platform issues we experienced earlier this year. As I mentioned last quarter, we continue to execute on the road map for stability and improvements. As we close out this school year and preparations have already begun for the coming fall, we are heads down making sure our customers get the best experience possible. So I'm comfortable with our progress and believe we are on the right track as we prepare for the fall season. And as we have discussed previously, the demand for our products and services, as indicated by application volumes continues to be strong relative to historic levels. And while our focus is on finishing this year executing against our road map, we believe the demand environment sets us up well for the future. And although we experienced a marginally higher level of attrition since I gave an update on our last call, this was not unexpected. We continue to monitor, but we are confident it won't harm our long-term prospects. I believe the macro environment for school alternatives like ours continues to be a long-term trend that will serve as a tailwind to our business. Our job right now is to maintain focus and execute through the rest of this year and into the fall, so that the students and their families can continue to choose the options, including our programs that they deserve. Thank you, and I will now turn the call over to Donna. Donna Blackman: Thank you, James, and good afternoon. As James mentioned, we are seeing strong demand for the fall as measured by application volume, and we remain confident in the long-term growth in the business. This quarter's results reflect continued demand and solid execution across the business, and I'll start by reviewing those results. Total enrollments grew 1.8% to 244,500 and total revenue for the quarter was $629.9 million, up 2.7% compared to last year. Revenue in our career learning, middle and high school programs grew nearly 16% to $259.5 million, driven by strong enrollment growth of 11.6%. General Education revenue was $357.5 million, down 3.6% compared to last year, driven by an enrollment decline of 5%, which was more than offset by the growth in our Career Learning business. As we think about next quarter, it's important to remember that we anticipate enrollment decline as most of our programs no longer accept enrollments during the fourth quarter. We are focused on converting these leads into new enrollments for the upcoming school year, and we expect a sequential decline next quarter like we typically do every year from Q3 to Q4. Total revenue per enrollment across both Career Learning and General Education was $2,485, up 2.9% from $2,415 last year. As a reminder, revenue per enrollment can vary between General Ed and career due to program and state mix as well as timing. So we encourage investors to focus on total revenue per enrollment, which, as I've said previously, we believe is the most representative measure of underlying performance. Given this quarter's results, we expect total revenue per enrollment for the full year to be up roughly 2% from last year. We've received a lot of questions about next year's enrollment expectations, and I want to reiterate that it is still very early in the enrollment season. We should have a better picture of the enrollment landscape during the fourth quarter call as well as more color on the funding environment as states finalize their budgets in the coming months. Turning back to the results from the third quarter. Gross margins at 36.8% for the quarter was down 380 basis points. We expect to finish the year with gross margins in the range of 37% to 37.4%. Now let me provide a bit more color on gross margins. The year-over-year decline is primarily driven by continued investments in the business, including those related to our platform rollout as we support the transition. We would expect a portion of these costs to moderate as we move into FY 2027. Selling, general and administrative expenses totaled $102.5 million, down $16 million or 13.5% from last year. We expect to finish the year with SG&A down 6% to 8% compared to last year. Stock-based compensation for the quarter was $9.6 million. We now expect to finish the year with stock-based compensation in the range of $40 million to $42 million. Adjusted operating income was $140.4 million, down 1%. Adjusted EBITDA was $171.3 million, up 1.8%. And adjusted earnings per share for the quarter was $2.30, down $0.03 from last year. As in years past, we expect fourth quarter profitability to be less than the third quarter as we ramp up marketing and other spend for the upcoming school year. Now moving to our balance sheet. Capital expenditures for the quarter were $18.5 million, up from $15.8 million last year. Free cash flow, defined as cash from operations less CapEx, was $202.4 million, up from $37.3 million last year. For the year, we expect free cash flow to be flattish to last year. We finished the quarter with cash, cash equivalents and marketable securities of $856 million. Turning to our guidance. For the full year, we are narrowing our revenue, AOI and CapEx guidance ranges and affirming our effective tax rate guidance. For the balance of the year, we expect revenue in the range of $2.490 billion to $2.520 billion, narrowed from $2.480 billion to $2.555 billion last quarter. Adjusted operating income between $490 million and $500 million narrowed from $485 million and $505 million last quarter. Capital expenditures between $75 million and $80 million, narrowed from $70 million and $80 million last quarter and an effective tax rate between 24% and 25%, unchanged from last quarter. As you'll note, the range of revenue implies fourth quarter revenue below the fourth quarter of last year, driven by marginally higher attrition rates and tough comparisons associated with the timing of funding true-ups. We do not, however, believe this is indicative of any change in underlying demand trends. We continue to see positive trends in demand and customer experience, and we remain optimistic about the coming school year. We believe that our investments in the business are setting us up for long-term success and the ability to meet the demand of families seeking alternative education options. Thank you for your time today. Now I'll turn the call back over to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets. Jeffrey Silber: I appreciate the timing in terms of trying to gauge enrollment for next year. But I was wondering if you can comment on the contract renewal pipeline or new business. I'm just wondering how that's going, if you're seeing any pushback from some of the issues that you incurred last summer. James Rhyu: Yes. Jim, I think sort of 2 separate questions, and I think they have sort of similar-ish answers, but one may be more positive than the other. I think with our existing clients, we -- first of all, we're very thankful that our existing clients remain, I think, really positive on our programs. They understand the value that together, we're able to deliver and the value that we can bring to those programs. So we still think that we have very good relationships with our partners. I mean, clearly, we have partners that aren't happy about things that have happened over this past year. But in general, they're working collaboratively with us, and I think they're pretty understanding. On the new business development side of it, interestingly, we have seen no negative impact in terms of doors that are opening for us, conversations we've been able to have. And in fact, our pipeline of new business activity is, I would say, probably as strong or stronger than it's been in the 5 years that I've been the CEO, certainly. So I think the issues that we've experienced on the platform side, and I've gone out and talked to a bunch of these customers myself personally sort of to gauge the sentiment out there. Almost none of them focus on the issues that we've had. I think they're all focused on the success that we can deliver for families across this country and the belief that the options and the choices that we can provide for them are of paramount importance. And so we're getting nothing but really positive feedback. We proactively discuss the issues we've had this past year. And I think to it either, they're all pretty understanding. They've -- many of them have been through some issues themselves, almost all of them experienced really difficult issues regarding the platforms that they monitored and executed on during COVID. So sort of reasonably fresh experience of somewhat negative platform issues. And so pretty positive conversations along those lines. And again, I think just the pipeline of activity that we have is as strong as we've seen in 5 years. Jeffrey Silber: Okay. That's great to hear. I know, again, you're not commenting on the funding environment for next year. But I know there's been some changes in certain states. Pennsylvania has been one that's been in the press. Do you see other states changing how they're funding virtual schools? Is that a trend we might see continue? James Rhyu: I think it's a little bit hard to sort of call a trend. Pennsylvania, as you indicated, they've had legislation on the books. I believe it may be for almost 20 straight years to cut virtual funding. They're one of the states in the country that have the longest-standing virtual programs. They have some of the highest penetrations in the state. They have a very, very robust marketplace of providers in that state. I think, as you know, the politics have played into it for many, many years and particularly in that state, there's been legislation on the books. We've been pretty successful for 20 years, getting that legislation sort of beating back a little bit. And at some point, that's not going to happen, and this was the year. I think our business remains, I think, pretty robust in Pennsylvania. I think the market in Pennsylvania remains robust. I think that, if anything, these types of situations present opportunities for stronger players like us. And so we'll obviously look at ways that we can take advantage of any situation like this in the marketplace. So I actually think that something like this, in particular in Pennsylvania presents an opportunity. More broadly across the country, I don't see -- I don't think we see any different trend than the activity we've seen in the past 10 or 15 years. I mean there's always legislation that's getting proposed, both for and against virtual programs. I don't see a materially different trend now than there was in any time in at least the past 10 or 15 years. Operator: Your next question comes from the line of Alex Paris with Barrington Research. Alexander Paris: My first question relates to enrollment and the enrollment windows. It was my understanding that some of the enrollment windows at some of the programs might have closed earlier this year than last year and previous years in general, given the challenges of last fall. And then obviously, we expect windows to be closed for the full fourth quarter. Is that an accurate statement? Did windows close earlier in the third quarter than last year? And what impact, if any, can you quantify on enrollment in the third quarter? James Rhyu: Yes. I think -- so the short answer is yes. And I think more -- maybe more profoundly, not just the windows, I'll say, closed earlier, I think, which we've indicated previously, we are very proactively not maybe taking advantage of even as much as we theoretically could windows that are open because we generally this year have taken the stance of trying to backfill as opposed to grow. And so that's sort of what you've seen. And so when you have programs that you can backfill and you do, but you don't grow them and then you have other programs where windows are closing earlier, you're going to have a dynamic where it puts downward pressure on enrollment. I think we've been very clear and consistent with that all year. And so yes, I think you're exactly correct. And through the fourth quarter, that's going to continue to be so to the extent that really we don't have windows open through the balance of this year. And so it's only a story of attrition. But again, I think that was pretty transparent from previous calls that we've discussed, and it does not change our perspective of the overall demand environment, which continues to be strong and bodes well for the fall. So yes, you're going to have this dynamic, which we've explained around this year enrollment trends, which is going to run counter the past few years in terms of in-year enrollment growth. But I don't think that's a commentary on the overall demand, which we see continue to be very strong. Alexander Paris: Well, it looked like you backfilled well in the third quarter with enrollment coming in where it did a little bit. I mean we expected a sequential decline. We got a little sequential decline, but it was still up 1.8% year-over-year. Part of that's due to windows being closed earlier, part of it's due to the fact that you're not pushing hard, you want to get it right. Is there any way to quantify how many students you left on the table, so to speak, in the third quarter because of early windows being closed? James Rhyu: I think it'd be difficult to quantify sort of -- I think it's difficult to quantify because conversion rates and things like that are a little bit variable. But it's clearly in the thousands. I think it's -- if you sort of just looked at prior year's trends and assuming that demand was similar and see how much we grew in the prior year, we left on the table probably a similar amount that we could have grown this year. Alexander Paris: Okay. I got you. So sequentially, it grew from Q2 to Q3 last year. This year, it did part of that is due to the closed windows. James Rhyu: Yes, exactly. Alexander Paris: Yes. Okay. And then given the demand continues to be so strong as measured by application volumes, does that mean that these students get added to waitlists? And does that bode well for the fall term? James Rhyu: Yes. In some cases, yes, they get added to a waitlist. In some cases, we've actually started opening up enrollment for the fall. So they're sort of in, I'll say, like a provisional state maybe because it's technically not open. But basically, we're accepting applications now. And so we have some like, I'll say, provisional state enrollments as well. And so I think, yes, it does give us a little bit of a head start on the pipeline for next year. There are those a not insignificant number of families who unfortunately are, I don't say, desperate for a solution immediately. And when we're not able to provide that immediate solution for them, then in those cases, they often do look elsewhere. So there is some number of the pipeline that we can't translate into next year enrollment because they're looking for an immediate solution and where we can't provide that, we certainly understand that they're going to look somewhere else. Alexander Paris: All right. And then last question on the topic. Enrollment at some programs, their window was closed early. Can we say similarly that the enrollment window for the fall has opened up earlier this year than last year? James Rhyu: I don't think materially. Yes. I mean I do think we try to get a little bit of a head start, but I don't think we're materially different than last year. We try to open the windows early every year, I guess, maybe for the fall is what I'm saying. I do think that probably there is a little bit of a dynamic where in prior years, where there -- we open enrollments for the fall, there are some small number of families who when they realize, oh, we're calling in for the fall, but you actually have a spot now, I'll take the spot now. So that sometimes will happen. Alexander Paris: Got you. And then anything to read -- this is my last question on enrollment. Anything to read into the fact that general education enrollment was down 5% and career learning enrollment was up 12%, just round numbers. I know it doesn't really matter economically. Care to comment any color on that? James Rhyu: Yes. No, I don't think there's anything really to read into that. It's just -- like you said, it's -- we sort of look at the whole pie and we break them up into those buckets. But I don't think there's not a specific trend, I guess, really that maybe to answer your question is that we see that's positive or negative based on those numbers. Operator: [Operator Instructions] Your next question comes from the line of Stephen Sheldon with William Blair. Matthew Filek: James and Donna, you have Matt Filek on for Stephen Sheldon. Given you seem to be making good progress on mitigating the platform issues, how are you thinking about marketing spend from here? Is that something you plan to push the pedal on? Just curious how we should think about SG&A spend over the next year or so? James Rhyu: Yes. I think we're on a trajectory for essentially business as usual from here on in. I think we're executing well against our road map, as I mentioned earlier, I think that we expect a very robust and successful fall. There's -- I don't see anything that is going to hold us back right now for ramping up. And I think we're going to be in the market pretty aggressively. I will say, which I think actually is -- again, is a net positive for us that -- and I won't call it a trend yet, but I guess I see certain data points. And again, I'm not saying yet it's a trend, but there are certainly some data points that appear as though the customer use of AI might be actually improving conversion because the ability for people to have better research essentially into different programs, I think, ultimately benefits us. And so therefore, I think that there are some data points that we see where conversion could ultimately improve and therefore, our cost of acquisition actually goes down. And so I think that there are some things that I think look generally positive in sort of the funnel mechanics, if you will, of our business heading into the fall. Matthew Filek: Got it. That's helpful color. And then can you just provide a little more detail on the Adult Learning segment and what it might take to get that segment to return to growth? I know in the past, you've been a little more positive on MedCerts with Tech Elevator and Galvanize, the laggards there. But just an update on what's going on within that segment and the path to get things back to growth eventually would be helpful. James Rhyu: Yes. I think I mentioned this before. First of all, these businesses to us are -- I mean, if they disappear tomorrow, I don't think our shareholders would notice from this impact of our numbers, and they're just immaterial and not meaningful enough to really have a long-term impact for shareholders. I think the underlying businesses, as we've described before, the boot camps are in just secular decline. I think it's going to continue to be the case. I think it's very difficult for the secular environment for the boot camp side, the Tech Elevator, Galvanize side of the businesses to really recover meaningfully. And at least my industry checks across the folks in the industry that I know that run these kinds of businesses, I think, would all sort of echo this similar sentiment, at least privately for sure. I think the MedCerts business is and continues to be an attractive market segment for us. We have not executed well across that market segment. We've had some leadership changes in the past year or so that we're hoping that will help reignite our positioning there. I continue to believe that we're going to make investments in that. I think it benefits our K-12 programs. And I think it -- the market opportunity still exists. So it's not meaningful. The investments won't change the needle on anything in our financials. But I do think there continues to be opportunity there. We're going to continue to look for ways to take advantage of the opportunity. But I think clearly, our execution has not yet been where we expect it to be. Operator: That concludes our question-and-answer session. Ladies and gentlemen, this concludes the Stride Third Quarter Fiscal Year 2026 Earnings Call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Rogers Corporation First Quarter 2026 Earnings Conference Call. I will now turn the call over to your host, Mr. Steve Haymore, Senior Director of Investor Relations. Mr. Haymore, you may begin. Stephen Haymore: Good afternoon, and welcome to the Rogers Corporation First Quarter 2026 Earnings Conference Call. The slides for today's call can be found in the Investors section of our website, along with the news release that was issued earlier today. Please turn to Slide 2. Before we begin, I would like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers' operations and environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement made today. Please turn to Slide 3. The discussions during this conference call will also reference certain financial measures that were not prepared in accordance with U.S. generally accepted accounting principles. A reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call. With me today are Ali El-Haj, Interim President and CEO; and Laura Russell, Senior Vice President and CFO. I will now turn the call over to Ali. Ali El-Haj: Thanks, Steve, and thank you, everyone, for joining us today. I will begin on Slide 4. In the first quarter, we delivered solid results with all financial metrics meeting or exceeding the midpoint of our guidance for the third consecutive quarter. Q1 sales were $201 million, a 5% increase year-over-year from foreign currency benefits and a higher industrial demand in the U.S. If not for adverse weather conditions and multiple supplier disruptions, which impacted operations at some of our U.S. plants, Q1 sales would have approached the high end of guidance. We achieved a significant year-over-year improvement in profitability. Adjusted EPS more than doubled to $0.75 per share and adjusted EBITDA margins expanded 580 basis points to 16%. For the second quarter, we are forecasting sales to increase 6% at the midpoint of our guidance. We expect Q2 growth in automotive, industrial and electronics end markets. Adjusted EBITDA margins are projected to increase year-over-year by nearly 600 basis points. The improved Q1 results and stronger Q2 outlook demonstrate the progress we are making on our commercial and profitability initiatives. We are maintaining an intense focus on improving Rogers' multiyear growth outlook. The past quarter, we secured important design wins and continued to gain customer traction through our R&D pipeline. Turning to Slide 5. Beginning this quarter, we streamlined our reporting into 4 primary end markets. At 37% of sales, the industrial market remains our largest segment and now includes renewable energy and mass transit markets. Q1 industrial sales increased at a double-digit rate compared to the first quarter of 2025. Growth was driven by increased demand aligned with improved manufacturing PMI activity in the U.S. and Europe as well as additional market share wins with Rogers' traditional customers. The automotive market segment, which represented 24% of revenue in Q1, includes EV, HEV, ADAS and all other ICE vehicle applications. Sales declined year-over-year at a high single-digit rate due to lower global light vehicle production and weakness in the U.S. EV market. However, we are seeing positive design win momentum in automotive, which we expect to translate to robust sales growth in the coming quarters. The electronic and communications market segment includes sales in consumer electronics, semiconductors, wired and wireless infrastructure. Accounting for 18% of sales in the first quarter, this segment increased at a double-digit rate, driven by higher smartphone and wireless infrastructure sales. The improved smartphone sales resulted from higher volume, a favorable mix of higher-end devices and an increased share with existing customers. Lastly, aerospace and defense sales comprised 15% of revenues and improved slightly from last year. The growth was led by commercial aerospace sales in our AMS business. We expect aerospace and defense to remain a growth area for Rogers. Next, on Slide 6, I will outline our progress toward 2026 priorities. Our objective to grow the top line in 2026 and in the coming years remain our highest priority. We secured several design wins during Q1 in support of that goal. First, in the AES business, our high-frequency circuit material were designed into a new automotive radar application with a leading Asian OEM. Sales are planned to begin in the second quarter. In the AMS business, we were awarded several design wins for EV battery applications with leading OEMs in the United States and Asia. These solutions will be used across different platforms. We are further encouraged by the progress we continue to make across products in our R&D pipeline. We continue to test and validate our microchannel cooler technology for data centers with multiple customers. Feedback from our customers has been encouraging, and we believe our technology possesses unique capabilities for cooling high-power chips in data centers and AI applications. Development of high-frequency circuit material for data centers is also ongoing. Recent internal testing showed promising results, and we expect customer sampling and testing to begin within the next 2 quarters. While these projects move forward, we are also actively advancing other high potential opportunities. We continue to make progress with our 2026 profitability improvement initiatives. Across most of our manufacturing operations, we have seen measurable improvement in cost structure and overall operating performance resulting from the focused efforts of our dedicated team. The restructuring initiatives at our German facility remain underway with $13 million of annualized savings still expected by Q4 of this year. We also continue to efficiently manage operating expenses with strong control measures in place. Our capital allocation priorities support both organic and inorganic growth. Accordingly, we have increased our focus on evaluating potential M&A, and we continue to assess opportunities that align with our strategic and financial objectives. Our organic growth will largely be supported with existing capacity, but we are prepared to allocate capital for CapEx to support opportunities in our R&D pipeline as needed. I will now turn it over to Laura to discuss our Q1 financial performance and Q2 outlook. Laura Russell: Thank you, Ali. Starting on Slide 7, I'll summarize our first quarter results. Sales, gross margin, adjusted EPS and adjusted EBITDA all met or exceeded the midpoint of our guidance for the first quarter. First quarter sales increased 5% or $10 million, inclusive of foreign currency benefits of $7.9 million. As Ali mentioned, there were weather and supply disruptions specific to several of our U.S. manufacturing locations, which tempered our Q1 sales. AES Q1 revenues increased by 3.4% versus Q1 of '25. By end market, sales increased in the Electronics and Communications segment and the Industrial segment. EMS sales improved by 7% year-over-year. By end market, sales increased in the Industrial, Electronics and Communications and A&D segments. This was partially offset by lower automotive sales. Adjusted earnings per share were $0.75 in Q1 and increased 178% from the prior year period, resulting from higher gross margin and significant improvements in operating expenses. Foreign currency fluctuations had only a small effect on adjusted EPS as our global operations act as a natural hedge. Turning to Slide 8. Q1 adjusted EBITDA was $32 million and increased 580 basis points year-over-year to 16% of sales. The improvement in adjusted EBITDA was primarily a result of higher sales and improved product mix. Reductions in manufacturing costs, start-up and general and administrative expenses also contributed to the higher adjusted EBITDA. We continue to ramp our new factory capacity, which resulted in a $1.4 million headwind to EBITDA versus the prior year. However, new factory performance costs decreased versus Q4 of '25. Continuing to Slide 9, I'll discuss cash utilization for the quarter. Cash at the end of Q1 was $196 million and changed only slightly from the end of the fourth quarter. Cash provided by operations was $5.8 million compared to $46.9 million in Q4 of '25. Inventory reductions were a key driver of the much higher operating cash flow in the prior quarter, and this was not expected to repeat in Q1 of '26. Consistent with typical patterns, accounts receivable increased in Q1 following a large reduction in Q4 of '25. Higher accounts payable partially offset the Q1 increase in AR. Capital expenditures in Q1 were $4.7 million. Our expectation for full year '26 capital expenditures of $30 million to $40 million is unchanged. We did not repurchase shares in the first quarter, and we'll continue to balance returning capital to shareholders with other capital needs. Next, on Slide 10, I'll review our guidance for the second quarter. On a year-over-year basis, we again anticipate improvement in Q2 sales, margin and profitability. We are guiding Q2 revenues to be between $210 million and $220 million. The midpoint of the range is a 6% increase in sales year-over-year. The guidance includes our expectation for higher automotive sales from the start of new program wins and continuation of existing programs. In addition, smartphone sales should increase from normal seasonal factors with some growth in industrial end markets continuing. We're guiding gross margin in the range of 32.5% to 33.5%. The midpoint of the range is 140 basis points higher than the prior year due to higher volumes and cost structure improvements. We expect Q2 adjusted operating expenses to remain approximately flat to the first quarter. Adjusted EPS is forecast to range from $0.90 to $1.10. The $1 midpoint compares to adjusted EPS of $0.34 in Q2 of 2025. Adjusted EBITDA is anticipated to range from $35 million to $41 million. This equates to a 17.7% EBITDA margin at the midpoint of the range, which would be a 590 basis points improvement versus the second quarter of 2025. Excluded from adjusted EPS are restructuring costs related to the Curamik actions in Germany. In Q1, we recognized $4.4 million of associated restructuring charges, bringing total restructuring for this program to date to $9.8 million total. This is relative to our total estimated range of $12 million to $13 million. The remaining restructuring costs associated with this action will largely be incurred from Q2 to Q3 of '26. The program is still anticipated to deliver $13 million of annual run rate savings. Lastly, we project our non-GAAP full year tax rate to be approximately 30%. I will now turn the call back over to Ali. Ali El-Haj: Thanks, Laura. In summary, we had another quarter of solid execution and delivered improved Q1 results. Our second quarter outlook also reflects solid year-over-year improvements and highlights the momentum behind our commercial and profitability initiatives. We remain focused on execution and driving greater value creation. That concludes our prepared remarks. I will now turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question today is coming from Craig Ellis from B. Riley Securities. Craig Ellis: Congratulations on the real strong execution, team. Ali, I wanted to start just following up by one of the points you made about calendar '26's focus areas, and you indicated that growth is the highest priority. Can you talk a little bit more about the design wins that were achieved in EV and ADAS and when those wins would convert to revenue? And as the second part of that question, go into a little more detail in terms of what you're seeing with the data center opportunity? How material are the engagements that you have now? And how significant are the things that sound like they're more in the development or pipeline stage? Ali El-Haj: Okay. As mentioned, regarding the design wins, as we've indicated in the prepared remarks, we had several in the AMS side, mostly related to EV batteries and other applications. And on the AES side, we have, as I mentioned, one for radar applications with an Asian OEM. Both of these or actually, the majority of these wins will be in production between Q2 and Q4 of this year. So we will start seeing revenue out of these wins in Q2, Q3 and Q4 this year. As it relates to the data center, the opportunities are there, as we've been indicating for now the past 2 quarters. For 2026, however, revenue will not be significant. It will be mostly sampling or prototype type revenue. So it's not as significant as we would like it to be. I've always been indicating that this is probably a Q3, Q4 of 2027 and depending really on how fast our customer will accelerate their development and their qualification and the readiness for the product. But we see opportunities, as I indicated for data centers in all of our product areas, but mainly the highest volume or dollar impact will be out of our microchannels with the Curamik activities and the high-speed digital product lines. Craig Ellis: That's really helpful. And then I'll ask the follow-up question to you, Laura. Loved the trajectory of gross margin as we start the year. Can you talk a little bit about what's driving the sequential strength? Is it all really volume? Or are there some things happening on the COGS management side that are coming in a little bit better than we might have expected 3 months ago? Laura Russell: Sure. No problem, Craig. I'll take that. And with regards to the margin, what I would have to say is really a function of all of the above what you mentioned. We've spoke in the past in prior calls about our initiatives and our objectives in managing our operations to ensure that we are doing what we can to minimize yield loss and optimize on our input costs and really be effective in what we're running through our factories. Those initiatives continue and are in flight, and they have some favorable impact, which you see in our EBITDA bridge and some of the transitions that we call out on a quarter-over-quarter basis. Now with that said, the other thing that's favorable there that we're also discussing is some of the structural changes that we undertook that are in the margins. That's all to say. There's some other puts and takes that go the other way in terms of some transitions in terms of the segments and where we're realizing some of the revenue growth and gains. So there's always some puts and takes across the margin. In general, I would agree with you, Craig, we're making the right progress. We're keen to continue to make additional inroads and incremental improvements, which are some of the key initiatives that will assist us as we continue to focus on growing the business and the top line. Operator: Next question is coming from Daniel Moore from CJS Securities. Dan Moore: I want to start with industrial. It gets a little less attention, that's still a significant portion of your business. It sounds like gradual improvement. Can you maybe just talk about particular end markets within that bucket where things are improving or becoming -- are there any that are becoming more challenging in the current environment? Ali El-Haj: No, I think really, overall, the whole industrial segment for the business is really growing. Where we see maybe more impact is the semi. So semiconductor industry, as you know, it is growing. So we realized some increase in our revenue in that area. The rest of the economy and that just the manufacturing index here, PMI in the United States and Europe is higher. So we're tracking with that. In addition to some recapturing some market share with some of our existing customers. So kind of if you separate all the growth come from these 3 areas. One is general economy; one, semiconductor growth, and the third element is recapturing some market share with our existing customers for existing applications or newer applications. Dan Moore: Helpful. And maybe as a follow-up, just piggybacking on Craig's question on the data center opportunity. You talked in detail on the last call about the sort of specific applications. Maybe just take the opportunity to talk again about whether you would be replacing any existing thermal management technologies or completely complementary? And when might you be in a position to talk a little bit more about TAM and kind of what revenue might look like 2, 3, 5 years from now? Ali El-Haj: Yes, I'll take it backwards. So with regard to revenue and discussing revenue and potential, probably later this year, as we get -- we have a pretty good idea of the target and the potential. But some of this, as you know, is customer-specific. So we need to be extremely cautious here of what we communicate. With regard to the opportunity itself, it's really a mix. One is we look at the technology that we're providing for a specific solution of difficult issues that exist today. So more of a complementary but really solving serious issues that remains with the current systems today. So we would be -- it's a combination. We'll be taking some market share of the existing applications as well as solving some difficult issues with existing technologies regarding the thermal management today. So we believe the technology that we're introducing here is more specific, more efficient and will be more cost effective to the end user. Dan Moore: I know I'm out of questions, but last, if I could sneak it in, Laura. Can you quantify the revenue that slipped from Q1 due to weather and supply disruptions? And how much of that is in your guide for Q2? Laura Russell: Yes, no problem. So Dan, yes, we did have some disruptions, which we alluded to in our prepared remarks. I would indicate that had we not encountered those disruptions, we probably have been trending more towards the high end of the guidance range that we had set. Operator: Our next question is coming from David Silver from Freedom Capital Markets. David Silver: I did just want to level set 1 or 2 things, and then I have a couple of business questions. But I just want to make sure I'm not missing anything regarding your cost saving targets. So as of December 31, I believe you said you had achieved the run rate of $32 million. And in your remarks here, you've discussed the opportunity in Germany to capture an incremental $13 million by year-end. Is that how I should think about the total efforts that you've created? Or might there be another program or 2 that maybe I'm missing? Laura Russell: David, it's Laura. Let me take that for you. So you're right insofar as what you said about $25 million in '25. However, what I would tell you is that was the savings we realized in calendar '25. But when you annualize that, there's an additional $7 million still to be realized through the P&L. Then when you add to that, the savings that we'll realize, which will be an incremental $13 million on an annualized basis once we're through the restructuring of Curamik facility in Germany, that will bring us to a cumulative savings total of $45 million. So that just will give you the information that allows you to fully triangulate the savings and where we are today and fully realizing them through the financials. David Silver: That was the issue, the $25 million versus $32 million, and you read my mind very well there. Ali, I would just say the first quarter results reflect terrific work on the controllable factors. Your sales growth, I think, was modest, excluding the currency benefit, I guess, the currency tailwind. You've cited maybe auto as a softer spot right here, but due to improve. I mean, overall, what are you hearing from your major OEM customers? Are they cautious because of the geopolitical environment? Or what might be holding them back from moving more like this is kind of a more meaningful recovery, I guess, in broad-based demand for your key end markets? Ali El-Haj: Okay, specifically referring to the automotive industry. Obviously, it's not just geopolitical issues. We've got regulations issues and regulatory changes, especially in the U.S., as you know. So that's really impacted the EV market, especially in North America, specifically the United States. and to a similar extent in Europe. However, Europe is recovering, and we see growth in that market in Europe. It started towards the fourth quarter of 2025, and it continues. So we see a pickup there. China first quarter was very soft. And again, some of the incentives for the EV market in China was taken away or pulled back, and we think some of that will be reinstated. So that market will turn positive even in China within the next quarter to 2 quarters. So we think EV market is coming back. It's not an issue. We are not severely impacted by the EV market. We're trying to address the whole automotive market and just not just for EV, but whether it's hybrid, whether it's EV, whether it's ICE type applications, we're in. So we're targeting that market very heavily. We're engaged with a lot of the OEMs directly and indirectly as we speak. So we anticipate really continued growth. As I said, we had several design wins in the fourth quarter of last year, first quarter of this year, and we anticipate that will continue into the balance of 2026. With regard to the other industries, whether it's electronics and portable electronics specifically, we see growth in there for us. The mix of the high end, especially in the first quarter of this year, the mix of -- or the sale of the higher-end mobile phones and cell phones, what that did for us, it provided us higher revenue. We have higher content on those devices than just the standard lower-cost version phones. So that did help our growth, and we expect that also to continue. So we're capturing more market share, more applications within that market segment. And the mix is helping us also significantly. So we see growth really in all of our areas, and we're targeting every segment of our business for growth for the balance of this year. David Silver: And maybe just to follow up on your targeting of growth for the balance of the year, maybe going at it from a slightly different angle. But maybe for Laura, but you did highlight the capital expenditure budget, maybe the midpoint at $35 million. I don't think of your company as kind of a capital-intensive one normally. But within that proposed, call it, $35 million plus or minus budget, is there growth or targeted growth investments included in there? And maybe if you wouldn't mind just what areas of your company are you directing kind of some discretionary or growth-oriented CapEx towards? Laura Russell: Okay. So let me start there, David, and then if needs be Ali can add some additional color. So what I would say in terms of capital intensity, actually at the midpoint at $35 million, the intensity has declined versus where it was in prior year. So in '25, we were at 4%. I think in '24, we were at 7%. And what that's indicative of is as you talked about the capital intensity, we're largely through the investments in our facilities to expand capacity that we've made in the last 3 to 5 years, those investment decisions. So now what we're investing in is, number one, maintaining those facilities and automating as appropriate to improve our operational effectiveness. And then secondly, looking at the other auxiliary systems and processes that we have and how we can make them more effective and efficient in the business. So that's where we're currently largely investing. But the one thing that I did want to call out is that we also talk repeatedly to you all about the potential and the opportunity for the business. And we continue to evaluate that month-to-month, quarter-to-quarter, and we'll make the appropriate decisions as we keep that based on potential return on any potential investments. Operator: [Operator Instructions] Our next question is a follow-up from Daniel Moore from CJS Securities. Dan Moore: Yes. I apologize. I missed a minute or 2 of the call. But on the defense side of aerospace and defense, has your outlook or growth expectations changed at all since the start of the war in Iran, maybe not necessarily for this year, but looking out further just in terms of maybe a restock, et cetera? Ali El-Haj: No, it has not changed. I think we expect to continue to grow. I think the Q1, we were heavily impacted by actually the commercial aerospace industry, not the defense that was softer. And again, that's just really timing of projects, Dan, as you know, these are projects-driven type activities. Because of the restocking issue that's expected, we expect growth in Q2, Q3 and going forward. That's our expectations right now. Operator: Our next question is a follow-up from Craig Ellis from B. Riley Securities. Craig Ellis: I wanted to use Laura's comments on capacity and the investment that has been made so that you do have sufficient capacity and just use that as a jumping off point with something that I see broadly in a lot of the end markets where Rogers materials wind up, and that is we're seeing increasingly tight supply conditions. And in other sectors, we've seen customer order patterns change either with longer-term pipelining and visibility or other things. And so the question to you, Ali, is as we've seemingly gotten into more of a capacity-constrained environment, across the broader supply chain. How do you feel about your capacity? And are you seeing any changes in your customers' order behavior? Ali El-Haj: No, we don't really have an issue or constraint on capacity. I think what we see in our business is shifting, let's say, geographical demand and needs, where if you remember, we discussed the local-for-local strategy that Rogers has in place. So we've seen this is now playing more of a role in the business today and going forward than our capacity overall. So Rogers capacity overall is sufficient for what we forecast for the next probably 6 to 8 quarters without any concerns with the exception of the additional new R&D projects, new business that we discussed earlier. But for current business demand, we think we have sufficient capacity However, shift within regions or between regions, something we're looking at. So we may have to rebalance that available capacity in different regions. So it would be more of a rebalancing rather than investing more. Craig Ellis: And the follow-up to that and the next question is one as a follow-up. Does that present an opportunity for you to do things with pricing in an environment that just seems to be structurally tighter that can benefit what you bring home on the top line and gross margin? And then the next question is related to the tighter segment summary that you presented with auto and industrial, aerospace and defense, et cetera. What catalyzed the more consolidated look at end markets? And what does it do internally for you in terms of how you're running the business? Ali El-Haj: I don't think it's going to change the way we run the business. I think the business will continue -- the path we started a few quarters ago, I think we're going to continue running the business in the same way. The only thing that I've mentioned is, again, rebalancing this capacity and the availability of production lines where to serve the local geographical needs or serve the OEMs within those geographical areas. So this is something we're going to continue to work on going forward. With regard to pricing, my comments in the past, this is market-driven. We're going to continue to evaluate and study the market and understand the pricing -- the market tolerance for pricing and those conditions and we'll act accordingly. But we try to mitigate any cost increases internally first before we try to go in and ask our customers for price increases. So we try to do that internally first, mitigate that with our efficiencies, our cost reduction activities first, then last resort will be going back to increasing pricing on customers or for certain customers. Operator: Thank you. We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and thank you for standing by. Welcome to the Caesars Entertainment Inc. 2026 First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations. Please go ahead. Brian Agnew: Well, thank you, Daniel, and good afternoon to everyone on the call. Welcome to our conference call to discuss our first quarter 2026 earnings. This afternoon, we issued a press release announcing our financial results for the period ended March 31, 2026. A copy of the press release and our investor presentation are available in the Investor Relations section of our website at investor.caesars.com. As usual, joining me on the call today are Tom Reeg, our CEO; and Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our Chief Financial Officer; Eric Hession, President Caesars Sports & Online; and Charise Crumbley, Investor Relations. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward-looking statements under safe harbor federal securities laws, and these statements may or may not come true. Also, during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. Please visit our press release is located on our Investor Relations website. for a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure. And finally, Caesars Entertainment as a matter of policy does not comment on market rumors or speculation. We will not be answering any questions during Q&A today on this topic. Over to Anthony. Anthony Carano: Thank you, Brian, and good afternoon to everyone on the call. Caesars delivered solid results for the first quarter of 2026 as consolidated net revenues of $2.9 billion increased $77 million or 3% year-over-year. Adjusted EBITDAR of $887 million improved by $3 million over the prior year. Highlights for the quarter include continued sequential improvements in operating trends in Las Vegas, revenue and EBITDAR growth in the regional segment after excluding the impact of the Super Bowl in New Orleans last year and record Q1 revenues and EBITDA in our Digital segment. Starting in Las Vegas. The company delivered adjusted EBITDAR of $426 million versus $433 million last year. on flat revenues. We experienced a significant sequential improvement in the hospitality vertical in Q1 with occupancy of 95.3% in the quarter and year-over-year ADR growth of 1%. This marks a dramatic improvement versus the second half of 2025. Occupancy and rate trends benefited from a strong group and convention lineup with group occupied room during the quarter. While leisure trends were still down on a year-over-year basis versus the second half of 2025. We remain focused on elevating our product offerings in Los Vac. Our newly renovated villas at Caesars Palace guest room product and casino floor remodels continue to generate excellent feedback from our guests. Looking ahead, I'm excited for the opening of the Omnia day club at Talison May 15. The full remodel of the Augustus Tower at Ceasars Palace for completion by early 2027 and the opening of Category 10 by Luke Combs later this year. For the remainder of 2026, we continue to forecast sequential improvement in Las Vegas operating trends driven by group and convention mix and stabilizing leisure trends. Moving to our regional segment. The company reported net revenues of $1.4 billion, a 3% increase year-over-year and adjusted EBITDAR of $435 million, down $5 million from the prior year. The regional segment delivered improved EBITDAR results versus last year after excluding the benefit of the Super Bowl New Orleans last year. Our targeted marketing reinvestment strategy within our regional segment continues to deliver positive results, driving increases in rate play in Q1. On March 3, we closed on the acquisition of Caesars Windsor. Results of Ceasars Windsor are now included in our regional segment. Additionally, on April 9, we opened our newest managed property, Harris Oklahoma, which expands Ceasars Rewards to a new market. As we look ahead to 2026 in our regional segment, we expect to benefit from a group mix in Arena, the inclusion of Caesars Windsor, the completion of our $200 million Taco Master Plan renovation this month, hosting of select property events around the World Cup and continued return on investment on recent strategic marketing reinvestment. With the completion of our Tahoe Master Plan scheduled in June 2026, we will have successfully completed all major large planned regional CapEx projects since the completion of the merger back in 2020. in total, we have invested over $3 billion in CapEx into our regional portfolio over the last 5 years. Our regional portfolio is positioned to benefit from these investments moving forward. I want to thank all of our team members for their hard work this quarter. Their dedication to exceptional guest service continues to be the driving force behind our company's achievements. With that, I will now turn the call over to Eric for some insights into the first quarter performance of our Digital segment. Eric Hession: Thanks, Anthony. Caesars Digital delivered record first quarter net revenue and adjusted EBITDA of $374 million and $69 million, respectively. Flow-through during the quarter was strong at just over 66% and EBITDA margins expanded 566 basis points to 18.4%. Our results were driven by the following underlying KPIs during the quarter. On the sports side, net revenue was up 9%. Total volume declined 3% with mobile sports volume declining 1% with the declines more than offset by hold, which increased 100 basis points to 8.3%. In addition, parlay mix, average like per parlay and cash out mix all increased versus the prior year period. In iCasino, we delivered 18% net revenue growth driven by strength in volume and average monthly active users. We continue to elevate our product offering during the quarter to include new in-house games, improved bonusing capability and incented cross-play with brick-and-mortar through our remote exclusive product launches and customer events. Overall, in Q1, our total monthly unique players increased approximately 2% to 512,000 and average revenue per monthly player was up 15% to $219. From a tech perspective, we continue to convert new jurisdictions to our universal wallet and proprietary player account management system, which is now live in 27 jurisdictions and should be live in all jurisdictions by the end of April this year. As we look ahead, I'm pleased with the significant progress on the technology side of the business is driving net revenue growth in both sports and iCasino. The continuous progress we're making is showing up in our consolidated digital top line results. The revenue growth, combined with our efficient customer acquisition spend and our focus on operational excellence drive solid flow-through to EBITDA. We continue to see a business capable of achieving 20% top line revenue growth with 50% flow-through to EBITDA, which keeps us on track to achieve our long-term financial goals. I'll now pass the call over to Brett for some comments on the balance sheet. Bret Yunker: Thanks, Eric. As Anthony mentioned, on March 3, we acquired the operations of Caesars Windsor for USD 54 million and entered into a 20-year operating agreement with the Ontario Lottery and Gaming Corporation. We are excited to add Caesars Windsor to our regional portfolio. Our first quarter consolidated results demonstrated the stability of our Las Vegas and regional segments and the continued growth in digital. We expect to deliver strong free cash flow in 2026 during the balance of the year as a result of continued operating momentum, lower cash interest expense and lower CapEx. Over to Todd. Thomas Reeg: Thanks, Brett, and thanks, everybody, for joining. Happy with the start to the year, strong quarter for us. Vegas is obviously in a much healthier spot than it was kind of middle of last year. Starting the summer, still a tale of a very, very strong market when big events and groups are in town and softness when that isn't the case. I'd tell you, the ConAg week here was spectacular across the market have talked to our peers that saw the same. That's really a spectacular event and those types of groups, the entire city gets to participate. So we love those weeks, and we want to find more of them, we're working with the LVCVA to find more prospects that look like that. As we look into second quarter, when I told -- when we met on our last earnings call, I told you I'd expect second quarter to be up slightly year-over-year. I'd tell you, April was a little softer than we anticipated, largely because we didn't hold like we did last year. So I'd say we'll still likely be just short of last year, but again, much healthier than it's been. And then we cycle into comps versus last summer as everybody remembers that was a tough summer in Vegas. Vegas is the FIT business continues to improve. Our bookings feel good. It just feels like a healthier market than it did say, 10 months ago for us. So we feel good there. Regionals, if you recall, last year, we had the Super Bowl in New Orleans. That was a little over $10 million of incremental EBITDA that obviously didn't repeat with Super Bowl, not in one of our regional markets. But absent that, Regionals had a growing quarter, are off to a very strong start in April. So we feel good about regionals, the rest of the year. As Anthony said, our Tahoe redevelopment will be complete by the beginning of the third quarter. It's less disruptive than it was last year right now. We have the largest group of bowlers. Recall, that's a 3-year cycle with this year being the largest. So group business sets up well in region. We feel very good about Regional. Eric talked about digital highlights, pleased with that quarter. I know others have pointed to prediction markets as an impact on customer acquisition costs. Recall that the bulk of our customer acquisition comes from our Caesars Rewards database. That's a particular advantage now. We're not swimming in those same pools that where production markets are making acquisition costs higher. So you can see in our numbers, we had a very strong quarter, and we're off to a good start in second quarter as well. Also remember that we have some significant partnership expenses that roll off in '26. The bulk of those benefits will flow to us in the third and fourth quarter of this year and then into the first quarter of '27. So digital looks very strong. We're still on the path that we laid out a long time ago toward $500 million or more of EBITDA. With the completion of our capital cycle, we're in a free cash flow harvesting stage now. You've seen our capital expenditures come down we have been balanced between buying back stock and paying down debt. You'll see in the first quarter, we didn't buy back stock. First quarter for us is a heavy cash outflow quarter with our bonus payments, interest payments and then in this year's quarter, we spent the $50 million plus to buy out the Windsor contract. So you should expect, as we move forward through the year through our having free cash flow quarters, second through fourth then we'd be back to a balance between debt paydown and stock repurchase. And with that, I'll open up the floor to questions. Operator: [Operator Instructions] Our first question comes from Dan Politzer with JPMorgan. Daniel Politzer: First, I wanted to talk about Las Vegas a bit. Tom, you said the market feels a bolter than maybe 10 months ago. Can you maybe talk about what specifically you're seeing? Is there signs of stabilization in that leisure category, mid weekend, high and low end just kind of parse out the market a bit in more detail? Thomas Reeg: Yes, I'd say leisure market has continued to get healthier from the kind of the lows of last summer. We'd expect to see typical -- back to typical Vegas seasonality as we get into the hot months. But that leisure customer does feel a little bit firmer than it did kind of each quarter since third quarter of last year. As I said, it's a tale of weekends, weeks when the market has significant group events, significant sporting events, significant attractions, those are exceedingly strong, and we still do have weeks that are software weeks in April that were soft, where we just didn't have a great calendar in the market. But group business this year should be another record for us on top of last year's record. We're excited in May, the State Farm Conference comes back. for us, that will be a nice lift for us. And we feel better each quarter about how Vegas is performing. And I think the quarters of there's a downdraft that we're trying to catch up to our in the rearview mirror. I think it should be pretty stable going forward. And in terms of high end versus low end, I think it's -- as I've said before, I think Center Strip in general, has held up the best. Either end of the strip has held up less well. High-end has held up better than low end but Center Strip has kind of trumped high end versus low and we don't have a big bifurcation between, say, Caesars Palace and Heras in terms of performance, it's all fairly uniform for us. Daniel Politzer: Got it. And then more of a kind of high level one. Certainly you said you're going to be back in the market on share repurchases in the coming quarters. As you guys think high level philosophically about the value of the equity, can you just remind me or remind us of how you think about the proposition there? What do you think public equity investors are missing or overlooking as it comes to the stock valuation as you think about going back into the open market? Thomas Reeg: I mean we're looking at the returns we can get through buying our stock. There's obviously a free cash flow yield associated with that. Paying down debt, we are still more levered than we would -- then would be our preference. So there's continuing an active desire to delever. And then we have returns on growth capital projects. And as free cash flow comes in, we design which is the most attractive use of that cash flow. And as has been the case in the last year or so, the answer has typically been some mix of share repurchase and debt repayment, and that's what we'd expect going forward. Operator: Our next question comes from [ Brent Montour ] with Barclays. Unknown Analyst: Hello, everybody. Maybe starting with regional, Tom, I was wondering if you could give us some comments on that customer and how they're sort of faring in this environment with slightly higher gas prices. Obviously, we have stimulus that started coming in better. But the March data industry-wide did seem to slow and now there are some calendar issues just Sort of how do those sort of puts and takes sort of net out for you guys and what you're seeing on the ground? Thomas Reeg: I would say the consumer in general, but particularly the regional consumer has been remarkably resilient through the noise that we've seen in the last couple of months. Regional business in general feels firm, we feel very good about what we're seeing there and what we see going forward. We do have some idiosyncratic stuff in Northern Nevada, in particular. That's a tailwind for us. But across the board, regionals feel pretty good for us. Unknown Analyst: Okay. Great. And then maybe for Eric, you said, Eric, that the digital is still capable of doing 20% top line. You guys reported in top line, the low teens in the first quarter. but you gain share and sort of beat the industry on the iGaming side. So how do you get back to that 20% overall net revenue in the current environment? Eric Hession: Yes. I think the first quarter, our sports volumes being down 1% lower than we would expect for the long term. I think it's just annualizing some of the effects from last year with the Super Bowl being in New Orleans, and the teams may be being not as exciting for people for the Super Bowl caused some of that. And then in addition, the high hold increases offset some of the handle growth. But I think if you have mid-single-digit handle growth and then the iCasino side continuing to grow like it is, that's how we can get to that 20% range. As you saw, we grew much faster than the 50% from a flow-through perspective. So some months and quarters will have a flow-through that's going to be higher like we did this quarter. And we don't need to get that 20% revenue growth to get the bottom line growth that we're targeting. Operator: Our next question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: Just going back to Vegas for a second. There was a lot of talk last year about bringing value back to Vegas, and we've seen one of your peers bring out these all-inclusive packages and whatnot to kind of stimulate that leisure consumer. I'm curious where you are in that kind of process of any kind of pricing changes or how you think about that in terms of bringing back the leisure consumer more in the remainder of the year? Anthony Carano: Yes. The team is doing a great job here in Vegas looking at all of our properties and welcoming guests at every price point, we've got the all you can eat drink at a number of our properties on the east side. We've taken a look at price up and down all of our properties. And I think we're in a pretty good spot to attract every guest to Las Vegas. Thomas Reeg: And Lizzie, keep in mind, I know that narrative has been out there quite a while. We were over 95% occupancy this quarter. So we feel very good about where we are in terms of price value. . Elizabeth Dove: Got it. Got it. And then just on the regional side, you're kind of lapping some one timers in 2Q and you've got some of these renovations you mentioned, Matahu and whatnot kind of coming online. Any way to think about that, at least sizing some of these impacts from these renovations that you've been doing and how much that can benefit the remainder of the year? Thomas Reeg: Yes, I'd rather not get that granular on a per property basis, but I would say I'd expect regional to be a healthy grower through the year and second quarter is off to a good start. Operator: Our next question comes from Barry Jonas with Truist. Barry Jonas: I just wanted to dig into that all-inclusive package a little bit more. You recently started out at some of your lower-end properties, I guess what are your expectations there? Should we think of it as sort of a breakeven proposition, but hopefully, you'll get upside from gaming? Just curious to dig in on that a little more. Thomas Reeg: Yes. We're not pricing anything to break even, Barry. We're looking to be profitable in everything that we do. We know what each room in the portfolio, all 20,000 of them, we would expect when you're filled, how much that generates in revenue regardless of what they paid to get in the door. So you should think of this as when you're in your software periods where there's not significant group lift that this is a way to bring in people profitably, you shouldn't view them as a loss leader or even a breakeven proposition for us. Barry Jonas: Great. That's helpful. And then just for a follow-up. Curious if there's been any progress made in looking for some sort of solution to the VICI lease coverage issues you've talked about in the past? Thomas Reeg: Yes. I appreciate the question. As I said last quarter, I don't want to be providing a blow-by-blow every 90 days about talks that may or may not be happening between us and VICI. Everybody is well aware of where that lease sits. And when the 2 of us have something to report, I'll come back to you. I'm not going to -- I'm not going to keep updating every quarter, but I understand and appreciate the question. Barry. Operator: Our next question comes from David Katz with Jefferies. David Katz: Sorry, just got myself unmuted. You've talked about this a little bit, but I wanted to just go out in a slightly different angle. Within the regional gaming, it's obvious the opportunities you have, where you deployed some capital. there have been a handful of properties that have seen some competition. How have you evolved and deployed your strategies to compete specifically in those markets where there's been some head-on competition? Anthony Carano: Yes. We start with service, David, providing the best service in the industry. We've got Caesars Rewards, which we think is our largest acquisition and retention tool. And then as we've spoken to over the past few quarters, we've tweaked our marketing reinvestment, especially at competitive properties to become more competitive. We've ramped that down quarter-by-quarter over the past 4 quarters and to get more efficient. But the teams have done a fantastic job in our competitive markets. retaining our customers, delivering excellent service and giving them reasons to come visit a Caesars property versus one of the new competitors. David Katz: Understood. I know the mantra is sort of ramping down capital. But are there any singles and doubles type projects that may be out there in the regions to think about in the future? And how might we reflect those? Thomas Reeg: Yes, David, we're over $3 billion of capital in the last 5 years into the regional markets, the bulk of that into the properties that generate 80%-plus of our regional EBITDA. So if there's a thought that there's deferred capital out there in our portfolio that doesn't reflect what you see on the ground and what you see in the investments that we've made in the last 5 years. There is no big group of projects around the corner. This is normal capital cycle stuff as you come off a large capital expenditure program that's as broad-based as ours was. It's natural that you then spend some time harvesting that cash flow and then deciding what your next wave would be, but that's a couple of years away at a minimum at this point. Operator: Our next question comes from John DeCree with CBRE Capital Advisors. John DeCree: I wanted to ask a question about Caesars Rewards, I think earlier in the call, you mentioned it's one of your primary customer acquisition channels for your online business. I think it was relative to sports, but I assume the same for iCasino. Tom or Eric, can you tell us kind of where you are in terms of the penetration of that database as we think about kind of the growth targets going forward? Is there a lot more customer activation head? Is it more about just getting greater monetization from customers in the database, if you could elaborate, that would be helpful. Thomas Reeg: Yes, I would say that we continue to get better, but there's still a gigantic opportunity in converting customers in our database that are primarily brick and mortar with us. and play digitally elsewhere and bringing them into the fold. When we first launched our app on the sports side and frankly, on the iCasino side before Caesars Palace online, the experience lagged our peers. That's no longer the case. So it's going to those customers to get another look. And what we find is brick-and-mortar customer that shows up in digital for us increases their brick-and-mortar spend with us. I don't think that's because they gamble more. I think it's because we're consolidating wallet share. That's true of across the Caesars Rewards database. The more places we touch you, whether that's physical and digital, whether that's multiple properties within a marketer that's multiple properties across market, the more times we touch you, the more valuable you become as a customer for us. So that's a system-wide focus and effort. You'll see us in Vegas starting to talk to customers about the Caesars campus and all the things that you can do, you'll check into our property, and we'll be giving you information that shows all the places you can use your Caesars Rewards outside of the building that you're staying in. So we're leaning into that. We're doing more in digital, and it continues to get better, but that's an enormous opportunity for our digital business as we move forward and certainly as new states come online. John DeCree: That's helpful. My follow-up would be right down the same path. You've talked about paying down debt, buying back stock, but at least once a year I ask you about M&A. You obviously -- I think Windsor was a unique situation, but are there markets where you would expand your reach, Canada, U.S. regionals where it would make sense to grow our rewards database. Is there still enough synergy? Have you contemplated or think about M&A at this point at all in terms of expanding the network? Thomas Reeg: Yes. And John, as you know, we're always willing to look. I would say that purchasing an asset or a portfolio of assets in the near term for us is unlikely given the yield that we can find in our own stock, which there's far more certainty in that number than what you'd model in an acquisition. So unlikely we'd be a significant buyer going forward. But as you know, that can change depending on the opportunity that's in front of you. Operator: Our next question comes from Steve Wieczynski with Stifel. . Steven Wieczynski: So Tom, as you think about the rest of the year in Vegas, obviously, comps are going to get easier in the back half and your comments that the FIT bookings look solid or I mean, obviously, you're pretty encouraging at this point. But I guess the question is around with the FIT business still probably booking more close in at this point, how do you weigh those solid bookings now versus, let's say, let's say, gas fuel prices stay relatively elevated for an extended period of time and what that can mean in terms of driving traffic or even while its spend is folks or Vegas. I guess maybe help us think about the sensitivity that you've seen there in the past? Thomas Reeg: So I would say correlation between gas prices and spend in our portfolio is not particularly high. Where our average customer, it typically is at a level of income and worth that, that doesn't become a significant factor in their decision. Obviously, as you can certainly get to a level or extended a period of time where that may change. But really, as long as real estate values in the employment picture are solid, our business has typically performed pretty well, and I'd expect that to continue to be the case. Steven Wieczynski: Okay. Got you. And then sticking with Vegas, Tom, you talked about the 95% occupancy rate in Vegas this past quarter. Is there any way to help us think about how much of that 95% was incentivized, meaning did you guys have to promote more or do any more discounting in order to get that level of occupancy? Thomas Reeg: No, there was no meaningful shift in casino rooms. The shift you would have seen was more group business first quarter this year than last year, which crowded out some OTA business. Operator: Our next question comes from Stephen Grambling with Morgan Stanley. Stephen Grambling: One more on Vegas. Just given all the talk about attracting more big conventions like ConAg, it seemed like there was a window coming out of the pandemic where seemed like Vegas was taking share from other markets given The Sphere, Allegiant expanded convention centers. So what are you hearing from meeting planners or the convention community on what the competitive environment for that business looks like? And what really moves the needle to get some of these to come to Vegas? Thomas Reeg: Yes, there is a lot that goes into that. I'd tell you, for the types of conferences that we're talking about, it's super, super competitive. And that's been the case for -- regardless of the pandemic before or after we're talking about very lucrative conferences. There's no more -- everybody is kind of on the same footing as they were prior. There's really no jurisdiction anymore that's not recovered and competitive the way they were in the past. So we, as a market, provide a very compelling, particularly in the group side. This is what gets lost in that value discussion. On the group side, we provide a very compelling value trade. This is a very easy city to get around for your group. There's an unusually broad spectrum of attractions in the market, entertainment, restaurants, shopping, golf that all feed into that. And then there's political elements that come in, in some of these things. There's just a lot of different levers, and it's unique for each group. But for us, what we want and what we want the market to focus on is those events like ConAg that lift all boats and are not necessarily the highest profile, you're not going to be in a magazine because you got a great trade show or a conference versus some of the more high-profile stuff we've done. But those -- the meat and potatoes of that group business is really what drives the whole city. And I'm sure I know you talk to everyone in town, ConAg Week, there was not an unhappy operator in this time. And the more weeks we can fill like that during the year. These are -- this is elephant hunting as a market that you're going after. But if you can find even another 1 or 2 or 3, it moves the needle for everybody. And so that's what we're hoping we can deliver as time goes by. Stephen Grambling: Got it. And so just to clarify, it sounds it's less about really changing anything, CapEx or pricing, something like that, it's about telling the story? Thomas Reeg: That's right. . Stephen Grambling: And then maybe 1 unrelated follow-up on digital regarding the higher customer acquisition costs. It seems like we entered a window where there's not as many new states and handling ups have been slower in OSB. So with that in mind, should we be thinking about the higher customer acquisition cost impact is really more about replacing churn on the existing base? Or are you still finding opportunities to acquire customers? Thomas Reeg: We find opportunities to acquire customers, the chief opportunity for us, as we talked about is our database. But as you know, we've been 1/3 to 1/2 of the promo intensity of our peers. And our share has been fairly sticky. It's been growing in eye Casino. What that tells me is we have lower acquisition cost and lower churn than our peers, and that's been a significant benefit to us, particularly recently, as you've seen others start to talk about customer acquisition costs, ours have been pretty steady. Operator: Our next question comes from Shaun Kelley with Bank of America. Shaun Kelley: Maybe to start while we were talking digital for a minute, going back to Eric. Just curious on a little bit more color around the iGaming trends you're seeing. Obviously, it's an important growth driver for you. The NGR side sounds super encouraging. Just digging in a little bit more, when we looked at some of the market-wide handle growth and then even kind of net of hold a little bit on the GGR side, feel like we saw that slow a bit in Q1. I think a lot of it might have had to do with just slower OSB trends in cross-sell, but just wondering if you could unpack a little bit about what you saw in the market? And specifically, are you seeing some competition pick up in states like Michigan as well? Eric Hession: Yes. I would say there hasn't been a huge change, Shaun, in any direction either way. Our handle was up 20% year-over-year. It might be down a little bit from the prior years, but also we're talking about a much larger scale. So as that happens, you're going to see the percentages decline to some degree, particularly because we haven't had any new states open in any -- in recent times here. But in terms of additional competition, there have been a few new entrants just as companies have exited the market and others have taken their place. But I again would say that everything has generally been pretty consistent, we've been keeping our reinvestment levels relatively constant. And to Tom's point, our acquisition costs for the casino side have been kind of flat to down a little bit. And so we're kind of happy with how things are going. Shaun Kelley: Super. And then high level, Tom, earlier on, you made an interesting comment about you're not seeing as much if I caught it right, you're not seeing as much bifurcation between maybe high and low properties in the portfolio as maybe sort of location on the strip. And just sort of wondering if you could kind of expand on that as it relates to -- as we start to see some changes out there, maybe the opening of hard rock towards the latter end of next year, how do you expect that to play? Will that shift any of the center of gravity, 1 way or the other? Just how do you expect it to impact the Caesars portfolio? Thomas Reeg: Yes. So Shaun, I expect that to be a mixed bag for us. Given what they're building and the level of investment that's going in there, I think it's pretty clear that they're going to target the highest end of the market. And so while you've seen our regional CapEx cycle kind of move into a harvest phase, we've shifted capital toward Vegas and we shift our Vegas capital towards Caesars Palace and Paris, which are 2 that get high-end business. Mirage coming offline for us was we can see things like the High Roller, The Zip Line, the shows on the east side of the Strip have struggled a bit without those 3,000 rooms online. So that will be a benefit to us when you have almost 4,000 rooms with the Guitar tower feeding, obviously, we're the closest neighbor on most sides of the what Hard Rock is doing. So I think we'll have a benefit there. But we're anticipating that the high end will get even more competitive. The entertainment space, we'll get more competitive, I'd expect the cost of the biggest acts will go up. So we'd expect them to be impactful. But I'd also say, given the location and what they're building we're a little more optimistic that you'll get some of the -- what you and I saw back in the day where a new property opens and expands the market visitation goes up. It's not just cutting up the pet pie a little smaller. I think they can grow the pie a bit. So we're excited about what they're building and the fact that we're immediately adjacent to it, both on the East side and at Caesars Palace. Operator: Our next question comes from Jordan Bender with Citizens. Jordan Bender: Maybe to follow up on the last question. Tom, you kind of just talked about maybe how hard rock is going to impact like you and the market, but specifically like around kind of the playbook into next year, like should we anticipate that you guys to adjust pricing or change kind of the promotional strategy in the months kind of leading into that opening? Thomas Reeg: Yes. We'll have a full strategy to combat their opening. But Vegas is a totally different animal than regional. Vegas is a 95% cash business versus -- and you're generating profit from every vertical, whereas regionals are gaming centric and a lot of your nongaming is comp-based business. So keeping your properties full is paramount. So we'll have a strategy to combat that opening, but realize this is a 2% in capacity in terms of rooms. So this is not a huge -- it's not a seismic event from an occupancy perspective. So it's really just keeping your best customers in your system and minimizing the loss of your most profitable custom. Brian Agnew: And continuing to elevate the product as Anthony talked about, full remodel of the Augustus Tower and all the new capital investments that are going into Caesars and Palace ahead of the hard rock opening, that's really the key strategy going forward as we prepare for their open. Jordan Bender: Great. And then switching to more broadly. I think you have 2 union contracts coming up in the next several months. Anything to call out there in terms of either getting those done or extended and any impact maybe we should expect aside from that? Thomas Reeg: Nothing to talk about at this point. New Jersey comes up this summer, Vegas is not till '28. Operator: Our next question comes from Chad Beynon with Macquarie. Chad Beynon: Eric, I wanted to ask about the Alberta launch. Anything that you can share around that. I know it's a smaller population, but some good cities in there with big hockey fans that have probably been come into the market? How heavy are you guys thinking about leaning in there? And anything on a database that you already have ahead of the iGaming launch in July? Eric Hession: Yes. I would agree with kind of everything you said. It's a good opportunity. They actually have a fairly high average wealth per person it is on the smaller side in terms of the size of the province. But that said, it's both sports and casino. So we're very optimistic that it will be a great market. We're I would say, in terms of our performance in Ontario, it's kind of kind of middle down the road. And so here, when we launch our app is significantly improved from when it was when we launched Ontario. And so we'll be putting a much more comprehensive launch plan together that will really go after the sports as well as the casino market and we'll launch with the Horse and Caesars Palace brand. So it will be a much more significant plan. In terms of having a database already seeded in the market, it's not all that significant. There's just not a huge amount of travel between the different the United States and Canada from that province. And then in addition, there are some restrictions in terms of how the data can be transferred because it is out of the country or in the country, depending on which way you're looking. Chad Beynon: Got you. And then, Tom or Anthony, going back to the regional markets, revenues have been stable for several quarters, but margins have declined in the first quarter year-over-year. Obviously, the Super Bowl was a major headwind, so maybe you would have been closer to growing margins. But are we at the point where all things considered that we know right now that margins could start to improve if revenues are growing in this low single-digit range that we saw in the first quarter? Thomas Reeg: Yes. Operator: Our next question comes from Trey Bowers with Wells Fargo. . Raymond Bowers: Just getting back to the kind of use of cash, is there a leverage ratio that you guys target that once you achieve that kind of all the cash flows will be used towards buyback? Or not all, but the significant portion of it. Thomas Reeg: I would say it's always going to be a decision as the cash flow comes in. There's not a magic number where all of a sudden, it's going to be all share buyback. But we want our leverage to be sub-5x on a lease-adjusted basis. Raymond Bowers: Okay. And then just on the iGaming side of things. It looked like we were pretty close in Virginia. Any thoughts around just which states out there you guys feel pretty good about that might be coming into the system in the next couple of years? Thomas Reeg: Very hard to handicap, Trey. It's I wish it were the case that it were kind of incremental, like a football drive where you get to mid-field 1 year and then field go arrange the next year and then it's done the year after that, it's more like a car accident that happens in your vicinity. This stuff comes together very quickly as states get under stress budget-wise and look to are looking for revenue. The Virginia situation went from wasn't really on our radar as a possibility to a week later seemed high probability and then ended up not happening. Illinois, prior to their per wager tax a couple of days earlier, we were told they're going to legalize iGaming on Saturday night, and it was not even on the radar at the time as a real possibility. So it's very difficult to predict. What's easy to predict is state budgets are tight and getting tighter and states are going to be looking for avenues to raise revenue. And historically, gaming has been a place to do that. And if you look over the last couple of years, that's really only catalyzed in a way that was a headwind for us. It was tax increases or per bat taxes. And the reality is those don't raise enough versus what they're trying -- the holes they're trying to plug what really moves the needle is legalizing OSB or iGaming. So I think if you're looking over kind of an intermediate time frame. I'm highly confident there'll be more jurisdictions available to us. I just hesitate to predict which ones those would be. Operator: And our final question comes from Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: I know it's a smaller piece of the business, but the other lines to entertain... was there anything to call out there this quarter or -- throughout the year? . Thomas Reeg: Sorry, Dan. It sounds like someone is hitting you with a fire hose in the middle of the question. We missed most of it. Daniel Guglielmo: Sorry, I took my headphones out. So I know it's a smaller piece of the business, but the other lines, so entertainment and retail performed well versus last year. Was there anything to call out there this quarter? Or is that an area where you can continue to improve on throughout the year? Thomas Reeg: The only thing I could think of is our show our entertainment calendar in Vegas is more robust than it was last year, and that will continue throughout '26. We've got more shows both in the Coliseum and in Planet Hollywood. Daniel Guglielmo: Okay. Great. And then just as a follow-up, table game drop was down in both segments. Is that just a different mix of customers coming to the casinos? Or is it more tactical on your part with maybe less offerings, higher minimums? Any color there would be helpful. Thomas Reeg: It's typically timing based in Vegas. In regionals, it's going to be heavily skewed by Super Bowl. There was a ton of high-end business in New Orleans last first quarter, which didn't repeat since the game wasn't there. There's nothing particularly -- there's nothing in our strategy or in consumer behavior other than timing of trips that would explain that. Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Tom Reeg, CEO, for closing remarks. Thomas Reeg: All right. Thanks, everybody. We'll talk to you after next quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the Stepan Company First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Tuesday, April 28, 2026. It is now my pleasure to turn the call over to Mr. Ruben Velasquez, Vice President and Chief Financial Officer of Stepan Company. Mr. Velasquez, please go ahead. Ruben Velasquez: Thanks, Victor. Good morning, and thank you for joining Stepan Company's First Quarter 2026 Financial Review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings. In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stepan.com under the Investors section of our website. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information as perspectives contained therein helpful. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer. Luis Rojo: Thank you, Ruben. Good morning, and thank you all for joining us today to discuss our first quarter 2026 results. I plan to share highlights of the quarter's performance and provide an update on our key strategic priorities, while Ruben will provide additional details on our financial results. Before reviewing the quarter, I want to recognize our teams around the world for their continued commitment to safety and operational excellence. Safety remains our top priority and the foundation for everything we do at Stepan. That focus was evident as we delivered the strongest safety performance on record during the first quarter of this year. Congratulations, team. Q1 2026 was an important quarter of execution for Stepan. We advanced our footprint and asset base optimization efforts, delivered net sales growth in a challenging macro environment and continue to generate a strong volume growth across our strategic end markets. Organic net sales were up 4% year-over-year. Organic volume was flat with double-digit growth in Crop Productivity, Oilfield, Industrial Cleaning and in our Tier 2, Tier 3 customer base. This was offset by continued soft demand in European Polymers. Adjusted EBITDA was $50 million, down 14% versus the prior year, reflecting lower Surfactant results due to lower absorption and production timing issues in Asia, competitive pressures in Mexico, the impact of the U.S. cold snap and continued pressures from elevated oleochemical input costs. Polymers delivered an 8% increase in adjusted EBITDA, driven by 5% volume growth in North America and global margin improvement, which was partially offset by continued softness in Europe. Specialty Products delivered volume growth of 30%, reflecting a strong demand and new business with our MCT product line. EBITDA was slightly down due to product mix and lag on raw material prices. We continue to execute Project Catalyst safely on time and on budget. These actions demonstrate our disciplined approach to cost optimization while ensuring we maintain the capabilities needed to serve our customers and deliver balanced growth across our higher value end markets. We remain committed to a balanced approach with capital allocation. During the first quarter, the company paid $8.9 million in dividends to shareholders. Consistent with our long-standing commitment to shareholder returns, our Board of Directors declared a quarterly cash dividend of $0.395 per share. And last year, we increased our dividend for the 58th consecutive year. This track record underscored our confidence in Stepan cash flow durability and long-term outlook. With that, I will turn the call back to Ruben to walk you through the financial details for the quarter. Ruben Velasquez: Thank you, Luis. My comments will generally follow the slide presentation. As shared in our first quarter 2026 results release, reported net loss for the quarter was $41.4 million or $1.81 per diluted share versus reported net income of $19.7 million or $0.86 per diluted share in the prior year. The current year reported results include a $65.4 million pretax restructuring charge or $51.2 million after tax related to the previously announced closure of our Hillsborough, New Jersey site and the decommissioning of select assets at our Millsdale, Illinois and Stalybridge, United Kingdom facilities. The cash impact associated with this restructuring charge was less than $1 million during the quarter. Slide 3 summarizes our first quarter 2026 performance. Adjusted net income was $10.3 million or $0.45 per diluted share, down 47% versus adjusted net income of $19.3 million or $0.84 per diluted share in the first quarter of last year. The decrease in adjusted earnings was largely due to lower Surfactant earnings and higher interest expense. Consolidated EBITDA was $49.6 million compared to $57.5 million in the prior year, a 14% decrease. The decline was primarily due to Surfactant earnings driven by lower absorption and production timing differences in Asia, competitive pressures in Mexico, the severe cold snap in the U.S. and higher oleochemical raw material costs still working through our P&L. This was partially offset by strong polymers performance where adjusted EBITDA grew 8% versus the prior year. Cash from operations was $17 million for the quarter, and free cash flow was negative $14 million, driven by higher working capital requirements, which are typical during the first quarter of the year. We remain focused on deleveraging the balance sheet and maintaining our disciplined capital allocation. Slide 4 shows the total company pretax income bridge for Q1 2026 compared to Q1 2025. Because this is a pretax view, the figures shown reflect operating performance before the impact of income taxes. First quarter pretax income declined year-over-year, primarily driven by lower Surfactants operating income and lower capitalized interest income. These headwinds were partially offset by improved Polymers performance and favorable effective tax rate. Important to note, the higher interest expense reflects lower capitalized interest income associated with the start-up of our Pasadena, Texas site. Importantly, several of these drivers, including higher depreciation and the declining capitalized interest associated with Pasadena start-up had no cash impact compared to the first quarter of last year. Slide 5 shows the total company adjusted EBITDA bridge for the quarter compared to last year. Adjusted EBITDA was $49.6 million, down $8 million versus the prior year. I will cover each segment in more detail, but overall, Surfactants and Specialty Products were down, partially offset by Polymers growth. Unallocated corporate expenses were higher due to normal inflation. Turning to Surfactants on Slide 8. Net sales were $454 million, up 8% on an organic basis. Selling prices were up 2%, primarily due to the pass-through of higher raw material costs, improved product and customer mix as well as pricing actions. Organic volume was up 2%, driven by double-digit growth within the Crop Productivity, Industrial Cleaning and Oilfield end markets. We also grew double digits in our Tier 2 and Tier 3 customer segments. The Surfactant business achieved volume growth in all global regions, except Asia. Foreign currency translation positively impacted net sales by 5%. Surfactants adjusted EBITDA for the quarter decreased $7 million or 15% versus the prior year, driven by North America and Asia down $5.6 million. The majority of this decrease was due to lower absorption and production timing differences in Asia. This P&L impact has no effect on free cash flow and represents a onetime event that we expect to recover in future quarters. The cold snap in the U.S. and higher input costs complemented North America Asia EBITDA reduction. Latin America performance was negatively impacted by the competitive environment and high raw material prices in Mexico. Europe and Mercosur continue delivering solid performance anchored in our Crop Productivity franchise. Moving on to Slide 7. Polymer net sales were $130 million, an 11% decrease. Selling prices decreased 8%, primarily due to the pass-through of lower raw material costs and competitive pressures. Volume decreased 6% in the quarter. Volume in North America was up 5%, driven by Spray Foam and commodity Phthalic Anhydride growth. This was more than offset by a double-digit decline in Europe, driven by ongoing global macroeconomic uncertainty and a depressed construction market. Foreign currency translation positively impacted sales by 3% during the quarter. Polymer adjusted EBITDA increased 8% versus the prior year, primarily due to North America growing Spray Foam and commodity Phthalic Anhydride and global margin improvement. Specialty Products net sales were $21 million, a 24% increase versus 2025, primarily due to higher volume. Volume was up 30%, reflecting continued growth in our MCT product line. Specialty Products adjusted EBITDA decreased slightly due to product mix and the lag in raw material prices, which we expect to recover in future quarters. Now turning to Slide 8. Free cash flow generation remains a key focus across the organization. Cash from operations was $17 million in the first quarter and free cash flow was negative $14 million, reflecting typical first quarter working capital build. Capital expenditures were $31 million in Q1. Now turning to the balance sheet. We ended the quarter with a net debt of $511 million and a leverage ratio of 2.7x, which is lower than in Q1 2025. With that, I will turn the call back to Luis to discuss our strategic priorities and our progress on Project Catalyst. Luis Rojo: Thanks, Ruben. I will provide a brief update on our strategic priorities before turning to the progress we're making on Project Catalyst. Our strategy continues to be anchored in 4 key pillars: First, continue focusing on customer-centric innovation to drive top line growth. Second, our diversification strategy, which is accelerating growth in higher value end markets while extending our reach into the Tier 2, Tier 3 customer segment. Third, we remain committed to operational excellence across our supply chain operations with a continued emphasis on strengthening the reliability and resiliency of our manufacturing network, including ongoing improvements in our flagship Millsdale site. Finally, we're strengthening our financial position through a disciplined focus on free cash flow generation, deleveraging the balance sheet and prudent capital allocation. During the first quarter, we continued to see momentum in our strategic end markets. We delivered double-digit volume growth within our Crop Productivity, Oilfield, Tier 2 and Tier 3 and Industrial Cleaning businesses and delivered volume growth in all Surfactant regions except Asia. Polymers delivered strong volume growth in North America. Specialty Products grew volume by 30%, reinforcing the strategic value of our MCT product line. These results validate that our strategy is working and that our diversified portfolio continues to create value for customers and shareholders even in a challenging macro environment. We also continue to ramp up our Pasadena, Texas facility, which is a critical enabler for strategic growth in specialty alkoxylates. We continue to expect Pasadena to reach approximately 80% utilization on average in 2026 and full utilization in 2027, which will drive supply chain savings and support future volume growth. Let's move now to Slide 10. Turning to Project Catalyst. I'm pleased to share that we have measurable progress. As a reminder, Project Catalyst is a comprehensive plan designed to further optimize our asset base and create a more productive, agile and accountable organization to enable growth. The program is expected to deliver approximately $100 million in pretax savings over the next 2 years, with around 60% of the savings expected in 2026. We are on track to deliver the committed savings this year. Project Catalyst is not a short-term cost reduction program alone. It is a strategic transformation designed to enhance the competitiveness of our cost base while preserving customer service and growth flexibility. During the first quarter, we executed our plans to close our Hillsborough site and decommission selected assets at our Millsdale and Stalybridge facilities. While these decisions are never easy, they are the right actions to consolidate our network into more competitive and productive assets while responding to the structural changes and market demands we continue to see in the global commodity consumer end market. The program continues to be built around 3 core value levers. First, footprint optimization, which include the exit of underutilized or higher cost assets and improved utilization of our most competitive sites, including the ongoing ramp-up of Pasadena. Second, operational efficiency and cost optimization, including procurement savings and productivity improvement across our manufacturing and logistics network. Third, organizational effectiveness, where we are clarifying accountabilities and streamline decision-making and aligning resources more tightly to our growth priorities. Today, we announced that we have entered into an agreement to sell nonproductive assets, especially land at our Millsdale site for $30 million. These transactions align with our focus on strengthening the balance sheet. We expect the transaction to close in the fall of 2026 after all due diligence and regulatory items are clear. We continue to actively evaluate opportunities to further optimize our asset base, organizational structure and operating model. These include identifying additional ways to unlock value and monetize nonproductive assets. Looking ahead, we are executing a balanced strategy focused on top line growth, margin expansion and disciplined cost-out initiatives. While we continue to navigate a dynamic macro environment, and geopolitical environment, including a significant shock in the energy market, global tariffs, raw material volatility and uneven demand across our end markets, we remain confident in our path forward. With the continued execution of Project Catalyst, a strong momentum in our strategic end markets, the ramp-up of Pasadena and a disciplined approach to capital allocation, we believe we are well positioned to deliver adjusted EBITDA growth, generate positive free cash flow and deleverage the balance sheet in 2026. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Victor, please review the instructions for the questions portions of today's call. Operator: [Operator Instructions] Our first question will come from the line of Mike Harrison from Seaport Research Partners. Michael Harrison: I wanted to say congratulations to the team on the safety achievements there. That's very important. I wanted to maybe just start with a couple of questions about -- obviously, the Iran war is top of mind for investors right now. And I specifically wanted to understand what are you seeing in terms of raw material impact since the war began? Are you able to push through some higher pricing in response to higher raw material costs? And are there any situations in which you're encountering shortages or other difficulties in procurement? Luis Rojo: Great questions, Mike. Look, so of course, our raw materials depend a lot on the oil supply chain, and we are seeing escalation in raw material inflation. The good news is, as you know, we have a good process. We have a lot of pass-through contracts, and we have a disciplined process of increasing prices as well. And what I will say is that in most of the businesses, we have been very successful in passing through the price increases in line with the raw material inflation. So that's working through the system. We see the whole market going up. It's not only us, it's the whole market going up, which give us confidence that pricing will be sticky, more in some places than others, for sure. But in general, we feel pretty good. The other thing is, of course, raw material availability will continue to be a challenge because there are certain supply chains that are heavily impacted by the conflict in Iran, and there are some shortages in raw materials. The reality is that we could be growing faster than what we're growing now, but we don't have all the raw materials that we need. On the other hand, we have good contracts with our suppliers, everybody's hands on deck. And I think we're getting a good fair share of what is needed. So -- but of course, we will continue working with our supplier to ensure that we can grow faster in the current environment. Michael Harrison: All right. Well, you kind of addressed a little bit my second question, which is related more to the demand impacts of the Iran war across your 3 segments. It sounds like you're saying you could have grown a little bit faster if not for maybe some inability to get key raw materials or get supply. I'm curious, though, I would think that Stepan is relatively better positioned than some of your smaller or more regional competitors in terms of your ability to get inputs and get raw materials. So maybe just talk a little bit about how you're expecting -- obviously, consumer demand or consumer sentiment is a little bit weaker here. But are there situations where you might be able to pick up some market share because competitors simply don't have supply in certain product lines or certain regions? Luis Rojo: No, for sure, Mike. You are right that we have the scale to win, especially in Tier 2, Tier 3, which is a key segment that we keep focusing our resources. So what I would say is, yes, we have the opportunity to keep growing in those segments. The consumer is still resilient. The consumer is still spending, and we haven't seen any demand issues from the consumer side, and you have seen other companies reporting Q1 and still volumes and pricing and all of that is still pretty healthy. So we feel good about where we are right now. Of course, things are changing. Things are changing every week and every month. But I will say -- and a lot of people are not providing very long-term guidance because of the volatility and the uncertainty of the current situation. But when you think about things like Q2 where we have way more visibility, we feel pretty good about our plan and about our ability to grow in this environment. Michael Harrison: All right. Within the Surfactants business, particularly, you listed out a handful of issues that it sounds like were negative to earnings and to margins in the quarter. And I was hoping that you could provide a little bit more detail in terms of maybe helping to quantify these impacts and helping understand how those impacts are trending into the second quarter and the rest of the year. So you mentioned overhead -- higher overhead and some production timing issues in Asia. Is that something that was temporary in nature? Or is that something that's going to continue to be an issue for the rest of the year? Luis Rojo: No. Great question, Mike, and it's temporary, right? I mean we were clear that some of the items that we saw in Q1 are noncash and onetime in nature, right? For example, we had lower absorption, both in Asia and in North America, especially at the beginning of the quarter with the cold snap in the U.S. So we expect some of that to reverse in the future quarters. So if you think about it, we're happy -- not happy, we are -- I mean, we are okay with the 8% EBITDA growth in polymers. We should grow faster, but fine. The key issue in Q1 was the Surfactant business. And when you think about the $7 million reduction in EBITDA in the Surfactant business, you can think that we should be able to easily recover at least half of that in the following quarters with all the timing and production and all of that. So that's why we view this $50 million EBITDA as not representative of what is the true performance of the company. Michael Harrison: I guess just to finish up on that question about the Surfactants and the margin pressure. What about the competitive pressure in Mexico and the higher oleochemical costs? Is that something that should improve as the year goes on? Or is that something that could be a lingering headwind? Luis Rojo: Good point, Mike. And look, when you think about -- we talk a lot about CNO in the last few quarters because the reality was that the delta between CNO and PKO, we talk a lot about that in the last few quarters, right, was significant, was something unprecedented, right? CNO in the $3,000, while PKO was in the $2,000 per metric ton. The reality is that when you look at the situation now, they are similar, right? And that incentivize and that helps the whole pricing environment. So what I will say is we still have some of the high CNO raw materials in our P&L going through our P&L. But the reality is that with all the pricing that we're executing now is going to be more sticky because of the relationship between CNO and PKO. So that should help the margin improvement in the Surfactant business in Q2 and going forward. Michael Harrison: All right. And then last question I had is just on the Polymers business. Just curious for a better understanding of what drove the margin improvement there. I know you're calling out some spray foam volume, and I'm curious if that's something that's contributing to better margin and better mix there. And really just trying to get a sense of whether we should expect continued margin expansion year-over-year in that Polymers business as the year goes on. Luis Rojo: No. Look, our Polymers business is heavily influenced by the base that we had in Q1 2025, right? When you think about -- and you clearly see it in the bridge, right, how our European business is under pressure because construction demand is very soft with everything that is going on in Europe. And then North America improved, but from a very low base, I will say. So again, it's decent EBITDA margins. It's not the EBITDA margins that we deserve, but we improved in North America versus a very low base in Q1 2025. And as you rightly said, I mean, a lot of growth in a strategic priority for us, which is spray foam. We have talked about that, and we're growing significantly in that space because really the lamination market is more flattish with construction still weak and high interest rate and all of that. So we are not expecting the lamination market to be significantly up this year. None of our customers are projecting that. But we are still improving our business in spray foam, in PA and making sure that we come out of this crisis in Europe a little bit stronger in the second half. Operator: Our next question will come from the line of Dave Storms from Stonegate. David Storms: You mentioned in your prepared remarks that you're seeing growth in Tier 2, 3 customers in Surfactants. Just curious as to maybe what's working here? How sustainable is it? And maybe what's the outlook for that going forward? Luis Rojo: Look, as we have talked, I mean, we continue to invest in this customer base is a strategic effort for us. We provide not only a product, but we provide a service. We help them formulate their products. We help them solve their challenges on the formulation side. And the reality is that there are a lot of categories where private label are growing share and some of the value brands are winning versus the branded brands. And that's that dynamic specifically for the U.S. now that I'm talking. But we believe in the current high inflation, high gas prices and all of that, the relevance and the growth potential on some of those Tier 2, Tier 3 brands are going to still there, and we are helping them to achieve their targets. So it's a strong business. We're growing double digits. And as I said, it is more than a product. We have other elements that help us win in that space. David Storms: Very helpful. Another one for me. And I know we spent a decent amount of time already talking about the Iran war, but just trying to get my arms around maybe any impacts that might have on ag specifically. I know this time of year is when we start thinking about that a little more. Are you seeing any significant second order effects from the Iran war as it pertains to the ag line? Luis Rojo: Not really. So as we said in our remarks, I mean, we're growing double digits in Crop Productivity, continues to be one of our key strategic areas. And we don't see any impact. Now of course, the planting season, for example, in the U.S. is mostly done and executed and everything that we had to sell, we sold it for the planting season. So we need to see how things evolve for 2027. But for example, Brazil, which the season starts now is going well. We had great results in Mercosur. So far, we continue to see strong growth and our innovation program, our new product launches with the big ag companies is working and is delivering the growth -- I mean, very strong growth, double digit is very strong in this space. David Storms: Understood. And maybe one more for me. Great to see that Project Catalyst is still on track. And I know you gave us a nice breakdown of maybe the cadence for 2026 versus 2027. Are there any nuances that we should be aware of on a quarterly cadence or maybe it's more just a linear step-up as we go through the year? Any thoughts there? Luis Rojo: No, great question, Dave, because the reality is that we're going to start to see the majority of the savings of the Catalyst project now in Q2, right? So we made the tough decisions on the footprint side, and we executed all of them basically at the end of March, beginning of April. So you are going to see the majority of the savings ramping up in Q2 versus Q1. So we feel good about Q2 because, again, a lot of the Catalyst savings start now. And as you know, the 60%, we were very clear that the 60% that we're delivering this year, some of that is to cover inflationary pressures and all of that, but the majority of the savings start now. Operator: Our next question will come from the line of David Silver from Freedom Capital Markets. David Silver: I did want to follow up on some of Mike's earlier questions. Maybe I would like to focus on the demand side. So apart from the very near-term kind of Persian Gulf-related issues, the consumer generally has been under some pressure. And from your order book, could you maybe just talk about the health or the trend in demand for your traditional book of business? In other words, you've invested a lot in upgrading your product mix, 1,4-dioxane-free, et cetera. Are you seeing the uptake on those products that you anticipated? Or are we seeing, on the other hand, maybe a trading down phenomenon from cost-conscious consumers. So maybe just how you're looking at the demand side for your traditional portfolio of products and particularly for the value-added component of your business mix? Are you seeing the expected demand? Or are things going to be deferred maybe until after geopolitical issues settle down? Luis Rojo: No, great questions, David. Look, as we said, one, the consumer is still resilient. So the consumer is still spending money. All the data that you see in all our categories, the consumer is still spending the data. Now we have seen some trade down, right? That's why I made the comment that in some of the -- in some categories, we see private label growing a little bit faster than branded products, but that's actually okay for us. I mean, we -- again, we serve a lot of the Tier 2, Tier 3 consumers. We serve a lot of value businesses as well. And we don't see this as a negative for Stepan Company. The reality is that the consumer will continue to make choices. And when you think about that relationship between branded products and private label, there is still a big opportunity for the private label and lower-priced brands to grow. That's the reality in many of our categories. So I feel good about what we see out there because, again, the consumer is making some choices, but it's not something radical. And at the end, it is not hurting Stepan portfolio. David Silver: Okay. I did want to hone in on one of your more modest portions of your business, but one with growth. So there was a question about your ag business, but I would like to ask you about Surfactants or whatnot for Oilfield. So if anything, I mean, my sense is that there should be a very strong demand outlook for that portion of your business, let's say, going forward, certainly domestically. Could you just maybe talk about your positioning there and what are the opportunities, let's say, over the medium term to benefit from what I believe is probably going to be a pretty strong level of demand for drilling activity and things where your Oilfield products might be positioned to participate? Luis Rojo: Yes, for sure. And that's why, David, we keep calling all of those are our strategic priorities, right? Crop Productivity, Oilfield, Tier 2, Tier 3, right? And then within Tier 2, Tier 3, it's not only the low 1,4, it's also sulfate-free with AOS and with other products that we have. So we have a broad portfolio that can complement the consumer piece. But going back to your question on Oilfield, yes, we feel good. I mean we're growing double digits. As you know, our oilfield business is not that big. So the opportunities for growth are still significant for us. And we are happy with the double-digit growth that we are delivering. And the reality is that the focus, for example, in the U.S., which is our biggest Oilfield business globally, at the end, it's not about more drilling, right? I mean you don't see more drilling, you don't see more fracking going on. But what you can see is the use of more surfactants to make sure that you improve the yield of the current well, right? So that's an ongoing dynamic because you need to make sure that the current wells are more productive. And for that, you need the right chemistry with the right surfactants to improve the productivity of the well. So again, we don't see more drilling or more wells or more fracking in the U.S. in terms of more or new ones, but we see let's get more out of what we have, and that's where we play a role. So we feel good about this business, and we will continue investing and growing in this business. And of course, there is a lot of import dynamic that in the current environment are tougher and that favor the people that have local production in the U.S. like us. David Silver: Right. Okay. And then one last one for me, and it would have to do with your capital spending projections for this year. So I am looking in the appendix and the midpoint of your 2026 forecast for CapEx is $100 million. Can you remind me just what the sustaining portion of that might be? And then more to the point, where is Stepan devoting discretionary CapEx this year? In other words, beyond sustaining CapEx, where -- what's in the budget for this year? Where is that incremental CapEx going to be focused? Ruben Velasquez: David, yes, this is Ruben. Let me take that one. So yes, you're right. I mean we -- in the slides, we mentioned our range for CapEx, which is $105 million to $115 million. So we continue to invest in CapEx. It's something that it's a priority for the company. Of course, we are fully committed to make sure that our operations are operating safely. And then, of course, a lot of this CapEx is to make sure that our operations are well managed and that we have all of the resources and the facilities to operate in a safe way. A lot of this goes, of course, into our Surfactants operations and manufacturing. And we continue to invest in CapEx. So you have seen that in the last few years, we have been in the range of above $100 million, and we will continue to prioritize our investments into that. There is some of this CapEx that is towards growth, of course. But I would say a significant portion of it is targeting operating safely and making sure that we have the capabilities needed in our plants and in our supply chain. Luis Rojo: And let me add, David, as we have talked in the past, when you think about it, 75%, 80% is just for base reliability and infrastructure. We have growth, we have IT, we have other investments in our total CapEx forecast, and we will continue if we see the returns of those projects. But call it the normal CapEx for the company without any other major growth item is around $100 million or less. Operator: And this concludes the question-and-answer session. I would now like to turn it back over to Luis for closing remarks. Luis Rojo: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good morning. My name is Matthew, and I will be your facilitator today. I'd like to welcome everyone to the UPS First Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours. PJ Guido: Good morning, and welcome to the UPS First Quarter 2026 Earnings Call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties which are described in our 2025 Form 10-K and other reports we file with or furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the first quarter of 2026, GAAP results include after-tax transformation charges of $42 million or $0.05 per diluted share. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. [Operator Instructions] And now I'll turn the call over to Carol. Carol Tomé: Thank you, PJ, and good morning. Let me start by saying how incredibly proud I am of UPSers around the world. This past quarter brought significant external challenges from volatile global markets to rising fuel costs. Even so, our team stayed focused, pushed our transformation forward, and upheld the exceptional service our customers rely on. The first quarter of 2026 marked a critical transition period for our company, one in which we needed to flawlessly execute several major strategic actions, and we delivered. First, we further reduced nonnutritive Amazon volume by an average of 500,000 pieces per day and closed 23 additional buildings. Second, under our new agreement, we shifted a portion of our Ground Saver volume back to the USPS for last mile delivery. Third, we launched a voluntary driver buyout program we called Driver Choice, through which we will reduce roughly 7,500 full-time driver positions. Interest in the program was extremely strong and ultimately exceeded our expectations. Based on these actions and more, we are firmly on track to achieve our $3 billion cost-out target for the year. Further, we began scaling back leased aircraft as we retired our MD11 fleet and took delivery of new 767s, and we continue to capitalize on trade lane ships resulting from last year's trade policy changes. It's a dynamic environment. But even against that backdrop, our underlying business performed exceptionally well. In the first quarter, consolidated revenue reached $21.2 billion, with consolidated operating profit of $1.3 billion and an operating margin of 6.2%. Across our segments, performance was strong. In the U.S., revenue quality remained high with revenue per piece up 6.5% compared to the same period last year. Our international business delivered solid top line momentum, growing revenue by $167 million or 3.8% year-over-year and our Supply Chain Solutions businesses more than doubled operating profit versus last year. Our results were considerably better than our financial plan and targets. But it's worthwhile calling out that while we planned for it, our first quarter performance deviated from seasonal norms due to certain cost pressures that Brian will detail. These pressures are largely behind us. We expect to return to consolidated revenue and operating profit growth and expand operating margin in the second quarter of this year. Last year, we launched the most extensive U.S. network reconfiguration in our company history by targeting a 50% reduction in the volume we deliver for Amazon by June of 2026. With roughly 2 months to go, we are comfortably in the home stretch of this initiative. Our actions are moving us toward a more profitable U.S. small package business with the back half of 2026 expected to be the inflection point. With that as context, let me outline our priorities and how we intend to deliver revenue growth and margin improvement going forward. Our #1 priority is to move the right packages and the right mix of volume through our network. The market has changed, and we're adapting to it. We're overturning the old industry assumption that scale alone drives profitability. Instead, we're focused on premium segments like SMB, B2B and complex health care. Our strategy is working. We're seeing favorable mix improvements with SMB and B2B volume, representing a larger share of total U.S. volume and premium customer wins are driving meaningful revenue per piece growth. How are we winning? We're winning through innovative and differentiated capabilities like RFID labeling at customer locations, end-to-end cold chain solutions, RoTE for same-day and big and bulky deliveries, happy returns for boxless labelless returns and much more. And that's only a part of our growth story because we're also doing a better job of retaining and growing our existing customers. In the U.S., we saw a meaningful reduction in churn through the first quarter. Our customer-first strategy focuses on what matters most and that speed, ease and reliability. And while we're discussing capabilities, let me say like that, our digital access program. DAP gives us access to over 8 million SMBs and in the first quarter, we generated $1.2 billion in global DAP revenue, marking the second quarter in a row of delivering GAAP revenue over $1 billion. As we drive revenue growth, we'll also drive profit growth with margin improvement coming from higher productivity. We already run the industry's most efficient integrated network and with expanded automation and robotic deployments, we will make the network even more productive and adaptable. That added agility will create the strategic capacity we need to fuel premium volume growth over the long term. Growing premium volume is not just a U.S. strategy. It's a global strategy. In International, we're speeding up our ground network in Europe to win premium commercial volume. And in Asia, we recently opened a major expansion of our Incheon airport hub in South Korea. And in Taiwan, we opened our largest and most advanced logistics center in the region. We're speeding up our services across Asia Pacific as well as to, and from Europe further enabling global supply chains, particularly in the manufacturing, high tech and health care sectors, all premium sectors. Speaking of health care, it remains a top priority growth engine for UPS. We built a world-class, end-to-end logistics network to handle the most complex time- and temperature-sensitive health care products. And these capabilities are enabling us to win. In fact, our global health care portfolio has gained market share every year since 2021. And in the first quarter of this year, we generated our first $3 billion health care revenue quarter ever, with all 3 of our segments delivering year-over-year revenue growth. As I wrap up, we've now had 3 quarters in a row of performance exceeding our expectations. As we look to the balance of the year, there are a few external factors that we are watching that could impact demand especially higher fuel costs stemming from the conflict in the Middle East and U.S. consumer confidence, which is at historic lows. But these external pressures won't deter us. As we reach the finish line on our Amazon glide down and complete our network reconfiguration, costs will continue to come out. Premium volume will continue to strengthen and we will return to revenue and profit growth with higher operating margins and stronger returns on invested capital. Today, we are reaffirming 2026 consolidated financial goals. For the year, we expect to generate consolidated revenue of approximately $89.7 billion, and a consolidated operating margin of approximately 9.6%. So with that, thank you for listening. And now I'll turn the call over to Brian. Brian Dykes: Thank you, Carol, and good morning, everyone. This morning, I'll cover our first quarter results. Then I'll give an update on the Amazon glide down and our network reconfiguration and cost-out efforts. I'll wrap up with our financial outlook for the remainder of 2026. Moving to our results. Execution across our business was strong with results coming in above our expectations. Starting with our consolidated performance. In the first quarter, revenue was $21.2 billion, and operating profit was $1.3 billion. Consolidated operating margin was 6.2% and diluted earnings per share were $1.07. Now moving to our segment performance. U.S. domestic remained focused on revenue quality while executing our Amazon glide down and network reconfiguration initiatives. These strategic actions drove SMB average daily volume growth and strong year-over-year revenue per piece growth. For the quarter, total U.S. average daily volume was down 8% versus the first quarter of last year. Nearly 2/3 of the decline came from the glidedown of Amazon volume and our deliberate actions to remove lower-yielding e-commerce volume from our network. Total air average daily volume was down 8.9% year-over-year including the guide down of Amazon volume. Ground average daily volume was down 7.9% compared to the first quarter of 2025. Moving to customer mix. SMB average daily volume increased 1.6% year-over-year, driven by high-tech, health care and automotive customers. In the first quarter, SMBs made up 34.5% of total U.S. volume marking the highest SMB penetration in our history. Looking at B2B, while average daily volume was down 5.1% year-over-year, it represented 45.2% of our total U.S. volume which was a 140 basis point improvement versus the first quarter of last year and was our highest first quarter B2B penetration in 6 years. Our continued focus on revenue quality and a more premium U.S. volume mix has delivered several consecutive quarters of product and customer mix improvement, reinforcing that our strategy is working. Moving to revenue. For the first quarter, U.S. domestic generated revenue of $14.1 billion. This was a decrease of 2.3% year-over-year against an ADV decline of 8% with strong revenue per piece growth of 6.5%, largely offsetting lower volume. Breaking down the components of the 6.5% revenue per piece improvement. Base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 200 basis points. The remaining 110 basis point increase was due to changes in fuel price. Turning to cost. In the first quarter, total expense in U.S. domestic was nearly flat. While we delivered higher productivity and continue to make progress on the Amazon glidedown, those benefits were partially offset by short-term cost pressures in the first quarter. As Carol mentioned, these included temporary third-party lease expense to cover capacity constraints from retiring our fleet of MD11 aircraft, transition costs and excess operational staffing related to ground saver, and the combination of inclement weather costs and higher casualty expense. Combined, these pressures totaled about $350 million in additional expense for the first quarter. Cost per piece in the first quarter increased 9.5% year-over-year. The U.S. Domestic segment delivered $565 million in operating profit and operating margin was 4%, including a 250 basis point negative impact from the short-term cost pressures. These cost pressures are largely behind us as we move into the final months of the execution of our Amazon glidedown and network reconfiguration initiatives. Moving to our International segment. In the first quarter, revenue grew across all regions, driven by strong revenue quality and our focus on premium markets. Plus, we saw signs of recovery in trade length shifts stemming from the 2025 trade policy changes. Additionally, with the onset of the conflict in the Middle East, we adjusted our network and continue to serve our global customers throughout the first quarter. In the first quarter, total international average daily volume declined 6%. International domestic ADV decreased 6.6% compared to last year, led by a decline in Europe, that was partially offset by growth in Canada. Like in the U.S., we saw improvement in customer mix with SMB penetration reaching over 60%. On the export side, average daily volume in the first quarter decreased 5.5% year-over-year led by declines on U.S. destination lanes resulting from the pull forward of purchases in the first quarter of last year, spurred by changes in trade policy. U.S. imports in total were down 16.4% year-over-year led by a 22.5% ADV decline from Europe to the U.S. The China to the U.S. Lane, which is our most profitable trade lane was lower by 18.3% compared to last year. But as we have said before, with changes in trade policies, we see that trade doesn't stop, it moves somewhere else, and we continue to see volume growth in other parts of the world. Turning to revenue. In the first quarter, International generated revenue of $4.5 billion, up 3.8% from last year, driven by strong revenue per piece growth Operating profit in the International segment was $551 million, down $103 million year-over-year, primarily due to trade policy changes. International operating margin in the first quarter was 12.1%. Looking at Supply Chain Solutions. Supply Chain Solutions made strong progress during the first quarter, highlighted by the doubling of operating profit year-over-year, driven by improvements across business units. In the first quarter, revenue was $2.5 billion, lower than last year by $176 million. Logistics revenue was down year-over-year, driven by lower revenue in Mail Innovations. This was partially offset by revenue growth in Healthcare Logistics, reflecting market conditions, air and ocean forwarding revenue was down year-over-year. And UPS Digital, which includes Roadie and Happy Returns, delivered another consecutive quarter of revenue growth, with revenue up 19.9% compared to the first quarter of 2025. In the first quarter, Supply Chain Solutions generated operating profit of $206 million, an increase of $108 million year-over-year. Operating margin was 8.1%, up 450 basis points compared to last year. Lastly, looking at cash. In the first quarter, we generated $2.2 billion in cash from operations. Now let me provide an update on our Amazon glidedown, cost out and network reconfiguration efforts from the first quarter. Starting with variable cost. Total operational hours paced down with volume in the first quarter, and we're on track to reach our 2026 reduction target of 25 million hours versus last year. Looking at semi variable costs. By the end of the quarter, we reduced operational positions by nearly 25,000 compared to the first quarter of last year. In addition, the Driver Choice program that we initiated during the quarter is expected to reduce full-time driver positions by approximately 7,500 over time, putting us firmly on target to reach our reduction goal of 30,000 operational positions this year. And moving to our fixed cost bucket, we completed the closure of 23 buildings during the first quarter. We are planning to close an additional 27 buildings this year, most of which will be closed in the second quarter. We are pleased with the progress that we are making on our Amazon glidedown and network reconfiguration initiatives and are on track to achieve our targeted $3 billion in savings in 2026. Moving to our 2026 financial outlook. While the macroeconomic environment is different now compared to our expectations at the beginning of the year, we have been quick to adjust to the changing conditions and we're continuing to closely monitor the broader impacts across the global economy. As Carol stated, we are reaffirming our full year 2026 consolidated financial target. We are on track to generate revenue of approximately $89.7 billion with an operating margin of approximately 9.6% and diluted earnings per share expected to be about flat to 2025. The conflict in the Middle East in March drove an immediate spike in fuel costs. Our fuel surcharges are linked to published fuel benchmarks and adjust with fuel prices on a weekly basis. And we expect these surcharges to provide coverage as fuel prices continue to fluctuate. Now let me add color on the segment. Looking at U.S. domestic, full year 2026 revenue is still expected to be approximately flat year-over-year. We expect ADV to be down mid-single digits year-over-year due to our actions with Amazon which will be offset by a strong revenue per piece growth rate in the mid-single digits. Full year operating margin is still expected to be flat to 2025. Looking at the second quarter of this year compared to the first quarter, the USPS transition has been completed. The Amazon glidedown and network reconfiguration will wrap up by the end of June. We are leasing fewer replacement aircraft to 767 deliveries continue, and premium volume is expected to further improve mix. As a result, we expect revenue to be up low single digits and operating margin to be between 7.5% and 8.5%. Moving to the International segment and starting with the full year. We still anticipate revenue growth in the low single digits year-over-year, driven by a solid increase in revenue per piece. Operating margin in the International segment is expected to be in the mid-teens. Looking specifically at International in the second quarter, we will lap tough comparisons from changes in trade policy, benefit from normal seasonal uplift and continue to realize savings from our air network cost actions. As a result, we expect low single-digit revenue growth and an operating margin between 13% and 14%. And in Supply Chain Solutions for the full year 2026, we still expect revenue to be up high single digits, which includes revenue from our Andlauer acquisition and operating margin in SCS is expected to be in the low double digits. Looking at the second quarter, we expect momentum from the first quarter to continue, and we expect revenue in SES to be up low single digits year-over-year and operating margin between 9.5% and 10.5%. Now let's turn to our expectations for cash and the balance sheet. Capital expenditures are still expected to be about $3 billion, and we plan to make our annual pension contribution of $1.3 billion. We expect free cash flow to be approximately $5.5 billion, including onetime payments for the Driver Choice program. Lastly, we are still planning to pay out around $5.4 billion in dividends in 2026, subject to Board approval. As we near completion of our Amazon glidedown and network reconfiguration initiative, we will enter the second half of this year with a more agile and more automated network. Our focus is on premium volume and revenue quality and will grow in the best parts of the market. Taken together, these actions set us up for operating margin expansion and greater operational agility. With that, operator, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from the line of Tom Wadewitz from UBS. Thomas Wadewitz: So I wanted to ask you a question about the kind of ramp from 1Q to 2Q. You were a bit -- I think in early March, you pointed to kind of 4% to 5% 1Q margin. You were at the lower end of that. I know you identified, I think, kind of $350 million total transitional costs. How do you think about that like the key pieces of that ramp and just visibility to that versus what you might have had in terms of visibility to that ramp a month ago or 2 months ago? So I don't know if that kind of a little lower 1Q margin reduces visibility or if you say, hey, that was just kind of transitional. And then how does fuel factor into the kind of 2Q versus 1Q? Is there some tailwind that you consider? Or is that something you don't factor in but could give you a little support? So really just to kind of how do we think about the key levers, 2Q versus 1Q. Brian Dykes: Sure. Thanks for the question. So yes, let me make a couple of points on the impacts on the first quarter. So first, if you think inside the quarter, right, relative to the 4% margin, we incurred incremental weather and casualty costs that was more than what we had initially expected when we were setting the guide in and where we were in March. That was about 70 basis points, which gets us kind of towards the higher end of that -- of the range that we laid out. Second, when you go from first quarter to second quarter, there's really 2 components, right? We have normal seasonal uplift, right, from first quarter to second quarter. The other part is if you think about that weather and casualty, those are behind us, right? The aircraft leases, as Carol and I have both mentioned, we continue to take deliveries. So the incremental costs associated with those is coming down. And we've now completed the ground saver outsourcing. So a lot of that transitional costs that we incurred in the first quarter now comes out. And so that helps you bridge from first quarter to second quarter. On fuel, look, we reaffirmed our guide. We are not updating for fuel at this point. Fuel didn't have a material impact in the first quarter because really the ramp in prices happened late in the quarter and as we've gone into April. Look, fuel -- we manage fuel through fuel surcharges. So even though we have a large airline, we're very different than passenger airlines and our industry operates very differently. And so our fuel surcharge indexes protect us from impact to profit, right? Now there could be revenue impact to that, but there will also be offsetting expense. What we don't know is how long the high prices could persist. And then what happens, which relative to oil prices and commodity prices around the world where we actually procure. So we feel confident in the profit number based on the protection our indexes will provide and our surcharges, but it's not appropriate for us to update until we have further clarity on how long this will last. Carol Tomé: It's just too early in terms of the conflict. Clearly, there's a benefit right now to the top line, not so much on the bottom line because we're just covering our costs. But it's too early in the conflict to predict fuel might mean for the rest of the year. So we're going to stay close to it, and we're going to manage through it as carefully as we can, but we didn't want to lift because it's just too early. Operator: Our next question is coming from Scott Group from Wolfe Research. Scott Group: So just following up there, I get we don't know where fuel is going to end up, but in a higher fuel price environment where you guys are also raising the surcharge schedules, like should we assume that there is some sort of profit benefit from the higher fuel environment? And then maybe just, Carol, let's just take a step back, like big picture, like we're going to end up in the 7% and 8% range on U.S. margin this year. Help us think about where that can go over the next couple of years? We get through the Amazon glidedown, maybe we start to see a little bit of wage inflation start to kick in again next year. But where do you think margins can start to go over the next couple of years here? Brian Dykes: Sure. So let me talk quickly about the fuel. So Scott, as I mentioned before, look, the prices have spiked very quickly. It will have a revenue impact, but we also have associated costs. So we don't see this as a windfall in the near term. And again, depending on how long it lasts, it could have a revenue impact, but there could ultimately be a demand impact. So again, as Carol said, it's just too early to speculate on what the ultimate implications of could be. We'll monitor it. And as we know more, we'll update Carol Tomé: And Scott, we brought you all through a lot over the past almost 18 months, but we did it deliberately because it frees us to focus in on the market that we want to serve and serve them better than anybody else. And that includes SMB and B2B and health care. And with those premium markets, and the productivity that Nando and his team are driving in our business, there's an opportunity for continued margin expansion. This is the year of inflection. So the back half of the year will look considerably different than the first half of the year. And as we exit this year, we have an opportunity to grow U.S. margins in a meaningful way with that between RPP and CPP. So at the end of the year, we'll give you a sense of what we think '27 will look like, but it's going to be much better than '26 based on what we're seeing in the underlying health of the business. We're winning in the right markets. Our churn is declining. And all of this leads to stickiness with the customers that we want to serve with the right revenue quality coupled, with great productivity. Our hub productivity is the best has been in 20 years, just to put a point on it. We now have automated 67.5 points our teams almost on our way to 68%. And we know that cost per piece on an automated building is 28% lower than the cost and piece of nonautomated buildings. So there's some really good underlying trends here in the domestic business. And then outside the United States, we can't ignore that because our business performed better than we thought in the first quarter due to the great work of Kate and her team who also are leaning into the premium segments of the market. Brian called out that we grew SMB penetration in the international business, we did. It's now 62%. We also grew our B2B penetration outside the United States, now about 71%. So Kate and team are going to continue to lean into the premium part of our international small package business and we won't forget health care ever, because health care is such an important part of our growth engine it is in every segment of our business with double-digit operating margins, and we're going to continue to lean into that space in a meaningful way. And with just one more comment on that, just put a pin on it with just the changes that we're seeing in pharmaceutical companies with GLP-1 drugs and how they're going direct to consumer rather than through distributors. That's an opportunity for us and proud to say that we lead the market in that area. Operator: Our next question comes from Chris Wetherbee from Wells Fargo. Christian Wetherbee: Maybe just a quick clarification question and maybe bigger picture, I guess, for the driver buyout in the second quarter, can you just give a sense of what the impact will be if there will be a benefit in 2Q from that? And then maybe zooming out a little bit. We're about a quarter away or maybe a couple of months away from the end of the Amazon glidedown, there still is a significant amount of revenue associated with that customer. And I think there's been some changes, and they're always doing various things in the market. But I guess the question is, Carol, is this sort of where you want the portfolio? Do you think there is incremental work that needs to be done around that? How defensible it is? Just sort of give us a sense of how you think about that customer exposure. Carol Tomé: Yes. On the driver buyout, the drivers are leaving in April. So there will absolutely be a benefit in the second quarter. I don't know, Brian, if you want to dimensionalize that. Brian Dykes: Well, and that's part of the step-up that we've got, right? So we had a roughly $150 million in transitional costs in the first quarter that starts to go away as we go to the second quarter, and it helps us with the margin improvement that we see in the second quarter and then going into the second half. Carol Tomé: And as it relates to the Amazon question, at the end of the first quarter, Amazon made up 8.8% of our total revenue. That's down from, it was north of 13%, not very long ago. So really pleased with how we've partnered with Amazon on this glidedown. We hold that company in very high regard. And for the volume that we have remaining with Amazon, I think we're going to get to where we want to be. We are -- we have a great return network. And as you know, returns are the nemesis of anybody who's in the e-commerce. In fact, 19% of all e-commerce sales are returned. And so with our great reverse net work. And the capabilities that we have for Box's labelless returns, that relationship with Amazon is just going to continue to grow. And it's not just returns, that certainly is a key part of it. So give a shout out to the team at Amazon for working with us. We're pleased where we are, and we want to continue our relationship in the nutritive way that is turning out to be. Operator: Your next question is coming from Jonathan Chappell from Evercore ISI. Jonathan Chappell: Brian, I want to take Tom's question and flip it to international. As Carol noted, you did much better there. You're looking for flat revenue, you did up almost 4%. Your margin was over 12%, the range was 10% to 11%, yet the 2Q guide is exactly the same. Was there something temporary in 1Q that enabled you to beat by so much relative to what you were expecting in the first week of March? And why wouldn't that upside across both margin and revenue be extrapolated going forward? Brian Dykes: And yes, we were very pleased with the performance in international. I think when you -- there's a couple of things that drove it in the first quarter. As Carol mentioned, leaning into premium segments in Europe are helping us to drive revenue quality as well as, I would say that we mentioned the decline in the China to U.S. trade lane while it's down, it's not as bad as what it has been, right? And so I would say things were not as bad as what we expected or what they could have been. And so we are starting to see some recovery in certain trade lanes. As we roll into the second quarter, remember, we're still lapping the -- May will be the lap of the liberation Day and the China de minimis elimination which will provide some improvement in step up. And then we'll have another lap in September of the full de minimis elimination. So we do expect the improvement to persist. The other thing that's going on in international is we are seeing some incremental costs associated with the network reconfiguration around the Middle East conflict. It has impacted flight and block hours and some of the lanes. While it's not a large demand area or delivery area, it has impacted some of the network flows that we're managing through. Carol Tomé: Thanks for making that point. I think that's an important point. If you look at our exposure in the Middle East, it's pretty small. Job #1 was to keep our people safe. We have about 2,000 people there, and they're safe, I'm happy to say. In the first quarter, the export and import revenue was about $130 million. So it's not a lot of exposure, but we can't fly over the aerospace because we can't fly over the aerospace that is putting cost into the network. We want to continue to serve our customers. The other thing we're taking a cautious outlook on is just the elimination of de minimis in Europe. That happens this summer. We don't know if it will be disruptive or not, but it's a change and we saw the disruption that happened last year with the elimination of the minutes here in the United States. So we're just watching that. But I couldn't be more happy about actually the work that our international team is doing, to drive really great revenue quality and growth. Operator: Your next question is coming from David Vernon from Bernstein. David Vernon: So I'd like to kind of maybe understand the pace of cost takeout. Has there been any shift in timing caused by discussions you have the unions around the driver buyout? And then Brian, when you're thinking about the overall message you're trying to give us with guidance here, it does seem like first quarter domestic, if you give you credit for the 350 and international is performing really, really well, but we're not changing the full year. Like is this just, well, while we put the numbers out in the first quarter, and we're going to see how the year plays out, and we'll update it later? Or is something getting worse in the business that we can't see? Because I think the market's kind of hearing a beat and to raise as a beat and maybe core worse for the last half of the year. I'm just wondering if you could help me kind of understand what the messaging is here. Carol Tomé: Well, maybe I'll start and then Brian, you can come in. It is early in the year to raise. The underlying business is better than we thought. If I look at the results in April, we're going to exceed the plan that we put in place. If I look at the results outside the United States, have moved from red and certain trade lanes to orange. So everything is moving in the right direction. But David, it's early in the year. And there is a war in the Middle East. High gasoline prices could potentially impact demand towards the end of the year. We don't know. So instead, we want to stay with our plans, but I couldn't be more pleased with how our company is performing. There's nothing on the underlying trend that should be concerning here. It's just too early in the year to raise. Brian Dykes: Yes. And David, I would just add to that. On the guide, Carol is absolutely right. We feel very good about the health of the underlying business. If you remember, we said SMB grew in the first quarter. We expect that to continue. We'll lap some of the actions that we took on the enterprise customers as we go through the second quarter and see growth back to Amazon in volume in the back half. We expect revenue at Amazon to grow every quarter this year. So health of the underlying business is strong. Rev per piece is strong, base pricing is strong. So we feel really good about that. And Carol hit on international. On the pace of cost takeout, nothing's changed, right? I think if you look at the actions that we took in the first quarter, they actually set us up to do exactly what we said we were going to do, right? We transitioned ground favor. We executed on the DCP. As Carol said, nearly 80% of those positions will be eliminated by the end of this month. We are replacing the MD11 capacity as we take delivery of the 767. So we're moving in the right direction. We're getting things behind us that are going to help us drive the margin inflection as we go into the second half. Carol Tomé: Brian, isn't the shape of the cost out much like the shape of the cost out last year. Brian Dykes: It is very much so, right? And so you'll continue to see that improvement as we go through the course of the year. Carol Tomé: It accelerates as we had to do the back. Operator: Your next question is coming from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Great. I wanted to maybe ask a clarification on the driver bio program. It sounds like it ended up coming in or the involvement is either in line or slightly better than what you expected, but admittedly, there are a lot of articles out there in the news that are kind of discussing maybe a little bit less willingness to move forward with that program on the driver side. So it would be helpful if you can maybe separate fact from fiction, what you're seeing, help line expectations? Any clarification there would be helpful. Carol Tomé: Yes. Happy to. So when we laid out our internal plans for the driver buyout, we wanted to land on 7,500 physicians. Our program was oversubscribed. So perhaps that's the basis for some of the articles. So we had more drivers applying than we could accept. We accepted the 7500, we couldn't be more happy. Brian Dykes: And Stephanie, I would say that aligns with the pace of the cost takeout that we had laid out at the beginning of the year. we feel very comfortable that we're going to get to the $3 billion as we laid out and the actions that I articulated earlier are how we're going to get there. Carol Tomé: And you might say, well, why didn't you take more in? Well, we have to run the business. This is what we needed to run our business. Operator: Your next question is coming from Jordan Alliger from Goldman Sachs. Jordan Alliger: I wanted to come back to international. Obviously, with all the trade lane ships and everything that's gone on, margins are below what had historically been the long-term trends. So I'm just sort of wondering, over time, can we push back into a high teens margin level what will it take to get that margin uplift again coming from international? Carol Tomé: Well, if you look at the international business, there's been a lot of movement in the trade lines. And as we've talked to you, our China U.S. trade lane is our most profitable trade lane. We saw the margin in our APAC region down 500 basis points year-on-year. This is a moment in time because of the impact of the tariffs. This is going to normalize over time. And in fact, with the elimination of the EBA tariff and going back now to the 122 tariffs of 10%, we're actually seeing trade lanes move from red to orange yellow in the subpieces grain. So things are starting to normalize. So that means the margin will get back up. Operator: Your next question comes from Bruce Chan from Stifel. J. Bruce Chan: Maybe just wanted to zoom out here and get some high-level thoughts on demand and maybe what's assumed in your outlook here. We've heard from a few companies this quarter that maybe got some early indications of industrial demand recovery. Again, maybe you can just give us some high-level macro thoughts and talk about what you're seeing in terms of maybe any pockets of emerging strength by segment or geography or end market or whatever. Brian Dykes: Sure. So as I mentioned in my earlier remarks, look, we see the puts and takes on the macros, right? GDP ticked down a little bit. Industrial production ticked up a little bit. But I think you're right, we do see pockets of strength in the places where really leading in, right? So we mentioned automotive, high tech, health care, industrial, where we are seeing our ability to win more and take share. We don't expect -- we haven't seen a material shift in what we would expect for the addressable market growth in small package in the U.S. to low single digits, but we are winning where it matters to us. As Carol mentioned, health care, in particular, we grew across all segments of the business, and we continue to see strong uptake in there, which is higher than the average market growth rate. On the international side, Carol hit on it, right? We're I would say that while we're still down on certain trade lanes, they are moving in the right direction, right? And in particular, we are seeing international to international origin destinations growing, right? So trade is moving in places that don't touch the U.S., and it's improving in places that do touch the U.S. So overall, I would say not a robust improvement but incremental progress. Carol Tomé: If you look at China, Rest of the world, it's up 14% year-on-year. It's a small portion of our business, but that's an encouraging sign to see that growth rate. Operator: Your next question is coming from Ari Rosa from Citigroup. Ariel Rosa: Carol, you mentioned the CPP versus RPP spread -- we've seen RPP grow pretty nicely, but we've also seen CPP obviously take a pretty big step up. I'm wondering how you think about that normalizing? And when we get to a more normal level, what that can look like. Specifically, in terms of what's driving up CPP, how much of that are fixed costs that start to go away? And then on how much is the pricing environment helping you versus the mix benefit that you might be realizing from the shift towards higher-yielding packages? Carol Tomé: Well, I'll let Brian take that. Brian Dykes: Sure and I'll start. And so thanks. So look, I think getting back to this, call it, 50 to 100 basis point spread is healthy, right, for our business. And we'll be back there by the end of this year, right, is the way the year kind of sits out. When you think about what's going to drive that, one, we're taking actions to bring the network capacity in the U.S. back in line with the volume level that's DCP, that's Amazon building consolidation. That's all the things that we've outlined. And those, for the most part, now are done or are in progress. So we feel really comfortable with our ability to get the capacity lined up in the back half. On the revenue side, look, we talked about this $250 to $350 kind of range of base pricing improvement. And we've been in that range, right? And as we've been very clear about what's mix versus fuel versus base pricing. And I think we'll continue to get that kind of base pricing increase. You do that, right, through making sure that you're selling into the segments of the market that where we can deliver value to our customers, right? SMB, B2B, health care, and that's where we're really leaning in and that's where we're winning. So I think we do have the ability to get there in the near term and then manage that and grow in a more a more accretive manner more efficient network as we go into the fourth quarter of this year in '27. Carol Tomé: And I know Brian called this out in his prepared remarks, but in the U.S., the RPP growth was driven by base rate improvement, 340 basis points. Mix improvement, 200 basis points and then about 110 basis points from fuel. And that mix improvement is coming through this leaning into the premium segment, leaning into SMBs and leaning away from, well, volume that was related to China e-commerce retailers, mostly ground favor. So that's been moved out of the network. We've offered that volume to the market so that we can focus on the premium side. Operator: Your next question is coming from Ken Hoexter from Bank of America. Ken Hoexter: Carol, I guess your competitor noted it posted the strongest quarter of profitable U.S. share gain in 20 years. You noted your churn is declining. You're seeing favorable mix improvements here, especially on the target audience B2B. It sounded like your -- or Brian's answer to Bruce earlier that there's not that underlying strength that you're kind of really seeing kind of runaway here. I just want to understand, given what we're seeing in truck market on some of the rail volumes, that underlying -- is there just a delay typically in what you see economically? Are you seeing some of that pop up? I just want to understand maybe that mix or is it just what you're chasing is just different than the market now? Carol Tomé: Well, let's talk about market share for a moment. If we ignore the volume that we have made available to the market, and that includes Amazon and volume from e-commerce, Chinese retailers. If we ignore that volume, we actually gained 1.2% market share growth. So we have made volume available to the market that has gone to other carriers, including our largest competitor. It has. Because we deliberately moved -- made that volume available. So if I look at the underlying business, I'm really pleased with the share that we're getting. In terms of trends... Brian Dykes: Yes. And Ken, I think you're right. There is a slight delay in how things move through the supply chain, through the ports, through the TLs, the LTLs and the rails into us. We -- and like I said, I would say we see incremental momentum in our B2B business in the industrial business, part of that through capabilities, right, that we've been investing in. But part of it is through momentum. I would just say it has not been runway growth that would cause us to fundamentally change our market growth assumption for the year yet. Operator: Your next question is coming from Richa Harden from Deutsche Bank. Richa Talwar: It's Richa here. So yes, trying to get a longer -- a sense of longer-term cost per package potential. Obviously, CPP pressure has been high recently influenced by your Amazon glidedown. But as you progress through this year and into next year, how could your CPP trajectory look in light of maybe more cost efficiency from automation things to offset the step-up that we're going to see in your contract, I believe, next year, if that's right? Trying to just add more to Carol, your point that 2027 should look a lot better than 2026. I'm just trying to understand like puts and takes on the CPP line. And then in the spirit of longer-term potential, I just want to clarify one thing. Carol, I think you said you think margins will be back to high teens in international? Are you assuming U.S.-China business that wasn't structurally impaired from de minimis and it should return to where it was prior in terms of overall volume? Or how do you get back to high teens. I'm just trying to understand. Carol Tomé: Well, clearly, as the trade lanes normalize and we see more volume flowing through the China U.S. trade lane, that will help our margin. But it's not just that. We are investing in the premium opportunities where we're underpenetrated in Europe. Moving away from e-commerce, which is low margin into premium opportunities, and that's going to significantly improve our domestic margins in Europe. So it's a combination of actions that we are driving to drive back to mid to high teens in our international business. And then on the CPP potential. Brian, I'll let you take that. Brian Dykes: Sure. And I think even if you look into the back half of this year, our CPP gets down into the low single digits, right? And that's -- as Carol said, we have -- while we've been going through the network reconfiguration, we have been eliminating some of the less productive older buildings that require more maintenance. We have been heavily investing in automation that drives a much more efficient and agile network that should allow us to keep CCP in the low single digits. And then have that 50 to 100 basis point spread because we've got a more healthy customer mix and grow from there. That's a healthy business that can drive growth and profit improvement for us. Carol Tomé: And with our new outsourced relationship with the USPS, we'll be able to drive density upon the delivery, and that's a real way to lower the cost per piece is to improve the density per delivery. And as you know, we've just kind of completed the ramp up. So now we're going to start to see some benefits from that move. Richa Talwar: Okay. Just in the offset from the contract with the changes and how is that going to inflow nth back half of '27? Carol Tomé: Well, I'll tell you one thing. We have a lot fewer employers in our company than we had when we started this work. So that helps on the CPP management next year. Operator: Your next question is coming from Brian Osenbeck from JPMorgan. Brian Ossenbeck: Maybe just 2 sort of quick follow-ups. Just on mix shift, I understand the increasing percentage of mix for SMB and B2B, but it looks like B2B volume in absolute was down 5%. I don't know if you can provide some color as to why that occurred and what might be moving forward here? And then, Carol, just on the transition for the USPS, it sounds like it's done, maybe not everything went back to them in terms of final mile delivery. Can you give a little bit more color on that and also just how you expect to manage their own fuel surcharge, which was kind of a big headline. They never really had one in the past. So I don't know if that's something you can pass through as well with that program. Carol Tomé: So in the first quarter, we tendered about 977,000 ADV to the USPS, which was about 44% of our ground paper product. It was a wrap because we had to get -- work through dual labeling and some work that we had to do to transition. So it was a ramp up, really pleased with how we exited. And as we look to the second quarter, we'll be tendering around $1.5 million, something like that. So that's moving the way we thought it would. In terms of interesting surcharge that they put in, which appears to be a temporary surcharge, not entirely sure. It's not appropriate for us to talk about how we manage pricing by customer, but I will say the Pulse system tends to set the floor for the economy product, which is actually pretty good for the whole industry if they're raising prices. Brian Dykes: That's right. And Brian, on your question around B2B, the B2B volume decline was really driven by some of the intentional actions that we took last year. And part of it is Amazon, part of the Amazon volume that we're exiting through AFN is delivered to commercial addresses. There's other stuff that was returns for Chinese e-commerce and some other things that we're moving through. We'll cycle through that as we go through the second quarter. And again, we see strength in the underlying B2B business where we're winning on capability. Carol Tomé: And that may sound a little curious that a retailer would be a B2B, but it's the way that we think about our customer segmentation. If it's a return to store or return to a physical building, we're going to do that as a business transaction, even though the pay, if you will, the customer who's paying us might be a retailer. PJ Guido: Matthew, we have time for one more question. Operator: Our final question comes from the line of Ravi Shanker from Morgan Stanley. Ravi Shanker: Carol, the reports that you and your peer have applied for tariff refunds through the portal. Can you just tell us your understanding of how that will work kind of when that might come through? And also, what happens next? Do you get to keep the tariffs? Or do you have to pass them through to the end customers? Carol Tomé: Well, thanks for the question, Ravi. This is a complicated matter for sure. I'm going to zoom out just to talk about the EPA tariffs in total. So last year, since the tariffs have been initiated, the Customs Border Protection processed $53 million IPA-related entries and collected $166 billion in tariffs. For us, we processed $16 million EPA-related entries and remitted over $5 billion to the US. Treasury. Ravi, we are just a pass-through. We collect and we remit to the government. So now that the tariffs have been deemed refundable, we are working with the Customs Border Protection to apply for those refunds. Our approach is to work with the U.S. government and not to sue the U.S. government. We have applied for the refunds pursuant to the guidelines from the Customs Border Protection. Interestingly, they are not going first in, first out, but actually last in. So it's for the tariffs that have happened this year. For us, it means applying for tariffs for 2.5 million entries, a little under $500 million. We are making those applications started on April 20. We are making those applications today. We think it's going to take some time before the treasury remits money to us. But as soon as we get that money, we're going to remit it right back to our customer. Brian Dykes: Yes, that's a really important point. And I think, as Carol mentioned, we are purely a pass-through, so we don't expect that this will have an impact on our financial statements. Operator: Thank you. I will now turn the floor over to your host, Mr. PJ Guido. PJ Guido: Thank you, Matthew. This concludes our call. Thank you for joining, and have a good day.
Operator: Good day, and welcome to the Centene Corporation's 2026 First Quarter Earnings Report. [Operator Instructions] Please also note today's event is being recorded. I'd now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead. Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2026 Earnings Results Conference Call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Specifically, our commentary on our full year 2026 outlook, including the drivers of such outlook, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our first quarter 2026 press release and other public SEC filings, which are available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. I will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2026 press release. With that, I would like to turn the call over to our CEO, Sarah London. Sarah? Sarah London: Thanks, Jen, and thanks to everyone for joining us. This morning, we reported first quarter adjusted diluted EPS of $3.37, exceeding our previous expectations for the period. The strength of our first quarter performance enables us to increase our full year 2026 adjusted EPS outlook to greater than $3.40, up from our previous expectation of greater than $3. We are pleased to be off to a strong start this year as increased visibility and operational improvements are yielding positive momentum and lifting our overall financial performance. Results in the quarter included excellent progress within our Medicaid business as we continue to drive margin improvement through targeted and increasingly scaled initiatives to modernize and standardize processes to better manage medical cost trend. Our Medicare segment results were ahead of expectations with outperformance from both Medicare Advantage and PDP offerings. And finally, our commercial segment, the vast majority of which is made up of Marketplace performed in line with expectations on a pretax margin basis as a slightly higher-than-expected HBR in the period was offset by favorability in segment SG&A. As everyone knows, it is early. So while we are off to a great start, we are taking a prudent outlook for the balance of 2026 as we continue to gain visibility into key factors that will influence the remainder of the year. With that, let's dig into the results. Medicaid results in the quarter were ahead of our previous projection, outperforming our HBR expectation in the period. Within that, we experienced a flu season that was lighter than our original forecast and saw a slight utilization benefit from weather events. That said, we were pleased to also deliver solid fundamental outperformance in the quarter, thanks to continued focus and disciplined execution on trend management initiatives across the portfolio. [ Kavrell ] Health remains the largest driver of trend with other categories like home health and high-cost drugs continuing to be consistent contributors. That said, we are beginning to see pockets of deceleration across this cohort largely in line with our expectations for how trend would mature from 2025 into 2026. At the same time, we continue to strengthen and scale the multipronged trend program we deployed in the back half of 2024 and ramped significantly in the face of elevated trend in 2025. This includes standardizing best practices on utilization management across our markets, the addition and further expansion of successful clinical programs ongoing data-driven network optimization to ensure our members have access to the highest performing providers, advocacy around program reform with our state partners and increasingly aggressive efforts to stamp out fraud, waste and abuse. We've discussed here at some length the work we've done around ABA, but with the benefit of more than a year's worth of data under our belt, we are seeing stabilizing year-over-year ABA trends that we believe are a direct result of the actions we have taken to ensure appropriate high-quality care for ABA members across the country. We continue to strengthen our identification of outlier providers who exhibit suspect or fraudulent billing patterns. At the same time, we continue to advocate for the ability to more fully address fraud, waste and abuse in a standardized prevention-focused posture across Medicaid programs. We recently highlighted several potential reforms in response to an RFI from CMS, including allowing proactive payment suspensions, creating safe harbors and improving 2-way data sharing. We look forward to partnering with CMS in the states we serve to better protect taxpayer dollars and strengthen overall program integrity. Looking to the remainder of the year, our guidance assumes net trend, defined as medical costs net of these trends management initiatives, remains in the mid-4% range, and we continue to execute with the goal of outperforming that target. Rates are, of course, the other major contributor to our margin restoration agenda, and we continue to work closely with our state partners to ensure alignment between program revenue and member acuity. With respect to the full year outlook, we continue to track in line with our expectation for a composite rate yield of roughly 4.5%. Conversations with Medicaid departments remain constructive, and we continue to present refreshed data and in many instances, programmatic solutions for challenges our state partners are facing as they look to balance costs and benefits within the Medicaid program. It is still early, we are pleased with the momentum we are seeing across the Medicaid portfolio and we continue to see opportunity for advancement in 2026 and beyond. Our Medicare segment also delivered strong results in the quarter. Both Medicare Advantage and PDP exceeded expectations, producing an HBR of 84.9%, better than our previous forecast and contributing nicely to the first quarter adjusted EPS B. Medicare Advantage, we continue to strategically align our membership with our Medicaid footprint and made great progress on our path to positive earnings. While trend continues to be elevated versus historical baseline, it is so far consistent with what we planned for in our bids with slight favorability in Q1. Thanks to strong execution during both AEP and OEP, we are seeing a slightly more favorable membership mix and our decent membership is now at 40% of our overall portfolio. We are also seeing stronger year-over-year member retention, the continuation of a now multiyear theme, reinforcing the value of investments made over the last few years to redesign our sales and onboarding experience. This durable member base gives us the opportunity to deploy differentiated care models and drive both quality and health outcomes for members over the long term. Business also continues to make solid progress on our value-based care strategy. The team has built a disciplined, performance-driven model that is tightly integrated with network strategy, clinical execution and cost management. We have simplified our contract structure and focused the portfolio to a partner ecosystem that we believe can truly move the needle on quality and cost outcomes. We're also deploying innovative total cost of care models against high-cost specialties such as oncology, chronic kidney disease and behavioral health. These are part of a broader portfolio of initiatives designed to build critical momentum as we look to return the business to profitability. Our PDP business ended the quarter with just over 8.7 million members, thanks to the team's once again, thoughtful and data-driven approach to bid design and positioning. While it is still early, fundamental outperformance in the quarter was driven by slightly lower-than-assumed specialty drug trend, which gives us increased confidence in the trajectory of the business for the year. We are pleased that our Medicare members will have the opportunity to participate in the CMS Bridge program, and we support the goal of expanded GLP-1 access for more seniors. As the largest stand-alone Part D provider in the country, we've also been actively engaged in dialogue around the balance model and remain committed to partnering with the administration to leverage data, best practices and lessons learned from the Bridge program to position balance for success in the future. Looking ahead, we are encouraged that the finalized 2027 Medicare Advantage rates showed improvement compared to the advanced rate notice. While the final rate remains below observed medical cost trend, we continue to see a path to delivering breakeven financial results next year. Medicare Advantage and PDP programs play a vital role, providing access to care for millions of Americans, including some of the most vulnerable of our nation, and we look forward to working with the administration to identify new and important ways to fortify this program and strengthen the safety net overall. Finally, Marketplace. We ended the quarter with just under 3.6 million members, consistent with our previous commentary about post grace period membership. Metal tier distribution and age stayed consistent with patterns we reported on in early March with just under half of our members in silver, roughly 35% of members in Bronze and the remainder in Gold. Other member demographics like age and gender remain consistent with expectations and with recent years' results. Marketplace results were in line for the quarter with a slightly higher HBR offset by outperformance in SG&A. Within these results, the Q1 HBR was driven by higher than originally expected utilization isolated in our Silver tier membership, a dynamic we foreshadowed in early March. With the benefit of additional visibility, including the new March Wakely report and more complete claims experience, we now view this utilization as consistent with the acuity of the Silver members we enrolled, and we expect this membership to receive a meaningful risk adjustment offset as we look to the balance of the year. Let me talk about the additional insight we have gained since March. After last year's unexpected volatility, Centene committed to finding ways to create additional and earlier visibility into this market to support long-term stability. Last fall, we reached out to many of our peers, all of whom are receptive to submitting earlier data on membership demographics. Wakely, the independent actuarial firm that calculates interim risk transfer estimates for the market throughout the year, agreed to aggregate and publish that data at the end of March. As a result of that collaboration, the industry has more visibility than it has ever had at this time of the year about overall market dynamics. Having received this demographic data from almost all of our 29 markets, we are pleased to see that the market overall behaved in line to slightly favorable to our expectations despite 2026 being a year of unprecedented change. First, the overall market contracted as expected in a post APTCs environment. That said, market-by-market membership loss was in almost every market, less than we expected, which suggests that more healthy members stayed in the market in aggregate and that our pricing was appropriate relative to the overall market morbidity. Second, the Wakely data confirmed a meaningful market-wide shift from Silver members into Bronze and to a lesser degree, Gold, consistent with our expectations and with a directional shift in our own metal distribution. Finally, and perhaps most importantly, this data, when combined with our final Q1 paid membership and a full quarter's worth of claims experience, strongly supports the view that Ambetter retains Silver membership with higher acuity relative to the market and that this membership will ultimately receive a meaningful risk adjustment offset. Within our Silver tier, 75% of our members were renewals, giving us a high degree of visibility into year-over-year risk score capture. Through Q1, risk scores tracked closely in line with what we would expect given our claims experience in the period. Wakely data further allowed us to see a strong, consistent correlation between markets where we lost share due to price action and an increase in the overall acuity of our Silver population. Both of these data points strongly support the mix shift hypothesis. Looking to the rest of the year, we have taken what we believe to be a prudent posture relative to our forecast for the business, not reflecting the full suggested risk adjustment offset for this population within our new greater than $3.40 guidance. The June Wakely data, which consists of claims and risk score data across the market, will be key to allowing us to further refine this assumption. We continue to believe in our ability to deliver meaningful margin recovery in the Marketplace business and look forward to updating our full year view with the benefit of the June data. Stepping back, we are pleased that the disciplined execution this quarter yielded solid financial results. As we strengthen the fundamental operations of each of our businesses, we are increasingly well positioned to deliver tangible progress against our margin recovery goals. For this work, we announced an evolution of our leadership structure earlier this month. We are pleased that Dan Finke joined the organization to serve as our Group President, overseeing the Medicaid and Commercial businesses, and we were pleased to elevate Michael Carson to Group President, overseeing our Medicare PDP and Specialty businesses. Their collective experience will be instrumental as we continue to strengthen performance across the portfolio and deliver sustainable profitable growth. I'd like to close by calling out two additional bright spots from Q1. First is progress at Centene and the entire industry have made against our prior authorization commitments, including additional commitments announced last week that will make the prior authorization process faster, easier and less expensive. In our view, this work is not about self-regulating, it's about self disrupting. Industry leadership has worked closely together over the last 1.5 years, not because it is easy, but because it is the right thing to do for our members and for the health care system overall. I'd like to thank my peers for their awesome partnership and acknowledge the many team members at those organizations who, along with the CenTeam, are committed to transforming our systems and the system overall through an unprecedented level of collaboration and transparency. Finally, I'd like to close by congratulating the entire CenTeam for being named to the Forbes Best Employers for company culture list for the second year in a row, jumping more than 150 spots from our inaugural ranking last year into the top 50 employers in the country this year. While I'm pleased we delivered strong results in Q1, I'm even more pleased by how we delivered those results, collaborating as one CenTeam, living our values and behaviors and staying focused on our mission of transforming the health of the communities we serve one person at a time. With that, I'll turn it over to Drew to provide more details on the quarter. Andrew Asher: Thank you, Sarah. Today, we reported a strong first quarter, including $44.7 billion in premium and service revenue and adjusted diluted earnings per share of $3.37. This was just under $0.50 better than our expectations, largely driven by outperformance in Medicaid and Medicare segment HBRs. Our consolidated HBR was 87.3% for Q1. Starting with Medicaid, we ended Q1 with 12.4 million members, slightly down from year-end. More importantly, we demonstrated continued progress in the HBR with Q1 at 93.1%, an improvement of 50 basis points from the first quarter of 2025. As Sarah indicated, our slate of initiatives on both revenue and medical expense are bearing fruit as we continue to navigate an elevated behavioral health and high-cost drug environment. While we have a ways to go to get back to a reasonable Medicaid margin, this is the third consecutive quarter of progress toward that goal. We expect continued momentum as states reflect base trend in acuity data in rates and work with us to shape successful and sustainable programs. Medicare segment results were better than expected, including an HBR at 84.9%, demonstrating outperformance in both MA and PDP for Q1. Medicare Advantage, this gives us more confidence about the path to breakeven for 2027. And in PDP, it's always instructive to see how pharmacy trends start the year relative to expectations. To be clear, medical and pharmacy trends are still historically high in those businesses, though, were not as high as what we had built into our forecast as we actively manage cost and set bids accordingly. PDP high trends and high 2025 baseline cost, especially in specialty pharmacy will be factored into the 2027 bids. This, coupled with the mere mechanic of a risk model that's calibrated based upon pre IRA claims data and therefore, still insufficient to address non-low income trend, should push the direct subsidy up quite a bit again in 2027. In the meantime, we are pleased with the strong start to 2026 in both MA and PDP. Marketplace pretax earnings were on track in Q1 with a slightly higher-than-expected HBR in the quarter offset by strong SG&A management in the product. Consistent with what we told you at the March conference, our Silver metal tier members had higher than originally forecast gross medical cost in Q1 before any incremental 2026 risk adjustment benefit. We are very pleased with the early insights gained from the March Wakely data and reports. Sarah took you deeper into those observations, but suffice to say that the market size and share shifts when coupled with the metal tier distribution and our observed risk score trends are consistent with meaningful risk adjustment offsets for the higher Silver tier gross claims trends. In our current guidance, we have calibrated these factors in our membership distribution such that our forecasted year-end risk transfer assumption is for a slight receivable versus a prior payable forecast. Let me simplify all this in terms of guidance. We thought it would be prudent to embed in our current guidance a pretax margin for Marketplace around 3% for now, compared to our original forecast of approximately 4%. And as you heard from Sarah, this does not reflect the full potential risk adjustment offset suggested by the data we currently have as we await the June Wakely data. I'd also like to thank my industry peers for being receptive to this new Q1 process and recognizing an opportunity to gain visibility earlier in the year and most importantly, for timely submission of useful data to Wakely. This not only helps with 2026 forecasting, it will also give others earlier visibility of their potential risk transfer position when formulating 2027 pricing. One more thing on Marketplace. We ended the quarter with 3.58 million members right around where we told you we expected to be after navigating sign-ups, payments and effectuation. Consistent with our original guidance, we expect a little attrition throughout the remainder of the year, ending 2026, a little over 3 million members. Consolidated adjusted SG&A expense ratio was 7.6% in the first quarter compared to 7.9% last year, reflecting continued discipline and product mix. We ended the quarter with $437 million of cash available for general corporate use. During the first quarter of 2026, the company sold $1 billion of our stand-alone 2025 Part D risk share receivables and proceeds were used to repurchase $1 billion of senior notes that when coupled with strong Q1 earnings, resulted in a debt-to-cap ratio of 43.2%, down from 46.5% at year-end. Medical claims liability totaled $20.6 billion and represents 48 days in claims payable, an increase of 2 days as compared to the fourth quarter of 2025. As we look ahead, due to seasonal PDP sloping and the 2026 proportion of PDP to the total company, we would expect this faster completing business to drive down DCP a day or two as the year progresses. Cash flow provided by operations was $4.4 billion for Q1, primarily driven by strong net earnings, partial 2025 CMS PDP receivable sale and timing of other net payments and receipts. As we look to the rest of 2026, we are pleased to increase full year adjusted EPS guidance to greater than $3.40. Press release table, you can see we added $1 billion of premium revenue to our prior range, largely driven by Texas Medicaid. We expect overall Medicaid membership to be down about 6% from year-end to year-end. We continue to be on track and expect the Medicaid composite rate yield around 4.5%. We also adjusted our consolidated SG&A guidance range down by 10 basis points and added $50 million to expected investment income, and no change to our HBR full year range of 90.9% to 91.7%. One final topic, within finance, we are deploying advanced analytics and selective AI-enabled tools across forecasting, medical economics and payment integrity. Today, these capabilities are used as an independent validation layer alongside our traditional forecasting process, bringing more timely data into how we evaluate emerging medical trend. Also helping us identify fraud, waste and abnormal claims behavior earlier, supporting better prioritization of resources and more disciplined cost management on behalf of state and federal tax payers. We are pleased with a great start to 2026 and look forward to continuing to drive the margin recovery opportunity. Thank you for your interest in Centene and Rocco, we can open it up for questions. Operator: [Operator Instructions] And today's first question comes from Andrew Mok at Barclays. Andrew Mok: I wanted to follow up on the higher acuity in the ACA Silver tier. Can you help us understand why you believe you attracted that higher acuity cohort for this year? And it sounds like you're currently accruing for a partial risk adjustment offset and 3% pretax margins. If you did ultimately get the full risk adjustment offset, what sort of margin would that imply for the full ACA year? Sarah London: Yes, thanks, Andrew. So let me sort of take a step back and sort of anchor on the biggest thing that changed in 2026 for everybody, which is really the expiration of the enhanced APTCs, and thanks to the new Wakely report with earlier data, we can confirm that, that, as expected, drove a significant number of consumers out of the market. It also, as we've seen, as our peers have said and as the data confirms, drove a shift across the market from Silver membership into Bronze products as consumers looked for more affordable plants. And so as a result, the Silver tier remaining membership really follows the golden rule of risk pools that when it strengths, it becomes more and more bid. And so given our market size, our Silver footprint and, frankly, our intentional decision not to go as hard at Abram strategy, which we still very much stand by, we were positioned to retain and attract more Silver members who are now more acute in that overall post-APTC environment. Now important to note that in other insurance markets, the concept of adverse selection can be scary, but that's not actually the case in Marketplace because, as you know, the risk adjustment mechanism is specifically designed to counteract adverse selection. And often, it can actually be a profitable strategy to care for sicker members in this market. And that's really based on our view, with more than a decade of experience in the market. So as we think about the additional visibility that we have since March by virtue of the Wakely data, which has really confirmed that unlike last year, the market is behaving the way we would expect in a number of cases, actually favorable to our expectations, and then the additional quarter of claims experience for our paid membership where we're seeing those risk scores year-over-year track directly in line with the claims experience that we observed. That gives us confidence in the view that we have a higher acuity Silver membership that will attract and get a risk adjustment receivable. As you heard from both my remarks and Drew's, we have not accounted for the full range of what that receivable could be in the updated guidance, but that range does wrap around our original 4% target margin for 2026 in Marketplace and frankly, higher than that at the top end. And so we're -- bottom line, we believe that what we've incorporated into guidance is a prudent posture for now in advance of getting the June Wakely data, and we still feel very good about delivering meaningful margin improvement for the business in 2026. Operator: And our next question today comes from A.J. Rice at UBS. Albert Rice: So I think coming into the year, you basically in Medicaid, were forecasting a cost trend of about 4.5%, mid-4s and the rate updates being at 4.5%. It sounds like the rate updates are coming in consistent. The -- maybe the MLR and Medicaid is trending a little better. Is that primarily due to the flu and weather that you're calling out? Or are you seeing underlying performance improved there? And does that put you on a glide path if the trend is a little better versus the rate updates to get back to sort of a target margin for Medicaid next year? Sarah London: Yes, thanks, A.J. So you're right. We came into the year with an assumption of a flat HBR year-over-year and really, the idea that rate in that mid 4.5% will be matched by net trend, which is obviously overall trend netted against our medical cost initiatives of 4.5%. We obviously saw a better performance in Q1. A bigger piece of that was flu, a little bit of weather, but there was still fundamental solid outperformance on Medicaid HBR driven by the business. And that really is a result of that consistent sort of multi-tenet program that we've deployed over the last 1.5 years and pulling levers around network optimization, further scaling clinical programs, obviously, all the work we're doing around payment integrity and fraud, waste and abuse. We're also seeing increasing momentum from states around program changes and starting to see states even more receptive. We've called out a number of examples of those in the past, whether it be around formulary management or clarifying some of the benefits. We're now seeing states start to directly intervene on providers themselves around fraud, waste and abuse. And so those conversations are continuing to roll forward. So very pleased with the idea that part of the outperformance in Medicaid in the quarter was driven by delivering on the planned initiatives and also the fact that some of that pipeline of 2026 additional initiatives developed a little bit earlier than expected. Obviously, in the forecast for the rest of the year, we're not betting or counting on that outperformance to continue, but given sort of the fundamental drivers of that. It obviously leans positive. And that would mean that we would come in at HBR, call it, 15 or 20 basis points ahead of that 93.7%. As you heard me say before, I would be disappointed if we didn't beat 93.7% given where we stand today, I will reiterate that I will be disappointed if that's all we can do. As we look ahead to 2027, our goal is to continue to drive margin improvement forward. And we obviously have work requirements and a number of policy changes that we're looking ahead to. But as we are strengthening the core operations of the business, we are doing that with a mind to and a goal to continue to drive progressive margin improvement through 2027. Operator: And our next question today comes from Justin Lake at Wolfe Research. Justin Lake: Just a couple of follow-ups. One, you talked to the exchanges, and you talked to -- like you're talking to booking a receivable on risk adjustment, not just to the magnitude that you think it might actually come in. Is that true for the -- am I right there? And is that true for the whole book or just for the Silver's business? And then you gave us margins on Medicaid and exchanges, which we appreciate. Can you give us the same on Part D and Medicare Advantage in terms of margins, where you see them now versus coming into the year? Sarah London: Sure. So first, you are correct that we moved our position to expecting a slight receivable in Marketplace. That is across the whole book because it is, as you know, just important to remember that risk adjustment is agnostic of metal tier. And so it takes into account the relative acuity of the population that you enroll regardless of where they sit between Silver, Bronze and Gold. So that receivable accounts for the entire population. And again, we did not book the full amount that the data suggests with that range, both wrapping around our original target margin and outpacing that, frankly. And then in Medicare, again, we're not reflecting continued outperformance in quarters 2, 3 and 4 in either PDP or Medicare Advantage, but as Drew and I both talked to, the fundamental drivers of those make us feel very good about the trajectory of those businesses. And so that would suggest that both of those -- the segment margin for the full year would come in slightly better. Operator: Our next question today comes from Ann Hynes at Mizuho Securities. Ann Hynes: I want to focus on the balance sheet. It looks like that you paid off about $1 billion of senior notes that were due in 2027 by selling some receivables. And based on our calculation, you have another $1.2 billion due in 2027, and another $2.3 billion in 2028. So just for modeling purposes, should we assume that you'll have to refinance that at higher rates? Or do you hope to pay some of that debt down? Andrew Asher: Yes. Good question, Ann, thanks for paying attention to the balance sheet, like we do. So yes, we're acutely aware that we've got some maturities coming up in December 2027 and then the summer of '28. And so we would look to refinance those or maybe to your point, part of those at least a year out or so as we prepare for sort of rolling those into additional senior notes. So we're taking a look at our cash position and has improved quite a bit in the last 6 to 12 months, not just because of the PDP receivable sale. And we still have, as you can read in the last K and the Q, sort of the ability to sell more of that '25 receivable. But ultimately, we'll collect that, we think, no later than October from CMS. And then as we establish, let's say, a new receivable for the 2026 year, if that's where we end up in that position. then we'll think about that as well. So really pleased with the cash generation of the business. You saw that in the cash flow from operations this quarter. And we'll evaluate sort of continued modification of debt balances. As we think about the volatility of this business over the last couple of years and think about what's the right debt load for the company to open up other avenues for deployment of capital. Operator: And our next question today comes from John Stansel at JPMorgan. John Stansel: I want to talk about rate development in Medicaid. I know the CMS rate development guide kind of alludes to the idea of like the work requirements. And as we kind of enter the back half of this year, you're going to have states giving rate base that will have to contemplate or could contemplate work requirements impacting the acuity of the valuation. I guess, how are you thinking about those discussions when you go talk to states? And I know we've got Nebraska kicking up work requirements, I guess, what, on Friday. How have your state discussions gone as we start full some implementation of work requirements? Sarah London: Yes. Thanks for the question. So you are right that we've got Nebraska that's going to kick off earlier than others, although they're a 7-1 state. And really, they're the only state that has pulled forward into 2026 so far. But given that we operate in that state, I think that will be instructive. As we step into rate conversations this year, we are, as you noted, very conscious of the fact that some of those member months will carry into 2027. And depending at the rate and pace with which states roll out or implement the work requirements, and obviously, CMS has given them some flexibility around that, the need to incorporate any anticipated acuity shifts in those rates. And so we're absolutely bringing that forward into the conversation. As I said earlier, those conversations continue to be constructive. Just as we think about the kind of backward-looking experience, we are seeing more of 2025 data and frankly, the back half of 2024 data, which had that -- the major acuity shift from redeterminations in it. And then the trend that we saw in 2025 really make their way into the base period. And so that's supportive of having rates that match overall acuity and trend. And then very appreciative, as you mined out in the fine print, a really important set of guidance that CMS provided to states relative to when they come to seek certification on rates, being very explicit about how they have incorporated the impact of the OB3 and work requirements and what that might mean in terms of an acuity shift. So we think that is very helpful in terms of creating a level of consciousness and guardrail around that and sort of expectation management as those rates come up to CMS. There was also, I think, a really helpful set of guidance around the fact that in these kinds of instances, media rates and retros are also warranted. And so broadly, what I think we are seeing is the system flex the muscles that we built during the redetermination process. And so again, increasingly, actuaries not being hard tied to retro periods, but thinking about material program changes that may come and how they need to account for that. And then broadly, I would say that the flexibility that has been given to the states, the fact that this is on balance, a smaller, more focused population, we're seeing states actually get really precise a lot earlier in the process. I was talking to one state in particular that has already run their frailty definition on their population, has a very clear view of what the at-risk pool is, actually probably smaller than you would expect. And already thinking hard about, okay, what does that mean in terms of making sure that members who are eligible because they are correctly engaged or they are in that ex parte population get coverage and then how do we support the others to find opportunities. So all of that, I think, gives us confidence. Now it's certainly a policy change and there's implementation and therefore, there is likely to be some degree of risk pool impact. But I think the way it's being rolled out is much more thoughtful, much more informed by data, much more aligned relative to our work, the state's work, CMS's work. And so I think that makes us look at 2027 and 2028 as something that we feel confident that we can manage through. Operator: And our next question today comes from Erin Wright at Morgan Stanley. Erin Wilson Wright: Kind of more of a modeling question, but just the quarterly progression in terms of MLR and earnings from here. I know there's some moving pieces in unknowns and some assumptions you're making in Marketplace as well. But what is your guidance right now [indiscernible]? Or can you give us anything in terms of that quarterly cadence around MLR and earnings that we should be embedding in the model just given some of the maybe mismatch in terms of relative to your expectations this quarter and whether the Street wise, would like to get that right? Sarah London: Yes. Thanks, Erin. So overall, EPS progression follows the same arc that we described coming into the year, but I'll let Drew go into a little bit more detail and then click down into the specific lines of business. Andrew Asher: Yes, the EPS sloping, just like we said last quarter, we expect a step down in earnings from Q1 to Q2, still profitable. Q3 around breakeven and then Q4 at a loss position, given the seasonality of the business. And then maybe, Erin, more importantly, underneath that, what's driving that underlying sloping, in Medicaid, obviously, we had a good first quarter. We would expect Q2, Q3 HBRs to be higher than average and then Q1 and Q4 to be lower this year, lower than average. And then think about the traditional sloping of commercial businesses, including Marketplace, that's like a steady uptick of HBR throughout the year given the benefit plan designs and seasonality of deductibles. Medicare similarly, largely driven by PDP, so you can see a steady march of HBR increase throughout the year. The slope line should be tilted a little bit higher this year just because of the mathematical impact of PDP being a larger proportion of the Medicare segment. So think about that as you're modeling the Medicare segment, HBR throughout the rest of the year. And then SG&A, you go back multiyears, always the heaviest in Q4 given open enrollment and preparing for the 1/1 season. So that helps drive that -- us into a loss position for Q4. Operator: Our next question today comes from George Hill at Deutsche Bank. George Hill: And I've kind of an esoteric question, Sarah, which is as we think about your guys' initiatives in fraud, waste and abuse in particular, in ABA, as we've had conversations with like state representatives, when those issues get addressed, they tend to come out of the rate from a state perspective. So actually, fixing fraud, waste and abuse ends up being a headwind to rate from a state perspective. I want to know is that something that you guys see? And is that a headwind that you guys navigate? And would just love to understand how those conversations go on with your state counterparts. Sarah London: Yes, absolutely. So I think there are probably two components to that. So one is where we see excess use or fraudulent behavior. And unfortunately, we have seen a lot of that, both in terms of -- and I think we went into quite a bit of detail on this on the last call. But as an example, providers who were just prescribing the maximum number of hours every single week for every single patient. And so within that and then -- and frankly, sort of all the way down the continuum to more fraudulent behavior, that is a real opportunity to save taxpayer dollars and make sure that the fidelity of the rates that are in place for ABA are actually going to the right care. And then I think similarly, making sure that whether with units per utilizer or the number of utilizers are getting correctly prescribed the right therapy path and getting the right amount. So a lot of what we've been focusing on is what I would call sort of excess trend and then to your point, ultimately, if there is a tightening of the benefit design that would then allow for some degree of savings in rates. But I think we've got a ways to go before we get to that point. And it's really making sure that the state is paying for the right therapy for the right members at the right level. And that's all good, right? That is exactly what we want to have happen. But our focus has been in what we consider that kind of excess trend domain. And frankly, we're also seeing states, as I mentioned earlier, take more direct action and intervention on some of these suspect or fraudulent ABA providers, not even relying on the MCOs, but actually doing that directly because of an acknowledgment of, I think, the drag that, that is creating on the system overall. Operator: And our next question today comes from Stephen Baxter at Wells Fargo. Stephen Baxter: Actually, another balance sheet question. It looks like the net payable for risk adjustment is up by, I think, over $300 million sequentially versus year-end. And I think you're obviously not speaking to a receiver position. So is that just more about how you booked Q1 versus how you're now thinking about the rest of the year in terms of guidance? And then if we think about basically the range around the potential upside and downside on the risk adjustment change that you're discussing in the potential benefit if it fully comes to a point estimate, is it right to think that like the downside scenario, if you go back to the original assumption is similar in terms of order of magnitude? Andrew Asher: Yes, Stephen, no, an astute observation in the Q that we filed this morning. Yes, different thought process for what we actually book in the first quarter. And waiting to see, say, corroboration from the June Wakely data in terms of the accounting around that, which then think about our forecast, we forecast by year-end to be in that slight receivable position. So that's sort of the difference when you're evaluating that table in the Q. And then as Sarah said, in the range of upside and downside, yes, you're always thinking about -- and believe me, as we raised guidance in Q1, we're thinking about what could swing either way in all of our businesses and feel pretty good about what we think is a cautious prudent stance at a Marketplace margin around 3%, pretax embedded in current guidance. And as Sarah said, with the opportunity to the extent we get the corroboration that the data that we're seeing currently supports, then that would present some degree of upside to that current guidance. Sarah London: And I would just add, maybe specifically to sort of the downside scenario that again, emphasizing everything you said that we feel like we've anchored in a conservative point and that the downside would not be going back to where we started in terms of the meaningful payable assumption that went into the initial guidance for the year because I think that was maybe embedded in the question. Operator: And our next question today comes from Dave Windley at Jefferies. David Windley: I wanted to come back to the fraud, waste and abuse topic, and a follow-up to George's question. We've heard some consultants suggest that like fraud targets in state rate development can actually create, air quotes, a go get for the plans in terms of savings that you need within -- again, within the rate development. I wonder if you see any of that, Sarah. And then same topic, but in the Marketplace, I'm wondering what, if any, additional, I'll call them, generally program integrity measures you're expecting to be applicable in '27 that are not applicable in '26? Sarah London: Yes, thanks. So if I take a big step back on fraud, waste and abuse, we haven't -- I don't think we've explicitly seen the dynamic you're describing where states are kind of holding back on rate and saying, instead, you can make up the difference in fraud, waste and abuse. But frankly, I don't think we would be against that, right? The idea that states can -- would let us operate more fulsomely against our mandate, which is literally to preserve program integrity, there are a lot of places where I think we are handcuffed on a relative basis and where we could, I think, again, preserving all of the right benefits and the quality and the member experience preserve taxpayer dollars. And so that's a dialogue that I think we would be open to. And I think as states start to think about ways to make program changes that don't necessarily require more rate changes, that's a perfect example of one. And we feel like -- I mean, we've hit this a couple of times, but we feel like this is a place where we have really, really focused where we are applying the fact that we've got 30 states worth of data. We aggregate that data, not just to look at best practices, but frankly, to find fraudulent providers who hang out a shingle and then get kicked out of a program and show up in another state. And so we uniquely have an ability to get ahead of that. Drew talked about that in his remarks as well in terms of where we're deploying AI and some of those daily algorithms that we run. So again, I do think there is opportunity for program reform that doesn't necessarily create a rate headwind, but creates overall continued margin improvement opportunity and stronger program integrity for our state partners. And then relative to Marketplace, we are seeing a cleaner membership base as a result of the program integrity measures that went into place last year and those that rolled forward into this year. Obviously, some of those were stayed, and those are part of a court case that we estimate may see some resolution as we get through the summer, may not. And so it's possible that some of those roll forward then into 2027, and we're taking that into account as we think about 2027 pricing and what slight additional impact that may or may not have on the membership base and the risk pool as we roll forward. Andrew Asher: As I'm sure you're aware that we have a shortened open enrollment period for 2027, so we're preparing for that according to those rules. Operator: Our next question today comes from Kevin Fischbeck at Bank of America. Kevin Fischbeck: I wanted to dig in a little bit more to some of the comments about Medicaid. I guess you said that you were seeing pockets of deceleration in some areas of trends. So could you just talk a little bit about that a little bit more? But then also, what are you seeing around acuity? I guess there's been a lot of risk pool shifts on the Medicaid side and some of your competitors are talking about stabilization there. I would love to hear how you're thinking about how the risk pool has been trending the last few quarters? Sarah London: Absolutely. So we've talked about behavioral health, home health, high-cost drugs as three of sort of the top tier trend drivers for over a year now. And behavioral health has been and continues to be sort of the primary driver. of that. But we go deep and look at how we think trend is evolving in each of those areas, whether that be a PMPM impact, whether that be, as I mentioned earlier, sort of overall utilizers, units per utilizer depending on the domain that you're looking at. So as we look across that cohort, we are seeing some pockets of deceleration, particularly around sort of units per utilizer in the behavioral health space. I think that is probably partly an indicator of are state partners getting more sophisticated about defining the benefit and the provider community getting stronger in terms of articulating evidence-based guidelines. And obviously, that is in strong partnership with the work we're doing. ABA is a subset of that. And you heard me talk about the fact that we are seeing sort of more stabilization in that trend. Those trends are still elevated from past years, but we are seeing a year-over-year relative stabilization, again, in our view, a direct result of all of the work that we've done over the past year. So it's not necessarily some huge abatement. It's really sort of a trend lapse. We're not seeing the continued year-over-year steps that we've seen over the last couple of years, and we believe that a lot of the actions that we've taken are actually having an impact. And then from an acuity standpoint, we talked last year about overall trend, roughly 6.5%. Embedded in that was an assumption of continued attrition in the member base based on tightening redeterminations at the state level and that the corresponding acuity shift, I think it was 1 point, 1.5 points of membership a quarter, was embedded in that 6.5%. And so as we looked at 2026, similarly embedded in the net 4.5% trend assumption is an ongoing view of quarterly attrition for that redeterminations work and any risk pool shift that goes along with that. Operator: And our next question today comes from Lance Wilkes with Bernstein. Lance Wilkes: A couple of questions on Medicaid as well. Can you talk a little bit about kind of the net trend impact? And so really looking at kind of your utilization management, network management efforts? And what is the impact of those that kind of brings you from gross to net? And maybe within that, is there a component of state benefit design changes and maybe if you could quantify that? And then kind of rolling that forward, as you're looking in interacting with the states, what are they looking at from an RFP perspective and a pipeline perspective in terms of types of areas of focus, new business they might put out and/or how they're responding to the federal pressures they're seeing? Sarah London: Thanks. Let me sort of take those in reverse order. So it is after really the bolus of RFP catch-up that I feel like we saw in the post-COVID years, this 2026 is a little bit of a later year. We've got only a small number of larger states that are either in or planning an RFP process. In general, I would say that we're starting to see states better align the RFP process for different programs. And so Indiana, for example, is going to reprocure the entirety of their program all at once where they were historically on sort of an off-cycle schedule relative to the core program versus LTSS. And so that, I think, is a good thing in terms of opportunity for us because of the strength in the core program, the ability to actually expand membership through those processes. I think similarly, we're seeing states consider whether this is an opportunity to move additional higher acuity membership cohorts into managed care because they are looking at budget pressures as a result of OB3 and just overall economic pressure. And so having kind of that stable view of cost is this is an opportunity to think about what other populations they might roll into the RFP process. So we're tracking that very closely and feel like we're very well positioned for that. Relative to net trend, we haven't really quantified growth trend, but I do think that the levers that we've talked about pretty consistently around network, clinical programs, payment integrity, fraud, waste and abuse, all of that really drives us down to that net 4.5%. And again, as you saw in Q1, outperformance from that. We have a really strong pipeline of those initiatives as we think about the rest of the year, which gives us confidence in our ambition to outperform even sort of the current run rate. And as I mentioned, there are a number of places where states are leaning into program changes, again, not necessarily specific to rate impact, but thinking about where they can get clearer about benefit design and where they can allow the MCOs to apply our data-driven approach to finding the highest quality, lowest cost care and procuring that on behalf of the state in order to improve margin profile and ultimately give them a little bit of relief on the need to continue to drive rates up as the solution to the problem. Operator: And our next question comes from Sarah James at Cantor. Sarah James: If I put together the moving pieces on HBR total company withheld, Medicaid, Medicare, the rest of the year, Marketplace up 100 bps, it kind of implies that Medicare 1Q beat your expectations by about 370 bps. Is that the right way to think about it? Or did your consolidated HBR move within the range? And then I get that there's a program change between '25 and '26, but the implied slope on Part D and blended Medicare is significant. To me looks like it's 1,100 bps. So can you give us a little bit more detail on how your confidence that the slope will be so steep on Part D HBR? Andrew Asher: Yes, no, good questions. Let me take those in reverse order. Yes, you're right, the sloping of our Medicare segment HBR, should be steeper this year, but that's really a function of PDP being a higher proportion, a $25 billion of revenue or so of that segment. And we've got data going back to the inception of Part D in 2006 in terms of the impact of benefit changes and how to slope that. So I feel really good about our start to the year in PDP. And that parlays into your question about Medicare segment HBR as a whole. There was a beat. Certainly, we beat in Q1, not to the extent that you calculated but we're pleased with both Medicare Advantage and PDP contributing to the outperformance in Q1. And then as Sarah said, we sort of assumed that we revert back to our previous assumptions for Q3 -- Q2, Q3 and Q4, although obviously, we're going to continue to drive that -- both of those businesses to outperform even the current guidance. So hopefully, that helps with the context of the quarter. Operator: And our final question today comes from Scott Fidel at Goldman Sachs. Scott Fidel: I wanted to just ask maybe on Part D. And if you can drill a little bit more on the LAS versus the non-LAS and maybe first, just what the membership mix was at the end of the first quarter. And here, one thing we've been tracking has just been the sort of the variation in the specialty pharmacy sort of spending trends and utilization trends between utilization in LAS versus non-LAS since IRA and then how sort of the risk scores may get updated for that from CNS? And just curious as we sort of roll forward now into the first quarter, how much of that dynamic have you been seeing? Are you seeing some convergence between the two around those spending trends? Or is -- are they still pretty far divergent and then how the risk scores are sort of play underneath that? Andrew Asher: Yes. Good questions relative to our PDP business. So we're about 1/3 in our basic product, which is essentially the low-income subsidy, the LIS at about 1/3 and the enhanced product about 2/3 which is largely non-low income. And you're right, the motivations of the IRA and the applicability of maximum amount of pockets, we saw different behaviors in the non-low income population versus the low-income subsidy population that have always been essentially fully [indiscernible] protected. So those trends continue to be very high in not-low income. I mean essentially, members taking advantage of and quite frankly, pharma taking advantage also of that $2,000 maximum out of pocket. Now the good news is we saw that in 2025, we managed through that, still produced margin and pretax margin in the 3s, but then had that data to set bids and, quite frankly, set forecasts for 2026, assuming a continuation of a very high non-low income trend, especially in specialty pharmacy. And so that's reflected in our forecast. It was reflected in our bids. It's still a very high trend. We've been able to curtail it to some degree, but it's still a very high absolute number, just not as high as what we assumed in our forecast. So you're right on the model change, we proposed that the model accelerates the recognition of the impact of the IRA, especially on the non-low income population. That suggestion was not taken. It will naturally -- that data will naturally work its way into the risk model, but it won't for 2027. And that's why we think that direct subsidy is going to go up quite a bit again as we think about 2027. So good 2026 performance so far, and we're optimistic about continuing to deliver on PDP and believe that we're well prepared for 2027. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks. Sarah London: Thanks, Rocco, and thank you all for joining us this morning and for your interest in Centene. We are out of the gate in 2026 with solid momentum, and we look forward to updating you on how the business progresses over the coming months. My Centene colleagues, thank you for setting the tone. I'm excited to see what we can deliver for our members, our customers and our shareholders this year and going forward. Thank you all. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Welcome to the Opera Limited First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin. Matthew Wolfson: Thank you for joining us. This morning, I am joined by our CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand over the call to Song Lin, I would like to remind you that some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially as a result of various factors, including those set forth in today's earnings press release and in our most recent annual report on Form 20-F filed with the SEC. We undertake no obligations to update any forward-looking statement. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our Investor Relations website at investor.opera.com. Our comments will be on a year-over-year comparison unless we state otherwise. With that, let me turn the call over to our CEO, Song Lin, who will cover our first quarter operational highlights and strategy, and then Frode Jacobsen, who will discuss the details of our financials and expectations for the second quarter and full year. Song? Lin Song: Sure. Thank you, Matt, and good day, everyone. It's been less than 2 months since we reported our fourth quarter 2025 results with the trajectory for 2026 well ahead of internal expectations. And today, we announced that we surpassed even those recent forecasts. Q1 revenue exceeded the high end of our guidance range by $4 million and adjusted EBITDA exceeded the high end of our guidance range by $2 million. That translated to year-over-year revenue growth of 23% to $176 million with $42 million adjusted EBITDA or a 24% margin. It is also worth noting that revenue growth was comparable across advertising and query revenue and 24% and 23%, respectively, both contributing to an excellent starting position for the remainder of the year. On the advertising side, fourth quarter revenue was a new all-time high of $117 million. Our momentum and underlying growth was strong enough to more than offset seasonality. Our advertising partners run performance-based campaigns, so we would not see this level of growth if our partners were not also experiencing success. As a result, we are able to continue increasing our share of wallet with a continued focus on scaling our e-commerce partnerships. As an example, just 2 weeks ago, we were awarded Affiliate of the Year from AliExpress. And in late 2025, we received a similar recognition from Shopee, another key partner. We are humbled by the appreciation shown and operate Opera Ads with their continued success as our North Star. Our partners appreciate the 3 core pillars of Opera Ads. First is a unified media technology ecosystem that combines our own ad inventory augmented with the wider programmatic landscape and advanced targeting algorithms to deliver hyper relevant placements and the precise moment of user intent. Second is consistent execution that delivers daily volume without sacrificing quality. And finally, a deep collaborative alignment that fosters a transparent, closely aligned working relationship with our partners. Working with such global partners will translate demonstrated performance in active markets to continued regional expansion. And while e-commerce opportunities will only increase as the year progresses, I'm also excited about taking our learnings from that vertical and applying it more broadly. For example, as we enter the travel heavy second and third quarters, we see a clear potential to establish Opera Ads as a source of well-targeted audiences for the travel industry. All in all, there is no shortage of opportunity and it's all about execution to deliver the best results for our partners. Within the 23% growth of query revenue, search revenue growth continued expanding and reached 14% in the quarter, a level we have not seen since 2024. The remainder of query growth was driven by non-search query revenue, which continues to be multiple times larger than the year ago quarter with underlying growth also offsetting seasonality. In total, query revenue was $58 million in the fourth quarter and representing 33% of our revenue. As we've discussed before, the AI age comes with completely new monetization potentials for our browsers, both from conversation with the native Opera AI assistant and as it relates to the back-end understanding of a user's intentions, presenting relevant products and services natively in the user interface. The browser is unlike any other app. It's a gateway to almost every service available online. And as the browser gets smarter, the user can more efficiently act on their intentions. For example, if the user starts formulating a query in the URL bar, the browser can understand the intention and expand the interface to present relevant destinations or if a user was interrupted during a session, the browser can organize that history and enable a seamless continuation later on. In fact, AI unlocks both advertising and query revenue opportunities for us. On the advertising side, deep learning and agentic AI are leading to greater optimization and better targeting of user intent, resulting in greater conversion rates for our advertising partners. On the query side, we are witnessing an evolution in search. Historically, search has been limited to the keywords users are searching for. But over the past few years, we have seen it transform from simple keywords to more complex and longer question-based queries and more recently to chat conversations. As a browser with control of the URL bar and omnibox, we are well positioned as an entry node to search and AI chats. As these more complex searches and conversations begin to be monetized, we are in an excellent position to benefit. Now turning to our products and recent innovations, [indiscernible] on the key topic of AI potentials for the browser. We recently introduced Browser Connector available both in our subscription-based agentic browser, Opera Neon and in our mainstream browsers, Opera One and GX. Browser Connector allows users to plug their favorite AI tools directly into their live browser sessions via a protocol known as MCP, providing the AI platform of their choice with full real-time context of open tabs and active content. Think of this as bring your own AI. The MCP protocol is the open standard that enables a secure connection between the browser host and AI models, giving users the freedom to choose their preferred combination of browser and AI back end. With Browser Connector, the user no longer needs to act as the personal secretary of their own online AI tools, copy and pasting links and context. Instead, the browser enables the AI of choice to access and re-page content, understand open tabs and even take screen shots to analyze images of graphs. Beyond the technical upgrade, Browser Connector reinforces Opera's long-standing advocacy for user choice over ecosystem lock-in. Product innovation translates to user appreciation and increased usage of our browsers, which again translates to revenue tailwinds. Looking at key Western markets, we see users who engage with AI within our browsers, spend over an hour more per day in the browser and even perform 50% more traditional searches than comparable users who are not yet engaging AI, all of which directly contributes to ARPU growth. Our broad approach to monetization puts us in a differentiated position as most companies that are monetizing AI today are either chip and compute providers or those relying exclusively on subscriptions and usage-based models. In terms of our user base, we added 4 million users during the fourth quarter, bringing our total monthly average users to 288 million. We added 400,000 Western users on top of the seasonally strong fourth quarter and we benefited from both continued Android adoption and PC platform growth and 1 million new Opera GX users globally. In total, our annualized ARPU was $2.43, a 25% increase year-over-year. The final topic I would like to discuss is MiniPay, our noncustodial stablecoin wallet with deep ecosystem roots. MiniPay is the leading stablecoin wallet in Africa, appreciated for its technical ease and seamless integrations. We see great opportunities and real life benefits with access to stablecoins, both within emerging markets and as a global payment framework. Just last week, we announced a USD 1 million incentive for local developers of mini apps that take advantage of the transaction opportunities of MiniPay and we are using our on the ground presence in Africa and Latin America to provide in-person support. This supports the continued expansion of mini apps available in MiniPay, covering a broad range of services from finance, shopping, entertainment and utility tools. MiniPay has now activated over 15 million wallets and processed over 430 million total transactions. With that, I would like to turn the call over to Frode Jacobsen, our CFO, to discuss our financial results, guidance and capital allocation in greater detail. Frode? Frode Jacobsen: Thanks, Song. As Song Lin mentioned, we are very pleased with the start of 2026 and the trajectory we are on now well into the second quarter. Yet again, we overperformed our estimates and delivered an incremental $4 million of revenue on top of the guidance range with over 50% conversion to incremental adjusted EBITDA. This level of outperformance is particularly impressive in the face of seasonal headwinds following the holiday heavy fourth quarter. Instead of a seasonal dip, our underlying commercial momentum overpowered those trends and drove sequential advertising revenue higher in the first quarter. Q1 also marks our 20th consecutive quarter as a Rule of 40 company and we are well on track for 2026 to be the sixth consecutive year where we meet that high bar. In fact, our average annual revenue growth or CAGR stands at 21% over the past 10-year period, a feat few public companies achieve, even more so for companies that have been around for over 30 years like Opera. In these times, filled with innovation and opportunity, we continue to benefit from the resilience and agility of our business model, disciplined execution and our consistency in pairing rapid and organic growth with healthy profitability. Our outperformance continues to be broad-based with total revenue growth of 23% as opposed to the midpoint guidance of 19% growth. Within our total quarterly revenue of $176 million, advertising was $117 million or 67% of the total and query revenue was $58 million. Advertising revenue grew at 24% and the evolution of our search business into a broader query approach resulted in query revenue growth of 23%, a level we haven't seen since the post-COVID rebound in 2021 as we better monetize high-intent user actions across the browser interface. In terms of costs, I want to highlight the fact that we scaled the business beyond expectations while also improving gross margin by about 60 basis points versus the prior quarter. Cost of revenue items combined represented 36.8% of revenue, down from the 37.4% we saw in Q4 and according to margin expectations from our prior cost commentary. Also as expected, cash-based compensation ticked slightly down from the Q4 level to $21.5 million. Marketing spend came in just below what we had built into guidance at $38.5 million, while the [Technical Difficulty] of all other OpEx items, pre-adjusted EBITDA came in at $9 million or just above expectations, but still resulting in a slight net benefit. All in all, our continued cost discipline underpinned our adjusted EBITDA overperformance coming in at $42 million for the quarter [Technical Difficulty] or a 24% margin. Operating cash flow was also $42 million in the quarter, representing a 100% conversion of adjusted EBITDA as strong net collection more than offset the limited tax payments we incurred. Free cash flow from operations was $35.5 million or 85% of adjusted EBITDA. We continue to expect fluctuations quarter-to-quarter due to the size and timing of tax and bonus payments as well as other working capital movements, though I will reiterate my statement from last quarter that the full year conversion ratio of EBITDA to these cash flow metrics as achieved in 2025 continue to be reasonable expectations also for 2026. Turning to capital allocation and return of cash to our shareholders, where we combine a recurring dividend program of $0.80 per year with our recently launched $300 million buyback program. The dividend is paid out semiannually with $0.40 or $36 million paid out in January. In terms of the buyback, we repurchased 1.14 million shares in March for a total spend of $17 million pro rata distributed between public buybacks and repurchases from our majority shareholder at the same price per share, $14.88. This reduced the total number of shares outstanding as of 31st March to 89.55 million. You'll see $12.8 million of the spend in our Q1 cash flow with the settlement of the remaining $4.1 million taking place in Q2. Now turning to our guidance. In terms of our full year outlook, our solid start to the year allows us to raise revenue guidance to $727 million to $740 million or 18% to 20% growth for the year as a whole. With that, we are raising the low end of guidance by $7 million and the high end by $5 million from the range we provided just 2 months ago, adding about 1 percentage point of growth to our expectations. Still, in line with our guidance logic, this range continues to allow for later upside potential in the second half of the year. We let just over 40% of the incremental revenue flow through to our adjusted EBITDA guidance and update our annual range to become $170 million to $174 million or a 23.4% margin at the midpoint. That means that our prior high end of the range has now become the midpoint. For the second quarter, we guide revenue of $176 million to $178 million or 23% to 25% growth. The quarter is already well underway and both our operational and commercial performance supports the nice step-up versus prior implicit expectations. We guide adjusted EBITDA of $40 million to $42 million, representing a 23.2% margin and 28% adjusted EBITDA growth at the midpoint. In terms of costs, we then implicitly guide to a full year OpEx base pre-adjusted EBITDA of $562 million at the midpoint, of which $136 million in Q2. We continue to expect cost of revenue items combined to represent about 38% of revenue for the year, with midyear coming in around the annual average before we go slightly higher in Q4 with its seasonal advertising peak. As discussed before, Opera Ads has a different gross margin profile compared to our O&O revenue streams, resulting in a greater cost of revenue component in our overall results even as our Opera Ads gross margin is ticking up. Apart from the business mix effect, we continue to see the Opera Ads gross margin expanding as the platform scales and our optimization algorithms evolve in addition to benefiting from low marketing costs and limited OpEx base. Cash-based compensation expense is expected to grow just above 10% for the year as a whole, which is slightly lower than our earlier expectation of growth in the low teens. We expect costs to increase modestly in Q2 with annual salary adjustments effective as of April. Post Q2, compensation cost is expected to show smaller movements quarter-to-quarter. Full year marketing costs remains expected to grow by about 10% from the 2025 level with Q2 costs quite similar to Q1, followed by a slightly higher spend level in the later quarters. In sum, cash-based compensation and marketing will then decline from representing 36% of revenue in 2025 to representing about 33% of revenue in 2026. For all other OpEx items, pre-adjusted EBITDA, we increased our full year estimate to represent just over 20% growth year-over-year, up from our earlier expectation at about 15% growth. This is explained by hosting costs and the effects of our rapid business scaling, increased AI usage and pricing impact of constrained supply, while other items included in the total remained stable overall. We expect the cost category to increase quite linearly as the year progresses. In sum, while we continue to focus on building scale over accelerating margin expansion, as we refresh our estimates, we see a slight further widening of the gap between revenue and cost growth, allowing us to lift our adjusted EBITDA margin by about 15 basis points at the midpoint of full year guidance 2 months after providing the first color on 2026. In light of our performance and outlook, we remain very pleased with having expanded shareholder returns beyond our recurring dividend program to also include our new buyback program. We repurchased 1.3% of shares outstanding in the program's first month at an attractive $14.88 per share, accelerating ROI upside for our shareholders. While it's only been a couple of months since our last release, we've been excited to share today's updates with you and look forward to keeping you posted on our progress. With that, I'll turn the call back over to the operator for your questions. Operator: [Operator Instructions] And we'll take our first question from Eric Sheridan with Goldman Sachs. Eric Sheridan: Wanted to know if we go a little bit deeper into the learnings you have to date with respect to the adoption of AI tools across your user base and when you look longer term, what do you see as the opportunity set either at the browser level or maybe even for the rise of agentic commerce behavior by users that could bode well for both user growth as well as monetization opportunities? Lin Song: Sure. So -- it's Song Lin here. I'll try to answer. So yes, so high level, I guess, number one, I would say that I think the -- more like we are always advocate for AI and that's also why we almost try to embed it in many of the aspects within the browser anyway. And as we also talked about in the script that we also have it, for instance, from the URL bar, Omnibar to, of course, also the offer AI assistant that you can engage from sidebar and then further on to allow you to use AI with their own subscription, bring your own AI. So that's consistent with our offerings. And I would almost say that, number one, in general, we see that once we provide it in the right context in the right moment, users are very happy about it. So that's why we -- I think we also talked about it briefly in the script that whoever use AI, we saw that they almost spend 1 hour more in, say, desktop browsers, which is already a very long hour spend compared with any other thing. And then they also typically search almost long time more, right, than the others or engage with AI in different ways. So I think in general, we are very positive about it because those basically transfer to better opportunity to capture user intent and also the monetization opportunities as follow-on. So I think that's, in general, where we see that why it's beneficial. And on the other end, though, I think maybe the only thing I will just say that we should, of course, never forget that in the end of the day, user is a first, right? So as Opera, for instance, we never try to push user to something without may not be what they want. So I think #1 priority should always be that you give what user want. And also, it's also equally important to be aware that, of course, it's not all about efficiency, for instance, because for many of the times, if users just want to kill time, they just want to enjoy what they do and we should also respect that. So I think that's what also we see that people in the longer term, whoever win will be, who respect user behavior, give them the AI and the right context and right time, helping them use their own stuff instead of giving something with the lock-in ecosystem, whatever that is. And I think that's what we see at least major growth of us, both for the use of all those AI features, but also for how we actually see quite a good growth of user base. And you can see that even though Q1 is actually traditionally almost a bit lower season, it's actually we have been done very well on the user base-wise. And we actually also see one of the highest growth of MAUs on desktop, for instance, likely as a result. So that's -- yes, more like that's some high-level figures. Operator: We'll move next to Naved Khan with B. Riley Securities. Naved Khan: So 2 questions from me. One is this metric you shared about users who engage with AI spend an hour more per day and you see 50% increase in searches. I'm curious what percentage of your base is engaging with the AI chat features that you currently have? And what are the levers that you control to drive this higher? And the second question I have is just on the Google renewal that's coming up at the end of the year. How are those conversations going? Are you confident about renewing it? Or just give us your thoughts there. Lin Song: So yes, it's only I think I also try to answer it. I captured the last question first, I think I'll just revert on that. So yes, I think for Google, I think we also talked about, I believe, 2 months ago in our Q4 release that we are very happy to be one of the first to sign with Google, the renewed, let's say, agreement for the year due to the DOJ requirement, right, with them in the U.S. So very happy. We are very happy. I think they're also very happy that we are one of the first partners to do that. And moving forward, we don't expect any surprises. We have very good dialogue with them. Hopefully, there will be also some interesting openings of new potentials that we can cooperate with Google, both on the search, but potentially on the AI side and a few other side. And yes, for the renewal, I think we typically have stand on the process of renewing with them by -- yes, more towards the second half of the year. I think we'll continue the right path on that trend and we'll provide an update when such is available. But for now, I think the cooperation is fantastic. And as you also see that we even have one of the highest growth of traditional search parties ever. So I think both sides are very happy. And hopefully, we can expand that partnership moving forward. Yes. And then I guess also super quickly comment a bit on your questions on AI, right? So yes, I guess in short, for now, we have not disclosed the exact AI usage percent. I think the reason is just because now there are so many touch points and entry points of AI that is almost a bit hard for us to define a particular entry well, what comes as the user use AI or not because that can happen both from Omnibar whenever there is a suggestion, which is, of course, we are always updating. So that's also why you see a good growth of query revenues. Most of them are actually resulted of the many of the AI features that we are trying to resonate. But of course, it's also possible for user to both access AI from the sidebar with Open AI. But with the latest introduced of browser with own AI, you can actually compute the browser by Browser Connector from your ChatGPT subscription inside the browser directly or from your cloud and other chatbots directly from a webpage. So I guess it will become harder for us to define particularly what content AI usage because I think that will be almost prolific that almost the majority -- I think we do expect majority of the interactions within the browser will encounter AI in one form or another. And I think our goal basically just to make sure that we are a browser choice. We are a standalone player, we give them all the options available. And hopefully, for instance, if you have a cloud-based subscription, our goal is just to make sure that Opera is the best place going to use and saying that if you have ChatGPT subscription, but you also want to use [indiscernible] sometimes, we should also be the go-to choice. So I think that's our aim and I think we are actually moving forward to that goal. Operator: We'll move next to Ron Josey with Citi. Ronald Josey: I wanted to ask a little bit more on search, specifically with query growth accelerating in the quarter. And Frode, I think you talked about the search evolves and your broader query approach overall. So talk to us about the evolution as search is -- we see accelerating query growth and specifically the tie between, call it, the new browser AI tools and engagement as search revenues growth and query grow, in fact, accelerate. So any insights on the evolution here would be super helpful. And then bigger picture, understood with guidance here, but any insights on the broader advertising environment would be very helpful. Are there any verticals to call out one way or the other? Frode Jacobsen: Ron, Frode here. I'll start. So I think in the first quarter, we saw the year-over-year search, like pure search revenue was growing at about 14% year-over-year, which was very strong and up from the growth that we saw in all the quarters in 2025. And then on top of that, we have the broadening of the category, including also the non-search query revenues that drove it up to 23% total overall. So I think we look at that category in an enthusiastic way because as these new tools evolve and as people can engage with the browser in new ways, we have more opportunities to direct people to the things they are looking for in native ways in the browser. Ronald Josey: And further to that, as engagement ramps, you talked about more opportunity direct. And then we heard in the call earlier, I think, Song, you talked about broader engagement for those who have adopted AI tools. I know we've talked about that on the Q&A section. But any insights on adoption of AI tools to the browser and the user base overall? Lin Song: Yes. So yes, it's Song Lin here. So I guess I'll just complement a bit on what Frode is saying that on -- I mean, as I said, I think now the way we see it, it's becoming really proliferating that like, for instance, if you just use Opera browser, you can go to ChatGPT by just using the Browser Connector, or you can benefit from there to control the Opera browser. And the same way that, let's say, if you type a regular URL, we will actually use AI to say that, oh, maybe this is Amazon tools -- product that you would like, right, it will pop up, either you click on, they will go through it. And same as the Booking.com is also a perfect example that now it actually works that way. So I would almost say that I think now we are basically coming to a stage where you could arguably say that majority of the user searches probably have AI involved in one form or the other. And I think we will see that will be the future moving forward. And I think the key is just -- as we also maybe mentioned a bit earlier that I think the key is just maybe find the right design and the combination that it should really facilitate users' browsing behaviors. I think maybe that's also something that people go to that. At the end of the day, it's always consumer first, is always end user first. It's very important that it's something facilitating. For instance, that's also why we provide this Browser Connector instead of pushing them to force them to use some particular Opera Ad tool, but actually they can use whatever existing tool they like. And I think that's a very important philosophy that we believe in. And we have to feel strongly that, that should be the direction of what a browser should do, right? As an independent player, user can choose whatever AI they like. It can be from existing big players. It can be even from open source if they choose. And then we just have to make sure that we provide this Browser Connector in MCP protocol that people can access and said great and then they can use whatever to control it. And I think we are basically in the best position to provide it. So maybe perhaps that's also why I would almost say that so far for the browser come up by the particular AI providers, I don't think there's too much acceptance of it. But rather, we actually see very nice growth -- actually we have the higher growth of our users, say, for desktop that we have not seen for years. So I think we are very encouraged by that. Operator: We'll take our next question from Jim Callahan with Piper Sandler. James Callahan: Interested on the comments on travel, rolling out the sort of performance-based product there. Would just be curious if -- how much of the pieces are in place to kind of roll that out? Or is that something that's kind of already in the model today? Frode Jacobsen: So I'll go in terms of the model. So our guidance is always quite bottom up estimates where we look at what we have today. And then we rather leave upside for things to scale better than what we built into guidance in the later parts of the year. And of course, travel is a big opportunity. It's very -- we can use our lessons from the e-commerce opportunity to scale into this vertical. It's also interesting seasonality-wise, but it has a different annual profile with sort of midyear travels, et cetera, whereas e-commerce and shopping tends to be or is definitely strongest around year-end and the holiday season. James Callahan: Okay. Got it. That is helpful. And then anything in terms of guidance for, I don't know, either 2Q or full year, just relative growth between query and advertising? Frode Jacobsen: We will be a bit careful to break it down into detail because it evolves as we evolve the opportunity, especially the non-search parts of query is relatively new. And then search as a whole is also quite market-based on top of how we move our user base. And then on the advertising side, of course, we have a baseline and we have a guidance and we also have opportunities that you just touched on. So we -- for now, I would say Q1 was very strong on the query overall. I think we don't need to continue a year-over-year growth of over 20% on a query basis to meet our guidance, but it's a bit too soon to discuss specifics for the better parts of the year. Operator: [Operator Instructions] We'll move next to Jacob Stephan with Lake Street Capital Markets. Jacob Stephan: Congrats on a nice quarter. Maybe just to start off for me, I'll ask on the MCP. This kind of positions you as kind of the central call point for several AI tools. But do you think that this kind of risks cannibalizing any of the Opera Neon subscriptions or economics? Or is this kind of a complementary funnel? Curious your thoughts here. Lin Song: Yes. So yes, that's a very good question. So as like -- yes, it's a very relevant question, right? So I guess, yes, we do have a choice, right? Like any given AI feature, which are quite interesting, we do have a choice of do we only give it to Opera Neon and hopefully, we will push more for subscription revenue? Or do we think that it's more relevant for the broader audience? And as a result, hopefully also attract more users in the generic Opera One or GX product, right? So -- but I think basically, as also demonstrated by our numbers, I think we are in a bit slightly luxury situation that we are not burning money like all those base model companies. We are quite profitable and we have good revenue. And also because our revenue model is because of advertisement, right, that we do not really have to rely on fixed subscription revenue. And then be aware that typically that subscription revenue is also -- if you are a traditional AI company, that subscription revenue also coupled heavily with burning token cost, which is almost many times not sustainable. So I would also say that in this particular case you asked, it's a bit easy simple decision because we see it, we saw that there's a great user feedback, people liked it and we calculated that it's economically much better to put it outside really just because remember, this is bring your own AI, right? So we don't even need to use our own tokens, this is tokens from ChatGPT or whatever based on what you already have. And so we don't really have any cost really whatsoever. But that if that causes a higher retention, how user search, how user use our browser because at the end of the day, if user have to use it inside the browser anyway that we would be able to capture all the intent and monetize if needed anyway. So this particular case is actually a very easy decision that it makes more sense to have it available on the general product and make money by regular browsers, which are already demonstrated to be very profitable anyway. I'm sure that there will be certain features may be tailored to particular vertical audiences that would only be available in Neon like many of the current Neon features is and those that will be more subscription-based. But yes, for the Browser Connector, it's an obvious choice that it's better to make it widely available. Jacob Stephan: Okay. Very helpful. Maybe just last one for me on MiniPay. Obviously, nice momentum there. At what point does this kind of become more of a P&L contributor versus just a strategic investment? Do you kind of -- I guess, looking longer term, what are your plans for MiniPay, OPay? Frode Jacobsen: Yes, I can comment a bit on MiniPay. So MiniPay is already meaningfully contributing. We generate about $20 million of revenue from the broader ecosystem around it. It is a very successful product, as you say, and it does allow people -- we've tailored it initially for emerging markets to have an easy way to access stablecoins and other blockchain types of assets. And we continue to think it has a huge potential ahead and can really scale. Still, this is one of those items that is quite early, still a bit early in terms of how big it can get and what the trajectory looks until that point. On OPay, which is a separate topic, that's a company that Opera founded back in 2017 and we have a 9.5% stake in that, that we carry on our balance sheet at about $300 million of book value. That company is by now operating completely independently from Opera and is advancing on its own. So while we're not operationally working together, we, of course, share a history and we're very proud to see how that company has scaled and is sort of working towards what we expect will ultimately be an IPO, which we think is also very positive for Opera because it would sort of immediately make visible the market value of that company and Opera's stake in it. Operator: We'll take our next question from Jonnathan Navarrete with TD Cowen. Jonnathan Navarrete: How are buybacks going 2Q so far? And how should we think about the phasing through the year? Frode Jacobsen: So I don't think we'll get into sort of talking ahead beyond sort of the historical period. But overall, we're, of course, very pleased to have that program in place. I guess it's the third or fourth time that we launched a buyback program and by far the biggest one that we have launched. I think we already are -- we reported our March trades essentially since the program became -- was launched in late Feb and we could start trading in March. And already, I think it can contribute to accelerating ROI for our shareholders as we take shares out of the denominator. And then sort of going ahead, I think we continue to be, as we've always been with buybacks, opportunistic and adjust the program to maximize the value that we can create. I think just the fact that we are in that position, we talked about it a bit on the last quarter as well, we are growing fast and we are self-funded in the sense that the business is generating very healthy cash flows. And our CapEx model that Song touched on, on the AI side is very limited compared to other companies that you would think about in that space. So we don't have like a massive investment need to drive our business. It's a software layer, it's a service and we -- that is what we are good at. So we don't want to compete in a hardware race. And that also means that the cash we generate, we can actually return it to shareholders. We like the recurring dividend and the buyback just helps us drive incremental upside. Jonnathan Navarrete: Great. And just one more question. There were some reports this morning that OpenAI missed some internal sales targets. And just wondering what could be the read-through, if any, for you guys? Frode Jacobsen: Hard... Lin Song: OpenAI? It's not open... Frode Jacobsen: I think -- okay, it's actually convenient that you asked the question immediately after my prior response because I think we do -- we are quite distinguished. If you think about companies that have an, let's say, AI opportunity, then of course, we have the major platforms like OpenAI, et cetera, but you also have Opera, right? And -- but we do it as a service in a browser. We don't try to compete against the big LLMs out there, whether it's ChatGPT or Gemini or Claude or any of the other ones. But we are very good at providing an interface for LLMs to exist very close to the user to control the browser, to take into account context of the user and to enable it to be as productive as possible, right? So for example, as we talked about with the Browser Connector, our own Open Opera AI in the browser, like as a human, you don't have to sit and be like the personal secretary of an AI model and copy paste links and text, right? You can just -- you can operate these tools in the browser with the context included. So I think comparing us to OpenAI in some ways, flattering that you ask. But at the same time, I think our cost and capital need structure is completely different. Lin Song: Yes. Maybe I'll just add, right, that I just -- I think in general, I think, hopefully, as we also demonstrated that like both Opera and the potential our users are already demonstrated to be very AI-savvy, I would say. Otherwise, it probably like -- unlike some other maybe old-fashioned browser companies, people who use AI tend -- whoever use Opera tends to be AI-savvy, they tend to be very interested. So I would almost say that I think, of course, 300 million MAU, that is a very attractive partners that we will want to grow AI is I think we must be a very attractive partners that they can work with. For instance, if you compare with many other, we call it similar big player like even Claude or X or whatever, I think I believe their MAU are in the range of almost 1/10 of our MAUs, right? I'm sure OpenAI has a bit more, but at least 300 million, there must be a very interested partnership opportunities. So I guess that will also be our -- hopefully, with the year moving on, we can see what can be done there. Operator: And it does appear that there are no further questions at this time. I would now like to hand the call back to Song Lin for any additional or closing remarks. Lin Song: Sure. So yes, I guess thank you to everyone for joining us today. 2026 is off, again, to a great start. Our continued momentum and truly exciting landscape has already resulted in a solid foundation for continued strength through the remainder of the year and well beyond. Have a good day, everyone. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Curbline Properties Corp. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Stephanie Ruys de Perez, Vice President of Capital Markets. Please go ahead. Stephanie Ruys de Perez: Thank you. Good morning, and welcome to Curbline Properties First Quarter 2026 Earnings Conference Call. Joining me today are Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at curbline.com, which are intended to support our prepared remarks during today's call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO and same-property net operating income. Descriptions and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement and investor presentation. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes. David Lukes: Good morning, and welcome to Curbline Properties first quarter conference call. We had an incredibly productive and active start to the year as investment opportunities have remained elevated, leasing demand has remained strong, and we've tapped new markets, increasing our liquidity and access to capital. This activity is falling directly to the bottom line, leading to an increase in our OFFO guidance range. This is, of course, a result of dedication and hard work from our team, and I'd like to thank everyone at Curbline for their contributions that have positioned the company for outperformance. We continue to lead this unique capital-efficient sector with a clear first-mover advantage as the only public company exclusively focused on acquiring top-tier convenience retail assets across the United States. I'll start with an overview of investment activity and shift to operational highlights before handing it off to Conor to walk through quarterly results, the 2026 guidance increase and the balance sheet in greater detail. Beginning with investments. In the third quarter of 2025, we began to see an acceleration in acquisition opportunities that were consistent with the existing portfolio and our convenience thesis. This elevated level of activity has continued putting us in a position to raise our 2026 investment target to $850 million from $750 million. We believe the increase is primarily attributable to 4 factors, each of which are unique to Curbline. First, the convenience business is a fragmented but liquid local business with over 90% of transaction activity between private buyers and sellers. We recognized this when we started buying properties before the pandemic and have structured our investment, leasing and property management teams to be in the markets where we want to own properties. This has allowed the team to build personal relationships with the owners of the highest quality real estate and the brokers that dominate each individual market. For the marketed deals we acquired post spin-off, we've worked with 29 different brokerage companies, which highlights not only the fragmented structure of the market, but also the importance of the national network of relationships that Curbline has built. Second, Curbline now has been publicly listed for roughly 18 months, has a proven track record of closing on convenience properties, and we believe owns the largest high-quality portfolio of convenience properties in the U.S., totaling over 5 million square feet. This reputation and scale, along with our access to capital and investment-grade rating is leading to more inbound calls from the aforementioned private owners and brokers that we received before we went public. This brand awareness assisted by local and regional market events has made Curbline the first call and the trusted buyer for high-quality convenience properties and is providing greater visibility and transparency on our deal flow. Specifically, of the $1.2 billion of assets acquired since our spin-off, 22% have been off-market, highlighting the growing importance of inbound calls from sellers. Third, the convenience property type is very different than the grocery and power center business in terms of operations and management. As a result, we've taken the strong accounting, legal and IT infrastructure from our predecessor and layered down the findings from our over $1 billion of acquisitions to refine our investment approach and focus only on actionable deals that we think have a path to success and meet our return hurdles. With a finite number of hours in the day for our deal teams, this has allowed us to increase efficiency and productivity by avoiding deals with unworkable issues that simply aren't worth our time. And fourth, according to the Federal Reserve, over 50% of nonresidential real estate in the country is privately held by individuals over 65 years old. It is becoming clear to us that these owners are seeking liquidity today more than ever, which is adding another potential multiyear tailwind to our deal flow. We are continuing to tailor our team and our network to tap into this growing opportunity set and believe it will lead to a steady pipeline of future deal flow. The net result of these 4 factors is an increase in opportunities that meet our criteria of primary corridors, strong demographics, high traffic counts and creditworthy tenants and importantly, are additive to our future growth rates. And it highlights the unique and significant addressable investment convenience market that provides an opportunity to scale the business. Moving to operations. We've signed over 145,000 square feet of new leases and renewals this quarter. Trailing 12-month spreads remain consistent with our 5-year averages as the shortage of space in affluent markets where we operate continues to lead to attractive leasing economics. We invest in simple, flexible buildings that are at the nexus of consumer behavior. These straightforward rows of shops can support a wide variety of uses, and this flexibility drives tenant demand from an extremely wide pool of tenants. The result of our portfolio is a highly diversified tenant base with only 8 tenants contributing more than 1% of base rent and only 1 tenant more than 2%. All 62 of our new and renewal leases this quarter were with different tenants and 71% were national credit operators. Both of these data points highlight the incredibly deep market for leasing to a wide variety of credit users. In terms of same-property growth, we generated almost 5% growth in the quarter, and our capital expenditures were just 6.3% of quarterly NOI, placing us among the most capital-efficient operators in the entire public REIT sector, an important hallmark of the convenience asset class. In summary, I could not be more optimistic about the opportunity ahead for Curbline as we exclusively focus on scaling the fragmented convenience real estate sector in an effort to deliver compelling relative and absolute growth for stakeholders. And with that, I'll turn it over to Conor. Conor Fennerty: Thanks, David. I'll start with first quarter earnings and operating metrics before shifting to the company's revised 2026 guidance and then conclude with the balance sheet. First quarter results were ahead of budget, largely due to higher NOI, driven in part by higher-than-forecast occupancy and resulting recoveries, along with lower G&A expenses. NOI was up 3% sequentially and over 50% year-over-year, driven by acquisitions, along with organic growth. Outside of the quarterly operational outperformance, there were no other material variances for the quarter, highlighting the simplicity of the Curbline income statement and business plan. You will note that in the first quarter, we recorded a gross up of $1.8 million of noncash G&A expense, which was offset by $1.8 million of noncash other income. This gross up, which is a product of the shared services agreement, and that's the 0 net income, will continue as long as the agreement is in place and is excluded from any G&A figures or targets. In terms of operating metrics, the lease rate was up 30 basis points year-over-year to 96.3%, with occupancy up 60 basis points. Leasing volume in the first quarter accelerated from the fourth quarter, driven by an uptick in renewals, though quarterly volumes and figures remain volatile given the lack of available space in the portfolio and the company's denominator. As David noted, we remain encouraged by the amount of activity and depth of demand for space. Same-property NOI was up 4.8% for the first quarter, driven by a 3.5% base rent growth and lower uncollectible revenue year-over-year. Importantly, this growth was generated by limited capital expenditures with first quarter CapEx as a percentage of NOI of 6.3% and trailing 12-month CapEx of 7.3% of NOI. Moving to our outlook for 2026. We are increasing OFFO guidance to a range between $1.20 and $1.23 per share, which at the midpoint represents 14% growth. We believe that this level of growth will be the highest certainly in the retail space and amongst the highest in the entire REIT sector. Underpinning the midpoint of the range is: One, roughly $850 million of full year investments; two, a 3.25% return on cash with interest income declining over the course of the year as cash is invested; three, CapEx as a percentage of NOI of less than 10%; and four, G&A of roughly $32 million, which includes fees paid to SITE centers as part of the shared services agreement. Those fees totaled $1.1 million in the first quarter. In terms of same-property NOI, we continue to forecast growth of 3% at the midpoint in 2026, which follows 3.3% in 2025 and 5.8% in 2024. As I have noted previously, the same property pool is growing but small, and it includes assets owned for at least 12 months as of December 31, 2025, resulting in a large non-same-property pool which we expect to grow at a similar rate to the same property pool over the course of the year. That said, in the second quarter, the timing of 2025 CapEx spending and a difficult uncollectible revenue comparison will act as an almost 300 basis point headwind to same-property NOI growth. As a result, we expect a meaningful deceleration in same-property growth in the second quarter before accelerating into year-end with second half base rent growth expected to average over 4%. For moving pieces between the first and the second quarter, interest expense is set to increase to about $8.5 million as a result of the funding of the private placement offering in late January. Additionally, noncash revenue is expected to decline sequentially by about $500,000 due to the write-off of below-market leases in the first quarter. And lastly, G&A is expected to remain roughly flat quarter-over-quarter. Finally, included in the first quarter share count are just under 1 million shares related to the unsettled forward offerings completed to date. We expect dilution from the forward offerings to be an approximately $0.01 per share headwind to 2026 OFFO, which is included in our revised guidance. Additional details on 2026 guidance and the moving pieces that I just outlined can be found on Page 11 of the earnings slides. Ending on the balance sheet, Curbline was spun off with a unique capital structure aligned with the company's business plan. In the first quarter, Curbline closed on the remaining of the previously announced $200 million private placement offering. Additionally, in the first quarter and the second quarter to date, the company sold 11.8 million shares on a forward basis with $296 million of expected gross proceeds, which we expect to settle in 2026, including cash on hand at quarter end of $306 million, along with total unsettled equity proceeds of $371 million, Curbline has over $700 million of immediate liquidity available to fund the remaining investments included in guidance after taking into account retained cash flow. Curbline now proven access to a variety of capital sources is a key differentiator from the largely private buyer universe acquiring convenience properties. The net result of the capital markets activities since formation is at the company ended the quarter with a leverage ratio of approximately 20%, providing substantial dry powder and liquidity to continue to acquire assets and scale, resulting in significant earnings and cash flow growth well in excess the average. And with that, I'll turn it back to David. David Lukes: Thank you, Conor. Operator, we are now ready to take questions. Operator: [Operator Instructions] Your first question comes from the line of Ronald Kamdem of [ Curbline Properties ]. Unknown Analyst: Just 2 quick ones. Just starting with the acquisition guidance raise to $850 million. Maybe just a little bit more color. Is this still sort of pretty granular? Is there any sort of larger deals in that pipeline? And what are you anticipating in terms of the cap rates and IRR [ specs ]? David Lukes: Yes, the pipeline at this point is exclusively individual properties. There's no portfolios of note. And I would say that generally, the deeper we get into these markets and the more deal makers we have in regions where we're looking to buy properties, the vast majority of the inventory remains to me individual properties. Conor Fennerty: On cap rate returns, no real change there from last quarter to the prior quarter, Ron, we're in the low 6s, which is an unlevered IRR in the 7% to 9% depending on the property. Unknown Analyst: Okay. Got it. That's helpful. And then just on the same-store NOI guidance. I appreciate the color on the decel in 2Q and then the next on to the end of the year. But as you sort of step back, maybe can you just give us some thoughts on just what you think the long-term sort of same-store growth for the portfolio is? Is that 3% plus number the right sort of way to go about it as the portfolio sort of scales? Conor Fennerty: Ron, again, it's Conor. We -- when we announced the spin-off put out a target of an average growth of 3% for 2024 to 2026. As I mentioned in my prepared remarks, we did 5.8% in 2024, we did 3.3% in 2025. So we're, I'd say, running a little bit ahead of that average number of 3%. And I feel like -- I think we've said this publicly, this is a 2.5% to 4% business in periods of time where there is a supply-demand imbalance, which we happen to be in right now, we're probably in the high end of that range, but that feels like a pretty good bogey for this portfolio over time. Operator: Your next question comes from the line of Craig Mailman from Citi. Craig Mailman: It doesn't seem to have impacted consumer spending so far, but just with things with Iran, as they continue to drag out you guys -- the portfolio is a little bit restaurant heavy here just given the nature of it. Just kind of curious what you guys have seen on foot traffic? And if there's been any changes so far? And just your thoughts if this drags out and oil does start to be sort of a drag on consumer spending going forward. Like how should we think about the cushion you guys have in coverages on some of these leases and maybe the appetite of some of these franchises to continue to grow if there's a little bit of pause in the economy? David Lukes: Craig, it's David. I would say 2 comments on that. One is that foot traffic through geolocation data is very useful for us to figure out the desirability of a property. We use it a lot in acquisitions. We use it a lot to understand what types of tenants we can put in properties and how we can generate leads to make sure that our leasing stays relevant. It's not a great proxy that we use to find out tenant profitability because basket size is difficult to find. Specifically, the majority of our tenants don't hold inventory. They're service-oriented. And so I think we're real estate first, and we're more tenant second. By being real estate first, what that means is we like to own rows of small shops that are simple and ubiquitous, and therefore, the shape and the size of those units can be used by a wide variety of users. I do think that over time, we will always have an exposure to QSRs, the small format QSR business fits into a pretty small, simple rectangular building. That building can be used by lots of other types of tenants. And so avoiding the purpose-built sit-down restaurants is a key differentiator, I think, for this type of real estate. So I think when you're kind of talking about a general slowdown in the economy, I wouldn't really see us as being able to forecast whether that is happening or not, I think we're very squarely in the running Aaron's type of consumer behavior. So if you look at the types of tenants we're putting in our properties and we're buying into, they tend to be those tenants that drive a lot of traffic from running Aaron's. And I think that they're not luxury oriented and they're not destination trips. So I would say that the insulation for us is probably more to do with consumer behavior and a little bit less so on the economy. Craig Mailman: Okay. That's helpful. And then just switching gears, maybe cap rates and IRRs and you guys have really ramped the volume here of deals you're doing, and I'm assuming that some competitors are trying to come into the space, and you guys are the first mover. Just kind of curious with the inbounds that you're getting, the 22% off market, what's the prospect of continuing to be able to kind of keep cap rates in that low 6 or maybe even get better deals as you guys can solve solutions for people looking for maybe some either surety of close or deadlines on close or tax issues as they're kind of selling some of these assets. Could you just talk about the difference in returns that you're getting on these off-market where you're getting the inbounds versus a fully marketed deal? And where the market is trending just given how much capital you guys have put out the door lately and some of the attention that might be coming into these assets? David Lukes: Sure. Sure. Well, I mean, I'd say, first of all, there's definitely growing interest in the sector. I think most of that is simply because the financial returns are so heavily focused in cash flow. It's such a low CapEx business. I think that's desirable from a lot of institutions who can generate more of their IRR from cash flow and less on future appreciation. And so there has been growth in interest. We've heard a lot about institutions becoming intrigued by the property type. I think there's 2 things to note on that, though. One is that the market is so fragmented. It is actually quite difficult to put out large pools of capital in a short period of time. You really have to build relationships over a long period of time and be willing to close on a very large number of small transactions. So the granular nature makes it very difficult for someone to push a button and get into the sector. Secondly, if a competitor did want to get into the sector at scale, I think that they would most likely have to team up with a local operator. And when you add fees and carried interest on to that, it almost puts a floor on the going-in cap rate that an institution will be willing to pay to generate the same IRR that they require. And so I do think that has helped put a little bit of a floor on cap rates. I'd just remind you that the going-in cap rate for this asset class can be low 5s to high 6s. It's just that we're doing enough volume that we're blending to around 6 . It feels fairly sticky. And part of the reason I feel sticky is that the market rent spread is still generating an unlevered IRR between 7% and 9%. And I don't really see that moving in the near term. Operator: The next question comes from the line of Floris Van Dijkum of Ladenburg Thalmann. Floris Gerbrand Van Dijkum: Nice -- another nice quarter here. You guys are really proving your concepts. I wanted to question -- some people have referred to your business almost as a net lease business. You have 98% recovery ratio. Maybe talk a little bit about the management value add? And what are you bringing besides acquisitions, what are you bringing to the table? David Lukes: Floris, It does have some characteristics that are similar to that lease, but I think the largest difference is that we're buying real estate first. And we're buying a real estate first because when we get a vacancy, we are more likely to release it at a higher spread, and therefore, it is growth. And the growth aspect of this business is very different than that lease. We enjoy a shorter WALT, we enjoy a mark-to-market that we can actually capture. And so I think the management value add is not so much in repositioning or redevelopment as much as it is making sure that the tenants are paying a rent that keeps up with market, and we're always aware of what another tenant will be willing to pay for that same nonpurpose-built simple building format. And I would say our leasing team is very, very aware that the number of deals we're doing is so wide with a wide variety of users. I mean it's pretty shocking that every single lease signed during the quarter was with a different tenant, and that's unusual for a destination type property where it tends to be concentrated on a handful or a dozen national operators. This is a very, very wide pool of leasing. So I think the management value add has everything to do with trying to figure out who can pay the most rent and who's willing to pay that rent to be along the kerb line of a very high-traffic intersection. Floris Gerbrand Van Dijkum: Maybe a follow-up question, if I may. Maybe talk a little bit about the difference between your GAAP cap rates and your cash GAAP rates. How much of a difference is there? And is that meaningful? Because presumably, the assets you're buying have quite a bit of below-market rents in place. Conor Fennerty: Floris, it's Conor. You are spot on. So our average differential between GAAP and cash, I think since we went public is about 35 basis points. That's a pretty wide range, similar to our cap rates where there's -- somewhere it's 0, and there's others where it's 100-plus basis points. So Again, average is kind of like that low 30s on the GAAP versus cash. All the numbers that we've referenced have always been cash. We don't quote or budget GAAP cap rates. Operator: Your next question comes from the line of Thomas Todd of KeyBanc. Todd Thomas: David, I just wanted to ask your comments about the ownership held by population that's 65-plus. You indicated you feel that's an important consideration as you think about the years ahead and the company's investment opportunity set. Do you see potential to transact using OP equity a little bit more as you look ahead? And then Also, what do you do to sort of better tapped into the segment of owners? Is the strategy generally consistent with your acquisition strategy currently? Or is there anything that you can do to more quickly or sort of more efficiently tap into that seller cohort? David Lukes: Yes, it's a really interesting subject because I think over time, when we've looked at the profile of the sellers, it was so heavily tilted towards life events or life planning. And when you look at the ownership of this asset class across the country, and remember, we're a very, very small component of the overall addressable market. So it is an important aspect of what we need to understand is who are the sellers and why are they selling? Well, if they're live events, and if you think about the volume of assets owned across the country of a certain generation, I think we're getting growing confidence that the pipeline of available deals that fit our buy box is growing and will likely grow quite a bit in the next 10 to 15 years as that, that generation starts to move real estate out of their estates either before or after a life event. So to your point, we have definitely started to shift our deal teams to not only be building relationships with brokers, but also estate planning attorneys, wealth management offices, private banks because accessing the data and trying to find out who owns the best real estate in every one of these markets is really important because the likelihood that there's going to be a transaction in the next 10 years is pretty high. Todd Thomas: Okay. That's helpful. And then I just wanted to follow up. Obviously, you increased the -- your acquisition guidance, but just curious, last quarter, you said you had visibility on around half of the pipeline that you were discussing. And I'm wondering how much visibility you have today on that increased pipeline? And are you seeing any changes at all in the market in terms of the pace or sort of motivation around seller activity just given some of the turbulence in the credit markets. Does that -- has that caused any sort of broader fallout at all that might put Curb in a little bit of a better position? Or is that not having an impact at all? Conor Fennerty: Todd, it's Conor. I'll start with the second part of your question, and David can cover things differently. I would say, in short, no. I mean it seems like this market generally is less correlated to the CMBS market, the IG market, whatever it might be. And that probably is a function of the fact that those markets aren't used to finance these assets. To David's point, it generally is private wealth or brokerage houses that are funding these and/or there is no mortgage. So the short answer on the second part of your question is, no, we haven't seen a material impact or change in deal flow because of geopolitical events or macro shocks. To the first question on the pipeline. So at this point, we have closed, we have under contract or have been awarded about 90% of that $850 million bogey. So we've got really good visibility on closings for, call it, the next 2 quarters. And then I would say there's a chance we exceed that figure for the full year. The only thing I'd flag though is that pipeline has some risk to it until we're through due diligence on all the assets. So to David's point, it doesn't include any portfolios of size. So that risk is mitigated by the number of properties, but we've got some more to get those closed. And again, we're optimistic based off what we're seeing that we can hopefully find more over the course of the year, but that's a TBD, and we need to work through the existing pipeline first. Todd Thomas: Okay. Got it. That's helpful. Conor, you said closed under contract or awarded about 90% of the $850 million. Is that right? Conor Fennerty: Yes. So call it $750 million of the $850 million. Operator: Your next question comes from the line of Alexander Goldfarb of Piper Sandler. Alexander Goldfarb: So actually, maybe just following up on that question, and maybe I missed it in the release, you guys were clearly very active on the ATM and cash with over, call it, roughly $600 million on hand. So Conor, as we think about the pacing of acquisitions for the balance of the year, is -- are you saying -- is 2Q going to be a real heavy quarter? I mean it doesn't seem like it's so far, we're already 1/3 of the way in. But I just want to understand the cadence just given the amount of cash that you have on hand versus clearly, what's a burgeoning acquisition environment. Conor Fennerty: Yes. So as I mentioned in my prepared remarks, Alex, we have enough cash and unsettled equity on hand to fund the entirety of the remaining $850 million, so call it the $700 million outstanding as of April 1. You're right to -- it's hard to assume those closings will be concentrated in the second and third quarter. There are obviously some that will spill in the fourth quarter, but we are expecting a pretty active middle of the year in terms of closing time line. So we don't expect the forward activity outstanding for a point past the end of the year, I would say. Alexander Goldfarb: Okay. And then the next question goes back to something that we discussed or talked to you guys about, I don't know, a few quarters ago. Your acquisition pool regionally is expensive. It's a lot of markets that may not be traditionally the prime REIT markets. But as you get into these different geographies, are you finding that there are either more opportunities within existing markets where you already are? Or are you finding that there are more opportunities in markets that you hadn't considered. I'm just trying to understand as you build these local relationships, whether it's leading you deeper into existing or whether it's leading to a broadening of markets that you originally never conceived of? David Lukes: Alex, it's David. Well, I guess -- first of all, when I read your note this morning and you mentioned nooks and crannies. I think that was a very good way of putting it. It feels like markets where we've developed a lot of firsthand knowledge through buying and owning and operating, we're finding more intersections through our research that fit our buy box. And so we're really targeting some of those nooks and crannies within existing markets where the traffic count and the wealth and kind of the Aaron's running and the geolocation data is all telling us that we should be going deeper into a specific submarket. And you've seen that on our acquisition pipeline, where we continue to invest in markets where we already are in. On the other hand, there is a growing knowledge base that we're getting on other markets where it may not be a large MSA, but it has a pocket with a lot of concentrated traffic in wealth and a limited amount of supply, and that's a pretty encouraging algebra to good IRR. So when you see us go into some of these smaller markets, it's simply because there's a lack of supply and there's a kind of an extreme concentration of traffic into a couple of intersections. So whereas, I guess, in summary, it started with going deeper into existing markets and it's moving a little bit into being open-minded to finding other markets that have great properties to buy. Operator: Your next question comes from the line of Mike Mueller with JPMorgan. Michael Mueller: Kind of a quick follow-up on the prior question. So as it relates to some of these newer markets, are you seeing any kind of geographical biases when it comes to pricing or underwriting? Or is it really just based on whether it's a convenience center or not? I guess, are the cap rates that you're seeing in like Wisconsin and Minneapolis very different for a comparable product than you'd see in Georgia or Florida? David Lukes: I think that the historical spread between submarkets still exist in this property type as well. I would say the irony is that I'm not sure that really flows through to the IRR as much as it has to do with -- there are simply more private buyers with more investable capital in areas like Florida and California. And so the competition is a little bit less in some of the other states. I think the trick for us is finding those pockets where we can generate a similar or better IRR, and we probably have a little bit less competition. Operator: Your next question comes from the line of Paulina Rojas of Green Street. Paulina Rojas Schmidt: The Whitestone transaction was an interesting data point for the sector and the portfolio shares some characteristics with your portfolio, mainly that is largely an anchored, but it also has a lot of meaningful differences. Do you see any relevant read-through from that deal for Curbline? Anything that you would flag as pertinent to your portfolio? Conor Fennerty: Yes, Paulina, it's a good question. I want to be careful about not opining on transaction. I would just say there are probably more differences than similarities in our view. And I think average asset size, some of the things you pointed out, market mix, whether or not there's a shadow anchor are pretty big differences versus what we're targeting. I would also just say to David's commentary, we are seeing plenty of real compelling individual transactions or one-off transactions in the markets we want to operate, and so we're focused focusing there. But I would just say at the risk of opining directly on transaction, there are more differences than there are similarities. Paulina Rojas Schmidt: Okay. And then markets have been volatile and at various points, we have been a risk of attitude given the geopolitical concerns and what that could mean for inflation rate growth, et cetera. So as you think about that backdrop and what it means, where do you think Curbline sits in terms of vulnerability relative to other service center peers? And I mean that not just operationally, but in the context of your heavy growth-focused strategy. David Lukes: What was the last part? Sorry, Paulina. Paulina Rojas Schmidt: I said that I mean it, not just from operations, what that could mean for the operations of the business, same property NOI and such, but also from a capital markets perspective and the fact that you're in a very heavy growth focused cycle [indiscernible] cycle. Conor Fennerty: Paulina, it's Conor. I guess a couple of things. I would say our balance sheet and our relative balance sheet to us affords us a lot of cushion for whatever might happen in the macro environment or geopolitical environment to the genesis of your question, whether that's duration, whether that's leverage, whatever it might be. We also, I think, in putting the macro side, if you're in a growth vehicle, feel like you need to be prudently financing your business. And so avoiding a situation where you're trying to match fund or scramble to put financing in place, I think, is one of the ways to mitigate the risk that you're alluding to. From an operational perspective, I think this comes back to, I think, maybe Craig's question on consumer spending. Our service and restaurant-based tenants aren't destination type tenants. They're not sit-down restaurants, they are white tablecloth. I don't know if I would argue the're necessity or all necessity-based, but there is a margin of safety in terms of where they sit and kind of consumer behavior, as David mentioned, as opposed to consumer spending that I think also makes our cash flow stream a little durable. The last thing I would just say from a tenant or diversification perspective, we do focus on credits. We're 70-plus percent national and a decent chunk of those are public or IG rated, which, again, with no tenant or only 8 tenants greater than 1%, also helps partially mitigate. So I don't know if I were directly answering your question, but it feels like we're trying to do a lot of little things in addition to having a business plan that helps mitigate against potential risk. But again, I'm not sure if that's directly answering your question. David Lukes: And Paulina, it's David. You certainly tell us if we're answering directly. But I guess what piqued my interest is when you said risk off environment. To me, risk is very much correlated to the size of the bet that one makes and the concentration of where you're willing to concentrate capital. And this business is so granular. We're buying buildings that have a handful of small tenants. And so I think that the diversification aspect not only of the tenant roster, but also regionally and then lastly, by just the sheer amount of capital going into each deal is so small. It feels like a risk mitigator that probably is less correlated to kind of the red light, green light of the overall capital markets because these transactions are happening in local markets with local buyers, whether we're involved or not. And I feel like that diversification is a pretty big differentiator. Paulina Rojas Schmidt: Sorry for not being clear, but somehow you got it. And maybe a last one, it's a clarification. I'm not sure I understand. You flagged a headwind for same property NOI related to the timing of bad debt and CapEx spending. Could you help me understand the mechanics of the CapEx component specifically. How does its timing translating to NOI headwind, whether it's really a space that was taken offline or something else? Conor Fennerty: No. So just over the course of the year, we have capital projects which are recoverable by tenants or a piece can be recovered by tenants. Generally, that's pretty spread out over the course of the year. It happened to be quite concentrated in 2025 and just the second quarter. And given our small denominator, Paulina, it happens to be just a big headwind for this 1 quarter. So similar to lifestyle centers, power centers, grocery, there are capital projects which are recoverable. And for us, again, we just had a concentration in the second quarter. Operator: There are no further questions at this time. And with that, I will now turn the call back to David Lukes for closing remarks. Please go ahead. David Lukes: Thank you all very much for joining our call, and we look forward to speaking to you in the next quarter. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.
Operator: Good day, and welcome to the Watsco, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star and then one on your touchtone phone. To withdraw your question, you may press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Albert H. Nahmad. Thank you, and over to you. Albert H. Nahmad: Welcome to our first quarter earnings call. This is Al Nahmad, Chairman and CEO. With me are Aaron J. Nahmad, our President, Paul W. Johnston, Barry S. Logan, and Rick Gomez. Before we start, our cautionary statement: this conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. First quarter results point to improving stability now that the transition to A2L products has matured. We expect a more simplified business environment this year. It is still early in our summer season, but so far, so good. We are also excited to announce our agreement to acquire Jackson Supply, a legendary, market-leading Sunbelt distributor with $230 million in annual sales. We are fortunate to know many great entrepreneurs in our industry. Jim Duret, Jackson’s owner, and his talented group of leaders, all of whom will remain with the company, certainly meet the definition of great entrepreneur. Our relationship with Jackson dates back more than 20 years, and we are grateful to Jim for entrusting us with this company’s next chapter. Jackson will expand our Sunbelt presence by 25 locations and provide diversification of brand and products, given their strong presence in parts and supplies. As I mentioned, and consistent with our culture, the Jackson team will continue to operate and grow the company with our full support. In addition, our community of leaders, along with Jackson, will collaborate and learn from each other, as is also our culture. We expect to close the transaction sometime in the second quarter. Within our existing business, we continue to build and expand our technology platform, which provides us an immense long-term competitive advantage. E-commerce sales increased 16% during the quarter while outpacing overall growth rates. OnCallAir, our digital platform that helps contractors present and sell solutions to homeowners, increased customer sales by 20%, reflecting a rich sales mix of high-efficiency systems. We expect the gross merchandise value for OnCallAir to exceed $2 billion this year. Let me say that again: we expect sales on OnCallAir to exceed $2 billion this year. We feel like this is a good start and expect more progress as adoption by contractors gains momentum in years ahead. Turning now to our first quarter results. Sales increased 2% in the U.S. markets, reflecting a mature mix of A2L products as well as an improved mix of high-efficiency systems, offset by lower unit sales. Unit volumes stabilized as the first quarter progressed. Gross margins remained largely intact, reflecting good execution by our leadership team to sustain price and competitiveness. We continue to execute on several ongoing initiatives to enhance gross margins with the long-term goal of achieving 30%. SG&A remained flat as improved operating efficiency offset incremental technology investments and new locations. We expect overall operating efficiency to further improve, and our technology can now show its mettle in a simpler operating environment. Our balance sheet continues to be strong, and we remain debt free. Let me repeat that: we remain debt free. As I mentioned, we continue to invest in innovation and technology to separate us from our competitors, and we are making incremental investments to enhance our competitive position and add to our long-term growth and margin profile. For example, we are developing new innovations aimed at capturing more sales to large institutional customers, which is set to launch during the second quarter. We are accelerating the use of our pricing optimization tools to make further progress towards our long-term target. We have launched a new initiative to compete and grow sales in a highly fragmented parts and supplies segment, which comprises almost 50% of the industry’s market share. And we have begun to harness the power of artificial intelligence, offering the potential to further transform the customer experience, improve operating efficiency, and create new data-driven growth strategies. These investments, along with our scale, entrepreneurial culture, and capacity to invest, are unmatched in our industry. With that, we will now open the call for questions. Operator: We will now begin the question-and-answer session. To ask a question, please press star and then one on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of Ryan James Merkel from William Blair. Please go ahead. Albert H. Nahmad: Good morning, Ryan. Operator: Can you hear us? Ryan James Merkel: Yes, can you hear me? Yes, sir. Now I can. Yes. Okay. Hey, everyone. Congrats on the deal and a good start to the year. I wanted to start high level. Al, can you just unpack your comments about improved stability as we head into the summer? What is changing? And are you seeing April positive in terms of year-over-year growth at this point? Albert H. Nahmad: Let me turn to our expert on that sort of thing, Barry S. Logan. Oh—he just dropped off the call. Please let the operator know we are trying to reconnect him. Operator: Yes. Okay. Aaron J. Nahmad: Rick, do you want to jump in there? Rick Gomez: Sure. I will take a stab, and then Barry can backfill and enhance it. Ryan, good morning. If we just look at the first quarter in isolation, and then I will turn to April: we saw the full maturity of the A2L product transition, with units still weighing a little bit, which means the market is not yet fully healed. There is no inflection point here, but things did get incrementally better as the quarter progressed, and we exited the quarter nicely, with March up high single digits on a same-day basis. So far, three weeks into April, that momentum has sustained itself, and we are seeing incrementally more stability in April than we did to start the year. April has begun nicely. All of that said, we are still not yet in what is the thick of the selling season, so we will be a little cautious in our tone and our optimism, but this is incrementally more stable, more positive, and less complex. We will take that in a first quarter. Barry S. Logan: If you zoom out even further, the history of this industry for 30, 40, 50 years has been a pretty mature, slow-growth, steady-as-you-go industry. Then COVID hit, and it seems like all chaos broke loose over the last five years. We had extreme demand as people were investing in their homes. We had extreme supply chain challenges, which constrained the products that we could sell. We had multiple regulatory changes that changed the products that sold—almost 100% of the equipment we sold—twice in that period. We have had tariffs. We have had inflation. We have had different tariffs. We have had constraints or limitations on refrigerant canisters. It has just been one thing after the other for five years, and it seems like, coming into 2026, most of that is behind us—certainly the items being driven by the industry in terms of regulatory changes and so forth. So we look forward to a more normalized 2026 as we started the year, and I think we have gotten at least most of the way there. Obviously, there are still some things changing with tariffs and some dynamics, but we are looking forward to a more normalized environment and getting back to business, hitting the streets, taking care of our customers, and growing the business. I think that is materializing. It is also interesting that we saw e-commerce sales bloom this quarter. That tells us the contractors’ daily life has reset into a good place to start this year. I always mention contractor credit as a critical measurement of how the market looks, and that is in very good shape. Also, now that the product line is the product line, we saw an increase in higher-efficiency systems being sold. As Rick said, it is early, but those are good indicators and what we have been looking for. Ryan James Merkel: Alright. Very helpful. I will leave it there and pass it to others. Thanks. Operator: Thank you. We have our next question from the line of David John Manthey from Baird. Please go ahead. Albert H. Nahmad: Morning, David. David John Manthey: Morning, Al. Thanks for taking my question. My question is primarily on the Jackson Supply acquisition. Correct me if I am wrong, this looks like a Goodman distributor primarily, and as far as I can tell, it looks like a great fit within the CE, GEMA, and Baker footprint that you currently have. Is there anything else you can share with us about mix, margins, growth? What made this an attractive acquisition for Watsco, Inc.? Albert H. Nahmad: This is a relationship we have had for a very long time, and we have seen them succeed in our markets over years. We know they have the right leadership and the right strategy, and all we want to do is support it so they can continue to expand. If they need more capital, we will provide that. If they need more technology, we will provide that. If they need more equity for their leadership, we will provide that. It is just a wonderful business to become part of Watsco in every respect. Texas is where they are from mostly, and that is always a very good HVAC market. It resonates on all the points that are important. David John Manthey: Sounds good. And then as it relates to the stabilization or normalization theme, when we look at your numbers through the year, the volume comps get easier, the price comps get more difficult. I do not want to slice this too thin, but thinking about normalization through 2026, would we expect a natural handoff based on year-to-year comps—if we are going to have a normal, stable year—that equipment would grow whereas price tails off toward the end of the year? Is that how you are thinking about it? Albert H. Nahmad: We are hopeful that we are going to grow, and it seems like we will. But it is too early. We are not going to make a call on market conditions that far out. We are seeing improvements, and we are pretty sure we are on the right path, but let us wait and see. Regardless of what the markets do, we will do well, and we have a competitive edge over other distributors that we tell you about over and over again. David John Manthey: Sounds good. Thanks a lot, Al. Albert H. Nahmad: You bet. Operator: Thank you. We have the next question from the line of Thomas Allen Moll from Stephens. Please go ahead. Albert H. Nahmad: Good morning, Tommy. Thomas Allen Moll: Good morning, Al, and thanks for taking my questions. To start, I wanted to expand a bit on the year-to-date comments that Rick made. If March exited the quarter in high single-digit growth and April has continued that momentum, is it fair to infer that your residential equipment volumes are now flat or maybe a little bit better than flat in those two months? And how long has it been since that was the case? Albert H. Nahmad: All yours, Rick. Rick Gomez: Yeah, Tommy, we are not going to slice it that thinly for three weeks in April. Again, we are not yet in the full selling season. The prior question got at it a little bit: this time last year, we saw volumes begin to degrade a bit, so mathematically it stands to reason that looks better now. Price-wise, we had pricing actions that took effect last year. I will remind everyone that our mix of A2L products in the first quarter of last year was about 25%, and like-for-like, the new equipment is at a double-digit price point above where it was last year. It was about 60% of our mix in the second quarter of last year. The ultimate comparison is versus two years ago or three years ago, and we will be in a smarter position to answer that after the second quarter. So far, so good is how I would describe the start in April. Thomas Allen Moll: Fair enough. Al, a question for you on inventory. There have been some big moves in recent quarters and years. As you enter the selling season for 2026, how would you characterize the inventory position? Albert H. Nahmad: We expect, given the market conditions, to reduce our investment in inventory, which affects our cash flow because we will improve the inventory turn. So many changes were occurring recently that it can only get better. We expect our inventory turns to increase and contribute to cash flow for the rest of the year. Paul W. Johnston: Plus, our supply chain is a lot more solid than it was in the past. Aaron mentioned COVID and all these changes in models and products. Finally, our manufacturers have an opportunity to make a single line of products continuously throughout the year, and I think that is going to help inventory turns. Thomas Allen Moll: Thank you both. I will turn it back. Paul W. Johnston: Thank you. Operator: We have the next question from the line of Jeffrey David Hammond from KeyBanc Capital Markets. Please go ahead. Jeffrey David Hammond: Hey, good morning, everyone. Maybe just to start, the Section 232 update seemed to bring about questions about follow-on pricing. Have you seen any pricing from your OEMs in the near term outside of normal course that would suggest more upward movement in pricing? Albert H. Nahmad: I do expect it because of the duties that are being paid now by some of the manufacturers. I cannot quantify it yet, but yes, the pressure is on the manufacturer, and I believe they will raise their prices. We have had a number of price increases to date from several manufacturers which have already become public, so they are well known. I believe we will have a price increase pretty much across the board, but we will have to wait—probably in the second quarter we will know for sure exactly what those price increases look like. Jeffrey David Hammond: Okay, great. On that, there has been increasing questions about price elasticity. Unit costs are getting up, and there was debate last year about repair versus replace. Was that the A2L transition, or was that the consumer being tight? I noticed your non-equipment or other products were up. What are you seeing, and how are you thinking about repair versus replace as we go into the selling season? Paul W. Johnston: We are happy with both. We are seeing a definite uptick in our compressor sales, which are not going to offset, by any material stretch of the imagination, the equipment sales, but we are also seeing a rebound in equipment sales. I think it is going to be a dual market for a while where we have an increase in parts and, at the same time, an increase—hopefully—in equipment. I do not think it is either-or anymore. Rick Gomez: Just to expand on that for a second, remember that non-equipment for us means a lot of things. It is a very broad basket of goods. Parts are actually the minority of what is non-equipment. Yes, parts grew, but so did virtually everything else in non-equipment, including supplies, our small and growing plumbing business, and commercial refrigeration (which we report separately). So there is broad-based growth there, and it is not necessarily a read on repair versus replace all the time. Paul W. Johnston: To say it analytically, replacement parts—parts sales—are less than 10% of Watsco, Inc. So when we say 30% is non-equipment, that means roughly 20% is everything else from an analytical point of view. Jeffrey David Hammond: Thank you. Operator: Again, if you have a question, please press star and then one. We have the next question from the line of Nigel Edward Coe from Wolfe Research. Please go ahead. Albert H. Nahmad: Good morning. Nigel Edward Coe: Hi, Al. I wanted to go back to your comments on inventory turns continuing to increase. The 1Q inventory build was a little bit higher than what we expected; it looked quite normal. My initial reaction was that the destocking is behind us—it sounds like that is the case. I just wanted to clarify that comment. And I am wondering if the inventory build is getting ahead of price increases or slightly better demand. Anything more there? Albert H. Nahmad: There has been a shift in product innovation. When products innovate, we have to carry the existing inventory to support what has been out there, and then we have to take inventory in for the new changes in the product. That does inflate inventory, but that does not bother us. It is part of the normal course. We run a very conservative balance sheet. We have no debt, so we can afford to have swings in inventory perhaps better than our competition can. Aaron J. Nahmad: I would not call our expected inventory turns enhancement and burn-through of inventory “structural destocking.” That is not what we are talking about. As Paul mentioned, the supply chain, our OEMs, and the whole process are more stable and reliable than they have been. We bought inventory for the summer selling season to make sure that we have the right amount of product in the right places to support expected customer demand, and we expect to turn inventory better than we have been able to because there is less noise in the system. Nigel Edward Coe: Another way to ask it: do you expect sell-in and sell-through to equalize now, going forward? And with these price increases—which do not sound like they have been formalized—you had a big uptick in gross margin last year in 2Q versus 1Q on the price increases. Do you expect that to happen this year with the pricing coming through? Albert H. Nahmad: Let me refresh our discussion on that. We have a target of 30% gross profit margin, and a lot of things go into that. We are not going to get there overnight. We have a plan to get there, and that involves pricing technology, which we are getting really good at. I am sure the sophistication of our pricing system is superior to anything else on the market; that will help gross profit margins. Our ability to consolidate purchases across the whole company from vendors and manufacturers will also help improve gross profit margin. Barry S. Logan: I want to go back to the inventory discussion to be educational about it. This is not a structural further reduction in inventory—that is not the goal. The goal is to own less inventory on average throughout a given year. That is the equation of inventory turns: cost of sales divided by average inventory. We want less load in the branches over time while keeping our customers happy every single minute of the day. As lead times and on-time delivery metrics with manufacturers improve, it lets us moderate the amount of inventory we carry. It is much more subtle than the big stick we took to inventory last year. This is the subtlety of improving inventory turns over time and going back to where they should be and where they had been for many years before all these changes. Aaron J. Nahmad: I will add one more note: with our new Hydros system, which we discussed at our investor day, we can increase product assortment at each branch while still carrying less inventory because we can turn that inventory faster. Operator: Do we move on to the next question? Albert H. Nahmad: Yes. Go ahead. Operator: Thank you. We have the next question from the line of Steven Volkmann from Jefferies. Please go ahead. Albert H. Nahmad: Good morning, Steven. Steven Volkmann: Good morning. Most of mine have been answered, but I have a bigger-picture one. Back in the pre-COVID times, there was often a meaningful difference between announced price increases and what was actually realized in the market. How are you viewing that these days? We have seen a number of announced increases year-to-date and whispers about more coming, yet the demand environment is still not great. How does that play out as the year progresses? Paul W. Johnston: One thing to realize is we have a very diverse market—both geographically and by type of customer. An announced price increase does not always apply completely to certain segments, for example, people with longer-term contracts. We end up with an announced price increase and then a realized price increase, and it is generally less than what was announced. Aaron J. Nahmad: I would add that the software we have brought online to help our businesses—not only with analytics and pricing and making sure we have the right price for the right customer—but also to administer those increases, is important. Every time there is a price increase from an OEM, it touches thousands of SKUs for thousands of customers, and the number of permutations and the administrative work associated with that—which used to be done essentially by hand—was overwhelming. With our tooling, one of the benefits is that we can appropriately adjust pricing for all customers for all SKUs that have new pricing very quickly so that we do not have the risk of a lag in implementing price increases where we otherwise did have that risk, sometimes missing changes that needed to be made. Steven Volkmann: Appreciate that. Almost a segue, AJ: it feels like you are talking as if there is an inflection in your e-commerce platform. Assuming growth in that platform is accelerating, does that impact your gross margin target? Is that a tailwind, or is it just more sales? Aaron J. Nahmad: All of the above. We realize a higher gross margin with our online sales than our offline sales, and e-commerce sales are increasing. We expect that trend to continue. Our cost to serve is lower with online sales, and customers are using that tooling because it helps them organize their businesses and how they procure products. It is a win for all of us, especially the customers. We very much expect to continue investing in our e-commerce technologies and tooling for our customers, and we expect adoption to continue. To give you a sense of what is possible, we have markets—like the state of Florida for one of our subsidiaries, an $800 million business—where almost 70% of their sales go through e-commerce tools. Barry S. Logan: Looking even more long term, this is one of the most underappreciated aspects we write about every quarter. The future attrition benefits we get when we have active e-commerce users create an incredible moat and stickiness to future revenues and customer relationships. That really matters when you look out three, five, seven years. Aaron J. Nahmad: While we are on the subject, we also sell more line items per invoice when we sell online versus offline. It is a winning formula to sell more products online, and we are focused on it. Steven Volkmann: Thank you all. Albert H. Nahmad: Thank you. Operator: We have the next question from the line of Christopher M. Snyder from Morgan Stanley. Please go ahead. Christopher M. Snyder: Thank you. I wanted to ask about Q1 inventory. It was up about 25% quarter-on-quarter, which matches what we saw in the last five to six years, but in those years OEM inventory was tight and lead times were long. This year, it feels like the opposite. I was surprised at how much your inventory came up in that construct. Is this because you feel that demand is turning, or are there well-appreciated April price increases coming even before the Section 232 changes and there was some building to get ahead of that? Paul W. Johnston: First, remember that the composite inventory today is all A2L product. A year ago, it was a mixture of old and new product. If you look at the inventory increase for equipment, it is in the mix of price, not units. We actually own fewer units at March-end than we did a year ago. Also, when you sell an A2L product today, you have to sell an indoor unit and an outdoor unit. We had to increase our inventory of indoor units to accommodate the new A2L refrigerant, and that could be part of what you are seeing. Christopher M. Snyder: Interesting. Following up on inventory: over the last year, it seemed difficult for the industry—both distributors and OEMs—to have a sense of how much product customers were holding. Now it feels like there is another round of OEM price increases coming. I imagine here in early Q2, distributors and contractors may look to get ahead of that. How do you think about those channel dynamics? Have you done anything versus a year ago to have better visibility or confidence in how much inventory customers are holding? Aaron J. Nahmad: We did not buy ahead of the expected price increases coming from the Section 232 tariffs. Some of our customers hold some inventory, and we do not have visibility into those numbers, but I do not think it is particularly material. There were some customers that bought ahead of the price increases coming now from the Section 232 tariffs, but by the end of the quarter or end of the season, that will be noise—it will smooth out. Paul W. Johnston: Most of our contractors are not carrying a lot of inventory. They do not have mega warehouses where they put inventory in. Aaron J. Nahmad: The reason we have all the convenient locations with as much product variety as they need is because most customers do not carry inventory. They do not know what they are going to sell that day until they go to someone’s house, figure out the problem and the solution, and then they work with our teams to get the right product out of our stores to go install it in that home or building. Across brands and OEMs, there are different business models. Our model with our brands and customers is that we carry it for them, with over 100 locations in Florida to take the pressure off them having to stock anything. There are other models—including some factory-operated models—that have under 30 branches in Florida and need their customers to stock product to get it into the channel. That is a business model choice. It is not right or wrong; it is just a different model. Christopher M. Snyder: Good point. Appreciate that distinction. Thank you. Operator: We have the next question from the line of Patrick Michael Baumann from JPMorgan. Please go ahead. Paul W. Johnston: Good morning. Albert H. Nahmad: Morning. Patrick Michael Baumann: I know it is early in the season, but do you have a view on what you think unit sell-through will be this year? Rick Gomez: Better than last year. Albert H. Nahmad: I have no idea. Rick Gomez: We are obviously shy to answer that question in April. If I ask it back: do we feel better or worse today? I feel better today for sure. The other equations in the answer—existing home sales, new home sales, consumer spending, consumer confidence, and contractor confidence (who ultimately sells the product in someone’s home)—seem like a better situation, but time will tell. Patrick Michael Baumann: Did you see any regional disparity in performance in March and April? Asking in the context of a really hot start to the year from a weather perspective in certain areas. Paul W. Johnston: In the northern markets, you had some severe winter, closed locations, and lost business. We rarely blame or complement the weather, but the northern markets had a bit of disruption in the quarter. That resolves as time goes on too. The Sunbelt outperformed the North for those reasons. That is just the first quarter and not something to draw an inference from over the longer term. Aaron J. Nahmad: Part of why we are geographically diverse is so that all of that becomes normalized over time. Patrick Michael Baumann: Of course. My final question: could you opine on Home Depot’s acquisition of Mingledorff’s and how you see that impacting acquisition opportunities for you? Are you seeing valuation multiples go up in the industry after that deal, or anything else to point out on how it might impact the competitive landscape? Albert H. Nahmad: We have been competing with the business they bought for a long time. We are not threatened by it at all. I am not going to say what I really think because it would not be nice, but no—it is not something that we worry about. Aaron J. Nahmad: We have known the Mingledorff family for a long time. We wish them well and that business well. It takes two to tango, especially in our business model and formula, which our Chairman started 50 years ago. The family needs to want to join our family, be here, run their business, and use our tools, technology, and capital to do what they do—do more of it and continue to grow. If that is not in their interest, then it is not a good fit. If it is, and there is mutual trust and respect, then it is a wonderful fit. We will keep doing what we do. We have done it successfully for a long time, and I do not think we are short of opportunities in the future. Patrick Michael Baumann: Makes sense. Thanks a lot, guys. Best of luck. Albert H. Nahmad: Thank you. Patrick Michael Baumann: Thank you. Operator: We have the next question from the line of Jeffrey David Hammond from KeyBanc Capital Markets. Please go ahead. Jeffrey David Hammond: Hey, guys. Just a couple follow-ups. On gross margins, you held the line pretty well, and I know you got some price benefit in 1Q last year—that was good to see. How do you think gross margins trend, given you have a particularly tough comp in February? And separately, can you give us what commercial HVAC equipment was in the quarter? I am not sure if I missed that. Rick Gomez: On the commercial side, we did not see a whole lot of divergence between residential and commercial. The biggest divergence was domestic versus international, but residential and commercial traveled very close together. On margins, if you go back 10 years and take second quarter and third quarter together, there is usually a modest retreat in margins only because historically those quarters have some OEM pricing actions, and the cooling season plus R&C mix typically influences second and third quarter margins versus off-season margins. Last year did not follow that trajectory because of the price increases. We will see what this year brings; in the absence of new information, we will see what the OEMs begin to talk about in the next few days. Historically, there is a different profile to margin during season versus out of season. Offsetting that, supply sync is now launching, and we expect that to be helpful as it scales. Aaron mentioned Hydros and DCR—its companion initiative around purchasing in non-equipment—that is gaining momentum and scaling. There are puts and takes. We will share more when we know more, but historically there is always a little difference between seasonal and off-season margins. Jeffrey David Hammond: Okay. Thanks. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Albert H. Nahmad for closing comments. Albert H. Nahmad: Thanks for listening, and thanks for your interest in our business. We are very excited about the future. As I said, we are uniquely capable of investing in the industry through acquisitions and post-acquisition initiatives. We are in it for the long term, and we are happy you are with us. Bye-bye. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Hello and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Northwest Bancshares, 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, please press star then the number 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Michael Perry, Managing Director of Corporate Development, Strategy, and Investor Relations. You may begin. Michael Perry: Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares, Inc. first quarter 2026 earnings call. Joining me today are Louis J. Torchio, President and CEO of Northwest Bancshares, Inc.; Douglas M. Schosser, our Chief Financial Officer; and Thomas K. Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental first quarter 2026 earnings presentation, which is available on our investor relations website. If you would like to read our forward-looking and other related disclosures, you can find them on slide 2. Thank you. I will now turn the call over to Louis J. Torchio. Louis J. Torchio: Good morning, everyone. Thank you for joining us today to discuss our first quarter 2026 results. I will let Douglas M. Schosser take you through the specifics of our first quarter performance, but first, I want to reflect on the growing momentum and continuing transformation at Northwest Bancshares, Inc., and how our achievements in the first quarter have positioned us for continued growth in 2026. On slide 4, you can see some of the financial highlights of the first quarter 2026. We delivered $51 million in net income for the first quarter, a record in the company's history, resulting in more than 16% year-over-year net income growth. Momentum in our C&I business continued with $191 million of average C&I loan growth in the first quarter, representing 28% year-over-year growth. We have continued to grow our nationwide business verticals in a disciplined manner. The first of these was launched in 2023, and collectively, they now represent approximately 23% of our commercial lending portfolio. These verticals are led by experienced and highly networked industry leaders, giving us a strong point of distinction in these specialty finance areas. We continue to focus on growing our SBA lending business both locally and nationally in 2026, building on our momentum from earning a spot among the top originators in the U.S. by volume in 2025. We recorded a net interest margin of 370 basis points in 2026, benefiting from our deposit franchise, which is one of Northwest Bancshares, Inc.'s core strengths. We achieved our third consecutive quarter of lower deposit costs, among the best in class among our peers. Our ongoing expense management discipline allowed us to achieve another quarter of improved performance with our efficiency ratio at 59.4% and our adjusted efficiency ratio of 57.8% for the quarter, and we have now fully recognized all the expense benefits from our recent acquisition. Our record net income in 2026 drove strong returns with an ROAA of 1.22% and ROTCE of 14.6%. In addition, with recent headlines surrounding credit, I want to highlight that we saw our nonperforming assets and overall delinquencies decline this quarter, and we recorded a lower annualized net charge-off ratio of 16 basis points for the quarter, which is below the low end of our full-year guidance. We achieved these results while continuing to invest in talent, technology, and new financial centers to support our future growth. I am pleased with our results, and I am proud of the team for driving strong core performance across the bank. As we have highlighted on previous calls, we continue to execute on our plans to transform the consumer bank. With the opening of our first new financial center since 2018 in the Indianapolis MSA last year, we debuted our new financial center design focused on customer hospitality. We are continuing to build out our presence in our Columbus headquarters market with five new financial centers now under development and due to open later this year in key locations. We expect to open the first of these by the time we have our next earnings call in July. In 2026, we delivered on our commitment to our shareholders, returning more than half of our profits through a quarterly dividend of $0.20 per share. This is the 126th consecutive quarter in which the company has paid a cash dividend. Looking ahead for the rest of 2026, we continue to focus on delivering organic growth and strong financial performance, expanding our financial center network, serving our core customers and communities, and delivering growth across our consumer and commercial lines of business. I will now turn the call over to Douglas M. Schosser to review our first quarter results in more detail. Douglas M. Schosser: Thank you, Louis, and good morning, everyone. As Louis indicated, we are pleased with our financial performance in the first quarter. This is the product of the efforts of our entire team working tirelessly to deliver these results, and I am grateful to the team for their efforts. Now let us continue on slide 5 of the earnings presentation, where I will walk you through the highlights of Northwest Bancshares, Inc.'s financial performance for the first quarter. Our GAAP EPS for the quarter was $0.34 per share, and on an adjusted basis our EPS was $0.35 per share, an improvement on the prior quarter of $0.31 per share and $0.33 per share, respectively, primarily driven by expense management discipline and a decrease in our overall provision for credit losses. Net interest income grew $300 thousand, or 0.2% quarter over quarter, with net interest margin improving to 370 basis points, benefiting from an increased securities portfolio yield and a decrease in our cost of deposits. On a year-over-year basis, net interest income improved 11.5%. Noninterest income decreased by $5.2 million quarter over quarter, driven by a higher BOLI benefit recorded in 2025. On a year-over-year basis, noninterest income improved 14.9%. Total revenue was $175.1 million for the first quarter, which represented a slight decline quarter over quarter due to a higher BOLI benefit recognized in 2025, but represented a 12.1% increase year over year. I would also point out that we achieved significant positive operating leverage of 560 basis points quarter over quarter in 2026 as we maintained our focus on exercising tight expense discipline and saw the last of our Penns Woods acquisition expense savings materialize. This also translated into an improvement in our adjusted efficiency ratio to 57.8%, which was a 170 basis point improvement quarter over quarter. All of this created an improvement in our pre-tax pre-provision net revenue in 2026, which increased to $71.7 million, a 1.5% increase from fourth quarter 2025 and a 9.3% increase year over year on an adjusted basis. Turning to slide 6, I will spend a moment covering our loan balances. Average loans grew $102 million quarter over quarter, benefiting from organic loan growth in both our commercial and consumer businesses as we continue to experience runoff in our residential mortgage and legacy CRE portfolio. We achieved our second consecutive quarter of period-end loan growth in the first quarter, with period-end loans increasing by $49 million to $13.1 billion, laying a strong foundation for continued growth in 2026. Our loan yield decreased to 5.62%, or 3 basis points, in the first quarter as we saw the impact of the December 2025 rate cut become fully priced into our loan portfolio. Our C&I loan growth continued with strong performance in several of our new verticals and in our other commercial loan portfolios. Average C&I loans increased $191 million, or 7.8%, quarter over quarter and $579 million, or 28.2%, year over year. Our overall interest rate sensitivity position remains slightly asset sensitive with continued growth in floating-rate commercial loans. However, we feel we are appropriately positioned for the current and expected interest rate environment in 2026 based on what we know now. Moving to slide 7 and our deposits, which continue to be a source of strength and stability, our average total deposits grew by $276 million quarter over quarter, partially benefiting from continued focus on commercial growth and deepening consumer relationships. Our granular, diversified deposit book has an average balance of more than $19 thousand 500, with customer deposits consisting of over 719 thousand accounts with an average tenure of more than 12 years. Our cost of deposits decreased 5 basis points to 1.48%, a product of our proactive management of the overall portfolio. As an example, 43% of our CD portfolio matured in 2026 at a weighted average rate of 3.60%. New volumes came on at a weighted average rate of 3.12%, supporting an overall decline in deposit costs. On slide 8, we show net interest margin increased 1 basis point to 370 basis points in 2026, with purchase accounting accretion's net impact equating to 7 basis points. Turning to our securities portfolio on slide 9. New security purchases in the quarter were consistent with the current composition of the portfolio and continue to strengthen an already strong source of liquidity. Our portfolio yield continues to increase as new securities purchased came on at a higher yield than the runoff portfolio, resulting in a yield increase of 4 basis points to 3.15% in the quarter. Twenty-six percent of this portfolio is in held-to-maturity, to protect tangible common equity. Turning to slide 10, our noninterest income decreased $5.2 million quarter over quarter, driven by a decrease in bank-owned life insurance income due to a higher BOLI benefit in 2025. Noninterest income increased $4.2 million year over year, benefiting from an increase in service charges and fees and a gain on an equity method investment. Regarding noninterest expense, as detailed on slide 11, as previously referenced, the adjusted efficiency ratio was 57.8% in 2026, representing our third consecutive quarter of improvement, continuing the expense management focus over the last year. Overall expense, excluding merger and restructuring expenses, was lower quarter over quarter due to lower compensation and benefits expenses driven by the completion and recognition of all the costs and benefits of the Penns Woods acquisition, combined with more normalized performance-based incentive compensation expenses. On a year-over-year basis, expenses in the first quarter 2026 were higher, but the year-ago quarter did not include the acquired Penns Woods operations. On slide 12, you will see our overall ACL coverage remain flat at 1.15% in 2026, driven by lower net charge-offs in the current period. Our quarterly annualized net charge-offs of 16 basis points were below the low end of our full-year guidance. Our NPAs declined this quarter. While our classified loans did increase this quarter, we have no expectation that the increase would result in higher overall charge-offs. Turning to credit quality on slide 13, our credit risk metrics remain within internal expectations, given the impacts of loans that we acquired. Our total delinquency declined from 1.50% to 1.30% quarter over quarter, primarily as a result of the planned runoff in the CRE criticized portfolio. Our 90-day-plus delinquency declined from 51 basis points to 34 basis points quarter over quarter. NPAs decreased by $16.5 million quarter over quarter to 70 basis points of average loans and are only slightly above the levels of first quarter 2025, mostly due to the payoff of a long-term health care facility. Taking a deeper dive into the breakdown of our credit quality on slide 14, in 2026 we did experience an increase in classified loans as a percentage of total loans and on an absolute basis, which was attributed partially to two C&I borrowers. As we have discussed on earlier calls, our strategy with respect to classified loans is to continue to work with our borrowers and preserve our market relationships. In addition, as we highlighted in the earnings release, the Board of Directors reviewed our share repurchase program, and we now operate with a buyback authorization of up to $50 million. This action, when combined with renewal of our shelf registration, is simply additional and appropriate capital management. Our capital priorities remain unchanged. Finally, on slide 15, we are maintaining our previous outlook for the full year 2026. We continue to be confident about Northwest Bancshares, Inc.'s business, and we are excited about the prospects for the year ahead. I will now turn the call over to the operator. Operator: We will now open the call for questions. At this time, I would like to remind everyone that in order to ask a question, please press star then the number 1 on your telephone keypad. We will pause for just a moment. Your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, everyone. Maybe starting on the balance sheet growth on the loan side, can you walk us through expectations for paydowns, what drove them in the first quarter, and thoughts on the pace of slowing paydowns going forward and how that balances against origination activity in the commercial book? Also, it was a good quarter from a credit perspective with NPAs coming down and lower charge-off activity. You touched on the increase in criticized and classified, and you commented you are not expecting higher net charge-offs from that. Can you expand on why that would be the case and what gives you confidence those inflows will come through? Douglas M. Schosser: Thanks for the question. In the first quarter, as we have discussed on prior calls, we continued to work through our criticized and classified asset book, so there will be some downward pressure from payoffs there. Additionally, there were some payoffs in CRE. A few years ago, we stopped originating a lot of commercial construction loans. Those are now slowly moving into the permanent market, so we continue to have a little bit of runoff there, and we are not necessarily back into that space in a significant way. Those dynamics will continue. One reason we are reiterating and keeping our guidance consistent is we believe there is opportunity around slowing residential mortgage loan payoffs that can help, and we continue to see good pipelines in all the commercial verticals and commercial businesses. Generally speaking, we are comfortable with the forward look on low- to mid-single digit loan growth for the year. On credit, we are reevaluating internal ratings on our loan portfolio. If we believed there was loss content, those credits would migrate into lower ratings and ultimately charge-offs. As we sit here today, we do not see that as a high probability. We continue to work with our borrowers through the cycle to preserve market relationships and help them work out credits in a positive way for both the borrower and the bank. There was nothing in the increase that gave us a lot of pause. Operator: Your next question comes from the line of Jeff Rulis with D.A. Davidson. Please go ahead. Jeff Rulis: Thanks. Good morning. On the securities purchases in the quarter, you added quite a bit. Do you feel like you still have appetite where earning asset growth outpaces loan growth, or are you still interested in building that side of the balance sheet? And on reserves, with the charge-off outlook you outlined, is the 1.15% reserve level roughly where you expect to manage it? Lastly, on capital, with the buyback, is that just widening the tools to use, and any update on M&A appetite? Douglas M. Schosser: On securities, you are seeing a couple of dynamics. We discussed last quarter growing the overall size of the book because we were a little low relative to peers, but that was not meaningful growth. We also took advantage of what we thought the rate market would do. Early in the quarter, when we thought rates were likely to be cut a couple of times, we made some opportunistic purchases for paydowns we knew were occurring later in the first and into the second quarter. You will see the book grow a bit from that, but we are not going to reinvest new cash flows when they come off; they have already been reinvested. That is a more precise, tactical positioning rather than a material change to the composition of the balance sheet. So yes, it may be lumpier this quarter, but if you smooth it over the year, we expect pretty balanced percentages, and we are not anticipating growth in the securities portfolio as a percent of earning assets. On reserves, we are comfortable at the 1.15% coverage. It will be influenced by CECL model economics, charge-offs, and loan growth. With loan growth, we would have some additional reserving, but keeping overall coverage around 1.15% is likely. On the buyback, our prior authorization from 2012 was stale. It is good corporate practice to refresh it and share that with the street. It should be viewed as another tool in the capital management toolbox, much like the shelf registration. No change in capital priorities as a result of that move. I will turn it to Louis for M&A. Louis J. Torchio: As we noted in our earlier commentary, we are most pleased with core growth and a really clean quarter. Our focus throughout 2026 is to continue to execute post-acquisition, scale our businesses, and improve financial returns, including ROA and ROTCE. Anecdotally, given uncertainty in the marketplace—macroeconomic, geopolitical, interest rates, and Fed policy—the M&A dialogue has slowed. We remain laser-focused on core organic back-to-back quarter results, and that is where we will be focused throughout 2026. Operator: Your next question comes from the line of Tim Switzer with KBW. Please go ahead. Tim Switzer: Good morning. My first question is on deposit competition. There have been reports that certain markets have been more competitive recently, particularly as it now looks like the Fed may not lower rates until later this year, if at all. Can you talk about what you are seeing in your markets—are any more competitive than others, and are different deposit categories more intense? Also, can you help us think about the expense trajectory over the course of the year, and where you think we might be sitting at the end of this year heading into 2027? Douglas M. Schosser: We continue to see a very strong competitive set for deposits, and we do not see that changing. We also have branch openings and other initiatives where certain markets will be priced differently when you are in a heavy acquisition campaign versus maintenance. We are not seeing a let-up in deposit competition and continue to operate with that mindset. On expenses, we are pleased to have the Penns Woods expense saves behind us, so we would not expect further reductions from that activity. The path now is to manage expense growth consistently. With stronger performance, there can be higher potential costs around incentives and producer compensation. We have not changed our guide. We are slightly below an annualized level on the low end of that guidance, and we have given ourselves some room on expenses. We will continue to manage for positive operating leverage and keep expense growth in line with revenue growth. Operator: Your next question comes from the line of Brian Foran with Truist. Please go ahead. Brian Foran: Good morning. You mentioned the national commercial verticals are now 23% of loans. Two questions: Is there an upper limit or range where you are comfortable letting that get to as a percentage of the total loan book? And as you look ahead, is there anywhere you would flag either adding to existing teams or any appetite to add additional verticals? Also, on commercial real estate, is competition leading to pricing or structures where you are having to pass on deals? Douglas M. Schosser: There is not a hard upper limit, but we remain prudent. The verticals are newer and have not gone through full cycles, so we are mindful of that. We are also looking for balanced commercial opportunities. We would like to see CRE paydowns slow. We have a new leader in that group and are optimistic about the business. We are around 130% of Tier 1 capital on CRE, so there is room there. We will make smart, strategic additions when opportunities arise, but we do not rely on any one area. On CRE competition, it is certainly competitive. We have been able to find spaces where we remain relevant to customers and maintain good pricing and structures. If that changes, we would reevaluate. Right now, structure has not been a binding constraint for us; there can be some pricing give. For well-structured deals with full relationships, that is part of the game. Louis J. Torchio: Those national verticals provide differentiation and diversification of risk. We have procured industry experts, are scaling prudently, and are watching vintages. We want complementary growth in our core markets across the four states where we operate—lower middle market and business banking. We would like to mitigate some CRE runoff by focusing on light industrial, away from construction multifamily. We are maintaining hurdle rates and prudent underwriting amid economic uncertainty. We would not expect verticals to overtake the portfolio. Our pipeline is much stronger than a year ago, in large part due to scaling those verticals. Operator: Your next question comes from the line of Manuel Navas. Please go ahead. Manuel Navas: Thanks for the commentary today. Net charge-off performance was really strong. Is there potential for lower guidance eventually, and could you be looking at a lower long-term rate? Also, near-term NIM—can you talk about the moving parts? Where do you see loan yields from here, what are new pricing levels, and can deposit costs decline more without a Fed rate cut? With new branches opening, do you have room in your NIM guide to win market share in those markets? And lastly, where could you have eventual fee synergies from the Penns Woods acquisition, including C&I-driven fee opportunities? Also, on BOLI, is this quarter the right run rate? Douglas M. Schosser: Our long-term net charge-off rates are through-the-cycle metrics to accommodate economic transitions, so we are not changing the long-term view. We are very happy with 16 basis points this quarter, but it is too early to pull back on the full-year guide, which is why we did not change it. It remains a wide range, and right now we think it is likely toward the lower side, but we are not changing it yet. On NIM, on the asset yield side with no rate cuts, we feel good about maintaining current levels. There is a push-pull as loans originated at higher rates pay off, creating pressure, but new originations are still priced a few basis points better on average than loans coming off. On deposits, we have originated deposits in a lower-rate environment, especially shorter-term CDs, so as that book rolls, there is still opportunity for cost reduction, but not as large as it has been. That is why we expect a pretty stable margin in the low 3.70% area. Competition is a factor. We are working hard to maintain margin, and it will be more of a grind—no big moves expected either way. On new branches, yes, we have room within our guide to support market-share acquisition with appropriate pricing. They will open throughout the year, and activity will be a relatively small percentage of the total. Pricing will differ by market, and we expect to see marketing and acquisition pricing tied to those openings. On fees, we are excited about growing our wealth business. We have added a new head of wealth and see opportunities, particularly as commercial grows and we connect wealth and commercial for liquidity events. Our offerings span brokerage to trust. SBA continues to be a fee opportunity with room to run. On BOLI, you are closer to the normal run rate now, but it can move around; within the number, we had about $100 thousand of benefit this quarter, so not materially different on a core level. Louis J. Torchio: I would add that we are offering a more robust commercial suite—products and services that support fee generation. The Penns Woods acquisition fit nicely into our footprint and was lower risk for us. We are focused on transition and execution and believe we can do even better in-market with wealth, SBA, and commercial offerings. Our mortgage banking and home equity offerings are also robust. In Columbus, where we are headquartered, we see significant opportunity and scale. We are already in-market with hiring across commercial, small business, wealth, and mortgage to support upcoming branch openings. Operator: Your next question comes from the line of Daniel Edward Cardenas with Green Capital. Please go ahead. Daniel Edward Cardenas: Good morning, gentlemen. Most of my questions have been asked. Could you give additional color on the increase in classified loans? I think you said two C&I credits accounted for that jump. What industries were they in, and is that indicative of bigger trends? Douglas M. Schosser: If you look at slide 14, we offered some color there. No one vertical or area stands out, and nothing gives us concern about the overall portfolio. They are somewhat isolated. As new financials come in, there will be migrations in and out. There was nothing that raised significant concern about emerging losses in future periods as a result of those changes. Operator: Your next question comes from the line of Kyle Gierman with Group. Please go ahead. Kyle Gierman: Hi. This is Kyle on for Dave Bishop. You had a nice uptick in C&I loans this quarter. Which verticals contributed the most, and what is the outlook for new segments into 2026? Douglas M. Schosser: We do not break out growth by specific verticals. We continue to see good momentum across our national verticals. We are not planning to add new verticals at the moment and have no current intentions to change how we go to market. Operator: Last question comes from the line of Matthew M. Breese with Stephens Inc. Please go ahead. Matthew M. Breese: Good morning. On commercial real estate growth for the remainder of the year, is the expectation stabilization or even growth, or should we expect continued, albeit more moderate, declines from here? Also, on the C&I pipeline, what are the yields and spreads, and are there notable differences between local in-market C&I lending versus the national verticals? Douglas M. Schosser: We are focused on stabilization rather than leaning into growth near term. We have new leadership, and we are working through prior pressure from construction loans refinancing to permanent that are coming off the book. We have room in CRE; our concentration is relatively low, and CRE remains a product that makes sense in our markets. On pipeline yields and spreads, composition is consistent with what has been going on the book. We are not seeing notable changes. Within our verticals, SBA will have higher spreads given the risk profile. We are comfortable with our opportunity to continue driving similar spreads and yields. In-market deals can be more competitive given different local players, which can create pricing pressure. The national verticals tend to reflect a more market-based perspective on rates and spreads. Louis J. Torchio: Not all verticals are created equal. Some have broader opportunities for deposits and fees, while others are more transactional and asset-based. While in-market yields can be a little thinner given competition among large and small banks, cross-sell opportunities and integrated product penetration per customer are important to our strategy. Both the national and in-market approaches are important, and we are highly focused in-market to capture our share. Operator: That concludes our Q&A session. I will now turn the call back over to Louis J. Torchio, CEO, for closing remarks. Louis J. Torchio: On behalf of the entire leadership team and the Board of Directors, thank you for joining our call this morning. I am excited about our momentum in 2026, as we are well positioned to capitalize on opportunities to drive profitable core growth. I look forward to speaking with you on our second quarter earnings call in the summer. Operator: That concludes today’s call. Thank you all for joining. You may now disconnect. Everyone, have a great day.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank Earnings Conference Call for the First Quarter 2026. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead. Patrick Ryan: I would like to welcome everyone today to First Bank’s first quarter 2026 earnings call. I am joined by Andrew Hibshman, our CFO, Darleen Gillespie, our Chief Retail Banking Officer, and Peter Cahill, our Chief Lending Officer. Before we begin, Andrew will read the safe harbor statement. The following discussion may contain forward-looking statements. Andrew Hibshman: The following discussion may contain forward-looking statements concerning the financial condition, results of operations, and business of First Bank. We caution that such statements are subject to a number of uncertainties and actual results could differ materially. Therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties is described under Item 1A, Risk Factors, in our annual report on Form 10-K for the year ended 12/31/2025 filed with the FDIC. Pat, back to you. Patrick Ryan: Thank you, Andrew. Earnings came in below our expectations in the first quarter. Elevated credit costs in the credit-scored small business portfolio were the primary driver. We have taken a very proactive stance regarding the management and cleanup of this portfolio. The product parameters and sales processes were revamped starting in 2025, and all known issues in the portfolio have either been charged off in full or specific reserves have been established. Elevated loan payoff activity also impacted earnings. As Peter and Andrew will discuss, unusually high payoffs in the fourth quarter drove lower average balances during Q1 and that impacted the overall results. We are still working to make up for those elevated payoffs, but strong loan growth so far in April and healthy pipelines provide reason for optimism that we can still achieve our loan growth goals. The net interest margin was down slightly in the first quarter, partly driven by reduced purchase accounting accretion income and partly driven by heightened deposit competition. Overall, credit quality seems to be holding at manageable levels. Specifically, our levels of nonperforming assets and criticized loans remain at levels well within historical norms and peer averages. Furthermore, our strong allowance for credit losses and overall capital levels provide a strong buffer. Regarding overall core profitability, I believe we will see a return to strong balance sheet growth as we move forward as payoffs normalize. In fact, through mid-April, net loan growth was up $50 million, putting us pretty close to plan. The margin will obviously be dependent on the overall rate and competitive environment, but we expect it should remain at healthy levels moving forward. First quarter expenses were somewhat elevated based on seasonal factors like payroll taxes and snow removal, and we expect they will remain relatively stable throughout the remainder of this year. Furthermore, our strong capital levels provide significant dry powder for share buybacks should attractive buying opportunities emerge. In summary, while the quarterly results were disappointing, we believe the elevated credit costs are isolated to the small business portfolio, and profitability should return to stronger levels as we move forward in 2026. At this time, I would like to turn it over to Andrew to provide some additional detail on the financial results. Andrew? Andrew Hibshman: Thanks, Pat. For the three months ended 03/31/2026, we recorded net income of $7.6 million, or $0.30 per diluted share. This translates to a 0.79% return on average assets. Net interest income decreased $2.2 million compared to the fourth quarter, primarily due to lower average loan balances, which resulted from limited growth during the current quarter coupled with the late-quarter timing of payoffs in the linked fourth quarter. Additionally, the yield on average loans declined by 21 basis points, which was partly related to the elevated level of prepayment fees in the linked fourth quarter. This outpaced the 15 basis point decline in interest-bearing deposit costs and contributed to a five basis point decline in the net interest margin. I will note that compared to last year’s first quarter, net interest income grew by $1.9 million, or 6%, and that was primarily driven by lower interest-bearing deposit costs. At 3.69%, we believe our first quarter net interest margin remained very strong and compares favorably to our peers. Looking ahead, we continue to manage a well-balanced asset and liability position, and we anticipate stronger loan and deposit growth, which should result in increased net interest income generation regardless of what happens with rates. We anticipate continued declines in our purchase accounting accretion over the next several quarters. We are also seeing enhanced deposit pricing pressure as the market adjusts to the expectation that the effective Fed funds rate will stay higher for longer. Offsetting some of that pressure is that we continue to replace the runoff of lower-yielding assets with higher-yielding loans. We expect these factors in aggregate to support a relatively stable margin, with the potential for some pressure should the current flat yield curve environment persist. Net charge-offs increased to $5 million in the first quarter from $1.7 million in the linked quarter, almost exclusively related to our small business portfolio. This was the primary driver of increased credit loss expenses in the first quarter. Our allowance for credit losses to total loans increased one basis point to 1.39% from 1.38% at December 31. With the recent increases in our allowance, our reserve coverage ratios are very strong. Noninterest income grew to $2.4 million in the first quarter of 2026, compared to $2.3 million in the linked fourth quarter and $2 million in 2025. The slight increase in the current quarter primarily relates to higher earnings from some modest investments we have made in certain small business investment funds. Noninterest expenses were $20.9 million for the first quarter, compared to $17.1 million in Q4. The increase was primarily driven by a $1.9 million gain on sale of an OREO asset, which was booked as a contra expense in the fourth quarter. Excluding the impact of this nonrecurring item in Q4, noninterest expense increased by $1.9 million primarily due to seasonal factors. Salary and benefits expense increased primarily due to typical first quarter increases related to merit salary adjustments, benefit cost increases, and increased employment taxes connected to annual incentive payments. Occupancy and equipment expenses were impacted by annual rent increases, along with the impact of higher maintenance costs given the harsh winter in our primary footprint. Looking ahead, we view our first quarter expense level as a reasonable overall run rate as we move forward. The first quarter marked our 27th consecutive quarter of operating with an efficiency ratio below 60%. This has positioned us as a top quartile performer among our peers on this metric and is a differentiating strength for First Bank. We expect to drive revenue growth during the rest of the year without needing to add to expenses, which should move our efficiency ratio down over the next several quarters. Tax expenses totaled $2.3 million for the first quarter, with an effective tax rate of 22.7%. This compares to 25.7% for Q4. First quarter taxes included the benefit of items related to stock compensation and compensation activity, which historically has an outsized impact during the first quarter. We anticipate our future effective tax rate will be approximately 24% to 25%. Our capital ratios remain strong. We executed a modest amount of share repurchases during the quarter, and we could fully execute our approved $20 million buyback program and still maintain strong capital ratios. For example, assuming $20 million in buybacks and a static balance sheet, our total risk-based capital would be approximately 12.5%, well in excess of any regulatory minimums or internal policy limits. Going forward, we aim to continue driving shareholder value through a combination of core earnings, a stable cash dividend, and share buybacks as applicable over time. At this time, I will turn it over to Darleen Gillespie, our Chief Retail Banking Officer, for her remarks. Darleen? Darleen Gillespie: Thanks, Andrew, and good morning, everyone. Deposit growth of $25.1 million was modest during the quarter. While we saw solid activity onboarding new relationships and expanding existing ones, seasonal fluctuations and some expected outflows influenced ending balances for the quarter. Average interest-bearing deposit costs came down 15 basis points during the quarter, and we benefited from the Federal Reserve rate cuts that occurred in 2025, as well as our continued proactive efforts to optimize and manage deposit pricing. Going forward, we may see some moderation in this benefit as heightened industry competition continues to place pressure on deposit pricing. We remain focused on striking the appropriate balance between growth and cost discipline. Overall, we continue to execute effectively against our dual priorities of deepening relationships while prudently managing funding costs. In addition, targeted promotional pricing has proven successful in attracting new customers and, importantly, retaining those relationships beyond the promotional period. Our newly opened and relocated branches are doing well and meeting deposit growth expectations. Retention levels among customers impacted by branch consolidations have remained strong, and associated attrition has tracked within our plans and budgeted expectations. This is a testament to the outstanding execution of our relationship bankers across our footprint. Looking ahead in 2026, deposit growth continues to be a priority in order to fund our expected loan growth in a profitable manner and to maintain a strong net interest margin. We intend to achieve this by maintaining a strong deposit funding pipeline, continuing to retain and grow existing relationships, and utilizing promotional pricing when prudent and necessary to win in this highly competitive market. Our teams are closing loans and adding full operating accounts, which is a key element of our growth and funding strategy. After a very active year of optimizing our branch network in 2025, we have minimal branch activity on the horizon in 2026. We will continue to be opportunistic where it makes sense to enhance the efficiency of our network, the convenience for our customers, and our potential exposure to new clients in existing or adjacent markets. But right now, our focus is on optimizing the growth and pricing of our deposit portfolio. We intend to keep working to achieve our goal of bringing our deposit costs closer to our peer bank median. At this time, I will turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter? Peter Cahill: Thanks, Darleen. As Pat and Andrew described, our Q1 numbers reflected a slower quarter in terms of loan growth. Last year, as you know, despite average loan growth of $267 million, we finished with annual growth of $149 million, or 4.7%. Much of that second-half decline was due to loan payoffs in Q4 of $135 million, which far exceeded payoffs that averaged $50 million in each of the previous three quarters. Results this past quarter were impacted again by loan payoffs. We mentioned a good loan pipeline at year end, and I think we had a pretty good quarter from the standpoint of converting that pipeline into new funded loans. Loans closed and funded in Q1 totaled $106 million, which equals the quarterly average for both 2024 and 2025—so not a slow quarter from the standpoint of new loans closing and funding. Payoffs in Q1 were $73 million, however, higher than our average quarterly payoffs in each of the past five years. Payoffs bank-wide were made up of 59% investor real estate loans. Of all the payoffs in the quarter, the same figure, 59%, stemmed from the underlying asset being sold, and the balance of those payoffs were primarily from loans being refinanced out of the bank. As in previous quarters, new loans continue to be centered in C&I and owner-occupied real estate. For the quarter, this category made up 50% of new loans, with investor real estate loans comprising 40% and consumer lending 10%. We are seeing the same competition we have seen in previous quarters, primarily from the regional banks in our market. We continue to get decent spreads in the 250 basis point range over FHLB. Some of the competition is pricing lower, and we are also seeing banks loosening terms a bit by not requiring deposits or offering longer amortization schedules, etc. Despite the competition, we are still seeing good things in our lending pipeline. After closing and funding over $100 million in new loans during the quarter, the pipeline at quarter end—what we call probable fundings—stood at $383 million, up 15% from where it was at year end. The number of loans in the pipeline—the number of individual loans—at quarter end was up 9% over year end. Regarding the makeup of those loans, 66.5% are C&I loans compared to 61% at 12/31. The impact of our solid pipeline, as Pat mentioned, has been seen already in Q2. In mid-April, we hit loan growth for the year of close to $50 million, which is where we should have been a couple of weeks earlier at March 31. On the topic of asset quality, we have mentioned the softness we have been experiencing in the small business portfolio over the last couple of quarters, and Pat and Andrew both talked about the impact this past quarter. Last quarter, I mentioned that we have turned over staffs in that area and significantly tightened credit parameters, which, as you would imagine, has slowed production significantly. Delinquencies are no longer growing; we are very focused on providing attention to the relationships we have in that portfolio presently. Otherwise, delinquencies across all business lines were very manageable at quarter end. The earnings release did mention that our increase in nonperforming loans was related primarily to the addition of a well-secured single-borrower commercial real estate credit totaling $9.5 million. I will just add that this assisted living property shows current cash flows north of 1.8 times debt service coverage and a loan-to-value of 52%. So while it impacts our numbers presently, we expect a positive resolution there. In summary, while the payoffs we experienced resulted in a slow quarter as far as loan growth goes, we have seen a pickup since then and we remain confident in our plan to grow the loan portfolio by $200 million this year. All segments are expected to contribute to that growth. That concludes my remarks about lending, so I will turn things back now to Pat for some final comments. Patrick Ryan: Thanks, Peter. We will now open the call for questions. Operator: Press star then the number one on your telephone keypad. Your first question comes from the line of Justin Crowley with Piper Sandler. Your line is open. Patrick Ryan: Good morning, Justin. Justin Crowley: First, I was just wondering if you could spend a little more time on the small business portfolio that I know we have discussed a lot—what has been driving the weakness there, and what gets you to a point where you are comfortable that any further negative impact in that book should be contained, given some of the actions taken over the past couple of quarters? Patrick Ryan: Yeah. Absolutely. So the short answer, Justin, is there is no one factor. Certainly, we have seen plenty of data in the market that small businesses have been feeling some stress given the volatility in the overall economy. In general economic factors within a small business portfolio, these are companies by definition that have a smaller revenue base and therefore less of a cushion to absorb things like volatility in margins or the loss of a big customer, etc. On top of that, some of it, we believe, was tied to folks being a little more aggressive than we would have liked on the overall marketing of the product. It is a credit score product. It is one that we have been using for six or seven years now, so it was not a brand new solution. But we were looking to grow and scale that business over the last couple of years, and I think some folks, in an effort to try to build that, were moving beyond the core tenets of our relationship banking model. So we have revamped those processes. We have tightened up the parameters. And as Peter mentioned, new production has slowed down significantly. We are tracking the data closely. When we see issues—when we have significant delinquency—we are moving quickly to take care of those loans either through charge-off or specific reserve. As Peter mentioned, as we have looked at some of the delinquency trends, it feels like things are starting to settle down there. Obviously, time will tell, but we are definitely feeling like that initial surge is past us. Given the changes we have made over the last nine months, we think the results moving forward should be significantly better. Exactly what “better” means, time will tell. But again, it is a relatively small portfolio; it is down under $100 million at this point. Given the steps we have taken to address the known issues, we think we are getting past the uptick, and we think we will see some better performance out of that portfolio moving forward. Justin Crowley: And then just to clarify, the stress you are seeing is not coming from the SBA product; it is coming outside of that program and the smaller-dollar-type loans. Is that accurate? Patrick Ryan: These are smaller-ticket—couple hundred thousand—lines of credit and term loans that are not necessarily SBA-related. So it is not an SBA-specific situation. Justin Crowley: And you said it was about $100 million. Just looking to put some more numbers around it—do you have what the reserves against that portfolio are, and then a sense of where charge-off rates have been in that book specifically so far? Patrick Ryan: If you looked at the quarter, the $5 million number was almost exclusively related to that portfolio. Over a 12-month period, the number was probably closer to $9 million. But if you scroll back further, again, this is not a brand new product. It is one that we have been using for a while, and it felt like the scoring became a little less predictable. Some of it might have been related to some of the cash infusions from COVID—we cannot really say for sure. Prior to that, the performance was actually really good; we had very minimal charge-offs. If you look at it at a point in time, the numbers look really high. If you spread it out over a two- or three-year period, you are probably looking at maybe 2% to 3% a year over that time frame. Again, higher than we would like, and, obviously, as a result, we made changes to the underwriting and the sales process to slow that production down. But what we have in the portfolio now is folks that have been with us for a while, have been paying as agreed, and have not been showing delinquency issues. So, again, we think the performance moving forward should be significantly better. Andrew Hibshman: I will just quickly add: we have about $2 million of specific reserves allocated to known problems, and we have also made some adjustments in our allowance calculation to put some money away for unknown problems. Right now, it is $2 million of specific reserves for identified specific loans, and we have adjusted some of the other factors within our calculation to address some potential issues going forward. Justin Crowley: Okay. So does that get you north of a 3% reserve in that book? Andrew Hibshman: Yeah, probably. Patrick Ryan: Within the allowance models, small business is part of overall C&I, but you can see the overall allowance is up in the 1.37% range, which is a very healthy level relative to where we have been and relative to where the industry is. We certainly think there is significant money set aside to deal with potential issues. And listen, we are charging everything off in full. There will be some recoveries here—we are not factoring that into the numbers. But we think that we have put a lot of money aside to make sure we are protected here. Justin Crowley: Got it. Shifting gears: on the comment that the NIM should hold relatively stable here—that has been the messaging—could you detail what is embedded in that in terms of new loan yields versus what is rolling off the portfolio, and the volume of repricing opportunity as we get through the year? Patrick Ryan: I can address part of that. Peter can jump in on new loan yields. With some of the volatility in the markets, Treasury yields moving higher, I think loan pricing is well in the 6% to 6.5% range—higher depending on asset class, product type, things like that. Then, Andrew, if you want to provide some details on the repricing and the modeling. Andrew Hibshman: We still have a good chunk—without getting into a ton of specifics—of loans that are repricing off of loans that were originated five years ago in a significantly lower interest rate environment. So we have a lot of loan activity that is repricing a couple hundred basis points higher in some instances. We believe that repricing is going to offset some of the purchase accounting accretion declines, and those declines we expect to be a little more muted than they were over the last couple of quarters. I believe purchase accounting accretion was $1.2 million in the first quarter. It was $2.6 million last year. That will continue to come down, but probably only $100 thousand to a couple hundred thousand dollars a quarter going forward. So that will continue to have a negative pull on the margin, but we continue to see enough loans repricing higher that should offset most of those declines. The big wildcard will be what we need to do on the deposit pricing side—whether we need to price up to bring in new money to fund the loan growth that we expect. Again, we feel fairly confident that we can maintain a fairly stable margin with a lean towards maybe some pressure depending on deposit pricing over the next several months. Justin Crowley: And do you have what floating-rate exposure is in the loan book? Andrew Hibshman: It is still about 25% of the portfolio. It fluctuates a little bit. That number has moved a little higher over the last couple of years because we have been doing more C&I and shorter-term stuff than we had been doing in the past, but it is still about 25%. It was closer to 20% a couple of years ago, and now it is between 25% and 30%, but around 25% is still the right number. Justin Crowley: Would that all reprice immediately, or is there a lag, and is there any protection in the way of interest rate floors? Andrew Hibshman: I do not have the details on the floors, but yes, there is some protection there. Most of it would reprice either right away or the next month. We still have some interest rate swaps in place that are protecting us a little bit on some of these things, but not much. Especially as rates move lower, some of those would move lower. It is pretty much right away for the 25%. There are some floors, but I do not believe most of the loans are at the floors. Obviously, if we see some bigger rate cuts, the floors become more relevant than a quarter-point adjustment by the Fed. Justin Crowley: That is helpful. On expenses, you called out some of the seasonally higher occupancy costs inflating the number in the period. As we look at compensation, is that a good way to think about that level moving forward? You mentioned higher payroll taxes—curious how much should flow back out as we think about the forward trajectory. Peter Cahill: The first quarter is a pretty reasonable expectation. Andrew Hibshman: It could move a little bit down because of the technical factors you noted. We did our salary increases in March, so you do not have the full impact of those salary increases in the first quarter. I think the run rate in Q1 is pretty close to where we would see things going forward because some of the one-time items will get offset by the increases in the salary line item that happened late in the quarter. I do not anticipate any significant increases to that number going forward. Across most expense line items, a fairly stable run rate over the next several quarters is where we see things. Justin Crowley: On the broader topic of expenses—balancing further investment, particularly on the technology side as we are seeing more rapid AI adoption—how are you thinking about implementing that? Patrick Ryan: I would say it is a combination of working internally with folks who are our first movers. We have a full team doing testing; they have access to the more advanced tools and are developing use cases. As those use cases roll out, there will almost certainly be some tech cost associated with them, but in many cases there should also be corresponding savings. There may be a situation where tech spend increases a bit, but we would also envision some other expenses coming down. In conversations with our primary technology providers, they are looking at embedding AI tools into products and services we are using. We have, in most cases, fixed-price contracts there, so we do not expect that will drive significantly higher cost in the short run. Over time, as the quality or value-add of the tools they embed are more noticeable, that could drive some pricing power on their part. The short answer is we will be looking to make strategic incremental investments based on use cases that we uncover, but it is not something we expect would be huge additional dollars. We are not spending time on R&D and coding like the big guys are doing to try to get a step ahead. We want to be ready to move quickly, which is why we have developed the working groups, the use cases, the testing parameters, and the sandbox safety parameters so that we can start using some of these AI tools in a safe way. Justin Crowley: Great. I appreciate the color. I will leave it there. Thanks so much. Patrick Ryan: Alright. Thanks. Operator: Your next question comes from the line of David Bishop with Hovde Group. Your line is open. David Bishop: Hey, good morning, guys. Patrick Ryan: Morning, David. Andrew Hibshman: Hey. David Bishop: I think you mentioned in the preamble that you still sit in a very enviable tangible and regulatory capital position. Maybe your view of excess capital—how aggressive can you be in terms of addressing the buyback on any pullback in the share price? Patrick Ryan: We have an approved buyback in place and plenty of availability within the plan. Obviously, slower growth in the quarter is not the goal, but the paydowns during the fourth quarter and first quarter led to some significant additional capital accretion during the last half year. The short answer is we have strong capital levels to put to work if it makes sense. David Bishop: Got it. And then, in terms of revamping the small business group—you have the other specialized business units. Do you continue to see good opportunity to grow there? Any stress in any of those segments, like private equity or ABL, and your appetite to continue to grow those segments? Patrick Ryan: Those segments are doing well. We talk about them together as niche businesses, but they are very different. You are talking about a credit-scored product that is supposed to be scalable and light-touch, which is very different than the detailed, thorough, traditional underwriting we are doing on the ABL and the private equity side. Those other groups are performing well. We take a measured, methodical approach—not looking to bet the farm on any one of these individual segments. We think each of them could grow reasonably over the next couple of years and continue to contribute to overall profitability and diversification of the portfolio. David Bishop: Got it. As a follow-up, I think Peter mentioned the one larger commercial real estate credit—assisted living. Any additional color on ultimate resolution and the near-term outlook for that credit? Patrick Ryan: We are a participant with a larger bank on that, so we are taking our cues from them. All the data regarding our specific borrower—which is part of a much larger corporate entity that is going through a restructuring—points to the fact that we are in a very strong position. When you have a corporate restructuring, things get put on hold while that gets sorted out. Given the underlying strength of the asset, from a cash flow and LTV perspective, we have every reason to believe we are going to be fine there. The timing of when that comes off the books will be driven by how long it takes to work through the corporate restructuring process. We think and hope it would be gone by the end of the year, but it is hard to be more specific than that. David Bishop: Got it. Final question: there is a lot of discussion about deposit pricing competition across the Metro New Jersey/New York market. It is very competitive. Do you have the spot rate of deposits or margin at the end of the quarter, and maybe the marginal cost of deposits so far through April? Patrick Ryan: Andrew probably has the March deposit cost number; maybe that is the best place to start. Certainly, for incremental dollars, we are seeing pressure. If you want to try to raise some money in the CD market, that might have been a 3.50% rate six months ago, and now it is moving closer to 3.75% or even higher. You have seen the cost move higher on the brokered and wholesale side, and those markets are moving in lockstep. Andrew, if you have more specific data around what the March deposit level looks like. Andrew Hibshman: We had a rate cut in December and a couple of other rate cuts earlier in the quarter, so that trickled into the first quarter. We saw the big benefit of that hit in January. Pricing has stayed relatively stable when you look at overall deposit costs in January, February, and March. There is a little bit of pressure now with us trying to bring in some additional money, and pricing has gotten a little bit more competitive with Treasury yields moving a bit. I think deposit pricing should remain relatively stable compared to the first quarter, with maybe a little bit of pressure as we saw starting in March, and we will have to continue to be competitive into the second quarter. Operator: Your next question comes from the line of Jake Civillo with D.A. Davidson. Your line is open. Jake Civillo: Hey, good morning. On the compensation expense side, you talked about some of the moving parts. Is any of that competition-related or opportunistic hiring? Patrick Ryan: Regarding hiring, that is always happening, but I do not think there was anything in particular I would point to in Q1 as a driver. It was more a function of seasonal items that are nonrecurring for the remainder of the year, and that was the driver of the elevated numbers in Q1. Andrew Hibshman: I would just add that the market is still competitive for finding people, but we have not seen a ton of extra pressure. Salary increases are pretty standard this year. Overall, it is more standard stuff and some seasonal items in Q1, but nothing outside of normal or outsized salary increases, and we do not expect that we will have to be more competitive than normal to continue to bring good people into the bank. Jake Civillo: Fair. Thanks, Andrew. And then one more for me. You pointed to the $50 million net loan growth number in the first couple weeks of April. Does that follow the similar 50/40/10 split you referenced earlier? Patrick Ryan: I think year to date has been pretty consistent with the portfolio that exists today. In any given quarter or month, you could have a particular larger loan that might sway the numbers one way or the other. Peter, was there anything that jumped out at you if you looked at year-to-date growth that was an outlier from the overall portfolio composition? Peter Cahill: No. I would say it fits right in. Because it is more recent, I know a couple of the chunkier loans since 03/31 were in the C&I owner-occupied category. It was not the case where we closed and funded a couple of investor real estate loans to help the numbers or anything like that. It has been more of what we have been chasing for previous years. Jake Civillo: Okay. Great. Thank you. Operator: Again, if you would like to ask a question, press star then 1 on your telephone keypad. I will now turn the call back over to Patrick Ryan for closing remarks. Patrick Ryan: Thank you, everybody. We appreciate your time today, and we will look forward to regrouping with folks once we get through the second quarter here. Thanks, everyone. Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Universal Health Services, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session. To ask a question during the session, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Darren Lehrich, Vice President of Investor Relations. Please go ahead. Darren Lehrich: Thanks, Daniel. Good morning, and welcome to Universal Health Services, Inc. first quarter 2026 earnings conference call. With me this morning are our President and CEO, Marc D. Miller, and our Chief Financial Officer, Steve G. Filton. Marc D. Miller and Steve G. Filton will provide prepared remarks, and then we will open it up to Q&A. During today's conference call, we will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, we recommend a careful reading of the section on forward-looking statements and risk factors in our Form 10-Ks for the year ended December 31, 2025. In addition, we may reference during today's call measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI, and adjusted net income attributable to UHS which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in today's press release. With that, let me now turn it over to Marc D. Miller for some introductory remarks. Marc D. Miller: Thank you, Darren. Good morning to all participants on today's call, and thank you for your continued interest in Universal Health Services, Inc. The first quarter of 2026 featured significant acceleration in our behavioral health outpatient strategy with the announcement of the Talkspace acquisition and continued steady operating performance and cash flow generation in our core operations in the midst of more challenging seasonal volume trends. Revenue growth for the first quarter was 9.6%. Adjusted EBITDA, net of NCI, increased 8.4% and adjusted EPS increased 16.1% as compared to the first quarter of 2025. These results highlight the adaptability and financial discipline of our leadership teams and the benefits of our efficiency initiatives which are driven by technology adoption and operational excellence. Speaking first to the Talkspace acquisition, announced on March 9, Talkspace is an established market leader in virtual outpatient behavioral health care with a network of 6,000 licensed professionals serving all 50 states. We believe Talkspace is the best-in-class virtual platform in the behavioral industry with a differentiated technology offering and strong brand recognition among patients and clinicians. Talkspace's successful payer-driven business model aligns well with our strategy to increase access to a full spectrum of outpatient services and diversify our behavioral payer mix. Over the past 24 months, we focused significant resources to grow existing outpatient service locations adjacent to our hospital campuses and develop new freestanding outpatient clinic locations. We will continue to invest in these areas internally. The addition of Talkspace's high-quality, scaled platform accelerates our ability to create the industry's first end-to-end continuum of behavioral health care services that is strongly aligned to the demand trends and preferences of the market overall. This national continuum includes lower-acuity outpatient and step-in services, all the way to residential and inpatient services where we have led the market for more than four decades. We plan to share more details about the impact of the transaction after closing, but I would like to highlight two primary benefits of the acquisition. First, from a strategic perspective, Talkspace represents a multiyear value creation opportunity underpinned by access to new sources of outpatient revenue growth. This is supported by the strength of the base Talkspace business, which has a very strong outlook on a standalone basis, and is enhanced further by the programs we plan to develop alongside Talkspace to complement each other's businesses. For example, there is a significant opportunity for us to introduce Talkspace's 6,000 clinicians into our environment to develop higher-acuity virtual offerings such as virtual intensive outpatient programs, or IOPs. This will improve our ability to manage more patients stepping down from Universal Health Services, Inc. facilities with a preferred virtual option. The types of programs we build on a virtual outpatient basis will drive higher-quality continuity of care further downstream after our patients step down from higher levels of care. There are numerous other bidirectional revenue synergies we will be working on post closing that will improve access to outpatient virtual services for Universal Health Services, Inc. patients and improve access to higher levels of care for Talkspace patients. Second, from a financial perspective, we expect the deal to be accretive to earnings during the first 12 months post closing, and we expect it to be increasingly accretive thereafter. By year three post closing, we expect the effective EBITDA multiple for the Talkspace transaction to be in the single-digit range. Moving on to the quarter, I would like to highlight a few items before I turn it over to Steve G. Filton to review the financials. From a growth perspective, we met our internal same-facility revenue growth and earnings objectives in the first quarter despite a more dynamic operating backdrop. This was accomplished through solid expense management and higher contributions from pricing in both segments due to more positive trends in rate. We expect same-facility growth to be more balanced between volume and pricing as the year progresses, as we believe first quarter volume performance was impacted heavily by seasonal factors consistent with what we highlighted in February on our fourth quarter earnings call. From a technology perspective, our enterprise-level AI governance process remains very active and is focused on two primary domains within our business: in the operational domain to impact quality and patient experience, and in the administrative domain to increase efficiency. During 2025, we focused heavily on scaling solutions that reduce the burden of routine administrative tasks. We deployed and scaled a total of eight different use cases of AI solutions into our revenue cycle operations that are now yielding significant benefit on a go-forward basis. For 2026, we are focusing more heavily on enabling solutions in our clinical operations to improve hospital-level efficiency and patient experience. Included in our 2026 roadmap are several new use cases being designed and built with Hippocratic AI, which is one of our key AI solution partners. It is too early to project the longer-term financial impact of the 2026 initiatives. Although we expect them to be incremental to margins over time, and just as importantly, we expect them to have a real impact on quality and patient experience. In closing, I am encouraged by our progress so far in 2026 and remain optimistic about our ability to deliver high-quality services in an efficient manner to the communities we serve. On behalf of our entire organization, we look forward to welcoming Talkspace employees into Universal Health Services, Inc. in the coming months. With that, I will now turn the call over to Steve G. Filton for more details on the quarter. Steve G. Filton: Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions. The company reported net income attributable to Universal Health Services, Inc. per diluted share of $5.65 for the first quarter of 2026. After adjusting for the impact of the items reflected on the supplemental schedule included with the press release, our adjusted EPS was $5.62 for the first quarter. On a same-facility basis, adjusted admissions at our acute care hospitals declined versus the first quarter of 2025. We estimate acute care volumes during the first quarter of 2026 were impacted by approximately 200 basis points due to weaker flu and respiratory activity and winter weather in certain markets. Performance in the Nevada market rebounded slightly with adjusted admissions increasing approximately 1.5% over the prior year. Same-facility acute care emergency department visits increased approximately 2%, and we also saw positive trends in certain higher-acuity important inpatient service lines, notably cardiology, orthopedics, and neurology. On a same-facility basis, net revenues in our acute segment in the first quarter of 2026 increased 8.2% and were up 6.2% excluding the impact of our health plan. Acute care same-facility revenue per adjusted admission increased 6.3% during the first quarter of 2026 on a reported basis and was up 4.9% after excluding approximately $30 million of prior-period supplemental program net benefit related to the expanded 2025 Nevada program which we contemplated in our guidance. Operating expenses were well managed across labor and other expense categories. Same-facility acute care salaries, wages, and benefits expense per adjusted admission increased 3.1%, and supply expense per adjusted admission increased 3.5% over last year's first quarter. Same-facility contract labor was 2.3% of acute care segment revenues, or 40 basis points lower year over year. Other operating expenses increased primarily as a result of the growth in our health plan. For the first quarter of 2026, our acute care performance resulted in 11.7% growth in same-facility segment EBITDA. Excluding the prior-period supplemental program revenue, first quarter 2026 same-facility acute care segment revenue would have increased 3.3% on a year-over-year basis. With respect to health insurance exchange trends during the first quarter of 2026, we estimate an impact of approximately $15 million. Our exchange adjusted admissions declined approximately 5% as compared to the first quarter of 2025. However, due to our expectation that some of the exchange members treated at our acute care facilities during the first quarter will not sustain their premium payments, the impact to our acute care financials assumes an effective HIX decline that is higher than the reported trend. We are reiterating the full-year $75 million pretax impact which assumes the exchange declines will steepen somewhat as the year progresses. Turning to our behavioral health segment results during the first quarter of 2026, same-facility net revenues increased 7.3%, supported by a 5.8% increase in same-facility revenue per adjusted patient day and a 1.6% increase in same-facility adjusted patient days as compared to the first quarter of 2025. We estimate that the winter weather impacted first quarter behavioral health volume growth by approximately 40 to 50 basis points. Same-facility behavioral health segment EBITDA increased by 8.4% in the first quarter of 2026. Excluding the net benefit from prior-period supplemental payments, same-facility revenue per adjusted patient day would have increased 4.9% and same-facility segment EBITDA would have increased 4.3%. For wage trends in behavioral in 2026, we expect growth of approximately 6% on a year-over-year basis, moderating slightly from the 7% to 8% level we experienced during 2025. In California, we are making good progress year to date with respect to the state's nurse staffing ratio requirements that go into effect June 1, and we remain on track with the assumptions contemplated in our 2026 outlook. Cash generated from operating activities was $402 million for the three months ended 03/31/2026, as compared to $360 million during the same period last year. During the first quarter of 2026, we spent $217 million on capital expenditures. In the acute care segment, we continue to invest in the 156-bed de novo hospital in Florida scheduled to open in May, and in two bed towers and a replacement hospital project together comprising 178 beds that go online during the second quarter. In our behavioral health segment, we opened a 144-bed de novo joint venture hospital in Pennsylvania in the early part of the first quarter, and plan to open a 120-bed de novo hospital in Missouri later this year. During the first quarter of 2026, we acquired 675,000 of our shares at a total cost of $127 million. As of 03/31/2026, we had $1.3 billion of repurchase authorization available pursuant to our stock buyback program, and we expect to remain active with share repurchase throughout 2026, including leading up to and following the closing of the Talkspace acquisition. From a balance sheet perspective, in late April, we expanded the aggregate capacity of our credit facilities by $900 million to provide additional flexibility with the pending Talkspace transaction, other potential acquisitions, and our continued prioritization of returning capital to shareholders through buybacks and dividends. As of 03/31/2026, we had $373 million of borrowings outstanding pursuant to our revolving credit facility, the borrowing capacity of which was recently expanded to $1.5 billion. Turning to our outlook for 2026, we are reiterating the financial and operating forecast that we established on February 25 in conjunction with fourth quarter earnings. Customary with our historical practice, we plan to reevaluate annual guidance as necessary in conjunction with our second quarter earnings planned for July. Operator, that concludes our prepared remarks, and we are pleased to answer questions at this time. Operator: We will now open the call for questions. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To allow as many people as possible to submit a question, please limit yourself to one question and one follow-up. Please standby while we compile the Q&A roster. Our first question comes from A.J. Rice with UBS. Your line is open. A.J. Rice: Hi, everybody. Thanks. I appreciate the number you gave on the behavioral side, 4.3% as sort of the normalized core growth. There are a lot of moving parts in the acute business: the negative impact from the weather and the flu, and on the positive side some DPP variance year to year. Can you parse those out and give us a sense of what the core grew on an EBITDA basis in the acute side, possibly? And then, on AI use cases that Marc called out, can you pick two or three that are really meaningful and delve a bit more into the opportunity to deploy AI? Steve G. Filton: I think it was in the low single-digit range, A.J. Marc D. Miller: On AI, we are focused on administrative functions to increase efficiency and on clinical operations where we can impact patient experience and improve outcomes. We have already deployed and scaled eight different AI use cases in our revenue cycle operations, which are yielding significant benefits, including improvements in denials management and revenue capture. We are also doing a lot of things that touch the patient experience. We are not doing much in the core clinical decision space yet, but over time we expect progress there as well. A.J. Rice: Okay. Alright. Thanks so much. Operator: Thank you. Our next question comes from Jason Paul Cassorla with Guggenheim. Your line is open. Jason Paul Cassorla: Thanks. Good morning. I wanted to check back in on the $46 million of combined Nevada and Ohio out-of-period Medicaid supplemental payments. I think we are calculating around a $120 million to $130 million year-over-year benefit from total Medicaid supplemental payments in the quarter. Is that a fair characterization? And if so, can you help bridge what would indicate a decent step up in core EBITDA ramp for the remainder of the year to meet that 5% growth expectation? Steve G. Filton: That is accurate, and it is worth noting that none of what you enumerated was outside of our expectations. The vast majority of DPP we recorded in Q1 was in our guidance. If you exclude the $46 million of out-of-period DPP in Q1, you will have a good run rate for the rest of the year, and that number is consistent with what we disclosed in our 10-K and will disclose in our first quarter 10-Q as our estimated DPP for the year. We recognized that we would have this significant benefit in Q1 largely because we had a number of large DPP programs last year, for example Tennessee and D.C., that were not approved and therefore recorded until after the first quarter. As far as the ramp for the rest of the year, our overall results were within our expectations, and that implies we expect a ramp in our earnings as the year goes on to get to that core level growth of 5% embedded in our guidance. Those assumptions include the continued ramp-up of new facilities, Cedar Hill in Washington, D.C., which celebrated its first-year anniversary this month, the opening of the new hospital in Florida, the opening of 178 new beds in existing hospitals in California, Las Vegas, and Florida, continued improvement in behavioral, both in outpatient revenues and operating leverage from volume growth. Volumes were on the softer side in both acute and behavioral, and we expect them to improve as the year goes on. Finally, we expect continued moderation in wage pressures in behavioral versus the significant investments in 2025. Jason Paul Cassorla: Great. Thanks. As a follow-up on the behavioral volume picture, excluding weather impacts, you still hit the low end of your 2% to 3% volume target in the quarter. How much of that acceleration ex-weather was a function of higher headcount and increased labor supply versus changes in demand or throughput? Steve G. Filton: Two broad trends. First, we invested heavily in staffing in behavioral in 2025 to allow greater flexibility to take on demand, and that is beginning to reflect in volumes. Second, we continue to focus on outpatient growth, where more and more of the demand is shifting. We think demand remains strong for behavioral services, and we are doing a better and more focused job capturing that demand, which we view as an upward trajectory. Operator: Thank you. Our next question comes from Ann Hynes with Mizuho. Your line is open. Ann Hynes: Good morning. Can we talk about bad debt reserve trends? With Medicaid disenrollment and the expiration of the ACA subsidies, how is that trending versus your expectation? And does your guidance assume deterioration of collectability on copays and deductibles? Steve G. Filton: We addressed the HIX dynamic as it relates to uncompensated care and bad debt in our prepared remarks. We saw a decline in HIX volume in Q1, and we recorded an additional reserve because some HIX patients presenting with coverage will later be deemed not to have coverage if they fail to make premium payments. We have taken a reasonably conservative position in Q1. We continue to believe our $75 million negative estimate for the impact of the HIX subsidies expiring is appropriate; it will get larger as the year goes on, which was always our expectation, and that impact largely is reflected in higher bad debt and uncompensated care. Other than that, no dramatic changes in payer mix: slight increases in uninsured and Medicare, slight decreases in Medicaid utilization, and no big changes in denials or patient status changes. Investments in technology, people, and process in our revenue cycle, particularly in acute, are helping us keep pace with payers. We will increase that focus in behavioral throughout 2026. Operator: Thank you. Our next question comes from Matthew Dale Gillmor with KeyBanc. Your line is open. Matthew Dale Gillmor: Thanks. Following up on pricing, it seemed like rate outperformed even excluding the DPP. What drove the stronger price in the quarter, and why do you expect moderation for the rest of the year? Steve G. Filton: Mix was a factor. With significantly lower flu this year, by definition the remaining patients were of higher acuity; flu and respiratory are lower-acuity cases. We also saw healthy increases in more acute service lines—cardiology, orthopedics, and neurology—which supported acuity and pricing. We expect a more balanced contribution between rate and volume as the year progresses. Matthew Dale Gillmor: And on professional fees, any trend updates and what are you doing to alleviate pressure, particularly in radiology? Steve G. Filton: Our guidance contemplated professional fees rising at an inflationary single-digit rate, maybe toward the high single digits, and we are largely operating within that range. We are addressing pressure from certain hospital-based physicians by running more competitive RFPs for coverage and reducing locums usage, which is more expensive. It is a daily operational focus, but we have been successful keeping fees manageable. Operator: Thank you. Our next question comes from Joanna Gajuk, filling in for Kevin Mark Fischbeck with Bank of America. Your line is open. Joanna Gajuk: Hi, good morning. On the HIX volume decline, can you talk more about payer mix in the quarter? Steve G. Filton: We saw a decline in HIX volumes, a slight decline in Medicaid utilization, a slight increase in uninsured volumes, and a slight increase in Medicare volumes—no major changes beyond that. Joanna Gajuk: Thanks. And on supplemental payment programs, sounds like nothing new was approved this quarter. Any update on Florida and California? Steve G. Filton: In Florida, there is a high level of confidence among providers, based on feedback from the state, that the pending 2025 program is likely to be approved. We do not know the exact timing. We have been estimating about a $50 million benefit, and when we see the final approvals, that benefit could be measurably higher; we will adjust guidance when appropriate. In California, a renewed or expanded program is much less certain. We are not estimating a potential benefit there until there is further consensus between the state and CMS, although it is possible an expanded program could be meaningful. Operator: Thank you. Our next question comes from Justin Lake with Wolfe Research. Your line is open. Justin Lake: Thanks. On core growth, ex-DPP your core EBITDA looks down about 5% to 6% by my math. Anything in last year’s first quarter that did not reoccur, or anything else driving the decline? Steve G. Filton: It is difficult to respond with precision without your calculation in front of me, but the items you referenced were anticipated and embedded in our guidance. We understood the difficult DPP comparison in Q1 and that our earnings trajectory would need to increase over the year to get to the core 5% growth embedded in guidance. We believe we can get there for the full year, but we are not at that core 5% growth in the quarter when excluding DPP and other nonrecurring items. Operator: Thank you. Our next question comes from Benjamin Hendrix with RBC Capital Markets. Your line is open. Benjamin Hendrix: Thank you. On HIX trends, you cited a 5% decline in volume, but for the year you assume 25% to 30% of HIX patients lose coverage. Are you updating that assumption based on 1Q results? Steve G. Filton: While we could identify a 5% decline in HIX volumes in Q1, we expect some patients recognized as HIX will later be identified as not having coverage due to nonpayment of premiums. Our reserve reflects a higher effective HIX volume decline, probably in the low double digits—around 10% to 12%. We continue to believe the decline could reach 25% to 30% for the year. We were not expecting to be at that level in Q1. There are still dynamics around premium payments and coverage status that we will learn more about over the next quarter or more, and we are being conservative from an accounting perspective. Operator: Thank you. Our next question comes from Andrew Mok with Barclays. Your line is open. Andrew Mok: Good morning. Given flu and weather were early quarter dynamics, can you comment on volume progression throughout the quarter in each segment, including exit rates in March and April? Steve G. Filton: The flu comparison was more significant in January and February; flu season was largely over by March in both years. Weather impacts were concentrated in January and February and were market-specific. March was a “cleaner” month—no real flu impact and no significant weather impact—and volumes showed a more normative year-over-year increase. Operator: Great. Thank you. Our next question comes from Raj Kumar with Stephens. Your line is open. Raj Kumar: Following up on March and April trends, did you see a pickup from deferred care pushed by winter storms? And any commentary on acute care surgical volumes and acuity shifts year over year? Steve G. Filton: Elective procedures that are scheduled and postponed due to weather tend to be rescheduled. The bigger acute impact was flu, which is not something you recover. We estimate $5 million to $7 million of weather impact, mostly in the D.C. market where burst pipes closed beds temporarily. You recover from closures operationally, but you do not recapture the lost patient days. On the behavioral side, you may recapture outpatient visits, but inpatient trauma-type admissions are generally redirected elsewhere if patients cannot reach the hospital. We are not counting on significant recapture of deferred procedures in our growth outlook. Operator: Thank you. Our next question comes from Craig Matthew Hettenbach with Morgan Stanley. Your line is open. Craig Matthew Hettenbach: On the outpatient behavioral strategy and Talkspace, how has the Thousand Branches initiative been going, and did it inform the Talkspace decision? Marc D. Miller: Things are going well, though deployment has been a bit slower due to state-by-state factors. Thousand Branches did not drive the Talkspace decision. We have known Talkspace for many years and have long focused on building outpatient capabilities. The Talkspace opportunity emerged when they indicated an openness to strategic options, and we moved forward. Our internally developed outpatient offerings will complement Talkspace as we build the full continuum. Craig Matthew Hettenbach: You mentioned the effective multiple could be single digits a few years out. What gives you that confidence? Marc D. Miller: We have confidence based on a full look at their business model, recent performance, and their standalone plans for the next 24 months, combined with the incremental programs we can drive together. Today’s multiple is harder to assess off current earnings, but with their growth path and our combined initiatives, we expect earnings to scale such that in a few years the effective multiple will be in the single digits. Operator: Thank you. Our next question comes from Benjamin Rossi with JPMorgan. Your line is open. Benjamin Rossi: Good morning. On volumes, what is your current outlook for Medicaid volumes for the year in both segments, and are you seeing any signs of volatility returning through administrative churn or eligibility friction? Steve G. Filton: We saw slight declines in Medicaid utilization in Q1, which is consistent with our expectations for the year. Outside of HIX, payer mix changes in Q1 were relatively minor and consistent with expectations, and that is how we are thinking about the rest of the year. Benjamin Rossi: As a follow-up on de novos, can you update on recent openings in Nevada and D.C., and the Florida hospital set to open next month, and how you are thinking about full-year EBITDA performance? Steve G. Filton: As part of our guidance, we said the new Florida hospital would likely have an operating loss in its first year, as most de novos do. We expect that loss to be largely offset by gains at Cedar Hill in D.C. We still believe that, though Cedar Hill’s improvement is likely more back-end loaded than originally contemplated due to weather and other dynamics. The additional capacity coming online in Q2—new towers in Las Vegas and on Florida’s West Coast, and a replacement facility in California—are in existing markets and should ramp relatively quickly, contributing positively in the back half. Operator: Thank you. Our next question comes from Ryan M. Langston with TD Cowen. Your line is open. Ryan M. Langston: On denials activity, are you seeing accelerating levels of denials but navigating more effectively? Any color by payer class? Steve G. Filton: We are not seeing a material increase in denials. Others have cited more aggressive payer behavior; our investments in revenue cycle technology, personnel, and processes—particularly in acute—are allowing us to keep pace. We plan similar investments in behavioral over the next 12 to 18 months. Operator: Thank you. Our next question comes from Analyst with Goldman Sachs. Your line is open. Analyst: Good morning. Update on behavioral supply-demand equilibrium—any incremental shifts on supply or demand versus the last couple of years? Steve G. Filton: Behavioral demand remains strong. Our greatest challenge has been meeting that demand due to staffing in certain markets and roles—nurses, therapists, mental health technicians. We have made progress but it remains a focus. Demand is also shifting more to outpatient delivery, similar to the long-term trend in acute. We are addressing this through freestanding outpatient facilities (Thousand Branches), step-down programs, and the Talkspace acquisition. Analyst: As a follow-up on outpatient strategy and capital allocation, how are you balancing buybacks relative to allocating more capital toward building out outpatient and digital capabilities? Steve G. Filton: Since announcing Talkspace, we have emphasized it is not an either/or with share repurchase. We continue to view buybacks as compelling and intend to remain active; our previously discussed annual target of $800 million to $900 million remains a minimum target. The Talkspace deal modestly increases leverage from just under 2x to just over 2x, leaving plenty of capacity for additional M&A, an aggressive CapEx program, and continued returns of capital through buybacks and dividends. Operator: Thank you. Our next question comes from Analyst with Baird. Your line is open. Analyst: Thank you. Following up on core growth math, inputs I am considering include net DPPs, the exchange subsidy headwind, California staffing requirement headwind, flu/weather impact, Palm Beach Gardens de novo costs, and Cedar Hill which sounds more back-end loaded now. Anything else to consider, or any nonrecurring items from last year’s first quarter? Steve G. Filton: Those are the items we have discussed, and none were a surprise to us in the quarter. Overall results were consistent with our internal expectations. Weather and flu were the less predictable elements, but we referenced both on our Q4 call. On Cedar Hill and the new Florida hospital, we continue to expect a near wash for the year, with Cedar Hill more back-end loaded. Analyst: And on behavioral labor efforts focused on retention of year-one hires—last time you cited turnover moving down from as high as 50% to at least 40% over the last half year. Where does turnover stand today, and what was the pre-COVID reference point? Steve G. Filton: Behavioral salary and wage expense was up about 8% in 2025 and moderated to roughly 6% to 7% in Q1 2026. We expect further moderation as the year progresses, reflecting less aggressive hiring, moderation in wage increases, and measurable progress in turnover. Turnover remains elevated industrywide but is improving meaningfully versus last year. Pre-COVID turnover was materially lower than today’s levels, and our initiatives are aimed at continuing to narrow that gap. Operator: I am showing no further questions at this time. I would now like to turn it back to Darren Lehrich for closing remarks. Darren Lehrich: Thank you, everyone, for participating in today's call and for your interest in Universal Health Services, Inc. Have a great rest of your day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the ArcBest Corporation First Quarter 2026 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded. I will now turn it over to Amy Mendenhall, vice president, treasury and investor relations. Please go ahead. Amy Mendenhall: Good morning. I am here today with Seth K. Runser, our president and CEO, and J. Matthew Beasley, our chief financial officer. Other members of our executive leadership team will also be available during the Q&A session. Before we begin, please note that some of the comments we make today include forward-looking statements. These statements are subject to risks and uncertainties, which are detailed in the forward-looking statements section of our earnings release and SEC filings. To provide meaningful comparisons, we will also discuss certain non-GAAP financial measures that are outlined and described in the tables of our earnings release. Reconciliations of GAAP to non-GAAP measures are provided in the additional information section of the presentation slides. You can access the conference call slide deck on our website at arcb.com and in our 8-K filed earlier this morning, or follow along on the webcast. And now I will turn the call over to Seth. Seth K. Runser: Thank you, Amy, and good morning, everyone. The first quarter brought a challenging operating environment with severe winter weather, higher fuel prices, and continued uncertainty. Even so, we remain focused on what we can control: executing our long-term strategy with discipline and advancing initiatives that support profitable growth, efficiency, and innovation. I am incredibly proud of how the ArcBest Corporation team responded in a dynamic environment. They stayed disciplined, remained close to our customers, and continued delivering flexible, efficient, and integrated solutions to meet evolving needs. Customer demand has remained steady, and we continue to see improvement in our pipeline. While the timing and pace of a broader recovery remains hard to predict, conditions are becoming more constructive. Leading indicators of manufacturing activity have moved into expansion, which is supportive of future freight demand. At the same time, truckload markets are showing early signs of tightening as capacity continues to exit the industry, driven in part by regulatory enforcement and higher operating costs. In our customer conversations, there is an increasing emphasis on execution, reliability, and visibility, and those priorities align closely with how ArcBest Corporation serves its customers. Against that backdrop, we will launch ArcBestView in May. This platform enables customers to quote, book, and track shipments across our logistics solutions through a single intuitive interface. We developed ArcBestView in close partnership with customers, and early feedback has been very encouraging. Combined with our integrated solutions and continued progress in our digital capabilities, this platform enhances our ability to help customers respond quickly, manage complexity, and build more resilient supply chains. Importantly, this launch reflects a broader set of capabilities we have been intentionally building over time. Our investments in the network, technology, and operating tools have strengthened execution today while expanding what we can deliver for customers going forward. We continue to advance the initiatives we outlined at Investor Day, and our team remains focused and aligned on achieving our long-term targets. Let me walk you through our progress for the quarter. In the Asset-Based segment, daily shipments increased 2% year over year to nearly 20,000 shipments per day. While severe winter weather affected volumes and service earlier in the quarter, service has since normalized and remains at a high level. The investments we have made in our network, equipment, and labor planning tools position us to sustain strong, consistent service through the summer months and across the balance of the year. We also remain disciplined on pricing. Deferred price increases averaged 6% in the first quarter, our strongest result since 2022. That reflects our continued focus on revenue quality. In addition, the expansion of our dynamic quote pool has given us greater ability to make real-time pricing decisions, allowing us to be more selective and further optimize yield and profitability. Demand for our Managed Solutions offering continued to build during the quarter, resulting in another record performance and double-digit growth in daily shipments. This momentum reflects a stronger pipeline, deeper customer engagement, and the value our team brings as they help customers manage increasingly complex supply chains. In truckload, we remain focused on optimizing freight mix and maintaining pricing discipline. Revenue per shipment improved meaningfully both year over year and sequentially, driven by a tighter capacity market, higher fuel prices, and improved yield quality. Across the business, we continue to make progress on efficiency and innovation initiatives. Continuous improvement training has now been implemented across approximately 75% of the network. Teams are focused on process discipline, safety, and adoption of new tools, and that work is producing tangible results. To date, these efforts have generated $32 million in annualized cost savings, with additional benefits expected as implementation continues through the remainder of the year. We are also making meaningful progress with our city route optimization project and remain on track to complete the latest phases of deployment. This AI-enabled initiative is reducing manual work, improving route planning, and increasing asset utilization across the network. Phases two and three are expected to be fully operational in the coming months. To date, the program has delivered $15 million in annualized savings while also improving network efficiency and service. The success we are seeing with city route optimization reflects a broader philosophy at ArcBest Corporation. We start with strong ideas, test them in the business, learn quickly, refine what works, and then scale with discipline. That approach is shaping how we deploy AI and is guiding the next wave of initiatives across our technology roadmap. Our AI strategy is deliberate and closely aligned with our business priorities. We are deploying AI where it can create meaningful operational and financial benefits, and we are embedding AI capabilities in the core initiatives across the organization. Just as important, we are not forcing a single solution across a complex business. Instead, we are applying the right tools for the right needs. This approach allows us to move with speed and purpose while maintaining the governance required to ensure these solutions are secure, responsible, and scalable. We believe AI delivers the most value when it strengthens our people and enables better decision-making. Our approach is practical and disciplined. We are investing in initiatives with clear return, partnering externally where it accelerates progress, and combining advanced technology with the network, processes, and expertise that already differentiate ArcBest Corporation. Most importantly, our customers remain at the center of this work. Digital tools are helping us serve them better, while the expertise, responsiveness, and reliability they expect from ArcBest Corporation remain unchanged. Across our technology roadmap, including AI-driven initiatives, we are aligning resources, simplifying processes, and using data more effectively to help offset inflationary cost pressures, improve decision-making, and lower our cost to serve. That work is driving meaningful productivity gains across the business. In Asset-Light, for example, we continue to improve how we manage and optimize buy rates, particularly as market conditions shift. Initiatives such as offer collection, automated negotiation, and capacity sourcing augmentation are enabling faster, more informed decisions. Taken together, our technology and AI initiatives are strengthening our business. They are improving how we work, enhancing operational performance, and helping ArcBest Corporation execute effectively today while building for the long term. Looking ahead, we remain focused on removing barriers and simplifying how work gets done across the organization. That means enabling teams to collaborate more effectively, move faster, and stay focused on what matters most to our customers. As we continue to align and streamline our operation, we are strengthening our execution today and building a more agile, scalable ArcBest Corporation for the future. With that, I will turn the call over to Matt to walk through the financial results. J. Matthew Beasley: Thank you, Seth. Good morning, everyone. In the first quarter, disciplined execution, operational focus, and cost control enabled us to navigate the challenging environment while continuing to position the business for long-term success. On a consolidated basis, first quarter revenue was $1 billion, up 3% year over year. Non-GAAP operating income was $13 million, compared to $17 million in the prior-year period. Adjusted earnings per share were $0.32, compared to $0.51 in 2025. At the segment level, Asset-Based operating income declined by $9 million year over year, while Asset-Light generated non-GAAP operating income of $3 million, an improvement of $4 million from last year. Turning to the Asset-Based segment. First quarter revenue was $655 million, up 2% on a per-day basis. The ABS operating ratio was 97.3%, which was 140 basis points higher than last year and 110 basis points higher sequentially. Daily tonnage increased 7%, reflecting a 2% increase in shipments per day and a 5% increase in weight per shipment. Our large and growing digital quote pool continues to improve our visibility into demand and expand our options within the network. That has allowed us to target certain heavier shipments that fit well operationally and generate attractive incremental profit contributions. Revenue per shipment increased slightly, supported by the higher weight per shipment, but that was partially offset by a 4% decline in revenue per hundredweight, which primarily reflects the shift in freight profile toward heavier shipments. On the cost side, operating expenses increased for several reasons, including additional labor needed to support shipment growth, annual contract increases in union wage rates, higher fuel prices, and increased depreciation expense associated with our equipment investment. Turning to trends so far in April, shipments per day are down 1% year over year, while weight per shipment is up 6%, resulting in daily tonnage growth of 5%. We are beginning to see modest improvement in truckload-rated shipments which, along with other changes in freight profile, is contributing to the higher weight per shipment. Revenue per shipment in April has increased 10% year over year, driven by the heavier freight profile and a 4% increase in revenue per hundredweight, largely reflecting higher fuel surcharge revenue. Excluding fuel surcharge, revenue per hundredweight declined in the low single digits, primarily due to changes in freight profile. Sequentially, from March to April, weight per shipment is flat, shipments per day are up 1%, and tonnage per day is also up 1%. Revenue per shipment has improved by about 4%, due to a 4% increase in revenue per hundredweight, largely reflecting higher fuel costs. Excluding fuel surcharge revenue, revenue per hundredweight was slightly positive on a sequential basis. Fuel impacts became more pronounced in April than they were in the first quarter, which included only one month of elevated fuel prices. Higher fuel costs increased fuel surcharge revenue, but they also raise operating costs for us across the network. While our fuel surcharge mechanisms are designed to recover higher fuel costs over time, periods of rapid fuel price movement can create short-term timing differences between when revenue is recognized and when those costs are incurred. Historically, ABF’s non-GAAP operating ratio improved by approximately 350 basis points from the first quarter to the second quarter. Based on current trends, we expect second-quarter performance to improve sequentially by approximately 400 to 500 basis points. This outlook reflects continued momentum in our commercial pipeline, disciplined execution on pricing initiatives, and the impact of recent fuel price movements. Turning to the Asset-Light segment. First quarter revenue was $378 million, up 7% on a daily basis year over year. Shipments per day increased 10% and reached a new first-quarter record, as strong growth in Managed Solutions more than offset our strategic reduction of less-profitable truckload volumes. Revenue per shipment declined 3% as higher rates associated with tightening capacity and increased fuel costs were more than offset by a greater mix of managed business, which typically involves smaller shipment sizes and lower revenue per shipment. We also made meaningful progress on the cost side. Selling, general, and administrative expense per shipment declined 15% to the lowest level on record, driven by productivity initiatives and a higher mix of managed business, which carries a lower cost to serve. Employee productivity also reached a record high, with shipments per person per day increasing 26%. As a result, the Asset-Light segment delivered non-GAAP operating income of $3 million in the first quarter. Turning to April trends for Asset-Light. Daily revenue is up approximately 24% year over year, driven by 17% shipment growth led by our managed business. Revenue per shipment has increased 7%, reflecting higher fuel costs and early signs of tightening capacity in the truckload market. Looking ahead, we expect second-quarter non-GAAP operating income in Asset-Light to be in the range of approximately $1 million to $3 million. This outlook reflects continued yield discipline, active cost management, and improved productivity performance, which together provide a solid foundation for long-term profitable growth. Turning to capital allocation. We continue to take a balanced, long-term approach that supports growth while maintaining strong financial discipline. Many of the network, technology, and productivity investments needed to support future growth are already in place. As market conditions improve, we believe the business is well positioned to benefit from improving demand without a meaningful increase in capital requirements, which should support attractive returns on invested capital. Returning capital to shareholders remains an important priority. In 2026, we returned more than $10 million through a combination of share repurchases and dividends. Looking ahead, we expect to remain opportunistic with repurchases based on share price while continuing to prioritize high-return organic investments and a disciplined approach to leverage. Our balance sheet remains a significant strength. We have ample liquidity and a net debt to EBITDA ratio that is well below the S&P 500 average. This financial position provides flexibility to navigate uncertainty, invest where we see attractive returns, and respond quickly as opportunities emerge. As Seth said, we are staying focused on what we can control—executing our long-term strategy with discipline and advancing initiatives that support profitable growth, efficiency, and innovation. As we look ahead, we remain confident in our strategic direction and in our ability to deliver the long-term targets we outlined at Investor Day. We will now open the call for questions. Operator: As a reminder, if you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. You will be limited to one question per participant. Your first question comes from the line of Ravi Shanker from Morgan Stanley. Your line is live. Ravi Shanker: Great. Thanks. Good morning, everyone. At the top of the call you said you are seeing conditions becoming more constructive. Can you help unpack that a little bit—which end markets, maybe which parts of the country you are seeing that? And do you expect that to be fairly broad-based through the course of the year? Seth K. Runser: Hey, Ravi. Thanks for the question, and good morning. We are seeing demand trends that have started to stabilize, though overall levels still remain below mid-cycle norms. Manufacturing and housing continue to pressure our volumes like we have talked about in the past, particularly around weight per shipment, which remains below normalized levels for the network. Despite these headwinds, we grew shipments by 2% in Asset-Based year over year, and our dynamic shipments are starting to trend heavier as well, reflecting improving freight selection. April tonnage and shipments have also increased sequentially and tracked in line with normal seasonality, which is an encouraging sign as we move through the rest of the year. Our focus is on pricing discipline, service consistency, and cost control, while staying closely engaged with our customers during this volatile time with fuel prices and everything that is going on. Capacity fundamentals continue to move in a more constructive direction and provide the earliest sign of a more balanced market ahead. You have heard about ongoing truckload carrier exits, a tighter regulatory environment, and aging industry fleets—which makes me happy that we have invested in our fleet throughout this cycle. While the timing of the demand inflection remains uncertain, the supply rationalization is progressing. Manufacturing PMI has moved into expansion territory these past three months, an important directional indicator for freight demand. Housing and automotive are still constrained but could improve if we get rate cuts later this year. As conditions normalize, our available network capacity, strong customer relationships, and pipeline position us well to capture incremental demand efficiently and effectively. I have spent a lot of time with customers over the last three months, and it is clear they are gravitating towards partners they trust—organizations that can bring consistency, insight, and stability during rapid change. We view markets like this as an opportunity, and we have made purposeful investments throughout this cycle to ensure we are positioned ahead of the next inflection. In short, we are investing, listening, and executing—delivering value for our customers and shareholders regardless of the broader environment. Operator: Your next question comes from the line of Chris Wetherbee from Wells Fargo. Your line is live. Christian F. Wetherbee: Hey. Thanks. Good morning. I wanted to pick up on some of the comments you made about TL-rated shipments and the broader truckload market—what it might mean in terms of volume shifting back over. It seems like on the margin you are seeing that. You noted regulatory tightening moving in your favor. As you think about the rest of the year beyond what you have seen so far in April, what does that opportunity look like? What would you expect to see in terms of a tailwind from a volume standpoint? Seth K. Runser: Hey, Chris. Seth here. I will talk through the truckload side, and then Eddie can make some comments on truckload-rated business moving into Asset-Based. On the truckload side, most enterprise shippers are responding positively and granting increases where needed because they are seeing what is going on with capacity. We have seen a shift to shorter-term rate increases as well as mini-bids to mitigate our spot exposure while maintaining the service that our customers expect. Demand is more stable, but supply constraints continue due to increased costs and regulatory pressure. Spot rates are currently exceeding contract by 15% to 20%. Normalized for fuel, we saw contract increases in the low- to mid-single digits in the first quarter year over year, and we expect low- to mid-double-digit increases as we move through the second and third quarters—this is on the truckload side. Moving forward, we will continue to optimize our truckload volumes, bring on profitable new business, and shed business that we cannot profitably execute. I have been really impressed by the team—Asset-Light delivered $3 million in profitability in the first quarter, versus $1.5 million for all of 2025. I will turn it over to Eddie to talk about truckload-rated shipments moving into the Asset-Based network. Eddie Sorg: Yeah, Chris. This is Eddie. We have seen tighter truckload capacity producing higher spot rates, and combined with higher fuel prices, we are starting to see early signs of business push into our integrated logistics solutions and LTL. The first signs are in our transactional markets—we are up to over 250 thousand quotes a day—so we get early visibility into potential spillover from truckload to LTL. It is giving us a great opportunity to find the highest-quality revenue in those opportunities and then deploy dynamic pricing or one of our volume quote facilities to capture that business where it makes sense in our network. I would not say it is a robust spillover yet, but there are early signs of some of that coming back to LTL and our integrated logistics offerings. Operator: Your next question comes from the line of Jason Seidl from TD Cowen. Your line is live. Jason H. Seidl: Thanks, operator. Good morning, gentlemen. I wanted to talk about your comment that we are not yet near mid-cycle. You are clearly getting much better pricing right now, which is pretty impressive. As we move towards mid-cycle demand, where do you see pricing going, all else being equal, in the truckload space? Seth K. Runser: Hey, Jason. Good morning. Core LTL pricing continues to improve, supported by a rational market and the disciplined actions we have taken despite the softer environment. We expect that discipline to hold as market conditions evolve. Deferred contract renewals increased 6% in the quarter—our strongest result since 2022—and that reinforces the confidence and durability of our core customer relationships. Customers are still with us; they are just shipping less. As volumes recover and capacity tightens, we expect pricing discipline to persist and ultimately translate into further rate improvement. As volume improves, we also expect more core business from our current customers. Our strategy for dynamic quoted freight is unchanged, but its effectiveness improves as the quote pool expands. A larger quote pool gives us more selection within the targeted freight universe, allowing us to choose what fits best in our network to deliver high-quality pricing and profitability. Those shipments have trended heavier as the pool has expanded over the past six months. As optionality increases, we get better pricing. Our core pipeline continues to strengthen, and as we get new wins, we gain flexibility to optimize mix and maximize incremental profit contribution. We have a long history of pricing discipline and evaluate books of business based on how each account performs in the network—not a single pricing metric. We remain focused on profitable growth, ensuring we are properly paid for the value we deliver. We continue to make targeted investments in service and efficiency to enhance the customer value proposition while improving our cost structure. ArcBestView rolling out in May is another example. Feedback has been great, and we will continue to serve customers efficiently with pricing discipline through the cycle. Operator: Your next question comes from the line of Scott Group from Wolfe Research. Your line is live. Scott H. Group: Hey. Thanks. Good morning. With the OR guide for Q2 outperforming seasonality, can you add color on what is driving that—how much is flow-through from fuel versus tonnage getting better? And on fuel, in prior big diesel increases we have typically seen a bigger spike in revenue per shipment and revenue per hundredweight. Is there anything different about how we should think about fuel for you right now? J. Matthew Beasley: Hey, Scott. As we think about first quarter moving to second quarter, the outperformance versus what we would expect is broad-based. If you look at revenue per day, shipments per day, daily tonnage, weight per shipment, revenue per hundredweight—across all of those, our current projection for the second quarter is outperforming the ten-year history. Fuel was a factor in the first quarter given volatility, and we still would have been within our guidance range even without the fuel changes. Fuel changes are not the primary driver of the second-quarter outperformance. They are a contributor, but the strength across the business—both on the commercial side and on the yield side—is driving the sequential OR performance. Historically we see around 350 basis points of improvement moving from the first to the second quarter, but when you take into account the strength across revenue, shipments, tonnage, weight per shipment, and pricing, that puts us in the 400 to 500 basis points of improvement we are projecting. Operator: Your next question comes from the line of Jordan Alliger from Goldman Sachs. Your line is live. Jordan Robert Alliger: Hi. Morning. I wanted to come back to weight per shipment. You have mentioned your changing freight profile and mix is a big part of it. Historically, weight per shipment has often been correlated to improvement in the economy. Is some part of the weight per shipment strength you are seeing—even into April—related to the economy, or is it truly just mix shift? Seth K. Runser: Hey, Jordan. Good morning. Our weight per shipment on core business is still impacted by the softer manufacturing economy, which can cause shippers to reduce shipment size. Our retention is in a great place, and we are starting to see core produce more. Dynamic shipments have been trending heavier, which impacts weight per shipment and is a direct result of expanding the quote pool—it allows us to be more selective in real time, optimizing yield, network, profile, and profitability. That increased visibility and optionality allow us to accept certain heavier shipments that fit well within our network. In April, year-over-year weight per shipment is up about 6%, impacted by heavier dynamic shipments and a bit of truckload-rated shipments that Eddie mentioned earlier. We are beginning to see modest improvements, but it is still early. As a reminder, we are impacted a bit more than others on weight per shipment because our U-Pack service ties to the housing market. With housing where it is and interest rates elevated, it has resulted in fewer household goods moves—generally smaller in shipment count but heavier in nature. Normally, from first to second quarter, we see U-Pack improve, but it is still below historical norms, leaving operating leverage. We believe more truckload freight will move back into LTL as capacity normalizes in truckload, and our managed pipeline continues to grow. As managed grows, it feeds other service lines and we can select the best freight for the network. We have been through many cycles. There is still uncertainty, but I am proud of the team’s execution, customer engagement, and pricing discipline. We are built for any environment, and customers appreciate partnering with us when fuel moves up or capacity tightens. We focus on saying “yes” and delivering. Operator: Your next question comes from the line of Bruce Chan from Stifel. Your line is live. J. Bruce Chan: Thanks, operator, and good morning. On the Asset-Light business, you have been focused on productivity. It seems like a good chunk is coming from the mix of managed business. Assuming we are kicking off the cycle here, how are you thinking about shipment growth and the need for additional headcount in truck brokerage? And what is the spot versus contract mix there? Seth K. Runser: Hey, Bruce. I am really proud of the team for delivering $3 million in non-GAAP operating income in the first quarter—versus $1.5 million for all of 2025. We are encouraged by continued truckload capacity exits. We saw strong shipment growth led by Managed, which had another record quarter, reflecting investments we have made to position Managed as a truly integrated logistics company. Operating expenses were lower, and we ended with record-high productivity in Asset-Light and record-low SG&A cost per shipment, all contributing to improved productivity. This comes from technology investments to grow without adding headcount and developing our employees to be ready for the next cycle. Shipments and revenue are strengthening in April—we noted our operating income range of $1 to $3 million for Q2 in our 8-K. We continue to align costs and resources to business levels. I am also excited that Mac has three months under his belt; he has been a huge addition. We are improving profitability of our account base and focused on productivity with technology deployments—we are still in the early stages of a lot of that. J. Matthew Beasley: And, Bruce, on spot versus contract mix, over the last year it has been roughly a 50/50 split, and that is the level we saw as we moved through the first quarter as well. Operator: Your next question comes from the line of Tom Wadewitz from UBS Financial. Your line is live. Thomas Richard Wadewitz: Great. Good morning. Circling back on LTL pricing. In 2Q, revenue per shipment sounds like it is up nicely in April, but it also sounds like a lot of that is fuel. What is the lag we should consider with the stronger 6% contract renewals and also weight per shipment? Ex-fuel revenue per shipment sounded flattish in April versus March. When do we see improvement in ex-fuel revenue per shipment? Seth K. Runser: Thanks, Tom. Fuel surcharge is one component of pricing and generally protects us as fuel prices increase and helps customers as prices decrease. Fuel surcharge covers more than just over-the-road fuel—there is propane for forklifts, rail, purchase transportation, and other costs—so it is not just on the freight we move. Eddie can talk about yield and timing. Eddie Sorg: From a yield perspective, we really sharpened focus in the second half of last year, and we had a strong result in the first quarter with over 6% increases. We are building to a better overall mix in core LTL. With fuel moving up, it brings higher revenue but also higher cost, and the timing between fuel surcharge collections and underlying costs can make it harder to see the benefit in the near term. Overall, we feel good about the mix of business and our yield discipline. We are committed to continuing to improve LTL pricing. Confidence comes from strong growth in 2025 that is continuing in 2026, a robust sales pipeline—especially in Managed Solutions—and our expanding quote pool, which lets us further adjust business mix to secure the most profitable freight for our systems and network. Even if fuel moves up or down, the yield fundamentals remain strong. Operator: Your next question comes from the line of Brian Ossenbeck from JPMorgan. Your line is live. Brian Patrick Ossenbeck: Good morning. Thanks for taking the question. On recent headlines in truckload brokerage—the risks of chameleon carriers, the Montgomery case, and potential extension of safety or liability risk to brokers—are you doing anything with your carrier base based on these headlines and potential regulatory or Supreme Court outcomes? And if liability is extended to brokers, what does that do for the industry? Seth K. Runser: Thanks, Brian. Safety has always been fundamental to how ArcBest Corporation operates. While recent media attention has focused on specific situations, we remain focused on disciplined execution and consistent operating practices aligned with applicable laws and regulations. We use a structured, compliance-based process to select and monitor third-party carriers, with ongoing visibility into authority, insurance, and safety status. Carriers that do not meet requirements are not eligible to move freight for us. The FMCSA provides the national regulatory framework for carrier safety; we operate within that and invest in systems and processes to support disciplined risk management and operational consistency. At this time, we do not expect these developments to change our outlook or approach to safety and compliance—it is already embedded in how we run the business. Customers expect us to operate safely and responsibly, and we maintain open, constructive dialogue to support their long-term goals. Regarding capacity, continued truckload exits due to bankruptcies and regulatory pressures—along with developments like Delilah’s Law and issues around non-domiciled CDLs—are constraining supply. We focus on what we can control and partner with customers to navigate uncertainty. With service in a great place, we feel positioned to lead and capture opportunities. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Your line is live. Stephanie Benjamin Moore: Hi. Good morning. I wanted to talk about your 2028 targets. When you originally gave those targets, the macro was in a different position than it seems to be today. Can you talk about progress toward those targets with a firmer freight environment and how you are thinking about them now? Seth K. Runser: Hi, Stephanie. We have confidence in our long-term view and the targets we outlined at Investor Day. We did not expect a significant freight recovery in 2026 within those targets, so some of what we are seeing now is earlier than anticipated, but we still need more consistent demand. We are encouraged by truckload exits and three positive months of PMI readings. Geopolitical risk and higher fuel could impact inflation and rates, but supply-side effects are visible, and we are watching for further demand inflection. Across Asset-Based and Asset-Light, our focus is building a scalable, disciplined operation to fully capitalize on our initiatives and operating leverage. Over the past several years, we invested in network, technology, and productivity, and remained disciplined on pricing. As the market improves, we expect those investments to translate into greater network density, better utilization of excess capacity, and more freight per stop, allowing incremental volume to flow through resources already in place. At Investor Day, we outlined earnings potential as the market inflects. In Asset-Based, we modeled about 100 basis points of non-GAAP OR improvement versus 2024, with upside up to 280 basis points if industrial production returns to trend, housing normalizes, and truckload spot rates improve. In Asset-Light, we modeled a $10 million improvement in expedite and a $75 increase of net revenue per shipment per year, with upside of up to $30 million as expedite manufacturing recovers and truckload rates normalize. In truckload brokerage, every $10 of margin per shipment expansion equates to $3.5 million of incremental profit. As volumes inflect, we expect incremental margin to improve, and we feel good that we are on pace to achieve our long-term goals. Operator: Your next question comes from the line of Ari Rosa from Citigroup. Your line is live. Ariel Rosa: Hi. Good morning. The connection was not great there, so I may have missed a little bit earlier. Seth, you have now been in the CEO seat for a few months. The business is not new to you, but I would love to get your reflections after a few months—how you are thinking about potentially doing things differently from how Judy was running the business. You have the long-term targets, but broaden that out—how are you thinking about managing the business, and what objectives might differ from your predecessor? Seth K. Runser: Thanks, Ari, and good morning. I believe in our company’s strategy and our ability to achieve the long-term targets we outlined at Investor Day in September. I always go back to the customer. In my conversations, our solutions resonate. We differentiate as a logistics partner with assets, which is different from much of the competition. By finding ways to say “yes,” we believe we will drive greater revenue, profit, and account retention. I have been focused on optimizing our sales resources, putting people in the best position to succeed, win and grow business, and deepen long-term relationships. We continue to optimize our cost structure and improve customer experience. When ArcBestView launches in May, it will be differentiated and allow customers to self-serve key information. In my first three months, I believe accelerating our strategy will drive sustained value creation. The environment has been unpredictable for years, but I am confident: our strategy is sound; we navigated the downturn well; we have significant operating leverage when the market turns. This team focuses on what it can control and views these times as opportunities. We have positioned for growth and margin expansion with investments in Asset-Based, technology, and productivity. Our pipeline is strong; new business and cross-selling are accelerating; tech-enabled initiatives are progressing faster, and we continue to win external awards that validate the strategy. My goal is to accelerate our progress. None of this is possible without our people—I spend a lot of time with employees and could not be more proud. We are positioned to deliver on our long-term targets, deliver value for customers, and translate that into shareholder value creation. Operator: Your final question comes from the line of Ken Hoexter from Bank of America. Your line is live. Kenneth Scott Hoexter: Great. Good morning, Seth and Matt. I want to talk about the stickiness of the dynamic freight. In the past, you had too much, and as you wanted to switch to your own capacity, it was tougher. Do you have a newer process that enables more fluidity? Maybe talk about excess capacity now. And given the rising ISM, when do you see that shipment growth? Are others being more competitive and impacting shipments near term? Seth K. Runser: Thanks, Ken. Our business is primarily core, and that is where we spend most of our time. The dynamic mix has changed due to growth in the quote pool; the actual shipment count we target is relatively consistent, but with a bigger quote pool we can optimize the network. We optimize mix daily based on profit maximization, current market prices, and available capacity. As capacity tightens, we expect our optionality to improve. Since the inception of Dynamic, as the quote pool has expanded, our revenue per shipment has improved over 50%. Our peers often use 3PLs to make those adjustments—we are the 3PL with assets, which improves optionality for customers. On excess capacity and ability to scale, we think in three buckets: people, equipment, and real estate. On people, we have invested in labor planning tools and feel positioned for strong service through the summer and the remainder of the year. We have one of the newest fleets on the road due to disciplined investment through the cycle. On real estate, we have added over $800 to the network, with enhancements ongoing. As optimization efforts improve productivity, when volumes inflect we will need to recruit fewer people, which allows us to say “yes” to customers. Operator: That concludes the question-and-answer session. I would now like to turn the call over to Amy Mendenhall for closing remarks. Amy Mendenhall: Thank you to everyone for joining us today. We certainly appreciate your interest in ArcBest Corporation and hope everyone has a great day. Operator: That concludes today’s meeting. You may now disconnect.
Operator: Welcome to Xylem Inc.'s first quarter 2026 results conference call. All participants will be in listen-only mode. You may press star, then 1 on your telephone keypad. Note this event is being recorded. I would now like to turn the conference over to Mr. Michael Travers, Senior Director of Investor Relations. Please go ahead. Michael Travers: Thank you, operator. Good morning, everyone, and welcome to Xylem Inc.'s first quarter 2026 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. They will provide their perspectives on Xylem Inc.'s first quarter results and discuss the second quarter and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I will ask that you please keep to one question and a follow-up, and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of the website. A replay of today's call will be available until midnight, May 12, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur. These statements are subject to risks and uncertainties such as those factors described in Xylem Inc.'s most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and/or adjusted basis unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Please turn to slide four. I will now turn the call over to our CEO, Matthew Pine. Matthew Pine: Thank you, Mike. Good morning, everyone, and thank you for joining us. Coming off a strong 2025 with sustained momentum, 2026 is proving resilient with a solid first quarter financial performance despite a dynamic external environment. Demand for our mission-critical solutions was consistent with expectations. Our teams are leveraging our reduced complexity to execute with discipline, staying close to customers, as evidenced by our strong book-to-bill in the quarter, and focusing on long-term value creation. We had a strong start to the year deploying capital across the business in line with our priorities. In January, we increased our dividend by about 8%. In February, we announced a new $1.5 billion share repurchase authorization, executing on $581 million in the first quarter. This reflects our confidence in the business and our commitment to a balanced approach to capital allocation. In March, we signed an agreement to acquire a German firm that designs and manufactures highly engineered water quality instruments. The company is a leader in submersible sensors for environmental monitoring, and the acquisition expands our role as a systems intelligence partner supporting resilient long-cycle demand, enabling higher-value digital and service solutions. I also want to highlight how our transformation is helping advance our priorities. Our self-improvement initiatives are foundational, simplifying our structure and processes to build stronger capabilities. They strengthen our resilience, enhancing our ability to mitigate macro uncertainty. That operational foundation is centered around making it easier to do business with us and building our growth engine. To that end, WSS booked our largest order ever this month, an outsourced water contract for $850 million delivered over 20 years. This is not just a milestone; it reinforces that our strategy is delivering. We continue to make progress with our disciplined approach to M&A with a solid pipeline of opportunities in place, progressing towards our $1 billion annual target, optimizing our portfolio, and leveraging our balance sheet. Taken together, this progress shows we are well underway in our multiyear operating model transformation, strengthening our growth engine through disciplined execution and operational rigor. I will now turn the call over to Bill to take us through the details of Q1 and updated guidance. Bill Grogan: Thanks, Matthew. Please turn to slide five. We are pleased with the strong start to the year. The team stayed focused despite volatility and delivered healthy results to build off of as we progress through the year. Demand remained solid with our ending backlog up sequentially to $4.7 billion and our book-to-bill for the quarter above one. Orders were flat versus last year, driven by project timing in WSS offsetting strength in the other segments. Revenue was also flat in the quarter versus prior year, in line with expectations, as we saw impacts from our 80/20 efforts in China, with headwinds moderating our short-term revenue outlook. The team's operational discipline delivered a quarterly EBITDA margin of 20.6%, up 20 basis points versus the prior year. Improvement was driven by productivity and price, more than offsetting inflation, significant mix, and lower volume. We also achieved quarterly EPS of $1.12, a 9% increase over the prior year. Net debt to adjusted EBITDA increased to 0.6 times, driven by our opportunistic share repurchases in the quarter. Free cash flow was positive in the first quarter, driven by timing of accruals and lower payments, offset in part by restructuring costs and higher CapEx. The teams continue to make progress with our working capital efficiency metrics. Please turn to slide six. In Measurement and Control Solutions, book-to-bill was below one, but backlog remained flat sequentially at roughly $1.4 billion. Orders were up a robust 15%, driven by smart metering demand in Water as we made progress on the projects that shifted out of Q4. We expect double-digit orders growth for Water throughout the balance of the year. Revenue was up 1%, driven by Energy metering demand, offset in part by softness in Water meters. EBITDA margin was 20.9%, down 10 basis points year-over-year, driven by unfavorable mix and inflation, partly offset by productivity and price. We also want to provide an update to our metering divestiture. Due to regulatory approval timing, we now expect the deal to close at the end of Q2, which is reflected in our updated guidance. In Water Infrastructure, orders were up 2% in the quarter, driven by strong demand in Transport, supported by growth in the U.S. and India. Revenue was down 1%, driven by softness in Treatment related to walk-away actions, partly offset by strength in Transport. Growth in the U.S. was offset by declines in China and Western Europe. EBITDA margin for Water Infrastructure was up 120 basis points, with productivity more than offsetting inflation and mix. In Applied Water, orders were also up 2% and book-to-bill was well above one, lifted by large projects and data center wins. Data center orders in Q1 exceeded the full-year amount for all of 2025. Revenues were flat versus the prior year, primarily driven by strength in U.S. commercial buildings offsetting softness in industrial and residential end markets. EBITDA margin was below expectations but increased 10 basis points year-over-year, driven by productivity and price, mostly offset by inflation, volume, and mix. We are confident in the segment's strong margin expansion opportunities throughout the remainder of the year. Finally, Water Solutions and Services saw an orders decline driven by capital project timing. Subsequently, WSS booked its largest order ever in April, an $850 million outsourced water contract. Revenue declined 2% year-over-year, driven by capital project timing and weather impacts on service branch operations, partly offset by strength in dewatering. Segment EBITDA margin was 22.1%, up 40 basis points versus the prior year, driven by price, productivity, and mix, offset by inflation, volume, and investments. Please turn to slide seven for our updated full-year and second-quarter guidance. The organic outlook is largely unchanged versus what we provided at the start of the year, with minor changes to our reported figures due to the delayed divestiture closing in MCS. Full-year reported revenue is now expected to be $9.2 billion to $9.3 billion, up from the prior guide of $9.1 billion to $9.2 billion, which delivers revenue growth of 2% to 3%, while organic revenue growth of 2% to 4% remains unchanged versus prior guidance. EBITDA margin is expected to remain at 22.9% to 23.3%. This represents 70 basis points to 110 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation, as well as investments in the business. Benefits from our simplification efforts will help mitigate mix pressure from MCS. There is no material impact to our projected results from recently announced changes in tariffs. Despite the benefit from share repurchases, we have chosen to keep our EPS range unchanged at $5.35 to $5.60, reflecting a prudent approach to guidance in an uncertain macro environment and not a change to our outlook for the year. Cash flow generation started strong this year. We remain committed to low double-digit free cash flow margin in our long-term financial framework, and we will make additional progress in 2026. Now drilling down on the second quarter, we anticipate revenue growth will be in the 2% to 3% range on a reported basis and roughly 1% organically. We expect second quarter EBITDA margin to be approximately 22% to 22.5%, which is up 20 to 70 basis points, driven by price realization, productivity gains, and higher volumes. Second quarter MCS EBITDA margin will be down year-over-year, driven again by the impact from Energy; however, we expect it to improve sequentially from the first quarter and return to margin expansion in the second half. These results will yield second quarter EPS of $1.31 to $1.36. We started the year with strong demand and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio, and benefits from our simplification efforts, while we also continue to monitor broader market conditions and volatility, including the Middle East conflict, changes in tariffs and other inflationary pressures, along with fluctuations in currency and interest rates. Overall, our expectations for the year remain positive and we are building on our strong momentum. With that, please turn to slide eight, and I will turn the call back over to Matthew for closing comments. Matthew Pine: Thanks, Bill. I want to return to the core purpose of our company: to empower our customers and communities to build a more water-secure world. We have been very intentional about putting customers and communities at the center of our strategy. One place you can clearly see that progress is in sustainability. Xylem Inc.'s 2025 sustainability report was posted to our website on April 24. The report reflects the fundamental truth about our business: long-term success is driven by disciplined execution, applied in service of a clear purpose that delivers meaningful outcomes for the communities we serve. Looking back at 2025, that alignment delivered concrete, measurable results. In partnership with our colleagues, customers, and communities, we achieved our sustainability goals we set in 2019 around water reuse, pollution prevention, and stewardship. Looking ahead, we are building on that progress through our 2030 sustainability agenda, which is focused on longer-term systematic impact around three signature priorities: decarbonizing the water sector, strengthening water stewardship, and expanding access to water, sanitation, and hygiene. Sustaining this progress means continuing to evolve Xylem Inc. so we are positioned for what comes next, especially for our customers, as we leverage the simplicity we have created through the first phase of our transformation. That is why I am pleased to share two updates to the executive leadership team to further strengthen how we serve our customers across our global footprint. Snehal will assume a more focused role as Chief Growth and Commercial Officer. In this role, Snehal will lead our enterprise growth strategy and execution, doubling down on commercial excellence, customer focus, and consistent delivery of scale. At the same time, to accelerate innovation that directly translates into customer value, Sivan has been appointed to a newly created role as Chief Innovation and Products Officer. Sivan will build the capabilities required to bring differentiated solutions to market faster. This leadership update, along with our purpose-forward culture, operational rigor, and disciplined capital deployment, accelerates Xylem Inc.'s growth engine and positions us to deliver exceptional long-term value creation. We will now open the call for questions. Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Our first question comes from Deane Michael Dray with RBC Capital Markets. Please go ahead. Deane Michael Dray: Thank you. Good morning, everyone. Can we get more about this outsourced contract and congratulations. This is exactly the way you have positioned WSS to build out services. Anything about the customer and anything on the economics? And is there a pipeline for more of these types of outsourced contracts? Matthew Pine: Yes, there is more pipeline, and I push the team every day on that topic, Deane. Thanks for the question. I cannot name the actual customer, but it is an existing customer of ours in the specialty chemical vertical. We are providing process water for cooling and also boiler feed water in their manufacturing process. It is a great example of our technical know-how on the front end of a capital build along with our ability to provide a long-term service tail, which is really great for the next 20 years for our business. I will have Bill walk you through some of the numbers. Bill Grogan: Yes, Deane. Out of the $850 million, it is about 75% service and 25% capital. We will realize about 10% of the contract value this year, with the balance of the capital build next year, and look to flow water in 2028 to start the service tail. Deane Michael Dray: Really good to hear. Just a second question, Matthew. I like how you started off using the word resilient. Can you give us a sense of the municipal demand outlook at this stage of the year, and anything on the macro? There is nervousness about project activity away from municipal, but just the approval process on projects. Any color would be helpful. Thanks. Matthew Pine: Yes. I would say that overall utility demand remains resilient. As I noted, I was with about 15 utility CEOs across all parts of the U.S. a few weeks back. These are large municipalities across the U.S., and there was no indication of any meaningful funding pullbacks or project delays outside of some of the normal things you would expect to see. For our business in Q1, U.S. utility orders—based on the MCS and the Water Infrastructure segments, which are really a proxy for utility orders—were up double digits in the U.S., and our revenue was up mid-teens. That shows the resilience of utility demand in the U.S. If you pull the lens back, overall Water Infrastructure was up 2% in orders, supported by Transport, the U.S., and India. We have talked a lot about China and have signaled that in the past, and we were down 30% year-over-year in China, which is a big part of the drag. In Western Europe, there is short-term noise with our 80/20 initiatives. In MCS, as Bill noted, orders were up 15%, driven by large Water orders primarily in the Southeast U.S. and solid Energy activity. All in all, there remains significant demand for our solutions. We are dealing with aging infrastructure in the developed parts of the world—Western Europe and the U.S.—that must be addressed. The U.S. Army Corps of Engineers grades our water infrastructure poorly—C- to D+ depending on drinking water, wastewater, or stormwater—so there is about $1.5 trillion needed over the next decade just in the U.S. to maintain those poor ratings. From our perspective and from customers' perspectives, things are still robust. Operator: Thank you. The next question comes from Andrew Alec Kaplowitz with Citigroup. Please go ahead. Andrew Alec Kaplowitz: Good morning, everyone. Can you give us a little more color on what you are seeing in terms of price versus inflation across the company? And you mentioned Applied Water—Q1 margin was generally fine across the portfolio—but you thought Applied Water would get back to 20%, and you did acknowledge you recorded a bit lower than you expected. Talk about conviction staying ahead of inflation and getting that uptick in margin trajectory for the rest of the year. Bill Grogan: For the broader portfolio, we are still price-cost positive from a price and material cost perspective, including the tariff piece. The teams have been extremely proactive and have built up a solid skill set to understand the levers, timing, and process to capture incremental value to offset inbound inflation. With the escalation in the Middle East and fuel prices increasing, we have implemented immediate fuel surcharges to offset that. We are confident we can stay ahead of inflation through price as our first lever, with sourcing actions as a secondary lever. For Applied Water specifically, performance was below our expectations, primarily due to mix within sales on the gross margin line. We are confident they will get back above 20% as we look at the balance of the year relative to cost actions taken, mix normalizing, and some of the data center projects Matthew highlighted starting to ship at a little bit higher margin, with sequential improvement through the balance of the year. Andrew Alec Kaplowitz: Thanks, Bill. Maybe the same kind of question on organic growth for the year. You need an uptick in growth in the second half to meet your forecast. It seems like you made progress on booking those 5–10 projects you have been most focused on in MCS. Give us a little more color there. And on WSS, do you need a capital recovery at all to make your original mid single-digit organic growth for that segment? Bill Grogan: We have seen the things we needed to see happen in the first quarter relative to strong MCS orders and some of those projects that were delayed now converting, which will play out through the balance of the year. We still need a couple more orders to hit for us to reach our back half, but conversations with the team look positive. The book-and-ship for MCS is actually up 9%, so there is a lot of traction and progress, and channel inventory is back to normalized levels. From a broader Xylem Inc. perspective, we will see a significant ramp in volume from the first quarter as part of our normal seasonality. If you look at the third quarter, it is basically the same revenue dollars sequentially, and we go from 1% growth to 5%. Then we will see the normal seasonal ramp in the fourth quarter relative to Water Infrastructure to get to another mid single-digit number. Normal seasonality and the orders we needed to win have progressed and give us confidence in our back-half figures. Operator: The next question comes from Michael Patrick Halloran with Baird. Please go ahead. Michael Patrick Halloran: Good morning, everyone. Just touch on the capital allocation piece. Good to see the magnitude of buyback in the quarter. What does the intent look like from here? If the stock stays in and around where it is now, do you see yourself being as aggressive as we move through the year? Matthew Pine: We continued to buy in April and will reassess the balance of Q2 after this month. We are looking at it a couple of ways: managing our leverage between half a turn and a turn net debt to EBITDA, and balancing that with taking advantage of stock dislocation. We will reassess at the end of the month as we get into Q2. We have a healthy balance sheet and will continue to deploy capital across our whole framework over the course of the year. Michael Patrick Halloran: Makes sense. Maybe talk about the M&A optionality—pipeline and ability—and give more context on why the tuck-in you made on the analytics side made sense. Matthew Pine: We have talked about $1 billion of capital deployment toward M&A to help us get to the mid-teens EPS growth outlined at our 2024 Investor Day. We are still tracking for that. Our improved internal process is now much more focused within segments with segment presidents owning pipeline development bottom-up. Because of that work, we have a very strong pipeline across all segments, which gives us confidence we can be more consistent over time with capital deployment. Regarding the recent tuck-in, we signed an agreement—subject to confidentiality with the seller—so we cannot share the target's name. The purchase price was $219 million. It is a highly engineered water quality instruments business, strengthening our position in high-margin optical sensing and process applications across clean water, wastewater, environment, and industry. We expect significant revenue synergies by leveraging our industrial and utility customer base as we continue to grow our analytics business. Operator: The next question comes from Jacob Frederick Levinson with Melius Research. Please go ahead. Jacob Frederick Levinson: Good morning, everyone. On Measurement and Control, it looks like things are stabilizing a bit there; the order book looks solid. Can you mark to market where we are in the cycle across Electric and Water? There is a refresh cycle in Electric; maybe that is coming in Water. How does that play out this year and into 2027? Matthew Pine: At a high level, if you go back to 2008–2009 with the American Recovery and Reinvestment Act coming out of the Great Recession, utilities on the Electric side did a major push on AMI. You started to see a refresh last year into this year and over the next couple of years. Water was five to seven years behind that initial wave of AMI deployments. As we move through the next two to three years of Electric refreshes, we will start to see a pickup in Water refresh as we exit this decade going into 2030. Jacob Frederick Levinson: That is helpful. On China, I think you mentioned it was down 30% this quarter. Have we bottomed in that market, and is it a function of comps? Relatedly, how much of that 30% is market versus the work you are doing to reposition the business? Bill Grogan: We would say it is bottoming out—bouncing at the bottom. The team is making progress with focused efforts in areas where we have more differentiation. Roughly a third of the decline is market, a third is competitor actions, and a third is us actively walking away from business. For total Xylem Inc., most of the pressure is in the first and second quarters, and the comp gets easier in the back half. For the full year, China is about a 1% headwind for sales, concentrated in the first half at about 2%. Jacob Frederick Levinson: Great. Thank you very much. I will pass it on. Operator: The next question comes from Nathan Hardie Jones with Stifel. Please go ahead. Nathan Hardie Jones: Good morning, everyone. On MCS, we have seen pretty good order growth over the last few quarters—double-digit for four quarters in a row—but the actual dollar level of orders has been below the level of revenue. How does that support growth going forward, not just this year but into 2027–2028? What kind of order rates do you need to support growth over the next couple of years? Bill Grogan: Long term over the cycle as things normalize, it is that high single-digit rate. Given lumpiness from large projects, you have to look at a combination of our backlog position in conjunction with orders. Our backlog increased sequentially but not to the magnitude implied by book-to-bill because some orders received within the quarter were for projects we had already won and now have firm commitments to start delivering within the year. Look over a rolling 24 months at a high single-digit orders growth rate, with a check on backlog growth and position as replenishments progress. Nathan Hardie Jones: As a follow-up, margins: you already guided to stronger margins in the second half, and the margin expansion in 2026 is significantly lower in the first half than implied in the second half. What are the contributors to accelerating margin expansion in the second half, and where should we see those materialize? Bill Grogan: It is across the portfolio, with significant expansion within MCS and Water Infrastructure, primarily as mix normalizes and we shift from price-driven growth to significant volume growth as projects hit in MCS and Water Infrastructure. We also get past some walk-away pressure and China pressure in the first half. It is volume and mix normalization, leveraging structural cost taken out last year and continued in 2026. Operator: The next question comes from Brian Blair with Oppenheimer. Please go ahead. Brian Blair: Good morning, everyone. Following up on Nathan's question, given current visibility with MCS inclusive of mix expectations and the pending divestiture, how should we think about margin cadence through the back half and, more importantly, a realistic exit rate—or equivalently—jumping-off point for 2027 margin? Bill Grogan: As noted in the prepared remarks, MCS will sequentially increase and exit the year post the international metrology divestiture well in excess of 25% EBITDA margins. That is the base rate going into next year, with the Water balance-of-sale normalizing and continued profitability improvements within the Gas and Electric businesses. Brian Blair: Understood. Your consolidated organic sales outlook is unchanged, and it does not sound like the moving parts have meaningfully shifted. If we think about the segment expectations you outlined last quarter, are there any shifts you would call out, particularly for MCS and WSS? Bill Grogan: No major changes to the organic guide in aggregate, and no major changes to the makeup between the segments. Operator: The next question comes from William Griffin with Barclays. Please go ahead. William Griffin: Thanks for the time. Good morning. Coming back to price-cost, specifically potential supply chain impacts on material costs as global supply chains continue to be disrupted. I know you have some fixed-price arrangements for materials, but how long do those last, how much do they insulate your business, and what is your visibility to managing increases in raw materials costs post those arrangements? Bill Grogan: We have some forward fixed contracts, but they are limited and focused on certain raw commodities. Our supply chain team does a strong job of alternate sourcing and competitive bidding to mitigate increases through dynamic supply chain management. Our first lever is incremental pricing. The team’s practice post-COVID, through inflationary drivers, tariffs, and now potential increased inflation due to rising fuel costs, gives us confidence we can continue to offset. The magnitude could compress margins slightly—since we are not getting 40% flow-through on incremental price—but dollar for dollar, our expectation is that we can manage. The next four weeks will be critical relative to geopolitical developments and logistics lanes, but we are as prepared as we can be given the nimbleness of our organizational construct. William Griffin: Appreciate that. On 80/20, you had previously talked about 2026 being the peak of walk-away—about a 200 basis point offset to organic growth guidance. What is the cadence or timing? Is that primarily in the first half or evenly spread? Bill Grogan: It is more weighted to the first two to three quarters of the year. There is some longer-tail activity within the Treatment business in Water Infrastructure that may extend past that, but it is more heavily weighted in the first half. Matthew Pine: We will wrap up there. Thanks for your questions, and thank you to everyone who joined today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the AllianceBernstein First Quarter 2026 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead. Ioanis Jorgali: Good morning, everyone, and welcome to our first quarter 2026 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com. Joining us to discuss the company's quarterly results are Seth Bernstein, our Chief Executive Officer; and Tom Simeone, our Chief Financial Officer. Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks. Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we will file on Friday. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum, so please ask all such questions during this call. Now I'll turn it over to Seth. Seth Bernstein: Good morning, and thank you for joining us today. While the first quarter was marked by geopolitical tensions and elevated volatility, AB's results underscore the resilience of our platform and our diversified business mix. I want to start by highlighting the key themes that shaped this quarter listed on Slide 3. First, the proposed Equitable Corebridge merger will provide a step-function acceleration of our flywheel and meaningfully enhance AB's scale and growth outlook. The combined company will have over $350 billion of general account assets and generate $70 billion to $80 billion of new liabilities annually, positioning AB among the most strategically important players in the insurance asset management channel. Over time, we expect to manage at least $100 billion of general and separate account assets from Corebridge. We look forward to supporting our new partner in delivering better outcomes for their policyholders while we benefit from enhanced scale, improved earnings durability and increased capacity to invest for growth. We believe this announcement will further accelerate the momentum already evident across our insurance franchise. Today, we serve more than 90 third-party insurance clients with $58 billion of AUM, including $32 billion of general account assets. Deployments from recently announced strategic insurance partnerships are progressing ahead of schedule and are expanding beyond the initial mandates. We are well positioned to benefit as these partnerships continue to grow. Second, while we continue to drive inflows from secular growth engines like insurance, private markets and active ETFs, we had firm-wide active net outflows of approximately $6 billion in the first quarter, concentrated within a subset of active equity strategies. Active equity outflows of roughly $11 billion spanned across channels and reflect recent performance challenges as well as client allocation decisions. We also had taxable fixed income outflows of nearly $2 billion as positive institutional engagement was offset by retail redemptions concentrated in the Asia Pacific region. Turning to the positives. We generated over $3 billion of organic inflows in tax-exempt fixed income and alternatives multi-asset strategies, respectively. Our private market platform reached $85 billion in AUM, up 13% year-over-year, reflecting strong institutional momentum. At the same time, our SMA business stands at $63 billion, growing organically at 15% annualized rate in the first quarter. We continue to build on our technological edge and efficiency benefits for financial advisers, extending from a predominantly municipal-focused SMA offering to a broader multi-asset toolkit. We're seeing real traction in taxable fixed income SMAs highlighted by a recently funded $300 million mandate. AB has long been a market leader in tax-optimized fixed income SMAs, an area made increasingly scalable by recent advances in data science. Our active ETF lineup now encompasses 25 strategies with more than $16 billion in AUM, up over 150% year-over-year, with 8 of our ETFs surpassing $1 billion in AUM, including our 5-star rated disruptors ETF, ticker FWD. Our security of the future thematic portfolio has surpassed $4 billion in assets, nearly tripling from a year ago with $1.7 billion of inflows in the first quarter alone. While these offerings are currently smaller than some of our larger marquee services, they represent emerging durable growth engines that will reshape the composition of our AUM over time. Looking forward, our institutional channel is positioned for accelerating net flows in the second half of 2026, supported by the largest pipeline on record, surpassing $27 billion in AUM. Third, our distribution platform provides direct access to secularly growing channels, including ultra-high net worth, insurance asset management and defined contribution. Together, these account for more than 45% of firm-wide AUM and provide relative stability across market cycles. Bernstein Private Wealth ended the quarter with $155 billion in assets under management, and it contributes more than 1/3 of firm-wide revenues. Our insurance asset management business now manages approximately $120 billion of insurance general account assets across a growing roster of global partners. Our customized retirement business exceeds $100 billion in defined contribution assets, and we continue to innovate by incorporating a broader set of asset classes, including private markets and insurance solutions that provide guaranteed lifetime income. Overall, while this quarter's results reflect mixed dynamics and pressure from the challenging macro backdrop, we believe our broad product capabilities and differentiated distribution position AB well to generate organic growth over time. Slide 4 provides an overview of our financial results, and Tom will walk through these in greater detail later. Turning to Slide 5. I'll review our investment performance, starting with fixed income. Global bond markets posted modestly negative returns in the first quarter as heightened geopolitical tension, rising energy prices and shifting policy expectations pushed yields higher across most developed markets. Credit markets were mixed. Investment-grade and high-yield corporates posted modest declines overall with U.S. corporates outperforming Eurozone peers, while securitized assets proved resilient. The Bloomberg U.S. Aggregate Index was roughly flat, outperforming the global aggregate, which returned negative 1.1% in the quarter. Our American Income and Global High Yield products both underperformed their respective benchmarks in the first quarter. Yield curve positioning and allocation to emerging markets detracted from AIP's relative returns, while GHY was similarly affected by European high-yield exposure and EM corporates. Notwithstanding near-term headwinds, our fixed income platform continues to perform well over longer measurement periods. More than half of our assets outperformed over the 1-year period, while 80% outperformed over 3 years and 64% over 5 years. Turning to equities. U.S. equity markets were hurt in the first quarter of 2026 with the S&P 500 returning negative 4.3%. The quarter began constructively but reversed with the emergence of credit concerns, AI-related disintermediation risks and escalating geopolitical tensions. Despite some early signs of improvement in year-to-date relative performance, our track records remain pressured and below our expectations. 23% of assets under management outperformed over the 1 year, 24% over 3 years and 44% over 5 years. This primarily reflects the outsized impact of our larger U.S.-oriented growth strategies that have underperformed this quality growth derated in recent quarters. However, our equity platform is intentionally diversified across styles and geographies, avoiding overreliance on any single market regime. International and emerging market strategies with a smaller AUM base continue to perform well. In fact, we have more than 25 strategies with nearly $40 billion of AUM that are outperforming their respective benchmarks or composites over both the 3- and 5-year periods with 8 out of the 10 largest among them being international or global strategies. As market breadth began to improve entering 2026, a growing share of our growth, value, core and thematic strategies delivered stronger relative results. Looking ahead, we believe a more balanced earnings environment and continued economic stability could favor international and value-oriented strategies, while lower tracking error portfolios may provide clients with more consistent participation across shifting market leadership. Turning to Slide 6, I'll discuss our retail highlights. Retail gross sales rose sequentially and surpassed $23 billion for the first time in 4 quarters. However, the channel recorded net outflows of nearly $6 billion in the first quarter, reflecting elevated redemptions. Active equity and taxable fixed income each exceeded $4 billion in outflows, driven primarily by redemptions from select marquee U.S. services in Asia Pacific as relative value and capital flows have shifted toward neighboring and domestic markets. Passive equities and passive fixed income also posted outflows. These headwinds were partially offset by more than $3 billion of tax-exempt inflows and nearly $1 billion of alternatives and multi-asset inflows, continuing their durable organic growth trajectories. Our retail muni SMA platform has consecutively positive quarterly inflows for more than 3 years, a testament to the compounding strength of our market-leading capabilities. We are well positioned as the bond reallocation trend continues to unfold, particularly as we extend our success into tax-aware SMAs. Moving to Slide 7, I'll cover our institutional channel. Institutional gross sales also increased both sequentially and year-over-year. However, the channel had roughly $2 billion of net outflows, primarily driven by more than $5 billion in active equity outflows. Despite some short-term headwinds from insurance hedging activity, the channel recorded over $2 billion of inflows in taxable fixed income, reflecting broadly improved institutional appetite. Alternatives multi-asset also saw positive inflows for the fifth consecutive quarter, supported by deployments in private markets and fundings of defined contribution plans. Institutional engagement across private credit has persisted with nearly $1 billion of deployments on the back of improved terms and widening spreads. This includes direct lending, where ABPCI recently secured a $0.5 billion third-party institutional mandate reflected on our pipeline. Furthermore, our pipeline has reached a record high $27.5 billion in assets under management, supported by $9 billion in new commitments. This growth reflects expansion of our recently announced insurance partnerships to include additional mandates. It also includes an increase in Equitable's commercial mortgage loan commitments to $12 billion, up from the previously announced $10 billion. The pipeline fee rate declined slightly to 19 basis points, primarily due to the addition of sizable fixed income and passive equity mandates. Excluding roughly $5 billion in passive mandates included in the pipeline, the fee rate for active AUM stands at 23 basis points. Next on Slide 8, I'll cover Private Wealth. Quarterly gross sales continue to set new records at Bernstein Private Wealth with the channel registering its third consecutive quarter of organic growth. Inflows grew nearly 2% annualized, while net new client assets rose 5% annualized in the first quarter. Redemption requests for private credit products that offer periodic liquidity stayed well below our 2.5% quarterly cap. This is a testament to the combined strength of our highly specialized adviser sales force, coupled with ABPCI's strong investment track record built on a decade-long partnership since Bernstein was among the pioneers that distributed direct lending as an asset class. I'm particularly proud of the differentiated client service we offer in alternatives, reinforced by the seamless collaboration between our homegrown distribution and investment teams, a defining advantage for AllianceBernstein. Adviser headcount is tracking ahead of our 5% annual growth target. We believe our platform offers exceptional support and training that drives industry-leading adviser productivity, tracking both experienced and emerging talent. As we continue to invest in adviser headcount growth and productivity, including integrating Generative AI capabilities into daily adviser workflows, we anticipate continuous client experience improvement along with more targeted and effective prospecting. Adviser headcount remains a key area of focused investment and a critical lever for long-term growth within the channel. I will close with Slides 9 and 10, which highlight the momentum of our private markets platform and the opportunities from the Equitable Corebridge merger. In partnership with Equitable, we have scaled our private markets platform to $85 billion in fee-paying and fee-eligible AUM, anchored primarily in credit-oriented strategies, including direct lending, asset-based finance, commercial real estate debt and investment-grade and corporate structured private placements. Equitable's $20 billion permanent capital commitment now fully deployed and exceeding the original commitment has been a critical catalyst, accelerating our expansion in private markets while strengthening our ability to seed and scale higher fee strategies. Our collaboration continues to deepen and evolve, progressing across residential mortgage solutions, structured private placements and most recently, commercial mortgage loans. Each initiative builds incremental scale while broadening the applicability of our capabilities across third-party insurance and other institutional client channel. Our goal is to serve a diverse base of retail, institutional and insurance clients across a wide range of risk return objectives. The proposed Equitable Corebridge merger amplifies this flywheel. With a combined general account asset base exceeding $350 billion and a broader liability profile, the merged company will be one of the largest players in the industry, creating significant opportunities for AB. Importantly, the strategies developed for Equitable are not bespoke or stand-alone solutions. They form the commercial foundation from which we serve a growing universe of third-party insurance and institutional clients worldwide. Amplifying the flywheel with the inclusion of Corebridge is a defining moment in AB's evolution, not simply additive to our existing asset base, but potentially transformative in its impact on scale, earnings, durability and long-term strategic positioning. With a proven operating model, a powerful strategic partner and a focused growth strategy, we're well positioned to achieve our $90 billion to $100 billion private markets AUM target by 2027 and extend our growth trajectory beyond that milestone. With that, I will pass it on to Tom to discuss our financial results. Thomas Simeone: Thank you, Seth. Good morning, everyone, and thank you for joining our call. Adjusted earnings for the first quarter of 2026 were $0.83 per unit, representing a 4% increase year-over-year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders. On Slide 11, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q. In the first quarter, net revenues reached $871 million, representing a 4% increase year-over-year. Base fees grew 5% year-over-year, reflecting 8% higher average AUM, partially offset by a lower firm-wide fee rate due to the mix shift. Performance fees totaled approximately $23 million, down $16 million year-over-year, reflecting lower realizations from private market strategies. Our full year private markets performance fee outlook remains unchanged at $70 million to $80 million. Importantly, we are increasing our full year combined performance fee outlook to $95 million to $115 million, reflecting stronger-than-expected contributions from public market strategies. I will cover this in more detail shortly. Dividend and interest revenue, along with broker-dealer-related interest expense declined year-over-year, reflecting lower cash and margin balances within private wealth. Investment losses totaled $5 million, largely attributable to hedging costs associated with seed-like investments. Other revenues totaled $20 million, up $6 million versus prior year's quarter, driven primarily by higher shareholder servicing fees and mutual fund reimbursements. Turning to expenses. First quarter total operating expenses were $580 million, up 4% year-over-year, driven by a 4% increase in compensation expense and a 5% increase in noncompensation expenses. Total compensation and benefits rose 4% year-over-year with a compensation ratio of 48.5% of adjusted net revenues, consistent with last year's accrual rate. We expect to continue accruing at 40.5% compensation to net revenue ratio in the second quarter while remaining mindful of market volatility and potential adjustments in the second half of the year as conditions evolve. Promotion and servicing expenses increased by $1 million, while G&A expenses increased by $6 million or 5% year-over-year, reflecting normalization from relatively depressed levels in the first quarter of last year. For full year 2026, we continue to expect non-compensation expenses to range between $625 million and $650 million. This outlook reflects normalization in promotion and G&A expenses, along with discretionary investments in technology and the operational build-out for new strategies. Promotion and servicing expenses are expected to represent 20% to 30% of non-compensation expense, while G&A comprising the remaining 70% to 80%. We are making steady progress integrating the new commercial mortgage loans platform. Importantly, Equitable has increased its long-duration general account mandate to $12 billion from $10 billion with onboarding in the second half of the year and the assets producing a high single-digit fee rate. Interest expense on borrowings was flat compared with the prior year. ABLP's effective tax rate was 5.6% in the first quarter of 2026, which reflects a favorable mix of earnings. We continue to forecast ABLP's effective tax rate in 2026 to be between 6% and 7%. Our operating income of $291 million is up 3% versus the prior year, slightly below the growth in revenues and operating expenses. Our adjusted operating margin was 33.4% in the first quarter, down 30 basis points year-over-year due to investments in the business. These investments include technology initiatives, the onboarding of new investment teams and increasing financial adviser headcount. Importantly, margins remain at the high end of our Investor Day target range of 30% to 35%, which we had expected to achieve by 2027. As markets normalize, we expect improved operating leverage to support stronger flow-through from existing services, reinforcing our ability to balance reinvestment with profitability. In the first quarter, our firm-wide fee rate was 38.1 basis points, reflecting a negative mix shift in AUM. As we've noted previously, the fee rate remains highly mix dependent and several factors weighed on the rate relative to the prior year. In retail active equities, average AUM declined to 18.7% of firm-wide AUM from 20% a year ago as market appreciation was largely offset by outflows. In fixed income, elevated rates and FX volatility pressured taxable fixed income AUM with outflows concentrated in higher fee strategies such as American Income and Global High Yield, while inflows were primarily driven by lower fee municipal SMAs. Finally, turning to Slide 12 and our outlook. We now expect total performance fees for fiscal year 2026 of $95 million to $115 million, up from our prior range of $80 million to $100 million with additional potential upside dependent on market conditions. This reflects an increase in our public markets performance fee outlook to $25 million to $35 million, driven by first quarter realizations from our alpha-generating international small-cap strategy. Our private markets performance fee outlook remains unchanged at $70 million to $80 million despite a light first quarter driven by prudent proactive markdowns concentrated in software and tech services exposures. Note that these markdowns were not driven by credit events. And even if realized, they would be within our assumed annual loss framework. As a long-term buy-and-hold investor, ABPCI fully expects to realize value recovery across all creditworthy borrowers over time. It is important to note that the rate outlook and wider spread environment is supportive of forward-looking returns. All other guided items remain unchanged from last quarter. Looking ahead, we are encouraged by our institutional outlook, supported by a record pipeline of $27.5 billion, including public market mandates expected to fund next quarter and private markets mandates expected to fund by year-end, most notably the increased $12 billion commercial mortgage loan mandate from Equitable. We expect continued inflows across secular growth areas, including private wealth, SMAs, ETFs and private alternatives. Taken together, we have meaningfully strengthened our business mix and positioned the firm for the future by leaning into areas of structural growth while addressing areas of pressure with discipline. We look ahead with optimism, confident in what we believe to be a position of strength. With that, operator, please open the line for questions. Operator: [Operator Instructions] We'll take our first question from Craig Siegenthaler at Bank of America. Craig Siegenthaler: My question is on the Equitable Corebridge merger and your expectation to manage $100 billion of incremental AUM over time. So in terms of general account assets for the NewCo, what percent of total GA assets do you assume you're going to manage? And is the current GA level at Equitable in the $70 billion range now, plus I think there's $17 billion on the side of private market initiatives still. I just want to kind of refresher on all the numbers. Onur Erzan: Craig, Onur, let me take that question. Obviously, the Corebridge Equitable merger is a very exciting development for us. As it was announced at the March 26 call, we expect at least $100 billion over time from both GA and separate account assets. Obviously, it's very early days since that announcement, and that deal is most likely going to take another 9 months or so to close roughly by year-end or fourth quarter. And hence, it will take us time to really do the bottom-up buildup of that $100 billion between GA and separate accounts. And in terms of funding of the assets, given the deal will likely close end of '26, it's going to be more '27 and beyond in terms of the new AUM coming to AB. So on one hand, we are super excited. On the other hand, we recognize it's going to take a few quarters to materialize those opportunities given the deal time line. In terms of the GA buildup, we're not dependent on only Equitable or Corebridge. As you have seen in our slides, our GA assets from third-party clients grew by 28%. If you look at our pipeline, we had significant momentum in the pipeline. So for instance, we added a $3.5 billion CLO opportunity to our pipeline as an example. And we have a lot of other pipeline opportunities, which makes up 8% of our pipeline fees coming primarily from insurance clients. So overall, we are very excited about the trajectory in GA, both for proprietary as well as third-party clients. Craig Siegenthaler: Just as a follow-up, as you look at that $100 billion, what is the expected mix of public corporate or government debt that has CUSIPs versus private assets that are originated by your proprietary private markets businesses? Onur Erzan: Again, we don't have an exact bottom-up buildup yet that is in works. Our estimate is, given this includes the separate account business, which tends to be more publics. And given some of the assets from the GA will be coming from the fixed income book, I think it's going to skew heavily towards the publics versus private in terms of day 1 opportunity, if you will. But over time, if you think about this balance sheet, it's going to be one of the largest U.S. retirement companies and it will originate annuities across RILAs, fixed annuities, variable annuities, et cetera. That means your general account assets will grow materially. And a portion of that new flow, if you will, will make its way to private, and we're going to be a strong beneficiary of that growth. So you shouldn't only look at it in terms of what is mappable on day 1. You should look at it as what is the expectation on a go-forward basis given the new Equitable will be double the size of the origination and the assets at the minimum. Craig Siegenthaler: And congrats on the $100 billion of future wins. Onur Erzan: Thank you. Operator: We'll move next to Alex Blostein at Goldman Sachs. Alexander Blostein: I was hoping you guys could expand on what you're seeing in the institutional private credit market. Obviously, lots of volatility on the retail side. You guys don't have a ton of exposure there. But as you think about both opportunities and risks that are in the market today, how are you approaching that channel? Onur Erzan: Thanks, Alex. Let me take that question as well. We continue to see strong momentum in our institutional business for private credits. To underline your comment, yes, you're right. We don't have a significant exposure on the retail side, but we're also very pleased with what we have seen on the retail and private wealth side of private credits. If you look at our BDC, our redemption rate has been less than 2%. So that's much lower than what we have seen from our competitors. That speaks to the strength of our integrated asset and wealth management franchise. Proximity to the client helps us maintain lower redemption rates in these retail vehicles, partly in our private wealth channel. If you look at our private alts cap raise in private wealth, actually, it grew from [ '25 ]. Our first quarter fund raise in the '26 versus '25 for private wealth was more than 30% higher. So definitely, we also continue to see momentum across private equity and private credit in our private wealth business, which admittedly skews more high net worth and ultra-high net worth. And on the institutional side, to get to your core question, as I mentioned, we continue to add significant mandates to our pipeline. As Seth also mentioned in his opening remarks, we are seeing more accelerated and expanded benefits from some of the strategic partnerships we announced around the third-party insurance, and that remains the largest driver of our new pipeline. It's broad-based. It includes both asset-backed ABF-type of mandate as well as fund financing like NAV finance and real estate debt. And furthermore, we had several new mandates outside the insurance in core institution as well. So net-net, broad-based momentum skews heavier towards insurance, but seeing strength in noninsurance institutional as well. The implication is we're going to be comfortably hitting and exceeding our private markets AUM goal of $90 billion to $100 billion. Alexander Blostein: Great. And a follow-up for me. I was hoping to touch on the fee rate dynamics, both in the quarter, but really more importantly, looking further out. A couple of dynamics at play. Obviously, you mentioned that the active equity performance has been challenged, and we've seen that show up in retail flows, which are obviously higher fee rate, a bit mixed on the retail fixed income for now as well, but some wins on the institutional side of things, you mentioned private credit. So when you put it together, how does the evolution of the fee rate likely to look over the next couple of quarters? Thomas Simeone: Alex, it's Tom. We generally don't provide fee rate guidance, but we do prioritize sustainable organic growth and long-term profitability over focusing solely on the fee rate. Looking forward, we expect the fee rate trajectory to continue to reflect the mix of organic growth and market movements, which have been supportive in early 2Q. Operator: Next, we'll move to Bill Katz at TD Cowen. William Katz: Just coming back to the expense outlook for a moment. It was in fact how do you interpret the slide with the initial take this morning. So you're keeping your expense non-op growth relatively stable. If I look at the first quarter, I think you're run rating well below the low end of the guide. How do we think about maybe the pacing to the spend as the year unfolds? And what kind of flexibility do you have if the markets remain volatile? Thomas Simeone: There's some seasonality in there. This happens from time to time. I would continue to stick with our guide at $625 million to $650 million. And then maybe just divide it up less what we have in there for 1Q so far. And as far as some flex, you may recall last year, we did have a lot of flex. We actually flexed down quite a bit because our business decelerated due to all the market volatility. So we do have flexibility that we can pull on this year if needed, but we did want to let the advisers get in front of some clients and attend some firm meetings that were withheld last year. William Katz: Okay. That's helpful. This is a follow-up. Maybe stepping back, talk about wealth management, very durable asset for you guys. A lot of cross currents in the industry at large. I wonder if you could talk a little bit about maybe -- and I appreciate you're also at the upper end of the market, so maybe not quite as intense as some of the key players that I think you're comped up against. That being said, I wonder if you could talk a little bit about maybe the competition for financial advisers, what the market dynamic has been in terms of industry churn? And then sort of curious, there's a lot of sort of anxiety around Agentic AI. I was wondering if you could maybe click down a layer and sort of talk about where you're leveraging that and where some of the risks might be prospectively? Onur Erzan: Thanks. Let me break that into 2 questions. One, talent market dynamics, how are you feeling about that? And second, come back to Agentic AI and impact on the business. On the talent side, we feel pretty good. We are well immune from the high churn that some of our competitors are facing. Ultimately, our retention rate for our senior advisers, which drive a majority of our flows and the ones that helped us achieve the record productivity this quarter have remained loyal. Again, our attrition rate remains very low depending on the year. It tends to be low single digits. And if you look at our recruiting, as you have seen, we added -- we added roughly 14 advisers, and that means our adviser headcount is up roughly by 5% in the first quarter. So we remain on track in terms of our ability to add talent. So feeling good about that. I mean, ultimately, we are not complacent. We'll continue to pay competitively for talent. And we'll continue to make our platform a preferred platform for existing and new talent based on our investment expertise, the tools that we provide like tax management as well as investments in technology. In terms of the segue to Agentic AI, given we are more on the high net worth plus side of things, we tend to deal with more complex client situations. Our highest growth part of our business, our ultra-high net worth business grows at 4x as fast as the rest of the business. So that creates, in my opinion, some moats in terms of the technology disruption because we deal with a lot of complex tax issues. We deal with a lot of complex global family issues. Some of the value add is also in value-added services, not the standard asset allocation and/or basic tax mitigation strategies. So that is the bigger picture. In terms of how we are taking advantage of AI, it's in several different areas. We are definitely using it much more for client meeting preparation, like using our CRM system to be better prepared for client engagements and hopefully using that to drive more growth from those conversations, driving share of wallet. We are definitely using it to create efficiencies in the way we manage our business, particularly the client servicing side. Actually, if you look at our client service associates onshore, that has been relatively flat, although we have been adding advisers, new clients as well as growing organically. So some of that servicing efficiencies are driven by the usage of technology and client servicing. One example would be how we deal with RFPs. We use technology and AI heavily in that. And then finally, in more client acquisition, we are using much more advanced lead generation technologies, and we are getting into much more AI-driven marketing to drive new growth. So all in all, it cuts across servicing and efficiencies, effectiveness in client conversations as well as new client acquisition. That said, I cannot put a number on it yet. Probably, I'm in the same ZIP code with my colleagues in wealth management. I mean, again, there are a lot of good things happening, but still the early innings of AI. Although we see the benefits, it has not translated into very concrete financial impact yet, but that's yet to come. Operator: We'll move next to John Dunn at Evercore ISI. John Dunn: Maybe just staying on private wealth for a second. I know there's seasonality in the second quarter and then you mentioned private wealth demand. But could you remind us about maybe seasonality for the rest of the year, maybe shifting product demand and then the temperature of like the channel's appetite to put money to work? Onur Erzan: Yes, sure. Yes, seasonality, John, definitely is something to be mindful of. Obviously, April is a tax month. So we tend to have a soft April in general in terms of flows because a lot of our clients pay taxes. And it happens every year. In terms of the client demand, even though obviously, there are heightened risks in terms of macro, the war in the Middle East, oil prices, this and that, our high net worth and ultra-high net worth clients remain very engaged. Actually, it has been relatively robust in terms of risk taking. We have not seen them go to the sidelines. As a result, we remain excited about the fundraising and growth. Again, as you have seen in Q1, we had very high sales relative to the previous 8 quarters. So we've definitely seen a momentum in sales, and we are not seeing a major slowdown yet. The 2 words of caution would be: number one, obviously, if the Middle East situation gets worse, if the conflict gets longer, et cetera, et cetera, I mean those all have impact on consumer sentiment and high net worth and ultra-high net worth clients will not be immune to that. So that can -- that's definitely a risk that we are monitoring. And then secondly, given some of the volatility and some of the software headlines, et cetera, some of the M&A activity has slowed down. When M&A slows down, it also slows down exits for entrepreneurs and the liquidity events of business sales, IPOs, et cetera. And that has an impact on our business. So if that slowdown again, extends because of the macro environment, that might slow our business down. But we're not going to be alone in that. We're not going to be an outlier. It's a little bit of a market beta, if you will. Seth Bernstein: John, I would just add that the resilience in the private client group is echoed I think, more broadly in the business. And given the volatility we've seen, it's kind of amazing markets are where they are, and we continue to see people exploring committing money to longer-term opportunities. So look, there are a lot of potential drawdowns arising given the volatility in the macro market, but we're pretty pleased with progress to date. John Dunn: Got it. And then maybe could you just walk through some of the factors like outside of investment performance that could get high-yield fixed income funds distributed in Asia back to being less of a headwind? Seth Bernstein: Yes. We are -- reopening our Global High Yield strategy in Taiwan. We've gotten regulatory approval, which is what stopped us. And so we're optimistic that we'll see incremental flows from there. We continue to see appetite for fixed income, but it's been more competitive and the alternative opportunities, particularly locally have been stronger. However, the dollar remains fairly strong. I'm hopeful we'll see some recovery along with performance. I don't know, Onur, if you have anything more to add. Onur Erzan: Yes. I think those are the main points. I mean the only other minor I would add to that is our ETF platform continues to build momentum as well. If you look at the monthly run rate, domestically, we are basically getting close to $0.5 billion net flows per month. So definitely a very healthy growth rate for our ETFs, which are across asset classes, including fixed income. And then we are expanding that momentum into international. We launched 2 ETFs, fixed income ETFs in Taiwan. We launched several UCITS ETFs in Europe this week in fixed income. So as a result, you will see us tapping into new markets outside our traditional intermediary channel using the ETFs. So it's going to take, again, a few quarters to build momentum in those new products, but we are seeding the ground for future growth in new products as well. Operator: Next we'll go to Dan Fannon at Jefferies. Daniel Fannon: So one more just on the private wealth side and tracking above the 5% adviser growth target. And so I was curious if you could just give a little bit of a framework or profile of the adviser that's joining your platform? I know you generally aren't paying the same levels of transition assistance or other things, but curious about the profile? And then how you anticipate those to ramp as they integrate into your platform over time? Onur Erzan: Sure. Great question. Yes, you're absolutely right. We typically have a bias towards more new to industry internal promotes as well as mid-career switches from other careers as our historical recruiting model. We have not done major recruiting in book takeovers, if you will. And as a result, our cost of talent acquisition seems to be much lower than what we see from some of the competitors. That being said, as we look at the talent mix, we are open to adding some experienced advisers, some of which might have books. So as we think about the rest of the year and the broader pie, I mean, I would say probably 75% would fit into the more traditional profile and then roughly 1/4 would be more on the experience side, some of which might have existing transferable assets. So that's how I think about the adviser mix. And in terms of the year-end adviser kind of numbers that we are targeting, probably given we have been intentionally fast in terms of adding new advisers early in the year, it's going to be slower in the rest of the year by our recruiting plan, but we probably would end a couple of percentage points higher than what we exited this quarter on a net basis. So that would be a rough number that we are targeting. Again, we are -- these are, I would say, directional targets. Ultimately, we flex up and down based on the talent we are seeing. Finally, in terms of how much time does it take for a new adviser to ramp up, et cetera. We have specific initiatives to get the advisers to full productivity over a shorter period of time. We have dedicated teams that are focused on it. But typically, it takes 4 years or so for an adviser to be breakeven if it's a completely new-to-industry kind of adviser. And then you see that adviser to peak probably within 5 to 10 years. So that's sort of a typical profile for new-to-industry kind of fresh talent, if you will. Daniel Fannon: Great. And then just a follow-up on the pipeline. obviously, record levels, and I think you gave some context around the funding of that. But could you talk more broadly about momentum as you think about the institutional channel and kind of sales activity and kind of product mix in context of that outside of what is actually in the pipeline today? Onur Erzan: Yes, sure. And if you think about our average deployment for the pipeline, we are currently running at 9 months. So the good news is the record pipeline will be deployed relatively quickly. So that's good news because that pipeline runs through fee-generating sales based on that. In terms of new opportunities, we touched on Corebridge Equitable, the $100 billion. So that definitely is quite a sizable opportunity ahead of us in '27 and beyond. In terms of other areas, a couple of things I would highlight. One, again, the broadening of the third-party insurance franchise. So we really have good momentum there. We continue to add new relationships, and I expect more there, both on the general account side with private credit and fixed income, but also on the separate account side with equities and multi-assets. And then in terms of the other broader institutional markets, we are definitely seeing some momentum in Asia Pacific. Some of our more quantitatively oriented strategies have found good demand there and definitely expecting more opportunities materializing across our systematic platform globally, but also specifically in Asia, given they are pretty big buyers of systematic strategies, particularly equities. Operator: And next, we'll move to Benjamin Budish at Barclays. Mason Fleming: This is Mason on for Ben. I just wanted to ask more about your ETF business. Can you talk more about the current distribution footprint outside of your wealth platform? And if possible, can you share any color about the current economic arrangements with distributors? And how they may be changing at all? Onur Erzan: Yes, for sure. In terms of our ETF franchise, you're absolutely right. It cut across our proprietary wealth channel as well as our third-party distribution. The third-party side has been growing at a faster rate, but from a smaller base. As you would expect, as we launched the ETF business starting back in 2022, we first leaned into our private wealth channel and then use that original foundation to scale into third party domestically and then overseas. On the third-party side of things, we are definitely seeing momentum. We onboarded our ETFs to multiple new platforms, wirehouses, regional broker-dealers, independents, et cetera. In terms of the total sales mix, we tend to have a very small, immaterial almost distribution through the direct platform. So think about the Fidelity, the Schwabs of the world, the direct-to-consumer part of those businesses. So as a result, our dependence on those funds, supermarkets, et cetera, is much lower than some of the other ETF providers that has large ETF franchises, particularly in passive. So I would say our third-party distribution cost is not materially impacted by what's happening with some of those platforms. Operator: And we'll take a follow-up question from Bill Katz at TD Cowen. William Katz: Just coming back to performance fees, thank you for the updated guidance. Can we unpack the incremental pickup in the public side? How much of that is just due to maybe market positioning versus anything going on the hedge fund side and anything related to maybe the shuttering of a relatively sizable hedge fund you announced? And then on the operating expense side, just coming back to that for a moment, it looks like it's up about 6% on the midpoint year-on-year. As we look out into 2027, would you anticipate any kind of deceleration of the core expense growth? Or would that likely stay the same just given the myriad of different growth vectors out there? Thomas Simeone: I mean, generally, it would stay the same, speaking from the operating expense side first. We generally haven't offered any next year's information this early on. But it would generally be flat. There's nothing on the horizon that I'm aware of to offer any additional color on the expenses. As far as the performance fees, no, the changes in performance fees [ aren't ] impacted by the closure of Arya that we announced recently. And then what's driving the publics is our international SMID product in 1Q versus last year. Operator: And there are no further questions at this time. Mr. Jorgali, I'll turn the call back over to you. Ioanis Jorgali: Thank you very much, Audra, and thank you, everyone, for joining our call. I hope you have a great day, and please reach out if you have any questions. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, April 28, 2026. Following today's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to David DeMartino, Senior Vice President, Investor Relations. Please go ahead. David DeMartino: Thank you, operator. Good morning, everyone. Welcome to Zimmer Biomet's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, President and CEO; and Suky Upadhyay, our CFO, to be Finance Operations and Supply Chain. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. For details this can involve these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements, please refer to our SEC filings. Please note, we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Additionally, the discussions on this call will include certain non-GAAP financial measures, some of which are forward-looking non-GAAP financial measures. Reconciliation of these measures to most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our first quarter earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Ivan. Ivan? Ivan Tornos: Good morning, everyone, and thank you for joining today's call. I would like to start, as I always do, by sharing my gratitude to our Zimmer Biomet team members around the world, your determination, your discipline and your dedication to customers and patients are what moves our business and our mission forward. We're off to a strong start to the year, strategically, operationally and financially, and that momentum is a direct reflection of the strength of our team the resilience of our business and the impact that we can have where we stay focused on innovating and executing for our customers. Once again, my sincere thanks to the Zimmer Biomet team members. . During my prepared remarks this morning, I'm going to cover 4 key areas. First, I'll start by summarizing our first quarter results. Second, I will provide an update on our U.S. go-to-market changes. Third, I will discuss our 2026 outlook. And then lastly, I'll briefly cover the progress that we continue to make across the 3 key strategic priorities of the company, those being people and culture, operational excellence and innovation and diversification. Starting with the first quarter results. I'm proud of how the team began the year, making strong progress to our 2026 sales growth commitments, EPS and free cash flow commitments. In the first quarter, we grew sales 2.9% on an organic constant currency basis at the upper end of our annual 2026 revenue guidance range. And we delivered adjusted EPS of $2.09, which was up 15% year-over-year. Notably, the first quarter saw a $0.20 benefit from tariff-related items relative to our expectations. As we get into the details of these results, unless otherwise noted, all statements on this call will be about the first quarter of 2026 high compared to the same period in 2025 and all commentary would be on a constant currency and adjusted operating basis. First quarter 2026 organic constant currency commentary excludes the impact from the Paragon 28 acquisition, which we closed in April of 2025. Looking at the first quarter results in more detail. Our U.S. business increased 3.2% and while international grew 2.5%. These results reflect healthy end markets, strong technology sales, which once again grew in strong double-digit rates and continued momentum from our recently launched new products. Importantly, this performance was against the backdrop of changes to our go-to-market strategies in both the U.S. and some designated international markets. U.S. knee growth of 2.2% in the quarter reflects a greater than 20% increase in partial knee cells driven by our Oxford Partial Cementless Knee, the only partial cementless knee on the market in the United States. This performance was partially offset by pressure in our legacy Toran Knee implants, such as NextGen and [indiscernible], which we continue to phase out as part of our brand rationalization strategy. International Knees grew 1.3% for the quarter. Our U.S. hip franchise grew 5% in the quarter as we are seeing increasing traction of our hip triple play of one which now represents nearly 40% of our U.S. Hips temps, OrthoGrid, or AI-based hem navigation platform, a HAMMR or surgical impact. International Hip sales increased by 1%. The -- while still early in its launch, we are seeing rapid adoption in Japan, the second largest market for Zimmer Biomet or for first of the warm iodine core hip implant, which is designed to help address the risk of very prosthetic joint infection after total joint replacement. Our technology and data, bone cement and surgical business grew nearly 12% in the quarter. Our strategy of offering a comprehensive suite of technology solutions is paying dividends. as we are seeing continued strong ROSA and TMINI sales across the board. To further this one-stop shop approach at the American Academy of Orthopedic Surgeons in March in New Orleans, we hosted technical evaluations of boss or fully autonomous AI-driven orthopedic robotic system, which we acquired via the Monogram acquisition. Surgeon feedback was overwhelmingly positive as the potential gains in safety, efficiency, ease of use, reproducibility and accuracy resonated very strongly with the customers that we engage. We recently completed enrollment in our 102-patient clinical study, we continue to expect U.S. approval and the launch of the semiautonomous version in early 2027, followed by the fully autonomous version in late 2027 or early 2028. In anticipation of the mBos launch, we're increasing the number of robotic clinical sales representatives targeting to hire over 200 by the end of 2027. Finally, SCP growth of 1.6% was once again led by our U.S. CMFT and Upper Extremities businesses, partially offset by continued challenges in restorative therapies and in our trauma business. Double-digit CMFT growth in the U.S. was driven by our external closure franchise which continues to perform very nicely above market per extremities increased upper single digits in the U.S. as both our OCF stemless shoulder and our Identity total shoulder platform continued to gain momentum. Moving on now to discuss the U.S. got market changes. In the U.S., the transition to a dedicated and specialized sales channel is progressing as planned. While the quarter did see some modest disruption, it was in line with our expectations. And importantly, we are seeing rapid increases in productivity in those territories that we have transitioned. We remain on track to complete the transition by the end of 2027. Internationally, the evolution of our go-to-market models, particularly in emerging markets, is ongoing and also is performing in accordance to the plan and the expectations that we have. While we did see an impact on growth in the quarter, this was very much accounted for internally. While our commercial changes are progressing as planned, given that it is still early in the year, we are maintaining our full year 2026 organic constant currency revenue growth guidance of 1% to 3%, with growth roughly consistent throughout the remainder of 2026. Instead of this, our assumption of up to 100 basis points of price erosion is unchanged. We continue to anticipate an approximate 50 basis points FX tailwind to full year revenue growth with the second quarter being a bit neutral at current rates and Paragon 28 to contribute around 100 basis points to reported sales growth in 2026 before being reflected in organic growth. As a result, our reported sales guidance also remains unchanged at 2.5% and to 4.5% for the full year. We now expect 2026 operating margins to be better than anticipated, down slightly less than 50 basis points from 2025, which still contemplates lower gross margins, dilution from the Paragon 28 acquisition and increased investments in our U.S. commercial channel. We anticipate operating margins in the second quarter of 2026 being down roughly 200 basis points from the second quarter of 2025. In the third quarter, operating margins being down around 50 basis points sequentially from the second quarter. Our guidance for interest expense, tax rate and end of year shares outstanding, which we continue to assume up to $750 million of share repurchases remains unchanged. Given these dynamics, we are raising both our EPS and free cash flow growth expectations for the year 2026. We now expect adjusted EPS to be $8.40 to $8.55 from the previous guide of $8.30 to $8.45. And we expect our free cash flow growth to be in the range of 9% to 11% versus the previous guide of 8% to 10%. As I said, all in, the year is off to a very strong start, and I could not be any prouder or excited about what the remainder of is going to bring to Zimmer Biomet. Turning now towards 3 key strategic priorities for the company, people and culture are being number one; operational excellence, number two; innovation and diversification number three. People and culture remain the key competitive differentiator for Zimmer Biomet. And we continue to focus on placing the right talent in the roles to advance our strategy. With that in mind, I'm very pleased to share that Dr. Jonathan [indiscernible] reknown surgeon from the hospital for special surgery has joined Zimmer Biomet as Chief Science Technology and Medical Affairs Officer reporting to me. In this role, Dr. [indiscernible] will lead the strategy, delivery and management of our global portfolio spanning AI-enabled robotics, software and data, smart implants and connected technologies while also overseeing or global medical education. On our second priority of operational excellence, we continue to make great strides in improving operating efficiency through expanding our manufacturing footprint into lower-cost geographies. In addition, we're making very meaningful progresses on reducing working capital by lowering our days of inventory on hand while at the same time accelerating a very robust SKU rationalization program. We expect these combined efforts to strengthen our industry-leading margins while meaningfully continue to improve our free cash flow conversion rates. On Pillar #3, from an innovation perspective, we recently committed to becoming the exclusive orthopedic investor in the mobility revolution fund, a musculoskeletal venture capital fund launched through our collaboration between Deerfield management and the Hospital for Special Surgery in New York City. This is going to give us the opportunity to invest in technology that has the potential to truly change the standard of care from AI data applications to cartilage repair solutions. Speaking of the latter, we're also teaming up with some of the world's leading researchers in this groundbreaking opportunity. It is inspiring to see how rapidly we're advancing our commitment to solving some of the key [indiscernible] orthopaedics whether it's awareness, safety, efficiency and outcomes today and in the future. Lastly, on diversification, our recent acquisitions are all seeing positive momentum. Paragon 28, first quarter growth accelerated around 200 basis points from the fourth quarter of 2025 and is trending back towards double-digit growth performance. OrthoGrid delivered its strongest quarter to date, with significant growth and accelerated adoption, solidifying OrthoGrid as a core driver of our digital ecosystem and interior hip triple play. Finally, with enrollment complete in the Monogram clinical study, we remain on track to bring this very exciting first-to-the-world technology to market. In conclusion, we are very proud of the progress that we're makeing so far in 2026. We continue to prioritize our go-to-market commercial transformation in the U.S., and we continue to focus on driving robust adoption of our new product innovation cycle. Before I turn the call over, I want to comment on the announcement that we made this morning regarding Suky's decision to leave Zimmer Biomet for a new opportunity in the biotechnology space. For nearly 7 years, Suky has been a value partner and disciplined operator, helping us in improving our WinGuard weighted average market growth rate profile through organic and inorganic portfolio optimization driving a top quartile margin profile for Zimmer Biomet, strengthening the balance sheet and significantly improving the free cash flow conversion and growth. I'm thankful for his leadership and contributions. And we think continued success in his next chapter. Above all, I'm thankful for his friendship, which I know will continue for many years to come. During this transition, Paul Stellato, our current Controller, Chief Accounting Officer and Head of Corporate FP&A, will serve as Interim Chief Financial Officer. Paul is a seasoned business leader bringing more than 20 years of financial and IR Investor Relations experience to the role. Since he joined Zimmer Biomet in 2022, Paul has been instrumental in translated our strategy into disciplined capital allocation, including our share repurchase program and recent acquisitions as well as leading the creation of global search services around the world. I'm extremely confident that he is the right leader at the right time, and I'm confident he will provide a steady direction and leadership as we continue to conduct a search for a successor, and I look forward to our continued partnership. With that, let me turn the call over to Suky. Thank you. Suketu Upadhyay: Thank you, Ivan, and good morning, everyone. I'm proud of what we've accomplished together over the past 7 years. I believe Zimmer Biomet has a clear strategy and meaningful opportunity ahead. I would also like to take a minute to thank the entire Zimmer Biomet organization for all of the hard work and dedication that you put into advancing our mission while delivering on the company's objectives. The dedication and resiliency are impressive. I wish you continued success. Now turning to the results. Reviewing the first quarter results, net sales were $2.087 billion, an increase of 9.3% on a reported basis. and 2.9%, excluding the impact of foreign currency and the Paragon 28 acquisition. Consolidated pricing was 40 basis points negative in the quarter, in line with our expectations. Growth in the quarter benefited from opportunistic end-of-quarter purchases above historical levels, continued momentum from our recently launched products, as Ivan noted, and strong robotic sales. Turning to our P&L. We reported GAAP diluted earnings per share of $1.22 compared to GAAP diluted earnings per share of $0.91 in the prior year quarter. Higher revenue and lower restructuring costs, the previously mentioned tariff benefit and lower share count were partially offset by modestly higher taxes in the quarter due to geographic mix. On an adjusted basis, we delivered diluted earnings per share of $2.09 compared to $1.81 in the prior year. This increase was driven by higher revenue, the aforementioned tariff benefit and a lower share count, which were partially offset by increased commercial investments. Adjusted gross margin was 73% and higher than the first quarter of 2025, driven by favorable mix and a benefit from tariffs. Notably, a portion of this tariff benefit included refunds that we had anticipated in the second half of the year. Adjusted operating margin was 27.3%. Adjusted net interest and nonoperating expenses were $71 million above the prior year driven by higher debt related to Paragon 28. Our adjusted effective tax rate was 18% and fully diluted shares outstanding were 195.8 million, down year-over-year due to $250 million of share repurchases in the first quarter. Now turning to cash and liquidity. Another strong quarter of cash generation with operating cash flows of $359 million and free cash flow of $246 million. We ended the quarter with approximately $424 million in cash and cash equivalents. As Ivan had covered the rest of year outlook, I would like to close by again thanking the entire ZB team for their hard work and dedication. And with that, I'll turn the call back over to David. David DeMartino: Thank you, Suky. Operator, let's open up for questions. [Operator Instructions]. Operator, please go ahead. Operator: We'll take our first question from Rick Wise with Stifel. Frederick Wise: Going to miss you, Suky. From my perspective, the year is off to a good start, you outperformed Ivan in the quarter, you beat sales, strong gross margin speeds. But just since I only have 1 question, but you didn't raise by overall by the beat, you left sales unchanged EPS less than the EPS beat. I appreciate you keep talking about being more balanced and tempered as you think about guidance. But it's the start of the year. Is there -- are you seeing anything in the business or the market or competitively or in your sales transition that prompts that conservatism beyond just again, your desire to stick with your tempered guidance. Ivan Tornos: Rick, thanks for the question. So as you highlighted, we had a very strong first quarter. And as I sit here looking at the next 3 quarters, the word that comes to mind is confident. I'm very confident that we're more in the right direction. We continue to see the sales force changes progressing as planned. We had some disruption in the quarter early in Q2, but everything is going in accordance to plan. We have a solid pipeline in technology. You saw the growth in technology, continue to see great momentum with new products. We've got a very robust list of new customer targeting strategies that are materializing. So from a revenue standpoint, I'm very confident that we are moving in the right direction. On EPS, we did raise -- maybe didn't raised by the entire bid. We're also investing in a variety of fronts, namely in the sales force and model changes. And we did raise free cash flow. So again, very solid first quarter everything move in the right direction. So why are we not raising our guidance now because it's early in the year. This is a year of transition. We said so. We are making fairly substantial changes in a variety of fronts, go-to-market models here in the U.S. some changes in emerging markets, namely China. We're making investments in innovation at a ball pace. We're hiring people. We're making talent changes. So we feel, even though the first quarter was very strong, it's probably prudent to wait, let's call it, 90 days and then have the conversation again. But again, I'll leave you with 1 word confident, very confident that we move in the right direction. Thank you for the question. Operator: We'll go next to Vijay Kumar with Evercore ISI. Vijay Kumar: Congrats on a nice print here. And Suky, I wish you the best. Maybe 1 sort of high level, Evan,Ivan, and you mentioned U.S. sales force transformation is on plan. Any -- you also made some interesting comments about you're seeing rapid increase in productivity in regions where you're seeing this transition. Any further details that you can share on other metrics that you're tracking perhaps, things like attrition rates, what percentage of sales force now dedicated or direct, if you will, in sort of on the similar line and any macro impact that we need to think of outside of the sales force reorg anything from Middle East . Ivan Tornos: Absolutely. So let me give you some of the key public metrics that we've been sharing. So at the beginning of the journey, early 2026, we mentioned that roughly 66%, so 2/3 of the U.S. sales force, roughly 2,500 people were 1099. At the end of Q1, the number is already slightly below 60%. And -- it's already roughly a 10% reduction on the number of 1099s. And obviously, that implies that these 1099s are now fully dedicated to Zimmer Biomet. So no longer they're doing Zimmer Biomet 1 or 2 other jobs. So a fairly significant decrease in the number of nondedicated individuals. We started the year with roughly 25% of the sales force being specialized. So 1 of every 4 reps carrying a dedicated sales back. Another number is approaching, if not exceeding 30%, 3-0. We loin, I believe and I spoke about this, Vijay, the top 6 independent distributors accounting for roughly 40% of sales. They're in extension of no less than 7 years with Biomet. So that was a fairly significant risk that we retired. Relative to turnover rates, we had a target of no more than 12% turnover given the changes and our turnover rate is in the single-digit range. So again, early in the year, only 9 days behind, but everything is progressing in accordance to plan. To the point that we're thinking that perhaps we could go a bit faster as we get into Q2, Q3 and the rest with the commitment is still being we're going to close the entire transformation by the end of 2027. I believe you had a second question or part 2 of the question. Anything else, any follow-ups there. Vijay Kumar: Just on the macro piece, Middle East, any impact? Ivan Tornos: Okay. Middle East. From a macro standpoint, obviously, like everybody else, we continue to monitor what's happening in the Middle East. Today, we have seen no material supply disruptions, a minor freight cost increase in the quarter that we're able to absorb. From a supply standpoint, most of our key products are dual source, if not 3 sources. We got at least 1 year of poly. So this is not something that we're concerned about. So we're not seeing any distribution challenges there. So again, so far, life is good. . And then from a sales impact standpoint, we didn't see any impact in the first quarter. So that's on the Middle East. And then you got a variety of other macro or deals that we're monitoring, but nothing that it was impactful in the quarter, and nothing that we see has been impactful in the second quarter and beyond. Thank you for the question, Vijay. Operator: We'll go next to Matthew Blackman with TD Cowen. . Mathew Blackman: You hear me okay? Ivan Tornos: Yes, we can. . Mathew Blackman: Great. Ivan, Vijay actually asked this, I think, in those list of questions, but I'm not sure that you touched on it. You did talk to seeing increasing productivity in some of the geographies where you're doing the sales force work. I was just hoping maybe you could expand a little bit on that, just maybe in general, talk to some to the extent that you're seeing any green shoots, let's call it, from the work that you've done maybe sort of in the latter part of 25 or maybe even early here in 2026. That's worth calling out that gives us confidence in the lift that you still have ahead of us -- ahead of you. Ivan Tornos: I appreciate the question, Matt. So we probably could spend an hour going through data points. As you can imagine, given the magnitude of the project, we're tracking all gaps of KPIs, but I'll give you maybe 3 or 4 reasons to believe. In the territories that we did switch from nondedicated to dedicated. So again, a 10% reduction, we've seen fairly dramatic improvements in productivity. Nationwide or average [indiscernible] around 7 cases our lead competitor is in the 16, 17 cases per week run in the territories where we made the switches already are in double-digit ranges for the number of cases. So that's pretty encouraging to see very quickly that improvement, no surprise. When you go from spending 2, 3 days, are we doing cases to 5 days, you can imagine the product that is going to increase. along with productivity increases we've seen sales improvement in those dedicated structures. Our average extremities shoulder number for the quarter was strong. that is directly correlated to the number of shoulder specialists that we have added, both in an inpatient HOPD structure as well as in ASC, and we continue to see great momentum in shoulder. So productivity is improving a number of cases. Sales is improving in those territories. The lower turnover rates that I was [indiscernible] to Vijay is mostly coming from some of these story changes, higher engagement once we come fully part of the company. So again, plenty of reasons to be in that we're in the right direction. . Operator: We'll go next to Robbie Marcus with JPMorgan. Robert Marcus: Suky, I'll add, I guess, my sadness and congratulations. You'll be missed. I wanted to follow up, IvanIvan, maybe on a couple of things you mentioned. And it really comes down to what is and what isn't maybe onetime in the quarter? It seems like there were some product discontinuations in these, maybe a little bit of end of quarter purchasing and then perhaps maybe some benefit in gross margin. Wondering if you could size any of those? Any other potentially onetime items in the quarter and how to think about that resolving over the rest of the year? . Ivan Tornos: Absolutely. Thank you, Robbie. So I'll touch on U.S. needs and what happened in the quarter? And then maybe Suky, you can comment on gross margins and how durable they are. So look, it was not the greatest quarter for U.S. knees, but it was definitely in alignment to our expectations. We knew we were going to be going through some of these changes related to the go-to-market transformation, and we accounted for those. So I would say the single largest reason why the USD number was no higher than the 2.2% is some of the changes that we made in the U.S. organization. We lost 2 accounts in the quarter, fairly large. We believe going to be able to recoup some of the business, but we'll see as we get into the rest of the year. There was a Kaiser strike in the West Coast where we had the highest share in knees. So while that was disrupted for everybody, it was more disruptive for us. . In my prepared remarks, Robbie, mentioned how we are moving from legacy brands. namely NexGen and Vanguard to making the transferring to a one new franchise, that being persona. And as we went through that, we saw some disruption. So I will tell you, probably mostly in line, except a couple of the accounts that we lost -- and that's the body. We got to do better, and we expect to do better than growing 2.2% in U.S. knees. Relative to quarter-end deals, all the staff, those are in line with what we typically do. It was not a significant onetime event. We do strategic purchases. We try to convert ASCs. There is demand in the market for bundled deals, we include technology, implants and whatnot, and we're going to continue to do those. Suky, do you want to comment on gross margin? Suketu Upadhyay: Robbie, on gross margin, we saw a very strong quarter. largely driven by the invalidation of the IEEPA tariffs, which contributed about $0.20 to results in the quarter. We were beyond that a little bit better on underlying performance as well. The way you should think about the gross margin line is of that $0.20 that we benefited in Q1, we had originally assumed about half of that would be credited in the second half. So that was a bit of a pull forward. And so the remainder of that $0.20 drops $0.10 to the bottom line and is largely the driver of the beat or the raise, I should say, on earnings per share. As you think about gross margin for the full year, we still expect it to be down modestly versus prior year at around 71%, give or take. And the way you should think about the cadence is that it's going to be roughly consistent for the remainder of the quarters. So again, underlying performance on gross margin is as expected. The biggest driver in Q1 was the invalidation of those tariffs. Operator: Our next question comes from Travis Steed from Bank of America. Travis Steed: Just to follow up a little bit on Robbie's question. I guess looking at the U.S. knees specifically, comps do get 400 basis points tougher in the back half. And so just how do we get confidence that in the kind of the back half acceleration in U.S. Knees? And I don't know if I heard correctly, was there -- did you say in the earlier question, you saw some disruption early in Q2. I don't know if that was an early Q1 misspeak or maybe I missed it wrong? Ivan Tornos: No, no. The disruption was on Q1, Travis. So when you look at the changes we made in the first quarter, I noted a reduction on nondedicated representatives there was some disruption. We did lose 2 fairly large accounts in the quarter. So no, I did not comment on disruption on the second quarter. Your main question, what gives us confidence that we're going to accelerate our net growth in the second half is the ramp-up of our new products is the fact that we continue to place and sell a lot of technology, 30% growth in technology in the first quarter, all in with the rest of surgery, bond cement is 12%, but the actual technology growth in the first quarter, and that's TMINI is 30%. So once you start growing technology at those rates, obviously, implants fall at some point. So the account conversions that we've seen in the technology sales, the changes we're making from a go-to-market standpoint, new product acceleration gives us confidence that the numbers should increase. Thank you, Travis. Thank you. Operator: We'll go next to Chris Pasquale from Nephron. Christopher Pasquale: It didn't come up in your prepared remarks, but 1 of your competitors have been dealing with an issue that impacted their ability to serve customers for a few weeks at the end of the quarter. doesn't appear to me at first glance like you benefited much from that dynamic. But could you just talk about what you've seen in the market and whether you think that has any implications for your business, either here in the first quarter or what you're expecting in . Ivan Tornos: Yours. First things first, it's very unfortunate that companies go through those dynamics. So I'll start with a No, we did not see any material impact. So we do not see the fact that we had a competitor going through such dynamic impacting our business in a meaningful way. . Operator: We'll go next to David Roman with Goldman Sachs. David Roman: Maybe we could unpack a little bit some of the trends outside the United States. I think this is the first quarter in quite some time that OUS growth has trailed the U.S. and likely trailed where end markets look to be performing. So could you maybe help us think through some of the factors influencing those geographies to the extent to which there might have been any type of intermittent disruption versus what might be a change in the trajectory of that franchise? Ivan Tornos: [indiscernible] you, David. So a couple of things. Number one, the comps in the first half for international are more difficult than the second half. So that's one part, and I would like to talk what comes, but it is definitely an element here. Secondly, we've made, as we announced at the end of 2025 and as we said in 2026 early in the year, we made and we're making some distributor changes in geographies such as emerging markets, Middle East and Europe and China primarily, where we have gone from a large network of distributors to having one, if not true partners. And that's obviously brought some disruption. And then thirdly, there were a couple of onetime events that have been orders in certain geographies internationally that didn't come or wait. But all of that said, the expectation is that we're going to be growing international mid-single digit in the second half of 2026. Thanks for the question, David. Operator: We'll go next to Larry Biegelsen with Wells Fargo. Larry Biegelsen: I guess for my 1 question, I'd love to hear about the rollout of Monogram. I know it's early, but it's an important product for you. So once you launch the semiautonomous system with Persona early next year, how should we think about the pace of the rollout? Will there be a limited launch initially at select centers and how that might impact ROSA. Just help us think about that, please. . Ivan Tornos: Larry, I love the fact that you always got a technology-related questions about the future of the company. So thank you for that. Very excited about Monogram. As I mentioned in my prepared remarks, we completed the clinical trial. So we are deeply focused now on the preparation of the 510(k) submission. And we continue to anticipate that we're going to be in a position to launch this new-to-world technology in early 2027. What should we expect of Monogram? If what we've proven is right, the fees remain there going to be launching the most efficient readout there in what we can do cases under 4 minutes procedure times. We believe that it's going to have the highest amount of safety given the enhanced surgical boundaries. We believe that it's going to really democratize orthopedic cases from a technology standpoint, very consistent when it comes to a procedure is very reproducible. The learning curve is very short. So it is easy to use. And then again, the level of accuracy we've seen with the robot is like nothing that I've seen in my many years dealing with technology. So we believe we got a bulk platform that can get scale up fairly rapidly. And to that point, we are going to invest to make sure that's the case. So we are hiring north of 200 sales reps behind the launch of Monogram in addition to the many reps that already got in the field. We are investing heavily on clinical evidence. We recently announced that we hired Dr. Jonathan [indiscernible], who happens to be 1 of the world's global key opinion leaders when it comes to technology, some of who's actually been an entrepreneur as well. We're also investing in rethinking or rather thinking, not just the clinical strategy, but also the economic strategy. So I can spend an hour talking about it, but I will say this is going to be a very bold launch, one that we're prepared already as we speak. What's going to happen with ROSA. We are committed to having a suite of technology solutions. So ROSA with TMINI was recently launched. One of the reasons why technology is growing 30%. We're going to keep that. It is the #1 robot outside of the U.S. where CT scan is not CT scanning. It's not the preference. We love what we're seeing with our partnership with Finsurgical and TMINI. So we strongly believe that the combination of Monogram plus ROSA plus TMINI, it's going to give us a competitive advantage. Very excited about Monogram. Thanks for the question. Operator: We'll go next to Matt Taylor with Jefferies. Matthew Taylor: I actually wanted to ask a final question about the tariff impact you saw the benefit here in Q1. I guess what are you assuming for the rest of the year with regards to EPA tariffs or tariffs in general? And what do you think could happen with the 232 investigation. Just asking a curiosity more than anything else. Suketu Upadhyay: Yes. Matt, good to talk to you. So we are assuming that the 122 tariffs remain intact for -- into the second half of the year. we are assuming that the EPA remain invalidated. And therefore, we took the benefit of that $0.20 in the first quarter, as I mentioned. And moving forward on the 232, I think it's still evolving and dynamic and no material updates at this point, but the overall situation remains fluid, and we'll keep you posted as things unfold. . Ivan Tornos: I'll just add Matt, quickly. On the 232, the validation we're getting from our IT sources is that it's not going to impact those companies that operate under the Nairobi protocol. So we're feeling pretty confident that we've got a pathway to mitigate that. Thank you. . Operator: Our next question comes from the line of Richard Newitter with Truist Securities. . Richard Newitter: One of the innovations that feels most innovative for you guys that's exclusively in your hands. It's the Canary smart implant that's embedded in Persona IQ. But just noticed it doesn't get a ton of airtime even on this call. And I know you had some positive clinical trial updates at AAOS for this technology. It seems like there's potential to generate real savings to the system here, better patient management post surgery. I know in the most recent CMS inpatient rule proposal, the CCJR is extending some of those initiatives that would seem to lend themselves in favor of a technology like this. I'd just love to hear kind of where you are on this particular product subsegment? Why we're not hearing about it more? How and if this can be leveraged as a more meaningful differentiator moving '26 into '27? Ivan Tornos: A lot of the question, Richard. Thank you. Look, early on, probably, we talked too much about Persona IQ without having the data. Now we're taking a different approach. We're going to get all the data. we're going to get everything validated, and they want to talk about it. I will tell you, overall, everything is tracking in accordance with expectations. As you mentioned, we did publish some very robust data on what Persona IQ brings in terms of lowering cost, improving outcomes, et cetera, et cetera. So that was published, I think it was 4 to 6 weeks ago. I've seen with some of the changes around IPPS and the CJR expansion, this is the kind of product that can make a robust impact. There is an increase on DRGs or expenditures, as you say, with DRGs, 469, 470 for those companies that perform better. So now we will be in possession of the implant that can, in an objective way, track whether our implant is performing better. So companies that have connected data before, during and after the procedure. Companies that can being objective data around outcomes, promo whatnot, and they can validate that can reduce the cost of care I believe they're going to be meaningfully rewarded. So we continue to invest in a variety of fronts to make sure that we are the company that can validate all of the above. So committed to the space, the technology, and we like what we see. Operator: We'll go next to Caitlin Roberts with Canaccord Genuity. Caitlin Cronin: Just to touch on ROSA shoulder. Any updated color on the launch and when will move to a broader launch? Ivan Tornos: Thanks for the question. We are now fully on the full market release. I was actually done in Florida, where we've been demo in the technology. The feedback continues to be very strong. It is surgeon center. So we're not launching a technology that only certain surgeons can use. So if you are an anatomic or reversed type of surgeon case technique you can use ROSA Shoulder for both types of surgery. We are getting really solid data around the accuracy of the platform. So we can robotically do surgeries that impact the land as well as the humoral, -- so we can do both the gleno and human resection. It is extremely efficient. We already are actively working on version 2 that's even more efficient than the first generation of ROSA Shoulder and it is fully integrated to the rest of the ROSA ecosystem. So again, another example going back to the question that Rich had of collecting data before doing after surgery with ROSA Shoulder and being able to engage in proms, conversations, outcomes and whatnot. So again, we move from limited market release to full market release, and we're going to scale up the number of units that we're going to be deploying in the U.S. and other markets. Thank you, Caitlin. Operator: We'll go next to Matt Miksic with Barclays. Matthew Miksic: Follow-up on Paragon. You mentioned some acceleration there. If you could talk about what's driving that and whether you expect to maybe exit the year on double digits? And how we should think about the time line for another potentially paradigm like strategic investments? . Ivan Tornos: Thanks, Pat. So we actually -- the first quarter almost a double digit when it comes to Paragon 28. And early in the second quarter, we are in the teens. So the growth is accelerating. We also saw a 200 basis point sequential increase from Q4 of 2025 to Q1. And to answer your question succemely, what's driving this is focus. We live in Albert and the Timalon. They're getting robust investments behind the platform. The launching products at a rapid pig the hiring reps in a variety of fronts. So focus is what's driving the growth here. And we expect to exceed 2026 strongly in the double-digit growth. In terms so when are we ready to do the next deal. Look, we've got a lot going on here. We are changing the go-to-market model here in the U.S., integrating Paragon about to launch Monogram, which is going to be very disruptive and it's required a lot of focus. And then we've got another deal called [indiscernible] also doing really well that we're integrating. So we're going to pause. We're going to continue to do buybacks. And at the right time, we'll execute on a deal similar to Paragon, which I think is prone to be very solid for Zimmer Biomet. Thanks for the question, Matt. Operator: We'll go next to Steve Lichtman with William Blair. Steven Lichtman: Suky, all the best to you. Ivan, where do you think we are at on underlying hip and knee market growth? Are there any incremental headwinds to market growth in the U.S. that you're seeing on elective procedures or willingness of your hospital customers to purchase bigger ticket items like ROSA? . Ivan Tornos: We continue to track the market growth rates and it's very solid. We pick the overall recon market to be growing north of 4%, not 4.5%. So obviously, we got to do better in Knees. We are where we need to be, but we're going to accelerate in hips. We've not seen any material impacts. I get the question around what's happening with Medicaid, ACA and whatnot, we track cost of data. First of all, Medicaid is low single digit for us. So said differently, I think it's about 1% of our revenue comes from Medicaid, less than that. And then in terms of ACA, is less than 12% of our cases. . We track the top 10 accounts in the U.S. to 10 accounts being hospitals like Mayo, Cleveland, HSSC New York and Other. We continue to see waiting lease being fairly long. So I would say the market is 4%, 4.5% durable. Pricing dynamics continue to be where they need to be. So we had a quarter of 40 basis points of price erosion overall, in line with our expectations. So we don't see anything from a market perspective that we're concerned about. Thank you. Operator: We'll go next to Jeff Johnson with Baird. Jeffrey Johnson: Suky, best of luck. Ivan, maybe on the sales transition. I know we covered a lot of this last quarter, but I just want to make sure I'm understanding a couple of things. we've heard in some conversations. I think some of your reps that were not 100% dedicated, you're kind of truing up and giving them guarantees this year. That extra stub that you may be guaranteeing some of those reps. Are you excluding those costs from non-GAAP EPS and margins, just I think about how to set my model up for next year or this year and next year? And then secondly, in some of those conversations, we've heard if those guys were trued up and given a guarantee this year, it might be more next year they think about, do they stay or not without that guarantee. So -- how are you thinking about the disruptions from the sales transition? Is that more of a 26% impact? Could some of that continue into '27? Just wondering how you think kind of these disruptions gate out between this year and next year? Ivan Tornos: Thank you, Jeff. Look, we go through sales force changes in a variety of ways and magnitudes often. So this is not something we exclude. So going back to why OpEx is slightly higher and what is the EPS going. We're investing in making sure that this works out. So that's number one. We have offered 2-year guarantees that are backed up from a revenue standpoint, in some cases, 3-year guarantees. But I would tell you, Jeff, the single largest guarantee that you can offer a sales rep is to let him or her now that it is going to be a long-term future for the employee. So money may cover 2 to 3 years. But when you have technology that you're launching like Monogram, when you have the full [indiscernible] in Orthopaedics you're making the investments that we're making, most reps see this as the place to be for the next 2 years. We can also with jobs every other year. Money is not going to keep you there. But having the feature that they feel they have a Zimmer Biomet was keeping them here. . So I will tell you in my conversations we sold reps all over the U.S., and I'm spending 70% of my time on the road visiting every single territory. That's what we hear. -- if you give me a bank that is robust, if you made me part of something that is going to be great for the long term. money matters in the short term, but my career is probably more important. Thank you, Jeff. Operator: We'll go next to Matthew O'Brien with Piper Sandler. Matthew O'Brien: And Suky, best wishes in your future endeavors. Just on the pricing side, Ivan, you mentioned down 40 bps in Q1, but I think you said you're sticking with the down 100 for the year. I guess why stick with the 100 bps should we expect things to get progressively worse throughout the course of the year and then exit the year down even more than 100 basis points and kind of continue forward at a higher rate than we've seen historically? Or are you just still going to be still trying to build in some conservatism with that metric here this year and then going forward? . Ivan Tornos: Well, first of all, that is the range that we've been given for a while, flat to 100 basis points. In '25, we did better than that. There were a couple of onetime events in international markets. As we enter 2026, we guided flat to 100. We closed the first quarter, but it's a similar answer to revenue and other elements of the guidance. We're going to wait and see there are macro events happening. There are changes in a variety of international markets. There is competitive pressure here in the U.S. So we're going to wait and see. We like where we are at the end of the first quarter. We'll update you on pricing again in the August call. Thank you. Operator: This concludes the question-and-answer portion of today's call. I would like to turn the call over to back over to Ivan Tornos for any closing remarks. Ivan Tornos: Sure. I want to thank everybody for joining the call today. And most importantly, I want to thank the Zimmer Biomet team for the strong execution in the first quarter. I give you 1 word confidence. We -- I am very confident we were in the right direction, not just into 2026, but most importantly, how we are making the company future proof when it comes to the strategy that we have how we think about operating the company for the future and the commitments that we're making. I would like Suky, my friends okay here to close the call, given the fact that this is going to be the last time that he represents Zimmer Biomet as the CFO. So Suky? Suketu Upadhyay: Yes. Thanks, Ivan. So I've learned and taken a lot of away from you over our 7 years together. And the 1 thing that's most impactful is your approach to gratitude. So I'll start there. I'd like to thank you, the ZB team, the Board and all of our many partners for an amazing 7 years. We've accomplished a lot in a really tough environment. But Ivan, we've built a strong foundation from which to grow. -- and I'm confident that under your leadership and with the team's execution, you will take ZB to the next up. I wish you all the success and I'll be shining from the sidelines. Ivan Tornos: I'm going to miss you. Thank you. Thanks, everybody. Bye-bye. . Operator: This concludes today's call. Thank you for your participation. You may now disconnect.