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Operator: Welcome to the Eastern Bancshares, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this event is being recorded for replay purposes. In connection with today's call, the company posted a presentation on its Investor Relations website, investor.easternbank.com which will be referenced during the call. Today's call will include forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied due to a variety of factors. These factors are described in the company's earnings press release and most recent 10-K filed with the SEC. Any forward-looking statements made represents management's views and estimates as of today, and the company undertakes no obligation to update these statements because of new information or future events. The company will also discuss both GAAP and certain non-GAAP financial measures. For reconciliations, please refer to the company's earnings press release. I'd now like to turn the call over to Denis Sheahan, Eastern Chief Executive Officer. Denis Sheahan: Thank you, Rob. Good morning, and thank you for joining our call. With me today on the call are Bob Rivers, Executive Chair and Chair of the Board of Directors; Quinsey Miller, our President and Chief Operating Officer; and David Rosato, our Chief Financial Officer. Our first quarter performance was solid and in line with our expectations with results reflecting the impact of typical seasonal trends. Operating income increased 31% and operating earnings per share increased 18% from a year ago and generated an operating return on average tangible common equity of 12.8%. As expected, period-end loan and deposit balances were down modestly from year-end. However, customer sentiment remains positive and commercial loan pipelines ended the quarter at record high levels, giving us confidence for strong activity in the coming quarters. Following a record year of originations, our commercial lending team remains energized and that momentum is carrying into 2026. Overall, we believe Eastern is well positioned to deliver meaningful value to shareholders by executing on organic growth opportunities and a consistent return of capital. We continue to see positive trends across many areas of the business. First quarter highlights include continued momentum in Wealth Management with positive net flows approaching $400 million in the quarter. Solid build in loan pipelines for both commercial and home equity lending, strong asset quality, significant capital return to shareholders and the successful completion of the Harbor One merger core system conversion. Wealth management is an important component of our long-term growth strategy. Beyond strong investment solutions and results we provide comprehensive wealth services, including financial, tax and estate planning as well as private banking. Wealth assets increased to a record high of $10.3 billion including $9.8 billion in assets under management, driven by strong positive net flows, partially offset by weaker equity market performance. We've been pleased with the integration of the Eastern and Cambridge wealth teams, which continue to capitalize on the deepening alignment within our banking business, elevating client engagement and referral activity. Notably, we have considerable opportunity to expand relationships within Eastern's client base, and our plan is to lean into that meaningfully over the next several years. Given the wealth demographics of our footprint, we are encouraged by the momentum of our business. Asset quality continues to be a real strength for us. Net charge-offs were 17 basis points, and we saw a solid improvement in nonperforming loans since year-end. We remain very comfortable with our risk profile with limited exposure to current higher-risk sectors, including private credit, software, life sciences and clean tech. Our lending to non-deposit financial institutions or MDFIs as defined by the call report, is less than 3% of total loans and as low risk as it is largely centered on organizations that provide affordable housing in Massachusetts, REITs that lend in our market, mostly in the multifamily space. and a small number of asset-based lending relationships we know well. Overall credit trends are positive and reflect the quality of our underwriting and deep knowledge of our customers, communities and local economy. Importantly, as the macro and geopolitical environment continues to evolve, we remain vigilant and closely engaged with our customers and consistent with our proactive risk management approach we will address any emerging issues prudently and quickly. Turning to capital. Given our profitability, we continue to generate capital in excess of our growth needs, we remain focused on rightsizing our capital through a combination of organic growth, share repurchases and quarterly dividends. This was evident in the first quarter as we repurchased 3.9 million shares for $75.1 million. As of quarter end, we've completed 59% of the current authorization and we expect to finish the program around midyear, at which point we anticipate executing a new authorization subject to regulatory approval. In addition, we announced a 15% dividend increase, marking our sixth consecutive year of dividend growth since becoming a public company, reinforcing our commitment to deliver consistent capital returns to shareholders. In February, we successfully completed the Harbor One merger core system conversion. With this milestone behind us, we are excited to realize the full potential of the combined franchise. This achievement reflects the extraordinary efforts of our employees, particularly given the conversion was partly executed amid a significant snowstorm in Greater Boston. I want to sincerely thank everyone who contributed to this effort for their dedication and teamwork. Importantly, we remain on track to capture the merger's targeted cost savings and onetime charges are largely complete with approximately $2 million remaining in the second quarter, bringing the total to $67 million. Before turning the call over to David, I wanted to spend a moment on artificial intelligence, a topic we are frequently asked about. Everything we are doing in AI is centered on improving how we deliver for our clients. Our focus goes beyond streamlining processes and efficiency and is centered on the objective of knowing our customers better than we know them today. One of Eastern's long-standing strengths has been the depth of our client relationships and AI will allow us to scale that advantage in meaningful ways. It will enable us to better anticipate customer needs, provide more relevant product recommendations and engage customers at the right time with the right solutions. This will further differentiate our franchise through an even higher level of personalization that customers typically receive from much larger banks. As a result, we view AI not only as an efficiency tool though it certainly will streamline workflows and improve productivity, but also as a driver of revenue growth. David, I'll hand it over to you to provide a review of our first quarter financials. R. Rosato: Thanks, Denis, and good morning, everyone. I'll begin on Slide 3 of the presentation. The first quarter marked a solid start to the year and was mostly in line with our expectations. We reported net income of $65.3 million or $0.29 per diluted share. Included in net income was $30.8 million of nonoperating costs, mostly related to the Harbor One merger. On an operating basis, earnings were $88.6 million or $0.40 per diluted share. While operating earnings decreased 6% linked quarter, they were up 31% year-over-year reflecting the enhanced earnings power of the company. Looking at Slide 4. We are pleased with the continued strength of our profitability metrics while operating ROA of 117 basis points and return on average tangible common equity of 12.8% were down from Q4. Both metrics improved from a year ago when operating ROA was 109 basis points and operating return on average tangible common equity was 11.7%. We remain focused on driving sustainable growth and profitability. Moving to the margin on Slide 5. Net interest income of $244.7 million or $250.8 million on an FTE basis increased 3% from Q4. The growth was driven by margin improvement due to lower cost of funds, partially offset by $3.1 million of lower net discount accretion, which totaled $19.5 million compared to $22.6 million in the prior quarter. Excluding accretion, net interest income increased approximately 5%. As you all know, quarterly accretion income can be lumpy. Looking ahead, we expect accretion to average $21 million to $22 million per quarter. In Q1, accretion of $19.5 million was about $2 million below trend. The net interest margin expanded 2 basis points linked quarter to $3.63. The improvement was driven by a 16 basis point reduction in interest-bearing and liability costs, reflecting improved deposit pricing. This more than offset a 7 basis point decline in yield on interest-earning assets, primarily due to lower loan yields, partially offset by higher security yields. Net discount accretion contributed 28 basis points to the margin compared to 34 basis points in Q4. Excluding the impact of accretion, the margin expanded approximately 8 basis points from the fourth quarter, highlighting the underlying strength of our core margin performance. We have included a new disclosure report on the repricing characteristics of our interest-earning assets on Page 18 in the appendix. Excluding the impact of cash flow hedges, which are in runoff mode, $1 billion or approximately 35% of our total loan portfolio is floating at current rates. The remaining $14.9 billion is comprised of variable and fixed rate loans of $4.1 billion and $10.8 billion, respectively. The time buckets reflect the dollar value of any repricing or cash flow events for the portfolio, including projected prepayments based on the forward yield curve. We have also disclosed the projected yields as assets run off the balance sheet, inclusive of purchase accounting. Current loan origination yields are 5.75% to 6% for commercial, 5.5% to 6% for residential, and HELOCs are indexed to prime. Excluding floating rate loans, we expect approximately $2.8 billion of turnover for repricing over the next 3 years. Based on current origination yields, this activity is expected to be accretive to NII and margin. For the securities portfolio, we expect approximately $1.5 billion of principal cash flow in the next 3 years at a weighted average book yield of 2.86%. Again, this cash flow will be accretive to NII and margin. Turning to Slide 6. Noninterest income for the quarter was $43.6 million, a decrease of $2.5 million compared to the fourth quarter. On an operating basis, noninterest income was $45.1 million, down $1.6 million. The largest contributor contribute to the variance was a $1.9 million loss on investments related to employee retirement benefits, reflecting weaker equity market performance. This compares to $1.7 million in income for the prior quarter, resulting in a $3.6 million quarter-over-quarter reduction in noninterest income. The unfavorable impact on income was partially offset by a $1.2 million improvement and related benefit costs reported in noninterest expense. Conversely, noninterest income benefited from a $2.9 million increase in miscellaneous income and fees. Primarily driven by a $1.7 million gain on the sale of commercial loans. This gain is related to a Harbor One loan workout that resulted in a note sale above our remaining fair value mark. Turning to Slide 7, we highlight Wealth Management, which is our primary fee business and accounts for more than 40% of noninterest income. Wealth assets increased to a record $10.3 billion, including AUM of $9.8 billion, driven by strong positive net flows. We're particularly pleased with this performance given that weaker equity market conditions during the quarter created headwinds for asset values, yet we were still able to deliver growth. underscoring the strength of our client relationships and full-service capabilities. Fees decreased modestly from the fourth quarter, but increased nearly 12% from a year ago primarily driven by strong growth in assets. Moving to Slide 8. Noninterest expense was $198.6 million, an increase of $9.2 million compared to the fourth quarter. The increase was primarily driven by seasonal costs and a full quarter of Harbor One operating expenses, partially offset by lower nonoperating costs. On an operating basis, noninterest expense was $167.9 million, up $11.8 million from the prior quarter. The increase reflects seasonally higher payroll and benefit-related costs as well as the full quarter impact of Fiber One. The largest contributors to the quarter-over-quarter increase were salaries and benefits of $10.6 million. Occupancy and equipment costs increased $2.1 million and technology and data processing expenses rose $1.2 million. These increases were partially offset by a $2.2 million reduction in professional services expense. Nonoperating noninterest expense of $30.8 million decreased $2.6 million, primarily due to $1.8 million of lower merger-related costs and $800,000 lower other nonoperating expenses. As a reminder, the first quarter typically represents a seasonally high point for expenses, and we expect a moderation in the quarterly expense run rate over the remainder of 2026. Importantly, with the completion of the Harbor One core system conversion in February, we remain on track to achieve the projected merger cost savings. Moving to the balance sheet, starting with deposits on Slide 9. As expected, balances declined from year-end. Deposits finished the quarter at $25.1 billion, down $366 million or 1.4%, primarily due to seasonal outflows at elevated competition for deposits. In addition, $81 million of Harbor One's broker deposits matured in Q1. Total deposit costs decreased 13 basis points to 1.46% and primarily driven by lower costs and time deposits and money market accounts. We are committed to increasing deposits to support our loan growth strategies. The New England deposit environment remains competitive, and we are taking targeted actions to ensure our offerings are appropriately positioned to defend and grow share. While these efforts will result in some upward pressure on costs, we remain focused on balancing growth of our high-quality deposit base with that of the margin. Notably, retention of Harbor One deposits has been consistent with our expectations. Turning to Slide 10. Total loans declined modestly from year-end, consistent with our expectations. Period-end balances were down $187 million or less than 1%. The decrease was driven in part by nonperforming loan resolutions of $35 million and commercial real estate payoffs. We are pleased C&I continue to be a source of growth with balances increasing $49 million or 1.1% from year-end. We finished the quarter with record commercial pipeline of approximately $800 million. which gives us confidence in strong origination activity in the coming quarters and supports a favorable growth outlook as we move through the year. We continue to benefit from the strategic investments we have made in hiring talent and our differentiation in the market. We can deliver the breadth and products and services typically associated with much larger banks by retaining the certainty of execution that comes from local decision-making and a deep understanding of our customers and communities. Turning to consumer lending. Home equity balances grew slightly during the quarter. We are underpenetrated in this line of business, and growth has been somewhat episodic. Largely due to capacity constraints within our legacy origination platform. We are in the process of implementing a new home equity origination platform, which we expect will improve speed scalability and consistency, enabling more sustained growth. Given the strong underlying consumer demand across our footprint for this product, we are excited about the opportunity ahead and we see home equity as an attractive area of growth. Residential mortgage balances were down approximately 1% from year-end. Our expectation is the residential portfolio will remain relatively flat in 2026 as we favor HELOC and commercial loan growth. Turning to securities on Slide 11. We continue to be pleased with the overall quality and positioning of the portfolio. Balances increased $171 million since year-end, reflecting disciplined deployment into attractive opportunities. The portfolio yield increased 14 basis points to 3.18% for the quarter, supported by recent purchases. From a valuation perspective, AFS unrealized losses totaled $277 million at quarter end compared to $259 million at year-end. Turning to Slide 12. Our capital position remains strong, as indicated by CET 1 and TCE ratios of 13.2% and 10.2%, respectively. As Dennis stated earlier, we are focused on rightsizing capital through organic growth, share repurchases and quarterly dividends. We expect to generate excess capital but plan to manage our CET1 towards the median of the KRX, which is currently 12%. Our commitment to rightsizing capital was evident in Q1 and with the repurchase of 3.9 million shares for $75.1 million at an average price of $19.33 which was $0.68 below the VWAP for the quarter. As a result, our diluted common shares outstanding were 220.8 million as of March 31. Second quarter to date, we have repurchased an additional 740,000 shares through yesterday for a total cost of $14.4 million and now have 4.2 million shares remaining on our authorization. We have now completed 65% of the buyback. We currently anticipating completing the buyback around midyear, at which point we anticipate executing a new authorization subject to regulatory approval. Additionally, if the Basel III proposal to reduce risk weights on certain assets is adopted, our preliminary estimates suggest an increase to Eastern's risk-based ratios of approximately 1%, which will support additional share buybacks over time. As displayed on Slide 13, asset quality remains excellent as evidenced by net charge-offs to average total loans of 17 basis points. Nonperforming loans improved as expected, falling nearly $35 million linked quarter to $138 million or 60 basis points of total loans. NPLs were lower in both the legacy Eastern and acquired Harbor One portfolios. Progress has continued in the second quarter, and we expect further credit resolutions in the quarters ahead. Reserve levels remain robust as demonstrated by an allowance for loan losses to $37.9 million or 143 basis points of total loans. Criticized and classified loans of $801 million or 5.1% of total loans, were up modestly from $793 million or 5% of total loans at year-end. The increase was driven by higher criticized balances on the Harbor One portfolio, largely offset by continued improvement in legacy Easter loans. As we deepen our knowledge of the acquired portfolio, we further refined risk ratings and this led to the increase in Q1. In addition, we booked a provision of $5.8 million, up from $4.9 million in the prior quarter. Finally, slides covering our CRE and investor office portfolios can now be found in the appendix. We remain focused on the investor office portfolio and believe the worst of the office loan issues are behind us. so we remain realistic in our outlook. The portfolio totals $1 billion or 4% of total loans. Criticized and classified loans are $160 million an improvement from over $170 million at year-end. Our reserve level of 6% remains conservative. Importantly, we reunderwrite all investor office loans of $5 million or more each year, and we recently completed that process during the first quarter with no unexpected findings. Before turning to Q&A, I'd like to briefly address our 2016 outlook on Slide 14. At this time, we are not making any changes to full year guidance as the first quarter performance was mostly in line with our expectations. While there were some offsetting factors in the quarter, none alter our overall view of the year, and we remain confident in achieving the projections in the outlook. With that said, based on Q1 results, we may trend towards the lower end of the NII guidance range we shared in January. In addition, we are mindful that the economic environment remains fluid. We continue to closely monitor conditions impacting our business, our customers and the communities we serve. Given the ongoing uncertainty around geopolitical developments, interest rates, inflation and broader market volatility, we plan to revisit our outlook at mid-year this visibility improves. That concludes our comments, and we will now open up the line for questions. Operator: [Operator Instructions]. Your first question comes from the line of Feddie Strickland from Hovde Group. Feddie Strickland: Good morning, everybody. Just wanted to start off with a clarification. I appreciate the new interest earning asset pricing slide, and it seems like that's maybe a big part of the margin expansion story at this point. But just as a point of clarification, it's as projected yield on that. Is that where the yield is rolling off? Or where you expect those loans to be priced at? Denis Sheahan: That's the yield rolling off. Yes. And Feddie, just to be clear on that, there is a footnote that sense is on a non-FTE basis. That's -- I'll give you an example. So if you see the total security yield of $310 million, we reported that for the quarter, securities were $38 million. That 8 basis point difference is the FTE adjustment on those assets. Feddie Strickland: Got it. And I guess of the fixed loans that are repricing. I mean, how much of that is kind of fixed over the next year? Just trying to get a sense for what the opportunity simply from backfill free pricing is. Denis Sheahan: Well, we -- I mean we I mean if you look at the columns. Yes, Q4 to 6%, 7% to 9%, 10% to 12%, right? R. Rosato: Yes. You can see, we tried to break this out and obviously, we'll be happy to take feedback on this since it's the first time we've done it. But we tried to characterize the portfolio in the loan portfolio into the three major groups. Floating is prime and SOFR. And in commercial, that's SOFR-based in consumer, that's prime. Those are the HELOCs. Intermediate repricing and then what's fixed. We aggregated that in buckets thinking that the most useful information was the current yield by maturity bucket or so than the exact mix of whether that's fixed or floating. Now what you'll find is within 3 months is the whole floating bucket. Everything else is fixed or variable, meaning intermediate term fixed, and that represents the repricing opportunity. Feddie Strickland: That's super helpful. And just one more for me. There's been some news of some larger competitors moving into the Boston market on the wealth side. Can you talk about the extent to which you've run into them so far? Have you expect any pressure there? Denis Sheahan: Sure, Feddie. So yes, there's frequently news of entrance into the market. We're not alone in understanding the very strong demographics from a household income and wealth perspective in New England and in Massachusetts, in particular. But it's always been a very competitive market. We'd expect that to continue. So new entrants don't disturb us. We're well used to competing with others in the market and have been for many years. R. Rosato: Dennis, I would just add to that. A lot of those new entrants are focusing higher asset amounts than our core, bread and butter. Operator: Our next question comes from the line of Justin Crowley from Piper Sandler. Justin Crowley: Just wanted to keep on the margin. You left the guide unchanged. And I think last quarter included two cuts in the guide. So -- just kind of curious with the Fed likely on pause here, how you should think about that impacting the NIM and just the expansion that you've laid out? Denis Sheahan: Sure. Thanks, Justin. So I would go back to what we've been very consistent for quite a period of time now is we are essentially interest rate risk neutral to NII. We've talked about on past calls that a steeper deal curve is better than a flatter yield curve, but it's relatively modest. I pointed out 1 to 2 basis points positive margin impact up per 25 basis points of steepness. So the -- we feel good about the NIM. We feel really good about the core NIM as well. The only challenge around margin is really just two things: One, it's the variability of accretion that we've talked about in the past. We tried to point out, it was down $3.1 million linked quarter here had an impact on the reported margin; and then the other side the other issues or things that we think about is just the size of the balance sheet and then the growing issue for the industry is the cost of deposits. Justin Crowley: Okay. And so on that latter point, just on funding costs, is that sort of the aspect that gets you to have a bias towards just the lower end of the range on NII? Are you thinking about deposit pricing pressure any differently here as you sit here today? Denis Sheahan: Yes. So yes, we put out the original full year NIM of $1.20 billion to $1.050 billion. We're thinking we'll be within that range, but we're concerned about being on the lower end of that range. That's really driven by two factors: one, loan growth. It was -- we expected weaker loan growth in Q1. It was slightly -- it was down slightly more than we were expecting. And so that's a volume issue on the asset side. And then it's a price issue on the liability side around the deposit base. We had really good deposit performance in Q1 from a price perspective, a little less so on a volume perspective. Justin Crowley: Okay. Got it. That's helpful. And then just one last one. Just on loans. If you could just give a little more color on the loan pipeline. I know it's at record levels, but just what that what that mix looks like and what gets you confident these pull-through as customers continue to get their arms around some of the uncertainty that still exists today. Denis Sheahan: Sure, Justin. Happy to do that. So first of all, as David mentioned, our loan growth was a little softer than we expected in the quarter. And some of that is why the pipeline is as large as it is. We had a pretty rough first quarter in this part of the country in terms of weather. So something slipped a little bit. But we have a very -- a record high pipeline beginning the second quarter here. So we do expect to have very, very good closings. In terms of -- before I give you the numbers, would things slip a bit because of perhaps what's going on geopolitically or what have you, we don't think so. Certainly, with the pipeline as it stands today. These are pretty far along in the process. It's a good mix between commercial real estate, C&I and community development lending with commercial real estate being about 57% of the portfolio C&I just under 30% and then the rest is community development lending, which is more affordable housing lending typically. So a really good mix, and that also gives us a lot of confidence in where that commercial loan pipeline is headed. We also feel really good about our consumer home equity pipeline. David referenced that a little earlier we think that will have good progress second and into third quarter, too. Operator: Your next question comes from the line of Jared Shaw from Barclays. Jared David Shaw: Maybe sticking with the deposit side. you have good betas through first quarter. I guess if we're in a flat rate environment with some of the expectation that competition increases. Is this sort of peak beta, do you think here? And that could go going forward, we could see a little bit of pressure? Denis Sheahan: Yes. I mean the short answer is, yes, I think there will be betas will be slower to come down than they were going up, our beta was 46%. The -- we -- again, I'll go back to my original question as part of the original question of we're roughly interest rate neutral. That's good. But we -- I would expect probably a 2 to 3 basis point incremental cost to deposits as the year unfolds here, which is probably translates into 1 or 2 basis points to the overall margin. Jared David Shaw: Okay. And then do you have the spot deposit rate at the end of the quarter? Denis Sheahan: Yes, it was 142 basis points versus 146 basis points for the whole -- for the full quarter. Jared David Shaw: Okay. Okay. And then when you're looking at the sort of the competitive pressure. Is that primarily for attracting new money to the bank? Or is that -- you're expecting now to have to pay more for retention, maybe especially of retention of Harbor One? Denis Sheahan: I think of it as a bit of all of the above when -- just a little bit more color, thanks. We've talked about smaller banks being competitive in certain parts of our market repeatedly. That's kind of the nature of this market up here. I think what's changed is you're now seeing more aggressive pricing from larger banks. Some of that's to support what they're trying to do in wealth management. Some of that is online, and some of that is just larger banks being more competitive. So those dynamics are changing, that affects everything that affects it attraction of new money, but it also impacts existing because of the flows that you see just across your deposit base in normal times. There's a certain amount of money that's always in flight. R. Rosato: I think, Jared, I'd just add, I think you know we spend a lot of time thinking about our deposit base. It's a wonderful deposit base. And we're just signaling that we see we see cost increasing. But if you look at the trend and how we've managed this deposit base through a merger with the company that had a higher cost of deposits than we, if you look on Slide 9, now Q3 cost of deposits was 155 basis points. So through the merger, we've still been able to bring it down, as David said, spot is 142. So we spent a lot of time thinking about this, but we do think it's fair just to signal that there is competitive pressure on deposits. And we think that we'll certainly be affected to a degree by it. But even within that, we manage this deposit base very, very intently. Jared David Shaw: Yes. Okay. I appreciate that. And then if I could just one final one. What would be, as we look at second quarter, with some of the moving parts on salaries and the closing of the deal, what sort of a good salary level for second quarter? And then should we expect marketing expenses to maybe trickle higher with some of this deposit initiative too? Denis Sheahan: So let me kind of just go down the whole list. Yes, salary will come down Salary will be down linked quarter because of the timing of the merger as well as normal onetime in the first quarter. The tackle come down, occupancy will come down. The only thing I'm really thinking on the expense side is we were under a bit on professional. That will probably tick up, [indiscernible]. R. Rosato: And marketing, yes, it's fair to say that's seasonal as well. Home equity promotions will be much heavier in the spring season heading into summer. And yes, on the deposit side. So you should see marketing tick up in Q2. Operator: Our next question comes from the line of Damon DelMonte from KBW. Damon Del Monte: And David, I was just looking for a little bit of clarification on the guidance slide. If you look at the -- if you try to back into like the average earning assets, when you look at the NII range that you provided in the margin ranges you provided, if you were to kind of take the midpoint of that, that kind of puts you at about $28 billion in average earning assets, which is where you guys hit this quarter. So just trying to connect the dots here of looking at where the average earning asset balance could be during the year, kind of given the outlook for loan growth. Denis Sheahan: Yes. So the issue will be we have a strong pipeline from what we think will be, let's say, at end of the second quarter, we'll be right back on our expectations on an ending period basis. I think the issue, the crux of your question is really around the averages. So even though with that strong pipeline, we'll get back to what internally we say is budget. I do believe the averages are going to take a little longer to catch up. So where -- that's the thought process around the lower end of the margin or the net interest income guide. Lower average balances on the asset side and then not lower averages on the deposit side, but slightly higher costs. Damon Del Monte: Got it. Okay. All right. And then with respect to the outlook for provision, again, the guided range didn't change from last quarter. But it came in later this quarter as you guys continue to work through credits where you need to reserve for. So I guess how are you thinking about the provision going forward, just kind of given the composition of nonperformers and expected growth? Denis Sheahan: Yes. I mean, again, we're not long post this merger. So there's -- admittedly, there's a little bit of conservatism in not lowering the guide. We Obviously, credit improved a lot in Q1. Provision expense coming in at 58%. If you run rate that would take us towards the low end of the $30 million to $40 million. But we're just being cautious there with the dynamic of still early in the Harbor One and with what's going on in the macro economy. Operator: Your next question comes from the line of Laurie Hunsicker from Seaport Research. Laura Havener Hunsicker: I just wanted to go back to expenses here. Can you just share with us what was the FICA expense and what was the snow removal expense this quarter? Denis Sheahan: Well, let's think about it linked quarter. FICA was up $3.1 billion linked quarter. Snow was up about $650,000 linked quarter. Laura Havener Hunsicker: Okay. That's great. And then do you have a spot margin for March? Denis Sheahan: Sure. 365. So up two from the quarter. Laura Havener Hunsicker: Right. Okay. Okay. And that includes basically the same amount of accretion that you reported in the quarter? Denis Sheahan: I mean we talk about accretion being lumpy quarter-to-quarter. It's even more lumpy month-to-month. But that's a good number, Laurie. I know in past costs, sometimes I'll adjust it for you. This one doesn't need adjusting. Laura Havener Hunsicker: Okay. Perfect. And then just last question here on credit. Obviously love seeing the drop in commercial nonperformers. So 2 parts to this. Can you share with us the drop in office nonperformers at $37 million, down to $11 million. Can you just share with us the resolution there? And then second part, the industrial warehouse, it looks like the nonperformers there keep going higher. So you went linked quarter $25 million to $41 million. Can you just tell us a little bit about that since that book is larger? R. Rosato: Sure. So Laurie, that was just a coding error that we found on Harbor One loans. So they -- when we -- when we closed the deal, that specific loan was coded as construction, but construction had been completed, and it should have been classified as industrial warehouse. So there's really no change there. And that was all considered as part of the credit mark reserve established against, et cetera. Nothing changed there. It was merely a reclassification from construction to industrial. Denis Sheahan: Yes. And then just -- there's nothing unusual in the resolution of any of those loans. They just Yes. I mean they were financed by another party. That's basically it, Laurie. We had reserves established, et cetera. We went through a whole workout on them and they're -- that project is now with new borrowers, not financed by us. It's -- that's simply it. Some -- I mean, we did call out the gain on that one commercial loan. So there was a loan sale in there. We generated the $1.3 million gain, which just -- the final resolution was better than the remaining fair value mark. So it was a good guide this quarter. Operator: next question comes from the line of Matthew Breese from Stephens Inc. Matthew Breese: Thanks for having me on. Maybe just thinking about the deposit strategy a little more. Is there a growth component or target, meaning there's a certain dollar amount of deposits you're looking to bring in because I guess what I'm worried about is, a, you certainly don't want to dilute your most valuable characteristic too much or unnecessarily so. And then B, as you think about the promotional rates just on your website, money market and CDs and kind of the high 3s, low 4s versus incremental loan yields in the high 5% or 6% range. It's just not great for the incremental margin. And so I wanted your thoughts on all that, where do you start to cut this off dollar-wise to come in. Denis Sheahan: So we guided to, David, 1% to 2% deposit growth for the year. So we don't have outsized expectations in terms of growth. Again, what we're just trying to signal is that we are seeing deposit competition increase in the marketplace, which is perhaps higher than we anticipated at this point. It's coming from smaller competitors and larger competitors. So we're just trying to bring some reality to our forecast on that, but we're not we're not guiding to significant increase in deposit growth. Again, it was 1% to 2% for the year. And I mean you referenced CDs and money markets. We also have checking what we call stacked offer, meaning different rewards for different levels of account balances across checking accounts, which is something this company has done for years very successfully. So it's not all coming in. All those deposit flows don't come in at that highest money market or C&E rate. And then I would just reiterate, we are not the high in the market either. And I'd say again, Matt, what I referenced earlier, which is how we've managed the cost of deposits over the past several quarters even when adding a bank that has a higher deposit cost than the legacy company from 155 basis points in Q3 to a spot of 142 at the end of the first quarter. So that's -- you're right, this is a very material component of the company, our deposit base, an important one, but we manage it very deliberately. Understood. And then tying that back to the margin, as I think about the NIM guide for the full year and where you sit today, is it fair to say that we kind of end the year closer to the high end of the range versus the low end? Or what is kind of the cadence of the NIM throughout the year given everything you've outlined. Well, the somewhat dependent on the pace in the second quarter, the build of loan and deposit balances, but the -- we're expecting the core NIM without purchase accounting to incrementally improve each quarter. And so -- and then I'll go back to the -- when we announced the Harbor One transaction a year ago at this point, we telegraphed a 3.70% margin that's the middle of the guide we gave in January, and we still think we'll be in that 10 basis point range. And we ended Q1 on a spot basis at 3.65% which is the low end of it. Matthew Breese: Okay. I appreciate that. Last one, I think about the -- some of the reductions and payoffs this quarter, how much of it was -- or is there an outsized portion of it that was acquired loans versus legacy Eastern? And is any of that strategic in nature, meaning you got your arms around Harbor One and maybe the a bit more transactional commercial real estate that might be better off kind of elsewhere than with you. Is that a component of it? And is that incorporated into the full year guide? Denis Sheahan: I think the only real color there, the Harbor One portfolio is nothing unexpected. We're so early in it, but there's nothing coming in either from a credit mark or from a payoff pace unexpected. There was, let's say, some elevated commercial real estate payoffs in the legacy portfolios, legacy now being defined as legacy or and Paper Trust. We actually think that's a sign of a healthy market. So that was a little higher than we expected, but we'll see if that continues or not. It's just a higher level of activity in the market. Operator: Your next question comes from the line of Janet Lee from TD Bank. Sun Lee: So on the deposit cost commentary, so you're expecting some modest increase in deposit cost. A lot -- I guess some of that has to do with the retention of. Or does that have to do with retaining Harbor One deposit base, which is obviously a higher cost base that's -- is that part of that. Is that what's driving the increase along with the competitive deposit competition in your market. How much of the Harbor One retention is the factor in your deposit cost outlook? Is it harder to retain versus before? R. Rosato: No. It's more about just the market, pricing in the marketplace. I mean, certainly, an element of our deposit base. An important element is the Harbor One customer base -- but this is what's going on in the market broadly. And it's been -- it's consistent and expanded from the back half of last year, we saw this pricing really kick off with lower institutions. Now we're seeing it with institutions that are higher than us, so it's reflective of what's going on in the marketplace. But certainly, yes, we are engaged in very importantly retaining the Harbor One customer deposit base, and that's going very well. But it's mostly about what's happening in the market. Sun Lee: Got it. For loan growth, so it looks like the loan growth will be picking up in the coming quarters. But just given the lower base, is it fair to assume that it's coming in at the lower end? Or do you have more optimism that it could be somewhere in the middle or even at the upper end, how should we think about the cadence of loan growth picking up? Denis Sheahan: I think the original range is where our expectations are. It's a fairly tight range. So I don't want to shave that high or low at this point. As I would just go back to -- we -- loans were modestly down in Q1. It wasn't a surprise to us. That's normally what happens in Q1 and here in New England. It was a little worse because of the weather. But we have record pipelines. We feel good about it. Operator: And there are no further questions at this time. I will now turn the call over to Denis Sheahan for closing remarks. Denis Sheahan: Thank you, everybody, for joining us. I appreciate your questions. We look forward to speaking with you at the end of our next quarter. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to the Ameris Bancorp First Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead. Nicole Stokes: Thank you, Bailey, and thank you to all who joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our website at amerisbank.com. I'm joined today with Palmer Proctor, our CEO; and Doug Strange, our Chief Credit Officer. Palmer will begin with some opening comments, and then I will discuss the details of our financial results before we open up for Q&A. But before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to our performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to Palmer for his comments. H. Proctor: Thank you, Nicole. Good morning, everyone. We appreciate you taking the time to join our first quarter call. I'm proud of our performance to start the year, primarily from three things. First, we operated at a high level of core profitability with an ROA above 1.60%, PPNR ROA at 2.30% and our return on tangible common equity of almost 15%. Second, we experienced good growth in loans, deposits, earning assets and revenue. And third, we actively managed our capital by repurchasing 1.4% of the company in the quarter at about a 7.5% discount to yesterday's closing price. In addition to those 3 positives, I want to revisit something I said on our first quarter call last year. I said we were focused on enhancing revenue generation and positive operating leverage. And once again, we executed on our plan compared to the first quarter of 2025, our quarterly revenue is up 10%, with expenses up only 4%. That's about a 21% efficiency ratio on our growth due to our focus on efficient organic profitable growth. More specifically, on an annualized basis, we grew loans and deposits by 5% to 6%, along with earning assets at nearly 10%. Revenue increased 9.5%, driven by an uptick in fee income, which represented a strong 22% of total revenue for the quarter. Our continued focus on expense discipline across the company results in an efficiency ratio of just under 50% despite some seasonal revenue and expense headwinds in the first quarter. Our net interest margin expanded 3 basis points to 3.88% in the quarter and remains well above peer level. Loan production was $2.2 billion in the first quarter, a 45% increase over first quarter last year. Our loan pipeline remained robust at $2.8 billion. On the deposit front, we continue to focus on core granular deposits and relationship banking with total deposits up 5% annualized in the quarter. Our noninterest-bearing deposits grew $323 million in the quarter recapturing some of the seasonal decline of last quarter. Our noninterest-bearing deposits returned to 30% of total deposits, and we have minimal reliance on brokered funds. We increased our capital return in the quarter by repurchasing $75 million or 1.4% of shares outstanding, which is the highest level of buybacks we have had in any 1 quarter. Capital levels remain robust with CET1 finishing at roughly 13% and our TCE ratio slightly above 11%. These capital levels position us well for any type of environment. Credit quality was stable. Our 1.62% reserve was unchanged and both net charge-offs and non-performing assets, excluding government-guaranteed mortgages, improved modestly in the quarter. CRE and construction concentrations were relatively stable at 265% and 46%, respectively. Overall, we remain well positioned for future growth, and this growth should be positively impacted by the continued disruption in our Southeastern footprint. I'll stop there and turn it over to Nicole to discuss our financial results in more detail. Nicole Stokes: Great. Thank you, Palmer. So we reported net income of $110.5 million or $1.63 per diluted share in the first quarter. Our return on assets was 1.62%. Our PPNR ROA was 2.3%, and our return on tangible common equity was 14.75% for the quarter. Our tangible book value increased to $44.79 and that's about 12.5% higher than a year ago. As Palmer said, capital levels remain robust, and we were notably active in our share buybacks during the quarter, repurchasing $74.9 million of common stock or 950,400 shares at an average price of $78.76. Combined with our full year 2025 share buybacks, we've repurchased just over 3% of the company over the last 5 quarters. Our remaining share repurchase authorization was $84.3 million at the end of the first quarter. Our net interest margin expanded 3 basis points to a strong 3.88%. The expansion came from 6 basis point positive impact on the funding side, more than offsetting the 3 basis point decline from the lower asset yields. Our margin level is well above peer and it's 100% core without any purchase accounting accretion from M&A. Our asset liability sensitive is effectively neutral and has really served us well through this macroeconomic environment. That said, we do anticipate we could have some slight margin compression over the next few quarters, and that's really due to pressure on the deposit costs as we fund our balance sheet growth. We believe the margin could decline a few basis points per quarter, probably 5 to 10 total basis points lower over the next few quarters. But we will continue to focus on growth in net interest income, both through earning asset growth and margin management. Non-interest income increased $8.1 million this quarter, mostly from better mortgage fees as well as an increase in our equipment finance fees. Total non-interest expense increased about $14 million in the quarter, partially driven by seasonally higher compensation costs, specifically higher payroll taxes, 401(k) matching expense and incentive accruals. Comparing cyclical first quarters, our efficiency ratio this year was 49.97%, an improvement from 52.83% first quarter of last year. This improvement was driven by the positive operating leverage as year-over-year quarterly revenue growth was $28.5 million, and our expense growth was only $6 million for that same period. Going forward, I anticipate the efficiency ratio to be slightly above 50% for the rest of the year. During the quarter, we recorded $16.6 million of provision expense, annualized net charge-offs this quarter decreased to 21 basis points. We continue to anticipate net charge-offs in the 20 to 25 basis point range for 2026. Our reserve remained strong at 1.62% of loans, the same as last quarter and overall asset quality trends remain strong with non-performing assets, excluding government-guaranteed mortgages and net charge-offs down in the quarter and both classified and criticized remain well below peer. Looking at our balance sheet. We ended the quarter at $28.1 billion of total assets compared to $27.5 billion at year-end. Earning assets grew $607.8 million or 9.7% annualized as we grew both the loan book and the bond portfolio. Loans grew $314.5 million or about 5.9% annualized. And as Palmer mentioned, our loan production and our pipelines remain strong. The real big win for the quarter was our core deposit growth. Deposits grew $261 million or 4.7% annualized, and that was really strong growth in both our consumer and commercial customers of $547 million. As expected, we had the seasonal outflows of about $430 million of public funds and our noninterest-bearing to total deposit ratio improved back up to 29.8% from 28.7% at year-end. We project our loan and deposit growth to be in the mid-single-digit range for the rest of the year. And as I previously mentioned, we expect longer-term deposit growth will be the governor on loan growth. With that, I'm going to wrap it up and turn the call back over to Bailey for any questions from the group. Operator: [Operator Instructions] Our first question comes from Will Jones with KBW. William Jones: So Nicole, I just wanted to start just with the margin. You guys have just perpetually continued to outperform your guidance and kind of outperform your expectations there, although the forward outlook, the messaging has really been the same that you kind of see a couple of basis point headwind just as it becomes more competitive to fund some of your growth, although it feels like that messaging hasn't particularly changed much either. So maybe just a backward-looking question, what has kind of differed from your expectations with that dynamic? And maybe more forward-looking, where are you seeing new loan yields today coming on just relative to new deposits? Nicole Stokes: Yes. Great question. So I'll start with kind of the look back. And we've said all of our guidance when we talk about our ALM modeling and where our margin guidance is going. We've said all along that, that had to do with some of our guidance we added was deposit pressure and also the funding and the mix of the deposits as we fund the growth. So where is the growth coming from? Certainly in the first quarter, something that really helped the margin was the deposit growth of the noninterest-bearing. So $323 million of noninterest-bearing growth absolutely helped the margin. And I understand that every quarter, I say that there could be some slight compression coming. But I did want to mention that our March -- for the month of March, our month of March margin was slightly below the 3.88% that we reported for the quarter. So we really do see they're kind of coming down a little bit in the quarter. In the future quarters, again, not huge amounts, but just some slight compression coming in, but we will continue to remain focused on the growth in NII and the profitability. And then when you talk about -- and I think the second part of your question was the loan and deposit production. And that feeds in exactly to the first part of the question. When we look at our loan coming on yields and production for the quarter versus our deposits, our loans -- it's still accretive when you take in all deposits. When you take in interest-bearing and non-interest-bearing, loans came in for the quarter, total loan production at about 6.13%. And and then total deposit production, including noninterest-bearing came in at about 1.90%. So that's still coming in at a positive accretive spread to margin. However, if you take out the interest, the noninterest-bearing and you look at just interest-bearing deposits, our interest-bearing total deposit production was at 2.74%. So as we don't continue to get that noninterest-bearing growth, the spread between loans and interest-bearing deposits are slightly dilutive to margin. It just goes back on how key that noninterest-bearing deposit growth is for us. William Jones: Yes. Okay. That's very helpful color. We like margin beats for what it's worth. I guess, unpacking that just a little bit more. If we think about an environment where we don't get rate cuts for the rest of the year, is it possible that deposit costs could actually creep up throughout the year, just as we think about this 5 to 10 basis point margin headwind that you kind of see? Nicole Stokes: So if rates stay flat -- there's a couple of moving targets there. Tactically speaking, we have all of our -- our retail CDs are all pretty short. We've got about 35% of our retail CDs that reprice or that mature in the second quarter. And those are coming off at about a 3.48% and you compare that to our first quarter production of 3.44%. So it's very close. I mean, new production was a little bit accretive compared to what is expected to come off. And then when you look at the whole book, 83% will mature the rest of this year. And that is about a 3.39% versus production of 3.44%. So there's definitely that tailwind that was coming in on CDs has certainly slowed, which is feeding into my guidance. So on overall deposit cost, a lot of that, I think, is going to be contingent upon competition. And on the loan growth and the opportunities that we have for loan growth, we are going to protect our core relationships and protect our customers, but we are definitely after the relationship not just a transaction. And so we like having noninterest-bearing included in -- we like the operating accounts for our loan customers as well. So that blend is really what's going to help keep our deposit costs. William Jones: Yes. Okay. That's great. And lastly, I just wanted to talk -- touch on fee income a little bit, particularly the equipment finance business. I feel like maybe we've underappreciated a little bit some of the growth that's happened there in that business and that revenue stream. Maybe if you could talk about any drivers or initiatives that you've taken there in that business? And then just what an appropriate growth rate for the equipment finance revenue stream is going forward? Nicole Stokes: Yes. So the equipment finance, we do like that business. And I think everybody knows that we've got that credit box where we like it. And so the non-interest income that comes from that, that's really service charges and some fees on those loans. We like that. We think that that's going to grow pretty commensurate with the rest of the balance sheet. They're actually down to about 6.9% of total loans. They kind of peaked out at about 7.2%. So I would consider the growth of the equipment finance to be in line with the growth of the rest of the company, and those fees should grow similarly to the loan growth. Operator: Our next question comes from David Feaster with Raymond James. David Feaster: I wanted to start. I appreciate your commentary on the deposits or the governor for growth, still targeting mid-single-digit growth. You've done a phenomenal job driving core deposit growth and funding growth with core deposits. Could you talk about the strategy to grow core deposits? And would you be willing to utilize more non-core funding to support growth if needed? And then just how the competitive landscape for deposits is playing into some of that? H. Proctor: Yes. I think, if you look at our investments and talent over the last several years, we focused a lot, as I've said before, on treasury management. That's been a huge help for us when it comes to operating accounts, payroll accounts. And obviously, we remain focused on just even consumer checking accounts. But that's kind of in our DNA. That's where our focus will continue to lie. Would we be willing to sacrifice some of that for growth? We would, for the right kind of growth. I mean, our growth will always be measured. We don't like erratic growth, but we will certainly remain competitive and capitalize on opportunities that come before us. So the answer to that would be, yes, we'd be willing to sacrifice some of that for future growth. David Feaster: Okay. And maybe just -- there's obviously been a lot of disruption across your footprint. Kind of a 2-part question, I guess. First off, how has that disruption impacted the competitive landscape in your footprint? And secondarily, have you seen much dislocation from any of this M&A yet? And is it on the client acquisition side or the hiring front, where are you seeing the most opportunities? H. Proctor: Well, our focus remains on the client acquisition side because as we've said before, we have the talent. We're very selective in the talent we have, and then we'll continue to obviously look at new talent. But in terms of our ability to execute on our mid-single-digit kind of growth, we've got everybody we need on board to do that. So our focus remains on the client. I think the benefit we probably have, David, is by being an overlap market with a lot of the disruptions going on and already having a present in those existing markets where you've got name recognition and you may potentially have -- already have some of the waller share, not all of it. I think that gives us a leg up over a lot of our competition that just doesn't have the same presence we had in some of those overlapping markets. So I view that as a potential accelerator for us where we're not having to introduce the bank. They already know the bank. And in some situations, we already have, as I mentioned, some of the business. Now, the objective is to get -- become the primary business and primary wallet shareholder. And so I think that's where you'll see our growth from the disruption continue to accelerate. But we clearly stay focused on the customer acquisition side, and that's where that focus will remain. David Feaster: That makes sense. And then you've got a lot of excess capital, you're continuing to generate a lot of organic capital. Wanted to get the thoughts -- I just want to get your thoughts on the regulatory relief here, specifically on the capital relief side. Have you done any work around what that could mean for you all, especially around the treatment of MSRs? Does that change your strategy at all? And then just how do you think about capital deployment? Obviously, the buyback has been a focus. Just kind of curious your thoughts on capital at this point. H. Proctor: Yes. Because we have so much capital right now in terms of the relief, it really doesn't change our direction at all. Because we're already well capitalized, especially when it comes to any efforts for growth. Our capital priorities will remain intact in terms of what the opportunities are. And first would be the organic growth that we stay concentrated on. Then, I do think that depending on the macro environment, if it presents opportunities, there's additional buyback opportunities perhaps. And then, third, you've got dividends, which we're pleased with where those are. And then last but not least would be M&A. But like we've said before, M&A is really not on our radar just because we've got so much opportunity in front of us, and we don't need to distract ourselves from the great organic opportunities that are in our disruptive markets. And Nicole, anything you want to add on that. Nicole Stokes: Sure. On the regulatory changes. So, I think the Fed has estimated that CET1 capital is probably going to fall by about 8% for banks and about an 8% reduction in risk-weighted assets. And our preliminary analysis shows that we're going to be very close in line with the Fed estimates. Operator: Our next question comes from Gary Tenner with D.A. Davidson. Ahmad Hasan: I'm Ahmad Hasan on for Gary Tenner here. First question on maybe loan growth trends. I saw that unfunded commitments increased. Can you comment on the pipelines and what we could potentially see in 2Q? H. Proctor: Yes. We remain obviously driven by our markets, and we were very encouraged by the start of the year. And more importantly, we saw robust pipelines throughout all the different verticals. It wasn't any 1 vertical. So that's more encouraging than anything to me in terms of diversification and opportunity. Any growth that accelerates or decelerates is really going to be driven more by the macro environment than it is anything internally here. Structurally, we're well positioned to capitalize on those tailwinds or headwinds. But I will tell you, we remain encouraged by the existing pipelines across the board. Ahmad Hasan: Got it. And maybe on mortgage banking income, it rebounded strongly despite lower production volumes and narrower gain on sale margins. Can you talk about the different puts and takes there and maybe outlook on that segment? Nicole Stokes: Absolutely. So when we look at fourth quarter, we had some seasonality in the fourth quarter. And so revenue was actually down in the fourth quarter is the anomaly there based on some wholesale versus retail mix. And so really, the first quarter was just a rebound back to normal profitability as we had expected. And then, I think that continues. The first quarter was a good strong quarter. Now a lot of that is dependent on rates and rate loss, but we are in good markets for the mortgage group. H. Proctor: In that sector, as you know, it's just so rate driven and tied to that 10-year. We did see an increase in apps, obviously, January, February when rates dipped. And then, of course, they rebounded backwards the other way. So it's primarily driven by the rate environment. Ahmad Hasan: All right. That makes sense. And maybe broadly, can you talk about your AI strategy and what that means for your expense levels and perhaps how that is impacting different contract negotiations with your vendors? Just trying to hear you. H. Proctor: Yes. I would tell you that AI here is more of an evolution than a revolution. And the way we look at it is utilizing it to build capacity, not so much to cut out expense. And so what we have done is spend a considerable amount of time looking through process here throughout the company, especially in some of our higher-volume areas and how we can create automation for that. And with that, you're going to build efficiencies. And with that, you're going to build capacity. So as the bank grows, we won't have to layer in additional expense. But that's the way we look at it. We don't look at it as a true cost-saving measure. We look at it as an ability to build capacity for the company as it continues to grow. Ahmad Hasan: Got it. That makes sense. Maybe just the second part of that question. Is it getting easier to negotiate contracts with your software vendors or... H. Proctor: Well, it is, it depends on the software. And obviously, the best part of AI is being able to utilize it to look through some of those contracts, and help you identify some opportunities. But yes, a lot of software vendors are getting very anti right now and trying to lock you in for longer-term contracts, which we're not a big fan of because technology changes so quickly. And the last thing you want to be is beholden to something that becomes antiquated in short order. So we are able to negotiate within reason, but they are becoming more aggressive on the other side, knowing that they need to lock in some of their customers in anticipation of disruption in their own world. So that kind of works both ways. Operator: Our next question comes from Russell Gunther with Stephens. Russell Elliott Gunther: Maybe just a follow-up on the expense question. Really great improvement year-over-year on an already stellar efficiency ratio. Nicole, you tend to level set us relative to consensus expectations for the year. So hoping you could weigh in there and then perhaps just address the cadence of non-interest expense as well. Nicole Stokes: Sure. So I think consensus right now is really a good number. When you look at kind of the 2025 actual and 2026 consensus, that's about a $35 million increase. And remember, fourth quarter was a little bit low last year. So it's about a 6% increase. And if you take in a little bit extra mortgage, I think that expense run rate looks reasonable. You kind of have a 4% to 5% increase in overall expenses, majority of that being salaries and benefits. And then you add in a little bit extra for mortgage, you can kind of get to that $30 million to $35 million increase. So that's kind of where I would guide. So I feel like consensus is good in that. I think it's running about $160 million, $162 million a quarter for the next 3 quarters. And then remember, second and third quarter is typically our cyclically higher quarters because of that extra mortgage expense. Russell Elliott Gunther: Okay. Excellent. And then a similar follow-up on fees. So I appreciate the comments around mortgage as well as the Balboa gain on sale. In the past, you've kind of helped us think about core fee income growth at the mortgage vertical. And so any insight there for the year would be helpful as well. Nicole Stokes: Yes. So -- and I apologize, I didn't hear. Did you say ex mortgage or for mortgage? Russell Elliott Gunther: Well, I'll take it, but I was really focused on the ex mortgage piece in particular. Nicole Stokes: Yes. So for the ex mortgage piece, I think that you can expect kind of service charges on deposit accounts to really kind of follow the growth of deposits. So if we're expecting mid-single-digit deposit growth, I would say, mid-single-digit service charge growth. And then same with equipment finance activity, I would say that the loan growth that, that fee activity should follow the loan growth for that group. So again, kind of mid-single digit as well there. And then other non-interest income, that really includes kind of our BOLI income, which is pretty stable. And then it also includes some SBA gains. And so typically, second and third quarter are a little bit higher than first quarter. But I think kind of tying it in consensus seems to have -- be really close, I think, to expectations. Operator: Our next question comes from Christopher Marinac with Brean. Christopher Marinac: Palmer and Nicole, I wanted to ask a little bit more about the deposits per account and the information you've given us now for several quarters. Probably $1 billion ago on deposits, you used to have interest bearing checking in the 80s per account. Now it's well over $100,000. And I'm curious, is that a reflection of change of behavior of your customers? Or is it that you're focusing on slightly bigger small businesses within the footprint? H. Proctor: I think it's -- what is a reflection of, is our customer base has grown, the existing customer base and then the customers that we're calling on, and a lot of customers, they just have more liquidity on their balance sheet. So I think that's really the primary driver of that differential. Christopher Marinac: And in terms of kind of net new accounts, the pace seems to have been kind of mid-single digits for a while, Palmers. Is that still something you're kind of looking at as a consistent piece going forward? H. Proctor: Yes. That is the objective. And when you look at -- especially our noninterest-bearing, we continue have been very pleased with not only the growth there, but also the unit growth, not just dollar growth. And the team remains laser-focused on that opportunity. And if you can lead with that opportunity and then follow with the loans, that's the preferred method. So many times, banks have historically led with the loans and a cheap rate on the loan and then ask for deposits. We try and turn that on its head and ask for the deposits and then consider doing a loan. But in competitive environments, that gets more and more difficult to do. Christopher Marinac: Understood. And then just a quick question on the mortgage business. Do you see the change in the rates in the past maybe 6 to 8 weeks? Does that impact at all profitability as the rest of this year, particularly in the seasonally strong Q2 and Q3. Does that play out any differently than you would have thought? Nicole Stokes: I think it came exactly as we expected. We knew that fourth quarter was a little bit low because of the mix and the first quarter came in. I think what was maybe a little bit better than expected was production, was a little bit better than expected because typically first quarter is a little bit cyclically slower. And it did drop a little bit, but it was coming off of a really strong fourth quarter. So we would have expected it to drop a little bit more than it did. So it was definitely a good quarter for mortgage. Christopher Marinac: And then looking into these next few quarters, do you think we could still use sort of past history as a reasonable guidepost for the moment? Nicole Stokes: I do. I think so. I mean, second -- I would say that first quarter, because it was seasonally strong. I think second quarter could be consistent with first quarter. And then depending upon what we see with the 10-year, there's certainly, I think, some pent-up demand if we get some movement. If not, then I think we're going to be similar to where we are for the first quarter. But people are -- and again, we're close to 90% purchased. So we're not a refi shop. So you're really going to -- our business is going to be consistent with just like events that people are moving and buying houses and that the tailwind for us could really be if rates come down, if we get kind of a refi boom later in the year. Operator: Our next question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: I jumped on here a little late, so apologies if I'm hitting anything you've already covered. But Palmer, it feels like you've been pretty bullish about the organic growth opportunities in the bank for some time. What do you think it would take to get kind of above and beyond the mid- to high single-digit growth? Because it feels like the potential maybe is there for even faster growth, is it really just deposits? Or is there something else besides that, that you need to see happen to get maybe even stronger growth? H. Proctor: Well, the capacity is certainly there, but so much of that is driven by the macro environment. And -- the thing that we can assure the market is that if it's prudent to do so, we will hit the accelerator. I think right now, growth we're encouraged by what we see. But historically, we're accustomed to growing at double digits. And that's obviously where we would all like to get back to. But only if it's prudent to do. So while we like mid-single digits better than what historically the banks have seen over the last couple of years, we do hope that we can get back to higher single digits or double digits in general on a go-forward basis, but that's just going to be driven by the macro economy. Stephen Scouten: And then in terms of the pace of the repurchase from here potentially, how price sensitive would you guys be with the continued outperformance of the shares? And how should we think about excess capital? Is there a CET1 level you think about? Or is there a total payout ratio? What would be kind of the marker that we should look at there? Nicole Stokes: Yes. So our TCE target, we've kind of said around 10%, 10.5%. We're above that currently. And then our CET1, we've kind of targeted around 12%, and we're currently above that. So in our total risk base, we're targeting about 14% to 15%, and we're right in that at 14.8%. So all of that being said, we like where our capital is. When you think about the buyback, we were more aggressive. We've been more aggressive, and we doubled the buyback last October, and then we're aggressive. When we look at kind of balancing our buyback versus growth and how to utilize our capital, we could -- we have about $84 million left. So we could do the remaining $84 million, which would be the full $200 million buyback and have about 9% asset growth and keep our capital ratios pretty consistent to where they are today. We could do about $34 million more. So that would be about $150 million of the $200 million, so 70% of the authorization and do about 11% asset growth and keep our capital levels kind of flat. So I'm saying all that to say that I think you could see us being opportunistic, but we definitely felt we went pretty aggressive in the first quarter, knowing that, that kind of strategy and we have that runway in our capital numbers. Stephen Scouten: Extremely helpful, Nicole. And then maybe just last thing for me, maybe a more philosophical question here. I mean, you guys have been pretty adamant that M&A is very low on the priority list really not on the table or of interest today. But when you guys have run the bank so efficiently and are putting up such great returns, at what point do you say, hey, if we're putting up a 1.60% ROA, it'd be great to put that on a much bigger pool of assets? And does that philosophically drive any thoughts around M&A at some point down the line? H. Proctor: Well, for us, as long as that pool of assets is generated organically, we're fine with that. But in terms of M&A itself, it -- to your point, it's -- we have a high bar that allows us to be a little more discerning because most of the deals that are out there are obviously -- they're all dilutive to a certain degree. And then we look at -- our biggest priorities are deposits. So when you try and look for deposit-rich banks that could be accretive, it narrows down the playing field pretty quickly. And then furthermore, with all the opportunity in front of us, there's just very little interest in getting distracted with an M&A deal. So it remains low on our priority list. And now if we didn't have the organic ground game or didn't see the opportunity for growth, maybe you reconsider a step back or move it up the priority stack. But right now, we just don't see the benefit in getting distracted with that. Operator: This concludes our question-and-answer session. I would like to turn the call over to Palmer Proctor for any closing remarks. H. Proctor: Great. Thank you, Bailey. One of our key internal priorities for 2026 has been operating as 1 bank, 1 team and a commitment clearly reflected in our strong first quarter results. And I'd like to thank all my Ameris teammates for their contributions to this outstanding start to the year. Looking ahead, we're going to remain focused on controlling what we can control and driving profitable organic growth and top-tier performance metrics while enhancing shareholder value through continued growth in our core deposit base, and tangible book value per share. I want to thank you once again for joining our call. We appreciate your continued interest in Ameris. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Megan, and I will be your conference operator today and would like to welcome everyone to the First Quarter SLB N.V. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a Q&A session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. You may remove yourself from the queue by pressing star two. As a reminder, this call is being recorded. I will now turn the call over to James McDonald, senior vice president of investor relations and Industry Affairs. Please go ahead. Thank you, Megan. Good morning. James McDonald: And welcome to the SLB N.V. First Quarter 2026 Earnings Conference Call. Today’s call is being hosted from Houston, following our board meeting held earlier this week in Midland, Texas. Joining us on the call are Olivier Le Peuch, chief executive officer, and Stephane Biguet, chief financial officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. For more information, please refer to our latest 10-K filing and other SEC filings which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our first quarter earnings press release, which is on our website. With that, I will turn the call over to Olivier. Olivier Le Peuch: Thank you, James. Ladies and gentlemen, thank you for joining us. Before we begin, I would like to acknowledge our people, customers, and partners in the Middle East as they navigate this challenging and uncertain time. Our strong presence in the region dates back more than 85 years, and I am proud of the resilience and unity demonstrated by our people as they work in lockstep with customers to safeguard our teams and assets, preparing for an eventual resumption of operations. I want to commend the entire SLB N.V. team for their continued care, commitment, and support for one another and for our customers. Turning to today’s call, I will start with our first quarter performance, followed by an update on the evolving situation in the Middle East, and our outlook in the mid to long term. I will then cover our strategic initiatives including production recovery, digital, and data centers, and provide our outlook for the second quarter. Stephane will then take you through the financials and we will open the line for your questions. Let us begin. It was a challenging start to the year, marked by severe disruption in the Middle East that impacted our first quarter revenue and earnings. At the onset of the conflict, customer decisions to safeguard personnel and assets led to an initial wave of operational shutdowns. As the conflict persisted, further activity curtailments followed as a result of production shut-ins. The impact of these actions was most pronounced in Qatar due to force majeure and the suspension of offshore operations, and in Iraq due to the security conditions. We also experienced a more gradual impact from offshore shutdowns in other countries in the region, driven by a combination of security concerns and export capacity disruptions. In addition to the situation in the Middle East, unfavorable activity mix and higher costs further weighed on the quarter, most notably in OneSubsea. Looking across the divisions, Production Systems and Digital grew year on year, while Reservoir Performance and Well Construction declined mostly due to the impact of the conflict. Production Systems year-on-year revenue increased 23% due to the acquisition of ChampionX, which continued to deliver accretive growth. Additionally, we are on track to achieve our synergy targets. On a pro forma basis, ChampionX also grew year on year, demonstrating the increasing demand in the production market. Turning to Digital, we increased 9% year on year driven by strong uptake in digital operations. Of note, automated footage reading increased by 145% year on year as customers continue to adopt digital and AI-powered solutions to boost operational performance and efficiency. Also, data center solutions remain a bright spot, with 45% growth year on year. The momentum in this area continues, as you saw our recent announcement to serve as a modular design partner for NVIDIA DSX AI factories. With our growing backlog, we remain on track to exit the year at a $1 billion run rate and expect the growth rate to accelerate in 2027. Overall, despite the challenges of the quarter, I am pleased that the strategic decisions and portfolio actions that we are taking in digital, data center solutions, and production recovery are delivering results. I would like to express a big thank you to our teams in the Middle East and across the world who continue to deliver each day for our customers in this very dynamic environment. Now let me turn to how we expect the market to evolve as the conflict in the Middle East is resolved. Firstly, we anticipate that oil prices will set at levels above the pre-conflict baseline. This reflects the new balance of liquid supply and demand which has been significantly altered by more than 500 million [inaudible] lost production impact thus far. In this environment, energy security remains at the forefront. We expect many countries to accelerate efforts to diversify supply, strengthen domestic resource development, and rebuild strategic and commercial inventories that have been drawn down during the conflict. In short, the fragility of the global energy complex we are witnessing today demonstrates the strategic importance and long-term value of oil and gas. Together, these dynamics are expected to support a constructive macro environment for upstream investment over the coming years. In the near term, activity would be led by the restoration of capacity across the Middle East for both oil and gas. While some countries that executed orderly shut-ins should be able to resume production within days or weeks, other areas—particularly where disruptions were more abrupt—may require more value ramp-up including additional waiting time and maintenance. As a result, while the near-term recovery will be gradual and differ across countries, we see an upside in the outlook beyond demand restriction from the prolonged conflict. We are committed and ready to support our customers across the region. Beyond the region, we expect a broad-based response across both short and long cycle investments. Short-cycle activity is likely to strengthen first, particularly in North America and parts of Latin America, where operators can respond quickly to higher prices. In addition, well intervention activities that can lead to additional production will get a natural boost across all basins. At the same time, we expect renewed momentum in long-cycle developments, especially in offshore and deepwater markets, as customers look to secure durable, large-scale sources of supply. This is also likely to improve certainty of offshore FID approvals while also supporting increased exploration activity. As we can read in third-party reports, the FID pipeline in 2026 is strengthening and directionally adding over $100 billion of total investment approval, visibly ahead of the last two years, and with another step up expected in 2027, with deepwater resources getting a large portion of these investments. Regionally, this presents opportunities in Africa, Asia, and Latin America. Africa is one of the most compelling long-term opportunities, with a significant base of underdeveloped oil and gas resources. We expect portfolio allocation to shift more favorably towards this region over time. In Asia, we continue to see prioritization of access to gas, both onshore and offshore, as it works to diversify supply through development of national resources. And across Latin America, from Guyana to Brazil to Suriname, we see continued strength in deepwater developments, complemented by short-cycle growth in unconventional Argentina. Separately, Venezuela continues to represent an exciting growth opportunity where we can expand on our existing operations in-country. To conclude this section, in the context of energy security and the rebalancing of supply and demand, we see three primary drivers of increased investment over the coming years. First, the replenishment of depleted commercial inventories and strategic reserves. Second, diversification of supply including greater redundancy sourcing. And third, increased emphasis on developing local resources to enhance long-term resilience. Our core business will benefit from these dynamics, supporting the positive outlook for SLB N.V. into 2027 and 2028. Let me now describe the additional strategic growth levers for SLB N.V.: production recovery, digital, and data centers. Starting with production recovery, this is becoming increasingly critical as the industry faces structural challenges in replacing reserves and sustaining production from existing assets. In this context, technology that enhances recovery and extends the life of mature fields is no longer optional—they are essential. Against the macro we just discussed, this is a defining moment for production recovery. These technologies have the potential to shape the next stage of recovery in unconventional assets and create a step change in quality and enhancement in every basin and play, from deepwater to conventional, and from gas to oil. With ChampionX, we are uniquely positioned to lead in this space by combining production chemistry, artificial lift, digital capability, and subsurface domain expertise while helping customers unlock additional barrels from existing reservoirs in a capital-efficient manner. This is particularly relevant as operators look to maximize recovery, improve returns, and bring incremental supply to market in support of energy security. We also held our first production recovery summit in Houston a couple of weeks ago, and we are very pleased with the engagement from our customers from every region across the world. They increasingly recognize the potential of this domain and the opportunities it presents to underpin growth for the industry. Turning to digital, this business continues to build strong momentum and is a key driver of both differentiation and long-term value creation for SLB N.V. While still a relatively small portion of our revenue today, its impact extends well beyond its size. Our approach is grounded in domain expertise, where AI, data, and software are integrated into our platform and workflows to deliver measurable performance outcomes. This is not about standalone tools; it is about embedding intelligence across the full life cycle of whatever developments and production. Our teams continue to make exciting developments, particularly in the urgent adoption of AI. As the number of use cases increases and the value of these technologies is proven in the field, we anticipate increased adoption. Over time, we expect digital to become an increasingly important lever for growth, both as a standalone business and as an enabler across our broader portfolio. We are excited to share more about this business during our Digital Investor Day later in June. Finally, data centers represent a new and rapidly expanding opportunity for SLB N.V., leveraging our core strengths in engineering, manufacturing, and project execution, while extending our scope of modular infrastructure solutions to support the accelerating demand for AI and digital capacity. In less than two years, we have established our right to play in this industry, proven by our manufacturing know-how and supply chain capabilities. We are building on this expertise to support design engineering and performance optimization of the data center build-out. And we are currently scaling the business by expanding capacity, deepening partnerships, and selective international growth. While still at an early stage, this business is already demonstrating the characteristics we are looking for: capital-light growth, strong demand visibility, and a clear path to becoming a meaningful contributor to earnings over time. Looking ahead, we see additional upside to opportunities such as thermal management, decarbonized power, and scaling as a systems integrator. These are areas where our capabilities can further differentiate our offering and expand our addressable market. We also continue to assess potential opportunities to accelerate this trajectory through targeted M&A. Taken together, these three areas—production recovery, digital, and data center solutions—reflect how we are evolving our portfolio toward higher-return, technology-driven, and less cyclical growth. They are complementary, scalable, and aligned with the long-term trends shaping both the energy system and digital infrastructure. Let me now share our view on how the second quarter may unfold. First, it is uncertain how long geopolitical disruption will last and how the recovery in the Middle East will unfold. At the same time, we are facing higher procurement and logistics costs driven by the conflict. As a result, it is challenging to provide precise guidance for this quarter. However, there is a scenario where our portion of disruption in the region persists through the middle of the second quarter and then begins to gradually ease. Under this assumption, we estimate that the sequential revenue and earnings decline in the Middle East will be fully offset by all of our international markets combined, where we anticipate mid- to high-single-digit revenue growth with improved margins. Meanwhile, North America revenue is expected to be flat sequentially. By division, under the business scenario just highlighted, Digital and Production Systems will grow globally, while Reservoir Performance and Well Construction will decline globally. I will now turn the call over to Stephane to discuss our financial results in more detail. Stephane Biguet: Thank you, Olivier, and good morning, ladies and gentlemen. First quarter earnings per share, excluding charges and credits, was $0.52. This represents a decrease of $0.20 when compared to the first quarter of last year. During the quarter, we recorded $0.02 of merger and integration charges, primarily related to the ChampionX transaction. Overall, our first quarter global revenue of $8.7 billion increased 3% year on year. Excluding the impact of the ChampionX acquisition in the third quarter last year, revenue declined by $607 million, or 7% year on year. When compared to the fourth quarter of last year, revenue fell by just over $1 billion, or 10.5%. This decline was approximately 200 basis points, or about $200 million, higher than what we expected at the time of our last earnings call in January. This was primarily due to the impact of the conflict in the Middle East as we experienced operational disruptions throughout the month of March. Company-wide adjusted EBITDA margin for the first quarter was 20.3%, down 346 basis points year on year. Margins were negatively affected by high decrementals on the Middle East revenue impact. We did not make any material adjustments to our cost base during the quarter, as our immediate focus was the protection of our people and preserving operational capacity for the expected future rebound in activity. We also incurred additional logistics and materials costs as a result of supply chain disruptions due to the conflict. Beyond the effect of the Middle East conflict, first quarter margins were impacted year on year by increased tariffs, project mix, and higher costs in OneSubsea, as well as pricing headwinds in select markets, particularly in Well Construction. Let me now go through the first quarter results for each division. First quarter Digital revenue of $640 million increased 9% year on year, primarily driven by 87% growth in digital operations. This was supported by increased digital services adoption and new technology introduction, as well as the acquisition of ChampionX. Notably, annual recurring revenue for the division stood at $1.02 billion at the end of the first quarter, representing year-on-year growth of 15%. Digital pretax operating margin of 20.9% was essentially flat year on year. However, adjusted EBITDA margin of 26.1% declined 473 basis points due to lower amortization relating to exploration data as a result of the mix of surveys sold during the quarter. As you know, Digital margins are historically lowest in the first quarter due to seasonality and steadily increase throughout the year, reaching the highest level in the fourth quarter, as evidenced by last quarter’s results. This trend will continue, and consequently, we expect to achieve full-year Digital adjusted EBITDA margin that is at least equivalent to last year’s level of 35%. Reservoir Performance revenue of $1.6 billion decreased 6% year on year, while pretax operating margin of 16.1% decreased 47 basis points. These decreases were due to lower stimulation and intervention activity, primarily as a result of the disruptions in the Middle East. Well Construction revenue of $2.8 billion decreased 6% year on year, primarily from lower activity due to the disruption in the Middle East, partially offset by higher offshore drilling activity in Europe and Africa, Latin America, and North America. Pretax operating margin of 15.2% contracted 463 basis points year on year due to lower profitability on account of the Middle East conflict, as well as pricing headwinds in select markets. Finally, Production Systems revenue of $3.5 billion increased 23% year on year. Excluding the impact of the ChampionX acquisition, first quarter revenue decreased 6% year on year. On a pro forma basis, revenue from the ChampionX production chemicals and artificial lift businesses grew 2% compared to 2025. This strong ChampionX performance was offset by the impact of the Middle East conflict, lower OneSubsea revenue, and, independent of the conflict, lower product deliveries in Saudi Arabia. Production Systems pretax operating margin of 14.2% declined 240 basis points year on year due to lower profitability in Surface Production Systems, Completions, and OneSubsea. As it specifically relates to OneSubsea, pretax margin in the first quarter was 14.4%, compared to 18.1% in 2025. Margins were affected by the concurrent wind-down of several large programs and the initiation of new projects with high start-up costs. OneSubsea margins are expected to increase over the remainder of the year. ChampionX partially offset those effects as we continue to make progress with our synergy realization. As a result, ChampionX margins this quarter were higher than in both Q4 and Q1 of last year and were accretive to both Production Systems and total SLB N.V. margins. Now turning to our liquidity. Our net debt increased $797 million sequentially to $8.2 billion. During the quarter, we generated $487 million of cash flow from operations. Free cash flow was slightly negative at $23 million on account of the payment of annual employee incentives and the seasonal increase in working capital that we typically experience in the first quarter. This was compounded by delayed collections in the Middle East stemming from the conflict. We expect our cash flow generation to follow our historical pattern, with free cash flow gradually increasing throughout the year, with the majority coming in the second half. Capital investments, inclusive of CapEx and investments in ATS projects and exploration data, were $510 million in the first quarter. For the full year, we are still expecting capital investments to be approximately $2.5 billion. During the quarter, we repurchased $451 million of our stock, and we still expect to repurchase a minimum of $2.4 billion for the full year, in line with 2025. As a reminder, we are targeting to return more than $4 billion to our shareholders in 2026, through a combination of dividends and stock buybacks. Before I wrap up, let me come back to our second quarter outlook and more specifically to the Middle East. I would first like to clarify that the Middle East represented approximately 70% of our Middle East and Asia business in the first quarter. Under the specific scenario that Olivier highlighted earlier, where operational disruption in the region persists until the middle of the quarter, and then starts to alleviate, we estimate that it would negatively impact our second quarter earnings per share by an incremental $0.06 to $0.08 when compared to the first quarter. This is the result of lost revenue as well as higher procurement and logistics costs associated with the conflict. I will now turn the conference call back to Olivier. Olivier Le Peuch: Thank you, Stephane. I believe we are now ready to take your questions. Operator: We will now open the call for questions. We will now begin the Q&A session. If you would like to ask a question, please press star followed by one. Your first question comes from the line of David Anderson with Barclays. Your line is open. David Anderson: Hi. Good morning, Olivier. How are you? I am good. Morning, Olivier. So looking past some of the near-term disruptions, I was wondering if you could expand a bit more on your views on how the investment cycle has changed. You mentioned a broad-based recovery in 2027 and 2028. Is that predicated on oil prices being structurally higher now? And can you also comment on which end markets you see the most upside in as you sit here today? Olivier Le Peuch: I think there are multiple reasons why I think we will initially benefit from an uptick in investment. First, indeed, we are projecting that the commodity price will be higher after this than they were before. But more importantly, the significant impairment of the supply-demand balance has created the need for replenishing inventories, replenishing the strategic reserves, and also has heightened the risk around energy security. As a consequence, there will be multiple factors that will play into an increased investment outlook. Firstly, replacing inventories and strategic reserves will supplement the natural demand in oil and gas. Secondly, the energy security imperative will drive national decisions to invest into local resources and to diversify sources of supply, including creating some redundancy if and as necessary, and clearly maintaining in the future higher inventory stockspares to prevent future shocks of supply. This aligns with trends that were already in play that were indicating offshore was set for a rebound as we exit 2026 into 2027. We believe that this combination will affect both the short cycle in the near term and the long cycle at scale into 2027 and 2028. So, in our opinion, we are set for an uptick into a cycle of strength going forward. David Anderson: So, Olivier, you had talked about deepwater looking particularly attractive in that outlook. Obviously, that is part of the long-cycle story. Can you talk about where you see the most upside in terms of SLB N.V.’s business? Is it more on the Well Construction and Reservoir analysis side? Could OneSubsea be a big driver? Just trying to think through the businesses that would be most impacted. Olivier Le Peuch: First, we are confident that offshore has been very attractive economically now and is the last large resource asset for operators to unlock and develop going forward. That is the reason why we are seeing this uptick in the FID pipeline and the projections by many reports saying that this will at scale exceed what we have seen in the last couple of years. The macro is very positive for deepwater, and this is true across Africa, Asia—East Asia—and the Americas, for different reasons. Africa, as I stated in my remarks, is set to be one of the main beneficiaries. It has vast undeveloped resources—both oil and gas—on the West and the East coasts, and is clearly set to be developed. This is where we see potential acceleration of FIDs in the coming quarters. The Americas are very strong, from Brazil to the Gulf of Mexico, and I believe this will continue, including plays in Central America. In Asia, because of gas, we see a doubling down on the development of gas and deepwater resources, with a lot of developments happening these days in Indonesia. You have seen some of the announcements we made earlier today in the earnings press release, with OneSubsea being awarded in Malaysia and in the South China Sea—a critical award. I believe that our core at large would benefit from this rebound; we have strong market positions across the divisions. But yes, indeed, OneSubsea is expected to benefit at scale and, as guided previously, we expect OneSubsea bookings this year to be visibly higher than last year and to then have a growth trajectory in 2026 and into 2027 and 2028 as we see the scale of this offshore cycle developing. Operator: Thank you. Your next question comes from the line of James West with Melius Research. Your line is open. James West: Hey. Good morning, Olivier and Stephane. Olivier Le Peuch: Good morning, James. James West: The Middle East is your backyard. You have owned that market for a century or more. You do not leave conflict zones, but when conflicts happen you are always there for the recovery. As you think about the recovery and how it could unfold—I know you made some comments in your prepared remarks about this—but as you talk to the customers, what do they want to do? What do they need you for initially, and how do you think the momentum builds assuming that the conflict resolves in the timeline that you and others laid out? Olivier Le Peuch: First, to be clear, we are working in lockstep with customers every day and every week. We continue to work closely with them to understand as they are contemplating all options for recovery while observing the geopolitical developments. We stand ready, so we are more in standby as we speak. Multiple scenarios are being considered, and there are some countries where the resumption of operations will be relatively fast and could turn into days and weeks. There are other countries and facilities and fields that have been shut in abruptly where we will need to intervene. Hence, there will be an initial phase of assessment and an initial phase of intervention before production can come back to full capacity. There are zones in the region where security will remain a concern and will delay further the recovery. So it is a gradual recovery, but yes, we are working very closely with customers both to mobilize equipment and resources and also to anticipate the reservoir consequences and the type of services that we will need to provide as the conflict stabilizes and as customers have the confidence to remobilize. We see clear long-term upside in the region, and we see that some countries will actually use this to catch up and maybe expand their capacity to recover market share and production lost during this period. James West: Got it. Very helpful. And then maybe a quick follow-up. Understanding that most geographies and, of course, companies and countries want to diversify supplies, do you see more of your customers that are Middle East-based stepping outside of the region? They have already started to do that a little bit, but stepping outside more post conflict? Olivier Le Peuch: Generally, operators will continue to diversify across the entire world, and there are plenty of basins that still stand undeveloped. I highlighted Africa. There is a lot of oil and gas resource that is set to be developed, and I think the fiscal terms and the security conditions have improved in the region and will make it critical. But the Middle East remains a low-cost barrel and low-cost gas region at scale, and hence it will continue to attract investment as well. The national resource holders in the region will continue to develop at scale their resources. So we see a mix, and I think beneficiaries will include Africa, the Americas—offshore—and Asia deepwater, and production recovery across all regions, because this is where the fastest incremental barrels can come from. Operator: Thank you. Your next question comes from the line of Steve Richardson with Evercore ISI. Your line is open. Steve Richardson: Good morning. I was wondering if we could talk a little bit about Digital. You made this acquisition with S&P. What we understand is this is a largely U.S.-centric software suite and dataset. Can you talk about what the longer-term vision is there, and be sure to hit on how and if that is an enabler of some of the other things you are doing in the broader business outside of Digital? Olivier Le Peuch: Absolutely. As described in our press release this morning, we have come to an agreement with S&P Global Commodity Insights to acquire the upstream petrotechnical software suite—not their data—and this is mostly deployed in North America with independents and is quite specific to the unconventional market. This is highly complementary to the offering we have. As we go forward, this will complement our offering in North America, give us support to expand the reach of these petrotechnical workflow solutions internationally for hybrid markets, and also help us to expand and address the next challenges in unconventional development and recovery. We will use this new software suite to complement what we have, add domain depth, and unlock new unconventional workflows. It gives us broader market access and a tool that is fit for the unconventional market where we did not have the same offering today. Separately, as you may have seen in the earnings press release, we have entered an agreement to pursue a strategic partnership with S&P Global Commodity Insights around AI, giving us the opportunity to use the power of large language models and domain-specific foundation models using the global datasets of S&P Global Commodity Insights. Together, we will provide our customers with unique insights by applying AI capability and our domain foundation models on the full datasets of S&P Global Commodity Insights. That is unique and will be very appreciated by customers. Steve Richardson: That is great. And I suspect we will hear much more about that at the Analyst Day in June. I am wondering if you could give us a brief update on the data center business and your outlook there in terms of securing additional customers, your commercial approaches, and expectations for the balance of the year relative to what you talked about a quarter ago? Olivier Le Peuch: We continue to reiterate our ambition and our goal that we will reach or exceed a $1 billion run rate as we close this year. We have made great progress this quarter to secure additional customers that give us further visibility into demand for our capacity in 2027 and 2028, and we are developing more growth and scaling beyond the exit-rate guidance going forward. You have seen one announcement with NVIDIA that shows they have selected us as their modular design partner for the DSX AI factory. It means a lot—it means we have been selected as a trusted partner to develop modular infrastructure solutions for the DSX centers, large-scale future builds that need to be scaled fast. We will add capability to build sites and manufacture equipment off-site and bring this modular infrastructure to NVIDIA’s customers in the future. You will see additional announcements coming that will show the breadth of our customer reach and the scale of our operations going forward. We are very pleased with the progress, and this will continue in 2026 and clearly at scale in 2027. Operator: Thank you. Your next question comes from the line of Arun Jayaram with JPMorgan. Your line is open. Arun Jayaram: Yes. Good morning. Olivier, production recovery seems to be an important theme this morning. I was wondering if you could highlight some of the industrial and technical challenges in restoring production that is offline in the Middle East, and do you think that, assuming we get to an improvement in the situation in the Middle East in 2Q, this could be a driver of SLB N.V.’s second half 2026 results? Olivier Le Peuch: Firstly, we will not be commenting on behalf of our customers in the Middle East as they go through the assessment of their facilities—some of them, as you know, have been damaged by this crisis. I will comment on the engagement, collaboration, and close partnership we have with our customers to prepare for remobilization as security concerns abate. Some shut-ins were done orderly and will just require a resumption of operations with remobilization of resources with no significant short-term impact. Others will need well intervention activity, and that is where we have upside. We will work with our customers to help restore production and use the production recovery technology set to help regain pre-conflict capacity. Long term, as resumption of operations gradually occurs throughout the following months and possibly quarters for some countries, we see upside in the desire for some countries to uplift their capacity and to participate in the replenishment of depleted inventories and strategic reserves. We see a sequence of intervention first, production recovery focus next, and then large-scale development and expansion of capacity for some countries. Arun Jayaram: Great. I have a follow-up to Steve’s question on Digital. If I look at year-over-year trends, your revenue was up 9% but your margins fell by 473 basis points. Can you talk about what you saw on the margin front and perhaps the recovery potential for Digital margins over the balance of the year? Stephane Biguet: I will take this question, Arun. As you know, we closed last year in Digital with full-year EBITDA margin of 35% and pretax operating margins of 28%. There is a bit of a distinction between pretax margin and EBITDA here. We started 2026 with pretax margin of just about 21%, which is essentially in line with where we started in 2025. EBITDA margins, however, were indeed lower, and this is exclusively due to lower amortization from the mix of exploration data that we sold during the quarter. Stepping back, as I said earlier, the first quarter of the year is typically the lowest for Digital margins. We fully expect to see the same pattern we have seen over the years, reaching the highest margins in the fourth quarter. It is our ambition to deliver total EBITDA margins from Digital of at least 35% this year as well. The quarterly choppiness is not a concern to us. Operator: Thank you. Next question comes from the line of Scott Gruber with Citi Research. Your line is open. Scott Gruber: Yes. Good morning, Olivier and Stephane. Olivier Le Peuch: Good morning. Scott Gruber: In a world where code writing becomes easier and more commoditized, can you speak to the resilience of the value-add of your Digital portfolio? And as you take moves to shape the portfolio like you have done with the S&P acquisition, how do you think about expanding that value-add and enhancing that resilience? Olivier Le Peuch: Customers are accelerating the adoption of digital because they believe that no matter where the cycle is—whether it is a high or challenging cycle—they need to differentiate and extract efficiency and productivity in geoscience and planning workflows, operational performance and efficiency in drilling, and in production and recovery. They have seen that digital capability is delivering, and you can see it by the adoption of digital operations growing nicely year on year, driven by drilling and production operations where customers are adopting AI and software solutions that can transform the performance of drilling operations—like drilling automation—and transform production workflows to render ESPs autonomous. These capabilities will be sought by every customer. Every use case we see is resonating across customers in every basin. We see not only resilience but a long-term tailwind in any cycle, and digital will continue to have a tailwind in our industry because we have data like no other industry, we have scientists and engineers who love to work with data, and we have AI that is becoming a catalyst and x-factor to unlock productivity. We are unique in our capability; we have deep domain knowledge and a platform that can help scale AI capability. It is the right time for the industry to adopt AI at scale. We will show more during our Digital Investor Forum. Scott Gruber: I look forward to it. And a follow-up: with an outlook for higher oil prices, at least over the medium term, how does that impact the Digital business? I assume your seismic sales could improve. How meaningful could that be? And more importantly, would you anticipate customers taking some of this excess cash and spending it on more software and applications to get a bigger boost for their own internal efficiency? Olivier Le Peuch: When commodity prices are high and customers have more optionality in discretionary spend, they invest in domain and in digital, and they accelerate exploration. We foresee that, and we are seeing signals that exploration is coming back. We have seen announcements of companies reinvesting in exploration at scale because they want to secure reserves to participate in long-term energy security. At the same time, yes, they use discretionary spend to buy datasets to accelerate exploration, which we will benefit from, and they also participate in more pilots and make decisions faster to accelerate platform and software deployment in their organizations. Operator: Thank you. Your next question will go to the line of Sebastian Erskine with Rothschild & Co Redburn. Sebastian, your line is open. Sebastian Erskine: Hi. Good morning, gentlemen. Thanks for taking my questions. I just want to start on SLB N.V. OneSubsea. It is really one of the jewels in the SLB N.V. crown. You guided that full-year 2025 results to $9 billion in order intake over the next two years. I wonder if you could give an outlook on the margin expansion within the OneSubsea business, particularly with comparisons to the broader offshore E&C universe? Is there more room for integration with the rest of your portfolio or further efficiencies related to your existing subsea business? Any color on the margin outlook for OneSubsea? Stephane Biguet: Sure, Sebastian. You have noticed that for the first time we gave you our margins for OneSubsea for the first quarter. Unfortunately, they were not as strong this quarter, but these are temporary effects due to the timing of project completions and start-ups. You have seen where the margins were in the same quarter of last year—pretax margins of 18%—which means EBITDA margins are very close to 20%. This is what we expect from this business over the cycle at the minimum. Even though we started on a rough note in the first quarter, we expect the margins to normalize in the coming quarters. On the back of a backlog that is increasing year on year—we are up 5% year on year on the backlog—we have better visibility on the growth going forward and on potential margins. Olivier Le Peuch: I will add a couple of things. In production recovery, subsea as a domain of deepwater is essential for our customers, and production recovery plays a great role. We have a unique subsea processing portfolio. You have seen another announcement that we are continuing to innovate and enhance the project we have with Equinor in Norway, and we made an acquisition that complements our offering to better participate in the intervention world of deepwater subsea. The production recovery strategy and the connection with our overall core capability is essential going forward. It will help customers leverage OneSubsea to enhance production of existing fields and provide more life-of-field services, including digital capability, to subsea installations. So it is both on the EPCI cycle and then on the long-term life-of-field services that we will benefit. Sebastian Erskine: I really appreciate the color there. And then just a follow-up. I think, in prepared remarks, you mentioned toward the end of the data center solutions section that you were considering potential further M&A following the announcement of the S&P Global deal. What areas are you seeking to add in terms of your portfolio? Olivier Le Peuch: We are looking at opportunities where we can build a portfolio with more technology anchors across modular infrastructure—for example, thermal management comes to mind. We are looking at opportunities that could complement the offering we have and the go-to-market motion we have carried into the space. Operator: Thank you. Next question will go to the line of Mark Bianchi with TD Cowen. Your line is open. Mark Bianchi: Hi. Thank you very much. I just first wanted to quickly clarify the outlook for the second quarter. You are essentially saying that results will be the same as the first quarter, and there is a $0.06 to $0.08 incremental hit from the Middle East that is being offset elsewhere. Is that the message you are trying to deliver here? Stephane Biguet: Yes, that is a good summary, Mark. Just to be clear, this is under the specific scenario that we highlighted, where the operational disruptions start to ease more or less at the middle of the quarter and then gradually recover. In this scenario, we can offset the negative impact of the $0.06 to $0.08 incremental effect of the Middle East with the rest of the international operations. Mark Bianchi: Great. Thanks for that, Stephane. The other question I had, going back to OneSubsea and the $9 billion of awards over 2026–2027: given the outlook here, do you see upside to that now? And how are you thinking about your competitive positioning? We hear a lot from your competitor about their capabilities. Can you talk about how you see OneSubsea positioned from a competitive perspective? Olivier Le Peuch: First, commenting on the cycle, the more these dynamics play out as the conflict ends, the more we believe that investment will be attractive in the deepwater market, which is the majority of what we foresee as FIDs in 2027 and 2028. The more it will expand the size of the addressable market. Hence, if FIDs firm up, if not accelerate, in 2027 or even in 2026, this will give us potential to outperform the guidance we have given. On positioning, we feel extremely good. We have partnered with Subsea7, which gives us, when customers ask for integrated offerings, the integrated capability to deliver—and we have done this at scale with many customers. We have developed partnerships and collaborative engagements with several customers that have led us to work jointly to improve the design of subsea architectures and unlock FIDs—this is true with Equinor and BP. We also believe we have a unique portfolio in subsea processing with no match in the market. You have seen announcements today and will continue to see a pipeline of projects that make it unique. You have seen the Åsgard-type subsea gas compression unlocking a new level of recovery in Norway, and the additional announcement we made today on the Gullfaks project where we will rework with our customer to extend life and improve performance of subsea processing to unlock the next level of recovery. We feel good about our integration capability, the pipeline—you have seen awards in Malaysia, in the South China Sea, in Suriname, and in Norway announced today—and we will continue to have a pipeline of exciting projects across the Americas, Asia, and Africa. We are pleased with OneSubsea’s progress and continue to support them fully. Operator: Thank you. Your last question comes from the line of Neil Mehta with Goldman Sachs. Your line is open. Neil Mehta: Thanks so much. Morning, my friends. You talked a lot about some of the cost impacts that you are seeing in the Middle East and how that is impacting margins, and I think we all understand that at a conceptual level, like freight. But can you give us some of the line items that are causing the pressure points and help us understand the specific items? Stephane Biguet: Clearly, the situation in the Middle East introduced strain on supply chain networks locally, with ripple effects elsewhere. The line item most impacted is logistics and transportation costs. Coming next are raw materials—those derived from petroleum products, and that includes chemicals. So it is raw materials and logistics mostly. This impacted margins in the first quarter and it will linger for a while. We are not going to just let that hit our costs—we have mobilized our commercial organization to recover some of these increased costs, and we are activating inflation pass-through clauses in our contracts. Where we do not have those, we are in direct negotiations with both our suppliers and our customers to offset these effects. We are used to these spikes from inflation, and we try to recover as much as we can. Neil Mehta: And my last question: it has been a couple months now that ChampionX has officially been in the SLB N.V. portfolio. Any observations about what it is bringing to the table and how you have been able to integrate the system into the broader company? Olivier Le Peuch: First, I will reiterate the results part of the ChampionX addition to our portfolio. As Stephane highlighted, ChampionX has been accretive to the company in the first quarter, growing year on year and expanding margins year on year. Second, I will come back to the three days we spent with our board in Midland. It was a pleasure to see in action our former ChampionX employees integrating fully in a customer-centric, opportunity-to-outcome pipeline demonstration with our board, showcasing our fit-for-purpose technology—highly integrated and already getting pull-through and synergy, both revenue and technology, that customers appreciate. We also met many customers with our board in Midland and received very direct and transparent feedback—they were very pleased with the integration progress and see the potential that ChampionX, together with SLB N.V., can bring to operations in the Permian. We are seeing the benefits in financial results, we are seeing an exciting opportunity for production recovery—as we commented at the summit we hosted—and we see the enthusiasm of our teams and customers. This is a unique combination that can unlock the potential of production recovery, particularly in unconventionals, but also across all our basins worldwide. Operator: Thank you. I will now turn the call over to SLB N.V. for closing comments. Olivier Le Peuch: Thank you very much. Ladies and gentlemen, as we conclude today’s call, I would like to leave you with the following reflection. First, while recent events have created near-term disruption, they have also reinforced the need for secure and reliable energy, which will support oil prices above pre-conflict levels and create an ongoing backdrop for oil and gas investment. Second, production recovery, digital, and data center solutions are creating the foundation for accelerated growth. And finally, I want to recognize that this year marks 100 years of SLB N.V. As we celebrate this milestone, I am proud that we are not only honoring an extraordinary legacy but also building the foundation for the next century of innovation, performance, and leadership. With this, I will conclude today’s call. Thank you all for your time. Operator: This concludes today’s conference call. You may now disconnect.
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 Financial Bancorp. First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Scott Crawley, Corporate Controller. Please go ahead. Scott Crawley: Thanks, Kate. Good morning, everyone. Thank you for joining us on today's conference call to discuss First Financial Bancorp's first quarter financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the first quarter 2026 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information we will provide today is accurate as of March 31, 2026, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to Archie Brown. Archie Brown: Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our first quarter results, and I'm very pleased with our overall performance. The first quarter was a busy one as we closed the BankFinancial acquisition, completed the conversion of Westfield Bank and wrapped up the sale of the BankFinancial multifamily loan portfolio. Adjusted earnings per share were $0.77 with an adjusted return on assets of 1.45% and an adjusted return on tangible common equity of 19.2%. Adjusted earnings per share increased 22% compared to the first quarter of last year, driven by a robust net interest margin and strong fee income. Our net interest margin was resilient despite the Fed funds rate cut in December as the expected decline in loan yields was offset by a similar decline in deposit costs. Assuming no short-term rate reductions by the Fed, we expect the margin to remain stable in the near term. Loan balances increased slightly for the quarter due to the BankFinancial acquisition. Excluding the BankFinancial portfolio, loans declined for the quarter as seasonally strong loan production was offset by extended payoff pressure in the ICRE portfolio. Compared to the first quarter of 2025, originations increased approximately 45%. And excluding Westfield and BankFinancial, originations were up by over 25%. Our expectation for loan growth for 2026 has not materially changed. Loan pipelines are very healthy, and we expect strong production in the second quarter. We also expect payoff activity in ICRE to approach more normal levels, leading to solid loan growth in the second quarter. Adjusted fee income was strong for the quarter. Historically, fee income significantly dips early in the year. However, we successfully combated this trend in the first quarter. Adjusted noninterest income was $75.6 million, which was 24% higher than in the first quarter of 2025 and only a slight decline from the linked quarter. These results were driven by record wealth management income, strong client derivative income and record leasing business income. Additionally, expenses were well controlled during the quarter with total noninterest expenses coming in well below our expectations and acquisition-related cost savings exceeding our initial estimates. Net charge-offs were 35 basis points of total loans and were impacted by one large commercial relationship. Other asset quality indicators were stable with nonperforming assets slightly declining from the linked quarter to 44 basis points, while there is certainly more uncertainty in the economy due to the impact of the war in Iran and, our current expectations are for asset quality to gradually improve throughout the year, similar to our performance in 2025. Capital ratios are strong and continued to climb in the first quarter. All regulatory ratios were well in excess of regulatory minimums and the tangible common equity increased to 7.9%. Tangible book value per share was $16.15, which was a 2.6% increase over the linked quarter and a 9% increase compared to the first quarter of 2025. Tangible book value was at approximately the same level as the third quarter of 2025 just prior to the Westfield Bank acquisition. This month, the Board of Directors authorized a $5 million share repurchase plan, replacing the plan we had in place through 2025, and we are evaluating opportunities to employ buybacks as part of our overall capital planning. I'd like to take a minute and discuss our recent acquisitions. During the quarter, we successfully completed the conversion of Westfield Bank. And then for the quarter, Westfield deposit and loan balances were stable, we maintained high associate retention, and we have achieved the financial results that we expected from the transaction to date. We're happy with the quality of the bank we acquired and with the talented team that has joined us. We also completed the purchase of BankFinancial on January 1 and plan to convert systems in early June. We remain excited about the opportunities in the Chicago market and continue to see growth potential from this transaction. Now I'll turn the call over to Jamie to discuss these results in greater detail. And after Jamie, I'll wrap up with some additional forward-looking commentary and closing remarks. James Anderson: Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial performance. The first quarter results were excellent and included strong earnings, record revenues driven by a robust net interest margin and higher-than-expected fee income. Our net interest margin remains very strong at 3.99%, increasing 1 basis point during the quarter. Cost of funds declined 13 basis points, while asset yields declined 12 basis points. End-of-period loan balances increased $71 million, which included $228 million acquired in the BankFinancial transaction. This was partially offset by a $152 million decrease in ICRE balances, reflecting the payoff pressure that Archie mentioned earlier. Total average deposit balances increased $1.7 billion, including $1.2 billion acquired in the BankFinancial transaction and the full quarter impact from Westfield. We maintained 20% of our total deposit balances and noninterest-bearing accounts and remain focused on growing lower cost deposit balances. Turning to the income statement. First quarter fee income overcame seasonal headwinds with strong performance across all income types. Additionally, we had an $8.9 million gain on bargain purchase related to the BankFinancial acquisition. Noninterest expenses increased from the linked quarter due primarily to the impact of our most recent acquisitions. Our ACL coverage decreased slightly during the quarter to 1.36% of total loans and we recorded $8.5 million of provision expense during the period, which was driven primarily by net charge-offs. On asset quality, net charge-offs were 35 basis points on an annualized basis an increase of 8 basis points from the fourth quarter, while NPAs as a percentage of assets were 44 basis points, declining 4 basis points from the fourth quarter. Classified assets as a percentage of total assets also declined slightly during the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.41 to $16.15, while our tangible common equity ratio increased to 7.88%. Slide 8 reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $80.5 million or $0.77 per share for the quarter. Noninterest income was adjusted for $1.3 million of losses on the sales of investment securities, the $8.9 million gain on bargain purchase related to the BankFinancial acquisition and a $1.4 million loss on the surrender of a bank-owned life insurance policy. Noninterest expense adjustments exclude the impact of acquisition costs, tax credit investment write-downs and other expenses not expected to recur. As depicted on Slide 9, these adjusted earnings equate to a return on average assets of 1.45% and a return on average tangible common equity of 19% and a pretax pre-provision ROA of 1.99%. Turning to Slides 10 and 11. Net interest margin increased 1 basis point from the linked quarter to 3.99%. Total deposit costs declined 13 basis points from the linked quarter, offsetting the impact of lower asset yields. Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances increased $71 million during the period. As you can see on the right, we acquired $228 million of loans in the BankFinancial transaction. This was offset by a $152 million decrease in ICRE balances. [ Absent ] the acquisition, loan balances decreased 4.7% on an annualized basis, driven by elevated payoffs and ICRE. Slide 15 depicts our NDFI exposure. As you can see, our total NDFI balances are approximately 3% of our total loan book and all NDFI loans were pass rated at the end of the first quarter. The majority of our NDFI lending is concentrated in loans to REITs, which we believe further mitigates our risk. Slide 16 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $1.7 billion, including a $1.2 billion impact from the BankFinancial transaction as well as a full quarter impact from Westfield. Slide 18 highlights our noninterest income. Total adjusted fee income was $76 million, with leasing and wealth management both posting record results. Foreign exchange delivered strong results and client derivative fees increased during the period as well. Noninterest expense for the quarter is outlined on Slide 19. Core expenses increased $12.9 million as expected during the period. This was driven primarily by our recent acquisitions. Turning now to Slides 20 and 21. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $207 million, which includes $3.1 million of initial allowance on the BankFinancial portfolio. This resulted in an ACL that was 1.36% of total loans, which was a 3 basis point decline from the fourth quarter. We recorded $8.5 million of provision expense during the period. Provision expense was primarily driven by net charge-offs, which were 35 basis points. Additionally, our NPAs to total assets decreased slightly to 44 basis points, while classified asset balances as a percentage of total assets decreased to 1.02%. Finally, as shown on Slides 22 and 23, capital ratios remain in excess of regulatory minimums and internal targets. During the first quarter, tangible book value increased to $16.15, while the TCE ratio increased to 7.88% at the end of the period. Our total shareholder return remains strong with 35% of our first quarter earnings returned to our shareholders during the period through the common dividend. The Board also approved a $5 million share repurchase program. We maintain our commitment to providing an attractive return to our shareholders and we'll evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie? Archie Brown: Thank you, Jamie. Before we conclude our prepared remarks, I want to comment on our second quarter outlook, which can be found on Slide 24. On the balance sheet, we expect mid-single-digit loan growth on an annualized basis during the second quarter as loans filter through our strong pipelines and ICRE payoffs slow. On the deposit side, we expect core deposit balances to remain relatively flat compared to the first quarter. Our net interest margin remains among the highest in the peer group, and we expect it to hold steady in a 3.99% to 4.04% range over the next quarter, assuming no rate cuts. Related to credit, we expect second quarter credit costs to approximate first quarter levels and ACL coverage to remain relatively stable as a percentage of loans. As I mentioned earlier, similar to last year, we expect credit trends to gradually improve over the course of the year. Further down the income statement, we expect fee income to be between $75 million and $77 million, which includes $14 million to $16 million for foreign exchange and $20 million to $22 million for leasing business revenue. Noninterest expenses are expected to be between $151 million and $154 million. We successfully completed the Westfield conversion in March and are scheduled to convert BankFinancial over the summer, we're on pace to achieve our modeled cost savings in the Westfield acquisition and should realize full savings beginning in the third quarter, and we expect full BankFinancial savings to be realized beginning in the fourth quarter. Before I wrap up, I want to thank our associates for the incredible work they've done this year integrating Westfield into First Financial and the work they're now doing as they prepare for the BankFinancial conversion I also want to mention how proud I am that First Financial was selected for the Gallup Exceptional Workplace Award for associate engagement. This marks the second consecutive year that we have received this honor which is awarded to 4% of the thousands of companies that Gallup works with worldwide. We have partnered with Gallup for more than 6 years, and we've made associate engagement a core tenet of our corporate strategy. I want to commend our associates and leaders who work throughout the year to drive engagement, knowing that by doing so, we're also improving the client experience and shareholder value. To conclude, we're really happy with our first quarter results. We've made substantial progress across the company, and we worked diligently to be a bank that consistently produces top level results. We remain focused on the right things and are determined to build on the momentum generated by our first quarter performance. We've had a very strong start to 2026, and we believe that this is going to be another very successful year for First Financial. Kate will now open up the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo with Raymond James. Daniel Tamayo: So I guess maybe first, starting on the loan growth side. You talked about the impact from the payoffs in the first quarter, $152 million, I think, is the number you gave. So we talked to a lot of banks this earnings season about this headwind and kind of what's going to change to remove that headwind going forward. So just curious on your thoughts on that, kind of what drives your confidence those headwinds on the paydown side slow? And just a little bit more timing if it's second quarter or you think it's back half of the year. As it relates to the timing of the paydowns? Archie Brown: Yes. Thanks, Danny. Yes, I'll maybe start with some color, and then I'll come back to the kind of how we see our outlook on it. We talked about this primarily being ICRE. We had -- we don't show REITs in the ICRE totals, but we also had some REIT paydowns or exits, if you will, and that shows up more in our commercial line. That was probably another $23 million, but it's all related in the commercial real estate space, if you will. Look, it's been a mix. We probably saw about 30% of our ICRE balances were exited because of the properties were sold. So there's been a little more, I think, a little more volume of sales occurring as some of the developers owners are saying, look, this is -- I'm getting good pricing. It's a good time to do it with the uncertainty. So that's a piece of it. We've seen about maybe close to 1/4 of it go to the secondary market. And then we've seen other banks come back in. We've seen -- for several years, we weren't seeing the larger regionals in the space. They're back in and they're aggressive and they're taking out loans. In some cases, for us, hotels, we don't have a big book, but that's where some of it's come from. Other cases, loans that they're taking and they're taking for very aggressive pricing or, in some cases, structure that we don't think is appropriate. So we're seeing some of it move like that. So if you said property sales, secondary market, larger banks coming back in and then some REIT exits that's sort of been the mix of what we've seen happen. We talked to our commercial real estate team, just what we're seeing in their conversation with borrowers and just with the level of payoff requests coming in, they just are slowing. And what our team sees is that over the course of the second quarter, that will slow -- continue to slow. In addition, our production ramps up more in the quarter. So it's a combination of the 2, we don't know exactly where this is going to fall, of course. There's timing of payoff things that can occur. But they're hopeful that they're going to be somewhere that portfolio around flattish for the quarter. And if they're flattish along with the other activity we have, I think that drives our growth overall. Daniel Tamayo: That's great. Very helpful detail there, Archie. I guess the other side of that, and you touched on it at the end, is the production I think you talked a little bit about it in the prepared remarks, but maybe talk about the pipeline and some of the drivers within that, particularly on the commercial side for the rest of the year? Archie Brown: The pipeline, I think we signaled is pretty strong. Now look, I guess everybody can define what a pipeline means. In our -- in the language we're using here, we call these advanced stage pipeline or a late-stage pipeline. Generally, this is where we've been awarded the business. That doesn't mean we'll close them all. Sometimes they'll fall out for different reasons, but that's how we're looking at this. And it's just -- it's up substantially from the early part of the year, and we think that activity is continuing. The sentiment in the market, I know there's a lot of macro activity going on, but demand is pretty strong. Borrowers are pretty active, and we think the pipeline will continue to build. So that's given us some confidence that we'll see the growth we've talked about. And it's pretty much across the board. When you look at all of the areas that we lend into. We're seeing good pipeline activity. Daniel Tamayo: Okay. Great. And then lastly, again on the same topic, but just curious where you guys stand, I mean, in Chicago right now? You closed the BankFinancial deal. It was really for the deposit side? I know you had some presence there prior to the deal. So maybe update us on where you stand from like a lender perspective and where you're looking to get to over time? Archie Brown: Sure. So Danny, as you said, we closed early in the year, convert early June. As you said, it's been primarily a deposit play deposits are holding, I think, pretty well at this point. And we're sort of building out the team, if you will. So we've added some commercial banking talent. We had a team I think we've added one here in the last month or two. We plan to add more bankers to the commercial banking team. We've added wealth advisers to the team, private bankers to the team. So we're kind of filling out, if you will, what I call the more of the wholesale commercial team to complement the retail strategy. And we think there's good opportunity. If you go back and look at that bank, they really weren't generating activity in those areas to speak of. So we think it's -- as we get the team filled out, almost anything we do there is going to be additive to the bank's balance sheet. Operator: Your next question comes from the line of Brandon Rud with Stephens. Brandon Rud: I guess maybe my first one, the cost of interest-bearing deposits was 2.33% for the full quarter. I'm just curious, embedded within your NIM guide, is that kind of a good starting base for the second quarter or I guess, I guess, yes, is that still a good starting point for the second quarter? James Anderson: Yes, we talked -- when we're talking deposits, Brandon, we really talk more kind of the overall -- like our overall cost of deposits. So that -- but that number that you're quoting there, I mean that's the -- I guess, the exit cost going into the second quarter would be slightly lower than that. And so we're showing our overall cost of deposits in the first quarter was 1.83%, and we think we can get that down in the second quarter, another 2 or 3 basis points. So the cost of interest-bearing deposits would just kind of flow right off of that as well, obviously. So the -- so our starting cost of deposits in the second quarter. Again, 1.83% for the full quarter in the first quarter, the starting point is around 1.80%, 1.81%. Brandon Rud: Okay. Perfect. And then I think you said the fourth quarter of this year, I think, is going to be the first clean quarter with all the expenses taken out. So thank you for the guide for the second quarter. I'm assuming kind of stair steps down from there. I guess what is that all-in run rate with all the cost saves kind of look like in the fourth quarter then? James Anderson: Yes. So we'll get a stair step down here in the -- let's see here. In the second quarter, call it down into that range where we guided to. And we think then it is relatively flat for the remainder of the year. We may get a little bit more coming down. But obviously, we have some other stuff outside of the acquisitions where we're making other investments and whatnot where costs are moving up, just like normal in that 2% or 3% range that's going to offset the decline really from the from the BankFinancial deal. And the BankFinancial deal, obviously, was a little bit smaller in their expense base. But the fourth quarter, so we should see that step down in the second quarter, which gets us to that guide that we put in the outlook, and then it's relatively flat for those -- for the out quarters. Brandon Rud: Got you. Okay. So the cost savings effectively fund the investments and that's a stable rate? James Anderson: Right. Operator: Your next question comes from the line of Karl Shepard with RBC Capital Markets. Karl Shepard: I guess I just want to start on the margin quick. We have the guide for 2Q. But just thinking about your balance sheet, I'm guessing if we don't see any cuts, that's probably a pretty good spot to be for the rest of the year? Or should we be thinking about loan growth maybe changing the mix a little bit and helping the margin? James Anderson: Yes. Yes, this is Jamie, Karl. Yes. So that guide, obviously, with rate cuts getting looks like getting pushed out in either later in the year or into '27 at this point, obviously helps us from a margin standpoint, being slightly asset sensitive. But yes, so when we -- as we remix out of some of the securities balances that we've put on with the liquidity that we got from -- especially from the BankFinancial deal, you could see -- and it's not a lot, obviously, because based on the earning asset base of -- based on the earning asset base that we have, that rotation is relatively small out of the securities book into the -- if we have loan growth in that 5% to 7% range, you're talking about a couple of hundred million dollars a quarter, right? So if we rotate out of securities for a portion or all of that, it's just not -- it's not that much to basically get a lot of lift in the margin, but you might see a basis point or 2. Karl Shepard: Okay. And then I saw in the deck a new branch in the Westfield markets. I'm assuming that was planned ahead of the merger, but just we talked a little bit about Chicago expectations and investments there, 2 questions ago. But anything in Westfield markets to flag? Archie Brown: Yes, Karl, this is Archie. So specific to that branch, that was actually a branch underway when we were negotiating and announcing a deal, they already had that branch under construction. So we just completed. Actually, we opened it up as a First Financial branch prior to the conversion which is, I think, a good thing from training and letting people get to use -- kind of get to introduce to First Financial. With regard to other things we're doing in the Northeast Ohio market, I think altogether, so I think there's about 4 FTE added because of Wadsworth that branch. I think we've added about another 9 producers whether they be on the commercial, small business side, wealth, private banking. We've added about 9 producers to that market. to kind of round out all the things that we do. That's all baked into the expense numbers as well. But we think there's upside of adding the additional production capability. Operator: Your next question comes from the line of Brian Foran with Truist. Brian Foran: Your capital has rebuilt pretty quickly here, which is a good problem to have. I mean, in some ways, maybe just an open-ended question on what you're thinking going forward. I think you mentioned maybe evaluating more buybacks. And then as part of that, if there's anything notable to share around Basel III or around how you're thinking about the binding minimum between CET1 and TCE and things like that. But yes, really just kind of focused on the excess capital and what you're thinking for the next 12 months or so? James Anderson: Yes. Yes, Brian, this is Jamie. So yes, if you -- we are compounding capital at a high rate just based on our earnings level. And if you look back pre Westfield and BankFinancial, I mean, maybe to a lesser extent, BankFinancial. But if you look back pre-acquisition, at the end of the third quarter, and I'm talking about our tangible book value per share we're basically back to where we were now pre-acquisition level. So what we were very pleased with. So we are piling in at this earnings level, a lot of capital. And really, when you think about it for us, I mean our regulatory ratios are fine. We have a lot of cushion there. Typically, our constraint when we look at -- like if we look at an acquisition, our constraint typically is in the TCE ratio. We're close to 8% now, just below 8%. Obviously, we have some AOCI impact in there. And then rates moved against us a little bit in the first quarter to -- or that would have been even a little bit higher. So our typical constraint is to TCE ratio. We would like to be that -- like to have that above 8% and we're getting there pretty quickly. But when we talk about buyback and looking at that, obviously, we're going to be mindful of price and the earnback on that -- on a buyback and looking at that TCE ratio. But we are -- so we have a -- when we look at the common dividend, we have a payout ratio in the low 30s, call it, 30% to 35% now based on our earnings level post acquisition. So we wanted to get a couple -- a quarter or 2 of impact in from the acquisitions to see where we were from a capital ratio standpoint, where everything was going to fall out -- and then so we had the Board approve the share buyback. We haven't done any buybacks in several years, mainly because of, well, several things. We've had -- we had a couple of nonbank acquisitions during that -- so we haven't done a buyback since '21. And we had a couple of the nonbank acquisitions in there, which aid up a pretty significant amount of capital for us because they were all basically all cash deals. And so all goodwill aid into the TCE ratio. So we think we're at a level now, especially with our earnings, the amount of capital we're bringing in, where we can look at buybacks and potentially, I think what we're looking at is looking at that total payout ratio, again, which now with just the common dividend is in the low 30s of increasing that somewhere in that 50% to 60% range. And so if you do that math, the other -- obviously, the other piece of that is the buyback. So you're talking about another 20 to 30 points of where the buyback would play into that. And then -- but that we're -- I don't know if we're saying we're guaranteeing we we're going to do that, you could probably see us execute some on the buyback. It would be dependent on some other factors, potentially macro factors and then we would -- if we see a strategic M&A deal, we would prioritize that in front of the buyback. But yes, I think absent that, I think you would see us start executing on the buyback. Brian Foran: That's great. If I could ask one follow-up. The CRE paydown discussion was really helpful. I think the last point you made was seeing some pricing and structure that you don't necessarily want to match. I wonder if just anecdotally, kind of at the aggressive end of the market, could you share where you're seeing yields or spreads get to? And are there any particular points in structure that you're seeing people give on? Is it an LTV thing? Is it a personal guarantee thing? What are the kind of things you're seeing in the market that you don't want to match? Archie Brown: Yes. This is Archie. I mean we had a deal that we were -- we thought we were within days of closing. It's like a $25 million or $30 million transaction. We thought we were in days of closing and one of the large regionals had been competing on it. And then, I guess, when they realized they had lost it, they came back and basically eliminated the covenants. So it wouldn't even change and just eliminated the covenants. So we're seeing that. Certainly on a fixed charge coverage ratio, those numbers may be coming down. It's those kind of things in particular. Our pricing is aggressive also, I may have mentioned earlier, but certainly sub-200 basis points of spread, 170, 180, in some cases, lower for some commercial, really high-quality commercial deals even lower on spread. So it tends to be really aggressive pricing, loosening up some of the coverage ratios would be probably the primary areas we're seeing it. Brian Foran: All right. Hopefully, it's not true with swooping in with no covenants. Archie Brown: Yes. Well, I think the point here too is, I mean we're -- I think everybody is excited about activity and wanting loan growth, and we want it too, but we don't want to give our skis. So we're going to get growth, but we need -- we want it to make sense, and we want to be happy about it 2 years from now. Operator: [Operator Instructions] Your next question comes from the line of Brendan Nosal with Hovde Group. Brendan Nosal: Maybe just starting off here on some of the -- just the overall balance sheet. It looks like there's some pretty big discrepancies between where spot balances were for kind of loans, cash and securities versus average balances for the quarter, and I guess there's a lot of noise. So I guess, can you fill us in on when the BankFinancial loan sale occurred during the quarter? And then where do you see overall average earning assets landing in the second quarter? James Anderson: Yes. Great question, Brendan. This is Jamie. So the loan sale closed on at the end of -- the very end of the quarter, it closed on March 30. So when you look at our cash and securities we had call it, roughly $400 million sitting in cash, not in securities, it was sitting in cash at the end of the quarter. And so that $400 million-ish we will not put that to work in the securities portfolio. We will kind of slowly let higher cost either borrowings or deposits or broker deposits run out, and we'll fund that with the cash from that loan sale. And then so when you're talking about earning assets, the earning asset base for the first quarter kind of spot at the end of the quarter was around $19.7 million -- around [ $9 million to $15.7 million ]. So if you take that $400 million out sitting in cash, I guess, it's sitting in interest-bearing deposits at banks. So that will come out, and then you'll start to see again, with the loan growth that we guided to, if that is -- again, if that's in that 5% to 7% range, you're talking about a couple of hundred like $200 million a quarter. Our plan is to fund about half of that with cash flows from the securities portfolio and then the rest, we'll grow the earning asset base. So if you're talking about maybe $100 million or so increase in earning assets each quarter. Does that make sense? Brendan Nosal: Yes. Yes. And then just I guess there's still a bit of a discrepancy on my end of just kind of where that number will land in the second quarter just with the moving pieces. Can you just maybe help a little more on kind of where [ AAAs ] land. James Anderson: Yes. So you're talking around $19.5 million. Brendan Nosal: Okay. All right. Fantastic. Maybe turning back to the margin just kind of unpacking the core NIM ex accretion versus the accretion piece. I think you had 10 basis points this quarter of fair value accretion. Just kind of curious when you kind of look at the path for that, what does that number look like? James Anderson: Yes. We think that will be relatively steady at that 10 basis points. Obviously, it could move around if we get either slowdown, and it's all based on the amount of payoff/prepayments that we get on that portfolio. But somewhere around that 10 basis point range in that -- and the dollars would be around that $4 million to $5 million of accretion income. Brendan Nosal: Okay. Perfect. Last one for me here. Just when you kind of look out at growth expectations for the balance of the year, can you kind of dissect that between the core commercial bank versus your various specialty businesses? Archie Brown: Yes, this is Archie. So when you say the specialty, are you meaning core versus like specialty including Summit and Oak Street, things like that? Brendan Nosal: Yes. So yes, when I say essentially Oak Street, Summit, Agile, those books versus kind of the traditional commercial bank. Archie Brown: Yes. I mean it's the top of my head, but I'd say it's slightly tilted towards the core commercial. Agile is going to grow, but they're going to grow. It's just the base is not that huge, and they'll -- if they grow I can't recall now $20 million, $30 million. Summit it will grow, but their amortizations have picked up, so their growth rates are just not as strong as they used to be. So specialty is contributing -- but I would say we're talking commercial core commercial consumer is going to be, as you said, 50% to 60%, maybe 65%. James Anderson: Yes. This is Jamie. Yes, it's about -- I would say it's about 2/3, 1/3. And then Agile, they have a -- the second quarter is their big quarter for growth. Yes. Operator: I'll now turn the call back over to Archie Brown for closing remarks. Archie Brown: Thank you, Kate. I want to thank everybody for joining us today and following along our progress during the first quarter. We look forward to talking again in the second quarter. And hopefully, we'll be sharing even more good news with you. Have a great day. Have a great weekend. Bye now. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Procter & Gamble's quarter end conference call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Chief Financial Officer, Andre Schulten. Andre Schulten: Good morning, everyone. Joining me on the call today are John Chevalier and Keri Cohen, our Senior Vice President of Investor Relations. I will start with an overview of results for the third quarter of fiscal '26 and then discuss our progress on near-term business interventions and longer-term transformation efforts. I'll close with guidance for fiscal '26 and then we'll take your questions. As we expected, we saw a solid acceleration in top line results in our fiscal third quarter. Bottom line results reflect the strength of the top line progress with partial offsets from incremental investments in the business and energy cost impacts from the conflict in the Middle East. Taken together, we remain on track to deliver within our guidance ranges for the fiscal year. Organic sales increased more than 3% versus the prior year. Volume increased 2 points, pricing was up 1 point and mix was flat for the quarter. We delivered broad-based growth across the business with each of our 10 product categories growing organic sales. Skin and Personal Care grew organic sales high single digits. Hair Care, Family Care and Home Care grew mid-single, Personal Health Care, Oral Care, Fabric Care, Baby Care, Feminine Care and Grooming, each grew low single digits. Growth was also broad-based geographically with each of our 7 regions growing organic sales. Focus markets were up 3%. Organic sales in North America grew 4%. Volume was up 3 points, driven by improved consumption and trade inventory dynamics. We saw a benefit from base period trade inventory destocking and a modest help from a current period trade inventory increase late in the quarter, driven by Easter timing. Price/mix added a point of growth. The Europe region was up 2%, led by enterprise markets being up 6% and modest growth in focus markets, led by the U.K., Italy and Spain. Greater China organic sales grew 3%, continued growth in what remains a challenging consumer environment, Pampers and SK-II led the growth, each up double digits. Enterprise markets in aggregate grew 5% for the quarter. Latin America organic sales were up 5%, with Mexico and Brazil each up high single digits. Organic sales in Asia Pacific, Middle East, Africa enterprise region was up 4%. Global aggregate market share improved to in line with prior year with positive trends through the quarter. 26 of our 50 -- top 50 category country combinations held or grew share for the quarter. On the bottom line, core earnings per share came in at $1.59, up 3% versus prior year on a currency-neutral basis, core EPS was in line with prior year. Core gross margin was down 100 basis points, and core operating margin was down 80 basis points versus prior year, strong productivity improvement of 330 basis points was offset by healthy reinvestment in innovation and demand creation. Currency-neutral core operating margin was down 70 basis points. Adjusted free cash flow productivity was 82% and we returned $3.2 billion of cash to shareowners this quarter, $2.5 billion in dividends and over $600 million in share repurchases. Earlier this month, we announced a 3% increase in our dividend, continuing our commitment to return cash to shareowners, and this marks the seventh consecutive annual dividend increase and the 136 consecutive year P&G has paid a dividend. In summary, this was a solid quarter of progress. Positive sales and share trends and earnings growth in a difficult environment. Geopolitical dynamics have thrown new challenges in front of us, but we will continue to fully support the business to maintain the momentum that we are creating. As we move forward, we remain committed to the integrated growth strategy, a portfolio of daily use products and categories where performance matters. In these performance-driven categories, we must deliver irresistibly superior products across the product itself, the package, the brand communication, retail execution and value. We continue to drive productivity with multiyear visibility to fund innovation and demand creation and to mitigate cost headwinds. Constructive disruption is key to staying ahead of and to creating emerging trends and opportunities in our fast-changing industry. Finally, an organization that is fully engaged, enabled and excited to serve consumers and to win in the marketplace. Now P&G's point of difference. Our competitive advantage comes from outstanding integrated execution of these strategies across all activity systems in the company and from anticipating what capabilities are needed next. While the core strategy remains constant on last quarter's call and at the CAGNY conference, we outlined 3 major changes in the landscape around us. media fragmentation and changing consumer media preferences are affecting how consumers are collecting information about our categories, including platforms like social media, retail, media and AI portals. The retail landscape is changing, more concentration, but also brand proliferation. Retailers are becoming media platforms and media platforms are becoming retailers. Third is inflation across food, energy, health care and many other areas of spending has taken a toll on consumers and how they assess value. Recent geopolitical events have elevated this to a new level of concern. In short, the consumer path to purchase is changing every day, and we expect an even more intense pace of change in the next 3 to 5 years. The interventions and investments we're making in P&G capabilities to adapt to these changes are beginning to bear fruit, strong innovation supported by sharper consumer communication and retail execution. A few examples. Building on the success of Dawn Powerwash in the U.S., Fairy Skip the Soak in the U.K. is a great example of deep consumer insight that's driving innovation. Consumer research showed us that more than 70% of U.K. consumers soak dishes before washing. With this insight in mind, we created the Fairy Skip the Soak idea, which instantly and intuitively helps consumers understand what the product is and what it's for. Integrated superiority across all vectors, where the product name inspires the packaging, in-store execution and communication, all supported by superior performance that delivers on the promise. Skip the Soak drove Fairy brand household penetration to 61%, up 5 points in its first year. Mr. Clean continues to innovate on its core proposition and solving more cleaning jobs with new additions to the portfolio, core and more. The brand has launched new innovations on the Magic Eraser platform that improves the longevity with a dense form and a wider micro scrubbing structure that now last 2x longer. We restaged the packaging to use room and mass-focused names that clearly signal where to use the Eraser. At the same time, we launched Mr. Clean shower and top scrubber to address consumers' #1 most hated cleaning chore, shower and tub. Mr. Clean Shower & Tub scrubber delivers a quicker, easier and deeper clean with the power of the Magic Eraser, a sturdy grip handle, built in squeegee and a pivoting head for hard-to-reach areas. The results, Mr. Clean is winning consumers and driving category growth, delivering 18x its fair share of the bath cleaning category growth since launch. Germany Pantene identified an opportunity to improve brand and product superiority awareness by capitalizing on media landscape shifts. The increased investments in social media and influencer partnerships including top German beauty opinion leaders, hair experts and brand events, including talk-worthy local events like the Oktoberfest and Berlin Fashion Week. The impact earned consumer earned influencer posts grew 4x and total reach tripled despite a 20% reduction in media spend. Pantene value share in Germany is up 60 basis points versus a year ago and accelerating. The other examples we've discussed recently also continued to deliver strong results, including Greater China Baby Care, Mexico Fabric enhancers, Brazil Hair Care and U.S. Personal Care. Finally, site boosted liquid detergent in the U.S. continues to deliver strong results, initial weeks in the tight EVO launch are on track with our high expectations. While we work to improve our near-term results, we're also making progress on the longer-term reinvention of P&G capabilities, the next phase of constructive disruption that will create and extend our competitive advantages in each element of our strategy. The way to break through consistently is to build the strongest brands in the industry. P&G has the unique strength and capabilities to redefine brand building to deliver consumer-relevant superiority. First, we are leveraging our large iconic brands with huge consumer bases and all the data we gather. We are now scaling the integrated data platforms and the technologies that will enhance our team's ability to mine this data for insights that lead to new product innovations, brand ideas, performance claims and marketing campaigns across all relevant consumer platforms. Next, we are driving our unique set of innovation capabilities, substrate technology, formulaic chemistry, devices and biology to deliver breakthrough solutions in every part of the business. Third, we have tremendous supply chain capability. Supply Chain 3.0 is driving a more complete system connection from purchase signal to our production planning and material ordering to ensure consumers find the product they want each time they shop. We know how to automate, digitize and autonomize our operations. And more importantly, we have qualified a financial framework to generate strong returns on these investments. Our innovation and supply capabilities are key enablers to win in the volatile market we operate in today. Connecting R&D, supply chain and procurement allows us to adjust sourcing optimized formulations and qualify alternative supply faster and more effectively than ever done before. It took years to build these underlying platforms and capabilities, and we are now in full scaling mode across the company. The next step is to connect the dots to integrate the pieces. We will close the loop, and we believe this will create a new S-curve for growth and value creation centered around our consumers. We are confident in the short-term progress we're making, and we're excited about the mid- to long term as we leverage our strength at unique capabilities to set us apart from the industry. Moving on to guidance. As we saw in our press release this morning, we are maintaining our fiscal '26 guidance ranges across organic sales growth, core EPS and adjusted free cash flow productivity. However, where we will land within those ranges has become more uncertain given the geopolitical dynamics in the Middle East. We continue to expect organic sales growth of in line to 4%. We're seeing progress in most categories and regions, as you can see in this quarter's results. Underlying global market growth for our portfolio footprint is around 2% on a value basis, with a positive trend over the last 2 months. However, it's unclear how much higher gasoline and energy costs will impact near-term consumer spending in our categories. Also, as I mentioned earlier, the trade inventory increase we saw in March was driven by Easter timing and likely some protection against potential price increases or supply chain disruptions resulting from the conflict in the Middle East. We expect this to result in fourth quarter organic sales somewhat lower than third quarter. As a reminder, our top line guidance includes a roughly 30 to 50 basis point headwind from product and market exits as part of our restructuring work. Our bottom line guidance is for core EPS growth in line to 4% versus prior year. This equates to a range of $6.83 to $7.09 per share. This guidance includes a foreign exchange tailwind of approximately $200 million after tax, unchanged from our prior outlook. We now expect a headwind of approximately $150 million after tax for the fiscal from a combination of commodity-linked cost inflation, feedstock exposures and logistics disruptions resulting from the conflict in the Middle East. Almost all of these increased costs will be in the fourth -- fiscal fourth quarter. Our teams are doing a tremendous job to protect supply continuity and to minimize cost impacts much of this work, such as rapid product reformulation and supply diversification is enabled by the advanced data tools and capabilities we discussed earlier. With the timing of these cost impacts, there is little opportunity to create short-term offsets within cost of goods sold. Likewise, we will protect our demand creation investments in the business to support our new innovation and maintain positive momentum. In fact, we've approved incremental investments in several businesses in the last month. Given all the above, we now expect full year EPS results to be towards the lower end of the guidance range. Our fiscal '26 outlook continues to call for approximately $500 million before tax and higher costs from tariffs. Below the operating line, we continue to expect modestly higher interest expense versus last fiscal year and a core effective tax rate in the range of 20% to 21% for fiscal '26 combined a $250 million after-tax headwind to earnings growth. We continue to forecast adjusted free cash flow productivity in the range of 85% to 90% for the year. This includes an increase in capital spending as we add capacity in several categories and as we incur the cash costs from the restructuring work. We expect to pay around $10 billion in dividends and to repurchase approximately $5 billion of common stock, combined a plan to return roughly $15 billion of cash to shareowners at fiscal '26. This outlook is based on current market growth rates, commodity prices and foreign exchange rates. Significant additional currency weakness, commodity or other cost increases, further geopolitical disruptions, major supply chain disruptions or store closures are not anticipated within the guidance range. We won't provide guidance for fiscal '27 until our next call in July. However, we understand investor concern about potential cost and supply impacts from the Middle East conflict. For perspective, the annual cost impact of Brent crude at around $100 per barrel is roughly $1.3 billion before tax or $1 billion after tax versus a pre-conflict oil price in the mid-60s. Again, this goes beyond direct commodity cost to include other upstream and downstream cost impacts that would hit our P&L. Regarding supply impact, we are hopeful the full flow of materials where we resume in the coming weeks. We continue to work closely with our suppliers and contract manufacturers to identify potential short-term risks. So far, our business continuity plans continue to perform well despite some force majeure declarations by our direct suppliers or by their upstream suppliers. No company will be immune to these effects. But this is an example of where our capabilities help us buffer the impact on our business. Our business teams have been developing multiple contingency plans to mitigate potential cost and supply disruptions. Underpinning each of these options is a commitment to maintain support for our brands and superior value for our consumers. We remain willing to manage some short-term pressure on the bottom line to come out of this period with stronger brands and business momentum. On the other side, this has proven to be the right path in the past, and we are confident that it is now. In summary, we continue to believe the best path to sustainable balance growth is to double down on the strategy, stronger integrated execution to delight consumers with superior products at superior value. Challenging markets like the ones we compete in today are an opportunity for P&G to step out from the pack and to lead. We have the brands, the tools, the capabilities, and most importantly, the people required to win. We're confident in the short-term progress we're making. It won't be a straight line, but we are moving in the right direction. We are building momentum, and we are excited about the long-term opportunities ahead. And with that, we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Steve Powers of Deutsche Bank. Stephen Robert Powers: Andre, you covered a lot of ground in your prepared remarks. But I guess as you look through the puts and takes and timing nuances, in the third quarter, how do you assess underlying progress on organic growth? And to what extent are you confident it could be further progressed into the fourth quarter and into '27? And I guess I asked that in the context of the $1 billion in after-tax cost headwinds that you mentioned have now built for the year ahead as well as the accelerated investments you've set in motion that I presume are also likely to carry forward. And so as you approach fiscal '27 planning with all that in mind, do you think productivity alone will be necessarily relied upon as offense to those factors? Or do you feel the building advantages and momentum you're building will allow for potential use pockets of incremental pricing should the need arise. Andre Schulten: Steve, thanks for the question. I have a great amount of confidence in the progress we're making on the growth side. The breadth of the progress is visible across regions and across categories. And if you drill a level deeper and you look at the individual plans that we are executing across the brands that are responding the fastest and the best, they show that our hypothesis underlying our business model is working. When we innovate, when we deliver a better solution for our consumers and our categories, they respond. The prime example for me is the tight liquid intervention we made again, a huge business in the U.S. and the formula upgrade we delivered was the biggest upgrade we made in 25 years and just showing that performance improvement to the consumer at the same price, leading to mid-teens growth on a business like that is impressive. We're seeing the same on the beauty category. SK-II growing 18%, just continuing to invest in the brand proposition, the innovation on the super premium side with different forms is gaining momentum and just great execution. The examples we gave -- the other examples we gave are just solidifying that same model. So I feel very strong about the progress because I also see the amount of brand country combinations that is still to come will only increase the momentum. So I feel very good about the diligence the team is applying really understanding what is the intervention we need to make across product, package, communication, go-to-market and/or price to give the consumer the value that they will respond to. And I feel very good about our ability to create excitement with the consumer when we innovate into new areas. The confidence in that model comes with conviction that we want to continue to invest behind it. The noise, I would call it, from the commodity exposure is significant. As you know, $1 billion after tax is nothing to sneeze at from a headwind standpoint. And we have a lot of work to do to work through the supply chain side and the cost side. I think you've seen us excel in that space. The last time when we had to do this coming out of COVID, with the supply chain crisis. I think the team even further sharpened their skills and reformulation. We further diversified our supply base. We further diversified our flexibility on our formulations and we further sharpened our understanding of what our short-term productivity levers that we can pull. And honestly, there's a lot of room in our P&L to drive short-term productivity and that will be the first place to go. Will it be sufficient to offset the full $1 billion after tax, likely not. With that, we continue to innovate. And pricing -- selective pricing with innovation where the consumer tells us their interest is high, their willingness to pay for better performance is there will be the other part of the offset that we're driving. So we're building those plans, and I'm confident it will leave us in a reasonable place from an earnings growth standpoint, while not jeopardizing the investment in sustained organic sales growth and share growth, which honestly, we're just delighted to see the ship turning this quarter. Operator: Your next question will come from the line of Dara Mohsenian of Morgan Stanley. Dara Mohsenian: Just 2 follow-ups on Steve's question. Just a -- can you discuss if you can see any advantage on relative sales performance versus competitors here as you look at the post Iron conflict situation from a supply chain or sourcing standpoint, is that something you think can be significant? Or is it more modest in nature? Obviously, it's a fluid situation, but any thoughts there would be helpful. And just be, you mentioned progress in a lot of areas on the growth side, whether it's certain brands, et cetera, with the innovations you put in place, your spending behind the business in Q4. The first part of the question, you've got some potential competitive advantage here post the Iran conflict. Are you comfortable that you're back to organic sales growth outperformance versus your categories going forward as we look out beyond fiscal Q4? Do you have visibility around that? Just your thoughts around the potential timing of sort of broader outperformance across the portfolio versus some of the areas where you're seeing progress already would be helpful. Andre Schulten: The supply chain side is too early to assess. But if history is any indicator for what's to come. Our supply chains are generally resilient. We have flexibility. We have ability, as I said, to reformulate and our retail partners tend to lean on us to be their reliable partner in these times, and we've managed not to let them down. We've seen other players struggle, especially if it's long supply chains, especially if it's heavily contract manufactured supply chains. So again, if history is any indication of what's to come, I feel relatively good about our position. And if anything, I have more -- even more confidence if that's possible in our supply chain team, procurement team, our R&D teams who are just on top of every single element of this every day. Outperformance versus the market is absolutely what we want to deliver. We've done it in quarter 3. We want to do it in more quarters. Will it be in every quarter, I don't know. There are many drivers to this, but I feel that we are getting to a point where there's enough mass in the interventions we've made we've hit enough critical components of the portfolio with the right innovation, with the right interventions across the vectors that we will see continuous progress every quarter. Again, can I promise that every quarter will outperform the market? No. But I'm more confident than I've been in a long time that we will go exactly in that direction. Operator: Your next question comes from the line of Lauren Lieberman of Barclays. Lauren Lieberman: I wanted to check in on China. So China of 3% this quarter. Just if you could give us a sense for how the market performed in your categories? And then you called out the tremendous acceleration in SK-II. So I just wanted to talk a little bit about what you're seeing in the beauty market in China, in particular. Andre Schulten: China delivered 3%, as you've seen in the quarter. So last 3 quarters, 5%, 3%, 3%, very good progress. And again, I think the fundamental reinvention of the China model all the way from go-to-market portfolio communication model, innovation model, I think, is starting and is continuing to pay dividends. The market is still difficult. Consumer confidence is still low and down versus the normal equilibrium. The market growth is still negative across most channels. And the only growth you see is in online and into in yen. So the market content -- context is really still the same. The positive side of China is the consumer is very discerning and the consumer is very engaged in our categories. And when we deliver true superiority, they are willing to go there. And that's what you see in SK-II. SK-II was up 18% in total. I think China was up 13% in the quarter. China travel retail was up significantly. And you see exactly that when the consumer sees excitement, value something that they enjoy, they will go there and pay the premium. The same is true in Baby Care, I think 19% growth in Baby in the quarter. And for the exact same reason, best-in-class consumer understanding product performance and innovation that is in line with that with the great communication model gives us growth in one of the most difficult categories. Great visibility, I think, to driving that model across more categories, more mature thinking around the channel approach that we take between online to yen and our brick-and-mortar channels. So I see a lot of upside in the China market because of that maturing thinking in strategy and execution. But again, our closes are always closed. China is China. So a lot of volatility to be expected, but I feel very good about where the team is headed. Operator: Your next question will come from the line of Peter Grom with UBS. Peter Grom: Andre, I know we're not getting guidance for '27 today. But in your response to Steve's question, you touched on productivity and pricing with innovation as offset to inflation and that it would put you I think you said in a reasonable place from an earnings growth standpoint. And so I don't know if I'm reading too much into this, but I just wanted to clarify that despite these headwinds and a commitment to invest in the business but you still see a path to earnings growth next year based on where things stand today. Andre Schulten: Thanks, Peter. I'm -- look, I'm very happy that I don't have to give guidance today because what do we know, what the world looks like 3 months from now. With what we know today with $1 billion headwind and with the assumption that we can manage through the supply side of things well, we will do everything, everything that we can to do exactly what you're describing. But it's a work in progress. It's a work in progress on the macro side. It's a work in progress on pushing the productivity lever as hard as we can, and it's work in progress on honestly, a lot of tough choices that we can make within our P&L. The one thing we will not compromise on is the investment in the parts of the business that are showing momentum. So I won't give you any more detail than that, but be reassured the team and the work that is happening right now has the sole objective to deliver exactly what you're describing. Earnings growth even in light of these challenges, without sacrificing reinvestment on the business without sacrificing or jeopardizing the momentum we're building. Operator: Your next question will come from the line of Peter Galbo with Bank of America. Peter Galbo: I just maybe wanted to click in a bit more. I think you were very deliberate in your comments about increased investments across several kind of country products combinations. I believe you said over the last month. And we've heard a little bit about [indiscernible] in the U.S., SK-II obviously in China. But maybe you can give us a few more just where the incremental investments are really going in from a country product combination standpoint as we start to contemplate Q4 and into '27? Andre Schulten: Peter, look, you will understand, I won't give away where we're going in terms of the innovation investment and the strengthening. But it's the areas you would point out have opportunities. So if you look at Baby Care in the U.S., we're growing share at a global level on Baby Care. But the U.S. is not performing where we want it and that requires intervention. The plan is extremely strong. The conviction of the team and our conviction is very high. And as we said, we'll continue to drive interventions and innovation in that space. The momentum that the team is building in Beauty Care is fantastic to see. And talking to the team and the number of ideas they have to further build that momentum. I have high confidence to give them the flexibility to continue to invest with the innovation and the commercial ideas that they have. Fabric Care, we just launched Tide Evo, very strong execution in market, retail support is outstanding. So again, an area of significant upside and a significant reason to believe that we can accelerate. And I could keep going, Peter, but it's basically what I said is we have a bigger and bigger share of the portfolio where we either have interventions that are already working or we have a very clear plan in place with conviction that investment will pay out and deliver, and that's what we'll execute over time. Operator: Your next question will come from the line of Chris Carey with Wells Fargo Securities. Christopher Carey: Andre, I wanted to ask about the concept of pricing power and whether you think that this is different for perhaps the consumer staples industry, but more specifically for P&G. You did mention that there was potentially some front-loading of inventory levels in the quarter as retailers potentially prepared for do pricing for inflation. I don't know if I heard that wrong, but nevertheless, it does imply that retailers are aware that incremental pricing is a possibility for this new round of inflation. The reason I bring that up is because I feel a lot of questions around consumer staples companies, including P&G, potentially losing the concept of pricing power into new inflationary cycles with so much inflation over the past 5 to 6 years. I wonder if you could just give some thoughts on pricing and whether you think pricing as a concept is different for the sector or for P&G than what it has been more historically. And then just as a follow-up, just from a competition, you have mentioned in recent earnings calls that competitive activity has heated up now that inflation is moving higher, are you seeing competitive activity start to ease as competition needs to become a bit more rational given cost structures? Andre Schulten: Thanks, Chris. Look, there's a natural tension in these situations. You have broad macro cost headwinds which are hitting everyone in the industry, which generally is demanding pricing. So typically, when you see these headwinds, the entire industry will move up in terms of pricing. And then on the other side, you have the reality that the consumer has been hit with cumulative inflation beyond anything that they've seen in recent history. I think the opposite ends here, the way to square that in our mind is innovation. Consumers do respond well if we give them a truly better proposition in the categories that we're in because they see there is upside. There is still upside in many of our products to make them better deliver a better experience and delight the consumer. And if we do that and we take a little bit of pricing with it, consumers respond. The other reason why that works is it generally comes with a choice for the consumer because we won't price across the entire portfolio just a straight line. But we give the consumer choice. We give the consumer choice to either pick the innovation with a bit of pricing and the promise of better performance or stick with what they know. We have a very well-developed vertical portfolio, as you know, both from a brand tiering standpoint and from a price point standpoint. So I don't think we've lost pricing power I think pricing power has to be earned and the way to earn pricing power is to combine pricing with truly a delightful experience for the consumer. And if we do that, and we're honest with ourselves, instead of just assuming we can take a straight 5% price increase across everything, I think it will work. So that's the job at hand for the team. And luckily, again, we're in categories where that generally works because these products are products where you see as a consumer, you use them on a daily basis and you know whether they are delighted or not. And you know whether the product you just bought is better than the one you had before, and therefore, it's worth the price. On the competitive side, too early to say, to be honest. I think this is just a few weeks. And I think everybody is still -- at least we are grappling with what reality are we looking at. You would expect some pull back, hopefully, in terms of promotion activity but it's too early to observe. What I can tell you, the data we have is still relatively stable, but promotion activity in Europe and the U.S. as the 2 indicators with the closest read are slightly increasing back to pre-COVID levels. So with the data read that we have, nothing has changed yet. We'll see where this goes. Operator: Your next question will come from the line of Robert Ottenstein of Evercore. Robert Ottenstein: First, just a follow-up. Can you disaggregate the volume number in the quarter for the Easter impact the inventory drawdown last year and SKU rationalization that you were planning. So we kind of have a better sense globally exactly where volumes are. And then perhaps building on that, maybe give us an update on the restructuring program that you announced in June of last year in terms of head count reorganization and kind of rebalancing some of the functions and the people and responsibilities. Andre Schulten: I'll keep it simple because into every effect on the base period versus base period of that base period, we get confused. The simple answer I give you, I think the pull forward from Q4 into Q3 is about 1 point. So we would have rounded to 3% organic sales growth instead of having a strong 3%. That's my easy answer and the IR team can give you all the gory details behind it. But think about it, the underlying growth, in my mind, would have been about 3%, but rounding up. With the pull forward, we had a strong 3%, the net impact about 1 point of volume forward from Q4 into Q3. The restructuring program is very well on track. Multiple components. We have the portfolio part of the restructuring with the go-to-market changes in Bangladesh, Pakistan, the portfolio choices across Asia Pacific, all of that is being executed and actually slightly ahead of the program objectives. The head count reduction is being executed in line with trajectory. So we're on track to deliver 15% nonmanufacturing head count reduction over 2 years with a significant portion of that being delivered this fiscal year, by the end of this fiscal year. The organization programs, look, our objective really is, as we said, to enable our organization to be closer to the consumer and be more empowered than they are even today. as the next phase of organization design. We want smaller teams that are empowered to make decisions that have the data to make those decisions without a lot of leg work and that are freed of internal work processes and leg work that they otherwise would have to do. That technology bundle is being rolled out right now. So data access, data analytics, reporting capability, I would call that toolbox, number one, rolling out. Second toolbox, how do we enable those teams to be better at consumer-facing work. So think about concept ideation, content creation, pushing that content out across all platforms, measuring it, reworking it. That's toolbox #2, that is being scaled as we speak. Number three, the whole innovation part that's already being used. So think about molecular discovery suite think about perfume discovery, digital twins to qualify innovation, that's already well in place. And then the fourth component of the intervention is automation. So we talked about unattended shifts. We now have those programs rolled out across 9 categories. And again, the feedback from the plant organization to skip the night shift is great. We are upskilling those people to deliver a higher order task in the factory that is working, and we have multiple automation programs qualified that we are rolling out. So I think consistent progress on the organization design side and consistent progress on the technology data site that is underpinning that progress on the organization. Operator: Your next question comes from the line of Kevin Grundy with BNP Paribas. Kevin Grundy: Congrats on the progress in the quarter. Andre, I want to come back to gross margin, not to beat a dead horse here, but kind of pull together some of the threads that we've talked about, this is around ability to price input cost, productivity, kind of controlling what you can control for the organization. The $1.3 billion pretax headwind, thanks for sharing that. That's helpful. Understanding the volatility of the environment and a lot to sort of digest here around pricing decisions and consumer demand, et cetera. But just to play this back, it sounds like your base case is the gross margins will likely be down, I would say, looking out to next year, given that cost headwind and May using sort of reasonable assumptions implied kind of a lower pricing contribution. I think getting back to Chris' question, like is it different, this may imply like typically the CPG companies are kind of able to price through this. Is that a fair take? The base cases today would be that gross margins are down and maybe there is understandably a little bit more trepidation around pricing given the K-shaped economy, et cetera, et cetera. So I just want to play that back to you and get your take. Andre Schulten: Thanks for the question, Kevin. Look, the honest answer I'll give you is I don't know. The second part of the answer is I don't really care. Not because I don't care about the financial impact. But what is more important is what are we doing within the activity system that drives top line growth and bottom line growth. that's what ultimately we want to drive and then the gross margin and the margin are outcomes of that. So if we continue to drive great productivity, which we will check, if we continue to drive innovation that's winning even though it's gross margin dilutive, check. If we continue to drive investment in the right trial driving activities on the sales deduct side, check. So if all of those things happen and the gross margin is down, I feel great about it because it will drive top line growth and it will drive earnings growth. We will not let gross margin dilute because we're not delivering productivity or we're investing in things that don't drive top line and underlying earnings growth. But where exactly that balance comes out for me is very hard to predict and honestly not that relevant as long as the underlying activity system does what we need it to do. Operator: Your next question comes from the line of Filippo Falorni of Citi. Filippo Falorni: Andre, I wanted to ask about your enterprise market business. I think you mentioned 5% growth in the quarter and 4% in Asia, Middle East and Africa. So any impact that you saw within the 4% from -- in terms of demand from the conflict in the Middle East. It seems pretty minimal based on the reported results, but are you expecting some further impact in Q4? And then also related to this, in terms of like some of the Southeast Asia countries and India, countries that rely more on oil from the Middle East. Are you seeing any demand impact in those regions? And how do you think that evolves going forward? Andre Schulten: Yes, Filippo. Look, every enterprise market cluster has been performing very well. As we said, Asia, Middle East, Africa, up 4%, Latin America up 5%, Europe enterprise markets up 6%. So it's encouraging to see the breadth and the consistency of the growth. I -- as you already pointed out, the Middle East in it of itself is a relatively small part of our global sales, about 2%. And I can only thank the team in the Middle East. Our Dubai-based teams and Middle East-based teams are doing an amazing job showing resiliency and professional commitment to keep the business running while dealing with the situation. So big thank you and shoot to those teams. So the direct impact on sales, no. Actually, the business is doing well still. And for the rest of the effects, the only thing I can tell you is the upstream supply chain is more exposed in the Southeast Asia region. So that's where we have to do more work to ensure that we can continue to supply have all the feedstock available, et cetera. So that's a heavy workload there that our supply chain team is mastering. It's too early, I think, to expect any consumer demand impact from the conflict. So we're not seeing that. All markets are growing strongly. India is growing. So I think that's the question where we have more visibility next quarter and again, part of why I'm happy not to give guidance today. Operator: Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I have a quick question on Baby Care, which appears to be turning following declines over the past year. You did highlight unit volume growth in certain markets. So curious to hear how much of that is end market led growth versus market share gains? Also, can you talk about the interventions you've made to drive a turnaround in that business? And I guess, how should we think about the momentum going forward? Andre Schulten: Thanks for the question, Bonnie. Baby Care at a global level is growing share. 5 of 7 regions are growing share. And the biggest region, not growing share is the U.S. So that's where the focus is. The regions that are growing are further ahead in truly driving superior propositions. It's coming back to the same playbook. We've talked about China earth rates down, market volume down, hundreds of competitors were growing 19% in the quarter. Why? Because we understand the consumer drive the innovation, have the execution. Same is true in the other 4 regions that are growing. That's the opportunity in the U.S. So that's where you see investment in the product. You see investment in how we communicate that benefit in a more relevant way to our consumers in the U.S. and trial building activity to ensure that we get that product into moms and dads hands and on baby's parts as fast as we can. The playbook is the playbook, and we know how it works. What we're in right now is the execution, which takes some time in baby care. It's a complicated manufacturing lineup, et cetera. But I'm very confident the team has the plan, and I'm very confident to put the money where that plan goes. Operator: Your next question comes from the line of Kaumil Gajrawala of Jefferies. Kaumil Gajrawala: As we're all working through the various puts and takes from the geopolitical issues, I think you mentioned very specifically in your prepared remarks, it's not just commodity costs, but all the other sort of things that come with it as part of that $1 billion. Can you maybe just talk a little bit more about what those items are just so it's something that we can watch and track a little more closely? And then on tariffs, we're starting to see some public companies, especially in their filings, talk about potential tariff refunds. Curious where you stand on that. Andre Schulten: [ Nick ], the cost impact is broader than just commodity. Obviously, a lot of feedstock. Basically, the majority of our feedstock is petro-based. So it's input NAFTA, you name it input costs into our suppliers' production system, part number one. Part number 2 is sourcing changes that we are making, either because of cost or availability generally mean less effective sourcing lanes which means higher transportation costs, longer lead times, higher inventory levels, including outside warehouse. The third component is reformulation. When materials are not available, we reformulate into others, which might come with upcharges. In many cases, they do. because we don't want to dilute the performance of the product. So we have to go to an alternative formulation that generally comes with higher cost. The last component is just finished product logistics again, diesel costs going up. That's the most immediate impact you see in quarter 4, that immediately passes through to the P&L in terms of higher logistics and transportation costs. Force majeure, again, we see some suppliers just not being able to supply at all. We see some manufacturing facilities that have been compromised by the war. And so it's not just the oil price, it's also the availability of product and input costs that is then driving the exact same comments that I just gave you. Tariff refund, look, we are following the process. The U.S. administration is beginning to lay out. Once that process is clear, defined and accessible, we will follow it. We have about $150 million after tax in refunds available from the IEEPA tariff. How much of that is recoverable or not, we'll find out. Operator: Your next question comes from the line of Andrea Teixeira with JPMorgan. Andrea Teixeira: Andre, you mentioned the recovery in volumes with innovation. Obviously, that has been remarkable. But I understand that you're also improving affordability in some areas. Have you been able to recover volume share in the most price-sensitive categories I believe you had some interventions in tissue in the U.S. And like you mentioned in Baby Care in some of the kind of price cohorts that you may be able to assist the low-income consumer. Can you talk to that, in particular in the context of the U.S. and also focus Europe. Andre Schulten: Andrea, I think the volume share gains in the U.S. are broad-based. It's a combination of the innovation launches we are driving. I was talking about tight liquid. That's a big component of volume share gain. Family Care is a combination of interventions made by the business, but most importantly, also period-over-period effect. Remember, we -- family care was the business that was heavily impacted by the port strikes in Q2. So you see that reverse effect coming through now, that's playing out in share and the growth rates. But we are very careful. Look, we always look at every component of what we know drives consumers purchase decision. Is it better for them to have a better product, better presented with packaging, with clear communication and execution in store. And if we think that will address the value outage that a consumer might see and not pick our products, we will go there. And that works in most cases, where it is truly an affordability aspect and we are, in relative terms, just too expensive, we will address it that way. And it is not a general theme. I can give you one way or the other. That is the difficult and very careful calibration we're making brand by brand and honestly SKU by SKU because in some cases, it might just be price point versus price per unit or price per dose. So -- but you see a combination of all 3 drivers, base period here in terms of share, value interventions we're making on the product and performance side and yes, selective interventions in either price point or just value per use. Operator: Your next question comes from the line of Olivia Tong with Raymond James. Olivia Tong Cheang: You've quickly obviously taken a number of actions to improve trial affordability. I mean it's early days, of course, but what's your read on the staying power of the volume lift it has had and could have going forward? And the 100 basis points of reinvestment in gross margin, was it fairly similar by division? Or did it vary materially across the divisions? And is that the amount that we should expect for the foreseeable future? Andre Schulten: Olivia, I think the staying power of the of the trial of the growth is strong because it's grounded in consumer insight, and it's again done at that very detailed level, with the right level of diligence to say, what is the outage. Will we get it right in 100% of the cases? No, but I think our hit rate is improving significantly, and that's why you see the pickup. And that's what we are tracking diligently. So Shailesh and I are sitting down with every business to track whether that is actually delivering against the expectations? And if not, what are the learnings we're taking, but we've done this now for 6, 8 months. And you can see as we cycle through these iterations, we get better and better at diagnosis, triage and then making sure we get the right interventions executed. The reinvestment type and level is really different, therefore, by business, by brand, by country. So I can't give you a standard recipe of this is what it looks like. It is different, not only by category. It is different by country, it is different by retail, it is different by SKU. The level of reinvestment give us until July. We are working through those plans right now. I don't want to give you a blanket answer. I think it really depends on the plans as we review them over the next 90 days and what we decide to go forward with and we'll give you more visibility as we get into guidance conversations. Operator: Your next question comes from the line of Robert Moskow of TD Cowen. Robert Moskow: A couple of kind of near-term questions and a clarification. Andre, when you talked about fourth quarter being lower than third, I just want to confirm that's in absolute dollars. And then I think in your prepared remarks, you talked about consumers pulling forward purchases as an inflation hedge. I thought that's what I heard. Maybe the trade is doing it. Can you speak a little bit more about that? Do you have any evidence right now that consumers are doing this to prepare for more inflation ahead? Andre Schulten: Let me start with the second part of the question. I think the pull forward, if anything, if you're a retailer and you're tuned to what's going on, you might have pulled in a little bit of inventory. But it's hard for us to really quantify that. On the consumer side, no, nothing. I don't think the consumer is loading pantries at this point in time, nothing visible to us. So I think the consumption side is actually stable. I think the inventory side, which we -- and again, I think I will give you all the glory details between base periods and loading effects. But I wouldn't say the price-driven loading is the biggest part of it. I think it's just base period, is a significant component of that. When I say Q4 might be lower than Q2, I think it's growth rate we're talking about here. So there's a point -- of shift, a point will come out of the growth rate that you all had anticipated for Q4. And that's the -- as I said, we would have rounded to 3% in Q3 instead of having a solid 3%. So that's the logic of the point to look forward I was talking about. Operator: Your next question comes from the line of Edward Lewis of Rothschild & Co Redburn. Edward Lewis: Andre, just wanted to look at sort of supply chain 3.0, which you've talked about. I mean I guess I sort of think of this as a kind of way you're deploying AI across the organization. And when I think about sort of your initial assessment of what costs might be on the cost headwinds heading into fiscal '27, how much of an advantage do you see already from what you're doing on AI in sort of rating that into a certain extent, if that's the right way to think about it? Or is it still too early to really see sort of significant benefits from the moves you're making around AI and supply chain 3.0. Andre Schulten: Look, I wouldn't call Supply Chain 3.0 AI. I think it's really applying technology that is available to us in our manufacturing and supply chain processes. Some of it is AI, but a lot of it is a lot more basic automation that we're driving. We are scaling the technologies across all categories. Again, we talked about unattended shift models that is rolling out throughout more and more categories and more and more plants. Unattended warehousing, including loading and unloading of finished product, pack and raw materials rolling out globally, real-time touchless quality rolling out across the corporation. All of that is embedded in the productivity commitments we've made, so the $2 billion to $2.2 billion, $1.5 billion of that in cost of goods. This gives us confidence that we can continue that level of productivity. And what we'll be pushing now is how much can we accelerate? How much can we accelerate that 2030 vision that carries the supply chain 3.0 endpoint in our mind. How much of that can we carry forward to help the situation. And I think that will be the conversation over the next 90 days and will inform part of our guidance. But we know -- we know it works, and we know what to do. We have the technologies available. It's about how fast do we roll them out. And I think that's where we'll push the envelope. Operator: Your final question will come from the line of Michael Lavery of Piper Sandler. Michael Lavery: I just wanted to come back to inflation mitigation and maybe a couple of parts to it. I guess just if the pressure is primarily oil price driven, and given the stretched consumer, how do you balance thinking about pricing responses versus just the volatility in something like oil prices? And then just on how to kind of think about the spending piece. This could be nitpicking your words. I want just clarify it. You said you wouldn't sacrifice spending on businesses that have momentum. Does that suggest potentially for businesses without as much momentum that maybe you would postpone interventions? Or is your thinking that should we hear you as any of those growth-focused investments would continue regardless of the inflation environment. Andre Schulten: Thanks for the question. Look, I think the volatility component of where is oil going to be is a reality that we understand. But that's why we are -- what we're trying to do is control our destiny. We control productivity. We control the choices that we can make in sourcing. We control innovation. So that's where we want to drive the majority of the recovery because if we price with innovation, no matter where oil is, it will be the right thing for the consumer because the innovation is worth the pricing that we're taking. So we're trying to address exactly what you're describing, which is decoupled as much as we can, the interventions we're making from the volatility we're seeing in the market. So it's the right answer no matter where this goes. Would it be perfect? No, but I think that should be the North Star that we're going after. Look, the very simple answer to your second part of the question is momentum versus investment. Every business leader's job is to create momentum. And so we need to create a business plan that gives us confidence that where we don't have momentum yet. We will deliver momentum within a very short period of time. And honestly, I have confidence that every 1 of our business leaders is doing that, and I see only increasing conviction that they are able to do it. So I don't think we're going to have an issue of -- we don't have enough opportunities to invest. We will have the right plans and then it's a matter of wise and sound resource allocation within that. All right. I think that was our last question. Thank you so much for your time. Again, I want to close out where we started, strong quarter. Thank you to the P&G team. We're building momentum. Will it be a straight line? Absolutely not. We're working through the headwinds that we have identified. We feel very good about our relative positioning to deal with those headwinds and we'll talk more, and I know you're looking forward to that about next year in the July call. Please don't hesitate to reach out with questions. Our IR team is available to you. So am I, and thank you very much. Have a great day. Operator: That concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
Operator: Good morning, and welcome to The Hartford's First Quarter 2026 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Kate Jorens, Senior Vice President, Treasurer and Head of Investor Relations. Thank you. Please go ahead. Kate Jorens: Good morning, and thank you for joining us today for The Hartford's First Quarter 2026 Earnings Call and Webcast. Yesterday, we reported results and posted all earnings-related materials on our website. Before we begin, please note that our presentation includes forward-looking statements, which are not guarantees of future performance and may differ materially from actual results. We do not assume any obligation to update these statements. Investors should consider the risks and uncertainties detailed in our recent SEC filings, news release and financial supplement, which are available on the Investor Relations section of thehartford.com. Our commentary includes non-GAAP financial measures with explanations and GAAP reconciliations available in our recent SEC filings, news release and financial supplement. Now I'd like to introduce our speakers, Chris Swift, Chairman and Chief Executive Officer; and Beth Costello, Chief Financial Officer. After their remarks, we will take your questions assisted by several members of our management team. And now I'll turn the call over to Chris. Christopher Swift: Good morning, and thank you for joining us today. Hartford's first quarter 2026 results were strong, building on continued momentum from the past few years. Our broad portfolio of complementary market-leading businesses continues to generate superior returns for shareholders. The strength of our businesses, the breadth and depth of distribution relationships and our customer-centric focus position us to navigate a dynamic environment. Against the backdrop of geopolitical and economic uncertainty and rapid technological change, we continue to execute with discipline and advance our strategic priorities. Looking forward, our foundation is strong and our strategy is clear, reflecting who we are at the core, an underwriting company that consistently delivers with discipline and innovates with purpose. Among the quarter's highlights, Business Insurance delivered strong written premium growth of 6% with an underlying combined ratio of 89.2%. In Personal Insurance, the underlying combined ratio improved 4.7 points year-over-year with growth impacted by a competitive market. Employee Benefits core earnings margin was 6.9%, driven by outstanding life and strong disability performance, along with excellent new business sales growth and the investment portfolio continued to generate strong net investment income. All these factors contributed to core earnings of $866 million and an outstanding core earnings ROE of 20.3% over the trailing 12 months. Let's take a closer look at the first quarter performance. Business Insurance delivered another strong quarter, reflecting excellent execution across all lines. The current market reinforces the importance of underwriting discipline, pricing rigor and risk selection, areas where we continue to differentiate ourselves. Increasingly, our underwriting decisions benefit from real-time insights embedded directly into workflows, supporting smarter risk selection and more accurate pricing. Leveraging deep agent relationships, we are growing where price, terms and conditions appropriately compensate for risk. This is clearly reflected in our quarterly results as we continued to outpace the market in small business and remained selective in certain middle market and specialty lines. Focusing on small business, results again demonstrated the strength of our industry-leading franchise. Written premium growth of 8% and an underlying combined ratio of 89.4% were driven by excellent execution across our core offerings with double-digit growth in package and commercial auto. Our small business strategy is supported by a flexible multichannel go-to-market model. Customers have multiple ways to engage, whether it's through agents directly or via embedded capabilities such as payroll providers. All channels provide consistent service capabilities, underwriting and pricing. An important component of our strategy is the expansion of our market-leading small business ecosystem across multiple dimensions, including size, risk, product and segment. By size, we are increasingly working across business insurance to target the small end of middle market and growing with customers as their businesses scale, leveraging the breadth of our underwriting expertise and product offerings. By risk profile, we move seamlessly from admitted into E&S where appropriate, allowing us to support customers as exposures become more complex. By product, we are combining our specialty products with our unmatched small business distribution to deliver more tailored and complete solutions. And by business segment, we are launching efforts in the small and midsized market within employee benefits, leveraging our small business expertise. Moving to Middle & Large, written premium growth was solid at 5% with an underlying combined ratio of 91.3%. The team remains focused on disciplined underwriting and selecting opportunities that deliver attractive risk-adjusted returns in an increasingly competitive market. We are continuing to transform underwriting workflows, including through an AI assistant that augments key components of the underwriting process. Turning to Global Specialty. Results remain solid with another quarter of underlying margins in the mid-80s. Written premium growth of 3% reflected economic conditions, including fewer construction projects within our core area of focus. Global Re delivered premium growth of 11%, driven by growth in lines with strong risk-adjusted returns. Across Global Specialty, we are continuing to invest in the automation of lower complexity risk and enhancing underwriting workflows in more complex areas. Turning to pricing. Business Insurance renewal written pricing, excluding workers' compensation, remained relatively consistent at 6% in the quarter. Pricing in commercial auto and liability, including umbrella and excess remained strong and above loss trend. Property continues to remain highly profitable and an attractive area for growth, so though pricing moderated in the quarter. Pricing within small business package and middle market general industries was fairly steady in the mid-single digits and represents 60% of our property book. Shifting to Personal Insurance. First quarter results reflected solid execution amid a competitive market backdrop. In auto, where annual policies are over 70% of the book, renewal pricing reflects actions taken to date and are expected to moderate further in 2026. The market remains dynamic with competitors aggressively positioning renewal rate decreases, increasing marketing spend and introducing new business discounts. We remain disciplined and expect direct auto growth to remain challenged in the near term. In Home, results were outstanding, supported by consistent underwriting with low double-digit pricing. Within the agency channel, new product rollout continues to progress as planned with very positive agent feedback. Our agency offering is now live in 15 states with 30 states planned by early 2027. We are committed to our long-term objective in personal insurance to expand market share thoughtfully and deliberately with sustained profitability at target levels in our direct and agency channels. Moving on to Employee Benefits. Core earnings margin of 6.9% was driven by outstanding life and strong disability results. Persistency remained strong in the low 90s and fully insured premium increased 3% year-over-year. We were pleased with the excellent sales this quarter, supported by disciplined pricing and underwriting execution. Results were driven by a double-digit increase in quote activity, strong sales management and continued investments in technology that are translating into stronger value propositions for customers and brokers. Sales also benefited from 2 states with paid family and medical leave coming online in the quarter. Additionally, we continue to enhance our digital capabilities and deepen API connectivity with HR and benefits administration platforms, driving greater ease of doing business and a more seamless customer experience. These benefits are most pronounced in the large account segment, where our leadership is anchored by differentiated absence and leave solutions that tightly integrate disability, paid family and medical leave and supplemental products. At the same time, expanding our presence in the under 500 lives segment remains a key strategic priority, including broadening product offerings such as dental and vision for small and midsized employers. In closing, first quarter results demonstrate continued momentum and execution of our strategy. In Business Insurance, a diversified portfolio, strong distribution relationships, disciplined underwriting and technology-enabled execution continue to drive profitable growth at attractive returns. In Personal Insurance, our focus remains on thoughtful market share expansion, supported by continued progress in the agency channel. Employee Benefits remains a high-quality accretive business where our leadership in absence and leave positions us well at the large end of the market and ongoing investments will enable us to extend those capabilities to small and midsized customers. Investment income remains strong, supported by a diversified and durable portfolio. Taken together, I am confident in The Hartford's ability to continue delivering strong financial results and superior risk-adjusted returns for shareholders. Now I'll turn the call over to Beth to provide more detailed commentary on the quarter. Beth Bombara: Thank you, Chris. Core earnings for the quarter were $866 million or $3.09 per diluted share with a trailing 12-month core earnings ROE of 20.3%. In Business Insurance, core earnings were $551 million with written premium growth of 6% and an underlying combined ratio of 89.2%. Small Business continues to deliver excellent results with written premium growth of 8% and an underlying combined ratio of 89.4%. Middle & Large business had another strong quarter with written premium growth of 5% and an underlying combined ratio of 91.3%. Global Specialty's first quarter was solid with written premium growth of 3% and an underlying combined ratio of 86.1%. The Business Insurance expense ratio of 31.6% is generally consistent with the prior year with staffing costs and investments in our business being partially offset by the impact of earned premium growth. In Personal Insurance, core earnings were $141 million with an underlying combined ratio of 85%. The underlying combined ratio improved 4.7 points in the quarter with improvements in both auto and home. The Personal Insurance expense ratio of 27% remained flat to the prior year. Written premium in Personal Insurance declined 6% with a 10% decrease in auto, partially offset by 4% growth in home. Agency growth remained strong at 9% over the prior year. Renewal written pricing increases were 6.8% in auto and 11.8% in home and effective policy count retention was relatively stable. We expect retention to improve as pricing continues to moderate. Turning to reserves. Favorable prior year development was driven by reserve reductions in workers' compensation, homeowners and personal auto. General liability reserves related to sexual abuse [ and molestation ] exposures from the 1970s and 1980s were increased by $70 million, which included a provision for a settlement in principle in one bankruptcy proceeding involving a religious institution. Excluding the impact of the increases in general liability reserves, total net favorable PYD impacting core earnings was $75 million. With respect to catastrophes, P&C current accident year losses were $230 million before tax or 5.1 combined ratio points. Business Insurance catastrophe losses of $171 million were primarily driven by winter storms. In small business, losses from winter storms were $73 million this quarter compared with $8 million in the prior year quarter. Historically, freeze-driven winter storms like storm burn tend to impact small business customers to a greater degree. Personal Insurance catastrophe losses of $59 million were primarily from tornado, wind and hail events across the Midwest. Moving to Employee Benefits. Core earnings of $127 million and a core earnings margin of 6.9% reflect outstanding group life and strong disability performance. The group life loss ratio of 73.2% improved 6.7 points, reflecting lower mortality in term life and accidental death products. The group disability loss ratio of 72.7% increased by 3.7 points, driven by less favorable long-term disability loss trends as well as higher short-term disability claim incidents, including in paid family and medical leave where we continue to take pricing actions to reflect the increased utilization of these products. The employee benefits expense ratio of 26.7% increased 1.3 points compared to 25.4% in first quarter 2025, driven by higher staffing costs and higher technology costs. Turning to investments. Our diversified portfolio continues to produce strong results. For the quarter, net investment income was $739 million, an increase of $83 million from the first quarter of 2025, driven by higher income from limited partnerships and other alternative investments, a higher level of invested assets and reinvesting at higher rates. The quality of The Hartford's portfolio remains strong across public and private credit and equity. Private credit covers a range of subsectors, including traditional private placements, commercial mortgage loans, private asset-backed credit and direct lending to corporate issuers and business development companies. Investments related to direct lending and business development companies have been topical of late. The Hartford's investments in this sector represent approximately 2% of our invested assets. Investments are largely focused on well-capitalized companies with sound business models and platforms with multiple sources of liquidity. These investments have attractive yields and are expected to continue to contribute positively to our portfolio's performance. The total annualized portfolio yield, excluding limited partnerships, was 4.5% before tax, up 10 basis points year-over-year and down 10 basis points from the fourth quarter. The decline from the fourth quarter was primarily due to lower returns on public equity-related fund investments, reflecting broader market declines and a modestly lower yield on variable rate securities. First quarter annualized limited partnership returns were 5.1% before tax, materially higher year-over-year, but lower than the fourth quarter, reflecting reduced returns in the private equity and real estate portfolios. Geopolitical volatility and economic uncertainty may lead to this trend continuing in the near term. For full year 2026, with the current backdrop, we expect net investment income to increase, supported by continued growth in invested assets with overall portfolio yields expected to be generally in line with 2025. Turning to capital management. Holding company resources totaled $1.8 billion at quarter end. During the quarter, we repurchased 3.3 million shares under our share repurchase program for $450 million, and we expect to remain at that level of repurchases in the second quarter. As of March 31, we had $1.1 billion remaining on our share repurchase authorization through December 31, 2026. In summary, we are very pleased with our strong performance for the first quarter and believe we are well positioned to continue to enhance value for our stakeholders. I will now turn the call back to Kate. Kate Jorens: Thank you, Beth. We will now take your questions. Operator, please repeat the instructions for asking a question. Operator: [Operator Instructions] Our first question comes from Andrew Kligerman from TD Cowen. Andrew Kligerman: I -- my first question is around pricing. And I thought it was great to see that in Business Insurance, you really ex workers' comp didn't have much deceleration in renewal written pricing. And one of your competitors, I'd say, was closer to 100 basis points of deceleration. So my question is, particularly in the small business area, could you talk a little bit about the resilience of pricing there? Is this a line of business that could hold rate increases, maybe a little bit of deceleration, but maybe it holds in for the long haul? Or do you see this coming under a lot of pressure as we've seen large accounts and upper middle in particular? Christopher Swift: Andrew, thank you for the question and joining us. Let me just make some overall commentary and maybe give you a little bit of data. And then between Mo and myself, we could share our views on small commercial and how resilient it most likely can be. So in my prepared remarks, I think we talked quite a bit about commercial auto and liability, including umbrella and excess and that overall property continues to be a growth area for us. And our property book is 60% concentrated in small business package and middle market general industries. As you noted, the quarter, we were basically ex comp at 6%, down 10 basis points from fourth quarter of 2025. So we feel really good about the team's ability to execute and keep margins, and that's no small feat. So really, really, really proud of the team. I would -- as I normally do, Andrew, I'll give you some GL pricing because we talk internally -- anything liability, we just really need to be disciplined. So for the quarter, GL pricing was up to 9.7%, 50 basis points up from the fourth quarter at 9.2%. And I would say with the primary lines in the high single digits, and then anything sort of excess umbrella in the low double digits that have been generally consistent with the fourth quarter or up a little slightly. Within small, I would give you an ex comp number of 7.2%, which was down 50 basis points from 7.7% in the fourth quarter, mostly due to auto. But again, still an overall strong component, particularly whether it be the property component or the E&S binding component. Middle market, I would just share was down 53% ex comp or down to 5.3% from 6.2%. And then in Global Specialty, actually, Global Specialty executed very well and increased pricing up to 4.8% from 4.1%. So I think all that indicates, again, a real discipline by the team, a real focus. And when you really talk about small business, I think our ability to be very consistent and steady with price increases, both on the auto side, both on the property side or the GL side has been a key component of just reliability that our agents look for. So we try to be thoughtful. We try to take little bites at the apple on a state-by-state basis. And I think there is a level of durability that if you don't shock and surprise customers and agents with modest increases, your retention will hold and you can maintain your margins. But Mo, what would you add? Adin Tooker: I like your response. I think the only thing I'd add, Andrew, is that in the small business space, I would ask you just to think about our maneuvers quarter-to-quarter really about execution and rate adequacy as a starting point. We're really not responding to competitive pressures. What you see is trying to make sure we maintain margins and find the growth that we think is there. And that's in comp, especially in our package spectrum, auto, even in the E&S side. So really, I think it's really about execution from a great, great starting point on our small business side. And then the only other thing I would add is on the small -- excuse me, on the middle and global side, as we talked about in previous quarters, it really depends on how the market holds up. So we're really proud of how well the team executed maintaining margins in what is a moderating market. And the market will really determine the growth rates for us in Middle and Global going forward. Andrew Kligerman: Yes. I think that just for volumes that you could do that with 6% written premium growth and maintain some rate. So the follow-up is related. Chris, I appreciated your prepared remarks about how -- particularly in small, you're able to go to many places, specialty, direct, et cetera. And when I think about The Hartford, I think about the best-in-class in small mid. And lately, I've been hearing a lot of companies are making a big push to small mid. They feel that AI is enabling them. So maybe a little more elaboration on The Hartford's competitive moat amidst this AI expansion among a lot of your players? Will it be easier for them to look like Hartford and do things that Hartford does? Or why is that moat so strong even amidst AI? Christopher Swift: Yes. Well, thank you for noticing. Yes, we're really proud of our capabilities in the SME space broadly defined. That doesn't mean we can't play in the larger end of the market, but we're thoughtful about competing there. But in sort of SME land, I think we have some strong capabilities. We've been at it for a long time. We've had a technology orientation going back decades. We've had a partnership with agents and brokers, but primarily agents that really care about the SME space. We know what's important to them from a service side. And we're one of the digital leaders in small business and increasingly in middle, particularly the small end of middle. So we're going to continue investing in those capabilities, I think, to differentiate ourselves and make us an easier company to do business with and know our customers. So when you put it all together, I do believe that there is a moat that we got to constantly defend because there is a lot of good competition out there and a lot of good brands that agents and people recognize. But we are in a good position. We will continue to defend and invest to differentiate ourselves over a longer period of time. What happens with AI and agents and distribution in general, I think, is still a play that's going to evolve over time. But we have deep partnerships with all our distribution partners. We have capabilities that if markets move on a direct or a more embedded basis, as I said, we'll be ready. But we've partners that we do a lot of good servicing for and taking care of sort of our joint customers in a true partnership mindset. So we feel good about that. But Mo, what would you add? Adin Tooker: You mentioned it quickly, but I think what we're finding, Andrew, is that all of the capabilities we've built over 30 years in small really matter a lot in middle. And those same capabilities, we believe, can help us grow profitably in the middle space because the agents -- there's a margin pressure they're feeling as well and as much help as we can give them helps grow their margins in the middle market space as well. Operator: Our next question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan: My first question was on Business Insurance and specifically on the expense ratio. If you could just help us think about the seasonality and just trajectory from here. I know last quarter, you guys laid out a target below 30%. And I know that's for the end of '27. But given, right, that the expense ratio was higher this Q1, just trying to get a sense of like the trajectory from here? Christopher Swift: Elyse, thanks for joining us. So I would say with expenses overall, there is a little bit of seasonality in the first quarter just coming off year-end and all the first quarter activities that happened primarily from a compensation and benefit side. So not surprising. Our expense targets by business are right on plan for the first quarter. So there's no new news there. I would say I reaffirm everything that we've talked about last call and the targets that we're aiming for at the end of '27. So nothing's changed, absolutely nothing in our ability, I believe, to deliver on expense improvements over the next 7 quarters. I would say incrementally, we do expect improvement in '26. So I think you will see a decline in all the major businesses segments of an expense ratio decline in '26 with continued improvement in '27. Elyse Greenspan: And then my second question, also sticking within Business Insurance, right? I think in your prepared remarks and in response to the first question, right, you guys were pointing to more of a stable pricing environment away from comp. And obviously, pretty good premium growth within BI in the quarter, expect business insurance driven by small. And so when you guys think about the current market, does it feel like you can maintain premium growth within small commercial kind of in this 8-ish percent range just based on forward views on pricing, et cetera? Christopher Swift: Yes. It's hard to forecast. I can tell you, the team has, I think, distinctive capabilities, offerings. We've talked about it from a technology side, relationships. But we got to compete. Market will tell us if we can remain competitive and thoughtful, particularly from a pricing side. So I think the overarching point I would just say, Elyse, is, yes, we'd like to grow. We plan to grow. But we got to maintain margins and be thoughtful about sort of the trade-off between profitability and growth. I think we are well positioned to do that to make those trades. So we'll just have to see how the market plays out over a longer period of time. And Mo, what would you add? Adin Tooker: Maybe just one point. Elyse, the additional piece I would give you is the flows continue to be really strong, i.e., submissions into both the retail, i.e., the admitted part of our small business franchise and the non-admitted. And that flow and our hit rates are relatively flat. So we feel really good about this continued flow that we're getting from our agents, which demonstrates to us the strength and position we have with them. Operator: Our next question comes from Brian Meredith from UBS. Brian Meredith: First of all, Chris, you've got some good E&S capabilities. Maybe you can talk a little bit about what you're seeing in the market as far as is business kind of flowing back to the standard markets from the E&S markets at this point in the cycle? Are we kind of heading in that position? And then maybe also talk a little bit about what you're seeing about -- with the MGA competitive -- competition out there? Christopher Swift: Brian, I'm going to let Mo answer that just because he's the principal architect of a lot of our growth strategies in the marketplace. But I would just say I feel a level of stability. And I don't sense a lot of movement one way or the other. But Mo, what would you really say? Adin Tooker: Yes, Brian, maybe I'll tell it in 2 different ways. One, in our binding business, which sits in Small Commercial, as I said, the flow continues to be really strong. We don't feel the admitted market taking much back in that space. As we talked about, pricing is down a little bit, but our starting point is really good. So we're excited about the binding opportunities. We don't feel MGA impact in the binding space. If I shift into our Global Specialty space, where it's more of a brokerage model, again, flow continues to be really strong there in just about every single product for us. We do feel a little bit more flow back to the admitted in the larger risk space. There is a little bit of a competitive nature there. But as Chris talked about, our pricing improved in that book. We continue to -- the casualty lines, we're getting the pricing we need. And broadly, in our specialty book, and that's admitted and non-admitted, we do feel the MGA is having an impact. In any place, we're really trying to build capacity or brokers are trying to build capacity, we do feel that impact. And I don't feel that changed in the quarter, but it's been pretty persistent over the past several quarters. Brian Meredith: Great. And then second question, I was hoping to chat a little bit about workers' comp. Kind of where are we with respect to -- I mean, it's still a competitive market out there. I know you're kind of expecting some margin deterioration this year in comp. Where are we as far as profitability? Are we getting to a point where maybe we're going to see some leveling out in comp and maybe some improvement? Christopher Swift: No. Brian Meredith: Pricing? Christopher Swift: Just bluntly. I think our pricing was relatively flat in the first quarter, Brian, to the fourth quarter. If I look at activity broadly defined in the marketplace, there's people still putting through negative rates in various states. California is sort of the outlier. We always talk about comp ex California. I think we're proud though of being sort of the top carrier in that area. I think we've been disciplined and thoughtful. I think the underlying trends are still relatively stable. If I look at severity, particularly on the medical side, a level of stability, still well within our 5% pricing in and reserving assumption. I think severity would say probably is running in the 3%, 3.5% range. So it's behaving. I feel good about the market. We still got to be disciplined, but I don't see a price increase coming anytime soon because, quite honestly, the book is behaving pretty well. But Mo, what would you say? Adin Tooker: Brian, the only thing I would add is that it's basically right on expectations for us, both top line and bottom line. And I don't think you should expect us to see the book grow dramatically. There's parts of the book that are really competitive that we're pulling back on. For example, white collar in middle is really competitive, and we're just not able to grow that at the pace we'd like to. But broadly, think about top and bottom line on budget and basically we're relative to our expectations, exactly where we thought we'd be. Operator: Our next question comes from Mike Zaremski from BMO Capital Markets. Michael Zaremski: I guess just kind of hammering in on kind of the market level of competition. I know you've -- I'm not trying to obsess about it, but Chris, you spoke to increasing competition a number of times in your prepared remarks. I don't think it's that surprising to folks given the excellent profitability levels that you and many of your peers also throw off. I guess you guys have lived through many hard and soft cycles. Do you feel that HIG's operating strategy would kind of pivot or change materially to the extent the market continues to soften materially over the coming year or 2? Christopher Swift: No, I think, again, I appreciate the question and acknowledge that the market is competitive. Markets are always competitive. So you got to know what you're good at and know what you can do well. I don't see our business model strategy changing dramatically for market cycles. I think it's a discipline that we have. So if there are conducive aspects of the market, as I said in my prepared remarks that we could get the price we need, the terms and conditions and generate good returns on our invested capital, we'll feel good about growing that or not growing if we can't. So I don't know if I'm really answering your question or getting what you're really asking for, but yes, we know how to run a business in various cycles. Michael Zaremski: No, you did. We just get a lot of questions from investors about -- that seem a bit worried about the pricing cycle. And I think we're trying to remind folks that the sky is not falling. So I'm just kind of pivoting just for specifically to Global Specialty since you called out pricing being up a bit. Just curious if -- what caused that, if it's worth talking about? Christopher Swift: Yes. I would say -- Mo, you can add your color. I would say wholesale, particularly on the primary liability side and a little excess casualty, where the team is really being disciplined and focused on getting rate as I said, with anything, with liability in the product line, we are super focused on getting the needed rate. But Mo, any color? Adin Tooker: Well, I think that's the key point. I think the rest of the book is fairly stable, Mike. If you think financial lines, it is where it's been. We didn't feel dramatic change. Marine is the same. We have a lot of lines within that global specialty book, but I think the standout in the quarter was the rate coming back up in wholesale casualty lines. Operator: Our next question comes from David Motemaden from Evercore ISI. David Motemaden: I was hoping you guys could unpack some of the movement in the underlying loss ratio in Business Insurance this quarter? And maybe just talk a little bit about how much of a headwind workers' comp is within there and some of the other moving pieces? And maybe just given the pricing environment, how you're thinking about that for the rest of the year? Christopher Swift: Yes. I'd first say, as I said earlier, it's -- there's no surprises. I think our picks, obviously, one quarter in are holding. I think we've used the phraseology that the setup for 2026 was similar to 2025 with some modest comp pressure. So I think that continues just based on math. I think property is moderating, but still highly profitable. And what I would say, David, is we closed 2025 with a little over $3.3 billion in property premium. We think we could grow that 10% this year, again, with good margins, good returns. Certain lines in the property world are still positive. As I said, the spectrum component of [ BOP ] the property component there is up, I think, 6.3% in the first quarter. I think GI property, general industries property is up 4%. So yes, there's always going to be sort of puts and takes. But as we sort of look out, I still think '26 will play out largely like '25 with some very modest headwinds. But Beth, Mo, would you add anything? Beth Bombara: Yes. The only thing that I'll add to that is if you look at the underlying loss and loss adjustment expense ratio in Business Insurance, it moved very modestly from first quarter of last year to first quarter of this year. And when I look at sort of the underlying lines of business within there, there's no big moves one way or the other. It's really just very small move kind of across the book. So it's not as if there was some amount of big favorability that was being offset by a large amount of deterioration, and that's in line with what we would have expected. David Motemaden: Got it. That's helpful color. And then maybe just pivoting to group benefits and specifically group disability, that's been deteriorating a bit over the last several quarters. I know some of that is just the long-term disability sort of normalizing. But could you just talk about maybe some of the short-term disability trends and how you're thinking about the disability loss ratio throughout the rest of the year as some of the pricing actions you guys have been taking maybe starts to show up? Christopher Swift: Yes. Again, I appreciate the comment because you've done your homework, right? I mean the disability line has long-term STD and now increasing a larger percentage of our paid family and paid medical books. The latter 2, STD and the paid family, paid medical, obviously, our short cycling businesses, I'd like to say, generally is 1- to 2-year rate guarantees. I would say that the incident rate in particularly paid family and medical is higher than we anticipated, but we're taking, again, the appropriate pricing actions in the marketplace because it's a benefit people are actually really, really using, and we can adjust rates appropriately. I think we've -- I said in my prepared remarks, we got 3 states coming online, 2 came online first quarter in paid family medical. And I think [ Maine ] comes online May 1 of this year. So I would say that those are the components. LTD is up a little bit. And I would characterize that as just a little bit of a reversion to the mean. LTD has been performing so exceptionally well over really the last 2, 3 years. Our pricing assumptions and our reserving assumptions are a little bit back to the mean, both on incidences primarily. And terminations have always been strong, and we've got a great claims department that will get people back to health and work. So I would say those are the components. But Mike Fish, what would you add any additional color on? Michael Fish: Yes, I would just add, in the quarter for paid family leave, the new states that Chris referenced, generally, when we see new state programs come online, there is a pent-up demand element, meaning we see high utilization in that first 1 or 2 months of the year that those programs go live. So we expect to see that moderate through the year. And again, second, just adding on the rate increases we've been putting in place in paid family leave, double digit again this year, and we're maintaining persistency in the upper 80% range. So very pleased with our ability to place rate, and we'll continue to do that as utilization moderates through the year. Operator: Our next question comes from Katie Sakys from Autonomous Research. Katie Sakys: I want to shift back to the BI reserves for a moment. I think excluding the legacy charge this quarter, the core general liability book still looks quite strong with no net adverse development for several quarters now. How is the loss emergence in GL tracking versus your original expectations? And does what you're seeing today reinforce your confidence in current casualty loss picks going forward? Beth Bombara: Yes, I'll start with that. Yes, I mean, we feel very good about our loss picks in the GL book, both from the standpoint of prior year reserves and the loss trend that we've embedded in our 2026 picks. We look at the reserves every quarter. We look at them by accident year, by product line. Obviously, quarter-to-quarter can be small movements kind of within that. But overall, no change in our net GL reserves, excluding the legacy item that we discussed. And we feel good about what we're seeing and what that means relative to our loss position. Katie Sakys: Okay. And then, Beth, you mentioned in prepared remarks that direct lending and BDC exposure is about 2% of invested assets. Can you help us understand how much of that exposure is to software or adjacent borrowers? Beth Bombara: Yes. So as I said, our investments in sort of direct lending and BDC is about 2%. If we look at just the BDC portion, it's less than 1%. And I'd have you think about our investments in those groups of assets as being very diversified. So there obviously is a software component. But as we look through the underlying exposure and the underlying loans, we feel very good about the exposure there. And as I said, we continue to see these investments performing well for us. Operator: Our next question comes from Gregory Peters from Raymond James. Charles Peters: So I'm going to go back to the benefits business on the sales side for my first question. And Chris, you mentioned numerous times through your prepared remarks and the Q&A, how disciplined you are regarding growth and maintaining price discipline. And it looks like you had a really strong first quarter in sales. And I generally view that market as being pretty competitive. So maybe you could unpack -- and maybe it was embedded in that answer about pricing, but maybe you could unpack the results you reported for the first quarter in terms of sales? Christopher Swift: Yes. I'll remind you of the numbers and then ask Mike Fish to add his commentary. So yes, I think the 53% increase in sales growth is a meaningful number. I would say if you exclude the 3 states that paid family and paid medical leave are coming online, which are new, that increase drops to about 40%, but still meaningful. But I would say that the market conditions, I think, were primed for us to take advantage of opportunities. And I think more quotes were out, Mike. I think we improved our sales management and sort of bidding concepts of where we wanted to start when we came out with initial quotes. I think our capabilities, particularly at the national account level have been being recognized more and more by our agents and brokers. So it was almost like the perfect combination of a lot of things that we've been working on to have these results. Obviously, we look at pricing very closely from a management side. And I would tell you, in aggregate, the cohort that we put on, will generate returns in line with our targets. So I put all that together and say, yes, it feels good, feels disciplined, and we're going to try to keep it going. But Mike, what would you add? Michael Fish: Yes. Just a couple of items. First of all, on that pipeline development. So we started early last year, really working hard within our sales and across our sales team, essentially investing in our sales footprint as well as market analytics to do a much better job engaging at the local level. So we saw that, as Chris noted, coming through in higher activity, quote activity. So a good component of what we saw in the sales in the quarter was really just driven off of, I'd say, sales execution at the local level. So very, very pleased with that. And then second, we've been very clear in talking about our investments, our technology investments in the benefits business. And that's across absence, across our HR technology integrations that we have. And those are really paying off. So when our sales team is out engaging with brokers and ultimately, when we get into that moment in front of a customer in a finalist meeting, and that would be on the larger end of the market. We just have a phenomenal story to tell. So I think all those items came together to produce a really nice sales result in the quarter. And again, just reinforcing, we're maintaining our underwriting discipline. We haven't changed that, and we will not do that. Charles Peters: Fair enough. I'll pivot over to the Personal Lines business since it hasn't really been asked of yet. You talked about 70%, I think, was the comment about 70% of your business being annual policies. I know you're in process of rolling out prevail, which I presume is 6-month policies. But maybe you could spend a minute and give us some more detail about how you expect The Hartford to perform beyond just a couple of quarters with the rollout of prevail and how the -- considering how competitive the marketplace is, just curious what your view on the outlook there is? Christopher Swift: Yes, I would summarize, Greg, what I tried to say in our comments is I think we have our strategy and objectives very clear. I think we've invested heavily, and as you said, our new product and platform, particularly in the direct channel. We're rolling out the same product and platform in essence, in the agency channel, which, again, the independent agent channel is a great strength of ours. And I think getting back into that in a more meaningful way with a more modern product is being well received and will continue to drive incremental growth. I think the balancing act in all this is we worked so hard to get back to target margins. And we're really [ loath ] to give back any pricing or cut rates just to grow. So we're going to continue to find our niches, our pockets, whether it be through AARP or through agents. And as we roll out more states for agents, I think we'll obviously have a higher growth rate. But yes, it's a balancing act. But we don't want to kick up everything we work so hard on. But I'll ask Mo or Melinda if they'd like to add any color? Melinda Thompson: Yes. Thank you. What I would just add is that agency is growing today, a function of the investments we've made there, smaller base, direct will take certainly more time. But the investments that we've made in product, technology, customer experiences, things that we are doing with AI, they're all aimed at customer experiences that are about supporting the long-term growth. So we'll navigate the current market cycle and play for the long term. Operator: Our next question comes from Rob Cox from Goldman Sachs. Robert Cox: Just a question, just to go back to the [ cats ]. Just a little higher than we thought this quarter, but it sounds like it was driven by your exposure to small business and freeze-related losses. Just curious how the [ cats ] in the quarter compare to your own internal expectations? Any updated thoughts on how you're thinking about diversification into property from a broader perspective and if you're now lined up to see any recoveries on your aggregate reinsurance treaty? Beth Bombara: Yes, I'll take that, Rob. So I would say, overall, when we look at our [ cat ] losses for the quarter, compared to what our original expectations would be, it's probably about $30 million higher. So it's not a significant change from what we would have expected. And as I said, it really was focused in the small business area where we just tend to see with freeze activity, higher losses there. So that is definitely what drove that. And then as far as the aggregate treaty, what I'll just say to that is, as you know, our aggregate treaty kicks in when subject losses reached $750 million. Again, it doesn't include our global recast. And so through first quarter, we're at $204 million. And so we'll have to see how the rest of the year progresses as to whether or not we would hit that aggregate. Robert Cox: Okay. That's helpful. And I just want to follow up on the distribution discussion here. I think, Chris, you mentioned [indiscernible] strong distribution relationships, which is clearly part of the firm's competitive advantage. There's some industry discussion on whether or not distribution costs are too high and will come down over time. So just curious on your views in that debate. And in particular, any thoughts on magnitude or time frame? Christopher Swift: Yes. That's like being a Red Sox fan or a Yankees fan. So there's always going to be discussion and debate who's got the better club. So yes, what I would say is, speaking for us, and our ability to sort of manage costs. I'm really proud of what the team has been able to do to sort of keep our overall cost to acquire new business relatively flat over the last 3 or 4 years. And Mo's led that effort with the team. I mean it's still a significant amount of money on a percentage basis or dollar level. But I think we've been able to complement our distribution partners with technology, with service, with making their life easier. And we try to impress upon them, the more that we could do business together, I think the more money they would make in our relationship compared to everyone else. That's not unusual to sort of say, but it's really actually true with our capabilities. But I think you're really alluding to the future, and I tried to allude it to a little bit in a response. I'm not sure what AI is going to do in the agent world. And that's why we've been talking more about sort of our multimodal capabilities, whether it be through agents and advice channels, whether it be direct, whether it be embedded, whether it be other technologies. And not every product line is created equal, right? You can make the argument that the simpler product line today of auto is maybe most prime to be impacted by AI and how that happens. And you have other complex lines that really people need advice. They need to make sure that they understand the various features in a product and what's in, what's out. So I think advice will always be needed, and we'll continue to partner in the best way possible with our distribution partners to figure out how consumers want to consume advice and where they want to go for advice as a first step. But Mo, what -- would you add anything else? Adin Tooker: I like where you went in terms of the partnership model. A lot of our digital investments, our service centers in small and middle are really about that partnership with the agents. So the compensation becomes less of a conversation because of the service we're providing to support the upfront customer. And in many situations, we are providing that service for our agents. So that partnership is a really key model for that discussion longer term. Operator: Our last question today will come from Yaron Kinar from Mizuho Americas. Yaron Kinar: Just want to start with personal auto. Just given the changes in the competitive environment today, do you expect that to continue now with the Strait of Hormuz situation? And on the one hand, maybe you have better frequency coming out of lower gasoline prices. On the other hand, you have maybe supply chain issues driving severity up. So do you see any impact on the competitive environment with all that? Christopher Swift: Yes. Yaron, I would say a couple of things top of mind. One, price of gas, price of oil and miles driven isn't really correlated that much. I mean people will still have to commute to offices. Obviously, the trend of work from home has changed sort of driving patterns. Maybe there's a slight decrease in summertime driving. But generally, all our models say price of fuel is not really indicative of miles driven. I think the whole war situation creates a lot of uncertainty that we're going to have to watch closely and see how it plays out. That said, I don't see a direct line into the U.S. here from our cost of goods sold in products, but our derivative impacts and second degree impacts of chemicals, fertilizers, plastics, all have an element of petroleum in it. So there could be some minor effects there, but I would say when we picked our loss picks for the year, I think we have a margin for adverse deviation for these types of items and events. And we still feel good as we sit here today where our picks are for the full year, particularly in personal lines. Yaron Kinar: That's helpful. And then maybe circling back to the last line of questions around AI and the intermediaries. Is there a risk that The Hartford negotiating power with intermediaries in small commercial would diminish if larger brokers are able to use AI to move down market and infringe on a space that's really been dominated by smaller agents? Christopher Swift: Well, you might be really referring to agent consolidation and what happens and if consolidation continues to play out. I think, Mo -- when Mo and I think about it strategically, we still think it's a net benefit to us because carriers, I think, will -- particularly the large national account carriers that have broad-based capabilities particularly as all these agents and brokers are trying to simplify their business model and do business with less carriers. I think it's still a net positive for us over the long term. But Mo, what would you add? Adin Tooker: Chris alluded to it before. I think what we're finding is actually the opposite. The large carriers are consolidating to those who have the most capabilities to help them create additional margin in the small business space. So they're looking to fewer people who have better capabilities. So actually, we feel like it's a large market for small business, large brokers are actually coming our way in terms of the momentum in terms of flow and long-term capabilities and commitments we think we win in that space. Yaron Kinar: But I understand that you may see more flow, but ultimately, don't they have stronger negotiating position when they try to determine the terms of the actual contract or policy? Adin Tooker: Yes. I think this is where the balance of power is actually really equal because of all the capabilities we bring. There's very few people who can bring what we bring in the small business space, and I can prove to any agent and broker how we can make $0.01 or $0.02 more in every dollar for them that leads to some really productive conversations. Operator: And we are out of time for questions. I would like to turn the call back to Kate Jorens for any closing remarks. Kate Jorens: Thanks for joining us today. As always, feel free to follow up with any additional questions, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Property Trust's First Quarter 2026 Earnings Call. Joining me today are Michael Nierenberg, Chief Executive Officer of Rithm Capital and Rithm Property Trust; and Nick Santoro, Chief Financial Officer of Rithm Capital and Rithm Property Trust. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Property Trust website, www.rithmpropertytrust.com. If you've not already done so, I'd encourage you to download the presentation now. I would like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. And with that, I will turn the call over to Michael. Michael Nierenberg: Thanks, Emma. Good morning, everyone, and thanks for joining us. For the quarter, the company had a pretty uneventful quarter as we continue to look for opportunities that could be a game changer for this capital vehicle. With asset manager valuations under pressure, downward pressure on equity valuations in the public markets, we're going to continue to remain patient and work towards creating value for shareholders. While the geopolitical events affecting the world, credit spreads have remained actually in a relatively tight range and markets in general are performing well away from the headline risk we've seen in some of the retail private credit. Even there, if you take out the retail component, private credit is still performing well. The [ softer ] headlines you've been reading about will take a while to play out and the earlier vintages in the private credit world where companies borrowed money at large multiples of revenue will likely be the ones affected negatively in the future. And a lot of those deals were originated back in the '20 '21-ish kind of vintage. For RPT, we positioned the company for success by doing the following. When we took over this vehicle in '24, we made a decision to clean up the balance sheet, liquidate a lot of the residential stuff and reposition the company in the commercial space using this as an opportunistic vehicle to deploy capital in the commercial world. Today, the company has just a little under $100 million of cash and liquidity. The balance sheet is extremely clean. There's no problem loans and again, is in great shape. While we continue to wait for the opportunity to transform the company, we'll continue to pay the dividend. From an optionality standpoint, at some point, it's likely if we can't -- we need to grow the vehicle, quite frankly, from an overall capital standpoint. If we can, we'll be looking at different opportunities in the M&A world. And at some point, we may consider even buying back a little bit of stock here. With that, I'll refer to the supplement that we posted online. I'm going to start on Page 3. And again, this is just really the summary of what Rithm is, Rithm Property Trust. Today, the pipeline is, give or take, about $2 billion. It's always fairly robust. We're looking at large opportunities in the multifamily space. We also evaluate things that we could potentially do around our Genesis business, where we continue to grow our multifamily lending there. The equity is a little bit under $300 million. It's about $287 million. The commercial real estate portfolio, this is all post '24 vintage things that we've done is $236 million, and we have, give or take, a little bit under $100 million of cash and liquidity. When you look at the financial highlights for the quarter, quite frankly, not a lot of activity. We sold down a little bit of -- we sold a few CRE floaters in the quarter to create a little liquidity, looking for better opportunities, quite frankly, to increase earnings. As I pointed out in my opening remarks, the credit markets have continued to perform well. The CMBS markets perform well. But while saying that, we'll continue to monitor opportunities to turn over the portfolio and deploy capital in higher-yielding assets. GAAP income, negative $3.2 million or $0.42 per diluted share. Keep in mind, we did a reverse split. I think it was in Q4. Earnings available for distribution, negative $300,000 or $0.04 per diluted share. Again, not a lot of activity. A lot of this relates to either the G&A or the dividend paid. Dividend paid in the quarter, $0.36 per diluted share, which correlates to about a 10.8% dividend yield based on where the equity is trading today. Book value, $236.2 million or $30.83. And then as I pointed out, cash and liquidity a little under $100 million. When you look at RPT, I mentioned again earlier, the strategic transformation. Again, going back to when we took over this vehicle, we cut G&A dramatically. We cleaned up the balance sheet. We sold down a lot of the residential portfolio where we could. And I'll talk a little bit about the equity that's remaining in the book. We've made some new CRE investments, and that was mostly done in floating rate AAA CMBS. We made a few loans on the debt side. We deployed $50 million in equity alongside Rithm in the Paramount transaction, which we closed in December of '25. We continue to renegotiate our repo agreements, and we continue to improve liquidity. So overall, the company is in, what I would say, as much as there's no very little activity in great shape, and we look for an opportunity to deploy capital or create more capital, quite frankly, on something that's going to be a game changer. I'd like to go back and refer to what Blackstone did with BXMT many years ago or what we did with Rithm, which was going back to 2013, where we started that with $1 billion of capital. And today, the company has about $8 billion of capital. So we need to be patient here. As I pointed out, we'll continue to pay the dividend. At some point, we need to make a move in either clean up the vehicle or figure out a way to grow it. And obviously, we're actively trying to grow the vehicle. When you look at Page 6, the repositioning of the portfolio, where we can go here. I pointed out on the Genesis side, we're doing more lending in the multifamily space. There could be some opportunities to work together with that company. We continue to look for opportunities to put our capital in the debt markets on the CRE side, and then we'll continue to evaluate opportunistic investments and figure out different ways that we can increase shareholder value. And then on Page 7, it really just talks about how Rithm Property Trust benefits from the overall Rithm ecosystem, and that includes the Paramount transaction that we closed in December and then our asset management businesses, Sculptor and Crestline. So with that, I'll turn it back to the operator. We could open up for Q&A and then get on with our beautiful Friday. Operator: [Operator Instructions] And your first question comes from the line of Craig Kucera with Lucid Capital Markets. Craig Kucera: Optically, it looks like the strategy this quarter was to reduce your CMBS holdings and deleverage. Are you expecting to lever back up in the near term by investing in other asset classes such as loans from Genesis? Or should we expect leverage to be a little bit diminished for the near term? Michael Nierenberg: Yes. We looked during the quarter, the market felt -- despite performing well, the market felt or the world feels horrible. So when you think about that in credit spreads, and we saw high-yield gap a little bit wider, but then it came in about 50 basis points to where it is today. So we use that as an opportunity to say, if the world doesn't feel as good, let's sell down some of our, what I would call, levered AAA CMBS, which is yielding, give or take, about 10% with the thought as we might be able to deploy more capital in higher-yielding assets. Quite frankly, we -- at this point, we'll continue to sit on the cash and look for those opportunities. I mentioned in my opening remarks, we're looking at a large portfolio now of multifamily assets that will be coming at some point in May. And we're seeing some opportunities on the debt side, quite frankly, that I think we'll be able to deploy capital at higher yields. than where we are on some of the AAA CMBS. But for now, it wasn't really just to reduce leverage. It was to create more capital for what I would call opportunistic investing. But at some point, that capital will get redeployed where that goes back into a debt, some kind of lending, multifamily or even buying back some equity here. Craig Kucera: Got it. And I guess if the market or at least how you feel about the world continues to be sort of miserable, do you think you'll continue to harvest proceeds from CMBS? Or do you think you kind of work through what you wanted. Michael Nierenberg: It's a really -- we're in a really interesting period of time, right? Because when you read the headlines or you think about the headlines, there's been a lot of negativity around private credit, yet you look at a lot of firms that are in the [ PE ] business, and they're still sitting on a lot of these portfolios that go back many, many years you look at the equity markets were at all-time highs. So if you think about private credit, private credit sits on top of equity. So what's going to go first, the equity. So when you look at the public markets in general, the markets feel -- as much as the world feels terrible, the markets are performing extremely well. We look across RMBS, you look across CMBS, you look at the liquidity that we're seeing in all these different lending markets, things are actually okay. The geopolitical side just feels horrible though. Obviously, there's a lot of headline risk coming out of the administration and other places. But -- so I think we're just looking for better opportunities to actually create more earnings. Craig Kucera: Got it. Changing gears, there was a pretty decent pickup in professional fees this quarter. Was that more just a onetime event? Or should we expect to see something similar going forward? Nicola Santoro: That was a onetime event in the quarter. It had to do with us looking at various capital options. Craig Kucera: Okay. Fair enough. And this quarter, you closed on the Paramount transaction in the fourth quarter and at the Rithm Parents and of course, Rithm Property put in $50 million. Was there any impact to the income statement this quarter from Paramount? Nicola Santoro: Paramount for the quarter was essentially flat. Craig Kucera: Okay. That's helpful. Will that ramp up at any point? Or should we expect that to be really more of a backloaded type of investment? Nicola Santoro: No, it will ramp up as the investment continues to accrete and as we make progress on Paramount. Michael Nierenberg: Just a little color on that. When we took -- we closed the company, I believe we closed the transaction on December 20. So we've had really just a quarter of working on that. We've taken G&A from $65 million down to about $30 million. The performance, the lease-up activities is at the highest levels we've seen in 20-plus years. When you look at the properties, you have New York and San Francisco. We're in the middle of doing a few refinancings. We have some potential JV equity investments. So we're excited about that. We've had a ton of conversations with different [ LPs ]. The initial thought there was -- it's an opportunistic situation. But around that, we're going to raise capital either from third parties or just bring in JV partners with the intent of trying to make 2x and 20-plus percent on our money. So some of it will be back-ended. Some of it will be, as to Nick's point, as we accrete up over time, but that hopefully should be a good one. You look at our New York portfolio, it's -- for the most part, it's essentially leased up. So things are good on that one. Operator: Your next question comes from the line of Jason Stewart with Compass Point. Jason Stewart: On the Genesis loans, are those likely to be more portfolio-based or chunky? Or is there an opportunity for flow? And then a follow-up on Craig's liquidity questions. Is there an opportunity to do anything with the unsecured debt just given how much liquidity is on the balance sheet? Michael Nierenberg: So the unsecured debt, I believe, is like a [ 9% ] and [ 7% ], [ 8% ] kind of coupon. If we could get the company rated a little better, that drops to [ 8% ] and [ 7%], [ 8% ] When you think about that in the debt markets for this type of company, it's not a horrible cost of capital. Obviously, we want to make it more accretive and make sure the investments are more accretive, thus selling down some of the CMBS and looking for an opportunity to deploy in higher-yielding assets. When we think about Genesis, on the Genesis side, we bought this company, I think, in late '21/'22. At that time, they were doing $1.7 billion of production. The company was making $40-odd million of EBITDA. We've taken that where this year, I think we're going to do something between $6 billion and $7 billion of production, and the company should make between $150 million and $200 million of EBITDA. So it's been -- knock wood, it's been a very good successful acquisition, and it's been a great feeder for our business. From Genesis, we've established a couple of things. One is we have a nontraded REIT we launched with one of the large money center banks where we're actually raising capital alongside some of the production that comes out of Genesis. That's gone extremely well. We've also done a large [ SMA ] around some of the Genesis flow with one of the sovereigns overseas. So when we look at what we've done there, that's been a great one. Now we're actually looking at, is there a way to take these assets in the securitization market, quite frankly, that could be north of 20% or 15% to 20%. Can we actually use this vehicle to -- either around multifamily or some of the other stuff that's not going into these flow programs to actually grow earnings at RPT. So that's something that we're extremely focused on. Hopefully, we get there, and that business continues to grow. So that's really the thought around the Genesis side. Operator: Your next question comes from the line of Henry Coffey with Wedbush Securities. Henry Coffey: Obviously, actually a lot of progress in here and you cut your losses. And if we go with Nick's comments, we're almost at the point of breakeven on an EAD basis. If you -- things -- the environment or the political environment is bad, but it's probably not going to get worse. And so it's fair to say that the debt and credit markets, whatever they are, aren't going to get worse. And what's the holdup in terms of deploying assets? Are there like opportunities like you said, that don't show up until May? Are there enough opportunities out there where you could, if you wanted to push hard, leverage this thing up now? What is sort of the overall temper of the market right now in terms of opportunities? Michael Nierenberg: This vehicle on a relative basis, Henry, is extremely small. We need to create a large pool of capital to make a difference in the earnings and profile of the company as we go forward. And I think to your point on the equity or the debt and credit markets, there's a ton of capital still out there in the markets being deployed. When you look at all the headline risk, and you've heard some of the other folks that run some of the larger asset managers, on the -- the real headlines around the private credit stuff were really the redemptions that came about from retail. Anybody that has institutional money, those are typically going to be in longer-dated locked-up funds. So that's not really the problem in what I would say, the credit markets. So if somebody comes out and I use this example, I was in Asia last week speaking. If you look, most of these documents have, I'll call it, redemption limits for a specific reason. To the extent that retail comes in and they want -- and you've seen folks want 10% or 15% out of some of their -- out of some of these funds, a lot of the funds have 5% limits. And they have 5% limits for a reason because you don't want to just liquidate good assets for the sake of liquidating because retail needs the money back. So I think my whole view on this is that on the private credit markets, it's really an education process. how do people -- how does a private wealth client buy into a private debt fund or private credit fund, making sure they understand really what the liquidity functions are. Because what you're seeing in the markets these days, there's been a lot of demand for evergreen type funds. We have an evergreen type fund out there, I mentioned on the Genesis stuff. And you just have to make sure there's an ample amount of liquidity. Now it's a very different thing, I think, when you have assets that are secured by -- or cash flow that's secured by assets as what we do in Genesis and really in the so-called [ ABS space ]. But the gist of it is around the private credit markets is that you're not seeing a lot of selling. You're seeing more capital that continues to get deployed, and you haven't seen this huge gap in spreads. So overall, when you think about where we are, there are going to be opportunities, but we haven't -- we wanted to create a little liquidity during the quarter in the event that we could deploy at a much higher level. And quite frankly, we just haven't seen it come to fruition. I pointed out on the multifamily stuff, that -- it's a reasonable size deal that we're actually looking at. Rithm Property Trust cannot do the entire thing, just to be clear. So that it could be a combination of third-party capital, Rithm Property Trust and Rithm. And I guess -- and again, that's similar to what -- the way a lot of these other larger asset managers have grown their business where they're using different capital vehicles and funds to share in the, I'll call it, in the wealth of a great investment. Henry Coffey: On the capital side, this is -- there's a funny [ cajun ] joke that I'll share with [indiscernible] later on, but this is kind of a chicken or an egg thing. And it seems -- we have a lot of confidence in you as investors. And there seems to be a point where you just have to kind of do it, accept maybe some near-term dilution and then get on with the business of growing RPT into a bigger business. What does that pain threshold look like for you? Michael Nierenberg: I think as long as we think that we could do something that's accretive longer term for shareholders, we'll do it. I mean I think the whole notion of the REIT business, when you think about it logically, where REITs trade relative to asset management companies, and it's effectively the same thing. The only difference is I look at Rithm, our bigger company, obviously, we're trading, give or take, 5x EBITDA. You look at some of the larger asset managers, they could trade anywhere from 10 to 30x -- so the whole arbitrage, if there is an arbitrage is to continue to create asset management vehicles where you can turn them from 5x to 10x. In the case of Rithm, if we did something like that, the stock is a $20 to $30 stock, and it trades at, give or take, $10. If you look at Rithm Property Trust, we need to raise pools of capital. We've been very good and disciplined around maintaining book value in all of our REIT vehicles because I think we're -- we have a lot of expertise around the house. We've been doing this for 30-plus years or whatever it is. And from a market perspective, we're typically -- we have a reasonable view from a macro level. As it relates to this vehicle, to the extent that we can raise a large pool of capital and it gets deployed accretively and all of a sudden earnings start moving, we'll do it in a heartbeat. Henry Coffey: I mean the stock is at half of book value issuing stock here would be painful, but maybe also the recognition that the market is not really getting it and maybe the pain from issuing stock at this level would only be temporary. And I'm just kind of thinking... Michael Nierenberg: But you need to do it around an accretive transaction. It's not just to raise capital is what I would say. So if there's something that's hugely accretive, then we'll come back into the market, and we'll work with our investor base, and we'll work with our capital formation groups and our banks, and we'll try to get something done. Somebody -- I think it was either Craig or Jason asked about the onetime charge. That was part of what we were working on in the quarter is to figure out a way to raise a pool of capital. Operator: Your next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: The commercial mortgage REIT sector has been under pressure for several years, and there only seem to be a few companies successfully emerging from the [indiscernible] downturn in values and credit with scale being a big differentiator. There's been one interesting deal in the space, which is the ARI sale to Athene of its entire loan portfolio. And at the same time, we're seeing real estate transaction activity pick up and [ LP ] investors start to increase their real estate allocations. So I wanted to ask if you're seeing any change in engagement from perhaps public commercial mortgage REITs, the smaller ones or otherwise private vehicles about potential combination scenarios. Michael Nierenberg: Yes. I mean I think one of the things that we've been very good at over the years is to try to differentiate ourselves from others. And look at what we've done in the mortgage space is we built -- it goes back to the Fortress days. We built Mr. Cooper, which is now owned by Rocket. We built OneMain, which is now public market. We had sold down the equity to Apollo when I was at Fortress. We built Newrez from nothing, and that company is great. We built Genesis or helped grow Genesis Capital. So we've been very -- what I would say is we've been pretty acquisitive, which has enabled us to grow our business. We'll continue to look at M&A, particularly in the world that you point out. It's not easy getting folks, the combination side when you talk about what I would call a lot of broken REITs. Our -- this REIT is not broken. This balance sheet is crystal clean. There's -- when I look at the equity, just to give you a sense, there's, give or take, about $100-ish million of equity that's tied up in residential deals that are marked extremely well, that are -- they are reperforming loan deals that were created by the prior management team at what was known then as Great Ajax. So when I look at what -- where we want to go with this and I think about the overall REIT space, we'd love to do combinations with folks. We want to grow it. I will tell you the Paramount transaction has opened up the door as a firm for us to -- we probably had hundreds of conversations with LPs and different folks about -- and it's on the private side, obviously, in the public -- in different real estate activities or real estate transactions, and that will continue. So I think that's been a really good one. Our asset management business at Sculptor, they raised $4.6 billion on their last fund, and they're extremely active in the real estate space. So getting these smaller deals -- everybody wants to do a deal or we want to do deals. Not everybody wants to give up their business, quite frankly, and something that's underperforming. I mean it's just that simple. Should these smaller businesses are very, very difficult to have them exist and to try to grow because you need the capital to grow it. So my long-winded answer is we're always actively looking to do M&A around this, and I think you're going to see more M&A in this. But our balance sheet is crystal clear, right, -- crystal clean. We're very, very different than I think some of the other legacy REITs that have, quite frankly, suffered a little bit here based on some of the earlier vintage lending that's occurred. Operator: There are no further questions at this time. I will now turn the call back over to Michael Nierenberg for closing remarks. Michael Nierenberg: Thanks so much for your questions. Have a great weekend. Look forward to updating you throughout the quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Norfolk Southern Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Also note that this call is being recorded on Friday, April 24, 2026. And I would like to turn the conference over to Luke Nichols. Please go ahead, sir. Luke Nichols: Good morning, everyone. Please note that during today's call, we will make certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or future performance of Norfolk Southern Corporation, which are subject to risks and uncertainties and may differ materially from actual results. Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Our presentation slides are available at norfolksouthern.com in the Investors section, along with our reconciliation of any non-GAAP measures used today to the comparable GAAP measures, including adjusted or non-GAAP operating ratio. Please note that all references to our prospective operating ratio during today's call are being provided on an adjusted basis. Turning to Slide 3. I'll now turn the call over to Norfolk Southern's President and Chief Executive Officer, Mark George. Mark George: Good morning, and thanks for joining us. With me today are John Orr, our Chief Operating Officer; Ed Elkins, our Chief Commercial Officer; and Jason Zampi, our Chief Financial Officer. Before we get into details, I wanted to start by recognizing our Thoroughbred team. Working together, we successfully navigated another challenging winter with weather events that affected most of our territory, putting real pressure on the network and our volumes in the month of February. But as conditions normalized and our network recovered, we were able to capture the available volume in March and exited the quarter with solid momentum, all while staying focused on what matters most: operating the railroad safely. Our safety performance continues to excel, which remains our most important work. We're seeing the benefits of the investments we've made in technology, training and standard processes from digital inspection tools to more rigorous operating standards. These efforts are helping us detect and address potential issues earlier and keep our employees, customers and communities we serve safe. Our FRA reportable accident rate is down yet again, thanks to the systems we have and our leadership. I'm proud of how our people stay disciplined and committed through all the weather challenges and other distractions. On costs, we remained disciplined. Total adjusted expenses were up just 1% year-over-year despite inflationary pressures, storm costs and sharply higher fuel prices. We earn new business, expanded key relationships and saw customer confidence grow across multiple sectors, reflecting improved execution and trust in our capabilities. We're seeing strength and encouraging results across multiple parts of the business, reflecting focused investments and improved coordination across our teams. Ed will walk through some of our wins and the underlying volume drivers in more detail. Lastly, stepping back to the broader environment, the macro remains a mix of puts and takes. Customers continue to manage dynamic and shifting supply chains. But our message is simple. Norfolk Southern is well positioned to grow alongside of them. The strength of our network combined with the flexibility we built into our cost structure gives us confidence to navigate whatever the market brings. And with that, I'll turn it over to John to get into the operational details. John? John Orr: Good morning, everyone, and thanks, Mark. Throughout 2025, our Norfolk Southern team was focused on growing our team's capabilities, skills and speak up willingness, creating the environment to deeply embed our safety and service maturity and capabilities. Now for the full quarter behind us in 2026, we are realizing measurable gains from those successive efforts. We are advancing and layering progressive PSR 2.0 structural changes to build more resilience and efficiencies across the railway, develop generational railway leaders and provide our customers with the best possible service plan. As Mark noted, extreme and network-wide winter weather in the first quarter tested the network. I'm very proud of the entire enterprise in the way we anticipated, prepared and responded to deliver for our customers. The extraordinary commitment of more than 19,000 rail orders across our franchise was clear in the service and volume execution coming out of the system-wide storms. Thank you to all my fellow rail orders. The entire team delivered both daily and storm backlog demand and drove post-pandemic daily GTM volume records, made possible by our operations and commercial teams. Turning to Slide 5. At Norfolk Southern, Safety is the core value to which all of our operating decisions are made. Our continued investment in safety is producing results while building a stronger, more durable safety culture. In the quarter, our FRA personal injury ratio was 1.10. This is consistent with full year 2025 performance. Our FRA accident ratio was 1.43. This reflects a 37% improvement year-over-year in the first quarter. Our FRA mainline accident ratio was 0.26. For the second consecutive year, Norfolk Southern continues to lead the way for Class I railroads in mainline incident reliability. This progress is not isolated, it is also mirrored in a reduction of non-FRA reportable accidents. These improvements reflect the strategic impact of our intentional coordination of field-level technology coupled with execution across back office, work scope process refinement and field conversion engagement. Combined, we are creating reliable network value by engineering out risk from operations wherever our teams work. This holistic approach to safety improvement is now embedded in how we plan, execute and manage the railway every day. While we are all proud and encouraged by our safety improvements, we are driven by a relentless drive for continuous improvement. Our enterprise is committed to putting in the work. We know there's more work to do. We are strengthening our stop work authority, reinforcing a speak-up culture and relentlessly addressing root cause analysis to prevent block crossing and other incidents. Turning to Slide 6. Throughout the first quarter, the network demonstrated resilience in the variable demand environment we faced. Our focus remains on improving our train speed while maintaining balanced discipline around energy management and service levels, a core operational priority. While shipments were modestly lower year-over-year, we moved 1.1% more gross ton miles, reflecting stronger train productivity and better asset utilization across the network. Terminals well improved year-over-year, coupled with continuous focus on execution of the plan. This supports gains in car miles per day. We have been intentional about protecting service and operating the network at a lower cost structure. That discipline is reflected in an 8.6% fewer recrews, improved locomotive reliability and continued reductions in unscheduled train stops. Improved crew scheduling and greater crew availability are supporting stronger crew productivity across the network and the better aligned, qualified T&E crew base, which is down about 6% year-over-year. And we continue to strategically recruit and renew our workforce in markets where we anticipate growth. Reliability drives improved productivity in cruise, locomotive and fuel efficiency. Taken together, these results demonstrate we are controlling what we can control, managing costs, improving efficiencies and positioning the network to respond to the evolving market conditions. Turning to Slide 7. At the core of PSR 2.0 is a self-reinforcing operating system, a flywheel where disciplined execution compounds over time. At Norfolk Southern, we know when we run the plan, reduce recrews and improve network velocity, we create stability in the operation. Stability matters to our people and to our customers. It allows us to deliver our service and utilize assets more effectively, improve locomotive and field productivity and operate with better energy efficiencies. Operational gains have manifested into the continued evolution of our service plan and its execution. They feed directly back into better schedules, better planning and more consistent execution. We now have a connected system where every improvement strengthens the next. That compounding effect is how we intentionally build a more resilient railroad steadily over time. Our war rooms continue to translate this discipline into measurable results. The mechanical room has improved detection quality in our wheel integrity systems while delivering confirmed defect identification that directly improve safety and reliability. This is a clear example of technology process and field execution working together at scale. At the same time, our need for speed war room is embedding advanced analytics directly into daily operating decision-making. By pairing data science with frontline execution, we are improving plan quality, accelerating decisions and strengthening the performance across our network. Disciplined execution across the organization is delivering results. In the first quarter, we achieved a fuel efficiency record, strengthening our competitive position in a high fuel price environment while protecting margins. More importantly, it reflects the repeatability of this operating system. Taken together, our PSR 2.0 transformation and operating systems position us to continue to outperform our original cost reduction commitments and deliver sustained progress across safety, service and financial performance. With that, I'll turn it to you, Ed. Unknown Executive: Thanks a lot, John, and good morning, everybody. Let's move to Slide 9. We closed out the first quarter with significant volume momentum, and this is offsetting a volatile February where severe winter weather impacted our customer car loadings for several weeks. Overall, volume finished down 1%, primarily due to challenging intermodal market conditions as well as merger-related losses. However, revenue ended the quarter flat year-over-year and RPU was up 2%, with solid core merchandise pricing and some favorable high-level mix, which were somewhat overshadowed by some puts and takes within the individual business groups, particularly within coal. Within merchandise, volume and revenue increased 1% from a year ago, and this was driven by continued share gains in our chemicals and our automotive markets. RPU less fuel was flat year-over-year within the segment as strong core pricing was offset by mix interactions due to sustained growth of lower-rated commodities within our chemicals franchise that we've talked about for a couple of quarters now. In our intermodal business, volumes decreased 4%, reflecting difficult comparisons related to tariff front-running in 2025 as well as impacts from the winter storms in the quarter and ongoing merger-related losses from prior quarters. Overall, intermodal revenue declined 1% and revenue less fuel decreased 2% due to these volume impacts while improved pricing and positive mix within the segment drove ARPU higher by 3% and RPU less fuel higher by 2%. Looking at coal, volume increased substantially as higher electricity demand, stockpile replenishment and a supportive regulatory environment powered our utility segment. Now this strength was partially offset by reduced volume in domestic met coal. And so while total coal volume increased 9%, revenue declined 2% as mix headwinds from utility growth and continued overhang of export pricing drove ARPU down by 9%. Let's go to Slide 10. Here, we highlight several dynamic factors influencing our market outlook, including the conflict in Iran, which has obviously driven energy prices sharply upward in the near term. Our fuel surcharge revenue will be the most immediate impact as an offset to fuel expense. And additionally, we're aggressively pursuing volume and revenue opportunities in a variety of energy-related markets while also monitoring potential impacts to overall consumer demand. Looking at merchandise, we have a subdued, but positive outlook for vehicle production due to near-term economic uncertainty on the part of consumers. Manufacturing activity remains mixed with output forecasted to expand modestly amid the shifting economic landscape. Energy prices and global supply chains will be significant wildcards in the months ahead due to the conflict in Iran. And depending on the duration of supply chain disruptions, we could see near-term opportunities in markets like natural gas liquids, export plastics and potentially even crude oil. Looking to our intermodal markets. International volumes are going to remain soft due to continued tariff volatility and trade pressures. On the other hand, retailers have been maintaining lean inventories in response to this macro uncertainty for which a visual restocking offers some support from baseline freight activity. The truck market has turned relatively positive with dry van rates trending upward in the first quarter of '26 and capacity continues to rightsize while demand is firming. Taken together, we have an optimistic view of intermodal, although we're tempering that optimism somewhat due to increased competitor activity following the merger announcement. Let's turn to coal, where a combination of global factors is supporting pricing across both metallurgical and thermal seaborne markets. Now most notably, the conflict in Iran is impacting global LNG supply chains, opening the global market to consider alternatives such as U.S. sourced thermal coal. The Utility outlook remains positive as growing domestic electricity demand and inventory restocking should continue to support Norfolk Southern coal volumes. Okay. Let's move to Slide 11, where I'm excited to introduce an innovative new short line and transload partnership, which is subject to standard regulatory approval with Jaguar Transport Holdings. Unlike traditional short-line transactions across the industry, which have been focused on finding efficiencies and leveraging lower density lines, our new partnership focuses on growth in a high-density switching corridor located in Doraville, Georgia. Our new partnership, which includes operation of both an industrial short line and our transload terminal, will deliver exceptional local service and responsive capacity to customers in the growing Metro Atlanta market. Now here's what I want everyone to take away. This new partnership is just the latest example of our larger growth strategy in action. We're focused on building and executing innovative deal structures that deliver new capabilities and exceptional value for our customers. Look for more innovative solutions and new capabilities in the months ahead as we continue to execute on our strategy for growth. With that, I'm going to turn it over to Jason Zampi to review our financial results. Jason Zampi: Thanks, Ed. I'll start with a reconciliation of our GAAP results to the adjusted numbers that I'll speak to today on Slide 13. We incurred $52 million in merger-related expenses during the quarter, while total costs related to the Eastern Ohio incident were $10 million. Adjusting for these items, the operating ratio for the quarter was 68.7% and EPS was $2.65 per share. Moving to Slide 14, you'll find the comparison of our adjusted results versus last year. From a year-over-year perspective, the operating ratio increased 80 basis points. Inflation and fuel price headwinds drove an approximate 280-basis-point increase. However, we were able to mitigate a large part of that increase through productivity and higher revenue per unit. Taking a closer look at our quarter on Slide 15, overall costs were up 1% as we were able to offset an estimated 5% headwind from inflationary pressures. Specifically, fuel price alone was $31 million higher than last year and over $40 million higher than our expectations, a phenomenon that really accelerated in the later part of March and has continued here into the second quarter. We have continued to deliver on our productivity initiatives with fuel efficiency and labor productivity delivering over $30 million in savings. Partially offsetting those gains we had some volumetric increases that drove purchase services and rents higher in the quarter. So to summarize our financial results on Slide 16, while first quarter costs were only up 1% and in line with our cost guidance for 2026, the lack of revenue growth combined to drive a modest EPS reduction. While we overcame typical operating ratio seasonality in Q1, we are constantly striving to improve. We continue to refine our focus to unearth other opportunities, and you heard John talk about some of those initiatives as we work towards the $150-plus million of efficiencies planned for this year on top of the over $500 million in productivity we generated over the last 2 years. Fuel is obviously going to be a wildcard for the remainder of the year, and we anticipate it to be a headwind in the second quarter. But despite that, we expect to achieve typical margin seasonality from 1Q to 2Q. We continue to move forward. John and team are continuing to drive productivity while maintaining a safe railroad with consistent and predictable service levels and Ed and his team are pursuing high-quality growth opportunities across the entire book. Overall, we're executing to the plan we laid out, focusing on safety and service within a reasonable cost outlook while progressing through our merger application with UP. And with that, I'll turn it over to Mark to wrap it up. Mark George: Okay. Thank you, Jason. You all just heard that we are laser-focused on 3 fundamentals: First, safety. We continue to make progress through better tools, better processes and a culture that treats safety as a value, not a metric. Second is service. Our customers are seeing our resilience coming out of the winter weather and getting back to consistent, reliable performance even as volumes increase. And third, costs. We're maintaining tight control, driving productivity and aligning our expense base with demand as we fight to win volume. Overall, we see a promising story emerging where we can leverage any reasonable volume expansion the market presents with our commitment to control costs, giving us confidence in our ability to drive attractive and profitable growth. Now turning to guidance. Last quarter, we provided an adjusted operating cost envelope of $8.2 billion to $8.4 billion for 2026, and I'm proud of how the NS team has handled all the challenges in Q1 to remain on track for our guide, and I remain confident in our cost control playbook. Now while the underlying cost structure remains intact, fuel prices are obviously putting upward pressure on the cost outlook. As you heard from Jason, the price surge in March alone resulted in expenses that were $40 million higher than our expectations. While we are sensitive to the impact of conflict and inflating energy markets are having on people's lives, today, it is unclear on how long fuel prices will remain inflated and by how much over the remainder of the year. In light of this, we are maintaining our current cost guidance while acknowledging the near-term volatility and uncertainty on one of our key cost inputs. Our team has worked hard to be transparent with all of you. We will continue to monitor the situation as we progress through Q2 and gain more confidence on where fuel will settle, and we will update you accordingly. And finally, just as a brief update on the merger, we remain on track to refile the application by the end of the month. This revised application will be even stronger in articulating the benefits of creating the nation's first single-line transcontinental railroad. And with that, let's open the call to questions. Operator: [Operator Instructions] First, we will hear from Chris Wetherbee at Wells Fargo. Christian Wetherbee: Maybe 1 point of clarification and then the question. I guess, Jason, you mentioned normal OR seasonality 1Q to 2Q. Just kind of curious what you see that normal seasonality as being just to clarify. And then Ed, you talked a little bit about competitive activity, I think, particularly in Intermodal as it relates to the merger. I guess as you think about that, have we seen most of that happen already? Is that something that maybe still has yet to play out? And is it more than intermodal? Or is it really more sort of contained within Intermodal? Jason Zampi: Chris, it's Jason. Let me start with the OR question. Just a reminder, first about some of the headwinds that we've got in our plan. We've talked about inflation and some of those year-over-year pressures in that 4% range. We've got lower land sales. Specifically, you may recall, we had a $35 million land sale in the second quarter last year that we don't expect this year. We've got to absorb those revenue losses from the competitive merger responses. And now obviously, we have to deal with these fuel headwinds that are going to continue into the second quarter. So that said, you put all those together, all those headwinds, we're really still expecting to be in that normal kind of sequential OR improvement. We think about that at about 200 basis points, and that's really due to all the productivity initiatives that we've got going on. Mark George: And an uptick in revenue from first quarter to second quarter... Ed Elkins: And this is Ed. To your second question there. Yes, it's really, we think primarily an intermodal story. And it's playing out the way that we've anticipated so far. And frankly, we're doing everything we can to make sure that we're earning everything we can from both the road and from other modes. Operator: Next question will be from Scott Group at Wolfe Research. Scott Group: Ed, I have a question. intermodal pricing is arguably somewhat cyclical tied to truck pricing. Coal pricing is volatile. It feels like merchandise pricing has been like the constant, and I see merchandise RPU ex fuel flat and so maybe you'll say it's mix, but just some thoughts I would have thought or hoped we'd see some better merchandise pricing? And then Mark, just -- you mentioned quickly the merger, just applications coming next week, you've had months now to gather feedback. Anything that gives you more confidence in approval? Any feedback that gives you concern? Just any high-level thoughts. Mark George: Ed, why don't you go ahead. Ed Elkins: Sure. I'll probably disappoint you because I'm going to say it's mix. First of all, we've had a good quarter and a very strong track record on the core price here. RPU, of course, is not price. When we see our merchandise book, frankly, I think we're close to a record this quarter for RPU less fuel, it's really about growth in some of the lower-rated chemicals commodities, stuff like frac sand and NGLs, where we've done a really good job of earning new business there. And at the same time, we continue to take price very aggressively where we can. And I would say that for the most part, I'm really satisfied with where we've landed on core price and adding incremental revenue through some of those low rated commodities has been a good thing for us. Mark George: Yes. Thanks, Ed. And look, with regard to the merger, I think being out on the road and seeing how this has played out these past handful of months since we submitted the initial application, I'm feeling a lot better as we talk to customers and understand the concerns, as customers are listening to the opposition and some of the steer tactics, and we get a chance to clarify with facts, I believe we have a really good story. The new application is going to confirm what we said in the original application on the logic of doing this deal and the benefits that single-line transcontinental railroad will bring to the country and to our shippers. In fact, we're going to have a much stronger set of data that actually makes the case even stronger. So we feel pretty good about it and I think, right now, it's just about trying to get on the clock and by getting that application in on the 30th, the clock will start running. So I feel better, Scott, than I did even 5 months ago when I felt really good. Operator: Next question will be from Brian Ossenbeck at JPMorgan. Brian Ossenbeck: Maybe just to clarify with Jason, can you give us the fuel and weather-related costs into the quarter? I don't think we heard the specific call out here directly. And just Ed, maybe going back to the '26 market outlook, much of the different I guess, segments here moved a bit higher vehicle manufacturing warehouse in particular, truck makes sense, but maybe you can give a little bit more context as to what you're seeing and feeling in there that gives you the confidence to move those up a notch on your rating scale and maybe how that's expected to play out throughout the rest of the year? Jason Zampi: Brian, first part of your question. So thinking about fuel specifically, versus prior year was up $31 million just from price, but the really big impact that we're talking about is kind of that difference compared to what we expected. And just in the month of March alone, that was up over $40 million. So the price we paid per gallon in March was up 45% over last year, and we really see that same phenomenon kind of happening again here in April. So kind of splitting that up between prior year and then what our expectation was. I'd tell you on storm costs. And John, you can give a little color on this, but that was about million to $15 million in the quarter of costs. And John, you give a little background on that. John Orr: Yes. Let's just go to fuel for a second because it's not just the price story, it's the consumption story, and we set a consumption record that is compounding its value in the fuel efficiency cost levers that we've been pulling through our precision fuel operations all of last year and this year. With the help of finance, operations, IT, everybody, we've got an integrated fuel management system that is giving us value in both how we purchase it, how we distribute it and of course, how we consume it in our -- through our energy management on board. So those are some things that are in a high-cost environment give us those double coupon values that we can enjoy. And as far as the storms are concerned, they were very concentrated. Unfortunately, they're across the whole Eastern Seaboard from north to south. And most of that, we're able to work through very quickly, but in a concentrated way. So the money you see there impacted us and were the nice thing for our services, we're able to rebound and push through for the balance of the quarter. Ed Elkins: And this is Ed. You were asking about where we have optimism or where the markets are that we think have opportunities. I'll kind of just go around the horn and repeat someone has said on the prepared remarks and try to get in a little bit more detail. Start with intermodal, clearly, there's a reason to be optimistic about domestic Intermodal, domestic non-premium. We've seen growth there despite some of those competitive headwinds that we talked about. And I think there's more opportunity to come. When you think about higher fuel prices and what that does to our competitors on the road, it makes Intermodal more compelling naturally. And with the good service product that we're able to offer, I think we have a compelling case to make there. International side, I think there's a lot of trade uncertainty still out there. And frankly, when you're comping against the pull forward that happened last year, that's going to be challenged. If I go to coal, we continue to be constructive on the utility side of the business. I think restocking will continue. And I think electricity demand over the medium term at least is going to inflect upward. And so we feel good about that piece. Met side -- or excuse me, on the export side, I think the U.S. coals are finding new opportunities overseas because of all the all the disruption from the conflict as well as commodity price constraints -- well, commodity prices and constraints on sourcing from some of those things. So we'll see how that plays out. On the industrial side, I think I mentioned in the prepared remarks that we're exploring actively opportunities that are showing up in places like NGLs, export plastics as well as possibly even some of the petroleum products that we'll want to move in current environment. And generally, we feel pretty good about manufacturing. There are some real signs of life out there, whether you're looking at the economic factors or even listening to various stories. We have over more -- we have, gosh, 400 or so projects in our industrial development pipeline. We're actually starting to see that pipeline begin to move. Last year, it was really held pretty tight, but we've had 12 projects come online in Q1 here and that will be worth about 70,000 loads when they're at full rand. And for the full year, we'd like to see a few dozen more of those come across the finish line, and we think we can. Operator: Next question will be from Jason Seidl at TD Cowen. Jason Seidl: Wanted to talk a little bit on the Intermodal side. I mean, obviously, there's some competitive dynamics going on impacting the business. But one of the largest trucking companies indicated that they're already having inquiries from clients about peak season planning. I wanted to know where you stood with your discussions with customers on that? And then maybe a little bit on the new short line partnership initiative. Is this a one-off? Or do you see, if this gets approved, replicating this in other regions? And if so, where? Ed Elkins: I appreciate the questions. They are good ones. Again, I'm bullish on domestic non-premium Intermodal for the rest of the year, at least for the foreseeable future from a combination of factors, first one being, we've seen the supply of over-the-road drivers be constrained. I think that's going to continue to happen. I think I said it on an earlier call that we really need to see demand rather than supply be the thing that pushes this forward. And I think we're starting to see that. You look at the price of on-highway diesel and what trucks are having to pay for that. Intermodal is going to be a compelling value proposition for a lot of customers, but it's only compelling we have a good service product, and that's what John and I are really focused on how do we deliver that value for customers. So I feel pretty good about that piece. In terms of our new partnership with Jaguar, I meant what I said. It's an innovative deal that I think is going to deliver exceptional value for customers. And if we can make it work, and I am very confident that we can, we're going to look to replicate this sort of deal elsewhere. Operator: Next question will be from Jonathan Chappell at Evercore ISI. Jonathan Chappell: John, I wanted to ask you about 2 specific cost items and how we think about them going from here. You mentioned the fuel consumption down 6% year-over-year, but also down sequentially. I can't find another time where your fuel consumption was down 4Q to 1Q, especially given weather. So is that the new kind of base we should think about going forward, maybe not 6% year-over-year improvement, but continue to march lower from here? And then also on headcount, you're in this tight little range all year last year, about 19.3 to 19.4, stepped down about 300 in 1Q. What happened? Why is headcount down? And again, is this going to be a tight range where we should be about down 300 every quarter for the rest of the year? John Orr: Thanks for your questions. And on our fuel productivity, well, I'd like to take all the credit for such a sequential improvement, it is improving sequentially, but there are some accounting adjustments within that fuel number that give us a small benefit, but sequentially, we're improving, and that's really driven by treating fuel as a major cost lever and precision fueling, how we're managing that and how we're driving consumption, improving locomotive reliability and fuel efficiencies. As we said before, it's a journey, and the program will stretch over several years and it involves integrating more tech process refinement, both in the field and here at [ 650 ], and it's integral in our strategy. So well, it's never going to be a straight line and the volatility in pricing is going to have its own aspect. Our desire is to continue to march towards the most progressive fuel efficiencies we can get. So that's aligned with our locomotive strategies. It's aligned with our conversions from DC to AC and even found within how we restructure our zero-based plan model and continue to have a relevant plan rather than a historic plan. And as far as labor productivity is concerned, we're benefiting from fewer recrews. We've restructured our starts last year, our zero-based plan affected approximately 200 starts -- train starts and train revisions. This year, we have another pipeline of similar scale, and we'll continue to create predictable schedules. And that helps because as we restructure starts, well, it's being driven by volume and workload and held in place by zero-based plan, it's really focused on lowering held away, better using crew accuracy, lineups for crew rest and crew cycles and those was manifest into a more productive workforce. And our qualified count is really about not chasing the curve, it's about focus on retention, the accuracy of our new hire pipeline and our training and onboarding to better position us to absorb growth with the best existing resources. So our pipeline is always active. We're recruiting the best people we can find, being very selective and giving them the benefit of a very robust and precise training program. Lots of work to do there, but we're exercising labor productivity and workload so that we can maintain our service structure and give our customers the best experience we can. Mark George: I guess I would just add, we're really not just hiring to some aggregate number. We've got some 90 different crew bases across our network where people have to be qualified to operate in those specific districts. So we have to monitor the demographics of each of those crew bases. When we expect to see retirements come and get ahead of those curves because it takes about 6 months to hire somebody, train somebody, qualify them and expecting some attrition to happen during that process as well, so we got to do that for 90 different crew bases. Now some -- we've got cushion, others were in deficit because they're in locations where employment is full and a very difficult place to hire. So there's a lot of work that goes in to make sure that what productivities we're going to be driving across the network so that allows us to absorb attrition versus when will volume come. So it's a real delicate balance to determine the level of hiring, for which location 6 months in the future in a very uncertain demand environment. And I think right now, we're doing well, but I will tell you, it's probably the the single biggest debate we have internally is the level of hiring we need to do based on the market outlook. Operator: Next question is from David Vernon of Bernstein. David Vernon: Sorry, problem with mute. So I guess, Ed, as you think about the growth prospects for export thermal if that were to kick in, can you kind of help us understand kind of what the range of possible outcomes is there from a volume and also from a yield perspective, would that be additive to ARPU -- negative to ARPU? How do we think about the potential for a pickup in export coal affecting the revenue outlook for you guys? Ed Elkins: Yes. Export thermal would be helpful to our ARPU mix. And the first quarter got hurt by winter weather. It was just -- it was hard to get out of the ground, hard to move it and hard to dump it. But I think we're going to see that rebound, particularly if the conflict in the Middle East continues there's going to be more markets open up to U.S. coal. So yes, I'm optimistic about it, and it will be helpful. Operator: Next question will be from Richa Harnain at Deutsche Bank. Richa Talwar: I wanted to talk about costs, 1% cost increases by 5% inflation. Maybe you can talk about initiatives that you're focused on to keep that cost trajectory going. You gave us a lot on headcount and stuff and fuel efficiency. But maybe talk about some of the other buckets where you're seeing the most success what hasn't been done that you think there's more potential for? That's on the cost side. And then, Ed, I would love to hear, I think you said you feel really good about manufacturing picking up, and you've heard some anecdotes from your customers. I know you talked about the success you're winning on projects and things, but I'd love to hear maybe more broadly what your sense on the macro backdrop and what hand that's delivering to you? Jason Zampi: Yes, I'll start on the cost side. You point out the I think, pretty good cost control we had here in the first quarter, up 1% with 5% headwinds from inflation and fuel. And it's really driven by a couple of things. And we have a really good track record that we've shown over the last 2 years of getting about $500 million in productivity, and we've got a lot of projects and initiatives in the hopper to hit that $150 million plus. For the first quarter specifically, and then I'll turn it over to John to kind of talk about what we're working on the remainder of the year. just from fuel efficiency alone, we last year improved 5% the year before that 3%, now first quarter, we're hitting an all-time first quarter record. So really strong performance there. And that -- we will continue down that path. And that labor productivity continues to be one of our biggest components where we really benefited quite a bit over the last 2 years. And as we've talked about in the past, not just T&E productivity, but really labor productivity across the board. John Orr: Yes. Jason, you hit on a disciplined approach to this. and we're committed to it. We've adjusted our budgets accordingly. But it's across all streams. Productivity, obviously, we started in T&E, our zero-based planning through 2025 and version 3 that we're undertaking in 2026 is giving us a benefit on crew starts with a focus on continuing to create our own capacity through weight and train length that give us the opportunity to really make best use of our infrastructure. And from the T&E, there are incidental costs that come out of that with running a more resilient railway, and leveraging of our portals with fewer train starts, more mechanical resilience, better locomotive capability. So all of those [indiscernible] flow through to purchase services and others. Big focus on our next generation of purchase service and enterprise resource management and the discipline around those major purchases and fuel is going to continue to be a big driver of that. But I'm really proud of what the team is doing on safety, significantly lower incidents and oxidants even above and below the FRA reporting threshold. That's giving us the ability to really drive the plan, have accountability where our cars are, have more accuracy on when our trains arrive and depart. That gets us lower equipment rents that gets us into better locomotive turns, better locomotive utilization and there's significant value in those things. So it is really working the fundamentals with projects that are coming online and really driving big benefits. It's small wins and big ones put together. They are going to really create the flywheel that we've got that's creating the improvement. Operator: [Operator Instructions] Next will be Jordan Alliger at Goldman Sachs. Jordan. Jordan Alliger: Just wanted to come back to sort of -- I know you've talked a lot about the intermodal service, that's a key focal point. And I was looking at your network update slide, and it looks like the intermodal service composite has been sort of like 85%, which is off from the high of low 90s. So I guess, is that weather related? Is it temporary? How do you address that? And in your view, do you need to be above 90% to start getting market share back? John Orr: We'll let talk about market share. But if you've heard me speak on these calls, I'm never pleased about any particular metric. But I am pleased that sequentially, we're pacing slightly ahead of where we were last year at this time. And it's not just the average, it's really getting down to the lane, getting down into the customer, the important commitments that we've made to our customers and their product view and their sorting view and the end-to-end capability that we're building in them. So I would love to be a higher number. I'm striving to be a higher number. But sequentially, I'm very pleased that we're seeing that improvement. And my job is to give Ed every opportunity to walk into any customer with good service in his back pocket to negotiate is our market share. Ed Elkins: Thanks, John. And look, I think we will have a better number, and I know you're working on it. But look, you nailed it, John, I mean, you said that we've focused at the lane level. There are some lanes that have a lot of potential, some lanes that have some potential. And where we have a lot of potential and we have very good data on that, we're very focused on delivering an exceptional service product. And that's what John and I talk about every single day. That doesn't necessarily manifest itself in an average, but I can tell you right now that we are laser-focused on those lanes and those opportunities where we have a lot of potential to take traffic off the highway and deliver a very good service product for them. So thank you. Operator: Tom Wadewitz at UBS. Thomas Wadewitz: So Mark, I want to refer back to the fourth quarter call. I think you were kind of maybe somewhat fresh off the share shift in Intermodal. And you had some fairly aggressive comments, I think, on just competing in the market and you're going to compete hard in the market. What do you think the competitive dynamic is like among rails in the East? It seems like there are kind of puts and takes, maybe you've got a little growth in chemicals, autos, maybe a little late rail share, I'm not sure, and then you got -- they've got some intermodal. But how do you think about that? Is it pretty stable? And then I think on the -- I guess, on the international and domestic, is there a share shift in international? Or that's just like kind of completely like-for-like customer? And I think, Ed, you talked about the just the weakness in international being maybe just demand-driven, but not share shift. So a couple of thoughts on competitive dynamic and then just shared international intermodal. Mark George: Sure, Tom. Thanks. Good question. And look, obviously, following the merger, you saw a flurry of new alliances taking place with our Eastern peer and Western peer and some of the Canadian railroads and that has obviously had some level of impact on us. I mean it's enhanced competition, frankly, just from the mere announcement of this merger. So we talked about some of the losses that we've had and that we're going to continue to fight like heck to retain our share and fight in other areas to gain to offset some of that. And that's what the team has been doing. They've been doing a great job, I think, competing. Look, I think you have to step back. This North American rail network is running pretty damn well. All the railroads are operating well and they're all offering very good competitive products, which is really great because we are an integrated supply chain and we cheer on the other railroads to have good service because we all want to be -- we all interchange with each other. Half of our volume interchanges with another railroad. So we don't want anybody to be in a bad service situation. So it's not just us, we want everybody to be good, and they are all good right now. But when it comes to the competitive offering, I think the product that John and the operations team has put out there has been really good. It's been really resilient. And I think we're doing a good job on the commercial side as well being more responsive and working to solve problems with our customers. So I feel really good about our competitive position right now, I do, in pretty much all the areas. I think the challenge we have on the international side, there's a lot of uncertainty going back to tariffs of last year. There has -- there's been probably some inventory depletion that's taken place and it hasn't seemed to really fully started to restock yet. So international has been relatively weak. Not sure when that's going to turn around. Domestic on the other hand, for other dynamics, I think given the cost profile with what fuel is doing to truckers, we feel pretty good about being able to taking some share off the highway. But Ed, why don't you talk a little bit more? Ed Elkins: Sure. I think you kind of nailed it. We believe that the product we're delivering is very competitive in the marketplace. And you're right, Mark. We want all of our rail competitors to be very strong because oftentimes it's hard to get customers to discriminate between ourselves and other railroads. We're all just one big railroad. And that's true in many cases. So we want strong rail competition. We're really focused on the highway. The competitive landscape continues to be very competitive. And frankly, higher fuel prices are probably helping us deliver additional value for our customers across the board, particularly on the domestic Intermodal side. And we've seen a little bit of share shift, as you alluded to. Some of it's a competitive response, some of it's just more book diversification. And we continue to work on how we can improve our position. I'm really proud of the team and what they've been able to do. Operator: Next question will be from Walter Spracklin of RBC Capital Markets. Walter Spracklin: My question is for Ed, taking a little more high level on the freight recession. We're hearing a lot of commentary from your counterparts in trucking that is outright saying the recession -- this recession is coming to an end. But your peers in railroads seem to be a little bit more conservative in terms of making that call. Is this just a supply-side thing where the new rigs have driven better pricing for trucks, and that's what's causing that more positive view? Or I know the trucks have talked a little bit about higher demand in some of the industrial verticals. Just curious if you're seeing any green shoots on the demand side outside of truck pricing or just your own pricing that is suggesting that the freight recession might be finally coming to a bit of an end here? Ed Elkins: Really good question. And I think I'm probably talking to the same folks you are when it comes to trucks on the supply side. There's a few uncertainties out there in a few parts of the equation that haven't been solved yet. The first one being what's going on with housing and interest rates and inflation. And those are 3 big factors that I think really need to resolve themselves before we can declare anything over, so to speak. At the same time, we see the IPI come up. We've seen manufacturing for, I think, 3 straight months now, be above water. We see some strength in the auto industry, both in terms of demand as well as supply. So there are some green shoots, and we are cautiously optimistic about certain segments. But I remain vigilant on those 3 factors that I think really need to come around before we could say we're out of the woods. Mark George: Yes. I think to call an end of the freight recession may be a bit premature. But I think for us to be able to start taking share from highway, fuel prices are going to help that. So that's a little bit of the optimism you hear. And then some of the green shoots we see in industrial production, which usually has a 6-month lead time, it gives us a little bit of optimism that maybe there's something they're brewing. And I think, Ed, you would say that when it comes to manufacturing, we're not necessarily seeing it yet except for some of the components that go into manufacturing. Those are areas like plastics and some metal components, we're starting to see some growth there. So we're not calling an end to the freight recession, but we're saying there's green shoots. So we'll keep an eye on it. Operator: Next is Brandon Oglenski at Barclays. Brandon Oglenski: Sorry, Mark, you got one more from me. I'll keep it pretty short here. Jason, can you just help us and maybe already address this, but the average sequential OR change that you guys would view in 2Q? And maybe just at a higher level, I mean, you guys have been working towards like more safe outcomes and everything I get it, but the operating ratio has been moving maybe in the wrong direction. Should we be thinking, though, if that freight market is turning that there's a lot of like potential for incremental margin here, too? Ed Elkins: Yes, absolutely. No doubt about that. We've got the capacity to move all this volume. John and the team have done a great job from a service perspective and making sure we're ready to handle it. We've got the resources in place. And then to your point, because of that capacity, when this comes through, it's a really good incrementals. Mark George: I think you just wanted to hear the sequential margin improvement, you would think a couple of points. Ed Elkins: Yes. Yes. About 200 basis points of sequential OR benefit from first quarter to going into the second quarter. Mark George: Thanks a lot, Brandon. And look, I think just to kind of recap a little bit here. We told you at the beginning of the year that we were focused on preserving safety, maintaining service and controlling costs while we were going to fight for every dollar of quality revenue we could. And we did exactly that in the first quarter. Revenue being flat later than we hoped, but we are more optimistic on the top line as we enter the second quarter because there are some signs of life emerging in the market. Now that said, this is a very dynamic world with an awful lot of cross currents. So we've just got to keep an eye on that. Let's keep an eye on those weekly volumes, and that will give you some indication of how things are shaping up. But we got a tight grip on cost right now and real good momentum on productivity and efficiency. So we're going to carefully balance all of our resources, and so that we're able to move the volume when it comes while we continue on this never-ending drive for productivity and efficiency. And regarding the merger, we're going to submit our revised application here on the 30th. Like I said before, the rationale is the same, but the depth and the quality of the data in the application considerably strengthens our case. And look, when you step back and look at it, our customers, our supply chains, they're increasingly national and global, but our U.S. freight rail network is fragmented. So a single-line transcontinental network is going to simplify service, reduce interchange complexity, that's going to allow freight to move more efficiently, more safely and more reliably from origin to destination. That's what this is about. It really is going to deliver a very compelling proposition for more customers to choose rail over highway. And ultimately, I think that's good for the country, and it's good for everybody. So thanks all for your participation in today's call and stay safe out there. Thank you. Operator: Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Have a good weekend.
Operator: Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hilltop Holdings First Quarter 2026 Earnings Conference Call and I would now like to turn the call over to Matt Dunn. Please go ahead. Matthew Dunn: Thank you. Before we get started, please note that certain statements during today's presentation that are not statements of historical facts, including statements concerning such items as our outlook, business strategy, future plans, financial condition, credit risks and trends in credit, allowance for credit losses, liquidity and sources of funding, funding costs, dividends, stock repurchases, subsequent events and impacts of interest rate changes as well as such other items referenced in the preface of our presentation are forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risks and uncertainties. Our actual results, capital, liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in the preface of our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that certain information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop.com. I will now turn the call over to Jeremy Ford. Jeremy Ford: Thank you, Matt, and good morning. For the first quarter, Hilltop reported net income of approximately $38 million or $0.64 per diluted share. Return on average assets for the period was 1% and return on average equity was 7.1%. To summarize the quarter, PlainsCapital Bank reported a continued expansion in net interest margin while generating year-over-year growth in both core loans and core deposits. PrimeLending narrowed its operating loss when compared to the first quarter of 2025 as the mortgage business benefited from higher origination volumes. And HilltopSecurities delivered strong earnings as net revenues across its business lines showed good momentum to start the year. At PlainsCapital Bank, a favorable 3.38% net interest margin and the continued execution on a robust loan pipeline helped to produce $47 million of pretax income and a 1.2% return on average assets for the quarter. Operating results at the bank were supported by active management of the deposit portfolio and a further remixing of earning assets into core loans. This combination led to an increase in net interest income of $8 million versus the first quarter of 2025. Results in the quarter included a $1.8 million provision expense. This was largely driven by a stressed auto note credit that we have discussed in prior quarters. Will is going to provide further commentary on credit in his prepared remarks. The bank is poised to deliver continued core loan growth as we seek to organically recruit talented bankers to our platform and expand on our existing customer base by offering value-enhancing products and services. Additionally, we expect to grow core deposits on a year-over-year basis, but we anticipate modest seasonal volatility in core deposit balances. We believe the backdrop of a healthy Texas economy and a constructive shape to the yield curve will continue to provide a favorable operating environment for PlainsCapital Bank. Moving to PrimeLending, where the company reported a pretax loss of $2 million during the first quarter. The improvement in financial results was primarily driven by year-over-year increases in loan origination volumes and gain on sale margins as well as cost structure enhancements that were implemented in 2025. However, overall profitability within the mortgage business remains under pressure from stubborn headwinds such as affordability and the interest rate lock-in effect. The spring and summer months historically drive elevated origination volumes at PrimeLending. However, persistent volatility in long-term interest rates creates greater uncertainty around second and third quarter production than in a typical year. Given the structural challenges that homebuyers currently face, we anticipate that overall volumes will be materially impacted by prevailing mortgage rates. We remain focused on achieving internal productivity metrics to best position the business for profitability in this prolonged mortgage cycle. During the quarter, HilltopSecurities generated pretax income of $15 million on net revenue of $116 million for a pretax margin of 12.7%. Speaking to the business lines at HilltopSecurities. Public finance services continued to produce solid top line results as it delivered $23.6 million of net revenue. which is a modest decline versus last year's robust first quarter. Structured finance showed strength in a volatile interest rate environment as the business line delivered net revenue of $23.6 million benefiting from a material increase in DDA lock volume on a year-over-year basis. In Wealth Management, results further improved versus the prior year's first quarter from higher advisory fees and transaction fees. We continue to see organic growth in the wealth business in the midst of a competitive operating environment. Finally, fixed income services delivered $14 million of net revenue which was a 58% increase compared to the first quarter of 2025, primarily from strong sales volumes. Despite the highly volatile interest rate environment, HilltopSecurities produced a solid first quarter and improved pretax income by 60% on a year-over-year basis. The firm continues to add scale to our core competencies and deliver value to our clients. Moving to Page 4. Hilltop maintained strong capital levels with a common equity Tier 1 capital ratio of 19.1%. Additionally, tangible book value per share increased to $31.97. During the period, we returned $11.8 million to stockholders through dividends and repurchased $47.5 million in shares. Thank you. And I'll now turn the presentation over to Will to discuss our financials in more detail. William Furr: Thank you, Jeremy, and I'll start on Page 5. As Jeremy discussed, for the first quarter of 2026, Hilltop reported consolidated income attributable to common stockholders of $37.8 million, equating to $0.64 per diluted share. The quarter's results included 7% growth in net interest income, driven by ongoing efforts to manage deposit levels and costs, coupled with approximately 5% year-over-year average HFI loan growth at PlainsCapital Bank. In addition, PrimeLending and HilltopSecurities delivered growth in fees driven by improved origination volume and margins in mortgage and improved fixed income trading results during the first quarter of 2026. I would like to remind all call participants that the prior year's first quarter results included $41.8 million of revenue and $28.8 million of net income related to the sale of the merchant banking investment and a legal recovery at Plains Capital Bank. Turning to Page 6. During the first quarter, Hilltop's allowance for credit losses declined by $2.5 million to $89 million. This decline is largely attributable to a modest improvement in the overall credit quality of the portfolio, including the net impact of positive credit rating migration, payoffs and new loan growth during the quarter. While the economic condition impact during the first quarter was limited, we do believe that the macroeconomic environment, including the geopolitical landscape will continue to provide volatility and uncertainty in future periods. As we've stated since the introduction of CECL, we believe that the allowance for credit losses could be volatile and the future changes in the allowance will be driven by net loan growth in the portfolio credit migration trends and changes to the macroeconomic outlook over time. As of March 31, allowance for credit losses of $89 million yields an ACL to total loans HFI ratio of 106 basis points. Turning to Page 7. Net interest income in the first quarter equated to $112 million, including $1.3 million of purchase accounting accretion versus the prior year same period Net interest income increased by $7 million or 6.7%, reflecting our ongoing efforts to prudently lower deposit costs while continuing to focus on growing customer deposits and relationships across the franchise. At this point in the rate cut cycle, the team at Plains Capital Bank has achieved an interest-bearing deposit beta from the first 175 basis points of reductions from the Federal Reserve of 74%. While we're pleased with these results to date, we recognize that competitive intensity and pricing pressures could escalate in the future. Our current expectation for a through-the-cycle interest-bearing deposit beta is 60% to 65%. In addition to the improved interest-bearing deposit beta outcome, Hilltop's overall asset mix has improved versus the prior year with average excess cash levels declining by approximately $1.1 billion, while average HFI loans have grown by approximately $407 million. We expect that this mix shift will continue to benefit net interest income into the future quarters. Currently, our estimates for future NII and NIM reflect our expectation that the Fed will execute 2 additional rate reductions in 2026. I'm turning to Page 8. First quarter average total deposits were approximately $10.6 billion and have declined by approximately $82 million or less than 1% versus the fourth quarter of 2025. On an ending balance basis, deposits declined by $347 million to $10.5 billion from the prior quarter ending balance level. The decline in deposit balances reflects the expected outflows during the quarter from certain of our public entity and commercial clients, specifically related to seasonal distributions. Our expectation is that deposits will stabilize and grow throughout the second half of 2026. Looking at the chart on the left of the page, we're very pleased with the stability in our noninterest-bearing deposits as our banking teams continue to focus on growing relationships, including growth in our treasury management suite of products. During the quarter, total interest-bearing cost declined from the prior quarter by 20 basis points to 249 basis points as of March 31. Given the current market conditions, including a competitive operating environment, we do expect that interest-bearing deposit costs will begin to stabilize at these levels until we see additional movement from the Federal Reserve. Moving to Page 9. Total noninterest income for the first quarter of 2026 equated to $188 million. First quarter mortgage-related income and fees increased by $5 million versus the first quarter of 2025, reflecting growth in loan origination volumes of 16%. While the mortgage market had begun to stabilize during the fourth quarter of 2025 and the beginning of the first quarter of 2026, the volatility created by concerns over the Iran conflict has impacted markets interest rates and slowed mortgage demand during the latter part of the first quarter. Given the uncertainty regarding the ongoing conflict and its impact on inflation, yields and housing demand, we are maintaining our mortgage production volume expectation at $9 billion to $10 billion for the year. In addition, we expect the gain on sale margins will remain relatively stable at the current levels given these environmental challenges. Further, revenue from principal transactions, commissions and fees increased by $11.2 million, driven primarily by growth in fixed income services, coupled with growth in wealth management and structured finance. The most significant driver of the decline in revenue recorded in other noninterest income, related to the sale of merchant banking investment during the prior year same period, which as noted on the slide, equated to $41.8 million. It does remain important to recognize that both fixed income services and structured finance businesses, HilltopSecurities can be volatile from period-to-period as they are impacted by interest rates, overall market liquidity and production trends. Turning to Page 10. Noninterest expenses remained relatively stable from the same period in the prior year, declining by $3 million to $248 million. During the prior year same period, expenses were impacted by $4.8 million, resulting from the net impact of the merchant banking investment sale and the recovery recorded in professional services. Looking forward, we expect expenses other than variable compensation will remain relatively stable as the ongoing focused efforts related to streamlining our operations and improving productivity continue to support lower headcount and improved throughput across our franchise, helping to offset the ongoing inflationary pressures that persist in the market. Turning to Page 11. First quarter average HFI loans equated to $8.3 billion, which grew by $218 million or 2.7% versus the fourth quarter levels. Continuing from 2025 and into the first quarter of 2026, we have continued to see solid activity across our commercial loan pipelines. Growth in the pipeline has been geographically dispersed centered in commercial real estate lending. Further, while the most recent pipeline trends are encouraging, we are monitoring for any negative demand impacts resulting from the current conflict in the Middle East, higher interest rates and higher oil and gas prices. Based on the current business flows, we are expecting full year average HFI loan growth to range between 4% and 6%. As noted in prior quarters, we continue to retain mortgages originated PrimeLending and would expect to continue to do so in the coming quarters. Our expectation is that we will retain between $10 million and $30 million per month. I'm moving to Page 12. First quarter's results include $4.3 million of net charge-offs. This quarter's net charge-offs largely reflect the write-down of loans within the auto note finance credits that we've discussed over prior quarters. During the first quarter, the net charge-offs in the Auto Note portfolio equated to $3.6 million. As shown in the chart in the upper right of the page, nonperforming assets increased modestly, driven largely by the negative migration of one credit in our commercial real estate portfolio. Regarding credit overall, we've not seen any prevailing trends that cause undue concern in our portfolio. However, we do continue to monitor all aspects of the portfolio very closely as higher interest rates, international conflicts and higher energy prices could have a negative impact on our clients over the coming quarters. Moving to Page 13. As we move through the second quarter of 2026, there continues to be a lot of uncertainty in the market regarding interest rates, inflation and the overall health of the economy. We are pleased with the current positioning of our balance sheet and the ongoing work that our team is executing each day to move our company forward through what has been an ever-changing operating environment. As is noted in the table, our outlook for 2026 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes and we adjust our business to respond, we will provide updates to our outlook on future quarterly calls. Operator, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call. Operator: [Operator Instructions] Your first question comes from the line of Woody Lay from KBW. Hannah Wynn: This is Hannah Wynn in for Woody Lay. My first question is on the NII range that you gave. I saw it bumped up this quarter from your previous guidance. And I was wondering if you could give a little color into this and where you're seeing loan yields come on and also where you might expect this to change if we don't end up seeing a rate cut this year. William Furr: Thanks, Hannah, for the question. Well, as we noted kind of in the prepared comments, we've seen what we believe to be pretty solid loan growth. We expect that loan growth to continue throughout the year. We're also seeing, as we noted, an improved deposit beta, the 74% through the cycle, while we would expect that likely diminishes if there are additional Fed rate cuts, we're very pleased with kind of where that has positioned us. So that was the basis in large part for the increase in the guide. As it relates to overall loan yields, our going on loan yields during the quarter were about 6.5% overall. So that's -- we view that as pretty favorable. Hannah Wynn: Okay. Great. And then my other question is on the capital front. I know you guys were active again on buybacks this quarter and wondering where you expect this activity to continue and also where you would put M&A in your capital priorities right now? Jeremy Ford: This is Jeremy. Yes, we were active. I think we're being more consistent with our repurchases this past quarter. And we have an authorization of $125 million for the year. So we'll be market dependent. We'll be looking for us to be consistent in our share repurchase and M&A is always available to us. We have the resources and the balance sheet. I think that -- so it would be a priority if we have the right strategic fit or if it is also a financially compelling transaction. Operator: Next question comes from the line of Matt Olney from Stephens. Matt Olney: I want to dig more into your mortgage expectations for the remainder of the year. Will, I think you mentioned you're keeping the mortgage volume guidance for the full year unchanged. I guess some of the other -- I think some of the other third parties have moved more cautious if rates have increased in recent months. So anything else you can share about your outlook here? And I see you're assuming some Fed cuts in the NII guidance. I'm curious if you're also assuming lower rates with your mortgage outlook. William Furr: Thanks for the question. From a mortgage perspective, what we're kind of asserting here is we don't have clear visibility into the buying season for the second and early part of the third quarter. What we do see, and we noted in our comments was more muted demand in March and certainly directly after the conflict began overseas. And so as a result of that, we likely are moving. We would say we're going to -- we're still within the range. But if we -- historically, we guided -- if you look through our guidance, it's kind of midpoint. And so as we see softness, you could move to the lower end. But that said, it all depends on how temporary kind of the effects are and how the overall market recovers once the conflict is resolved. So we're kind of cautiously optimistic there. And I know the team at PrimeLending continues to work hard to grow the business and originate mortgages for our customers. So that's the primary view there. As we get more clarity around the impacts and the longevity of the impacts, we'll provide more perspective next quarter. Matt Olney: Okay. Well, what about -- specifically about your rate assumptions. I mean we see the NII assumptions and the rate backdrop there. But what about the broker-dealer, the mortgage piece? Are you assuming any rate changes in other -- is it kind of through the entire enterprise? Just any more color on your rate assumptions. William Furr: Yes. So we -- our current assessment is 2 additional rate cuts, and we apply that across all of our businesses consistently. We also apply that to all of our guidance consistently. So that is the basis. I'd tell you, if we got no cuts, and that was all that occurred, which is also a pretty static and sterile analysis. But if that occurred, you could see NII move higher $8 million to $10 million, and then we would see likely a slightly better or improved revenue perspective in HilltopSecurities as well. Matt Olney: Okay. Appreciate that. And then as far as the net interest margin, great margin performance this quarter. It looks like the driver, interest-bearing deposit costs went lower. I was hoping you could speak to any more drivers of the margin performance this quarter? And just how sustainable do you think these levels are? William Furr: Yes. So I think from a deposit perspective, we feel good about the work the team has done. The 74% interest-bearing deposit beta through this point in the cycle, we feel very good about and it's higher than we've historically modeled or experienced. That said, there -- and we noted this, there continues to be kind of ongoing competitive intensity. And by virtue of that, we could see the need to increase deposit rates modestly. That said, we're going to be cautious and thoughtful about that because we are focused on growing overall relationships and deposit balances over time. And that's why I noted that our kind of through the cycle, if we get some additional Fed activity in terms of downward rates, we'd expect to see that beta back up to the 60% to 65% level. And so that's kind of how we're thinking about it. As you look at NIM, we do believe we've kind of gotten to a peak NIM level given a consistent Fed. And so we would guide NIM flat to modestly down from here. And again, we feel good about the guidance we provided on NII as it relates to both interest rates as well as our balance sheet positioning and our overall deposit cost. Operator: Your final question comes from the line of Cole Martin from Raymond James. Cole Martin: I'm on for Mike Rose this morning. Just on expenses, I was hoping you could talk through your nonvariable expenses guide of 0% to 2% and kind of what the puts and takes would be to really get to flat growth this year? And then also how much of that is technology driven? William Furr: Yes. So I think the guide really presumes, I'd say, normal inflationary increases in personnel-related expenses as well as our technology service provider costs. Those are in there. We are obviously making thoughtful investments across the franchise to grow our bankers, our client-facing and customer-facing associate groups. And so that's really the basis of what would drive it higher. And we would expect it to be modestly higher on a year-over-year basis, just given those investments that we're making. Obviously, we continue to make investments in technology, our data platforms, the deployment of AI where practical across our organization certainly is a key focus as well. And those investments are kind of considered in the guidance as well as we look forward. So from an expense perspective, we are very pleased with the work the team has been able to do to drive productivity throughout the organization and keep our expenses other than variable compensation relatively stable over the last couple of years, but we do continue to see inflation, and we also expect to continue to make again, investments in client-facing resources as well as technology to continue to position the organization to be successful into the future. Cole Martin: Great. And then on deposits, I was hoping you could give a little bit of color on how much of an impact deposit competition that's had and kind of where you see the health of the consumer going out through 2026? William Furr: Yes. So I think deposit competition remains robust for sure. And what I would say is we've seen largely rational behavior, what we would call largely rational behavior by the competitive set through this portion of the rate cycle. And so we've been able to operate within that. And so when I say rational, we don't see a lot of competitors offering rates that we would call irrationally high, even though there's certainly activity out there to kind of grow clients and teaser rates and the thing and the like. So from that perspective, we feel like the competitive intensity is still there. It's pretty high. But that said, it seems rational at this point. Operator: There are no further questions. That concludes the question-and-answer session and today's call. You may now disconnect.
Anders Edholm: Good morning, and welcome to this presentation of SCA's 2026 First Quarter Report. With me here today, I have President and CEO, Ulf Larsson; and CFO, Andreas Ewertz, to go through the results and take your questions. Over to you, Ulf. Ulf Larsson: Thank you for that, Anders. And also from my side, a very good morning. So despite the increasing costs and the continued challenging market for forest industrial products, we delivered SEK 1.1 billion on EBITDA level and by -- that's an EBITDA margin of 23% for the first quarter. Segment Renewable Energy had a record high result during the first quarter, and that was driven by electricity prices, strong deliveries and also a very good market for liquid biofuels. Our new wind farm located in Jamtland started operations during the quarter and contributed to a high profitability within the segment. And our high degree of self-sufficiency in strategic areas continue to be an important factor to mitigate higher costs, partly offsetting higher wood raw material and energy costs. Turning over to some financial KPIs for the first quarter. As already said, our EBITDA reached SEK 1.1 billion, and that corresponds to a 23% EBITDA margin. Our industrial return on capital employed came out on 2% accounted for the last 12 months, and the leverage was 2, while our net debt to equity reached 11.9%. And I will now make some comments for each segment, starting with Forest. Stable harvesting levels from our own forest have contributed to balanced supply of wood raw materials to our industries during the period. We have seen a long-term trend of increasing sawlog prices, and they continued up also in the first quarter. However, availability of sawlogs has increased towards the end of the quarter due to the big storm, and that will also gradually reduce prices coming quarters. Regarding pulpwood prices, they have been rather flat for a couple of quarters, and now they have started to come down. When we compare the first quarter '26 with the first quarter '25, sales were up 2%, while EBITDA was up 1%, mainly due to higher prices for wood raw materials. Over to solid wood products. And -- in general, we still have a slow underlying market for solid wood products. We continue to note signs of improvement in the repair and remodeling segment, and we also see a decreased production in Scandinavia and Germany, generating a better supply and demand balance, especially for spruce. Stock levels remain on the high side among producers for pine, but are on normal levels for spruce and stock levels at customers continue to be on the low side. Delivery volumes were lower in Q1 '26 in comparison with the first quarter of '25, but first quarter '25 was an exceptionally strong quarter. SCA stock level of sawn goods is currently on a very balanced level. The price for solid wood products increased by a bit less than 4% in the first quarter of '26 in comparison with the fourth quarter of '25. And this development is in line with what I said when we presented the report for the fourth quarter last year. Sales were 13% lower in comparison with the same quarter last year. EBITDA margin decreased from 16% to 4% due to higher raw material costs, lower deliveries and a negative currency effect. Today's stock level of solid wood products in Sweden and Finland is described at the top left on this slide and is shown in relation to the average for the last 5 years. As mentioned earlier, we note that the inventory level is on the high side, especially for pine, while the SCA inventory level is balanced. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmill production has been lower than average in the beginning of '26. And in the diagram to the top right, we can note that the export price index decreased in the first quarter. SCA's prices, however, increased due to a better mix. Going into the next quarter, I estimate that prices in the market will increase. On the other hand, increasing freight costs will have a negative effect, resulting in a slight net price increase for SCA. Looking forward, we will probably see a stable development going into autumn with an okay balance between supply and demand. Over to pulp. When comparing the first quarter '26 with Q1 '25, sales were down 16%, mainly due to lower prices and negative currency effects. EBITDA was down 88%, which was also driven by lower prices and negative currency effects. During the third and fourth quarters of '25, demand for NBSK pulp was rather weak and prices were stable at low levels. Net prices on NBSK then decreased further in the first quarter of '26, very much due to the higher rebates in Europe and U.S. At the same time, gross prices increased in Europe and U.S. despite weak demand. In China, demand for NBSK pulp was on a normal level during the first quarter, but prices remained low. The conflict in Middle East is adding complexity in the pulp market, and it also increases the cost pressure. Looking at CTMP, demand was very low in January and February, and prices were at the bottom. However, during March, we saw an improvement in demand and prices started to increase. Inventories of NBSK were on a high level during the first quarter. Hardwood inventories on the contrary were below average level. Finally, CTMP inventories have been on a rather normal level. Moving over to containerboard. Sales were up 4% in Q1 in comparison with the same period last year, driven by higher delivery volumes, somewhat mitigated by lower prices and the negative currency effect. EBITDA was down by 56%, driven by lower prices, negative currency effect and higher energy costs. We have noted a rather soft box demand during the start of the first quarter, but it has since then developed in a cautious positive direction. The retail business remains a positive driver, and we have also seen the manufacturing industry recovering in the beginning of the year. European demand of containerboard has been moving sideways during the first quarter, in line with the box demand. There is no new containerboard capacity expected to start up in the first half of '26, although we can expect a ramp-up effect of new capacity started in '25 with the vast majority coming in testliner. Kraftliner inventories remain above historical average in Q1, as you can see in the graph. During the first quarter, the availability of OCC has been in balance with supply and demand, which in its turn has led to stable prices in the first quarter. Prices for brown kraftliner in Central Europe has during the first quarter decreased with EUR 25 per tonne and for white kraftliner with EUR 20 per tonne. Anyway, we now feel a more solid underlying demand in combination with strong cost pressure. And due to that, we have implemented a price increase of EUR 60 per tonne for brown kraftliner and EUR 40 per tonne for white kraftliner from the 1st of April. Finally, I will say some words about renewable energy. And in the segment, we have had a stronger quarter compared to the same period last year and maybe the strongest quarter ever. And that is, of course, mainly due to higher production and stronger margins in our -- with St1 jointly owned biorefinery in Gothenburg. In addition, we have also had a positive impact from our new wind farm in the county of Jamtland. Electricity prices were high during the quarter, which had a positive impact in our wind business. Our new wind farm, Fasikan, was taken over in time and on budget and has been ramping up production during the quarter. SCA's land lease business is stable at 10.6 terawatt hours according to plan. And this is, as said before, equal to 20% of installed capacity of wind power in Sweden. The market and price for solid biofuels were strong due to cold weather during the first quarter. Anyway, the positive effect was mainly offset by higher costs for raw materials compared to same quarter last year. For liquid biofuels, we have seen continuous high margins compared to previous quarters. The main reasons are the implementation of RED III across European countries as well as strengthened EU control mechanism regarding imported products and feedstocks. In March, we also see additional price increases due to the situation in the Middle East. We expect market volatility in renewable fuels to remain high as Europe ramps up the blending mandates, both in HVO and SAF. And with that, Andreas, I hand over to you. Andreas Ewertz: Thank you Ulf, and good morning, everybody. I'll start off with the income statement for the first quarter. Net sales decreased 8% to SEK 4.7 billion, driven by lower prices and negative currency effects. EBITDA decreased 33% to SEK 1.1 billion, driven by lower prices, negative currency effects and higher cost for wood raw material. EBIT decreased to SEK 543 million and financial items totaled minus SEK 86 million with an effective tax rate of below 20%, bringing net profit to SEK 380 million or SEK 0.54 per share. On the next slide, we have the financial development by segment. Starting with the Forest segment to the left. Net sales were in line with the previous quarter at SEK 2.5 billion. Higher prices for sawlogs were offset by lower delivery volumes to SCA's Industries. EBITDA decreased slightly to SEK 884 million due to seasonally lower harvest from SCA's own forest compared to the previous quarter, which was offset by higher prices for sawlogs. In Wood, prices were slightly higher compared to the previous quarter. Net sales decreased to SEK 1.3 billion due to lower delivery volumes. EBITDA decreased to SEK 49 million, corresponding to a margin of 4%. High costs for wood raw materials and lower delivery volumes were partly offset by higher prices. In Pulp, net sales decreased to SEK 1.6 billion compared to the previous quarter, while EBITDA increased to SEK 40 million, corresponding to a margin of 3%. Lower costs for planned maintenance stops were offset by negative currency effects and lower prices. In the quarter, we took market-related downtime in our CTMP mill due to high electricity prices. In Containerboard, net sales were in line with the previous quarter at SEK 1.7 billion. EBITDA decreased to SEK 104 million, corresponding to a margin of 6%. Lower prices, negative currency effects and higher energy costs were partly offset by lower costs for raw materials and higher delivery volumes. Renewable Energy, we had a record quarter. EBITDA increased to SEK 206 million, corresponding to a margin of 31%. The increase was driven by high electricity prices, the new Fasikan wind mill and higher results in liquid biofuels. On the next slide, we have the sales bridge between Q1 last year and Q1 this year. Prices decreased 4% with lower prices in pulp and containerboard, partly offset by somewhat higher prices in wood. Volumes were flat with higher volumes in containerboard, but lower in wood. And lastly, currency had a negative impact of 4%, bringing net sales to SEK 4.7 billion. Moving on to EBITDA bridge and starting to the left. Price/mix had a negative impact of SEK 255 million. Higher costs from mainly wood raw materials had a negative impact of SEK 111 million. We had a positive impact from energy of SEK 34 million and a negative impact from currency of SEK 203 million. In total, EBITDA decreased to SEK 1.1 billion, corresponding to a margin of 23%. Looking at the cash flow. We had an operating cash flow of SEK 569 million in the quarter. And as you know, other operating cash flow relates mostly to working capital currency hedges and should, therefore, be seen together with changes in working capital. Looking at the balance sheet. The value of the forest assets totaled SEK 104 billion. Working capital decreased to SEK 5 billion. Capital employed totaled SEK 112 billion. Net debt stood at SEK 12 billion and equity totaled SEK 100 billion, corresponding to a net debt to equity of 12%. And we are now almost finalized our large ongoing investment projects. Thank you. With that, I'll hand back to you Ulf. Ulf Larsson: Thank you, Andreas. And just to summarize, I mean, we have had a challenging first quarter. I think we have controlled what we can control in a good way. We see a positive effect from the ramp-up of our big strategic investments, and we are looking forward to the time when we can move over those extra volumes to our main market in Europe and the margin that can create. We have also started up our new wind farm outside Bracke in Jamtland and the project was done on time and in budget. So by that, I think we open up for questions. Operator: [Operator Instructions] We will now take our first question from oannis Masvoulas of Morgan Stanley. Ioannis Masvoulas: Three questions from my side. I'll take them one at a time, if that's okay. First, on containerboard. So you're starting from a fairly depressed EBITDA margin level in Q1. And going into the second quarter, you should be benefiting from lower fiber costs as well as lower power costs. How about other input costs around logistics, chemicals, et cetera? Just trying to understand the overall development into the second quarter on the cost side. And then related to that, is it fair to expect another increase in kraftliner prices in May to help restore margins? I'll stop here for the first one. Ulf Larsson: I'll start with the market and then Andreas will give you the cost perspective. And I guess, I mean, as you realize, we did increase the price for kraftliner from 1st of -- first, we reduced the price by EUR 25 per tonne for brown kraftliner in the first quarter and EUR 20 for white top. And then from 1st of April, we have announced that we will also come through with price increases of EUR 60 per tonne for brown and EUR 40 per tonne for white from 1st of April. And that will stepwise be implemented in the price for the first quarter. I guess we see no price movement in May. We haven't heard anything more from testliners producers. And I think it's fair to say that they have to start and then I believe that kraftliner can come after. So nothing is planned for May. But if we will remain on this level when it comes to gas prices, I guess, we'll see some attempts in -- yes, later in Q2 or in the beginning of Q3. So that's my view. Then Andreas, about the cost situation. Andreas Ewertz: Yes. On the cost side, if we start with pulpwood, the pulpwood will continue to go down slightly in Q2, but very slightly. As we talked about earlier, we have this 6 months lag effect. So the pulp wood prices will go down mainly in the second half of the year. OCC prices are fairly stable. If we look at electricity prices, they're very high in January, February. So depending on how the electricity prices develop, but most likely, it will be lower compared to Q1. And then in terms of transportation costs depending on the oil price development, but the oil price will, of course, affect transportation. So that's the big moving parts. Ioannis Masvoulas: Okay. Then the second question, can you comment about current pulpwood prices? I know you mentioned a slight benefit in the industrial units in Q2, but just trying to understand where are we now on pulpwood prices versus the peak of 2025? Andreas Ewertz: Yes. So pulpwood prices, they went down slightly in Q4, slightly in Q1, but we are talking about maybe 1% to 2% down. It would continue to go down 1%, 2% in Q2. And then you get a larger effect in Q3 and in Q4 because of this lag effect. Ioannis Masvoulas: Okay. And just the last one for me. You talked about the CTMP market where demand remains low, same with prices. Could you give us an update on operating rates in Q1 here and your expectation for Q2? And how are you feeling about this business given the depressed market backdrop? Are you willing to run the asset? I know it's a low-cost mill, but just trying to understand how you're looking at optimizing the business here. Ulf Larsson: Well, in the first quarter, I would say that we have maybe run the CTMP mill at 50% or something like that, I mean, due to high electricity prices and also the margin cost for pulpwood. So that's the case for first quarter. And I mean, CTMP has been a very bad business in the first part of this year. Now we see that the CTMP market is picking up. And I guess one part of it is that short fiber pulp is picking up step by step and maybe we see some kind of substitution. I also feel that we have a better consumption by board customers, not the least. And so I mean, just now, we are running more or less full for the moment being. Of course, we keep an eye on the electricity price. And if it's too high, then we have to close down, but we are rather positive for the CTMP business in the second quarter. Operator: And we'll now move on to our next question from Linus Larsson of SEB. Linus Larsson: I'll start with a follow-up on the input cost side. And if you could maybe elaborate a bit on the pulpwood cost declines that you're seeing in your wood consuming operations over the course of the next few quarters. If you could quantify in any way what you're expecting going into the second half of 2026, please? Andreas Ewertz: Yes. So as I said, now we got maybe 1% down on pulpwood cost in Q1 compared to Q4, while the sawlog prices increased with around 7% in Q1 compared to Q4. In the second quarter, we expect both pulpwood and sawlog prices to go down slightly, but we're talking about 1%, 2%, maybe 3% on pulpwood and 1% to 2% on sawlogs. And then we'll see a bigger effect in Q3 and Q4. But it's hard to say exactly now because it's now we're going to -- in second quarter, then we're going to get more of these storm volumes, of course, will help to get the price down. So we'll see, but we expect a bigger decrease in Q3 compared to in Q2. Linus Larsson: Great. And then -- and I hate to ask this, but if you could maybe please help us dissect the other line, which was weaker in the first quarter? And if you could help us understand what the normalized level might be going forward? And the reason I'm asking is that this is actually where more than the entire deviation compared to consensus occurred. So if you could just help us understand that would be super helpful. Andreas Ewertz: Yes. Firstly, we have a seasonal effect, but the biggest thing is, of course, profit in stock. So when we sell something, for example, from the Forest business to the Wood business, then the Forest segment, of course, makes a profit. But until the Wood division sells that final product, you eliminate that profit. And that's why you have this cyclicality between -- dotted line between different quarters. So because of the increased prices of sawlog and a bit lower delivery volumes in our Wood segment, you have a higher other costs, but that's only periodization between different quarters. Linus Larsson: Great. That's really helpful. And like given what you just said, Andreas, any pointers for what to expect in the second quarter? Andreas Ewertz: I think if you look at the full year, of course then these prioritization effects, I mean, they get canceled out. So if you look at the full year, then you get quite a good picture of the yearly other costs. Linus Larsson: Sorry, what do you mean -- if I look at the past couple of years, that... Andreas Ewertz: Yes, yes, exactly. The past year. Operator: And we'll now move on to our next question from Robin Santavirta of DNB Carnegie. Robin Santavirta: Now in terms of Middle East crisis, you mentioned in the report that it increases uncertainty and of course, the oil price is also higher and you call out this as an indirect negative. But you have high energy self-sufficiency. Do you think you have a competitive advantage to Continental European producers, especially in containerboard? Ulf Larsson: Yes. I mean, we are not dependent on Russian oil and gas or oil at all, more or less. I mean that is, of course, a positive thing. And the other thing is that when it comes to distribution, I mean, we used to say that we have 40% -- degree of self-sufficiency due to the fact that we now produce liquid biofuels in Gothenburg and our part, I mean, account for around 40% coverage of the total cost. So that is, of course, very positive. And as you could see also in this quarter, I think we did the strongest quarter ever for renewable energy and a big part of that was, of course, liquid biofuels. Robin Santavirta: Right. And then also related to containerboard from what I hear from not only you, but from other companies in the market, it seems demand has increased quite significantly in March and April, and it's certainly in containerboard grades in Europe and the start of the year was much slower. What explains the pickup in demand? Is this just pre-buying before prices go up? Or are there other dynamics in play? Ulf Larsson: It's hard to say really. I think one thing can be that you have -- I mean, I guess people, they are securing the raw material supply in different areas due to the geopolitical situations. So that might be one thing. But we also feel that -- I mean, the retail sector has been quite good for a while. And now we feel also that the industrial customers, they are coming back. And I mean, not at least today, I mean, we have seen some reports and also yesterday from some companies. And I mean, they also say that the order inflow is quite strong also from the more heavy industry, which has -- that will have a good impact also on our kraftliner business. So yes, the market is definitely strong just now. The balance is -- still we are a little bit on the high side when it comes to the inventory level. And I mean, we all know that we have a lot of testliner capacity out there, curtailed just now, I guess. And on the other side, if we will -- if gas prices will remain on this level, there still -- I guess, many of them, they lose money. So I guess we will see -- it's a mix between supply-demand and cost pressure and so on. But I guess we can -- we might see some further price increases coming into the autumn. Robin Santavirta: I understand. Finally, just on saw timber. I mean, this market, of course, is tricky. But when I look at log prices in Europe and when I speak to companies there, they complain about scarcity, essentially of sawlogs -- prices of -- log prices that are much higher than you have in Northern part of Sweden. Why wouldn't you sort of have better -- I mean, you're in black figures most of the quarters, even in this tough environment. But could it be a setup where you basically do not need the construction market to come back and still get higher prices? Or is there something I'm missing with the mismatch of sawlog prices in Europe versus Northern part of Sweden. Ulf Larsson: I don't know if I fully took your question, but you talked about price deviation from Northern -- Southern part of Sweden... Robin Santavirta: I mean, they are paying 2x more for sawlogs... Ulf Larsson: No, no, they don't. No, no, they don't. And I think that's a misunderstanding. No. I mean you look at public price lists, and that is, of course, not the price in the market. So I guess, when we do some comparisons, I mean, you don't -- it doesn't really differ too much. And also when it comes to log size, I mean, the log is much more narrow in the Northern part in comparison with the Southern part and so on. So I don't think that delta is -- yes, we are favored. Robin Santavirta: So the price is roughly the same. Ulf Larsson: Maybe not the same, but it's not -- as you say, I mean, it's not the double price. So I mean, I think it's -- and then, of course, now with -- now you have the storm effect, and we haven't seen really the result out of that. You see a big difference between spruce logs and pine. You see also in the end market that now we have a deviation for sawn goods by SEK 300 per cubic meter more or less if you compare spruce and pine to the advantage of spruce, of course. And I guess that's a result of the spruce beetle effect that we had in Central Europe a couple of years ago. So I mean they have a deficit of spruce logs. So it's a more complex market than that. And you cannot really look at official price list. That's my clear message. You have to -- because what we buy in the market is something completely different in many cases, where you have to add premiums and things like that. Operator: And we'll now take our next question from Johannes Grunselius from SB1 Markets. Johannes Grunselius: It's Johannes here. I have two questions. I would like to zoom in on your energy business and the containerboard business. So on energy, you said it already, Ulf, but you had a nice tailwind from higher biofuels. So I was wondering if you could provide some color on what that means. I think your earnings delta were like SEK 60 million Q1 versus Q4. How much did biofuels supported that earnings growth? Ulf Larsson: I can first start with the production. I mean, we are also in the ramp-up phase with biorefinery in Gothenburg, and that is the first thing. We have had record production in that unit, and we are far above design capacity. So that is a very positive thing, of course. And then in addition to that, of course, we have had a very good price development. And then Andreas, you can. Andreas Ewertz: Yes. So if you look in Q4 compared to Q1, the solid biomass pellets and unrefined fuels basically had the same profitability in Q4 as in Q1. So the increase comes from -- roughly half from the wind segment and roughly half from the biofuel business, roughly speaking. Johannes Grunselius: Okay. But what you're saying, it's more of a ramp-up benefits, not sort of pricing benefits. And could you comment on Q2, how we should think about the pricing effect here coming from higher prices? Andreas Ewertz: Both. We got both, higher margin in the biofuel business compared to Q4 as well as good production. And we'll have to see how the market develops. But for energy, I mean, if fuels continue to be high, that, of course, will benefit our fuels business. But then, of course, Q2 is a weaker market for our Solid Biomass segment and Wind compared to Q1. Johannes Grunselius: Got you. And then on containerboard, if you could elaborate a bit on basically operations and also the mix because I assume you're still in sort of a ramp-up phase in Obbola. So do you foresee sort of tangible benefits from more efficient operations in the coming quarters and also benefits from a more commercial mix, if you can elaborate on that one, please? Ulf Larsson: I mean, step by step -- I mean, we produce more in Obbola. And by that, we also will be -- if you count per tonne, I mean, then you will be more also cost efficient. And first, the volume and then we fine-tune the cost level. And this year, as we said before, I mean, we will probably produce around 100,000 tonnes more in '26 in comparison with '25. And step-by-step, we will be more and more cost efficient. So that is one thing. But as you say, I mean, all surplus volumes today, I mean, they are placed in overseas market and the margin is completely different if you have to place those volumes in Asia or U.S. or South America or wherever. So I mean, when the market comes back in Europe, that will, of course, improve the margin quite a lot, I would say. Operator: And we'll now take our next question from Gabriel Simoes of Goldman Sachs. Gabriel Simoes: So I have two. The first one, they're both on the forestry side. But the first one is related to your forestry -- your silviculture cost in the first quarter, which are usually lower. But then I would expect some of that to come back in the second quarter, right? So overall, if you could guide us towards the level of expected profitability on a per cubic meter basis for wood harvested maybe excluding the revaluation, of course, for the remainder of the year and for the second quarter, specifically, that would be very helpful. And then a longer-term or more strategic question here would be basically on the valuation of these forests, right? So the company now trades at a significant discount to the book value of the forest. And I just wanted to pick your brains on whether this is something that bothers you and if there are any measures to try and unlock some of that value of these forests. Andreas Ewertz: Yes, I can start with the seasonality of the forest. I won't go into exact figures, but just to get some flavor. And as you know, we harvest seasonally more from our own forest in Q2 compared to Q1. So that's a net benefit. Then you're absolutely right that in Q2 and Q3, especially, we have our fertilization and silviculture cost because it's then we replant, we do this fertilization. And that's maybe, roughly speaking, what can it be SEK 50 million to SEK 80 million per quarter in Q2 and in Q3. And then, of course, we will see how higher oil prices, of course, will also affect our -- the transportation and harvesting business. So on the plus side, we harvest more from our own forest, will have slightly lower prices, and we will have higher seasonal costs for silviculture and fertilization. Ulf Larsson: And then when it comes to the valuation of the forest and if you plan something to unlock the hidden value of the forest, I mean, we don't. I mean, we have had a couple of big transactions recently. And I mean, they show that the book value is also the market value. And I mean, we trust that. And forest and forest business is a cyclical business. So you have to like that and see opportunities when you have them. And I guess we will -- we are looking forward to what's going to happen now when Stora Enso will split, of course, and that might have an impact on the view of the price of the forest. Otherwise, I mean, we are following continuously the market for -- I mean, the local market for -- when you buy and sell forest estates, and we can just see that we are more or less on the same level as before. So I mean nothing has changed. Operator: And we'll now move on to our next question from Oskar Lindstrom of Danske Bank. Oskar Lindström: Three sets of questions from Danske Bank here. First off, I'm just very curious, are sort of higher oil prices and talk of possible aviation fuel shortages in Europe creating a greater interest from you or from others in your aviation fuel project in -- biorefinery in Ostrand? That's my first question. . Ulf Larsson: Yes. I mean, as you say, just now, it is good profitability in the biorefinery in Gothenburg. And by that, you can say that conditions for the Ostrand project should also be very good. And I guess they are. But that is, of course, a much bigger bet. And as we have also said, this market will be very volatile, and it's also very capital intensive. And I guess if -- before you start a big project like that, you need to have some security when it comes to some kind of offtake agreement or at least the price level for SAF long term. I mean you can talk about resilience and degree of self-sufficiency and things like that, both in the union, but also in Sweden. Will that come? We don't know. And the tricky thing, I guess, with these kind of projects is always the political risk. I mean we are used to take the technical risk, the project risk, and we can handle that. But the challenge is really the political risk. Will something change when we have a new government in place, both in Sweden and in the union and what kind of impact will that have? And that will, of course -- it's more challenging to raise the money needed for such a big projects. Oskar Lindström: But -- follow up on that. I mean, would you be open to doing that as a JV then? Ulf Larsson: Absolutely. I think that's the only solution really. I mean we can provide a fantastic place close nearby Ostrand, lots of synergies. We also have from now the energy supply, which is really important. But maybe the most important thing, I mean, we are maybe the only player in that part of Sweden that can provide with the raw materials, I mean, the feedstocks. I mean, I guess we are a perfect partner in the JV, but this project is, of course, too big for us alone. And -- so we have to talk with some friends if this should come through. Oskar Lindström: Very interesting. My second question is, I mean, continuing on that with the Middle East conflict causing disruptions, as you mentioned. We hear a lot about how this is having an impact on Continental European producers, perhaps especially of containerboard, who are dependent on natural gas and oil for energy. What about sort of -- is it causing other shifts sort of that you're noticing, for example, in Asia or having impacts on logistics, which is causing shifts in the market or in the cost curve that are meaningful for you. Ulf Larsson: Yes, I don't know if we see some structure -- I mean, for everyone, I mean, we see that the freight costs, I mean, they will increase, of course. And in our case, as I said before, I mean, we have maybe a degree of self-sufficiency due to the biorefinery we have in Gothenburg up to 40%, and that is different for different companies. And as you also say, I mean, we are not depending on oil and gas prices as we have a fantastic energy supply situation in not only SCA, but Scandinavian companies. So I mean, that is, of course, in our advantage. But input costs will increase and freight costs, oil, one thing. The other one is, of course, chemicals into the industry. But on the other hand, I mean, that will have, I guess, a bigger impact from plastics and other competing materials. So it's really hard to say how this will turn out. If you will see a big restriction now when it comes to aviation and things like that, that might create the same situation as we had during the pandemic that people they will stay home and build Verandas and do a lot of work in their gardens and the houses and so on that might create some kind of better market for solid wood products. I mean, it's hard to say and it's hard to speculate. We are so focused now on trying to control what we can control. And that is also something that we are very happy in the first quarter. I mean we have had a good production. The cost level is good, very strong energy business. We see a positive effect of those strategic projects that we have launched. And -- but still, we are at the bottom of the business cycle just now, and let's see when it will recover. Oskar Lindström: And my third and final question is more straightforward. In the Renewable Energy division, I mean, you've obviously been able to benefit here in Q1, partly from the ramp-up, of course, which will be hopefully sustainable for the rest of the year, but also from higher prices due to the situation in the Middle East. Are you able to lock in any of the higher prices through hedging or something like that so that we get a little bit of that benefit for the rest of the year as well? Andreas Ewertz: If we start with the wind business, then we don't hedge anything. I mean, that's just our self-sufficiency, so then we're exposed to spot prices. If we look at our solid biofuel business, here I say you have much more long-term stable contracts and they have some spot volumes, but a large share is long-term contracts and they are quite stable prices, while the spot, of course, that moves up and down with the market. And with the biofuel business, there you do some contracts in advance, but not very far. So I would say we are exposed to spot, and that's part of our strategy to be -- have a high self-sufficiency. As I said, on oil, we are around 40% self-sufficient. So there we want to have when the cost goes up or down, our renewable energy income goes up and down as well. So I would say we don't have that long hedge exposure on renewable energy, more spot. Operator: And we'll now take our next question from Andrew Jones of UBS. Andrew Jones: I just got a couple of questions. First of all, on containerboard, you mentioned the first EUR 60 hike through in April, nothing expected in May. The index realized EUR 30. I'm curious what you're seeing from some of your competitors where some of them hiking, but with a bit of a delay, maybe coming through in May? Or like what explains the lower index move? And just to confirm, like are your customers in April already paying that EUR 60? Has that been fully implemented? Ulf Larsson: Good question. And yes, I guess they -- many of them, they have announced price increases from 1st of May. So what you see now in the index is the price hike from SCA. And I mean, as I would say, the major part of our business is also related to the index movements. I mean, we will not get even 50% of this price increase in April, but we will get it in May. So that's the case. Andrew Jones: Yes. Okay. That makes sense. And just on the Wood Products business. I think you guided last quarter to flat price development in the first quarter, and it looks like it went up about 7% on a revenue per tonne basis. So kind of curious what changed versus your initial thought process? And can you give us some guidance on how you see prices developing in the second quarter? Ulf Larsson: Maybe you have a better memory than me. I think I said 4%, and I think we had 4% more or less. But I'm not sure. But anyway, we had a small price increase, but the price development for sawlogs was even higher. So that's also the main reason for the profitability coming down. In the second quarter, I mean, it was a little bit of a disappointment for me. I thought that we should have a higher price increase in the second quarter in comparison to the first quarter. But I guess we will have around 4%, a little bit more for spruce, a little bit less for pine, a little bit more in some markets, a little bit less in other markets. So we try also to work with the mix, of course. And now this quarter, we see that log prices will come down a bit. But on the other hand, I guess that 50% of the price increase will be mitigated by higher freight costs. So it will be a small positive effect from increasing prices and also a positive -- small positive effect from decreasing log prices, I would say, in the second quarter. Andreas Ewertz: And you're right. I mean, as Ulf said, we probably expected prices to be a bit more flat in Q1, but then get a larger effect in Q2. Now we got a bit of that Q2 effect already in Q1. So I think the increase was about the same as we thought, but less -- more in Q1 versus Q4, but less in Q2 versus [indiscernible]. Ulf Larsson: Yes, related to what we said. But my thinking was that we should have a stronger market really in the second quarter. But that has not come through. It is much stronger for spruce than in comparison with pine. So spruce is maybe a little bit better and pine is a little bit less good, I would say. Andrew Jones: Yes. That's clear. And actually, just on the freight question. You have -- I know you have some of your own vessels, I mean, obviously, that probably doesn't protect you from bunker fuel and all that sort of stuff. But I mean, how does -- can you quantify the impact on your freight costs across the various divisions from what you're seeing now and maybe compared to what you think your peers might be paying, but without that self-sufficiency in vessels? Andreas Ewertz: [indiscernible] so figures you can work with, it's that if you took both bunker oil, we took oil for burning and then also diesel for trucks and everything. I think our total exposure is around 130,000 to 140,000 tonnes. And then we get back 50,000 tonnes is from tall oil and that's linked to the fossil price plus a green premium. So there we are self-sufficient at around 40%. And then, of course, [indiscernible] and our pellets business will be also an indirect hedge. But if you remove those, I mean, our total exposure of 130,000 to 140,000 tonnes, minus 50,000, that's around 80,000, 90,000 tonnes of exposure. And of course, this indirect effect from pellets and [indiscernible]. Operator: We'll now take our next question from Cole Hathorn of Jefferies. Cole Hathorn: I'd just like to ask on the pulp markets for softwood pulp in particular. What do you think is ultimately needed to bring down those inventory levels and tighten this market here? Because we've seen some kind of demand shift to the hardwood side. We've still got a lot of inventory levels in China. Softwood futures have come lower. It just seems like quite a disconnected market, softwood versus hardwood. So I'm just wondering what do you think needs to play out over the next few months to help balance the softwood market and ultimately support further pricing? Ulf Larsson: It's a very good question. And I mean we are a little bit surprised ourselves, I must say. I mean, we have heard also talk about interest in implementations in China that swing capacity is now running long fiber and so on. But honestly, I don't know really. But what we have seen is that a positive price development step-by-step for eucalyptus pulp. And just now, I mean, you have a small delta between hardwood and softwood. So I guess that is the first sign that we will see some kind of substitution going forward. But again, when you look at the inventory level, you are still on the high side for softwood and on the low side for hardwood. And also, we have big producers in hardwood, they have announced some curtailments. But on the other hand, we have also heard that some Scandinavian producers, they have also announced curtailments now. But I mean, short term, it's always a question about supply-demand balance. And I guess, the price difference now between short and long fiber, that will help a bit. We see that on CTMP already now, definitely for March, but also, I guess, coming in now in the second quarter, that will help us. I don't feel that we have any structural things that dramatically have changed the situation. I mean, as long as something is a little bit cheaper than something else, I mean, then you try to substitute as much as you can. So I mean, long term, I don't think this is a structural thing. It's more a question about supply-demand. And so let's see, but a little bit annoying, of course. Cole Hathorn: Well, hopefully, we see some capacity closures. But if I look at some of the softwood producers, there's some listed players that have seen their debt trade down. It seems like a lot of the market is really under pressure. If assets do become available, how does SCA think about M&A in that context at the right price? Or are you just comfortable staying with your business in Sweden? Ulf Larsson: Yes. I think our -- I mean, we are an integrated forest company with the industry. And I mean, I have a great respect to move into other geographies if you don't -- can guarantee the raw material supply. So I think the integrated model we have today, I think, has been very profitable over time. And also in relative terms, I mean, we perform well. And as it is just now, we have also done a lot of big strategic investments, and we will be very cautious now. We will focus on, I mean, ramping up what we have started and also to consolidate the balance sheet. And so I mean, for us, no M&As, at least not short term. Operator: And we'll now take our last question from Pallav Mittal of Barclays. Pallav Mittal: So firstly, just following up on oil and appreciate all the self-sufficiency and hedges that you have highlighted. But if I just look at your transportation and distribution, it is almost 25% of your cost base, so say, roughly around SEK 4 billion and diesel is up 30%, 35%. So how do you plan to offset that SEK 1.5 billion cost headwind that you have? And just as a follow-up to this, are you seeing the roadside pulpwood increasing on the back of diesel costs going up? Andreas Ewertz: As I said before, we have around 140,000 tonnes of exposure to bunker oil and diesel and oil in our industries. And roughly that we produce 50% to get back from a tall oil. So there is an exposure of 80,000 to 90,000 tonnes. So of course, I mean, if the prices of diesel or oil goes up, I mean, they will have a 90,000 around roughly exposure, so they can calculate the figure. And then in [indiscernible] that's the pure oil part. And then transportation, I mean, part of our business, I mean, we have our own RORO ships. So there is only the bunker exposure. And of course, [indiscernible], especially to U.S. and there we freight ships. And of course, then it depends on how the market for renting those or freighting those vessels move forward. But to bunker and diesel, our net exposure is around 80,000, 90,000 tonnes. Pallav Mittal: Okay. And then just -- how should we think about your capital allocation now going forward given the pressure on -- I mean, the market and the free cash flow generation? Do you think maintaining dividend is possible in this market environment? Andreas Ewertz: So in terms of CapEx, I would say that we will have around SEK 1.5 billion in current CapEx this year and then around another maybe SEK 400 million, SEK 450 million in strategic CapEx. And then in terms of capital allocation with dividend or with share buybacks or other strategic CapEx, I think that's something for the Board and now we're focusing just on ramping up and getting the cash flow for our investments. Operator: With no further questions on the line, I will now hand it back to the host for closing remarks. Ulf Larsson: And that concludes our presentation of the first quarter report, and we wish -- welcome back in July for our half year report. Thank you very much for joining us today.
Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the SouthState Bank Corporation First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to William Matthews, Chief Financial Officer. Please go ahead. William Matthews: Good morning. Welcome to SouthState's First Quarter 2026 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young and Jeremy Lucas. We'll follow our pattern of brief remarks followed by Q&A. I'll refer you to the earnings release and investor presentation under the Investor Relations tab of our website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties which may affect us. Now I'll turn the call over to you, John. John Corbett: Thank you, Will. Good morning, everybody. Thanks for joining us. For the quarter, SouthState delivered a return on assets of 1.37% and a return on tangible common equity of 17.6%. As we progress through 2026, our 4 main priorities are: first, to expand our commercial banking sales force; second, to deliver meaningful organic growth; third, to systematically retire shares at an attractive valuation; and fourth, to learn how to leverage the benefits of artificial intelligence and implemented throughout the company. We're making good progress on all 4 fronts. As far as recruiting, we're now in a yield curve environment that is more favorable to balance sheet growth. And with the consolidation disruption occurring throughout our markets, we see an opportunity to expand our commercial banking team by 10% to 15% in the next couple of years. In the last 6 months alone, our division presidents were successful in attracting and growing our commercial banking team by about 7%. We're going to continue to be opportunistic, but based upon the rapid success we may slow the pace of hiring in the next few months. Second, for organic loan growth, loan pipelines have grown 50% since last summer, and that's resulted in solid annualized loan growth of 8% in the fourth quarter and then another 7.5% loan growth in the first quarter. Pipelines grew significantly again in the first quarter, which gives us confidence moving forward. Our previous loan growth guidance for 2026 called for mid- to upper single-digit growth this year. There's a decent chance that we could end up on the higher end of our guidance. The biggest highlight by far has been the success in Texas and Colorado. On a year-over-year comparison, loan production in those 2 states have more than doubled from $500 million in the first quarter of '25 to $1.1 billion in the first quarter of '26. And Houston, specifically, experienced the highest loan growth of any market in the entire company this quarter. Third, on stock buybacks. We've repurchased nearly 4% of our shares outstanding since the beginning of the third quarter at an average price of $95.28. We continue to see this as an attractive use of excess capital at a time when bank valuations seem, at least to us, disconnected from fundamental performance and intrinsic value. And then fourth, we're enthusiastically embracing the potential for artificial intelligence. We're deploying more and more Copilot licenses and training our bankers at the individual user level. We're researching and beginning to deploy AI tools from our major software providers at the department level. And we're looking for ways to reengineer processes between departments at the enterprise level. More to come, but we're pleased with the way the entire organization is embracing these new tools with the goal of improving our speed and scalability, speed for improved customer service and then scalability for efficiency and shareholder returns. Before I turn it over to Will, I'll point out that we've refreshed some of the slides in our deck to highlight the value proposition of being a SouthState shareholder. Our story hasn't changed and it isn't complicated. We're building a premier deposit franchise and we're doing it in the fastest-growing markets in the United States. We adhere to a geographic and local market leadership business model. It's a model that empowers our division presidents to tailor their team, products and pricing to deliver remarkable service to their unique local community. And at the same time, an incentive system built on geographic profitability that instills a CEO and shareholder mindset. This is a model that produces durable results that have outperformed our peers on deposit cost, asset quality and overall returns. And the outperformance is consistent and durable over the last year, over the last 5 years, and over the last 20 years, ultimately leading to a top quartile shareholder return over multiple cycles. Will, I'll turn it back over to you to walk through the details on the quarter. William Matthews: Thanks, John. Our net interest margin of 3.79% was just below our guidance of 3.80% to 3.90%. The slight miss was primarily a result of deposit costs being a few basis points above our expectation in spite of the 6 basis point improvement from the prior quarter. Loan yields of [ 5 96 ] were slightly below our new loan production coupons of [ 6 09 ] for the quarter and accretion of $38.8 million was in line with expectations and $11.5 million below Q4 levels. Excluding accretion, our NIM was up 1 basis point. Net interest income of $562 million was down $19 million from Q4 with the day count impact being $12.6 million of that difference. As John noted, we had another good loan growth quarter with loans growing $896 million, a 7.5% annualized growth rate. Average loans grew at a 6.5% annualized rate. Our Texas and Colorado team led the company in loan growth, and every banking group within the company grew loans in the first quarter. We have some optimism about continuing loan growth as our pipeline at quarter end was up 33% compared with year-end. Noninterest income of $100 million was at the high end of our range of 55 to 60 basis points guidance. We had a solid quarter in capital markets and wealth with seasonally lighter deposit fees, offset by stronger mortgage revenue, which was aided by an increase in the MSR asset value net of the hedge. NIE of $359.5 million was in line with expectations. Looking ahead, we have no changes to our NIE guidance for the remainder of the year. But if we have greater success in our recruiting efforts and we've been pleased with our success thus far, NIE could, of course, move up somewhat. Net charge-offs of $10 million represented a 9 basis point annualized rate for the quarter, and this amount was matched by our provision for credit losses. Nonaccrual and substandard loans were down slightly. Payment performance remains very good, and we continue to feel good about our credit quality. Turning to capital. We repurchased 1.5 million shares in the quarter at a weighted average price of [ $100.84 ]. This makes a total of 3.5 million shares repurchased in the last 2 quarters. And our share count was 97.9 million shares at quarter end, down from 101.5 million shares a year prior. Like last year's fourth quarter, the first quarter payout ratio was higher than we expect to maintain over the long term, but we thought it is an opportune time to be more active. Our strong loan pipeline and recruiting success give us some optimism, we'll need to retain capital to support healthy growth. Even with a higher capital return posture and a 7.5% annualized loan growth in the quarter, capital levels remained very healthy. CET1 ended at 11.3%. Our TCE was 8.64%, and our tangible book value per share ended at $56.90. I'll point out that our TBV per share is up almost $7 or 14% and above the year ago levels, and our TCE ratio is up 39 basis points from March 2025, even with our higher capital return activity over the last couple of quarters. Operator, we'll now take questions. Operator: [Operator Instructions] We'll go first to Catherine Mealor at KBW. Catherine Mealor: I wanted if you could start on the margin. Will, you talked about how the margins fell a little bit below the range just on deposit costs. Curious if you still think that 3.80% to 3.90% range is fair for the year or if deposit pressures are bringing that a little bit lower than the range? Stephen Young: Sure. Thanks, Catherine. This is Steve. Let me kind of walk through our various assumptions and kind of update them versus last quarter. So to your point, yes, we were -- we thought that the margin would start out in the low 3.80s for the first quarter and trend higher during the year, it looks like we missed that by a couple of basis points at the start of the year. If you look at the 4 things that really make up that guidance and our forecast or the level of interest-earning assets, the rate forecast what our loan accretion forecast is in deposit costs. So those 4 things. And if you look at the interest-earning assets, I think we forecasted for the first quarter, we'd be between [ $60 billion and $60.5 billion ]. I think we ended up at [ $60.2 billion ] so right in the middle of that. We said for the year that our interest-earning assets would average somewhere in the $61 billion to $62 billion range. And I think where we are with that, we think that it's a potential -- we're kind of reiterating that, but we do think that the loan growth might drive that slightly higher. A little bit too early to tell, but that it could -- interest-earning assets could end the year in the $63 billion, $64 billion range relative to the fourth quarter, but the average is probably going to be more on the high end of what we were thinking. As it relates to rate forecast, last quarter, we thought that there would be 3 rate cuts coming into 2026. And it looks like right now, the market is [ sub-0 ] relative to the conflict and so on. I think the 2-year and the 5-year treasury rates were up 40 basis points from the lows earlier this quarter. So we've now taken out the rate cuts in our forecast. On loan accretion, which is our third one, is we forecasted $125 million for the full year of '26, and there's really no change to that coming in line with what we had expected. And then the last one was on deposit costs and our original deposit beta forecast was 27%. And then for -- it looks like we came in around 20% for the quarter. So if you kind of go back and look at the movie, I think for the first 100 basis points of cuts, we got 24, we had a 38% beta. And then the last 75 basis points, we had a 20% beta. So you combine it all together, we've had a 30% beta on 175 basis points. But as we look forward and think about the deposit environment that we're at in the flat environment with our growth trajectory, we think that the deposit cost will be in the mid-170s versus our early forecast to be in the low mid-170s. So based on all these assumptions, we'd expect NIM to be in the 3.75% to 3.80% range. If the mid -- if growth is in the mid-single digits, we would expect NIM to be on the high end of the range. And if growth is as we expect, a little bit higher in the high single digit, we'd expect the NIM to be on the lower end of the range with net interest income higher. So hopefully, that helps tell you all the different assumptions. Catherine Mealor: Yes, that's great. And then just kind of take us in big picture. I mean it feels like this is growth related, right? So as you just kind of think about your model and your forecast, is there a big change in NII dollars? Or is it more of earning assets, it's higher and that's coming with a little bit of a lower margin, but that you're at the same place in terms of dollars? Stephen Young: Yes. I think if you look at our models in 2026 because growth takes a while to accelerate and get into the budget '26, the NIM is, if you have lower NIM in the short run, it gets you lower NII dollars to '26. But if you look at 2027, it all sort of catches up with higher growth. So that's kind of the way I would describe the net interest income dollars. Operator: We'll move next to John McDonald at Truist Securities. John McDonald: Great. I was hoping you could drill down a little bit in terms of what you're seeing on the loan growth front? What gives you confidence that you might be able to see the high end there? And kind of just drill down a little bit more in terms of kind of gross production versus payoffs and utilization. John Corbett: John, it's John Corbett. The production -- loan production that we had in the first quarter was very similar to the fourth quarter, which that was a record for us, almost $4 billion. But a lot of the growth came in the latter part of the quarter. We wound up at 7.5% loan growth. Last quarter was 8%. And really, the growth was broad-based, both from the type of loan we are doing and also the geography. I mean, investor CRE was up 9%, C&I is up 9%, single-family residential owner occupied, up mid-single digits. And from a geography standpoint, I think Will said in his opening remarks, every single geography grew led by Texas and Colorado, which was the thing that puts a smile on our face as we worked through the integration last year. Following Texas and Colorado at $1.1 billion, Florida and South Carolina each did about $640 million of production. Greenville was the strongest in South Carolina and as I mentioned earlier, Houston had the highest production in the entire company. But winding the clock forward even with the $3.8 billion in production, we did not drain the pipeline. The pipeline stayed full, and we actually grew the pipeline 33%. So it went up to $6.4 billion from the end of the year was at $4.8 billion. A lot of that's happening in Florida and Texas. So just with the momentum we're seeing with the pipeline growth, we think we can keep this momentum going, and we think we could be in the upper end of our guidance that we gave you previously. John McDonald: Okay. Great. And then just a follow-up on the deposit costs. Can you give us a little more color on what you're seeing in terms of competitive dynamics and maybe what you're doing in terms of deposit mix any promotional strategies? And just what are the wildcards around the deposit cost for this year? Stephen Young: Sure. Yes, John, this is Steve. Yes, a couple of things on that. We look at how we -- the new money that we raised during the quarter and we look at the money market rates as well as the CD rates. And so this quarter, we raised about $400 million in new money at the new money market rate at 2.68%. And our new and renewed CDs came in at 3.69%. So that's sort of where money is coming in. We also if you exclude the seasonal runoff of public funds, our customer deposits actually grew at 7%, about $850 million. And most of that was in the business area, it was up 10%. So a lot of treasury management and so on. So I think that's probably where we're continuing to lean in. From a geography perspective, if you look at our deposit franchise, because we run a decentralized P&L model, we track all of the different divisions and banking groups together. And the deposit cost in the legacy Southeast footprint that we've had is in the mid-140s and then in Texas and Colorado, obviously had a great quarter relative to growth. But the deposit costs are in around the 210 range. And so we think over time, there's going to be an opportunity to lower these with the addition of treasury management, retail and small business products, but that just takes time, but we think there is some opportunity there over time. And the balancing act is deposit growth versus profitability. And so we're tweaking dials around that. The last thing I would say about deposits -- I will tell you that back to the way that the interest rate curve increased during the quarter. We did see more competition towards the end of the quarter. And so our new money market rates started the quarter in the 240 range and ended somewhere in the 3% range. So I think what that's telling you until we can sort of get a little pat on rates to come back down, I think we'll have opportunity on the deposit side. But right now, I think it's just a tough environment, as you know. Operator: We'll move next to Stephen Scouten at Piper Sandler. Stephen Scouten: One other question maybe on the NIM front. It's just -- the change in the guidance, how much of that would you say is related to that last comment you made about the progression of deposit competition versus removing that 3 cuts. I think at 1 point, it was maybe 1 to 2 basis points of help for every 25 bps, but I think that had been diminished over time. So just kind of wondering the puts and takes... Stephen Young: Yes, I think it's probably half and half. So I mean, I think the 2 things driving a little bit the NIM lower between 3.75% and 3.80% versus 3.80%, 3.90%. There's probably things intact. One is, I think, our view of growth versus what we originally given you. So that's probably half of it. And probably the other half is the deposit competition higher than we -- is what we expected. And so the question is, when we got down to the final mile on the deposit beta getting from 20% to 27%, rate went up toward the end of the quarter. And so I would assume at some point when we get back to a rate cutting cycle, that will ease off and we'll be able to get some of that, particularly in some of the new markets. But that would be kind of how I would characterize it, if that's helpful. Stephen Scouten: Extremely helpful. And then maybe digging into the hiring plans and activity a little bit more. Obviously, you put that as your kind of #1 strategic goal, I think, in the presentation. So can we get an update on what that number was this quarter? I think it was [ 26 ] last quarter? And then kind of if you continue to be focused more on Texas, Colorado, maybe the newer IBTX markets and maybe even the Nashville market, which I think was a newer entrants for you guys? John Corbett: Yes, we kind of kicked off the initiatives, Stephen, at the beginning of the third quarter to expand the commercial banking sales force by like 10% to 15% in the next couple of years. And this is the kind of thing you just got to be opportunistic about it. It's not going to happen on a straight line. But the team geared up. They built a recruiting pipeline with a couple of hundred folks in there. And we've grown the commercial banking team specifically by 7% from October 1 to March 31. Most of that growth, the net growth of the team occurred in Texas and Colorado. Dan Strodl and the team have done a great job carrying the brand and the flag out there. That's an area I'd probably look to them to integrate, assimilate the team and maybe not grow too far too fast. But I would like to see our team in the legacy Southeast markets continue to take advantage of that growth. So I think maybe by the end of the year, when we end the -- I guess, it would be the third quarter for 4 straight quarters, maybe we're in the 10% net growth rate. Stephen Scouten: Okay. If I could sneak in one more. Just kind of wondering how you're thinking about the total payout ratio. Obviously, the last couple of quarters have been extremely aggressive, but I know Will said you might need to hold more capital for growth. So how can we think about what you might be from a total [indiscernible]? William Matthews: Stephen, really, our guidance of 40% to 60% over the medium to long term still holds. And I think that makes sense. If you think about it at a -- call it, a 17% return on tangible common equity, if we're growing at the 8% to 10% range, then a 46% payout ratio would essentially hold our capital levels pretty constant. We did exceed that not only in the fourth quarter, but also here in the first quarter. I think first quarter is around 93%, but we thought it was an opportune time given where the share price dislocation was in our minds and we're more active. But we -- I'll also say too, our capital policy and thoughts about capital in addition to the growth, we have, I think, a pretty sophisticated capital stress testing framework, and that informs our capital thoughts as well. So we integrate that, and we like to travel in that 11% to 12% CET1 range. Operator: We'll move next to Anthony Elian at JPMorgan. Anthony Elian: Will, you reiterate the expense outlook from the 4% you gave us last quarter. Just thinking about the cadence of quarterly expenses. Is it pretty consistent with each remaining quarter or anything you'd call out for the pattern of expenses by quarter? William Matthews: Yes. I'll call it a couple of things and say, of course, there are things that vary with revenue. You've got some revenue-based expenses, but just sort of some general trends we've seen over the years, and some of the embedded structural things. So our -- generally, most of our staff's annual -- I mean, annual base pay increase typically occurs in July 1. So that gets you -- that kicks in the third quarter. That's 1 thing to keep in mind. Our ownership model incents people both support and in running a business with revenue to think about how they spend money. And sometimes you see more conservatism earlier in the year and sometimes -- last year, if you look at our fourth quarter, you saw less conservatism with respect to NIE spend. So that's a little bit in there too. First quarter, you've got normal things like the higher FICA expense to be a little higher 401(k) match those kind of things. So anyway, but we're still sticking with our guidance that we gave heading into the year in that roughly 4% range and we'll continue to address that update as the year goes along. And some of that will, of course, depend on, as John said, the opportunistic nature of our hiring initiatives you can't necessarily time that exactly when you want it when good people become available. Anthony Elian: And then, John, you made a comment in your prepared remarks that you may slow the pace of hiring in the next few months given the success you've seen. It just seems like you have a lot of room across your footprint to keep making hires. Is the potential for a slowdown of hiring due to keeping a closer eye on what expenses could do over the short term? Or -- just walk us through that, please. John Corbett: Anthony, it's less about the expense growth. I mean this expense that you have hiring folks is really an investment in the long-term growth of the bank. You look at our core values of our company, it's all about the long-term horizon, the compounding effects of that. So really, it's less about that and it's more just about the assimilation process. We've hired 75 or 80 commercial bankers in 6 months. A lot of that occurred in Texas and Colorado. And you just want to make sure folks are assimilating well into the credit culture of the bank there. So I'd probably look to slow a little bit in Texas, Colorado and continue to be opportunistic in the Southeast. Operator: We'll go next to Michael Rose at Raymond James. Michael Rose: Steve, the fees to average assets were a little bit above the target this quarter. I think it was 61 basis points. Obviously, some good momentum there. Any change in thoughts to that? And can we get an update on the correspondent business just given the changing rate curve in your view? Stephen Young: Sure. Thanks, Michael. Yes, sure. On noninterest income, to your point, I think our guidance for the full year average assets was -- noninterest income to average assets was between 55 basis points and 60 basis points. We ended up at 61 basis points. We put a new slide on Page 12 in the deck that you can kind of look at the trend. The good news is if you kind of look at it year-over-year, we're up from $86 million in the first quarter of 2025 and now we're at $100 million. So that's really healthy growth year-over-year. I would say that as you think about the correspondent revenue. You can look at that graph on Page 12. That really has driven almost half of it. We were at $16.7 million a year ago now around $24.4 million. So I think in our earlier call in January, we mentioned that we probably thought we would average somewhere in the $25 million a quarter on correspondent revenue. Really, there's no change to that. We were $24.4 million so basically right in line. I don't think there's much of a change. There might be 1 quarter is a little better, 1 quarter is a little worse, but I think that's generally good. And I think our general tone relative to noninterest income to average assets continues to hold kind of in the middle of that range between 55 and 60 basis points. We're going to be growing the asset base as we're growing. Michael Rose: I appreciate it. Maybe just as a follow-up, just as it relates to kind of the commentary, John, around pipelines. I think you said they're still strong and robust. Can you size that for us? And maybe just given the success that you've had hiring kind of in the Texas and Colorado markets, what that could contribute to growth for the franchise over time. I would expect that it would grow at an increasing rate. So the mix would be weighted towards those 2 markets given some of the success and obviously some of the merger disruption? John Corbett: Yes. Just to kind of frame up the size of the pipeline. A year ago, the pipeline at the beginning of the year was $3.2 billion. Right now, it's $6.4 billion. So it's doubled. And 2/3s of that growth has occurred in Florida, Texas and Colorado, those states. There is a little bit of a mix shift change. Last year, we really saw all the growth was in C&I and very, very little in commercial real estate. The commercial real estate portion of the pipeline has picked up from 35% of the pipeline a year ago. Now it's about 45% of the pipeline. Still C&I is the majority of it. Operator: We'll move next to Janet Lee at TD Bank. Unknown Analyst: This is Noah [indiscernible] on for Janet Lee. First question, with the investment securities portfolio moving a bit higher, can you walk through how you're thinking about the trade-off between deploying into securities versus loans? Stephen Young: Sure. I think for us, as we think about balance sheet growth, we're mainly looking at it relative to loan growth. I think we're pretty comfortable. I think our securities, the assets is around 13%. I think in this environment, unless we got a few more rate cuts and there was a bit more of a carry trade there. That is probably not something that we're going to be trying to fund new security purchases. I don't expect the securities book to really move. I will tell you that we have about $900 million the rest of the year that's maturing, about $900 million in 2027, and that weighted average rate is around [ 3 60 ]. So we probably get about 100 basis points on just keeping that book reinvested, but I don't expect us to expand the book significantly. Unknown Analyst: Got it. That's helpful. And then a follow-up. I appreciate the AI slide in the deck. I'm wondering from a cost perspective, is there anything quantifiable that you're seeing in terms of expense saves and then when we would begin to see that flowing through to the bottom line? John Corbett: Yes. The incremental cost and expense of AI on the margin is not that high. What we're seeing is that a lot of the major software providers that we currently have in place, they're embedding these AI tools and software that already exists. And then on the individual user level, the Copilot licenses, it's an expense, but it's relatively small. The fun thing about this is learning about individual use cases and the power of this. We were in a meeting this week, and we own a factoring company where it takes an individual about 2.5 minutes to load in an invoice, and there's always some human error in that. So 2.5 minutes per invoice, we've employed an AI tool that can do 1,000 invoices in 2.5 minutes with 100% accuracy. So these are small use cases, but it's sort of getting everybody excited. But as far as the expense run rate, I don't see a big build in the expense run rate. A lot of this is embedded in software we currently utilize. Stephen Young: I think just a follow-up on that. I think the success that we're thinking long term, and it's not any time in the next year, but maybe the next 18 to 24 months is one of the things that we are measuring and monitoring is our number of revenue producers versus the number of our support personnel. And so for us, what we should think that should happen out of this AI boom and the efficiency is that as we increase revenue producers, our support personnel should stay relatively flat, and that should open up sort of the margin in that. So that's kind of how we're thinking about monitoring it Operator: Next, we'll move to Gary Tenner at D.A. Davidson. Gary Tenner: A couple of questions. First, just a follow-up on the capital commentary and the kind of payout ratio questions from earlier. Any preliminary calculation on the potential impact of new capital rules on your capital levels? William Matthews: Yes, Gary, we have run some math on that. And it's roughly 7% reduction in our risk-weighted assets. And that would be roughly an 85 basis point positive impact on our CET1 levels. Now I'll say that we don't run the company currently where the regulatory limit is our controlling factor. There are a lot of other factors, including as I said, our capital stress testing as well as ensuring we maintain the confidence of the rating agencies and whatnot. So I don't know that that necessarily changes our thoughts a whole lot, but certainly something that's new, and we have to study a lot further. Gary Tenner: Appreciate that. And then a follow-up on the fee side of things. Just curious about the deposit account fee line. Obviously, you had a really sizable ramp over the course of 2025, and this quarter seemed a little more of a seasonal dip than typical. So I'm just curious kind of how you see that line trend either full year-over-year or just over the course of the year? Stephen Young: Sure. This is Steve. Yes, typically, in the fourth quarter, that usually hits the highs of the year because of the seasonal debit card and fees that happen towards the Christmas season and so on. I think from our perspective, I would think that the trend year-over-year would be in the -- I think in in our modeling, it's somewhere in the 3%, 4% range year-over-year. So if you kind of look at that and trended it higher, I think that would probably be the way to think about it. But I think all of that is within -- as we model it, that's all within that 55 to 60 basis points guidance. Operator: We'll go next to Ben Gerlinger at Citi. Benjamin Gerlinger: I just wanted to kind of follow up on correspondent banking. I know you guys said 25-ish per quarter, 100 for the year. I know there's a little bit of kind of sensitivity to rates. So is it just more business activity and then kind of thinking longer term, if we do get a couple of more cuts, could that 25 turn into 30? Or how should we think about just the business operations overall? Stephen Young: Sure. No, that's -- it's a good question. Let me just kind of frame it up and one of the things I think there was a bit of confusion last quarter is just this whole gross versus net. So when I speak about correspondent revenue, I'm speaking to the growth. So you have that graph on Page 12. The $24.4 million is the gross revenue. The other -- the minus 3 is the variation margin, which is really kind of an interest margin. But really what the fees that were produced were $24.4 million. So that's kind of how I think about the business and how we communicate. I guess, looking at the ranges of that business. So in our best years, that business did about $110 million of revenue. The worst year did about $70 million. So we're kind of towards the higher end of that. But of course, we're growing the business organically. So I think the upside to it, where there's some new products that we're rolling out really won't have much of an impact in '26, but probably more '27, which would be around commodities to support our energy business would be some of our FX. We do FX, but we're doing a little bit more hedging. That should add a few million dollars. So on the margin, there's probably some reasonable upside to it. But I would -- I wouldn't -- I don't think $30 million is a good run rate in '27, for instance. I just -- I don't know that we know that yet. But as we get further into the year and as we roll out these products and see how they go, I think that would give us more confidence maybe in the -- by October to be able to give you a better forecast. But for right now, there's a lot of volatility, of course, our ARC business is doing really good. Our bond and trading business is really starting to do well as well. So these things are coming together. The question is with all the volatility how that's going to play out the next quarter or 2. But I would just expect, as we see it and as we forecast, it's pretty sturdy and steady for a while before we have the next leg up. Benjamin Gerlinger: Got you. Okay. That's great color. And then just a follow-up on mortgage. Is there a fair value mark or anything that's in there. Just it seems large. William Matthews: Ben, it's Will. As I mentioned in my prepared remarks, we had our normal practice reviewing our MSR valuation, and we had a positive impact this quarter of about $4.5 million net on the MSR valuation. Some quarters has moved against this, some quarters moved it to a positive. This quarter was a positive. Operator: We'll go next to David Chiaverini at Jefferies. David Chiaverini: I wanted to drill into the deposit growth outlook. So with your strong loan growth, and following the first quarter on the deposit side was very strong, but what's your sense of your ability to sustain that level of growth, again, given the strong growth outlook on the loan side? Stephen Young: David, it's a good question. I think it's the part that is the hardest at this point. I think you saw cost in the yield curve move up during the quarter, you saw short-term funding costs move up during the quarter. So it's obviously, at this point in time, it's different than it would have been maybe in January. My guess is it will get a little easier as we get some of the volatility out. Like as I mentioned earlier, our customer deposits grew at 7% this quarter. Obviously, we had the seasonal public funds thing that usually runs around a little bit. We are off $400 million there. But our business accounts, our business was up 10% and a lot of that was treasury management. So hard to forecast here because as I mentioned, the rates on our money market new openings moved up during the quarter from 2.40 to close to 3. So I guess, I think we can obviously generate deposits. The question is at what cost. And if we can have the funding market move down a little bit, that would be helpful. But generally, the business is growing. The question is at what cost. David Chiaverini: And then shifting over to credit quality. Looking at nonperforming assets, within the 5-quarter trend. So it looks very stable there. But some of your peers in the Southeast and Texas are showing some upticks. Curious about your view if you -- if there's any areas you're watching more closely? John Corbett: We went through this period, David, where rates spiked up 5%, and we underwrote a lot of the commercial real estate with a 3% rate shock. So that's why we saw a lot of reclassing into special mention and classified of the commercial real estate portfolio. And we inserted a new slide on Page 18. I don't know if you saw it or not, we broke out that investor commercial real estate portfolio. And really, there's little to no concern about the loss content in that portfolio given the loan to values and the payment performance. We broke it out by every category, and we're at a weighted average loan-to-value of these problem loans of 56%. The -- 98% of them are current. That includes non-accruals. So that's really not an area of concern. The areas would be the normal areas that generally in the economy where we're seeing a weaker consumer on the lower income range of the consumer. And then on some of the small business, particularly SBA loans because a lot of those are floating rates and they had to deal with a 5% rate shock as well. But we've got naturally, the government guarantee on 75% of that. So anyway, that's a rough overview of kind of our view on credit, but it feels pretty stable right now. Special mentions are coming down. Classifieds to tick down a little on a percentage basis, charge-offs continue to remain low. Operator: And we'll go next to Dave Bishop at Hovde Group. David Bishop: Yes, maybe stay on the credit topic. I appreciate [indiscernible] the NDF lending segment. Are you seeing any sort of credit stress within that -- those buckets. Any note you're well below peers, any appetite to even grow some of the exposure to some of those segments. John Corbett: Yes, we're not. The credit team, when all this hit the news, I spent a lot of time with Dan Bockhorst and the credit team analyzing and digging deep in this portfolio. And as you pointed out, it's really an area that we don't have much exposure to. It's the third lowest NDFI exposure amongst our peers, 1.7%. And the biggest piece of that is capital call lines, which our advance rate averages like 50%. So the 1 thing if you step back and think about this pressure on that market, there's been a lot of growth in it over the last few years. So if you think that there's pressure on it, it's probably going to enhance the underwriting standards, which may -- some of that business may shift back to the banking industry on a high-level viewpoint. David Bishop: Got it. And one follow-up in terms of the comments regarding the assimilation of some of the New York bankers in the Texas, Colorado markets. Just curious in terms of those hires are those bankers sort of through noncompete and nonsolicit agreements. I'm curious if they're sort of generating load in the loan pipeline at this point? John Corbett: Yes. It's a case-by-case basis. But I want to say that Dan Strodl told me that the loan pipeline was up to $400 million for the new folks he brought on in the last 6 months. So there's good production early on. A handful of them will have some kind of employment agreement we'll work through. So he's off to a great start. To be able to double your production and go through an integration conversion, take it from $500 million to $1.1 billion. That team has done a fantastic job. Operator: And that concludes our Q&A session. I will now turn the conference back over to John Corbett for closing remarks. John Corbett: All right. Audra, thank you. And as always, we want to thank all of you all for your interest and support of the company. If you have any follow-up questions, feel free to reach out. We'll be available today. And I hope you have a great day. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the OceanFirst Financial Corp. 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 withdraw your questions, simply press 1 again. I will now turn the call over to Alfred Goon. Please go ahead. Alfred Goon: Thanks, John. Good morning, and welcome to the OceanFirst Financial Corp. first quarter 2026 earnings call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we would like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website oceanfirst.com. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings for a complete discussion of forward-looking statements and associated risk factors. And now I will turn the call over to Christopher D. Maher, Chairman and Chief Executive Officer. Christopher D. Maher: Thank you, Alfred. Good morning, and thank you to all who have been able to join our first quarter 2026 earnings conference call. This morning, I am joined by our President, Joseph J. Lebel, and our Chief Financial Officer, Patrick S. Barrett. We appreciate your interest in our performance and this opportunity to discuss our results. This morning, we will provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. We reported solid first quarter results, which included earnings per share of $0.36 on a fully diluted GAAP basis and $0.43 on a core basis. GAAP earnings per share increased a penny and core earnings per share increased $0.08, or 23%, as compared to the prior year’s quarter. In terms of performance indicators, we delivered our fifth consecutive quarter of net interest income growth, which increased by $1 million, or 1%, as compared to the linked quarter, and was up $10 million, or 11%, as compared to the prior year’s quarter. This performance was driven by an increase in average net loans of $268 million and net interest margin expansion to 2.93%, supported by lower cost of funds and earning asset growth. Total loans for the quarter increased by $92 million, representing a 3% annualized growth rate, driven by $429 million in originations. Asset quality remained exceptional as total loans classified as special mention and substandard were 1.5% of total loans, below our ten-year average of 1.8% and within the top decile of our peer group. The quarterly provision was primarily driven by loan growth and an increase in criticized and classified loans, partly offset by lower unfunded commitments. GAAP operating expenses for the quarter were $73 million, which includes $4 million of merger-related expenses. On a core basis, operating expenses of $69 million declined by $2.1 million, or 3%, from the linked quarter, primarily driven by the impact of our strategic initiative to outsource the residential lending platform and disciplined expense management across the company. Looking forward, we worked diligently to restructure our core IT infrastructure and position the bank to benefit from the deployment of artificial intelligence across all departments. We have invested in AI through existing vendor relationships and have started to see the efficiency benefits in legacy bank processes while looking to further enhance our capabilities. We see significant opportunities to date, and these efforts will enable our ability to improve operating leverage, building further scalability as the bank grows. We will provide additional commentary on our financial outlook in a moment. Capital levels remain strong with an estimated common equity Tier 1 capital ratio of 10.7% and tangible book value per share increasing to $19.86. During the quarter, we also repurchased a modest number of shares solely related to the vesting of employee equity awards. We did not repurchase any shares under the board-approved authorization. As previously announced, a quarterly cash dividend of $0.20 per common share was declared, marking the company’s 117th consecutive quarterly cash dividend. Finally, on 12/29/2025, we announced our merger agreement with Flushing Financial Corporation and an investment agreement with Warburg Pincus. To date, both companies have received shareholder approval. In addition, we have received regulatory approvals from the State of New York Department of Financial Services and from the OCC. Approval from the Federal Reserve remains the final outstanding regulatory requirement to complete the merger. We continue to work towards an expected closing in 2026 and a full systems integration and rebranding in 2026. Importantly, we have made arrangements to accommodate branch transactions for all customers in all branches effective on our first day of operation. We have undertaken that work as we believe that the additional Flushing branches will provide an immediate and meaningful competitive advantage. We plan to provide a detailed financial update on the Flushing merger in connection with our second quarter earnings, which will include a discussion on the pro forma balance sheet and other projections from our latest view of the merger model. In the meantime, we remain focused on executing our organic growth strategy, which is clearly reflected in our results this quarter. At this point, I will turn the call over to Joe for additional color on these businesses. Joseph J. Lebel: Thanks, Chris. I will start with loan originations for the quarter, which totaled $429 million and resulted in quarterly loan growth of $92 million, which was in line with our expectations given typical first quarter seasonality and a handful of customer-accelerated closings at the end of Q4. Our C&I business grew 19% on an annualized basis from the linked quarter, with closed loan volume in C&I and commercial real estate up 81% year-over-year, reflecting continued momentum from our recruitment of talent added in 2024 and 2025. We added another three C&I bankers in Q1 2026, with plans for more in the coming quarters. Total deposits grew by $192 million, or 2%, in the quarter. Excluding brokered deposits, deposits increased $314 million, driven by broad-based organic growth across our core business lines and institutional deposits. The Premier Bank deposits grew $9 million, or 3%, from the linked quarter. The team has brought in over 1,500 new accounts across 400 relationships since the May 2025 inception, approximately 20% representing noninterest-bearing accounts. As an added benefit, the teams contributed $21 million in loan originations for the quarter, and the loan pipeline in Premier stands at $40 million. Customer engagement and calling activity has been significant, and the addition of the Flushing branch footprint will provide a meaningful tailwind moving forward. We remain confident in our 2026 Premier deposit targets and have recently added two new Premier teams located in Manhattan and Long Island, with a few more on the horizon. Lastly, noninterest income decreased by $2.7 million to $7 million during the quarter, primarily driven by a lower gain on sale of loans of $779,000 relating to the Q4 2025 outsourcing of our residential platform. Additionally, we saw some reductions in commercial loan swap income due to lower swap origination volume for the quarter. That should improve through the year as seasonal origination volumes increase. Overall, noninterest income levels were in line with our expectations and as guided in the previous quarter. With that, I will turn the call over to Pat to review the remaining areas. Patrick S. Barrett: Thanks, Joe. As Chris noted, net interest income increased and margin expanded in line with our previous outlook. Compared to the previous year’s quarter, net interest income grew $10 million, or 11%, attributed to the tremendous loan growth in the latter half of 2025. Pre-tax pre-provision core earnings grew 4%, or $1.2 million, from the prior quarter, driven by earning asset growth during the quarter and in 2025. Loan yields decreased modestly, reflecting both lower rates and a continued mix shift within the portfolio. Total deposit costs decreased 16 basis points, driven by disciplined pricing across our relationship base and reflecting the positive impact of the Fed’s rate cuts in late 2025. Looking ahead, we expect positive expansion in net interest income in line with our loan growth and a stable to modest increase in margin over the next quarters. As Chris mentioned, asset quality remained very strong with nonperforming loans to total loans and nonperforming assets to total assets both at 0.31%. Criticized and classified loans increased during the quarter, driven by one large commercial relationship that remains current and well collateralized. Even including this increase, asset quality continues to remain at the low end of historical levels for criticized and classified loans. Lastly, net charge-offs were de minimis, representing only 3 basis points of average total loans on an annualized basis. Turning to expenses, core noninterest expense decreased from $71 million to $69 million, driven by our initiative to outsource the residential business. Non-core items in the first quarter were almost entirely Flushing merger-related costs. Looking ahead, we expect our second quarter core operating expense run rate to remain in the range of $70 million to $71 million. Capital levels remain strong with our estimated CET1 ratio at 10.7%. A word on taxes: We expect our effective tax rate, which was 24% in the first quarter, to remain in the 23% to 25% range absent any tax policy changes. This will change with the impact of the Flushing acquisition, and we will update you accordingly once the transaction closes. There are no changes to our full year guidance as stated in the previous quarter, although we have removed the modest impact of further Fed rate cuts from our outlook. To recap, our guidance is for mid- to high-single-digit loan and deposit growth, NIM growing past 3% in the back half of the year, other income ranging from $7 million to $9 million per quarter, and expenses stable at $70 million to $71 million per quarter. Note that these are stand-alone expectations and do not reflect the impact of the Flushing acquisition. We have also added our second quarter outlook for your convenience. At this point, we will begin the question and answer portion of the call. Operator: Thank you. Ladies and gentlemen, we will now begin the Q&A session. At this time, I would like to remind you to press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking the question. Our first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning. Maybe starting first on the deposit side. Nice quarter of growth for you, and it sounds like the Premier folks are making an impact there. You touched on this a little bit in the prepared remarks, but how sustainable do you think this is? Is there any seasonality in the first quarter numbers, and are you able to maintain the mix shift that you have had? Any color on the deposit side would be great. Thanks. Christopher D. Maher: Dana, I think you see some seasonality. It is not uncommon for us in our space, given where our geography is. Frankly, given the Premier team’s momentum, we are going to see more in Q2 and Q3. Joseph J. Lebel: We are still pretty bullish there. It was a little bit of a slow start to the year for them, but it was more than made up for in other areas of the company. So we are pretty happy with the trajectory. More work to do, but overall, we are generally optimistic. Daniel Tamayo: And the reiteration of the net interest income guide despite pulling the cuts out—correct me if I am wrong, but is the read there that competition is increasing and impacting loan spreads, or is it something else? Patrick S. Barrett: I would say yes, competition is pretty intense. You see that in our loan yields—stable versus expanding. So any benefit from maturities and rollovers is being competed away for new originations, and of course the yield curve is playing a little bit of havoc with repricing. We have been positioned relatively neutral for several quarters on interest rates, and the impact of the Fed cuts is less of a thing that rolls through our balance sheet than it is a reason that gives us the ability to reduce deposit costs. There is about a quarter lag on seeing the benefit of that when we do it. We saw nice benefit from the Fed’s rate cuts in September, November, and December rolling through this quarter. We had only modeled, I think, a September rate cut and a December rate cut previously. So when we take that out—because we tend to track with consensus where the market views and predicts rates to be—it was less than a $0.5 million impact on the year. It is a little bit more on an annualized basis for next year, but pretty much de minimis for this year. Daniel Tamayo: Got it. Thanks for the color, Pat. And then maybe one for you, Chris, just on the portfolio sale for Flushing. Any update there on potential size, timing—anything you can give us in terms of where you stand with that now? Patrick S. Barrett: Yeah. So the only thing I can tell you is that— Christopher D. Maher: When we work through legal day one and have all those answers, we will promptly share them with folks. Nothing has changed our outlook since the last time that we spoke. The merger model is holding up, so there is really no deviation in terms of marks, earn-backs, anything like that. We are pretty much on track to where we thought we would be. I would leave the details around the balance sheet restructure for legal day one, and we will talk to you then. I would note that certainly there are some loan segments we are looking at, but it even goes deeper than that. We are looking at hedges and liability structures and securities portfolios. It is an all-encompassing review to make sure we have the right balance sheet coming together as a combined company. There are a lot of different things we would tick and tie, but we will report them out to you promptly. Our views have not changed, the merger model is on track, and there is no reason to have any concern about either marks or earn-back periods at this point. Daniel Tamayo: Alright. I appreciate it. Thanks, guys. I will step back. Operator: Our next question comes from the line of Timothy Jeffrey Switzer with KBW. Please go ahead. Timothy Jeffrey Switzer: Hey. Good morning. Thanks for taking the question. You mentioned you hired a few C&I bankers already, two other Premier bank teams, and you are looking to do a little bit more hiring. Any goals in terms of how many bankers you would like to add, and how should we think about this impacting the expense outlook? Christopher D. Maher: Tim, the way I think about it is we are really bullish on the opportunity to be building out our franchise in New York. We think there is so much opportunity there that the more qualified bankers we can bring on, the better. As we see that opportunity, it is getting us interested in adding a few more bankers. But, Joe, you might talk a little bit about the work you are doing now—this is kind of key hiring season—so why do you not take it from there? Joseph J. Lebel: There are a lot of irons in the fire. I am a big believer that you hire talent when talent is available to you. We were fortunate to get a couple folks just ahead of the hiring season. We are in the thick of it today. I think you will see more from us in the coming quarters, and we are pretty bullish. A lot of that now is going to come in the C&I section of the bank, which is where you are going to see the vast majority of the loan growth as we diversify the mix over time. But there is good talent to be had across the geographies we are in. Christopher D. Maher: I would also note, and we mentioned this in the prepared remarks, that we have made a lot of progress on a few things that relate to costs around the company. We did guide on stand-alone expenses, and those reflect us being able to add a significant amount of talent but not have expenses go up. We are seeing material decreases in some of the operations areas, which is helping us fund the new folks that we are bringing on board. I think we are going to have a brisk hiring season and we are going to be able to comply with the expense guidance that we put out earlier. Do not look for expenses to move up if we are able to hire several more high-quality bankers. We have room to do that. Patrick S. Barrett: Do not be surprised if you see compensation expenses go up and data processing expenses go down, with the net being a push. Timothy Jeffrey Switzer: Understood. You touched on this in your comments earlier, but there was some slight credit migration across some of the more forward-looking metrics—nothing crazy and all from low levels—but just to check the box, is there anything systemic in there or concentrations in certain sectors? Christopher D. Maher: No. It is really just a single business. A single customer had a weak year last year, so you look at your risk ratings on that basis. At this point, it looks like they have runway to recover and migrate back out of that over the foreseeable time period. We are watching closely, but it was only one credit, and it was not something that had a pattern or that we would be concerned about bleeding from there. Timothy Jeffrey Switzer: Great. And one last quick one from me: the timing of close for the merger—should we be thinking 2Q? Christopher D. Maher: We are going to close pretty promptly after we receive the final regulatory approval, but we have to respect their process and understand where they are. Typically, you are not able to close for about 15 days after you receive the final federal approval. We would be hopeful that we are doing it earlier in the quarter, but who knows. We have to respect the process and see how things fall out. Operator: Our next question comes from the line of David Jason Bishop with The Hovde Group. Please go ahead. Christopher D. Maher: Morning, Dave. David Jason Bishop: Hey. Chris, Joe, as you get to know the legacy Flushing franchise and customer and deposit base, any update on your assumptions in terms of your ability to go in there and maybe reprice and remap some of their deposit products and realize some of the deposit cost saves you may have contemplated on first pass? Christopher D. Maher: I think there is opportunity, Dave, in a lot of different ways. First, we have been very pleased as we start working face-to-face with people in broad numbers and get to know them better. We have hundreds of people with OceanFirst Financial Corp. and Flushing working together and preparing for not just the closing, but the integration and how we are going to run the business together, and we really enjoy that opportunity. There is a lot of good talent there. A particular call-out: we think the branch folks are fantastic. We are working through a process of integrating the commercial bankers as well. In terms of deposit pricing, I think some of that will be a little bit market driven. We have to understand where the market comes. The yield curve bouncing around the last few weeks has at least raised the question in our mind about how much you could reprice. But the model was not especially dependent upon that. We are looking at the whole balance sheet. If we have an opportunity to restructure the balance sheet, we may be able to be less dependent on certain sources of funding, which could give us some options as well. We still feel good about it, but we are also watching the broader world and where short-term rates are and what Fed policy becomes, because that will probably make a little bit of a difference over the next couple of quarters. As Pat pointed out, it is not going to make a big difference in our full-year earnings or the NIM, but around the margins, it could be better. David Jason Bishop: Got it. Then maybe one follow-up question. Obviously the focus with the merger is in the New York Metro Area, but there is a lot of disruption from integration and M&A down in the greater Baltimore/DC region. Are you still looking to potentially add talent down in this metro area as well as Boston? Christopher D. Maher: Absolutely. I was just staying with that team a couple of weeks ago, and we think there is a great opportunity there. Joe, maybe you can walk through that a little more. Joseph J. Lebel: We have almost a dozen folks down there now. We have continued to build that team out in the last 18 months and remain out there looking for more. I think we are still just scratching the surface of our opportunities down there. Christopher D. Maher: One of the things we are seeing is the advent of technology—there are a lot of smaller technology players that are working in the mission-critical government space, from defense to cybersecurity and more. Because they are smaller companies, it particularly suits our banking model where the relationship matters a great deal; they are looking to align themselves with a bank over the long term, and a bank that can grow with them because they may be small today but have aspirations to grow quickly. I really enjoyed meeting and working with a lot of those clients, and we think we can grow that pretty nicely in the coming years. David Jason Bishop: Great. Appreciate the color. Christopher D. Maher: Alright. Thanks, Dave. How about next? Operator: Our next question comes from the line of Christopher William Marinac with Janney. Please go ahead. Christopher D. Maher: Thanks. Good morning. Christopher William Marinac: I wanted to ask about the non-New York geographies—new C&I business you are doing in Philadelphia, Boston, and the DC corridor—and how those markets can complement what you are building now with Flushing and the combined OceanFirst Financial Corp. footprint. Joseph J. Lebel: Chris, I will start with Boston to give you a little bit of flavor. The three C&I hires this year were in the Boston footprint. We are pretty happy with that addition; the team is now eight folks or so. As I mentioned earlier, we are almost a dozen down in the DC/Baltimore metro. Philly has always been a consistent performer. It is a book that is north of $2 billion today. We are really bullish on all three markets, continuing to add people in those segments. The C&I business is growing in all three segments. If you recall, initially the CRE business was very strong in Philly and Boston, but the focus for us has been to diversify the books, and I think we have done a really good job there. We are just touching the surface; I think there is a wealth of opportunity going forward. Christopher William Marinac: Great, Joe. Thank you for that. And, Chris or Joe, if you go back to when Signature failed a couple of years ago, how much business is still out there to move if you had to ballpark it today? Christopher D. Maher: There is always some opportunity there, but what we are really focused on is winning share across a wider group of different competitors. In fact, the hires we made—including a number of hires we made into the Premier Group this year—came from other banks and have other targets. What we tried to build when we brought our teams over was to hire folks that had a history of working in this model and bring in bankers from a variety of different institutions, bringing them into the Premier model and making it work. We are less dependent upon any particular competitor, but there is still opportunity out there. The Premier Group, although recruiting from a variety of sources, is still a deposit-heavy, deposit-centric hire. The bankers we are looking at there are bankers that can bring management portfolios with them, which is a slightly different focus. The C&I folks bring cash management with them as well, and we are really happy that our C&I bankers are funding almost 50% of their asset growth with their own deposits, which exceeds our expectations in that segment. In the Premier segment, we expect it to be more of a contributor of excess funding. So it is a slightly different candidate but looks very similar to what we have done over the years. Christopher William Marinac: Great. Thank you, Chris. I appreciate the background here. Christopher D. Maher: Alright. Thanks, Chris. Operator: Thank you. At this time, we have no further questions. We will now turn the call back over to Chris for closing remarks. Christopher D. Maher: Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in July at our second quarter results and hope we will have the opportunity to go a little deeper in the Flushing merger model at that time as well. Thanks, everyone. Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a pleasant day.
Operator: Good day, and thank you for standing by. Welcome to Apogee Enterprises Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Jeremy Steffan, Vice President, Investor Relations and Communications to begin. Jeremy, please go ahead. Jeremy Steffan: Thank you. Good morning, and welcome to Apogee Enterprises Fiscal 2026 Fourth Quarter Earnings Call. On the call today are Don Nolan, Apogee's Chief Executive Officer; and Mark Augdahl, our Chief Financial Officer. During this call, the team will reference certain non-GAAP financial measures. Definitions of these measures and a reconciliation to the nearest GAAP measures are provided in the earnings release and slide deck, which are available in the Investor Relations section of our website. As a reminder, today's call will contain forward-looking statements. These reflect management's expectations based on currently available information. Actual results may differ materially from those expressed today. More information about factors that could affect Apogee's business and financial results can be found in our press release and in the company's SEC filings. With that, I'll turn the call over to Don. Donald Nolan: Thanks, Jeremy, and good morning, everyone. We're glad you could join us for our fourth quarter earnings call. As I spent more time with the business over the past several months, engaging with our teams, visiting our operations and working closely with our leadership group, I've gained a deeper appreciation for both the strengths of our portfolio and the discipline embedded in how we operate. While the market environment continues to evolve, we are focused on executing what is within our control, managing through near-term pressures and continuing to build a strong foundation for long-term sustainable performance. I'm confident in the organization we have in place and the enhanced strategic direction we are taking as we move forward. With that said, I'm pleased to share that our results for the quarter were ahead of our expectations on both the top and bottom line despite what continued to be a dynamic and challenging environment. I'd like to thank our team of dedicated and resilient employees for their focus on delivering exceptional products and services to all of our valuable customers. Fiscal 2026 was a year of disciplined execution for Apogee as we navigated a difficult environment while continuing to strengthen our operating foundation. Our teams delivered meaningful gains in safety, service and productivity and generated solid cash flow. I'd like to emphasize 3 areas that position us particularly well for the future. First, Performance Services successfully integrated UW Solutions into the segment. They delivered upon the first year financial targets for the acquisition of $100 million in revenue and adjusted EBITDA margin of at least 20%. The total segment delivered revenue of almost $200 million and an accretive margin for the company, and we're excited for the future given the expanded market, greater geographical reach, along with the added substrate capability and coating technology. Second, the Apogee management system continues to drive meaningful improvements across our manufacturing footprint, utilizing technology with embedded AI. Last fiscal year, our Architectural Metals segment made significant progress improving outcomes for our Tubelite brand, completing a value stream redesign, which resulted in improved service levels and lead times. We also reconfigured our Linetec finishing facility in Wausau, Wisconsin, creating a tighter, more connected footprint that streamlined anodizing, paint and packaging operations. This drove significant reductions in material movement, ultimately creating a leaner and safer environment. EMS has truly become a cornerstone of Apogee's operating success, creating a safer work environment for our teams, delivering better quality, service and reliability for our customers and building a culture of continuous improvement that will drive even stronger outcomes in the years ahead. And third, we actively managed our cost structure and manufacturing footprint to mitigate portions of direct and indirect tariffs while driving efficiencies across the organization. These decisions were difficult, and we certainly don't take them lightly, but we are confident that the actions further position Apogee to successfully navigate the market headwinds we see today and expect in the near future. What we delivered in fiscal 2026 reflects more than just execution. It reflects the strength of a strategy that has guided Apogee through change and positions us to lead. The strategy we put in place in 2021 continues to serve us well with a clear focus on becoming the economic leader in our target markets, actively managing our portfolio and strengthening our core capabilities and platforms. That focus has driven meaningful improvement across the business, including a more competitive cost structure through facility consolidation and organizational alignment, tighter supply chain integration and greater leverage of enterprise back-office functions. At the same time, the Apogee Management System delivered substantial gains in productivity and safety. We elevated pricing discipline and sharpened our portfolio, resulting in higher margins and increased profit dollars over the past 5 years. Moving forward, we are enhancing these strategic pillars to position Apogee as a more growth-oriented customer-obsessed organization. Pillar #1 is focused on accelerating leadership in target markets by differentiating through deep customer focus and insight, shaping what we offer and how we deliver it to be the economic leader in the markets we serve. The second pillar involves growing and strengthening the portfolio through organic and inorganic advancements and differentiated solutions that address evolving customer challenges and deliver lasting value. And the third pillar is all about advancing core capabilities by driving a culture of continuous improvement through operational excellence, talent development and technology that truly elevates the customer experience. Building on the progress we've made, we continue to identify areas for growth in nonresidential construction markets. We see opportunities to further leverage our deep knowledge of this industry by offering differentiated products, project expertise and strong customer relationships across architectural building products and services. At the same time, we are evaluating adjacent opportunities and growth avenues that build on our core capabilities in performance surfaces, including the selective expansion of substrate capabilities and advanced coating technologies. These opportunities have the potential to extend our reach into new markets and geographies, broaden our end market exposure and provide platform style growth options for the future. Our focus remains to be disciplined on execution and thoughtful with our capital allocation as we evaluate opportunities intended to support durable returns, long-term earnings and cash flow generation across the portfolio. By cultivating a broad growth mindset, deepening our commercial and customer insight capabilities and intentionally expanding into new and adjacent markets, we are positioning Apogee not only to respond to evolving customer needs, but to anticipate them, shaping demand, redefining our competitive space and creating enduring value over time. As we look ahead, we're reminded that our industry will always move through cycles. But Apogee's future is not defined by those cycles. It's defined by the choices we're making today. By investing in the strategic growth areas where demand is strongest and by elevating our focus on delivering exceptional value to our customers, we're building a company positioned not only to navigate the near-term environment, but to achieve long-term sustainable success. I'm deeply proud of what our teams have accomplished, and I'm even more confident in where we're headed. Together, we are creating Apogee that is stronger, more resilient and capable of delivering exceptional value for all stakeholders. With that, I'll turn it over to Mark to cover the financials and our fiscal 2027 outlook. Mark Augdahl: Thanks, Don, and good morning, everyone. First, I'll begin with a review of the results of the fourth quarter, followed by full year commentary and then discuss our outlook and assumptions for fiscal '27. Starting with our consolidated results. Net sales increased 1.6% to $351.4 million, primarily reflecting favorable pricing in the Metals segment that helped offset a portion of higher aluminum costs. Favorable mix also contributed, partially offset by lower overall volume. Adjusted EBITDA margin increased to 12.1% compared to 11.9% a year ago. The improvement was primarily driven by lower incentive compensation and risk-related insurance expenses, along with productivity improvements. We also benefited from cost savings associated with Fortify Phase 2 with actions substantially completed during the quarter. The improvements were partially offset by higher aluminum costs, the impact from the reduction in volume and higher health insurance costs. Adjusted diluted EPS was $0.92, slightly ahead of our expectations and up year-over-year, primarily driven by lower amortization and interest expense. Turning to our segment results. Metals net sales declined approximately 2% to $110 million, reflecting continued challenging market conditions. The decrease was primarily due to lower volume, partially offset by favorable price and product mix. Despite the revenue decline, adjusted EBITDA margin improved to 6.5%, driven by cost savings from Fortify Phase 2 and favorable product mix, partially offset by higher aluminum costs that were not fully offset by those pricing actions and the impact of lower volume. The Services segment delivered its eighth consecutive quarter of year-over-year net sales growth, primarily due to increased volume from project timing, partially offset by price. Adjusted EBITDA margin decreased to 7.5%, mostly driven by lower price, partially offset by the impact from higher volume and improved productivity. Backlog for services ended the quarter at $694 million, down approximately 4% compared to the prior year, but we are well positioned entering the upcoming fiscal year. Glass net sales declined to approximately $67 million, primarily driven by lower volume and price due to continued end market demand softness. Adjusted EBITDA margin also declined to 13.5% due to lower volume and price and higher material and freight costs, partially offset by productivity improvements, lower incentive compensation and warranty-related expenses. Performance Surfaces net sales increased to over 13%, driven by volume growth supported by share gains in the retail and fine arts market channels. Adjusted EBITDA margin decreased due to higher material and manufacturing costs, partially offset by net sales leveraged from higher volume. On a full year basis, the company net sales increased 3.2% to $1.4 billion, driven by $65.3 million of inorganic contribution from the acquisition of UW Solutions. This growth was partially offset by lower volume, reflecting softer end market demand in Metals and Glass throughout the fiscal year. Adjusted EBITDA margin declined to 11.9%, primarily due to higher aluminum costs as well as the impact of lower volume and higher health insurance costs. These headwinds were partially offset by lower incentive compensation and risk-related insurance expenses and savings generated under Fortify Phase 2. Turning to cash flow and the balance sheet. Net cash provided by operating activities was $55.8 million in the quarter compared to $30 million a year ago. The improvement was driven by higher net income and working capital improvements. On a full year basis, net cash from operating activities was $122.5 million and similar on a year-over-year basis. Also during the fiscal year, we used $27.3 million for CapEx, prioritizing investments that drive operational efficiency and margin improvement. In the fourth quarter, we repurchased $15 million of stock and on a full year basis, returned $37.2 million to shareholders through dividends and share repurchases. Our balance sheet remains strong with a consolidated leverage ratio of 1.3x, no near-term debt maturities and significant capital available for future deployment. Looking ahead to fiscal 2027, the market characteristics are expected to remain relatively unchanged, especially in the first half. We anticipate continued competitive pricing and volume pressure in the Metals and Glass segments, elevated long-term interest rates and a dynamic macroeconomic environment. External indicators, including the Architectural Billings Index and FMI reflect ongoing softness in the operating environment throughout the year. Amid these conditions, we remain focused on executing the enhanced strategy, Don referenced earlier, which is positioning the business to drive organic and inorganic growth over time. While we remain confident in the long-term fundamentals of our business, the pace and direction of global economic conditions continue to be in flux, and as a result, we've set wider full year sales and EPS ranges to ensure our guidance reflects the realities of today's operating environment. For fiscal '27, we expect full year net sales between $1.38 billion and $1.43 billion and adjusted diluted EPS in the range of $2.70 to $3.25. This guidance includes the following headwind assumptions; normalization of corporate incentive compensation expense, elevated aluminum and fuel cost inflation and persistently rising health insurance expense. These are partially offset by benefits from the fourth quarter Fortify 2 actions in Metals and Corporate, prior year tariff costs that have since been mitigated and will be tailwinds mostly impacting the first half and pricing actions expected to offset incremental inflationary costs and finally, continued emphasis on cost controls across the organization. We anticipate generating slightly more revenue and profit in the second half than the first as macroeconomic factors are expected to improve throughout the upcoming fiscal year. Additionally, we expect interest expense of approximately $10 million and adjusted effective tax rate of 26% to 27% and capital expenditures between $35 million and $40 million. Looking ahead to the first quarter, we expect net sales to be slightly lower and adjusted EPS to be lower on a year-over-year basis. We also expect operating cash flow generation to start the year strong, reflecting disciplined execution and working capital management. As we look ahead, we recognize we are operating amid a challenging macroeconomic environment marked by pricing pressure, elevated interest rates and uneven demand. Even so, our focus remains firmly on what we can control, operating safely, executing with discipline and managing the business for long-term success. I want to thank our employees for their continued dedication and execution and our customers for their trust and partnership. Importantly, our strong cash generation and disciplined approach to managing our balance sheet provide the flexibility to reinvest in the business, advance our strategic priorities and return capital thoughtfully. That financial strength gives us confidence in our ability to navigate near-term headwinds while positioning Apogee for sustainable performance and driving long-term value for all stakeholders. With that said, we will now open up the call to questions. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Julio Romero with Sidoti & Company. Julio Romero: Mark, I appreciate you running through some of the headwinds and tailwinds in the guidance in your prepared remarks. I was hoping you could help us out with putting a finer point on any effect baked in for the year-to-date rise in aluminum prices and kind of what assumptions are baked in, in terms of price increases to help offset that? Mark Augdahl: Sure. So first of all, yes, aluminum has been an interesting thing to be tracking, and we've been doing so diligently. I think we've seen about 87% increase in aluminum costs over the past year and 25% increases since -- just since January. So yes, very dynamic market as it relates to that. As far as how we're thinking about that, we're certainly baking those increases in where we, at this point, have no idea what's going to happen to aluminum costs going forward, but we are certainly addressing price or addressing -- offsetting those costs that we've seen by implementing price as appropriate. We're looking at all levers around that price, too, whether it be surcharges or regular price built into our normal pricing processes. So certainly a drag on the year, which is reflected in our outlook, but we're doing all that we can to mitigate those impacts. Julio Romero: Got it. Very helpful there. And then on tariffs, did I hear you guys correctly that the tariff impact from the prior year is essentially fully mitigated and should be a tailwind in '26? And then secondly, I guess, what would that imply with regards to the recently revised tariff policy, no direct impact and just more of an indirect impact on the rising aluminum side? Mark Augdahl: Yes, that's correct, Julio. So first of all, I think we articulated last year that -- or for F '26, we had about a $9 million impact on tariffs. It was primarily as it relates to our supply chain as we move product across the border to Canada and back. That was offset with the actions that we put in place with Fortify 2, but it will be a headwind in the first half of the year, excuse me, it was a headwind in '26, it will be a tailwind now in '27. Julio Romero: Got you. Super helpful there. One more, and I'll pass it on. Don, you mentioned in the prepared that the Apogee Management System is leveraging embedded AI to drive some manufacturing improvements. Can you expand on those comments? I think you mentioned some benefit with regards to reconfiguring a finishing facility in Wausau, and then another initiative on the metal side. I was hoping you could expand on those comments. Donald Nolan: Sure. Look, it's early days for us in AI for sure, but we're already starting to see some impact. We have a few things that we're looking at and using in our manufacturing facilities already, but it's early days and more to come. I think the other thing that you should know is we're rolling out Copilot across the company, and we're starting to see some impact as everyone gets a little bit more productive. I think -- but this is a long-term investment. Operator: Our next question comes from Gowshi Sri with Singular Research. Gowshihan Sriharan: Okay. On the metal side, with the aluminum headwind and Fortify that's helped you kind of maintain margins. Have you consciously shifted your mix of customers or project types away from certain low-margin accounts? And should we expect more of that mix pruning as we go through FY '27? Mark Augdahl: From my perspective, we have not changed our product or customer mix as it relates to anything that's gone on with aluminum cost increases. If that's -- if I'm answering your question correctly there. Gowshihan Sriharan: And just in Metals in respect as well, have you shifted away from... Mark Augdahl: No. Aluminum is the base of most of our product in that segment. Donald Nolan: Yes. I can give it at this price, aluminum is the best material for these applications. Gowshihan Sriharan: Got you. On the Glass side, have you -- are you changing any price structure in terms of surcharges or contract duration so that it's not exposed to any rapid swings in input pricing? Mark Augdahl: The Glass market is unique as the float suppliers do provide surcharges to us as they get impacted by various components of their cost. And to the extent that those are passed on to us, we pass them on as well. Gowshihan Sriharan: On the Fortify 1 and 2, as SG&A is down [indiscernible], how much of that SG&A efficiency is truly structural versus temporarily depressed by lower incentive comps? Are there any areas where you actually expect SG&A to step back up in FY '27? Mark Augdahl: It's a great point. Yes, both incentives as well as Fortify savings impacted the SG&A rate in F '26. We did -- we are reinstating our compensation programs are allowing for our STI to come back into play. So it will be a drag on our F '27 results. So therefore, I do expect our overall SG&A rate to increase. Gowshihan Sriharan: Got you. On the performance and UW platform, you have -- you look like you have a lot of runway. But from an operational standpoint, are there any specific capacity bottlenecks or process constraints in that business that you need to address in FY '27 to support the next leg of growth there? Donald Nolan: No. I mean, you hit it right on the head. We're really excited about the growth potential for Performance Surfaces, especially our resin deck mezzanine flooring line. We continue to expand that business, not just in the United States, but in Europe and elsewhere. So we are investing in that plant. And -- but short term, we don't see a problem there. Operator: And I'm not showing any further questions at this time. I turn the call back to Don for any further remarks. Donald Nolan: In closing, we remain confident in the actions we're taking and the foundation we've built. We're a leaner, more agile organization with a clear and urgent focus on serving the customer. I want to thank our employees for their dedication and commitment. They continue to make a meaningful difference for our customers and our company. Our strategy is clear, our discipline is strong, and we believe Apogee is well positioned to deliver long-term value. Thank you for your continued interest and support. Operator: Thank you, ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Before we get started, let me remind everyone that through the course of the teleconference, Kinsale's management may make comments that reflect their intentions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain risk factors, which could cause actual results to differ materially. These risk factors are listed in the company's various SEC filings, including the 2025 annual report on Form 10-K, which should be reviewed carefully. The company has furnished a Form 8-K with the Securities and Exchange Commission that contains the press release announcing its first quarter results. Kinsale's management may also reference certain non-GAAP financial measures in the call today. A reconciliation of GAAP to these measures can be found in the press release, which is available at the company's website at www.kinsalecapitalgroup.com. I will now turn the conference over to Kinsale's Chairman, President and CEO, Mr. Michael Kehoe. Please go ahead, sir. Michael Kehoe: Thank you, operator, and good morning, everyone. Today, I'm joined by Bryan Petrucelli, our Chief Financial Officer; Stuart Winston, our Chief Underwriting Officer; and Salmaan Allibhai, our Chief Actuary and Head of our Data and Analytics team. In the first quarter 2026, Kinsale's diluted operating earnings per share increased by 37.7% over the first quarter of 2025, generating an annualized operating return on equity of 24%. Gross written premium was down 0.5%, but net written premium grew by 5.6% for the quarter as our business lines with the least reinsurance participation continued to show positive top line growth. Kinsale's combined ratio was 77.4%. E&S market conditions in the first quarter continued to be competitive with the level of competition and our growth rate varying from one market segment to another. We added additional disclosure to our 10-Q this quarter with gross written premium detailed by underwriting division, first quarter of 2026 and 2025. This quarterly disclosure complements the annual disclosure of premium by underwriting division in our 10-K and provides some insight into market conditions and growth prospects at a more granular level. And continuing the trend from the last few quarters, much of the headwind to our growth emanates from our large commercial property division, where we write larger layered property accounts and where there is an abundance of competition and falling rates. Excluding the Commercial Property division, Kinsale's growth in gross written premium was 6% for the first quarter. The investment thesis in Kinsale has always started with our disciplined underwriting and low-cost business model. By maintaining control over our underwriting operation and never outsourcing it to third parties, we drive a more accurate and more profitable underwriting process while offering our brokers the best customer service and the broadest risk appetite in the E&S market. Likewise, our 17-year commitment to making technology and analytics a core competency, allows us to operate a smarter business with a tremendous cost advantage over every competitor in the market, no exceptions. And in this competitive period of the insurance cycle, the Kinsale model continues to succeed. In the first quarter, new business submissions were up 6%. New business quotes were up 8% and new business bind orders were up 9%. We are seeing the largest headwind to growth among larger accounts, particularly within our Commercial Property division. It's on the larger premium accounts where the competition is most intense. Hence, our continued focus on smaller transactions where margins continue to be robust. You can see this smaller account trend in our average policy premium for the quarter. It was $12,200 per policy, down from $14,200 and in the first quarter of 2025. Finally, we continue to work on technology innovation, including extensive use of AI models to drive automation in our business process, especially underwriting and claim handling and throughout our software development and analytics teams. This innovation is improving efficiency, customer service, accuracy and data collection across our business, and we have begun incorporating various AI agents into our enterprise system. With the talent of our technology professionals in our bespoke enterprise system and the lack of any legacy software, we are well positioned to expand our tech lead to the benefit of both profitability and growth. And with that, I'll turn the call over to Bryan Petrucelli. Bryan Petrucelli: Thanks, Mike. As Mike just noted, the profitability of the business continues to be strong, with net income and net operating earnings increasing by 26.1% and 36.3%, respectively, quarter-over-quarter. The 77.4% combined ratio for the quarter included 4.5 points from net favorable prior year loss reserve development compared to 3.9 points last year, with less than 1 point in cat losses this year compared to 6 points in Q1 last year. Gross written premium decreased by 0.5 point for the quarter, while net written premium grew by 5.6% and as Mike mentioned, the growth in net written premium was higher than gross as the lesser reinsured lines continue to grow at a nice clip. We produced a 21.1% expense ratio for the quarter compared to 20% last year. The other underwriting expense portion of the ratio, which is the best measure of the operational efficiency of the business, was 10.3% for the quarter compared to 10.5% in Q1 2025. The overall expense ratio increase is attributable to a higher net commission ratio resulting from higher reinsurance retentions. The larger retention provides a positive economic trade for the company with a higher net commission ratio being more than offset by greater underwriting and investment income. On the investment side, net investment income increased by 26.5% for the first quarter over last year as a result of continued growth in the investment portfolio generated from strong operating cash flows. Kinsale's float, mostly unpaid losses and unearned premium grew to $3.3 billion at March 31 from $3.1 billion at the end of 2025. Annual gross return was 4.5% for the quarter compared to 4.3% last year. New money yields are averaging around 5%, with an average duration slightly above 4 years on the company's fixed maturity investment portfolio. And lastly, diluted earnings per share continues to improve and was $5.11 per share for the quarter compared to $3.71 per share for the first quarter of 2025. And with that, I'll pass it over to Stuart. Stuart Winston: Thanks, Bryan. There's plenty of competition in the E&S market. There's also opportunity and it's also a market in constant transition. Areas like large shared and layered placements in commercial property, certain professional lines, management liability and public entity all continue to experience strong competition and headwinds to growth. Recently, we have noticed more aggressive competition in some long tail lines like construction over the last quarter as well. There are also strong areas of opportunity with favorable growth prospects within the E&S market. Within the overall property market, our small business property and Inland Marine, Agribusiness property and Personal Insurance divisions all experienced favorable underwriting conditions and strong growth in the quarter. Within Casualty, our Agribusiness Casualty, Allied Health, General Casualty, Healthcare, Entertainment and Product Liability division saw favorable markets and growth in the quarter as well. We also continue to drive growth through new product offerings and product expansions, robust marketing efforts, new broker appointments and continually improving service standards combined with the broadest risk appetite in the business. As Mike mentioned, overall new business submission growth increased 6% in the first quarter, a similar rate to the fourth quarter of 2025. We continue to see a decline in new business submissions in the Commercial Property division that handles large shared and layered deals and excluding the Commercial Property division, new business submissions were up 9% for the quarter. While our lines of business are experiencing varying levels of competition and pricing pressure, the combined pricing trend for Kinsale is in line with the Amwins Pricing Index, which showed a rate decrease of 3 1/3% compared to a 2.7% decrease in the fourth quarter of 2025. Although large commercial property placements continue to experience strong rate pressure, other property lines like small business property and Inland Marine and casualty lines like commercial auto, excess casualty and general casualty, present opportunities for meaningful rate increases. We continue to have a high level of confidence in our model and its ability to perform throughout all parts of the market cycle. The foundation of that confidence is our underwriting discipline, our market responsiveness, our low cost and maintaining the flexibility to adapt to changing conditions. What is especially encouraging is that the business continues to show very good momentum. For small- to medium-sized risks, submissions are up, quotes are up and binders are up. That tells us the market is responding well to what we offer and that our value proposition continues to resonate with brokers and insurers. In a hard market, our model allows us to lean into opportunity. In a soft market, it gives us the discipline to stay selective and focus on business that meets our return thresholds and to exploit our low-cost advantage over our competition. We do not need a specific market environment to perform well. The model is designed to adapt, and we believe that adaptability is a real competitive advantage. So when we look ahead, we feel good about where we are, we feel good about the opportunities for profit and growth and we remain very confident in the long-term strength and durability of the platform. And with that, I'll hand it back over to Mike. Michael Kehoe: Thanks, Stuart. Operator, we're now ready for any questions in the queue. Operator: [Operator Instructions] Your first question comes from Dan Cohen with BMO Capital Markets. Daniel Cohen: Just first on the new disclosure of the new business quotes and the new bind orders. Can you just maybe expand on how that's trended year-over-year and quarter-over-quarter. I understand, Stuart, you said this was up. Just wondering if you could quantify that? And how should we be thinking about this KPI relative to submission growth? Michael Kehoe: Dan, this is Mike. I would say we've had requests from people over the years for a little bit more granular disclosure. So we're providing it. The more granular, the more volatile those numbers are. So I wouldn't overthink how important it is that in a 90-day period, some things up or down. But across the 25 divisions, I think you can see what we're talking about, which is overall, we're in a competitive market, but there's plenty of opportunities in some places. In other places, there's a lot more competition, and we're going to grow a little bit more slowly. Daniel Cohen: Okay. And then maybe just given the material expense ratio and the best-in-class returns today, just wondering, is Kinsale willing to deteriorate some of its accident year loss ratio for higher growth in the near term? Is that a part of the equation at this point? Michael Kehoe: Listen, we always manage all of our product lines to a low 20s return on equity or greater. And we're constantly adjusting pricing in both directions based on our understanding of the relative profitability of a given line. So that's just a normal part of managing an insurance company. But our ROE for the quarter was 24%. So I wouldn't expect a meaningful deterioration from that, no. Operator: Your next question is from Hristian Getsov with Wells Fargo. Hristian Getsov: My first question is on the accident year loss ratio. So I think it was much better than people expected, up 40 bps year-over-year. But is there anything one-off you'd like to highlight maybe in favorable non-cat weather? Or how should we think about the accident year loss ratio moving from here just given more mix shift towards casualty and just loss trend versus rate in lines away from property? Salmaan Allibhai: This is Salmaan. There's nothing out of the ordinary, no one-time adjustments to the accident year loss ratio. I'll just remind you that throughout the course of the year, there is a little bit of seasonality when it comes to that current accident year loss ratio. And so typically, the first quarter is a little bit higher than the other quarters, but nothing out of the ordinary to report. Hristian Getsov: Got it. And then just given the new disclosure, I was surprised to see E&S homeowners declined 22% in the quarter. Was that driven by increased competition? Or was it something more timing-related. Stuart Winston: Yes. It's the high value -- this is Stuart. The high-value market is experiencing some increased competition, and we're -- the limits that we're offering are tend to be lower. So it's -- the average premium is dropping a little bit. Michael Kehoe: We're still showing, I think, good growth in our Personal Insurance division, which is obviously also a homeowner split. Hristian Getsov: Got you. And then if I could just sneak 1 more. I know your reinsurance renewal is coming up and you guys increased retentions last year. But how are you guys thinking about it for this year given the below-average forecasted hurricane season. But also counterbalancing that, which is the lower cost of reinsurance? Michael Kehoe: Yes. This is Mike. We look at reinsurance retentions, limits, et cetera, every year. We've obviously increased our retention many times over the 17 years in business. And so obviously, we'll look at it again this year, but I can't really commit at this moment to how the treaties will be placed. I'll just note, it's a 6/1 renewal date. Operator: Our next question is from Andrew Andersen with Jefferies. Andrew Andersen: On the casualty side, Mike, maybe you could just talk a bit about how competitive behavior has been changing over the past 6 months, whether that's from MGAs or admitted carriers and on the flip side, maybe where it's been more stable than we would expect. Michael Kehoe: Andrew, I would just say, in general, we're looking at a competitive market. I think Stuart highlighted at the underwriting division level, where we're seeing -- I would look at the growth rate as a proxy for how competitive things are, right? The faster we're growing, the more opportunities we're finding. Stuart, I think you commented about the increase in competition on the long-tail lines. Stuart Winston: Yes, we're starting to see a lot of competition from fronts and MGAs and new companies on long-tail lines, specifically in construction over the last 4 to 5 months. So that's -- it's ramping up pretty aggressively there, but there's still premises liabilities is strong for us. Anything related to auto, we're seeing meaningful opportunities there. Michael Kehoe: And maybe one other thing, just to reiterate is that there's -- it's a different market when you're looking at larger transactions than when you're looking at smaller. And hence, we've always focused predominantly on small- to medium-sized accounts. And in a more competitive market, we always feel like that's a great safe harbor for Kinsale. Andrew Andersen: Got it. And that kind of ties into this question, but the submission growth seems pretty similar quarter-over-quarter, but down from where it was maybe a year or so ago. How much of the slowdown of the submissions would you kind of characterize as demand-driven versus some pullback on just irrational pricing? And perhaps you could also update us on some initiatives to expand broker relationships or the penetration with the existing brokers and how that could help top line as we go through the year? Michael Kehoe: In terms of the submission growth, again, we've always looked at that as a little bit of a leading indicator, maybe not a perfect one. But the ex commercial property, the fact that our submissions were up, I think, 9% for the quarter. We look at that as an attractive growth rate. If you had to characterize it, it's a competitive market, but reasonably steady, and we're excited about the growth prospects. There is a little bit of the shift from where larger accounts are under more competitive stress. So that has the near-term impact of, if you will, it has a depressing effect on the growth rate, but only until some of those accounts transition off the books, and then we see more of a normalization. But in terms of new broker appointments, we're always looking for top quality brokers to trade with. And that's a dynamic market. We're principally a wholesale distribution model. If there are changes in the marketplace and an experienced team of brokers who want to start a new shop, we're typically quite supportive of that. Operator: Our next question is from Pablo Singzon with JPMorgan. Pablo Singzon: Mike, thanks for the disclosure and submission growth. Are you noticing any change in retention? Or is the delta between gross premium and submission mostly pricing exposure as well as the mix impact from large commercial property? Stuart Winston: Yes. Pablo, this is Stuart. New business hit ratios and renewal hit ratios have been consistent quarter-to-quarter for a long time. So no big change there. Pablo Singzon: Okay. And then maybe a broader question. So small business E&S and even on the admitted side, has historic have been challenging to break into and some of your larger competitors have said that technology might enable them to be more competitive with smaller customers. Are you seeing any evidence of that emerging in the market today? . Michael Kehoe: No. Obviously, technology has always been an enormous priority for Kinsale. We talk about it in terms of making technology a core competency of our business 17 years ago when we started the company alongside of underwriting and claim handling. And I think that's providing some pretty powerful benefits. I think you can use our expense ratio in part as a proxy for the lead we have over competitors in terms of technology. We like to think we're going to be able to adapt new technologies that are coming out, whether it's software and hardware or whether it's AI models. We think we can adapt that and incorporate those innovations into our business more quickly because of the skill of our tech professionals because of the fact that we don't have legacy software going back 20, 30, 40 years. We don't have thousands of legacy applications to maintain. I think our competitors would have to speak to their own positions on that issue, but we feel like we're in a good spot. Operator: Your next question is from Mark Hughes with Truist. Mark Hughes: Yes. On the property front, where do we stand in terms of the sequential change in competition or pricing. The question is, is it reset at the lower level and now you're just kind of running through that and eventually, you'll hit the easier comp or is it continuing to drift to the downside? Michael Kehoe: Yes. We don't really have any good news to report there. I would say the easier comps, just like last year will be in the second half of the year, because we've always had a little bit of a disproportionate percentage of that commercial property volume in the first 6 months of the calendar year. Mark Hughes: And then the -- yes, the expense advantage, I think you had kind of touched on this earlier that your focus is going to be on keeping -- managing the low 20s ROE but you talked about using the expense advantage. Would you say that essentially, you're in the -- you're using that to the degree that's appropriate at this point that you're not going to be pushing more or using the expense advantage to grow the top line. Is that -- that's something you've already deployed, so to speak, to the extent that you choose to? Michael Kehoe: Mark, I think the way I'd characterize it is we're always estimating our loss cost, some lines of business we write are short tail, like the property cat exposed business. It's heavily dependent near term on the weather. The fire peril on a property book is a little bit more statistically predictable. We write short, medium and long tail casualty those things are impacted by different things like changes in tort law and inflation and -- so yes, we're always thinking about our expense advantage. We also think about our underwriting advantage, controlling our own underwriting, having a more accurate process. We think about the tremendous amount of work we've done in terms of analytics, constantly figuring out smarter ways to segment and price risk. I think that's an advantage. But then on top of that, we've got a tort system that's not 100% predictable, right? There's the law of large numbers. We've got accurate ways to reserve for future claims, but there's -- you never know definitively the cost of goods sold. And so hence, the conservative reserving, we've got a 17-year track record of those reserves developing favorably on a GAAP basis. But yes, all those things go into the mix, and we think it puts us in a great position to not only generate best-in-class returns but to continue to grow the business. We are ambitious. We do want to grow. But we subordinate the growth if we have to, to profitability. But I think the message on this call is that even in a highly competitive market, we're finding lots of ways to grow. Admittedly, the gross written premium number being down 0.5% for the quarter might seem to contradict that. But when you consider all the commentary we're making around large accounts being under more stress, in a lot of ways, the book is just shifting or transitioning to a little bit more of a smaller average premium, and we're fine with that. The profitability in that business is top-notch. So long term, we're confident we're going to continue to grow and take market share, but certainly never at the expense of an attractive level of profitability. Mark Hughes: And then just out of curiosity, how is the equity portfolio performing? Michael Kehoe: It's performing well. I think if you look back over -- so keep in mind, we're about 2/3 actively managed equities and 1/3 passive, principally the S&P 500. I think since late 2022, we've lagged the S&P, but we've more or less matched our benchmark, which is the Vanguard VYM, the high dividend ETF. And lagging the S&P is mostly related to the fact that we've got a little bit less of a weighting toward tech. It's not that we're not big believers in technology. It's just that we're a little bit more of a value orientation. Operator: [Operator Instructions] Your next question comes from Rowland Mayor with RBC Capital Markets. Rowland Mayor: I appreciate the new disclosures on the growth rates by unit. I was just wondering on the commercial property. It looks like it was $65 million of premium in the first quarter and $375 million last year. What portion of that is actually in the large property category you're talking about the competition? Michael Kehoe: We don't have a specific breakout, but the average premium in that division, I think, is somewhere between $30,000 and $40,000 per policy. Stuart Winston: That commercial -- that commercial property division, that is the large shared and layered division. So everything else has handled small properties broken out separately. So Commercial Properties is a stand-alone division for the large shared and layered deals. Michael Kehoe: Yes. And if you look at that division, Rowland, if you looked at that, like, say, a year or 2 ago, I think the average premium might have been north of $50,000. So you can see where we're either losing some of those larger accounts or maybe we're participating higher in the schedule where there's less risk, so hence, less premium. It's a variety of factors. But definitely, a trend towards smaller accounts where, again, we're very confident around the margin in that business. Rowland Mayor: Okay. Perfect. And then I wanted to ask, you had mentioned the low 20s target for ROEs. And I guess with the amount of capital coming into the space and seemingly going after lower return targets, do you think it will normalize back to your market? Or do you think you might long-term need to come down into the high teens at some point? Michael Kehoe: I think with a better underwriting model and a cost advantage that's so significant, it's -- it's hard to believe that it exists. No, we're confident in a low 20s return on equity. We kind of look at it, if you will, it's like a spread over the risk-free rate, which is admittedly slightly -- if you use the 10-year treasury, that's a little bit below 5%. But just generally speaking, we're about 15 percentage points above the risk-free rate. Operator: Your next question is from Pablo Singzon with JPMorgan. Pablo Singzon: Mike, the submission growth rate you provided, do you have a sense of how that compares to the overall market or maybe the subsegment of E&S where you compete in, right? I just want to get a sense of, first, like sort of where the macro is trending? And I guess, more importantly, how you are running against it? Michael Kehoe: Yes. Pablo, we don't have any specific information for the overall market. But I would say, in general, brokers do a great job working hard for their clients. Their clients want low-cost, broad coverage. So they typically canvass the market to make sure they're getting the best terms and conditions for their customer. So I assume there's some commonality to the stats we have versus what our competitors have. But we don't really know that. Operator: Your next question is from Mark Hughes with Truist. Mark Hughes: You talked about more competition in construction. How are you seeing the volume of opportunities? Have you seen any kind of slowdown or delay in construction activity? Stuart Winston: Mark, this is Stuart. We haven't seen any delays, but we don't also focus on large project-specific policies for those parts. I think you will see that in certain areas, outlets in the Northeast for wraps that projects are being delayed a little bit, but that's not really where we focus on in the construction book. Mark Hughes: And then in the general casualty, the growth was still pretty strong double digits, at what, 11% or 12%? How did that compare to the fourth quarter? I think for all of last year, you were up in the low 20s. I'm just sort of curious sequentially what you've seen on the general casualty book? Michael Kehoe: Mark, we don't have the stats to provide today, but we do have in the K, you've got the by underwriting division, gross written premium for the year, and it's a 3-year look back. Mark Hughes: Yes. Yes. Exactly. Okay. And then Bryan, on the cash flow, the cash from operations up 8%. Should we think -- is that going to track along with net written perhaps? Or how would you think about the cash flow dynamic playing out this year? What are the guideposts we should keep an eye on in terms of the free cash. Obviously, it's helping to drive investment income. So I'm just sort of curious, any thoughts there. Bryan Petrucelli: I think that's a good way to look at it, Mark, trending it with net written premiums. Operator: There are no further questions at this time. I'll now turn the call back over to Mr. Kehoe for closing remarks. Michael Kehoe: All right. Well, I just want to thank everybody for participating. And hopefully, you get a sense of our optimism and hope everybody has a great day. Goodbye. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon. My name is Pryla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rexford Industrial Realty, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, you may press star one again. Thank you. I will now hand the call over to Mikaela Lynch, Director of Investor Relations and Capital Markets at Rexford Industrial Realty, Inc. Mikaela, please go ahead. Mikaela Lynch: Thank you, and welcome to Rexford Industrial Realty, Inc.'s First Quarter 2026 Earnings Conference Call. In addition to yesterday's earnings release, we posted a supplemental package and earnings presentation in the Investor Relations section on our website to support today's remarks. As a reminder, management's remarks and responses to your questions may contain forward-looking statements as defined by federal securities laws, which are based on certain assumptions and subject to risks and uncertainties outlined in our 10-Ks and other SEC filings. As such, actual results may differ, and we assume no obligation to update any forward-looking statements in the future. We will also discuss non-GAAP financial measures on today's call. Our earnings presentation and supplemental package provide GAAP reconciliations as well as an explanation of why these measures are useful to investors. Joining me today are Rexford Industrial Realty, Inc.'s CEO, Laura Clark, together with our COO, John Nahas, and our CFO, Michael P. Fitzmaurice. It is my pleasure to now introduce Laura Clark. Laura? Laura Clark: Thank you, Mikaela, and thank you all for joining us today. The Rexford Industrial Realty, Inc. team delivered a strong quarter. We set a record for leasing activity, executing 4.1 million square feet of leases, reflecting increased tenant activity and demand for our higher-quality portfolio. The decisive actions we are taking to advance our strategic priorities are driving top- and bottom-line growth, supporting our outperformance and higher expectations for the full year. Today, I will provide an update on our strategic focus areas and the broader environment. John will then discuss our operating performance and share a deeper view on market trends. Finally, Fitz will walk through our financial results and increased full year outlook. We entered the year with clearly defined goals to drive long-term shareholder value. In the first quarter, we made meaningful progress against our three strategic areas of focus: opportunistic dispositions, accretive capital recycling, and operational rigor. I will start with our programmatic disposition strategy, which is focused on strengthening future cash flows and reducing development exposure. To date, we have closed on $144 million of dispositions with another $170 million under contract or accepted offer, keeping us firmly on track to achieve our target for the year. Through these strategic dispositions, we are de-risking cash flows, capturing premium valuations, and avoiding future dilutive capital spend, all while directly supporting our next priority: accretive capital recycling. As we redeploy capital from dispositions, our investment decisions remain anchored in our commitment to delivering superior risk-adjusted returns. Given the dislocation between Rexford Industrial Realty, Inc.'s public market valuation and the intrinsic value of our platform, share repurchases remain a compelling driver of FFO and NAV per share accretion. In the first quarter, we executed $200 million of share repurchases. Looking ahead, we will continue to evaluate opportunities across our portfolio to increase the quality and durability of our future cash flow growth and unlock meaningful value through accretive capital recycling. We also made material progress against our commitment to enhanced operational rigor. Last quarter, we shared our focus on prioritizing occupancy amid softer market fundamentals. Our team's strength of execution—proactively engaging tenants, addressing end-market requirements, and driving demand for our assets—translated into stronger leasing and shorter downtime. Our first quarter results and increased full-year guidance expectations directly reflect our efforts to preserve cash flows and reduce capital costs, a continued focus moving forward. Regarding operational efficiency, our actions to date have positioned us to achieve meaningful G&A savings, bringing G&A as a percentage of revenue below the peer average, and we expect to continue reducing this level over time. Turning to the infill Southern California industrial market, where Rexford Industrial Realty, Inc.'s unique positioning provides unparalleled visibility into conditions on the ground. Infill Southern California is home to more than 24 million people, represents the twelfth largest economy in the world, and includes the fourth largest industrial market globally. A diverse set of macro and microeconomic drivers shapes demand and supply across the segment and market, meaning that no submarket, building size, or quality tier performs the same. Importantly, this diversity underpins strong long-term supply and demand fundamentals. Against that backdrop, the first quarter reflected a shift across the market. Increased tenant activity translated into higher leasing volumes. Specifically, first quarter leasing activity for the Rexford Industrial Realty, Inc. portfolio was over 70% higher year over year. In addition, current leasing interest on our vacant spaces increased to approximately 90% compared to 75% last quarter and a year ago. Notably, momentum accelerated through the quarter, with the majority of our leases executed in the second half of the quarter. While demand in certain submarkets and product types remained soft and market fundamentals are still under pressure, we are encouraged by the early positive signs we are seeing within our portfolio and the market. We view this incremental improvement as a necessary precursor to broader stabilization, setting the stage for an eventual tightening in availability and lower vacancy across the market. Importantly, our high-quality, functional assets and supply-constrained locations reinforce our confidence in Rexford Industrial Realty, Inc.'s ability to deliver outsized growth. Supply under construction remains near historic lows, and the structural barriers to new supply that have emerged in recent years, including significantly increased regulatory restrictions, have fundamentally altered the market's ability to add supply. We believe these long-term constraints will deepen Rexford Industrial Realty, Inc.'s competitive moat and reinforce the value of our irreplaceable portfolio. These favorable dynamics are amplified for buildings under 50 thousand square feet and align with Rexford Industrial Realty, Inc.'s core focus on smaller-format, consumption-driven industrial. Supply under construction in this size range is immaterial, and approximately 80% of the existing inventory was built over 50 years ago, reflecting the longstanding difficulty of adding smaller-format product and positioning our value-creation platform to deliver outsized per-share growth over time. In closing, we are encouraged by the incremental improvement we are seeing in the market. We are confident Rexford Industrial Realty, Inc. will continue to capitalize as the market approaches a trough and demand conditions improve. We remain well positioned to deliver meaningful, sustainable value creation for our shareholders. Before turning the call over to John, I would like to congratulate him on his well-deserved promotion to COO, recognizing his exceptional leadership and substantial contributions across Rexford Industrial Realty, Inc.'s operations. John? John Nahas: Thank you, Laura, and good morning, everyone. Before I begin, I would like to express my gratitude for the opportunity to step into the COO role. I am proud to be a part of a tremendous Rexford Industrial Realty, Inc. team, and I am excited to help lead Rexford Industrial Realty, Inc. as we execute upon our strategy to drive performance. Overall, we delivered a solid first quarter, with results tracking ahead of our expectations and reinforcing the durability of our platform. Leasing activity gained momentum throughout the quarter. Our focus on prioritizing occupancy has resulted in over 4.1 million square feet of lease transactions. The volume is comprised of 144 deals averaging 29 thousand square feet, with approximately 70% coming from renewals, including the renewal of Tireco at our 1.1 million square foot building on Production Avenue in the Inland Empire West. Cash releasing spreads for the quarter were negative 15.4% inclusive of the Tireco renewal and negative 1.8% excluding the Tireco renewal, in line with our expectations. I would like to take a moment to further describe the Tireco renewal given its relative size and impact. The renewal was strategic for a number of factors. First, at the time of negotiation, we had visibility to the upcoming vacancy of an immediately adjacent building similar in size and functionality that would have represented an efficient, low-cost relocation option for the tenant. Second, considering the significant capital investment and downtime associated with the potential vacancy next year, it was financially advantageous to preserve the occupancy. Finally, we opportunistically chose to limit the extended term to three years and to convert the lease structure to gross, thereby allowing us to collect a material reduction in property tax assessments anticipated to occur over the term. While this renewal generated an approximately 30% negative spread, it was amplified by the above-market in-place rent that was established during the last lease extension and is not indicative of future leasing spreads in the portfolio. Turning to the market, as Laura noted, we are seeing higher levels of leasing activity. Demand drivers continue to emanate from consumption-related sectors such as construction-related uses, food and beverage, and automotive businesses, and notably, we have not seen a negative impact on demand related to the current geopolitical conflict. Importantly, the level of activity and conversion rate to leases continues to be dependent on product size, class, and submarket. Demand for spaces under 50 thousand square feet remains healthy and well diversified. Tenants seeking larger spaces over 50 thousand square feet are generally focused on functional space that can be leased at value rates. As a result, Class A product in certain submarkets, such as San Fernando Valley, Orange County, and San Gabriel Valley, continues to see slow activity, as evidenced by delayed rent commencement on development projects that we have delivered in those markets. Focusing further on submarket-specific demand, we continue to see notable increased activity from 3PLs in the Inland Empire West and from advanced manufacturers which are seeking both larger and smaller-format spaces in specific portions of the San Fernando Valley and South Bay markets. One such example is the stabilization of our completed repositioning project at 1315 Storm Parkway, which is a 38 thousand square foot building in the South Bay that we leased to an advanced manufacturer. Overall, we are encouraged by these trends and the general increase in activity. However, we continue to closely monitor net absorption across our markets. The overall infill SoCal market continues to experience negative net absorption, resulting in a 20 basis point increase in vacancy with rents declining approximately 70 basis points compared to last quarter. Deal terms aside from rate continue to be stable, including concessions and annual escalations. Moving on to capital allocation, we remain focused on our disposition strategy and disciplined capital deployment. During the quarter, we disposed of five assets comprised of two development projects that did not meet our current return requirements and three operating assets that were sold to users at premium valuations. Subsequent to quarter end, we closed on one additional property that was formerly in our near-term development pipeline, and we have $170 million of additional dispositions under contract or accepted offer which are subject to customary closing conditions. In regard to repositioning and development, we continue to rigorously evaluate the strategy for each asset in our pipeline with a focus on maximizing risk-adjusted returns. As a result, two projects were removed from our prior near-term pipeline to pursue more accretive outcomes. At Green Drive in the City of Industry, we were able to meet an active user-sale requirement and have pivoted to executing a sale and capitalizing on a premium valuation. At Mulberry Avenue in the Inland Empire West, we are foregoing a previously planned repositioning project that no longer meets our return requirements, and the property is now being offered both for sale and for lease as-is. At the same time, we continue to move forward with value-creation opportunities that meet our underwriting targets. Ruffin Road in San Diego was added to our future development pipeline, as it will ultimately deliver a highly competitive building in a desirable location and is forecasted to achieve a 200 basis point development spread. With that, I will turn it over to Fitz. Michael P. Fitzmaurice: Thanks, Laura and John, and good morning, everyone. We are pleased with our first quarter financial results, which reflect our continued focus on what we can control: driving occupancy, recycling capital accretively, and preserving balance sheet flexibility and strength. Starting with financial results, first quarter core FFO per share of $0.61 was $0.01 above our internal forecast and up $0.02 sequentially from the fourth quarter last year. The $0.01 beat was largely driven by stronger NOI growth and accretive share buybacks. The $0.02 sequential improvement was driven primarily by lower G&A, and also accretive share buybacks and stronger NOI growth. Same-property NOI growth was 90 basis points on a net effective basis and negative 40 basis points on cash. While the year-over-year change benefited from average occupancy gains, we did experience higher concessions. Regarding bad debt, as expected, expense was elevated this quarter. It was concentrated in a few tenants and not broad based. Our tenant watch list continues to trend low, underscoring the strong credit quality and stability inherent in our diverse tenant base. Turning to capital recycling and the balance sheet, disposition proceeds were redeployed into share buybacks. We bought back $200 million of shares at a weighted average price of $36, bringing our cumulative total since mid-2025 to $450 million. This capital rotation was meaningfully accretive. Selling assets and redeploying into shares at a significant discount to intrinsic value was a key factor in our ability to raise full-year guidance. We view share buybacks at these price levels as a superior use of capital, providing a direct and meaningful increase to shareholder returns. We ended the quarter with net debt to adjusted EBITDA of 4.5x and $1.3 billion of total liquidity, with no significant maturities until 2027—a balance sheet that gives us strength and flexibility. Based on approximately $300 million of remaining dispositions expected to be completed by the end of the year, we have significant liquidity and opportunity to deploy capital towards the highest risk-adjusted returns across our suite of opportunities: share buybacks, repositionings, and select developments. Turning to our 2026 guidance increase, we are raising our full-year core FFO per share midpoint by $0.02, primarily driven by outperformance in the first quarter due to strong leasing activity as we continue to prioritize occupancy and accretive capital recycling. We have also raised our same-property NOI growth outlook by 50 basis points at the midpoint, both on a net effective and cash basis. Average same-property occupancy is now expected to be 95.1% to 95.6%, up 30 basis points at the midpoint. Our bad debt assumption of 75 basis points of revenue remains unchanged, as does our net effective releasing spreads of 5% to 10%. All other assumptions—G&A of approximately $60 million and interest expense of approximately $112 million—remain intact. On the repositioning and development front, we expect to stabilize and commence rent on approximately 1.1 million square feet of value-added projects, generating $17 million of annualized NOI, with the majority expected to come online in the second half of this year. This is down slightly from our earlier expectations due to rent commencement delays that John noted. Conversely, approximately $12 million of annualized in-place NOI will come offline related to 2026 construction starts, in line with last quarter. The weighted average timing of the annualized NOI coming offline is late in the third quarter. Before we open up the call for questions, we acknowledge the near-term pressure from releasing spreads given the market rent decline over the past three years. However, our focus is clear: control the controllables. We are navigating the current phase of the cycle with a clear, disciplined strategy centered on execution. Our primary bridge to growth is a rigorous focus on driving occupancy in our overall portfolio. And we have a robust repositioning and development pipeline representing roughly $50 million of NOI poised to come online over the next two-plus years, which serves as a powerful offset to current market rent resets. Furthermore, we are aggressively optimizing our capital allocation by selling non-core assets and redeploying those proceeds into accretive share buybacks at attractive valuations. By pairing these actions with a lean approach to G&A, we are strengthening our cash flows while positioning us for outsized growth as the broader environment improves. In closing, a big congrats to John on his promotion. John, I truly appreciate your leadership and our continued partnership. Finally, on behalf of Laura, John, and myself, I want to extend our gratitude to the entire Rexford Industrial Realty, Inc. team for their ongoing dedication and consistent execution of our strategic goals. I will now turn the call back to the operator and open the line for questions. Operator: Thank you. And at this time, I would like to remind everyone, in order to ask a question, simply press star then 1 on your telephone keypad. We will now open the call for questions. I will now hand the call back to Mikaela Lynch to begin the Q&A session. Mikaela Lynch: Thank you, and good morning. Our first question comes from Craig Mailman from Citigroup. Craig, please go ahead. Craig Mailman: Hey, good morning, guys and girls. Laura, you had mentioned that you are seeing some improvement that accelerated through the back end of the quarter. Can you talk about where you are seeing those pockets of strength in terms of your submarkets? I have heard John's comments on 3PLs and the IE West, but any other verticals or tenant types to call out as you are seeing some kind of continuing bottoming in the process in L.A.? John Nahas: Yeah. Hey, Craig, this is John Nahas. I will jump in and take that. So overall, we have continued to see some consistent themes—construction-related uses, advanced manufacturing in certain submarkets as I mentioned in the prepared remarks, food and beverage. Those are themes that we saw active last quarter, and those continue this quarter across all markets. And then from there, there is really a bifurcation, whether we are talking about below 50 thousand square feet—where we continue to see a broad base of demand, just based on consumption in the infill markets—and then above 50 thousand square feet, it gets a little bit more submarket dependent. So while 3PL activity remains increased in the Inland Empire, it is not the only tenant activity we are seeing out there. It does go beyond a bit more, but it is really mixed and micro-market dependent. I think it is maybe helpful to talk a little bit about where we are today with activity compared to where we were last year. We saw the back half of 2025 show increased activity as compared to the first half of the year, where there was a bit more turmoil from tariffs and other macroeconomic impacts, and that produced some good volumes in the market. When we got to the fourth quarter, there were deals that were being executed, but what we did not see at the time was the early formation of the leasing pipeline. So there was slower touring activity, and as a result, this quarter we saw less conversion into executed deals, particularly around some of the Class A product. And I mentioned this in the prepared remarks as well. That is a pocket in a number of submarkets where we still do not see the same levels of demand recovery. There are exceptions to that. The South Bay market, in particular, is one to point out where Class A really fits the advanced manufacturing demand. I mentioned San Fernando Valley. There are certain pockets, particularly Santa Clarita Valley, where we see that tenant demand forming, as well as in San Diego. And then there have been some recent deals that hit the market in the Long Beach area where demand is forming as well. So it is really kind of across the board—feeling better. There is better sentiment in the market this quarter. We are seeing more signs of that early leasing pipeline starting to form, but we are watching it very closely in terms of how that is going to convert into executed deals, which we would expect to see happen over the next two to three months. Operator: Thanks, Craig. Mikaela Lynch: Our next question comes from Samir Khanal from Bank of America. Samir, please go ahead. Samir Khanal: Thank you. Good morning, everybody. I guess, Laura, on the one hand, it looks like you are starting to see improvements in the market. You talked about tenant activity. But when I look at the development leasing side, it is still taking a bit longer. I guess maybe just reconcile the two items. Thanks. Laura Clark: John just touched on what we are seeing from a development perspective in terms of some of the drivers there, but just overall, Samir, what I would say is we are encouraged by the early signs of improvement—a pickup in activity. We are seeing increased tenant decision making and an increased level of lease executions, and that certainly varies by size, submarket, and product type. All that said, market fundamentals are under pressure. Net absorption is negative and vacancy ticked up. So we take all these different dynamics into account. We do see the bottom forming of the cycle, and these are good early signs. As we look ahead, we expect and hope to continue to see quarters of improved incremental demand, and that is what is really going to be critical to net absorption turning positive in the market, vacancy moving down, and rates firming. Operator: Thanks, Samir. Mikaela Lynch: Our next question comes from Greg McGinniss from Scotiabank. Greg, please go ahead. Greg McGinniss: Hey. Good morning. I am curious who you are finding as buyers for the dispositions, whether those are in-place assets or ones that are coming from the redevelopment pipeline, and what types of cap rates are being achieved on those. John Nahas: Yeah. Hi, Greg. This is John. So if you look at what we sold in the first quarter as an example, there are really two buckets. There are the development sites that we sold, and the buyer profile for that tends to be merchant developers that are well known in the region and good groups that develop product here. Those deals do not really trade on a cap rate basis. It is more about land basis that supports their underwriting targets. And then the other half of the sales that completed were operating assets that were sold to users, and so that pricing there represents pretty strong cap rates. On a blended basis, we were below 4% this quarter with the three assets that we sold to users. The reason for that is the users do not really look at it from a cap rate basis; they are looking at it from a dollar-per-square-foot standpoint. There are other considerations that drive that demand, such as some of the accelerated depreciation benefits that they now have, not only from the real estate but investments that they are making into fixturization and equipment. Right now in the market overall, we are still seeing low transaction volume, and it presents this opportunity for users to continue to be active, and so we are capitalizing on that where it generates these low cap rates that allow us to accretively recycle capital. We actually had a couple of repositioning projects that I mentioned in my prepared remarks where we have shifted gears on strategy to take advantage of interest in the market. So we are going to continue to do that where we see low cap rate opportunities that will allow us to collect those proceeds and put them to work at higher yields. Mikaela Lynch: Thank you, Greg. Our next question comes from Michael Griffin from Evercore. Michael, please go ahead. Michael Griffin: Just wondering if you can give us some more color on where market rents are. I realize it can be submarket by submarket, but maybe for the portfolio broadly. Rents signed in the quarter were, call it, in the mid-$15 range, but you have $18 rents expiring for the rest of the year. If you kept your net effective and cash mark-to-market guidance the same—which I believe on a cash basis is 0% to down 5%—does that imply the rents you are signing on those expiring leases are going to come in in the mid-$16 range? Is it $17? Just help us contextualize where market rents are and the expectations for the rest of the year. Thank you. Michael P. Fitzmaurice: Yeah. Our expectations for releasing spreads have not changed since last quarter. On a net effective basis, they are going to be between 5% and 10%, and on a cash basis, flat to negative 5%. As we disclosed last night, Tireco did have a disproportionate impact on releasing spreads this quarter. As we move throughout the remaining part of the year, we do expect releasing spreads to reaccelerate into the back half of this year. Mikaela Lynch: Thanks, Michael. Our next question comes from Michael Mueller from JPMorgan. Michael, please go ahead. Michael Mueller: Yeah, hi. If you continue to buy stock back like you did in the first quarter, would it likely be coupled with an increase in disposition activity? Michael P. Fitzmaurice: Hi, Michael. Good morning. Yeah, look, buybacks are tied to disposition activity. Our expectations for this year are between $400 million and $500 million. To date, we have about $145 million already closed and another $170 million under contract. We view buybacks through an opportunistic lens. When we see a disconnect between our intrinsic value and the current market price, we are going to lean in. We demonstrated this approach over the last six months. We have $500 million remaining on the program. In terms of appetite, it is obviously share-price sensitive, balanced with ensuring we maintain our low leverage of 4.5x and other competing uses of capital. Mikaela Lynch: Thanks, Michael. Our next question comes from John Kim from BMO. John, please go ahead. John Kim: Thanks, Mikaela. Just on the buybacks, you certainly make a compelling case to continue it. But looking at the market's reaction today and year to date, it does not seem like you are really being rewarded for it. So I am wondering, if this thing continues, would you consider pausing buyback activity? Laura Clark: Hey, John. Thanks so much for the question. At the foundation of how we are allocating capital is directing capital to the highest risk-adjusted returns and where we can drive FFO per share, NAV per share, and shareholder value and growth. We are going to continue to assess where those opportunities are. As Fitz mentioned, when you look at the disconnect between our intrinsic value and where the stock is trading, that has been a compelling use of capital to date. So we will continue to assess that, as well as opportunities to invest within our value-creation platform through our repositionings and select developments as we move through the year. Michael P. Fitzmaurice: Thanks, John. Mikaela Lynch: Our next question comes from Vince Tibone from Green Street. Vince, please go ahead. Vince Tibone: Hi, good morning. I wanted to dive into the leasing activity you mentioned was at a record high. Looking at the stuff, it looks like it is mostly driven by renewals and then the Tireco lease being a part of that. Outside of Tireco, are you generally trying to do more early renewals than in the past? Spreads have held up a little better there. Just trying to get a sense of your strategy on the renewal side in a softer market. Are you going after more renewals as a way to help retention or hold up better on the rent side of things? Curious about your approach. John Nahas: Yeah. Hi, Vince. This is John. As you noted, the Tireco transaction did help lift the overall leasing volumes. Beyond that, there are a number of deals that were made across various unit sizes across our portfolio. When it comes to renewals and retention, we are prioritizing that where we can. It is part of our overall strategy to prioritize occupancy. I will say that tenants in today's market—depending on the size range and depending on the submarket—might have more options that work for them. Part of the activity levels we are seeing with tenant touring is being driven by tenants evaluating what is available in the market relative to the space they currently have. When we see that happening, we are proactive in engagement and, in some cases, trying to preempt that exercise. That was part of the strategy with the Tireco renewal, as I mentioned. Our numbers show that. Our retention is up a bit, and renewals are making up a slightly higher component of our overall leasing activity in the quarter, which is a result of that approach. Mikaela Lynch: Thanks, Vince. Our next question comes from Vikram Malhotra from Mizuho. Vikram, please go ahead. Vikram Malhotra: Good morning. Thanks for taking the questions. I had one clarification and then a broader question. First, you mentioned sort of the leasing dollar ramp up. I am wondering if you can give us a square footage target you have to put to keep the core portfolio occupancy, and then how much you need to lease square footage-wise for the development portfolio to meet your goals? And then a bigger picture question: clearly you are selling attractively and buying back stock, but is there a thought to take a deep dive into the portfolio, maybe identify markets or submarkets you do not want to be in long term, and take advantage right now by doing a bigger sale, a $1 billion sale, or a mini-portfolio sale where you position this portfolio for the long run? Thanks. Michael P. Fitzmaurice: Sure. Good morning, Vikram. In terms of square footage that we expect to commence as it relates to our guidance, between 8 million and 8.5 million square feet this year, which includes about 1 million square feet from our repositioning and development. Laura Clark: In regards to your question on additional dispositions, we do continually assess the portfolio. We are looking to identify additional opportunities to build a more resilient and higher-growth platform and portfolio going forward. We are assessing risk, we are assessing capital needs, and we are assessing product that aligns with our ability to drive true value creation and differentiated growth. Importantly, as is contemplated in our current disposition guidance for the year, we are focused on recycling capital on an accretive basis that enables us to drive FFO and NAV per share growth. Mikaela Lynch: Thanks, Vikram. Our next question comes from Richard Anderson from Cantor Fitzgerald. Richard, please go ahead. Richard Anderson: Thanks. Good morning. I wanted to ask a broad question around some of the tangential demand factors around advanced manufacturing and data centers and even, in your case, aerospace and defense being a potential lightning rod of demand in Southern California, and how that manifests itself in your smaller-format consumption-oriented platform. Is there a dotted line, a straight line, a dark line to your business from these outside demand factors, or do you feel it directly in your leasing process? Thanks. John Nahas: Yeah. Hi, Richard. Data centers are not really a core component of our business. There are a lot of power demands that come with that, and so that one is not something that makes up a material opportunity for our portfolio. When it comes to advanced manufacturing, the answer is yes—it is a very bold, connected line. We see that demand being applied to spaces both large and small. The property I mentioned in the prepared remarks, Storm Parkway—pretty close to our average unit size—represents the typical unit in the Rexford Industrial Realty, Inc. portfolio, and we leased that to an advanced manufacturer. It is important to note there are different facets and layers to this sector. Some of them are the biggest household names that everyone recognizes, and then there are all the vendors and service providers that come with that industry. We see a lot of demand, especially in the South Bay markets, specifically the coastal portions of that market, where there is demand across all those ranges. We have executed deals with the household names, and we have been very happy with the level of demand that ranges from some of our smallest units in that market—going down to 5 thousand square feet that are a little bit more incubator type—up to things like Storm and beyond. Even Western, which we stabilized last year, which is a Class A development we delivered in Torrance, fits into that category. So it is a very relevant and active sector. As I mentioned, we see this demand in other pockets of San Fernando Valley, San Diego, and now a little bit in Long Beach and a little bit in Orange County. We spend a lot of time focused on the demand that comes from that sector in the market and have had some success to date. We are pretty pleased by it. Operator: Thanks, Richard. Mikaela Lynch: Our next question comes from Brendan Lynch from Barclays. Brendan, please go ahead. Brendan Lynch: Great. Good morning. Thanks for taking the question. Maybe talk about the long-term plan for the Tireco asset. I would imagine getting the lease renewal makes it easier to dispose of if you so choose, and it does not really fit in with the rest of your portfolio. How should we think about that going forward? Laura Clark: Hi, Brendan. John Nahas: Our focus was on addressing the lease roll for next year as we thought about structuring that renewal, so it is not really a read-through to any longer-term strategic plan for that asset. Michael P. Fitzmaurice: Thanks, Brendan. Mikaela Lynch: Our next question comes from Baird. Please go ahead. Analyst: Hey, good morning out there. I was hoping to unpack the decline in lease term signings during the quarter—if there is anything specific to call out there. You would think if tenants were seeing an inflection point or a bottoming-out phase, they would be seeking a little bit more term and lock in favorable terms. Is this a strategy that Rexford Industrial Realty, Inc. is pursuing to weather the near term and kick out for a cycle in, say, 2029 and beyond? Is there anything worth highlighting within the lease term, or are we just reading through one print and there is some hodgepodge numbers in there? John Nahas: Yeah. Hi. It really depends. There are tenants in the market who are trying to capitalize on current market rate levels and lock them up for longer periods of time, and in some cases, that might be the best decision to meet that requirement and do that deal. In others, we may proactively try to shorten terms strategically so that we can get to a reset moment if we believe that is going to come in the next few years. Tireco is a good example of that. We chose to limit that term on the extension to three years. It really depends on competitive supply and how much leverage there is on each side of the table for each situation. In terms of the overall statistics for the activity that we converted in the first quarter, it also comes down to size. The mix of units that falls into our volume can have an impact. Generally speaking, the smaller units in our portfolio on average tend to have shorter terms anyway, so that is impacting the number as well. Mikaela Lynch: Thanks. Our final question comes from Wells Fargo. Please go ahead. Analyst: Yes. Thank you. Good morning out there. I wanted to go back to rent a little bit. It looks like the pro forma targeted rent in your redevelopment portfolio seems to be a little bit higher than current market rent. Is that part of a mix issue, or is there some type of rent growth that is baked into that pro forma? Michael P. Fitzmaurice: No. That has to do with the mix issue. Operator: Thank you. Mikaela Lynch: That concludes the Q&A portion of our earnings call. I would now like to turn the call over to Laura Clark for closing remarks. Laura Clark: Thank you all for joining us today. We look forward to spending time with you throughout the quarter, and I hope everyone has a wonderful weekend. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to Phillips Edison & Company, Inc.'s First Quarter 2026 Earnings Call. Please note that this call is being recorded. I will now turn the call over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin. Kimberly Green: Thank you. I am joined today by our Chairman and CEO, Jeffrey S. Edison, President, Robert F. Myers, and CFO, John P. Caulfield. As a reminder, today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings. Our discussion today will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, both of which have been posted on our website. Please note that we have also posted a presentation, and our caution on forward-looking statements also applies to these materials. Following our prepared remarks, we will open the call to Q&A. Given the number of participants on the call today, we respectfully ask that you be limited to one question. Please rejoin the queue if you have follow-up questions. With that, I will turn the call over to Jeffrey S. Edison. Jeff? Jeffrey S. Edison: Thank you, Kimberly, and thank you everyone for joining us today. We are pleased to report another quarter of strong results, which reflect the strength of our high-quality portfolio and the consistency of our execution. The Phillips Edison & Company, Inc. team delivered NAREIT FFO per share growth of 4.7%, core FFO per share growth of 6.2%, and same-center NOI growth of 3.5%. We are pleased to increase our full-year 2026 guidance. Our growth rates for NAREIT FFO and core FFO per share are in the mid to high single digits, consistent with our long-term targets. We are operating in a time where there are many ongoing uncertainties, both domestically and globally. Interest rates have been volatile. The global trade picture is shifting, and conflicts overseas continue to affect markets. Technology, especially AI, is changing how companies work. Add in an active election cycle and high energy costs, and it is no surprise that there is a general feeling of uncertainty. In times like this, the market tends to reward businesses that have stability. And that is exactly where Phillips Edison & Company, Inc. plays: grocer-anchored, necessity-based, everyday retail. Phillips Edison & Company, Inc. offers resilience while also offering steady growth. We believe Phillips Edison & Company, Inc. is built to deliver growth across changing economic cycles. Our long-term growth targets remain unchanged. We are maintaining our focus on driving value at the property level. Our retailers are healthy and continue to look long term. We are seeing a resilient consumer, and our top grocers and necessity-based retailers continue to drive solid foot traffic to our centers. One of the dynamics we are watching closely is the gap between private and public market pricing of assets. This influences our capital decisions, including how we fund growth and where we invest, and it is why the Phillips Edison & Company, Inc. team stays disciplined about accessing the most efficient capital. Our platform can raise capital in the public markets, through institutional joint ventures, and through asset recycling. We believe markets in 2026 will reward companies with a focused growth strategy and the ability to fund growth responsibly. Phillips Edison & Company, Inc. is well positioned to continue to do both. In summary, we are pleased with first quarter results and our outlook for 2026. We operate in a resilient part of retail. We are located in the neighborhood close to your home. We are disciplined about our investments. And most importantly, we have the best teams in the business. With our shares trading at a discount to our long-term growth profile, we believe Phillips Edison & Company, Inc. represents an attractive opportunity to invest in a leading operator that can deliver mid to high single-digit annual earnings growth. We will continue to drive more alpha with less beta. With that, I will turn the call over to Robert F. Myers. Bob? Robert F. Myers: Thank you, Jeff, and thank you for joining us, everyone. Our first quarter results were marked by solid leasing activity and success in growing cash flows. We continue to see high retailer demand with no current signs of slowing. Necessity-based categories, quick service and fast casual restaurants, health and wellness, beauty, fitness, and med tail continue to be excellent drivers of demand. Seventy-four percent of Phillips Edison & Company, Inc.'s rents come from necessity-based goods and services. Phillips Edison & Company, Inc.'s leasing team remains focused on capturing demand and driving continued high occupancy while pushing very impressive comparable rent spreads. Our pricing power remains market leading. During the first quarter, leased portfolio occupancy remained high at 97.1%. Leased anchor occupancy remained strong at 98.4%, and leased inline occupancy remained high at 95%. Our rent spreads reflect an extremely positive retailer environment. During the first quarter, Phillips Edison & Company, Inc. delivered comparable renewal rent spreads of 21.2%. Solid retention during the quarter means less downtime and lower tenant improvement costs, which translates to better economics for Phillips Edison & Company, Inc. Looking at comparable new rent spreads, they remained strong at 36.2% during the quarter. Inline leasing deals executed during the first quarter, both new and renewal, achieved average annual rent bumps of 2.7%. This is another important contributor to our long-term growth. As it relates to bad debt, we actively monitor the health of our neighbors. Bad debt was lower than expected in the first quarter at around 60 basis points of revenue. We continue to expect bad debt in 2026 to be in line with 2025, which came in at just 78 basis points of revenue for the year. Our retailers remain healthy. We have a highly diversified neighbor mix with no meaningful rent concentration outside of our grocers. Turning to development and redevelopment, Phillips Edison & Company, Inc. has 19 projects under active construction. Our total investment in this activity is estimated to be approximately $74 million with average estimated yields between 9% and 12%. During the first quarter, six projects were stabilized with over 87 thousand square feet of space delivered to our neighbors. This reflects incremental NOI of approximately $1.7 million annually. We are focused on growing Phillips Edison & Company, Inc.'s development and redevelopment pipelines, which is an important driver of growth. In addition, the Phillips Edison & Company, Inc. team continues to find accretive acquisitions that add long-term value to our portfolio. Our year-to-date acquisition activity through this week reflects $185 million. This includes five grocery-anchored shopping centers, three everyday retail centers, and land for future development. Currently in our pipeline, we have approximately $150 million in assets that we have been awarded or are under contract that we expect to close by the end of the second quarter. Our pipeline reflects a combination of grocery-anchored neighborhood shopping centers, everyday retail centers, and joint venture opportunities. I will now turn the call over to John. John? John P. Caulfield: Thank you, Bob, and good morning and good afternoon, everyone. Our strong first quarter results demonstrate what we have built at Phillips Edison & Company, Inc.: a high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows. First quarter 2026 NAREIT FFO increased to $92.9 million, or $0.67 per diluted share. First quarter core FFO increased to $96.4 million, or $0.69 per diluted share. And same-center NOI increased 3.5% in the quarter, primarily due to higher revenue driven by increases in average rents and economic occupancy. Turning to our balance sheet, this quarter we extended our weighted average duration on our maturity and increased our percentage of fixed-rate debt, which is important in times of interest rate volatility. In February, we completed a public debt offering of $350 million aggregate principal amount of 4.75% senior notes due 2033. The proceeds were used to repay term loans that were maturing in 2027 and a portion of our revolver. With $810 million in liquidity at the end of the quarter, we have the capacity to execute our growth plan. Our net debt to trailing twelve-month annualized adjusted EBITDAR was 5.3x at quarter end and was 5.1x on a last quarter annualized basis. At the end of the first quarter, Phillips Edison & Company, Inc.'s outstanding debt had a weighted average interest rate of 4.4% and a weighted average maturity of 5.8 years when including all extension options, and 94% of our total debt is fixed-rate debt, which includes Phillips Edison & Company, Inc.'s share of debt for our JVs. We are pleased to increase our 2026 guidance. Key drivers of our increased guidance include a continued strong operating environment, strong year-to-date acquisitions activity, and our recent bond offering. Our updated guidance for 2026 NAREIT FFO per share reflects a 5.9% increase over 2025 at the midpoint, and our updated guidance for 2026 core FFO per share represents a 5.8% increase over 2025 at the midpoint. We are pleased with these strong growth rates. We are reiterating our full-year 2026 guidance of 3% to 4% same-center NOI growth, and we are pleased to reaffirm our full-year 2026 guidance of $400 million to $500 million in gross acquisitions at Phillips Edison & Company, Inc.'s share. The Phillips Edison & Company, Inc. team is not just maintaining a high-quality portfolio; we are building one. We continue to have one of the best balance sheets in the sector, which has us well positioned for continued external growth. As Jeff mentioned, we remain disciplined about accessing the most efficient capital. These sources include additional debt issuance, dispositions, joint ventures, and equity issuance when the markets are more favorable. Year to date, we have sold $29 million of assets at Phillips Edison & Company, Inc.'s share. We plan to sell between $102.1 billion in assets in 2026. In summary, we are very pleased with our results this quarter, and our ability to raise guidance for the remainder of the year. We continue to see a resilient consumer, and we believe our portfolio will outperform as necessity-based retailer demand remains strong. Looking beyond 2026, we continue to believe that Phillips Edison & Company, Inc. can consistently deliver 3% to 4% same-center NOI growth and achieve mid to high single-digit core FFO per share growth on a long-term basis. We also believe that our long-term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity. We believe our targets for core FFO per share and AFFO growth will allow Phillips Edison & Company, Inc. to outperform the growth of our shopping center peers on a long-term basis. We will now open the call for questions. Operator? Operator: Thank you. As a gentle reminder, please limit yourself to one question. You may re-queue. Your first question comes from Andrew Reel with Bank of America. Please go ahead. Andrew Reel: Good afternoon. Thanks for taking my question. We can appreciate your necessity-focused tenant base is positioned to weather some macro uncertainty, but just curious to hear any latest color on your conversations with some of these discretionary or off-price mom-and-pop tenants in the current environment—maybe any incremental changes in their tone or plans versus, say, six months ago—and how do those conversations compare to what you are hearing on the necessity side? Jeffrey S. Edison: Great question, Andrew, because it is one that we are very focused on as we try to read what kind of feedback we can get there. Bob, would you like to give a little color to that and what we are seeing? Robert F. Myers: Absolutely. Thank you for the question, Andrew. This is something that we monitor all the time, and probably our best indicator—not only are we on the ground, locally smart—we also have visibility that would suggest that we have the best renewal pipeline and new leasing pipeline in about the last six to nine months. An interesting fact is we just approved 28 deals in the last nine days. The feedback that we are getting—with high retention and leasing spreads at 21.2% this last quarter—reflects strength, and we are not seeing any pullbacks, even from the local tenants or from national retailer demand. All the retailers that we meet with at ICSC are looking for new sites in 2026, 2027, and 2028. Occupancy costs continue to remain very strong at 10%. We feel very good about where we are at currently. Operator: Thank you. Your next question comes from the line of Haendel St. Juste with Mizuho. Please go ahead. Haendel St. Juste: I wanted to ask about transactions. Obviously, you had a very active start to the year—$185 million in the quarter—and another $150 million in negotiation and under contract. What are you seeing or picking up in your conversations? Are there any changes in either the volume of buyers out there, underwriting, or competition that suggest people could be pulling back in light of the choppy macro? And thoughts on deployment of capital over the next few months—any willingness to scale back a bit to see if there are changes in pricing as a result of the choppy macro? Jeffrey S. Edison: Great question, Haendel. It is a simple supply-demand issue. We are seeing a very ample supply of product coming on the market. Yes, there are more buyers, and we have had some major transactions take place in the business that we have not seen for a while that are of substance—billion-plus kind of acquisitions. You continue to see a strong appetite, and it is all driven by what Bob was talking about in the last question: we are in a really good operating environment. In that operating environment, there continue to be a strong group of buyers out there. But we are also seeing a lot of product. Our opportunities year to date are up 70% over last year at this time. So we are seeing a lot of product, but we do have competition. Bob, anything else you want to add? Robert F. Myers: The only other thing I would add is we continue to sell our product. We have investment committee every week, and we are reviewing anywhere between five and ten new projects a week. We have reviewed 195 deals this year compared to 115 last year. The deals that we are underwriting are up about 26%, and the deals that have been presented to investment committee are up 40%. If anything, we are continuing to see more product hit the market than less. I think there are real sellers. Yes, there is more competition. There are more buyers out there. But you have seen the success we have had with the ten acquisitions that we acquired year to date—we are buying these at a cap rate of about 6.5% to 6.75%, and we are still solving for our unlevered returns above 9%. We do not see anything really slowing down. If you look at the $150 million pipeline and the $185 million that we have closed, we are in a great spot to be in the range of our guidance between $405.1 billion, if not more, based on the opportunity set that we see. Haendel St. Juste: And no change in the cap rate for the pipeline versus the $185 million already done? Robert F. Myers: It is consistent with that 6.5% to 6.75%. Haendel St. Juste: Got it. Thank you. Operator: Your next question comes from the line of Michael Griffin with Evercore ISI. Please go ahead. Michael Griffin: Thanks. On the leasing pipeline, particularly as it relates to renewals, it seems like you have really seen continued strong demand. In your conversations when leases are coming up for negotiation—thinking particularly about some bigger boxes and grocers—is there any opportunity to shorten the number of option periods or embed rent step-ups? I realize you are able to get those with the inline tenants, but with the bigger boxes, is there any way in those lease negotiations to get more leverage on the landlord side to drive earnings growth or rent bumps throughout the course of a new term? Robert F. Myers: Great question. Certainly, most of our grocers that we have inherited over the past 25 to 30 years already have embedded options for the next 30 years, and they are typically flat. Sometimes you get lucky and they might be 5%. If we ever have the opportunity to renegotiate with them—or in a case where they are paying percentage rent—where we can blend the rent together and reset the terms, or if we decide to give an anchor that is a grocer an inducement, in a lot of cases we are able to negotiate added term and some sort of bumps that go along with that. We are capitalizing on as much of that as we can. Probably the biggest value is just through consents on restrictions, no-build areas, or, given the relationships of being the number one grocer owner in the market, it gives us flexibility to create a lot of value. So we are picking up value in other places. And then, as you mentioned, with our inline tenants that we are negotiating new leases with, we limit the amount of options; if we do give options, we want to see, you know, 20% with good 3% to 4% CAGRs year after year. It is a combination of that and, during our renewals, cleaning up items that are nonmonetary clauses—think caps and restrictions, no-builds—where we are able to unlock value. I am glad we are doing it because we are 97.1% occupied, so we continue to find leverage through those avenues. Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Caitlin Burrows: Given the strong operating environment, your comments that you bought land, and that you want to increase development and redevelopment, what is your latest take on your own development and redevelopment and the industry more broadly? Jeffrey S. Edison: Thanks for the question, Caitlin. We have announced we have about $70 million of development work that we are on right now for this year, and we continue to be able to do that at very attractive returns. It is an important part of our business. It is not the major part of our business, but it is one that we are looking for opportunities in all the time. Bob, any other thoughts? Robert F. Myers: The only thing I would add is that we purchased two parcels so far this year, and they are right beside our grocers. A great example is one that we acquired in North Port, Florida. It is about 5.8 acres. We are going to create five different pads. Our center is Publix-anchored right across the street; it does $1 thousand a foot and it is full. There continues to be a tremendous amount of demand, and we already have a lot of this pre-leased. We continue to find those high-opportunity sites. The other land parcel that we acquired is an old bank, and banks are wonderful opportunities to repurpose and bring in a Starbucks or Chipotle or Swig—somebody that is hot and in demand. We are able to generate somewhere between 9% and 12% returns on those ground-up development opportunities, which is consistent with us. We have increased our development pipeline over the past few years from $40 million to $50 million to $74 million this year, as an example. We want to continue to lean into those opportunities and continue to look for ways to create value at each of our properties. Operator: Thank you. Your next question comes from the line of Ronald Kamden with Morgan Stanley. Please go ahead. Ronald Kamden: Just a quick two-parter. On the 95% inline occupancy, thoughts on getting to 96% to 97%? What sort of blocking and tackling needs to get done to get there? And then a quick follow-up: I think I see your local neighbors concentration ticked up to 26% versus 25% last quarter. Was that intentional, and where are you comfortable with that local neighbor exposure? Robert F. Myers: There has not been any real movement on the local side between 25% or 26%—that is right on top of each other. On the 95% inline question, one of the initiatives we put in place this past year was a bounty targeted space approach. We identified our top 100 spaces that would create the highest ABR on an annual basis. We put our leasing team on that and put different incentives in place. Through April, we have executed 28 deals on those particular spaces with another 24 at LOI or lease out, so we are almost 50% of the way there. That is your needle mover. With very high retention numbers of 90% to 93%, complemented by these targeted space initiatives, that is how you get the other 100 to 150 basis points. We are seeing a lot of success, and I am really excited about where we will finish the year. Operator: Your next question comes from the line of Cooper R. Clark with Wells Fargo. Please go ahead. Cooper R. Clark: Thanks for taking the question. Retention came down year over year while new rents were up significantly. How much of this was you proactively deciding to take back space and not renew certain tenants, given the ability to drive strong pricing power with potentially healthy operators? Any color on how to think about that dynamic and retention levels moving forward? Robert F. Myers: Great question. Our retention rate this quarter was 88%. That had 100% to do with a 64 thousand square foot box that we knew was going to vacate about three years ago. We already have three tenants lined up to backfill it at significantly higher levels of rent. If you exclude that one-time situation, our retention for the quarter would have been 92.4%. It is not a crack or an indication. A normal part of our business is capturing spaces where we see better opportunities to do mark-to-market rent adjustments. We will always be focused on merchandising and finding the right necessity-based goods and services retailer so we can continue to get attractive leasing spreads and drive consumer demand. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead. Michael Goldsmith: Good afternoon, and thanks for taking my question. You took up the FFO guidance, but none of the underlying components moved higher. Can you provide a little bit of context for what drove the higher earnings expectation? Is it acquisition timing, termination fee income, or anything else? Just trying to get a sense of what is driving the greater confidence in earnings here. Jeffrey S. Edison: Thanks for the question, Michael. It is a variety of things. John, do you want to go through the pieces? John P. Caulfield: Good afternoon, everyone. We started the year at a great pace, with a strong operating environment like Bob has been talking about, strong year-to-date acquisition activity, and our recent bond offering. In the quarter, our bad debt was near the lower end of our range, and we were pleased that the bond was at an interest rate lower than we budgeted. It is still early in the year, and one thing we are watching is the SOFR curve, which is higher than where we started the year. When we look at bad debt, we maintained that range. We considered each of the ranges. We like the ranges where they are. Overall, after a good first quarter, we are more optimistic about the year than where we started, and that gave us confidence to raise our ranges for FFO. It is early—it is Q1—we will have opportunities to refine, but we are very happy that our growth rates are in the mid to high single digits for 2026, which is consistent with our long-term growth targets. That gives us a good and more confident outlook for the year. Operator: Your next question comes from the line of Todd Michael Thomas with KeyBanc Capital Markets. Please go ahead. Todd Michael Thomas: Hi. Good afternoon. Jeff, you indicated in prepared remarks that you are closely watching private and public market valuations. Can you elaborate on that comment—what you see as the spread today relative to where you are trading, the acquisition cap rates you are achieving, and so forth? And what actions does the company take as a result? Jeffrey S. Edison: Great question, and one we have spent a fair amount of time looking at. Our view is that in the private markets today—there are some fairly major transactions that have taken place—there is a 50 to 75 basis point difference between where the public markets are and where the private markets are. That makes the private markets a better source of capital. If you look at the major transactions that have happened in our space this year, the winners are the private equity capital across the board. For the public companies, we have to continue to find the cheapest source of capital so we can continue to take advantage of the opportunities in the marketplace. That means you are always looking at everything: joint ventures, issuing equity, selling assets—all of which are part of figuring out where you can get the cheapest source of capital so you can continue to fund your growth going forward. That is what we are focused on. The market comes up and down and changes over time, but that is our focus. Todd Michael Thomas: You reiterated the disposition volume for the year. Do you lean into dispositions a little bit more as the year progresses, or lean a bit more on joint venture capital than you have year to date? Any changes around the edges given that spread you are seeing in the market? Jeffrey S. Edison: I think yes, there is a little bit more lean-in because it is attractive, and you will see some leaning in. Operator: Your next question comes from the line of Floris Van Dijkum with Ladenburg. Please go ahead. Floris Van Dijkum: Thanks for taking my question. Following up on the capital allocation, I noticed that you closed on two unanchored centers during the quarter, and you have one that has happened subsequent. Maybe talk a little bit more about the return expectations and why you think this makes sense for Phillips Edison & Company, Inc. to pursue these centers, and why investors should be excited about venturing away from your typical grocery anchors. Jeffrey S. Edison: Thanks, Floris, for the question. We have made it clear over the last twelve months that we are really excited about very specific opportunities to take advantage of everyday retail where we think we can get outsized returns. It is a much more inefficient market than our core market, and we think there is a place for that in our portfolio, where we can use our market knowledge and our locally smart ability to know markets to take advantage of that. We think it is a great opportunity for the company to get outsized returns for part of our portfolio, and we are going to continue to look for those opportunities. It is hard, and it is a big market—you have to find the inefficiencies—but that is what we are really good at. We are the best at taking those properties and turning them into really strong assets. In our buying, we are targeting properties where we can take the Phillips Edison & Company, Inc. machine and create a lot of value. The first two are great examples of what we will be able to show the market we can do with them. Bob? Robert F. Myers: Thanks, Floris. I am really excited about this strategy. Over the last two and a half years, we have closed on 12 assets for about $221 million. We are finding opportunities to buy properties from less sophisticated owners where we can put our national accounts team on them. The criteria we set: exceptional demographics—$110 thousand median incomes in three miles, 100 thousand people in three miles—plus configuration and sight lines. I like to see about 45% local tenants, 55% national, which gives us the opportunity to continue to increase spreads and rents. Looking at the subset of 12, they have 5% CAGRs, a great complement to our 3% to 4%. In some cases, we have acquired some that are 8% to 10% CAGRs. We have already moved the needle 310 basis points in occupancy on this subset of 12. Our new leasing spreads in this category have been 45%, and our renewal spreads are 27%. There are inefficiencies we have found while not overpaying for assets. In this space, we have acquired at a 6.9% cap and are solving for 10% to 11% unlevered returns. Our average purchase price is about $321 a foot. It allows us to lease it the Phillips Edison & Company, Inc. way, which we do exceptionally well with our operating results and the team on the ground. Operator: Your next question comes from the line of Juan Carlos Sanabria with BMO Capital Markets. Please go ahead. Juan Carlos Sanabria: Thanks. Only my best friends call me Juan, if that is okay. Just curious—going back to Caitlin's question on new supply—are there any pockets of the country where you are seeing new greenfield development? Maybe pockets of the Sunbelt that you would call out or are watching? Jeffrey S. Edison: Overall across the country, it is a really small amount. There are specific cases where grocery stores are looking for specific locations where you are seeing some growth. You are seeing Publix grow north from their existing platform; you are seeing H-E-B add additional stores in Texas. But they are specific and very small. Part of our business is to make sure that we know what is going on in every market we are in. Even if there is one being built in a specific market near one of our centers, if it is a competitor we have to beat it—we have to figure out how we are going to win. We are just not seeing much at all in our markets. I think that is creating the operating environment we have where there is a ton of opportunity to be aggressive on leasing, reach very high occupancy levels, and drive rents. That is what we are proving out with our performance. Operator: Your next question comes from the line of Analyst with Barclays. Please go ahead. Analyst: Thank you so much for taking the question. I noticed that you maintained $5 million to $8 million of collectibility adjustments guidance. Could you elaborate on the specific categories or tenant types driving that assumption today? Have you seen any early signs of stress in first quarter trends for 2026? Jeffrey S. Edison: Thank you for the question. John, do you want to take that? John P. Caulfield: Good morning. One of the advantages of our business model is the diversification that we have across our neighbors. The components are pretty consistent with what they have been, but the overall volume is a little lower. For us, when people ask about a watch list and look for national names, it is actually at every center. Especially when you are as highly occupied as we are, we are always looking for new leasing opportunities or places to get in there, and for that we have one in every center. The absolute count of neighbors that we are focused on actually declined this quarter compared to last. Considering the volumes of acquisition that we are adding every quarter, to see that number broadly come down was a very positive sign. I am still the cautious one of the group, but we feel really good about the year while still leaving those pieces. As Bob was talking about categories earlier, there is not any one particular space. We continue to see great demand and strong performance at each one of our assets. Operator: Your next question comes from the line of Paulina Alejandra Rojas-Schmidt with Green Street. Please go ahead. Paulina Alejandra Rojas-Schmidt: Good morning. You have indicated that your health ratio, or OCR, for your inline tenants sits at about 10%, and you have mentioned that you see room to gradually push that up to 13%. Walk us through the thinking behind that—whether it is anchored on prior high watermarks or other benchmarks. What does a shift like that mean downstream for tenants on an EBITDA basis for the average inline tenant? Jeffrey S. Edison: Great and very complicated question, Paulina. The 10% is a generic number because each specific retail category has a different health ratio that is healthy for them. We are using broad numbers here, but it is very specific to the type of retailer what a healthy number is. We also get the advantage of inflation and the growth in sales, which allows us to keep it at 10% while we are growing rents because of the growth in sales. Bob, would you like to talk a little about your views on the health ratio and how we are doing on the leasing side? Robert F. Myers: Absolutely. Most importantly, we want to make sure that our neighbors are profitable. We have seen a lot of success over the last two or three years with not only our retention rates, but also renewal increases being 18% to 21%. The visibility that we have, with 125 renewals out for signature, shows no slowdown or cracks. We have been able to hold that 9.5% to 10% health ratio pretty static over the last three years while maintaining those renewal spreads. I do think there is room to move to 10% to 13% or 14% over time, very merchant-specific, over the next several years. Another helpful factor is that we are starting with ABRs on average of our inline neighbors at $27. It is a lot different increasing rents at $50 than it is at $27. There is a combination of a lot of things that goes into that health ratio, but bottom line for us, it is about keeping our neighbors healthy, profitable, and being a good partner. Operator: Your next question comes from the line of Michael William Mueller with JPMorgan. Please go ahead. Michael William Mueller: Hi. Another quick JV question. How much are the investments being made in those programs going to be influenced by your equity cost—particularly if your equity cost improves a lot, where on-balance sheet looks much more attractive? Jeffrey S. Edison: Our JV strategy is primarily to expand what we can buy. We are buying things in our JVs that we would not buy on the balance sheet, and that is an important part of why we set this up. If our cost of equity changed dramatically, we would still be buying the same stuff with these particular JVs because that is the level of ownership we want in those properties, and we think we can add value there. We also get a fee structure that is complementary. For us, it is expanding where we can buy and what we can buy without putting the full 100% exposure from the balance sheet. That has worked out very well historically, and it is working out great in the JVs we have going right now. Operator: This concludes our question and answer session. I will now turn the conference back over to Jeffrey S. Edison for some closing remarks. Jeff? Jeffrey S. Edison: In closing, I want to reiterate how pleased we are with our first quarter results. Our grocery-anchored neighborhood shopping centers are driving solid foot traffic and market-leading pricing power. We continue to see a strong operating environment. While the macro environment remains volatile, Phillips Edison & Company, Inc. is well positioned to perform through cycles. We offer both stability and steady growth. Phillips Edison & Company, Inc.'s disciplined execution and operating strength reinforce our increased guidance for core FFO per share growth. With our shares trading at a discount to our long-term growth profile, we believe Phillips Edison & Company, Inc. represents an attractive opportunity to invest in a leading operator that can deliver mid to high single-digit annual earnings growth. The Phillips Edison & Company, Inc. team remains focused on executing our strategy and generating stable long-term value. We will continue to drive more alpha with less beta. I would like to thank our Phillips Edison & Company, Inc. associates for their continued hard work and also thank our shareholders and neighbors for their continued support. Thanks for being on the call today. Have a great day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for joining, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Western Financial, Inc. First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question, press star-1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, please press star-1-1 again. Please be advised that today's conference is being recorded. Now it is my pleasure to hand the conference to Tony Rossi. Please proceed. Tony Rossi: Thank you, Carmen. Good morning, everyone, and thank you for joining us today for First Western Financial, Inc.'s First Quarter 2026 Earnings Call. Joining us from First Western Financial, Inc.'s management team are Scott C. Wylie, Chairman and Chief Executive Officer; Julie A. Courkamp, Chief Operating Officer; and David R. Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the events and presentations page of First Western Financial, Inc.'s Investor Relations website to download a copy of the presentation. Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial, Inc. that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. With that, I would like to turn the call over to Scott. Scott C. Wylie: Thanks, Tony, and good morning, everybody. We executed well in the first quarter and saw positive trends in many areas, including loan and deposit growth, net interest margin expansion, well-managed expenses, higher mortgage banking revenues, and improved asset quality. This resulted in another increase in our level of profitability, with EPS up 85% quarter over quarter. We continued to maintain a conservative approach to our new loan production with our disciplined underwriting and pricing criteria. As a result of the additions we have made to our banking team over the past few years, as well as the generally healthy economic conditions in our markets, we had a solid level of loan production which was diversified across our markets, industries, and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share. Moving to slide four, we generated net income of $6.2 million, or 63¢ per diluted share, in the first quarter, which was higher than the prior quarter. This represented our third consecutive quarter in which we generated an increase in net income and earnings per share. With our prudent balance sheet management, our tangible book value per share increased 3.3% quarter over quarter. Now I will turn the call over to Julie for additional discussion of our balance sheet and trust and investment management trends. Julie? Julie A. Courkamp: Thank you, Scott. Turning to slide five, we will look at the trends in our loan portfolio. Our loans held for investment increased $41 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production, but with the higher level of productivity we are seeing from the additions to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. New loan production was $116 million in the first quarter. That production was diversified across our portfolios, and we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria. This resulted in the average rate on new production of 6.31% in the quarter. Moving to slide six, we will take a closer look at our deposit trends. Our total deposits increased $95 million from the prior quarter, or 10%, or $35 million in the quarter. The deposit growth in the quarter brought our loan-to-deposit ratio down from 96.5% in the prior quarter and 96.4% from a year ago to below 95%. Now turning to trust and investment management, slide seven. We had a $43 million increase in our assets under management in the first quarter, primarily attributed to lower market values, which were partially offset by the addition of new accounts. Net new accounts and contributions contributed a net increase of $42 million in the quarter. On a year-over-year basis, our assets under management increased by approximately 1%. As David will cover shortly, our trust and investment management fees have increased 5.3% from 2025, and we have restructured that team for growth. Now I will turn the call over to David for further discussion of our financial results. David? David R. Weber: Thank you, Julie. Turning to slide eight, we will look at our gross revenue. Our gross revenue increased 3.4% from the prior quarter due to increases in both net interest income and noninterest income. Turning to slide nine, we will look at our trends in net interest income and margin. Our net interest income increased 1.5% from the prior quarter due to an increase in our net interest margin. Our NIM increased 10 basis points from the prior quarter to 2.81%. This was due to a reduction in our cost of funds which was primarily due to lower rates on money market deposit accounts as a result of the company reducing deposit rates commensurate with the short-term decreases in 2025, and runoff of higher-cost deposit accounts. Our net interest income increased 19.7% from 2025 due to an increase in net interest margin and an increase in average interest-earning assets. Now turning to slide 10. Our noninterest income increased by approximately $600 thousand from the prior quarter. This was primarily due to increases in gain on sale of mortgage loans, risk management and insurance fees, and trust and investment management fees, which increased for the third consecutive quarter. Now turning to slide 11 and our expenses. Our noninterest expense decreased by $1.1 million from the prior quarter. The decrease was due to an OREO write-down in the fourth quarter 2025 and a decrease in professional services, partially offset by an increase in salaries and employee benefits due to payroll tax seasonality and an increase in bonus accruals as a result of the improved earnings in the quarter. Our efficiency ratio improved for the sixth consecutive quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Now turning to slide 12. We will look at our asset quality. As Scott indicated earlier, we saw improved trends in the loan portfolio in the first quarter, with decreases in nonaccrual loans and NPAs. This was partially driven by the sale of the last OREO property we had on the balance sheet. Additionally, we had no loan charge-offs in the quarter. Our allowance coverage was 77 basis points of total loans as improved trends during the quarter drove a release of provision. Now I will turn it back to Scott. Scott? Scott C. Wylie: Thanks, David. Turning to slide 13, I will wrap up with some comments about our outlook. Based on our first quarter performance, what we are seeing in our markets, our expectations for the year are unchanged from what we provided at the start of the year. Overall, we continue to see relatively healthy economic conditions in our markets, seeing good opportunities to add both new clients and banking talent due to the ongoing disruption from M&A activity, particularly in the Colorado banking market. We also recently added a new market president for Scottsdale, Arizona, where we see good opportunities for growth. Our loan and deposit pipelines remain strong and should continue to result in solid balance sheet growth in 2026, with loan and deposit growth at similar levels to what we had in 2025. In addition to the balance sheet growth, we expect to see more positive trends in our net interest margin, our fee income, and more operating leverage resulting from our disciplined expense control. We had net interest margin expansion of 26 basis points in 2025, and while we expect further expansion in 2026, it may not be at the same level as last year. While we will remain disciplined in our expense control, we believe that investing in the business will drive future shareholder value. The ongoing disruption from the M&A activity in our markets creates unique opportunities for us to add banking talent. We will take advantage of those opportunities if and when they materialize, as well as opportunities to add new clients. Based on the trends we are seeing in the portfolio and the feedback we are getting from clients, we do not see anything to indicate that we will experience any meaningful deterioration in asset quality. The positive trends we are seeing in a number of key areas are expected to continue, which we believe should result in steady improvement in our financial performance and further value being created for shareholders in 2026. We will now open the call for questions. Operator: Thank you so much. And as a reminder, if you do have a question, press star-1-1 and wait for your name to be announced. To remove yourself, press star-1-1 again. One moment for our first question. It comes from the line of Brett Rabatin with Stonex Group. Please proceed. Analyst: Hey. Good morning, everyone. Good afternoon. Wanted to start off. Obviously, great to see the trends this quarter in a number of categories. How many MLOs have you added, and then, obviously, a stronger start than usual on mortgage. How much production did you have this quarter? I know it was better than usual for 1Q. Scott C. Wylie: I think we added one new MLO in the quarter, and we added another seven folks in front-office banker-type jobs. The MLO additions are especially nice if they are a good fit for us and producers because they have very low fixed costs, and their compensation largely comes from variable cost from production. Do either of you have the data for last year, Andy? For last year MLO adds? And then this mortgage— Tony Rossi: Yeah. Give me a second. Scott C. Wylie: We will look up that number, Brett. Julie A. Courkamp: Mortgage had a good, strong first quarter. We saw gains on mortgage loans go from $800,000 in quarter four to $1.5 million in quarter one. So really strong production and economic conditions, I think, spurred that, but also the MLO adds we have been doing over the last several quarters have just given us a level of ability to produce mortgages. David R. Weber: And lock volume increased a little under $40 million quarter over quarter. We were just under $180 million in secondary lock volume for Q1. And then in 2025, we added eight MLOs. Scott C. Wylie: Okay. That is helpful color. And just on that point, I would love to tell you that we were expecting a strong first quarter, but actually, our experience is first quarter tends to be pretty quiet. We had been thinking that with the pent-up demand from slow mortgage markets in our geographic region that eventually we would see some pent-up demand come out and drive some volume. And I think that is what happened in Q1. It is a combination of pent-up demand, of course that we had unseasonably warm weather in our markets in Q1, and then definitely the impact of the new MLOs we have added. So those were really nice results to see. I will add one more data point. David R. Weber: We did not see a material decrease in lock volume in March, when rates materially increased. So that is what gives us comfort as far as what was driving mortgage origination volume, that it really was not solely dependent on improved rates because in March, that obviously did not happen from a rates perspective, and our volume still looked good in March. Operator: Okay. Analyst: That is helpful. And then you mentioned Scottsdale, new market president. Any other markets that you are keen on trying to grow stronger organically? And then I saw PNC made quite a few layoffs. I am sure mostly back office, but just wanted to hear if you are able to capitalize on any disruption in Colorado and maybe an update on what you are seeing from that perspective. Scott C. Wylie: So let us start with Arizona. In Arizona, we felt like we needed a leadership team that others would follow and that could really help us build our teams out there. We have two offices, one in Scottsdale, one in Phoenix, that have been open for years, and they have had good growth and they are profitable. But we have tiny market share in Arizona. We think we have a platform that would be attractive and unique and differentiated in that market, but we did not really have the leaders to put the teams together to make that happen. So we recruited one of the top folks out of First Republic/JPMorgan and added him nine months ago, something like that—October maybe. And then we hired one of the top folks out of FirstBank/PNC that started maybe a month or two ago. Those two executives have a very complementary set of skills, and they work really well together so far, and we are excited about what they can accomplish. We are feeling really positive about these hires we have made for Arizona and where that team is going to go. In terms of your second part of your question about market opportunities in other markets, it is everywhere. It is amazing to see the quality of talent that we are seeing when we open up a position. I think it is a generational opportunity for us. We have hired several people already. We have several more in the works that are going to be real value drivers for us going forward. And we have done it all in a fairly well-contained cost environment. We have been spending between $19 million and $20 million a quarter for something like twelve quarters now. It looked higher in the fourth quarter last year, but remember, we wrote down $1.3 million of an OREO because we had that last OREO under contract, and we knew the price was going to be down $1.3 million from our book value. So that shows up as an operating expense even though it is nonrecurring, obviously. Those expenses appeared more inflated in Q4 of last year than they really were on an operating basis. And then your last question on PNC: there is a really unique kind of emotional connection between Colorado and FirstBank that had long, deep roots here. I think it is a real challenge for any acquirer from the outside to come in and navigate that. The news this week that they were laying off 800 people or whatever it was was big news. I had phone calls this week from people calling to say that they were sad, that this was a real tragedy for our economy here. I think that is just going to continue to create opportunities for us, and I see it pretty much every day. PNC is making a big effort to handle a smooth transition, and no knock on PNC. I think the test they have is a real challenge. Analyst: Scott, you have started the year at a stronger pace than last year on loans in particular. Would it be too aggressive to say you could be a double-digit grower this year? Scott C. Wylie: If you look at our loans year over year, I think we grew 11%, and our deposits grew 11–13% year over year. Our guidance we have been giving is kind of high single digits. Although, if you take out the quarter-over-quarter puts and takes, I feel like we seem to be around 10%, which would be double digits to your question. On fee income, we had really seen that flat for years. We have made many changes now in that area in particular—we talked about the mortgage one already, but also in the wealth side. We have some changes that we feel very positive about. We are seeing some green shoots there that are pretty exciting. I do think that we will see continued revenue growth this year with really nice operating leverage. If you look back—again, take out some of the bumps—we did 54¢ in EPS in 2023, 87¢ in 2024, $1.34 in 2025, and now our run rate seems pretty clearly over $2. I think that bodes well for 2026–2027 earnings. Operator: Thank you. One moment for our next question. It comes from the line of Wood Neblett Lay with KBW. Please proceed. Analyst: Thanks for taking my questions. Wanted to start on the net interest margin. It has been two consecutive quarters of pretty meaningful expansion. I believe you noted you expect the expansion to moderate, but it still feels like the NIM is biased higher. Any thoughts on how we should think about the trajectory there? Scott C. Wylie: I have been saying for six or eight quarters that I believe we will ultimately get back to a 3.15–3.20 kind of a NIM because that is historically what we have seen in normal markets with normal yield curves and normal economics and a normal competitive environment over my forty years of running banks. I think we will still get there. The pace is just hard to predict. The finance team, in particular, is reluctant to say, not knowing anything about what is going to happen in the future with the Fed and the war and whatever, that we are going to see 10 basis points improvement a quarter. I think David would feel comfortable saying we are not going to see that in 2026. But we have seen, as you said in your question, really good NIM improvements. What is driving that—our people are doing a really good job of having pricing discipline. That shows up on the loan side. We saw loan yields in Q1 down slightly when actual rates were down 50 basis points. We are seeing acquirers wanting to prove that they make a difference; they are out doing really aggressive loan pricing. We hear about this, and we are not going to compete with that. Yet our people are still producing nice growth with high-quality credits that produce zero loan losses like we have had now, again. And on the deposit side, we saw a 50 basis point decline in Q4, and we put all that into our deposit pricing, which a lot of banks here did not, and we did not see any runoff. We actually saw nice deposit growth. David, did I miss anything big there? No? You covered it. We are not guiding to 10 basis points a quarter. Analyst: As a follow-up to that normalized 3.15–3.20 margin, it is not going to happen this year. What is a realistic timeline to getting the net interest margin back to those levels? Scott C. Wylie: It is hard to predict. There are so many variables that go into it. I am hopeful that we are back with a 1% ROA in 2027. Whether we get there for the full year, in January, or in December, I do not know yet. We have come a long way since the rapid run-up in short-term rates, the inverted yield curve, the failure of big regional banks—all that. We said we were going to play defense; we did. We said we were going to go back on offense; we have. We have some really historic opportunities in the markets right now. I think we are doing a great job of taking advantage of them, and you are seeing that play out. That is going to drive more operating leverage, more profitability, and some nice outcomes for our shareholders. Julie A. Courkamp: Our ability to materially improve NIM—there is a very large opportunity for us in DDAs, and our organization is extremely focused on that. There are a lot of different things that we are working on, and hires that we are looking to make or have made in that area. We cannot really predict it, but there is a lot of effort going into focusing on noninterest-bearing deposits and then keeping our discipline on loan pricing, which has been something we are also quite focused on. Analyst: Maybe last for me. On the trust business, it is great to hear the commentary on new accounts opened and fees were up quarter over quarter. You have made some changes to emphasize more of a growth business model. Where do we stand in the trajectory of that business? Scott C. Wylie: We brought in a new head of wealth a year ago now—he started on April 1—from Goldman. He was in a senior wealth role there. Through him—he is leading it—we have done a complete overhaul of our planning function, our trust function, and our investment management, which also include our insurance area and our retirement services. We have replaced the leadership in all those areas and built stronger teams. We built out some new products and services which we have been test marketing, and that has all gone better than we had expected. In addition, this new hire—his name is Brandon Summers—had particular expertise in selling B2B wealth services, and that is not something we had done before. That was a big part of why we recruited him. We have also launched a B2B offering which is similar to what you see at the big Fortune 500 companies, where the company will hire a specialist firm to provide wealth consulting services to their executives as a benefit. We do not have a lot of Fortune 500 companies in our market, and we do not really want to compete against that business, but for our target clients—lots of entrepreneurial and some good-sized businesses—they do not have a product offering like that. We have created a trademark offering called WorkWell, and we are out selling that, and we have a person dedicated to marketing it. We think that is going to be really impactful in the future. There are really nice synergies between that and selling our banking services—back to Julie’s treasury management and the DDAs. This all has really nice synergies to what we are doing anyway. That is a summary of what we are doing on the wealth management side that is really exciting. It is starting to show results, as you said—really just green shoots at this point. We are going to see a lot more impact in the next couple of years. Analyst: It is great to hear the momentum there. I appreciate you all taking my question. Scott C. Wylie: Yep. Thank you, Woody. Operator: Thank you. Our next question comes from Matthew Timothy Clark with Piper Sandler. Please proceed. Analyst: Hey. Good morning. Thanks for the questions. I wanted to touch on interest-bearing deposit costs and maybe the spot rate at March if we could have it. And then how you are thinking about additional relief from here with the Fed on hold? Scott C. Wylie: That sounds like a question for David to me. David R. Weber: Thank you. Matt, the spot rate on deposits was 2.79% for the end of the quarter. With the Fed on pause, I go back to Julie’s comments. We have a lot of opportunity from a funding cost perspective with growing our DDA balances. Even with the Fed on pause, we feel with the company’s focus there and the things we have laid out and are working on accomplishing that we have opportunity to grow that portfolio, which will then help bring down our average cost of deposits and average cost of funds. Analyst: Along those lines, your noninterest-bearing deposits tend to decline in the second quarter. Should we still expect that to be the case, or is it different this time? David R. Weber: I would not say anything different at the moment. We typically see deposit outflows, as you mentioned, related to tax payments in the second quarter. I do not know that there is anything that we know today that would make that different. So I think that is what we are thinking about as far as Q2. Analyst: And then the FHLB borrowings that you have, can you just remind us if those are overnight or if there is some term to them? And is there a plan to use excess cash to pay those off? David R. Weber: The FHLB borrowing was an overnight that was swapped, and that swap matured in early April. Depending on how our liquidity evolves going forward, we will see if it makes sense to pay that off and keep it at zero, or if we need to replace that. We will just have to see how things evolve. Analyst: So it is zero as of in April here. Is that what you are saying? David R. Weber: It is a zero balance in April as of now. Analyst: Okay. David R. Weber: Correct. Analyst: Sounds good. And then in terms of the near-term NIM, I know there is a little bit of relief on the deposit side, but assuming you lose some noninterest bearing seasonally, you get the benefit of the FHLB going away. It does seem like maybe the margin is flattish in the near term to flat to down slightly. I have to retest the numbers, but that is kind of where I am. Julie A. Courkamp: I think we still have opportunities to continue to see NIM expansion in the remaining quarters in 2026. To Scott’s point earlier, I do not think it is going to be 10 basis points a quarter, but I do feel that we will continue to have opportunities to expand NIM. Analyst: Great. And then just last minor one, you bought back a little bit of stock. It is not a big amount, but just curious what price you paid? David R. Weber: It was $23.85 on an average basis. Analyst: Perfect. Thank you. David R. Weber: Thank you. Operator: Our next question comes from the line of William Joseph Dezellem with Tieton Capital Management. Thank you. Analyst: A couple of questions. First of all, the deposits grew at roughly two times the rate of loan growth in the first quarter. Would you step back and just walk us through the general dynamic behind that? Is that a normal seasonal phenomenon, or was there something specific to your activities that led to that ratio? Scott C. Wylie: Over the last many quarters, we have put a much more significant focus on deposit growth. Our feeling is to get to be the bank that we want to be at $5 billion or $10 billion, we need to have as strong of a deposit story as we do on the loan and the P10 side. So it has definitely been a focus for us now for several quarters. We do not really do loans here that do not come with a primary banking relationship. We literally write that into our loan documents. It is part of the expectation that we have with any conversation we have with any prospective client. It is a part of the conversation we have with existing clients. We report on it internally—what loans we have that do not have deposits associated or have smaller ones. It is a very routine part of the conversation here, just being good bankers and driving relationship-oriented clients. The fact that in one quarter we saw a little bit more deposit growth than loan growth—I would not read too much into that. We saw something like that in the third quarter last year. Some of the feedback we got was that we should try and manage that so it is more consistent, and there is no way of doing that. It just happens when it happens. The more relevant number for me is that we grew deposits 22% more than we grew loans over the last twelve months. That is probably a really relevant and helpful data point. If we see some decline in deposits in Q2, which is likely, I would not read anything into it either. That is just part of who our clients are and the fact that they pay taxes in Q2 that pull down the money market accounts and whatnot here. Analyst: That is helpful, Scott. Let me take it one step further, though. Over time, where would you anticipate the loan-to-deposit ratio would end up? You said sub-95% now, and if you keep up the trend that has been in place for several quarters, it will be at sub-85% and then sub-75%. Next thing you know, we are sub-50%, and I suspect that is not where you are headed. I am being a bit facetious, of course. What is your long-term thought? Scott C. Wylie: That is true—that is not where we are headed. I have been doing this a long time, Bill. I never really know where the next $1 billion of deposits are going to come from, but our clients do have a lot of liquidity, and we find that we are always able to produce deposits when we want them. It does not mean you do not have to focus on it. It does not mean you do not have to do the things that Julie was just talking about in terms of focusing on deposit strategies and strengthening our treasury management team, improving our technology, stuff like that. But at the end of the day, we have historically operated First Western Financial, Inc., and my prior banks, with loan-to-deposit ratios in the 90s. When it gets into the high 90s, we get more uncomfortable. When it is in the low 90s, we think that is fine, but we are not going to pay up for higher-cost deposits. I think that has fueled nice growth for us over the years and will continue to do that and provide the operating leverage we need to drive earnings that can support the growth that we want to do. Analyst: Lastly, with the geopolitical events, specifically the Iran war, what, if any, impact have you seen from your customers' behavior on either the loan or deposit side or the pipeline of activity? Scott C. Wylie: I was thinking about that before this call, Bill. Over time, I have found when our clients get nervous, they kind of stop doing things and say, “I can wait.” We have not seen that yet in this case, and I am not sure why that is. Maybe the Middle East seems like a long way away from the Rocky Mountain region. I am not sure why we are not seeing it, and, knock on wood, it has not had any negative impact on us so far. We really have not seen any impact, and I am not hearing about it in my conversations with clients or prospects or with our folks in the field at this point. That could change, but right now, our days are much more consumed by all this disruption that we are seeing from the M&A activity than global economic or political stuff. Operator: Our next question comes from the line of Ross Haberman with RLH Investments. Analyst: Morning. Scott C. Wylie: Morning. I am sorry, Ross. I got on a bit late, so if you addressed these questions, I apologize. Analyst: Could you talk about loan growth and what your expectation is in 2026 in terms of net loan growth and what offices you think it is going to originate from? What are you seeing better demand from? Is it Arizona, Colorado, or elsewhere? Thank you. Scott C. Wylie: Great question. We did not really talk specifically about that. I did mention that we are seeing loan growth across the platform in terms of geography and industry type, and we are not seeing weakness in one place or another. We are also not stretching anywhere. I would tell you that our owner-occupied CRE number was getting a little higher than we felt comfortable, and we have pulled that down. I do not have that number handy. Is it from 360 to down to, like, 325 now? Julie A. Courkamp: In that range. Yep. Scott C. Wylie: That is a change that we are driving. We are actually seeing probably more owner-occupied CRE demand than ever, but we are being very selective there. The guidance we have given for balance sheet growth is high single digits, but I did say earlier in the call that we are up 11% year over year in loans and up 13% year over year in deposits. I do not think we are ready to jump out and say we are going to see mid-teens growth this year, but it does seem like 10% would be a reasonable guesstimate from where we are today. Analyst: Is a good amount of the growth of the loans coming from Arizona and/or Montana? Scott C. Wylie: In the backward-looking data, no—neither one. But I would also tell you that we are seeing some nice opportunities in both markets, and I think that you are going to see nice growth out of both those markets in the next twelve to twenty-four months. We have really good people there, and they are working hard. We live the market disruption in Colorado more than elsewhere, but it is everywhere. We are seeing it in Wyoming. We are seeing it in Arizona. We think there are lots of opportunities for us in Montana too. The numbers are just bigger in Colorado and more immediate for us because we are in Denver, but we are seeing opportunities everywhere. You know very well our theory about market share. We have tiny market share, and I think by just showing up and doing a good job of what we do differently than everybody else—which is we are local, we are trusted, and we are expert—those three things play really well in the market today. Analyst: Are you seeing pressure to raise rates on the deposit side, and is it coming from the bigger banks in your markets today? Scott C. Wylie: I would take a stab at that question, David, and then I would be interested in your answer too because it seems like less to me. The conversations I am having—people are calling, or I am calling them, and they are saying, “I do not want to be with a national bank. I want to be with a local bank.” They do not even say the word “rate.” They say, “When can I move?” We have actually created here a conversion concierge—the internal people call it the Switch SWAT team. We tell people we have a Switch SWAT team that will come out and help them transfer their accounts here and simplify the whole conversion process. They love it. I literally do not hear the question, “What rate are you going to give me?” I think we have a really extraordinary window of opportunity here, and we are doing everything we can to jump through it. David, what are you seeing in terms of the day-to-day stuff? David R. Weber: My simple answer would be: Is the pricing market for deposits still highly competitive? Yes. Am I fielding a bunch of calls from our bankers saying we need to raise deposit rates? No. Those are the dynamics that we are seeing in our markets at the moment. Analyst: One final question, if I may. Have you announced any new plans for new branches in any of your markets, or if you found something small to buy as a fit-in, would you consider buying that today? Or is any growth you really want to be organic? Scott C. Wylie: We are very focused on organic growth, without a doubt. We have not talked about it because we do not have anything to talk about yet, but as part of the whole market disruption thing, we are seeing really good people that are available that we are trying to bring here. Most of them so far—all of them—have been in our existing footprint, but there are some that are in adjacent footprints that would be very attractive to us. Hopefully, we will have something to talk about later this year there. That would be a big plus as far as I am concerned. If we could bring a couple of well-established teams that want our toolbox to be able to go out and sell with, that would be fantastic. And to buy. Analyst: Thanks again for all your help. The best of luck. Have a good weekend, guys. Scott C. Wylie: Yep. Thanks, Ross. Operator: Thank you. And as I see no further questions in the queue, I will conclude the session and turn it back to management for closing remarks. Scott C. Wylie: Thank you, and we appreciate everybody dialing in on the call today. We talked about some of the noise in Q1 that was built off of the noise in Q4, but clearly we are seeing really nice trends in operating leverage that are translating into great EPS results. If you back up and look at that year over year, we have seen a nice multiyear trend. Our NIM is continuing to improve. Organic growth is continuing across the platform. Our asset quality continues to be very strong, and we do not see anything today that would change that. I think that is a very encouraging referendum on the credit quality that we pursue here. Our efficiency ratio has really trended down nicely from 79% a year ago to 70–73%, and that is not going to stop, I do not think. Our goal here is to get our ROA back over 1%; with our capital efficiency, it is going to drive a nice ROE in the low teens, and really, I think, get First Western Financial, Inc. back towards a financial performance where we should be. So with that, thanks everybody for dialing in. We really appreciate the support and your interest in First Western Financial, Inc. Have a great weekend. Operator: This concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Good morning, and welcome to the Erie Indemnity Company First Quarter 2026 Earnings Conference Call. This call was prerecorded, and there will be no question-and-answer session following the recording. Now I'd like to introduce your host for the call, Vice President of Investor Relations, Scott Beilharz. Please proceed. Scott Beilharz: Thank you, and welcome, everyone. We appreciate you joining us for a discussion about our first quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer; and Julie Pelkowski, Executive Vice President and Chief Financial Officer. Our earning release and financial supplement were issued yesterday afternoon after the market closed and are available within the Investor Relations section of our website, erieinsurance.com. Before we begin, I would like to remind everyone that today's discussion may contain forward-looking remarks that reflect the company's current views about future events. These remarks are based on assumptions subject to known and unexpected risks and uncertainties. These risks and uncertainties may cause results to differ materially from those described in these remarks. For information on important factors that may cause these differences, please see the safe harbor statements in our Form 10-Q filing with the SEC filed yesterday and in the related press release. This prerecorded call is the property of Erie Indemnity Company. It may not be reproduced or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. With that, we move on to Tim's remarks. Tim? Timothy NeCastro: Thanks, Scott, and good morning, everyone. Before we get into our first quarter results, I'd like to share some recent changes to the Erie Indemnity Company Board of Directors. First, Tom Hagen recently informed the Board of his decision to step down as Chairman after serving in the role for more than 20 years. Following a special meeting of the Board of Directors on April 19, Jonathan Hirt Hagen was unanimously elected as Chairman of the Board. Jonathan is the son of Tom Hagen and the late Susan Hirt Hagen and the grandson of our Co-Founder, H.O. Hirt. He has served on our Board since 2005 and as Vice Chairman since 2013. Jonathan brings a thoughtful, steady approach to leadership, along with a strong understanding of our business and of our culture. He also carries forward the legacy of those who helped build this company grounded in service, integrity and a long-term perspective. Tom will continue to serve as a member of the Board as Chairman Emeritus and Chair of the Executive Committee. His experience and guidance will remain an important part of our leadership as we move forward. The Board of Directors also recently welcomed a new member, William Edwards, is an attorney and partner at Taft in Indianapolis, Indiana, where he practices employment law. He's also an alumnus and current Board Chair at Wittenberg University, which is the alma mater of Erie's Co-Founder, H.O. Hirt. Finally, we are deeply saddened by the recent passing of one of our long-time Board members and retired Erie executive, George Lucore. George spent 38 years as an employee, retiring in 2010 as Executive Vice President of Field Operations. He continued his service to the company by joining the Board of Directors in 2016, where he remained an engaged and thoughtful contributor. He often said he was honored to continue his association with Erie in this capacity, and we were equally honored to benefit from his experience and his perspectives. Let's now turn to the first quarter results. As we shared in previous calls, 2025 was one of the more challenging periods we faced in terms of profitability, marked by elevated weather activity, including the costliest weather event in our company's history last March and a complex market. But by the end of 2025 and now in the first quarter of 2026, we started to see a more balanced picture and early signs that we're beginning to turn a corner. We're still operating in a competitive market, and there's more work ahead, but the steady measured progress is encouraging. Here to share more details of our first quarter results is Chief Financial Officer, Julie Pelkowski. Julie? Julie Pelkowski: Thank you, Tim, and good morning, everyone. Starting with the results of the Erie Insurance Exchange, the insurance operations we manage. With significantly lower catastrophe and weather-related losses in the first quarter of 2026, the underwriting performance of the core business of the exchange continued to be more evident in contrast to the elevated weather activity we experienced a year ago. Following the period of significant rate increases across the industry, growth continues to be challenging. Higher premiums are impacting customer behavior and measures like policies in force and retention reflect a more competitive landscape. Now getting into the details of the first quarter performance of the Exchange, starting with growth, direct written premium grew 3.6% in the first quarter of 2026 compared to 13.9% in the first quarter of 2025. Given our pricing has reached more adequate levels, this has increased our competitive position challenge. While our average premium per policy grew 8.1% in the first quarter, policies in force were down 1.7% from this time last year and retention declined to 88%. Shifting to profitability. The Exchange's combined ratio was 99.4% in the first quarter of 2026 compared to 108.1% in the first quarter of 2025. The primary drivers of the combined ratio improvements are twofold. First, non-catastrophe losses improved about 3 points compared to the prior year, reflective of stronger rate adequacy. From a catastrophe loss perspective, we saw an almost 7-point improvement from the first quarter of 2025. As Tim mentioned, the first quarter of 2025 included the most expensive weather event in our history, which drove the much higher combined ratio last year. In 2026, the catastrophe losses we experienced were more in line with historical trends. Our policyholder surplus at the end of March was $10.1 billion, consistent with the December 2025 surplus level, reflecting essentially breakeven underwriting and investment results. Shifting to the results for Indemnity. Net income was nearly $151 million or $2.88 per diluted share in the first quarter of 2026 compared to $138 million or $2.65 per diluted share in the first quarter of 2025. Operating income increased approximately 10% to almost $167 million from $151 million in the first quarter of 2025. Management fee revenue for policy issuance and renewal services grew approximately $31 million or 4.2%, in line with the increase in the direct written premiums of the Exchange, while we had more modest expense growth of 2.8% in the first quarter of 2026. Commission expense, our largest cost of operations, increased 6.4% to $465 million, driven largely by agent incentive compensation due to the underwriting profitability improvement as well as higher base commissions driven by premium growth. Noncommission expenses decreased approximately 5.6% to $180 million, primarily driven by lower professional fees and expenses across most other categories, except for personnel costs, which were impacted by higher pension costs and increased compensation. Our investment income in the first quarter was $22 million compared to $20 million in the same period of 2025, reflecting higher net investment income driven by higher yields and higher invested balances. As always, we take a measured approach to capital management and maintain a strong balance sheet. For the first 3 months of 2026, our financial performance enabled us to pay our shareholders approximately $68 million in dividends. With that, I'll turn the call back over to Tim. Timothy NeCastro: Thank you, Julie. As we look ahead, our focus is on building on this momentum, continuing to move forward with discipline and staying grounded in the long-term approach that's guided us through this past year. On the personal lines side, we're excited for the continued rollout of Erie Secure Auto. Following a successful pilot in Ohio, we expanded into Virginia and West Virginia. We're already seeing a positive impact on submissions and premium in those states. We expect to introduce Erie Secure Auto in four additional states this quarter with continued expansion planned throughout the remainder of the year. In commercial lines, we're continuing to introduce Business Auto 2.0 across our footprint. After rolling out to eight states in 2025, the product expanded to North Carolina, Virginia, Maryland and the District of Columbia in the first quarter of this year. We now have one remaining state, New York, to complete the rollout. This product is improving the quoting and servicing experience for agents and customers while also supporting greater consistency and efficiency in our underwriting. Another rollout that will help connect our independent agents with customer leads is our new online quote platform. It was launched in Ohio in February, and we'll introduce it in Maryland, Pennsylvania, Virginia and West Virginia next month. This is a more streamlined modern quoting experience designed to move prospects through the process more efficiently. It's the result of several years of testing and refinement, and over time, it will replace our existing online quoting tools. Importantly, it supports growth, improving lead conversion and reducing connection time to our agents while integrating with products like Erie Secure Auto as they're introduced across our footprint. Modernization of our technology platforms is key to our ability to introduce these new capabilities, and we're making meaningful progress. Today, more than half of our systems have been migrated to contemporary platforms, enhancing both the capabilities we deliver and the speed at which we bring new solutions to market. The modernization is only part of the story. We're also focused on how artificial intelligence can help us improve how work gets done across the organization. Over the past year, we've moved from early experimentation, scaled deployment of secure tools, including ChatGPT Enterprise now available across our employee population. And we're embedding AI into real workflows with strong governance in place. In claims, AI is helping teams prepare subrogation cases more quickly and more consistently. In other areas, teams are reducing backlogs, accelerating analysis and improving response times. Many of our most impactful use cases are practical, saving time, improving quality and reducing risk. And to be clear, this isn't about replacing people, it's about helping our employees do their best work. Our advantage has always been the judgment, care and experience of our employees and agents bring to what they do. We believe AI should strengthen that human touch and not replace it. That will continue to be our focus as we leverage this powerful tool across the organization. As we move through 2026, we remain focused on supporting our employees and agents, serving our customers and continuing to build on the progress we've made toward restoring profitability and balancing it with healthy growth. Thank you all for your continued support and for your interest in Erie.
Xiuyi Ng: Good morning, everyone. Welcome to CLCT's 1Q 2026 Analyst Briefing. I'm Xiuyi, Investor Relations for CLCT. With me today, we have our CEO, Gerry; CFO, Joanne; CFO Designate, Lintong; and Head of IPM, You Hong. For this meeting, we will start with a brief presentation followed by a Q&A session. [Operator Instructions]. So with that Gerry, please go ahead. Kin Leong Chan: Thanks, Xiuyi. Welcome everyone to CLCT's first Q 2026 business update. Thank you again to making some time this morning to attend this presentation. This is update. So I think it will be relatively short. There'll be more Q&A time later. So CLCT, we are the first and largest China-focused S-REIT. So now, of course, we also have connectivity to the C-REIT market through us jointly listing a C-REIT on the Shanghai Stock Exchange with our sponsor. Our current total asset is SGD 4.5 billion. We have 8 retail malls, 5 business parks, 4 logistics assets. And most of our assets are in Tier 1 and Tier 2 cities. Distribution yield using FY 2025 DPU with the unit price now is roughly about 7.5%, right? That reflects some of the unit price movement from the broad market winners after the start of the Iran war. In terms of our asset allocation, you can see that relatively unchanged. Our retail is still our largest and most resilient asset class, 70% of gross rental income, that's the biggest part. And then the remaining 30% is what we term as more new economy, so business parks 27% and logistics parks smaller at 7%. In terms of the different segments, generally speaking, the retail has been showing relatively more resilient with our AEI effects starting to flow in Q1 of this year. Logistics stabilized, of course, with some rent resets that we have done in 2025. And business parks, we will see that continue to have weak demand. So overall portfolio gross revenue and NPI dropped about 5% and 3%, respectively. And that's mainly due to the divested Yuhuating effect. So encouragingly, on a same-store basis, you will see that our portfolio gross revenue marginally negative at minus 0.4% year-on-year and NPI actually increased 1.3% year-on-year. If we dissect further for retail, again, on the headline revenue, it declined by 7.2%, but again, mainly due to the loss of Yuhuating's revenue, which alone was about RMB 21 million. So without that, if you exclude that on a same-store basis, it narrows to -- the drop narrows to minus 0.5% year-on-year. The other effect is -- for retail is that the completed AEIs started to provide us with new revenue flow. That's about RMB 5 million per quarter, and it was somewhat offset by some of the weakness -- continued weakness we see at Xinnan, Grand Canyon Mall and Aidemengdun. For BP and Logistics, when we combine together the revenue is relatively flat year-on-year. What we have done, of course, we continue to focus on operating efficiency. Our operating costs on a year-on-year basis, we reduced by 3.7% on same-store basis. Next, if you look at some of the retail operational statistics for first Q. Continued growth in traffic and tenant sales. You can see traffic grew by 3.3%. Tenant sales grew by 5.5%. And both of these statistics are generally faster than we have seen in terms of growth than the average of full year 2025 over that full year 2025, which grew about 2-plus percent for the full year 2025. But really, we are continuing the strong momentum that we saw 4Q 2025. Overall, occ cost is healthy, 17%. Again, there's a slight drop in occ cost and that's due to the good healthy sales growth that we have seen. Trade categories that have done well. F&B 4.2%, that's not a surprise, it has been a big category for us. Again, last quarter, I shared the same trends that are driving this F&B segment. We introduced new high-performing trading brands, which are 2 factors for [ shoppers ]. Growth also was broad-based. We have all local favorites, Japanese sushi chains and bakeries all doing well. IT up 8.5%, that's again boosted by consumption voucher as far as we mentioned, we expanded more digital brands during our AEI in Xuefu and Wangjing. Brands like Huawei continue to do very well in our malls. Jewelry & Watches plus 8%, again, driven by the trend to invest in gold. Toys & Hobbies, again, a standout, plus 59.6% this quarter, continued popularity of the collectible toys market. So again, POP MART was 100% up year-on-year. Again, we did very well. [indiscernible] Xuefu going strong. They are up about 58% in terms of sales growth. The other categories that are not in the slide, but I can share a little bit. Last year, we did a lot of supermarket AEIs. So the supermarket upgrading Wangjing share to Xizhimen did well, so those powered our supermarket category. Actually, it's there in the right-hand side. We had strong sales from that RMB 80 million, right? So the growth there is, of course, that double digit since last year's supermarkets, some of them have closed down. And once they were open, this supermarket drove good traffic growth at the 3 malls that we opened. Another category that did well, sporting category, we also opened Decathlon in Rock Square and very good ANTA Guanjun [indiscernible]. So the sporting category this quarter also did very well, plus 46%. One real surprise for me is that the fashion category actually turned positive this quarter, was positive 1.4%, a small positive, and growth was driven by the stronger malls and some of the names that have been going well, most of them, which is basically winter wear, thermal wear. And perhaps it's driven by the winter season. We had a strong overall growth of about 40% sales growth. While no one quarter is in a trend yet, but certainly, this is encouraging because we have had many quarters where we have not seen fashion had a positive sales growth. In terms of occupancy, our malls continue to have high occupancy. So this quarter, we had 97%, with almost all malls are above occupancy of 95% except for Xinnan, which is, of course, we are continuing to reposition. In terms of reversion, similar levels to 2025 at about minus 2% with 2 anchor renewals affecting our reversion number. We are doing some anchor renewals at Nuohemule and Aidemengdun. Business Park occupancy is at 86%, a slight drop from 4Q 2025. Usually, leasing momentum in the first Q is usually slower. But our Business Park assets outperform -- continue to outperform our submarkets despite generally softer environment for business parks. We see improvements in Xinsu and Ascendas Innovation Hub. But they are small -- they are decline in some of the other assets, for example, AIT, Ascendas Innovation Towers' occupancy dropped mainly due to one of the BPO tenants that did not renew upon expiry. We are looking to fill that. Hangzhou Phase 1 and 2 challenging market, which we shared before supply-wise, occupancy drop was from 2 bigger e-commerce tenants that pre-dominated that took up about 4% space of Hangzhou 2. Previously, we also shared that for Hangzhou 2, we had some X master lease service office that -- service office lease that we took back, that's about 55,000 square meters. And then where we subleased now from about 70% last year, we are now up to 74% backfill, right? So we'll continue to backfill that space. Overall Business Park's reversion is at minus 11%. We are, of course, prioritizing occupancy to actively trying to retain our tenants and conversion of the new leasing pipelines. You can see that actually this quarter, we did do quite a lot of leases, almost 60,000 square meters of renewals and new leases in first Q. So we are working hard at it. Logistics Parks, smallest part of our portfolio, 3% of GRI. We can probably say that I think the Logistics portfolio has stabilized. We further improved in Chengdu, driving occupancy of that asset to 96.2%, and also improving the overall logistics portfolio to about 99%. So we feel that rents have almost bottomed up in this Logistics portfolio. We aim to continue to achieve full occupancy at this level. Capital management before I hand it off to Lee to talk about it, I would like to just highlight that in terms of our average cost of debt, this quarter, we have managed to cut it down from 3.3%, where we ended off the year in 2025 to 3.1% by benefiting our efforts from [ RMB ] financing and overall constructive rate environment in both SGD and in RMB. So for this quarter, with the combined efforts, we managed to translate loan interest rate savings of about SGD 2.9 million. So that's about 18% year-on-year drop. So over to you, Lintong. Lintong Yan: Thank you, Gerry. So capital management remain a core strength and priority for CLCT. So our focus is actually very clear. We wanted to maintain a healthy balance sheet and they're actively lowering our cost of borrowing and protect distribution stability across the cycle. So as at March 2026, our CLCT's debt level is slightly higher than 1 quarter ago, following our distribution. That has resulted in aggregate leverage of 41.4%, which still remain comfortably within the regulatory limit. More importantly, like what Gerry has just now highlighted, we actually have achieved year-to-date average cost of debt of 3.1%. This represents 40 basis point reduction year-on-year and 20 basis point reduction versus full year 2025. These are tangible outcomes from active actions taken early in 2025, when we proactively refinanced and shifted funding from higher cost SGD debt into lower cost RMB debt. And also, we have increased our proportion of RMB-denominated debt, which has strengthened our balance sheet against resilience FX -- make it more resilient against the FX movement. So in -- as we deliberately balanced our SGD and RMB debt mix to stay flexible across various macro conditions, I want to highlight that in the small table on the upper right corner, right? That actually shows our distribution sensitivity on SGD and RMB interest rate movement. We now have more floating rate debt in RMB in SGD, right? This actually positions CLCT to benefit from monetary easing in China while being better suited for any potential volatility in SGD interest rate, given the global macro environment. And with lower borrowing costs, that has also strengthened our credit profile. Our interest coverage ratio has improved to 2.9x under stress test scenario, where the 100 basis point increase in average cost of borrowing or 10% decrease in our EBITDA, our ICR, interest coverage ratio, is remaining -- is able to remain comfortably above 2.3x, well above various regulatory threshold. CLCT's debt maturity profile also is very well staggered with annual refinancing kept at around 25% of our total debt, that is to manage our refinancing risk. The only offshore bond that is maturing in 2026 is RMB 600 million, 3.8% FTZ bond, which is due for refinancing in Q4 2026. While CLCT has sufficient committed bank facility to refinance this bond, but we see this as a good opportunity for us to further diversify our cost of funding as well as to refinance our debt and meaningfully lower costs. So we will actually keep unitholders informed about our refinancing efforts in the following quarters. So finally, we have strengthened our natural hedge. Our RMB-denominated debt now represents about 60% of our total borrowing, including other hedging instruments, we have around 78% of our total debt in RMB-denominated form. So in summary, our capital management strategy is to deliver a very clear and measurable outcome for our unitholders, lower cost of debt and stronger resilience to interest rate and FX movement, right? So these efforts underpin our distribution stability and provides CLCT with long-term growth capacity. Over to Gerry. Kin Leong Chan: Okay. Thanks, Lintong. I will just end off with maybe just a summary of our strategy in 2026, which is really a continuation of what we have done in 2025. We're trying to build a portfolio in the long term that aligns with China's focus on domestic consumption and innovation-driven economy. How we are doing it? We create value. We have, in 2025, established a long-term capital recycling vehicle via C-REIT platform. This will continue to support our ongoing portfolio reconstitution. 2026, our immediate target is to expand in -- some expansion in our new assets, especially retail, while continuing to make sure our properties have a stable occupancy. Unlock value, what we have done, of course, is last year, we have recycled CapitaMall Yuhuating. In 2026, our first priority is still to buy an asset to replace, replenish and reconstitute what we have sold in Yuhuating. But we will continue to work on and see whether there are suitable opportunities to recycle some of the noncore or mature assets where we feel that value has kicked. Extract value. Our AEIs, I think it's clear for everyone to see have been successfully completed and helping us in terms of organic income in 2026, right? So that will be -- continue to be a key part for us. We are trying to identify whether we can attract more value from existing assets. And as we look for new acquisition, we also want to see whether the new acquisitions that we are evaluating have potential and room for us to continue to apply our AEI expertise on them. Proactive capital management, I think Lintong has already touched on it. We will continue to drive down our average cost of debt while reducing our FX risk where appropriate. So that's the end of my presentation. I'll hand it back to Xiuyi for the Q&A session. Xiuyi Ng: Thank you, Gerry for the presentation. Now let's proceed to the Q&A segment. We have our first question from Terence. Please go ahead. Terence Lee: Congrats on actually the strong numbers. Actually, I really wanted to ask on Q-on-Q. I noticed that in fourth quarter last year, actually both revenue and NPI did drop in sort of like the mid- to high single-digit number on a Q-on-Q basis in fourth quarter. And then this first quarter, it did improve quite substantially on the Q-o-Q from fourth quarter. So maybe can you share on the Q-on-Q movements in the numbers? That's my first question. Yes. Maybe you can answer this first. Kin Leong Chan: I will answer that, and if there's some additional info that the CFO want to provide, he can do so. For the first Q numbers, I think if you look at this slide, we sort of have already laid that out. Of course, the big effect is Yuhuating, right, in terms of the revenue. And that's -- I think, I mentioned that actually quite for a big number, that's about RMB 21 million that we lost for revenue just because we lost -- we divested Yuhuating. But if you exclude that, you look at the other components, right? We have the AEI effects flowing through. So last year, most of our AEIs are completed, some at the late part of 3Q, some at the late end of 4Q. So most of the income really haven't come in. But this year, we have full contributions from all our AEIs. Just now I mentioned that the swing there is about RMB 5 million per quarter. So that's a key part of why I suppose you saw that retail revenue has on a same-store basis has been quite stable, right? Of course, as I mentioned, it's slightly offset by some of the poorer assets. I'm talking about Xinnan, Grand Canyon Mall and Aidemengdun. So that's basically how we come to about flat, excluding Yuhuating for the retail revenue. Business Parks. Business Parks NPI-wise, actually, if you look at the segmental breakdown, you would have saw that actually Business Parks also improve. Like part of it was because you recall last year, we had been trying to backfill some of the spaces in Hangzhou Phase 2, I mentioned about the service office master tenant, which we took back the leases from and then started releasing up. Last year, we said that we finally managed to lease it up to 70%, but a lot of it was really committed at the back end, right, of the year? And then, again, the income flows and effects started flowing in 2026, right? So that helped basically together with Logistics Park get us to a position where revenue is flat rather than declining in those sectors. And of course, generally, we're trying to maintain cost control. So I mentioned the cost control, and we have saved about 3.7% on a same-store basis. So that's why on overall basis, you can see the NPI is up 1.3%, excluding Yuhuating's effect. Is that... Terence Lee: Yes, that's very helpful. Maybe if I can ask a separate question. I understand that the C-REIT regime has changed quite dramatically. I mean your sponsor is looking at another separate C-REIT. So I wanted to get your views on how the changes impact the existing C-REIT and whether you may look to divest assets via C-REIT or how are you looking at asset divestments? Kin Leong Chan: So two questions. I think one is about the new C-REIT and the relationship with us and the sponsor. Second one is whether we are looking for more securitization or divestment from our portfolio into the new C-REIT. I think those are the two questions. So the new C-REIT format is something that really picked up in concept only end of last year, and it's something that the CSRC in China, the securities regulator, is driving very hard to get going off the back of quite a successful -- already quite a successful C-REIT market that they have right now. And CapitaLand as a very reputable REIT player globally and also in China, right, has been invited to do that sort of the first pilot batch of this new C-REIT format. The differences -- I can let Lintong explain the 2 differences in the short while. But when this was discussed, right, certainly, CLCT was also in the loop. And we also were consulted to see whether we want to have any assets securitized into this vehicle, right, new vehicle that's coming up, which will probably be second and third Q by the time they listed of this year, right. And we decided that since we have done our first securitization quite recently, right, we wanted to pace up the pace of our securitization or divestment, so that our DPU can have some income stability. As you can see from the results, we -- even though Yuhuating's divestment was not that big, we still lost some income. And we wanted to see whether there are opportunities to basically buy some assets to put -- to basically replenish those income before we go on to the next securitization, right? And if you look at the general market for C-REIT, it's actually very buoyant. So we are in no hurry. The market will be there for quite a while for us to take advantage of when we need that liquidity, right? So it depends on whether we have the capital needs, maybe we find very good assets at very good attractive yields that then we may think of activating another round of securitization. You Hong can explain the diverse between a new and old C-REIT as well as what people are seeing in terms of how they work together. Hong You: Yes. So on the new regime, if I may, we can call it commercial C-REIT, just to terminology it differently from the previous regime called infrastructure C-REIT. They are actually quite similar in terms of leverage, the legal structure and all that. I would just say there are 2 to 3 main differences that drives them. One is the speed at which I think the regulatory wanted to move this faster. So I think they have sort of -- the approval window will be shorter because last time, there's NDRC, CSRC sequentially have to approve it. But now I think it's all in the CSRC's purview, so that's number one. Number two, I think asset class, they've expanded into a more bigger real estate focused commercial asset class, namely including office, hotel. Of course, retail are still in it, and all the other more generic type of income-producing real estate are all admitted to this commercial real estate, which previously it was very limited. Number three, I think they've also relaxed certain reinvestment obligations. So I will not go into too detail. But having -- so basically, I think this is welcomed generally by the market as a whole. And from our point of view, I think we are indifferent as to which vehicle is -- can be our offtake vehicle. I think there were also questions on why there are 2 [indiscernible] C-REITs in the -- under CapitaLand's name, I think the regulators also suggest that there could, in the future, be actions there to take care of that, but that will be a next-stage action, yes. Terence Lee: That's very, very clear. And hopefully, we can see more C-REITs to come. That's all I have. Xiuyi Ng: The next question is from Geraldine. Geraldine Wong: Congrats on the more stable than expected set of results. Maybe just tying back to Terence's question on divestment, you'll probably look to phase out a little bit more to reduce DPU impact. Can we also say the same for the existing recycling to your -- to [ CRCR ] in terms of retail assets? Kin Leong Chan: Yes, I think we view it the same actually because it's kind of, I would say, a slew of tools that we have in our disposal because we are part of the same group, right? So we will -- whether it is to the new C-REIT or the old C-REIT, we will place it according to our own needs. Geraldine Wong: Okay. Okay. You also mentioned about acquisition opportunity that you see in other retail assets. Just wondering, would you want to pace that with a divestment? Or if the opportunity is really very interesting, will you actually consider doing EFR given that gearing now is at 41%... Kin Leong Chan: Well, it depends on how attractive the deal and basically the timing that we have basically to complete the deal. So there are quite a lot of permutations, yes. So it really depends. Geraldine Wong: Okay. Okay. Maybe just squeezing in question on Logistics and Business Park. Logistics reversion was a positive surprise. Is this lease specific or really reflecting a potential bottom -- early bottom for the Logistics asset class within China? Kin Leong Chan: I think it's quite been a trend for about 2 quarters already. You Hong can add a little bit more color, but we have tried to communicate that we feel that rentals have really reset, so that's why if you look at the reversions, it's actually just mildly negative in this quarter. Hong You: The reversion mainly come from, if I recall correctly, Kunshan and Chengdu because these 2 are the ones that have a bit of change in leases. But having said that, I think our observation of the market, I think we have alluded to previously as well that we will hopefully be seeing the rent are stabilizing and following 2 years of quite, I would say, drastic drop. Of course, we can't say for the whole China because I think North part of China, Southern part of China may be in a different -- slightly different timing and cycle of the market. But in the 4 cities that we are in, I think this is generally observed. Geraldine Wong: Okay. China, very big. Maybe just on Logistics, right? If you look at your 4 assets, how many percent of the leases are still on the rent that has yet to be [indiscernible] versus the already mark-to-market rents? Hong You: I will say that our leases are generally in the 2, 3 years kind of lease cycle. And then we have more or less done with the [ marketing ], that's my view. Geraldine Wong: Okay. So it looks like one more year to go then. Hong You: No, I would say that we have more or less [indiscernible] to the market, although some of them are 2, 3 years, but I think we have done the big churn in the last 1 and 2 years. Xiuyi Ng: The next question is from [indiscernible]. Unknown Analyst: [indiscernible] from OCBC here. Just a few questions. I noticed that the retail reversion is still negative despite the trade sales going up. So what's causing the divergence? Is it just a timing issue or like tenants still being squeezed? And related to this question is occupancy cost. What should we think about as a steady state kind of occupancy cost like trended lower to 17%? And is this going to trend further lower? And another question I have is on cost reduction, 3.7%. So it is somewhat substantial. What was actually being done to drive that kind of cost reduction? And should we be expecting further cost reduction? Then my third question will be in terms of the cost of debt. So do you have some guidance on where it will go towards the end of this year? Kin Leong Chan: Thanks for the question, 4 questions. So the first 2, I will touch on a little bit before I let You Hong to take the first 2 in detail and then I'll let Lintong answer second 2 in more detail. So generally speaking, the whole China environment is still in a deflationary or environment, right? So prices are not really moving up, right? And that certainly [ keep true ] when you try to ask tenants to increase rent. But of course, for those categories and those malls that we are really well, we have better ability to ask for higher rents, right? This quarter, I spoke about there was -- for the retail, there were some anchors that we renew that affected our reversions. I recall the number without them is minus 1.6%, minus 2%, but still negative. You're right, still on a negative trend or slight negative. And I shared previously, I think last quarter that what I'm -- we believe that sales trend are leading indicator for reversions, right? Of course, the timing you can debate of how much leading indicator it is, right? We have had a year -- almost a year plus or 2 years actually of sales growth, right, that outstrips -- obviously outstrips rental growth, right? So that to me shows actually our tenants are actually in a healthy position, right? That should continue to underpin the strength of our retail portfolio. In terms of the savings, we do work very hard on them. The details, I will let Lintong talk about it. And in terms of both operating expenses as well as our interest, we are working very hard on it. So the first details maybe on the operating side, occupancy costs, maybe You Hong, you want to add more color on that? Hong You: Yes. Thanks. So I think that's a really good question actually. We are also trying to understand and in my conversation with ground team, we are also trying to see whether there's room for us to drive ramp up. So I think the 70% is actually already below the levels of -- before the levels of the pre-COVID. So then again, I think our -- what we hear is that when we talk to the tenants, they are still relatively cautious on upping the rent, although they are able to still do good business, but I think the resistance is there because for one reason is that the they are also sort of in the deflationary environment, trying to promote and do more promotions, do more sales events. So they also felt that the margin -- their business margin is also not as good as the good old days, right? I think that's number one. And number two, I think in terms of the aggressive expansion tenants, what we are seeing is more in the drinking, in the bakeries, some of them still do. But the large format kind of tenants, F&B, fashions are still sort of lacking or rather the willingness to expand is still not there overall. I would say, so we would want to work with them to see how to drive it up. But I think at the moment, we are still seeing the rent being rather subdued, right? So I think that will probably take a bit of time. But hopefully that with now we see the new data on the DPI and all that. Hopefully, the CPI will also be able to go into the positive territory for a longer time, right? I think then people will start to feel that the inflation cycle will turn. I think that will help us generally. Lintong Yan: So for the interest saving, yes, so for this quarter, we are very encouraged to see our cost of borrowing has actually come down. So, yes. So this is actually years of efforts. Since 2025, we have been actually very much focused on lowering cost of debt and also to use the renminbi borrowing to actually lower our overall cost of borrowing. This actually takes time to filter through because we do have some expensive swaps that actually need time to mature and reset. So I think for now, I guess, this level of cost of borrowing, I think we hope to actually hold it there because we still have some floating rate that are actually subject to macro environment, right? But we do hope that we are able to hold the interest rate here at this level. And then we are also looking for opportunities to further reduce our interest rate, right? Take for some example, our FTZ bond that is actually currently the passing coupon rate is 3.8%, right? So this bond is actually coming due. So I think we are able definitely to refinance this bond at below 3% kind of level, even better than that. So -- but this bond will actually -- any refinancing effect will probably be filled in 2027 and when they -- actually interest savings contribute full year, right? And also, we do observe that occasionally, there are opportunities for us to swap our SGD debt into RMB debt through cross-currency swap because the interest rate environments are actually still quite volatile on the long end, right? So opportunistically, we are able to capture some interest savings when we swap SGD into RMB using cross-currency swap. That is actually we might be able to actually pick up a few interest savings here and there. So generally, if you want to look for some guidance, I guess we will be able to keep at this level, like 3.1% kind of level and hopefully can do better. Also want to highlight that earlier, I mentioned our fixed and floating rate debt, right? The ratio is now 65%. And that actually allowed us to enjoy any interest rate savings if the SGD rate actually continue to stay low and then if there's any chance of RMB further monetary easing coming this year. Unknown Analyst: Source of operating costs? Lintong Yan: Okay. Source of operating costs, right? So the team has actually been very focused on the cost measure, right? So a part of our operating costs actually come from revenue-linked expenses because if you look at our cost structure, we have a lot of expenses, including the property tax as well as some of the management fees are actually linked to our revenue. So this part, the decrease -- a portion of it is actually linked to our revenue decrease because we have actually some -- our Yuhuating has been divested. And on the operating front, we have actually seen significant savings in maintenance costs, right? So these are something that we continue to focus on and to actually save the NPI. Kin Leong Chan: Maybe I'll just add a little bit color on that. So the property cost savings, of course, we work indeed very hard actually with our property managers, who, of course, you know is our sponsor, right? So as Lintong said, if you take out the Yuhuating effect, right, if you look at same-store basis, the minus 3.7%, half of it is the revenue-related cost drivers. Some of the costs basically goes and correlates to the revenue levels. The other half, somewhat like, I would say, somewhat like fixed cost, but we have trimmed that down by quite a bit. And the first Q actually, we have made very, very double-digit sort of cuts to those fixed costs on a year-on-year basis. So on a combined basis, that's why you get this minus 3.7%. Xiuyi Ng: We have the next question from Terence Lee. Terence Lee: Terence Lee from UBS. If we look at Page 7, the 1Q year-on-year sales improvements, is there a way to just maybe talk through what would be like from the bottom of the list, like which sectors are more, I guess, worrisome or not performing that well? Kin Leong Chan: Okay. You're talking about trade categories that we may not have shown here. I would say usually, when this question is asked, last quarter, I would say fashion, but this quarter, fashion sort of surprised us a little bit. So the other category is the beauty category, the cosmetics. Again, I think last quarter, I did say within the beauty category about minus single digit, minus, I would say, maybe mid-single digits. But actually, this quarter also not -- it's negative, but it's not so bad, a little bit. I think you also can talk about EVs a little bit that's a big trend. Hong You: Correct. So I think from what we are seeing, the 3 categories that we see year-on-year drop, which is more on the slightly higher side is ranking them vehicle EV sales. And secondly is -- I think EV sales is also reflected in the nationwide consolidation number that was published a while ago. And I think leisure and entertainment also dropped. I think last year, we had a good movie and all that. This year, I think the movie hasn't been -- we haven't seen any big blockbusters, right? So I think that's that. And thirdly, I think home livings, we also -- but that's a very small trade to begin with. But home livings has also seen a little bit of decline year-on-year. I think these are the 3 main ones that we see drop. The rest is a bit more like a mixed bag. There are malls that do better. Also on fashion, I think Gerry mentioned, overall, we see a slight positive. But between more malls, we see differences, right? So some of the strong must do better. I think our [indiscernible] negative. So I think the rest I wouldn't be able to generalize too much, I think. Kin Leong Chan: I mean, in summary, I think this quarter, particularly the positive has more than the negatives. Terence Lee: Yes. I think it almost sounds like the negatives are not that negative broadly, like the range from slight negative to positive as it gets for Toys & Hobbies. Kin Leong Chan: We hope the trend continues. I don't want to call a trend, but this is 1 quarter, yes. Terence Lee: Okay. And next question, remind us of the RMB hedge policy again? And I guess what would be the effective hedge rate on this first quarter results? Kin Leong Chan: Okay. I'll turn that question to Lintong. So the hedge policy and... Terence Lee: FX hedge policy, sorry. Kin Leong Chan: You're talking about the income, right? Terence Lee: RMB to SGD? Lintong Yan: Okay. So we typically hedge -- we look at our RMB exposure and cash flow, right? We typically are forward looking at our upcoming distribution from China, right? We typically hedge about 75% to 90% and then probably 6 to 12 months ahead. So that actually really depends on the hedging cost because I mean, RMB and SGD depends on the tenure that might have some positive carry, which means the forward premium is in our favor. And sometimes the forward premium is actually quite expensive. So we actually look into these hedging costs to decide how much we hedge and for how long we hedge. But generally, it's about looking forward, right so 6 to 12 months and then hedge about 75% to 90%. So as you can see that actually RMB versus SGD recently has actually stabilized. That actually has helped us in terms of our hedging decision as well. Terence Lee: So just if you can help us make our job easier, what would be the effective rate for first quarter or even first half? Lintong Yan: You mean we hedging. Yes. So we hedged about 80% of our forward rate. So our rate hedge is about 5.4%, around that kind of level. Terence Lee: Okay. That's weaker than spot. Lintong Yan: Yes, because some of these hedges was actually done at the second half of last year and then some are actually done at the beginning of this year. So you can actually see that the spot rate has actually strengthened, especially after the [indiscernible], right? So actually towards the March, right, the RMB has actually reached, I think, [ 5.35 ] kind of level. So some of our hedges was actually done before that. Kin Leong Chan: Usually, 6 to 12 months, can do in 6 to 12 months. Terence Lee: Got it. And maybe just going back to the comment by Gerry about wanting to buy first before doing securitization. Just a question on the rationale, like why isn't this more so done at the CLI level? And I guess a little bit more relatedly, related to capital deployment, is there not more value you see in buying back your stock now? Kin Leong Chan: The first question, you were asking why is it not more with the CLI level? Terence Lee: Meaning to say like why -- I mean, if the plan was to so-called like buy or source for, let's say, malls in the market to buy, improve and sell, like why would this not be done at the CLI level? Like why would -- what is the strategic rationale for doing this at the CRCT level? Kin Leong Chan: Okay. Okay. Same strategy. Why CLI is not doing it and why CRCT is doing it? Is that the question? Terence Lee: Or rather, why would it be done at both levels? Kin Leong Chan: I think, first of all, I would say the objective and strategy for China-focused REIT will be very different from the objective and the strategy of global asset management or fund management platform, which CLI is trying to -- CLI is positioned for basically, right? So from CLI's perspective, I'm sure you have heard Paul and Chee Koon talk about it. It not only have China business, they got business basically across different jurisdictions. The asset allocate their business according to where it may bring them the best growth. So it may or may not be China. And in China, they may have different strategies than us. We are quite straightforward, right, because we are China focused. And China for us is Greater China, China, which means Mainland China, Hong Kong and Macao. These are the 3 places that we can look for assets. And we will portfolio reconstitute within these countries across asset class that we currently play in or we may in future, but not -- perhaps not immediate future to look at other asset class, right? So our acquisition, our divestment, our value add would therefore, be contained within China. So that's quite clear for us. I think the other thing that the relationship between us and the sponsor is that the sponsors have different strategies. But one thing that's certain is that they are supportive of our objective. And you will recall, we still have historical ROFRs with the sponsor, right? So when we are looking for assets that we -- assets to basically inject into the REIT, those assets are, of course, up for consideration together with third-party pipeline that we generate from [indiscernible], right? So that's in terms, I think, of the strategy. Second question is unit buyback, right, unit buyback. I think I addressed this in this manner, right? Of course, stock price, it's sort of volatile, sometimes it's down, sometimes it's up, right? And therefore, the trading yield present itself accordingly. Right now, our trading is about 7%. So in terms of capital allocation, right, for the same dollar, which we are using the same gearing headroom, we got to decide for ourselves whether we can find a deal that is basically accretive against the trading yield, right? And that's our ultimate test, right? We sold an asset only end of last year. You Hong is still working hard. Just now, I talked about the pipelines that we have assessed to see whether indeed we can find something that we can buy and add value. Of course, if you buy back our own stock, it could be immediate. But if you buy something that's an asset that's accretive, that means we are basically buying at a yield higher than our trading yield plus, as I said, we want to have some value add in there plus potential to improve on the assets that we buy in. That could actually prove to be a better proposition for the same unit of [indiscernible]. Xiuyi Ng: The next question is from [indiscernible]. Unknown Analyst: I have two questions from me. First, how do you see rental reversions for the Business Park assets trending for the rest of this year? And how is the leasing sentiment like on the ground? Second question is more on aggregate leverage. Was the increase in the total debt a temporary bump to pay out the FY '25 distributions? And what is the ceiling that you'll be comfortable with if you were to acquire an asset and fund it with debt? Kin Leong Chan: First question, I'll let You Hong take, then I'll comment on the second question. Hong You: Yes. On the reversion side, Business Park, I think we -- between assets, we see that since we are still the stronger one, although it also had slight negative this quarter, but the stress really comes from, I would say, Hangzhou. And the situation on the ground, I think we have shared before for the last couple of years, I think there were quite a bit of supply coming on board, but it has sort of I think the last bit of the supply should be already in, right, in that submarket per se. So I think within the submarket, we look at how the other people are doing. I think generally, we are looking at close to 70% already. We are also at slightly above 70%. So I think the kind of competition that we see probably will last a bit longer, but hopefully not that long. So for this year, I still expect that reversion to be stay within this kind of range level. But hopefully, by the time when all the supply glut have sort of been absorbed by the market, I think then we will see a more healthy situation going forward. Kin Leong Chan: On the leverage, indeed, yes, first Q is affected by the fact that we drew on some loans for distributions. So we do expect, over the next few quarters, some money to come back as we extract dividends from our assets in China. So that's something to look out for. In terms of for acquisition, what's our limit? I think generally speaking, yes, the S-REIT environment, although MAS guideline is 50%, most S-REITs will try to contain themselves within 45%, right? And I think that we are now about 41%. So different REITs have different level of gearings. Also a little bit -- we have to look at it a little bit with regards to the -- maybe the cost of debt as well. I think our ICR is still quite healthy, right, a good buffer above the 1.5x required by MAS. So I think generally speaking, our financial metrics still look quite stable, yes. So that will be how I think about basically the leverage that we can take on. Xiuyi Ng: The next question is from [ Joell ]. Unknown Analyst: I just have two questions. The first is regarding electricity prices. I noted from your AGM Q&A is more impacted by coal prices rather than oil prices. I believe coal prices is probably up about 15% higher year-to-date. So I'm just wondering what is CRCT doing? Any proactive actions to handle the higher electricity costs going forward? Kin Leong Chan: Okay. That's the first question. You Hong can take that. I think main thing is basically electricity trend in China as well as I think maybe you can talk about our ability to cut electricity consumption at the ground. Yes. Hong You: I think for the electricity price so far, based on our survey, it has not been affected by the Middle East situation. In China, generally, I think we have seen news that oil price, the gasoline price has gone up, but not the electricity. So I think the government also have -- would want to keep that stable for obvious reasons. So I think that's number one. I think for the ways to reduce consumption, I think this is -- has been always something that we have discussed and hopefully drive. Along -- over the years, I think we have also tapped on, [ for example ], the automation or data analytics to actually help our technicians to be able to drive the efficiency on the same chiller, same electricity level. Of course, the weather -- sometimes weather conditions fluctuate. So I think that can only help. But from our point of view, I think we do what we can in terms of equipping our technicians with smarter and better tools to analyze and to drive the unit rate down. The other thing I may just want to share a little bit that I think this is still [ probably ] coming. I mean we are trying to source our electricity, a portion of it from green renewable sources. In China, some of the cities, this has become available at a rate that's equivalent, not more expensive than the equivalent nongreen energy. So I would say so far, we have been sort of procuring a portion, I think, around slightly above 10% of our energy from the green sources. So I think this is something that we are also watching and experimenting without increasing our costs. Unknown Analyst: That's quite clear. My next question is regarding new leases versus renewed leases. Noted that roughly it's 40% new lease, 60% renewed lease across all your segments. Is there a preference? And also a follow-up on that, any incentives that you're giving on the ground? Kin Leong Chan: You Hong? Hong You: Sure. For retail, I think we would generally like to see a healthy level of renewals, right? It ranges between -- or rather new brands, I would say, right? New brands inject new vibrancies and interesting ideas to the malls. So I think between 40, 50 of new brands is actually quite common. We have seen before, right? In times that's a bit more challenging, of course, then we tend to renew more. But if we have a choice, we do want to get new brands in. That's retail. But for Business Park and Logistics, I think our preference is more sticky tenants, right? So I think generally, the pie will shrink to more fit, I would say, renew, right? So I think usually, we see that figure between 60 to 70 renewal, another 30 to 40 in the new tenants, I mean. Okay. Of course, we do what we can to drive up occupancy and rent. But I think generally, we are also watchful of not going over the line. So I think generally, our save on core, the rent free or -- basically, we do save on core market type of rent-free on incentives. It's quite typical that we have first 1 to 2 months that's for renovation and it could also be some of the market where it requires, it can be about 1 month of rent free that also happens, right? So I think that's something that we will do. Kin Leong Chan: And apart from incentive, I think what we want to do is to be responsive to the tenant needs, right? So in some situations where they need additional power, they need better transportation. We may upgrade power, we upgrade lease for them if the tenant is serious and a strong tenant, right? So these are the kind of things that we do take into consideration. Xiuyi Ng: We have a final question from Vijay. Vijay Natarajan: I have three quick questions. Maybe I'll take it one by one. Firstly, in terms of this Middle East conflict, have you seen any impacts to your portfolio of tenants? Is there any tenants who are exposed to energy, logistics, shipping, et cetera, in Business Parks, Logistics that you are -- that is facing some pressure. And from my understanding, China has a cash flow issue. Are you seeing in terms of rent collection, has this been improving and your rent collection is much more on time at this point of time compared to 1 year before? Kin Leong Chan: Okay. I think for the Middle East conflict, one thing that has really stand out for me is China seems to be quite well controlled in terms of the effect. Utilities, I think You Hong has covered. But that's really tip of the iceberg in terms of they are owning self-sufficiency. Supply chains are being disrupted. But by and large, what we hear in China is things are still available, right? And then in terms of businesses, direct businesses to our tenants, retail, there's actually no issues because just like in last year, when we talked about tariff war, most of our retailers, many of them are local buyers, local sellers, basically selling to local crowd, buying from local producers, right? And the international brands, they do not typically ship from Middle East. Middle East is not a merchandise producing area, right? So retail is not that big an issue. Business Parks, there are a handful who have businesses or sell particularly to Middle East, but that's not a big portion of their business. Nobody really went out of business because of that in our Business Parks. And in terms of Logistics, again, our logistics portfolio, maybe half of it service domestic distribution, right, half of it export facing that's in Shanghai, right? Again, not much to report in terms of disruption from Middle East because they don't have that much business going with Middle East, right? What we do say is second order impacts you cannot ignore, which is in our outlook slide, because petrochemicals, which come from Middle East are a feedstock to some manufacturing inputs for some of the factories in China, for example, plastics and so on and so forth, right? But as many economies and China watches would also inform even that China have a solution because actually, you can produce the same petrochemical with coal, right? It depends on how much in terms of cost of production, basically. But with the prices that the petrochemicals from oil is -- we are talking about, it's making the coal chemicals quite actually a good alternative. So economy and production base is as diversified as China. Actually, we had just one economist spoke to us yesterday. In fact, you would say that strategically it favors China to withstand the pressures that come from the Iranian war. So that's my take on it. Sorry, the second the arrears. No problem with arrears. Hong You: Yes. We don't see any major change in pattern in terms of arrears. Vijay Natarajan: Okay. My second and third question, okay, earlier, you touched upon acquisitions. Maybe can you touch upon which segments you would be looking at and what kind of yield benchmarks you would be looking at for potential acquisitions ahead? And third question is, is there a trend of retail tenants signing a slightly longer lease because I noticed your WALE going up a bit. I mean are the tenants trying to lock in the rents at these levels in the retail segment, especially? Kin Leong Chan: Your first two questions, I will answer. Maybe You Hong can take the last one. The type of assets we're looking at and then the new levels, okay? So actually, we spoke about it, the type of assets that we are looking at. Today, we have 3 asset classes, retail, business park and logistics. We are more focused on the more defensive part, which is retail, right? 70% of our portfolio is in retail. We look at the trends, retail have been more resilient, particularly our sort of our subset, which I call bread and butter, malls, right, not the luxury malls, but maybe more the middle market ones. We are looking more in terms of that segment. But that doesn't stop us from looking at other asset classes. For example, while business park in general are not doing so well, you would have because of the manufacturing drive in China, right, would have seen factories actually doing quite well. And on and off, there may be industrial properties that are not so much decentralized offices, but more of the R&D, more catering to actual production, right, that may be available for sale. Those if they are at the quality of our Xinsu portfolio, which have been very, very strong, right, certainly is something that we can look at. But as a priority, of course, we are -- I think we want to stick to where we add the most value, which is really retail, right? So that's one thing that I can share. The other thing in terms of yield, I think it's very simple. As a REIT, we want to look for something that is yield-accretive. Today, our trading yield is about 7%. That's one way that you look at it. The last deal that we sold for our retail mall, we sold it at NPI cap of about 6-plus percent. So definitely we want to beat those metrics, right, in order to basically, over time, improve the average yield of our assets. You Hong, you want to touch on the next question. Hong You: Yes. WALE, so I don't think we have -- okay. Indeed, some of the retailers do ask for longer locking for both -- I mean, trying to sort of see that the rent is rather favorable and reasonable and also secondly to have a reasonable period of recovery of their investments, right? But we have been more careful in not lock ourselves in if we deem that the rent is [indiscernible]. So I think that will protect us and give us the chance, of course, to go back in terms of negotiating rent on a higher side when the cycle is due. So I think we don't see a big trend in having to lock in very, very long leases, fair to say that. Kin Leong Chan: The bump you see in the first probably is the 2 anchors that we sort of [ resigned ]. Hong You: Yes. Yes. Correct. Correct. Xiuyi Ng: Thanks, Vijay. And thank you, everyone. Since we have no further questions, this concludes our session for today. Please feel free to reach out to me or my team if you have any questions. Thank you all, and have a good day. Kin Leong Chan: Thank you.
Operator: Welcome to the BE Semiconductor Industries Q1 Conference Call. I will now give the word to Richard Blickman. Richard, go ahead. Richard Blickman: Thank you. Thank you all for joining this call. I'd like to remind everyone that on today's call, management will be making forward-looking statements. All statements other than statements of historical facts may be forward-looking statements. Forward-looking statements reflect Besi's current views and assumptions regarding future events, many of which are, by nature, inherently uncertain and beyond Besi's control. Actual results may differ materially from those in the forward-looking statements due to various risks and uncertainties. including, but not limited to factors that are discussed in the company's most recent periodic and current reports filed with the AFM. Such forward-looking statements, including guidance provided during today's call, speak only as of this date. Besi does not intend to update them in light of new information or future developments nor does Besi undertake any obligation to update the future forward-looking statements. For today's call, we'd like to remind -- we'd like to review the key highlights for our first quarter ended March 31, 2026, and update you on the market, our strategy and outlook. First, some overall thoughts on the first quarter. Besi reported strong first quarter results and advanced packaging orders in an improving industry environment. Revenue of EUR 184.9 million, increased 28.3% versus the first quarter of 2025 due to higher shipments for high-end mobile and 2.5D AI photonics and data center applications. Q1 '26 orders of EUR 269.7 million more than doubled versus the first quarter of 2025 due to broad-based growth across all Besi's end-user markets, with particular strength in hybrid bonding, mobile and photonics applications. Orders increased 7.7% versus Q4 last year due primarily to a significant increase in bookings for hybrid bonding systems from multiple customers and end-user applications. Increased revenue growth this quarter favorably influenced Besi's profitability. Net income rose 20.6% and 63.8% versus Q4 '25 and Q1 '25, respectively, with net margin increasing to 27.9% versus the 21.9% in the first quarter of 2025. Improved profitability this quarter was due primarily to enhanced revenue growth, disciplined expense management and the benefits of operating leverage in Besi's business model. We realized a gross margin of 63.5% in the first quarter this year as increased prices helped offset increased component and energy cost inflation. In addition, our liquidity position improved significantly with net cash growing by 186.9% versus the fourth quarter last year to reach EUR 103.3 million. Growth in our net cash position reflected improved profit and cash flow generation from operations of EUR 93 million in the first quarter 2026, which more than doubled versus the comparable period of the prior year. During the quarter, Besi repurchased approximately -- for approximately EUR 14.2 million of its shares, which brings the total purchases to EUR 25.5 million under the current EUR 60 million buyback program. Next, I'd like to discuss the current market environment and our strategy. We've noticed an important improvement in market conditions since our last report, driven primarily by strong growth in AI demand and to a lesser extent, additions to mobile and automotive capacity. The latest TechInsights forecast calls for 21% assembly market growth in '26 and 75% between 2025 and 2030. We expect to significantly exceed such projected growth rates given our leadership position in advanced packaging and wafer-level assembly, particularly in flip chip, multi-module die attach, hybrid bonding and next-generation TCB systems. Favorable order trends in the first quarter of this year reflect the strength of Besi's advanced packaging market position, particularly for next-generation 2.5D and 3D AI applications. Unit orders for hybrid bonding systems more than doubled versus the fourth quarter last year and exceeded the prior quarterly peak reached in Q2 2024 with respect to total units and order value. Growth was due primarily to a larger-than-anticipated capacity build this quarter by a customer and to a lesser extent, repeat orders from a memory customer for HBM applications. In addition, we shipped 2 evaluation tools to a second memory customer for HBM applications and adoption increased to 20 customers overall. Progress also continued on our TC Next agenda with 2 new orders received and adoption increasing to 6 customers. Besi's business prospects for 2026 were also enhanced by renewed growth for high-end mobile and automotive applications in this first quarter. Our business strategy is currently focused on supporting customer adoption of our wafer-level assembly and 2.5D AI product portfolio and ramping the supply chain and production personnel necessary to meet increased order levels. We are also developing additional Vietnamese production capacity for mainstream assembly applications in order to free up incremental capacity in Malaysia for wafer-level assembly production. Further, Besi is increasing its service and support efforts in Taiwan and Korea in anticipation of increased hybrid bonding activities in such regions. Our favorable outlook for hybrid bonding growth in 2026 is also supported by a series of new products and use cases announced this year for logic, memory, co-packaged optics and consumer applications. Such announcements suggest that the pace of hybrid bonding adoption is increasing as we approach the timing for the introduction of many new AI-related products anticipated in the 2027 to 2030 period. Now a few words about our guidance. Based on our backlog and feedback from customers, we anticipate that Besi's Q2 '26 revenue will grow by 30% to 40% versus the first quarter of this year as strong revenue and order growth continue versus the prior year period. In addition, gross margins are anticipated to increase to a range of 64% to 66% Operating expenses are anticipated to be flat to up 10% due to increased revenue and customer support activities. As a result, we anticipate a significant expansion of our net income and profit margins relative to Q1 '26 and Q2 2025. As a result, we forecast for H1 '26 that revenue will increase by 49% versus the first half of 2025, assuming the midpoint of our second quarter '26 guidance with a substantial improvement in operating and net income. That ends our prepared remarks. I would like to open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from Didier Scemama from Bank of America. Didier Scemama: Richard, can you hear me? Richard Blickman: Yes, I can hear you, Didier. Didier Scemama: Sorry about it. Just on hybrid bonding, those orders in Q1, you mentioned that you're a bit surprised by those orders. I think it was not really expecting that they would be as significant as they were. Does that change anything about the profile of the ramp for this year at your main customer? Or like is that leading to higher deliveries already this year because of AP7? Just give us your thoughts on this. And then of course, I've got follow-ups on HBM. Richard Blickman: Well, what is happening, you can follow easily in the bigger picture provided by Taiwan customer is that we see an acceleration in adoption of hybrid bonding and the orders scheduled for installation in the first round in AP7 has been pulled forward somewhat from Q2 to Q1. In addition, the program has been enlarged for 2 reasons. One, for the overall, let's say, time line to fill in the anticipated 100 bonders. That number we are told may be significantly higher, plus orders placed for co-packaged optics. So overall, you can say good news and acceleration of placing orders and to some extent, also an outlook for increased number of bonders required. Didier Scemama: Understood. And so on that front, I think you mentioned in the past in previous calls that 2027, you could start to see some new AI logic customers coming on board. I mean have you got sort of line of sight on that? Richard Blickman: Well, we all know that AMD was the first to adopt hybrid bonding for several families, and they continue to do that. But then we also know Broadcom, and one of the positive developments was also the Apple M5. So we see broader adoption. At the same time, we've heard or we've been told road maps from another very big customer in the data center modules that we can expect more hybrid bonding adoption going forward. So that is why we make the statement that we see accelerated and broader adoption. Also the number of customers. Remember, a quarter ago, it was 18. Now we are at 20. So on the logic front, the adoption is broadening and increasing. Didier Scemama: Okay. Makes sense. And then on the HBM front, I think you mentioned that you had repeat orders from, I think, a memory customer. I think that customer, if I understand correctly, was the one sort of in sort of final trial phases for HBM4E 16-high adoption. And I think he was expecting some form of results in shipping those samples to their large customer. Is that validation of your view that HBM 4E is the really insertion point for hybrid bonding? And any idea as to the volume opportunity there? Richard Blickman: Well, the, let's say, evaluation programs, the customer engagement end customer has also increased very well in this first quarter. That has resulted in several more orders. And if all goes well, that should lead to mainstream adoption for certain HBM devices. It's still following the time line, which we have understood that this year will be a major qualification year. And then based on the success of the qualification, setting up production capabilities towards the end of this year for mainstream volume production in '27. That road map stands, and it's being supported ever more by orders by publications in the public domain of the progress. Also, one of the end customers is very clear also on their website on their adoption strategy of hybrid bonding for HBM. So that pace has picked up in the quarter. Didier Scemama: And just a final question. I think last quarter, you said that the rule of thumb was 150 hybrid bonding system deployed by logic customers that will mean the TAM for HBM could be 600. I mean anything that would sort of make you change your view either positively or negatively? Richard Blickman: No, that still stands. So if you compare a capacity of 50 bonders for logic and you simply look at all these beautiful websites and materials about building these 2.5D modules, you can easily see a processor surrounded by 3 or 4 memory stacks. And that explains you already one ratio. The other ratio when you have 16 dies in a stack, you need to do it 16x as opposed to 1 logic device. So you need much more capacity for HBM than you need for logic. But that has always been the case. So the rule of thumb is intact and also supported by customers demonstrating capabilities. One of the interesting recent documentation from TSMC is about the advanced packaging road map. And I invite everyone to look at that, published on CNBC. Operator: The next question comes from Alexander Duval from Goldman Sachs. Alexander Duval: Congrats on the strong orders and progress on hybrid bonding. Just wanted to ask a couple of regional questions. Firstly, when we look at the regional trends, it looks like U.S. was comparatively low relative to some other regions. So just curious to what extent it would be reasonable to expect an increase in the coming quarters as hybrid bonding orders for logic expand beyond your Asian customer base and into the U.S. customers? And then secondarily, understanding on China, it looks like robust orders there. I wondered if you could help delineate what are the key factors that were driving this? Richard Blickman: Excellent. Well, U.S. currently at the levels where it is. Remember, we had a big round for the initial capacity for hybrid bonding received already about 1.5 years ago. And that capacity is being filled in, is being qualified, is being tested. And based on the results of that customer, one can expect more bonders to be required or not. So that success is depending upon customer adoption. At the same time, we have the onshoring programs, one from TSMC to the U.S., one from Amkor, also Micron. And if all goes well, one can expect a shift from capacity built in Asia to more capacity onshore in the next years to come. What we heard is that in the next 2 years, so '26, '27, preparation, building fabs and then as of '28, volume production. We are, of course, engaged in those programs. And timing, again, is according to those customers' information, volume production as of '28. And your second question about China, yes, there are several robust orders from Chinese-based customers. Number one, what's hot is the 2.5D CoWoS-like capacity expanding at the same time, photonics, all the pluggables and also a recovery in modules for high-end smartphones, so mobile, and carefully tide turning for industrial automotive. So that's the picture of China. But I can also share that more and more future capacities are built outside China. So you see more in Malaysia, Philippines, Thailand and also coming up more strongly Vietnam. And that's where we have our facility building currently tools by the end of this year, the first bonding system, not hybrid, but epoxy bonding. And then you see a market opening up in India. Five major customers are setting up production capabilities for mid- to lower-end devices, mostly power right now, but also modules for high-end smartphones and also other devices more in the mid-market applications. So China, although you have to segment also a China local market, which is also expanding, but the non-Chinese manufacturing in China, you see a clear change to countries outside of China. Operator: Our next question comes from Ruben Devos from Kepler Cheuvreux. Ruben Devos: I just had a follow-up on the second memory customer regarding the 2 evaluation tools. Just curious around your thoughts, whether you could help us understand a bit what they're testing at this stage? Like is this a full sort of tool of record type of evaluation? Or is it more of a focus qualification around the specific application, more configuration? And how would that conversion maybe from evaluation to pilot lines look like in terms of time line? Richard Blickman: As I mentioned, the time line is '26, '27, '26 development, setting up certain pilot, although small volumes for end market qualification purposes and then more production expected for mainstream market adoption '27 onwards. Ruben Devos: Okay. And that would be a full tool of record type of evaluation, right? Richard Blickman: Yes, of course. Ruben Devos: Okay. And then just a second one regarding agentic AI. I think we've been hearing about agentic AI as a strong driver at the CPU level. Just interested to hear your thoughts whether that would have a different packaging intensity versus maybe the cycle that has so far been GPU-led? Also, have you seen any shift in the approach of your U.S. logic customer on advanced packaging with you in recent months? Is that CPU angle showing up in discussions? Richard Blickman: No, not in those details. I can't help. Ruben Devos: Okay. And just a final one. I mean, I think about like 6 weeks ago, there was some chatter around the potential relaxation of these JEDEC thickness standards for 20-high. I mean they were talking about moving from 775 micron towards 825 or even 900. Yes, of course, curious how you read those discussions? And has that changed the conversations you're having with your memory customers at all? Richard Blickman: No. First of all, it does not change the advantage of using a hybrid process over a reflow process. The benefits are more and more demonstrated that you have a faster circuitry, you need less power and that means less heat. The only reason we understand that this height should be available is for a process for 1 of the 3, which simply requires that height. The other 2 are not impacted by that change. So as we said end of February already with our year-end numbers or third week of February, and that is confirmed in the rest of this quarter, we see an increased engagement and activity and also announcements, and again, look at the Samsung website about hybrid bonding for HBM. That has not changed the adoption pace or rate of adoption because of the benefits. And you could also add those benefits are every day more proven in the logic application. And you see a broadening adoption, higher volumes, pulled in capacity requirements. So that supports also the adoption of hybrid bonding in HBM stacking. Operator: The next question comes from Charles Shi from Needham & Company. Yu Shi: First off, really congrats, Richard. I think hybrid bonding has been a 10-year work for you and for the company by now and glad to see it finally coming into fruition. But I have a few very important clarification I want to make with you here. You said the 2 evaluation units is going to a second memory customer, but I thought you already have 2 memory customers. So is this actually going to the third memory customer? Richard Blickman: No, you're right. We have -- we had 2. One is the U.S. and one Korean who started in a lab to develop a similar hybrid solution already 2 years ago, I think. But the change is that they have moved this to the forefront. So -- and that customer has 2 applications, one is logic, the other one is HBM stacking. So on the memory front, adding the third one, we now have all 3 who have our hybrid bonders to further evaluate and define the adoption of hybrid bonding for HBM stacking. Yu Shi: Got it. So the time line you provided to a previous question regarding that customer who just took your 2 evaluation units, 2026 qualification, 2027, maybe transitioning into production. Is that still the right time line to think for that -- I mean, the third memory customer who actually came in a little bit late? Richard Blickman: Well, the time line is '26. And as we explained several quarters, that has not changed. The first customer aiming towards the mid of this year, June, July. And the second one, a bit following behind, which could be end of Q3, Q4. So that will determine the adoption of volume for '27. Yu Shi: And the third customer? Richard Blickman: The third customer is ready to go, but they are all evaluating along the same, yes, let's say, parameters for one specific end customer. The whole world knows. That customer has invited all 3 to have these hybrid bonded stacks available by the end of '26 to be used in end market applications in '27. Yu Shi: Richard, that's very encouraging. So maybe I want to ask you one more question on the memory evaluation in general. We know your leading foundry customers sticking with the stand-alone tool configuration. But what's the landscape there for your memory customers between integrated and stand-alone? Which route do you think they are going to -- going after? And one of the very frequent questions I got from investors is whether there is any difference in terms of the economics, in terms of the revenue dollars you get from integrated tool setup versus a stand-alone on a like-to-like basis, meaning same configuration, same customer, are there any difference? Richard Blickman: Excellent. I'll start with the dollar numbers first. So we sell bonders and AMAT sells Kinex automated lines. And they both have a sales value. And the extra which you have is the handshake between the bonder and the Kinex tool. Customers currently, and we have shared that several times, and you also said that in Taiwan, still the overwhelming majority is stand-alone because of the initial phase where we are in. So you have multiple customers, different die sizes, different process requirements and for flexibility reasons, that customer uses stand-alone. It's undisputable that in an integrated line, you achieve better process requirements, particles, also timing between the steps and the integrity overall of die-to-die and wafer-to-wafer. Those advantages are used in front end for over 3 decades in the so-called cluster tool concepts. So the industry is evaluating the 2 aspects. Number one is the hybrid bonding process. And number two, what is the best total solution to produce devices using hybrid bonding. And as we all know, the hybrid process is very sensitive to particles, so 0 particle requirement. And by definition, in an automated line like the Kinex, you can achieve the best process environment specifications. So the verdict, you can say, in a way is on the one hand, towards high-volume production of specific devices with minimum changeover. Once you have more changeover and you require more flexibility like the Taiwanese customer, at this moment, that is still in stand-alone. But that is very likely in the future to change to an automated line concept simply because of process requirements. But for us, back to the dollars, it doesn't make the difference for the bonder. The bonder has a certain value, cost of ownership value, and that is the same stand-alone compared to integrated in a line. Yu Shi: Richard, if you want to make a call today for HBM, is it more likely to be integrated or stand-alone? That's the last question. Richard Blickman: Integrated because HBM is dedicated for high-volume production. And then it's more likely to do that automated than stand-alone. Operator: The next question comes from Robert Sanders from Deutsche Bank. Robert Sanders: Just a question on HBM again. Can you talk about the yield numbers that you see at the moment in development? And what does the end customer need to see in terms of yield before they go ahead, whether it's the memory guys or the end customer? And the second question would just be, is this going to be a partial transition at HBM4E if all things go well? Or would it be a wholesale transition? I guess the reason I'm asking is because there's a lot of installed TCB capacity that the companies would continue to like to reuse. So I'm just interested to think it will be a sort of binned chip. So only the best chips will be hybrid bonded and the rest will be used TCB and then maybe at HBM 5, it will become a full insertion? Or do you think it could be quite rapid? Richard Blickman: Excellent. Thanks, Rob. Number one, what we hear is clearly, and this is forever. There's always a quality difference over a wafer on certain devices. So you could, like we've had historically, end up with quality classes, the highest and hybrid bonders, et cetera. On your yield question, we do not receive detailed yield numbers. But what we know as a rule, if a process is not well up into the 99.9%, then it becomes a very difficult long-term perspective. So yields in interconnect are at those levels. Where are we today? Well, we should be able to achieve those levels. Otherwise, it would make no sense to do these evaluations and qualifications. So the confidence is certainly that we should reach those levels. We reached them, as we all know, with logic already quite some time where the yields are very well up in the 99.99-something percent. So the hybrid bonding process can achieve that. And for HBM stacking, one still has to prove that and that's what's currently happening. Is HBM more difficult than logic? On the one hand, you have far less I/Os, so it should be more simple. On the other hand, you have vertical stacks of 16 devices. They are per definition thinner. So the process is different. And in certain ways, on the one hand, easier than logic because bond pad pitch is less critical. But on the other hand, the vertical stacking. So they both have their specific, let's say, issues to deal with. But again, coming back to why are these customers, all of a sudden, and which we expected from the very beginning, putting far more effort into the adoption of hybrid bonding is simply because the proven performance upgrades are driving that adoption by an end customer and that's a very big customer. Robert Sanders: And any idea when the TCB market could see a downturn because of this in memory, for example? Richard Blickman: One should see. If you would imagine a certain volume to be produced, it will be less TC if one uses hybrid. So that's an offset in the same end volume. We should see that by the end of this year or as we have said already in the middle of this year, we should see more confirmation from the Samsung side. So in the end, it's the number of devices produced and whether you use Process A or Process B results in a different number of machines. Operator: The next question comes from Martin Marandon-Carlhian from ODDO BHF. Martin Marandon-Carlhian: My first question is on hybrid bonding use in GPUs. I mean the biggest GPU vendor did recently some aspect of their design for their next GPU coming out in '28, saying they would use 3D stacking. So first, do you expect it to be hybrid bonded? And second, if that's the case, when do you think you will have visibility on the timing of the ramp-up? And I have a follow-up. Richard Blickman: Excellent. Well, that's exactly one of the major game changers, and it is forecasted to be hybrid bonded. So that all fits into the acceleration, which we explained at the very beginning, anticipating on the adoption of hybrid bonding in that family of next-generation products. And the timing for that is more equipment to be ordered and installed in '27, ordered in '26 for volume production as of '28. Martin Marandon-Carlhian: Okay. Great. And a second one would be on the chip-on-panel packaging. Do you think that the shift to square panel could somewhat open new opportunities for TC Next or hybrid bonding? Richard Blickman: Well, the 310 x 310 panel is a very clear development coming to market also in the next year and 2 years. We already received orders for certain applications. So our bonders can handle the 310 x 310. Hybrid is a bit early, but we see it for many other applications being anticipated because it saves quite some waste. And you can expect with larger die sizes more module type of designs, 2.5D, but even more 3D. That panel will be used as a carrier more and more. So that trend is clearly visible. We will share some more information on the Capital Markets Day or Investor Day mid-June to give you some more examples, but that is certainly happening. Martin Marandon-Carlhian: Okay. Great. And the last one for me, just on the cost for change. I mean the guidance for the next quarter is OpEx up around mid-single digits sequentially, while sales are up 30% to 40%. So can you share a bit more color on what you did there to maintain that kind of discipline on OpEx, that would be helpful? Richard Blickman: Simply, it's controlling costs. That's our job. No, but there is no change as such in our structure. But with increased revenue, you have an enormous operating leverage, if that is also your question. Operator: Our next question comes from Nigel van Putten from Morgan Stanley. Nigel van Putten: I've got a question on photonics actually, even before moving to co-packaged optics. I think you're already seeing quite a wide range of applications in terms of your tools like hybrid bonding. I think TCB, flip chip and multi-module attach can all be involved here. But in terms of sort of focusing on the near term, so actually before CPO, are you already seeing more of a benefit as the market moves to silicon photonics and also and/or, I guess, higher throughput pluggable devices? Yes, that's my first question. Richard Blickman: Well, as we have reported, started middle of last year, a significant expansion of that market segment with multiple customers building those pluggables. And also in the pluggables, you have the next generation, which requires more bonding steps. So that unfolds in a very positive way for us. You see that also in the numbers and the details we provide. You should not mix that with co-packaged optics because that's another application and a different process. Also on that co-packaged optics, we have made significant progress. And for instance, the COUPE process, we delivered the hybrid bonding for accomplishing those kind of contacts. Also there, we will spend more details on background and development road maps in the Investor Day. But again, it's certainly an extension of the hybrid bonding applications into this rapidly developing market. Nigel van Putten: Helpful. Sorry, go ahead. Richard Blickman: Sorry, does that answer your question? Nigel van Putten: Well, I had a follow-up, but I'll wait until the Investor Day then I look forward to receiving more detail. I want to ask my second question on order intake, which has clearly been very strong last 2 quarters. I know you don't really disclose the backlog, but I calculate around EUR 400 million by March end. So that seems you could do with some digestion on the order side while still growing revenue very comfortably. However, on the other hand, I presume the backlog is for a narrower set of applications around 2.5D and hybrid bonding, while you're also now flagging mobile and automotive picking up. So essentially, how should we think about order intake in the current quarter relative to the last 2? Richard Blickman: Well, we mentioned continued momentum, a continuing trend. Don't forget, we are in an up cycle and up market. So as long as there's no signs of saturation in the end market, you can expect that to continue. We have been able to ramp our capacities in past up cycles significantly, 50% quarter-on-quarter. You see that now again ramping as well. So that's as much as we can. Yes, so far this quarter, we have seen no change. Operator: The next question comes from Nabeel Aziz from Rothschild & Co Redburn. Nabeel Aziz: I just had one on your service business. You talked about raising your presence in Taiwan and Korea for your service professionals in terms of preparing for greater hybrid bonding shipments. Have you seen a pickup in recent quarters in your service revenues in 4Q and in 1Q? And how do you see that trending through this year? Richard Blickman: Well, certainly, number one, when the tide turns positively, clearly, customers' production lines are loading and they need more support, they need more spare parts, they need more service, upgrades. And then for hybrid bonding, but also for certain refill processes, you need more specialized support to reach the 24/7 production requirements. And that simply is following a model used in front end where, within 4 hours, a defined list of spare parts for hybrid bonders that is close to 900 need to be available. And that's all in place. So you see a broad increase in the demand of service spares and retrofit kits. Nabeel Aziz: Okay. Yes. That's very clear. And I think on -- in recent years, your service revenues have been pretty stable around 15%, 16% of group revenues. So as we look forward with a greater proportion of hybrid bonding in the mix and your hybrid bonding installed base growing, should we expect the service intensity to reflect more a front-end mix kind of towards 20%-ish range of group revenues? Richard Blickman: Absolutely. So what I just explained in a few words, the level of support we have to provide to hybrid bonding front-end type of environment is significantly higher than in the back-end environment. So that 15% may very well move up towards the 18%, 19%, 20%. For front end, it's typically somewhere between 20% and 25%. Also the long-term contracts in service and support are standard in front end. So that increases and changes the model altogether. Nabeel Aziz: And then just last one. So yes, on a margin perspective, do you see the greater requirements being either a headwind or a tailwind to gross margins? Richard Blickman: A tailwind, certainly a tailwind. So support is certainly, if you organize it right, of course, but that's with everything, is potentially a higher-margin business. Operator: The next question comes from Martin Jungfleisch from BNP Paribas. Martin Jungfleisch: Congrats on the strong results. The first question is really on capacities and lead times. In the press release today, you talked about freeing up incremental capacity in Malaysia. Can you just disclose what your current hybrid bonding capacity is in terms of tools per month or year and where the expansion could potentially get you to? And also, if you could provide some updates on lead time for hybrid bonders now that the order momentum is picking up quite a bit? Richard Blickman: We were at 15 bonders theoretically per month. So that leads to about 180. With the increase in floor space and adjusted to a model required by several customers, we can now expand that to 250 per year. So that is a significant increase altogether. You won't see that for the number of bonders produced in the year, but how typically orders are placed and expected delivery by customers with a lead time for now the 100-nanometer of 6-month standard. We can satisfy any model presented to us by the big 5 using the current expanded capacity. On top of that, you need more people in the field to install to support. I mentioned earlier the spare part model supporting operations. We have put that all in place. So the infrastructure needs to be ready to support that higher volume as well. So it's not just the production floor, but that is all part of our overall model, the EUR 1.5 billion to EUR 1.9 billion in the next 3 to 5 years, which is a prerequisite to support organization for growing revenue to those levels, which is roughly 2.5 to 3x what we have currently. And for the hybrid bonders, it's significantly more. Martin Jungfleisch: Right. And the other question is mainly on EMIB from Intel. There's a bit of news flow on increased demand for Intel's EMIB packaging. Can you just disclose like what kind of relevance this business has for you and what kind of your prospects are, where you think this could go to in the future? Richard Blickman: We are involved since the very beginning in placement of these EMIB modules that could be a positive business impact. But as things with Intel develop as they do, we first need to see more evidence. But they have a significant capacity installed, which we delivered the systems placing those modules. But it's good news when it increases. Any next question? Operator: We have time for one more question. The last question comes from Madeleine Jenkins from UBS. Madeleine Jenkins: I just have one quick question on China. I know they're building out a lot of capacity at the moment on 2.5D. I was just wondering on 3D or hybrid bonding. Are you in any discussions with them about this technology? And are they indicating that they might order tools kind of in the coming years? And when would you sell to China that equipment? Richard Blickman: Number one, we only sell to China, what we -- and it's with any country, what we are allowed to sell. So we follow very strictly the regulations in this case, by the U.S. government, and we have that tested every 6 months. And we are allowed simply with the current levels and the current ingredients in the die bonders and in the hybrid bonders, it's not much different. So that is open for use in the China market currently. There's, of course, development going on and applications are still distant. There could be a philosophy to use hybrid bonding in 3D stacking to lengthen the node size life, so to increase the performance of those devices with a 3D hybrid bonded structure. We are, of course, in development of those kinds of modules. but that is still in very early stage. So the current big market in China is 2.5D mass reflow flip chip for us, which we also disclosed in previous quarters, which is more or less standard equipment, but very, very much advanced. Our flip chip has absolutely the best cost of ownership also in China. But you can expect that they will develop certain local Chinese device structures using a hybrid process. Madeleine Jenkins: Perfect. And just on that, so in terms of timing, is it a few years? Or obviously, China, they do things very quickly over there. So could it be sooner than that? Richard Blickman: Yes. They are -- as I just said, they are engaged in development, also very aggressive in a sense, in positive sense to study carefully the benefits of a hybrid process. They are much more driving that. And it's also very easy to understand. The world outside China is very much trying to extend the life of a mass reflow process because we all know those processes. So the hurdle to move to hybrid takes time. In China, it is more because they can overcome that they are not allowed to invest in the next generation with smaller device geometry so then to solve that using hybrid process, which could be a very significant market. Operator: Thank you. And with that, I will now turn the call back over to Richard Blickman for any final remarks. Richard, go ahead. Richard Blickman: Well, thank you all for taking the time and asking questions. You're most welcome if you need to understand some more details, we're happy to provide. Thank you. Bye-bye.