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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.
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.
Operator: Hello, everyone, and welcome to the Bancorp Inc. First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Andres Viroslav. Please go ahead. Andres Viroslav: Thank you, operator. Good morning, and thank you for joining us today for the Bancorp's First Quarter 2026 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Dominic Canuso, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There'll be a replay of the call available via webcast on our website beginning approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 1 (800) 770-2030 with a passcode of 9545117. Before I turn the call over to Damian, I would like to remind everyone that our comments and responses to questions reflect management's view of today, April 24, 2026. Yesterday, we issued our first quarter earnings release and updated investor presentation. Both are available on our Investor Relations website. We will make certain forward-looking statements on this call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we'll be referring to certain non-GAAP financial measures during this call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are in the earnings release. Please note that The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian? Damian Kozlowski: Thank you, Andres, and thank you for joining our call today. The Bancorp earned $1.41 a share in the fourth quarter. EPS growth year-over-year was 18%. First quarter ROE was 35.1% and ROA was 2.57%. Fintech, GDV continues to grow above trend at 18% year-over-year. Revenue growth in the quarter, which includes both fee and spread revenue was 15% year-over-year. Our 3 main fintech initiatives continue to move forward quickly and are well positioned for success. Our onboarding of new programs and expansion of current programs continues at pace. Cash at program has been launched. It will ramp up during '26 and '27 and show progressive accretion to our financials. Credit sponsorship balances soared in the first quarter to $1.65 billion, a 50% nonannualized increase over the fourth quarter of '25. As previously said, we expect to launch at least 2 significant additional programs in '26. Announcements are subject to our partners' marketing time lines. Embedded finance platform is close to completing the development of its first operational use case. We plan to announce at least one client in this area in '26. We also made continued progress in reducing our criticized assets, which includes both substandard and special mention assets. These assets declined from $194.5 million to $163.1 million, or 16% quarter-over-quarter. We expect more progress over the next few quarters. Lastly, we are maintaining our guidance of $5.90, EPS for '26 with $1.75 per share in the fourth quarter. Our expectation for '27 EPS is in a range $8.10 to $8.30. 2026 buybacks are forecast to be $200 million total and $50 million a quarter in '26 with '27 buybacks equal to near 100% of net income in the year. Our 3 major fintech initiatives, along with platform efficiency gains from restructuring and AI tools, plus a high level of capital return through continued buybacks, will be the driving forces beyond EPS accretion. EPS gains are subject to development and implementation time lines in fintech. I now turn the call over to our CFO, Dominic Canuso. Dominic? Dominic Canuso: Thanks, Damian. The first quarter builds on our momentum and strategy from 2025 and is setting up for a strong 2026. Ending loans for the quarter are $7.75 billion, which is a 9% non-annualized linked quarter growth and 22% growth year-over-year. Credit sponsorship growth accounted for 88% of total loan growth linked quarter and 83% of total loan growth year-over-year, bringing the segment to approximately 21% of total loans up from 15% prior quarter and 9% a year ago. Our strategy is to continue to shift the loan mix towards the higher returning lower cost credit sponsorship business. Average deposit growth was also a robust 9% non-annualized linked quarter fully funding the loan growth with an average deposit cost of 1.7% in the quarter, which was a 7 basis point decrease from prior quarter and 53 basis points lower than the prior year quarter. We also ended the quarter with $1.34 billion in off-balance sheet deposits comparing to $850 million at the end of the fourth quarter and $793 million prior year demonstrating the continued growth of our partnership-based deposit franchise, along with the strength of our overall liquidity position. NIM was 3.87% in the quarter, down 43 basis points from prior quarter and 20 basis points prior year's quarter. The decrease versus prior quarter is driven by both the mix shift in loans to credit sponsorship and the lagged impact of the lower short-term rates on variable rate loans. For some additional context on NIM, especially as we continue to mix shift loans towards fintech, our fintech lending fees are the equivalent to an additional 24 basis points of net interest margin. In addition, given the volume of off-balance sheet deposits, we generated from $900,000 from deposit sweep fees, which is recognized in other income, which equates to another 4 basis points of net interest margin. Noninterest income mix, excluding credit enhancement, was 33% compared to 30% in the fourth quarter and 29% in the first quarter of 2025. Fintech fee revenue is 29% compared to 27% for both prior quarter and prior year quarter. It is important to note that the growth in the credit sponsorship loans that we saw in the quarter is a leading indicator of fintech fee growth, both in the lending fees and higher transaction fees due to the higher volume of churn in that portfolio. Regarding credit, we continue to see improvement in both our current and leading credit metrics with particular note in REBL and leasing. REBL criticized loans are down $24 million, or 29% to $59 million from prior quarter and down 75% over the last 18 months. When excluding fintech credit sponsorship loans, which are supported by full credit enhancement, our traditional lending portfolio saw a provision reversal of $1.3 million, even as the traditional lending portfolio grew in the quarter. The release of reserve was primarily driven by specific reserve reductions in our leasing portfolio that were established in the third quarter of 2025 as positive progress continues to be made with those borrowers. Noninterest expense for the quarter was $55 million with an efficiency ratio of 41.5% when excluding the credit enhancement revenue. We continue to invest in the fintech platform, including building out embedded finance capabilities along with launching new products. At the same time, we are leveraging AI and refilling costs across the organization to continue to improve efficiency and allocate resources to support our fintech initiatives. Operator, you may now open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Joe Yanchunis of Raymond James. Joseph Yanchunis: So with your 2026 EPS outlook reiterated. Can you talk a little more about your embedded finance offering and this initiative's impact on 2026 results? I mean, how long will it take to onboard this first partner after announcement? Obviously, partner delays are a thing in this space. I just was hoping to get a little more color on that from your end. Damian Kozlowski: Yes. We have very little revenue for embedded finance in '26. We have more in '27. But you're exactly right. We're likely to announce at least one partner. It does take a while to fully build out the capability, depending on what the use case is. It could be very limited or it could be very broad. So that impact of embedded finance will really be fulfilled in '27 and '28. So very little revenue is in our own plan for '26 for embedded. Now we do have revenue in there for continued sponsored lending growth and for a potential announcement around 2 new partners. So that has more of an impact than the embedded would on our own budget. Joseph Yanchunis: Got it. That's helpful. And in your prepared remarks, you discussed some metrics behind your off-balance sheet deposit in that strategy. I mean, how should we expect this to evolve over the coming quarters? I assume the amount earned per deposit is based on the individual deposit costs and correct me if I'm wrong there. But will the biggest driver of revenue growth from this be moving more deposits off balance sheet or getting better economics for deposit? Damian Kozlowski: It's both, right? So over time, we take the higher cost deposits off the balance sheet. And we do, depending on the program that we're taking off the balance sheet, we may get some spread on that, right? It's in our own forecast, that's a small part. It's basically gravy. And the way we look at our own forecasting over the next 3 to 5 years, it wouldn't be as we grow the other parts, the main initiatives, that's literally gravy on top. It's not a big part of our own planning. And they're volatile, right? And it depends on the program. But they will grow. We'll have forced lower basis points on what we have to pay out as we take more higher-yielding deposits off the balance sheet. And in select occasions, we will get some spread on transferring those deposits through our network to other banks. Joseph Yanchunis: Okay. I appreciate that. What about the Aubrey? What are your current thoughts on the timing of selling that property? And has your expectation around the sale price changed given the recent softness that we've seen in rent prices? And then additionally, has there been any thought on redeploying those proceeds into share repurchases? Or will you just accrete that capital? Damian Kozlowski: Well, we're going to return 100%, as we've said before, of share buyback from our net income until we get a multiple that we think is appropriate for our ROE and growth. So that -- whatever we get in net income, we'll distribute back to shareholders through buybacks. But Dominic can give you a good Aubrey update. Dominic Canuso: Sure. Yes. So we're continuing to invest in the property to increase the occupancy rate as we -- the occupancy rate of variable rooms has been 80% even as we doubled it, and there are plans to continue to finish the remaining 50 units that need to be upgraded. We're just over 60% of occupancy on a total unit basis, and we expect to hit near 70% in the very near term. We expect the property to be operating breakeven by the end of this quarter. So its impact to our financials should be neutral. And we've shifted a bit given the significant progress and success in the continued occupancy from just removing it from the balance sheet to actually getting it to a stabilized valuation, which may take a little longer, but ultimately result in better economics for the bank when we exit. Joseph Yanchunis: Okay. That was helpful. But I actually just want to kind of dig into something that you said, Damian. So I was under the impression the guidance implied $50 million of share repurchases per quarter in '26 and then you returning 100% of net income or putting up -- the buy back 100% of net income in '27. So would that mean if you sold the Aubrey does that mean you're going to sell the Aubrey in 2027 kind of based on your answer? Damian Kozlowski: We're looking to -- I think we'll be totally full if we're going to go to stabilization. That would probably be a first quarter next year event. We have -- there's close to 50 buildings on the property, right? And there are 9 left, and we're reconditioning those 9 buildings over 3 phases over the next 9 months. So if we get the stabilization probably would happen occur at the end of next year, where stabilization is in the high 80s, low 90s. And then we would be able at least to get, obviously, our basis covered, but the appraisals are in the low 50s. So -- and if we were to monetize, it would be a rounding error to our buyback. If we're looking at our buyback, we're a little bit less than net income this year because we did so many buybacks last year that we're just building a little bit of extra equity into the end of this year, and then we would return 100% for the foreseeable future, we think, depending on the multiple. So the exit on the Aubrey, if stabilized, if someone doesn't come in and just write a check. But our current intention is to fix those 9 buildings, get it up to high 80s, 90 and then monetize it at this current time because we've done so much work already. Joseph Yanchunis: Right. Okay. Great. And then one last one for me here. How much of your balance sheet are you willing to dedicate to credit-enhanced loans over time? Damian Kozlowski: All of it? Joseph Yanchunis: All of it, okay. Damian Kozlowski: Credit enhanced or credit sponsored loans. Which one do you mean? Joseph Yanchunis: The credit sponsored loans, the one that... Damian Kozlowski: I thought that quite meant. So there's 2 parts, right? There's credit enhanced loans and then there's also loans that we might do that are distributed or we might take parts of bigger origination, slices of it, right, and keep it on the balance sheet. But of the sponsorship loans, I mean it's possible when we're looking at our pipeline, that will be a much bigger part of our business. Now that's over many years. So we're going to -- and many -- remember, many of our businesses like SBA, the real estate business, which we have distributed before, are fairly liquid assets. The same is true with the demand loans on the institutional. So this is a multiyear thing, and it really depends on the programs. Chime is a very unique situation where we're using a lot of balance sheet. That's very unlikely to happen. There will be some balance sheet used for future programs. Some might be bigger than others. Chime is a very special case. So this is a very -- when we look at our APEX 2030 strategy, we might -- originally, we were thinking 10%. And then we thought more like 30% or 40% of the balance sheet possibly in the next 3 to 4 years. Operator: Your next question comes from the line of Manuel Navas of Piper Sandler. Unknown Analyst: This is Grant on for Manuel. I just wanted to ask, could you talk a little bit more about the shift in LLR for fintech loans that was -- came in at 1.81% this quarter and was 2.84% last quarter. Could you just talk a little bit more about what drove that shift? Did you do more secured credit cards that require less... Damian Kozlowski: So the economics, I'll let Dominic handle it. The overall economics, the NIM of the entire program because it's in different places of the balance sheet, and we fund it with noninterest-bearing deposits is around 3% NIM. But the whole portfolio of products if we take a look at all the economics. That -- and the cost structure on that is not traditional lending, right? So you're not supporting it with origination and all the things that you would on a traditional business. So -- and it's credit secured. So we're getting -- the whole economics of the portfolio is around that would move up over time potentially with different product sets. And I'm only talking about Chime. But Dominic, do you want to dig a little deeper? Dominic Canuso: Sure. Grant, to your question, the secured product did outperform the growth in the quarter. And so there was a mix shift towards that product, which does have a lower loan loss reserve relative to the other products. But across our product, continues to improve, as you can see in those metrics as the performance of customers along with the growth demonstrates the growth potential of the programs. Unknown Analyst: Understood. And I also wanted to ask what is kind of the pace of fintech loan growth from here? I see the goal was $2 billion by year-end. You're now at $1.67 billion, and you were at $1.1 billion at 4Q. How does this adjust other metrics like fee income or NIM? Dominic Canuso: The success in the quarter, we're very pleased with, and I think outran our internal expectations. It does not change our full year targets or expectations. I think what it does is demonstrate the strength of the balance sheet. We'll see in the near term, along with the fees that we anticipate from the churn, particularly in that higher volume portfolio. So overall targets remain the same. I think there was just a little bit of a pull forward of volume that we anticipate, which is very positive, and we're excited to see. So it just means that the balance sheet will be a little higher earlier in this year than originally expected. Operator: Your next question comes from the line of Timothy Switzer of KBW. Timothy Switzer: So Damian, you mentioned in your opening comments that the new cash program has launched and will ramp up over the course of the year. And it looks like we saw some acceleration in GDV. Was there any contribution at all this quarter? Damian Kozlowski: No, very little. No. So very little, right? So our partners are very -- they're meticulous when they launch these programs in solar way. So we go through a long testing phase. And then you start -- we're in the full I would say, turn the dial stage where everything is set. We're watching you have incremental kind of gating issues. So we've already passed the first gate, and we're ready to start turning up the dial. So a lot of work has been done. Like I said, that by the end of the year, it should be fairly meaningful to our financials. So all predicated on the time lines, right, of that gating. It's going very well so far, but things can -- I think it's going to be good. So you'll see that dial turned up through '26 and then especially through the first part of '27. So everything is going well. And I think all the -- us, our partner are all pleased with the implementation. Timothy Switzer: Awesome. That's great to hear. So it sounds like the real acceleration, like an inflection point kind of occurs in the beginning of '27. Damian Kozlowski: Well, it will ramp up this year. It will start being meaningful. When we talk about our own forecast with our programs, we see a bump in the fourth quarter. That's part of the bump, right? It's not embedded finance like we were saying before, but that is -- it's definitely the Chime lending, it's definitely Cash App, other programs that we will announce other lending programs. We'll also announce other lending Banking-as-a-Service programs over the course of the year. And all those things will start meaningfully contributing by the end of this year, but then '27, there will be multiple things ramping up together, which will really lead us into that '27 guidance that we have. Timothy Switzer: Okay. Nice. And so you talked about this earlier with Grant's question on the 3% NIM. But I'm not sure if that was just the secured card or all the fintech loans. But could you kind of help us -- the economics? Damian Kozlowski: Yes. The reason I said that is because I just wanted to give the -- there's a lot of confusion because it's a different -- it's -- we don't break it out separately, and it's in total economics, right? So we're funding it, right, with noninterest-bearing deposits, right? There's multiple different products. There's 4 and it's growing, different products. But if you look at the entire economics of it today through the Bancorp, right, it's around 3% NIM for us, right, because it's obviously being funded. Timothy Switzer: Card or all of the fintech. Damian Kozlowski: That's everything together. We don't give independent economics, but the blended economics that's about what it is, right? That potentially will grow over time depending on the product mix. And it's a very -- I think it's incredibly synergistic for both us and our partner. I think it works for us -- for both of us. The programs have grown. Obviously, it's been a great source for revenue, but also of relationship deepening for Chime, and we're trying to support their initiatives by using our balance sheet. Now that's -- once again, that's a very unique relationship. I'm not saying that we will have -- like we do with Chime. That's very unique where we have a very deep relationship with them, obviously, for the issuance of their cards and new products and now their lending products. So we look at the entire economics of the relationship. That 3% doesn't include obviously all the interchange, our part of the interchange that Chime originates. So... Timothy Switzer: On the secured card? Damian Kozlowski: No, not on secured card. That would be in the -- if you look at all the products, the lending product that we we're talking about all products, right? So any of their products where there's interchange involved, we get a portion of that. Plus obviously, they have deposits that are sitting in the bank that are in excess of the noninterest-bearing deposits. So some of the saving deposits, some of those are off balance sheet. So I would say there's the lending part where if you add all the economics together, it's around 3%, right? But it also has -- it's secured, remember, it's credit enhancement. right? Then separately, there's a whole stream of revenue. Obviously, that's appears of fees that's only linked to interchange. And then the third party economics, there's other deposits that fund the bank, excess deposits that are rent out that provide deposits to the bank, too. So that's -- it's such a broad, deep relationship that there's multiple revenue streams from the Chime relationship. Lending is just one of them. Timothy Switzer: Yes. Okay. I get that. And I'm getting a lot of questions about kind of the profitability on these loans because if we take the numbers that are, I guess, disclosed and we can directly tie to those loans, if I take the fintech fees and the interest income and then those average balances, it looks like it's an annualized yield of about 2.7% and it's pushing off these non-fintech loans yielding nearly 7%. And I know obviously credit risk, it's not a traditional loan where it costs as much to originate. Where are the -- and maybe just the broader part of that relationship with Chime, I know all of this ties together like you mentioned. But... Damian Kozlowski: Well, you're not that far off, right? So that's 2.7%, we're saying it's around 3% today, right, with the mix currently, right? But the cost structure is radically different. It's only a fraction of traditional, right? So you're getting a 3% NIM. And this once again is separate from the other 2 revenue streams. You're getting a 3% NIM, right? But it's a fraction of the cost of traditional lending, and it has no risk of loss. So think about that, right? So if you kind of -- that's like almost -- it's almost a bond, right? You can think about a 3% -- a short-term bond that's yielding 3%. And then you have all these other revenue streams that are coming off that, including increased spend. So if you think about it, we're lending money out to people that wouldn't have used it otherwise, and that creates interchange, right? And the velocity there is extremely quick, right? So we're talking about billions potentially every month that are going through those products, creating fees for Chime, obviously, but also creating economics for us. It's creating additional GDV spend. Dominic Canuso: Just to add, I think the most important part here is the fact that each partner has unique expectations and unique designs. And given the ability to generate deposits, generate transaction fees, whether it's debit or credit, parking loans on the balance sheet and potentially off balance sheet in the future for loans, off-balance sheet deposits that are excess or funding other programs with deposits, we believe the economics to the partner are where they need to be for them to invest and grow in their programs. And for us to see the returns on a total ROA and ROE basis that are accretive to where we are today, which is why we expect and intend to continue to shift the balance sheet towards these products. Timothy Switzer: Got it. All that answers my question very clearly. And in terms of like the velocity, can you maybe let us know what was the volume on the loans this quarter? Or how long are you holding these on the balance sheet on average? And then how might that change in the future, whether you guys change your strategy or these 2 upcoming credit sponsorship programs sound like they might be shorter duration. If you plan to transfer more securitizations, anything like that would be really helpful. Damian Kozlowski: It's hard to give you clarity on that because we haven't announced. There's a bunch of different use cases from wage access to longer-term installment loans. And we intend to do all those things, right? So we intend to provide some on balance sheet, probably not as much as our current relationship with Chime to other partners. We intend to securitize a lot of it, so you'll get incredibly high velocity. And you'll hold those loans from 3 to 30 days probably at the most. Usually, it's only a few days. It will be purchased back by the fintech partner and then securitized. And then there is definitely a situation where we'll be holding pieces of loans at a much higher yield, right? So loans that we like or if it's important to the product for us to hold -- excuse me, partner to hold a strip, we will, but those loans will be very, very high. So if you look at the NIM today, of The Bancorp where it is today, right? We're around 4% if you add back what Dominic was saying, the basis points and the fee that potentially could be viewed as interest, right? So it's not that different. We had some deterioration in our NIM. But if you add back the increased fees from this quarter versus last year, it's 12 basis, 13 basis points different in NIM. Your NIM is going to -- your net interest margin should go up over time, right, if you add back all those fees depending on the programs because you're going to obviously have pressure on deposits going down, right, because of our liquidity. So we'll take more high deposits off the balance sheet. And then when you look at these programs, the Chime situation is the lowest -- probably the lowest NIM situation you would have because all the synergistic revenue. So that, over time, once again, adding back potential fees from the line that we have that third line in our financials around fintech loan fees, plus you look, obviously, the interest is -- if there's any interest on those loans is already in our NIM calculation, that after this initial stage should start moving up, right? And then in many of these cases, because of velocity of loans, you'll be getting fees. And so you'll get effective yields, very short-term loans very quick. Many of them will be backstopped or securitized. So you'll have a conversion on the balance sheet from traditional nontraditional lending. There'll be less of a -- potentially of a traditional bank reserve -- these are the structure of these loans. The velocity will go up very high. And if you add back the fees on these loans, the NIM -- the effective NIM on these loans over time will go up. Now in the near term, they'll go down for the reasons that we stated on the Chime program, but that should turn around as we add new partners. Timothy Switzer: Great. Yes. I mean, that's really helpful. I mean, regardless of where the reported NIM goes, APEX 2030 ROA 4%, ROTCE at 40%, bottom line is moving up. Damian Kozlowski: Tim, just look at this quarter, we had a 35% ROE, look at our ROA, right? And if you consider the fact that we're going to be repatriating our equity, our equity stays the same. So any -- as we -- as our net income moves up, obviously, our ROE, ROA will continue to move up and our efficiency ratio is likely to move down. Timothy Switzer: Yes, that's great. Okay. Another area that has become a bigger and bigger opportunity in the fintech side of things for you guys is off-balance sheet deposits, which I think is down to $1.3 billion right now. Your press release mentioned $900,000 earned on deposit sweep in other income. Is that where all the revenue from your off-balance sheet deposits are reported? Just want to make sure I'm catching all the revenue. Damian Kozlowski: Yes, Dominic can answer that, but yes. Dominic Canuso: That's correct. That's where it's located. As Damian mentioned earlier on the call, first quarter is seasonally high just because of tax season. We do expect it to contribute, but it's probably a secondary or tertiary benefit from all the strategies we just talked about. Timothy Switzer: Okay. Yes, makes sense. I think on the last on this call, I got a few more, if that's okay. On the REBL book, good to see another quarter of improvement in the credit metrics there. Can you give us an update on how the maturities and refinancing within the REBL book are going right now? And one thing I'm looking at is the percentage of REBL balances maturing over the next 12 months declined meaningfully for the first time in a while in Q4, it's now less than 50%. Do you have that updated number for Q1? Because it kind of seems like they could indicate you're seeing less 1-year extension and more actual payoffs. Damian Kozlowski: Yes. So remember, we have great visibility. These are repositioning mostly at workforce housing, and they require works. So there's constant draws, right? We have reserves and everything. So we don't -- the reason that we had that bubble when we did was that because the origination period where we got back into the business, there were a lot of loans done at that time, right? We haven't -- we've maintained the portfolio, but that bump in -- that large bump in origination during that period that we resulted in classified assets has worked through the system, right? So those were the buildings that were having issues due to the supply shock, interest rate increases, sharp interest rate increases. So that bubble has gone through the system. So that's dropping because we just haven't had as many originations, right? So -- and if a project is completed, right, it's on plan and everything. Sometimes sponsors will want a year or 2, and that's built into our contracts, 2 1-year extensions and people take advantage of that sometimes. It's that both of our agreement and they're stabilized loans at that point, they may want to do an exit and they're not exactly want to do it at this interest rate. So yes, that -- the reason that was so high was because of that bubble. And that bubble is -- I don't know the exact maybe Dominic has that on his fingertips, maybe we can publish it in the future. But that is slowly working down quickly. Timothy Switzer: Okay. All right. That's helpful. And kind of related to that, it looks like the average yield on the REBL book has gone down from about 8.5% to 7.6% in the last 2 quarters. It seems like a pretty quick decline. Could you talk about the drivers there in terms of maybe what new loans are coming on at versus rolling off? And how much of that decline could be due to some of these extensions or modifications of that... Damian Kozlowski: Go ahead, Dominic, do you want to handle that? Dominic Canuso: Sure. Yes. Well, just as a reminder, 1/3 of that portfolio is variable. So you'd clearly see a step down with the short-term interest rate environment that we've seen over the past year. But to the point that you just spoke about, which was the vintaging -- that large vintage roll-through, again, they're on 311 contracts, many of which came to that second term and were either recapped or refinanced or sold out. Those recaps and refinances were at lower rates because they were at more stabilized values, previous investments, stronger investors. So those rates by the quality of the positioning of those loans brought down the rate combined with the variable rate environment. We do think we're at a good point now having worked through that large vintage bubble and with the lower rates that we should see much more stability going forward. You'll Continue to see loans rolling off in the low 8s and being put on in the mid-6s. So you'll see that natural portfolio churn. But that's just the interest rate environment we're in nothing more than that. Timothy Switzer: Okay. All right. That's helpful. And then the last one for me. Is there any risk or even opportunity from the proposed executive order on banks being required to obtain citizenship info? It seems like that would be a big lift for a lot of the fast banks given like the third-party relationships and how small some of these accounts are. And like on the opportunity side, would your prepaid card products be required to attain citizenship info as well? It seems like it could push a lot of people towards those sort of products. Damian Kozlowski: Well, that would be a very difficult thing to do since prepaid cards, every prepaid card, that would be every incentive card. That would be Cracker Barrel. I mean that would be a restaurant card, that would be very difficult. There are some -- and those deposits on those type of cards, in many cases, are not even insured deposits because you don't know who it is. We do have, I think, many institutions, we have fairly good information in that area if it gets implemented. If it becomes a requirement, everyone will have to do it, right? I'm sure there will be an implementation phase. There might be new accounts. All those things aren't clear at this time. So we can't really comment on it. But we do collect a lot of -- depending on the type of account and the use, there is a lot of already information like social security numbers and everything for many of our -- not of our clients, obviously, but of their clients that end up being deposits at our bank. So there is requirements already in place. And we -- right now, we don't know how that has to play out, whether that -- how that actually gets worked through the system. Obviously, the regulators, everyone -- it would be -- everyone would have to be involved and it would have to be implemented over long periods of time. Operator: I would now like to hand the call back to Damian Kozlowski for closing remarks. Damian Kozlowski: Thank you for joining us today, everyone. Operator, you may disconnect the call. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Good day, and thank you for standing by. Welcome to the First Hawaiian, Inc. Q1 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, we will have a question-and-answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager. Kevin Haseyama: Thank you, everyone, for joining us as we review our financial results for 2026. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, Chief Financial Officer; and Lea Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements, so please refer to slide one for our safe harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. I will now turn the call over to Bob. Bob Harrison: Thank you, everyone, for joining us today. I wanted to start by sharing our support for the communities impacted by the recent flooding in Hawaii from the Konololo storms and Typhoon Sinlaku in Guam and Saipan. It is really important for us to support our communities, and we are actively providing relief and support to help our customers and those affected in the relevant communities. Moving on to the outlook, the statewide unemployment rate remained stable at 2.2% in January. That compares to the national rate of 4.3% for the same month. Through February, total visitor arrivals were up 7.1% compared to last year, primarily due to more visitors from the U.S. Mainland and Japan. To date, spending through February was $4.2 billion, up 14.8% compared to 2025 levels for the same period. At this point, it is too soon to know how tourism and the local economy might be impacted by recent global events. The housing market remains stable with the median single-family home sales price on Oahu in March at $1.2 million, up 3.4% from the prior year, and the median condo sales price on Oahu in March was $510 thousand, up 2% from the prior year. Turning to slide two, we had a strong start to the year. Loans and deposits grew, credit quality remained solid, and we remained well capitalized. Our return on average tangible assets was 1.2% and return on average tangible equity was 15.3% for the first quarter. The effective tax rate for the first quarter was 22.5%. Turning to slide three, the balance sheet remains solid as we continue to be well capitalized with ample liquidity. We remain asset sensitive and well positioned to benefit from a higher-for-longer rate scenario. During the quarter, we repurchased about 1.3 million shares at a cost of $32 million. Turning to slide four, total loans grew over $128 million in the quarter, up 3.6% on an annualized basis. We had good growth in CRE and C&I loans, partially offset by runoff in the residential loan portfolio and payoffs in the construction loan portfolio. Some of the growth in the CRE portfolio and decline in the construction portfolio were due to completed construction projects converting to permanent financing. Now I will turn it over to Jamie. Jamie Moses: Thanks, Bob. Turning to slide five, we delivered solid deposit momentum in the quarter with total deposits increasing by $262 million, driven primarily by growth in public operating balances. Retail and commercial deposits were modestly higher and, importantly, did not experience the typical seasonal outflows we have seen at the start of prior years, which we view as a positive signal. Public deposits increased $244 million reflecting higher operating account balances. We continue to see meaningful improvement in funding costs with the total cost of deposits declining seven basis points to 1.22%. Our noninterest-bearing deposit ratio remained healthy at 31%, reinforcing the strength and stability of our core funding base. On slide six, net interest income for the quarter was $167.5 million, down $2.8 million from the prior quarter. Net interest margin was 3.19%, a decline of two basis points sequentially. This reflects the full-quarter impact of the December rate cut. As we look ahead, we expect the balance sheet repricing story to continue throughout the year. Turning to slide seven, noninterest income totaled $52.8 million for the quarter. The decline from last quarter was primarily attributed to lower BOLI income and swap fee activity, which we view as timing-related rather than structural. Noninterest expense was $127.9 million, and there were no material, unusual, or nonrecurring items in the quarter. Our expense profile remains well controlled and aligned with our full-year outlook. With that, I will turn it over to Lea to review our credit performance. Lea Nakamura: Thank you, Jamie. Moving to slide eight, the bank continued to maintain its strong credit performance and healthy credit metrics in the first quarter. Credit risk remains low, stable, and well within our expectations. Overall, we are not observing any broad signs of weakness across either the consumer or commercial books. Criticized assets decreased by 21 basis points, and nonperforming assets and loans 90 days or more past due were 30 basis points of total loans and leases, down one basis point from the prior quarter, resulting from a decrease in dealer flooring nonaccruals. Quarter-to-date net charge-offs were $4.9 million, or 14 basis points of average loans and leases, unchanged from the fourth quarter. The bank recorded a $5 million provision in the first quarter. The allowance for credit losses increased by just under $1 million to $169 million, with a coverage ratio of 1.17% of total loans and leases. We believe that we are conservatively reserved and ready for a wide range of outcomes. Bob Harrison: Thanks, Lea. Turning to slide nine, we have updated our outlook for key performance drivers. We continue to expect full-year loan growth to be in the 3% to 4% range. With the markets now expecting no rate cuts this year, we have revised our full-year NIM outlook to be in the 3.22% to 3.23% range. We expect second-quarter NIM to be up two to three basis points from the first-quarter NIM. Our outlook for noninterest income remains about $220 million for the year. Finally, we expect expenses to gradually increase throughout the year, and we continue to forecast full-year expenses will be about $520 million. That concludes our prepared remarks, and now we would be happy to take your questions. Operator: We will now open the call for questions. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Anthony Elian with JPMorgan. Anthony Elian: Great. Thanks. Jamie, on the outlook, the drivers of the two to three basis points sequential increase in NIM in 2Q—could you help us unpack that a little bit? What is driving the range for the full year moving higher, and is that entirely coming from no rate cuts this year? Jamie Moses: Tony, good morning. The right answer to that is the balance sheet repricing story that we have had and seen for the last year or two. Again, just to remind everybody, we have about $400 million of fixed-rate cash flows that come off every quarter and get repriced at about a 155 basis point spread higher on a weighted average basis between loans and securities. That is really the driver as we go forward. We still are an asset-sensitive balance sheet, so we will see a decline in NIM if there is a rate cut in any given quarter, then the balance sheet repricing dynamics after that will drive the NIM higher as we go forward. Anthony Elian: Thank you. And then on expense, you reiterated the outlook of $520 million for the full year, but I think 1Q came in a little bit lower than what we were expecting, which should imply a pretty good pickup over the course of the year. Is that the right way to think about it, and what are the areas driving the increase in expense? Thank you. Jamie Moses: Yes, it is going to be broad based in terms of the areas. Hopefully, we will get some more salary expense in there as we have talked about. We are looking to hire talented folks to come over and drive revenues for us, so hopefully that is where we will see much of that pickup. But generally broad based, and I think you are thinking about it correctly in terms of a little pickup and a ramp as we get throughout the year. Operator: Thank you. Our next question comes from Jared Shaw with Barclays. Jared Shaw: Morning. When you look at the growth, C&I growth has been pretty good. Any specific drivers underpinning that? And can you update us on your appetite for Mainland expansion? Any of the hires, Jamie, that you are talking about—should we think are coming maybe off island? Bob Harrison: Yes, Jared. Let me start with the loan outlook. The $71 million in C&I growth for the quarter—about $24 million of that was dealer floor plan, and the rest were draws on existing lines of credit, both local companies and Mainland companies. So it was pretty broad based, with good growth in dealer flooring, which we appreciate. We look at that for the rest of the year as being an opportunity, along with commercial real estate, to continue to grow. On hiring, we are looking for people all over. Of course, we would strongly prefer to hire locally, but if we are unable to do so, we would look to the Mainland. Jared Shaw: On the floor planning, are you seeing utilization get back to more normal levels? I know it was pretty low for a while. Or is that growth coming from expanding the network? Bob Harrison: We added a new dealer relationship during the quarter, but that was not all of it. I think it was a little bit of utilization, so a mix of both. Jared Shaw: Okay. And then separately, the securities yields are still pretty low and, with the extra capital you have, would you consider putting on more of a cost-of-funds leverage play here, or utilize some of the extra deposit growth on securities and prefund some of that cash flow that is going to be coming off? Or should we think that you are going to be reinvesting cash flows as they happen? Jamie Moses: Yes, Jared. I think the answer is the latter. We are just going to be reinvesting cash flows as they come off. No plans to do any sort of restructuring or anything at the moment, and no plans to expand the size of the securities portfolio either. For now, it is just cash flows coming off, and we will reinvest them. Jared Shaw: Great. Thank you. Jamie Moses: Thank you. Operator: Our next question comes from David Feaster with Raymond James. You may proceed. David Feaster: Hey, good morning, everybody. I wanted to touch on the competitive side. You have a unique perspective. Could you compare and contrast the Mainland versus Hawaii? Are you starting to see competition shift from just pricing to pushing on structures and standards? What are you seeing on that front? Bob Harrison: Yes, Dave, this is Bob. We really have not seen much change. It has always been cyclically competitive on pricing. Now we are getting a little bit more competitive on price primarily on the Mainland, but a little bit here. It has always been a bit more competitive on price in Hawaii given the various banks' low loan-to-deposit ratios—everybody has liquidity they are looking to put to work here in Hawaii—so that is always an issue here. We are seeing it cycle down slightly in our Mainland markets. A little bit of that is multifamily construction that was higher on a spread a year and a half ago than it is today, so that speaks to that. The other thing we are seeing is the larger banks are taking bigger pieces of deals, and so there is less available. There is a little bit more competition for deals themselves as some of the larger banks are increasing their hold levels. Does that address your question? David Feaster: Yes, that is helpful. And you reiterated the fee income guide. Can you walk through some of the business lines, the underlying trends, and some of the puts and takes you are seeing there? Bob Harrison: On the wealth side, we are continuing to see really good interactions between our customers and our wealth advisers. That business has continued to grow year after year for many years now, so that has been a nice opportunity. The fees associated with our credit card business have been pretty stable. There is movement quarter to quarter—usually a little stronger in Q4, a little less in Q1—but that is pretty standard for what we would expect in that business. Jamie, anything you would add to that? Jamie Moses: Yes, the only thing to add is there is a portion of our BOLI that is market driven and can be somewhat volatile. We saw that a little bit at the end of the first quarter with the market underperforming, so we had fewer fees related to that. Swap fee income in our loan book can also be cyclical depending on what kind of lending we are doing in a particular quarter and what our customers want. Combine those with what Bob mentioned, and that is how we get to the fee guide. David Feaster: Okay. And then touching on the funding side—you had a lot of success this quarter, with a lot of benefit from public funds. Can you touch on competition on the funding side and how you think about gaining share and driving market share growth on the deposit front? Where do you see more opportunity—commercial or retail? What funding trends are you seeing? Bob Harrison: Virtually all of our deposits are here in market. It is a day-in, day-out ground game—getting out there and meeting with customers and prospects, showing them the different products and services we offer, and seeing how we can make that work for them. There is not a lot of magic to it that would change quarter over quarter, but our folks are out there meeting with customers on the consumer, small business, and larger business side. David Feaster: Alright. Thank you. Operator: Our next question comes from Kelly Motta with KBW. Kelly Motta: Hey, good morning. Thanks for the question. On capital—really solid here—I apologize if it was asked already, but have you done any work on the proposed capital changes and the potential impact to your ratios? Jamie Moses: Yes, we have done a little bit of work on it. We think that it could possibly add maybe 1% CET1 to our capital levels. But, again, it is proposed, and we are not going to change our capital allocation strategy or plans based on that. If it goes through the way it is, we think it is about a 1% add. Kelly Motta: Got it. That is really helpful. You have been very consistent with the share repurchase. It seems like, even with growth picking up, that is probably a good expectation. How are you thinking about that? Thank you. Jamie Moses: Yes, Kelly, I think you summarized it well for us. Bob Harrison: We have the $250 million allocation, and we used $34 million in Q1. It is not set for a particular year or timing, so we will use it as it makes sense going forward. Jamie Moses: Yes, to be clear, the amount of the authorization was $250 million. Kelly Motta: Got it. That is really helpful. Then, on credit—anything you are watching or pulling away from? Lea Nakamura: I do not think there is anything we are pulling away from. Given the uncertainty in the environment, the volatility, and the recent natural disaster events that have happened in our footprint, we are watching certain portfolios very carefully, but we have not really seen anything so far. Kelly Motta: Got it. Thank you so much for the time. I will step back. Operator: Thank you. Our next question comes from Andrew Terrell with Stephens. You may proceed. Andrew Terrell: Good morning. To go back on the margin, I hear you on the near-term and full-year guide, and that the majority of what underpins that is the fixed repricing. Is there any level of benefit you would expect or work to do on the deposit base as you move throughout the year? Have you fully exhausted the ability to reprice lower, or are there other tweaks you could make on the funding side? Jamie Moses: There is still some ability to work on that, in particular with CD pricing and what rolls over every quarter. We have seen a significant decline in the competitive environment around those from, say, a year or so ago, so we could still see some benefit from that. The March deposit cost number was 1.20%, a little bit lower than what we had in the quarter, so you can see the dynamics of CD repricing around that. I would not expect it to go too much lower with rates staying the same in totality in terms of deposit cost. The guide for the year on the NIM is inclusive of any rate actions we might take on the deposit side, as well as the repricing story. Andrew Terrell: Last quarter, you talked about the fixed cash flows for the year—roll-off yield 4%, new asset yield 5.5%. There has been a lot of rate volatility throughout the first quarter. Do you feel like a 5.5% blended new asset yield is still a fair assumption based on what you are seeing for loan origination yields and where you are buying securities today? Jamie Moses: Yes, I think so. It is going to depend quarter to quarter based on what type of lending activity we do in any given quarter. If activity is primarily in lower-spread things, it might be a little bit lower than that. But for the year, 155 basis points is a good number, and that $400 million per quarter of cash flows coming off and repricing is still a good number. Andrew Terrell: Got it. One last one: we started talking more about Mainland M&A interest last year with you. Has anything changed there—any willingness or appetite, or your view of the M&A market as it stands right now? Bob Harrison: No updates. We are still talking to people to see if there are things that might make sense, but we have not changed our profile or what we are looking for. We are really looking for a good fit first and foremost and then take it from there. Andrew Terrell: Great. Thank you for taking the questions. Operator: Thank you. Our next question comes from Matthew Clark with Piper Sandler. You may proceed. Matthew Clark: Hey, good morning. Just a couple follow-ups on the cash flows on the asset side. It is $400 million a quarter, but can you give us a split between loans and securities on average? We can guesstimate the rates, but I am trying to forecast those individual yields. Jamie Moses: The right way to think about it is, for the year, we expect $600 million of cash flows coming off the securities portfolio. That leaves $1 billion in cash flows from loans. The spread of 150 to 155 basis points that we talked about is inclusive of the roll-off and roll-on yields. In the quarter, we added in the securities portfolio in the 4.90% range of yield, and a little bit higher than that—around 6.20%—on our loan yields. I think that gets you what you need there, Matthew. Matthew Clark: Great. Then, to drill into the CDs—how much do you have coming due in 2Q, and what are the roll-off and roll-on rates? Jamie Moses: In Q2, we are going to have about $1 billion come due. That is currently somewhere in the neighborhood of a 2.90% CD rate, and I think that will roll over at something like a 2.50% weighted average. It is hard to tell for sure because some folks roll into promos and some roll into rack rates, but if you back into the margin guidance we have given, you can get to what you need on the CD side. Matthew Clark: Got it. Getting to a NIM that is a little bit above what you are forecasting for 2Q. Thank you. Operator: Thank you. I would now like to turn the call back over to Kevin Haseyama for any closing remarks. Kevin Haseyama: We appreciate your interest in First Hawaiian, Inc. Please feel free to contact me if you have any additional questions. Thanks again for joining us, and have a good weekend. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead. Salvatore DiMartino: Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's First Quarter 2026 Earnings Call. This morning, our Chairman, President and CEO, Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation, which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank NA may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us. Additionally, when discussing our results, we will reference certain non-GAAP measures, which exclude certain items and reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures. And with that, I would now like to turn the call over to Mr. Otting. Joseph? Joseph Otting: Thank you, Sal. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. We are pleased to report another quarter of solid progress and continued momentum across our core banking franchise. Our first quarter performance reflects continued improving fundamentals, strong C&I growth, a high level in growth of core deposits, further progress in reducing the level of nonaccrual and criticized classified loans, continued margin expansion and industry-leading capital levels. Just as importantly, our first quarter results demonstrate we are exceeding and executing on the strategy we laid out 2 years ago and delivering against our priorities. We are doing exactly what we set out to do. strengthening our earnings profile, improving the quality of our balance sheet and building a top-performing regional bank. The progress we are making is intentional and driven by a clear focus on disciplined execution. Now turning to the slides. Slide #3 of the investor presentation, I'd like to highlight some of the key performance factors and drivers during the quarter. First, disciplined expense management has been a hallmark of our return to profitability over the past 2 years. And in the first quarter, operating expenses continued to decrease, and we expect them to decrease in 2026 and 2027. We also had another quarter of net interest margin expansion, driven primarily by lower funding costs. Second, one of our key growth strategy is to diversify our loan portfolio by increasing our C&I lending platform. This quarter marked the third consecutive quarter of C&I loan growth after us reducing our exposure to certain industries, lowering our single transaction exposures and exiting certain relationships that did not meet our return hurdles. And we've done this throughout 2024 and part of 2025. Third, we experienced a further reduction in our overall CRE exposure, mostly through par payoffs resulting in the multifamily and CRE portfolios declining by $1.6 billion or 4% relative to the fourth quarter and further improvement in our CRE concentration. Fourth, we continue to see positive credit migration as nonaccrual loans declined by 11% and criticized and classified loans decreased by 3%. Additionally, we ended the quarter with a robust CET1 capital ratio of 13.2%. In terms of future capital distributions, our focus first is on demonstrating several quarters of sustainable profitability and continued improvement in our nonaccrual loans and flexibility to support our anticipated loan growth. We expect the Board taking actual and capital distributions in the second half of the year. Finally, I would like to highlight 2 other milestones during the first quarter. We were very pleased with Fitch and Moody upgraded the bank's long-term and short-term deposit ratings to investment grade with a positive outlook. And when we filed our 10-K in late February, we disclosed that the previously material weakness in internal controls have been remediated. Both of these milestones reflect the tremendous effort, dedication and hard work of our entire team. On the next couple of slides, we spotlight the significant progress we continue to make in our C&I lending businesses. During the quarter, C&I loans grew by $1.4 billion or 9% on a linked-quarter basis, significantly higher than in prior quarters. On Slide 4, we go into detail on the trends in our C&I portfolio. While the first quarter is typically a seasonally slow quarter for originations -- you can see on the left side of the slide that our originations were essentially flat compared to the fourth quarter. We also will note that the pipeline remains strong, and we expect second quarter fundings in C&I to be similar to Q1. On the right side is the 5-quarter trend in the C&I portfolio. After bottoming in the second quarter of last year, we've had steady growth and in the first quarter, C&I loans grew by $1.4 billion, up 9% compared to the fourth quarter and year-over-year 12%. The next slide provides quarter-over-quarter growth by loan category. While the majority of the growth was driven by our 2 main strategic focus areas, specialized industries lending and corporate and regional commercial banking. This quarter growth was broad-based with growth also occurring in the mortgage finance and asset-based lending verticals. Now turning to Slide 6. You can see the trend in our adjusted diluted EPS. We whereby we have now reported 2 consecutive quarters of VPS growth by executing on all our strategic initiatives. On an adjusted basis, we went from $0.03 in the fourth quarter to $0.04 during Q1. One other positive note I'd like to make is that during the first quarter, we completed the consolidation of our 6 legacy data centers into 2 co-location centers with no disruptions neither to the organization or any of our customers and this positions us well in 2027 to have the baseline and platform for our core conversion with ultimately the goal in 2027 is to get on to one core. So with that, I'll now turn it over to Lee to review our financials and credit quality. Lee Smith: Thank you, Joseph, and good morning, everyone. We're very pleased with another quarter where we continued to execute our strategic vision to make Flagstar one of the best-performing regional banks in the country. We were profitable for the second consecutive quarter following the bank's return to profitability in the fourth quarter. More importantly, we made real progress against key initiatives that drive our financial forecast. We achieved net C&I loan growth during the quarter of $1.4 billion, significantly higher than previous quarters following the origination of $2.6 billion in new C&I loans, of which $2 billion was funded. As we've discussed, net C&I growth in previous quarters was muted as we rightsized legacy C&I positions within the portfolio. Most of this is behind us and you're now seeing the growth from new originations materialized into net loan growth. NIM expanded 10 basis points after adjusting for the onetime hedge gain of approximately $21 million in Q4. Furthermore, much of the new C&I growth occurred towards the end of Q1, meaning the full benefit of these newly originated loans will be felt in Q2 and beyond. Core deposits, excluding broker grew $1.1 billion, and we reduced deposit costs by 21 basis points. We paid off another $1 billion of flub advances and $300 million of brokered deposits as we further reduced our reliance on high-cost wholesale funding. Despite this deleveraging of $1.3 billion, our balance sheet only decreased $400 million quarter-over-quarter. CRE and multifamily payoffs were again elevated at $1.6 billion, $1.1 billion of wins were par payoffs and 42% of these payoffs were rated as substandard loans. We resolved the situation with one borrower that was in bankruptcy and reduced our nonaccrual loans by $323 million, while substandard loans decreased almost $700 million, meaning we reduced nonaccrual and substandard loans over $1 billion quarter-over-quarter. Our ACL reserve decreased $78 million, primarily driven by lower CRE and multifamily loan balances. Operating expenses were again well contained at $441 million, a decrease of 5% quarter-over-quarter. And we ended the quarter with 13.24% CET1 capital at or near the top of our regional bank peers. We were also thrilled to be upgraded by both Moody's and Fitch, particularly given that both agencies returned our long and short-term deposit ratings to investment grade. We continue to execute on our strategic plan, exactly as we said we would. Now turning to Slide 7. We reported net income attributable to common stockholders of $0.03 per diluted share. On an adjusted basis, we reported net income attributable to common stockholders of $0.04 per diluted share. First quarter was a relatively clean quarter with only one adjustment, our investment in FIGA Technologies, which decreased in value during the first quarter by $9 million based on its closing stock price as of March 31. Subsequent to the end of the quarter, we have sold out of approximately 75% of our FIG position at a gain of $1.8 million compared to our March 31 mark. interest income and NIM temporarily and until we replace it with new C&I, CRE or consumer growth. In order to retain some of the higher quality relationship CRE runoff in the future, we have assumed spreads off of SOFR in the 175 to 225 basis point range versus our contractual option of 275 to 300 basis points of a 5-year flow. Lower noninterest-bearing DDA growth in Q1. Deposit growth in Q1 was all interest-bearing, which was positive, particularly as we also reduced interest-bearing deposit costs 21 basis points quarter-over-quarter. We believe the current rating agency upgrades will help us garner more noninterest-bearing DDAs going forward. But as it's been pushed out, it impacts net interest income and NIM. We expect total assets to be approximately $94 billion at the end of '26 and $102 billion at the end of '27 as a result of net loan growth. The reduction in interest income has been partially offset by reducing provision and operating expense guidance. Adjusted EPS is now forecast to be in the $0.60 to $0.65 range in '26 and in the $1.80 to $1.90 range in '27. Slide 9 depicts the trends in our net interest margin over the past 5 quarters. We continue to post steady quarterly improvements in NIM, driven largely by lower funding costs. First quarter NIM increased 10 basis points quarter-over-quarter to 2.15% after adjusting for the recognition of a onetime hedge gain of $21 million in the fourth quarter. Turning to Slide 10. Our operating expenses continued to decline, reflecting our focus on cost containment. Quarter-over-quarter, operating expenses declined $21 million or 5%. Slide 11 shows the growth in our capital over the last few quarters. At 13.24%, our CET1 ratio ranks among the top relative to other regional banks, and we have about $1.6 billion in excess capital after tax relative to the low end of our target CET1 operating range of 10.5%. The next slide provides an overview of our deposits. Core deposits, excluding brokered, increased $1.1 billion on a linked-quarter basis or about 2%. This growth was primarily driven by growth in commercial and private bank deposits of $461 million and retail deposits, which were up $142 million. As in past quarters, during the current quarter, we paid down $300 million of brokered deposits with a weighted average cost of 4.76% -- in addition, approximately $5.3 billion of retail CDs matured during the quarter with a weighted average cost of 4.13%, and we retained 86% of these CDs as they moved into other CD products with rates approximately 35 to 40 basis points lower than the maturing products. In the second quarter, we had $4.8 billion of retail CDs maturing with an average cost of 3.98%. Also during the quarter, we further deleveraged the balance sheet by paying down $1 billion of flub advances with a weighted average cost of 3.85%. The deleveraging CD maturities and other deposit management actions led to a 21 basis point reduction in the cost of interest-bearing deposits quarter-over-quarter. Slide 13 shows our multifamily and CRE par payoffs, which were again elevated this quarter at $1.1 billion, of which 42% were rated substandard. These payoffs are resulting in a significant reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have decreased $13.4 billion or 28% since year-end 2023 to approximately $34 billion, aiding in our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. Additionally, the par payoffs have helped lower our CRE concentration ratio by 134 basis points to 3.67% -- the next slide provides an overview of the multifamily portfolio, which declined $5.5 billion or 17% on a year-over-year basis and $1.1 billion or 4% on a linked-quarter basis. The reserve coverage on the total multifamily portfolio was 1.83% and remains the highest relative to other multifamily focused lenders in the Northeast. Additionally, the reserve coverage on these multifamily loans where 50% or more of the units are rent regulated is 3.20%. Currently, there are $11.9 billion of multifamily loans that are either resetting or maturing through year-end 2027 with a weighted average coupon of approximately 3.75%. Moving to Slides 15 and 16, we have again provided detailed additional information on the New York City multifamily portfolio, where 50% or more of the units are rent regulated. At March 31, this tranche of the portfolio totaled $8.8 billion, down 4% compared to the previous quarter and has an occupancy rate of 97% and a current LTV of 70%. Approximately 52% or $4.6 billion of the $8.8 billion are pass rated loans and the remaining 48% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $1.9 billion are nonaccrual and have already been charged off to at least 90% of appraised value, meaning $287 million or 15% has been charged off against these nonaccrual loans. Furthermore, we also have an additional $73 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 20% of either charge-offs or reserves against this population. Of the remaining $2.7 billion, but a special mention in substandard loans between reserves and charge-offs, we have 5.8% or $154 million of loan loss coverage. We believe we're adequately reserved or have charged these loans off to the appropriate levels. And with excess capital of $2.2 billion before tax, we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 17 details our ACL coverage by category. The $78 million reduction in the ACL was largely driven by lower CRE and multifamily health reinvestment balances. Our coverage ratio, including unfunded commitments, was at 1.67% at quarter end. On Slide 18, we provide additional details around credit quality, which trended positively during the quarter. Nonaccrual loans totaled $2.7 billion, down $323 million or 11% compared to the prior quarter. Criticized and classified loans also declined, decreasing $385 million or 3% compared to the prior quarter. During the quarter, we did see an increase in special mention loans as a result of our comprehensive and prudent process that analyzes in detail all loans with a reset or maturity date 18 months out, 18 months from March 31, 2026, is September 27, and 27 is our largest reset year where nearly $9 billion CRE loans either reset or mature. This amount includes approximately $2.9 billion of multifamily, where 50% or more of these units are rent regulated. As part of this internal forward-looking process, we've applied the relevant pro forma contractual interest rate calculations and adjusted risk ratings accordingly. Three items I would note, we are now 75% through analyzing the entire 2027 cohort. The results of this analysis is reflected in our ACL, and we continue to see significant substandard par payoffs each quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $967 million, a decrease of $19 million from the previous quarter. As mentioned last quarter, the biggest driver of this delinquency number is the additional day or 31st day of March when calculating delinquencies at precisely 30 days. As of April 21, approximately $493 million of these delinquent loans have been brought current. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next 2 years. With that, I will now turn the call back to Joseph. Joseph Otting: Thank you very much, Lee. Before moving to Q&A, I wanted to add that we are encouraged by our continued progress made in the first quarter and remain focused on driving sustainable profitability, improving returns and delivering long-term value for our shareholders. With continued improvement in credit trends solid loan and deposit growth and strong capital levels, we believe that Flagstar is well positioned in 2026. In addition, I'd like to thank our Board of Directors, our executive leadership team and all the teammates at Flagstar for their dedication and commitment to the organization and our customers. And operator, with that, I would be happy to turn it over to you to open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Chris McGratty with KBW. Christopher McGratty: Lee, maybe a question for you to start the margin adjustment for next year. I hear you on being a little bit more competitive on the payoffs. Could you unpack just the differences in your assumptions for the margin for next year? Specifically, is it a balance sheet size and the NII conversation size versus margin? Lee Smith: Yes. So it's a little bit a balance sheet and then a little bit of the additional payoffs of the CRE and multifamily book. So as I mentioned, the balance sheet at the end of '26 will be about $94 billion, $102 billion at the end of '27. So we are assuming a slight reduction versus what we had previously guided to sort of in that $500 million to $750 million range. But if you look at Q1, we did see $1.6 billion of par payoffs, paydowns and amortization in that CRE and multifamily book. And as I mentioned in the prepared remarks, it's both good news and bad news. The good news is it's allowing us to get to our diversified strategy more quickly of 1/3, 1/3, 1/3, but it does impact short-term interest income and NIM, and that's what you're seeing. So we think that we'll be able to use the funds from those payoffs to just further grow the C&I, the consumer and originate new CRE loans, but it sort of pushes everything out. So that's one of the items that is impacting the NIM. I think some of the better quality CRE loans that we would look to retain -- we'll be pricing those after spread to soar in the 1.75 to 2.25 range. And that's obviously a lower rate than the contractual reset, which is 5-year plus $300 million. And we've deliberately left that contractual rate in place because, as you know, Chris, we've been trying to reduce our exposure to those CRE multifamily assets where we have -- we're overweight and there's higher risk. So that's obviously working. And then we're seeing, as a result of that, fewer loans that are resetting are staying with us. We were sort of originally in the 50% range. It's now in the 35% to 40% range. And then the final piece that I mentioned was we saw very strong deposit growth in the quarter, $1.1 billion very pleased with that. It was all interest-bearing. We would like to see more noninterest-bearing growth. We think that will come with the rating agency upgrades, but that sort of pushes it affects NIM in the short term, and it sort of pushes everything out. So it's a combination of those items that you're seeing just bring the NIM down 10 to 12 basis points. Christopher McGratty: That's great. And then, Joseph, for you, I mean, the consequence of this is you have more capital and then I heard you on the Basel III. It feels like everything is lining up for the back half of the capital distribution that you alluded to in your prepared remarks. Can you just talk through the mile markers that from here you might need to see before you pull that lever? Joseph Otting: So Chris, we've been fairly consistent saying is we wanted the company to demonstrate consistent quarterly earnings. And our goal is -- obviously, we feel that will occur now as we've turned the quarter in the fourth quarter and then the first quarter. That's one of the legs of the stool. The second would be our goal is to get the nonperforming assets down to $2 billion by the end of the year. And so that was kind of the second leg of that and to continue to make progress from roughly the $2.6 billion level that we are at today. And then the third is just understanding how much growth we can have in the C&I portfolio and balancing that against the CRE payoffs I'd say the way we look at that is the CRE payoffs have been greater than we expected, but the C&I originations have also been more. And we do see some acceleration in the C&I occurring not only in our pipeline, but as we add more people into the various industry specializations and geographic strategy that we actually think that will continue to grow. And so when you take those kind of 3 factors into account. It was always management's intention to have a good insight to that through the second quarter and then have dialogue with the board on capital actions going forward. Operator: Our next question will come from the line of Jared Shaw with Barclays. Jared David Shaw: Maybe just sticking with margin. But for this year, when we look at loan yields this quarter, I guess that was a little bit weaker than we were expecting. Anything that you're seeing there that we should call out? And then just sort of as we look at the pace of margin expansion for the next few quarters, how is the loan yield playing into that? Joseph Otting: Yes. Well, if you look at the actual asset yield, it wasn't down that much quarter-over-quarter when you consider the rate reductions in the fourth quarter. That's what I would say. The reduction was twofold. So in terms of the interest income, you've got what I just mentioned we had more payoffs and paydowns as it relates to that CRE and multifamily book, which we think is sort of a -- it's a good news story, but it does impact that short-term interest income a NIM. And remember, you do need to adjust in Q4 you do need to adjust for that hedge gain of $21 million, which was included in interest income and NIM. So when you adjust for that, the NIM was 2.05% in Q4, increasing 10 basis points to 2.15% in Q1. The other thing that I would point out, and I allude you to some of these in my prepared remarks, Jared, when you think of the $1.4 billion of net C&I growth in the quarter, I would say $600 million of that came right at the end of the quarter, in the last week or 10 days. So you're not seeing any pickup in NIM and interest income in Q1 as a result of that but you will see that flow through in Q2 and beyond. The other part of it is the borrower that was in bankruptcy that got resolved on March 31, the last day of the quarter. So you've got a significant amount of loans coming off of nonaccrual and then a new accruing loan that is coming on you didn't see any benefit of that in the first quarter because it occurred on the last day of the month and the quarter. You will see that flow through in Q2 and beyond. And I would just point out the net C&I growth of $1.4 billion in the quarter, we feel that we can continue at least at that run rate throughout this year, and we've been talking about growing C&I and people have been asking you what do we think we can do. And I think this is the first quarter where we're really showing the power of everything that Jose and Rich have built and what those bankers are doing on the C&I side. Jared David Shaw: Okay. All right. And then if I could just ask quickly 1 more. You in the past talked about adding cash and securities. I think it was about $2 billion to $4 billion -- is that still -- what's sort of the path forward on cash and securities balances with the broader backdrop? Joseph Otting: Yes. I think as you look forward in '26, you will probably see our cash position come down a couple of billion. We will be buying more securities. I think you can expect us in Q2 to be buying at least $1 billion, $1.5 billion of securities. And we would look to get that securities balance back up to probably $16 billion or so as we move into the second half of 2026. The securities were behind, as I've said before, pre vanilla short duration RMBS CMOs. But it gives us an additional lever should we need to create more cash to let some of those securities run off. But a lot of it, as well, remember, Jared, given by what are the par payoffs because as we're seeing those CRE and multifamily loans pay off, that is generating cash and we've got the option to grow the securities or pay down wholesale borrowings. And you saw us pay down another $1.3 billion of expensive wholesale borrowings in the quarter between flu and brokered deposits. Operator: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: Maybe staying on the topic of the Moody's and Fish upgrades. I think Moody's upgrade also came with a deposit rating upgrade. So can you talk about the implications for both funding costs? I think you mentioned more DDA growth. But also for expenses, is there any benefit on the FDIC expense side? So would love to get a full set of benefits from the upgrades beyond just the capital side? Joseph Otting: Sure. Let me take the Moody's upgrade on the deposit. As we obviously look to bring on new relationships and roughly, there were 75 new relationships that came in, in the first quarter. is part of our strategy, obviously, is to make those both depository and fee income relationships in addition to loans. And not so much in the middle market, but in the lower end of the corporate market, where -- we are focused on a lot of those companies have in their -- kind of their bank or their investment policy is that the bank had to have an investment-grade rating generally from Moody's or an S&P rating to be able to exceed the FDIC insurance levels. And so that rating is very important to that strategy as we look to penetrate in and gain operating accounts that often exceed those dollar amounts. And so we think that is a turning point, so to speak, for us of our ability to gain sizable new deposits with the relationships that we're bringing into the institution. And so -- we think that will be significant for us as we move forward in that strategy. And I'll turn it over to Xin's question to Lee and let him answer that. Lee Smith: Yes. The upgrades have no direct impact on FDIC expenses. But as Joseph mentioned, I think we -- it's a huge advantage in terms of being able to raise deposits going forward. And both Moody's and Fitch took our short- and long-term deposit rating back to investment grade. So we're very pleased with that, and Moody's still has us on a positive outlook as well. Manan Gosalia: Got it. And then maybe to stay on the expense side, Joseph, you spoke about the consolidation of the legacy data centers and the setup for the core conversion in 2027. I guess how big of a lift is that? Is that multiple years? And how are you thinking about the expense number there? And I'm guessing it's baked into your guidance, but if you can just speak to that. Joseph Otting: Yes. So obviously, closing 6 data centers and getting into 2 co-location centers was really positive for us. It was reflected in our expense forecast for this year. Next year, we do today run 2 cores where we have 2 of the legacy organizations on 1 core provider and 1 on a third. It is our intent by July of next year to be [ AgeCore ] and on a run rate basis, we believe when that gets completed, it's roughly a $40 million decrease in expenses for the company. Operator: Our next question will come from the line of David Severini with Jefferies. David Chiaverini: So wanted to drill into credit quality a little bit. trends continue in the right direction with criticized and classified loans trending lower. Can you talk about your expectations going forward with these loans? Do you expect a continued downward trend? And any surprises you've observed either good or bad as these loans have matured or reset? Lee Smith: Thanks, David. Yes, no, we do not expect any surprises. Let me address that in the first instance. And we continue to see continued reduction of criticized and classified. As Joseph mentioned, we're on track to reduce nonaccruals by up to $1 billion this year, and we saw a nice reduction in Q1, and we believe that will continue throughout 2026. And that's obviously accretive from both an earnings and a capital point of view because those nonaccruals are 150% risk rated, we continue to see a lot of liquidity around the multifamily loans and that is why of the $1.1 billion of payoffs in Q1 42% was substandard. And that is consistent with the trend that we've seen for multiple quarters now. So we expect to continue to see a reduction in the substandard loans. And then I mentioned the special mention loans have increased this quarter because we're doing that very comprehensive 18-month look forward of all loans that are maturing or resetting in the next 18 months. 2027 is our biggest reset maturity year. There's $9 billion that is resetting and maturing. So with 3 quarters of the way through that analysis. And by the end of Q2, we will be all the way through 2027. And again, everything -- even though there was an increase in special mention loans, given the reductions in the other categories, given the reduction in CRE and multifamily HFI balances it's all reflected within our ACL reserve. And the final point I would like to add is on the charge-offs, as you brought up credit, David. So charge-offs were $78 million this quarter versus $46 million last quarter. However, $34 million of what was charged off related to the 1 borrower that was in bankruptcy. And of that $34 million $30 million was already fully reserved. So there was an incremental $4 million related to that bankruptcy really just sales costs that we needed to take. And if you subtract that $34 million from the $78 million, you're basically at $44 million of net charge-offs versus $46 million last quarter, which is about 30 basis points. So we are consistent from a net charge-off on a net charge-off basis and we expect that trend to continue next quarter as well. Joseph Otting: Yes. And David, the 1 other thing that I would add, I think Lee did a good job of describing that is when we do that look forward, of those loans today are current in the special mention category. So if you called those borrowers up, they would say, well, I've never missed a payment. But what we do in that 18-month look forward is we apply the current rate that they would incur if that loan matured today. And then we analyze that cash flow and make a determination where does their cash flow sit against fixed charge cover or cash flow coverage on the property. And so if your property is at 3.5% today, and you take it up to 6.5% for our contractual rollover, that's what's causing those loans to look slightly impaired when actually that is really a forward look to those with pretty punitive interest rates. David Chiaverini: Very helpful. And sticking with this theme, can you provide us with your latest views on a potential rent for us and the impact this could have on your portfolio? Lee Smith: Yes, absolutely. So we have modeled out a rent freeze, 3-year rent freeze occurred or starting October 1 '26. So a couple of other assumptions that I would add, we also assume as part of this analysis, the operating expenses increased 2.75% per annum and think about that as being inflationary. And we also assume that the market units or the non-regulated units are able to increase their rent 2.1% per annum. So here's what we found when we ran that analysis anything that is 70% or less rent regulated, there is no impact to the NOIs. And the reason for that is the rent freezes on the rent-regulated units are offset by increasing the rent on the market or nonrent-regulated units. So 70% is sort of the demarcation line. Anything that is above 70% rent regulated the recent impact to ROI over that time horizon, the 3-year time horizon of about 7% or 8%. And if you look at the rent regulated slides that we have in the earnings deck. So we have -- and the earnings deck shows everything that is more than 50% rent regulated, and we have $8.8 billion. But $4.6 billion is pass rated. -- with an amortizing DSCR of 1.5. So those borrowers would be able to absorb the rent freezes and that impact on -- and then when you look at the criticized and classified, which is $4.2 billion, we have taken significant charge-offs. So between charge-offs and ACL reserves, we've taken over GBP 500 million of charge-offs, and we have reserves against that population. So we believe that we're more than covered just given when we re-underwrote that book in '24 and we took over GBP 900 million of charge-offs, and we increased our ACL reserves we believe we're more than covered what -- given what we've already done. A couple of other things I'd point out, though, on this. It's not just about the rent freeze as you know, we're getting annual financial statements from these borrowers and looking and digging into those we're doing a deep dive on everything that is maturing in the next 18 months, and we undertake a robust analysis on all of those loans. We're reviewing things like the worst landlord list and lean and violation lease, and we don't have much exposure there. A lot of our borrowers, as you know, these are families where the properties have been with them for multiple years. So they have a low-cost basis they benefited from the 1031 tax rollover. So we do not have any REO on our balance sheet. And if there was an issue, it would be showing up in our charge-offs and ACL reserve, which, as we've just been through, you're not seeing. And the final thing I would add is there is still an incredible amount of liquidity for the ASC class. As we've seen from our quarterly par payoffs and as we saw again this quarter as well. Operator: Our next question will come from the line of David Smith with Truwiuth Securities. David Smith: I guess big picture. You obviously took your '26 and '27 earnings guidance a bit lower. Do you just view this as a delay and push out of your expectations by a couple of quarters? Or has anything changed at all about your medium and long-term profitability expectations for the bank? Lee Smith: David you are spot on. And that is exactly joseph and I were having this conversation. Not -- if you look at our thesis and everything we're doing, we are executing against our strategy. And all these stores worst case is maybe pushes things out 1 quarter or 2 quarters. And let me tell you what I've been by that. because the -- we're seeing increased paydowns or payoffs of that CRE multifamily maybe we just need 1 more quarter of $2-plus billion net C&I growth for 2 quarters. So everything is intact, those reset and maturity dates. We know they're coming. We just need to sit here and be patient. It's just time. and worst-case scenario, maybe you're just looking at an extra quarter or 2. So I think you've hit the nail right on the head there. David Smith: And then the change in assumption on multifamily loan repricing to $175 million to $225 million over SOFR instead of 300 over the 5-year. Does that have any impact on credit as you do the 18 months look forward on loans resetting? Lee Smith: Yes. So let me just clarify that. We the contractual resets, we are sticking by. So anything that is resetting or maturing but really resetting the contractual term is 5-year flood plus 300 or prime plus 275. We're not wavering off that, and we haven't waived off that. All we are saying is if there are better quality CRE loans within our portfolio, maybe it's in the builder finance arena or maybe it's in a non-officer where there's a deposit relationship. It's a strong credit then we probably need to -- in order to retain them, we probably need to move to a market rate which would be so for plus $75 million to $225 million. So that's all we're saying that we'll be very selective in only selecting those credits that are extremely high quality, and we think that there's either an existing or the potential for a future relationship. Joseph Otting: David, one point I think you were perhaps asking there was like when we're doing that forward look, and we're applying our contractual rate. We probably are 75 basis points over the market when we do that analysis that would perhaps push some of the loans into the special mention category that if you use a strictly a market rate and that analysis you would not see as many special mention credits. Operator: Our next question will come from the line of Dave Rochester with Cantor. David Rochester: Appreciate the comments on the Board meeting coming up and your thoughts on just capital deployment in general. You called out the $1.6 billion of excess capital above the bottom end of your target capital range. You talked about that for a quarter or 2 now. I was just curious how you're looking at that excess capital because we've seen some banks manage that down to their targets fairly quickly. Now that we have some clarity with the capital proposals. You've got more loan growth that's ramping up through the end of this year. Obviously, that's going to be improving profitability and whatnot, and you want to save capital for that. But are you in a situation now where you could easily just save half of that excess and dedicate that to the loan growth that you're expecting over the next couple of years and then take the other half and pay that out over the next couple of quarters? How are you thinking about getting to your targets more so in terms of timing? Lee Smith: Yes. Well, great question. And look, we -- I think we're in the fortune of what sort of ironic if you turn the clock back 18 months ago, people were asking if we had enough capital and you sort of fast forward to where we are today, and again, because of the great work that the Flagstar team has done, we're in this sort of situation where people are asking, what are you going to do with all the capital. We're in the fortunate position where we can do both, we can grow, and we can obviously execute on capital actions later in the year, as Jose alluded to. I think also what Jose said is exactly what we're looking to do here, which is the consistent profitability, and we've now had 2 quarters of profitability. So we're on the right track. We want to see those problem loans come down. We had a nice quarter in Q1, and so we want to see more of that. and then the organic growth, particularly on the C&I side, and you're really beginning to see that come through as you saw in Q1 with $1.4 billion of net C&I growth. But we can do both. And you mentioned the new capital rules and the Basel III proposal, look, we've analyzed that, and we believe that, that will give us an additional 60 to 80 basis points of CET1. So that's all in the risk ratings. And again, that's something that would be very helpful to us as well. But yes, we have optionality, and we're able to, I think, grow and we're able to take capital actions. We just want to prove out the consistent profitability as you see and see a little bit more reduction in those problem lines. David Rochester: Sounds good. Appreciate it. And then just on the new C&I bankers you've hired, I was just wondering how they've done with their marching orders to bring in the first deal in the first 90 days. And -- if you can just give an update on where you are on hiring for this year. I think you're targeting 200 bankers by the end of this year, which meant maybe another 75 that you had to go. If you could just give us an update on that. And then any lingering derisking efforts that you're wrapping up in equipment finance or any of the other segments? That would be good to hear about as well. Lee Smith: Yes. Let me start with the banks. So first of all, I mean, I just want to complement the job and the work that Rich and those bankers are doing. They have been phenomenal. As you can see from the net C&I growth in Q1. And again, this is very granular. The average loan size is in that $20 million to $30 million range in Q1. The average spread to sofa was actually went up. It was actually 242 basis points, and we've got just over 70% utilization. So doing a tremendous job. Today, we have 131 customer facing, C&I bankers I think Rich would like to probably more like 180. So I think you've probably got another $40 million to $60 million to go in terms of new hires. As we said before, our expectation and these are all seasoned bankers that know Jose, no rich our expectation is that they're executing on their first deal within 90 days. And then they're doing, on average, 3 or 4 deals in that first year, 5 or 6 deals a year thereafter. And I think if you sort of do the math on that, that's how we're getting to the C&I growth that we've alluded to. And again, you saw that come through in the first quarter. And then the second part of the question, yes, as I mentioned, a lot of the tool trees, as we referred to, where we had outsized exposure to single names. We are mostly through that. And if you look at the page on earlier in the deck, you can see that we really. We didn't have anywhere near as much runoff in those legacy equipment finance, asset-based lending categories. There was a little bit of a swap between the two. So that's why there may be a little noise there. But on a net basis, there wasn't much runoff at all. And we feel that you'll start to see those areas grow, which will then complement what we're doing with the national lending verticals, the specialty verticals as well as what we're doing from a middle and upper C&I market point of view going forward as well. Joseph Otting: Yes. The other thing obviously, Lee hit on the spot, we've assembled really an incredible team in the C&I space that have come to the company in that 20 to 25-year experience level across both geographic markets and industry specialization. Our focus really is in kind of that $20 million to $75 million range type credit size. And that gives us the ability both to scale quickly, but also clients that use a lot of bank products and services that gives us cross-sell opportunities. So I would say, I think if Rich was here, he would say probably 90% of the people are kind of hitting that first deal in 90 days with a number of them far exceeding that kind of production level. So it's really been an impressive story and I think if you had to assess where we are, I think we're kind of sliding in the second base on that overall strategy. So we really do continue to see, I think, good market expansion, good growth in both adding people and those people that have now been in the company for 6 to 9 months, are really hitting the stride. I commented in my comments that we really expect to be at or above the production level for Q2 to what we've done in Q1. And we actually were pretty hot coming out of the box this quarter with new closings that may have tried to get down in the first quarter, but leaked over into the second quarter. So the opposite of what we had in the first quarter is we had a really strong March on closing. We actually came out of the box really hot in April. And so we look for this to be an exceptional quarter. Operator: Our next question comes from the line of Anthony Elian with JPMorgan. Anthony Elian: Lee, on fee income, you reduced slightly the '26 outlook, but it still implies a material step-up for the rest of this year to hit that range. Talk to us about the areas you think will drive the increase in 2Q and beyond? Lee Smith: Yes, sure. So a couple of things on the fee income. First of all, and you probably already have, but I want to make sure people are adjusting for the figure gains, losses because that is in the noninterest fee income section. So we had a $9 million gain in Q4 and then we reduced the valuation and effectively, you saw a $9 million degradation in Q1. So that's an $18 million swing quarter-over-quarter. So I just want to make sure people are capturing that. But we think that -- it's really all of the line items. So capital markets syndication income, swap and derivatives. We hired a new head of Capital markets towards the end of last year and he's just finding getting his feet under the table, and we feel pretty excited about some of the things that we're seeing there. As we originate more loans, we expect unused loan fees to increase. We have some SBIC investments. The returns were slightly down in Q1 versus normal quarters, and we expect that to return to normal as we move forward. Q1 is seasonally low for mortgage gain on sale, and we would expect gain on sale to increase will increase as you move into Q2 and beyond. And then the CRE fee income should increase as we start originating new CRE loans. The consumer overdraft and service charges should increase. We think net loan fees and charges, deposit fees will increase. And we've said before, one of the things that we identified that was happening was we were waiving a lot of fees in the private bank and we are gradually reducing the amount of fees that we've been waving in the private bank. So -- it's not 1 area in particular. We expect to drive fee income across all categories and in all parts of our business model. Anthony Elian: And then on NII, can you share with us how much visibility you have just on the level of commercial real estate payoffs going forward, right, why what you saw in 1Q would lead to such a sharp reduction in your NII outlook next year? And really what I'm trying to get at is the confidence you have that this is it for reductions to the NII outlook. Lee Smith: Yes. No, it's a fair question. I would tell you that people, I think, need to appreciate is there are more moving parts to this model than probably any other bank out there that especially banks that are mature because you're dealing with par payoffs, pay downs, new originations, we're in growth mode, you're dealing with reductions in nonaccrual loans and they're lumpy. It's not linear. We're looking to pay down wholesale borrowings reduce the cost of core there are more moving parts to the story than any other bank out there. We are moving in the right direction. -- to be absolutely precise on every single one of those, it's not easy. And so we feel, based on the guidance that we've provided that is the best look that we have today. But par payoffs or paydowns increased, Sure, they could. We've got strategies in place, as I mentioned, for the better quality loans to try and retain them. But there's a lot of moving parts. I think what I would look at is the bigger picture. And as Joseph and I have both said, we are doing exactly what we said we would do and executing on our strategy. And the worst case here is maybe pushes things out 1 or 2 quarters. So instead of Q4 of '27, it's -- we get there in 1Q of 28 or 2 of because we just need another quarter or 2 of $2-plus billion of net C&I growth. That's the worst-case scenario. And that's how I would look at it when you're looking at the -- you got to look at the bigger picture. Operator: Our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: I wanted to touch on the inflows and outflows of NPAs this quarter. And going back to the Pinnacle group the bankruptcy loans, which I thought was maybe $500 million or $600 million in balances. If that came out, it implies a decent chunk of new NPAs went in -- and so I was just curious if that's the case, could you provide some color on the new inflows of NPAs number of loans, size of relationship -- and Jose, do you -- are you sticking with your outlook for a $1 billion reduction in nonaccruals this year? Joseph Otting: Yes. Yes. First of all, Matthew, we are sticking with that. it's kind of -- you got to look at that category kind of like accounts receivable each quarter, and we've had that like volatility where some come in and some go out. We had roughly million of resolutions during the quarter. So you do have inflows and outflows that in [indiscernible] and that has always been there where things are transitioning through that. We do expect this next quarter to be down $200 million in additional NPAs. So it's the trend line that we take a look at, but there is in and outside of that category on a fairly consistent basis. And Matt, I'll just remind you, 35% of our nonaccruals are current and paid -- we're very punitive on ourselves in the way that we risk rate these loans and no 1 else has that amount of their nonaccruals current and pay. But you've got to bear that in mind as and real estate secured. Matthew Breese: Understood. Okay. And then, Lee, could you just clarify where the hedge gain was flowing through in the average balance sheet. I thought it was in borrowings, but I think you had mentioned it was in interest income. I was squeezing in 2 questions in one. Lee Smith: Well, let me do -- let me handle 1 first because you'll have to pay for the next one. The -- it's all in the flu, the wholesale borrowings line. That's where that gain was, Matt. Matthew Breese: Okay. And then could you just provide this quarter, what were new loan yield originations overall? How does that compare to the pipeline? And how does that compare to the fourth quarter? Lee Smith: The -- yes. So I mentioned a couple of questions. The new C&I loans were coming on at a spread to sofa of $24 basis points in Q1. So which was higher that they were coming on around 225 in Q4. So we saw a nice increase in Q1 in terms of average spread to sofa. Operator: Our next question comes from the line of Casey Haire with Autonomous. Casey Haire: Lee, I had a question for you on the balance sheet forecast of $102 million in '27. So if we started 87 today, you have about $12 billion of multifamily coming back to you between now and 27. You lose 60% of it that is a $7 billion drag, that takes you down to $80 million. You originate $2 billion a quarter of C&I that takes you back up to $94 billion where is the -- what's the -- you're still $8 billion short versus that $100 million? I guess what are we missing here? Lee Smith: Yes. So a couple of things. C&I growth is pretty significant in both years. You're sort of looking at $7-plus billion in both years. But remember, on the CRE and multifamily side, we are originating new CRE loans, not New York City CRE loans, but CRE loans in other parts of our footprint. So the Midwest, South Florida California. So you've got to factor in the runoff in CRE and multifamily is not as big as you think because we're replacing some of that with new CRE originations. And then we also expect to see growth in the residential mortgage line item as well. as we're originating mortgages for balance sheet. So I think the piece you're probably missing is the CRE multifamily runoff is probably not as great as you're thinking because of the new loans we're originating. Casey Haire: Okay. Fair enough. And then the deposit growth was decent this quarter. What's the outlook there? Can you build on this momentum? And where do you want to what's -- how is the loan-to-deposit ratio? Where do you want to live on that ratio going forward? Lee Smith: Yes. We believe we can build on it. And as we said before, leveraging the new C&I customers that we're bringing in is as 1 area that we feel that we can be successful in. And if you look at Q1 and you look at the deposit growth, about $450 million was from the commercial customers and the private bank customers. And ultimately, we want to get the operating accounts of those commercial customers. But if we have to start with some interest there in deposits, that's fine as well. So we believe that we can leverage those new relationships on the C&I side. And our treasury management team is working diligently to make that happen, and we saw some green shoots in Q1. We believe the private bank is another area where we can grow deposits. And Mark Pit runs the private bank it really built out a real private bank with the Chief Investment Officer, trusted adviser. We've got a family wealth planner -- we've got all the products that they would need, interest-only mortgages now in a broad mortgage product set subscription lending. So we feel that that's an area where we can continue to bring in more deposits and then leveraging our 340 bank branches as well. And obviously, the new CRE lending we're doing, the expectation is that is relationship driven and will come with deposits and fee income opportunities as well. So we do believe that we can continue the momentum and grow more deposit I'd like to see some more noninterest-bearing DDA growth, but we think that will come with those upgrades that we got this quarter for Moody's and Fitch. Operator: Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: I know you I know your specialized and regional banking segments are being built out and deposit gathering initiatives will be in a different life cycle versus peers. But with rates potentially on hold, how would you describe deposit pricing pressure. It sounds like the Moody's switch upgrade could help alleviate some pressure that some peers might be seeing more of. Just talk on what you're seeing within your footprint? Lee Smith: Yes. Obviously, it's competitive [indiscernible] and we meet every week on this, and we review deposit gathering in every single market that we're in and we look at what our competitors are doing, and we make sure. Obviously, you need to be competitive. But what I would say is -- not only did we bring $1.1 billion of new deposits in Q1, we also reduced that cost of poor deposits 21 basis points. So we're not overpaying for these deposits. I think we're leveraging our relationships. We're leveraging the model that we built. And we'd be mindful, obviously, of what our peers and competitors are doing, you have to be. But I would say despite that, you've still seen us sort of execute and be successful with the deposits that we brought in and the reduction in core deposit costs. Bernard Von Gizycki: And just a follow-up. I know you paid down the FHLB advances by $1 billion during the quarter. What are your expectations for pay downs for the rest of the year? Lee Smith: Yes. I think the way we're thinking about it, Bernie, is we believe we can pay down another $2 billion or $3 billion over the rest of the year. And again, a lot of it will be driven by what excess cash do we have and that will be driven by what's going on with deposit growth, what's going on with the payoffs, the paydowns, but we think we can pay down another $2 billion or $3 billion of loan advances. Joseph Otting: Which get us into the like $6 billion a -- if you recall, when we got here, it was about $23 billion. Operator: And that concludes our question-and-answer session. I'll turn the call back over to Joseph for any closing comments. Joseph Otting: Thank you very much, operator, and thank you for taking the time to understand our story. We often say here, we started with 20 big items that we needed to knock off the list. We really feel we're down to about 4, have those well under control and are executing on that. And we remain extremely focused on executing on our strategic plan. We really want to transform Flagstar into a top-performing regional bank. Creating a customer-centric organization that's relationship-based culture and effectively manage risk to drive long-term value. So thank you for your time this morning, and thank you for joining us. Operator: This concludes our call today. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Gentex Reports First Quarter 2026 Financial Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Josh O'Berski, Vice President of Investor Relations. Josh O'Berski: Thank you. Good morning, and thank you for joining us today for our first quarter 2026 earnings conference call. I'm Josh O'Berski, Gentex's Vice President of Investor Relations, and with me today are Steve Downing, President and CEO Neil Boehm, COO and CTO, and Kevin Nash, Vice President of Finance and CFO. Please note that a replay of this conference call webcast along with edited transcripts will be available following the call on the Investors section of our website at ir.gentex.com. Before we begin, I'd like to remind you that many of the statements made during today's call are forward looking and reflect our current expectations. These statements involve a number of risks and uncertainties, both known and unknown, including those described in our press release issued this morning and in our annual report on Form 10-K for the year ended December 31, 2025, as well as general economic conditions. Actual results may defer materially from those expressed or implied in these forward-looking statements, if risks and uncertainties materialize or if our assumptions prove to be incorrect. I'll now hand the call over to Steve Downing for our prepared remarks. Steven Downing: Thank you, Josh. For the first quarter of 2026, the company reported consolidated net sales of $675.4 million a 17% increase compared to $576.8 million in the first quarter of last year, which did not include VOXX. VOXX contributed $88.6 million of revenue during the quarter while Core Gentex revenue totaled $586.8 million, which was a 2% increase despite global light vehicle production that declined more than 3% versus last year. Core Gentex revenue growth was driven by strength in Advanced Features across several regions, helping offset lower light vehicle production and ongoing unit volume headwinds. In North America, revenue increased approximately 6% despite a 2% decline in light vehicle production, driven primarily by continued growth and penetration of FDM shipments. In Europe, Japan and Korea, auto-dimming mirror unit shipments declined by approximately 8% versus last year. However, revenue for these combined regions declined only 2%, reflecting favorable product mix driven by the successful launch of a Cabin Monitoring System in Europe and continued FDM growth. In China, first quarter revenue totaled approximately $28 million, down 29% versus last year, reflecting the ongoing impact of tariffs on our exports to China. Overall, given the continued challenges facing many of our customers, our revenue growth continues to be driven by expanding electronic content and the adoption of new technologies. As an example, VOXX was a bright spot during the quarter with revenue coming in approximately 9% above our beginning of quarter forecast, driven by stronger-than-anticipated sales in the Premium Audio segment. Consolidated gross margin for the first quarter of 2026 was 33.8% compared to 33.2% in the first quarter of last year. Core Gentex's gross margin was 34% representing an 80 basis point increase versus last year. Gross margin benefited from operational efficiencies and favorable product mix, partially offset by the impact of tariff-related costs and higher commodity prices. Year-over-year, the company delivered nearly 200 basis points of operational gross margin improvement driven by strong execution and product mix despite the headwinds created by tariffs and commodity price increases. First quarter consolidated operating expenses totaled $105 million compared to $78.7 million last year, which did not include VOXX. The increase was primarily due to the VOXX acquisition, which accounted for $23.2 million of the change as well as $2.8 million of impairment charges. On a non-GAAP basis, Core Gentex's adjusted operating expenses were $78.3 million compared to $75 million in the first quarter of last year when we exclude impairment charges, acquisition-related costs and severance. As Neil mentioned in the press release, we are incredibly busy with the launch of some of the most complex and innovative technologies in the company's history. These launches include our Gen 4 FDM, new CMOS Imaging Sensors, In-cabin Monitoring Platforms, Dimmable Visors and Large Area Devices, along with multiple new VOXX Automotive and Premium Audio launches. These efforts are occurring at the same time our customers have drastically increased their requirements around cybersecurity for many of our existing and new products. Despite this activity level, the company remains focused on operating expense discipline and continues to leverage available tools to meet customer commitments while maintaining modest expense growth. Consolidated income from operations for the first quarter of 2026 was $123.7 million compared to $113 million in the prior year period. Core Gentex income from operations totaled $117.9 million, representing a 4% year-over-year increase. On a non-GAAP basis, adjusted Core Gentex income from operations was $121.4 million compared to $116.8 million in the first quarter of last year. Total Other loss for the quarter was $5.6 million compared to Other income of $0.6 million in the prior year period, primarily reflecting lower investment income and impairment charges. The effective tax rate for the first quarter of 2026 was 16.6% compared to 16.5% last year. Consolidated net income was $98.5 million compared to $94.9 million in the first quarter of last year, driven by higher sales and improved profitability. On a non-GAAP basis, consolidated net income was $103.7 million compared to $98 million last year. Earnings per diluted share were $0.46 for the first quarter of 2026 compared to $0.42 last year, reflecting increased sales and improved profitability, partially offset by Other losses. On a non-GAAP basis, adjusted earnings per share were $0.48 compared to $0.43 for the first quarter of last year. I will now hand the call over to Kevin for some further financial details. Kevin Nash: Thanks, Steve. Gentex's Automotive net sales were $566.2 million in the first quarter of '26, up from $563.9 million in the first quarter of '25 demonstrating revenue growth despite a quarter-over-quarter decline in light vehicle production and in base auto-dimming mirror unit shipments. The quarter-over-quarter increase in net sales reflects favorable product mix, new technology launches and content gains with customers. Net sales from Gentex's Other product lines, which includes dimmable aircraft windows, fire protection products, medical devices and biometrics were $20.6 million in the first quarter compared to $12.9 million in the first quarter of '25, which represents an increase of nearly 60%. This growth was driven by quarter-over-quarter increases of $3.4 million in aircraft window sales and $2.1 million in each of fire protection products and biometric sales. VOXX net sales contributed $88.6 million during the first quarter. And 1 year after the close of the acquisition, the integration is well underway, and the VOXX business has now achieved profitability. The focus for the next 12 months will be on scaling product launches, expanding sales channels and strengthening market position, while at the same time, improving margins and lowering operating expenses. During the first quarter, the company repurchased 3.3 million shares for $71.6 million at an average price of $22.1. As of March 31, approximately 32.6 million shares remain authorized under the repurchase program, and the company expects to continue to repurchase consistent with its capital allocation strategy. Turning to the balance sheet. Our comparisons today are based on March 31 of '26 versus December 31 of '25. Starting with liquidity. Cash and cash equivalents were $164.8 million at quarter end, up from $145.6 million at year-end. Short-term and long-term investments totaled $280.4 million compared to $278.4 million at the end of '25. Accounts receivable was $419.5 million on March 31 compared to $368.5 million at year-end, reflecting higher first quarter sales activity. Inventories totaled $523.5 million, up modestly from $516.3 million at year-end, driven by higher bill of material costs due to tariffs and precious metal cost increases. Accounts payable was $276.6 million compared to $248.9 million at year-end, primarily driven by month end timing and inventory purchases. Preliminary cash flow from operations for the quarter was $137.1 million compared to $148.5 million in the prior year period, as higher net income was more than offset by those changes in working capital. Capital expenditures for the first quarter were $17 million compared to $36.7 million in the first quarter of last year. And lastly, depreciation and amortization for the quarter was approximately $25.7 million compared to $25.5 million in the first quarter last year. I'll now hand the call over to Neil for a product update. Neil Boehm: Thank you, Kevin. The first quarter of 2026 was another strong launch quarter. In the quarter, over 65% of the launches were advanced interior and exterior auto-dimming mirrors and electronic features. HomeLink Full Display Mirror and advanced feature exterior auto-dimming mirrors where the product is driving the greatest growth of the Advanced Feature launches for the quarter. Within the first quarter, Gentex took part in several trade shows and customer events to demonstrate our products and capabilities. At IC West, we demonstrated our suite of products aligned for the security and access control industry, highlighting our Fire Protection, Biometric Authentication and Smart Home Solution products. Between our PLACE and commercial Fire Protection products, our HomeLink Smart Home Solutions and our BioConnect and EyeLock brands, our product lines provided some great conversations with customers, installers and industry professionals. Across our industries and in all regions of the world, we continue to see demand for localized production as a venue to offset tariffs and de-risk supply chain constraints. In China, this has created a substantial headwind in our markets. But globally and especially for North America, it continues to create opportunities. Our deep expertise in high-end electronics manufacturing and assembly, puts us in a unique position to participate in a number of these near-shoring opportunities. We remain optimistic about our ability to capitalize on a number of these opportunities. Our teams at Klipsch Onkyo, and Integra begun launching the products we showcased at CES. At Klipsch, the new Fives, Sevens and Nines are now available for purchase and combined impressive sole performance with incredible design. With a large number of new products still in development, we're excited to see how the balance of the year performs and how consumers react to these new products. While base mirror volumes remain pressured because of tariffs and global cost-cutting trends, our customers are deploying creative strategies to attempt to capitalize on consumer demand for technology. To that end, the team at Gentex remains focused on delivering the Advanced Features our customers and end consumers have grown to expect in their vehicles. Full Display Mirror remains a leading performer within the quarter, and we're well on our way to adding another 200,000 to 400,000 units versus last year's volume. Our Driver Monitoring Solutions are also driving revenue growth, with our product currently shipping to Rivian, Volvo and Polestar. We expect to begin shipping Driving Monitoring products for the next 2 OEM customers in the second quarter to early third quarter of 2026. Dimmable visor continues to gain customer interest, and our manufacturing teams are well underway to getting production lines built to support the expected volumes for first program launch, which will begin shipping in the back half of 2027 Vehicle production volumes for 2026 are slated to be flat to slightly down in our primary markets and pressure from our OEM customers to reduce cost and de-content vehicles remains a threat. But Gentex is well equipped with our product portfolio to continue outperforming our markets. Our pricing remains competitive, and our product quality and consumer demand for Advanced Features provides growth opportunities at our customers. Internally, our teams continue to focus on driving greater efficiency in our engineering and manufacturing processes, improving our component and supply chain pricing and availability and balancing the evolving tariff impacts as we launch in the port increasingly complex array of technologies for the global market. I remain highly confident in the team here at Gentex and their ability to continue to drive improvements while we advance and launch new technologies. Now I hand the call back over to Steve for guidance and closing remarks. Steven Downing: Thanks, Neil. The company's light vehicle production forecast for the second quarter of 2026 and full years 2026 and 2027 are based on the mid-April 2026 S&P Global Mobility outlook for North America, Europe, Japan, Korea and China. The S&P Global Mobility forecast for global light vehicle production for the second quarter of 2026 is expected to decline 2% versus the second quarter of last year, while light vehicle production in the company's primary markets is expected to be down over 3%. Full year 2026 production in the company's primary markets is also expected to decline 2% versus last year. Forecasted vehicle production volumes for the second quarter of 2026 and calendar years 2026 and 2027 were included in our press release from earlier today. Consolidated revenue for 2026 is now expected to be between $2.65 billion and $2.75 billion. Consolidated gross margin is still anticipated to be between 34% and 35% for the year. Consolidated operating expenses, excluding severance impairments, are forecasted at $410 million to $420 million. The effective tax rate is expected to be between 16% and 18%. Capital expenditures are projected at $125 million to $140 million, and depreciation and amortization is expected to total $100 million to $110 million. Also, based on the S&P Global Mobility light vehicle production outlook and the company's estimates for premium audio, aerospace, medical, fire protection and consumer electronics products, the company has updated its expected calendar year 2027 revenue range to be between $2.8 billion and $2.9 billion. As it relates to the recent invalidation of the IEPA tariffs by the U.S. Supreme Court, the company has not recognized any potential refund in its first quarter results. The company is in the process of assessing the potential impact of such a validation in its eligibility and process for seeking refunds. As of March 31, the company estimates that approximately $15 million of tariff costs have been capitalized in inventory associated with IEPA tariffs, which had not yet been expensed as of that date. Since the inception of the IEPA tariffs, the company, including VOXX, has directly paid a cumulative total of approximately $42 million, excluding amounts paid indirectly through suppliers, which was partially offset by approximately $5 million of costs recovered from customers to-date. Given the evolving situation, the company has not recognized any potential refunds because of the difficulty in predicting whether any tariff refunds will be available or whether the U.S. Customs and Border Protection Agency will contest any tariff refund claims made by the company. Based on first quarter performance and our current forecast for the remainder of the year, the company is increasing its current revenue guidance for the year, while maintaining the full year gross margin guidance. new tariffs, which are currently temporary, have been reflected in our outlook, assuming they will be effective for the full year. The company is also facing new and ongoing cost pressures from key commodities, including a number of precious metals petroleum-based products and memory components. These headwinds have not resulted in material supply chain disruptions to date, and we will continue to pursue customer reimbursement opportunities and internal VAVE projects to reduce the impact these headwinds could have on gross margin performance. At the 1-year anniversary of the VOXX acquisition, we are pleased with the cost improvements accomplished and how the teams continue to further integrate. We are also proud of the progress made across the organization as we begin to see the benefits of a shared strategy and expanded capabilities across the combined businesses. As we look ahead, we remain focused on the disciplined execution of many technology launches, development initiatives and R&D projects that are currently underway. Our focus on new technology is absolutely necessary to accelerate growth in a market where light vehicle production challenges remain. The efforts spent on new technology launches is designed to provide above-market growth over the next few years, and when combined with our disciplined approach to managing operating expenses, we believe we have a winning formula to create shareholder returns. We are encouraged by the increased interest from our customers on Gen 4 FDM and ICMS, Dimmable Visor and Large Area Devices, as well as several ongoing discussions with customers around becoming a strategic high-volume electronic supplier with a U.S. operating footprint to help OEM customers mitigate tariff exposure and geopolitical risks that exist in the current supply base. That completes our prepared comments for today. We can now proceed to questions. Operator: [Operator Instructions] Our first question comes from Joseph Spak with UBS. Joseph Spak: Steve, I actually wanted to pick up right where you left off. You mentioned this interest in becoming a high -- strategic high-volume electronic supplier. Can you give us some indication about how substantive the customer interest is? Are we talking about RFQs and formal sourcing decisions? Or is this more exploratory? And what type of incremental investment do you think should take from your perspective? Maybe what types of products or end markets are you talking about? And how should investors begin to think about a potential return on that initiative? Steven Downing: No, it's a great question. What I would say is we're right now with a couple of different OEMs were in the RFQ phase. So nothing's been sourced or awarded yet. But really, what you're looking at is, and you can imagine inside of a vehicle, there's a lot of electronic modules that are sourced as either Tier 2 or Tier 3 some of those in varying complexity. But from a capital footprint, we believe, over the next couple of years, it's a very light capital lift and definitely well inside of our capital guidance already for this year. Obviously, if that business were to expand significantly, then it would have a capital call, but it would be very much in line, if not a little less on it. If you look at capital as a ratio to revenue it would be actually a lower ratio than what we have currently with auto-dimming products. Joseph Spak: And just as a follow-up, do you see opportunities outside of automotive? And what do you think about your capabilities to be able to participate there? Steven Downing: Yes, absolutely. We see a lot of opportunities. Obviously, we're already making electronics in the aerospace industry, both for Boeing and Airbus, one of the things we believe is an opportunity is to continue to expand our aerospace footprint in the electronic space, but it's also starting to bring in with the addition of VOXX and Klipsch. We're starting to see opportunities in the consumer electronics space as well. Joseph Spak: Okay. And then just on the guidance. I was just wondering if you could help us sort of unpack because you raised the revenue guidance, it looks like by a little bit more than the beat. You did take a softer production view. So maybe what's sort of just driving that optimism over the rest of the year? And then within the unchanged gross margin guidance, just maybe a comment or two on what you're seeing from an inflationary pressure perspective and whether we should -- how we should think about that sort of falling within the range from some higher costs or if there's internal offsets to some of those pressures? Steven Downing: Sure. So I'll start with the revenue question first. You're exactly right. I mean we're seeing a lot of strength on the technology side and advanced features, which is fortunately more than offsetting some of the headwinds on the light vehicle production side. We tend to be a little more -- a little -- pretty aligned with S&P where they're at. I know it's a little more pessimistic than what some other Tier 1s or OEMs would say production is going to look like, after several years of this and production declines, we tend to believe that these numbers make sense to us. And so we're a little conservative in terms of light vehicle production, but we do see good demand for our highest end products, especially Full Display Mirror and cabin monitoring. And then like Neil mentioned in his prepared comments, as we move into '27 and beyond, advisers and large area devices, we're really starting to get a foothold there. And so -- we have the one award for visors already. I would say that by the end of this year, we fully expect that we'll have a couple more of those awards. And so we're pretty optimistic about longer term what content will look like -- and we've known for a few years now that we -- if we're tied just to light vehicle production that was going to be a declining market. So -- we've offset the challenges in China with growth in North America. And honestly, despite even though it's down a little in Europe, we're more than beating the market, both in North America and in Europe, Japan and Korea. On the margin side, yes, we're -- definitely, there's a lot of headwinds right now in the space, especially if you look at it between between the tariff situation, which is obviously very unpredictable at this stage, but between tariffs and then the cost increases we're seeing in precious metals. And when we say that, we're really talking about metals that we have exposure to, silver, gold, ruthenium, very, very volatile pricing in the last 12 months. And so those are definitely to a headwind. And then obviously, you can read about this anywhere. But when you start talking about memory components, we're kind of back to where we were about 3 years ago with definitely an inflationary market on the electronics side. So -- but all that said, when we look at our forecast, we have a lot of internal VAVEs and some positives as well. So we think we can weather that storm and still hit that margin guidance for the year. Operator: Our next question comes from Luke Junk with Baird. Luke Junk: Maybe I'll start with the guidance revision, Steve. Just want to understand the walk a couple of points relative to a little bit of a headwind from production [indiscernible] a lot and clear in terms of the higher tech products. What I want to double click in is just your [indiscernible] and vehicle mix you to date. And anything that we should be aware of relative to your updated assumption or any customers dynamics that could impact incrementally your view just underlying your shipments going through the year? Steven Downing: Thanks, Luke. What I would say on the -- especially on the vehicle mix side, we're doing really well in terms of -- despite some of the challenges and the overall sentiment in the market, demand for higher-end or well-equipped vehicles has continued to hold steady. And that's the one for us. I mean, they're starting to see some incentives in the marketplace, but it's not over the top right now. What we've seen on the negative side is really de-contenting on the lowest-end vehicles, and that's where you'll see some of the challenges on the volume side, both IEC and OEC volumes, especially in lower-cost markets. where these features are nice to have. But if the consumer is not paying for them, OEMs are looking for a way to try to save money. And so that's the challenge is how does that mix shape out over time, right? Does it continue to be moving towards lower end vehicles? Or are we going to continue to see demand on the higher end and well-equipped vehicle side? What we're seeing right now and on the release side and even from our customers is that, that portion of the vehicle build that's focused on higher-end consumers is holding up very well right now. Luke Junk: Cool. And then second, Neil, it would be just great to get your perspective on large area device so far this year in terms of your internal efforts now that you finally have the equipment in-house in terms of key progress markers and just iteration moving towards commercialization ultimately. Neil Boehm: Yes, absolutely. Team's made some really good progress in the last 2 months with the equipment we talked about in the first -- I guess, fourth quarter a couple of months ago, equipment's up and running. Just got buy off on it from the supplier, from the insulation and fixing some of the process. We just started running our first passes of some material through it earlier this week. So we probably have another, let me -- I'll sum it there's another month or 2 of kind of weeding out the process and really trying to get that tuned into what we need to be able to make good material. In the meantime, we're still utilizing our third-party sources, still putting parts through construction and manufacturing and validation to prove out the technology. Luke Junk: And lastly, just the electronics manufacturing opportunity from a margin standpoint and the sorts of things you'd be looking at Steve, it seems from a capital standpoint, that's pretty light lift, at least initially? Would it be right to think this is sort of a typical margin opportunity as well, not anything in [indiscernible] the contract manufacturing type relationship? Steven Downing: Yes. So if you look -- if you pull the companies who are currently involved in this business, we're modeling margin profile that's very similar to theirs. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping to start with one on what you're seeing in a bit more detail with respect to auto production trends. I understand your based on your forecast on the latest S&P view of negative 2%. But could you talk a bit more on what you're seeing with your own business by region? And I understand some of the strength at the high end. But given the war in the Middle East, I'm hoping you could help us understand if you've seen any degradation in OEM schedules maybe looking into the back half of the year. Steven Downing: Yes. Thanks, Mark. What I would say first is that we haven't really seen any degradation due to the Iran situation. What we have seen over the last 18 months to really the last couple of years, is definitely some weakening in the European market, especially with the traditional OEMs that we have our best content with. So if you think about the German OEMs, that's usually where we've had our best book of business. There has been a trend towards lower end vehicles in the European market. And so that has been a negative headwind we've been dealing with for the last couple of years. We don't see that worsening right now. It's kind of on the same plane as it was and has been -- and so we're not too negative that it's going to continue to worsen in Europe, but it's just not the uplift that we used to have out of the -- especially out of the German market. Mark Delaney: Understood. And my other question was also on the electronics opportunity you were describing. I understand you've had some RFQs out, but to the extent that those are successful, could you speak a bit more as to when you think you can start to see a financial impact from these engagements? Steven Downing: Yes. I think right now, most of what we're quoting is kind of like early '28 type SOPs. There's always the possibility something could come in quicker. It probably wouldn't be material from a revenue standpoint. -- if it did happen sooner, but really kind of what we're targeting is that '28 to '29 to have kind of a material level of revenue from that product line. Operator: Our next question comes from David Whiston with Morningstar. David Whiston: Just curious how -- for Q2, how are you balancing buybacks given what I see as a very cheap stock versus rising in-book costs in the Iran war? Steven Downing: Yes. So it's a great question, David. We would agree with you, the stock is definitely undervalued, at least given our performance. And so we're going to continue to take advantage of that, whenever possible. So the good news is if you look at how we fund share repurchases, it's all driven off of cash flow from operations. So the conflict isn't really changing our financial performance. If it did, obviously, we'd have to slow down repurchases, but we don't see anything really creating that type of financial problem with our ability to generate cash off the existing business. David Whiston: Okay. And on all the EV program cuts across the industry lately. Has that caused any major volume problems for you guys versus your budget? Steven Downing: Yes, there's definitely been some headwinds. I mean we were anticipating some better content. If you look at that vehicle lineup that we typically have really strong content, including not only just IECs but also OECs -- and so as those programs have pushed out, gotten canceled, delayed, that definitely has taken some of the growth away that we are hoping for. But it's not so substantive that it's causing a huge change to our forecast. It's just you would have expected another 1% or 2% of growth at least if those launches had happened on time and at volume. Operator: [Operator Instructions] Our next question comes from James Picariello with BNP Paribas. James Picariello: I want to first ask about an update on the VOXX integration and just how we should be thinking about the EBIT or EBITDA trajectory from here, right? Last year, for the full year, we saw adjusted EBIT of just over $10 million. We're almost at $6 million, did I say $1 billion, $10 million. Steven Downing: I like that number better. It was in yen. We knew. David Whiston: $6 million, almost $6 million just in the first quarter alone. So yes, just any thoughts on how this trajectory looks from here? Kevin Nash: Yes. I mean, great question. I mean I think there's been a lot of hard work. I mean, we are seeing a little bit of new growth from some of the new products that Steve mentioned -- or Neil mentioned in the call, so that they -- took typically carry higher margins. But their business is quite seasonal. So you expect a little bit of a dip probably in Q2 with a ramp in Q3 and Q4. But if you annualize that first quarter number, that's our expectation from a pretax profitability [indiscernible] mid- to high 20s is what we're looking at this year with the ramp towards the end of the year and into next year to get to our target of, call it, that 40% to 50%. James Picariello: Right. Okay. That's great to hear. And then -- just on the de-contenting topic. I mean, I know it was -- it was touched on during the prepared remarks. But I view it as two buckets. Obviously, I care more about your view, right? You have a global major global EV manufacturer. And then some dynamics taking place in Europe? Can you just shed light on what the latest is there? Steven Downing: Yes. I would say you're absolutely right. I mean it kind of breaks out that way. I mean you have the trend of what's going on with EVs, and obviously, there's no doubt that a lot of the investment that went into that on the supplier side did not have the payout that we were hoping for from a development standpoint. The good news is most of our products are ambivalent as it relates to what the powertrain is. So if we're launching a product for an OEM and they move from an EV to platform. We typically will have the same product on both of those. So it's not like the development is completely wasted. However, the volume difference and the content may be different between an ICE platform and an EV platform. And then as it relates to geographically, you're exactly right. I mean there's definitely some trends in certain markets, obviously, the China thing is very obvious of what it is, definitely have struggles there geopolitically, even selling products into Chinese and domestic OEMs. But -- on the flip side of that, probably the region that struggled the most, quite frankly, has been in Europe in terms of the content. And like I mentioned before in the Q&A session, the German OEMs where we've traditionally had some of our best book of business have definitely have had some troubles over the last couple of years. And so we don't see that changing or correcting course anytime soon. And that's where the focus on content and new technology is really important is for those customers. So if we want to -- you can't count on just auto-dimming mirrors for growth with those OEMs. And so we have to continue to evolve, and that's where the in-cabin monitoring system and the visors are really starting to gain traction and attention from those customers. and there's definitely a lot of interest there. And like we said, and you've seen at CES large area of device demand is there. Right now, we're in the engineering cycle where we have to get through this product. You have to make sure it's robust before we feel comfortable launching it. But we're much closer today than what we were anytime in the last couple of years. And so I think our confidence as a team, the durability of that product is surviving and lasting much better. I mean, we fixed literally thousands of issues that could have caused a program problem. And there are still challenges. There's no doubt, but we're definitely way further down that path than what we were this time last year. Operator: I would now like to turn the call back over to Josh O'Berski for any closing remarks. Josh O'Berski: Thank you, everyone, very much for your time, questions and attention. We hope that you have a great weekend. This concludes our call. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Alpine Q1 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jenna McKinney, Director of Finance. Please go ahead. Jenna McKinney: Thank you. Joining me and participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team who will be available to answer questions during the call. As a reminder, many of our comments today are considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. You can find our SEC reports, earnings release and most recent investor presentation, which contain reconciliations of the non-GAAP financial measures we use on our website at www.alpinereit.com. With that, I will turn the call over to John. John Albright: Thank you, Jenna, and good morning, everyone. We are pleased to report a strong first quarter in 2026, building on a record level of investment activity we achieved in 2025. We continue to execute our investment strategy by seeking to assemble a high-quality portfolio of single-tenant net lease properties leased to investment-grade rated tenants in addition to originating commercial loans with attractive risk-adjusted returns secured by high-quality real estate with strong experienced sponsored. During the quarter, we acquired a retail property in downtown Aspen, Colorado, for $10 million. This acquisition was structured as a 50-year absolute triple-net master lease and initial cap rate of 8.5% with 1.25% annual rent escalators. With regards to the property dispositions, we continue to selectively prune our portfolio, selling 3 non-investment-grade-rated lease properties for $5.8 million and weighted average exit cap of 7.4%. As a result of our combined first quarter property transactions, our property portfolio consists of 125 properties, totaling 4.3 million square feet across 31 states with a 99.5% occupancy and a WALT of 9.3 years. 50% of our ABR is generated from investment-grade rated tenants with Lowe's, Dick's Sporting Goods, Walmart and Best Buy, representing 4 of our top 5 tenants. Additionally, during the quarter, we originated a $32 million first mortgage loan, of which $8.6 million was funded at close. The loan carries a 24-month term with an initial interest rate of 13% inclusive of a 1.5% paid-in-kind interest, stepping down to an 11.5% current pay rate upon the borrower meeting certain conditions. The loan will fund the development of 101,000 square foot retail center with national investment-grade rated tenants and 3 outparcels. The retail center is located in the Atlanta MSA is shadow anchored by 128,500 square foot Target currently in development and is adjacent to an existing Publix, creating a strong and varied merchandising mix. Further, with regards to our commercial loan portfolio, we closed and funded the $31.8 million Phase 2 of our first mortgage loan investment secured by a luxury residential development located in Austin, Texas metropolitan area. The A-1 participation that was previously announced contributed an additional $10.8 million towards this funding. Accordingly, net of the A-1 participation, our combined investment in Phase 1 and Phase 2 of this loan was $40 million at quarter end. Reflecting this quarter's loan activity including two loan repayments totaling $7.2 million in January. Our commercial loan portfolio totaled $160.4 million with a weighted average current yield, including PIK interest of 13.5% at quarter end. We have sought to originate loan investments that complement our property portfolio and increase the overall yield earned on our total assets. Notably, our loan portfolio has now grown to our targeted level of approximately 20% of our total undepreciated asset value. However, as noted previously, timing of funding and repayments of loan investments may cause the relative size of loan portfolio to vary quarter-to-quarter. Looking forward, we have a highly attractive pipeline of investment opportunities, including high-quality properties, net lease investment-grade tenants and attractive loan opportunities. Given this robust pipeline and our recently completed investment activity, we utilize both our common and preferred ATM programs this quarter, raising a combined $36.2 million of equity. Furthermore, we are raising our 2026 outlook for investment volume by $100 million and increasing guidance for FFO and AFFO per diluted share to new ranges that apply approximately 12% growth at the midpoints. And with that, I'll turn the call over to Phil. Philip Mays: Thanks, John. Beginning with financial results. For the quarter, total revenue was $18.4 million, including lease income of $12.6 million and interest income from commercial loan investments of $5.8 million. FFO and AFFO for the quarter were both $0.53 per diluted share, representing 20% growth over the prior year period. Earnings growth for the quarter was driven by investment activity, in particular, our commercial loan investments as we grew the loan portfolio to approximately 20% of our total undepreciated asset value. Moving to the balance sheet. During the first quarter, we amended and restated our unsecured credit facility. Our new facility includes a $250 million revolver due February 2030 with two 6-month extension options, a $100 million term loan maturing in 2029 and a $100 million term loan maturing in 2031. At closing, we applied existing SOFR swaps, locking in initial fixed interest rates for both term loans at approximately 3.5% and for $100 million of the outstanding balance under the revolving facility at approximately 4.8%. As the existing stock agreements mature, we have entered into 4 swap agreements, which will result in changes to the current interest rates. I refer you to our prior press release announcing the amended credit facility, which discusses the timing and impact of those changes. Notably, with the closing of this facility, we now have no debt maturing for almost 3 years. During the quarter, we were also active on both our common and preferred ATM programs. Under our common ATM, we issued approximately 1.7 million shares at a weighted average gross price of $19.31 per share for net proceeds of $31.6 million. And under our preferred ATM, we issued approximately 186,000 shares at a weighted average gross price of $25.17 per share for net proceeds of $4.6 million. Reflecting our investment activity and equity issuance, we ended the quarter with net debt to pro forma adjusted EBITDA of 6.6x and approximately $90 million of liquidity. John provided an update on our property portfolio. As previously noted, our property portfolio includes properties acquired through sale-leaseback transactions and at quarter end, approximately 11% of our ABR or $5 million is generated from these properties, which include the Aspen property acquired this quarter and 3 previously acquired restaurants. Although these sales leaseback properties constitute real estate for both tax and legal purposes, GAAP requires them to be accounted for as financing. Accordingly, current annual cash payments from these properties of approximately $3.7 million are reflected as interest income rather than lease income. Also, as a reminder, our quarterly earnings press release includes a supplemental table that provides the details for both our commercial loan portfolio and related interest earnings. With respect to our common dividend, as previously announced in February, the Board increased our quarterly common dividend by 5.3% from $0.285 per share to $0.30 per share beginning this quarter. This new quarterly common dividend rate represents just a 57% AFFO payout ratio for the quarter. Now turning to guidance. For the full year 2026, we are increasing our FFO outlook to a new range of $2.09 to $2.13 per diluted share and our AFFO outlook to a new range of $2.11 to $2.15 per diluted share. Further, as John discussed, we are increasing our investment activity by $100 million to a new range of $170 million to $200 million. With that, operator, please open the call to questions. Operator: [Operator Instructions] Our first question will be coming from the line of Michael Goldsmith of UBS. Michael Goldsmith: First question, guys, you've talked about the strategy of high-quality net lease in combination with the commercial loans. So can you just talk a little bit about your acquisitions, your activity in the quarter and then what's in the pipeline and how that fits with that overall strategy. John Albright: Yes. I mean I think it's pretty straightforward. We have a fair amount of activity in the pipeline right now that we're really trying to bring in some additional investment-grade credits, higher up in our credit profile, and we're finding some good opportunities. So we're actually very optimistic on what we could do in this coming quarter. And then on the loan side, there are a couple of loans still in the pipeline. And as we have some lower-yielding loans burn off -- pay off in the upcoming months. That will be a nice recycle into higher-yielding and high-quality loans. So it's kind of a little bit more of the same. So everything looks pretty good from our perspective right now. Michael Goldsmith: And to follow up on your last point, I presume you're referring to this July 2026 loan? And is that just like -- is that only -- I guess you have one more kind of near-term loan expiring off in 2026? I guess you commented in the call how that could add some volatility to kind of like [indiscernible] to the earnings, but do you feel good about the opportunities to redeploy and limit some of that volatility in the near to intermediate term? John Albright: Yes. We feel very confident on kind of -- as we've expanded the loan program and done multiple loans with these developers, they are getting very used to kind of our -- the way we do business and the bespoke way we can kind of tailor these loans with their development needs. And so as these loans pay off, there's something else in the pipeline that they need to accommodate. So the pipeline is very strong and very high quality and the sponsors are high quality as well. So feeling good that these lower-yielding loans that are going to be paying off, and some of them are going to be paying off, we think, early, we'll have good opportunities to reinvest. Operator: Our next question will be coming from the line of Jay Kornreich of VP. Jay Kornreich: At the end of your comments, you referenced the loan portfolio nearly at the cap of 20% of total assets. So should we expect kind of a shift in strategy from here where the bulk investments are coming more so from more traditional net lease real estate instead of the loans? And if so, I guess, how do you view your cost of capital and deal spreads you could achieve on those types of new investments? John Albright: Yes. So we do have a larger amount in the pipeline of traditional net lease investments. And as far as some of the additional loans in the pipeline, as I mentioned, those will probably be fulfilling the need that we have with the lower-yielding loans paying off. And so with regards to kind of our cost of capital, as you know, in our 5-plus years, we've always been kind of cost of capital kind of constrained. So we do move out some properties at lower cap rates and recycle. But the yields that we have in front of us on the net lease acquisition side work well with sort of our capital structure right now. But Phil, do you want to chime in on that sort of end? Philip Mays: Yes, I think that's right. And then if you just think about it going forward, Jay, kind of we are near that 20% cap kind of an 80-20 blend, 80% properties, 20% loans and you look at the yields we've done in both of those buckets, your cost of capital works nicely with that. Jay Kornreich: Okay. I appreciate that commentary. And then I guess just maybe on the disposition side, you have done a significant amount of work over the past 18 or so months. Just with rightsizing tenant exposures, shrinking exposure to Walgreens and dollar stores, while I guess also buying higher credit in Walmart. Are there any other specific exposures you're kind of focused on rightsizing at this point? John Albright: No, not really. I mean, even though I think in the past, we've gotten asked about at home and so forth. But the at homes that we have are very high performing, and we've had interest from other tenants that want to buy the at home and bringing in their concept and at home is not interested in moving. So we have -- so we're in a good spot where we've gotten a high-yielding asset in a great location in Charlotte, and we're pretty confident they're going to be renewing because they're declining people, they want to give them a check. So even though you may see some credits that don't fit. It's all about the quality of the real estate. And we're -- there's actually one that we're working on right now that you would say would be a very low quality tenant, but we have an investment-grade tenant that wants to take over that space, and it looks like we'll be able to negotiate a buyout. So we're always looking to prune and upgrade, but it's -- again, it's all about the locations that we kind of really specialize in trying to buy that. We know that if these tenants leave, there's going to be a nice replacement opportunity. Operator: Our next question will come from the line of Matthew Erdner of JonesTrading. Matthew Erdner: Sticking with the loan portfolio for a little bit, do you guys have any loan to own options that you see yourselves capitalizing on? Or is it just going to be kind of recycled back into new ones? John Albright: Yes. The cap rates that they'll be able to sell these assets will not work with sort of our investment program. So most likely, none of these will turn into ownership positions. But certainly, as the developers build these tenants out and look to sell them they give us a right or really just come to us and say, do you want to buy it and we'll save a real estate commission. But the cap rates are very strong for these assets. So unfortunately, they just really won't fit. But hopefully, down the road, we'll find some where we can actually fit those into. And if we have a 1031 need, that could be more where that opportunity comes in. Matthew Erdner: Got it. That's helpful. And then looking out a little bit into '27, '28, it looks like 20% of the leases are rolling over. Could you just kind of walk through the process and if you've started discussions with some of those tenants and just how you envision those discussions going? John Albright: Yes. I mean, I think that everything that we have coming up, we've been in discussions with these tenants over time. And if we had if we had issues, we would probably be dealing with them early. So feel very strong that these are going to be renewal candidates. And as you know, that's one of the opportunities that -- where we like to buy with a shorter-term leases with a high chance of renewal. And a lot of these things are below market. And so that's why we're -- you're going to probably see a lot of natural renewals happen and usually get a bump up on the leases as well. Operator: Our next question will come from the line of Gaurav Mehta of AGP, Alliance Global Partners. Gaurav Mehta: I wanted to ask you on your investment-grade exposure and the lease term. As you look to acquire more properties, should we expect that you would look to increase that exposure and increase the lease term further? John Albright: Yes, that's -- look, that's always the goal, and there's a little bit of a mix. There's some properties in the acquisition pipeline that are shorter duration. And so there's definitely an opportunity to go in there and do an extend blend. But again, as I just mentioned, a lot of the lease rates are so low that we don't really want to give up that bump because we want higher lease duration. But what we have here in the pipeline is accretive to our lease duration as far as getting it longer term. And so that will look pretty good for us. But again, we're not in a hurry to kind of just have a higher lease duration and give up economics to our shareholders. Gaurav Mehta: Second question, on the investment guidance, just to clarify, the $170 million to $200 million, is that what you're deploying? Or is that on the loan side that includes what you're funding or its just originations? Philip Mays: Yes. So generally, both funding and deploying or if you want to look at the loans on an origination basis, both will fall in that range. I would say probably the funding is going to be just looking at the pipeline, it's a little hard to estimate with future loans and what funds are closing. But right now, I'd say the funding is probably $20 million less than the deployment, including full origination values, but both will fall within that range. Operator: Our next question will be coming from the line of Wesley Golladay of Baird. Wesley Golladay: I just want to go back to the question about the lease renewals. Do a lot of those tenants with the below-market leases, do they have options? Can you just mark those to market? John Albright: They have options. So unfortunately, it's going to be a set bump based on the renewal options. Wesley Golladay: Okay. Then a quick one on the accounting side. There's a lot of restricted cash around $24 million. Is that mainly tied to the, I guess, the more senior loans that you sold? And does that restricted cash get released throughout the year? Philip Mays: Wes, it's Phil. Yes, most of the restricted cash at the end of the quarter is related to loan reserves. We take pretty healthy reserves upfront as part of our loan process in closing. So a lot of that restricted cash is related to loan reserves. Operator: The next question will come from the line of RJ Milligan of Raymond James. R.J. Milligan: So maybe just a follow-up on that loan reserve comment, Phil. Obviously, with net lease, we can go down the top tenant list and look for people that are on the watch list, we don't have a lot of visibility on the loan book. I'm just curious if there's anything that you guys have on the watch list in terms of the loan book? Obviously, the PIK is a pretty big component. Is there anything that gives you any concern about collecting that as those loans mature? Philip Mays: Yes. So let me be clear about the loan reserves. So we'll take reserves related to real estate taxes or a certain period of interest upfront. And it's just part of our underwriting. And Steven or John can chime up and provide more details on that. We don't really have any credit concerns about any of the loans. And though those reserves are credit related, it is just part of our underwriting, conservative underwriting and making sure we get nice cash deposits upfront related to like a year of debt service or something like that. John Albright: Yes. So RJ, we basically want to really have these loans structured pretty tightly. So we forced the reserves, so we don't have to worry about real estate taxes, interest and so forth. And so out of our loan book, there are no concerns right now. The PIK is really done to accommodate the timing of how long it takes to develop. So you have less cash burn while you're developing. But the book is very healthy right now. R.J. Milligan: Great. That's helpful. And then Phil, maybe just on the capital raising side, you guys had a little preferred and some equity this year. How do you think about the more attractive capital sources going forward as we move through the year? Philip Mays: Yes. I mean just for -- so we ended the quarter with about $90 million of liquidity. At this point, we're generating probably close to $15 million of cash flow on an annual run rate. So that's obviously a great use for us on the free cash flow. Then John spoke earlier about dispositions at a lower cap rate. So that would be another use and then after that, RJ, we could look to be opportunistic on common or preferred, if it's trading at a good level. Operator: Our next question comes from the line of John Massocca of B. Riley Securities. John Massocca: I know we've talked a lot about the loan book over the call, but maybe kind of going to the one new loan originated in 1Q, there's a step down in there if they meet certain conditions. What are kind of -- maybe some color around the conditions that they would need to hit to get down to that 11.5%? John Albright: Yes. So basically, they've been negotiating leases and waiting for tenants to go through their signing process. And so if the -- some of the leases hadn't been signed by the time we closed it, so we said the rate needs to be higher until you kind of get those finalized. So it should be relatively short duration, unfortunately, but that's what that's about. John Massocca: Okay. And then I know the Austin loan was kind of contingent on them kind of selling some of the homes in that piece of property. So I mean how is that progressing? I guess how does that impact maybe interest income from that particularly large loan investment you've made? John Albright: Yes. So I'll answer kind of the cadence on the lot sales. So they're selling lots. So as you know, as the lots are sold, it goes through our A-1 participant first. And given that it's obviously late spring, the activity is stronger, but the asset has a large amenity that won't be open until the fall. So we expect that in the fall is really where the lot sales are going to pick up as people kind of going to get a lot more excited about it when it's closer to having the large amenity open. John Massocca: Okay. I mean, I guess, maybe the anticipation there is that your portion of the loan won't start getting paid down until towards the end of the year? John Albright: Correct. John Massocca: And then last one, Phil, maybe on guidance. In terms of G&A assumptions in the guidance, are you assuming any incentive fee payout to CTO at this point? I know it's kind of early in the year, but just kind of thoughts around how that could maybe impact your guidance outlook. Philip Mays: Yes. So the guidance doesn't assume any incentive fee. What is in there, right, is a little bit higher of a management fee run rate given the equity that we issued. So for the quarter, the management fee was about $1.25 million just based on the equity that was issued during the quarter, the go-forward run rate is about $100,000 higher a quarter, so $1.350 million, assuming no additional equity. But other than adjusting the management fee for our expectations, there's no incentive fee in the guidance. Operator: Our next question will come from the line of Craig Kucera of Lucid Capital Markets. Craig Kucera: We've been hearing from some of your competitors that there are an increasing number of portfolios coming to the market basically from like family offices that got into the space in 2021 and issued 5-year debt at rock bottom rates. Maybe they don't want to refinance. Are you seeing any small portfolios that might be attractive as acquisition candidates? John Albright: We're seeing a little bit of owners of assets that are coming up on a duration or they want to lower their exposure in a larger portfolio. But we're not seeing bigger portfolio sort of opportunities. The ones that we're looking at are really nice size for us and luckily being a small-cap company is that these assets can really move the needle versus the very large companies that really need to do those portfolio acquisitions. So we'll let the large tankers take on those. And as we just add these one and twos, they all add up very nicely for us, but we're not really chasing any sort of portfolio opportunities. Craig Kucera: Okay. Got it. Just one more for me. I think you were buying at about a 7.4% cash cap rate last year. This quarter, you closed at 8.5%. Just curious to hear your overall viewpoint on the acquisition environment. Has there been any move in pricing? Or should we expect something closer to, call it, 7.5% this year? John Albright: Yes, you're going to be closer to 7.5% of this coming quarter, at least, and maybe might see some opportunities in a quarter or two that are higher. Operator: And I'm showing no further questions. This concludes today's program. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Orchid Island Capital First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Melissa Alfonso, Office Manager. Please go ahead. Melissa Alfonso: Good morning, and welcome to the First Quarter 2026 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 24, 2026. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir. Robert Cauley: Thank you, Melissa, and good morning, everyone. I hope everybody has had a chance to download our deck as usual. That will be kind of the basis of our call today. First off, I'd just like to walk you through the agenda as usual. Jerry Sintes, our Controller, will walk you through the financial results. I'll then go through the market developments, basically discuss briefly the market variables that impact our decision-making and our performance and some have a few comments on those. Hunter then will talk about the portfolio and our hedging positions, and then we will open the call up for questions. With that, I'll turn it over to Jerry. George Haas: Thank you, Bob. If we start on Page 5, we'll look at the financial highlights of the first quarter. For the first quarter, we had a net loss of $0.11 per share compared to net income of $0.62 in Q4. Our book value at 3/31 was $7.08 per share compared to $7.54 at December 31. Total return for the quarter was a negative 1.3% compared to 7.8% in Q4, and we declared dividends of $0.36 during both quarters. On Page 6, portfolio highlights. Our portfolio continued to grow. During Q1, we had an average balance of approximately $11 billion compared to $9.5 billion in Q4. Our leverage ratio increased 7.9% compared to 7.4% at 12/31. 3-month CPR during the quarter was 14.7% compared to 15.7% and our liquidity at 3/31 was 54.5% compared to 57.7%. On Page 7 is our financial statements, which are also presented in our earnings release last night and will also be available in our 10-Q later. And with that, I'll turn it back over to Bob for a discussion of the market development. Robert Cauley: Thanks, Jerry. All right. I will start on Slide #9, as I mentioned. We're just going to go through the market variables that impact our decision-making and our performance. So on Page -- or Slide 9, we have the interest rate curves on the top of the page. On the top left is the nominal or cash market curve. On the right is the swap curve, on the bottom is just the spread between 3-month treasury bills and 10-year treasuries. Just a few general comments. Obviously, in this environment, the war headlines with respect to the war are driving performance of not just interest rates, but basically all risk assets. We kind of have competing forces at play. On the one hand, you have forces that are inflationary in nature. Others are kind of impact growth or slow growth. The ultimate outcome is yet to be seen. We could end up with both. We could end up with stagflation. With respect to the economic data we've seen, it's actually been fairly resilient, although I would characterize it as mix. We've had some strong, some weak. But that being said, most of the data that we've seen so far is really for the pre-war period. So we haven't seen a lot to gauge the impact of the war. I'd also like to point out that while the war kind of represents a headwind to economic activity and maybe supportive of inflation, there are also tailwinds impacting the economy. The One Big Beautiful Bill was passed last year. The government is running a very significant fiscal deficit. Both of those factors should be kind of supportive of the economy. And I think they go a long way in explaining why the data has been so resilient. And kind of finally, as we're fairly far into Q1 earnings, the earnings have been very strong. So at least so far, the impact of the war seems to be modest. With respect to rates, as I mentioned, rates have been very stable. If you look on the left, you can see that the curve has flattened. The market is pricing out most Fed cuts that were in the market 3 months ago or pre-war. Now there's virtually nothing priced in terms of cuts for the balance of '26, a few basis points. But the curve has been very stable. The impact of inflation is driving Fed cuts out of the market and the impact on growth is keeping longer-term rates stable. On the right-hand side, you can see the swap curve, even more stable, same kind of flattening. I would say that the difference between these 2 is simply just swap spreads. And if you look at where swap spreads are for some context, most spreads across the curve are at or slightly above their 12-month averages. They have been moving in Q1. I'll say a little bit about that in a moment. Moving on to the next kind of variable for us, obviously, mortgage spreads and the performance of TBAs. We do not own typically a lot of TBAs. We do own spec pools, but they trade at a spread to TBAs. So obviously, the performance of this matters. If you look on the top, you can see the spread of the current coupon mortgage to the 10-year treasury. This data goes back 16 years. So it gives you a lot of perspective. As you can see on the right-hand side, for quite a while, mortgage has been tightening. I think it's noteworthy to note that's pretty solid performance and also without the participation of one of the largest -- typically one of the largest holders of mortgages, which are the large banks. They have not been active in the market and yet this market has performed well. If you look at the extreme right, you can see the tightening. As we all know, early in January, President Trump put out a post on TruthSocial, indicating that the GSE, Fannie and Freddie would be buying up to $200 billion in mortgages this year. Mortgages gap tighter. That was in early January. As we moved into February, the performance of the sector was still very solid. At the end of the month, the war hit, we gapped wider. But as you can see, we've been tightening since. And so -- and the way I look at that is that the tightening that we've seen in place for 2 years appears to be resuming in terms of the extent of the tightening, our book was down about 6.1%. We've gotten back a little under half of that, but this week, we've given back a little bit, but we basically recouped about half. With respect to the prices of TBAs on the bottom left, as we always show, these prices are normalized. So for each coupon, we start at 100. I just basically want to show the change over the quarter. Obviously, the announcement by President Trump early in the month caused most mortgages to do very, very well, the exception being the orange line there. Those are higher coupon mortgages are representative of higher coupons and they would be impacted by speeds. The rationale for the buying of the GSEs is to try to drive spreads tighter, which would presumably impact refinancing driving it higher. So higher coupons did poorly. Then you see the impact of the war as we move into March and performance was all given up. Since quarter end, we've gotten some of that back, and we're pretty much back to neutral. With respect to the roll market, it's really with the exception of 1 coupon or maybe 2, it's been pretty benign. Most of the activity there was just driven by a presumed technical thing that those mortgages, the float was small and buying by the GSEs might have caused a squeeze, but that's actually gone away. The next big variable for us, obviously, is implied volatility in interest rates. Obviously, mortgages have a lot of vol component. So when vol is high, mortgages do poorly. When vol is low, they do well. And as you can see on the top, this chart really basically goes back a year or liberation day, April 2 of last year. And you can see after the initial spike, vol has continued to tighten. The onset of the war drove it higher, but we've come pretty much all the way back. So to the extent that vol stays at this type of level, this is very conducive for our business model. In fact, all of these variables, stable interest rates, low swap yields and mortgage performance that's steady, all of these are very conducive for our business model. Moving on to swap spreads in particular. You can see on the left of Slide 12 that spreads have been moving more negative or tightening. That's bad for our hedges because it's offsetting the impact of them, but then it's creating more spread for marginal cash investments -- as you see since quarter end, they started to wind back out. Of note, Hunter put on a trade during the quarter, whereby after TBAs had widened quite a bit after the war, we took a lot of our hedges out of TBAs and put them into swaps because they had tightened. And since then, that trade has worked quite well. If you look on the right-hand side, you see the DV01 composition of the hedge book. The green area represents swaps. So that's higher than it was prior to that. So that trade has worked out quite well. The next state variable, if you will, is refinancing activity. The current mortgage rate available to borrowers is around 6.4% depending on the day. As a result, refinancing activity has been fairly benign. We did have elevated levels -- as I mentioned, the President Trump's announcement, ultimately, the yield on the 10-year treasury dipped below 4% in late February, and we did see a couple of months of fast speeds. But with the backup in rates since then and mortgage rates sitting around 6.4%, for instance, on the bottom of the page, the gray area, the percentage of the universe that's refinanceable while it's higher, it's not high. And refinancing activity has been and we expect it to stay relatively benign. Hunter will have a lot more to say about that when we talk about the current construction of the portfolio, how we see that evolving over time and how we're positioned with respect to prepayment levels. The final variable that I would talk about would be the funding markets. I'm not going to say a lot about that now. We'll talk about that later. But the short answer is that the funding markets are far more stable than they've been. We had actions taken by the Federal Reserve, for instance, to put in place a reserve management policy, whereby mortgages as they roll off the Fed's balance sheet are invested in bills. Spreads available to us are at very attractive levels, and we don't have the spikes that we've had in the past at quarter end or year-end. So pretty much all of the variables that impact our market, whether it's the level of rates, implied fall in rates, swap spreads, funding levels, everything is in a very good state, if you will, right now. So it's very conducive and leaves us very bullish on the business model and levered MBS investing. With that, I will turn it over to Hunter. George Haas: The investment portfolio section of the presentation starts on Slide 16, if you're following along. Mortgage spreads continued their tightening trend that began following the volatility we saw last April, and that move accelerated meaningfully after the President's GSE purchase announcement on January 8. This drove spreads tighter by roughly 20 to 25 basis points versus swaps almost instantaneously within a couple of days. As we moved into February, those spreads began to drift a little bit wider and that widening accelerated sharply around the geopolitical events in the Middle East, jumping as much as 40 basis points wider at its peak versus the tights of the quarter. We closed the quarter near those wides and have begun seeing some stabilization since then as spreads have retraced about 20 basis points. So had a pretty volatile quarter in terms of spreads, first tightening sharply by 20 to 25 basis points before blowing out 40 and then quarter-to-date so far in April, we've tightened back in around 20 basis points. So against that backdrop, we remain focused on maintaining a highly liquid 100% agency portfolio and deploying capital opportunistically through this volatility. We raised approximately $108 million in the quarter and an additional $28 million in early April. Importantly, we were able to deploy that capital at attractive levels. Roughly half the capital as spreads drifted off their tight levels and at levels similar to those we saw in December and then the remainder of the capital we deployed after the big geopolitical shock. In total, we purchased approximately $1.6 billion of agency specified pools and TBAs with a focus on call protected collateral, including loan balance stories, borrower credit attributes and structures that we expect to perform well across the recent rate range. The net impact was a modest reduction in the weighted average coupon of the portfolio, reflecting a shift slightly towards slightly lower coupons. That included $182 million of loan balance 4.5s, $624 million of 5s, $425 million of FICO and LTV 5.5s and $138 million of 6 is mostly in the form of Geo pools and FICO. We also purchased $250 million of 15-year 4.5s. And as Bob alluded to, we've swapped out some of our TBA shorts that we had on in Fannie 30-year 5.5s for swaps at the kind of local wides. The net effect, as I mentioned, was a slight reduction in the weighted average coupon of the portfolio from 5.64% to 5.75%. More broadly, over the past several quarters, we've continued to refine the portfolio towards production coupons, say, at dollar prices around 99 to 101. So this encompasses the kind of 5% to 6% range of coupon buckets and that's where we see the best balance between carrying duration and convexity. As we've discussed, we've reduced our exposure to lower coupons that tend to exhibit greater spread duration and become -- can become a source of volatility during risk off periods, particularly when money managers are actively selling. At the same time, we remain disciplined around prepayment risk. The portfolio continues to be heavily concentrated in specified pools with strong call protection. At quarter end, approximately 92% of the portfolio was backed by specified pools with at least 10 ticks of payup. Turning to the funding side of the equation, Slide 19, if you're following along. Our funding conditions continue to improve over the quarter, allowing us to more fully realize the benefit of the December 10 rate cut. Both SOFR relative to Fed funds and our observed repo funding spreads to SOFR continue to grind tighter as reserve management operations helped stabilize the funding market. At present, we're currently funding in the 11 to 13 basis point range over SOFR, which is quite a drastic improvement from what we saw in the fourth quarter. Turning to the hedge positions. From a hedging perspective, we maintain a pretty consistent framework. The hedge coverage is approximately 65% of our repo balance, and we continue to put an emphasis on interest rate swaps. At March 31, our duration gap was approximately 0.07 years, which equates to a net long DV01 of roughly $375,000, I think $372,000 from the deck in the earlier slides. In terms of partial durations, our hedge profile remains barbelled between the 2- and 3-year part of the curve and the 7- to 10-year part of the curve. We do have a lot of swaps on in the middle, but that's just kind of -- if there were -- if I were to suggest there is a skew, it's to the front and longer end of the curve. By long end, I mean, 7 to 10 years. Prepayment speeds did pick up during the period, during the quarter in response to rates reaching local lows. Speeds increased from 10.9 CPR in January to 16.3% CPR in March. Looking forward, we expect speeds to ease in the coming months. I think the latest Street projections are for the prepaid universe to come down by approximately 15% expected to see as much, if not even a greater impact on us owing to the fact that we own more recent production in most of the portfolio. rates have moved higher. So that's really going to be the impetus for that slowdown in speeds. From a positioning standpoint, the portfolio remains somewhat defensive against the risk of inflation reaccelerating. The 6% higher coupon portion of the portfolio, which represents over 40% of total mortgage assets performed very well during this most recent sell-off, less -- did less so in the earlier parts of the quarter when rates were rallying. That said, marginal capital, we continue -- we expect to continue allocating towards production coupons, as I alluded to, kind of first discount or first premium part of the stack. And this is going to serve to gradually reduce our exposure to higher premium assets over time. Looking forward, while spreads have retraced from their recent wides, we continue to see an attractive environment for agency mortgages. At quarter end, the modeled returns for our combined portfolio, inclusive of hedges and at current funding levels were between 15% and 17% range return on equity. We believe those returns can move higher if prepay speeds do, in fact, trend lower or if the outlook for additional Fed easing reemerges. With that, I will turn it back over to Bob for his concluding remarks. Robert Cauley: Thanks, Hunter. Just to kind of give you kind of a quick rehash. Over the course of the last 4 or 5 quarters, Orchid has more than doubled in size. There have been benefits to us. As a result of doing that, we've been able to lower our cost structure. I would like to just turn your attention before I move on to any further points to Slide 31. Everybody would quickly turn to that page. What we have on Page 31 is basically 10 years of data. George Haas: 32. Robert Cauley: I'm sorry, 32. This is 10 years of data. On the top, we show our stockholders' equity going back to 2015. As you can see, it's been a very -- and by the way, this is annualized data. So this is annual data, not annualized, annual data. So the change year-over-year for both equity and our expenses. And as you can see, our shareholders' equity has grown by 442% over the last 10 years, which is an annualized growth rate of 18.4%. And our expenses have grown 159% or at a 10% annualized rate. The benefit of that or the offshoot of that is on the next slide, Slide 33, and you can see where our expense ratio is. Again, that's for calendar year 2025. As we move through the year, we will probably start to show this on a 4-month rolling average until we get to the end of the year when we can fully update the graph. As you can see, our expense ratio has moved from just under 3% or our G&A load to 1.7%, which is, as you know, very low in regard to most of our peers and actually only lower than all but the 2 largest peers. So that's one thing I wanted to point out. With respect to the portfolio, just to kind of quickly summarize what Hunter said, we expect prepayments to be benign, but we still have a very well protected portfolio with a very modest premium dollar price. Hunter mentioned that returns in the sector are approximately mid-teens, call it, 15% to 17% the current yield on the portfolio with a $0.10 per month dividend and the current book value is very much in that exact same range. So unlike last year, the yield of the portfolio in terms of the dividend divided by the book and returns in the market are very much in line. So to the extent that we were deploying new capital, it would not have any meaningful impact on the yield of the portfolio. And as we just alluded to, as we've grown the portfolio in the company, our expense ratio tends to come down. So in that -- the bottom line of that basically is that growth is accretive to earnings. With respect to our outlook, the market is very appealing to us. Returns are still attractive. They're not as attractive as they were a year ago, but they are still quite attractive. And all of the variables that matter to us, interest rates, the level, the level of swap spreads versus yields on assets, the level of implied vol, the funding markets, everything is in a very great state. And therefore, we are quite bullish on the market going forward. The big variable, of course, is the war. Nobody knows how that's going to play out, but it seems my personal observation, which is that the big tail risk going into the war was a massive escalation meaningful and lasting damage to production capacity in the Middle East. It seems that, that risk is now much lower. I think that kind of explains why the markets have become pretty benign over the last week or 2, while we still react to headlines from the war, generally, the risk assets have done well. And I presume that, that's just because we think that the big outsized tail risk is quite low. So that's our outlook. With that, we'll turn the call over to questions. Operator: [Operator Instructions] our first question comes from the line of Jason Weaver with JonesTrading . Jason Weaver: First, I noticed it looks like the effective duration of the portfolio extended a bit to about 3 as of 3/31. Was that intentional tactical decision around the purchase of the GSE purchase announcement or maybe just a consequence of adding those belly coupons? Robert Cauley: Yes, a little bit of both. And rates have drifted higher. The portfolio extended a little bit, and we're trying to sort of not add too much hedge at the local highs. So we don't mind that the portfolio duration drifts a little bit higher as we approach higher rates. In the beginning of the first quarter, when rates were pushing much lower, particularly in January and early Feb, we noticed underperformance in kind of higher coupons and wanted to make kind of a strategic shift to getting into some more 4.5s and 5s to have a little bit more balance. It is particularly true whenever we are at local highs in rates. I would just add to that. I agree with everything he said. If you look on Slide 21, we did move more of the hedge book to swaps. And if you look at the average maturity, it did go out a little bit kind of coinciding with what Hunter just said. So we moved the average life of the hedge book out about 0.3 a year. So moved it further out the curve. And that was a conscious decision in response to the movements in the portfolio. Jason Weaver: Got it. That makes sense. And then on the dividend, I know you're methodical about this, and it's obviously never easy to make the decision to make a cut. But can you talk about the sort of level of core spread income coverage at a floor that you need to establish the run rate going forward? Robert Cauley: Well, yes, I'm glad you asked that. I know everybody is concerned with that. A couple of things in mind. We have a distribution obligation. So in '24 and '25, we were paying a $0.12 dividend, which at the end of the year was 95% covered by taxable income. A lot of that was driven by hedges, the performance of our hedges during the tightening cycle, where we had a lot of equity in those hedges, which actually when you close them and they have significant positive equity, which was the case, that basically creates a liability, if you will, of future taxable income that has to be distributed over the remaining life of those hedges. So for that reason, we had a dividend yield on a tax basis that was slightly above the GAAP earnings of the portfolio. But as we mentioned in the last call, as we move into the new calendar year, we reevaluate. We've seen the effect of those closed hedges, one, wear off and two, be diluted just because of the growth of the company and the portfolio, shares outstanding. And so now when we appraise the current run rate, that's what drove us to move the dividend where it is. in terms of where that is in relation to what the portfolio is generating, they're very much in line. So right now, the dividend yield is very much in line with what the portfolio is generating and what you can earn in the market today on marginal capital, all in that 15% to 17% yield range. So they're all pretty much in line. And just next year, I will tell you, sometime in the first quarter, we will be again reevaluating where we see taxable earnings running for 2027. And to the extent necessary, we'll adjust. We don't, of course, have any insight into that at the moment. But now based on where we see things running, it would seem the prudent thing to do. And as I said, they're all in line now. We should be -- have our earnings of the portfolio, our dividend yield and the marginal return on capital all be pretty much in line. Operator: [Operator Instructions] our next question comes from the line of Mikhail Goberman with Citizens JMP. Mikhail Goberman: Just a quick one first. Could you update us on current book value? Robert Cauley: Book is up about 2.5% as of yesterday. We've given back some this week. If you had asked me the same question last Friday, it was a little higher than that. But this week, we've given back some of that. So we're up about 2.5% from where we were. Mikhail Goberman: Got you. And if I can just squeeze in one more. You talked about investment opportunities being pretty attractive at the moment. Assuming rates on MBS continue to kind of creep up higher. How does that sort of look to your portfolio construction of your premium portfolio going forward? Robert Cauley: You say rates, you mean mortgage rates available to borrowers? Mikhail Goberman: Yes. Robert Cauley: That would be beneficial. That improves carry. We have a slight premium in the portfolio, as I mentioned, Hunter mentioned about $1 to $1.5 price. We have call protection, which Hunter alluded to. In fact, I should just take over. I mean that's your question. George Haas: No, yes, it's -- like I said in my prepared remarks, the portfolio is over 40% in that 6%, 6.5% bucket, we have a couple of 7s. Those have been paying. The speeds were elevated, particularly in March. And as mortgage rates have risen, and spreads have blown out a little bit with respect to rates available to borrowers, we expect to see a corresponding slowdown in prepay speeds. So yes, we're probably -- we have intentionally skewed both the portfolio and the hedge book to guard against kind of rising rate environment. Our house view has been not quite as, I guess, sanguine as the rest of the market with respect to Fed eases. We've come along since held that we didn't think we were going to get as many as what was priced into the current market. That's played out. And so now that we're at the kind of higher end of the range, we're looking to restack the deck a little bit with a little bit more of a skew towards lower coupons as we add additional capital and to the extent that we have to pay down. So we'll probably buy more 5s and kind of first discount type coupons just because of where we are with respect to kind of the recent range in rates. Operator: And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Robert Cauley for closing remarks. Robert Cauley: Thank you, operator, and thank you, everyone. We very much appreciate you listening in on the call. To the extent you have another question that comes up or you don't listen to the call live and have a question that comes up after listening to the replay, as always, feel free to call. The number here in the office is (772) 231-1400. Otherwise, we look forward to speaking to you at the end of the second quarter. Everybody, have a good day. Thank you. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Sensient Technologies Corporation 2026 First Quarter Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornehl. Please go ahead, sir. Tobin Tornehl: Great. Thank you. Good morning. Welcome to Sensient's earnings call for the first quarter of 2026. The I'm Tobin Tornehl, Vice President and Chief Financial Officer of Sensient Technologies Corporation. I'm joined today by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. Earlier today, we released our 2026, First quarter results. A copy of the earnings release and the slides we'll be using during today's call are available on the Investor Relations section of our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which remove the impact of currency movements, cost of the company's portfolio optimization plan and other items as noted in the company's filings. We believe the removal of these items provides investors with additional information to evaluate the company's performance and improve the comparability of results between reporting periods. This also reflects how management reviews and evaluate the company's operations and performance. Non-GAAP financial results should not be considered in isolation from or a substitute for financial information calculated in accordance with GAAP. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release and slides. We encourage investors to review these reconciliations in connection with the comments we make today. I'd also like to find everyone that comments made during this call, including responses to your questions, may include forward-looking statements. Our actual results may differ materially from those that may be expressed or implied due to a wide range of factors. -- including those set forth in our SEC filings. We urge you to read Sensient's previous SEC filings, including our 10-K and our forthcoming 10-Q for a description of additional factors that could potentially impact our financial results. Please keep these factors in mind when you analyze our comments today. We'll start on Slide 5 of the deck. Now we'll hear from Paul. Paul Manning: Thanks, Tobin. Good morning, good afternoon. Earlier today, we reported our first quarter results. We've gotten off to a very strong start to 2026, delivering 7% local currency revenue growth, 10% local currency adjusted EBITDA growth and 14% local currency adjusted EPS growth. These results exceeded our early expectations and position us nicely for the year. We continue to have particularly strong results from the Color Group, which delivered 12.3% local currency revenue growth and 13.2% local currency operating profit growth. Commercial activity around natural color conversions continues to be very strong and the momentum is building. Flavors & Extracts Group also had a solid quarter, delivering 1.7% low currency revenue growth and local currency operating profit growth of 5.1%. Asia Pacific Group contributed local currency revenue growth of 4.7% and local currency operating profit growth of 14.5%. Each of our groups has had a nice start to the year. During the first quarter, we generated strong new sales wins across each of our groups and our sales pipelines continue to grow to support our revenue expectations. While we are seeing particularly high win rates in natural colors, our innovative product portfolio is also fueling success in each of our other businesses. Our customer service levels remain exceptionally high. And despite a sluggish overall food market in many geographies, we believe we are well positioned to continue our sales wins success. As I mentioned on previous calls, the preparations for the wholesale conversion of synthetic colors to natural colors in the United States remains our priority and current strategic focus. We are not seeing any slowdown in conversion activity and I will reaffirm what I previously stated that the U.S. conversion to natural colors is the single largest opportunity in Sensing's history. We are continuing investments around the world to increase our production capacity and to optimize our product portfolio. We also are building, continuing to build a resilient supply chain to provide the botanicals necessary to produce natural colors and to support the needs of our customers in alignment with their launch dates. These investments will support and position us for our $1 billion natural color sales goal. We advance further with customers on application support, they are also confirming that while natural colors may cost more than synthetic options, the cost impact remains manageable since natural colors are still a relatively small part of overall ingredient costs in most product categories. First quarter had no shortage of newsworthy developments in trade, tariffs, and geopolitics. We are continually monitoring these situations, but would like to provide some information around the conflict in Iran. We do not have any significant operations in the Middle East, and we are working to mitigate any potential supply chain risks that may result from the overall increase in fuel and certain commodity prices. In past circumstances like COVID and the invasion of Ukraine by the Russians, we have proven our ability to adjust prices where necessary and to minimize our financial impact and any major disruptions to our customers. This continues to be my expectation with the war in Iran. Now turning to Slide 6 and our group results. [indiscernible] had an excellent first quarter, delivering 12.3% local currency revenue growth and 13.2% in local currency operating profit growth. The group's first quarter adjusted EBITDA margin was 24.4%, flat to prior year despite our increased investments in support of the natural color conversion opportunity, the group continues to sell technically differentiated products, control its costs, execute on pricing strategy and deliver quality new wins. We are starting to see an uptick in customer orders for conversion of their synthetically colored products in the U.S. and the pipeline to $1 billion continues to look very promising. I now expect the Color Group to deliver double-digit local currency revenue growth in 2026. Previously, I expected high single to double-digit growth. I continue to expect the natural color conversion sales to build as the year progresses. As the sales build, I expect profit leverage to improve as well. Profit leverage in Q2 and Q3 for the Color Group will be similar to the relationship in Q1. Overall, the Color Group got off to a tremendous start to 2026 and remains on a great trajectory, and I'm very excited about the future ahead of us. Turning to Slide 7. Flavors & Extracts Group saw local currency revenue growth in the first quarter of 1.7% and an increased local currency operating profit growth of 5.1%, the group's adjusted EBITDA margin was 17.2%, up 30 basis points versus the prior year's comparable quarter. The results exceeded our expectations in the first quarter. The group continues to optimize its cost and focus on new and defensible flavor wins, and these factors have fueled the favorable profit leverage. Overall, we expect Q2 to be similar to Q1 with strengthening revenue and profit performance as we move through 2026. Now turning to Slide 8. Asia Pacific Group had a nice rebound in the first quarter, delivering 4.7% local currency revenue growth and 14.5% local currency operating profit growth. The group's adjusted EBITDA margin was 26.1%, up 220 basis points versus the prior year's first quarter. Overall, the Asia Pacific Group got off to a substantially faster start than we anticipated and is set up nicely for the future. The regional demand constraints that the group has experienced over the last few quarters improved in Q1. Plus, we generated strong new sales wins. Pending resolution of the Iran war, I continue to expect improvement throughout the year with greater sales and profit improvement in the back half of 2026. Now turning to Slide 9. Regarding our full year guidance, we are increasing our local currency ranges for the year. We now expect our local currency revenue to be up high single to double digits. Our previous guidance was for mid-single to double digits. We now expect local currency adjusted EBITDA and EPS to grow at high single to double-digit rates. Our previous guidance called for mid-single digit to double-digit local currency adjusted EBITDA growth and mid-single to high single-digit local currency adjusted EPS growth. On the capital allocation front, we still expect consolidated capital expenditures of $150 million to $170 million in 2026 to ensure that we are prepared for the forthcoming natural color conversion activity and that we can achieve our $1 billion sales goal. As I mentioned last quarter, we expect to spend between $225 million and $250 million on natural color capital over the next couple of years. We continue to anticipate an increase in our natural color working capital and maintain our goal of significantly improving our ROIC to the mid-teens over the next few years. Beyond capital expenditures, we will continually evaluate sensible acquisition opportunities, but we do not anticipate any share buybacks at this time. Now before I turn the call over to Tobin, I'd like to provide some information on a couple of our innovative technologies shown on Slide 10 is some information about 2 of our popular natural color platforms. Avalanche is a global portfolio of clean label alternatives to titanium dioxide. We're also showing a range of extrusion stable natural colors that are ideal for use in production processes utilizing high heat or pressure. Titanium oxide is a whitening agent commonly used in baked goods, frostings confections and makeup applications. In recent years, there has been a growing demand from our customers to remove titanium dioxide from their products. This demand has been driven by bands or regulation changes across the globe. It's quite difficult to replace TiO2 due to its exceptional performance characteristics and cost effectiveness. Our Avalanche portfolio addresses the market need for white products and is designed to best match the performance of titanium dioxide. The portfolio is robust and continues to grow as new technical application challenges arise. Next, I'd like to highlight our extrusion stable natural color offerings. They have been developed for maximum stability and performance in high heat or pressure process. For example, extrusion is commonly used to make breakfast cereals. Several large retailers and CPG companies have made announcements about their commitment to rapidly remove synthetic dies from this category and therefore, remains a priority for us. You'd like more information on any of our natural color technologies, please visit our website. Since 2019, the company's local currency adjusted revenue compounded annual growth rate is approximately 6%. Our growth in the first quarter is above that historical rate, and I'm quite pleased with the trajectory we are on for 2026 and beyond. I'm excited about the growth opportunities within each of our groups. Our pipeline for natural color conversions continues to build, and I'm pleased with our progress toward our overall revenue goal. We believe long-term investors are well positioned to benefit substantially from our execution. We will continue to emphasize investment in research and development, production capacity and a resilient supply chain in order to be ready to support our customers. The growth we are experiencing is a direct result of the execution of our long-term strategy seizing the opportunities in the markets in which we operate. I remain optimistic about 2026 in the future of our business. Tobin will now provide you with additional details on the first quarter results. Tobin Tornehl: Thank you, Paul. In my comments this morning, I'll be explaining the differences between our GAAP results and our non-GAAP adjusted results. The adjusted results for 2025 remove the cost of the portfolio optimization plan. While we do not have any portfolio optimization plan costs in our 2026 first quarter results, we believe that the removal of these prior year cost produces a clear comparative picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance. Turning to Slide 12. Sensient's revenue was $435.8 million in the first quarter of 2026 compared to $392.3 million in last year's first quarter. Operating income was $66.7 million in the first quarter of 2026 compared to $53.5 million of income in the comparable period last year. Operating income in the first quarter of 2025 included $2.9 million, approximately $0.05 per share of portfolio optimization plan costs. Excluding the cost of the portfolio optimization plan in the prior year, adjusted operating income was up 12.2% in local currency in the first quarter of 2026 compared to $56.4 million in the prior year period. Interest expense was $7.9 million in the first quarter of 2026, up from $7.3 million in the first quarter of 2025. The company's consolidated adjusted tax rate was 24.9% in the first quarter of 2026 compared to 25.3% in the comparable period of 2025. Local currency adjusted EBITDA was up 10.4% in the first quarter of 2026. Foreign currency translation had approximately a $0.06 benefit on EPS in the first quarter of 2026. Turning to Slide 13, cash flow used in operations was $14 million in the first quarter of 2026. Capital expenditures were $29 million in the first quarter and as Paul indicated, we continue to anticipate our capital expenditures to be between $150 million and $170 million for the full year of 2026. Our net debt to credit adjusted EBITDA is 2.4x as of March 31, 2026. As we communicated last quarter, we expect higher investments in inventory throughout the year to prepare for increased natural Color Conversion revenue. That is expected to increase further with our leverage ratio entering the upper does later in the year. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible acquisition opportunities and our long-standing dividend. As Paul indicated, we continue to invest in our natural color production capabilities and capacity. These investments will remain elevated for the next few years, and we expect to drive favorable volume and profit growth for years to come. Turning to Slide 14, revisiting our 2026 guidance. Based on our first quarter results, we now expect our local currency revenue to be up high single to double digits. Our previous guidance was for mid-single to double digits. We now expect local currency adjusted EBITDA in EPS to grow at a high single to double-digit rate. Our previous guidance called for mid-single to double-digit local currency adjusted EBITDA growth and mid-single to high single-digit local currency adjusted EPS growth. We continue to expect acceleration in revenue and EBITDA growth in the second half of the year. We expect our second quarter interest expense to be approximately $9 million and we expect our second quarter adjusted tax rate to be approximately 25%. Based on current exchange rates, we still expect the impact of currency on EPS to be immaterial for the year. Thank you for participating in the call today. We'll now open the call up for questions. Operator: [Operator Instructions] And the first question will come from Ghansham Panjabi with Baird. Ghansham Panjabi: Paul, it sounded like the first quarter came in, but then you thought. Just maybe give us a bit more color upon intended, I guess. And what drove that? Was there just faster conversions of customers? Was there a bigger contribution from load-in benefit as it relates to inventory build, et cetera? Just give us a bit more perspective on that. Paul Manning: Well, the simple answer is we got more wins than we thought. -- not only natural color wins in the general business, the base business, but also more natural color conversions than I had anticipated. So that would be one. I think we saw a nice set of wins out of Asia Pacific. And in addition to that, we didn't see as much of that tariff distortions that I was sort of concerned about on the last call. So that ultimately moderated a bit as well. And then in flavors, again, new wins, I think was the driving factor there. I mean price is sort of on the low single-digit side of that 7% overall consolidated revenue that came in, in line with what I had anticipated. But yes, the short answer is wins. Ghansham Panjabi: And then it relates to the cadence of growth in that segment as the year unfolds. I mean, obviously, a very strong start to you don't have full control in terms of business wins, et cetera, but presumably, you have some view on backlog, et cetera. How should we think about the cadence of that as it relates to 2Q through 4Q specific to your overall guidance for that segment? Paul Manning: Well, I think overall, Q2 will look pretty similar to in fact, in each of the groups. I'd like to see a little bit more top line out of flavor you'll see that in Q2 and as we go through the year. But yes, I think there'll be some on the Color Group side of things. Barring some unforeseen larger conversions than I would tell you that I see right now, Q2 should look a lot like Q1 and then, of course, we would expect to see more and more of this building as we get into the back half of this year and certainly as we get into 2027. I think right now, with customers, many of them are getting into the phase of, okay, they've done a lot of the reformulation work, if not all of the reformulation work. And then it's a matter of getting the rest of their ducks in a row, whether it's consumer test marketing regulatory reviews, aligning their production plans, scaling up these products, preparing for their eventual production of the natural colors. I think now we're getting into the phase where we may get a little bit more clarity from some on launch dates. But I think here, again, the short answer Q2 will look a lot like Q1. Q2 will look fairly similar to Q2 and Q1, but I think Q4 is where you'll see perhaps a more decided inflection point in natural colors. But I think ultimately, for the year, yes, we feel really good about where we are for each of the groups in terms of what they should deliver. Ghansham Panjabi: And then just 1 final one. On the TiO2 opportunity set, can you sort of frame that for us as it relates to how big that is in terms of the addressable market, et cetera? And is that part of the $1 billion sales threshold that you're focused on in terms of natural colors? Or is that separate from that? Paul Manning: Yes, that's a great question, I would tell you that, that may be the single most challenging program, but the irony of that is titanium dioxide from a regulatory standpoint is actually considered natural colors. So I hadn't contemplated that in the $1 billion, but if I'm getting the $980 million, I need a little push over the edge, I may count that on, but I'll let you know about that. But no, I think this is 1 of those that -- and you'll see more and more of this, too, right? As you convert to natural colors, there will be the next wave of regulatory expectations, right? So titanium dioxide is 1 of them. We've been working on this for a number of years. This came out really, Europe was first in sort of decrying the use of titanium dioxide, not only in food products, but also personal care products. And then the U.S. has sort of followed in the wake of that. It's I would say it's a conversion that's a little bit more in its infancy compared to the broader based natural color conversion -- but no, I think this could be a nice add-on, but I have not factored that into the $1 billion. Operator: Next question will come from Josh Spector with UBS. . Joshua Spector: I wanted to follow up just on just on the COLORZ growth, I'd just be curious, where is your confidence at today versus 3 months ago around the time line I mean a lot of investors are concerned that things could slip because your customers will be facing a lot of cost pressures in different areas. So obviously, 1Q was good. You're talking about new wins, but the stuff you thought would convert and move in the second half -- is that going faster or slower? Like any details there to help us understand the cadence would be helpful. Paul Manning: Josh, I pay attention to the time line very much the macro level, right? The expectation -- there are 2 really key dates here that I think the market has been moving towards January 1, 2027, which is essentially the Walmart deadline for having natural colors in its brand names throughout its stores in the U.S. And then the other noteworthy time frame that folks have been honing in on a January 1, 2028. So I think largely, customers remain on track with those. I'm very exceedingly confident. I think my confidence where with versus 3 months ago, I'm still very confident. I don't see -- I talked to a lot of customers. We're dealing with just about any customer you've heard of, you could say, -- we've got a vast pipeline across big customers, middle-sized customers and small ones. And so we can say this with a great deal of authority, there is no slowdown at any of these customers. And there is no deviation from, well, maybe I won't do this, maybe I will, said by no 1 that I've interacted with in the last 6 months. And so I think that the organizations are committed. You can go to the FDA website. I think there's a couple of dozen household names that have pledged this already on the FDA and to the American public that they will do this. So yes, I continue to remain very confident. Now what is the precise distribution of do we get 5% this month and 8% in the next month. Yes, that one's a little bit harder and quite frankly, possibly even unknowable to a large degree. But I think that customers are honing in on their launch date. Bear in mind that some of these brands have dozens, if not more than 100 products that they're attempting to convert that's a massive undertaking. These are all new launches. They require new packaging. They require new formulation, production scale-up. In some cases, customers need to implement capital in their plants to process it differently. So a lot of moving parts. So customers aren't being reluctant and they're not well. Maybe I'm not going to do this. No, they need to do it right and that takes time. And so we should not expect some massive conversion in these very early days. I think we're pacing very much at the pace that I would expect, and it's one that would accelerate as we get, again, closer to these deadlines because every customer that I have evaluated and spoken to, and there's a lot of them, they're very committed to this. Joshua Spector: I did want to ask on margins and colors. I mean if I go back to last call, you were talking about the year margins being down about 50 basis points. You were flat in first quarter. It sounds like from your comments earlier, you're thinking you're maybe flattish in 2Q, 3Q, corrective if I'm wrong, and you sound like you're up in fourth quarter. So are margins up there? And just what does that mean in terms of the OpEx investments? Is that embedded in there through the year? Is that slower and I'll throw 1 more if you're able to quantify what those OpEx investments are that you're going to grow into next year, that would be helpful as well. Paul Manning: Yes. So EBITDA we were flat for the quarter. As I noted in the comments, that's a bit better than I had anticipated. Really the moving parts here are you mentioned it, the capital expenditures -- and when, as I like to say, metaphorically, the little green light goes on, which is to say the equipment is up and running and producing product, and now you're depreciating it. So that is a variable. And then you're balancing that variable with you've got ongoing investments to ensure that we have the right personnel in place and we have the right engineers and we're doing the right testing and a lot of the other R&D and applications and processing engineering that goes into these conversions, right? So we made a lot of those investments. So that's a second factor. And then you're balancing that with the inflow of revenue. And so if the capital is done before the sizable revenue comes in, which I'm not particularly -- that I don't have a problem with that. I'm okay with being early on capital. So that's where you may see a little bit of a headwind on that leverage. But in instances, our customers maybe move a launch to the left or a bigger launch happens, then that would balance a lot of that expenditure out and therefore, provide a little bit of a tailwind to the EBITDA margin. So I think net-net for the year will be flattish on the EBITDA in the Color Group. I would expect us to be up in Asia. I would expect us to be up in flavor for the year. But color -- you got the variables, you're exactly right. And it's just a matter of how does the revenue flow and how do we progress along with our investments. And again, it may be a quarter or so that were early by. And I would consider I would be thrilled I was early on capital implementation, I had a bunch of folks sitting around waiting for products to come in. I can't think of anything more exciting in this moment than something like that. Operator: Our next question will come from Larry Solow with CJS Securities. Lawrence Solow: Paul, congrats to the year. So I guess, just kind of set the way I just ask those questions another way. Obviously, the quarter was a little bit better across segments, but in college to and the margin was a little bit better. It feels like and I think you're adjusting your margins a little bit. I guess, flattish on color side, you expect a little bit of a pressure, I think, last quarter. So is the change, basically, it sounds like revenue is a little bit faster coming in conversions are a little bit faster. No change on the expected investment this year. Is that kind of a good way to summarize what's happening in collars just for the year? Paul Manning: Yes, I think that's about right. Yes, revenue was a little bit better than we thought, and I think that -- and that went a long way. I think that going back to the previous question, yes, I think some of this is it's all about the timing. And so again, you may have a quarter where it's not such a smooth slope on some of these variables. But yes, you're absolutely right. I think we did better than we thought. And so therefore, the EBITDA was not down as I had thought it might be. It was more flat. And yes, I think that's a real positive outcome. I think it's indicative of a couple of things, though, too, right? not only wins, but it's high quality wins. And I think one of the things that I've talked about over the years, the point among many that distinguishes Sensient's is that we really pursue those natural color opportunities that are very strongly performance-based applications. Natural colors are exceedingly challenging in most formulations. But in others, it's a little bit more mundane, and then those are the ones that we tend to perhaps spend a little bit less time with. And so when you focus on the more technically challenging, those tend to be I suppose, more positive on the gross margin front than, of course, the more mundane. So I think the mix is going to continue to play a good factor here. And I think perhaps in my own mind, the mix was a bit better than I thought it would be right out of the gate in Q1. Lawrence Solow: I appreciate that. And just like on the more kind of hard to call it long term because it's only a couple of year outlook, right, where you give -- you have the January 1, 27 and more importantly, that's for Walmart, which I know is a nice percentage of just products in the United States. But January 28, obviously, is the kind of deadline or soft deadline. Clearly, I don't think you expect everybody to be able to convert, right, just impossible. So I'm just curious, are companies getting more competitive, more maybe not anxious, but just trying to solidify their plans sooner than the next guy because it feels like it's going to be a little bit of a game of musical chairs in terms of if the full supply chain is not ready for the conversion. Maybe only some could convert. I'm just trying to get any kind of color on tenant on just how that's progressing as you get kind of closer to these dates. Paul Manning: Yes. I would tell you that the bulk of the activity is going to be in 2027, but a significant amount of the activity, as you just saw here in Q1 is going to be here in 2026. So I gave you some of the factors that may impact the timing of these launches. But there's also the phenomenon of competitors, right? So if a competitor in this category converts to natural colors, and he does it sooner than his competitor would. You could expect that is competitor may want to more rapidly move in that direction as well. There is ultimately in markets, what I like to refer to and you can read about this one, too, there is a tipping point. There's a critical, critical mass of activity maybe it's 20%, maybe it's 30% of a market that it moves in this direction and then it moves very rapidly towards the end of -- and so part of what we're preparing for is that possibility that it may start off where you get 10% and 15% is converted and then you get up to about 20% and then it moves very rapidly in that direction. Now whether you want to call that a tipping point or just folks all pursuing the similar deadlines, one way or the other, I think everybody gets there. But yes, you're right. This is a matter of guiding your customers like, hey, folks, you can't all convert in Q4 2027, and you don't want to either -- so I looked at a customer's launch plan just the other day, and they had it all kind of metered out over the course of the year, this product category here and this product there and right? So I think customers are really forming these plans up very, very, very nicely. And they've got a lot of risk in terms of their timing, they need to achieve their deadlines as well. So Yes. I think the more we go into this direction, I mean, eventually, it just has to happen by virtue of the expectation of the market. But I think you may -- you could see more dramatic conversions sooner than we had thought because of some of that competitive activity when your competitors do it, and you're not, that's not a good thing for you and being a CPC competitor. So that remains to be seen. That's a bit of an uncharted territory, but then again, that's why we're like -- we're hitting it hard, Larry, on capital. We're hitting it hard on the supply chain. We are hitting it hard on stress testing this business, right? So I think we're going to be ready. Lawrence Solow: Great. Now I could just slip one more. Just I think a few weeks ago, I think just my question is more on the FDA and just their activity or their involvement. I know a couple of weeks ago, think they delayed some approvals of -- I think they were more genetically engineered natural colors. So potentially, these were competing products that you probably wouldn't want to be approved either but -- and I guess there engineered is maybe not "natural" -- but I guess my question is, is the FDA just getting more involved putting on with the natural and the involvement of the evolvement of natural colors or is it still more just -- I know they put out these recommendations and at all last year. I'm just curious if that was more of the -- just curious what's going on the FDA side and the supply chain. . Paul Manning: Yes. So Colors is -- let me start with 100,000 feet, and I'll tell a little story here, just to give everybody on a line a little bit of background. At 100,000 feet, colors are ingredients that have to be approved for use in food. So you may have heard other terms like grass. This is under a lot of controversy right now and in some corners, but Colors actually had to go through a full throttle, full throated, whatever you'd like to say, approval process with the FDA. And this approval process could entail tox studies, it could entail any number of tests, lots of data, ultimately a lot of time and money to get a color approved in the United States. Now -- what has happened over the years is many have been approved. There are many approved, but there will be more and more that will get approved in the future. Now sometimes these approvals it may be the use of this natural red, and I'm going to get it approved for use in soda, but it's not approved for use in candy. That may be a separate set of testing and evaluation by the FDA. So -- when you look at these approvals, you have to note what applications in food that they are approved for -- and so it's a very, very interesting process. It's very unique. It's very unique, and I would almost argue exclusive to colors that every 1 of these has to be approved by the FDA. So along the line, right, and you're seeing a lot more activity. So to your question, is the FDA more involved, yes, because there's a lot more, what they call, petitioning to use a new natural color in the market. And so from time to time, or at least maybe the one you're referring to, there was a beat route that was being challenged. -- sometimes entities may challenge the use of that natural color in a segment or they may challenge the name of that natural color that may challenge some other facet of the approval at the FDA. I wouldn't consider this to be unusual to any great degree. Long story short, there's a lot of natural colors that are approved. We've got a good toolbox that we can work from. But it's not a complete toolbox -- and so we very much get involved with the FDA on submitting raw materials that we could use for Colors as well. So very much a very active process right now for sure. And that's all public information. So if you ever wanted to go and check that out, you could see what's actually in the FDA's funnel on natural colors. Operator: [Operator Instructions] Our next question will come from Nicola Tang with BNP. Ming Tang: First one is a quick simple one. I was wondering if you could give us an update on the revenue related to the conversion of synthetic colors, I think [indiscernible] quarter, you're at about $5 million. Just wondering if you hear an update as of this quarter. Paul Manning: Sure. So yes, just to recap for everybody else on the line here. So couple of numbers we talk about, right? We talk about our $1 billion sales goal and that's derived from -- we have about $100 million of synthetic colors, and we think that will convert at about 10 to 1. So there's $1 billion is what we're chasing. The back half of last year, we invoiced specific towards that goal, this natural color conversion, about $5 million. That was what was invoiced. Now when you take that back half and you take Q1 of this year, now we've invoiced about $20 million or so towards that goal of natural colors. So stated in a different way, you look at the colors growth was about 12%. You can do the math here, but about half of that was the base business just continue to do really well. And the other half was this incremental derived from these natural color conversions. But order of magnitude over the last 9 months, it's been about $20 million of invoiced in natural color conversions in the U.S. Ming Tang: That's great. Second question, I just wanted to ask a bit more about the reported EPS guidance. Just thinking more in absolute numbers. So at the midpoint, you're upgrading your EPS guide by about $0.10. But the beep actually, when I look at Q1 versus certainly consensus expectations is more like $0.20 -- so actually, to me, it looks like although you've upgraded your guidance or of the metrics, it's actually an implied downgrade on the rest of the year. So I was wondering if you could help me, am I misunderstanding or are there reasons why your maybe there was some pull forward in Q1 or maybe you're taking a more cautious outlook been just general macro in the Middle East, as you mentioned. Just wondering if you could help me understand the new EPS finance. Paul Manning: Okay. Let me -- I'll give the first part of SAB, and then I'll turn it over to Tobin. He loves this question. So EPS -- so yes, we raised our guidance. And I always like to start with revenue, we've got a very strong ability to control that figure, right? -- customers may delay a launch or move a launch or they may do this or that. But in general, across an organization, this large -- we like to think we have a strong control over revenue, and we can predict that fairly well. [indiscernible] EBITDA. And so you see a nice raise on each one of those. As you get below EBITDA, that's where you then start to have to factor in things like interest and tax and then things we don't control like FX and other potential below the EBITDA line factors. And so that's where the EPS figure can get somewhat separated from the net leverage that you see between revenue and EBITDA that you therefore expect on EPS. So I think in short, interest is up substantially, and I'm going to let Toby answer that. But there's a couple of other factors in there, too. You can. Tobin Tornehl: Yes. I think -- and we kind of talked about it a little bit in our prepared comments, but through interest was up in the first quarter of $7.9 million versus $7.3 million last year. And we expect that to continue throughout the year, given the investments that we're making in natural colors. From the capital. And then as Paul mentioned, from people and R&D and everything. So we expect our overall interest expense to be up about $6 million throughout this year and that will progress on a quarterly basis as we kind of move forward. So you have that increasing. Our leverage ratio right now is about 2.4. In our comments, I mentioned, we expect that to climb as well as our debt increases throughout the year. So we'll be in the higher 2s from that point. tax rate, we're about 25% in the first quarter. We're guiding for 25% this next quarter and roughly about 25% for the year. So you have those components was a benefit. As I mentioned in the prepared comments, about $0.06 in this first quarter. Exchange rates are all over the place right now given what's going on in the world. I would say that in the back half of the year, that would become more of a headwind. But overall, FX should be about immaterial when you look at it for the year. So -- when you look at it, we did increase our EPS guidance from where we were in Q1. So right now, we're at high single-digit growth and double-digit growth. So that's kind of where we are at this point. Ming Tang: And then just going back on the previous -- you answered the previous question, I was just reflecting on it. When you said 20 million invoiced -- is that with reference to the EUR 100 million revenue synthetic revenue or the EUR 1 billion overall revenue opportunity? Tobin Tornehl: The $1 billion. . Ming Tang: And then the final question would be just around raw materials. You mentioned you don't have significant direct exposure to Middle East, but I think there's a general view that input inflation there may be more input inflation, particularly on the synthetic side. I was wondering what you're expecting in terms of inputs this year? And are we mainly talking about synthetics? Or should we be thinking about certain naturals within your supply chain, which are either sourced I don't know from the Middle East or from Asia or something where there might be a potential disruption either in terms of cost availability? Paul Manning: So in short, we believe that there is a sufficient amount of inflationary inputs that we're going to need to take pricing to address that. This would be sort of low single-digit magnitude. So not unlike again, where we've done this in other instances of tariffs and wars and pandemics and the like. We would anticipate taking pricing there. The biggest factors here, there's certainly the logistical inflation substantially derived from energy and petroleum more specifically. So we face that. . There's an impact of packaging as many of those raw materials have petroleum-based in inputs. And then of course, as many in the media are fond of saying, petroleum-based synthetic colors, of course, therefore, you realize that a couple of those synthetic colors are indeed derived. Of course, then again, many things in nature are derived from that as well. But that aside, we would expect to see more on the raw material side of synthetic colors for food and for personal care that we would need to address. For natural colors, it would come sort of fertilizers and other input costs we see rising. So those would have an impact on natural colors. But a lot of these costs for harvest are built into the next year's harvest often time. You hear me talk about that with our raw materials or with our agricultural business. So in short, there's many of these different factors, but I think we can address this, and we will address this with a modest amount of price increase that we would expect to give principally focused in synthetic colors for food and personal care, but also anything related to logistics, which is effectively all in down and outbound freight. And then, of course, a couple of other -- you'll hear propylene glycol is another one that's been heavily impacted by the war. So that's how we kind of see it playing out right now. And even if the war were to stop, there's still a sufficient enough backlog in other sources of a nurture here that the inflation is coming if it hasn't already, and so we're going to need to address that. Operator: The next question is a follow-up from Joshua Spector with UBS. Joshua Spector: Just a small follow-up and actually related to what you were just talking about, is just as you look at your 2Q guide, are you baking in anything in terms of a negative impact from transport logistics loss, et cetera? Or are you assuming your pricing offsets that more or less in real time? Paul Manning: I'm not assuming any bad, and I'm not assuming any good. So I didn't assume the inflation because at this point, it's fairly modest and some of it is, quite frankly, deferred. But I'm also not assuming any pricing in Q2. either from a guidance standpoint. Operator: And that concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tornehl for any closing remarks. Please go ahead. Tobin Tornehl: Okay. Thank you for your time today. That concludes our call. If you have any follow-up questions, please feel free to reach out to the company. Have a great weekend. Operator: The conference has now concluded. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Universal's First Quarter 2026 Earnings Conference Call. As a reminder, this conference call is being recorded. I'll now turn the conference over to Arash Soleimani, Chief Strategy Officer. Arash Soleimani: Good morning. Thank you for joining us today. Welcome to our quarterly earnings call. On the call with me today are Steve Donaghy, Chief Executive Officer; and Frank Wilcox, Chief Financial Officer. Before we begin, please note today's discussion may contain forward-looking statements and non-GAAP financial measures. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release and Universal's SEC filings, all of which are available on the Investors section of our website at universalinsuranceholdings.com and on the SEC's website. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly press release and can also be found on Universal's website at universalinsuranceholdings.com. With that, I'll turn the call over to Steve. Stephen Donaghy: Thanks, Arash. Good morning, everyone. We had a fantastic start to the year with a 38.5% annualized adjusted return on common equity. Our top line results were strong with growth across our multistate footprint, including in Florida. On a separate note, I'm pleased to announce the completion of our 2026-2027 reinsurance renewal for our insurance entities as our program is now fully supported and secured. During the renewal process in 2026, we also secured $352 million of additional multiyear coverage, taking us through the 2027-2028 treaty period. I'll turn it over to Frank to walk through our financial results. Frank? Frank Wilcox: Thank you, Steve, and good morning. Adjusted diluted earnings per common share was $2 compared to an adjusted diluted earnings per common share of $1.44 in the prior year quarter. The higher adjusted diluted earnings per common share mostly stems from a lower net loss ratio and higher net investment income. Core revenue of $398.2 million was up 0.8% year-over-year with growth primarily stemming from higher net investment income and net premiums earned. Direct premiums written were $506.5 million, up 8.5% from the prior year quarter. The increase stems from 4.9% growth in Florida and 18.3% growth in other states. Overall growth mostly reflects higher policies in force and inflation adjustments across our multistate footprint. Direct premiums earned were $531.4 million, up 3.5% from the prior year quarter, reflecting direct premiums written growth over the last 12 months. Net premiums earned were $356.9 million, up 0.3% from the prior year quarter. The increase is primarily attributable to higher direct premiums earned, partially offset by a higher ceded premium ratio. The net combined ratio was 89.7%, down 5.3 points compared to the prior year quarter. The decrease reflects a lower net loss ratio, partially offset by a higher net expense ratio. The 63.9% net loss ratio was down 6.6 points compared to the prior year quarter, with the decrease reflecting better current accident year results. The net expense ratio was 25.8%, up 1.3 points compared to the prior year quarter, with the increase primarily driven by a higher ceded premium ratio and higher policy acquisition costs associated with growth outside of Florida. During the first quarter, the company repurchased approximately 210,000 shares at an aggregate cost of $7.1 million. The company's current share repurchase authorization program has approximately $13.1 million remaining. On April 10, 2026, the Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock payable on May 15, 2026, to shareholders of record as of the close of business on May 8, 2026. With that, I'd like to ask the operator to open up the line for questions. Operator: [Operator Instructions] And our first question comes from the line of Paul Newsome of Piper Sandler. Jon Paul Newsome: Congratulations on the quarter. Maybe we could just start off with some thoughts or color on the competitive environment, both in Florida and outside of Florida. It gets lots of investor questions about whether or not we're seeing a change in the number of folks who are competing in those markets and maybe the speed at which obviously, the ROEs that you and others are reporting are so huge, whether or not that will attract a lot of new competitors. Stephen Donaghy: Paul, thank you. I think from a competitive perspective, we analyze our rates and are chasing rate adequacy more than we are chasing business. So from a competitive perspective, we feel good about where we stand. And obviously, from the quarter, we can bring on business when we want to and we see the markets profitably. So that's probably the answer I would give you. There is competition everywhere, but we feel good about our position and our relationship with our agents has never been stronger. So, yes. Jon Paul Newsome: Should we expect further price adjustments and rate adjustments for you folks in the future? Stephen Donaghy: We haven't kicked off our rate analysis at this point. So as we get ready to do that, we will analyze the past 12 months and see how that impacts. And I think as we continue to benefit from the legislative environment and our business, we will do the right thing by our shareholders and our partners. So we'll take that all into account and continue to do the right thing. Jon Paul Newsome: Maybe some thoughts on capital management. Obviously, given where the returns are accumulating some excess capital. How do you balance the various uses of that capital today? And should we expect further purchases as a focus or not? Or just maybe you could just kind of prioritize how you think about that. Frank Wilcox: Paul, this is Frank. I think we're going to stay the course. Our #1 priority with capital has always been to support the insurance entities, ensuring that they are adequately capitalized so that we can continue to produce the business that benefits the entire holding company system. That, combined with continuing to return shareholder value. Operator: Our next question comes from the line of Nicolas Iacoviello of Dowling & Partners. Nicolas Iacoviello: Congrats on the quarter. Could we just start -- I was wondering if there's any additional details or commentary you could provide around the outcome of your reinsurance renewal? Stephen Donaghy: Nick, thanks. I appreciate the comments. I think from the reinsurance perspective, we are very excited to be done and have it fully secured for 2026, '27. We were quite happy that we also extended our multiyear agreements. From a pricing perspective, we're going to sit on that until we get to May and release all the details as normal. We think it'd be premature for us to kind of make public comments relative to how we did, but we were very pleased with the market and very pleased with our partners for many, many years and how they treated us relative to this year. Nicolas Iacoviello: Got it. I know we'll see more details in May. But I mean, is there anything you could comment on how we should think about the retention? Is it fair to assume it would be similar on a GAAP basis versus prior year, and it would include some captive usage. I get, obviously, you'll have the opportunity to maybe buy down. But as it stands today, is that a fair assumption? Frank Wilcox: Yes. The retentions will remain the same for the insurance entities, $45 million. We plan to continue to use the captive in the same manner for the $66 million layer above $45 million for the first event. So structurally identical to last year. Operator: I'm showing no further questions at this time. I'll now turn it back to Steve Donaghy, Chief Executive Officer, for closing remarks. Stephen Donaghy: Thank you. I'd like to thank all of our associates, consumers, agents and our stakeholders for their continued support of Universal. Have a nice day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Principal Financial Group First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations. Humphrey Lee: Thank you, and good morning. Welcome to Principal Financial Group's First Quarter 2026 Earnings Conference Call. As always, Material related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Deanaa Strabo and CFO, Joel Pitts, will deliver prepared remarks. We will then open the call for questions. Members of senior management are also available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Deanna? Deanna Strable: Thanks, Humphrey, and good morning to everyone on the call. This morning, I'll discuss our strong first quarter performance and the steady execution of our strategy focused on delivering sustained growth across our diversified businesses. Joel will then provide additional details on our financial results and capital position. Starting with Slide 2, we delivered 13% adjusted non-GAAP earnings per share growth in the first quarter. above the high end of our target range. This performance was primarily driven by favorable underwriting results and improved mortality within our benefits and protection business, as well as positive market conditions for our fee-based businesses. This contributed to strong revenue growth and margin expansion. Strong performance and capital generation enabled us to return approximately $375 million of capital to shareholders in the quarter, including $200 million of share repurchases. We also raised our common stock dividend for the 12th consecutive quarter, an 8% increase on both a quarterly and trailing 12-month basis. Taken together, these results underscore the value of our diversified business model. Moving to Slide 3. We continue to make progress across our strategic growth drivers, the broad retirement ecosystem, small and midsized businesses and global asset management. Within the retirement ecosystem, we're starting the year with broad-based momentum. Total retirement transfer deposits of $12 billion in the quarter grew 35% year-over-year, and recurring deposits grew 7% over the same time period. This growth reflects our ability to win new business as well as retain and grow existing clients with a comprehensive suite of capabilities across recordkeeping, asset management, investment advice and income solutions. We're growing our participant base and helping them save more for retirement. This is evidenced by a 3% increase in the number of participants deferring into their retirement plans compared to the year ago quarter with average deferrals up over 3% as well. Participants continue to consolidate retirement savings onto our platform with $1.7 billion of roll-ins in the quarter when participants consolidate their retirement savings with us, This further reinforces our confidence in the strength of our platform and our ability to provide customized advice and solutions to meet their needs. Our retirement investment expertise, an important growth driver within the retirement ecosystem is further gaining traction with third-party retirement platforms. This is evidenced by DCIO sales of $1 billion in the quarter and nearly $8 billion over the trailing 12 months. For the small and midsized business segment, our differentiated capabilities and deep expertise are driving results. In retirement, the SMB market continues to perform well. Recurring deposits grew 6% over the year ago quarter and 7% on a trailing 12-month basis. strong new business activity and favorable retention resulted in positive account value net cash flow of $600 million for the quarter. In Benefits and Protection, our broad and meaningful value proposition to the SMB segment continues to drive growth and deepen customer relationships. Specialty Benefits delivered record sales up 24% over the year ago quarter. Additionally, business market life premium and fees grew 15% year-over-year, demonstrating robust demand for specialized solutions, which help business owners protect key employees and fund critical succession strategies. Our latest well-being index filled in late March confirmed steady employment trends with 90% of small and midsized business owners indicating they are maintaining or increasing staff. When we look at our own block across 180,000 diverse businesses in Group Benefits and Retirement both in pros have remained positive and are contributing to growth. In Global Asset Management, we're generating momentum with record gross sales in investment management of $37 billion, up 21% year-over-year. This growth is directly related to in-demand product offerings and our strengthened distribution relationships across global markets. Our private markets capabilities remain attractive to clients globally, generating net inflows of $400 million in the quarter and $3 billion on a trailing 12-month basis. Private Markets AUM grew 11% year-over-year due to ongoing demand for our real estate infrastructure and private credit strategies. Our active ETF business continues to gain traction and delivered net inflows of $400 million in the quarter and $1.8 billion on a trailing 12-month basis. Additionally, we generated strong net cash flow of $1.5 billion in the quarter from clients outside the U.S. Looking across these 3 growth drivers, I'm encouraged by this momentum, the breadth of our retirement solutions our leadership position in serving small and midsize businesses and our expanding global asset management capabilities create multiple avenues for sustained growth. We also continue to innovate in how we serve and engage customers across the enterprise, leveraging data and emerging technologies, including AI. We're deploying these capabilities across the organization to improve productivity, deepen customer relationships and continuously improve the experience we deliver every day. Before I turn this over to Joel, I want to share some of the important recognitions we've received. For the 15th time, Principal has been named 1 of the world's most ethical companies. This recognition from Ethisphere, which I am incredibly proud of underscores our long-standing commitment to integrity, transparency and responsible business practices. Principal Asset Management was also recognized as the winner of the data center Firm of the Year in North America by PERE a leading private markets publication. This award highlights our decades-long expertise, growing capabilities and track record in this sector. Together, these recognitions reinforce the strength of our culture and competitive advantages that differentiate Principal in the marketplace. In closing, the momentum we're seeing across our businesses gives us confidence in our ability to deliver our financial targets. As we expand our customer base to 82 million people worldwide, we remain focused on disciplined execution, sustainable growth, and creating long-term value for our customers and shareholders. Our strong performance this quarter reflects the dedication of our 19,000 employees around the world. Their focus on serving customers and executing with discipline allowed us to capitalize on opportunities early in the year and positions us well for continued growth as we move through 2026. Joel? Joel Pitz: Thanks, Deanna. Good morning to everyone on the call. I'll walk through our financial performance for the first quarter and provide updates on our capital position. As you can see on Slide 4, the first quarter was a strong start to the year, and we are well positioned to deliver on our 2026 financial targets. We reported non-GAAP operating earnings of $456 million, up 10% compared to the year ago quarter or $2.07 per share, an increase of 14%. Excluding significant variances, non-GAAP operating earnings were $479 million, up 9% compared to the year ago quarter or $2.17 per share. a 13% increase. Additionally, non-GAAP operating ROE was 16.1%, an improvement of 140 basis points compared to the year ago period. and at the midpoint of our 15% to 17% target range. Significant variances thought on Slide 11, had an after-tax impact of $23 million in the first quarter. Lower variable investment income was primarily driven by timing of real estate transactions and slightly lower returns in our other alternatives portfolio. We shared in our February outlook call that we were evaluating the presentation and depreciation for core real estate our alternatives portfolio. Beginning first quarter, we reclassified this noncash expense to realize gains and losses. This better reflects total returns by lining depreciation with where gains are recognized upon sale. We still expect full year 2026 variable investment income to improve relative to 2025 with or without this change. This impacts reported results only and there is no impact to our adjusted results. Margin expanded by 190 basis points to 30% in the first quarter. This improvement reflects our strong business fundamentals with 6% year-over-year net revenue growth and disciplined expense management while investing in the business. Turning to capital and liquidity. We ended the quarter in a strong position. with over $1.4 billion of excess and available capital. This includes $800 million at the holding company at our targeted level, $300 million in our subsidiaries, and $350 million in excess of our targeted 375% risk-based capital ratio, which was approximately 400% at quarter end. We returned $374 million to shareholders in the first quarter, including $200 million of share repurchases and $174 million of common stock dividends. Last night, we announced an $0.82 common stock dividend payable in the second quarter. This is a $0.02 increase from the dividend paid in the first quarter and an 8% increase year-over-year. This remains in line with our targeted 40% dividend payout ratio and demonstrates our confidence in continued earnings growth and capital generation. Moving to AUM and net cash flow. Total company managed AUM ended the quarter at $770 billion, modestly lower sequentially due to market performance and up 7% year-over-year. Total company net cash flow was negative $1.5 billion in the quarter, a meaningful improvement on both the sequential and year-over-year basis. The improvement was driven by positive net cash flow and international pension in the quarter and improved year-over-year results in Investment Management. Moving to the businesses. The following commentary excludes significant variances. Starting with RIS and as shown on Slide 5, pretax operating earnings of $318 million increased 4% year-over-year, driven by 3% net revenue growth and margin expansion. Operating margin of 41.5% expanded 60 basis points compared to the year ago quarter and is slightly above the high end of our target range. This reflects our disciplined focus on profitable revenue growth and expense management as well as some favorable seasonality and timing impacts in the current quarter. Fundamentals across the business remain healthy. As Deanna noted, we delivered strong transfer in recurring deposits as well as favorable retention, distal $1.8 billion of RIS account value net cash flow in the quarter, supported by fee-based net cash flow across both large and SMB market segments. Turning to Slide 6. Principal Asset Management delivered earnings growth of 10% year-over-year on 5% revenue growth and margin expansion. Within Investment Management, pretax operating earnings increased 8% from the prior year quarter. adjusted revenue increased over 2% year-over-year despite the impact of our recent divestiture. Higher revenue, along with expense discipline contributed to a 100 basis point improvement in Investment Management's quarterly operating margin gross sales in the quarter were a record, up 21% from the year ago quarter. This highlights the attractiveness of our solutions and the global reach of our distribution. Importantly, demand remains in several key areas, including $1.2 billion of the cash flow spread equally across private markets, ETFs and UCITS. Moving to international pension. AUM increased 4% sequentially and 20% year-over-year to a record $160 billion. The increase was primarily due to positive market performance and net cash flow as well as foreign currency tailwinds. Net cash flow was positive $500 million in the quarter, with $700 million of net inflows in Brazil. Pretax operating earnings increased 14% year-over-year, driven by the benefit of higher performance fees, favorable foreign currency impacts and growth in the business. Operating margin of 48.5% remains comfortably within our target range. Turning to Slide 7. Benefits of Protection delivered a very strong quarter. Pretax operating earnings were $177 million, an increase of 41% year-over-year. This was driven by more favorable specialty benefits underwriting, improved life mortality and business growth, starting with Specialty Benefits, premium fees increased 4% year-over-year, in part supported by record sales in the first quarter. As we indicated in our outlook call, we continue to expect premium fees growth to trend higher throughout the year, most notably in the second half. pretax operating earnings of $140 million increased 26% year-over-year, reflecting strong underwriting experience and growth in the business. Total loss ratio improved 220 basis points compared to the year ago quarter due to improved group life and group dental results, along with continued strong results and group disability. This translated into margin expansion, improving to 16.2% and up 290 basis points year-over-year. In Life Insurance, pretax operating earnings of $37 million, increased $23 million year-over-year, driven by improved mortality experience due to lower frequency and severity. This contributed to a 15.6% operating margin in the quarter at the high end of our target range. Moving to corporate. First quarter losses were elevated due to timing of expenses. On a full year basis, we expect segment results to be within our target range. Before closing, I'd like to make a few comments regarding our investment portfolio. There has been heightened attention recently on the insurance industry's exposure to private credit. First and foremost, we have over 60 years of experience underwriting and managing private assets for our general account and clients. As we shared with you last quarter, the vast majority of our private fixed income securities are investment grade with minimal exposure to direct lending. Importantly, our portfolio continues to perform well with experience better than our long-term expectations. I remain confident in our well-constructed and diversified portfolio, which is appropriately aligned with the liquidity profile of our liabilities. In closing, our first quarter results reflect disciplined execution across the enterprise with strong earnings growth, margin expansion and healthy underlying fundamentals. These results reinforce the strength of our diversified business mix, and position us well to deliver on our financial targets in 2026 and beyond. This concludes our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] The first question comes from Ryan Krueger from KBW. Ryan Krueger: My first question was on Specialty Benefits. Can you provide some more color on the favorable underwriting experience you had across dental, life and disability and also just how you're thinking about the outlook from here. Deanna Strable: Yes, Ryan, and welcome back. Obviously, it was a really strong quarter for Specialty Benefits. And I'll pass it over to Amy to talk about the drivers. Amy Friedrich: Yes. Thanks. Yes, Ryan, the underwriting performance was really strong this quarter. As you noted, with that 58.5% loss ratio. When I look through that, it really is primarily group life and dental that are driving that. So when I look at group life, it's going to be driven by that low frequencies that we saw in this quarter. And when I look at dental, I think we've talked in prior calls about some of the work we've been doing, certainly about past pricing actions which are now well into the experience and then also some of the dental network optimization efforts we've been doing, which are also moving into that performance as well. . I should mention too that group disability performance remains strong. It was consistent with prior year quarters, and it was tracking to what we expected. As a reminder, you asked about looking ahead. When we look ahead, second quarter does tend to be the seasonally highest for dental. So that means that the overall SBD loss ratio does rise a bit in second quarter. But when I look at full year outlook, I look at it very favorably with loss ratios expected to emerge at the low end or even slightly below the low end of the range we communicated at outlook. Operator: Ryan, do you have a follow-up question? . Ryan Krueger: Yes. On Investment Management, you've seen this good momentum in gross sales, but then redemptions have also largely ticked up and so the flows haven't improved as much. So I was just hoping to get a little more color on, I mean, maybe both sides of it, what's driving the gross sales momentum, but also why do you -- have you been seeing higher redemptions? And how do you think that may play out from here? Deanna Strable: Yes. Thanks, Ryan, for that. I'll ask Kamal to add color regarding that. . Kamal Bhatia: Sure, thanks for the question. It's a good one. So let me break down a little bit of the net flow question you asked. First, I'll just reiterate. I think the naan Joel highlighted this in their remarks and you mentioned it as well. We did generate record gross sales in Investment Management in the first quarter, 21% year-over-year, you would also acknowledge is an impressive number. And I would say it's directly related to our new product focus, new strategies that we are introducing into the marketplace. But more importantly, we are continuing to grow the number of distribution relationships across the globe. I would highlight for you that Asia had a standout quarter. They had a $1.1 billion of positive NCF and with our international clients delivering over $1.5 billion of positive NCF, so the key for us is to grow sales across the globe, which would be key to changing the NCF profile given our legacy book. Now to your question on what caused the NCF pattern this quarter, we did see some redemption activity that was concentrated among a very small number of U.S. equity -- active equity mutual funds in the U.S. wealth channel, primarily driven by changes in asset allocation and advisory business models. So our goal continues to be to deliver higher gross sales and gathering commitments to a broader product set. As redemption activity normalizes, I would expect our nonaffiliated NCF profile to improve for the balance of the year. And I would just end with that the future pipeline is very strong. I hope that answers your question, Ryan. Operator: The next question comes from Wes Carmichael from Wells Fargo. Wesley Carmichael: First question was on the Individual Life segment. I think just looking at results, I think it's the best quarter that segment is produced in a long time, and I typically think about the first quarter as being seasonally weak from a mortality perspective. So just wondering if you think anything in the earnings power has changed for that segment? Or is this just a little bit more onetime-ish nature? Deanna Strable: Thanks, Wes, for that question. Obviously, Life did have a very strong earnings quarter, really driven by mortality. So I'll ask Amy to give some color around that. . Amy Friedrich: Yes, thanks for noting that. I do think we definitely feel like we saw some positive volatility in mortality this quarter. And so we've had other quarters though where we talked about it going in the opposite direction. So I definitely see some positive mortality sitting in this. But what I would also say is that when we think about our full year results for this segment, we did communicate guidance range in terms of our margin from that 12% to 16%. And even though this was kind of pointing us towards that mid- to higher end of that range, I would say something that is in the -- towards the lower end of that range for a full year expectation for the earnings power and margin power of this business is what I would be thinking about for the health of the business. Deanna Strable: The other thing I would just say on that, if you did look at claims, it was great to see that the positive came both from incidents and severity and a lot of times volatility tends to come from the severity piece but we did see some better-than-expected results on both incidents as well as severity. So... Unknown Executive: And when I parse those up, incidents and severity, it is about 50-50 for each of them. Operator: Wes, do you have a follow-up? Wesley Carmichael: And so just switching to RIS, pretty strong transfer deposits. Just curious if you could maybe just touch on the flow outlook for that segment for the rest of the year. Deanna Strable: Yes, I'll turn it over to Chris. As you know, we focus on revenue growth and ultimately really drove strong. We did have very strong fundamentals across RIS large case tend to be lumpy when you look at transfer deposits, and this was a quarter we benefited from that, but I'll ask Chris to give some more color. Christopher Littlefield: Yes. Thanks, Deanna. Thanks, Wes. So again, I think as you noted, we did have a really good quarter from a net cash flow perspective driven primarily by strong transfer deposits and also experienced very strong contract retention. And those 2 things were also supported by healthy recurring deposits and stable participant withdrawal rates. And all of this is despite the ongoing market performance. So really feel good about our net cash flow. As we look forward, as Deanna said, as we like to remind you, we really focus on driving profitable revenue growth but as we look forward to close in 2026, we do expect it to follow the historical pattern where Q1 is our strongest for the sales and transfer deposits and the remaining quarters are likely going to be impacted by strong markets. which increases withdrawal dollars as well as the lumpiness that we see in large from time to time in the quarterly results. Deanna Strable: Thanks, Chris, and thanks, Wes. Next question. Operator: The next question comes from Suneet Kamath from Jefferies. Suneet Kamath: I wanted to start with RIS also on the advice model that you guys have. And correct me if I'm wrong, but my understanding is that you use more of a sort of a call center model as opposed to sort of feet on the street or building out wealth management offices. And I know 1 of your competitors is taking that latter approach. Just wondering if that's something that you guys have looked at Or if it's something that you might consider? Deanna Strable: Yes. Thanks, Sameet. Thanks for being there for the question. As we've talked about, our focus is really on the majority of our participants and want to be able to broad -- provide broad-based support to those that don't have as much access or to the adviser community. And so I think our approach is different. But I'll ask Chris to continue to give a little bit more insight into that. Christopher Littlefield: Thanks, Suneet, for the question. Again, we really, as Deanna mentioned, focused on those participants that we serve already. And we're not really looking at building a number of storefront physical presence locations. We do have a few hundred salary-based advisers covering about 90% of our participant base to be able to offer them advisory services, and we're seeing nice results, as we mentioned, we're seeing great in-force dynamics, whether it's from participant roll-ins, increasing deferral rates, increasing in who are deferring all of that is coming from the advice model that we're offering. We're seeing an increase in our retail individual customers that are both IRA and advisory services covers up about 11%. And on the year. And so our model is really focused on focusing on our participants, focusing on those more mainstream than the high net worth and really focusing where Americans need to help. and we believe that we have a model that will be successful over time. Deanna Strable: Yes. And the other thing I'd mention there is we are supplementing that with enhanced technology that will continue to build up as we try to best meet the needs of those clients and how they want to be. So Suneet, do you have a follow-up question? Suneet Kamath: I do. And I wanted to come back to the SMB market. It sounds like last quarter, if I remember correctly, you guys were pretty confident in the employment outlook. It sounds like in your prepared remarks, you talked about being confident so far this year. But as we think about the economy and sort of the volatility that we're just seeing in the markets given its kind of global issues, is there typically a lag that you would see that maybe you're not seeing it show up in your results now, but down the road, there could be some impacts from this uncertainty that we're seeing. Deanna Strable: Yes, Suneet, a couple of things. And then I'm going to ask Amy to give some additional color. I have asked Amy to spearhead a group really focused on monitoring this real time across the enterprise. I think a couple of things I'll say there is we have a broad-based and employer base. So if you think about it, we have 180,000 employers just across RIS and Group Benefits ranging from different size, different industries, different geographies. And I think that diversity is really going to serve us well. . As mentioned, we're looking at it from our block perspective. We also have very regular surveys with SMB employers as well. And just sitting here today, we're not seeing anything that is impactful. But we also understand that some of this is going to be dynamic, and we want to stay close to it. But I do come back to it, I think that diversity is really going to serve us well. But I'll turn it over to Amy. Amy Friedrich: Yes. I agree with how Dana set this up. And I do want to reiterate, as we're seeing in our results, both employment and wage growth are really holding steady in our block. So I'd say wage growth is looking really healthy and similar to what we saw last year. And employment growth has moderated just a bit, but it's really aligned with what we expected to see this year. So your question though about could there be a little bit of a lag, I do think that uncertainty of which there is definitely the presence of some uncertainty for both employers and employees, tends to have an effect on the marketplace in a couple of ways. One way is that people tend to kind of settle back into not necessarily going to make some big expansions in terms of growth, but they also settle back into, I'm not necessarily going to retract back or do something differently. So it has a little bit of a static effect, that uncertainty in the marketplace. What that means for employees is many of them are staying where they are, what that means for employers is that many of them are holding true to the plans that they had for the year. So I'm not that big lag. I am seeing some uncertainty in the sentiment, but small and midsized business owners tend to be and our data proves this out. more optimistic in terms of how aggressively they can take advantage of the market situation when uncertainty does clear. And so I don't -- I'm not seeing a big lag effect, but we will continue to watch that every month. Deanna Strable: Thanks, unit, for the questions. Next question. Operator: The next question comes from Jack Madden from BMO Capital Markets. Francis Matten: My first 1 was on international pension. The earnings run rate is going to step up this quarter, even kind of backing out the significant variances that you call out. I guess could you just unpack some of the drivers there? And which do you think are kind of more repeated more sustainable versus some of the more transitory factors like FX or elevated performance fees. Deanna Strable: Yes, I'll ask Joel to talk through that. And again, thanks, Jack, for being here and for your questions. Obviously, it was a strong earnings growth for international pension, and that segment continues to provide some great diversification to our overall results. and really focused on where we feel that we can drive growth. So I'll ask Joel to give some specifics on the quarter. . Joel Pitz: Jack, as we indicated last quarter, they're in the mid-60s, we did expect improvement wants in the IP results, and that certainly did manifest itself in first quarter with about $80 million of adjusted earnings for the quarter. I'd say, from a run rate perspective to your question, it was a little bit outsized this quarter because of a performance fee within China Construction Bank, our pension business. There was about a $7 million performance fee that was paid within that market. That is 1 way that we're compensated for providing the services that we do within the pension space in China. So it was outsized this quarter, but it's something that's going to be volatile, we can expect into the future. So everything else being equal, I'd say a good run rate, it's going to be more in the mid-70s, a good source to build off. But importantly, we are getting some FX tailwinds finally. I've been in this business a long time, and it's nice to say FX tailwinds as opposed to headwinds and it's really nice to see the underlying results of these businesses, manifest themselves in the U.S. dollars in a meaningful way. Deanna Strable: Yes, I hope that helps. And do you have a follow-up question? Francis Matten: Maybe just 1 on the kind of the outlook for VII and performance fees in the investment management business this year, do you have any visibility at this point to kind of the cadence of realizations. I guess to what extent do you think market conditions need to change or improve in order to kind of unlock a more normal level of real estate monetization? . Deanna Strable: I'll have Joel address that. . Joel Pitz: Yes. So that's going to be a Continue to expect 2026 to improve relative to 2025. One of the reasons why we did have the results we did this first quarter was because there was no real estate transaction activity. As a reminder, we have about 50% of our OFS portfolio. within the real estate as it is depend upon transaction activity, again, which there was none in the first quarter. We do see some pickup in activity for the second, third and fourth quarter. And therefore, that's -- we do see some improvement year-over-year. But underlying performance of the of portfolio in its entirety is performing well than expected. And your question, we don't need to see anything change within the macro environment in order for us to deliver on that improvement that we communicated in outlook. Deanna Strable: Yes. I think the other part we've been there was performance fees from an investment management perspective. And I think we said on outlook that we expected '26 to be similar to '25, but those are going to be lumpy by quarter and they were a little lower in the current quarter. . Operator: The next question comes from Will Libertas from Raymond James. Unknown Executive: What drove the lower BRT sales in the quarter? And is there a little bit more competition flowing into the SMB PRT market. Deanna Strable: Yes. Thanks, Wilmar the question. I'll ask Chris to address that. Christopher Littlefield: Thanks for the question. Again, if you remember, our fourth quarter was a very strong PRT quarter, fourth quarter of 2025, not just for us, with over $1 billion of PRT sales, but for the industry at about $28 billion. And I think what that had an impact of doing was really reducing the pipelines in the first quarter. So I think we haven't seen the industry wide data yet. But anecdotally, it sounds like the industry is pretty light in the first quarter, and we reflect those trends. So that would be how we're thinking about the PRT business. The pipeline remains a little light in the second quarter. But if you remember last year, also sort of developed this way as well, sort of lighter in the first half, more accelerated PRT sales in the second half. And we kind of expect this year be fairly similar to 2025 when it comes to PRT. Deanna Strable: Yes, Wellman, and I think as we've discussed, we're not going to take sales for the sake of sales. We're going to make sure we're disciplined on the capital that we deploy and the returns that we can get from that and if it is lower, we're looking for other opportunities to ensure that we're driving profitable growth across the enterprise. So thanks for that question. Do you have a follow-up? . Unknown Analyst: Yes. Are you seeing the competition actually improving or decreasing in group dental given you guys have implemented price increases, but you're still seeing healthy sales growth. Deanna Strable: Yes. I think that question, you cut out just a little bit, but I think it was really regarding the competitiveness in the group dental market and how that might be impacting the sales volumes. And again, I feel very proud of the results that we delivered both on the profitability side as well as the growth perspective for Specialty Benefits, but I'll have Amy address the market from a dental perspective. Amy Friedrich: Yes. Thanks, Wilma. We do tend to be a very significant player nationally in the dental marketplace. And so 1 of the things that we saw emerging probably 18 to 24 months ago was some things around cost trend and some other things related to impacts on dental pricing that we did then move into our pricing. So we had seen some utilization changes, cost trend changes that we moved into pricing. As we look at last year's results, I do feel like we were 1 of the first in the market with some of those pricing changes, and it did yield a little bit of some of the dental sales that we had for prior year. So I see this year's production, this quarter's production as a good indication about the power of our dental production for the year in comparison to last year. I do think we are comfortable that with the rate we're putting out there in the marketplace, and we're the recipient of some market movement in the marketplace of some of our competitors putting in some rate increases that has brought some things back out to market. So we like the profitability that we're seeing in the dental business that we're writing. And we think it's a good indication for the type of power that dental business will have for us throughout 2026. Deanna Strable: Well, I hope that helps. Thank you for the questions. . Operator: The next question comes from Tom Gallagher from Evercore ISI. . Thomas Gallagher: First question just on RIS fee flows. 1Q '25 I think you had a jumbo case that you lost. How were the jumbo case call-outs for this quarter? Did you have any wins, losses? How did that influence RIS-Fee flows this quarter? Deanna Strable: I'll have Chris address that. You're right. Last first quarter, we had a more significant on the left side this quarter, we're seeing it more positive on the transfer deposit side, but I'll have Chris give some more color. Christopher Littlefield: Yes. I think we had really good wins in the first quarter coming off what was a really strong fourth quarter as well. So I think I'd take you back, and we had strong wins -- it's really strong fourth quarter, and that momentum continued in the first quarter. You're right. Last year, we did have a large case loss that we called out. This year, we had broad strength, but we also had a couple a couple of large case wins in the quarter. And so you did see that very significant difference in growth in our transfer deposits. And as you know, the large segments tend to be a little bit lumpy. and the SMB market tends to be sort of more steady and strong. Deanna Strable: Tom, do you have a follow-up? . Thomas Gallagher: Yes, Deanna. So my follow-up, I guess, is for Kamal, the on performance. It looks like your 1-year numbers for equities and Ashalim got better. Fixed income slipped a little bit. 3-year numbers fell across the board, though, in all 3 categories. Are you seeing any impact from the performance issues? And why do you think the performance has slipped a bit here? Deanna Strable: Yes, I'll have Tom address that. Obviously, investment performance is something we spend a lot of time focused on. There is some duplication across some of those, especially when you get into asset allocation. But I'll ask Kamal to follow up on that. Kamal Bhatia: Absolutely. So I'll start with your question on investment performance and break it down by the segments as you highlighted. Improvement on the 1-year number in certain pieces and then 3 years, slightly weaker. One thing I'll highlight for you, these numbers do not include our very strong private market performance. In fact, our marquee real estate strategy is #1 in its category. And as you know, that drives a significant flow for us. I think in Dan's comment, we also highlighted for you that we grew our private market business 11% year-over-year, I would highlight for you, only 1% of that was from macro. So it shows that we have the engine when investment performance kicks in. But specifically to your question, the area of our core weakness right now is around U.S. equities, particularly active U.S. equities. is an area of weakness, particularly in the short term. The long-term numbers are very, very good. As you said, our fixed income performance has improved, particularly non-U.S. fixed income performance is very, very strong. We see that in our flows, particularly around emerging market debt, which continues to attract a lot of client retention. Asset allocation is very important. As you know, we offer our portfolio in multiple flavors. One of our strategies on the hybrid side continues to do well, but you have highlighted some of our challenges in active book that comes from the U.S. side. And then the last thing I would highlight for you just this quarter is by design, we do run many of these strategies to complement as the passive business has grown across the industry, we design our products to be different than the index. That does lead to, in periods of high volatility, significant deviation in market performance. sometimes positive, sometimes negative. But that's what the clients ask from us. They don't want index-like products from us. And in periods where we deliver, it creates a tailwind as well. and it also supports our stable fee rate, which you have always highlighted as a strength for Principal Asset Management. Deanna Strable: Thanks, Tom, for the questions. Next question. Operator: The next question comes from Michael Ward from UBS. Michael Ward: I was wondering on the Specialty Benefits, did the M&A that you did in the quarter? Like did that contribute at all to the new business growth? And then are there other targets out there that you guys could look to transact on? Deanna Strable: Yes. Thanks, Mike, for that question. We did do a small dental network acquisition with a company that we had a relationship with. I'll have Amy talk to that. And obviously, as I've said on prior calls, it's great to be leaning into some areas that can help drive growth as we continue to think about our portfolio. So Amy . Amy Friedrich: Thanks for the question. So we did -- as Deanna noted, we did a small dental network acquisition that happened to be in Alabama, it was both a dental network and then some renewal rights for a block of Group Benefits business. We feel really good about that transaction. Your question, though, I think, was specifically was that into first quarter results? And the answer is no. Those were not yet present in first quarter results. Any benefit we get from that in terms of new business or cross sales or power of our dental network will start showing up in second quarter and beyond. I do like being able to lean into this piece of the business. We've got some really nice engines running for us in the Specialty Benefits business. And I like being able to add to it a bit inorganically to help us with future growth. Deanna Strable: Thanks, Mark. Do you have a follow-up question? . Michael Ward: Yes. On RIS, I guess, you guys, I would say, have been a little bit quieter just in terms of the inclusion of privates for retirement funds in the time of funds. I'm just curious your sort of stance on that issue and how you see that heading going forward for the industry? Deanna Strable: Yes. I'll have Chris talk through that. Obviously, we applied and support thoughtful efforts to expand investment options within retirement plans. The recent DOL guidance is an important step, but I think our stance is going to take time. It's going to be slow. And ultimately, as we talk to our plan, our customers they're intrigued but are not pushing to move at a fast rate for inclusion, but I'll see if Chris has some additional flavor. Christopher Littlefield: Yes. Thanks, Michael. Thanks, Dana. Yes. I mean I agree. I mean we do support the evaluation of privates to be included in retirement plans. And obviously, we've been offering privates and retirement plans for a long time with our real estate strategies. So we do believe that they play a proper role but they are complex and they come with new challenges. And I think the DOL proposed safe harbor that you need to evaluate the performance and the fees and the liquidity and the valuation and the benchmarking and the complexity that causes plan sponsors and fiduciaries to sort of step back and really be thoughtful about what works for them, what risks are we exposing participants to. And so I think we see a very measured approach to people considering the inclusion of privates in the retirement plans. We just had a significant client conference with 50 or so of our largest and important clients and there wasn't tremendous -- there were a lot of questions and a lot of wanting to understand. But I'm not sensing a tremendous like movement toward everyone, including privates quickly into their plans. I think it's going to take some time and I think as we've said in the past, it's probably going to be introduced first through advice solutions, whether that's a target date solution vehicle or a managed account vehicle because they are complex they need a little bit more explanation and the plan sponsor fiduciaries and the fiduciary committees are going to just take some time understanding how do we include this, how do we monitor the performance? How do we think about the valuation issues? And then how do we deal -- so again, we support it. We're working with a lot of investment partners on including their solutions into various vehicles. But I think it is going to be a bit more measured progress as opposed to a big wave of inclusion here in the short term. Deanna Strable: Next question. Operator: Our final question comes from Pablo Singzon from JPMorgan. Pablo Singzon: So just to start off, maybe a question for RIS. I wanted to ask about your efforts or the growth spread earnings, whether from institutional lose or AM sitting in retirement plans, how do you see the fee versus spread mix evolving over time? Deanna Strable: Yes. Thanks, Pablo, and great to have you on the call. I'll have Chris really address that. As we've talked about, we really do think about our -- how we think about fee and spread is holistically because those are ways that we drive revenue across our retirement ecosystem. So we think less about 1 versus the other and really think about how they can contribute to overall retirement as well as principal growth. But I'll have Chris offer some additional color. Christopher Littlefield: Yes. Thanks, Pablo. We have, over the last several years, really put some emphasis into looking at how do we continue to grow our spread-based earnings. Obviously, PRT and the annuities businesses provide some nice spread-based earnings. But as importantly, we've really focused on growing capital preservation options within our retirement plans, which we call sort of WSS GA solutions. And those, we've driven very significant flows in those over the last several years and including over $400 million of flows in the quarter just on WS or SGA. We do think there is an appetite for capital preservation products that can serve the needs of the participant and continue to think that there's opportunities to drive that. But we're not targeting any particular mix. fee-based flows are really important for us, and we continue to focus on driving profitable fee revenue and at the same time, supplementing and complementing that with the right mix of more capital-consumptive spread-based products. to make sure that we're getting the returns on the capital that we're doing, while also at the same time, meeting the needs for our retirement plan participants for capital preservation. Deanna Strable: Thanks, Pablo. I hope that helps. Do you have a follow-up? . Pablo Singzon: And then secondly, maybe come out. I was hoping you could elaborate on your comment about the asset management pipeline being very strong. Is it better than it was a year ago? Are you seeing new opportunities? Anything you can comment on there things. Deanna Strable: Yes. That's a great final question. We do have a strong pipeline as we sit here today. I think volatility in the market could impact the timing of when that flows in, but I'll have Kamal will give some additional color. . Kamal Bhatia: Sure. Pablo, thank you for the question. So just to follow up to Deanna's comments, I feel very good about our pipeline. Our commitment pipeline has now grown to over $9 billion. just to help you understand, these are mandates that we have actually won that have not funded. And they have diversified across both public and private markets largely from our growth in our global client base. And that's key because the demand is more diversified. Historically, we have highlighted for you a pipeline of around $6 billion around real estate. So you can see how this has scaled up. And it also shows that we are continuing to bring new products to the marketplace as well. So I believe the setup for 2026 is very constructive on that front. Deanna Strable: Thank you, Pablo. I hope that helps. Operator: We have reached the end of our Q&A. Ms. Strable, your closing comments, please. Deanna Strable: Thank you. As we close, I want to thank all of you for joining the call. Our first quarter results underscore the strength of our diversified business model, our focus on execution and growth and our long-term discipline. As mentioned, we are confident in our ability to deliver on 2026 financial targets, and we're well positioned to navigate the current environment, grow and deepen customer relationships and deliver long-term value for shareholders. We appreciate all of your continued interest in Principal and look forward to our ongoing dialogue. Thank you again for your time, and have a great day. . Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good day, everyone. Welcome to the conference call covering NBT Bancorp's First Quarter 2026 Financial Results. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com. Before the call begins, NBT's management would like to remind listeners that, as noted on Slide 2, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. At this time, all [Operator Instructions] As a reminder, this call is being recorded. I will now turn the conference over to NBT Bancorp President and CEO, Scott Kingsley, for his opening remarks. Mr. Kingsley, please begin. Scott Kingsley: Thank you. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's First Quarter 2026 Results. With me today are Annette Burns, NBT's Chief Financial Officer; Joe Stagliano, President of NBT Bank; and Joe Ondesko, our Treasurer. Our solid operating performance for the first quarter was driven by disciplined balance sheet management, the growth of our diversified revenue streams and the continued benefits of integrating Evans Bancorp into our franchise following the merger in May 2025. These factors have contributed to productive gains in operating leverage. Operating return on assets was 1.29% for the first quarter with a return on tangible equity of 15.50%. These metrics represent meaningful improvement over the first quarter of last year and have provided incremental capital flexibility. Our tangible book value per share of $27.05 at quarter end was more than 9% higher than a year ago. The continued remix of earning assets, diligent management of funding costs and the addition of the Evans balance sheet resulted in a 28 basis point improvement in net interest margin year-over-year. We got off to a slow start in January and February with the very difficult winter weather conditions, and we experienced a higher-than-expected level of commercial real estate payoffs. With that said, activity since then has been quite good and we are very pleased with the types of customer opportunities we are seeing across our footprint as well as our current pipeline levels. Growth in noninterest income continues to be positive, highlighted by a new all-time high in quarterly revenue generation from our retirement plan administration business. Our capital utilization priorities remain focused on supporting organic growth while continuing our long-standing commitment to annual dividend growth. In addition, our strong capital levels continue to allow us to evaluate a variety of M&A opportunities. Another component of our capital planning is to return capital to shareholders through opportunistic share repurchases. Consistent with that approach, we repurchased 250,000 of our own shares again in the first quarter of 2026. One year in, the integration of our Evans Bank colleagues has gone smoothly and validated the strong cultural alignment we saw from the outset. Their customer and community-focused approach continues to enhance our franchise, and we remain excited about the opportunities ahead in the Western region of New York. Momentum across Upstate New York semiconductor corridor continues to build. Since Micron's groundbreaking late last year and the completion of its site acquisition from Onondaga County in the first quarter development activity has accelerated. Site development and infrastructure build-out for the first fabrication facility are now underway and we are already seeing tangible benefits with more than a dozen of our customers securing contracts tied to the project. Stepping back more broadly, across our 7-state footprint, we continue to see encouraging activity tied to advanced manufacturing, infrastructure investment, housing development and workforce-driven economic initiatives. These dynamics are evident across our core markets, including manufacturing and defense activity in New England as well as construction and community revitalization efforts throughout our legacy regions. While activity levels can vary quarter-to-quarter, the depth and diversity of these initiatives reinforce our confidence in the markets we serve. We believe NBT is well positioned to support this activity through our relationship-driven model, significant balance sheet capacity and a diversified set of financial solutions. I will now turn over the meeting to Anette to review our first quarter results with you in detail. Annette? Annette Burns: Thank you, Scott, and good morning. Turning to the results overview page of our earnings presentation. For the first quarter, we reported net income of $51.1 million or $0.98 per diluted common share. We have improved earnings 27% from the first quarter of 2025 with growth in our balance sheet, net interest margin improvement and a 4.5% year-over-year growth in our fee-based income as well. Earnings were modestly lower than the prior quarter, consistent with seasonal expectations, 2 fewer days in the quarter and a normalized effective tax rate. The next page shows trends in outstanding loans. Total loans at $11.5 billion were down $50.9 million from December 31, 2025, with other consumer and residential solar portfolios in a planned runoff status, representing half of that decline. In addition, we continue to experience an elevated level of commercial payoffs, similar to the prior 2 quarters. Our total loan portfolio remains purposely diversified and is comprised of 56% commercial relationships and 44% consumer loans. On Page 6, total deposits were up $244 million from December 2025, primarily due to the inflow of seasonal municipal deposits during the quarter, along with increases in consumer and commercial customer account balances. Generally, in most of our markets, municipal tax collections are concentrated in the first and third quarters of each year. We experienced a favorable change in our mix of deposits out of higher cost time deposits and into checking, savings and money market products. 59% or $8 billion of our deposit portfolio consists of no and low-cost checking and savings account at a cost of 38 basis points. The next slide highlights the detailed changes in our net interest income and margin. Our net interest margin in the first quarter increased 7 basis points to 3.72% compared with the prior quarter, as the 9 basis point decrease in the cost of funds more than offset the 2 basis point decline in earning asset yields. Loan yields decreased 4 basis points from the prior quarter to 5.66%, primarily due to the repricing of variable rate loans following the prior quarter's federal funds rate decreases. We were able to actively manage our funding costs downward to more than offset that impact as evidenced by the 10 basis point decline in our total cost of deposits to 1.34% for the quarter. Net interest income for the first quarter was $134.3 million, a decrease of $1 million compared to the prior quarter but more than 25% above the first quarter of 2025. The decrease in net interest income from the prior quarter was driven by 2 fewer days in the first quarter of 2026. The opportunity for further upward movement in earning asset yields and net interest margin will depend largely on the shape of the yield curve and how we reinvest loan and investment portfolio cash flows. The trends in noninterest income are outlined on Page 8. Excluding securities gains, our fee income was $49.7 million consistent with the prior quarter and increased 4.5% from the first quarter of 2025. Our combined revenues from retirement plan services, wealth management and insurance services exceeded $32 million in quarterly revenues. Noninterest income represented 27% of total revenues in the first quarter and reflects the strength of our diversified revenue base. Total operating expenses were $112 million for the quarter, a 0.5% increase from the prior quarter. Salaries and employee benefit costs were $68.8 million, an increase of $2.8 million from the prior quarter. This increase was primarily driven by seasonally higher payroll taxes and stock-based compensation, partially offset by lower medical expenses. In addition, annual merit increases occurred in March at an average rate of 3.3%. The quarter-over-quarter increase in occupancy expenses was expected, driven by increase in seasonal costs, including utilities and higher maintenance costs. The effective tax rate for the first quarter was higher than the prior quarter at 23.3% primarily due to the finalization of the deductibility of last year's merger-related expenses and the associated impact on the full year effective tax rate in 2025. Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended March 31, 2026, was $5.6 million compared to $3.8 million for the fourth quarter of 2025. The increase in provision for loan losses was primarily due to a slightly higher level of net charge-offs and nonperforming loans resulting in a higher level of allowance for loan losses. Reserves were 1.2% of total loans and covered more than 2x the level of nonperforming loans. In closing, we believe the strength of our franchise positions us well for growth opportunities as they arise. We continue to see productive engagement across our markets reflecting our ongoing investment in our people and communities. Thank you for your interest in our results. At this time, we welcome any questions you may have. Operator: [Operator Instructions] Our first question comes from the line of Mark Shutley with KBW. Unknown Analyst: So expenses came in a little bit better than we were expecting despite sort of the seasonal factors there. So I was wondering if you could maybe update us on your outlook there and sort of maybe what's an appropriate run rate for the year? Annette Burns: Sure. I'll take that, Mark. So yes, there were some seasonality in our first quarter expenses, primarily higher levels of salaries and benefit costs related to payroll taxes and stock-based compensation as well as some higher level of occupancy costs. As we look into the next quarter, and we think about salaries and benefit costs, we'll probably see some increased costs related to our merit increases as well as an additional payroll day as well as our occupancy expense seasonal increase will probably be offset in the second quarter by just increase in productivity across our markets like higher travel training as well as technology initiatives. So with all that being said, our run rate in the first quarter was right around $112 million. That will probably be a good place to be in the second quarter. And we still think our run rate or overall increase in occupancy -- or overall operating expenses is typically runs between 3% and 4% annually. We still think that, that is kind of where we're landing for 2026. Scott Kingsley: And Mark, we had some costs in the third and the fourth quarter of last year on the operating expense side that were a little bit higher than sort of standard run rate. Some specific initiatives or some specific costs that we incurred in those quarters. So not unusual for sort of the other expense line to be a little bit lower in the first quarter with, as Annette mentioned, with the costs associated with stock-based compensation and payroll taxes to kind of be the higher one. Unknown Analyst: Great. That's helpful. And then maybe just looking to the NIM, the deposit costs are really strong. But sort of given the current rate environment, maybe seemingly more flat. I was wondering if you're seeing sort of increased deposit competition in your markets and what you expect for deposit costs from here. Annette Burns: So if I think about the margin over the past 2 quarters, I think kind of as we expected to see kind of with the federal funds rate cuts, that our loan repricing was going to happen almost immediately, and then we were going to have a little bit of time to work through our deposit rate changes. So we actively manage that, and I think we were successful through the first quarter of 2026. So our margin right now stands today at 3.72%. We think that's a really great place to be and throwing off some really meaningful earnings as we look forward, when we look at our funding costs, I think they're stabilized there's probably a little bit of opportunity to work that down a little bit, but that will probably be offset by some of our deposit growth initiatives as well. So I would say stabilized there. And then as we look at our earning asset yields, there's probably some repricing opportunities as we primarily look at our investment securities book as well as our residential mortgage book. And then really the shape of the yield curve will kind of influence margin improvements over the next couple of quarters, particularly where we reprice our assets in the 2- to 5-year range of that yield curve, which had seen some improvements and positively sloped starting in March. So I think as we look forward, it's stabilization as well as maybe a few basis points of improvement depending on that yield curve. We think about deposit pricing, I think there is competition for deposits, but it's fairly disciplined or we don't see anything terribly crazy, maybe a few pockets here and there. Scott Kingsley: I'd add to that, Anette, to your point, in most of our markets, and we've got some pretty diverse markets. But in most of them, deposit gathering has not been focused on additional share grab in most of our markets. Most of the people we compete with find that even the large banks that the cost of funding in our markets where we compete with them is probably lower than some of the larger metropolitan areas that they do business in. What we have seen on the asset pricing side is a competitive landscape. I think as people look for yielding assets, there's been a little bit of give up in spread whether that's on the commercial side or business banking. And in the first quarter, we thought that there were some people that mispriced indirect auto. So we chose not to participate in that at the same level that historically we might have from a growth standpoint. So in a difficult quarter for Pure auto sales, I think there were certain other people out there that were trying to do sustain their portfolios. We think we're really good at that portfolio from a total operational management standpoint and remember, the duration of that portfolio is somewhere between 24 and 28 months. So reengaging in that when the economics make a little bit more sense is kind of how we look at that. Operator: And our next question comes from the line of Feddie Strickland with Hovde Group. Feddie Strickland: I think to address this in your opening comments, but I just wondered if you could talk generally about sentiment among commercial customers. Are you seeing clients pull back at all on some of the economic uncertainty and credit rather interest rate uncertainty or the trends in the footprint like the chip manufacturing facilities still kind of pull the local economies forward regardless? Scott Kingsley: Yes. Thanks for that opportunity. So across the markets, customers are feeling pretty good about themselves. I don't think that we started the year thinking that they could possibly have more uncertainty than they went through in 2025, but we appear to have topped that in early '26. And we've said this before that uncertainty doesn't inspire action. But I don't think things have been held up. So I don't think we have customers who have said I'm going to pass on fulfilling capital expenditure projects that I had planned, either for capacity improvement in their businesses or just general recurring costs associated with being technically better. So we haven't seen any of that. I will say this, in the first quarter, we had a number of really exciting and really robust construction projects that did not get underway in the time line we expected. But most of them, as the grass is turning a little greener, they're finding their way to get out and start to work on some of that stuff. So we think there will be -- there was probably a little bit of a backup in the first quarter that will get taken care of here in the second quarter. But nothing never seen that is falling away. I do think that some of our very astute customers who use our capable and treasury management tools, in some cases, are paying down some of their leverage because there are opportunity to earn yield on that is not at the same level that it was 18 or 24 months ago. So I think much like our balance sheet, there's a lot of tactical management going on in our customers today. And -- but sentiment quite good across the franchise. Feddie Strickland: All right. That's great to hear Scott. And just if you could also give us an update on M&A conversations. It sounds like those are ongoing. I'm just curious on a similar question whether current conditions or maybe making that a little bit of a priority for some potential partners or whether that's a little bit of a headwind? Scott Kingsley: Yes. Let me kind of tack that and check that in a couple of different ways, which is we have ongoing conversations with like-minded smaller community banks across our 7-state footprint. Our priority is to try to do some fill-in work and whether that's a practical M&A transaction build out concentration in some of our markets ourselves. So if I was to hit on that really quick, I would tell you that our strategy in greater Rochester, New York and into the Finger Lakes is a build-out strategy that we recognize that we don't have the market coverage that we needed. So getting closer into the city of Rochester and maybe in the western and southern suburbs is a priority for us. So something you'll see us act on in the next 12 to 18 months. I feel a little bit similar to that in Southern New Hampshire and Southern Maine where our concentration in terms of spots in the market is not that concentrated. And -- but we've got great commercial lending teams in both markets. So giving them a little bit more to work with. We opened another branch in base side in Portland during the quarter. We're going to make a commitment in Scarborough going into the second half of the year or early next year. And we'd like to find a couple more spots in Southern New Hampshire, again, just to give our folks some opportunity for enhanced branding. I think if you look at the rest of our franchise, there are spots where we're still missing some participation in markets that we think we would thrive in. And it doesn't require us to move our geography another 100 or 200 miles. These are things that are either next door or within the existing footprint. So that's where we've been spending our time. To your point about priority for certain other people and maybe some people who are not necessarily experienced acquirers, there's been a handful of transactions in our marketplace that we think presents a disruption opportunity. There was a -- for us, in a market, a substantive transaction in the Mohawk Valley outside in the greater Utica area. We think that will present some opportunities for us a handful of things going on in Western -- sort of Western New England, Western Massachusetts and Connecticut, a couple of large transactions, but then a couple of small transactions where a couple of small community banks are getting together. So we've got some very specific and pointed initiatives attached to that from a disruption standpoint. And are pretty confident given past results that we'll see some productive gains from that. Feddie Strickland: Super helpful color. Just one more quick one for Annette. I apologize if I missed it somewhere, but did you have the loan discount accretion number for the quarter? I think I saw it was up, but not by how much and maybe what expectations might be for that number going forward? Annette Burns: Sure. Our loan accretion for the quarter was right around $6.5 million that's kind of a little bit down from what we had in the fourth quarter. And I would expect it to run somewhere in the $6 million to $6.5 million that corresponds with our intangible asset amortization around $3.5 million a quarter, so aligned with that. As we think about accretion where we mark those loans, we think we're capable of getting pretty close to those rates as we reinvest those cash flows in our loan book as well. Scott Kingsley: Yes. I would reinforce Annette's comment on that, that the size of the marks in either our residential mortgage portfolio or commercial portfolio, from both Salisbury and Evans don't leave us with the yields that are above current market yields. Operator: And our next question comes from the line of Manuel Navas with Piper Sandler. Manuel Navas: Can you just speak to loan growth this year and the kind of the makeup of the loan pipeline. Just wondering how things look with the runoff portfolios, the pullback in indirect auto, just kind of level set things as we kind of move across the year? Scott Kingsley: Sure. And let's see if I can sort of accomplish this efficiently from those sort of 4 subsets of questions, Manuel. Runoff portfolio, primarily solar residential. We've said before, that's roughly $100 million a year. That's exactly what we incurred in the first quarter, so $25 million in the quarter. And our expectation is that continues on the prepayment patterns in that portfolios are more similar to the prepayment patterns of home mortgage, probably not a really unexpected outcome since the equipment sits on top of the house. And so from a practical standpoint, that's kind of going according to plan. I think to the extent that we're incurring some losses in that portfolio from customers are not paying us back timely, it's as expected, not outside of that. And just as a reminder, we carry reserves around 4% of that portfolio. So I think we're really well covered relative to the expectation of future results as that portfolio runs up. Indirect Auto is an interesting one for us. Again, as I said before, we're really good at this portfolio. We really like the short duration of the portfolio. We like the asset because the customers in our market actually need that asset. And so our performance from a quality standpoint has been really, really solid. As a matter of fact, sub-30 basis point charge-off levels for quite a while now in that portfolio. In that portfolio, though, that if there's -- if people are trying to get share to build to their book, and in the first quarter, we saw a handful of institutions probably more dominated by credit unions that had really low rates. Rates that made no sense, rates barely above Fed funds rates, and that's not where we're going to participate and add to our portfolio. From the rest of the pipeline standpoint, nice mix of commercial real estate in C&I in our current portfolio in the pipeline for that like the construction projects that are out there. And as I said before, a couple of them have probably got underway a little bit later than maybe we would have hoped from a progress standpoint, there's a lot of infrastructure build going on in our markets, not just Central New York, but across the footprint. So opportunities for our contracting clients and people who service those industries to move forward. We really think that in the first quarter for us historically, is not our most robust quarter of growth, and that was evidenced in this quarter. We think we start to get back to more of that low to mid-single-digit growth rates for the balance of the year. Manuel Navas: I thought that was a pretty fulsome answer. Can you remind me and level set a little bit on kind of fee growth expectations, where the largest opportunities are? Where you'd like to see better growth, for example? Just kind of thoughts on that year-over-year. Annette Burns: Sure. Our fee-based income does have some seasonality with the first and third quarter usually being the most robust and second and fourth being a little lighter. I think we're really excited about the growth opportunities and our fee-based income. Most excited about the performance of retirement plan services. They really had some really great wins in the first quarter of 2026, and that's evident in their numbers. So really good trajectory there. But we also feel that wealth and insurance have some really good opportunities as well, particularly as we bring the whole bank to some of our markets like the Western New York region as an example. So feeling good about the trajectory there. I think as we think about full year growth expectations, I think we can look back to our historical performance over the past couple of years, which is are in the mid-single-digit growth rates for our fee-based businesses. I think we still continue to expect that's achievable for us. And deposit service charges, banking fees generally we are a little lighter in the first quarter seasonality, and that will continue to build as well as we get into the next few quarters. Manuel Navas: I appreciate that. My last question is could you give any extra color on some of the NPL build here, just anything we can disclose on that? Annette Burns: P Sure. I'll take that. Nonperforming loans, the majority of our increase during the quarter was related to a C&I relationship in the Western New York region. We're acting working through that. It's really a specific customer circumstance. So we have a handful of other nonperforming loans that we're continually to actively engage and work through as well, which are primarily commercial real estate based. We feel pretty good about our capacity to work through those and feel very good where we are from a positioning as far as our allowance associated with those. And I would just add that our consumer delinquencies have performed kind of in line with our expectations and in some cases, better than our expectations. So those are really looking good through the first quarter as well. Scott Kingsley: Yes. And just where we are, and this is not just us, but we're coming off such a low base that one relationship or a couple of relationships can actually make a difference relative to size of that nonperforming. But I think the important comment that Annette made was we think we have the capacity to work through these. Not only do we have the stamina to work through is -- but we have a really good job at identifying a customer that may be just going through a really difficult period of time. But we like everything about what they do. So this doesn't have to be us moving really quickly to sell assets and remove them from our portfolio. We have the same to work through stuff. Operator: Our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Scott so maybe just most of my questions asked and answered here. Just following up. I'm not sure I caught this or you might have spoken to Scott, but on the deposit cost side here, definitely a healthy step down. Just kind of curious, I know you operate in lower cost markets for sure. But just -- is this a good bottom to deposit costs? Or as you're entering maybe a little more relatively suburban markets and Upstate New York, do we see a little bit more of an upward pressure, if that holds flat here? Scott Kingsley: It's a decent question, Steve. I would kind of reflect on this that if you thought about the fourth quarter where there were 3 Fed funds changes in the last 4 months of the year. And the impact that had on our [indiscernible] assets, we knew that we had a responsibility to cover that and maybe a little bit more. But it was difficult to get all that in the same quarter that all of those happened. And I would really focus on sort of the month of December. But we had active management across all deposit portfolios and achieve that lower rate in the first quarter, arguably in January to get back to levels of beta performance that we think are sustainable for us. So your question is a good one relative to if we end up in a little bit more suburban or light metro markets with some of our growth plans. Will the cost of interest be a little bit higher. It might be. But again, if you think about the product we're really leading with is we're leading with the checking product. So if it's necessary for some larger commercial customers or even municipal customers for us to have a higher rate to secure the win of that customer. Long term, it's total cost of funds in the relationship. So I don't think we think it's going to be outside of the norm that we can't handle. And if you kind of think about a growth rate of just pick a number, 4% or 5% on a $13.5 billion base. That's $0.5 billion of new deposit balances on an annual basis. Even if those are a little bit above the blended cost of our existing deposit portfolio, we can probably held that small dilution. Stephen Moss: Okay. That's helpful. And then just in terms of -- the other thing I just want to touch base on in terms of cash flows. Just kind of curious on the security side, just maybe I missed in the deck, but what's the amount of cash flows that you guys have for the upcoming 12 months for securities? Annette Burns: Securities cash flows probably run somewhere in the $20 million to $25 million a month, pretty consistently, maybe out in '27, '28, there might be a little bit of more lumpiness to it, but pretty consistently over the next several quarters. Stephen Moss: Okay. And then on auto loans, I think I wanted to ask about was just kind of -- you guys mentioned competition with regard to pricing. Just kind of curious, was it just incrementally tighter that you guys weren't willing to put it on this quarter? Or was it kind of a meaningful step down and maybe we see that extend for a little bit here? Scott Kingsley: In the first quarter, and I think we're actually seeing a little bit of rationality here in the second quarter already. In the first quarter, there were offerings out there that were 150 to 200 basis points below ours. Stephen Moss: Okay. Got it. Annette Burns: I think you could combine that too with some lower auto sales just generally as well. Operator: [Operator Instructions] Our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: A few from me. First, Annette, maybe you could help me out with new loan yield originations this quarter and what's some of the roll-on versus roll-off dynamics to what extent is that positive still? Annette Burns: Sure. I'll get us started here. So if we look at our book. Our residential mortgage probably still has somewhere around 120 to 125 basis points to reprice. Our commercial yields have come in a little bit, particularly with the 75 basis point drop in the yield curve over the past 12 months. But it was probably still about somewhere in the 20 to 25 basis point range of repricing opportunities in our commercial book. If you look at our indirect auto book, our new origination rates are actually a little bit below where our portfolio yields are. So they're completely repriced and a little bit underwater at this point. And then I spoke about our investment securities portfolio that's probably somewhere in the $150 million to $175 million from a repricing opportunity. Matthew Breese: Perfect. Okay. And then I guess if loan growth remains subdued, may we see some tactical changes. And I'm thinking, do we see more consistent or even more aggressive buybacks. Or do we see you perhaps Connecticut is a really kind of heavily disrupted market right now with all the M&A you have your toe in there, maybe see you lead with lending to drive some better growth in that geography. I'm just curious as you play this out, what might we see you do? Scott Kingsley: So I don't think the strategy holistically changes by a lot, Matt. Will there be tactical opportunities in markets with disruption where it is? Definitely faster to lead with the asset product from a loan standpoint for sure. So to your point, whether that's Northwest, North Central Connecticut, whether that's the Berkshire's or in fairness, whether that's in spots in Central New York, honestly, today. So you're not wrong about that. I don't think that we'll think that it's a holistic change in strategy. What we are experiencing is an opportunity to hire some very high-quality people in several of our markets today, either coming from some of our larger bank competitors or for people that have been displaced in disruption. So that has been an opportunity, and we've probably added half a dozen people to our mix in the last 6 months. We probably 2 years ago, we're sure we'd ever get access to that level of quality individual. So that's a net positive. Has that shown up on the balance sheet? Yes, probably not. But on a going-forward basis, we certainly expect some opportunities to come out of that. But I think tactically, I think we're proving that we're pretty adept at moving with situations. And as logical opportunities present themselves in the markets will be there and we'll be in a position to win those opportunities. Should there be pricing dynamics that don't make sense for us on a long-term basis, we're unlikely to chase for those. Matthew Breese: Scott, should we think about consistent buybacks here? I mean, it's been $250,000 last couple of quarters. Is that something we should model in for 1 or 2 more quarters? Scott Kingsley: Here's how I kind of look at that, Matt, is that generating and retaining capital is hard like you work really hard to get to that privilege to generate capital to use for future opportunities. So we are not opposed to share buybacks. We don't think that, that's top of our priority list. But we can certainly fund what we've done for the last 2 quarters because our earnings generation has been so robust. So I don't think that we need to think about that as we're probably never going to start 1 of our conference calls with we bought 9% of our shares this quarter. That's not us. But a practical mechanism that says if the market is not recognizing our value, we want to be participatory in that Absolutely. Matthew Breese: Yes. Okay. Last one for me. Just an update on all things kind of chip manufacturing, not just Micron, but there's been tens of billions directed to New York creates and global foundries. And just curious in terms of activity, what's going on? And two, when do we start to see that translate into a bit more loan growth than we're currently seeing. And that's all I have. Scott Kingsley: Really decent question, Matt. I think the build-out of that GLOBALFOUNDRIES in Saratoga has really it's a great model to watch relative to what 1 might expect in the future with other fabrication facilities coming online. And the total sort of vendor environment that they had to create to be able to service that facility, watched housing developments and demographic improvement exist in that area for a number of years now. So that ought to continue. To your point, we're engaged in not only a lending facility at New York creates, but just to throw off that the activity generates there. It's a really important feature for not only Micron and global families, but other people who are interesting in pretesting their products are using that facility. So it's a very important economic stimulator for future development. So all in all, like anything from these very, very large project base. I wouldn't say we're disappointed that the pace has been a little bit slower than we might have initially expected. But remember, just the sheer size of these projects. So when you think about what's really important there, we keep coming back to what's really important is the sponsor, right? Global Foundries is doing very well. Micron is doing exceptionally well. So the strength of the sponsor is really, really important to this, and I think that they're committed to these build-outs on a long-term basis. Operator: our next question comes from the line of Jacob Civiello with Davidson. Jacob Civiello: Just 2 quick questions for me. I apologize if I missed this, but did you have a spot NIM for the month of March that you provided? Annette Burns: It's pretty consistent with where we landed for the quarter. Jacob Civiello: Okay. And then -- you talked about the commercial payoffs in the quarter being relatively consistent with the past couple of quarters as you kind of look ahead or think ahead, I know you talked about loan growth being kind of back to that low to mid-single-digit growth trajectory are the payoffs and paydowns factored into that? Are they slowing? Like, can you give us any perspective there? Scott Kingsley: Sure, Jacob. Absolutely. So just to give you a framing reference here, in the first quarter of last year, we had about $45 million or $50 million worth of early payoffs. That was pretty consistent with the second quarter. Starting in the third quarter, the number went above $100 million. And for the first quarter, about $125 million for this year. And again, I think a lot of that has to do with the valuation of some of our customers' assets, whether it's the holistic business they're doing or a piece of real estate that they own I think that as people look for yield from performing assets, all of those things have been in that consideration. I don't think that early paths are going to go to back to 0, but I also think we're seeing signs that our production levels are capable of handling a higher level of payoff and still demonstrating that balance sheet growth. And I think we're already in that phase. Jacob Civiello: Okay. I mean any particular geographies or customer type loan size... Scott Kingsley: Widespread. A couple of very attractive operating businesses some real estate projects that the owner probably thought that they were going to be the holder for 5 to 7 years, and they were able to go into an agency was at a hockey game in Western New York and had a chat with one of our customers who moved to an agency instrument 3 years before he thought it would be available. And so a wide variety and a wide variety of geographies. But as well as that, is that there's not of our geographies today where we're not seeing good growth attributes or good opportunities coming through. -- so kind of balance that with its widespread on the payoff side, it's pretty widespread on the growth side. Operator: Thank you. I have not shown any further questions. I will now turn the call back to Scott Kingsley for his closing remarks. Scott Kingsley: Thanks in closing. I want to thank everyone on the call for participating today, and thanks for your continued interest in NBT. Talk to you next time. Operator: Thank you, Mr. Kingsley. This concludes our program. You may disconnect. Have a great day.
Operator: Greetings. Welcome to Gaming and Leisure Properties, Inc. First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Joe Jaffoni with Investor Relations. Thank you, Joe. You may begin. Joseph Jaffoni: Thank you, Rob, and good morning, everyone, and thank you for joining Gaming and Leisure Properties first quarter 2026 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section on our website at www.glpropinc.com. In addition to the press release, GLPI also posted a supplemental earnings presentation, which highlights the events of the quarter. Recent developments, future considerations can be accessed at glpropinc.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. Forward-looking statements may include those related to revenue, operating income and financial guidance as well as non-GAAP financial measures such as FFO and AFFO. As a reminder, forward-looking statements represent management's current estimates and the company assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to risk factors and forward-looking statements contained in the company's filings with the SEC including Form 10-Q and in the earnings release as well as definitions and reconciliations of non-GAAP financial measures contained in the company's earnings release. On this morning's call, we are joined by Peter Carlino, Chairman and Chief Executive Officer of Gaming and Leisure Properties. Also on today's call are Brandon Moore, President and Chief Operating Officer; Desiree Burke, Chief Financial Officer and Treasurer; Steve Ladany, Senior Vice President and Chief Development Officer; and Carlos Cantrell, Senior Vice President, Corporate Strategy and Investor Relations. Thank you for your patience with that. It's now my pleasure to turn the call over to Peter Carlino. Peter, please go ahead. Peter Carlino: Well, thank you, Joe. Happy to be here this morning and always a lot more fun to make these calls when things are looking good, and we've had a terrific quarter. Our AFFO and AFFO per share both growing in mid- to high single digits through this first quarter. And as we did -- as we entered 2026, we sit in a very enviable position with a clear and well-documented line of sight toward a very healthy multiyear AFO growth both in our acquisition and development pipelines. With the acquisition of Bally's Lincoln in February as well as progress on several of our development projects. Our future capital commitments stand at roughly $1.8 billion, nearly all of which we expect to deploy by year-end 2027. And despite what was a relatively challenging year in the regional gaming markets, 2026, as you've been seeing the earnings reports and off to a very, very solid start and our rent coverage remained strong with the vast majority of our leases covered at 1.8x or higher. We feel pretty good about the opportunity that exists in the market today. We remain pretty active and feel pretty well about our balance sheet, their ability to transact in an accretive manner. As I've offered many times over the years, I would remind you that there is no transaction that we have to do, we are never pressured just to do something new. I used to say over at PENN National Event our customers may be in the gambling business, but we are not. So our focus remains on thoughtful transaction underwriting, careful capital deployment. Looking always at the health of our balance sheet and continuing to position the company for multiyear AFFO and dividend growth. So with that, I'll turn this over to Des. Desiree Burke: Thanks, Peter. For the first quarter of '26, our total income from real estate exceeded the first quarter of '25 by over $24 million. This growth was driven by approximately $33 million in cash rent increases resulting from acquisitions and transformation. For Bally's, the acquisition of Bally's Real estate increased rent by [ 7.5. ] The Chicago lease increased cash income by $5.5 million and in the Bally's Baton Rouge development increased cash rent by $2.6 million. For the PENN, [indiscernible] funding increased cash income by $5.4 million, the [indiscernible] cash income by $3.8 million. The Dry Creek, Ione and Cordish Virginia loan cash income by $3.5 million. And then the recognition of escalators and percentage rent adjustments on our leases added approximately $4.6 million. In addition, the combination of our noncash revenue growth steps, investment in lease adjustments and straight-line rent adjustments partially offset these increases, resulting in a collective year-over-year decrease of $8 million for the noncash items. Our operating expenses decreased by $49.8 million, mainly due to the noncash adjustments in the provision for credit losses. Included in today's release is our full year 2026 AFFO guidance of between $1.212 billion and $1.223 billion or $4.08 to $4.12 per diluted share in OP units. The guidance does not include the impact of future transactions. However, we did include additional development funding of approximately $590 million to $640 million, which will be funded relatively even by quarter throughout the remainder of '26, bringing our total development spend between $750 million to $800 million for 2026 full year. The acquisition of PENN's Aurora facility for $225 million is also included in our guidance, and we expect that late in the second quarter. And the anticipated settlement of $363 million of our forward equity is also still expected on June 1st. From a balance sheet perspective, our leverage ratio was at 5x at the low end of our target level. We are still under the impression that given our balance sheet position, our 7-year runway to fund our development projects and our annual free cash flow over that time frame, we have optionality to fund our accretive commitments. As a reminder, our significant development projects do pay us cash rent upon funding. And with that, I'll turn it back to Peter. Peter Carlino: And with that, I'll ask the operator, would you open the call to questions. Operator: [Operator Instructions] And our first question is from the line of Anthony Paolone with JPMorgan. Anthony Paolone: Maybe can you start with talking a bit more about what your investment pipeline does look like how does it feel in terms of what you're seeing out there, yields, all those various dynamics. Steven Ladany: Well, the pipeline that is outlined that has been disclosed, obviously, I think you're not talking about that. So assuming you're talking about what we're seeing behind the scenes that we've not yet announced I'd say we're having a very active dialogue on a number of fronts. The marketplace continues to be very productive I'd say it ranges from anything the large-scale divestiture portfolios coming out of, whether it be strategic decisions or M&A type of processes all the way to tougher the trial discussions we continue to have. So there are a number of fronts. They're very active dialogue. But I think as far as where we're at in the process, we're obviously not in a position to be able to announce anything at this time. I will say from a cap rate perspective since you brought that up, I think the market is normalizing, and normalizing in an area that's accretive to us. I don't think the 7.5% cap rates that have been previously printed in the not-so-distant past are indicative of what you will see going forward. I think the market has normalized some. I think credit markets continue to be somewhat turbulent for the gaming operators. And therefore, I think the realization of where cap rates probably play out for our benefit is more indicative of the [ 8% ] area that you saw Lincoln done and some of the other transactions we've announced more recently. Anthony Paolone: Okay. And then just my second one, as we look to '26, is there a sense or can you give us a sense as to which of the leases may not see bumps in 2026 because coverage falls below maybe the 18%. I don't know if maybe if things are still rolling down before they turn the corner. I'm just trying to get a sense as to where we should assume a bump share. Desiree Burke: The only lease that we currently do not expect escalation on would be the Pinnacle lease. We do have percentage rent adjustments that are coming in on the Pinnacle leases as well as a few other leases, and that should be a small decrease for 2026. I think we talked about that last quarter, it's below $4 million for a full year, but we would only see about half of that this year. And that is baked into our guidance, and that is just an estimate at this point. Operator: Our next question is from the line of Ronald Kamdem with Morgan Stanley. Unknown Analyst: This is Jenny on for Ron. The first on development funding. You raised your 2026 guidance to $750 million to $800 million. Can you walk us through like what drives that increase? And what projects may be moving faster than expected? Desiree Burke: Sure. So from a project perspective, we did raise the guidance right by $150 million on the high end for the full year. That's mainly due to our Chicago project where we have greater visibility and a clear spend cadence as the project has progressed and the podium has topped off. It does not mean that we're changing timing of when we think the properties may open. It's just the timing of our spend is coming in quicker than what we had originally anticipated. Unknown Analyst: Perfect. I think... Steven Ladany: Jenny, the only thing I'll add there is that in Chicago, they will be topping out both the podium and the tower next week. So pretty pleased with the progress there and still on track for first half '27 opening. Peter Carlino: We're always talking about that putting money out that gets current interest is a happy experience. So we're -- that's a very positive event for us. Unknown Analyst: That's exciting. I think the second question maybe on Life Virginia. I think you bought the land in the first quarter. Maybe talk a little bit more on the expect -- like when do you expect the remaining funding to be started in the second half '26. And just more details on that, the timing of funding and the first construction drawn will be great. Desiree Burke: Yes. So I mean, that is included in our guidance, and that is included in the $590 million to $640 million for the remainder of the year. We haven't provided specific guidance on month-by-month by projects. So I'm not exactly certain what else I can add to answer that question. Brandon Moore: And Jenny, just as a reminder, the structure that we have for the Cordish deal is a little bit different than we had for the Chicago transaction and our other development projects where the quarters equity dollars are all being spent first. So I think we'll get better visibility into this as the Cordish money goes in and the development gets underway. Operator: The next question is from the line of Steven Pizzella with Deutsche Bank. Steven Pizzella: First, obviously, there's a lot in the pipeline that you covered. But can you share your insights into some of the performance of the recent development openings? Steven Ladany: Yes. Sure, Steve. Look, obviously, it's been pretty productive here over the last 6 to 12 months, you go all the way back to Hollywood Joliet. As you heard from PENN yesterday, I think they're very pleased with the early returns there, clearly been incredibly additive relative to the prior facility. Live Petersburg, the Cordish Development in Virginia opened on January 22nd. That has been incredibly strong, doing a little bit over $15 million a month in each of the two months that that's been opened. So I think from an indication standpoint, clearly, shaping up to be a very good market for that permanent development. The other project that we opened from a development standpoint in December of '25 was Bally's Baton Rouge. I think the story there is very much the same. When you look at kind of the progress relative to the old boat, I think the key there is what we're seeing is market expand fairly nicely in Baton Rouge, just driven by that new supply and some of that incremental investment. So I think those things, in general, those data points give us a lot of comfort for some of the things that we're doing on a go-forward basis here. Steven Pizzella: Okay. Very helpful. And then -- go ahead. Steven Ladany: Yes. And then as Peter just mentioned, obviously, if you listened to PENN's call yesterday, I know you did. The hotel expansion at M has been very well received. Obviously, they're outperforming in that market and appear to be taking some share due to that expansion in capital investment. Brandon Moore: Yes. I'll also add, we opened in February, our first tribal investment with Ione, which had a very strong opening. And that appears to have grown that market. So I think we're very positively inclined with the first set of development projects that have come online and the general performance out of those facilities. Steven Pizzella: Okay. Great. Very helpful. And then just a bigger picture question, if I may. How do you value protections and the long-term relevance of the site versus a potential free cash flow of an asset or the free cash flow conversion? Steven Ladany: Sorry, Steve, I think you might have cut out for a little bit there. Could you just repeat that. Steven Pizzella: Just asking about you value the location of the real estate compared to like your protections and the long-term relevance of the study versus the potential free cash flow of an asset or the free cash flow conversion? Desiree Burke: We really do value it on a free cash flow basis. We look at the competition in that location drive times, whatnot, how we think that location will perform over the long run and what kind of risk there are in the future. and then we drive what we think the fair coverage would be on a property, and it's all cash flow generated rather than value of land and building. I don't know if that exactly answers your question, but... Brandon Moore: I think the location helps you get better visibility into the cash flow, right? So as Desiree said, we're valuing off of cash flow. The location can because these things are licensed and fairly sticky, the location isn't like a CVS where you can move across the street. So we do focus on the location, but as Desiree said, really focused on valuing the cash flow. Operator: Our next question is from the line of John Kilichowski with Wells Fargo. William John Kilichowski: And I'd like to start, Peter, I hope you're -- or it's good to have you back up your back is feeling better. My first question is on the Caesars Master Lease to had a pretty sizable move down in coverage this quarter. I was wondering if you can give us any color on what's going on with those assets? And maybe if you're seeing any green shoots there that might show a bottoming in coverage for the rest of the year? Carlo Santarelli: Yes, John, this is Carlo. I think you might have conflated two things. The Caesars Master Lease or Bally's Master Lease, too. I think if you're asking about Bally's, we pointed out at the time of the the Twin River Lincoln acquisition, the pro forma coverage for that lease was going to be a very robust 2.2x after the addition of Lincoln. With respect to yes, the Master Lease with Caesars coverage went to 1.59% in the quarter, still a very fine solid coverage in our view. We've long had a very strong relationship with Caesars Management. There were certainly some items in the fourth quarter that I think did negatively impact results, some hold in at Link City, also West Tower room renovations at a property there as well for them. So I think we feel pretty good that we have our hands around that situation. And as I said, at almost 1.6x, it's a pretty solid coverage. William John Kilichowski: I was complaining too, so I appreciate you breaking those out for me. And then my second one is just on the city of Chicago is talking about moving ahead with video gambling and Bally's as mentioned an impact to the business. I'm curious on your thoughts on how that may impact Bally's Chicago around rent or coverage? Desiree Burke: So we did underwrite the VLT possibility in Chicago. So it does definitely impact rent coverage, but it was underwritten in us determining the $940 million that we were willing to provide two Bally's for that project. Can't give you exact numbers as to what -- how it will impact. But certainly, that the VLT legislation shouldn't have an impact if it does go through. They are hearing different things about sweepstakes, Brandon. I don't know if you wanted to add anything on that, but... Brandon Moore: Yes. All the sweepstake stuff is it definitely impacts on. I mean, I think the point in Swiss takes is there's a pretty robust sweepstakes market going on in Cook County today. So the question of whether or not VGTs are going to have a significant impact on bricks-and-mortar gaming is somewhat open. We know we'll have some impact. And as already said, we underwrote this is that VGTs were in Cook County. And we also, for that matter, underwriters, if Hawthorne had a full gaming facility. So our underwriting in Chicago is fairly conservative. And while we would prefer VGTs not to be in Cook County, we don't view that as being overly adverse to our underwriting with that project if it should come. Operator: Our next question is from the line of Greg McGinniss with Scotiabank. Greg McGinniss: Just given some of the challenges that we've seen across gaming this year, firstly, how do you see operators responding? What are your thoughts on rent coverage in 2026? And secondly, does it change the nature of the conversations that you're having with casino owners in terms of types of deals that they're looking for? Unknown Executive: Greg, thanks for the question. I mean, I think we could start with we've been incredibly encouraged with what we've seen in the first 4 months across the regional gaming footprint this year. I think you saw yesterday very solid earnings from PENN, very solid earnings from Boyd in the Midwest and South region, Churchill earlier in the week also solid. So I think what we're seeing from a regional perspective has been encouraging after I think, a malaise over 2025 as the industry more or less digested very strong, both margin and top line comparisons, and we certainly saw that period more or less current rent coverage is a little bit. So I think our rent coverages are still in incredibly solid place, and we do believe what we've seen early in this year is incredibly encouraging in terms of the progress regional gaming is making. I'm sorry, I think there was a second part to your question. Greg McGinniss: Yes. Curious on how -- if that's had any influence on the types of conversations that you're having with casino owners, developers folks looking to make investments that kind of thing. How you change... Steven Ladany: Yes. Look, I think the one thing that's at least been more appearing to us is that the operators, developers, et cetera, who would be paying the rent have been significantly more focused on ensuring that they have a level of cushion and a higher rent coverage starting out of the gate. So I think whereby the market in the past may have been a little more nonchalant with respect to their starting point on a rent coverage basis. I think, due to some of the struggles that have taken place in things like maverick. You've seen that portfolios and pieces of portfolios that have been leased that had extra cushion on the rent coverage side have retained value for the owners, whereby whereas the assets that have significantly lower coverage have struggled to redeem the same type of credit recovery. So I think folks are focused on starting with higher rent coverage out of the box. Operator: Our next question is from the line of Brad Heffern with RBC Capital Markets. Brad Heffern: There's been a lot of investor concern about the rise reduction markets and the impact on gaming. How do you guys view that? And is that something that you think about when you're underwriting new projects? Brandon Moore: I think predicts in markets underwriting, we lump in with iGaming, I would say. We view it similarly. I think obviously, iGaming has got a more specific path and traction through the state regulation than the predictive market, which at a federal level, on the state level or completely unregulated at a federal level, I will say, lightly regulated at best. I think that there are a lot of challenges to the prediction markets right now. And while I won't tell you we're not concerned about the prediction markets, I don't think we're overly concerned about the prediction markets at the moment, given the challenges. And the fact that, look, there were there was gaming legislation, I think, in 9 different states, maybe a couple more that we were sort of actively monitoring this in and it really doesn't look like any of them are going to pass, including Illinois and New York they're still alive, but they don't look promising. Colorado may being the one that is a little bit more open. But the point being, I don't think the proliferation of iGaming is going to accelerate this session, which I think is good for us overall. And I think the predictive markets, we'll have to wait and see. We're keeping a close eye on it, but I wouldn't say we're really concerned at the moment. Brad Heffern: Okay. Got it. And then on Rockford, obviously, that loan is coming up for the initial maturity date soon. Do you expect that to be extended? And then what do you think happens ultimately ratio there? Do you think it just gets paid off or may be converted into ownership of the improvements. Desiree Burke: So Rockford, we've obviously begun discussions with those, but we haven't made a final determination as to what we're going to do with that one at this point. Operator: Our next question is from the line of Smedes Rose with Citi. Bennett Rose: I wanted to ask you, there's been a lot of, obviously, discussion in the media about Caesars potentially growing private and then that's led to various discussions around changes that might happen at the corporate level with that company. And I'm just wondering, just in terms of your leases, could you just maybe talk about how I guess, sort of durable they are in terms of do they attach going forward? Or are they easy to -- well, not easy, but could they sort of be gotten out of, if you will, if someone wanted to do that? Peter Carlino: Or that are legal. Brandon Moore: Yes. Good morning, Smedes. I think it depends on the structure of the transaction. So overall, generally speaking, our leases do have a concept in the of the discretionary or qualified brands for [indiscernible]. If you looked at our -- the leases that we have publicly available, but most of our leases all have the same concept, and in which case, it's possible that a transaction could be structured where GLPI would not have a consent right to it. That being said, there are a number of different things that have to be true for that to be the case. And I don't think we have enough visibility into the potential structure of that transaction to ultimately determine whether or not a consent will be required for GLPI. Clearly, if it is, we'll do what's in the best interest of our shareholders and evaluating that. But at the moment, we don't have enough information. I think our conversations with Caesars on this topic have been relatively few, but we have a close relationship with that management team. And if that transaction does go through, and that management team survives. I think, overall, we view that as a neutral transaction to us. It could be positive if there are things to fall out of it, but I don't think we're overly concerned about it. But the impact on our lead is, I would say, is TBD at the moment. Bennett Rose: Okay, okay. Fair enough. I just wanted to ask you bigger picture. So just in general, you started out the call talking about your in as dialogue across a number of different opportunities. Do you feel like owners you're speaking with have other sources of capital that are readily available to them? Or do you think that's become more scarce like over the last several quarters in terms of either direct competitors to you or maybe just more traditional regional bank lending and things like that? Steven Ladany: No. Look, I think there's the haves and have nots, right? To be totally honest and candid, there are certain parties that I think would probably struggle to find inexpensive capital that would be easily accessible based on their circumstances, whether it be their leverage or their operational profile or maybe even just the fact that they're very small or only have 1 or 2 assets. It's harder to get larger banks to finance those types of endeavors. Some of the transactions, though, to be totally candid, the larger operators, even the private ones that are larger family owned, et cetera, they have plenty of access to capital. It really comes down to broader decision-making and whether it's a strategic fit to do a sale leaseback versus to do a traditional bank loan or bond or what have you. So the dialogue depends on the counterparty and some of the counterparties have definitely have access to capital and others do not. Operator: Our next question is from from the line of Barry Jonas with Truist Securities. Barry Jonas: Peter, great to have you back. Hope your back is better. One store... Peter Carlino: [indiscernible] Barry, but we're back. I don't recommend back surgery to anybody, by the way. Barry Jonas: We'll follow that. I want to start with Bally's. They appear to be looking to do a bit more M&A, including the large deals internationally still -- so maybe more as it relates to the corporate area that influence how you think about future deals and underwriting with them? Brandon Moore: I don't think -- I think our answer is unchanged in the sense that we have always underwritten deals at the property level and the Bally's had a great transaction for our property level asset that we thought was accretive to us and our shareholders. I don't think we'd let Valleys work in international work to say is from that. That being said, clearly, that's another capital allocation decision that they've made with the various projects they have in place. And I guess our focus is more on what is [indiscernible] that we have with Bally's and their ability to execute on those. And at the moment, we're not concerned with the Bally's ability to fund and complete Chicago, for example. But I think it's more impactful in that way than it is on the overall risk as we look at sort of more property level performance. Barry Jonas: Understood. And then just for a follow-up. I appreciate the general comments on the pipeline. But any updated thoughts in terms of international or non-gaming opportunities and where that ranks in terms of the opportunity set? Steven Ladany: Well, I'll take international and somebody on gaming. So on the international front, we have had conversations around international properties as recently as this last quarter. But as we've said many quarters in the past on these calls, there's always a -- there's a tax implication aspect of it. There's a repatriation implication aspect of it. And there's just the legal and customs aspect that we have to get comfortable with, depending on the jurisdiction that we're looking at the domiciled business in. So we continue to look there. I would love to tell you that we could get comfortable and get something done in international capacity non-Canada just because that seems to be where others have gone. And so I'd like to do some new cutting-edge things somewhere else, but I'm not willing to tell you that I think that's coming anytime soon. So we're going to keep working. We'll keep trying to do our diligence and try to look for opportunities that would equate to an accretive transaction for us here in the United States when we bring all the money back and pay all the taxes. Peter Carlino: By the way, that answer is a perfect response to the non-gaming as well. We look at a lot of stuff, as I like to say, we kiss a lot of frogs, but we're still looking for a princess in that category. Operator: Our next question is from the line of Todd Tom with KeyBanc Capital Markets. Todd Thomas: Brandon, can you just talk a little bit more about the normalizing cap rates that you discussed what's driving that specifically? And in your comments, it sounded like it was about 50 basis points. I mean, is that sort of the right range to kind of quantify the change that you're seeing in cap rate expansion? Brandon Moore: Well, I'll let Steve -- Steve, I believe, answered that the first time. I will say, I think what's led to the normalizing of cap rates, what Steve is referencing is, obviously, we have a lot of data points behind the scenes, things that are coming to fruition, has happened all the time where things bubble up to the surface where people are interested in understanding the valuation of what they have. And I think Steve's pointed and he can hit it again, but was just that the rates we're seeing are beginning to tighten in a range, and we think we have a pretty good feel of where the right cap rate is for transactions. And I'd say that at least the cap rate that we'd be willing to execute on transactions, but Steve... Steven Ladany: Yes, yes. I'm sorry. I wasn't trying to peg a 50 basis point number out there. I don't think it's as precise as that, to be honest with you, each transactions and negotiation, you're sitting across from a counterparty and you're trying to figure out what makes sense for you, and what makes sense for them, and what's their need and what's your desire and it all has to kind of go into the blender. My point was, I think if you were to say what do I think the average market clearing, regional gaming assets sale leaseback on a regular way down the middle of the fairway transactions going to go for right now. I think it's going to have an 8 in front of it. It's not going to have a 7 in front of it. I'm not trying to be more specific than that as far as 50 basis points or 62.5, but I think the reality is that's just kind of where the markets trended at the moment. It doesn't mean that it can't pivot on a dime 6 months from now. We're telling you the markets moved again. But we would obviously anticipate and hope that our cap rate where we trade, our implied cap rate would grind tighter as well as the market being grinding tighter at that point. So where we're at today. I think from a cost of capital spread it where we're at, I think we're comfortable that the market is probably yielding any dates. Todd Thomas: Okay. That's helpful clarification. And then, Desiree, I had a question about the guidance adjustment. The nominal AFFO has increased about $30 million at the midpoint, I think, mostly at the low end, but it looked like it was a little more than it would seem to be due to the higher capital deployment on its own. And you talked about Chicago, but I was just curious if there was -- if there were some other changes around either earlier cadence of funding that had an impact or something else altogether. Can you just talk about some of the changes there around the guidance specifically? Desiree Burke: Sure. So really, it is mainly due to the funding changes because that's going to increase obvious their income. That's going to have an offsetting impact in our interest income. On the high end, we did see some increase in sulfur rates, obviously, this quarter, so that some of the benefit gets eaten up by the soft assumptions in the high end of our guidance that were not -- that we had already had a little bit of additional interest expense put into the low end of our guidance. So that's why you're not seeing an even change. I will also tell you there's some rounding involved because the stronger the round is coming into the guidance, it takes a lot less AFFO to increase that per share amount. Todd Thomas: Okay. That's helpful. Did anything change there in terms of G&A and the stock-based comp component? Did anything change there with regard to the mix as far as reconciliation there. Desiree Burke: Not at all. Operator: Our next question is from the line of Haendel St. Juste with Mizuho Securities. Haendel St. Juste: Desiree, can you talk a bit more about the positioning of the balance sheet in the current macro, lots of, obviously, volatility. You've got $1.8 billion of capital deployment you've outlined over the next 18 months. Leverage today is at the low end of your target range. It looked like it would be at the high end on a pro forma basis. So are you willing to that market tick up? How are you thinking about balance sheet management over the next 18 months and perhaps the need for new equity? Desiree Burke: Sure. So we sit here today with $275 million of cash that has not been deployed into that run rate of 5x, right? So as that become income earning, the leverage ratio will not increase for that portion or for the $363 million of forward equity that we have outstanding. We also have free cash flow into the tune of $230 million per year. So we have the majority of that still coming for this year and then the rest, as we said, we can do either debt or equity depending on what we expect to do. But I still expect us to be at the end of this when all of our transactions are completed the remaining $1.8 billion is funded. We get full credit for the AFFO that those transactions derived will still be at the low end of our 5 to 5.5x guidance or leverage, sorry. Haendel St. Juste: Got it, got it. I appreciate that. And then more broadly, the growth for this year is mid-single digit. I think next year is kind of the same. Is this something you think is sustainable beyond the next months? I'm curious how you're thinking about the sustainability of the long-term cash flow growth from the portfolio here in the next 2 years or more of an aberration or something you feel you can sustain over the longer term? Desiree Burke: Yes. So look, I can clearly see through '27 and see the growth there just as you can at '28 and beyond depends on which transactions that we come up with over the next year or two. We certainly will have growth related to escalation on our transactions, but outside of that, until we do an accretive transaction, I can't really predict 2028 and beyond. Operator: The next question is from the line of Rich Hightower with Barclays. Richard Hightower: So I want to go back to Smedes' question on the potential Caesars deal and how it might affect GLPI. There's obviously a parent guarantee in place on your Master Lease. And I appreciate the idea that it's really 4-wall coverage, that's the primary focus in any scenario. But what's your legal understanding of the ability of the parent guarantee to travel with the lease under a variety of potential deal structures? And how should we think about that from the outside? Brandon Moore: I think if you should think of it as the parent guarantee being one of the requirements that has to be in place for us to be forced to take a new tenant. In other words, in order to meet the definition of a qualified or discretionary transfer. There have to be -- certain things have to be true with respect to the transfer, but also with the transaction, including the pro forma leverage and the existence of a replacement parent guarantee. So again, I don't think we know enough about the anticipated structure of that transaction in order to determine whether or not, for example, the parent guarantee is at an entity level that would be -- would meet our lease requirements and be acceptable to us. We just don't know yet. But you should assume that, that does, in fact, travel with the next tenant. Richard Hightower: Okay. That's really helpful. I guess more broadly and maybe it relates to the cap rate comment as well. But are you seeing -- and I'll use the Bally's in New York project as an example here, but are you seeing other sort of previously competitive capital providers, and I'm really thinking of sort of the private credit universe that appears to be having its own issues in various ways. Are you seeing those potential competitors pull back from the market. Does that imply anything about GLPI's ability to step in as a cattle provider to a project like that or any other development going on? And does that affect market pricing for the capital as well? Steven Ladany: Sure. I'll give it a shot. To date, we haven't seen the credit type of folks pulling away. Now I can't speak to their ability to show up at the finish line, but I can just tell you on the -- at the early onset they seem to be just as much engaged in participating as anybody else. So I don't think there's a huge seismic shift in the competitive landscape. They are not new folks seemingly pouring in. So it's the same handful of people are looking at transactions. I think it all kind of goes back to relationships at the end of the day. and underwriting. And so they're kind of both critically important and they work together. You can obviously have successful underwriting and maybe not the greatest relationship, but that just means you did a transaction. And conversely, you have a great relationship in poor underwriting and then you have a friend that is not doing so great in either us. So I think we continue to try to operate in a position where we hope to be everyone's first call if there's something they're looking to do or something they're trying to be creative around. and then we look to try to make sure we overlay our underwriting success with that. And so, so far, it's worked out well for us. I think it will continue to have -- at least have a seat at every table, whether we -- whether it plays out the way we want it to or not is yet to be seen. Brandon Moore: Well, I think in New York, you kind of picked out the 1 unique animal in the bunch, which is -- that is a unique market that has a lot of interest of people that want to have a piece of that. So I think Valleys is an enviable position in New York where they're having a lot of different capital sources to discuss and talk to -- whether or not, we have an opportunity there for a piece of that. will be relationship-driven more than economically driven, I suspect. But I don't think we're doing it at a cap rate that's any lower than what Steve has indicated because, quite frankly, that wouldn't be accretive to us and not a smart use of our capital. So we'll see how New York feed out. I think that's somewhat unique. Peter Carlino: May be several layers of opportunity there. to say the least. And we expect at least to be at the table as Steve and Brandon have outlined. Unknown Executive: [indiscernible] should follow our way we hope. Richard Hightower: Got it. I also appreciate the hat-trick in terms of management's responses from all three of you, thanks. Operator: Next question is from the line of Chris Darling with Green Street. Chris Darling: So with Acorn Ridge now open, I'm wondering if you've had any discussion around the conversion of loan into a formal lease structure. And then separately, whether it's Acorn Ridge or any other tribal investment, can you talk about your level of visibility into the underlying financial performance of those properties and sort of regular cadence of any updates you might get? Desiree Burke: It has a term, right? So the Acorn bridge loan has a 5-year term with I think it's 2-, 6-month extension. So we're not in discussions about converting it to ultimately to a lease at this point. As far as performance goes, we do get quarterly certifications, which will include coverage ratios at least as far as how it's going to cover the rent. In this case, it's interest. So we're really just going to be looking at the AFFO vis-a-vis what interest payments we have as far as the stability of the operations of the project, but we will get information on a quarterly basis. Steven Ladany: And I think that with respect to Acorn Bridge, we have dialogue with the chairwoman there. And she's very very level-headed with respect to this and said like, look, get 6 months of operations under our belt. And then as a tribe, we'll start to kind of reevaluate what we want to do as far as future capital spend or financing markets, et cetera. So we're cheering on and anxiously awaiting future dialogue. Chris Darling: Okay. That's helpful. And then maybe taking a step back more broadly, as you think about underwriting new investments in the tribal space, are there any jurisdictions that are more or less attractive to you? Curious how you think about that. Brandon Moore: I think different jurisdictions lead to different opportunities. And by that, I mean, in a jurisdiction like California, you have a very large number of tribes and the opportunity for expansion, what you're seeing in California is despite the fact that there are a lot of tribal casinos, the tribal can is opening appear to be growing the markets that they're in. So there's a lot of opportunity in California just given the sheer size. Other -- in California doesn't have with their compact, a very stringent taxing regime. So even when the tribes enter into compact, they're not paying a lot of tax. In other states, they're paying more tax and have different different compacts. And so I think just sheer numbers, California, New York has some tribes, the Midwest has several tribes, Oklahoma. I'd say it's more relationship driven at this point. And we're looking at travel needs and trying to figure out which transactions that suit our underwriting. I will say there are a lot of opportunities. We're getting a lot of inbounds. We're getting a lot of questions around what we can offer. And so we'll have a lot -- we have a lot to digest. We'll continue to get a lot to digest, I think, this year and try to figure out how much capital we want to allocate to this form of financing and where. But I don't think it's necessarily driven by state line per se. It's just more the number of tribes in different areas is obviously a lot different in California than, for example, Alabama, which has one drive. Operator: The next questions are from the line of Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: Just one for me. Do you all have a minimum dollar size for redevelopment projects that you'd be willing to fund it feels like operator CapEx budgets are down for '26 versus '25, but improving properties has been working. So we're curious if smaller, less invasive projects at more properties are coming. Steven Ladany: Daniel, just to clarify, do you mean that this is a capital improvement project at an asset we already own? Daniel Guglielmo: Yes, yes. Steven Ladany: I don't think there's any number. We would fund down to whatever the tenant needs, assuming that it's a project that they think will be accretive to them, and we'll generate pro forma business for them that surpasses the cost of our capital. So I think we would look to be supportive of the tenant in any of these opportunities. Operator: The next question is from the line of Chad Beynon with Macquarie. Chad Beynon: You guys have clearly differentiated yourself with more of a drive to regional focus versus destination. And we've talked about it a couple of times on the call how strong the regional market has been year-to-date. Some operators actually improving margins, which we haven't seen for a few years. So does this indication or validation in your thesis maybe dissuade you into leaning in kind of back into Las Vegas beyond the top side and really just kind of doubling down in your current thesis and drive-to and regionals? Peter Carlino: I don't think we ever were leaning into Las Vegas, I mean and as has been well said, we look at these projects one at a time, almost location, not critical, but we have no special focus on Las Vegas at all. Look, I've been an enthusiast for the regional market for 20 years and trying to make the case that it's the better place to be safest place to put capital by far. I think we've demonstrated that in some -- a lot of events in the recent events in Las Vegas highlight that -- where we put our capital makes a lot more sense, but... Brandon Moore: Chad, I think it's -- go ahead, Desiree. Desiree Burke: No. You go ahead. Brandon Moore: Chad, I think it's -- I think -- as always, it's the strength of the cash flows. It's not the building, it's not necessarily the geography. It's the strength and safety of the cash flows. And I think if you look over time, acknowledging we don't share an upside any more than just the escalators we receive for a well-covered lease, the regional business has provided a lot of stability. And -- if you look back over the last few years, you've come off of very solid peaks. And as you mentioned, first quarter has been a very nice indicator that things are strengthening here again. Desiree Burke: And I would add, we've been saying this for a long time, but even back at PENN and our pending in 2008 of financial crisis, our properties held up the regional much better than what happened in Las Vegas. You saw that coming out of COVID as a regional properties [indiscernible] that much better than those in Vegas. That trend is continuing. So I agree with a few of the thesis. I think everybody should see it on their own at this point in time. Chad Beynon: Great. And maybe just to hit on one market to keep it on here. Peter, I know 20 years or so ago, you were looking at Atlantic City. We just returned from the East Coast Gaming, Congress, and it sounds like a lot of the operators down there are pretty scared in terms of what could happen with New York. Is that a market that you think could recover with capital? And would you be interested in helping out some of those operators either on the developmental did or pivoting our strategies? Peter Carlino: A pretty risky looking at what's on the horizon. New York is going to have a big impact. And I've long said that sooner related, New Jersey is going to have to break down and put something up in North Jersey. If they, let's say, want to lose all that business to the New York properties. That's just my view about it. So it's not a happy time to be in Atlantic City today. So look, there are always going to be some winners there without a doubt, but it's not a market that's looking for more investment. Operator: Next question is from the line of David Katz with Jefferies. David Katz: Covered a lot of details already. But look, when we look at the the market for regional properties today. If we can be sort of upfront about it, there's yourselves and one other who's closest like you? And then obviously, other capital sources that may be available, right? Peter Carlino: Dave, you could say the name. David Katz: I can, I can. I just usually don't as a policy and same with [indiscernible] Look, the nature of the question is, are you seeing a change in that competitive landscape, specifically for regional properties. We're in a moment where our collective expectation is that there's things coming to market. What does the competitiveness look like for you today versus where it was 6 to 12 months ago? Steven Ladany: To be honest, I think there's less competitors right now. And I think there's just been -- there have been a couple of gyrations in the market. There have been a couple of people that have dipped their toes in and either decided it wasn't for them or it got burned. And so we've seen the -- some funds, I guess we won't name names either. But we've seen some funds that have bought some some properties, which later than divested of those pieces or currently going through the Maverick bankruptcy and trying to figure that piece out. So I think that as -- I think as the market evolves, there's always going to be someone who's going to take a look. We love this business, right? There's a reason why we're in this business, and we think we're undervalued. So if it only makes sense that others will probably see that light and we'll decide they want to get involved as well. I think the complexity has been in the regional markets is there's a lot of diversity. You have to understand who the operators are. You have to understand the assets, and it's multiple assets with different competitive landscapes and market dynamics that go into a portfolio. And that's -- that's where it gets complex for someone sitting in an office and you name the big city to decide that like I can just roll this thing up at a certain percent, and this is going to make me a wizard. I think it becomes more difficult than that. And I think the reality is because of that, there'll constantly be people that will come in and then out of the space. So right now, I think there's 3 to 4 or 5 people that are probably looking at any larger portfolio that comes to market. And at the end of the day, it's probably the same 3-ish people that we'll put in some kind of indication. Operator: Next question is from the line of Robin Farley with UBS. Robin Farley: Speaking of not leaning into Las Vegas, I wonder if you could just update us on potential timing or what your latest thoughts are on opportunity for you at that site. Brandon Moore: I'd love to tell you our answers change. But as we sit here today, I think that the stadium is progressing quite nicely. And if you've looked at the cameras sitting on top of MGM Grand, you'll see that the stadium, the concourse level is up, and they're probably going to be putting on the first roof cuts here in the next 6 weeks. Integrated resort was always behind and not in the sense of being behind a bad way, but it just -- it was going to follow the construction of the concourse. And so I think we're getting to the point where Bally's will have some decisions to make about how much they want to do, and how they're going to do it. We have $125 million commitment remaining. Whether or not we expand that commitment is to be determined as we see the leasing of the site in the RED space start to fill out, and we get at a better picture of the revenue that will be generated on that side. We and Bally's will be discussing what level of investment above and beyond the $125 million, if any, will be appropriate from GLPI. But unfortunately, I don't think we have much different answer right now, but I do think in the next 6 months, that will change. I think the integrated resort will come into clarity in the next 6 months or so. Operator: Our final question is from the line of John DeCree with CBRE. John DeCree: I think we covered mostly everything. So I apologize if this is a touch redundant. I think you'd already answered investment sizing question as it relates to development. But with the Caesars buyout talk, we've got questions about portfolio transactions. So from your perspective, an investment sizing question, large portfolio of assets. Do you think there's a market there for real estate today? I think much of what we've seen so far is a single asset and from GLPI would -- is there an investment size that would be too small or too large, rather would you kind of consider anything that might come to market even if it's chunky. Brandon Moore: It might depend on whether or not it's going into another Master Lease with another tenant or how it's being done. I mean are there assets that are too small for us to look at there may be if they're accretive, and they're generating good capital, and we can put them into a lease with an existing tenant. I don't think there's anything we necessarily would not look at. If you're talking about the Caesars portfolio specifically, it's not clear to us which of any assets may fall out of that portfolio as a result of the impending or proposed transaction. We just have to take a look at it when the time comes. John DeCree: Brandon, maybe more broadly, if there was a multibillion-dollar transaction, unrelated to Caesars if there was a seller of a package of assets, is that something that would be in your wheelhouse, or is there a dollar amount where you say that we don't want to deploy that much capital or the market might not be there for that? Brandon Moore: I think as long as it's accretive, we do it. I mean, look, we did the Pinnacle transaction a few years out of the gate, which was roughly $4 billion. I don't think that there's any number that's necessarily too high of all of the portfolio assets we see right now. We just have to underwrite it. And if it's accretive based on our cost of capital at the time, I think we would look at it and do it. So no, I don't think there's anything too big or too small at the moment that we wouldn't look at. Peter Carlino: Yes, I've always felt there's never a shortage of opportunity for funding for a good deal. So I think Brandon answered it pretty well. As the small client, we [indiscernible] say, we'll hit some singles and even every now and then take a month if the spread is worth it. So nothing we won't look at. Operator: At this time, I'll turn the floor back to Peter Carlino for closing comments. Peter Carlino: Okay. Well, with that, I think the morning has been productive from our point of view. And we thank you for tuning in today. See you next quarter. Thanks very much. Operator: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Ladies and gentlemen, welcome to HCA Healthcare's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir. Frank Morgan: Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Healthcare, Inc. is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam. Samuel Hazen: Good morning, and thank you for joining the call. First, I want to recognize our colleagues for continuing to demonstrate a remarkable ability to adapt to changing conditions and deliver positive results for our patients, communities and stakeholders. The start of the year presented a dynamic environment for HCA Healthcare. From a volume perspective, we did not experience the typical lift related to seasonal respiratory conditions. Compared to the first quarter of last year, our respiratory-related admissions were down 42%, and our respiratory-related emergency room visits were down 32%. Additionally, winter storm that hit a few of our markets adversely impacted our volumes in the quarter. On the positive side, however, we experienced a greater net benefit than anticipated from state supplemental programs. As a reminder, these programs are complex, they're variable and difficult to predict. This benefit mostly offset impacts from the shortfall in volumes. Regarding payer mix for the quarter, the underlying shifts resulting from the changes in the health insurance exchanges were generally in line with our expectations. This area remains fluid. As we stated in our fourth quarter call, we have considered a range of potential scenarios as the effects continue to evolve. As mentioned over the last several quarters, our teams have been focused on a broad resiliency plan designed to generate cost savings where appropriate, enhance network execution and strengthen organizational capabilities. I am pleased with our resiliency efforts to date, and we expect they will continue to help offset some of the expected impact from the payer mix shift. Additionally, we were pleased with the volume results exiting the quarter. The reparatory related and winter storm impacts were mostly contained to January, with February and March volumes rebounding nicely. For the first quarter, revenue increased 4.3% compared to the first quarter last year. Adjusted EBITDA increased almost 2% and diluted earnings per share, as adjusted, increased approximately 11% versus the prior year period. We continue to deliver for our patients and important metrics including improved quality measures, increased patient satisfaction and reductions in the average length of stay. I remain excited about our digital transformation program and AI agenda. They progressed during the quarter with rollout of some key initiatives to more facilities. Our clinical teams continue to advance efforts to enhance quality, safety and services to our patients, with progress on broad initiatives across nursing care, hospital-based physician services and support functions. We continue to invest significantly in network development with our capital spending and with selective outpatient facility acquisitions. As compared to the first quarter last year, our networks expanded their overall sites of care by more than 4%, increased hospital beds through capital spending by almost 1% and added 4% to emergency room capacity. To summarize, we view the respiratory-related volume shortfall and the increase in supplemental payment net benefits as first quarter events. As such, we believe our assumptions for the remainder of the year related to volumes, payer mix and costs continue to remain in line with our original guidance. HCA Healthcare has an impressive capability to remain disciplined in dynamic environments. This is a resounding strength of our teams and what they have built over time. It is rooted in our culture and it helps us to execute on our mission to provide high-quality care to our patients while delivering strong financial results. With that, I will turn over the call to Mike for more details on the quarter. Mike Marks: Thank you, Sam, and good morning, everyone. Let me start by providing same-facility volume comparisons for the first quarter of 2026 versus the first quarter of 2025. Admissions increased 0.9%, equivalent admissions increased [ 1.3% ], inpatient surgeries were down 0.3% and outpatient surgeries declined 1.7%. ER visits increased 0.3%. As Sam mentioned, we had a much milder respiratory season in the quarter. This produced a drag on our quarterly volume growth in admissions and ER visits, up 70 basis points and 140 basis points, respectively. In addition, the winter storm in January impacted a wide swath of our markets, including Texas, Tennessee, North Carolina and Virginia, reducing admissions and ER visits by an estimated 30 basis points and 50 basis points, respectively. The impact of these 2 factors was consistent across all payer categories, and in total, adversely impacted adjusted EBITDA by an estimated $180 million. Regarding payer mix, commercial equivalent admissions, excluding exchanges, increased 0.6%. Medicare increased 1.9% and Medicaid increased 0.3%. We believe the variance in volume relative to our expectations was almost entirely driven by the respiratory season and winter storm. We view these factors as being temporal and not structural. Overall, taking all of this into consideration, our volume growth in the quarter was generally in line with our 2% to 3% volume growth assumption for the year, albeit at the lower end of the range. Adjusted EBITDA margin decreased 50 basis points versus prior year quarter. Salaries and benefits as a percentage of revenue improved 30 basis points and supplies improved 20 basis points. Other operating expenses as a percentage of revenue increased 90 basis points, primarily due to an increase in cost related to the Medicaid state supplemental payments, professional fees and technological investments. As Sam noted in his comments, volumes continued to improve throughout the quarter, and we noted a similar progression of operating leverage and cost trends. Regarding Medicaid supplement payment programs. While we expected an increase in net benefit of $80 million, we realized an increase in net benefits of approximately $200 million to adjusted EBITDA versus the prior quarter. This was primarily due to the grandfathered approval of Georgia, the reinstatement of the Atlas program in Texas and the year-over-year benefit of the Tennessee program that was approved in the third quarter of 2025. We are adjusting our full year range to reflect the decline in supplemental payment program net benefit between $50 million to $250 million versus prior year. This updated guidance does not include any potential impacts from additional approvals of grandfathered applications. We continue to monitor the ongoing developments related to these programs, and particularly Florida. We continue to feel positive about the prospects for the approval of the Florida program, which covers the period of October 1, 2024, to September 30, 2025. If approved, we believe it should result in additional revenues, which may be significant. Now let me provide additional information regarding the exchange environment. As we stated in our fourth quarter call, the complexity of the exchanges is significant, and we're tracking several areas within the company. For the quarter, we estimate our same facility exchange equivalent adjusted admissions declined approximately 15% versus prior year quarter. This represents our comprehensive evaluation of patients that presented with exchange coverage that ultimately will not be covered for their episodes of care. Using the same analysis, we estimate same facility uninsured equivalent admissions increased approximately 16% versus prior year quarter. Over half of this implied increase relates to the movement from exchanges and normal uninsured growth. The remaining portion reflects a slowdown of conversions to Medicaid from patients who were not willing to fill out applications. We estimate the adjusted EBITDA impact from the exchanges to be approximately $150 million in the first quarter of 2026 versus the prior year quarter. Given our experience to date, we still believe our full year range of $600 million to $900 million expected impact on adjusted EBITDA is appropriate. However, the exchange environment remains dynamic and has not fully settled. We will continue to track the fluid nature of this reform and will provide further commentary on our second quarter call. Moving to capital allocation. Capital expenditures totaled $1.1 billion in the quarter. Additionally, we purchased $1.57 billion of our outstanding shares, and we paid $183 million in dividends for the quarter. Cash flow from operations was $2 billion in the quarter, representing a 22% increase in the first quarter of 2026 versus the prior year quarter. Our debt-to-adjusted EBITDA leverage remains in the lower half of our stated target range, and we believe our balance sheet is strong and well positioned for the future. As noted in our release, we are reaffirming our estimated guidance ranges for 2026. I will now hand the call back to Frank Morgan for questions. Frank Morgan: Thank you, Mike. [Operator Instructions] Andy, you may now give instructions to those who would like to ask a question. Operator: [Operator Instructions] And our first question comes from the line of Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: I appreciate the color on the respiratory, SDP and other components. Maybe you could just give us a rundown broadly of how your results compare to your internal expectations for the quarter? Mike Marks: Thanks, Ben. This is Mike. I mean our results were a bit short in terms of adjusted EBITDA to our internal expectations. Besides our internal expectations is being pretty consistent with the midpoint of our guidance in terms of growth, pretty consistent actually with consensus coming into the call. Really 2 main drivers in terms of the shortfall to internal expectations. The first one is this kind of shortfall in the seasonal volume uplift from respiratory in the winter storms, which was mostly offset by the net benefit from the supplemental payment programs. A little detail here on seasonal volumes [indiscernible]. I've already kind of quantified the volume side of that. So let me talk about the expense side. As we were -- as we were coming into January, our respiratory season was actually strong at the beginning of the year. However, later in January, it became apparent that the respiratory season was actually ending abruptly. And we were then hit with a significant January winter storm across several of our states. Both the quick ramp down of the respiratory volume as well as the winter storm delayed our ability to flex down our seasonal cost in the quarter. We were ultimately able to do so as we move through the quarter, but there was a delay. So let me switch now to the supplemental payment program activity. As noted, Medicaid supplement payments net benefits was better than expected. As we came into the quarter, we did anticipate an increase in the supplemental payment net benefit in Q1 of $80 million, largely due to the increase in the Tennessee program that was approved in Q3 of 2025. So the $200 million of net benefit in the first quarter was about $120 million higher than our internal expectations in the quarter, and again resulted from the approval of the grandfathered Georgia program as well as the reinstatement of the Atlas program in Texas. So in summary, Ben, when I think about first quarter, largely, we were just a bit short in total. But when you take the temporal factors of the lack of the seasonal volume uplift and the pickup in net benefit supplemental payments, those are really the main drivers in the quarter. Benjamin Hendrix: Appreciate that color. And then kind of just a quick follow-up. Can you just give us an update on the moving pieces that kind of get you back to the initial guide? Maybe walk us through the components of the EBITDA bridge as you see them today after such a dynamic first quarter? Mike Marks: Sure. If you go back to the release, the really only change to our key assumptions for the 2026 guidance relates to the supplemental payment programs. We estimate that the Georgia approval and the reinstated Atlas program I previously discussed, will provide approximately $200 million of incremental net benefit for the full year that was not originally included in our guidance. I would note that the $120 million for Georgia and Texas that we talked about for the first quarter had a prior period impact in it. And so the component that applied the first quarter and for the full year of '26 really make up that $200 million. And so that's why we're adjusting our assumption for full year net benefit to now be a decline of $50 million to $250 million. And just to note, that assumption does not include any additional approvals of grandfathered applications. When I think about the rest of our assumptions, Ben, if you think about the impact of the exchanges, we still believe that, that $600 million to $900 million range is appropriate based on what we've learned in first quarter. Our resiliency assumptions that were in guidance also, we believe, are still reasonable and appropriate. And so at the end of the day, we just felt like that it was appropriate not to change our total guidance range, even with the $200 million improvement in first quarter. A chunk of that really goes back to this temporal nature of the headwinds that we saw in first quarter being related to the seasonal volume impacts in the winter storm and the related cost impacts. And so as we think about how we progress through the quarter, Sam mentioned that as we exited the -- exited the quarter in March, there are volumes were improving largely back to our original plan. We also saw the same thing in our cost structure. As we got through March, our cost trends really reflected good performance in March, and we're largely on plan. And so that's the walk-through on guidance. Operator: And our next question comes from the line of A.J. Rice with UBS. Albert Rice: Just to put a fine point on what we're just going on the numbers flying back and forth. Is the right way -- am I hearing you say, you basically had $180 million of negative impact from flu and weather in the first quarter? You picked up $120 million of benefit from DPPs in the first quarter that was not expected. So the net was a $60 million drag net of the unusual items or weather and flu. And then on the $180 million versus the $200 million of DPP in the full year impact. So you're ending up roughly $20 million if you maintain your guidance for Q2, Q3, Q4 better because of the incremental impact of DPP over the course of the year. I just want to make sure that's the right take from what you're saying. Mike Marks: Yes. I think that's -- you're generally in the zone. I mean we view the $180 million headwind in the quarter as being temporal and not structural. So we don't think that will repeat. The $200 million improvement for the full year '26 from supplemental payment benefits reflect Georgia and Texas. And then just broadly, we're not changing our full year guidance on earnings. And I think that's the way to read that. I think I would acknowledge there's a little bit of softness [indiscernible] consensus. It may be not fully explained, but it's pretty close from the moving factors in the first quarter. And then A.J., when we look at the rest of the year, and we think about the demand that we're seeing in the marketplace, we believe that we will be able to run between 2% to 3% volume growth in the next 3 quarters of prior year. Our original assumption around the exchanges, around revenue and our cost trends, we think that the balance of the year is another way of saying is largely back on our original plan. Albert Rice: Okay. And maybe a follow-up -- go ahead. Samuel Hazen: No, it's Sam. I mean, we do, I'll call it, a business analysis of the company in the first quarter. It's pretty much where we expected, save the respiratory dynamic. So we believe the business outcomes of the company in the first quarter are in line with the guidance we provided just 90 days ago. And so we're at a point where we're judging that. We're trying to influence what we can on the edges and put ourselves in a position where we get to where we need to be by the end of the year. I mean that's sort of the short story on what happened here. There's always puts and takes with the supplemental program. We've talked about that for years. What we're trying to judge is the business functioning and performing as we thought. And generally, that case, save the one item associated with the respiratory activity. Albert Rice: Okay. Could I just -- as a follow-up, your $400 million resiliency program, I know you've got a lot of AI initiatives and -- but some of that is other stuff. Can you just sort of update us on where you're at with the AI initiatives? And is that $400 million a pretty firm number? Is there a range around that as to what you might ultimately realize this year? Samuel Hazen: Well, in the quarter -- this is Sam. A.J., in the quarter, as Mike indicated, we get operating leverage. When we get volume, whether it's respiratory volume or surgical volume, we get operating leverage. So we lost a little bit of that in the first quarter. But again, when you sort of normalized for that, as we exited the quarter, we felt good about the leverage we were seeing in the subsequent months. And so when you merge that with the maturing of our resiliency program over the course of the year, we think we can get where we need to be with our cost objectives for 2026. Are there opportunities on maybe more possibly? Could we fund pressures that we haven't anticipated? Of course. I mean, that's what a dynamic business environment represent. I will tell you that our artificial intelligence agenda is getting implemented. We have productivity with our physicians, with our ambient listening capabilities and the documentation associated with that. We're rolling out our nurse handoff program, as I mentioned. We've got new initiatives that are rolling out to more facilities. That's got more patient safety and nurse engagement, some productivity to it. We're really excited about what the artificial intelligence program can do to complement our caregivers in our company and help us provide better care, do it more cost effectively and run the business better. We're seeing it in case management. We had good outcomes with case management, as we talked about with average length of stay. So all of this is coming together. Does it have some upside in some areas? Yes. Could there be some pressures in other areas? Of course. So when we put it together, we feel like we're on the program that we estimated at the beginning of the year. Operator: And our next question comes from the line of Ann Hynes with Mizuho Securities. Ann Hynes: I just had a quick follow-up from a comment you made in the prepared remarks, and then I have a question. Just on the Florida DPP, I do think there are some anxiety in the market because it's taking so long to approved. Do you have any color on maybe from a timing perspective when that could be approved? And then my real question is just on ACA, just with the increasingly uninsured and the bad debt, is that coming in line with your initial expectations? And can you remind us, does your guidance assume a deterioration in the collectibles of co-pays and deductibles of the insured? And what change is embedded in your guidance? Mike Marks: That is a multipart question, Ann. It was impressive. So when I think about -- let me start with Florida. And I do think that the size of the Florida program as such, the enhanced size that CMS is thoroughly reviewed this program, as you noted. But based on our sense of things as we sit here today, we do feel positive about the prospects of approval for the Florida program. And if approved, as I noted in my prepared comments, we believe it would result, not only in additional revenues, but those that may be significant. So that's a quick update on Florida. And obviously, we'll be watching this just like you will, and we'll keep you informed as that moves. As it relates to the exchanges and what we're seeing related to patient amounts do, I would say like this, as we came into our modeling, our models included some shift from silver, bronze. And what we're seeing is we study our patients so far is that there has been a bit of a shift from silver to bronze in the patient selection of metal tier. I wouldn't say, however, that, that shift is significant at this point, but there is some. We're also noting that even within silver, if you compare the benefit designs in 2025 to 2026, that the amount patients to within silver are also increasing as we are studying the 2026 activity. And so all this is leading us to conclude that we are seeing a growth in patient amounts due on the exchanges. And as we've noted in the past, we see a lower collection rate on patient balances from the exchange plans as compared to traditional managed care patients in this shift. I do think we'll have an impact on patient collections on uncompensated care. But from a context standpoint, I don't think that the -- the impact of the shift and the growth in the patient out dues is going to be overly material, given the relatively minor portion of our patient cash collections that relate to exchange patients. We did include in our original estimate of $600 million to $900 million, this increase in patient amount due on the exchanges. It's within the range of our models based on what we're seeing. On the broader part with the exchanges, to your point, we did anticipate movement out of the exchanges to uninsured. And so if I think about the kind of the payer mix implications within the model, as you go back to that discussion, we thought that we would lose about 15% to 20% of volume, of people leaving the exchanges. And we -- we think we saw about a 15% decline in first quarter, so at the lower end of that. You may recall that our assumption was about 15% to 20% of beds who lost coverage on the exchanges would migrate to employee-sponsored insurance and the rest who uninsured. As we're studying the patients during the first quarter that previously had exchange coverage, we are noting that the patients converting to employee-sponsored insurance or generally within the estimated range that we built into our guidance model. Interestingly, patients migrating to uninsured are just a little bit less than expected as we are seeing some individuals converting to Medicare or Medicaid due to the age or to changes in life circumstances. But I would note that this is a slight improvement and was not significant. And overall, that the payer mix deterioration from the exchanges is generally in line with our expectations for the quarter. [indiscernible], and obviously, this is going to continue to mature. So we'll have more mature insights. So I'll just end with this. I mean if you think about the growth in the uninsured that I highlighted in my prepared comments, a little more than half of that 16% growth was from the movement from exchanges, and that's in line generally, with our expectations. The other factor that did show up as growth in uninsured volume was the slow down in Medicaid conversions that we highlighted. Broadly, those are the components that I would say that are in our uncompensated care results for the quarter and largely are in line with our expectations and plans. Operator: And our next question comes from the line of Brian Tanquilut with Jefferies. Brian Tanquilut: Maybe, Mike, just a quick view, maybe to follow up with your comments on Ann's question to you. How do you want us to think about the sequential move then from Q1 EBITDA to Q2, factoring in the recovery in volumes and then your expectations on HICS and how that's all going to play out? Mike Marks: Yes. We don't generally give guidance by quarter, other than just kind of pointing back to normal seasonality, Brian. Clearly, as you noted from our comments, and we do view the volume shortfall in first quarter as being temporal and not structural. So I mean that's an important note. Broadly on the exchanges, you get a sense for what we saw in the first quarter, it is dynamic community. I think about what we're going to learn on the exchanges. I mean, we're going to continue to learn more as we go along. I think -- what that looks like is studying how much of the anticipated 2026 full year volume decline like came through during the first quarter, which is a bit difficult to today. We -- as we studied this, we know that certain individuals were in their grace period throughout the quarter, and they may drop coverage after the first quarter. We made an estimate for those patients in both our equivalent admission statistics and our financials. But I still think based on the data we've seen to date, we do believe that our assumption of a 15% to 20% volume decline continues to be reasonable. So those would be the thoughts that I can give you now related to the progression through the year. Operator: And our next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: So the health plans are all on an organized campaign today on prior authorization. I just was wondering if you could talk about any of the -- any payer behavior changes, particularly post discharge denials? Anything new that you saw emerge within the quarter or year-to-date? And I know you've been working with a number of plans to sort of streamline all this back and forth stuff. So just any color would be helpful. Mike Marks: Sure. Thanks, Whit. We continue to experience increased activity levels with our payers on denials and underpayments pretty broadly across payers and across products. I mean I might continue to call out Medicare Advantage as being a specific driver within the product mix. As you know, we've been working really hard over the last several years to strengthen our revenue cycle. We've added resources, technologies and a lot of capabilities around speed resolution to really go after the root cause of the denials. That work has continued to pay dividends. Given the results of the work of the company, I think as you look at first quarter with -- even with the pretty significant increase in activity around denials and under payments that we are seeing, our recoveries, our work around speed resolution, our work around appeals and getting these overturned or such that we were able to mitigate and not see a lot of year-over-year impact to earnings. But the denials and underpayments are still really high. And so it's a key part for our industry to continue to work together on. As you noted, we have launched over the last really 18 months now, a series of partnerships with many of our strategic payer partners. These partnerships really focus on digital integration to try to share more digital and structured data back and forth between us and our payers, eliminate faxes, eliminate paper. A lot of work around administrative simplifications for both us and our payers to deal with the really significant administrative cost burdens that are associated with kind of the health care in America. And then lastly, management of disputes. I would say that those are good in early work products, but we have a long way to go as we continue to move that forward. So that's a bit of an update on denials and underpayments [ improvement ]. Operator: And our next question comes from the line of Andrew Mok with Barclays. Andrew Mok: Wanted to follow up on the slower conversion to Medicaid. Just curious which states you're seeing that slow down, whether you view that as a temporary or issue or durable trend? And when you take a step back on the broader uninsured ACA population this year, did you make any changes to your bad debt accrual process? Mike Marks: Thank you. So when I think about Medicaid and the slowdown in the conversions, we think, and it's still early, there can be potentially some other contributing factors. But we largely think about this as people, who, this year, are less willing to fill out Medicaid applications. And so we suspect that, that could be driven a bit by concerns around immigration and like. So that -- we're studying that. I'm not quite sure if that's the full reason why. But that is a piece of the story here in terms of the year-over-year growth in the slowdown in Medicaid conversions that's impacting our uninsured volume increases. Broadly, yes, our budget is -- our plans for 2026 reflected the payer mix shifts and the patient amount due collections that we anticipated being impacted by the exchanges. And so that was reflected both in what we anticipated related to uninsured volume growth and related to the potential impacts in terms of patient due collection. So that was built into generally our models for 2026. Operator: Our next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I wanted to ask about the hurricane-impacted markets. I think guidance didn't assume any continued improvement from those markets. Can you just give us an update in terms of how things are playing out and if there's any signs that those markets are improving, particularly in North Carolina? Samuel Hazen: So this is Sam. North Carolina, here's the short story. Demand is above our expectation. It's costing us more to serve that demand because North -- Western North Carolina has a significant workforce deficit. We're having to bring in labor, nursing, nonnursing to support the demand. We have a very aggressive recruitment campaign and compensation program to service that demand, and we're hopeful, over time, we can mitigate the cost. So we've seen more volume. It's cost us more to serve it. So we're a little bit behind our expectations in North Carolina on the bottom line. Mike Marks: The other thing, Sam, that we're seeing is the payer mix change. In North Carolina, the -- it clearly has been disrupted in terms of that workforce disruption is also impacted in a less favorable overall payer mix. Broadly, when we think about the hurricane-related markets, in our guidance, we indicated that we did not think that we would see any kind of material improvement in year-over-year earnings from the hurricane markets. I mean, our Tampa facility [ Argo ] Medical Center has largely recovered in [indiscernible] but we don't think we're going to see any net material increase in year-over-year earnings from the hurricane markets due to the reason that Sam articulate. Operator: And our next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: On the impact from winter weather, should we expect any loss procedures in January to come back through the year? I think you said February, March volumes more in line or just wondering if you picked those January volumes up already. I'm sorry if I missed this, but can you quantify the impact from weather to the same-store inpatient and outpatient surgery growth? Mike Marks: So when I think about the winter storm specifically, in my prepared comments, we indicated that, that was 30 basis impact on year-over-year volume growth on admissions and a 50 basis impact on year-over-year ER visits. So just to keep that in mind. From a recovery standpoint, we do believe that from the winter storm, that we largely recovered the surgical component of that with the end of the quarter. What was not recovered and what drove the net volume impact here was really the emergency visits and the related emergency admissions, where there was really not a second chance to recapture that volume. And so I don't think that the winter storm was really an impact on our surgical volumes in the corporate and material. Samuel Hazen: Yes, it's not going to be notable over the rest of the year that we -- and we'll likely recover some volume, but it will be sprinkled into our mix in a fashion that we won't be able to really discern it. Operator: And our next question comes from the line of Justin Lake with Wolfe Research. Justin Lake: I wanted to follow up on your comments around exchange patients sitting in the grace period in February and March that you might not get paid for. My understanding is that managed care will let you know who these patients are in real time and that their coverage is suspended. Is that right? And just to be clear, how do you treat these patients within the exchange volume decline of 15% in the first quarter? And maybe share a little more color on how you accounted for this utilization during the quarter from an accounting revenue recognition perspective. Mike Marks: Sure, Justin. So if you think about the verification process that we have with our payers, we have some payers where we do receive some premium status information through our verification process. But the information that we are able to access is not consistent and is not standardized across exchange payers. As a result, we generally do not have reliable third-party visibility at the time of service whether a premium has been paid. When the information is available, it certainly helps us inform further patient engagement to encourage these patients to maintain their coverage. Generally, though, I would not characterize the eligibility and verification information we received at the time surface as comprehensive consistent are largely accurate as the verifiable data. Let's talk a minute, Justin, about the grace period and how that's flowing through. Patients that received premium assistance, whether they are auto reenrollees, new exchange enrollees or switching plans, generally have a 3-month grace period after the coverage is effectuated. For the first month of the grace period, the payer is required to cover the care. For the remaining 2 months, the payer is not required to cover any care episodes, unless the premium was called out by the enrollee. So our work, as we studied the quarter, was to first look at every patient that came in with exchange coverage and try our best to understand whether or not they attrited in -- they had an attrition during the quarter, at which point we recognize that revenue impact during the quarter, or to make an estimate of those that we believe will lose and come out of the grace period with attrition, where we will not get paid for that, and we'll know that in second quarter and beyond as they get past their grace period. For that last part, we've made an accounting evaluation and a business evaluation that we included in our analysis about equivalent admissions and revenue. And so when we articulate that 15% drop in equivalent admissions, it contains both of those components and same thing with the impact on our revenue and earnings. Operator: Our next question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: If you could talk about what you saw with acuity and case mix in the quarter. Maybe putting aside the lighter respiratory, which we know when probably drive a lower case mix. And then in terms of -- maybe in terms of patients and then some of the types of procedures and service lines, how that impacted the Q&A in case make as well. Samuel Hazen: So this is Sam. We saw increased acuity as reflected in our case mix. It was modestly up on a year-over-year basis. Inside of that, we did have the respiratory dynamic that we alluded to. But within the respiratory dynamic, we had a fairly acute component last year that was more pace mix driven than maybe we've seen in the past. But yes, we still jumped over that. So when you look inside of our business, in the first quarter this year, we had really strong cardiac activity. So our cardiac procedures grew significantly. Trauma was up 2.5%, also driving acuity. We had rehab services grow at a very good pace. So a lot of the elements that we've had momentum and from a service line standpoint, over the past few years, continued into the first quarter, again, influenced somewhat in total by these other factors that we alluded to. So we continue to find opportunities in the market to develop more comprehensive programs as our communities grow and service our communities more effectively closer to home. That will continue to be a part of our journey here. One other metric that I think is important with respect to case mix is our receiving of patients through our patient logistics centers grew by 2.4%. That tends to have a higher acuity level as well as rural hospitals, other community-based hospitals are using the deeper service offerings that we have in some of our tertiary and quaternary facilities. So all in all, we were generally satisfied with our case mix. Scott Fidel: And can I just ask a follow-up, just around the payer buckets on acuity [indiscernible]. Were they relatively consistent or would the exchange sort of disruption, did you see any sort of movement around the different payer... Samuel Hazen: What's interesting, the case mix was pretty consistent. The respiratory effects were pretty consistent. So we had consistency across all aspects of our payer classes when it came to sort of the overall story for the company. Operator: And our next question comes from the line of Kevin Fischbeck with Bank of America. Kevin Fischbeck: Okay. Great. Can you just talk a little bit about the $150 million impact from the exchanges this quarter and how that compares to the $600 million to $900 million annual number? Did you guys assume that, that number would build as the year goes on? Or are you saying that you're kind of trending towards the lower end for the year on that dynamic? And then also on the Medicaid side, is this dynamic something that you just kind of started noticing in Q1? Or has it been building for a while? And is it a dynamic that you think is peaking in Q1 or will get better or worse from here? Mike Marks: Yes. On the -- let's start with HICS, Kevin. If I think about the $150 million for the quarter, I mean, it's a quarter estimate. And obviously, that would put us a bit at the lower end of the full year range. But I think it's a bit early. I mean, it's dynamic. You can imagine, as we've gone through the quarter and we're trying to understand and analyze all of the moving parts around the exchanges, it's probably a little early to declare that the full year would be at the lower end of the range. So I'm not quite ready to say that. But I would say that we were pleased that in the quarter, we think that this $150 million reflects not only what we saw in the quarter, but our estimates of the attrition rate and a life that we've built in to our counter team. So a little early to try to give you a broader sense for the full year yet. But I would say, like we do think that this range of $600 million to $900 million is sort of a reasonable estimate for the year. So let me leave that there. On the Medicaid conversion slowdown issue, it's pretty nascent. We maybe saw a smidge of it at the very end of last year as well, but it really popped up on us here in first quarter. Given its nascency, again, a little early to call whether it's a sustained trend or something that just popped in first quarter, and we're watching it, as you can imagine, and we'll keep you up to things as we go forward. So that would be the... Samuel Hazen: Yes. I would say, though, Mike, just adding to that, I mean, our Parallon teams have a robust process for qualifying patients who need support through our financial counselors and other efforts. And so those continue. We're just dealing with some dynamics here that we haven't experienced before. And it's like Mike said, too early to really suggest that it's peaked or not peaked. We just need a little bit more time to judge it. Operator: And our next question comes from the line of Sarah James with Cantor Fitzgerald. Sarah James: And I'm sorry to circle back on to it. But amidst that March volumes were recovering towards the range of 2% to 3%, is that [indiscernible] possible for full year to hit the existing guide of 2% to 3% volume? Samuel Hazen: We couldn't hear what you were saying on the front end, but we think we know what you said, and that is how are volumes exiting the quarter and what does that do to our full year guidance. February and March were generally in line, when you put the 2 together, with our full year guidance. January was the quarter -- I mean, the month in the quarter where we saw a decline in activity. So when we're making a judgment about the rest of the year, we're judging what we think is going to happen in the last 3 quarters of the year. And we think our guidance around volume of 2% to 3% in the rest of the quarters is appropriate. And what we see with demand in the market, what we see with trends coming out of the quarter and what we see with capital projects and other initiatives to develop our networks, we feel that that's still a reasonable target. And so that's where we are at this point. Operator: And our next question comes from the line of Stephen Baxter with Wells Fargo. Stephen Baxter: Thank you for all the color on the moving parts in the quarter. If we think about -- I guess the only sort of year-over-year number you haven't given us yet is on resiliency. And I guess I'm wondering, is there any reason to think that just kind of a quarter of the full year impact that you talked about wouldn't be a reasonable placeholder for the first quarter? And then if we go through and kind of look at those moving parts, it does imply that the core growth in the quarter was probably closer to 2.5% or 3%. And I think you have a bit higher of a full year guide embedded here. Just wondering if you could help us understand what you think the shortfall was on the core kind of normalizing for all these moving parts? Mike Marks: When I think about the resiliency plan, and we're still confident in the full year $400 million guidance. So I'll leave that there. I mean I think that's a good estimate for the full year. When I think about core growth, I mean, we -- our first quarter's EBITDA growth was, call it, 1.9%. And the midpoint of our full 2026 year guidance is kind of, call it, 2.8%, 2.9%. And so that gives you a sense. I think we -- we've articulated the drivers in the first quarter. And so we largely think that it indicates that -- we believe we're going to be largely on plan for the next 3 quarters in terms of the overall makeup of volume and revenue and earnings back to our original plan here over the next 3 quarters, and that's how we think about it. Operator: And our next question comes from the line of Jason Cassorla with Guggenheim. Jason Cassorla: Maybe just to follow-up on the outpatient side. Historically, you've talked about some of the pressures you saw on Medicaid, but you more than made up of that on the revenue side of the fence. It looks like revenue was up just shy of 3% in the quarter for outpatient compared to the 9% or so you did last year. Sorry if I missed this, but can you give us any impact on the weather on the outpatient side? And then maybe how trends, revenue and volume-wise trended in the quarter, I guess, compared to -- with your ASPs compared to your remaining outpatient footprint would be helpful. Mike Marks: Sure. Let's start with the EV side the outpatient business. And yes, between respiratory and the winter storms, there was an impact on our ER volumes. And it's about 140 basis points impact on ER visits from respiratory, about 50 basis points of impact from the storm. If you think about that compared to the 23% growth in ER visits, it gives you a sense that you're back kind of a normal trends when considering things like the winter weather storm and in the respiratory season shortfall there on ER. Sam mentioned this, but we did have good growth in year-over-year things like EMR, EMS visits and trauma visits. So that was good. On the surgery side, our outpatient surgeries declined 1.7%, and that was 2.1% in hospital-based outpatient and 1% in our ambulatory surgery centers. On the hospital side, we saw a little bit of weakness in our ortho-related cases. On the ASC side, it was really more of the low acuity service lines like ophthalmology and ENT that drove the statistical decline. I would say, we were pleased with our revenue performance in our ASCs for sure. And when I think about payer mix for surgery, really for first quarter, the 2 big drivers of weakness on the payer side was Medicaid and of course, the exchanges, which we anticipated. So those would be kind of a run down. Samuel Hazen: Let me give a little backdrop here. When you look at our outpatient revenue and the composition of it, about 1/3 of it is emergency room. About 1/3 of it is outpatient surgery. And the other 1/3 is imaging, primarily driven by cardiac and so forth. And so when you think about the storm, it affects, obviously, the emergency room and our outpatient surgery and our imaging, all 3 categories. The respiratory is mainly the emergency room. So all of it sort of comes together in this composite view. And that's how we sort of dissect the outpatient business. So as we push into the rest of the year, we don't really have the implications of either of those for our outpatient platform, and we're confident that we'll be able to generate the revenue expectations for the balance of the year. Operator: And our next question comes from the line of Benjamin Rossi with JPMorgan. Benjamin Rossi: Across your network development efforts, I guess, what's your current cadence of ramping new beds in OR capacity? And how much of your 2026 growth is depending on projects already coming online versus future years? And then could you just give us an update on how you're generally thinking about M&A as a potential growth lever this year? And how inbound and outbound conversations with opportunities in your pipeline have developed to start the year? Samuel Hazen: So as I mentioned in our prepared remarks, we did see a number of outpatient acquisitions closed in the first quarter. Those were primarily related to opportunities in urgent care and ambulatory surgery and in our freestanding emergency room business unit. We had a number of acquisitions there. If we think about the going-forward aspects of acquisition, we continue to believe that's where most of our opportunities will be. It's in the outpatient arena and that complementing our hospital networks. And so our pipeline has a number of promising projects in it. And I'm hopeful that we'll get to close those as we push into the balance of the year. With respect to capital spending, we do have a significant pipeline of projects that have already been approved that are in development. That's almost $5.5 billion to $6 billion of approved projects that will come online over the next 24 to 30 months throughout sort of different periods within that time period. A lot of those projects are long-lived projects. And by that, I mean they're adding hospital capacity, which is difficult to do because they're big projects, they're disruptive projects to our facilities, and it takes a while to get them done. And then at the same time, we try to build those future growth that we anticipate in the markets. So there is a component of our growth expectation in '26 that's related to projects that have come online in '24, '25 and '26. And so we sort of blend that into our expectations every year. And we do have a slightly accelerated expectation in '26 as compared to the previous 2 years related to capital projects that are coming online. So we remain encouraged with the opportunities to invest in our networks. Our occupancy levels continue to be at high levels for us, and that presents opportunities for investment and growth. And as we build out our networks with outpatient facilities, as communities grow and as our overall hospital positioning increases, we think that gives us a good opportunity to grow our share and deliver positive returns. And we've had a tremendous pattern, I think, of producing positive returns on capital, and we still continue to believe we can deliver on that. Frank Morgan: Andy, let's take one last question. Operator: And our final question comes from the line of Craig Hettenbach with Morgan Stanley. Craig Hettenbach: Yes. Just a question on kind of contracting just for this year, just kind of what you're seeing in the rate backdrop as well as any visibility into 2027? Samuel Hazen: This is Sam. For 2026, we're pretty much fully contracted at our targeted levels. As we push into '27 and '28, we're in a contracting cycle as typical with our payer contracts, and we're about 1/3 of the way through on '27 and modestly into '28. And right now, we're on target. We believe we're going to be able to get into a range that works for our business as we finalize these contracts with the payers. As Mike alluded to, we got other issues that we're working with them on, that we think can be additive to them, additive to us, beneficial to our patients and their customers in a way that makes the system work better. And so we're confident that we'll get to the good answers on these contracts that we're in negotiations on currently. Operator: That concludes our question-and-answer session. I will now turn the call back over to Mr. Frank Morgan for closing remarks. Frank Morgan: Andy, thank you for your help today, and thanks to everyone for joining us on the call. We hope you have a great weekend. I'm [indiscernible] this afternoon if we can answer additional questions. Have a great day. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Byline Bancorp First Quarter 2026 Earnings Call. My name is Tiffany, and I will be your conference operator today. [Operator Instructions] Please note, the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call. Brooks Rennie: Thank you, Tiffany. Good morning, everyone, and thank you for joining us today for the Byline Bancorp First Quarter 2026 Earnings Call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and the corresponding presentation slides. As part of today's call, management may make certain statements that constitute projections, beliefs or other forward-looking statements regarding future events of the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed in its SEC filings. In addition, our remarks and slides may reference and contain certain non-GAAP financial measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. Reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measure disclosures in the earnings release. As a reminder for investors, during the quarter, we plan to participate in 2 upcoming conferences here in Chicago. The Stephen Chicago Bank tour on May 14 and the Raymond James Chicago Bank Symposium on May 28. With that, I'll now turn the call over to Alberto Paracchini, President of Byline Bancorp. Alberto Paracchini: Great. Thank you, Brooks. Good morning, and welcome to Byline's first quarter earnings call. We appreciate all of you taking the time to join the call this morning. With me today are Chairman and CEO, Roberto Herencia, our CFO, Tom Bell; and our Chief Credit Officer, Mark Fucinato. Before we get started, I'd like to pass the call over to Roberto for his comments. Roberto? Roberto Herencia: Thank you, Alberto, and good morning to all. As Alberto said, we do appreciate you joining us today and taking the time to engage with Byline. markets in general continue to offer plenty of distractions and at times entertainment. Shifting interest rate expectations, inconsistent economic signals, policy uncertainty and heightened geopolitical tensions with the Iran war at the center of it and its brother implications. These add another layer of complexity for businesses and investors alike. We have learned over time that durable results do not come from reacting to every headline. They come from being anchored to purpose, disciplined execution and long-term thinking. So we remain focused on driving value for our holders as we work and make progress I may add toward becoming the preeminent commercial bank in Chicago. We started the year with another strong quarter. ROA, PTPP, NIM and efficiency remain among the best-in-class tangible book value growth of 14% year-over-year are also knocking on the door of best-in-class. Our balance sheet remains strong and positioned to support customers through the cycle. I want to recognize what matters deeply to us, our people. Byline Bank was recently honored as a U.S. best-in-class employer in Gallagher's 2025 U.S. benefits strategy and benchmarking survey. We were also named to Newsweek's America's greatest midsized workplaces for women, highlighting our dedication to practices grounded in transparency, professional development, and flexibility, empowering women to build careers that grow with their lives. These awards reflect effective steel strategies with measurable outcomes, including employee well-being and engagement. They reinforce our people-first approach and strengthens our ability to attract, retain and develop top talent in a very competitive environment. I would like to point out that our SBA platform continues to perform well for the 16th consecutive year. Our team ranked as the #1 SBA 7(a) lender in Illinois, according to the most recently published fiscal year rankings. This kind of consistency does not happen by accident. It reflects decades of experience, disciplined execution and the dedication of an outstanding team. I would also like to recognize 2 individuals who have been familiar voices to many of us for a long time. This marks the end of an era as Terry McEvoy of Stephens and David Long of Raymond James step into new chapters in their careers. Collectively, as sell-side analysts, they've covered more than 200 earnings seasons. And more importantly, they brought professionalism consistency and thoughtful engagement to their work. We are grateful for the time they spend covering Byline and for the relationships built over many years. On behalf of the Board and the entire management team, we wish both Terry and David continued success in their new roles. To close, I remain very optimistic about Byline. We are operating with clarity of purpose supported by strong fundamentals, an engaged workforce and a resilient business model. We are very focused on compounding returns the right way through prudent growth, disciplined risk management and an unwavering commitment to our people and customers. With that, Alberto, back to you. Alberto Paracchini: Thank you, Roberto. As is our normal practice, I'll start with the highlights for the quarter, followed by Tom, who will take you through the financials and then I'll come back to wrap up before we open the call up for questions. As always, you can find the deck we're using this morning on the IR section of our website, and please refer to the disclaimer at the front. . Turning to Slide 4 on the deck. Overall, I'm pleased to report that we had a solid start to the year and delivered another excellent quarter. Earnings momentum continued along with strong profitability, disciplined expense management and stable credit quality despite an evolving macro and geopolitical backdrop. For the quarter, we reported net income of $37.6 million and EPS of $0.83 per diluted share, representing growth of 8.9% and 9.2%, respectively. Profitability was strong with ROA of 156 basis points and ROTCE of 13.7%. Pretax preparation income totaled $55.2 million, resulting in a pretax provision margin of 229 basis points, which marks the 14th consecutive quarter in which this metric exceeded 2%, reflecting the durability and consistency of our operating results. Total revenues were $112.4 million for the quarter. Net interest income remained solid at just under $100 million, while noninterest income was lower at $12.5 million, largely due to lower fair value marks for the quarter. The margin remained stable at 4.33%, notwithstanding a lower day count and lower yields. This was offset by a drop in deposit costs driven by a better mix coupled with pricing discipline, which Tom will cover in more detail shortly. From a balance sheet standpoint, total deposits increased 8.2% annualized to $7.8 billion, reflecting growth across both core as well as time deposits. Loan balances were modestly lower linked quarter as payoffs more than offset solid origination activity of $241 million. Expenses remain well managed at $57 million, down 5.3% from the prior quarter, with our efficiency ratio improving to 49.8% for the first quarter, one of the lowest levels we've reported since becoming a public company. Asset quality remained stable. Credit costs were $5.5 million for the quarter and consisted of $6 million in net charge-offs and a small reserve release of $0.5 million. Both NPLs and criticized loans showed declines and the ACL increased 1 basis point to 1.46% of total loans. Moving on to capital. Our capital levels continue to grow and balance sheet strength is evident with a TCE at 11.1% and CET1 over 12.5%. We exercised some of that capital flexibility this quarter and returned 40% of net income back to shareholders by repurchasing approximately 318,000 shares of stock at an average price of $30.84, in addition to our quarterly dividend of $0.12 per share. With that, I'll turn the call over to Tom, who will walk you through our results. Thomas J. Bell: Thank you, Alberto, and good morning, everyone. Starting with our loans on Slide 5. Total loans stood at $7.5 billion, down slightly from the prior quarter. The decline in balances was primarily driven by $72 million in runoff related to loan participations and acquired loans. Origination activity was solid with $241 million in new loans, while payoffs remain elevated at $320 million. Loan commitments increased and line utilization declined slightly to 59.2%. Loan yields came in at 6.84%, down 11 basis points linked quarter as a result of the December Fed rate cut. Pipelines remain strong, and we expect full year loan growth in the mid-single digits. Turning to Slide 6. Total deposits were $7.8 million for the quarter, up $154 million or 8.2% annualized from the prior quarter. The growth was due to increases in interest-bearing checking and time deposits. We saw a 6 basis point improvement in deposit costs, driven by lower money market rates, which brought over overall deposit costs down to 1.91%. Turning to Slide 7. Net interest income was $99.9 million in Q1, down 1% from the prior quarter and up 13% year-over-year. Net interest income was impacted by 2 fewer days in the quarter lower yields on earning assets and higher borrowing costs as a result of a balance sheet hedge that matured in March. This was partially offset by lower rates paid on deposits. The net interest margin was stable at 4.33%, declining modestly by 2 basis points from the last quarter, with 50% of the decline coming from lower accretion while expanding 26 basis points year-over-year. Our outlook for net interest income is based on the forward curve, which currently assumes no rate cuts or hikes in 2026. Given the rate outlook and our balance sheet position, this implies a net interest income range of $99 million to $101 million in the second quarter. We expect net interest income to grow driven by overall balance sheet growth and disciplined deposit pricing in the event short-term rates move lower. Turning to Slide 8. Noninterest income totaled $12.5 million in Q1, which was down approximately $3.2 million linked quarter. The decline on a quarter-over-quarter basis was driven by an additional negative fair value mark on loan servicing assets of $755,000 and a $1.3 million decline in fair value of equity securities. Excluding these fair value adjustments, fee income remained stable. We expect gain on sale to average $5.5 million per quarter and our noninterest income to be in the $14 million to $15 million range for the second quarter. Turning to Slide 9. Expenses came in at $57 million, down 5.3% from the prior quarter. This was driven by salary and benefits from lower incentives, legal costs and advertising spend. partially offset by higher data processing expenses. Our efficiency ratio improved 54 basis points to 49.78%, with noninterest expense to average asset ratio 2.37%, down 10 basis points. Looking forward, our noninterest expense full year guidance remains unchanged at $58 million to $60 million per quarter. Turning to Slide 10. Credit costs declined for the quarter with the provision coming in at $5.5 million. NPLs decreased $4 million or 5.6% linked quarter to $67 million, while NPAs to total assets improved to 71 basis points from 77 basis points in Q4. The improvement was driven by resolution activity during the quarter. The ACL remained flat at 1.46% of total loans. Moving on to capital on Slide 11. Capital levels continue to grow and remain robust with CET1 at 12.5%, 22 basis points linked quarter and up 77 basis points year-over-year. Total capital came in at 15.5%, up 69 basis points year-over-year. In addition, tangible book value per share grew to $23.79, increasing [ 1.5% ] on a linked quarter basis and 14% year-over-year. And last month, roll bond rating as we affirmed our BBB+ credit rating and outlook. In closing, another great quarter across the board and a solid start to the year. With that, Alberto back to you. Alberto Paracchini: Thank you, Tom. So to wrap up, we were pleased with our results and performance for the quarter, notwithstanding the level of uncertainty in the environment, we're optimistic in our ability to execute our strategy continue to grow the business and deliver value to shareholders. In terms of the outlook, pipelines remains at solid levels across our businesses, and we remain well positioned to take advantage of opportunities in the marketplace. With that, operator, we can open the call up for questions. Operator: [Operator Instructions] Your first question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Hope you're all doing well. Alberto, I was hoping you could just shed some more color just on the production levels in the quarter in terms of how much of the year-over-year decline may just been due to some of the macro factors at play these days versus seasonality. I know you mentioned the pipeline sold going to the rest of the year, but I was just hoping you could shed some light on that in the what in terms of payoffs as well. Alberto Paracchini: Yes, of course. Not a lot of -- so on your second point there. So not -- we didn't really see -- we had pretty good origination level. So the level of business activity was pretty good in commercial banking, our leasing business. Real estate was nothing unexpected on that end. A lot of the payoff activity or a portion of the payoff activity that we saw this quarter was just simply recycle us essentially recycling loan participations and loans that we had acquired coming from some acquisitions. That's really what drove it. if you actually strip out the impact of those, which is -- I mean, it's perfectly aligned with what we want to do ultimately with those books. If you strip that out, I think loan growth would have been somewhere in the 4% kind of level for the quarter. So nothing unusual other than just planned runoff coming from books that we've acquired over the years. Nathan Race: Got it. That's really helpful. Maybe a question for Tom. I know you don't give margin guidance specifically, but just trying to understand the trajectory of loan yields over the balance of this year just in terms of the context of kind of what the roll-off yield looks like and kind of what you're seeing in terms of blended rates on loan per these days. Thomas J. Bell: Roll-offs are, call it, $300 million-ish like a $450 million kind of coupon, so new production is typically around 675, 680 kind of coupons. Nathan Race: Okay. So imagine, again, without giving margin guidance that you're thinking the margin could kind of there just given maybe more rational deposit pricing competition these days and just given what you just described in terms of the roll-off . Thomas J. Bell: I mean, certainly, on the loan side, spreads will -- are maintaining well. I think as you'll see in the balance sheet, right, we grew the securities portfolio this year. That's a tighter spread transaction. So when you start to include that in, you could have a small tweak to the margin overall. But again, NII guidance growing over the year here. Nathan Race: Got you. And maybe one last one, Alberto, or Roberto. Just curious what you guys are seeing in terms of M&A conversations and activity levels these days. Obviously, you have a little bit of a headwind to earnings next year with the [ Durbin ] impact, which I know is not particularly big for you guys, but just curious if you're feeling more optimistic on M&A announcement over the balance of this year. . Alberto Paracchini: We're always optimistic in terms of just the level of conversations. I would tell you maybe right now, and I don't think this is inconsistent with what others have said in their earnings call. I mean, certainly, the uncertainty in the environment given the macro and geopolitical issues maybe causing some sellers to pause. That being said, I think the underlying level of conversations continues to be, I think, from my view, pretty healthy. Nathan Race: Okay. Great. I appreciate all the color. I hope guys have a good weekend. Operator: Your next question comes from the line of Brendan Nosal with Hovde Group. Brendan Nosal: Hope you're doing well. Maybe starting off here on capital. I think if my math is correct, you've nearly tapped out the current buyback plan. Is there a willingness to re-upping that and remaining in the market? Just given how much capital you have today and how much you'll continue to generate. Thomas J. Bell: Yes. Brendan, we're not -- we've only done about 300,000 shares. So we have to over a $2 billion program. So we have plenty of room to continue to repurchase shares. . Brendan Nosal: Great. And apologies for that after a long earnings week. Maybe pivoting to kind of funding here. A really nice quarter for deposit growth both overall and core funding. Just kind of curious why you opted to grow CDs as much as you did, given the lack of loan growth and then tie that into the competitive landscape in Chicago for core funding? Thomas J. Bell: I mean, we're first focused on full relationship customers. But we -- our CD book has grown over the years, and we're still trying to maintain a certain level of CDs. As you know, loan-to-deposit ratio was higher at the end of the year because of as an example on maybe some more institutional deposits. But generally speaking, we think we have a good deposit base. The CD book is good. The back book is performing well. As you can see that the CD yields are coming down kind of quarter-over-quarter. But given the Fed on hold, that's probably going to slow down here. But you still need to fund the bank, and we like the diversification that we get from it with the opportunity to potentially cross-sell those CD customers and other products. Operator: Your next question comes from the line of Damon DelMonte with KBW. Damon Del Monte: Hope you're all doing well. First one, just kind of regarding loan growth and the pipeline that you referenced. Could you just give a little color on kind of what is -- what's that comprised of? And what segments are building that pipeline for you? Alberto Paracchini: So all segments, Damon, but I would say like we have touched on in prior calls, probably the delta there, the one that's more rate sensitive is probably going to be real estate I would think rates have backed up, and I'm not talking about short-term rates, but the back up in 5 years, the backup and the 10-year real estate is much more sensitive to those. So I suspect if we see a decline in that later on in the year, potentially, that's going to probably positively impact volumes still within the range that we provide, which is that mid-single-digit target. That's the one that I would say has the highest probably the highest chance of having some volatility around rates. As far as the other category, which are really just commercial banking and our leasing business in general, pipelines are solid, and we really here to for, we really haven't seen an impact where people are saying, you know what, given the uncertainty in the environment, we are going to take a breather here and postpone something that we're planning to do for a few months just to see how the environment settles down. I mean, activity has been good. We've seen, for example, to give you some color companies are actively being marketed and sold in our sponsor business as well as we're hearing some of that also in our commercial banking book, which is a positive sign from a transaction activity standpoint. And borrower activity continues to be good. So demand for credit remains solid in those segment Damon. Damon Del Monte: That's great. Great color. Tom, you mentioned about the securities portfolio increasing in size, and you can see the average balances were up quarter-over-quarter. How do we think about that for the remainder of the year? Do you expect to add to that? Or do you think that might start to trail down a little bit? Thomas J. Bell: I think stable, Damian, we'll probably reinvest cash flows. I mean, we could go up a little bit just depending on market opportunities. But assuming loan growth will deliver, which we expect, there's probably no need to grow the portfolio meaningfully. Alberto Paracchini: I think big picture, Damon, the way we think about securities at least from a big picture standpoint, we're always going to be trying to grow deposits irrespective of what the environment is we are always going to be looking to try to grow deposits over time through the cycle. We just don't think we are good enough to be able to as some of our colleagues in the industry say, turn us big it on, turn is bigger off. So we're constantly trying to grow deposits to the degree that deposits start outpacing our ability to grow loans, then by definition, you would see that growth probably end up in the securities portfolio. So just big picture, that's kind of how we think about it. Damon Del Monte: Great sense. Operator: Your next question comes from the line of Brandon Rud with Stephens, Inc. Please go ahead. Brandon Rud: If I could follow up on an earlier question about the deposit costs. Can you maybe talk about the trajectory through the quarter relative to the $191 million reported? And when you think about a starting point as we enter the second quarter, would you anticipate that number kind of trending down a few more basis points. Thomas J. Bell: Pretty consistent. The average over the quarter versus period end pretty much unchanged. March was exactly on top of where the cost of funds was for the quarter. So not a meaningful change. I think the -- again, just maybe touching back on the prior question, the CD book is very short. It's 4 months, 5 months at length. So a lot of opportunity to reprice, but most of the book is repriced given that made its last cut, so to speak, in December. Brandon Rud: Okay. And maybe just a higher-level question. I think back in January, the plan was to not manage below $10 billion this year. I guess, is that still the plan? And can you remind me what the [ Durbin ] impact would be in, I guess, '27? Alberto Paracchini: Sure. Yes, Brandon, we are not trying to manage the balance sheet artificially stay under $10 billion. It just so happens that we're at $9.9 billion at the end of this quarter, but it could very well be -- it could have very well have been that we would have been over $10 billion. So we're kind of -- as we think about it, we're kind of there, and we expect to be crossing that barrier here at any point. And as part, maybe you want to take the Durbin impact for '27? Thomas J. Bell: Sure. Yes, as we mentioned, we don't have the same kind of entertain costs some of the other banks do. And I think we kind of quoted like about 4 basis points to ROA is a decline, just given that it takes effect again in 2027. July 1st. Alberto Paracchini: So it'd be July 1 of '27. And I think we had said publicly, we had said $3.5 million to $4 million in terms of the Durbin impact, Brandon. So obviously, that's an annualized number. So in July of 2027, all else being constant, we would see the impact of half of that in the second half of the year. Operator: [Operator Instructions] Your next question comes from the line of Brian Martin with Brean Capital. Brian Martin: Just wondering if you -- Tom, your last question, maybe I didn't hear your response or just on the call, I was just going to ask you on the cost of deposits, given the backdrop, like you said, the Fed the major last rate cut, it's pretty stable from here. I mean there's not much opportunity, like you said, on the CD side, given the book short. So just you would think relatively stable, give or take, as you think about going forward? Just wondering how the competitive pressures are. loan growth outlook looks pretty bright. So just trying to understand the competition. Thomas J. Bell: Yes. I would say relatively flat, maybe down a little bit. Again, mix helps us. We're always focused on relationship banking and commercial banking. So those are typically lower cost deposits, and that will help us. On the competitive front, on the consumer side, yes, it's the typical competition we see as far as rates, I don't think anything is crazy at this point. But we just want to keep our market share in that category. And so I would say nothing is going higher, at least at this point. And we just the book is almost fully repriced. So there's not a lot of lift for lower costs as we move forward other than mix. Brian Martin: Got you. Okay. That's helpful. And just the commercial payments business. I guess your confidence in just continuing to grow deposits, is that giving you some tailwind there on that opportunity? Thomas J. Bell: Yes. I mean I think that's more of a year goes on, we'll see more benefit from that. And obviously, the fee income that comes with that as well. And it takes a while to onboard the customers. So we'll start seeing that more here in the second half of the year. . Brian Martin: Got you. Okay. And then maybe just the last one, just some of the noise in the quarter in terms of the fee income. Can you just give some thoughts on kind of a baseline or how to think about -- you've given some color on the SBA business. Just kind of the some of the noise in the quarter, if you can just talk a little bit about how to think about the jumping off point, if you will, going into 2Q? Thomas J. Bell: Yes. We still gave guidance of $14 million to $15 million, Brian, I don't know if you heard that. Brian Martin: Sorry. Okay. Thomas J. Bell: But no, no, no. But for the quarter, we had lower swap fee income from our back-to-back program, and we expect that to pick up here. And then we had a small lower valuation on the sale of some lease assets, which was a one-off. So I would expect that's why I've given guidance of the $14 million to $15 million. But those were the 2 drivers other than the fair value adjustments. . Brian Martin: Yes. Okay. That's all I had, guys. I appreciate you taking the color. And congrats on the quarter. Operator: Thank you for your questions today. I will now turn the call back over to Mr. Alberto Paracchini, for any closing remarks. Alberto Paracchini: Great. Thank you, Tiffany. So in closing, I'd like to congratulate and thank all our employees on another solid quarter. Our level of performance would not be possible without their dedication, their effort and the commitment to customers, it really -- we couldn't do it without them. So thank you all. . And to everyone on the call, thank you for joining us today. We appreciate your continued interest in Byline, and we look forward to talking to you again next quarter. Thank you. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Eni's 2026 First Quarter Results Conference Call, hosted by Mr. Francesco Gattei, Chief Transition and Financial Officer. [Operator Instructions] I'm now handing you over to your host to begin today's conference. Thank you. Claudio Descalzi: Good afternoon. Amid the volatility and disruption to the energy system over the past 2 months, at Eni, we continue to focus on the delivery of financial performance and key strategic milestones. As we set out at our capital market update just over a month ago, we are working to deliver reliable, affordable and lower carbon energy for all our customers. Our industrial strategy anchored to technology skills and long-term investment into top tier assets across a diversified portfolio has, if anything, been further validated in the context of the event of this year. Our investment framework underpinned by strong cash flow and a robust balance sheet supports us in delivering sector-leading growth. As a result, we can also reward our investors through a combination of attractive distribution and the continued rise of the capital value of the business, something that has been reflected by the share price improvement. It's also worth keeping in mind that while energy markets have been highly volatile since March, Q1 average, also higher than the planning assumption set out at our capital market update were well within a historical normal range for our volatile industry. Actually, in euro terms, it was a bit softer than last year. 2026 has seen very positive advancement in strategic terms and Q1 supports this progress with strong financials. I will analyze the financial in more detail shortly, but we reported EUR 3.5 billion of pro forma EBIT, cash flow from operation of EUR 2.9 billion and pro forma gearing at 15%, well within our expected 10%, 15% range. Our pro forma gearing, assuming the full effect of Plenitude Deconsolidation is even lower at 12%. Major strategic events of the year-to-date include probably the ever best start to a year for exploration with an exceptional level of new resources discovered in 7 different countries. The FID of Geng North and Gehem in Indonesia, the dual exploration strategy, realization of a stake in our Baleine discovery. Strong production growth helped by start-up of production at NGC in Angola and first LNG export from the second Congo LNG. And in the transition sector, the agreement to reorganize and deconsolidate Plenitude and advancing 2 new biorefineries at Sannazzaro and Priolo. But before we get into the details of the financials, I will spend a bit more time on what was the most remarkable start of the year for exploration. As you know, we have established a track record as the leading exploration company in the sector, discovering an average 900 million barrels per year over the past 10 years. And while our impact activity is somewhat front-loaded in the first 4 months of 2026, we had already added around EUR 1 billion of new resources. Critically, these new resources also all have a credible and visible pathway to development and production, consistent with our focus on efficient time to market where we are also an industry leader. Our production growth to 2030 is visible and sector leading, and we are building material optionality for the 30s. In Angola, our Azule affiliate, as operator, announced the significant oil discovery of Algaita on Block 15/06, preliminary estimates put oil in place at around 500 million barrels and the presence of an FPSO merely 18 kilometers away promises a speedy and efficient development. In Cote d'Ivoire, the Murene South-1 well significantly extended the proven area of Calao gas condensate discovery, confirming a world-class discovery of up to 5 Tcf and 450 million barrels in place. In Libya, in March, we announced a 2 offshore gas discovery estimated to total more than 1 Tcf in place and closed by the existing Bahr Essalam facilities, enabling rapid tieback. In early April, we announced the Denise discovery in the Temsah concession offshore Egypt. Our preliminary estimate for Denise is 2 Tcf of gas and 130 million barrels of condensate in place and situated less than 10 kilometers from existing production infrastructure. Last, but certainly not least, this week, we announced the giant Geliga gas condensate discovery in the Kutei Basin, offshore Indonesia. Our preliminary resource estimate is in place gas of 5 Tcf and 300 million barrels of condensate, effectively a second Geng because Geliga is close to the undeveloped 2 TCF Gula discovery that includes also an additional 70 million barrels of condensate and thus development synergy plus the same infrastructure and time to market advantage of Geng. There is a clear case for a fast track development of a third major production hub and the significant production and value uplift this implies. Q1 results were consistent with the scenario condition we faced and the positive momentum we are generating in growing the company. But not all the upside of the scenario was captured in this quarter as our downstream and biorefineries were under the traditional maintenance that we execute before the start of the driving season. E&P delivered 9% year-on-year production growth and consistent capture of venture prices. Year-over-year, growth contribution from Norway and Congo were especially notable, and the outcome is after disruption to Middle East volumes in March. GGP pro forma EBIT of EUR 0.3 billion is reflecting the more volatile scenario, and it is consistent with our updated guidance of EUR 1.3 billion in pro forma EBIT. In our transition businesses, pro forma EBITDA of EUR 0.52 billion is consistent with our full year guidance of EUR 2.4 billion. Plenitude that will continue to grow both on clients and new capacity will increase its gross EBITDA by 20% to EUR 1.3 billion, while Enilive will continue to see supportive biorefining margin, and will reach an EBITDA of EUR 1.1 billion, 16% over last year. Our refinery utilization was low, reflecting a major turnaround program, which should position us well for the remainder of the year. Meanwhile, our results in Versalis highlight some evident progress in the reported results of curtailing its losses in line with our plan. Contribution from associates reflected the macro scenario condition with reporting a strong production growth. A higher scenario along the year will enhance the results of our satellites and could improve their distribution and our cash flow, too. The tax rate of 42% was in line with our full year guidance. Cash flow from operation generated was in line with our expectation with good contribution from associated dividend and a cash tax rate of around 25%. Working capital had a large negative impact on cash flow, consistent with the sharp rise in prices in March, but it's not out of the ordinary in that context. We do expect to reverse this in the coming quarters. CapEx was EUR 1.9 billion, in line with the full year amount of EUR 7 billion for the year. Net CapEx was broadly equal to gross with limited portfolio activity in this quarter beyond announcing but not completing the sale of a 10% stake in Baleine in Ivory Coast to SOCAR. After the quarter ended, we completed on the previously announced acquisition by Plenitude of Acea Energy for around EUR 500 million. We paid the third quarterly dividend referring to 2025 in March and repurchased EUR 280 million in share. Shares in issues have reduced by 17% since the end of 2021. Pro forma gearing of 15% incorporates M&A transaction announced but not yet concluded and represent a broadly balanced quarter for cash in and cash out. We expect the consolidation of Plenitude to close in the third quarter with a benefit to consolidated net debt over the following quarter as Plenitude funding is restructured. If we incorporate also this effect, our pro forma gearing is actually at 12%. Updating our guidance for 2026, we confirm the outlook for E&P production with a growth rate of 3% or 4%, incorporating our current assumption for the impact of Middle East disruption. We have also updated our market scenario projection for the year in the context of the current situation, raising full year Brent to $83 per barrel from $70, the TTF to EUR 50 per megawatt hour from EUR 36 as we believe that higher price will be necessary for the refilling of empty storage and refining margin in Europe our term to $8 per barrel from $6. From a financial perspective, reflecting the changed scenario underlying outperformance, we now estimate cash flow from operation, pre-working capital of EUR 13.8 billion, up 20% from EUR 11.5 billion set in March. Applying our proposed updated distribution policy, this implies a share buyback raised by around 90% to EUR 2.8 billion. As previously communicated, this is the floor for 2026 that will be maintained even in the case of future scenario deterioration. Actually, taking into account the current market prices are well above that level, we should expect even further increase in our distribution policy in the coming quarters. Our new policy will be put to shareholders for approval at the AGM on 6th of May. And this concludes my remarks. And along with my colleagues from any top management on the call, I am ready to take your questions. Operator: [Operator Instructions] I now leave the floor to Mr. Jon Rigby for the Q&A session. Jonathon Rigby: Thanks, operator. [Operator Instructions] And we're going to start with Biraj at RBC. Biraj Borkhataria: [Technical Difficulty] How should we think about that EUR 55 million this quarter and what we should assume for the full year '26 and into '27? And then second question is just on Indonesia, and congratulations again on the exploration success. Now that we're closer to the deal closing in Q2, are you able to say what the cash adjustment is set to be net to Eni? Jonathon Rigby: Biraj, can you just rego over your first question because we missed the start of it. Biraj Borkhataria: Sorry. It's the transformation costs, the EUR 55 million you've broken out, what should we expect for the full year? Claudio Descalzi: Okay. I'll leave the question about the transformation cost to Adriano Alfani. On Indonesia, we do expect a cash settlement. And also, you know that we work in this kind of model with some distribution that are related to the capability of funding of this entity stand-alone, but we do not disclose this amount that will be in any case irrelevant. Adriano Alfani: Sure. Thanks for the question. I mean on the EUR 55 million, while we started a new project, we continue to drive efficiency on all the sites that are in transformation. So you should read on annualized basis, roughly EUR 50 million of efficiency that we are going to bring. So you should not multiply EUR 55 million or [indiscernible], but you should discount about EUR 50 million at least of efficiency that we are going to bring. But you need to consider that today, the sites are in transformation for the future, adding value through the new project because we are going to start the new activities. So this is something that in the future will generate value. And by the way, it is incorporated in our CFO for guidance. Jonathon Rigby: Thanks, Biraj. We are now going to go -- sorry, one second. We'll now move -- sorry, apologies. We'll now move to Alejandro Vigil at Santander. Alejandro Vigil: The first one is about the situation in the Middle East in your portfolio. How are you managing the situation and potential impact in terms of your supply contracts, your oil and gas production in general, how you are managing this context? And the second one is about Indonesia. I remember that you were talking about the plateau of the new joint venture of about 0.5 million barrels per day. With the new discoveries, this is now a very conservative assumption? Or you reiterate this 0.5 million as a guidance for the production? Claudio Descalzi: I leave to Guido Brusco to answer both questions. Guido Brusco: First, on Middle East, the impact overall is marginal, both on oil production and of course, on free cash flow. We have limited exposure in terms of production, 3% of our total production comes from Middle East. As far as concerned, the products and LNG also is limited, if not 0 impact on LNG, thanks to the flexibility of our portfolio, the diversified geographical footprint, we could basically cope with the missing volumes coming from Qatar essentially. While for the products, we -- on all the commodities, gasoline, diesel and even jet fuel, we are prepared to honor all our commitments with our customers. So -- on Indonesia, yes, indeed, I would say the -- that assumption was reflecting the status of the base of resources at that time. Of course, having discovered Geliga, which is equivalent in terms of volume in place to Geng and having also another stranded asset there, Gula, which is give and take 2 Tcf, so we can basically replicate another hub in the region. So clearly, this will raise the production target in the medium to long term to more than 500, I would say, 700, 750 might be a reasonable figure. Jonathon Rigby: Thank you, Guido. We're going to move to Josh at UBS. Joshua Eliot Stone: Two questions. One, just on the buyback and your decision to list it. Obviously, I understand there's sort of mechanical nature here given the new cash flow guidance, but more a question of the timing of why you felt now was the time to do it so soon after the Capital Markets Day and your confidence there? And then second question, looking at your macro deck, one thing that does stand out is the gas assumption at EUR 50 per megawatt hour, which is above the curve. You're involved in the market, your storage business. Can you explain maybe why prices haven't moved higher so far? What do you think are the main reasons? And why you set your assumption above the forward curve? Claudio Descalzi: Thank you for the question that are partially connected clearly. We decided to move the buyback because we believe actually that is already evident there is a completely different trend even versus the Capital Market Day. The Capital Market Day occurred in the middle of March. The event at the time were just started once we were presenting our first scenario that was based on clearly a crisis, but that could be solved in a shorter time. There were not yet bombing on the facilities that occurred at that specific time and were expanded in the following weeks. And we see there is a continuous or practically 2 months already inside the crisis. This crisis is not just a matter of reaching a sort of cease fire or peace, but it's also to restart a lot of infrastructure and production facilities, processing facilities that were shut down or were impacted by fire and bombing. So it will take longer. So for this reason, we believe that there is a quite unexpected compliance by the market on the duration of this crisis that appears, I would say, much more impactful that the market is probably evaluating. On the gas specifically, we believe that in a EUR 40, EUR 45 megawatt hour environment with extended shortage of gas, particularly from Qatar because even if Qatar will be able to restart or there will be some kind of agreement in the coming weeks, it will take time to restart all these plants of this facility to restart the flow. You have to consider there is also bottlenecks in terms of tankers or ships and clearly LNG carriers. So the overall process of refilling European storage that completed the winter at the minimum, almost at the minimum 25%. Now we are at 30% and to reach at least 80%, 90% before the start of the next winter will require some price signals that should be increased. Price signals not only in the amount of the first front month value, but also on the structure of the curve that is not supportive. So we believe that both on oil and on the gas, our price deck that we have uplifted is still conservative. Jonathon Rigby: We are going to now move to Alessandro Pozzi at Mediobanca. Alessandro Pozzi: The first one is on the number of discoveries that you've made so far this year. I was wondering there is -- in your capital allocation framework, there is a little room for increase in CapEx. And we all appreciate the need to be disciplined when it comes to CapEx budgeting. And I was wondering, to this point, is CapEx more of an input to your modeling assumption? I mean, you want to stick to that level of CapEx despite the current scenario or there is some headroom for maybe accelerating some of these projects, especially the ones in Indonesia? And the second question on GGP. Just wondering whether you can give us more color behind the increase in guidance and whether that is connected to your higher macro assumptions as well. Francesco Gattei: Okay. I will -- just a very short introduction, then I leave to Guido Brusco and Cristian Signoretto for the two questions. Clearly, CapEx, we are strict to a level of CapEx that we want to keep under certain range. You have to consider in exploration that there are exploration that are occurring inside our business combination or affiliates, associates that are reported in equity. So once you see a discovery in Azule or in Indonesia, this will have a different treatment in terms of CapEx. Then I leave to Guido to explain also why CapEx will be relatively softer in this case. Guido Brusco: Yes. I think there are 2 handles here. One is some of the discoveries are discoveries near infrastructure. So our tieback, which are not requiring massive capital intensity. And I mean those are the ones that, on top of what Francesco said, that are in Angola, like Algaita, like the one in Libya or the one in Egypt, basically, those are tie in with, I mean, low cost. The other angle is the others, which we have made in Ivory Coast and in Geliga. The one in Indonesia, it applies again, the concept that Francesco just illustrated. It is in a business combination. But on those, we can also eventually apply our dual exploration model. So the net CapEx would be even accretive from our perspective. Now Cristian... Cristian Signoretto: Well, on guidance of GGP. So I'd say based on the Q1 results, which were fairly strong and the volume increase and the increase of asset-backed trading that we have seen in a more volatile scenario, we updated the guidance, taking that into consideration. And as we said before, also extending this, let's say, situation and scenario broadly along the next month, given the situation that Francesco just explained before to you. Alessandro Pozzi: Is there any new arbitration that we need to be aware of for the rest of the year? Cristian Signoretto: Say it again, sorry? Alessandro Pozzi: Is there any new arbitration that we need to be aware of for the next... Cristian Signoretto: No. Absolutely, not. Jonathon Rigby: Thanks, Alessandro. Next, we're going to move to Al Syme at Citigroup. Alastair Syme: First question just on gearing. Can you just confirm exactly how much net debt sits in Plenitude that obviously gets deconsolidated in third quarter? And then secondly, just a question around the biofuels market. Obviously, we've seen massive price increases through first quarter. You're putting a lot of growth capital in that business. But also this week, we've seen Europe's largest airline announced cuts to routing because of the price of jet fuel. And yet, I look and see sustainable aviation fuel, SAF, is 40% more expensive than jet fuel. So I wonder how you think about the issue of affordability of biofuels in your forecasting and investment [indiscernible]? Claudio Descalzi: Yes, about the Plenitude amount of debt that we are going to deconsolidate is EUR 2.6 billion. That clearly will be reduced once there will be the increase of capital as a consequence inside the new entity. And then I'll leave to Stefano Ballista to answer about the biofuel and SAF. Stefano Ballista: Yes. No, as you said, the scenario significantly improved. And actually, the main reason for the scenario improvement, it's driven by market fundamentals. It's driven by the demand increase that we are seeing due to the regulation and the mandates that are under deployment. And these are rules, mandates, target that has been defined. If we look at the most recent definition of new target, I'm thinking about U.S. with a new renewable volume obligation, we got an increase of about 60% of demand for the next couple of years. So this is the main reason. The geopolitical situation is going to give a little bit of extra headroom, but marginally compared to the fundamentals. This means actually that the perspective on biofuel is and remain definitely strong. When you look at biofuel, you need to look both at renewable diesel on one side and sustainable aviation fuel. The market is coupled. Sustainable aviation fuel is going to be the only answer to decarbonize the aviation transport. There is no other answer at the moment. And even with a small target in terms of blending, now in Europe, we are about 2%, you can create significant demand, but pretty much affecting marginally the overall cost position. So we've got significant space for improvement, not only on renewable diesel as it's happening, but also on sustainable aviation fuel with a marginal impact on a marginal component -- on one side of the component of the aviation business as a whole. So this is the view on the biofuel. And as I said, there is no other answer actually to decarbonize the aviation sector for a long while. Alastair Syme: Stefano, I mean, Europe's largest airline has basically said they can't afford jet fuel at this price. And I accept the mandate is only 2%, but it's meant to go up. So how on earth are they going to be able to afford a high percentage of biofuel of SAF, if it's 40% more expensive than the price of jet fuel, which they can't afford. It seems to be a conundrum. Claudio Descalzi: Okay. I can -- we can comment about what was the statement. But from our point of view, clearly, the biofuel now a solution to have a resource full in a situation of scarcity. The premium eventually could reflect the impact of the scarcity. And you have to consider the supply chain or the chain of production of SAF is relatively young and small. Once you will have a potential larger market, you have also improved synergies. So the cost position is not just a matter of, let's say, industrial process. It's also a matter of having this process aligned in terms of size and materiality with demand potential. We do expect that after this crisis, there will be as a reply, not only on environmental solution, but also apply towards a potential diversification risk to deploy a larger use of this kind of alternative solution for ships, for airplane and for cars. Jonathon Rigby: Thanks, Francesco. Thanks, Al. We're now going to move to Michele Della Vigna at Goldman Sachs. Michele Della Vigna: I wanted to follow up on your exceptional exploration success. And I believe you've also completed the first deepwater well in Libya and I was wondering what were the early results there? And second, I wanted to come back to aviation, but from a different side, I think we keep reading that we may be short of kerosene this summer. How do you see the situation? And how low do you think inventory days can go before flights are actually starting to be grounded? And how much do you think that in your refineries, you can actually tilt towards more jet fuel production? Claudio Descalzi: I leave to Guido to answer both questions. Guido Brusco: So the one in Libya has resulted in a noncommercial discovery. And -- but it was very important either for us to have a better understanding of the basin, which is quite large, huge, diverse in terms of number of prospects. And so you have to think that this is a block where the last well drilled was drilled by us in the early 2000s. So we are talking of a large basin with quite a number of untapped resources. So it's the first well, but we'll have, for sure, more understanding of the basin. As far as concerning the jet fuel, as I said before, we are prepared to satisfy and honor our commitment with our customer. Of course, the situation is very different and diverse if you, I mean, if you look at the different flight operator and supplier. But as far as concerned, Eni, we are prepared to satisfy our customers. Jonathon Rigby: Thanks, Michele. We're going to now move to Paul Redman at BNP. Paul Redman: Yes. First question is just come back to Enilive. Could you give us some insight into kind of what you've seen in terms of margins, February, March and what you're seeing in April for the biofuel business? And if they're a lot stronger, I was surprised the EBITDA guidance didn't get upgraded. Is this because biofuels is positive for the commercial business, maybe having a few more issues. And then secondly, just on working capital, I think you mentioned in your prepared remarks that you expect this to come down. Could you just talk us through how you expect that to play out? Francesco Gattei: I'll let Stefano to answer on Enilive, and then I will reply on the working cap. Stefano Goberti: Yes. First of all, on the scenario. Actually, the scenario on biofuel improved significantly along the first quarter even before the starting of the conflict. This is what's true in Europe. And it's, as I said before, linked to mandates, so to fundamentals. An example, we got recently approved in Holland, the new GHG target is 28% versus a rate of 14%, and we got no more double counting. So, a good news, to be honest, fully expected. Same in U.S., we got a market significantly increasing, again, linked to fundamental. Even in the first quarter, we got an average on the RIN about $1.5 per RIN. It was less than $1 last year. And now we are about $1.8 after the approval of the new target. So the market was already expecting the new mandate. In terms of output, it has been even better. So this got an extra drive in terms of overall margin. So this is in terms of market setting. In terms of results, a comment. In the first quarter, we got as Enlive as a whole, EUR 220 million of EBITDA pro forma adjusted. This means EUR 50 million above the first quarter of last year. And this has been fully driven by biorefinery performance. It actually, on top of driving the upside, as you said, balanced the partial pressure on retail prices that we are experiencing in Europe linked to fossil fuel prices. On top, I want to highlight that actually in the first quarter, we got Venice under maintenance and upgrading maintenance. So it has been shut down for the whole quarter. And that result has been achieved without that kind of production. Venice is going to come in place during the second quarter. And we're going to be at full potential for the second half, so being the condition of capturing results. Last comment, as I said, we were definitely expecting the improvement of the scenario even in the business plan. So this improvement has been for the majority already crafted in our business plan, that one related to fundamentals. The extra upside, assuming the extra upside is going to last for the time being, this is going to get an additional value that we are capturing and we're going to keep capturing. Jonathon Rigby: Thanks, Paul. So watch this space. The next questions come from Lydia Rainforth of Barclays. Lydia Rainforth: Two questions, if I could. I mean just... Francesco Gattei: No, I would like just to answer about the working capital very fast. The working capital will turn back, will improve immediately in the next quarter and clearly along the year, is subject to the evolution of the spike of the price that we -- let's say, we were -- we recognized in the first quarter. Sorry, Lydia, please continue. Lydia Rainforth: No, no, that was important. Just 2 questions. One, I just wanted to touch on Venezuela and what you're seeing there. And then the second one, sorry, this is more of a long-term thing. But are you seeing in terms of the conversations you're having with host nations, with governments, has anything changed yet? Are they suddenly going, actually, we'd like to accelerate plans around exploration. We want more in terms of energy security. We want you involved more. So just if there's anything -- those sort of conversations, or is it just too early for that at this point? Guido Brusco: On Venezuela, just a month ago, we've signed an agreement, which we call Cardón IV Sustainability Agreement, which would allow us to basically produce sustainably the gas and provide energy to the country. And this implies also future -- so this fix for the future essentially and implies also some activity to do some debottlenecking to the plant to increase slightly the amount of volume to the domestic and to have an export outlet for the larger resources, which Perla carries. Basically, Perla is a reservoir of 20 Tcf. So there is quite a significant potential for an export. On the oil side, we have 2 assets there, one in conventional water and one unconventional onshore. Two things happened. First, a new general license was issued by OFAC, which allows the -- I mean, the operator to carry activity in Venezuela. And second, a new hydrocarbon law was enacted at the end of January this year. And this provides a framework, a legal framework, a fiscal framework to develop in a sustainable way our oil assets. And of course, we are engaging the authorities to make this happen. Jonathon Rigby: And Lydia's second question was on host governments and changing. Guido Brusco: In Venezuela. Jonathon Rigby: More broadly, I think, as well. Lydia Rainforth: Accelerate the exploration. Guido Brusco: Yes. No, I mean, broadly, there is, of course, a positive reaction from government. And we are noticing in several geographies that government are more prone to provide the right enabler for the operator to increase exploration, provide fiscal term to produce stranded resources. Of course, there is a price element which plays a significant role, but many governments are trying to introduce enablers to make it possible. The focus is on energy security, of course, most of them are trying to maximize the domestic production on the government side. On the international oil company side, of course, diversification is another pillar of the strategy. It has proven in the last 5 years that 2 major providers of energy, Russia and Middle East for both oil and gas have failed to or has proven that they could fail to deliver and diversification in other geographies like Far East and South America or America in general and Africa is very welcomed now in the strategy. As Eni, we are very well positioned in these 3 geographies. We had very limited exposure to Russia. We have, as I said before, limited exposure to the Middle East. And if you look at the portfolio in the long term, which we presented also at our last CMU, the Americas, Africa and Far East will play a larger role in our portfolio. Jonathon Rigby: Thanks, Guido. We're now going to move to Martijn Rats at Morgan Stanley. Martijn? Martijn Rats: I've got 2. First of all, I just thought I'll ask you a broad question about demand destruction. It clearly is a topic and with a broad range of views of whether there is and how much oil and gas demand might have been destroyed as a result of these high prices. But I was wondering if you could share a perspective. And to be clear, the nature of the question goes just beyond jet fuel, which is sort of separate topic in its own right. But what do you think is the amount of oil demand that has been destroyed as a result of these very high prices? And the second thing I wanted to ask you is about the Argentina LNG FID. I noticed there wasn't a mention any more of it in the 1Q sort of statement, but that should still be on the schedule for later this year. I just wanted to confirm that. Francesco Gattei: About demand destruction, I think that thinking about demand destruction in a matter of 1.5 months, it's too early. So I think that demand is there. Clearly, there is potentially some small reduction that potential buyers that do not afford, but demand destruction is generally happening in a certain time frame. So for the time being, you see that there is no demand destruction. There is supply destruction. There is storage use and there is some kind of switch wherever it is possible to switch, eventually in certain coal gas plants. But I haven't seen a real material destruction in terms of demand from the data that we can collect. About the Argentina LNG, I leave to Guido for completing the question. Guido Brusco: On Argentina LNG, we are still projecting an FID by the year-end. And just to give you more visibility on the activity, the engineering work is almost completed. The main -- all the major EPC tenders are progressing, and we are estimating to complete by Q2, the majority of those and in early Q3, the remaining. And in parallel, a significant progress has been made also in LNG and NGL marketing as well as on project financing. So definitely, we're setting up ourselves and our partner and all the stakeholders in Argentina to -- for an FID by the year-end. Jonathon Rigby: Thanks, Martijn. And to be clear, it's probably more of a function of a long list of projects that we can't fit in every quarter. Martijn Rats: Excellent. Yes. Jonathon Rigby: Yes. Martijn. Moving on, we've got Matt Lofting at JPMorgan. Matt, have you got some questions? Matthew Lofting: Yes. Two, please. First, it struck me looking at the revised cash flow guidance for 2026 that if we annualize Q1, the new full year targets look comfortably above that. I imagine there's probably some price lagging effects in oil and gas that impacted the numbers in Q1, particularly given prices rallied sharply in March. I wondered if you could sort of share the price lagging impact and how that might come through. And then secondly, obviously unusual in many respects to raise distributions and buybacks so much so early in the year. Obviously, it's an unusual macro situation that we're in, in that context as well. But in the past, you've talked about effectively a sort of a hard floor and a sort of a soft ceiling to buyback revisions. Does that still apply for 2026 against the 2.8 baseline? Francesco Gattei: Yes. About the cash flow from operation results and the fact is clearly the -- as a consequence, you know that in the first quarter, as we mentioned, there were -- and downtime, still some maintenance. So we are not able to capture certain results. Also from the point of view of GGP, there were some benefits that we were able to capture partially but just the last month of the quarter. There is a ramp-up of production in E&P to improve the further benefit along the year. And on the other side, you have to consider that there is distribution from associates that follow in certain cases, quarterly, but in other cases, there are half-year or yearly distribution. So there are various elements that will determine a different distribution in the next 3 quarters versus what we had in the first quarter. The other question was. Yes, the unusual distribution is because we had the policy and we apply the policy. I think that I do expect that this distribution will become potentially even more unusual in the coming quarters if the market persists. Jonathon Rigby: Thanks, Matt. We're going to move to Massimo Bonisoli at Equita. Massimo Bonisoli: Two questions. One on the discovery in Indonesia regarding the SEARAH JV with PETRONAS. In light of the significant discovery in Indonesia, can you clarify whether the terms of the agreement already incorporated the option of the additional resource upside you just discovered ahead of the closing? And the second on the sensitivity table, given the recent increase in volatility in physical commodity markets with widening differential across crude qualities and geographies, do you believe the sensitivities you provided on benchmark prices are still fully representative? Or should we expect some divergence between benchmark movements and your realized profitability in the current environment? Francesco Gattei: On the sensitivity, then I will leave to Guido for the question about Indonesia. On the sensitivity, we gave -- you remember that we're, let's say, applied assuming a broader volatility range. So we're different than the usual sensitivity that we fixed on a shorter size fluctuation. Clearly, volatility and -- sorry, sensitivity is just a theoretical number. We do not capture all the arbitrage also because the arbitrage cannot be modeled because we don't know where this potential gap and the effect that on the physical barrel bottleneck that could emerge. So you keep it as a key reference, but it's clear there will be some specific spot situation where the sensitivity is not applied, but the sensitivity is applied also on 1.7 million barrels per day of production. So that effect is already in a certain way, diluting any specific case. I'll leave that to Guido. Guido Brusco: There are adjustments on the free cash flow working capital, but there are also adjustments on the new resources discovered in the interim period and beyond the interim period. So there are a mechanism in the agreement to readjust value accordingly. Jonathon Rigby: Thanks, Massimo. We're going to move to Fergus Neve at Rothschild. Fergus? Fergus Neve: There's been a flurry of exploration success at the start of this year and the 1 billion BOE of resources discovered is very impressive. I just wanted to know whether there was any color you could give on further wells being drilled this year that we might be looking out for and if there are any others you're particularly excited about? And then secondly, it was positive to see the chemicals result improved sequentially this quarter. How should we think about this improvement in terms of the contribution from the Versalis restructuring and then also the scenario in the quarter? And looking forward to 2Q, do we expect the business to be able to capture any improved margins should they materialize? Francesco Gattei: I'll leave then to Aldo Napolitano for the exploration and Adriano Alfani back for Versalis. Aldo Napolitano: Yes. In terms of program -- exploration program for the rest of the year, -- of course, we had a program this year that was really front-loaded. So many of the high-impact wells have been drilled. And so in 4 months, we have -- so we had the sequence of results that you mentioned. However, we still have some interesting wells to drill during the year, again, in Indonesia, so in the Kutei Basin. So we plan to drill another well, another interesting prospect. And we will have a couple of wells in Egypt and a well in Ghana. So this will complete the wells at least with a certain materiality. There's a large part of our exploration portfolio anyway that is interested by drilling for near-field ILX drilling, so contributing to production in very short term. But in those cases with more limited reserves. Adriano Alfani: So on the chemical side, if we look back to the Q1, the transformation has a positive impact of roughly EUR 100 million. Although we are facing a negative scenario because in the first quarter, clearly, there was a sort of a time lag between what Francesco was talking about before, the effect on the demand versus the negative effect of supply because we had higher cost in terms of feedstock, higher cost in terms of utilities. So at the end, the positive impact quarter-on-quarter at pro forma level is a little less than EUR 100 million because for the effect of the negative scenario, roughly EUR 85 million. If we go in the second quarter, we are putting in place a significant action in addition to further reduce costs and to continue the transformation plan, and we expect the second quarter significantly better than the Q1, also catching some shortage that we see on the polymer market despite still the high cost in terms of feedstock and utilities. Jonathon Rigby: Thank you, Adriano. We're going to now move to Mark Wilson at Jefferies. Mark? Mark Wilson: Okay. My first question is, you say how you can honor commitments to customers, gasoline, jet fuel, diesel, et cetera, totally understandable. And just does that flag the idea that margins can be squeezed given feedstock prices? That's the first question. And then the second one, more general, yes, yet more exploration success, deepwater, talking about additional developments as well. You commented previously, Claudio, on the service market and how there could potentially be tightness. We're seeing service providers talk about renewed developments. So how would you see tightness in that contractor market and any particular services you feel may be under pressure given developments that we're looking at? Francesco Gattei: Yes. About the first question on the margin -- potential risk of margin squeeze, this is -- for us, it's a relative risk because substantially, we are -- in our chain of supply, we can able to cover most of the products that we are delivering to our customers. So from our point of view, we are not in a situation where we have to rely too much on the cargo market. There could be some volumes related specifically on jet fuel, but this is a marginal amount. So for this reason, we do take the commitment. That this is a commitment that is clearly related to our integrated value along the chain. About the contractual services in the oil market, I leave it to Guido. Guido Brusco: Sorry, I have to restart again. So I was talking with the microphone off. So there are 2 elements of -- that are driving cost at the moment. One is driving the short-term cost inflation, and this is mainly driven by the conflict in the Middle East and of course, across the whole oil and gas value chain, higher energy prices, logistics, insurance, commodity costs are increasing, and these are bringing almost immediate cost inflation. But for one moment, let's imagine that this cost pressure will be shortly fixed, assuming that this cost pressure on the short term will disappear. There are, of course, longer-term drivers of cost pressure, an increase -- a general increase in the activity in the upstream. And we've noticed that basically, I mean, if you look at the inflation trends from '22 to '23, '23, '24, up to '25, we already had a 15% cost increase in -- I mean, starting from the 2022. And the pre-war 2026 and coming here, we were in the region of the 3% to 4% of cost increase. But if you add up this short term, which I was mentioning before, the range would expand from 4% to 7%. Of course, this is the average. There are costs which are in the long term, more under pressure like the vessel installation for the deepwater activity and others which are less under pressure like the onshore drilling rig, but this is the general overview that we see in the market. And that is backed up also by sources like IHS UCCI Index. Jonathon Rigby: Good stuff. Thanks, Guido. Thanks, Mark. We're going to move now to Chris Kuplent at Bank of America. Chris? Christopher Kuplent: Hope you can hear me okay. Just 2 quick detailed questions to follow up on. I wonder whether you can talk to us about those exploration blocks that have ended up with BP. Was there a consideration whether to do this with Azule? I'm talking about Namibia, sorry. And maybe you can tell us why not with Azule. And second, even smaller detail, I just wonder whether between your CMD and now, you've changed your expectations regarding receiving dividends from ADNOC Refining. Francesco Gattei: I leave the answer to Aldo for the block in Namibia and then on ADNOC, I will reply later. Aldo Napolitano: So if I understood correctly, so you're talking about the blocks that BP has -- the new blocks that BP has taken in Namibia. So these are real exploration blocks in frontier areas. So for the time being, it's an initiative of BP. So we are, of course, talking to each other, but they are not part of the Azule Energy activity. Francesco Gattei: About the ADNOC Refining, you have to consider that, that dividend is based on 2 activities. One is the one of refining the crudes. The other is related to trading. So these 2 activities clearly have different perspectives under the current crisis. We do not have yet changed any assumption. It's not material in the overall amount of dividend that we received in the year. So I will keep the assumption as it is and it's not -- eventually, we do believe there is a relative hedging between these 2 activities. Jonathon Rigby: Thanks, Chris. Christopher Kuplent: Sorry, the first answer was this was too much greenfield. I'm aware that you are not taking part, but I just wondered why not. Francesco Gattei: So as I said, it's an initiative taken by BP, so based on their geological reconstruction. And so I think the question should be made to BP, sorry. Jonathon Rigby: Thanks, Chris. We're going to move now to Sadnan Ali at HSBC. Sadnan Ali: First of all, could you just remind us of the divestment proceeds you're expecting for the rest of the year? And secondly, I was wondering if there's any further updates or developments in your plans to get back into trading. Of course, the volatile price environment that we're seeing now is a perfect opportunity to capture trading profits, which your peers will benefit from. So I was wondering if the current environment has accelerated your plans at all? Francesco Gattei: On M&A, you know that we have completed Baleine in the first quarter. And also on the other side, we have completed in the acquisition side, HNR, Energea, with Plenitude. We do expect to have a further disposal completed in the -- during the year. You have the one that we announced last year. There will be further opportunity that we are valorizing. We do exploration model, some tail assets or areas that we do not consider core. So there is activity ongoing negotiations that are getting closer to completion, and we do expect eventually to disclose later on. So remain, as we said before, quite material this year. On top of that, you should include the deconsolidation of Plenitude as an opportunity. Clearly, Indonesia is another factor that will benefit from the partial disposal of Indonesia, referring to the 10% that will benefit not only of a scenario that is quite supportive, but also of the new discoveries that are emerging and the overall upside potential that is related to that basin. On the trading, I hand back to you. Guido Brusco: Yes. On the trading, we had a journey which started with step 1 was to include the trading into the overall value chain of global natural resources to try to capture all the margin. This was the step #1. Step #2 was to change the model, to do some transformation internally and turn our trading arm from a pure service provider of the different business to a marketplace where we've optimized our activity in the assets driven by the market needs. And then there is this third stage where we wanted to improve our soft skills in trading. We have a large base of assets. We have refineries, we have storage, we have physical oil, we have physical gas. We have a lot in terms of resources and assets, and we wanted to improve our soft skills. So we started this engagement with other trading players to try to combine the best of the 2, the best of an oil company and the best of a trading company. And this is the objective of the third step, which are -- which is definitely forthcoming. And this scenario, of course, will accelerate it. But despite this contingent situation, we would have done in both cases, yes. Jonathon Rigby: We're going to move to the last question, which is from Bertrand Hodee at Kepler. Bertrand Hodee: I have just one left. On Venezuela, you had outstanding receivables of around $2.3 billion, with an estimated realized value of $1 billion. Do you expect to recover more than the $1 billion because of the new Cardón IV Sustainability Agreement? Guido Brusco: Yes. As I said before, we just signed one agreement, the Cardón IV Sustainability Agreement to fix the future. And now with this new engagement and conversation we are having on how to develop the oil assets, we will fix also the past. Bertrand Hodee: And so how should we think about this $2.3 billion of outstanding receivables? Guido Brusco: There will be mechanisms developed to recover these past dues within the framework of the development of the oil field. Is that more clear? Bertrand Hodee: Yes. So it's not going to be within the Cardón IV JV, but within the new oil framework? Guido Brusco: Or a combination. It's very flexible, but it will be essentially more focused or centered around the oil development. Francesco Gattei: New development that will clearly give more flexibility in terms of cargo that could be used or new revenues that could emerge by production -- additional production. Jonathon Rigby: Think of it as an holistic solution to all the challenges that we have. Thank you, Bertrand. Thank you, everybody, for joining the Q&A and your attention on Eni's Q1. We look forward to speaking to you soon. Have a great weekend. Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Hermann Haraldsson: Good morning, and welcome to our Presentation of our Q1 2026 Report. Yes, let's just go to the agenda slide. We will have the usual agenda for the presentation, and I will present the highlights of the quarter and the strategic update before handing over to Michael for the financials. So next slide, please. We have said that 2026 would be a year of growth acceleration and the first quarter tells us that we are back on track for that. We delivered 4% constant currency growth. And while January and February were soft, momentum changed in March, which saw a significant increase. This correlated with the launch of our spring/summer assortment where we went into the season with around 35% more styles than last year and an assortment that we believe is the most relevant and inspiring we have offered for some time. And we can see that our customers are responding. So that's very positive. On profitability, the underlying margin continues to improve. Our adjusted EBIT margin increased slightly versus last year despite significant FX headwinds. Looking ahead, we are in a strong position to push harder in the second half. Our inventory is clean and healthy, and we have already committed to a significant ramp-up for the autumn/winter season to fully capture the growth momentum that we are building. We will do this from our new base as the headquarter transition to Copenhagen was completed in February. This was done without disruption and gives us the foundation to build our culture and the best team in our industry. Today, we are also initiating a new SEK 200 million buyback program. Cash generation remains solid, and we will continue to distribute excess cash in a disciplined way. And finally, on the outlook, we confirm our revenue guidance of 3% to 8% constant currency growth. But given the solid start of the year, the higher end of the revenue range is now considered being more likely. The adjusted EBIT margin guidance is raised 30 basis points to 5.6% to 6.8% to reflect the favorable currency moves. And Michael, he will take you through the details later. So now please turn to the next slide. We believe that the improvement we saw in March is due to the strategic adjustments we made to Boozt.com going into 2026. We have elevated the brand. We are providing more inspiration, and we're using AI to improve the whole customer experience. And most importantly, we have rightsized and improved our inventory in many ways. Following a year where we had to focus on cleaning our inventory, which had become too deep and without enough freshness and newness, we are now gradually building a more inspirational and a more aspirational assortment. In the first quarter, we added more than 100 new brands to Boozt.com, including well-known names like Birkenstock and Hunter in fashion and Peugeot in home. We have also widened our buying within our current brand portfolio, making slightly more fashion bets. With more than 135,000 styles launched as part of the spring/summer campaign, we brought 35% more options than in SS25 to shop, and our customers responded well by buying 40% more style variations than last year. For the second half and the autumn/winter season, the buy plan is even more ambitious. We are adding more brands and more breadth across categories, including the return of Max Mara and GAP to the site and new additions like Paul Smith. In total, we are on track to add more than 200 new brands during 2026 across our different categories. The point is simple; our customers are responding to a better and broader assortment. This gives us confidence in the acceleration that we are planning for the second half. Next slide, please. Looking at the women's category, we are also seeing a better trend here. After a number of quarters with a decline in customers engaging with the category, we are starting to see a stable improvement. Active customers buying women's fashion on Boozt.com grew 3% in Q1, but the underlying development was even more encouraging. January and February were difficult, cold weather and limited inventory held us back, but it actually got a bit warmer in the region. And as we saw the first signs of spring, women reacted very well to the SS26 launch, supporting our acceleration in March. We expect this momentum to continue as we broaden our assortment even further in the second half of the year. It goes without saying that this also has a spillover effect onto the rest of the business. When women engage with fashion, they often also move into beauty, kids, sports and home. So you might say that a healthy women's category drives the entire platform. Next slide, please. As we scale that volume, it is essential that we do so efficiently and keep the cost base lean. AI has become a key part of how we do that, allowing us to handle increasing volumes without a proportion increasing costs. A clear example is in customer service, where AI now handles 40% of all inquiries. By automating the routine cases, we have been able to reduce our staffing requirements, allowing us to operate with a more focused team while maintaining a high service level. In the supply chain, we have removed 20% of the manual workload by automating product categorization, among other things, which also ensures better data consistency. And in the warehouse, we have effectively added 5% to 10% in capacity within our existing footprint through the use of AI. So it's all about using technology to make our current infrastructure work harder and more efficiently. These are just a few examples, but they give a good idea of how broadly we work with AI to increase efficiency across the entire value chain. So next slide, please. On the customer side, we are using AI to remove friction and make the shopping experience more relevant. This is already live and already contributing. All products now have AI-generated descriptions and tags. And for the spring/summer collection, we're also using AI-generated model pictures. We're also seeing a direct commercial impact from AI-supported style suggestions. When customers see outfits mixed and matched by AI, they add more to the basket, increasing the average order value. As we've said before, AI is going to get us to a shopping experience that is very close to the experience you get when you engage with an outstanding shopping assistant in a physical store. The only thing that is missing is the ability to feel and touch the products. Our Virtual Shopping Assistant is also off to a good start. While adoption rate is still in the very early stages, the conversion rate for customers who engage with the assistant is 130% higher than those who don't engage. So even though the sample size is still quite small, results are quite encouraging. On product discovery, our recommendation click-through rate has improved from 1.5% to 5%, a meaningful step in making it easier for customers to find what they are looking for. By delivering more relevant suggestions and testing a number of AI tools, we ensure that finding the right product remains as intuitive and easy as possible for the consumer. But to wrap it up, AI is making us a more efficient business and better retail at the same time. That is not always easy to achieve, and this is why we keep investing in it. The next slide, please. We work continuously to build out our non-fashion categories, adding both strong brands and more breadth to that part of the assortment. These categories performed well in the quarter, which is also evident from the increase in customers buying from more categories. If we look at the chart, the trend is solid. Every group from 2 to 6 categories is growing in high single digits, up between 7% and 9%. This is a positive step-up from what we saw last year, and it shows that our focus on cross-selling between departments is paying off. This is fundamental for us. We know that when a customer buys more than just fashion, when they add items from home or kids, they stay with us for longer and they return fewer items. The strategy is working, and it gives us a very strong foundation for the rest of the year. With that, I will hand it over to Michael for the financial review. Michael Bjergby: Yes. Thank you, Hermann, and good morning, everyone. I will start out by presenting our financials for the quarter, followed by comments on our updated outlook for the year. I'll start on Slide #11. So as Hermann said, we grew 4% in constant currency, and this was despite of lower inventory. We thereby maintained our growth momentum from Q4, and we improved our general return profile. There are a few notables in the growth patterns that I believe are worth highlighting. First of all, our strategy with increased focus on our main premium side is firmly executed and showing results as expected, growing Boozt is growing 6% in constant currency and Booztlet is declining. Secondly, the Nordics grew quite nicely with good stable growth in Denmark and Sweden, and we saw Norway grew 13%, where we continue to see that we have very strong potential for further growth and where we believe that we are underrepresented. Finland did not grow, and here, consumer behavior appears quite weak generally. As mentioned, a couple of times, March was materially stronger than January and February, and I just want to mention that this is both because constant currency growth was stronger, but also because we now see less currency headwind. This is something that will benefit us for the rest of the year and something that will show in the reported numbers already from April. Please go to the next slide for comments on our profitability. I think it's critical to understand that the quality of earnings are actually much stronger than they appear in the headline figures. The underlying gross margin is actually up and -- but impacted by FX, 70 basis points and also timing of other revenue as well as some COGS adjustment. And this is timing. As FX effects disappear, the reported gross margin will go up, and we saw that in March. So we had a positive reported gross margin in March, and that is a trend that we see continuing into April now, and we also expect for the rest of the year. So the EBIT margin was slightly up. This was driven by less marketing spend. We have produced offline and improved efficiency, and this particularly related in this quarter to Booztlet due to reduced focus and reduced need for clearance at our outlet site. The marketing spend was completely in line with plan and expectations as when we started the quarter, so nothing out of the ordinary. Next, please -- next slide, please. In Q1, the return on our capital improved as our inventory is moving faster and performing better. As you can see on the chart to the right, our quarterly inventory turnover improved to 0.4. And this, we believe, reflects both a broader, fresher and more relevant stock profile. When you have a stock profile like that, that's a very solid foundation for us to increase stock and take bets. So we actually strive to increase stock as soon as possible, but we are also very firm and very strict on the quality that we require, and there is not much high-quality stock available at this point for the spring/summer trading. As such, the larger inventory ramp-up will be seen in the second half of the year where the increased buying budget is committed. Now please move to Slide 14 and our cash development for the year. The free cash flow was negative and in line with expectations. It's driven by the normal working capital seasonality where we have significant payments of VAT provisions, et cetera. And this was combined with an increase in inventory where we're building up for the spring/summer trading. On the bridge on the slide, you can see that the change from the same quarter last year, which is quite a representative quarter. The main difference is really related to exit tax payment in Sweden; CapEx increase due to the relocation of headquarter and then a bit of a larger increase of inventory than what we had last quarter. I want to mention also that our last 12 months' free cash flow is SEK 754 million, so far above 100% cash conversion. Please move to Slide 15. So we ended the quarter with a cash position of SEK 239 million, and we also acquired shares for SEK 97 million in Q1. And as such, we continue to have a very strong balance sheet, and we have financial room to maneuver as we take on commercial opportunities in the market. Today, we have also find liquidity and space to initiate a new share buyback program of SEK 200 million that we are returning to our shareholders, and we will continue to be disciplined in our return of excess cash. This completes my financial review, and I'll now turn to our outlook on Slide #17. I'll start out with some comments on the currency because this obviously had a relatively large impact due to the macro volatility, which had an impact on our main currencies and particularly the NOK has appreciated against the SEK supported by increasing oil prices. This has changed the expected FX impact on our financials for the year, and as such, we are increasing our EBIT margin guidance. In the first quarter of 2026, we still had significant headwinds, both on revenue and EBIT margin. But if we assume that the current exchange rates hold, then that effect is diminishing quite materially for the rest of the year. That will be visible in our reported gross margin and our reported EBIT margin already from March. The full year impact is now expected to be around 1 percentage point negative on revenue growth and a small negative impact on EBIT margin, and this is based on [ bank's ] fixing rates as of yesterday. By the end of Q1 2026, we have also hedged more than half of our NOK exposure. We found that the current levels are attractive compared to last year. Although when we hedge, it did come with some implied cost because the forward rate is lower than the spot rate due to the interest rate difference between Norwegian kroner and the Swedish krona. The hedging also means that our sensitivity on our EBIT margin and our profit is lower now, which makes our updated EBIT margin guidance relatively robust. Please go to Slide 18 for the outlook of the underlying business. So as mentioned, the spring season has started well for us, and the business is progressing in line with plan. As we said from the beginning of the year, we are targeting a growth acceleration during 2026, and we have an inventory buying plan and commercial initiatives lined up to deliver exactly that. With the current momentum, we, therefore, consider the high end of the guidance range more likely. And on top of this, we also have almost 1 percentage points less negative impact from currency than what we expected in February. The EBIT margin guidance is upgraded by 30 basis points, which corresponds to almost SEK 30 million in absolute EBIT. So with this, I will now hand the word back to Hermann for some final remarks. Hermann Haraldsson: Thank you, Michael. It has been a strong start to the spring/summer season, but we are far from claiming victory. The macro and consumer environment is uncertain, and our most important quarter of the year is still a long way off. But for now, Boozt is in a stronger position than we have been for a long time. Consumers are responding. Our inventory is excellent and commercial initiatives are yielding results. So now it is up to us to work hard to build further momentum as we move into the summer months. So this concludes our prepared part of the presentation, and we will now open up for questions. So operator, please. Operator: [Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Just a couple of questions from me. And I clearly hear you when it comes to sort of the sales momentum that you are experiencing currently, especially for March and April. And of course, that builds confidence to take more risk on inventory, but you have done that before and misjudged the market. I think you mentioned a year ago that you came into 2025 with too high inventories in the hope that the market would pick up. So what measures are you taking this time to not make that same mistake? Hermann Haraldsson: Well, experience is a good teacher, Daniel. I think if you noted that we have made quite a big change in our assortment strategy, buying more options, buying more breadth. I think we became too cautious going into '25, so buying more narrow or more depth. And unless when you do that, we're, of course, relying on existing customers to basically buy more. And by selling 40% more variants. And actually, we didn't mention that during the call -- during the presentation, but we had 250,000 new customers. So the growth is very much driven by new customers. And that gives us confidence that by changing our assortment strategy and also -- we have also changed quite heavily in our marketing setup. This gives us confidence that we are on the right track. And again, experience tells us that if we have too much stock, Booztlet is the best channel to clear that and get cash. So that gives us confidence to be -- take a bit more kind of risk or fashion risk or stock risk, you might say so. But in general, our stock is too low at the moment. And if you don't have the stock, you don't sell anything, right? So I think that kind of we are seeing that the actions we made end of last year and beginning of this year, they are paying off. Daniel Schmidt: And what do you mean by significant ramp-up? What would that sort of entail in terms of inventory risk? Hermann Haraldsson: Well, we are talking about that we want to get back to double-digit growth in the second half. So probably, hopefully, that kind of -- at the end of the year, we see double-digit growth figures again. And of course, if you want to grow double digit, then you have to buy inventory for that. We are getting a higher inventory turnover. So that's kind of -- so we probably don't need to buy kind of much more than for the double-digit growth that we're expecting. But we, of course, have to buy in advance. And we are adding something like 100 new brands in the second half as well as 35% new styles or new options. So of course, we have to ramp up because we just have -- don't have enough at the moment. Daniel Schmidt: Okay. And just your comments on current trading, basically March and April, are very upbeat. Is that you alone specifically, you think, given what you've done with the assortment being more aspirational [ inbiz.com ] offering? Or is it also the market that you are, in general, seeing a better momentum in? Hermann Haraldsson: In all modesty, I think it's very -- it's quite company-specific because we don't see a tailwind with regards to the consumers. At best, the kind of the headwind that we've been facing over the last 2, 3, 4, 5 years is still the same. We're seeing consumer confidence figures actually in Denmark going down last month. So we're not seeing increasing headwinds. And of course, we're hoping for tailwind, but it's based on the things that we have done. And as I said before, when you launch 35% more options on the site and customers are buying 40% more variants and options, and you're getting more new customers than you have been getting for a long time. I think that tells the story that it's very much company-specific what we're doing. Daniel Schmidt: And is that -- given that you're sort of widening the offering and already done so, even though we didn't see this in this quarter when it comes to other revenues and you right timing effects, is that something that should drag along other revenues to pick up basically as we go into the coming quarters? Hermann Haraldsson: Yes. Daniel Schmidt: Do they correlate basically? Hermann Haraldsson: Yes. Yes. Yes. Daniel Schmidt: Yes. And that sort of builds your confidence that, that particular line will also pick up in the second half? Hermann Haraldsson: Yes. And it's baked into the EBIT guidance, yes. Daniel Schmidt: And are you also saying that when you say that there's not much quality inventory out there for the summer and spring season that even though you are seeing a pickup, you can't expect too much in the near term in terms of growth when we look at Q2? Hermann Haraldsson: Yes. That is why we are maintaining the revenue guidance with Q1 being better than expected, then, of course, it's more likely that we would end up in the high end of our guidance, but we just don't have enough stock for the first half of the year to go faster than we have expected. Daniel Schmidt: Yes. And then just a final question. When you talk about AI and the inventory capacity, you've seen additional 5% to 10% inventory capacity at the warehouse through AI. How does that work? What have you done basically? Hermann Haraldsson: Yes. That's -- it's actually quite a complicated thing, but it has something to do with kind of the stocking and the cross stocking because you know we have a bulk stock warehouse where we -- so we kind of -- yes, it's about refilling and making the stock available to when we need it. So -- and it's a long story, but when we have the transfer cells that we introduced made it possible for us to -- I wouldn't call it just in time, but something similar that basically present the relevant stock to the warehouse when we need it for sale. And this is -- and these are, of course, tweaks because we need to start building more automation as we grow. But that's within the plan that's baked also into the CapEx that we're guiding on. Daniel Schmidt: Yes. Okay. Hermann Haraldsson: Thanks, Daniel. Operator: The next question comes from Erik Sandstedt from Kepler. Erik Sandstedt: Erik Sandstedt with Kepler. Three questions, please. Firstly, in terms of the brands, you're adding a lot of new brands to the platform now. But could you just help us understand why some of these brands are coming on board now rather than earlier? Is this driven more by sort of improved acceptances from the brands or changes in your own proposition? I'm just a bit curious why so many brands are being onboarded now. Hermann Haraldsson: It's a good question. The -- of course, we are have become a very big platform in the Nordics. And we have a lot of customers, I think, something like 2.8 million customers in -- over the last 12 months. So if you want to sell fashion or apparel, et cetera, in the Nordics, it's difficult to kind of pass by us. But of course, we did -- we've tried to make a more clear distinction between Boozt and Booztlet. So making Boozt.com a more mid- to premium site, less discounting and more kind of premium. So of course, that means that brands are seeing it being more attractive to be in Boozt.com. Also when they see how we've been able to improve the customer experience, more inspiration, more guidance on the site. But kind of it all adds up. So it has a lot to do with us being much more clear on the profile of both Boozt and Booztlet. Erik Sandstedt: That's interesting. And then on marketing, I'm just wondering to what extent the Q1 margin improvement here is basically driven by lower Booztlet-related marketing. You also talked about structural efficiency improvements and so forth. But how should we think about this dynamic if inventory levels now build again? Will you need to market more? Or is there a risk that you have sort of underinvested a bit in marketing in this quarter? Michael Bjergby: Yes. Thank you. This is Michael. So we have invested exactly as we planned. But as you said, it is correct that we have spent less on Booztlet than what we did last year. So the decline is mainly coming from Boozt in the first quarter. This was completely in line with plan. So we have definitely not underinvested, but we are also at a level in Q1, which is lower than we expected to be for the full year. So as such, we do expect to ramp up as we get into higher or important trading seasons and potentially also in Booztlet if needed. Hermann Haraldsson: If I can chip in also is that if you don't have enough stock inventory, there's no reason to spend a lot of money on marketing. So that's why we are very much data-driven on our marketing. So we spend what is needed to attract the customers. So that's why kind of -- it's not a case of pumping the EBIT. It's just by being clever on marketing that we're doing this. Erik Sandstedt: But another way to frame that is, are you mainly spending on marketing to sort of clear out stock? Or are you not also just sort of building brand? Hermann Haraldsson: No, we are totally building brand. But of course, brand building has changed a lot over the recent years. And when it used to be offline media and TV is now across a lot of channels. So we are just -- we have become much better at getting return on our marketing investment. Erik Sandstedt: Perfect. And finally, on AI, you spoke about how that's sort of driving efficiencies. And I think you touched upon the revenue side as well. But a bit curious specifically on agentic commerce, how -- is that an opportunity for you? Or is it more a way to sort of mitigate risks and how the entire market is kind of changing how consumers are interacting with platforms and brands? Hermann Haraldsson: It's both. It's an opportunity if you embrace it and it's a risk if you kind of discount it, right? So you have to embrace it. It's still small. But of course, you have to prepare for the future where agentic commerce might be big. And of course, we are doing that and they are putting a lot of resources within resources. So I think it's kind of -- it's a given that you have to -- it's a sales channel and where consumers buy. So you have to be able to kind of accommodate that. So we see this, yes, again, opportunity if you embrace it, but a risk if you don't do that. Operator: The next question comes from Sebastian Gravefrom Nordea. Unknown Analyst: I'm Michael. And also congrats on what looks like a very encouraging start to the year. Hermann, you say you're far from claiming victory at this point yet. I mean you upgrade your growth guidance, at least you indicated that you're going to end in the upper end after only a small Q1 quarter here. So I mean, I guess, in light of everything going on with energy prices and still low consumer confidence, you must be very confident with the new assortment strategy and happy with what you see here in April so far. So maybe -- could you maybe again try to elaborate a bit on the dynamics here around introducing new premiumized assortment? I mean what effects does it have on shopper behavior, engagement and potential overall -- spillover effects on the overall platform? And I guess what I'm asking is what provides you the comfort and confidence on H2 performance trending towards double-digit growth? Hermann Haraldsson: Yes. It's quite depressing to look at outside the window, seeing wars in Ukraine and in the Middle East. So kind of consumer sentiment or macros are not really helping. But what gives us confidence is that the things that we are in control of, they seem to work. And '25 was a boring year; to be honest, it was a transition year where we did some cuts on staff. We announced the move. We had too much of you could always almost claim kind of noninteresting inventory, especially for the women. So we changed that. And the learning, of course, and we knew that is that women are the key because they are buying and they are buying the best. So if we're not attractive to the women's category, they would not shop also across categories. So this is why we did actually quite a big change to our assortment and said, okay, instead of buying deep and narrow, which is kind of you tend to do when you get a bit conservative or cautious, then you just rely 100% on the data and it means that you end up buying white and blue and black, et cetera. We said, okay, we'll provide more inspiration, take a bit more fashion risk on the edges, knowing that it probably will be the stuff that will be discounted in the season, but basically if showing more freshness and more inspiration and that has paid off. And I think that the interesting KPI is that we have like 35% more variants live, but have sold 40% more. So apparently kind of inspiring a bit inspires a lot and makes them buy more. So it's kind of -- and we have kind of have done that for the spring/summer and are doing that even further in the second half. And then that combined with our site shopping experience as well as our really, really strong marketing team that gives us confidence that the things that we are in control of will make us come back to a double-digit growth. I know it was a long speech, but I get really excited about it. Unknown Analyst: And if you look at the geographical performance, it appears that rest of the Nordics ex Norway continued to be fairly sloppy. I suppose this is a Finnish market. But what is your approach really to turn this around? And is it a priority at all here? Or are your focus elsewhere at the moment? Hermann Haraldsson: Yes. If you -- there's not much time to dig into the numbers. But if you notice Boozt.com, we are growing quite well both in Sweden and Denmark. I think 7% in Sweden, 9% in Denmark constant currency. And I think that is kind of some of the most encouraging numbers because our focus has been Boozt.com. We have to get Boozt.com. It's our premium brand. It's our flagship store and getting good growth in those 2 countries, along with a very strong growth in Norway, that gives us confidence. Finland, they are still cautious and probably still a bit concerned about their big neighbor to the East. And that means that -- but again -- and Booztlet, we haven't had the need to clear stock, which -- so we have a negative growth in Booztlet. I think it's something like 33% in Denmark reported. So I think that is -- so I think that kind of the underlying numbers are quite positive for us because the changes that we've made start with Boozt.com and Booztlet only steps in when we have excess inventory. So all in all, kind of -- we are also quite happy with the Nordics, to be honest. Unknown Analyst: Okay. And what I hear you say is continue to build momentum in Sweden, Denmark and Norway and [indiscernible] today. Hermann Haraldsson: Yes. I think we will fix Finland as we get along. Unknown Analyst: Okay. And then my last question, I think and maybe this is for Michael, on the NOK appreciation. It looks like you're getting some -- obviously, some benefits in '26 as reflected in your margin guidance. However, it doesn't look like you're getting the full benefit from the recent NOK appreciation. I guess maybe you've been somewhat hedged here in the start of the year. So is it fair to assume a somewhat positive spillover into 2027 on the margins if the NOK remains at the current levels? Michael Bjergby: Thank you. Yes, that is correct that we have done some hedging that implies some losses also because the forward rate is lower than the spot rate. But -- so there will be a little bit of a positive spillover into next year if the current rates hold, but it's relatively limited in sort of the 10 to 15 basis points area. Unknown Analyst: Okay. Very clear. Great stuff. Operator: The next question comes from Benjamin Wahlstedt from ABG Sundal Collier. Benjamin Wahlstedt: So a couple of more -- let's go to the long-term questions maybe. So your USD exposure is quite limited directly, but your suppliers are most likely paying for plenty of goods in USD. What have you heard in terms of pricing intentions for the autumn/winter assortment? Do you think lower USD rates will benefit Nordic consumers or well, by extension, fashion volumes in the end, do you think? Or what are your thoughts about this? Hermann Haraldsson: The USD doesn't affect us on the autumn/winter because the buy has been done and the prices have been agreed upon. So if they have any effect, that would be at the earliest for 2027. Benjamin Wahlstedt: And have you heard anything of the guidance... Hermann Haraldsson: No. No. No. Benjamin Wahlstedt: Any sort of pricing intentions for 2027? Hermann Haraldsson: No, not yet. Not yet. Benjamin Wahlstedt: All right. And then perhaps more of a bookkeeping question. Your D&A has been rather volatile in recent quarters. Could you say anything about what you see as a reasonable run rate assumption going forward? Michael Bjergby: Yes. So our D&A is going to be relatively stable also going forward. We have, as you know, because of the IFRS 16, we have the new headquarter, which is slightly higher. And the last quarter was impacted by some one-offs. But if you consider a little bit of increase compared to the run rate in 2025, then that is a good assumption for now. Benjamin Wahlstedt: All right. So up from the Q1 '26 level? Michael Bjergby: Yes, exactly. Operator: [Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Yes. Just a follow-up on -- I think you talked about it last quarter in terms of the sort of upgraded Boozt Club that you've been introducing should have some accounting effects on Q2. Am I right? Michael Bjergby: Yes, we mentioned that at the last call. We are still fine-tuning the concept, and we have not finalized the Club benefits. We are in testing right now, and we have the technical platform in place. But it's critical for us to get in the calibration right before we launch that is essential. And it's not something that is easy to unwind once we are live. So -- but I will also say that with the performance that we see right now, we are not in a rush to relaunch the Club as it is, even though we will launch at some point in time this year. However, for Q2, you should not expect a sort of an increase in depth from deferred revenue recognition from the Club. Daniel Schmidt: So it's going to be postponed a bit? Michael Bjergby: Indeed, yes. Daniel Schmidt: Yes. Okay. And you don't know really when then basically? Michael Bjergby: But we are -- as I said, we are calibrating the benefits of the Club. And that means that it may not be a revenue -- deferred revenue recognition depending on how it launches exactly because it's only if it's cash benefit directly that you have to reduce revenue. But if you are launching the benefits in a different way, then you can actually avoid it potentially. So that is what we are considering right now. Daniel Schmidt: Okay. So it's still up for discussion. Okay. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Hermann Haraldsson: Thank you for joining the conference, and thank you for some very good questions. So this -- yes, this concludes the webcast and the presentation, and I look forward to meeting you and engaging you over the next couple of weeks. Thank you very much, and have a good day.
Operator: Greetings, ladies and gentlemen, and welcome to the Vesta First Quarter 2026 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Fernanda Bettinger, Vesta's Investor Relations Officer. Please go ahead. Fernanda Bettinger: Good morning, everyone, and welcome to our review of the first quarter 2026 earnings results. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our first quarter 2026 results was released yesterday after market close and is available on the IR website, along with our supplemental package. It's important to note that on today's call, management remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, note that all figures were prepared in accordance with IFRS, which differ in certain significant respect from U.S. GAAP. All information should be read in conjunction with and its qualifying in its entirety by reference to our financial statements, including the notes thereto and are stated in U.S. dollars unless otherwise noted. I'll now turn the call over to Lorenzo Berho. Lorenzo Dominique Berho Carranza: Thank you for joining us today. and for your continued interest in Vesta. The first quarter marked a strong start to the year with solid leasing momentum and stable portfolio performance despite ongoing global tensions. Importantly, as our results demonstrate, we're seeing not only continued activity, but growing conviction from our tenants. This was reflected in new leasing and expansions with existing clients as well as with exciting new clients during the quarter. Our performance reinforces the strength of Vesta's platform and reaffirms our approach for 2026. And of our Route 2030 strategy, which is centered on expanding a well-curated high-quality portfolio for disciplined development, leveraging our privileged land bank to capture demand. We believe value creation in our space is driven more by quality than size. While we are seeing increased competition for stabilized assets, Vesta differentiation lies in our ability to develop and operate a selective portfolio aligned with global best practices and the evolving needs of our clients. Let me briefly highlight the key drivers of Vesta's results. As I noted, leasing activity remains strong with total first quarter leasing reaching approximately 1.6 million square feet, including 1 million square feet in new leases with best-in-class companies. Total portfolio occupancy reached 89.7% by $0.05, while stabilized and same-store occupancy reached 93.4% and 95%, respectively. Reflecting the strength and stability of our tenant relationships. During the quarter, we saw strength in the electronics and aerospace sectors and also in AI-related data center infrastructure which is becoming an increasingly relevant demand driver that will benefit from long-term structural tailwinds. On the development side, our pipeline continues to convert into active construction with Vesta projects breaking ground across key markets. This is further evidence of both improving demand visibility and the strength of our land bank which is expected to support the stabilization and gradual recovery of occupancy. Along these lines, as leasing activity continues to gain momentum, we have selectively resumed development. We launched 2 new projects in Mexico City and 1 in Tijuana during the first quarter, which brings our total development pipeline to approximately 1.6 million square feet. Importantly, our approach remains disciplined and demand-driven, prioritizing tenant back projects in high conviction markets. From a financial perspective, results remain solid. Total rental income increased to $76.7 million, while rental revenues reached $74 million, a 14.1% sequential increase. Also with sustained strength across our key profitability metrics, including NOI and EBITDA. Let me now turn to the broader market environment and how we are seeing it reflected across our portfolio. Recent data has focused on rising vacancy in certain regions, particularly in the North. However, what we are seeing is better characterized as a correction, not a structural slowdown or a decline in underlying demand. Markets such as Tijuana, reflect more uneven dynamics but it's important to note that this is largely due to supply from less experienced developers. Vesta's high-quality infrastructure-ready buildings continue to outperform, reinforcing our focus on portfolio quality. We're leveraging our strength in this market and launched a new project in Tijuana during the first quarter. New construction starts in key markets such as Monterrey have declined significantly year-over-year, reflecting a market that is adjusting quickly. In Mexico City, fundamentals remain strong. According to CBRE, Mexico City gross absorption reached approximately 6.7 million square feet during the quarter with pre-leasing accounting for most of the activity and more than half of new supply delivered already preleased. This dynamic reinforces both demand debt and forward visibility across this market. It has also led us to launch the 2 new projects in Mexico City, which I have described. In Guadalajara, we are seeing healthy demand, particularly from electronics and technology-related tenants, a key driver of activity in the market. During the quarter, we successfully pre-leased the 2 Vesta buildings under construction, underscoring the strength of underlying fundamentals and the sustained momentum we are seeing in the region. Let me now turn to how we are executing against this environment. Our strategy remains consistent. Vesta will grow through a high-quality well-graded portfolio developed with discipline and aligned with the long-term demand. As I have commented, our focus is on portfolio quality, not scale, ensuring that each asset meets the highest standards of infrastructure, energy and operational performance. This is particularly relevant in the current environment. Despite the competition for stabilized assets we are seeing, we believe there is greater opportunity in selective development where we can create value and differentiate through product quality and tenant alignment. Before I conclude, let me briefly touch on our capital position and outlook. As Juan will discuss, we continue to operate with a strong and flexible balance sheet, maintaining a disciplined approach to leverage and liquidity, which enables us to execute our strategy while navigating uncertainty. Capital allocation remains selective with a focus on high-quality projects supporting efficient growth. In closing, we are highly confident in our outlook. While near-term uncertainty persists, the underlying structural drivers underpinning our business are stronger than ever. Tenant activity continues to be robust. Foreign direct investment is maintaining strong momentum and manufacturing experts at record levels. At the same time, higher-value industries such as electronics, aerospace, semiconductors and data infrastructure are accelerating demand for Vesta's premium properties. We also expect a more favorable interest rate environment together with greater clarity around USMCA to support activity in the quarters ahead. Let me now turn the call over to Juan to review our financial results in more detail. Juan Felipe Sottil Achuttegui: Thank you, Lorenzo. Good day, everyone. Let me start with a brief overview of our first quarter results. On the top line, we delivered a solid start of the year, with total revenues increasing 14.4% to $76.7 million, primarily driven by rental income from new leases and inflationary adjustments across our portfolios. In terms of currency mix, 88.9% of first quarter 2026 rental revenues were U.S. dollar denominated compared to 89.7% in the same period last year. Turning to profitability. Adjusted net operating income increased 13.4% to $70.47 million. Our adjusted NOI margin decreased 62 basis points year-on-year to 95.1%, reflecting higher operating property costs relative to rental revenues in the quarter. Adjusted EBITDA totaled $62.1 million, up 12.4% year-over-year, while margin contracted by 130 basis points to 83.9% primarily driven by higher operating and administrative expenses during the quarter. Vesta FFO, excluding current tax, was $43.1 million compared to $45.1 million in the first quarter 2025. The decrease was primarily due to higher interest expense in the first quarter of 2026 compared to the same period in 2025. We closed the quarter with pretax income of $97.9 million compared to $28.6 million in 2025. This increase was primarily due to higher gains in the revaluation of investment properties, higher interest income and higher other income. This was partially offset by higher interest expense, reflecting an increase in the debt balance during the period, along with the increased foreign exchange losses and other expenses. Turning to our balance sheet. We ended the quarter with $206 million in cash and cash equivalents and total debt of $1.2 billion. Net-debt to EBITDA stood at 4.1x, and our loan-to-value ratio was 26%, down from the 28.1% at the year's end, reflecting the prepayment of the remaining $118 million MetLife III facilities. As of the end of the first quarter, we have no secured debt with 100% of our debt denominated in U.S. dollars and 87.2% of our interest rate exposure on a fixed rate basis. Finally, consistent with our balanced capital allocation strategy, on April 22, 2026, Vesta's shareholders approved a $74.8 million dividend for 2026 representing a 7.5% increase year-over-year. On May 6, we will pay a first quarter cash dividend. This concludes our first quarter 2026 review. Operator, could you please open the floor for questions. Operator: [Operator Instructions] Our first question will come from the line of Piero Trotta with Citibank. Piero Trotta: I have 2 questions. The first one is spec development in Tijuana. So given that the start, could you elaborate to us on the key conditions that supported the decision to move forward with this project in a market where vacancies remain high. More specifically, what metrics or market signals are you monitoring most closely when allocating capital in Tijuana? Just to understand as we see like in the market of Tijuana around 16% vacancy and even in your Vesta's portfolio is around 13%. What are you looking at when you're starting a new project in the region? And the second one is about leasing spreads that remained positive at around 9%. And I would like to understand how should we think about the sustainability of spreads from here as supply-demand dynamics continue to evolve across our markets, just to understand on this one. Lorenzo Dominique Berho Carranza: [Foreign Language] Thank you very much for your question and for being on the call. Well, definitely, this is a good quarter to start the year. And I would like to highlight that, as mentioned before, Vesta will -- with very -- little by little start development in certain markets, certain projects, we did good land acquisitions last year. And that's why we start again with projects in Mexico City as well as Tijuana with the ones that we started before in Guadalajara and Queretaro. So the Tijuana project, it's actually -- it's a continuation of our existing project mega region. We -- as you remember, we did a land acquisition on adjacent land to develop the second phase. We did the land improvements last year and today, we're happy to be able to now start the first building of the second phase. It will take us pretty much the rest of the year to conclude the building to be developed. And the reason of developing it is because we believe we have a good pipeline from either existing clients or potential clients that want to be established in a state-of-the-art industrial park in a good location where you can have good access to labor, good access logistically and very importantly, good access to energy. And that's what we already have in our park in Tijuana. And I understand that there's other vacant spaces in the Tijuana market. However, we know that none of them are so well located as this one and that's a key advantage. There has been some new vacant buildings in other submarkets of Tijuana. In many places, actually that lack energy, they lack logistic accessibility and they also lack labor. That's why they will probably remain for a longer period of time available until they find the right client. There's many, I would say, unexperienced industrial real estate developers. So that's why we feel comfortable with the type of buildings that we develop. And we think that eventually, this will turn into a successful project in a market that we know quite well. Secondly, on your question on spreads. Well, I think that the spreads will continue to be in a 10% to 13% range somehow. This one was -- this quarter was slightly lower just because of the -- maybe the combination of computation of previous quarters. But in the end, I think going forward, and we have stated this before, we think that over time, we will continue to see double-digit growth in terms of spreads. We have had some interesting re-leasing spreads throughout the quarter of projects in the 20% to 50% range, which is quite attractive. And I think that together with some of the new leases that have been signed also in some cases with rent, 30%, 40%, 50%, depending on the market. So this trend will continue. We see very strong rent levels in most of the markets. And in some markets, very strong rent growth still. So we are confident that, that will continue to be the same situation going forward. And we -- that's -- that continues to be a main driver of value for our existing portfolio with our existing clients and tenants. And we think that going forward, we will continue to see this positive trend. Operator: Our next question will come from the line of Gordon Lee with BTG Pactual. Gordon Lee: Just a quick question, it's sort of more a general sector question. But as you mentioned, there is a potential for a pretty significant consolidation in the sector, which obviously that's not something that you look at, your business plan is different. But I was wondering, generally, Lorenzo, how you feel about consolidation in the sector, particularly this type of consolidation, would you generally say that's good for better sort of competitive dynamics for a bit more disciplined on the ground? And specifically, do you think that might have also a positive effect in terms of discipline around development? Lorenzo Dominique Berho Carranza: Thank you, Gordon, for your question. It's quite interesting the market dynamics and what we have been seeing from a capital market perspective. I believe that this is a -- in some ways, this is a broader strategy from some global players that are active in Mexico that actually maybe their strength is on capital markets more than being on the local ground and having access to tenants as well as access to development and higher returns. And that's why I think that's a particular strategy for some of them. I think this is an industry that has -- that is very intense in capital. And I think that looking -- seeing that there's a lot of capital chasing for transaction, chasing portfolios even sometimes regardless of the type of assets they hold because sometimes they don't even match the original consolidator assets. But in the end, I think it's more the appetite of having industrial assets and being larger consolidators. I think that we will continue to see that going forward as long as there's strong capital chasing for attractive assets. I think that will continue to be the case. Also, I think it's relevant to consider that it sets a price -- sets pricing to transactions. So even for some assets that I believe are maybe below the quality of the Vesta standards having those prices, I think it's -- it sends a good signal on the opportunity that we see in our own assets that remember that Vesta, we selectively define which markets we invest on. We're very mindful of the quality of assets we develop. We also strategically define the type of tenants. So over the long term, we think that, that makes our assets be way more valuable and I think that, for that reason, these consolidations create an attractive baseline of reference so that we can have some sort of comparables to our own valuations. Gordon Lee: And do you think -- if I could just have a quick follow-up, do you think it has any implications, positive or negative on competitive dynamics or development discipline for the sector as a whole? Or no, I mean, do you think your day-to-day would be unchanged regardless of what happens? Lorenzo Dominique Berho Carranza: I mean frankly, most of these consolidators do not have development capabilities. So I think it doesn't -- I think it's only worth for certain merchant developers. But in the end, I think that we will continue to have our own discipline in terms of development. I think that maybe -- I think this will keep some of the acquirers more distracted in their own acquisition strategy, and I don't see them very active on the development. Operator: Our next question will come from the line of David Soto with Scotiabank. David Soto Soto: Just a quick one and It is related to the micro grid. It would be great if you could tell us in which regions are you currently developing this kind of facility? And what are the challenges that you are facing to develop this kind of facilities within the -- your industrial part? Lorenzo Dominique Berho Carranza: Do you mind repeating the question, David? Thank you. David Soto Soto: Yes, of course. It's related to your micro grid. It would be great if you could tell us in which regions are you currently developing these kind of facilities and which are the main challenges that you are facing? Lorenzo Dominique Berho Carranza: Thank you for which type of assets you mentioned? David Soto Soto: For the [indiscernible] that you are currently developing. If you are having these kind of development or micro grids development? Lorenzo Dominique Berho Carranza: Okay. So maybe if I understand correctly, the question is on which markets we might be developing well. Currently, we started a few projects in Mexico City, the land acquisition that we did last year. This is in the [ quality plan ] corridor, a very attractive market that has shown growth particularly coming from logistics as well as e-commerce and rental, and we continue to see rental growth. That's why returns are quite attractive. And for that reason, we believe that developing spec in the area is very, very appealing. We started a building in Tijuana. And very soon, we will start also development in Guadalajara, as you could see in our report, we were able to lease the 2 projects that we have under construction and we're happy to continue to see growth and demand coming in the electronics sector, particularly, but also this market has shown also strong dynamics in the logistics and e-commerce sector. So hopefully, soon, we're going to start some spec buildings similar to what we have done in the past in the rest of Park Guadalajara. So we're confident that with the land acquisitions we did last year, we're going to have a -- we're going to repeat the success that we have previously in the rest of Park Guadalajara I. Also, we acquired land recently in Monterrey, in La Palma, in Juarez. And these 2 markets are the ones that eventually, we will also start developing spec buildings or build-to-suit projects. We have started with a -- we have had good progress in the permitting licensing and little by little as long as we start seeing a strong momentum on the leasing, we will start buildings and will be a strong signal that the markets are permitting again to have some projects. And this is mainly driven by the pipeline that we have been generating. We have definitely seen stronger demand from different sectors particularly the ones related to electronics, the ones related to AI, to data center infrastructure as well as e-commerce, logistics and medical devices to name a few. So that's pretty much in most of the markets. We see that clients as well as potential new clients are -- have regained confidence in their expansions. Many of these clients have had record high numbers in terms of production and uncertainty is coming back again for them to continue expanding and continue opening up new operations in Mexico. Operator: Our next question will come from the line of Anton Mortenkotter with GBM. Ernst Mortenkotter: Congrats on the results. I have 2 quick questions. One is, I mean, you already mentioned a little bit of the dynamic that you saw that made you start the development. But I was wondering if there is any like specific sign that the market gave you in order for you to decide to move now and reactivate sort of strong Vesta development. That is one. And the other one is with all of these new newly announced developments, it's getting close to the cash balance that you already have. So how are you thinking about funding capacity from here? I mean, specifically, do you see any need or opportunity in the new term to tap either the debt or equity markets? Lorenzo Dominique Berho Carranza: Thank you, Anton, for your question. I think we -- definitely, we have internal metrics that we monitor in order to identify where we should be starting a project. And maybe just to use a positive example is the projects in Guadalajara that we started construction end of last year, we started without having a lease signed, but we identified that there was demand coming from certain sectors and that's why our decision was to anticipate to those clients by starting construction soon. So that in the meantime, while we are under development, we could be able to close with the potential demand that we saw. And this quarter, that's exactly what happened. We closed again, we pre-leased with 2 current existing clients of Vesta that continue to grow and require flexible space, the standards that we have developed in the past. Those particular metrics are the ones that we follow every time we start a building. Again, Mexico City, good dynamics. We have had some good success with the e-commerce clients. We will -- we think that there will continue to be demand for that. So we feel comfortable with that start for a project that will be eventually developed at some point end of the year. And again, Tijuana is a similar situation. Even that we have a few buildings available right now, which we are in a marketing stage, they're both in different regions, different submarkets in Tijuana, different dynamics, and that's why starting a new building in this region makes sense because of some potential demand that we are already identifying. So I think that this strategy has paid out well in other markets. We continue to see -- to have a few buildings that we are in the marketing stage. But we are confident that this will continue to be a good year and good absorption. And we think that we will continue to see good absorption. So this is actually the third quarter in a row that we see strong demand and good absorption. So I think that compared to, let's say, the start of last year, which was -- the uncertainty was incredibly high and projects were pretty much on all of them on hold. I think that dynamism has changed effectively end of last year and with a strong start of the year of clients looking for high-quality buildings with a great -- good reputation landlords where they can establish their new long-term operations and make their own investments in different sectors. Juan Felipe Sottil Achuttegui: As for the balance sheet, well, look, we have a very strong balance sheet. And we will always be flexible and keep our options open. We have $200 million in cash. We have a low leverage. So we will tap the market whenever possible, and we can sell properties, we can do equity. We will always be flexible and we'll see as we continue to grow, what is the best market to tap. And remember, all of this was mentioned on the 2030 plan and we have a long-term vision, and we will always take decisions that balance out the alternatives and balance out the capital requirements of the company. We're very flexible. Operator: Our next question comes from the line of Adrian Huerta with JPMorgan. Adrian Huerta: I have 2 questions. One is if there is any opportunities for asset recycling? Are you looking for potential asset sales? And the second one is how the yield on cost is today given movements on construction and land cost relative to what you can charge on rents? Lorenzo Dominique Berho Carranza: Thank you for your question. On the second question, I think that yield on cost continue to be very attractive in the 10% range, even in some cases, even higher than that. I think that one of the largest benefits to that has been our ability to acquire land at a lower cost basis, I think that we were very opportunistic last year and strategic so that we were able to acquire land at $0.70 to $1, and that's how, together with our ability to get competitive construction costs, that's -- and with a still attractive market rents. That's how we can be able to close a double-digit yield on costs in the -- we're doing deals in Mexico City at 9.8% yield on cost, close to 10%. And in markets -- in other markets, even at 10.5%, 11%, such as Queretaro, Tijuana, for example. So I think that our experience as a developer and managing well the construction process and construction competitive process. I think that that's giving us an edge so that we can make high returns. And more importantly, Adrian, it's not the ability to make 10% return on costs, but it's the spread on the investment that we can make since we believe that if properties in the larger portfolio environment we're seeing that are transacting at 7.5% to 7% to 8% range. We think that assets similar class to Vesta could be trading closer to a 6%. So developing at a 10% and stabilizing at around 6%. That's a lot of spread and this is exactly the value proposition that we have for our shareholders. Juan Felipe Sottil Achuttegui: Look as far as capital recycling -- building recycling, we will always be open to do that. I think that we have been successful in selling parts of our portfolio at a higher than net -- asset valuation value, and we will continue to look at those opportunities. And we do selectively -- we -- it's different to some of the FIBRA that they need to dump a lot of the assets they have recently acquired because they don't match their strategy. We don't need to do that. We sell selectively every now and then we want to only make a scope to our portfolio. But frankly, we invest -- develop to hold and we invest long term and every now and then opportunistically we sell. Operator: Our next question will come from the line... Lorenzo Dominique Berho Carranza: Just to add on that. I think our discipline is a good example. We like to sell above net asset value. Above valuations where we believe we can actually make -- create a premium and make a good profit. And I think a good example has been in the past where we have sold 10%, 20% above abrupt -- appraised value in the private markets. And then we have been able to develop again at 10%. I think that's the approach. In terms of capital allocation, I think that's a discipline that we will continue to see going forward. And I think that's a main differentiator on Vesta. Sorry for the interruption. Operator: Our next question will come from the line of Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: I only have 1 left, and it's a follow-up on Gordon's on the consolidation angle here. Just to get a sense of the impact that you could see, if any, particularly in the northern markets, let's say, Tijuana, Juarez, if this further consolidation takes place, whether you think that this has any impact on the -- your commercial efforts or on the lease spreads that you're able to get through, I mean -- and maybe perhaps on the positive side, whether a more consolidated market might just lead to better discipline on that front. Lorenzo Dominique Berho Carranza: Thank you. Well, I think that industrial real estate is -- in Mexico, it's a very fragmented sector. There's really no dominance from any player in any of the markets. I think that -- actually many of these consolidations, if you look carefully, most of the acquisitions are done in secondary and tertiary markets. Markets where actually we do not operate and are quite small. I mean, in the end, I mean, some of them there's an overlap, but the majority is in secondary and tertiary markets. So I don't think this could have a major impact when it comes to marketing certain regions as the ones that you mentioned. I don't know exactly what might happen with the -- those secondary and tertiary markets because in many of them, we're not that active. Operator: Our next question will come from the line of Carlos Peyrelongue with Bank of America. Carlos Peyrelongue: Total occupancy remained stable at 90% in the quarter. Your expectation for this year is for this level to be maintained or do you expect some increase. And in that case, which markets do you think would drive that potential increase in occupancy? Juan Felipe Sottil Achuttegui: Look, well, we generally don't project occupancy forward-looking. It's not a guidance item. However, we're very optimistic of the market dynamics, as Lorenzo mentioned, I think that we will have good absorption in the quarters to come. Carlos Peyrelongue: And in terms of market... Lorenzo Dominique Berho Carranza: And the market -- the market, mostly to be specific, we currently -- we have -- we're in a marketing stage in Monterrey in our Apodaca project, and that's gaining strong momentum. So we feel confident that we're going to see some good absorption in the next months -- in the next quarters, and that will have a very positive impact in occupancy. As you mentioned, it has stabilized, and I think there's an opportunity to see an upward trend. We will continue to see demand. So that Monterrey will recover soon also in some markets in the Bajio, which have shown resilience particularly in Queretaro. And actually, in some of the cases, we have good quality buildings where sometimes we rather wait until we have a good tenant. We think that our projects as well as our parks are in good locations with good energy infrastructure, with good quality buildings, again, good access to labor. So we think that eventually that will impact positive absorption and with that have a positive impact on occupancy. Operator: [Operator Instructions] Our next question comes from the line of Igor Machado with Goldman Sachs. Igor Machado: First one, a follow-up on construction costs. So could you please comment if given the ongoing conflict in the Middle East, are there any -- are you seeing imports are already increasing in price? And do you have any [indiscernible] to understand how could this impact your cost? And the second question is on the material equity in San Luis Potosi. So could you comment on what drove this and is this enough? And if you could please comment on how are you seeing the demand on the value region [indiscernible]. Lorenzo Dominique Berho Carranza: Excellent. Thank you for your question. Regarding marketing of San Luis Potosi. San Luis Potosi a smaller market for Vesta. However, we have a project which is next to the BMW plant of San Luis Potosi, this market has a strong dependence on the auto industry. And I think that last year was quite slow. But we start to see us -- as we start seeing a little bit of some adjustments in the production lines of them as well as other auto manufacturers. We think that there will be better demand throughout this year and with that, create a bit more absorption. We have a good quality project, again, right next to BMW. We already have good tenants, but definitely, it's a slower market. Should not have a major impact in the overall strategy for Vesta. And on your construction cost, well, definitely, that's something that we are monitoring carefully, how the -- what are the implications on the conflict of the Middle East on the construction cost. However, we have not seen any material adjustments -- I'm sorry, not materially -- larger adjustments so that could have a negative impact on construction. I think that what is -- nevertheless, I think that what is important to monitor is not only construction costs, but also FX because we calculate everything on a dollar per square foot basis. But even with that, I think that Vesta has been able to absorb well some fluctuations. And I think our -- and we will continue -- and also some of the projects that we have already started construction that we do on guaranteed maximum price. So even if there's fluctuations in the pricing throughout the construction process, that is not impacted to our final cost because we have already guaranteed the price. That's kind of the natural process to it. Operator: And there are no further questions. I'd now like to turn the call back over to Mr. Berho for his concluding remarks. Please go ahead, sir. Lorenzo Dominique Berho Carranza: [Foreign Language]. In closing, we continue to deliver on the important milestones of our Vesta 2030 strategy anchored in portfolio quality, disciplined execution and long-term value creation. Market dynamics are strong, particularly for high-quality infrastructure ready buildings, where demand continues to show resilience. This reinforces our confidence in the near-term outlook and our ability to capture incremental opportunities as activity continues to build. Against this backdrop, we remain committed to executing with discipline and expanding a well-curated platform to capture long-term demand. Along these lines, we look forward sharing important updates. Also on progress related to our Route 2030 strategy at our 2026 Vesta Day to be held in New York on November 11. As always, thank you for your continued support. Goodbye. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Chemed Corp First Quarter 2026 Earnings Conference Call. At [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Holley Schmidt, [indiscernible]. Please go ahead. Holley Schmidt: Good morning. Our conference call this morning will review the financial results for the first quarter of 2026 ended March 31, 2026. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 applies to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of April and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated April 23, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara. Kevin McNamara: Thank you, Holley. Good morning. Welcome to Chemed Corporation's First Quarter 2026 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions. VITAS's performance during the quarter exceeded even the high end of our expectations. We believe that the first quarter of 2026 would be a tough comparison as we continue to transition to balance our patient mix between short-stay and long-stay patients. VITAS management was able to add ADC through accelerated admissions from nonhospital preadmission locations while also maintaining a high level of hospital-based emissions. This was achieved while also keeping hospice labor costs lower than budgeted. These factors combined to allow VITAS to achieve higher-than-expected revenue growth and EBITDA margins while continuing to add Cushion to the Medicare Cap position in our Florida combined position program. Admissions at VITAS during the quarter totaled 19,394 which equates to a 6.9% improvement from the same period of 2025. We Hospital admissions as a percent of total admissions for our Florida combined program was 43.8% during the first quarter of 2026. As we have discussed previously, an appropriate balance for the sustained long-term stability in the Florida patient base, given the current mix of referral sources is that between 42% and 45% of total admissions that come from hospitals. Equally as important, as Joe will discuss in greater detail, admissions from all other preadmission locations increased 8.4% compared to the first quarter of 2025 in our Florida combined program. Improved admissions led VITAS to outperform our expectations while also adding over $32.5 million to cap cushion in the Florida combined program in the first quarter of 2026. March 31, represents the halfway point in the government fiscal year. We are more confident than ever that VITAS has put the Florida cap issue of 2025 behind us and has returned to a normalized rate of growth. Now let's turn to Roto-Rooter. Over the past 2 years, we have talked about the many headwinds that have persisted at Rotair, which is made for a difficult operating environment. While we believe [indiscernible] will continue to face some of those headwinds, the first quarter of 2026 also showed some signs of improvement across multiple fronts. For the first time since the fourth quarter of 2022, residential plumbing and residential sewer and drain revenue both increased during the quarter. We consider these Roto-Rooter's core services which drive the add-on revenue from excavation and water restoration. We see this as a very positive development for the company. Driving the increase in core residential service revenue was an increase in total leads of 3.3%. Paid leads during the first quarter of 2026, increased 18.7% compared to the same quarter of 2025. Continuing the same trend as past quarters, 53.4% of those leads were the result of paid advertisements. In the first quarter of 2025, we paid for 46.5% of the leads. The change of approximately 7% required Roto-Rooter to increase marketing spend by almost $3 million in the quarter compared to the first quarter of 2025. The centralization of water restoration billing and collections continues and has resulted in improved collections. These improvements resulted in a $1.5 million improvement in overall write-offs compared with the first quarter of 2025. Weather patterns in the first quarter of any given year are positive for Roto-Rooter. However, in the first quarter of 2026, unusual ice and snow storms across large parts of the country led to significant service disruptions due to road conditions. 24 [indiscernible] branches experienced some level of service disruption for a period of time across 5 days of the quarter. We estimate that these service disruptions resulted in a net loss revenue of between $3 million and $4 million during the quarter. On March 31, 2026, we repurchased the territory and assets of the franchises operating in San Francisco, California, and Fort Worth, Texas in 2 separate transactions. The aggregated combined purchase price of these transactions was approximately $20.6 million. Collectively, these retro locations serve a population of approximately 3.3 million people. This purchase is part of Rodger's ongoing strategy of acquiring franchises to boost productivity, market share and profitability. These 2 acquisitions are anticipated to add between $5 million and $5.5 million of revenue for the remainder of 2026. These acquisitions are immediately accretive to earnings. However, initially, growth -- gross margins, EBITDA margins, pricing and mix of service offerings tend to be below the average of our existing rotor portfolio. We are happy with the performance of VITAS in the quarter and its prospects for the remainder of 2026 and beyond. In our February conference call, we described this as a year of transition for Roto-Rooter. The first quarter clearly demonstrated this transition. We feel very positive that the initiatives we have discussed over the last few quarters are beginning to take hold. With that, I would now like to turn the teleconference over to Mike. Michael Witzeman: Thanks, Kevin. VITAS' net revenue was $420 million in the first quarter of 2026, and which is an increase of 3.1% when compared to the prior year period. This revenue increase is the result of a 2.2% increase in days of care, and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. The acuity mix shift negatively impacted revenue growth, 120 basis points in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by approximately 47 basis points. In the first quarter of 2026, Vitas accrued $2.4 million in Medicare Cap billing limitation. This is in line with our expectations. No Medicare Cap billing limitation was recorded in the first quarter of 26% for the Florida combined program and none is anticipated for the 2026 fiscal period. Average revenue per day in the first quarter of 2026, was $210.62, which is a 146 basis points improvement from the prior year period. During the quarter, high acuity days of care were 2.3% of total days of care, a decline of 28 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $70.8 million in the quarter, an increase of 0.6% when compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 16.8%. Now let's turn to Roto-Rooter. Roto-Rooter branch commercial revenue in the quarter totaled $56.5 million, a decrease of 1.9% from the prior year period. Commercial revenue was negatively impacted by the weather events discussed earlier to Kevin. However, for the 13 branches that had commercial business managers coming into 2026 and Commercial revenue was up approximately 10%. We added 18 new commercial business managers during the first quarter of 2026. We expect commercial business revenue to accelerate as these 18 new commercial business managers complete their training and begin to become productive sales leaders in their locations. Roto-Rooter branch residential revenue in the quarter totaled $16.3 million, a decrease of 1.5% over the prior year period. All lines of service increased from the first quarter of 2025 with the exception of water restoration. Demand for water restoration services continues to be strong, and our conversion rates remain high. During the transition to a centralized billing and collection model, we anticipated some disruption to the day-to-day billing processing function. In the first quarter of the average revenue per water restoration job declined by roughly 13%. We anticipate that this issue will improve as the year progresses with the tallies staff gaining experience and proficiency. Revenue from our independent contractors declined 3.3% in the first quarter of '26 compared to the same period of 2025. Our independent contractors are generally smaller operations in middle-market cities. Because they are independent contractors, they tend to operate more like a small mom-and-pop business than our owned and operated branch locations. We are actively working with the contractor group to help mitigate the issues in this segment of our business to get it back to a growth trajectory. Adjusted EBITDA in the first quarter of 2026 totaled $53.5 million a decrease of 9.6% when compared to the first quarter of '25. The adjusted EBITDA margin in the quarter was 22.5%, which represents a 218 basis point decline from the first quarter of '25. Roto-Rooter gross margin of 51% was in line with our expectations. As discussed by Kevin, the decline in adjusted EBITDA margin was mainly caused by increased Internet marketing costs. Finally, let's discuss the revised guidance for fiscal 2026. Historically, we do not give quarterly updates to guidance. Due to the materially improved performance of VITAS, coupled with the level of share repurchases in the first quarter of 2026, we believe updating guidance is appropriate in this instance. As a result of the better-than-anticipated first quarter for VITAS we have increased projections for the remainder of '26. Full year ADC growth for 2026 is updated to a range of 4.5% to 5.5% and compared to the original guidance of 3.5% to 4%. Anticipated revenue growth, excluding the impact of the Medicare Cap, improves from the original guidance of 5.5% to 6.5% and to a revised range of 6.5% to 7.5%. Finally, revised EBITDA margin, excluding the impact of the Medicare Cap, is anticipated to be 18% to 18.5% and compared to original guidance of 17.5% to 18.5%. We're factoring all the gives and takes within expected Roto-Rooter performance for the remainder of fiscal 2026, anticipated revenue growth remains unchanged at 3% to 3.5%. Estimated adjusted EBITDA margin is lowered slightly to 21.5% to 22.5% compared to the original guidance of 22.5% to 23%. This is primarily due to elevated marketing costs now expected to persist above our original guidance for the remainder of the year. Based on the above full year 2026 earnings per diluted share, excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $20 to $24.75. The midpoint of the revised guidance represents a 13% increase from 2025 adjusted earnings per diluted share of $21.55. The revised 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.6 million shares. The original 2026 guidance was for adjusted earnings per share to be between $23.25 and $24.25. I will now turn the call over to Joel. Joel Wherley: Thanks, Mike. In the first quarter of 2026, our average daily census was 22,723 and an increase of 2.2%. In the quarter, hospital directed admissions increased 13.6%, home-based patient admissions increased 2% and assisted living facility admissions increased 2.9% and nursing home admissions declined 5.4% when compared to the prior year period. The continued high level of hospital admissions allowed us to quickly transition in the quarter and start emphasizing admissions from other preadmission locations that generate a longer length of stay patient. This resulted in ADC growth that was ahead of the original projections. We were able to achieve this level of ADC growth while maintaining full-time equivalents below our budgeted targets for the quarter. Our average length of stay in the quarter was 102.7 days. This compares to 118.7 days in the first quarter of 2025. Our median length of stay was 15 days in the first quarter of 2026, a decline of 1 day from the first quarter of 2025. The new starts in Florida continued to grow at a very rapid pace. Marian, Pasco and Pinellas Counties, combined had 526 admissions in the first quarter of 2026, exceeding our expectations. AC for each new start continues to exceed our expectations, and we anticipate opening ManatoCounty in late second quarter or early third quarter. We intend to aggressively go Manati as we have in our other 3 new starts. I believe the opportunity for growth at VITAS has never been better. We have the difficulties of the 2025 cap circumstance behind us. We are looking forward to continue executing our strategies for the remainder of 2026 and beyond. That will translate into high sustainable growth while providing the best possible care to our patients and families. And with that, I'll turn the call back to Kevin. Kevin McNamara: Thank you, Joel. I will now open this teleconference to questions. Operator: [Operator Instructions] Our first question will come from the line of Brian Tanquilut from Jefferies. Unknown Analyst: This is Megan Holt on for Brian Tanquilut. Congrats on the quarter guys, and the guidance rates for the year. First, on the VITAS side, margins looked good in the quarter. How much of that was head count reduction that contributed to it? And then since you're raising the ADC guidance, do you expand labor capacity to support their growth for the remainder of the year? And then just lastly on the VITAS side, speak to any fraud enforcement you're seeing in Southern California, given the CMS cure? Kevin Fischbeck: I can start with the margin discussion, Megan, and then I'll let Joel talk about the fraud stuff. But we averaged roughly 100 FTEs below our budget in the quarter. we were able to efficiently serve the increased ADC with -- at that level. But I think to your point, that's not something that we view as something sustainable for the rest of the year. We intend to I think our original budget was adding 30 to 40 FTEs a month. We've increased that to closer to 60 per month for the remainder of the year. So we feel very good that if we add those 60, we can achieve the level of ADC growth we have currently budgeted and maybe a little better than that. Joel, fraud, stuff. Joel Wherley: Yes. So we certainly are very sensitive to the national campaign to root out fraud waste and abuse within the health care system. Certainly, the hospice concerns in California have been very public -- there were just Senate congressional hearings on Tuesday, speaking specific to it. We are very supportive of the efforts. However, we also want to avoid direct implications associated with the fraudsters and ensure that, that does not limit access for patients in need in those counties not only in California, but across the United States for legitimate providers to impact the quality of that patient and their loved ones final journey. . Unknown Analyst: Got it. And then on the Roto-Rooter side, it looked like you guys had some additional marketing expense in the quarter. Is that now the right run rate going forward? And you started seeing some pressure on the customers this time last year given the macro backdrop? And facing a similar headwind in terms of the economy right now and whatnot. So are you seeing that similar trends as we're a month into Q2 now? Kevin McNamara: Well, let me just start with the marketing costs. Marketing costs proxy for Google costs. And as we indicated, I mean our leads were up 3%. However, I mean, to get that 3%, we had the battle with the fact that due to changes in the Google algorithm are leads from the natural or free side of the search spectrum were down almost 16%, okay? So those were down 16%. Nothing Rodeo could do. We expect that to basically continue. We have several efforts afoot to increase our visibility on the natural side. But I mean, in the short term, it's going to be something approaching that. We hope to improve our position, but through the models, I would say that's kind of what we expect to see some tough sledding on the natural side of the search with Google. On the positive side, without increasing the amount we bid in the various domains. We've been getting a lot more clicks. I mean our clicks on the paid side went up over 18%. So I guess what I'm saying is, in order to keep our business where it is and basically, our sales where we budgeted, we've got to pay for more of the leads, and that means more marketing costs and kind of inexorable in the short and midterm. And so to answer your question, yes, we expect that to continue. Joel Wherley: Yes. Megan, from a specific number, [indiscernible], I can walk you through it a little bit. But we were from a year-over-year comparison, $3 million above last year in marketing costs. We had budgeted or guided -- included in the guidance was an increase of $1 million -- so we basically spent about $2 million in the quarter higher than what we had budgeted. Of that, we think that roughly $1 million of it was related to some of the weather things we talked about. We were -- when we couldn't get on the road, we were still getting calls probably a much higher volume than we would as we've talked about, weather is good -- that kind of weather is good for us, but we couldn't serve it. And so we were paying for calls that ultimately, we couldn't serve. We expect -- we thought that was probably about $1 million additional expense that shouldn't be really considered in the run rate. So all in all, we spent about -- on a run rate basis, we spent about $1 million more in the quarter than we anticipated. And the entire change in the EBITDA margin in the guidance is us adding $1 million per quarter of marketing costs for the next 3 quarters. Unknown Analyst: And then just any trends you can speak to so far in Q2? Joel Wherley: It's real early in Q2. I think things continue to progress the way we expect them to. . Operator: Next question will come the line of Joanna Gajuk from Bank of America. Joanna Gajuk: So maybe first on the border business. So can you just talk about the marketing for and the weather disruption -- and I guess I want to tie the quarter to the full year outlook. So now the full year outlook includes, call it, $5 million from these 2 franchises that you acquired. So there's some contribution in there too. And I guess you still expect the same revenue growth. So was there some sort of bad guy that after the good guys, so to speak, in the guidance, if you can walk us through . Kevin McNamara: Yes. So what -- I mean, what we talked about, Joanna, was that there are -- within the guidance and what's even in the first quarter, there are some positives, but there's also continued headwinds the contract operations still performed slightly below our expectations. The water restoration revenue, particularly on a price or cost per job is still below -- a little bit below our expectations. So those gives and takes sort of offset the acquisition revenue we anticipated. But revenue stays in line with where we thought it would be at the beginning of the year, just maybe the underlying components might be slightly different than what we had anticipated. But ultimately, the revenue continues to grow as we expected. Joanna Gajuk: And if I may, so on the collection rate, did I hear right? I guess maybe there was some improvement, but I guess you did not expect in Q2 -- so I guess I just want to make sure, are you still expecting to improve collection by $4 million to $6 million for the year. . Kevin McNamara: Yes, we were slightly better than that than our expectations in the first quarter. Having said that, part of that obviously comes from the idea that we're billing lesser job. So we anticipate both of those things improving as we finalize the centralization and those centralized employees get more experienced and we can bring up the revenue per job while still maintaining a higher collection rate. Joanna Gajuk: Right. That makes sense. And with these acquisitions that you mentioned, they usually just come with somewhat lower margins. Obviously, accretive printing money, right? -- the goal is to improve over time. Do you anticipate doing more of these this year? And are there some maybe other assets you would consider acquiring for that business? Kevin McNamara: Well, I would just say, Joanna, that it's hard to say. But yes, I would given the operating environment out there, we've noted that there are a number of franchise holders that held the franchise for a couple of generations and they're saying, "Boy, this is tough. Maybe I will consider selling to you and we're considering a number of possibilities. I would say that -- the 2 that we mentioned this quarter, San Francisco and Fort Worth are kind of unusual. They're real plugs. I mean the ones that are generally available to be groups of smaller franchisees that are very likely going to be participants in our independent contractor portfolio. But Yes. There's no question. We anticipate continuing to add additional locations for Roto-Rooter. It's a good acquisition environment for us in that time. Joanna Gajuk: And I guess any progress you mentioned you're making some traction with Google, Agusta I guess you had this new SEO partner. So can you give us an update there? Kevin McNamara: Well, I hate to get too part of the week, but let me just say this, we immediately saw an improvement in what we call visibility. And by visibility, the best way to do that is you look at how often you appear in the map section. That's where -- that's part of the -- that's where you get the natural. It's biggest driver of the natural leads or free leads. And as we indicated previously, at the end of 2024, we were appearing nationwide, 72% of the time. And halfway through the first quarter of last year, we dropped like a rock to the mid- to low 20% of the time showing up on those maps. What we saw in the first quarter of this year was working with our outside contractor, an improvement, basically, a 10 percentage point improvement in our visibility. And then in March, we saw a change in the algorithm again, which knocked us back a bit as far as is and again, working doing their match, we've been able to improve that almost back to the previous run rate of earlier this year. So it's a constant battle, Joanna. But yes, we're looking for certainly to stabilize the percentage of leads we get that are free. I mean as I indicated, I mean, we are winning the battle in a major way on the paid search. I mean we are getting substantially more leads without increasing the amount we're offering per lead. So the new -- the private equity firms that have come and kind of upended the Google market for leads. I don't know if they're pulling back. I don't know if they're not quite as scientific as we have become as far as our bidding process. But that's a real success story. The only problem is, if you're comparing it to a prior period where you were paying nothing for the lead, it's a tough comparison. But in any event, Joanna, it's a constant battle, do we anticipate improving on our position, no question about it. Now if you said how Google change our algorithm again, they tend to do it in a significant way once a year. So I mean I don't -- maybe we're past that at this point, but we'll see. Joanna Gajuk: Okay. And switching to [indiscernible] I just want to make sure because we hear other companies calling out the weather disruption in healthcare services. So it sounds like it wasn't material because you guys didn't call it out in the hospice business. . Joel Wherley: We get paid on a per day basis, Joanna. So we don't do fee-for-service. So there could be a disruption in a location where we can't get to patients for a day, but that doesn't really impact our revenue. Kevin McNamara: It might affect admissions, but not of a disruption is just a day or 2. On a specific day. That is correct. So no, Joanna, to answer your question, we did not have any weather disruption in our business model. Joanna Gajuk: Okay. Perfect. I just to confirm. But yes, that segment outperformed. So things are going pretty good there. And thanks for the update on the slowed, I guess, cushion, so that increased -- so now we've got the proposal for '27 year, right? And the rate up is going to increase and the cost is going to increase, call it, 2.4%. And I know you don't have all the details yet, but any indication on your kind of initial estimate in terms of the proposed increase in Florida versus the [indiscernible] for 2027. Kevin McNamara: At a very high level, very high level, we think that the revenue -- the rate increase might be slightly lower in Florida than the national average, but we're still we're still crunching the numbers and we don't have the details. They don't come out until some in the summer. Joel Wherley: Yes. Keeping in mind that is the proposed wage rule. We're still in the comment period, and a final wage rule typically is not put into place until the late part of the third quarter. Joanna Gajuk: Right. So that's 1 we will find out. But as of now, there are no indications, there's some outside dynamic that you experienced, I guess, last year. with that increase being high in Florida than overall. But maybe that's the opposite. So that should be manageable there. And there was a couple of other items in that proposal, including this new scoring system, the index SVI. So when we look at some of the data, there was 2 service CMS, VITAS was actually screening above average, but it seems like there was 1 of these measures that were like penalizing the providers because it was essentially capturing just the total number, not per patient. So any thoughts about any of these efforts or anything that was discussed in the CMS proposal, how could that impact your operations? Joel Wherley: Yes. Thanks, Joanna. And as I said previously, we are very supportive of the efforts to eliminate in a waste fraud and abuse from the hospice environment. But you have to keep in mind over 50% of patients needing hospice don't have access or receive that end of life care today. So we want to ensure any efforts to weed out fraudsters, which, again, we are very supportive of, don't in any way impact legitimate providers to be able to provide care to those in need. Now specific to your question about the proposed potential additional scrutiny that is listed in the wage drill. We're continuing to evaluate what the potential impact that might be on VITAS, but again, I'll go back to -- this is in the comment period, and we will be providing comments to ensure that we have communicated our guidance to ensure that, that scoring and that oversight is aligned with what legitimate providers were to be evaluated on a day-to-day basis across the country. And so weed out the fraud focus on improved quality and access for those in need. Kevin McNamara: And Joanna, just give you just very generally speaking, when we hear about fraud in the hospice and whatnot, especially we'll focus on California. You have to remember, they're in 2 buildings in Los Angeles County. There are more hospices located in those 2 buildings that they are in the whole state of Florida. I mean the fraud that we're talking about is it's real fraud. That is almost a business mailbox offices for hospices, no real patients, no real care totally different situation from what historically has been fraud in the hospice field, which tends to be highly specialized arguments between doctors, whether a 6-month terminal prognosis is indicated or not. I mean it's a bit different magnitude. But again, we continue to watch it. We don't want to be swept. We don't want to be a dolphin swept into a tune in net in the accidentally. But so as Joel said, we're watching it very carefully. Joanna Gajuk: So should I read this as even things like this new core system that they proposed is going to be finalized. There were some other things that the CMS proposed, but they never really force because they couldn't really figure out how they're going to measure things. So is it a similar situation with this particular one? Joel Wherley: Yes. We want to make sure that the criteria and the algorithms used to evaluate the scoring with makes sense and is accurate and does not include data that is been infiltrated by fraudulent claims processing from these providers. They've got to be able to filter all of that out and focus on legitimate providers and the measurement of the care and services provided from those. Joanna Gajuk: And to that end, when you mentioned making sure that these are legitimate providers. The other effort right out there. So also 1 of these meetings talk about these efforts they want to put in place where states would have to revalidate all providers within 30 days. Have you seen any of the starting? And I don't know if that -- I assume that things like hospice in California. But have you seen anything in your operations where the states are starting to do that? . Joel Wherley: We have not seen it to that level. There is in place a higher degree of evaluation on new locations and the review of their claims on a regular basis to ensure that these new providers are legitimate in providing actual care. I mean, again, if you think about where the focus has been in L.A. County, the expansion from 400-plus providers to nearly 1,500 providers in L.A. County alone. Those individuals -- those companies receive licenses. And we are very supportive of an improved surveying environment to ensure that they're legitimate and that their patients are legitimate. Kevin McNamara: Joanna, let me sure -- one reason Joanna is a little tried on this is we attempted to get a license in San Francisco. It took us about 6 years dealing with a number of surveys kind of kind of where people didn't understand what hospice was but we got it through it. We got it after 6 years. Joel's sitting here saying, how could 1,100 fake hospices get a license in 18 months where it took us 6 years with legitimate. I mean, that's the kind of stuff that's hard to explain. Now it's different state issues as not the federal government. So you're talking about different silos, but still, they got to coordinate their activities. But I guess what I'm saying is if you put any type of scrutiny and the type of scrutiny we're used to on licensing if they put anywhere a percentage of that, a small percentage of that, it would knock out about 95% of these fake hospices. Operator: [Operator Instructions] Next question will come from Michael Murray from RBC Capital Markets. Michael Murray: For VITAS, I think you're probably seeing a higher mix of admissions from hospitals in your new Florida markets. Just given your current cap situation in the state, how are you thinking about community-based admissions in these markets? Joel Wherley: So thanks for the question. And as we have talked previously, we're managing the balance in those preadmit environments, and we look at that on a daily basis. specific to where we're focusing or where our resources are deployed. And we feel that our community-based initiatives are responsibly growing back from where we needed to be in the last half of 2025. So we feel really good about the balance between hospitals as a preadmit and all of our other or community-based type admissions. Kevin McNamara: And Michael, keep in mind that with the -- you specifically mentioned the new starts, when we have a new start there, there is not, by definition, an existing base of long-stay patients. So regardless of where in the new starts only, regardless of where the preadmission location is for some period of time, they're all short-stay patients because we don't have a base of existing long-stay patients. You have legacy pace from past couple years. . Michael Witzeman: So when you're talking specifically about the new starts, think of them all as short-stay patients for at least a period of time. Michael Murray: Okay. And then these new markets are pretty sizable. How should we think about the volume opportunity longer term? What's your typical market share in Florida? And -- and how should we think about the range markets? Kevin McNamara: Well, I mean, again, if you look at our historical market in some of these markets where we're the original hospice, I mean, -- the numbers are staggering, Joel jump in here. But I mean we're a diamond provider in almost any county that we have the license to operate in. . Joel Wherley: Yes. And we don't see a significant change in our outlook specific to our ability to grow into a market. And our last 3 new starts that we talked specifically about have demonstrated that. So we feel really good about the long-term outlook on our ability to continue to effectively grow those markets as we have in the past. Michael Murray: All right. And then just 1 more on Roto-Rooter. So I just wanted to get a sense for your current mix of paid leads versus organic leads is -- and what are your expectations embedded in your guidance? Michael Witzeman: Paid leads are roughly 53% to 54% of our total leads at the moment. We anticipate that mix to continue. We don't -- we have not anticipated a deterioration or a significant improvement. And that's why, again, we took our guidance and added of additional marketing costs -- marketing costs for the rest of the year. But we don't -- we haven't projected a significant deterioration in that from the first quarter. Kevin McNamara: I mean it's hard. As I indicated, it's a constant battle. In the first quarter, we had 2 months of improving visibility on maps and then a change in change in March where we had a deterioration. And then we go to April to fight the battle and improve our visibility. So Mike is just saying as far as prognosticator, let's -- there could be some in, there's going to be some outs. Our hope, of course, is that we have improvement there, but it remains to be seen. I mean we've been to a period where you go back just less than 3 years, our percentage of leads from resources were 55% and that's 47%. I mean that's an expensive significant shift. Now having said that, Roto-Rooter has been through something similar, and that is when we went through the change from the importance of Yellow Pages, where Yellow Pages was all and Roto-Rooter has a dominant position in virtually every directory to the Internet. That was a tough marketing situation where we went from a dominant the first 2 pages in almost every major metropolitan directory to just 1 of 50 listings on the natural side. It was tough, but Roto-Rooter developed into in the dominant position nationwide on the Internet side. Now the Internet is changing. I have confidence that will be able to transition to the new normal, better than our competitors. And if you look at the growth we've had on the paid search side that is far as our 18% plus increase in leads on the paid search. I think that's a demonstration of that. But again, as we go -- there's a cost of the transition, and we're prepared to we're prepared -- I think, prepared to deal with it and rather we have done it in the past. Operator: I'm not showing any further questions in the queue. I'd like to turn it back over to Kevin for any closing remarks. Kevin McNamara: Thank you, everyone. We're happy. We had what we thought was a good quarter, excellent quarter in VITAS. And so good trends at both companies. And we look forward to reporting on our results for the current quarter in due course. Thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Have a great rest of your day.
Kati Kaksone: Good morning, everybody, and welcome to Terveystalo's First Quarter 2026 Results Call and Webcast. My name is Kati Kaksonen. I'm responsible for Investor Relations and Sustainability here at Terveystalo. As usual, I will go through the results with our CEO, Ville Iho; and our CFO, Juuso Pajunen. And after the presentation, you will have time for your questions. Without further ado, over to you, Ville. Ville Iho: Thank you, Kati, and good morning. Let's dive into it. So Terveystalo first quarter, during the first quarter, the market was even more negative than we expected going into the year. That was then clearly reflected into our revenue line, which came clearly down. And despite the adjustment measures that we did, especially in our operations, to adjust the ops to lower demand, there was a drop through to our adjusted EBIT, which was at EUR 34 million. Quality across the operations and services [ highest ] standard even improving, which is, of course, a positive sign of very professional and robust organization, delivering in any circumstances. If one then dives a little bit deeper in what's happening in Healthcare Services market, it is the market that is exceptionally negative this time around. We have not seen this type of a dip since the start of COVID. And basically, all of the segments, regardless of what data you look, all of the segments and services are roughly minus 5% to minus 10% down. The positive thing and silver lining with this one is that we are seeing a market bottoming out. So according to our judgment, and that's reflected also in our plans and actions, the bottom has been passed. And now the market shall start gradually slowly, but steadily grow from a low level. In our own operations, we have been, as we have reported earlier, we have been suffering from lower connected employees number. And that one as well, we see bottoming out. So going forward, now the number has been stable throughout the quarter and now looking at the sales funnel activities, looking at the renewals, looking at new opportunities, looking at win rates, we can with confidence say that we start turning this one into positive going into H2. Of course, the progress will not be rapid because this is B2B business and turning agreements around will take a while. But anyways, market and our own portfolio has bottomed out and now we can start developing on from this new base. The negative market environment was present in all of our 3 P&Ls, Healthcare Services, Portfolio Business and Sweden, a little bit different reasons and different levers into that one. But bottom line was that the market conditions were very, very tough during quarter 1 '26. Despite that one, of course, the absolute result level and profitability we achieved was high, and we can be pleased with our own ops. But now the eyes need to be fixed on growth going forward. Market will not give -- even though it starts gradually improving, it will not give anything for free. We still focus and concentrate on our own agenda. It is very much geared to boost growth in all of our segments. In Healthcare Services, we'll concentrate in occupational health care, a turnaround program and transforming that one to higher value for our customers and growth. We are renewing our offering for insurance customers and companies and intensifying cooperation with the insurance companies. We are focusing in segments that are growing in our traditional integrated care. One prime example is seniors where we have captured big markets in Kela 65 and Kela 65 continues developing positively for us. And of course, on top of this one, we are seeking drastic improvements in efficiency with our digital agenda in traditional operations in a digital 10X and also in prevention. In Portfolio Business, of course, a positive move from our side. This is dental growth. Actually, Dental has been a sort of a light or positive glimpse during quarter 1. It has -- the market conditions have been fairly good, and the team has done very good work in improving the business. And with the Hohde deal, the platform will be ever stronger and an integration of that platform, Juuso will comment on the phasing and timing of that one later in the presentation. We are actively engaging with healthcare counties. It is evident that they are very low with their purchases still. But at one point, that market will activate and we want to capture our fair share and even more from that one. In Sweden, market conditions have been tough. Now the efficiency is there, and we are operationally improving. Now the focus is in commercial actions and getting the revenue line in with the higher operating leverage and improving through that one, profitability. A cycle is a cycle, and it's clearly very, very negative at the present, but we need to look beyond this cycle. As I said, market will start gradually improving. But every time a strong cycle goes through an industry, some things change permanently. And that one, coupled with accelerating speed of technology development will mean that we need to be even speedier than the transformation of this industry, and we need to invest in all of the 3 modalities in Healthcare Services delivery. In integrated care, we are investing in Ella. We are making the life of our professionals easier, smoother, more efficient, and we are giving more time for professionals with the patients. In digital health care retail, we are improving the customer engagement call centers. We are investing in digital 10X and AI-assisted appointments and efficiency potential in this modality is huge. We are also starting to invest in prevention at scale, so digital engagement through digital and based on data proactive, active engagement with our customers being relevant when they need actively guiding them through their lifelong health journey and are looking for new growth in this emerging new market. We have the dry powder, we have the agenda, and we have the speed in executing in all of these 3 buckets. Two landmark milestones in this development during Q1. Terveystalo launched its new novel occupational health care digital platform for its first clients. This one is next level compared to current platforms in the marketplace. It's developed jointly with our joint venture, MedHelp, and it's now live, and it's used by the first paying customers. Early feedback from the market is very positive. We continue scaling this one rapidly throughout the year. And as I said, this is next level, this is future, and this will give way more value for our customers and better insights in their own personnel than before. This is a big step in our main business. In digital 10X, we have introduced AI-assisted appointments, and we are scaling that one. Also during the year, the efficiency potential in this modality is huge. We are also scaling volumes so that we can -- with our intelligent steering engines can steer more volumes in the digital modalities. At the same time, we are improving traditional physician-led integrated care. And there, the prime tool is Ella, which we have launched. It's the user interface for our physicians. And already now, we have gained some 30% efficiency improvement with the new platform. And at the same time, we have been able to give more time to physicians and patients. As said, we continue to scale this one up during the year. Within next 12 months, this is going to bypass any present platforms in the marketplace and will be a clear and powerful asset for Terveystalo. So market has been negative. It has bottomed out. We have agenda for growth. We continue investing. We continue accelerating our technology journey. And with that one, over to Juuso. Juuso Pajunen: Thank you, Ville. So good morning all. I'm Juuso Pajunen, CFO of Terveystalo. Let's go to the topic numbers. So first of all, if we look at the key numbers from first quarter, it is clear to say that the relative numbers are big. We see negative on everything else, excluding the NPS of appointments, which is improving and is a stellar 88. But outside of that one, each and every number is negative, and the market has been weaker than anticipated. But let's go through then a number by number, what we are talking about. But before we go to that one, it is good to note that if we look at absolute numbers, these are still quite robust figures. Our Q1 is materially above our average Q1 if we come to relative profitability. If we look in absolute EBITDA terms, this is the third best quarter ever in absolute EBITDA or EBIT, either way you want to look at. So in absolute terms, we are fairly strong. But in relative terms, we are absolutely disappointed and obviously, we'll work on to get forward. If we then look the group, we know that our big ticket component is the headwinds in the revenue. We also know that the mega trends are there. And in mid- to long-term, they will support, support the growth. But as stated, the market sentiment at the moment is exceptionally weak. If we then look on different segments, we will go a bit further into details. But in the Healthcare Services, the big thing is occupational health in the portfolios, it is the public sector. Sweden, we are now evening out. Then if we look on the group level and think about positives in here, our efficiency is strong. No matter how you view it in an exceptionally big market, we have been able to adjust our operations towards the lower demand, and we will continue to do that one. So all in all, with the efficiency, we will get forward. If we then look on the EPS impacting adjustment items, we have EUR 7 million of these ones. It is slightly more than I would like to see in there. But if we double-click those ones, we have a EUR 1 million related to divestment of child welfare, which was a strategic move, and we have now closed that deal at the end of January. We have EUR 1 million related to reevaluation of the values in the real estate assets. We are doing investments in those ones, and this is something that, when you reevaluate, this will take place. And then finally, EUR 1 million related to restructuring. It's good to note that structural restructurings, items that impact us in the future, not the demand-facing restructurings. And then finally, we have EUR 4 million in the strategic projects, which we have been communicating earlier that we have and we have guided how much annually is coming. This is slightly front heavy now facing a bit more in Q1 than I was anticipating. So all in all, then we end up in the reported EBIT of EUR 26.6 million. If we then go deeper into the Healthcare Services, margins are on a historically good level. So if we take any period of time and if we look at the Q1s of the history, the actual EBITDA and EBIT margins are solid. But obviously, they are coming materially down. So we come into the discussion of relative weakness and absolute weakness. And then if we look further where this is coming, this is coming from demand. The visit growth is minus 9.6%, and then everything else is basically flat. The visit growth, we will double click that one on the next slide. But basically, low morbidity impacts us through 2 different parts. We have the less appointments and weaker mix as the diagnostics are lesser than in a higher upper respiratory disease situation. And then obviously, the occupational health care has been contributing to that one. At the same time, as said, we are continuously adjusting for the lower demand, and we have also, during April, announced statutory negotiations towards the demand situation. And however, of these ones, once again, in absolute terms, we are in a good place, and we will continue to invest, for example, digital transformation like Ville explained. Then looking on the patient visits. We have -- the same factors we have been now going through in a couple of different quarters. We have the seasonality. We do know that we have some 43,000 fewer upper respiratory diseases than previous year. This is part of normal variation and changes annually. This is the lowest prevalence since the COVID pandemic if we take on the curves. Then if we look on the occupational health, it is very good to note, like Ville said, that we are now minus 5% in the connected employees, but it is now bottoming out or has bottomed out. Then the underlying impacts in there are still the same. We have the macro and macro component where there is less employees. And then in the dire times, employers are spending less into employee well-being. And then we have the actional part where we have the ongoing strong program to address this one. But at the same time, the connected employees and the large account sales cycles are longer. So we are getting back on growth in the second half of this year. Public sector has been now bottoming out like we see that this is not -- it's a minuscule bar in the chart. And consumer is having positive momentum in the total supported by the Kela 65 and general tendencies are there. If we then take a segue with that one to the portfolios, we already now see that in the consumer part, the dental business has been actually the best performing in relative terms of our businesses. They are basically flat while other modalities have been clearly down. This is a positive and then hopefully reflecting the future demand environment also. We have then good to note that in the portfolio numbers, we have the divestment of child welfare. It's visible in the bar order in here. Outsourcing is down 50%. This one, we have known. The contracts are expiring and ending. Staffing is still having negative momentum in the welfare -- wellbeing county market, but also that one is now little by little stabilizing out. Dental, as said, positive in relative terms in the performance. And we have announced the Hohde acquisition. That one is progressing well in a very good and positive dialogue with the authorities. And we are expecting the closing in the second half. And now based on the current visibility, it looks like it will be rather third quarter than fourth quarter. But obviously, in these processes, there are variables that are beyond our control. But as said, solid positive dialogue with the authorities. And if I would need to guess, it would be rather in Q3 closing than in Q4 closing. Moving to Sweden. We are having a weak market. It is a continued weak market and Sweden as an export-oriented nation is also having their share of the market environment. At the same time, it's good to note that our efficiency is in place. We have the EBITA margin is now improving, absolute numbers, 50% up, give or take, almost 60%. Obviously, within our scale, that is peanuts in the total absolute numbers. But it's signaling that we are going to the right direction. If we then look beyond the efficiency, our next battle in here is the growth. And we already now see that our connected employees are increasing. But at the same time, the behavior is similar by the employers as in Finland. So their behavior is dampened by the weak macro. But we have the means and the tools for growth in here. And we are confident that this will improve as we have iterated many times earlier. When talking about investments, we continue our investment cycle. We are now at EUR 56 million on the LTM. I think that it's good to highlight from here that what we are doing is facing the real world. It is in production, it is in use. Our brightest investments, Ella, it's the user interface for professionals. It's already live. We have been rolling it out to wider user groups with improved functionalities, and we are seeing continuous growth on the usage rate. So this is live. This is not something that happens at the back office and then one day comes somewhere. We are doing this one. The same applies to our joint venture, MedHelp. We have in March rolled out this to customers. We have paying customers on this one, and we are continuing this one. So what we are doing is already now impacting us positively. If we then look on the balance sheet, we continue to have a positive balance sheet position. Our net debt to EBITDA is at 2.4. It has been increasing due to weak cash flow in Q1 and reduced profitability in Q1. But if we double-click that one, we are in a good component. And on the cash flow perspective, it is good to note that in our cash -- how our cash operates. First of all, we are a negative net working capital company, which is obviously positive from a balance sheet perspective. But when the revenues decline, our cash flow also weakens because we don't actually release net working capital, we increase it. So that one is impacting us negatively. Then the second component on the cash flow is that if we -- if you look on the taxes paid now in Q1, we paid taxes from the record profits of '25, and that is having a negative impact on the cash flow. So all in all, our balance sheet is strong. We can continue to invest. We are not limited by the balance sheet. But at the same time, we are working on the cash flow and the key component in there is going back on growth. Then before going to guidance, let's take a quick view on the market environment. First of all, if we look at the red arrows, they are all pointing down. This is weaker than we originally expected in February. We have had negative momentum through all payer groups. And then we have had incidents in the world that are also impacting, for example, the consumer confidence that Ville was showing, now referring especially to the Iranian war. So the market environment in Q1 has been exceptionally weak. However, then if we look on the next 12 months and we look further the outlook, actually, the arrows are the same we had in February. And based on the data we have, we believe that the bottom has been seen. We do know that public sector both in Portfolio Businesses and Healthcare Services is on a lower level. They are still having stickiness in the system, but little by little, it will improve over time. If we then look at the consumer market, we have the dental, is already performing well. As stated in relative terms, it was the best performing payer group and discipline. And then looking forward, we have the Kela 65. We have recently heard the news on the widening of the scope of Kela 65 and widening the scope of the services within Kela 65, which are positive. Insurance market continues to be in a positive momentum. And then we have Sweden, which still is having positive macro forecast slightly coming down compared to their February post Iranian war, but they are still positive. So if we look at the market momentum, we believe that the market will improve. Then at the same time, we do know that this is tilting towards second half and the latter part of that one. So if we think about the developments, Q2 will definitely be difficult, Q3 is always seasonally low, and then Q4 is the place where we would see the impact. And with these ones, we reiterate our guidance. We expect full year '26 adjusted EBIT to be EUR 135 million to EUR 165 million. The estimates are based on the gradually improving demand environment as explained earlier and normalization of the upper respiratory infections in the second half. And as stated profitability in the first half is expected to be below the first half of '25. Then further to that one, it is good to note that our scenarios at the moment are pointing rather below midpoint than above midpoint of our guidance. So all in all, we have a difficult first half, but we have a strong, robust and efficient motor, and we are investing in the future. So we are confident that we are also delivering with those investments. With these words, thank you, and let's go to Q&A. Kati Kaksone: Thanks, Juuso. We are ready now for your questions. Do we have any questions from the phone lines? Operator: [Operator Instructions] The next question comes from Iiris Theman from DNB Carnegie. Iiris Theman: I have a couple of questions. So if I -- I'll ask them one by one. So firstly, what data indicates that the market has bottomed out? Can you explain that? Ville Iho: Over to you, Juuso. Juuso Pajunen: Yes. So basically, it depends how you look at on the market perspective. We obviously continuously follow up our different type of data points, consumer behavior, visits on different intervals, on days, on weeks and those ones. And at least our internal data is indicating that we have now bottomed out. Then you saw from Ville basically the connected employees perspective. Ville mentioned already in the call that it has been now stabilizing and gradually with the pipeline looking that we can capture going forward. But on the external markets, we are especially referring to our own internal data. Ville Iho: Yes. And I think it's important to note that now we are talking about sequential improvement. So market has -- if one a little bit cuts the corners, market has reset to post-inflation new normal. And now from that base, it starts slowly but steadily grow. Iiris Theman: Okay. And why did you keep your full year guidance even if your scenarios are pointing below the midpoint? Juuso Pajunen: Well, we have actually discussed this topic also earlier that when we are within the range and we see that both ends of the range are something within plausible scenarios, then we don't change it. So that is how we have behaved earlier, and that is how we continue to behave earlier. Iiris Theman: Okay. And can you still go through the drivers that will contribute to reaching the midpoint of the full year guidance, which implies basically only a 4% EBIT decline? Juuso Pajunen: Yes. So first of all, I iterated that we are likely to be rather below midpoint than above midpoint. So then it is up to you to decide on that one. But basically, the drivers that are pushing or that are impacting our guidance. And obviously, you need to put your own finger in the air, how you take them within your estimates. But we have the upper respiratory diseases, we have the consumer confidence and a general corporate behavior that we are expecting to improve from the current rock bottom. And then we are also confident that we have bottomed out in the connected employees and that we are getting forward with those ones in the second half. So these are the key drivers if we look our market. And then, of course, the public sector behavior is expected to have bottomed out at the moment. Iiris Theman: And then a question regarding portfolio businesses. The margin decreased significantly from Q4 and Q1 last year. So is this a one-off or a level that we should expect for the coming quarters? Juuso Pajunen: Well, all in all, portfolios is also facing a negative demand environment, especially from the public sector. And then it is good to note that now the outsourcing contracts have been also value contributing and decline in those ones will not anymore deliver margin expansion, but declining revenues is negative for us in the total perspective. So we are expecting improved performance in portfolios and also now sequential improvement, as Ville explained, for the full year. Ville Iho: Yes. So question, obviously, is warranted -- but if one looks at our plan and also our internal forecast, so we are not expecting as a drastic drop for upcoming quarters as you see during quarter 1, as you said. So we are looking for -- realistically looking for a gradual improvement from a lower base. Iiris Theman: Okay. But basically, the margin decrease is that related to -- mainly to outsourcing business? Juuso Pajunen: There are impacts. It is mainly related to the public sector. But basically, the overall market environment has been weak. So that has been contributing throughout. Iiris Theman: Okay. And my final question is related to the Finnish government's budget proposal that was just released. So is there anything negative or positive that you would like to highlight regarding private health care service providers? Ville Iho: Well, if anything clearly positive, expansion of Kela 65, obviously, is a highly welcomed initiative from our point of view. We have been investing in this segment. So user segment seniors. We have been investing in Kela 65 and now expanding the scope of the service to do more diagnostics and also allowing higher frequency of use will most probably increase the number of users and also frequency of use. So that's welcome news. Operator: [Operator Instructions] Sami Sarkamies: Can you hear me? Kati Kaksone: We hear you fine. Can you hear us? Sami Sarkamies: Okay. Four questions. I'll take this one by one. You're calling first half to be down from last year, but how should we think about the second quarter relative to last year, given your comments regarding the market having bottomed out during the latter part of Q1. Operator: The next question comes from Sami Sarkamies. Juuso Pajunen: Thank you, Sami. We identified you... Ville Iho: There's some stickiness online. Juuso Pajunen: But basically, we don't guide per quarter, but it is clear that quarter 2 will be also weak, but what we think about is sequential improvement in total. So at the moment, it is not against comparables as weak as quarter 1 was. Sami Sarkamies: Okay. And then on connected employees, we're expecting this to start growing sequentially in the second half of the year. Have you already won these deals? And how are front book prices looking relative to your current backlog prices? Ville Iho: Very good question. So deals are won and equally lost all the time. So then the real question forecasting forward is the funnel, how much renewals you have and how much new opportunities you have. And then against that one win rates. And then, of course, you have the packages and scopes and price levels. So what we are seeing now is a clear improvement in the new opportunities funnel. So new opportunities bucket increasing all the time and applying sort of average win rate to that one, we see a clear increase from that source. On the other hand, renewals from our existing customer base, that bucket is shrinking and renewal win rates are improving and really, really high. So just mathematically, looking forward, we can sort of, with confidence, expect growth. It's not going to be sort of early on rapid and skyrocketing, but it starts to grow. And of course, we want to accelerate it over time. Then looking at the scopes when these bids enter this tender space and comparing those ones with our current portfolio, the price levels are higher than existing ones. But then you need to, of course, do the full cycle of negotiations and go over the finish line. And only then you see what is the final package and what is the final price level on those agreements. But all in all, this is forward-looking picture, is positive, finally bottomed out and now looking forward and progressing to more positive. Sami Sarkamies: Okay. Then I may have missed, but did you give any commentary regarding cash flow in Q1? It was quite a bit below last year level. So what are you expecting for the full year? Juuso Pajunen: Yes. So basically, what I iterated on the balance sheet slide was that, first of all, cash flow was negatively impacted by the profitability. Then the second component is that we paid taxes from the record year previous year. So all-time high profits lead to all-time high taxes, obviously. And then the third component is that our net working capital is structurally negative, which means that decline in revenue impacts negatively our cash flow. And these are the 3 components. And obviously, taxes, we don't pay twice, but the growth component is very important for us for the cash recovery when we are going forward. Sami Sarkamies: Okay. And then my final question is on Hohde acquisition. Are you expecting to see any remedies from competition authorities? And what is your thinking on timing for closing when you sort of announced the deal at the year-end? Juuso Pajunen: Yes. So I also iterated that one on the portfolio slide. But basically, first of all, we don't comment the ongoing process from the content perspective. So that one we don't state at here. But on the closing, we have stated that the closing is expected to happen on the second half based on the dialogue so far that we have had with the authorities, we believe that it's rather in Q3 than in Q4. So we have a positive constructive dialogue continuously ongoing. Ville Iho: Yes. And maybe still, even though you said we don't comment the content, I can say that against the assumptions going in with what the process indicates and what is our current view on the sort of deal perimeter and the final package, I would say it's rational. It's rather on slightly more positive than we thought going in. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Kati Kaksone: Thank you. We covered some of the questions from the webcast audience already earlier, but there are a few left. So maybe starting from the cost structure and the adjustment made. What specific actions did we take? And what actions are we still implementing going forward? Ville Iho: So we are -- of course, we are adjusting as agile company should -- for the lower demand and lower volumes, especially in our sort of customer-facing activities in our operations. We have scaled down almost according to the lower volume in our ops in Healthcare Services, where the volumes were down by 11%, we were able to adjust FTEs by 10%. So that's a very, very good and sort of robust achievement by ops team. Then we are -- one needs to note and remember that at the same time, we are also investing. So we are increasing resources in product, customer service, sales, account management-related activities, especially in occupational health care, but also in consumer and insurance-related activities. But all in all, we have been able to adjust nicely. Looking forward, of course, we are -- given the negative cycle, we are using this window as an opportunity also to look at the overhead and look at some structures. We have a separate program related to applying AI in the back-office functions, and that has started. But that's not really now in the scope when we are adjusting for the lower volume. But during next 12 months, you will hear more about this project Nova also. Kati Kaksone: Thanks, Ville. Then let's talk about the outsourcing in the Portfolio Businesses where we have seen the revenue decrease for quite some time. What does the remaining outsourcing portfolio look like? And do we expect further planned reductions beyond '26? Juuso Pajunen: Yes. So basically, if we look at the numbers in '25, the outsourcing delivering revenue of EUR 55 million, give or take. And we have already in our guidance stated that we are expecting roughly EUR 20 million -- we are expecting EUR 20 million reduction in the outsourcing portfolio revenues in '26. And currently, we are very clearly going towards that one. Kati Kaksone: And then beyond '26 is a... Juuso Pajunen: Beyond '26, that remaining -- roughly EUR 30 million portfolio will continue shrinking year-on-year. Kati Kaksone: Yes. Exactly... Ville Iho: And then we are, of course, talking about legacy outsourcing deals, and that's the focus for that sort of sliding curve. We are, of course, interested in partnerships with the health care counties and we are engaging actively. Right now, sort of the sales funnel for larger outsourcing type of -- new type of deals is fairly thin, but sort of engagement is active. And I would say, also according to our sort of data and interviews, some 50% of the counties are interested in increasing their purchases from private sector. But as we have seen, it's very difficult to put a date on when that starts to grow. Kati Kaksone: Yes. And it should be noted that the remaining legacy contracts are on a higher end in the margin as well. So getting healthier from that perspective as well. Then a question on the connected employees in the occupational health. We have seen a decrease for a few quarters for now. Can we just reiterate the reasons behind the decreases? And what are the sort of consequences from? For example, last year, we had some negative media coverage and had that impact... Ville Iho: Yes, it's a very, very good question. It's a combination of a couple of things. When we went into our profitability improvement program in late '23, one of the activities that we were adjusting back then was our very low price level in our main business, occupational health care. So the market was sort of had bypassed us in pricing for quite some time. And hence, the gap was way too large to operate with adequate profitability in this business. We did the increases in 2 steps. And in hindsight, I guess we could have done it a little bit more smoother so that maybe 3 steps would have been the better option. That sort of latter price increase, coupled with the negative media coverage related to billing was a negative trigger point for sort of many companies and additional tendering. Since then, of course, it has been rectified and trust is back. But we saw the damage last year. But as said, the important thing is that after negative development and cycle, now it's bottomed out and forward-looking funnel looks positive. Kati Kaksone: Exactly. Then the last question is related to the cooperation with the insurance companies. We have talked about intensifying our cooperation and sort of next generation of insurance partnerships. And what's the plan there? Ville Iho: First of all, we are doing fine with insurance companies. So actually, looking at the market view, even though the absolute volume in use of insurance coverage for health care spend, all in all, for all of the operators, is negative at the moment. Our market share has been improving. So we are gaining in that market, even though -- even that one is in negative cycle currently. So what we are doing there, of course, we are, in a way, putting ourselves in insurance company shoes and looking at what they are facing, what type of problems they are seeing, how they want our operations to serve the end customer, but also then what type of transparency we want and need to give them related to effectiveness of our care chain and fluency of our care chains and cost level. And we are building that sort of more active engagement all the time and getting positive feedback from that front. So we -- with our capabilities, excellent capabilities, we can be a better partner for insurance companies, guiding and steering the customers and patients to right modality of service, right care chain, measuring the care chain effectiveness, being very precise in billing and also give transparency on that one and also provide more transparency on sort of a full scope of the population on those contracts. So there are many things that we are doing and continue to do to further improve our relationship. Kati Kaksone: Thanks. With that, we don't have any questions left. So any closing words first from you, Juuso and Ville. Juuso Pajunen: No, thank you. We will continue pushing for '26. Ville Iho: Absolutely. It's a tough environment, but of course, we are tougher and now see forward building on a lower base, but with a very, very positive view. Kati Kaksone: Thank you. And on a personal note, this is my last quarter with Terveystalo. It's been a pleasure working with you guys for the last almost 9 years. I have full faith in this company and the team, and I believe that Terveystalo will come through as a winner from this cycle and from this industry transformation. Thanks. Have a great rest of the day and weekend.