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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.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Moog Inc. Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Aaron Astrachan, Director of Investor Relations and Financial Planning and Analysis. Aaron, please go ahead. Aaron Astrachan: Good morning, and thank you for joining Moog's Second Quarter 2026 Earnings Release Conference Call. I'm Aaron Astrachan, Director of Investor Relations. With me today are Pat Roche, our Chief Executive Officer; and Jennifer Walter, our Chief Financial Officer. Earlier this morning, we released our results and our supplemental slides, both of which are available on our website. Our earnings press release, our supplemental slides and remarks made during our call today contain adjusted non-GAAP results. Reconciliations for these adjusted results to GAAP results are contained within the provided materials. Lastly, our comments today may include statements related to expected future results and other forward-looking statements, which are not guarantees. Our actual results may differ materially from those described in our forward-looking statements and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings. Now I'm happy to turn the call over to Pat. Patrick Roche: Good morning, and welcome to our earnings call. We delivered an outstanding second quarter. We achieved double-digit revenue growth relative to prior year, our second highest revenue on record with strength in all segments. We set records for both total and 12-month backlog with 12-month backlog up 33% from the prior year. We also delivered record adjusted earnings per share due to our strong growth and improved adjusted operating margin. Demand is strong. The business is executing well, and we're delivering ahead of our guidance. We are continuing to see the effect of a structural shift in the defense market, and we're well positioned to meet that growth. Our focus on operational simplification ensures that we can deliver on that growth and continue to meet customer commitments. Our results are reflective of continuing success in driving both improved operational and financial performance, and we're confident in our ability to deliver for the rest of the year. Now let's turn attention to end markets and the macro environment, starting with defense. The Middle Eastern war has further increased the need and urgency to boost U.S. defense industrial manufacturing capacity. This has resulted in increased spending requests by the administration and alternative procurement strategies to align resources within the industry. We are actively partnering with the primes and agencies to respond to this urgent and growing need. For example, production rates on key missile defense programs are anticipated to increase by factors ranging from 2 to 4x over the next few years. For our part, we continue to invest in expanding our capacity and are well positioned to respond and deliver increased production output. Moving to commercial aerospace. Customer demand remains strong with clear and consistent signals of increased production rates. We are confident in our customers' growth. Our production plans support those customers' near-term needs and longer-term goals while judiciously managing inventory growth. On the aftermarket side, higher fuel costs may result in a shift to more fuel-efficient aircraft and a reduction in some operating routes. Despite this, we are confident that our platform exposure and strong aftermarket position will support our current plan. Finally, within industrial markets, we see continuing stability with no discernible impact from the Middle Eastern war at this point. Backlog is firm relative to prior quarter. We see further strengthening of data center cooling pump demand. Overall, end market conditions across the board continue to be very favorable for our business. Now turning attention to the 3 leadership priorities that guide our work: Customer focus; people, community and planet; and financial strength. It was inspiring to see the successful launch of Artemis II and the safe return of NASA astronauts after traveling around the moon and back. Moog played a key role across the Artemis II mission with launch platform gantry actuation, thrust vector control on all stages of the SLS rocket and critical light control systems in the Orion spacecraft. We are proud of how our innovation has supported manned space exploration on Mercury, Gemini, Apollo, Space Shuttle and now Artemis missions. Back on earth, we are pleased that 2 important customers have recognized unique contributions we make to their business. We received Embraer's Supplier of the Year Award for 2025, recognizing consistent operational execution and technical collaboration on mechanical systems. We also received General Dynamics Land Systems Supplier of the Year for Technology and Innovation Award for 2025. Our technology leadership to solve our customers' most difficult technical challenges and our focus on operational excellence, always ensuring we meet our commitments has built through long-term partnerships. Our customers' demand is strong and rising. We are proactively investing in capacity and capability to meet the increased demand. This includes robust investment in facilities, manufacturing equipment and automation and supplier resilience. It also includes the onboarding and upskilling of talent to support next-generation production. Across each segment, we are simplifying, optimizing and driving productivity improvements to systematically reduce lead times, increase throughput and ensure readiness for further growth. We will continue to invest in our organic growth and partner with customers in the U.S. and the U.S. government to ensure that we are ready to deliver at higher production rates. Now turning to people, community and planet. We're committed to developing our high-performing and engaged workforce through targeted leadership development, strategic workforce planning and global talent initiatives that accelerate skill building and succession readiness. Our collaborative efforts extend beyond our walls as we've actively strengthened local community engagement by increasing the level of hands-on volunteer efforts globally, supporting education, well-being and social impact. In parallel, our sustainability efforts are advancing with meaningful projects like rainwater harvesting installations. Together, these integrated initiatives reflect Moog's holistic approach to building a sustainable business that cares for its people, enriches its communities and protects the planet. Turning to financial strength. Our 80/20 mindset is key to simplifying the business. It allows us to focus our commitment of people and investments to the most productive and profitable uses. We're achieving operational improvements, and we are redeploying resources to accommodate new demand. Our portfolio reviews stretch from our operating segments through business units to our individual facilities. We continue to prune the portfolio through licensing, asset sales and end-of-life decisions. This quarter, we exited the general aviation avionics market with the licensing of IP and a last-time buy for our customers. As we further develop our 80/20 capabilities, we're evolving our playbook to reflect the nuanced difference of applying 80/20 to our businesses from industrial businesses with thousands of customers and hundreds of products to aerospace businesses with fewer customers and highly integrated platforms. This learning and refinement are part of increasing our maturity. Now let me switch over to the work we are doing to optimize our balance sheet, specifically the structural improvement in our commercial aircraft business. We're simplifying our global manufacturing and supply chain network and reshaping our supplier relationships. We have made excellent progress on the supplier side in this quarter. We're ahead of our plan in moving suppliers to a more agile demand arrangement. And in that process, we've achieved inventory destocking exceeding our plan. We have also selected a fourth-party logistics coordinator who will assume the management of nearly 30% of our suppliers. These are all transactional suppliers. We continue to drive cycle time and work in progress reduction by transitioning to focused factories with fewer non-value-add handoffs between Moog facilities or outside services. We used an 80/20 mindset to prioritize the transition required to achieve this. We also invested in a new Philippine facility at Clark to accommodate inbound transitions and vertical integrations to support our focused factory in Baguio for commercial flight control systems. The cycle time impact on parts transferred is substantial. In this early phase, it gives us the confidence that we can continue to optimize the balance sheet. In addition, these transitions release floor space in our domestic U.S. defense facilities, which is needed to accommodate growth. These examples highlight our continued progress with 80/20, driving productivity and margin enhancement. Our drive to make structural change is also starting to demonstrate operational improvement. Pricing reviews are integral to our business process and continue to happen at all levels in the organization. We are taking actions to mitigate any cost risk arising from the Middle Eastern war. We are also reviewing the evolving tariff landscape, adjusting our mitigation actions as appropriate and pursuing refunds when available. Our pricing activities are ensuring that we are fairly compensated for the value we create for our customers. Now turning to the full year. We've updated our guidance for fiscal '26 to reflect our excellent performance in the first half and a more positive market outlook. We've increased sales and adjusted diluted earnings per share and held adjusted operating margin and free cash flow conversion unchanged. With this updated guidance, FY '26 will be a year of solid double-digit year-over-year sales growth, further expansion in adjusted operating margin, even stronger double-digit growth in adjusted diluted earnings per share and improved free cash flow conversion. This represents substantive achievement against our Investor Day goals, outperforming on sales growth and operating margin, excluding tariffs. And with that, let me hand over to Jennifer for a detailed breakdown on the quarter and our updated fiscal '26 guidance. Jennifer Walter: Thanks, Pat. Before I get into our financial performance, I wanted to describe the refinancing activities we successfully completed this quarter. First, we amended our $1.1 billion revolving credit facility and our $250 million term loan, extending maturities of each out to 5 years. We also issued $500 million of 5.5% senior notes maturing in 8.5 years. We used the proceeds to call our 4.25% notes that were coming due in under 2 years, redeeming them just after quarter end. We're pleased to have extended and staggered our debt maturities and achieved tight pricing on the new notes. We had contemplated refinancing activities in our previous guidance, so there are no material updates to the guidance we're providing today related to these activities. I'll now turn to the financial performance of our business. It was another outstanding quarter. Sales were robust and adjusted operating margin was strong, resulting in adjusted earnings per share well above our guidance. We also generated free cash flow in excess of earnings. We took $3 million of charges in the second quarter that we've adjusted out of the operating profit numbers that we'll describe. These charges were largely associated with simplification activities, in particular, continuing activities related to footprint rationalization. I'll now talk through our second quarter results, excluding these charges. Sales in the second quarter of $1.1 billion were 13% higher than last year's second quarter. Sales increased nicely in each of our segments. The largest increase in segment sales was in Space and Defense. Sales were $314 million, up 16% over the second quarter last year, reflecting broad-based defense demand. Demand was particularly strong for space vehicles and missile controls. Commercial Aircraft sales of $247 million increased 15% over the same quarter a year ago. The increase was driven by higher volume and pricing on some of our major production programs. In Military Aircraft, sales of $235 million were up 10% over the second quarter last year. Activity continued to increase on the MV-75 program, reaching peak levels for the current development phase earlier than we had planned. Industrial sales were $256 million in the quarter, up 9% over the same quarter a year ago. The expanding data center cooling market fueled our sales growth, and we also benefited from foreign currency effects. We'll now shift to operating margins. Adjusted operating margin in the second quarter was 13.4%, up 90 basis points from the second quarter a year ago. We achieved these results despite 100 basis points of pressure from tariffs. Excluding this pressure, all of our segments were up nicely, reflecting operating strength. Space & Defense operating margin was 14.6% in the second quarter, up 200 basis points. The increase was driven by profitable sales growth, offset partially by increased product development, business capture and operational readiness investments. The margin expansion drivers have been consistent over the past several quarters. Military Aircraft operating margin was 13.7% in the second quarter, up 170 basis points from the second quarter last year. We benefited from profitable sales growth. Commercial Aircraft operating margin was 11.9%, just above that of the second quarter last year. Operating margin expanded from pricing benefits and was pressured from tariffs. Industrial operating margin was 13.2%, just below that of the same period [Audio Gap], up 40% compared to last year's second quarter. The increase, which we achieved despite the pressure from tariffs, reflects both higher operating margins and sales. Let's shift over to cash flow. In the second quarter, we generated nearly $100 million of free cash flow, bringing our year-to-date performance into solid positive territory and better than we had projected. Strong earnings contributed to our cash generation. Despite our strong sales growth, we held working capital relatively constantly. Growth in physical inventories associated with sales growth was largely offset by customer advances. Capital expenditures were somewhat below the quarterly average from the past year and are expected to pick up in the rest of the year. We continue to invest in our facilities to support our strong growth opportunities. In particular, we'll invest to support secured growth within Space and Defense and operational initiatives within commercial aircraft. Our leverage ratio was 1.8x as of the end of the second quarter, putting us just below the target end -- target leverage of 2 to 3x. Our capital deployment priorities center around organic growth, and we'll pursue strategic acquisitions to complement our existing portfolio. We strive to have a balanced capital deployment strategy over the long term. We'll now shift over to our updated guidance for the year. We're increasing 2026 guidance for sales and adjusted earnings per share from what we provided a quarter ago, and we're reaffirming our guidance on adjusted operating margin and free cash flow conversion. We're increasing our sales guidance for the year, reflecting the strong second quarter as well as further sales growth later in the year. We're increasing our sales guidance for 3 of our segments and lowering it for one. In Space and Defense, we're increasing our guidance by $35 million to reflect broad-based defense demand. We're increasing guidance for Industrial by $30 million, reflecting a strengthened order book, including for data center cooling pumps. We're also increasing guidance for Military Aircraft with an additional $25 million of growth largely associated with accelerated activity on the MV-75 program. For Commercial Aircraft, we're decreasing our sales guidance by $20 million to reflect our decision to slow the rate of incoming inventory on certain narrow-body platforms. We're pleased to report that we're -- our adjusted operating margin in FY '26 at 13.4% despite growing tariff pressure. We're now expecting 110 basis points of pressure from tariffs in FY '26, up 30 basis points from our previous guidance. Increased activity within our Industrial segment is causing this additional pressure, and we continue to work on our tariff mitigation plan. Our underlying business is performing well such that we were able to compensate for the increasing tariff pressure. At the segment level, we're increasing operating margin in Space and Defense on second quarter strength, partially offset by higher levels of research and development that we'll make in the second half of the year. We're decreasing operating margin in commercial aircraft on mix. We're holding operating margins for Military Aircraft and Industrial. Within Industrial, we're fully offsetting increased tariff pressure with benefits associated with higher sales growth. We're increasing our FY '26 adjusted earnings per share guidance by $0.40 to $10.60, plus or minus $0.20. We're reflecting our second quarter EPS beat, additional operating profit we're now expecting in the back half of the year and lower nonoperating costs, which are partially offset by higher tariff pressure. For the third quarter, we're forecasting earnings per share to be $2.65, plus or minus $0.10. Finally, turning to cash. We're still projecting free cash flow conversion to be about 60% with some changes within our guidance from a quarter ago. We'll use more cash for growth in physical inventories, and this will be offset by an increase in customer advances that we've secured as well as reduced capital expenditures as we align our spend with growth areas and adjust our timing to our needs. With respect to physical inventories, it has taken us longer to [indiscernible] existing operational challenges, and we continue to focus on resolving those. We have made progress, however, on rescheduling material receipts within commercial aircraft, as Pat described earlier. Next quarter, we expect to generate free cash flow conversion at about 100%. We won't consume cash for changes in working capital but we will increase our investments in capital expenditures. Fiscal year 2026 is shaping up to be another great year. We'll achieve a record level of sales, further expand our operating margins and make meaningful progress towards generating strong free cash flow. And now I'll turn it back to Pat. Patrick Roche: Thank you. We delivered outstanding second quarter financial results. We increased our guidance based on the continuing strong performance within robust markets. And with that, let me open it up to the floor for questions. Operator: [Operator Instructions] Your first question comes from the line of Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng: Nice job on the quarter and the outlook. I was wondering -- I was wondering if you could start with the missile business and if there's any update to the 20% growth outlook you've seen there, number one. And number two, can the industry and yourself grow faster than that if asked by the government? And are you being asked to do that? Patrick Roche: Jon, could you repeat which piece of the business you were asking about at the very beginning? Jonathan Tanwanteng: The missile controls business. Patrick Roche: Yes. Okay. Yes, as you can see with what's going on in the world currently, the demand is obviously increasing in the urgency of that demand. I talked about changing procurement strategies from the government, and you saw that reflected in 7-year agreements with the primes on ramping up their capacity by significant amounts. I mean, quadrupling or tripling the rate of production, if you take PAC-3 to go from 650 missiles per year up to the level of 2,000 per year. We've been in discussions with our customers over the last year or more about these increasing demands. It was becoming obvious that the arsenal was depleted and that production rates needed to increase, and we've been preparing ourselves for that, Jon. So at our Salt Lake City facility. That's where we do a lot of these control actuation systems that go on to the missiles. We have freed up floor space within that facility by the transitioning of other products out of that building. We are investing in the facility with some new capabilities to support this growth in the missiles program. And we feel that we have the facility space available and the capabilities to increase our rate at the level that's being asked for. Jonathan Tanwanteng: Okay. Great. And then on the Commercial Aircraft side, how should we think about the impact of the war on your airline customers' demand? Is that fully reflected in your outlook today? And does your wide-body focus provide more relative insulation just due to the airplane economics? Or maybe does the impact on these customers maybe shift that the other direction? Just help us understand how you're thinking about that demand picture going through next year. Patrick Roche: Yes. So we have reflected our current thinking into the guidance. There is some impact on flight patterns. I mean the flights in and out of the Middle East are down, obviously. We have 2 forward stocking locations in the Middle East where we hold product for aircraft on the ground servicing. Obviously, we shut those down as a consequence of what was going on, and we're servicing those from other parts of the world at present. A lot of airlines are suffering from higher aviation fuel, and therefore, they're making decisions on number of flights on routes. That, we believe, also switches their focus over to more fuel-efficient aircraft, and we would regard 787, A350 to be in that class. So you could expect more hours on those types of aircraft. And when we look at it in balance then, we see our business sustaining on the aftermarket side for the rest of the year, roughly the rate -- our rough run rate. And so it's in the guidance. We think it's a fair reflection on where we are today. And then on the OE production side, we're continuing to support the customers' interest in increasing their ramp rate and their longer-term aspirational goals within our own plans. And thank you for taking the second question, Jon, because we're not limiting it to one question. Operator: [Operator Instructions] The next question comes from Kristine Liwag. Unknown Analyst: Pat, Jennifer, Aaron, I just wanted to ask on the defense environment. It seems like we're just in a completely different trajectory versus different cycles. The White House is asking for $1.5 trillion for fiscal year '27. Now whether or not that materializes or not, it seems like the general direction for that fiscal year '27 number is still higher than fiscal year '26, meaningfully so, maybe at least 20%. I was wondering when you look at your outlook for your defense business, like how is Moog positioned to capitalize on this potentially meaningful growth ahead? Because when you look at your core capabilities over the years, you guys have transformed from a component manufacturer to really providing more systems and solutions that are in greater need. So I just want to understand what that looks like and what's kind of embedded in your base case? And if we look out a few years, I mean, how meaningfully higher could revenue be? Patrick Roche: So thank you for the question, Kristine. Good to hear from you. Our business is continuing to expand as a consequence of this. And yes, whether it's a 50% step-up next year or 20%, it's a business that we are well positioned to secure. I think that's from 2 perspectives. It's our operational effectiveness as a business, and it's the technical capabilities we have. Let me explain both of those. So the operational efficiency side, our delivery performance on the missiles has been 100%, 100%. That's 100% on time, 100% quality to our customers. That is winning more business. And so when we announced our orders on PAC-3, that was a partial takeaway from one of our competitors. And so our operational performance wins us additional business, especially in an environment where the primes are struggling to get capacity. So we have an opportunity not just with the uplift on existing programs, but our ability to displace competitors on other programs. And then the technical side gives us an ability to increase our scope of supply. And so we're actively pursuing opportunities where we can add to the solutions that we deliver for the customers. So I would say they're the important factors that feed into a growing strengthening of not just the business, the market itself but our business within that market. Unknown Analyst: Super helpful. And we're also seeing multiyear agreements for the defense primes to increase capacity. When it comes down to where you are in your tier of a supplier, how do you anticipate that capacity spend going to be supported? Do you expect more customer advances to support some of that incremental working capital or CapEx? Or would you have to invest your own money to be able to meet some of those demand signals? How do we think about that balance? Patrick Roche: I think there's a mix in there. We are in the process of discussions with our customers about that ramp that's in front of us. If you reflect on the PAC-3 orders that we got in some of the prior couple of quarters over the last year, that was reflective of current production volumes of 650 units per year. Obviously, there's a significant ramp, and we're in negotiations with each of our customers on how we support that ramp with them over that extended period of time. We are prepared to invest in the business. We think that's the right thing to do. Jennifer has consistently said that we have a balanced capital investment plan and supporting the organic growth in pieces of the business that we excel at, it makes a lot of sense for us. So for instance, on the missile side, I talked about Salt Lake City facility. We're putting in a circuit card assembly line there that specifically supports those missile programs. So we are making internal investments on it. We are looking to our customers and the government to say, well, how can they help us accelerate things if we need to, but that's all ongoing discussion. Unknown Analyst: Great. Switching gears to space. You called out the Artemis II mission. I mean you guys are very -- your presence in legacy space companies are pretty clear with demand space exploration at Mercury, Gemini, Apollo and then previously historically with Space Shuttle, now Artemis. Can you talk about the environment for that? How -- what's your presence in terms of the newer space companies? How do you see the dollars shifting from legacy space versus the new space innovators? And what's your presence between the 2? Patrick Roche: Yes. So thanks for highlighting the rich heritage in space exploration. I mean we've been in that from the beginning, as I stated in the notes, a piece of Moog hardware flies into space every week, which is a remarkable fact. It's not just the legacy programs that we're involved in. I think, Kristine, you know that we are involved in thrust vector actuation on many of the launch vehicles themselves. So as the commercialization and growing defense presence in space drives demand, we get exposure to that on the thrust vector control side of launch vehicles. Our investment in what we call Plant 27 here in East Aurora campus is around avionics and actuation that goes right into those launch vehicles themselves, and we've been ramping our capacity there. Our exposure in space also extends to the space vehicles. And as you know, with space as the new warfighting domain, as it was described last year in Space Symposium, there is a lot of interest on the defense side in our space capabilities, and we see growth in that as well. And Jennifer called it out, I think, as space vehicle strength within the Space and Defense Group in the second quarter. Unknown Analyst: Great. By the way, not having to limit some questions, may be a bad thing but I'll push my luck here with one more. You guys have given a multiyear outlook on margins and where they could be in the trajectory and you've been executing on that. I was thinking about all these opportunities, all your end markets are experiencing significant growth. You have changed your pricing mechanism across the business. I was wondering how conservative is the previous 3-year guidance you've given on margin now with how well you've been able to execute so far? And when you look at the quality of the things that you're providing and the lack of other available options, really, where do you see the maximum limit on margin? And it could be in reference to your 3-year outlook or over time? Just want to understand the earnings power of Moog going forward. Patrick Roche: Well, I'm incredibly proud of the success we've achieved to date, Kristine, in delivering on those long-term goals we set out back in 2023. This comes up to the tail end of that period now, 2026. And as I said, we're delivering substantively on what we committed to in that we are due to give an update on what comes beyond this. And so we're looking forward to having the opportunity to do another Investor Day. It's maybe later in our calendar year. We'll announce a date at some point in the future. And I look forward with a high degree of optimism to our future, Kristine. Do you want to say something, Jennifer? Jennifer Walter: Yes. I would say for our guidance this year, we feel that we've got a balanced approach to our guidance like we did for EPS, we did increased that by $0.40, and we did beat our guidance by about that same $0.40. What we are seeing is, we're reflecting that strong Q2 in our guidance, and we're also projecting some benefit in the second half as well. Operating profit, specifically in Space and Defense is going to continue to contribute. So we have adjusted for that. But we're also now making additional investments in R&D because we've got such great opportunities, as we are just discussing some also lower nonoperating expenses. But we do have tariff pressure that is increasing that is offsetting that as well. So we want to make sure that we're staying balanced and some of the things that we're doing to reflect the strong operational performance of the business. We're also continuing to invest at higher rates, too, to secure and to ensure we're positioned great for new business opportunities. Operator: Your next question comes from the line of Gautam Khanna from TD Securities. Gautam Khanna: I wanted to make sure I understood. On the Commercial Aircraft guidance revision, what's driving that? Because it sounds like demand is pretty strong. Just curious. Jennifer Walter: Yes. So overall, demand is strong for our Commercial business. But when we talk about the guidance, we are making a deliberate decision so that we are not bringing in materials ahead of when we need it, and that does have some downward pressure for us on our guidance. It's not to say that there's any long-term substantial changes in anything that we're doing from an outlook. It's just us managing our inventory to align with the timing of deliveries that we need to do and not building up excess cash for that. So it's really a timing thing that is incorporated into that guide. Gautam Khanna: And just to be clear, is that due to cost-to-cost accounting or meaning what you expect to ship is no different? Jennifer Walter: We're bringing in lower amounts of material and those material otherwise would have been absorbed into the cost-to-cost accounting and been reflected in sales and operating margin. We're simply delaying that somewhat. Gautam Khanna: Got you. And so does that have an equal impact to benefit cash flow by the same amount? Jennifer Walter: It does. So it does benefit our cash flow, and you can see that our cash flow we're kind of holding the same. Some of the things that we're seeing on the cash flow side is from a short-term perspective, we are pushing out material receipts. That has a benefit. That's what we're talking about here. But there's also operational execution things of getting shipments out that we continue to work. It's managing our customer demand and transitions also fall into that as well. Gautam Khanna: Okay. That's very helpful. I was curious if you could give us some flavor for if demand has changed on some of the major Commercial Aircraft production programs like the A350, 787, does that explain some of the... Jennifer Walter: I would say, no, the demand has not changed. Sometimes it's just the timing of when we are doing the work that can impact when we're recognizing the sales But overall, there's strong demand for the -- there's strong demand for the aircraft. We're seeing that on the wide-body platforms that we've got significant content. We're seeing that on the narrow-body platforms as well. So overall, the business is very robust, and these things only reflect some timing. Gautam Khanna: Timing by Moog, not by the OEM customer, it is... Jennifer Walter: By Moog, yes, by Moog. So we're not going to bring in material prior that we can so that we can manage cash flow, manage the business for cash. Gautam Khanna: Okay. That's helpful. And then I was curious also, a quarter ago, there was a more urgent order for V-22 parts. I was curious, are you seeing other pockets of more urgent demand? I know you mentioned missiles but elsewhere in the defense business? Jennifer Walter: Not to that extent. That one was definitely one that stood out. That's why we called it out because it's basically the demand that we had expected for a year that it was all captured in one quarter. So there has not been anything significant that stands out like that. However, the overall growth of the business is significant, and that's why we've beat on our sales, and we are also raising our guidance on the sales as well because there is just that underlying business performance, not necessarily on any one program or acceleration of any one program but just overall strength in our defense businesses. Gautam Khanna: Great. And then I know you did discuss tariffs and the impact. Could you just maybe elaborate on what changed from the first quarter with respect to tariff impacts for the year? Because I remember you were moving product flows and helping the airlines file for duty drawback and the like. Is that still happening? What explains the variance on tariffs relative to what you thought a quarter ago? Patrick Roche: So I would -- Gautam, I would describe it as a pretty fluid situation still. I mean the tariffs were struck down in the quarter. The Section 121 tariffs were imposed then on other countries from outside the U.S. and that has a 90-day validity. And then we're moving over to Section 301 tariffs for the balance of the year, we anticipate as the administration continues to focus on tariffs as a revenue-generating mechanism. And so we assume that we have tariffs on an ongoing basis, and it's in our guidance. I think what has changed for us is the level of business in some of the parts of our organization that are particularly sensitive to the tariffs. So we have greater volume of business going through on the industrial side, that's attracting tariffs. And so the amount of dollars we're spending on tariffs has increased as a consequence of that sort of mix shift, if you like. Gautam Khanna: Okay. And I know I'm asking a lot of questions but I appreciate the invitation to do so. Just curious also, is there any kind of direct Middle East impact that you could foresee in the business? I'm not talking just demand-wise, but supply chain or input costs or any other kind of more diffuse impacts that we can see? Patrick Roche: Yes. Well, maybe a couple of things that come to front of mind. I mentioned earlier that we had 2 forward stocking locations in the Middle East. I mean their activities have wound down completely because of the war that's going on. So we've redirected where that work goes. Obviously, fuel, the cost of fuel has increased, and we see that in some parts of the world already, maybe even an escalated or an elevated level relative to what you see here in the U.S. So in the Philippines, we see fuel costs have increased quite significantly because it's all imported fuel. And so we've reflected those in our thinking as well for the quarter. So that's some of the direct impacts. Indirect changing of flight patterns, changing of aircraft flying and routes. We think we've integrated into our guidance as best we can at this point, and we'll see how that unfolds. It all depends on the duration and depth of the impact that comes from the war, and that is highly dependent on the duration. Gautam Khanna: Got you. But the fuel impacts are already reflected in your guidance. Patrick Roche: Yes. Gautam Khanna: We've already marked-to-market, assuming for the full year, we stay at this level. Patrick Roche: What I'm describing in Philippines are transportation costs and stuff like that. The direct input costs that we have, we've reflected what we expect those to be for the full year. Gautam Khanna: Perfect. And I just wanted to ask, I know it's 3, 4 weeks -- 3.5 weeks into the quarter you have not seen any indications of demand weakness incrementally from what you saw in the March quarter? Patrick Roche: No, nothing. Operator: Your next question comes from Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng: Can you hear me? Patrick Roche: Yes. Jonathan Tanwanteng: Okay. Perfect. I was wondering if you could give us a little bit more color on the FLRAA MV-75 program. How much that is pulled in by? And how that impacts your, I guess, revenue and profitability run rate in the out years, not specifically this year? Patrick Roche: So, in this year, what we were reflecting in the high level of activity in quarter 2 was getting up to the level of activity at an earlier point in the year. We expected to get to that level of activity, which we Jennifer described as peak activity. We expected that to come in the third quarter, I believe, and we got there in the second quarter because of the focus on the program from both our customer and the government. We brought forward some of the work we were doing. So we're at the peak run rate as we see it for the activities themselves. That continues throughout the EMD phase, engineering, manufacturing development phase of the program. There are conversations between our customer, Bell and the government about getting towards flight earlier than was originally planned, so getting into early-stage production more quickly. Those conversations are active, and we are supporting them. Jonathan Tanwanteng: Okay. Great. And then second, how should we think about the potential for Congress to change or flip this fall? And how does that impact your expectation on the defense spending in general? And if that could bleed through to specific programs like munitions or aircraft or in the space arena? Patrick Roche: Yes. I mean, whatever the total level of spending is, it really comes down to your exposure to different programs. And we believe that we are exposed to a set of programs that are in priority areas. The replenishment being one specific example, there's a need there that will have to be satisfied no matter what is agreed as the total budget for the defense forces. And then there are a number of priority programs, and we believe that our exposure is across many of those. And even if one or other goes by the wayside, we think we have a good solid growing business based on what's happening. Operator: Thank you. There are no further questions at this time. We have reached the end of the Q&A. I will now pass the call back over to Pat for closing remarks. Patrick Roche: So that concludes our earnings call. I appreciate you taking the time to listen to our update on the business, and I look forward to providing an update again next quarter. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Customers Bancorp, Inc. 2026 Q1 Earnings Webcast. [Operator Instructions]. I will now hand the conference over to Phil Watkins, Executive Vice President, Head of Corporate Development and Investor Relations. Please go ahead. Philip Watkins: Thank you, Miriam, and good morning, everyone. The presentation you will see during today's webcast has been posted on the Investors web page of the bank's website at www.customersbank.com. You can scroll the first quarter 2026 results and click download presentation. You can also download a PDF of the full press release at this spot. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking statements under applicable securities laws. These forward-looking statements are subject to change and involve a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update those forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our most recent Form 10-K and our current reports on Form 8-K for a more detailed description of the assumptions and risk factors related to our business. Copies of these filings may be obtained from the SEC or by visiting the Investor Relations section of our website. We also reference non-GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. At this time, it is my pleasure to introduce Customers Bancorp CEO, Sam Sidhu. Samvir Sidhu: Thanks, Phil. Good morning, everyone, and welcome to Customers Bancorp's First Quarter 2026 Earnings Call. I'm joined this morning by our Chief Financial Officer, Mark McCollom. Before we get into the results, I want to take a moment to share what makes this call meaningful to me. While I've been CEO of Customers Bank since 2021, January 1 marked my first day as CEO of Customers Bancorp. This was the result of a careful multiyear succession process that Jay, our Board and the leadership team built with intentionality. Jay is now our Executive Chairman, and having his guidance and engagement during this transition has been invaluable. I couldn't be more grateful for what he built and for the confidence he and the board have placed in me. And I want to be clear, the strategy, the culture and the principles that got us here are not changing, entrepreneurial urgency, a differentiated approach centered on service and technology, an obsession with earning the right to serve each client every day. Those don't change. The clearest proof that this model is working is our Net Promoter Score. It came in at 81% this year, up 8 points from last year and nearly twice the banking industry average of 41%. That puts us in the company of the most admired service brands across any sector, not just banking. It's the signal we look at very closely because it tells us whether the flywheel is humming. Great service drives retention and referrals, which drives financial performance, which attracts better teams, which makes the service even better. That cycle is self-reinforcing. And right now, it's not only working, it's accelerating. Now I'll take you through some highlights from the first quarter and our priorities then hand it over to Mark for the financial details. Turning to Slide 4. Q1 2026 was another clear demonstration of a model that is firing on all cylinders. I'll walk you through some financial highlights. Total deposits grew 16% and total loans grew 15% on an annualized basis in the quarter. Total noninterest-bearing balances grew to a record $6.7 billion, driven by our new teams. We delivered significant positive operating leverage with year-over-year revenue growth far outpacing expense growth. Tangible book value per share grew 16% year-over-year, continuing a multiyear track record of 15% plus growth, which is among the very top in the industry and we accomplished all of this while maintaining strong credit performance and ample liquidity. On Slide 5, you can see our top priorities. One of the questions I get asked most often since becoming CEO is what's changed. My answer is simple. The last several years were about building the team, aligning around a shared direction and executing on foundational investments, including in our tech, payments and risk management infrastructure. That work is largely complete, and hopefully, that shows. Now I am able to focus my time less in the next 2 to 3 quarters and more on building the platform for performance over the next 2 to 3 years. This shift is what shapes our 4 priorities for 2026. First, AI and automation. We are moving fast and with real conviction toward a goal of workflow orchestration across the company. Second, payments in the cubiX ecosystem. We built cubiX from scratch. And now by transaction volume, it is one of the largest commercial payments platforms in the country. Third, organic balance sheet growth and talent recruitment. Our past hiring supports our guidance of growth in loans and deposits that is well ahead of the industry. And our current team onboarding and recruitment pipeline sets up for continued growth in 2027 and beyond. And fourth, risk management excellence. This is not just a compliance posture. It is a competitive one. The regulatory environment around payments and digital assets is becoming more constructive, which plays directly to our existing strengths and widens our moat. We are appreciative of the increasingly collaborative relationship with our regulatory stakeholders and intend to be a bank that regulators view as a model for risk management. We believe that risk management excellence is becoming an asset for us. Turning to Slide 6 on AI. I want to be direct. We are moving aggressively to operationalize AI across Customers Bank. We believe AI represents the biggest opportunity in a generation for a bank of our size and culture. We are small enough to move fast and large enough to invest with intent, which is a rare combination. Most organizations are focused on productivity gains, which we are to and will achieve but we're most excited about the revenue generation and risk reduction opportunities from these tools. I am personally leading our AI transformation effort because I believe the bank in our tier that wins on AI will have compounding benefits and structural advantages that will be very difficult to match. To walk you through the evolution, in 2023, we entered into initial enterprise partnerships with companies like OpenAI and Microsoft. In 2024, we established a foundation by implementing AI governance and beginning data transformation efforts. In 2025, we moved into production. We trained 100% of our team members. We piloted targeted use cases which are already delivering measurable results. AI began first testing then writing code, and we started building agents. Now in 2026, we are training our team members to be builders and managers of agents, and we are seeking to automate end-to-end workflows across our operating platform. The 3 key initial focus areas in the commercial bank are loan onboarding with a focus on credit underwriting, deposit customer onboarding and payments orchestration. I'm thrilled to say that we're already seeing tangible results. From an adoption standpoint, 75% of our team members have AI licenses. More than 500 agents and custom GPTs have been built by our workforce, approximately 2 dozen of those in the last 2 weeks alone. We have saved more than 28,000 hours through AI-enabled workflows, unlocking the equivalent of almost 15 FTEs. This strategic change should allow us to scale our operations far faster than we would need to scale our workforce. We already have best-in-class efficiency, as you can see from our noninterest expense to average asset ratio. Even so, we would expect that as we grow our asset revenue and earnings per employee ratios would increase meaningfully. We should be able to provide medium-term targets on those in the coming quarters. At the same time, the value additive and strategic work conducted by our team members would go up immensely. To accomplish this, we are utilizing a broad range of tools. This includes strategic partnerships like one we just signed this week with a large frontier model provider that we are very excited about. We'll have more details to share on that soon, but it shows that leaders in the industry view Customers Bank as being on the forefront of utilization of this technology and assisting them in advancing adoption in the regional bank space. This partnership will initially be focused on the 3 priorities I outlined earlier: loans, deposits and payments. We are only at the beginning of realizing the benefits from this technology, and we intend to be a leader in unlocking it. Moving to Slide 7. We believe payments functionality is the future of banking, and cubiX is our platform for capturing that future. At its core, cubiX gives clients seamless access to all of our payments rails, from traditional wire and ACH to [ RTP FedNow ] and our proprietary 24/7 365 intrabank instant payments platform. We built it in-house. And today, it is one of the largest commercial payments platforms in the country by transaction volume. One item worth highlighting is that even though the digital asset industry saw meaningful declines in volume and prices over the last couple of quarters, our balances were relatively stable. Importantly, we processed $500 billion in transaction activity for our digital asset clients in the first quarter, a similar pace to 2025 despite the perceived market headwinds. This reflects the mission-critical nature of the service we provide and the quality of the relationships we have built with our customers. As we previously stated, we are focused on deepening that engagement through enhanced product offerings that drive increased wallet share and stickiness. In 2026, our priority is to broaden the cubiX ecosystem beyond its digital asset beginnings. We have started enabling and see significant opportunity in mortgage finance and real estate transaction settlement where the demand for real-time bank-grade payments infrastructure is growing. While the mortgage finance deposits represent balances from existing clients today, we are in active discussions with networks of prospective clients in the real estate industry, and we believe they will be meaningful drivers of noninterest-bearing deposit growth in 2026. To help make it real, our 90-day pipeline for cubiX' customers from new industries is greater than the slight decline in average digital asset balances we saw in the first quarter. Additionally, we see strong opportunities to partner with large institutions in traditional capital markets as exchanges move to 23/5 and eventually 24/7. This could drive both deposits and fee income opportunities for us with even further diversification. While cubiX is highly profitable serving the digital asset industry, when we achieve broader industry adoption, we will get meaningful operating leverage and even more durable earnings. We believe we are still in the early innings of unlocking the full franchise value of this technology. Moving to Slide 8. Banks by nature, grow at roughly the pace of the broader economy. There are only 2 ways to grow faster, acquire it or earn it. We earn it through our people, our platform and our culture. We are one of the top organic growth stories in the industry. We have not relied on acquisitions to build this franchise and have still delivered disciplined growth at rates that far surpass our peers. What we have done is continuously recruited top talent, giving them access to a strong balance sheet, a sophisticated product suite, best-in-class technology, and importantly, they gain a culture that empowers them to do more for their clients than they could elsewhere. I'm thrilled to say that year-to-date, we have already had 20 bankers join us or sign offer letters, and we're in active discussions with half a dozen other team leaders. These bankers represent a mix of geographic C&I and national specialized verticals. This is not a new playbook. It is the same strategy that has driven our long-term outperformance and that has produced results at the very top of our peer group. We are the #1 compounder of core EPS and a top compounder of tangible book value and revenue among peers over the last 6 years. They are the clearest long-term indicators of franchise value creation and share price performance. Before I hand the call over to Mark, I want to take a moment to welcome 2 new equity analysts joining our story. We're pleased to have Tony Elian from JPMorgan and Manuel Navas from Piper Sandler covering Customers Bank. Welcome to both of you. We look forward to building strong relationships for years to come. With that, I'll pass it to you, Mark. Mark McCollom: Thanks, Sam, and good morning, everyone. On Slide 9, you can see our GAAP financials, and I'll start my comments on Slide 10. In the quarter, we delivered GAAP and core EPS of $1.97 as GAAP and core earnings were materially consistent. Core ROE and ROA came at 13.1% and 1.13%, respectively. Our consistent execution has led to core EPS increasing 28% from last year. Turning to Slide 11. Total deposits grew over $800 million in the quarter to $21.6 billion, up $2.7 billion or 14% year-over-year. The quality of our deposit franchise continued to improve, and I want to highlight 2 dynamics in particular. First, noninterest-bearing deposits grew by over $400 million in the quarter. Included in this total was a $200 million contribution from spot balance increases in our digital assets channel. But what I really want to point out is the approximately $230 million contribution during the quarter from our traditional commercial franchise. These balances were up 9% quarter-over-quarter and 22% year-over-year. This is directly attributable to the success of our commercial banking team strategy and the strength of the relationships these bankers bring. As you heard from Sam total noninterest-bearing deposits reached a record $6.7 billion or over 31% of total deposits, not just top quartile but about decile of regional bank peers. Second, average total deposit costs declined again in the quarter by 8 basis points to 2.46% and our cost of interest-bearing deposits declined by 18 basis points. We are continuing to benefit from the positive mix shift of our deposit book as we grow lower cost relationship-based deposits. Turning to Slide 12. It highlights the results of our commercial banking team strategy. And I'll give you a spotlight on our 2024 vintage teams as they recently hit their 2-year anniversary with customers. The 10 teams launched in April 2024 now manage over $2.1 billion in deposit balances across approximately 8,000 accounts with 32% of these balances being noninterest-bearing at an average total deposit cost of around 2%. They've also generated a [ positive ] loan ratio of about 2.7x. These economics are really compelling. These teams became profitable in approximately 3 quarters and are generating a loan-to-deposit spread of over 400 basis points in addition to the significant excess deposits they generate. This slide also highlights the tremendous momentum we are seeing across our commercial businesses. In total, we added over 1,100 net commercial accounts in the first quarter. That's a 5% increase in our commercial account base in a single quarter, which is incredible. Notably, over 50% of that net growth came from the 2025 vintage teams. These teams have already produced low 9-figure balances of deposits at an extremely attractive blended cost of about 50 basis points. These accounts are operational in nature, and therefore, there's a lag between account openings and deposit balances coming over to our company. You can see this in the fact that less than 15% of the accounts opened during the quarter were meaningfully funded with deposits. These are similar stats that we used to show you in 2024 to give you a sense of the deposit balance fundings to come in future periods. This level of account activity gives us optimism for meaningful deposit balance growth from these 2025 vintage teams in the coming quarters. Turning to Slide 13 in loans. Total loans grew over $600 million to $17.4 billion, representing 15% annualized growth. We typically see the first quarter as the slowest growth quarter of the year so we're very pleased with this performance. Growth was broad-based across the franchise, top contributors in the first quarter included fund finance, mortgage finance and health care. As we often say, the mix of contributors can shift from quarter to quarter, but what remains consistent is the diversified multi-vertical nature of our asset generation platform. On Slide 14, net interest income for the first quarter was $191.4 million. Net interest income grew by $24 million year-over-year or 14%. The expected sequential decline in net interest income and net interest margin was driven by 2 primary factors. Approximately $10 million of accretion income in the fourth quarter, which did not repeat as well as a lower day count in the first quarter. If you account for those factors, we were essentially flat quarter-over-quarter despite the full impact of December's rate cut. One other item impacting net interest income for the quarter was the planned redemption of $110 million of higher cost subordinated debt late in the quarter. This redemption will help our net interest income in the second quarter. We continue to have leverage on both sides of the balance sheet, including loan growth and deposit mix improvement opportunities. With that, we remain optimistic about our ability to drive strong net interest income growth in 2026. Moving to Slide 15. Noninterest expense was $112 million for the quarter. As we highlighted on our previous call, we had about $5 million of expenses that were unique to the fourth quarter. And so expenses came in pretty much flat to the fourth quarter, excluding those discrete costs. We talk a lot about positive operating leverage. And I want to take a moment to show you what that means for our franchise. Year-over-year, core revenue growth outpaced core expense growth by nearly 2x. As a result, our core efficiency ratio improved by 300 basis points and core EPS grew 28% over the same period. That's a very strong positive operating leverage, and we believe this is what disciplined high-quality growth should look like. Our core noninterest expense as a percent of average assets was 1.82% once again placing us among the top decile of regional bank peers. On Slide 16, many of you recall that coming into 2026, we outlined our second operational excellence initiative, targeting $20 million in annual run rate proceeds across both revenue and expenses. I'm pleased to report that Phase 1 of that initiative has been substantially achieved on a run rate basis. and we are now increasing our target by an initial $10 million in Phase 2, bringing our total target to $30 million in run rate proceeds. On the revenue side, this was driven primarily by capital market sales within our existing SBA business, and you saw some of this in the first quarter of 2026. And the savings on the cost side were a mix of vendor, technology and risk management infrastructure improvements. These savings are being reinvested into the franchise, in people, technology and the capabilities that differentiate us. We view this as a key component of sustaining positive operating leverage into the future. On Slide 17, a tangible book value per share grew to $63.54, up 3% quarter-over-quarter and 16% year-over-year. This continues our multiyear track record of double-digit tangible book value per share growth and represents a CAGR of over 15% since the fourth quarter of 2019. Turning to Slide 18. Our capital position remains robust and continues to provide significant strategic flexibility. Our TCE ratio of 8.3% was up 60 basis points year-over-year even as our tangible asset grades grew 15% over the same period. We also repurchased about 620,000 shares of our common stock during the quarter at a weighted average price of about $68. Given the trajectory of our tangible book value I just described, that felt like an attractive price. During the quarter, as planned, we also redeemed the subordinated debt issuance I mentioned earlier, which explains some of the additional reductions in our risk-based ratios during the quarter. Even with these items, we still maintain a comfortable cushion to our internal capital targets. In addition to the subordinated debt over the last year, we've also redeemed over $140 million in preferred stock simplifying and improving the quality of our capital stock. We believe strong organic earnings position us well to support continued balance sheet growth and when appropriate, to return capital to shareholders. On Slide 19, credit performance remained stable across the board. NPAs as a percent of total assets remain low and below our peers. Total net charge-offs declined modestly quarter-over-quarter with strong performance across both commercial and consumer portfolios. Commercial MCOs remain very low, and our consumer portfolio represents only a small portion of our total loans, continues to perform within expectations. Reserve coverage was solid, though we continue to monitor the geopolitical uncertainty that exists in the macroeconomic environment. With that, I'll close with our 2026 outlook on Slide 20. We are reaffirming our full year 2026 management outlook across all key metrics. On loan growth, we had a strong start to the year, and our pipeline remains solid. For deposits, we also had a good start to the year, and both the newer teams and the franchise as a whole have good prospects to continue that momentum. With respect to net interest income, we continue to project growth of 7% to 11% over 2025. For noninterest expense, we are maintaining the range of $440 million to $460 million for the year. That is growth of only 2% to 6% even as we continue to invest significantly in people and technology. And lastly, there are no changes currently to either our capital or our tax rate targets. With that, I'll pass the call back to Sam for closing remarks before we open the line for Q&A. Samvir Sidhu: Thanks, Mark. Before I offer my closing remarks, I want to share something that I believe may be a first in the history of public company earnings calls. The prepared remarks you heard on my behalf today were delivered by my AI clone, not read by me directly. The execution of this call itself is a live demonstration of what we mean when we say AI is not an experiment at Customers Bank. We will be using it to transform our company. You can imagine use cases for this technology to support our relationship managers to drive revenue and enhance the client experience. To wrap up, in the first quarter, we delivered strong growth across every major dimension of the franchise. Deposits grew 14% year-over-year. Noninterest-bearing deposits hit a new record. Loans grew 15% year-over-year. Our cubiX payments platform onboarded new clients, creating diversification and repositioning this as a noninterest-bearing deposit growth vertical. Finally, we delivered positive operating leverage with a 300 basis point decline in our efficiency ratio, leading to core EPS growing by 28% year-over-year. We'll now open up the line for live questions. Operator: [Operator Instructions] Your first question comes from the line of Anthony Elian of JPMorgan. Please go ahead. Unknown Analyst: This is [ Mike Petrini ] on for Tony. So I'll start with a quick housekeeping one. What were the cubiX total deposit balances for the period end as well as the averages versus that $4 billion number at 4Q? Unknown Executive: Yes. Period-end numbers were right around $4 billion, and quarterly average numbers were right around $3.6 billion. Unknown Analyst: Okay. Great. And then on Slide 7, the mortgage finance and real estate deposits, they combined for about 20% of cubiX deposits. How much do you see both of those mortgage finance and real estate contributing in the next few quarters in cubiX, one could the capital markets sort of opportunity that you guys have identified on Slide 7 start factoring into cubiX deposit growth? Samvir Sidhu: Yes, sure. I'd be happy to take that. I think that -- what's really interesting about the mortgage use case, as we discussed before, this is to date existing customers that are using our advanced payments capabilities that we're using more traditional payments capabilities with us prior to sort of more traditional, think of it as sort of wire ACH in and out. And this has been a priority for us in 2026 to sort of see a bit of broad use of cubiX not only much further beyond the digital asset industry and also creating diversification in our deposit base. So I'll get to sort of the new deposits in a second. But what I would say is we're thrilled with the early progress on that goal, and we did not expect that as early as the first quarter, we'd be able to show you that slide that you referenced on Slide 7. So they currently represent about 20% of our deposits. The growth is really going to be coming from that 1% number you see there on the real estate transaction side which is really hugely valuable to customers that are currently banking with other banks that are looking for advanced payment capabilities beyond what they're able to get in addition to sort of the service that we offer. So we see that you heard in my scripted AI remarks that we expected about $250 million or so of noninterest-bearing deposit growth related to new verticals in cubiX just the next 90 days. We'll continue to update sort of on progress as the year progresses. Your last question was around the traditional capital markets use cases. That's still a little bit early days to add a little bit of color on what that would be is we have markets in the traditional side that are open 23/5 today, they will be open 24/7. And as you can imagine, there's a number of use cases to have [ FedNow RTP ] and cubiX for after-hours [indiscernible] reconciliation. Unknown Analyst: Great. And then if I can sneak one more quick one in there. Period-end loans and deposits each increased about 15% annualized. This quarter, you guys left the full year guide at that 8% to 12% range. Is there a level of conservatism taken to that guidance? Or sort of what are you seeing that would suggest a slight slowdown in balance sheet growth for the rest of 2026? Unknown Executive: No, I don't think we're I mean, we're still sticking to the guide that this year. As you know, there's certainly a lot of still geopolitical uncertainty out there in the market. Candidly, we were pleased by the level of loan growth we were able to generate in the first quarter. We had a couple of quarters ago, we had a couple of deals that we thought were going to close and didn't close during the quarter and then end up being a little below and then you start out in the next quarter really hot. In this case, you saw that our average loan growth versus our spot loan growth was pretty materially different, which implies we had a lot of loan growth actually closing in the month of March. So we feel that obviously sets us up well for the second quarter. But at this point, we're still sticking to our full year numbers. Operator: Your next question comes from the line of Kelly Motta of KBW. Kelly Motta: Please, I'm still recovering from the shock of the AI clone aspect of the call that's quite remarkable. Maybe a question for you and maybe your AI clone is you've been obviously at the forefront of this AI transformation here. I think to us as analysts, the potential efficiencies are pretty clear. your prepared remarks and highlight additional revenue opportunities as well. I was hoping just given your expertise and how far ahead of the curve you are on this front. You could speak to potential, what you mean by that and how we should be thinking about the potential revenue enhancements that AI could provide to Customers Bank and, I guess, thinking more broadly. Samvir Sidhu: Yes. Sure, Kelly, and then I assure you this is really me. What I would say is that just to add a bit more color, in the prepared remarks, I talked about how we feel we can scale the company at significantly higher rates than our head count will grow. And you can imagine sort of when you have an autonomous agent, you're essentially creating a digital worker. And when you have end-to-end automation across your workflows, which is very easy to say, very difficult to achieve, you can deploy these digital workers under human supervision and they can work around the clock. So you can appreciate getting to the state as much more than creating what folks will call sort of a GPT they can save a couple of hours or a chat prompt that can help you research right faster. Really, the challenge here, the difficulty here and the opportunity here is about having to change management strategy. It's about training and enabling your team members. It's about redesigning workflows and processes. It's about having developers and process [ mavens ] that are on staff. It's having broad-based AI frontier model and newer emerging commercial partnerships. We teased a couple of KPIs of how it might show up in our financials with the asset revenue and pretax profit employee KPIs. And I think we'll have tailwinds on each of those if we're successful and that's something that we'll be able to provide targets on in the future. At the end of the day, they kind of all come into lower efficiency ratio. That's sort of the net output. The use case is to kind of get to the heart of your question that typical companies and banks will be focused on will be productivity as well as, in some cases, improving the client experience which is table stakes. And I think those are hard to do, and we feel very good about our ability to achieve success there. But where we are really focused and feel we are uniquely focused is on the new revenue opportunities as well as reducing risk. So to get to your question, we plan to start using AI first business models to attract new customers to attack new verticals that will sort of help drive new opportunities that don't exist today. And these are things that are live and in production now that could result in impact as early as the end of the year, but definitely into 2027. And then we're also looking at really interestingly, completely redesigning the first, second and third line processes to reduce risk across all of our operations. And I think that's really also a unique way that we're approaching things. So it's not just sort of the loans, the deposits and the payments orchestration life cycles we're also thinking more broadly about areas within risk, compliance, audit, finance, marketing, legal, where we can really transform some of those risk and revenue enabling functions as well. Kelly Motta: Got it. I really appreciate the thoughtful and detailed answer. Maybe turning to the NII guide. I appreciate it's unchanged. I'm wondering, underneath the hood of that, the average cubiX deposits were down, though within range. And we didn't really see it with the growth in other areas of core deposits. So I'm wondering if you're able to provide -- was there any shift in kind of the components of what gets you to that NII range, meaning perhaps cubiX coming down slightly by growth in other areas? Just curious if we could parse that out a bit. Mark McCollom: Yes, Kelly, this is Mark. And that was me the whole time, by the way. But as we -- as you think about NII, you're correct. I think as the year is starting to play out, we had a couple of shifts. We did see -- I mean, we were really pleased to only see average cubiX deposits going down from 3.8% to prior quarter to 3.6%. Where you see on Slide 7 and you see the mortgage finance, but more importantly, the real estate which really then ties to our 2025 teams and some of the things we highlighted on commercial account growth. I would expect to see for -- in the second quarter and the third quarter, you'll start to see some of that account growth, which was only approximately 15% funded with deposits, some of that starting to take hold. So then that provides a little bit of a hedge for us in terms of our guidance. If we would continue to see a little bit more of a drop in cubiX deposits, I think it's early. Certainly in the second quarter to be able to predict where those end up on an average balance basis. But then I'd also say that we had both really strong marches, which led to our spot balance is being significantly higher in both loans and deposits than our average balances for the quarter. So when you look at -- take loan yields, loan yields ended the quarter at [ 3.62], SOFR yesterday was at about [ 360 ] right? So even if you're going to bring on new originations and across most of our verticals, we bring on new originations at 225 to 300 basis points over. But even at 300 basis points over [ SFR ], the majority of our asset production might still be coming in below where that current loan yield is on commercial because you can see in the top of that margin table, our commercial book today is kind of right around 680 all in. So even at 300 basis points over, which is really tough to do across all your verticals, new production is still coming in a little bit lower. So I would expect to see, on a margin basis to be -- loan yields coming down a little bit more how much that impacts margin is really going to be how successful are we on the deposit front. Again, given the green shoots we're seeing in the first quarter, it feels like we're setting up well for the year, but it's still early. So that's why you put all that together, we're saying, hey, we're not going to move on our guide yet for the year for NII and the last comment I'll make on all of that is that as a growth company, we focus on NII. We understand that you as an analyst community like to look at margin because that's kind of a shortcut to help fill out an earnings model. But at the end of the day, NII drives earnings growth, not net interest margin. And so we're really focused on that, and we're sticking to our guide at this point in the year. Operator: Your next question comes from the line of Manuel Navas of Piper Sampler. Manuel Navas: Yes. I just wanted to follow up a little bit on the cubiX deposits. Cash remains high on the balance sheet. And there was some conservatism on using cubiX or deploying cubiX deposits. Has that shifted at all so far, given kind of a little better more sticky deposits there and also some of the CRE customers coming on? Samvir Sidhu: Happy to jump in here and welcome officially and formally. So I think that what we've always said is that on the digital asset side, we've been -- we had an opportunity to really start to getting that amount of customer behavior over the past couple of years, we have and we'll continue to sort of hold these in cash for the time being. I think there are some things that we would look to the external environment that would give us some more confidence and comfort. One of the things that's interesting about the new verticals is these commercial customers come from traditional industries with long histories of operating account behavior. They're currently at banks and that -- where they without these advanced payment capabilities that cubiX can provide them. Those banks deploy the deposits. We're going to do the same, but also offer those customers superior technology and really improve their operations experience. So I think that's really one of the net differentiating factors. Those levels are already at 20%, including existing customers, though that 1% is a very small portion, and we expect that to significantly increase in the coming months and quarters. Manuel Navas: I appreciate that. Speaking to the 20 new role that are being added, what products or -- can you discuss -- I know they're kind of distributed, but is there any kind of key product or regional focus to those additions? And what's the pipeline look like for more hires? Samvir Sidhu: Happy to take that. So it's a combination of expansion of talent in existing geographies, there are one or 2 submarkets where we will be sort of, I call sort of adjacent expanding into. And there are some -- actually some new national deposit verticals, given that not every one of these team members has fully started the bank had sort of deferred to come back to you to give you a little bit more color. But it's consistent with the way that we've approached team hiring to date. Your second part of your question was about the teams and the pipeline. Similar story on the first part of your question in terms of how we would approach geographic and vertical focus. But I would also add that these while we've had 20 or so hired this year, we had about 40 last year, 100 the year before, 40 the year before, sales first-line bankers. So I think that we still expect to have some more hiring to do based upon the expense guide that we gave in the first half of -- sorry, in the first call of the year and also had an opportunity to share with you some of the benefits of [ OE 2 ], Operational Excellence [ 2 ], as we're calling it, and from the extra savings and plan to reinvest those savings into the institution which one of the big use cases and uses of that -- of those savings will be into hiring and supporting new teams. Manuel Navas: I appreciate that. I just want to add a question about mid movements going forward. Deposit costs are flattening out. I just want to kind of understand how the marginal cost of new deposit flows, how is it coming in? Or should we kind of expect deposit cost of the [indiscernible] from here? Samvir Sidhu: We're typically seeing in new deposits and remix is we're typically seeing them coming in about 150 basis points below the highest cost of our interest-bearing deposits, I think, which is which is interesting. So the marginal cost is significantly lower than our interest-bearing costs and also below our overall cost of deposits. Operator: Your next question comes from the line of Steve Moss of Raymond James. Stephen Moss: Nice quarter here. Sam, maybe just starting on the -- going back to deposits, again, not to beat a dead horse, but definitely struck by the step-up here in the mortgage finance and real estate and your short-term 90-day pipeline. Just kind of curious maybe how are you thinking about how these deposits -- how long they stay on your balance sheet, how long we turn over? And any sense for the overall pipeline as you look a little further out? I know you said the [ $250 million ] number, but -- just trying to think about the turnover of these deposits and where you're going to think you can grow here? Samvir Sidhu: Yes, sure. Thanks, Steve. And so -- the simple answer is they're sticky and long duration with deposits where we're really just helping them add payments capability, streamline their operations, lower the cost of their business, increase revenue opportunities for them that they otherwise wouldn't have. Coming back to cubiX deposit diversification, this is something we've been talking about for some time. We have now I think now we're really showing that we're able to sort of onboard customers on [indiscernible] that you referenced the $250 million just in the next 90 days. What I would say is we -- we're at 31% noninterest-bearing deposits, which is already at the top end of the industry. And we believe the opportunity ahead of us will allow us to keep taking this up even further. You look at the percentage of noninterest-bearing deposits of our total net deposit growth for the quarter. That's pretty impressive and staggering. Let's also not lose sight of the fact that -- we grew our non-cubiX noninterest-bearing deposits by $230 million in this quarter and adding that to last quarter, that 6-month totals almost $400 million from traditional commercial customers. Stephen Moss: Right. And then on those non-cubiX deposits, you've historically said for quite some time, a $2 billion type deposit pipeline. Just kind of curious as to where that shakes out these days. Samvir Sidhu: Yes, Mark would kill me, but it is significantly higher than it has been in the past. And I think that typically, we've been operating about that $2 billion-ish or so pipeline and it is significantly higher just by nature of the fact that you have new teams who joined us late last year, middle summer to Q3 of last year, who have had an opportunity. Mark shared some stats on over 50% of the account openings were from 25 teams, right? So these are folks who have been with us for less than a year, in some cases, only 6 months. And what I would also say is that as you think about sort of what -- going forward, hiring new teams for '27 is going to be really important as well. So the '25 teams are building momentum for '26. The '26 teams will build momentum for '27. And we're doing it earlier in the year from a hiring perspective, which I think is very unique, and it just shows that there's a lot more inbound requests and inbound conversations and in some cases, start well beyond the beginning of this year and bonus season really started last year. Stephen Moss: Right. Okay. Appreciate that color there. And then on the loan growth mix here, I definitely appreciate the chart as you can see the shift underneath here. Just kind of curious where you're seeing the strength in the pipeline? I know you said it was solid -- so obviously, that bodes well, but I'm assuming there's probably some sort of mix shift versus fund finance, which we saw was strong this quarter. Mark McCollom: Yes, I'll take that. This is Mark. If you think and we have provided -- if you look at our loan growth slides, this quarter, it happened at fund finance, which is a combination of both our capital call lines and our lender finance business. fund finance, mortgage warehouse and health care in the forefront. Last quarter, fund finance was down at the very bottom. But then the quarter before that, fund finance was actually up. So the look within fund finance, our lender finance category was $2.8 billion back in the third quarter of $25 million. It dipped about $300 million in the fourth quarter and then it came back again in the first quarter. What I would say about that is that we have a very defined credit box that we like to operate in. And at certain times, then that will mean when certain segments get a little bit more frothy, we're probably going to underperform a little bit. But then in cases like the first quarter, where I think there was a pullback in MFI and specifically in the lender finance space, we just stay in our credit box. And in periods like that, we're going to benefit a little bit. but the performance in that segment, which we -- because of some of the additional questions around NDFI and lender finance, in particular, we added an extra slide, Steve, which you can see on Page 23 in the deck, we've been in this business for a long time. And as we commented after the third quarter call, have really good looks through LTVs. We have collateral substitution rights and maybe most importantly, we have incredible diversification, both in terms of the total number of facilities that we participate in. And then within those facilities, the weighted average number of obligors and our low largest obligor within each facility gives us comfort and diversification. And then lastly, just being in the business for 10 years, we've never had a delinquency or a net charge-off. And that doesn't mean that it will always stay that way, obviously, banks run the business to take risk and credit risk. But -- this has been a business for us that's been actually a very strong performer. Stephen Moss: Okay. I appreciate all the color there. And if I could sneak one more in. On the, call it, $3.3 million, I think it was in warrant gains here for the quarter. Just curious the drivers of those warrant gains, was it from IPOs or clients getting additional venture funding or maybe just modeling just with valuation? Just kind of curious how to think about those warrant gains with -- and the episodic nature of them, obviously. Samvir Sidhu: Yes. So I'll sort of just jump in. I think that there's a combination of sort of private valuations, as you know, in sort of [ Black Scholes ] model, et cetera, for private market warrant valuation is also transactions that can happen that could be private or public like an IPO in nature and believe it or not, been -- in some cases, you have restrictions on when you can sell your shares for up to 6 months. So there's a lot -- that's sort of the way to think about it. What's really interesting is as we have a portfolio of these warrants that are dozens and dozens and dozens related to how many loans that we've sort of originated over the past couple of years. And one of the things that we say really interestingly here is we have very, very low historical over multiple decades of credit charges lower than traditional C&I in this business, and these warrant gains more than make up for any sort of net reductions that this industry has seen despite some of the potential perception. And I think that's really the interesting part about this is that we have -- these are -- these have been recurring over the past couple of quarters. I think that's what we're proud about. Operator: Your next question comes from the line of Peter Winter of D.A. Davidson. Peter Winter: Sam, you talked about one of the strengths is the investments you've made in risk management. And I saw both declines in professional fees and FDIC costs also came down. I was wondering if you can give an update if that should continue? And anything you can provide in terms of an update on the written agreement. Samvir Sidhu: Yes. Sure, Peter. Thanks so much. So I think that the -- I'll start with sort of the high level sort of point that you made is that I think that I mentioned this in my prepared remarks as well, is that we really truly feel and believe that risk management is becoming a competitive edge for the organization and also for sort of simplistic business unit perspective. A competitive moat per se, our cubiX business. We have said that professional services and insurance costs will continue to reduce over time as we progress our efforts there. I did say on the last call, which I think went a little bit unnoticed that we materially completed our work related to the written agreement at the end of last year. And then in 2026, we want to put that behind us. And that's really the interesting part about the whole story is when you add sort of technology plus risk management plus AI plus a business line that is facing sort of regulatory clarity and tailwinds plus the diversification of using that technology from that business line into new traditional markets that are also seen the need to go into after hours and 24/7 or 23/5 type payments capabilities. It is really interesting how uniquely positioned we are today. Peter Winter: Got it. That's helpful. And then separately, you added $10 million to reserves this quarter. Was that solely to support the strong loan growth? And maybe if you can give an update on your views on the macro risk and how that is factoring into your reserve setting process this quarter. Mark McCollom: Yes, Peter, this is Mark. We obviously had a really strong growth for loans this quarter. From an overall ACL as a percent of loans, we went up 1 basis point. So yes, I would say that most of our kind of over provision to charge off was just a function of that. I mean we continue to definitely watch the geopolitical uncertainty out there and continue to watch on if that could have any impact on any of our portfolios in coming quarters. But for this quarter, we felt that was appropriate to just have a very small increase to our ACL percentage overall. Operator: Your next question comes from the line of Kyle Gierman of Hovde Group. Kyle Gierman: This is Kyle on for Dave Bishop. Just wanted to touch more on credit quality. Obviously, it's been very good relative to peers, but you saw the increase in CRE and multifamily. I was wondering if you can provide some details surrounding that increase? Unknown Executive: Yes. So specifically within the multifamily nonperformers, I mean we had 1 loan that we made the decision to put on to NPA. It's -- when you move it to NPA, I mean we've actually charged down to its current collateral value. The loan is still performing according to its contractual terms. But we just made -- took a conservative stance to put on a nonperforming, although it is still paying according to its contractual terms. Kyle Gierman: And then maybe a final question. I saw you redeemed subordinated debt and repurchase of shares in the quarter. I was just wondering what the priority order for capital deployment is going forward? Unknown Executive: Yes, the priority order for capital really remains the same. And that's, first and foremost, it's organic growth. And to the extent that we have excess capital generation after supporting that organic growth, then number two, would be inorganic growth opportunities. And for us, you really need to think about that more in terms of expenses necessarily in terms of capital because for us, inorganic growth has historically been a lot of these team lift-outs. And -- but the team without cost money, which ultimately impacts capital. And then number three, if we have excess capital after those, then our Board had approved a $100 million share our share repurchase authorization back in February. And we felt in the first quarter at a weighted average price of around $68 we felt that was a prudent use of capital there as well. Operator: Your next question comes from the line of Janet Lee of TD Cowen. Sun Young Lee: Apologies if this was already asked as I was handling a few calls, and I don't have an AI agent. But for the -- for the new banking teams, for the 2024 teams on your slide, their spot deposit cost is 2%, and they're still bringing in a nice inflow of deposits into the bank that's driving the positive remix in deposits. Based on that, is it fair to assume that with the ongoing deposit inflows of the lower-cost deposits, net interest margin could improve from here versus the first quarter? And could you confirm whether that $400 million-ish cadence of deposits from the new banking team still holds? Or is there any change in expectations? Samvir Sidhu: Yes. Thanks, Janet. It has not been directly asked. And I think that one of the things that Mark did sort of refer, which I'll sort of focus on is, is that we're a growth organization, and we're focused on increasing NII. And I think that prior to you sort of joining the coverage, we sort of going back a couple of years, we really also sort of showcased NII trajectory and how that would sort of translate into NIM trajectory over time. We gave sort of NII growth guidance for this year. You're absolutely right on sort of the deposit, the marginal cost of deposits, whether they use for remix or whether they use to fund incremental loan growth. And I think that's something that we are and we'll continue to be proud of, and that's really what's unique about our overall story as we think out sort of the improvement as well as the funding of our organic growth. Banks with the flatter balance sheets that don't have the growth opportunities that we have, NIM makes a lot more sense for them, and this is the point that I would sort of continue to make [ that's ] their main lever for growing NII, where ours is really a combination of balance sheet growth and maintaining margin, maintaining margin, I think, is really important. And that's really the value proposition of [indiscernible], and I think that is really around our ability to grow net interest income year-over-year independent of rate environment independent of competitive environments. Sun Young Lee: Got it. And -- sorry, go ahead. Mark McCollom: Yes. Janet, this is Mark. I was just going to add that I made this point earlier in the Q&A is that if you look at our commercial business today, which makes up, obviously, the majority of our loan book, that's at a blended average cost in the first quarter of about 680. Current SOFR is at about $360 million, right? So in a commercial business, most of our commercial businesses tend to be kind of 225, maybe for commercial real estate up to 275 approaching 300 for some of our other verticals over SOFR. But that then implies that new loan volumes in both the first quarter and continuing into the second quarter, will continue to come on at a little bit lower yields than our overall commercial portfolio yield. So that's going to continue to have maybe a little bit of downward pressure on NIM, but again, given the amount of loan volume that we put on in the month of March, we still feel comfortable with the NII guide that we put out. That makes sense? Sun Young Lee: Yes, that's helpful. And just one follow-up on fee income. Where do you see the biggest upside from here? Or how should we think about the growth cadence that things are off a lower base and it's a little volatile, your fee income items. So how should we think about where which area presents the most growth opportunities and how we should think about the trajectory from here? Unknown Executive: Well, I think if you look back to where we were maybe a year ago when some of the discrete line items to today, our commercial lease income is about 50% and I would say that of the different line items of fee income we have, it's probably the least episodic because really what that commercial lease income represents, it represents interest income on operating leases. Those operating leases put -- actually put some pressure back to part conversation, put some pressure on margin because it shows up on your balance sheet as a noninterest-earning asset. But then you have both commercial lease income, but then also commercial lease depreciation on the expense line. But for fee income, you can see that our trajectory is going from $10.5 million a year ago to $15.4 million in the first quarter of this year, so almost 50% growth in that line. So when you look at the other lines, I mean things like for this quarter, I did see, I think one analyst maybe pulled out our sales of loans out of core earnings. And I would say, well, gosh, to us, that feels like core earnings because that's actually sales of just SBA loan originations which some banks might have a mortgage banking operation sell off their mortgage loans. We're just making a decision to sell and set a portfolio in some of our SBA loans going forward. So when you look to how we've grown overall fee income, we think it's now appropriate to think about a good floor for fee income is going to be somewhere in the $30 million to $32 million range. Operator: Your next question comes from the line of Tyler Cacciatori of Stephens, Inc. Tyler Cacciatori: This is Tyler on for Matthew. Can you just provide us some idea on the mix of cubiX deposits from a customer standpoint in terms of exchanges, stable coin providers and investors? Just really trying to see how much of each of those in a percentage of overall mix, if you have that detail. Samvir Sidhu: Yes, Tyler, I think that we have provided this a couple of years ago, and it generally stays -- it stays the same. Exchanges are sort of the biggest participants, as you can imagine, then followed by market makers and followed by stable coins. I don't have the percentages. Tyler Cacciatori: Understood. And then securities yields were a bit higher than what we were expecting during the quarter. Can you just update us on the dynamics there and how to think of those going forward? Samvir Sidhu: I'm sorry, I didn't catch the beginning of that. What was the question? Tyler Cacciatori: Securities yields were a bit higher than what we were expecting during the quarter, and we're just looking for an outlook there. Unknown Executive: Yes. Yes. I think that's really more a function of the fourth quarter than the first quarter. In the fourth quarter, we did have a couple of adjustments relating to prior quarters, which actually pulled down that yield a little bit artificially. So I think when you look at that [ $470 million ] yield that we had in investment securities, I feel like that's going to be a better kind of run rate going forward. Tyler Cacciatori: Okay. Great. That's very helpful. And then if I could just squeeze one more in. Do you have the amount of brokered deposits at quarter end? Samvir Sidhu: Stable as a percentage of deposits. Operator: Your final question comes from the line of Brian Wilczynski of Morgan Stanley. Brian Wilczynski: So the new commercial banking teams have been very successful again in terms of adding new low-cost deposits. It's great to see the 2025 teams ramping up, as you showed on the slide. Can you talk a little bit about what you're doing to deepening those relationships on the fee income side? Is there an opportunity to do more with those clients around treasury management, capital markets? And how do you plan to execute on that over the next 12 months or so? Samvir Sidhu: Yes. Sure. It's a great question, Brian. And I think that over the years, we have continuously expanded our treasury management capabilities, and that's really the big driver. And even prior to cubiX, that was one of the large initiatives a number of years ago. The organization is sometimes new teams or new verticals or new sort of sub verticals come on that have what we call sort of edge case treasury management capabilities. We continue to expand and broaden the edge case becomes our base case as we to expand. And over time, we've also thought about an incorporated parts of our team members that allow us to expand into new products and services to service customers. So what ends up happening is the new teams, the edge case for our overall company becomes their base case and that, that becomes something that we can then sort of cross-sell into our existing client base as well. Brian Wilczynski: Really appreciate that color. And then maybe one on the lending side. It was another strong quarter for loan growth remains very well diversified. I was wondering if you can maybe just talk about how your clients are reacting to the geopolitical uncertainty broadly. Has there been any impact at all over the past few weeks on client demand on the loan side? Does that vary at all maybe across the different segments? If you could just speak to what you're seeing over the past few weeks, that would be really helpful. Samvir Sidhu: Yes, I'm happy to jump in on that, Brian. It's obviously something that we spend a lot of time thinking about and trying to, in some cases, create connections. I think what I would sort of say just generally we haven't seen anything tangible that we can put our finger on. At the end of the year, you usually see folks who try to sort of close loans quickly by the end of the year 1 some loans slipped into April that we would have normally expected to close into 331. Why those happened? Difficult to say, but they still closed. So I'd say that sitting where we are today, we don't see any changes to go forward pipelines. We didn't really see any changes to commitments to closings, but it's something we continue to sort of stay close on. Operator: There are no further questions at this time. We have reached the end of the Q&A session. I will now turn the call back to Sam Sidhu, CEO, for closing remarks. Samvir Sidhu: Thank you to everyone for your continued investment in and support of Customers Bancorp. We believe Customers Bank can be the most admired commercial bank of its size in the United States, not the biggest, but the most admired. We're grateful for the confidence of our Board, the dedication of our nearly 900 team members and the trust of our shareholders. Thank you, everyone. Have a great day and a great weekend. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I would like to welcome you to the Primis Financial Corp. First Quarter Earnings Call. [Operator Instructions] I will now turn the call over to Matthew Switzer. You may begin. Matthew Switzer: Good morning, and thank you for joining us for Primis Financial Corp.'s 2026 First Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during the call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. Our non-GAAP measure, relates to the most comparable GAAP measure, will be discussed when the non-GAAP measure is used [indiscernible] readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember. Dennis Zember: Thank you, Matt. Thank you for all of you that have joined our first quarter conference call. We're excited to report that in the first quarter, we earned $7.3 million or $0.30 per share which compares to $22.6 million and $0.92 per share in the same quarter of '25. And as I'm reading that, excited to report earnings shrinking that much. The fact of the matter is, on an operating basis, we earned $0.33 per share in the first quarter, which excluded a small tax adjustment related to 2025 results. And when you compare that to second quarter a year ago, it's up 126% operating earnings, where we reported $0.14 in the same quarter of '25. And Matt may mention this, but the first quarter of '25 included a substantial gain on the deconsolidation of Panacea, which is what I'm excluding. Our key operating ratio has obviously improved alongside that earnings number I just gave you. On an operating basis, our ROA improved to 84 basis points compared to 40 basis points in the same quarter of '25. Driving that were a couple of items: margin, mostly; and as well as operating expense control. On net interest margin, our net interest margin benefited from the securities restructure as well as the mix of earning assets and climbed to 3.43% in the first quarter compared to $3.15 in the same quarter of '25. We continue to put up nice growth numbers that are manageable, but really distinguish us amongst our peer group. Loans ended at $3.4 billion, up 11.7% compared to the same quarter in '25. That excludes about $40 million or so that [indiscernible] that we moved into loans held for sale, related to a flow agreement with Panacea. So really, our growth was probably stronger than this. Deposit growth over the same period is really what you should look at. That came in at just better than 8% with very little of that from the digital platform, which is pretty steady state, at about $1 billion. The growth in checking accounts in our company was even more notable, with noninterest-bearing checking accounts growing to $541 million, which is almost 19% higher than where we were in '25. Checking accounts continue to be a more meaningful element of our deposit mix and were 15.9% of total deposits compared to just [ 14.2% ] in the first quarter '25. It's very important to note that weaker deposits in this strong fashion and never once felt pressured in our 4 bank or on our digital platform, to be more aggressive on rate. We're doing it with technology, with service, with people, with getting in front of us, focusing on commercial deposits and had real success. All of the energy and momentum on our fund sheet really starts at our core banking. There has never been a time since I came to Primis that our core bank has had this opportunity on both sides of the balance sheet. Honestly, we're winning business that several years ago, we just wouldn't have been in the running for or maybe even had a conversation about. Virtually nothing that we're doing to win this business has to do with rates or fees. We're leaning hard into our technology, our service, our people, our existing customers who are turning out to be amazing centers of influence for us. For so long, it felt like all we were doing here is working on our factory and stuff in the factory. But today's stuff is rolling off, that [indiscernible] line faster and faster. I'm very encouraged by what our people are accomplishing. Primis' warehouse has fully replaced life premium finance at this point , has been some well received in the marketplace. We finished the quarter with about $460 million outstanding. For a few days in the quarter, at the near the end of March, we credited $0.5 billion outstanding. This is before any [indiscernible], is before the busy [indiscernible] for retail mortgage. Importantly, warehouse is still producing important impressive yields and margins, efficiency ratios in the [ 20s ], the amount of scale and impact on our overall operating ratio in this business, it's not really something that's been fully banked or recognized in our current numbers. That's really -- they've been just scaling the business so quickly over the past year. But as we -- I believe we could probably double this business in the next 12 to 18 months. And I believe the incremental impact from that [indiscernible] is going to be very meaningful. Retail Mortgage had an absolute blowout for. [indiscernible] it was impacted by some Middle East activities and an impact on rates and fair value adjustments. And that's true. We might have reported $0.5 billion, looking at $0.5 billion more at that. But [indiscernible] pretax income in the Mortgage grew to $2.1 million in the first quarter compared to $766,000 same quarter a year ago. In the quarter, our earnings [indiscernible] up to 57 basis points on closed volume compared 46 in the same period a year ago. So on a profitability basis, we're up maybe 19%, 20% -- a little better than 20% on closed volume. Our recruiting pipeline has never been as strong, and we're consistently we double each month [indiscernible] flow volume, new files. So we have real [indiscernible] very positive about what the second half of the year would look like. Right now, we believe Primis Mortgage is on track to be a top 50 mortgage company nationwide in '26. And lastly, before I turn it over to Matt, I want to emphasize what's really proven [indiscernible] for us and our desire to build this into a top-performing bank. In our day-to-day here, we are [indiscernible] on growing checking accounts, like I mentioned earlier, to about 20% of total deposits. Secondly, we're determined to drive massive amounts of operating leverage from our consistent, reliable balance sheet growth [indiscernible] to decreasing OpEx. And I know I've been saying this for several quarters. And so as the quarter ended, I was pretty delighted, start playing with the numbers and see what I'm about to tell you here. If you look at the last year, first quarter of '25 from -- first quarter '25, all the way back to the first quarter of '24, we were reporting growth in core revenue of about $45 million -- excuse me, we were reporting core revenue of about $45.6 million, which is higher by 33.7%, call it, 34% over a year ago. Reported operating expenses straight off of [indiscernible] income statement, no adjustments, came in at $33.8 million, which is only 4% higher than the same time a year ago. That's 34% growth in revenue, only a 4% growth in OpEx. I had in my comments that [indiscernible] that we could do that for a couple of more years. But I refrain with Primis, so I tick that out. But this is an extraordinary level of operating leverage and really the driver of our results. Nobody approve things we've done in this area and that revenue may not be outpacing OpEx going forward. We had several strategy, of course, to continue getting this result. And one of those is AI. And I don't want to steal Matt's comment or his hard work on this. I know he's going to comment further on this. But any [indiscernible] is the same kind of opportunity and catalyst that you would expect me to report if we were doing M&A transactions. We already have all the tools we need for this. We expect hardly no additional investments except short, but -- except the deep training that we're going to give our staff to be effective with this. And we believe that in the year, we are going to be the undisputed leader amongst banks under $10 billion, using AI to drive operating results [indiscernible] sales efficiency, customer satisfaction experience and, importantly, fraud prevention. When you combine that with our work towards converting our core bank to a fully digital core, we are on the edge of being a uniquely positioned bank with technology that has figured out how to keep our [indiscernible]. With that, Matt, I'll turn it over to you. Matthew Switzer: Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation, located on our website and in our 8-K filed with the SEC. Beginning with the balance sheet. Gross loans held for investment increased approximately 14% annualized from December 31 to March 31, led by growth in Panacea and Mortgage Warehouse. Average earning assets increased 6% annualized in the first quarter, with a slower growth rate versus period end growth due to the ramp in mortgage route later in the period. Average deposits were up 4% annualized in the quarter, while average noninterest-bearing deposits were up 7% from year-end. Net interest income was approximately $32 million, a substantial improvement from $26 million a year ago. Our net interest margin in the first quarter was 3.43%, up from [ 3.2% ] last quarter and 3.15% in the year ago period. And we have expectations for further margin expansion as we progress through 2026. We completed a reduction of $27 million of subordinated debt at the end of January, so that was only partially reflected in the quarter. We also have approximately $400 million of loans repricing in the second half of 2026 and early '27 with a weighted average yield of 4.81% that will add to loan yields. [indiscernible] core bank hosted posits remains very active at 159 basis points for the quarter, flat from the fourth quarter. Cost of total deposits was 223 basis points in Q1, down 3 basis points each quarter. Our focus on growing NIB deposits is a key part of our strategy to continue driving funding costs lower. Our provision this quarter was $1.5 million, partially driven by growth in the loan portfolio described above. Approximately $0.7 million of the provision was due to specific reserving on impaired loans, while another $0.4 million on the activities in the consumer portfolio. Core net charge-offs remained low at 6 basis points in the first quarter of 2026. Noninterest income was $13.6 million in the quarter versus $12.8 million in the fourth quarter after adjusting for the sale-leaseback gain, investment portfolio restructuring and Panacea loan pool sale in the fourth quarter. Mortgage revenue was solid in Q1 at $10.8 million versus $10 million in the fourth quarter and would have been even better in the first quarter, if not for the impact of market volatility late in the quarter. Year-over-year, Retail Mortgage production was 122% higher in the first quarter of '26 versus the first quarter of '25, showing strong momentum as we head into the busy homebuying season. Also included in that production was $26 million of attractive construction to permanent loans in the first quarter, up from $4 million in the first quarter last year. On the expense side, when you exclude Mortgage and Primis division volatility and nonrecurring items, our core expenses were $22 million in the first quarter versus $20.8 million a year ago. Absent the increased occupancy expense from our recent sale leaseback transaction, core expenses on this basis would have actually been down year-over-year. We've been focused on controlling expenses to maximize operating leverage and feel like we are in a good spot on that front so far in 2026. I would also like to take a moment to briefly touch on how we are thinking about AI. As mentioned in the earnings release, we have canvassed the bank looking for opportunities to deploy AI tools to reduce repetitive and time-consuming tasks and generate efficiencies. Our first pass has identified hundreds of hours of opportunity and there is almost certainly more that can be found as we start tackling these projects. We view this as a key part of our strategy to keep expense growth to a minimum, while maximizing operating leverage. Equally as excited from where I sit, our in-house talent in this area, combined with the robust tools built into our existing products such as Microsoft CoPilot should allow us to get the vast majority of efficiencies without expensive consultants. In summary, we are excited to report a solid first quarter in line with our expectations and believe we are still on track to hit our profitability goal in '26. With that, operator, we can now open the line for Q&A. Operator: [Operator Instructions] And your first question comes from Woody Lay with KBW. Wood Lay: Wanted to start on Mortgage. And as you mentioned, it was a blowout quarter in what's typically a seasonally weaker quarter. We're now entering the stronger quarters ahead. What are your expectations for production in the near term? And then also in the Mortgage expenses, was there additional hiring that was done in 1Q '26 or elevated legal expenses, anything that sort of prop that up? Matthew Switzer: Nothing unusual on the expense side. Dennis Zember: I think what -- I think we probably -- I think maybe when you came into the year thinking we might have -- we closed $1.2 billion last year. but had a lot of momentum in the fourth quarter. I thought we'd probably have like a $1.6 billion, $1.7 billion mortgage company. And then through the first quarter, felt like it was a little higher, maybe $1.8 billion, maybe even $2 billion. But we -- I feel like we're probably still maybe around [ 100 ]. I mean we're going to -- April is very strong sort of reflecting what we thought. I think for the -- I said we're probably still somewhere in the $1.8 billion range on close volume. And I think what was important is as we've been growing, what's important is like we were at 46 basis points a year ago. We're at 57 basis points now on closed volume. What's impacting that is obviously a lot more scale on the fixed expenses as we get closer to $2 billion. A lot more focus on Matt mentioned construction [indiscernible]. We have a base construction term focus here that's honestly very centered on government for getting higher yields there. And really, we've been building that for the last year. These are probably 6 to 9 months.deals, and so that's starting to flow. So what's important, I think, is that we think we're going to do [ $1.8 ] billion or so this year as things look right now and maybe trend somewhere closer to probably a touch over 60 basis points. We -- the Middle East event probably hit us for a few basis points, 5 or 6 basis points, on profitability. So we might have been overseas had we not had a fair value [indiscernible]. That's going to happen in Mortgage, [indiscernible] Wood Lay: Yes. That's helpful color. And then maybe shifting over to the net interest margin outlook, Matt, you noted some of the loan repricing tailwinds through the remainder of the year, growth is expected to remain strong. You're going to have to fund that growth. Do you think you can continue to post strong growth and see margin expansion? Or will it be -- are we looking more at flat margin with the incremental growth? Matthew Switzer: I think we'll see a little bit more margin expansion because of the debt payoff, I mentioned, and we also had a little bit of a drag in the margin quarter from moving those loans to held for sale. We reversed some deferred costs that ran through the margin. It was only like 1 basis point. So we'll see some march expansion next quarter and a little -- and then probably inch up from there. I mean I would not expect margin to hit 3.6%. But would we hit high 3.4s to 3.5% as we go through the year, most likely. Wood Lay: Got it. And then maybe just last for me on the credit. I appreciate the comments on pay downs of those 90-day past due on past -- subsequent to quarter end. But just on some of those larger relationships that are still on NPA, any update on those and when we could see possible resolution? Dennis Zember: [indiscernible], you asked that, Matt, looks trade like you answer that one. I mean there's 2 bills real estate -- commercial real estate deals office. And both had pretty good quarters on new leases. So I mean -- I think it's trending positive there. I think the -- 2 things are trending positive. One, there is more leasing activity. Sales cycle on new leases in an office part like this is longer than we want it to be, but still, the fact that they're talking to a lot of folks and that there's pathway is positive. The second is cap rates are improving, and they're not falling like we'd like them to, but they are improving. And so I think [indiscernible] goes by, we're a little safer on their current. So they're not -- these are not -- I mean it could change any time. But right now, they're things are trending more positive there. Does that answer your question? Operator: Your next question comes from the line of Russell Gunther with Stephens. Inc. Russell Elliott Gunther: I wanted to start -- maybe just a quick follow-up on the margin commentary. I appreciate the directional guide, but maybe some of the underpinning assumptions. It would be helpful to get a sense for kind of where new commercial loan origination yields are today? And then, Matt, within the guide, how are you thinking about deposit costs for years? Is there room to move those lower? Or is there kind of a flat to upward bias within your margin expectations? . Matthew Switzer: I'll start with the last piece. I think on the deposit side, it's probably flat, up or down a couple of basis points, but not -- I don't expect any substantial moves in the cost deposits in the near term. On the production side, we're -- in the core bank, probably [indiscernible] Dennis Zember: Yes, we're probably regularly 5 years. And we're still probably all in, we're probably close to 5-year [ 275]. [indiscernible] Mortgage warehouses probably with phase is probably 1 month so for plus [ 315 ], [ 320]. Panacea is outstanding. I mean they are -- I mean they really -- I mean, the niche that they've established for themselves, their marketing, their profile, the opportunity to do business with them is reflected in the pricing, I think the rates they're getting on their production is exceptional to. They're probably 5-year treasury plus [indiscernible] on that kind of credit. On funding, Matt and I regularly debate this. I mean we could -- across the bank right now, I feel like we could probably take digital down 25 or 30 basis points, probably not lose that much. We can probably take the core bank down 5 or 10, it's already very low. But there some savings that we could get on the deposit side. The problem is it puts us in a place where we're not very strong on the on the growth side. And again, we're not leaning into rate on digital or anything else, but we also don't want to not be competitive. And right now, when we're looking at Panacea, Panacea could do $200 million for us this year. Warehouse could grow $300 million, $400 million. The core bank is the best [indiscernible]. That could be a couple of hundred million. We just don't want to get in a position -- I mean we don't want to go hardest 30 basis points of deposit cost and then just rely on home loan bank advances. That's -- we don't want to be that bank. Russell Elliott Gunther: I appreciate the color there. And Dennis, kind of took my next question in terms of how that loan growth shake out from a vertical perspective. So I appreciate that. Maybe I would then switch gears to the expense front. How are you guys thinking about directionally the overall expense base inclusive if we could, of the kind of mortgage banking vertical as well? Matthew Switzer: Inclusive of -- that was kind of hard to split out unfortunately because it's so tied to volume. I mean -- as you know, it's going to be an almost direct percentage of whatever their bill volumes going to be in the next quarter. I mean, I like to think of Mortgages net noninterest income and noninterest expense for the year. Now that doesn't include like spread income, which we also included our profitability. I mean, it's probably going to net us $5 million or $6 million for the year, so you can kind of back in to take your whatever -- your assumption is in noninterest [indiscernible] number mortgage and kind of back into expense from there? . Otherwise, when we kind of and then past volatility to it as well. So we're really focused on that more expense number, which is around $22 million. I think I think we'll stay in that kind of $22 million to $23 million range for the year. Russell Elliott Gunther: Okay. Understood. I appreciate it, Matt. And then just last one for me guys, would be an update on your kind of ROA glide path, like you mentioned in your remarks, I would expect to hit your targets, which I think are 1% ROA by the end of the year. What aspirations do you guys have from there and sort of a time line to achieve? Matthew Switzer: [indiscernible] do something. Dennis Zember: No, please. move the gold again. I can take . [indiscernible]. Russell Elliott Gunther: I understand. Yes, I get that. Dennis Zember: Yes. I mean -- I mean 1% is a good [indiscernible] we've not consistently been there, but 1% is not going to I mean, given our growth rate, that problem -- our growth rates and our dividends, that will probably keep the bank capital levels flat. But I mean we want to build book, we want to build capital ratios. We want to position ourselves to be strategic. And so we've got to be higher than that. I think mortgage at scale, I've said it's 57 basis points. Mortgage at scale probably is another 20% higher than that. That's going to be a big deal in the ROA. That's probably another 10 basis points for the ROA. Warehouse is probably going to add another 10 basis points once it gets to scale. The AI thing that Matt is working on and our rest of our bank, I mean, over time, I mean we're not looking at that if [indiscernible] is something that's going to reduce headcount. What it's going to do is take the experts we have and just make them be able to manage twice as much. And that's we can magnify that when we have growth rates like we have. We know -- I know I'm going to need these staff is, these staff return. I mean admirationally, we are be given these lines of business, on top of our core bank, we ought to be [ 125 ] or better and probably looking at more ROTCE to be something that we get there 15%. I think your 15% ROTCE, you kind of can control your feature. People don't like your stock and you can just buy it back. If they do like your stock, then you can do other strategic things. But really, until you get to that point, you're -- all you do is working to get to that point. [indiscernible]. Matthew Switzer: That's good. Operator: [Operator Instructions] Christopher Marinac with Brean Capital Research. Christopher Marinac: Dennis, the last couple of days, banks have talked about the competitiveness of digital deposits being more expensive than the brokered funds. And I'm curious what you think about that. It seems that you're in a much better place. You've been doing the digital banking much longer. And I'm just curious kind of how you look at that? And is that digital area going to grow less as a result of the rate environment? Dennis Zember: [indiscernible] you asked that question. I remember speaking on a panel somewhere, and I was talking about how we had these 25,000 or 30,000 digital customers all across the country. That have never been in the branch, probably never seen one of our bankers do. And I was talking about how that we sometimes produce their social media or we -- we communicated with them, we find out that they have a dog of [indiscernible]. And we will do things that are very community bankers. We will send up some slag a dog collar band, or we'll reach out to when we're in -- I've gone to see customers when I'm in [indiscernible]. I found additional customers was out there and went and had breakfast with them. The reason that -- I'm not going to sit here and say that these deposits are more expensive. Honestly, they should be. We have 25,000 or more digital customers that were banking with 6 people. So they should be more comfortable -- I mean more expensive. There are very little cost associated with it. But we have separated them from being just straight rate driven by being community bankers. The same thing that we do in bank to make our customers not be solidly right focused. We're doing that on the digital platform. I'm not going to sit here and say that we're the only people that are doing that, but I will tell you that we're probably more effective at that than our competition. And we've been doing that for now for 3 years since we've got the real big slug of deposits in here. Our average digital customer has -- average digital customer is probably down 150 basis points from where their peak was. The average digital customer has been here probably more than 30 months, closer to 36. Their average age is over 50. Average deposits probably appreciate $30,000, $40,000. They have the cell phone numbers of the fingers that work them. Everybody has talked to a banker. I mean it's just things like that, that have separated these customers from being solely rate-focused. Now I would tell you, in the core, the core base cost of deposits is probably $180 million $175 million -- $159 million. I mean, the digital is sitting there at like $375 million or so. Like I said, we could probably push that down 25% or 30%. So let's just say we could get them to [ 3.5 ]. So yes, it's obviously more expensive. But it's growing at that level. And yes, I don't know, I don't want to ramble about it. But I'm very proud. I'm very proud of how our bankers pushed a community bank attitude and approach on to these 25,000 customers, and that's paid off. Chris outside very long and ratable answer. Christopher Marinac: That is okay. My other question just goes back to the mortgage business. As you continue to thrive in mortgage, both in terms of production and gains plus the mortgage warehouse, -- is there a natural cap that will happen to how much of that business you want for the whole company? Will the bank just grow or route and kind of naturally cap how much mortgage will be down the road? Dennis Zember: See, that's the kind of thing you don't worry about when you're starting. Matt and I check all the time that we are claim to fame is that we find problems and we face some set they create new problems. I mean mortgage really should not be. We don't want to be a mortgage company here. We want to run an amazing mortgage company, but we don't want to be a mortgage company. It really probably should be more than 20% of our bottom line. No question about it. I mean, some of it is we have a dynamic team in mortgage and autonomy leader. And we have that for the core bank as well, too, in [indiscernible], but I mean the core bank, we're a little we don't -- we're still not fascinating with CRE. We're doing it, but that's not our hallmark. We're in some nongrowth, really fast growth areas in the core bank. So over time, where we've got to find a way probably to grow the core bank faster so that Mortgage, Warehouse, Panacea, all of those stay as tape to the bank and not the whole story. I mean we're not -- we don't want to change the growth profile or the growth dynamics. I mean our core bank is -- what our core bank right now is doing is amazing. And I don't want to step on the gas any harder and get a different kind of business. Some strategy will open up to us. We've not been in an M&A strategy or a position to do that, maybe that will open up one day. And that's probably the catalyst we need to build on the core bank and let these other items that we do are so good and just run so well a complement to that. Operator: Thank you. And there are no further questions at this time. I'd like to turn the conference back over to Dennis Zember for any closing remarks. Dennis Zember: Thank you all for joining our first quarter conference call. If you have any questions, Matt and I are a happy to get on phone with you. Otherwise, have a good weekend, and we'll talk to you soon. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Mr. Chase Mulvehill, Vice President of Investor Relations. Sir, you may begin. Chase Mulvehill: Thank you. Good morning, everyone, and welcome to the Baker Hughes First Quarter Earnings Conference Call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Ahmed Moghal. The earnings release we issued yesterday evening can be found on our website at bakerhughes.com. We will also be using a presentation with our prepared remarks during this webcast, which can be found on our investor website. As a reminder, we will provide forward-looking statements during this conference call. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for the factors that could cause actual results to differ materially. Reconciliation of adjusted EBITDA and certain GAAP to non-GAAP measures can be found in our earnings release and presentation available on our investor website. With that, I'll turn the call over to Lorenzo. Lorenzo Simonelli: Thank you, Chase. Good morning, everyone, and thanks for joining us. First, I'd like to provide a quick outline for today's call. I will begin with a summary of our first quarter results and recent portfolio actions, then highlight key awards and address the evolving macro environment, including the ongoing situation in the Middle East. I will then turn it over to Ahmed, who will present an overview of our financial results as well as provide guidance for the second quarter and review our outlook for the full year. He will also share an update on the progress with Chart integration planning and discuss recent actions to further optimize our portfolio. To conclude, I will highlight the progress we continue to make in positioning Baker Hughes as a leading provider of industrialized energy solutions, and then we'll open up the line for questions. Let us turn to Slide 4. Against the backdrop of ongoing conflict in the Middle East, our top priority remains the safety and well-being of our employees and their families. We remain in close contact with our team and continue to monitor the situation closely. And I am proud of our team's resilience. Despite a complex operating environment, we delivered another strong quarter of financial results, reflecting the strength of our portfolio and disciplined execution, which more than offset the significant impact of regional disruptions. For the first quarter, adjusted EBITDA totaled $1.16 billion, exceeding our guidance range as we continue to deepen our exposure into adjacent end markets and drive structural operational efficiency. Adjusted earnings per share were $0.58, 13% above the same quarter last year, even as results were impacted from the Middle East conflict -- the PSI divestiture and the formation of the SPC joint venture. Adjusted EBITDA margin rose 140 basis points year-over-year to 17.6%, driven by strong IET performance, partially offset by lower OFSE margin. Turning to orders. IET delivered another outstanding quarter with bookings reaching a record of $4.9 billion, marking the third consecutive quarter above $4 billion. This performance reflects ongoing strength across energy infrastructure, highlighted by $1.4 billion in Power Systems orders and further progress in LNG, gas infrastructure and CCS. IET also reported a book-to-bill of 1.5x for the quarter, resulting in a record RPO of $33.1 billion. This marks the fifth consecutive quarter that IET has achieved this milestone. Excluding transactions, RPO rose by 3% on a sequential basis and increased 10% compared to the prior year. These results underscore the diversity and versatility of the IET portfolio, supporting sustained growth across energy infrastructure markets as the importance of energy security continues to rise. During the first quarter, we generated free cash flow of $210 million. Our first quarter performance demonstrates the durability and robustness of our portfolio, the positive trajectory aided by our business system and the strong momentum in IET. We are confident that our versatile portfolio and track record of operational excellence positions us for sustained growth during Horizon 2 as we continue to navigate a volatile environment. Earlier this month, we announced the divestiture of Waygate Technologies as part of our ongoing portfolio management strategy and comprehensive evaluation to identify further opportunities for enhancing shareholder value. Combined with the sale of PSI to Crane and the joint venture with Cactus, which both closed earlier in January, we expect to generate gross proceeds of approximately $3 billion in 2026, further strengthening our balance sheet. Now turning to key awards on Slide 5. In Power Systems, we achieved another outstanding quarter, securing orders across our power generation, grid stability and energy management capabilities. For power generation, we converted a prior slot reservation agreement into an integrated solution award for a critical infrastructure project in North America. This contract includes NovaLT16 gas turbines, BRUSH Power Generation electric generators, gears and long-term aftermarket services, delivering up to 1 gigawatt of reliable power to support growing energy demand from data centers. Additionally, we announced a contract to provide 25 BRUSH Power Generation generators to Boom Supersonic. When paired with Boom's gas turbines, this is expected to deliver a total of 1.21 gigawatts of generator capacity for data centers. In grid stability, we secured a contract with Hitachi Energy to design, manufacture, install and commission 4 synchronous condensers. These will enhance system reliability and stability at 2 energy substations in Australia. By providing crucial voltage support and dynamic response, synchronous condensers help mitigate the challenges associated with intermittent power from renewable sources, ensuring a more reliable and stable grid. In energy management, Baker Hughes received a second contract for the engineering and design of Hydrostor’s advanced compressed air energy storage system in the U.S. This collaboration includes up to 1.4 gigawatts of potential equipment orders for compressors, expanders, motors and generators. Further highlighting our momentum in energy management, we announced a collaboration with Google Cloud to develop AI-enabled power optimization and sustainability solutions for data center applications. This partnership is a pivotal collaboration that leverages Baker Hughes expertise in power systems and Google Cloud's leadership in advanced AI and data analytics, bringing together the core capabilities of both companies to drive innovation and operational efficiency across the data center market. In gas infrastructure, we secured 2 key awards this quarter. We received a significant order for an advanced electric motor-driven compression solution supporting offshore operations in the Middle East. Additionally, Baker Hughes will deliver gas compression units, including 3 NovaLT gas turbines for the San Matias Pipeline S.A. in Argentina, marking our first NovaLT deployment in South America. In LNG, we booked equipment orders totaling $1.2 billion this quarter across key regions. Notably, Qatar Energy awarded us a significant contract for 2 mega trains on the North Field West project, representing 16 MTPA of capacity. Our scope includes 6 Frame 9 gas turbines, 12 centrifugal compressors and integrated power solutions, utilizing three Frame 6 gas turbines and three BRUSH Power Generation generators. We are also seeing potential acceleration of LNG project FIDs in North America. Reflecting this momentum, we recently entered into a strategic agreement with ST LNG to provide critical gas compression and power generation solutions for their proposed 8.4 MTPA LNG export terminal offshore Texas. Additionally, we continue to drive value through our life cycle model, signing a 5-year aftermarket service agreement with Petrobras. This contract covers maintenance, repair and engineering services for up to 64 aeroderivative gas turbines across 19 FPSOs, further strengthening our role as a trusted provider for Petrobras critical operations. Including our 1 gigawatt data center order highlighted earlier, we secured $1.4 billion in new energy orders this quarter, a strong start to the year that reinforces our confidence in achieving our $2.4 billion to $2.6 billion target for 2026. New energy bookings also included a significant award to provide advanced compression and pumping technologies for Qatar Energy, LNG's large-scale carbon capture facility. Our scope includes 6 compression trains powered by variable speed electric motors, enabling the capture and transport of 4.1 million tons of CO2 annually. In our Downstream Chemicals business, we signed a substantial multiyear agreement with Marathon Petroleum, establishing ourselves as the preferred supplier of hydrocarbon treatment products and services for 12 refineries and 2 renewable fuels facilities throughout North America. This strategic collaboration reinforces our position within the downstream market and demonstrates our commitment to delivering innovative solutions that enhance operational efficiency and support sustainable growth for our customers. Turning to Energy Upstream. We secured key awards that reflect our differentiated positioning and long-term value proposition to customers across the oilfield services market. In Brazil, we secured a major contract with Petrobras to deliver 91 kilometers of flexible pipe, risers, flowlines and comprehensive maintenance and installation services, supporting the country's pre-salt and post-salt developments. We also signed a major contract extension with Petrobras to provide integrated workover and P&A solutions for one of the world's largest offshore P&A projects. Within SSPS, we also received an award from Turkish Petroleum to provide subsea production systems for 5 wells in the Black Sea, including deepwater horizontal tree systems, manifolds, subsea distribution infrastructure and topside control units. In Argentina's Vaca Muerta shale, we signed a 3-year contract with YPF to provide well construction technology, including Lucida, rotary steerable and Perma Force drill bits to support unconventional shale development. We also continue to see strong momentum across integrated services, signing a contract with Gulf Energy to drill and complete 43 wells in Kenya's South Lokichar Basin, marking our first fully integrated project in Sub-Saharan Africa. Moving to digital. We continue to advance our position across both hardware and software solutions. In IET, we secured several contracts to deploy Cordant Asset Health, including an award for a large U.S. combined cycle power plant, which further illustrates the value of our digital solutions in enhancing efficiency and reliability. Notably, Cordant’s power-related orders doubled year-over-year, continuing strong momentum from 2025 when power orders rose by more than 80%. This robust growth highlights both the rapid adoption of our digital offerings within the power sector and our commitment to advancing the global transformation of power systems. In OFSE, we expanded our Lucida agreement with a large NOC for ESP surveillance and optimization and signed a new multiyear Leucipa contract with Xpand Energy, covering gas wells across the Marcellus, Utica and Haynesville Shale basins. Currently, this technology is actively deployed across approximately 75,000 wells globally, providing digital enablement that significantly differentiates our artificial lift portfolio through improved surveillance, optimization and production performance. Lastly, underscoring the expanding commercial synergy opportunities within our enterprise capabilities, we established a strategic collaboration with XGS Energy and were awarded a contract for initial well design and engineering support for its 150-megawatt geothermal project in New Mexico. Our early involvement positions us to deliver integrated subsurface and surface solutions that set us apart from our competitors. Turning to the macro on Slide 6. Despite an otherwise constructive global demand backdrop, the Middle East conflict has introduced a meaningful new layer of macro uncertainty. Disruptions across critical energy corridors, including the Strait of Hormuz, have tightened global oil and LNG balances, leading to sharp price increases. These developments have heightened inflationary pressures, which would present downside risk to global economic growth should the conflict persist over an extended period. The conflict has introduced significant volatility into global oil markets, impacting over 10% of global oil volumes. Concerns around the security of key transit routes have tightened near-term supply-demand balances with growing risk of undersupply in 2026. While the duration and full extent of the conflict remain uncertain, it is evident that geopolitical risk has become a structural reality for oil and gas markets. This development has significant consequences for the reliability of supply and global energy security. To address these challenges, there is a growing need for increased upstream investment to expand global production capacity and ensure we can meet rising demand. Additionally, rebuilding global inventories above historical levels is expected to play a critical role in supporting energy security, particularly given the significant drawdown of inventories following the extended closure of the Strait of Hormuz. The conflict has also significantly affected global LNG markets with 20% of worldwide LNG capacity now off-line, driving significant price volatility. The recent infrastructure damage in the region and the effective closure of the Strait of Hormuz have materially constrained the LNG market's ability to respond to growing demand, likely to result in a supply shortfall this year. Consequently, we are seeing increased sensitivity to price movements in key consuming regions. In Asia, higher LNG prices have led to fuel switching from natural gas to coal, which has helped moderate additional upward pressure on LNG prices. Meanwhile, in Europe, the gas injection season has begun at a slower pace against relatively low storage levels. Currently, storage levels are only 30% of capacity, 6% below last year and 13% below the seasonal average. These dynamics underscore the ongoing challenges and highlight the importance of energy security across global markets. Turning to 2026. We now expect global upstream spending to be modestly below our prior outlook of low single-digit declines compared to 2025, driven entirely by a significant reduction in Middle East activity. This is expected to be partially mitigated by more resilient spending across other regions with North America and international markets outside of the Middle East now expected to be broadly flat compared to last year. This outlook assumes a resolution of the Middle East conflict by midyear and the full reopening of the Strait of Hormuz. That said, geopolitical conditions remain fluid and the ultimate timing and magnitude of the recovery in the region are subject to a wide range of potential outcomes. In the near term, we anticipate greater emphasis on optimizing production from existing wells. Once the conflict ends and the Strait of Hormuz is fully opened, we expect a measured increase in activity in the Middle East, led by a meaningful increase in remediation and intervention work as previously shut-in wells are brought back online. The pace of activity in the region will be dictated by producers' ability to restore export flows out of the region. In light of these significant disruptions, we see 2 key structural trends shaping energy markets in the wake of recent geopolitical developments. First, energy security will likely become a foundational priority for governments and industry alike, driving greater emphasis on diversifying oil and gas supply sources and increased investment in power and energy infrastructure, while also supporting continued development of lower carbon solutions such as geothermal, nuclear and grid modernization. Importantly, this is not just about adding supply. It is about building a more resilient energy system that supports industrial outcomes. That means greater redundancy, more diversified infrastructure and less reliance on single large-scale assets. A more distributed energy system will be critical to supporting future economic growth. This is where Baker Hughes is uniquely positioned with differentiated capabilities across the full energy value chain, spanning from molecule to electron. By leveraging these strengths, we're able to support customers with integrated life cycle solutions across the full energy spectrum and adjacent industrial markets. Against this backdrop, we are increasingly confident that our Horizon 2 IET order target will exceed $40 billion, supported by strengthening demand across global energy infrastructure markets. Second, regardless of the outcome of the current conflict, we expect an environment characterized by heightened geopolitical risk that is likely to result in persistent risk premiums for oil and LNG prices. This environment underscores the importance for higher upstream investment, particularly across the U.S., Latin America and other deepwater regions. To close, let me briefly recap. Despite the ongoing tariff-related pressures and significant Middle East disruption, we delivered strong results with IET achieving 35% year-over-year EBITDA growth and reaching record levels in both orders and backlog. This performance reflects effective execution of the Baker Hughes business system, supported by strong pricing and continued productivity improvements. Looking ahead, we remain focused on the successful closing of the Chart transaction and ensuring a seamless integration process. We are making substantial progress in integration planning and remain confident in delivering our targeted cost synergies of $325 million. More broadly, our ongoing portfolio management actions, strategic initiatives and comprehensive business evaluation are reinforcing the durability and effectiveness of our long-term strategy. These efforts enable us to navigate an evolving market landscape with confidence and position us to capture new growth opportunities. With that, I'll now turn the call over to Ahmed. Ahmed Moghal: Thanks, Lorenzo. First, I would like to reiterate Lorenzo's comments that our foremost priority is ensuring the safety and well-being of our employees and their families in the Middle East. I'll begin on Slide 8 by presenting an overview of our consolidated results. Next, I'll give a quick update on the pending Chart transaction and discuss progress in our portfolio management strategy. After that, I'll review our segment results and provide a brief summary of the second quarter and the full year guidance. As Lorenzo mentioned, we once again delivered strong orders in the first quarter with total company orders of $8.2 billion, including $4.9 billion from IET. Adjusted EBITDA of $1.16 billion increased 12% year-over-year, driven by robust IET growth, partially offset by the impact of the Middle East disruptions on our OFSE business. Adjusted EBITDA margins increased by 140 basis points year-over-year to 17.6% GAAP diluted earnings per share were $0.93. Excluding $0.35 of adjusting items in the quarter, diluted earnings per share were $0.58, up 13% year-over-year. During the quarter, we generated free cash flow of $210 million. The first quarter is generally the weakest period for free cash flow due to seasonal factors, but this period was further affected by some delays in customer payments. Moving on to capital allocation on Slide 9. The company's balance sheet remains strong with our net debt to adjusted EBITDA ratio declining to 0.32x. Following the successful debt offering in March, our cash position increased to $14.8 billion, while liquidity increased to $17.8 billion. The long-term debt issuance in March raised $6.5 billion in U.S. bonds and EUR 3 billion in European bonds, marking our inaugural bond offering in Europe. The proceeds from this offering will be allocated towards closing the Chart acquisition. Our target remains to reduce our net debt to adjusted EBITDA ratio to between 1 and 1.5x within 24 months after the Chart transaction closes. We plan to achieve this through free cash flow generation and proceeds from our ongoing portfolio management actions. At the start of the quarter, we completed the previously announced SPC and PSI transactions. In addition, we anticipate generating gross proceeds of $1.6 billion from the IPO of HMH in the recently announced sale of Waygate Technologies to Hexagon. As a result, we expect to achieve our $1 billion incremental divestment target ahead of schedule, underscoring our commitment to disciplined capital management and maintaining our strong balance sheet. With respect to Chart, we remain focused on closing the transaction and executing a seamless integration. With regulatory reviews still underway in certain jurisdictions, we currently expect closing in the second quarter, understanding that the timing may evolve as those processes progress. We believe this combination will significantly enhance the value we deliver to customers, broaden our industrial portfolio and enable us to expand into adjacent markets. On integration, our integration management office led by Jim Apostolidis continues to make significant progress. The team is organized into 17 operational work streams, each focused on ensuring a smooth transition. To date, we have identified more than 250 synergy opportunities and remain confident in achieving the full $325 million of targeted cost synergies. As we have progressed through integration planning, our work has further reinforced both the strategic and industrial rationale of this acquisition while highlighting strong cultural alignment between the 2 organizations. Let's now turn to segment results, starting with IET on Slide 10. During the quarter, we booked record IET orders of $4.9 billion, driven by continued strength in Power Systems, LNG and gas infrastructure. Over the last 4 quarters, IET orders totaled $16.6 billion, which is up 25% versus the prior 4 quarters. Our first quarter results reflect outstanding performance in IET with revenue of $3.35 billion at the high end of our guidance range and increasing 14% year-over-year. Compared to last year, revenue was impacted by the PSI and CDC transactions, which together represented a headwind of 3% to aggregate revenue. Growth was led by strong performance in Gas Tech Services as we continue to work down the overdue aero derivative backlog. We expect these benefits to carry into the second quarter with a more normalized environment anticipated in the latter half of the year. During the quarter, IET revenue was slightly impacted by shipping delays associated with Middle East disruptions across key trading routes. IET EBITDA for the quarter increased 35% year-over-year to $678 million. Margins expanded by 310 basis points to 20.2%. This strong margin performance was driven by favorable backlog pricing, elevated project closeout and productivity and ongoing execution of the Baker Hughes business System, further reinforcing our operating discipline. Turning to OFSE on Slide 11. OFSE delivered another solid quarter, demonstrating resilience despite persistent macroeconomic headwinds and the ongoing challenges in the Middle East. Revenue for the quarter was $3.24 billion, reflecting a 9% sequential decline, while remaining slightly above the midpoint of our guidance range. SPC was excluded from the consolidated results after the formation of a joint venture with Cactus in early January, contributing 4% to OFSE's sequential revenue decline. Relative to our expectations, strong performance in Mexico, Sub-Saharan Africa and the Gulf of Mexico more than offset the disruptions experienced in the Middle East during March, which impacted OFSE revenue by approximately 2% when compared to the fourth quarter of 2025. OFSE reported EBITDA of $565 million, exceeding the midpoint of our guidance range. EBITDA margin declined 70 basis points sequentially to 17.4%. This decline was attributed to the SPC transaction, seasonality and the impact of Middle East disruptions, partially offset by an improvement in North America OFSE margins. The quarter was positively impacted by foreign exchange and more favorable mix of direct sales across offshore markets, which generally yield higher margins. In addition, SSPS posted continued strength in orders totaling $650 million, up 22% year-over-year. This is a robust 82% increase when excluding the impact of SPC. Turning to Slide 12. I will provide our outlook for the second quarter and then comment on our full year 2026 guidance. For clarity, I will speak to the midpoint of the guidance ranges. For the purposes of this guidance, it is assumed that the situation in the Middle East will continue through the end of June without further escalation. The full reopening of the Strait of Hormuz is anticipated thereafter, followed by a measured increase in Middle East activity levels during the second half of the year. This guidance does not account for any potentially significant secondary impacts, such as elevated inflationary pressures or broader supply chain disruptions that could arise from the ongoing situation. Starting with second quarter guidance, we anticipate company revenue of $6.5 billion and adjusted EBITDA of $1.13 billion. For IET, we expect results to demonstrate another quarter of robust year-over-year EBITDA growth led by Gas Technology and CTS. The impact on IET for Middle East-related disruptions is expected to be modest in the second quarter. Overall, we forecast IET EBITDA to reach $670 million. The major factors driving our guidance ranges for IET will be the pace of backlog conversion in GTE, the progress with aero derivative repairs in GTS, the level of disruptions related to the ongoing conflict in the Middle East, foreign exchange rates and trade policy. For OFSE, we anticipate second quarter results will be impacted by events in the Middle East and a return to a more typical mix of direct sales. While a normal seasonal recovery is anticipated for regions outside the Middle East, we expect this to be offset by significant declines in the Middle East. Consequently, EBITDA is projected to be $540 million for the quarter with revenues estimated at $3.2 billion. Outside of the Middle East conflict, factors driving our guidance ranges for OFSE include execution of our SSPS backlog, near-term activity levels, trade policy, foreign exchange rates and pricing across more transactional markets. Moving to our full year guidance. We are maintaining our company's revenue and adjusted EBITDA guidance range. Currently, we anticipate full year results to be slightly below the midpoint of these guidance ranges, reflecting both our resilience and adaptability in navigating ongoing uncertainties. Although near-term challenges persist due to the conflict in the Middle East, we remain confident that our portfolio positions us to manage short-term disruptions effectively. As we look ahead to full year IET orders, we have started 2026 with strong momentum, driven by a record first quarter led by Power Systems strong performance. Given this momentum, we believe we are well positioned to achieve at least the $14.5 billion midpoint of our order guidance. The growing emphasis on energy security is expected to further support demand for energy infrastructure, unlocking potential upside to IET's Horizon 2 order target. We now anticipate achieving at least the midpoint of our full year IET EBITDA guidance of $2.7 billion. Developments in the Middle East may result in minor delays to planned LNG maintenance in GTS. However, we expect these impacts to be more than offset by the first quarter outperformance and revenue conversion from higher backlog levels. In OFSE, ongoing tensions in the Middle East have introduced considerable uncertainty, which may impact our ability to achieve the midpoint of our original full year guidance range. However, should the conflict conclude by the end of June without significant escalation and provided the Strait of Hormuz is fully operational during the second half of the year, we anticipate being able to achieve the low end of our EBITDA guidance range of $2.325 billion. We will continue to monitor the situation closely, and we'll provide any significant updates if and when appropriate. In summary, we delivered another quarter of outstanding operational performance even with ongoing challenges in the Middle East. IET once again delivered very strong results, while OFSE demonstrated continued resilience against a difficult backdrop, highlighting the durability of the portfolio. This success is a testament to the strength of the Baker Hughes business system, which continues to drive enhanced execution, productivity and profitability across the organization. We also continue to advance our portfolio management strategy with the announcement of the Waygate Technologies divestiture marking another important milestone. Collectively, these efforts reinforce our focus on delivering sustained long-term value for our shareholders. With that, I'll turn the call back to Lorenzo. Lorenzo Simonelli: Thank you, Ahmed. For those following along, please turn to Slide 14. Following yet another strong quarter, it is clear that we are gaining real momentum in executing our strategy to transform Baker Hughes. Across our 3 time horizons, our strategy is designed to evolve Baker Hughes into a leading industrialized energy solutions company, one that is uniquely positioned at the intersection of energy and industrial markets. Fundamental to this transformation is our ability to operate across the full energy value chain, spanning from molecule to electron. In energy upstream, we continue to provide our customers with critical technologies and services that enable efficient and reliable hydrocarbon production. As those molecules move through the system, our energy infrastructure capabilities enable their transportation, processing and subsequent conversion into usable energy. Through the versatility of our IET portfolio, enhanced by the planned acquisition of Chart, we are expanding our reach into industrial markets that directly rely on the energy produced across the value chain, broadening our capabilities at the intersection of energy systems, industrial demand and global innovation. What differentiates Baker Hughes is not just our participation across these markets, but our ability to connect them. Our portfolio enables us to integrate solutions across the energy value chain, linking subsurface, surface and end-use capabilities in a way that is uniquely differentiated. This is especially important as the lines between energy and industrial markets increasingly converge, unlocking new opportunities for integrated solutions, higher-value offerings and a more durable recurring revenue streams. Reliability, scalability and predictability are critical to industrialized energy solutions, and this is precisely where Baker Hughes is positioned to lead. Across our broad and versatile portfolio, we deliver mission-critical technologies, comprehensive life cycle solutions and advanced digital capabilities for industrialized energy applications. Importantly, our ongoing portfolio actions continue to positively reinforce our path ahead. We continue to execute deliberate and strategic steps to advance our transformation as we build a company capable of industrializing energy solutions. Our strategy, unmatched portfolio and distinct capabilities position Baker Hughes to deliver sustainable growth, continued margin expansion and create long-term value for our shareholders and customers as we continue our journey in Horizon 2. In closing, I would like to thank all Baker Hughes employees for delivering another strong quarter. I especially want to recognize the resilience and focus of our colleagues in the Middle East who continue to support one another and our customers in a challenging environment. We continue to prioritize the safety of our people and their families. With that, I'll turn the call back over to Chase. Chase Mulvehill: Operator, we can now open the call for questions. Operator: [Operator Instructions] Your first question comes from Arun Jayaram with JPMorgan. Arun Jayaram: Lorenzo, I wanted to get your thoughts on the impact from the Middle East conflict on the potential for infrastructure spend, both from repairing damaged infrastructure and to add redundancy for greater supply surety. This obviously, as you mentioned, should be a favorable trend for Baker. But I was wondering if you could help us gauge maybe the intermediate and longer-term impact. I know you signaled how IET orders could exceed your Horizon 2 target, but I wanted to see if you could provide a little bit more color around this. Lorenzo Simonelli: Yes, definitely, Arun. And clearly, a lot taking place. And as we look at the current situation, the top priority remains, obviously, the safety and well-being of our employees and their families in the region. So we're taking all the right precautions and supporting them in these challenging times. As we look at beyond the considerable near-term uncertainty surrounding the situation, what we do recognize is that it's going to drive fundamental structural change across the energy landscape in the future. And first and foremost, energy security is going to become increasingly important, and it's going to really receive more emphasis, not just within that region, but also globally with regards to how countries treat their energy security. And it's going to lead to a diversified mix of energy sources that are going to be essential to meet the energy demand. And as a result, we see a stronger focus on diversifying energy supply sources, enhancing the reliability of the global energy markets. And to address this, we're going to see a few things. Firstly, increased upstream investment to expand global production capacity, ensuring we meet the rising demand and supporting the more durable upstream spending cycle in the years ahead. There's going to be a rebuilding of global inventories above historical levels to ensure that energy security is at foremost, and it's going to be playing a particular role in making sure that we avoid significant drawdowns in the future given the extent of what's happened from the Strait of Hormuz closure. Beyond the aspect of increased upstream investment, we're going to continue to see investment in lower carbon solutions, including geothermal, nuclear and grid modernization as part of the drive to build a more sustainable energy system. It's going to be about diversifying the energy mix and making it more durable. And so you're going to see a theme of increased investment in other areas. Also, it's not just about increasing energy supply. It's about the robust and resilient energy infrastructure and greater redundancy, diversifying infrastructure, reducing reliance on any single large-scale assets. So as you look at Baker Hughes, we're uniquely positioned to address these needs given the differentiated capabilities across the entire energy value chain from molecule to electron. And as we look at this going forward, we feel good about the opportunity to exceed the $40 billion target for IET orders that we gave out at the end of Horizon 2 in 2028. And it's not just about LNG FIDs. It's also about associated gas infrastructure, pipelines, compression stations, and we're seeing the need for more redundancy and investments being made in those areas. Operator: Your next question comes from the line of Scott Gruber with Citi. Scott Gruber: Yes, very strong results here in 1Q. But Ahmed, can you unpack the 2Q guide for us a bit more? IET usually sees a nice step-up in revenues and margins in 2Q, but the guide is a bit more flattish. Obviously, a strong comp, but just curious on some color there. And then in OFSE, you guys assume no recovery in the Middle East until 3Q, no pushback there. But if we do get better activity levels in the second half of the quarter as one of your peers is embedding, I just curious how much could that contribute to segment results? And it sounds like there's a bit better outlook across the other end markets. So some additional color there would be great, too. Ahmed Moghal: Yes. No, for sure, Scott. Look, I mean, as you said, and as we also said in terms of our remarks, there's still a great deal of uncertainty regarding ultimately the duration and depth of the conflict. So there are many different factors that could affect the second quarter as well as the second half. So just as a quick reminder, as you think about the second quarter, we're assuming the conflict persists through the end of June, but with no further major disruptions and that the Strait of Hormuz is not fully operational until we enter the second half of the year. So I think it's helpful to break it down by OFSE and IET. So really starting with OFSE, we -- with the backdrop of those assumptions, we expect a significant impact still to our Middle East operations in the second quarter with that region potentially falling, I'd say, more than 20% sequentially, which is double the rate of decline in the first quarter. And of course, that's driven by the fact that Middle East revenue in April, we expect to remain near March level and then hold throughout the second quarter, so effectively 3 months. The mix within that as well, I think, is important. So if you think about service-related revenue in the region will be affected, but the larger impact as we see it right now is going to be on the product sales side, just given the logistical challenges with equipment imports and exports. And to your specific question around if we see a quicker recovery as we go into the second quarter, there could be some upside to the Middle East revenue assumptions. And obviously, you'd expect us to be prepared to take action accordingly, and that's contemplated in the range for the second quarter. But with that upside, it could be somewhat delayed given the heavier mix of products that I talked about in the region because of that logistical piece. So outside of the Middle East, if you step back and you look at the rest of OFSE, we're anticipating at this point in time, a typical seasonal recovery across international markets outside of Middle East. And I'd say flattish revenue right now in North America. SSPS, we expect to deliver a sequential increase just driven by their backlog and linearity around that. And then OFSE margins, we're projecting a sequential decline in the second quarter, and that I'd attribute to some of the tailwinds that supported the first quarter margins as we went through it. So excluding those first quarter benefits, segment -- when you look at OFSE's operational margins in the second quarter could be modestly higher sequentially despite some of those supply chain and logistic disruptions. So that's really how we think about OFSE. When you look at IET, our second quarter assumes a modest impact from the conflict, and that's around logistical constraints, I'd say, for shipping products in and out similar to OFSE, and that would impact GTE slightly. And then in GTS, specifically, we experienced lower seasonal revenue declines during the first quarter, and that was driven by some of the overdue backlog that we -- the team executed quite well on. So this -- as you roll that forward into the second quarter, we would expect that to temper the usual significant sequential growth in GTS that you would see between 1Q and 2Q. So that's one factor I would call out. The other one is that at this time, we don't -- we do not anticipate any significant impact on GTS from potential LNG maintenance delays. So we, across IET have been driving, and now this is more an overall IET sort of view, better linearity. So we anticipate the second quarter segment revenue will be flat quarter-over-quarter. And on the margin side, in Q1, as we said, we had some strong productivity come through as well as favorable project closeout. And with those Q1 tailwinds, carry forward the stable revenue, IET margins, we expect to be only modestly up in 2Q. So stepping back and taking all of those factors into account at the company level, we expect the second quarter EBITDA for the company to be relatively flat versus the first quarter. So Scott, hopefully, that -- those building blocks help. Operator: Your next question comes from the line of James West with Melius Research. James West: I wanted to build on what Scott just asked about it and to think a little bit more about the second half. There's a bunch of moving parts. IET has been an outperformer. Maybe that implies that we want to be conservative in the second half or maybe we don't want to be. OFSE, we understand what you're saying about the Middle East, but there's a building recovery that's gaining momentum. And so I'm curious how we should think about -- we have the full year guidance, but how we should think about kind of 3Q, 4Q unfolding, both revenue-wise for OFSE and IET and margin-wise as we track towards your targets for the year. I'm assuming you have better visibility probably on IET than OFSE, but any help you can give there would be appreciated. Ahmed Moghal: Yes, James, as we think about the second half, it's really the usual multiple variables and the distinction between OFSE and IET, as you pointed out, given the visibility we have on the IET side. So maybe on the OFSE side, I'd say the first consideration is the extent of the state of the infrastructure and also the available storage capacity in the region. So that's a macro factor that obviously we're looking at. And given that level of uncertainty, we believed it more prudent to assume a measured ramp in the region during the second half of the year. And of course, that assumes that the Strait of Hormuz is fully operational at that point in time. So also across the world, we do see some offsetting activity in regions and now expect North America and international outside of the Middle East to be modestly stronger in the second half compared to what we contemplated at the beginning of the year. And so tying that into the margin profile for OFSE, you've seen us be very focused on cost discipline. The cost-out actions that we've been working on for the fourth quarter and the first quarter are starting to come through. And so we still see the potential to achieve the lower end of the OFSE EBITDA guidance range. But of course, there are a lot of factors into the mix. IET, what I mentioned earlier is better linearity and that carries through, as I think about it to the first 3 quarters and then a less pronounced 4Q increase when you compare it to prior years. And so while we recognize that there could be some modest impacts in the second half as well with cost inflation, the logistical challenges we've talked about, some potential project delays and/or potential maintenance delays, we only expect that to be modest at this point in time. And as a reference point, I think it's helpful to look back in 2022 when the start of the Russian-Ukraine conflict kicked off, we basically had only modest LNG maintenance delays that normalized over time following that initial spike in LNG prices. So with the current LNG prices being less pronounced, we expect it to be somewhat muted as we compare to '22. And the additional factor I would say is just thinking about linearity is that we don't expect a significant second half revenue ramp because of overdue aeroderivative backlog in GTS. So that will normalize over time. That builds up to just giving us some confidence in saying that we can achieve at least the midpoint of our full year IET EBITDA guidance range of $2.7 billion. So I just do want to emphasize the fact that this is -- it's quite fluid, but this is our best view given the current conditions, and it may change as additional factors emerge, including unforeseen persistent secondary impacts. And as we've always been, we're committed to maintaining the transparency, and we'll update you with the best view and projections for the remainder of the year as all the circumstances evolve. So hopefully, James, that builds out the year a little bit. Operator: Your next question comes from the line of David Anderson with Barclays. John Anderson: So really impressive to see the IET margins above 20% already. But I thought the standout this quarter were the IET orders. It came in well above our expectations. I was hoping you could spend a little bit more time on the Power Solutions side of the orders. Could you talk to -- you mentioned kind of the 3 primary drivers being generation, grid and management. Can you kind of talk about those 3 drivers, kind of how you see those playing out? It looks like the pace has you on track to maybe upside for your '26 order guide. And maybe if you could also comment on the longer-term stability of the data center demand, which is clearly an issue a lot of people are talking about. Lorenzo Simonelli: Yes, definitely, Dave. I'll take that one. And maybe let me start by reiterating what we said before that global power demand is in a multiyear growth cycle. And it's important to remember, we're only in the early stages and the current projections indicate that power demand will double by 2040, driven by factors such as data center and AI compute, digital infrastructure expansion, electrification, including EV adoption and the transition of industrial processes from fuel-based to electric power solutions and what we said before as well from the energy security aspect and making sure that there's redundancy. Also, as you look at the grid constraints becoming more pronounced, particularly in the United States, it's going to drive further investments taking place. And we see a fundamental shift towards behind-the-meter power solutions. And we're seeing also a shift in the customer mindset for these solutions. And it's no longer viewed as short-term bridge solutions. Increasingly, they're being deployed as long-term baseload power infrastructure, which obviously suits our portfolio well. And so as a result, we see the behind-the-meter market reaching $60 billion by 2030, led obviously by data centers, which we've continued to participate in. And it also includes 3 core capabilities of Baker Hughes as you think about power generation, grid stability and energy management. And when you take that, we look at the annual market opportunity expanding to more than $100 billion by 2030. And if you look at specifically power systems in the first quarter. Again, thanks. It was a great performance. And again, it shows the breadth of our Power Systems portfolio, securing $1.4 billion of orders across the 3 capabilities, and that accounted for almost 30% of total IET order, and we see strong momentum across power generation for large data center projects, synchronous condensers that support the grid stability and energy storage solutions for effective energy management. Also, our digital solutions, inclusive of iCenter and Cordant remote digital offerings continue to expand, and they increase the opportunities for cross-selling in these areas. So our rapidly expanding installed base is going to allow us to really have a synergy potential within that digital space and software platforms as we go forward. And if you look at the Cordant power-related orders, they doubled year-over-year in first quarter and sustaining their strong momentum from 2025. And we saw power orders increase over 80%, which, again, we see as strong momentum going forward. Our installed base for NovaLTs is also set to expand dramatically in the coming years given -- and will give a benefit to our aftermarket services business into 2030 and beyond. And the benefit of our extensive portfolio is going to enable us to deliver integrated power solutions for many different applications and end markets. So you can see we're feeling good about the durability and the robust nature of the demand outlook for Power Systems segment. And again, as we mentioned previously, potentially providing upside to the midpoint of our 2026 IET guidance range. And looking beyond 2026, confident in the strength of our IET orders, supported by what we're seeing is that fundamental rise in energy infrastructure demand. And this trend is expected to drive sustainable growth across Power Systems, gas infrastructure, LNG and other aspects of the IET portfolio. And given the positive trajectory that we see both within our Equipment and Services segments within IET, we expect continued and sustained growth for IET moving forward, hence, why the $40 billion order plus for 2028 Horizon 2. So hopefully, that gives you a breakdown. Operator: Your next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: You've clearly been busy on the portfolio optimization front. And I'm just curious, after the sales announced year-to-date, Waygate and the HMH IPO that Ahmed mentioned, you're already above that $1 billion kind of bogey that you set out there, I think, on the fourth quarter conference call. Can you just give us an update on how you're thinking about the portfolio optimization strategy going forward? Do you think you're largely done? And how should we be thinking about next steps? Ahmed Moghal: Yes, Stephen, I'll take that. As we've talked about a few times broadly, I just want to remind everybody on what drives portfolio management actions for us and the criteria we use. So there are 4 broad strategic criteria on top of the obvious financial ones. First is we like exposure to technologies that have critical applications, critical to customers and so forth. Second is around life cycle models and the ability to drive aftermarket calories. Third is a right to play in terms of commercial and operational synergies across the portfolio. And then I'd say fourth is earnings durability with expansion into new markets. So that's what we use. And then when you look at a quick recap, the recent divestitures, including the Waygate Technologies announcement and HMH IPO proceeds, we were expected to generate around $1.6 billion in gross proceeds. And when you couple that with those 2 recent transactions, we expect to, as you mentioned, achieve and exceed the $1 billion incremental divestment target ahead of the schedule, which we're doing in a very disciplined manner and maintaining and strengthening the balance sheet as we continue to go through this. So when you take those Waygate and HMH and you couple that with PSI and the proceeds from SPC joint venture, in aggregate, that's around $3 billion of gross cash proceeds in 2026. But all of these actions, I wouldn't look at them as a single milestone. So it's a continuum part of our ongoing portfolio management progress. So as we progress through the next couple of years, you'll see us remain very disciplined as to the approach and making sure anything that we do is very much aligned with the strategic objectives on driving value and the strength of the balance sheet. But I want to be clear in the near term, our focus is very much on closing and successfully integrating the Chart transaction. So hopefully, Stephen, that gives you a little bit of color on how we think about the portfolio. Operator: Your next question comes from the line of Saurabh Pant with Bank of America. Saurabh Pant: Lorenzo, maybe I want to go back to the Power Systems topic you were talking about. The demand side of the equation in response to Dave's question, I want to focus a little bit on the capacity side of things because demand is clearly very strong, right? But on the capacity side, I know you are doubling NovaLT capacity, but then you're also booked out through 2028, right? My question is, are you capacity constrained relative to the level of demand you are seeing? And when I ask that, Lorenzo, it's not just on NovaLT, but also on products like BRUSH generators, synchronous condensers, you talked about that. So any color on the capacity side of things, please? Lorenzo Simonelli: Yes, Saurabh, thank you very much. And as you said and we've said before, power demand is rising. And in North America, in particular, data center growth, manufacturing return and also the required infrastructure is going to be robust demand for power systems equipment inclusive of the generators, gas turbines and power generation, synchronous condensers to support the various aspects and very well suited to the portfolio that Baker Hughes has. The NovaLT remains a core product and as does the electric motors, gearboxes, generators, synchronous condensers and the control and protection systems. From a capacity standpoint, we're effectively sold out of NovaLTs through 2028 and the tightness we're seeing across the broader turbine market is well understood. And we have increased capacity, as we mentioned. We continue to receive strong inbound demand for the NovaLTs, and we'll evaluate each opportunity on its own merit. Our focus remains on customers that are becoming long-term partners and also with the financing and offtake firmly in place. And we're looking ahead to continue to closely monitor market conditions through our dynamic planning process, and we'll make the right decisions that are necessary to expand beyond the current doubling plan with a guided disciplined assessment of medium- and long-term supply-demand dynamics and a clear return threshold. For our Frame 5 gas turbines, which we can also sell into non-oil and gas markets from time to time, we have available capacity in '27 and '28 to support orders, which should the demand materialize. And importantly, we're actively assessing capacity needs across our entire Power Systems portfolio, not just the NovaLTs. As you mentioned, we have added capacity to our BRUSH product lines which include the generators and synchronous condensers. This will materially add to our annual revenue run rate. And we've also inaugurated our aftermarket NovaLT facility in Italy, which will support the robust services growth. So we're able to maintain flexibility across our manufacturing footprint and supply chain to support additional capacity as needed. And also, we're investing in different growth areas of technology development, which is core to our focus here for the next generation of engines and emissions reduction technologies, and we'll continue to invest across the R&D for power systems and also enhance our portfolio so that we can deliver the differentiated solutions to our customers. And taken together, our investments in capacity and innovation really positions us well to deliver sustainable growth and continued margin expansion and long-term value for our shareholders and customers. So I appreciate it, Saurabh. Operator: And that's all the time we have for questions today. I will hand you back to Mr. Lorenzo Simonelli, Chairman and Chief Executive Officer, to conclude the call. Lorenzo Simonelli: Yes. Thank you to everyone for taking the time to join our earnings call today, and I look forward to speaking with you all again soon. Operator, you may now close out the call. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone, have a great day.
Operator: Good day, and welcome to the Hansa Biopharma First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] This event is being recorded. I would now like to turn the conference over to Hansa Biopharma's CEO, Renee Aguiar-Lucander. Please go ahead. Renee Aguiar-Lucander: Thank you very much. Good afternoon, and good morning, everybody, and welcome to Hansa Biopharma's conference call to review the Q1 results for 2026. I'm Renee Aguiar-Lucander, CEO for Hansa Biopharma. And joining me today is Evan Ballantyne, Chief Financial Officer; Richard Philipson, Chief Medical Officer; and Maria Tornsen, Chief Operating Officer and President of the U.S. Please -- next slide, please. Please allow me to draw your attention to the fact that we'll be making forward-looking statements during the presentation. You should therefore apply appropriate caution. Next slide, please. This is the agenda for today's call, and these are the people who will, as I just mentioned, who will be covering the different sections. Next slide, please. So let me start by taking you through an overview of the quarter. As I mentioned in the Q4 report, we expected Q1 to be impacted by the significant number of initiatives, which we rolled out during the quarter, which I'll cover in some more detail later in the presentation. This is intended also that -- this is indeed also what we observed with revenues amounting to SEK 34.6 million, slightly above Q3 of 2025. We know that there will continue to be significant variability between quarters, and I do not expect this to change over the medium term due to the structural issues related to organ allocation in Europe. During the quarter, we raised $30 million in a convertible note, significantly extending our runway. We also paid down the NovaQuest debt by almost $15 million in January as per the restructuring agreement, and we now do not have another payment due until the middle of 2027. We also spent significant time and resources during the quarter compiling the briefing pack to the FDA related to GBS, which we submitted in early April. We're very excited about the fact that our abstract of the ConfIdeS study was accepted for oral presentation at ATC in June. In the quarter, we continued to build out our U.S. leadership team and also initiated our BLA review with the FDA. Next slide, please. In December of 2025, we announced the leadership change of the European commercial organization and initiated a significant reorganization in combination with the rollout of new system support and ways of working. We believe that this was necessary in order to be appropriately prepared for the rollout of a significant amount of data, which we'll be able to share with the physician and patient community starting in Q2 and continuing for the remainder of 2026. I want to thank all of my colleagues in the commercial organization for their leadership, collaboration and ability to adapt quickly as we all know that change is not easy and especially not when it comes in high concentration over a short period of time. However, we have achieved a lot over the last 3 months, and we can now start to see some of the benefits, though it will still take a couple of months for everything to truly get bedded down. Next page, please. I am not planning to provide any detailed guidance for this year, but I would like to share some fundamental components of which we will leverage to successfully navigate 2026. One year into my CEO role at Hansa, I'm glad to announce, and I'm sure that the organization is happy to hear that the changes which were necessary to stabilize the business and position it for growth have more or less been completed. This included the restructuring reduction in force, the renegotiation of the debt facility, raising of equity capital to ensure sufficient runway to read out key clinical data and obtain a potential U.S. approval, strengthening the internal expertise and experience required to successfully build an international and sustainable life science business, clarify and focus the pipeline strategy and last but certainly not least, review, reorganize and adapt the European commercial organization to improve transparency, performance and ensure the effective delivery of key clinical data to the physician and patient community. I believe that the company now is well positioned to benefit from the key events coming up this year, and we look forward to sharing them with you as the year progresses. Q1 was, I said in my report, a transition quarter, but there is no new or different information fundamentally impacting our market, and we have no reason to believe that the performance -- the performance was primarily impacted by the main changes that we rolled out during the quarter. We're also encouraged by the strong start to Q2, which we hope is the beginning of a consistent trend of improvement, which will be further strengthened by the data coming out in Q2. With this, I will hand over to Maria, who will provide some more details on several of these topics. Monika Tornsen: Thank you very much, Renee. Next slide, please. Let me first turn your attention to the European and international markets. In Europe, Idefirix has maintained a unique position since launch. There is no other approved therapy on the European market, which can do what Idefirix does, enabling a life-saving kidney transplant for highly sensitized patients. Across Europe, there are up to 11,000 highly sensitized patients waiting for a kidney transplant today. These patients need to navigate the complexities of finding an organ, and in some cases, that can take up to 12 years. In Europe, we launched with very limited data from only Phase II studies. And over the years, we have built on that clinical experience and now have over 200 patients treated with Idefirix in Europe. 2026 is a very exciting year for our European business as we will finally gain access to additional clinical data, which we know European KOLs are eagerly awaiting. Our Phase II data was published last year. And in 2026, we look forward to releasing additional data from our U.S. Phase III study, ConfIdeS, and most importantly, from our European Phase III trial, PAES. This data will allow us not only to communicate additional data to European transplant centers, but it will also enable us to seek full approval in Europe. In addition, we know that European KOLs are anticipating publishing their own real-world evidence, and we look forward to seeing these data published. Next slide, please. Our Q1 performance was, as Renee mentioned, impacted by the changes we made to our European business. We made those changes as we felt they would be necessary to drive growth in the second half of this year and in future years. Our Q1 product sales was SEK 33.9 million. The performance was mainly driven by France and our international markets. We do not believe this performance is a reflection of Idefirix potential, but rather a short-term impact based on the decisions we made. We have in previous calls talked about the challenges we have faced in Germany with the pause of the Eurotransplant program and in the region of Catalonia, Spain with regional reimbursement. I'm very pleased to report that our targeted efforts have resulted in positive changes. In Germany, the KOLs have submitted new consensus recommendations for publication in an international journal. These recommendations, which will enable German transplant centers to transplant centers -- transplant patients within the ETKAS program, where the majority of highly sensitized patients are listed, have been rolled out to German transplant centers in a webinar, and we anticipate the recommendations will be published in mid-2026. In Spain, we secured reimbursement in the region of Catalonia after months of targeted efforts. The new reimbursement pathway went into effect as of April 1 and post-Q1 close, we have seen our first sale in Catalonia with this new reimbursement pathway. Catalonia is a very important region for Idefirix. In our PAES trial, 1/3 of all enrolled patients came from 3 centers in the Catalonia region. As such, we have significant clinical experience already, and we anticipate this region will be a strong contributor to future sales. In addition to these positive accomplishments, we have also made targeted investments in new systems and activities to drive further growth of Idefirix in the coming years. Let's now turn our attention to the U.S. market. Next slide. We are excited about the potential of bringing imlifidase to the U.S. market. Today, there are approximately 15,000 highly sensitized patients on the wait list for a kidney transplant in the U.S. and 7,000 of those have a cPRA over 98%, making it very difficult to find a matching organ. For the patients with the highest cPRA, they may never receive an organ offer or have to wait over 7 years before they could have a transplant. Unfortunately, approximately 10,000 patients die or become too sick to transplant while waiting and a higher proportion of those patients are highly sensitized. This is where imlifidase can play an important role in reducing the wait time and enabling more patients to have access to a life-changing transplant. Next slide, please. We have recently conducted several market research projects in the U.S., which all confirm the unmet needs for patients and the potential place for imlifidase in their treatment journey. Today, there are no approved treatments for the desensitization of highly sensitized kidney transplant patients and the off-label treatments used are not seen as great options for patients. The burden of dialysis is also very real. Patients who wait for a kidney transplant need to undergo dialysis 3 times a week for several hours each time. That creates an extreme burden on the patient, impacting the patient's quality of life and also contributing to significant costs for the healthcare system. When preparing for a potential launch in the U.S., we know that we need to engage with several stakeholders within the transplant centers from surgeons to transplant coordinators, pharmacists and HLA directors. In particular, the HLA director will play an important role with imlifidase as they are responsible for the delisting protocols and managing the antigen profile of the patient. P&T approval will be critical to ensure access at hospital level. And in our initial research, financial decision-makers and clinical experts believe imlifidase will gain P&T approval given the strong clinical profile of imlifidase. Finally, we believe our initial launch drivers and uptake will likely come from centers with prior clinical experience of imlifidase and from high-volume kidney transplant centers. So let's turn to the next slide and look at our launch preparations. Our launch preparations are in full motion, and we are focusing our efforts on two critical areas: site of care strategy and market access. As I mentioned in the previous slide, we believe our initial uptake will come from centers with clinical experience and from centers who are performing high volume of kidney transplants. We are, therefore, focusing our efforts on the top 100 centers initially in the U.S. Those centers represent approximately 80% of the volume. And among those centers, we have 25 ConfIdeS centers who are accounting for 25% of the volume. These centers have clinical experience, which we believe will be a differentiating factor compared to the European launch where we only had two centers with clinical experience prior to European approval. Our market access activities have been focused on completing our market research and gaining a better understanding of transplant centers' financials. The majority of transplants are paid by Medicare and in particular, those patients who have waited for a long time for a transplant tend to a larger extent, have Medicare insurance. When speaking with financial decision-makers in the transplant centers, they all recognize the significant burden for these patients and the strong value proposition of imlifidase. Our efforts are focused on enabling speed of access at launch and breadth of adoption across multiple transplant centers. As mentioned in previous calls, we know that NTAP, new technology add-on payment and Outlier payments will be important for transplant center economics and prior CAR-T launches are good launch analogs that we are using to model our center engagements. Finally, we have also focused on identifying our distribution partner and other aspects of the supply chain to ensure we can deliver the product to the U.S. shortly after approval. Other activities in the quarter have been focused on building out our U.S. team with a particular focus on market access and medical affairs. Our full commercial build is expected in Q4, shortly before PDUFA. Our medical team are focused on engaging with KOLs and transplant center stakeholders at medical conferences. And we are, in particular, looking forward to the American Transplant Congress in Boston in June, where we will present our full ConfIdeS data, have a Hansa symposium and other KOL engagements. Finally, across the U.S. organization, we are focused on our site of care strategy. As I mentioned earlier, in each transplant center, there are multiple stakeholders we need to engage with from market access to medical affairs and commercial to ensure we have a successful launch. We have developed a strong strategy for how to engage these centers to ensure we know the stakeholders and can best support the incorporation of imlifidase into their treatment workflow once approved. With that, I will hand it over to our Chief Medical Officer, Richard Philipson, for an overview of our pipeline. Richard? Richard Philipson: Thanks, Maria. Next slide, please. I'd like to start by discussing Study 20-HMedIdeS-19, which we refer to as the post-authorization efficacy and safety study or the PAES study. As indicated by the name of the study, this is a post-approval commitment to the European regulatory authority following the conditional approval of imlifidase in Europe in 2020. Next slide. Primary objective of the study is to determine the 1-year graft failure-free survival in highly sensitized kidney transplant patients pretreated with imlifidase to turn a positive crossmatch against the deceased donor into a negative crossmatch. Secondary objectives include the evaluation of renal function, patient survival and graft survival up to 1 year after transplantation. And of course, safety is also one of the secondary objectives of the study. Next slide. Here, we provide an overview of the design of the study. Starting at the top of the schematic, patients enrolled in the imlifidase treatment group were highly sensitized with the highest unmet medical need based on the local kidney allocation system. Patients underwent a delisting step at prescreening to increase the likelihood of receiving a donor organ offer. When an organ offer was received, if the patient was cross-match positive to the organ, then the patient proceeded to treatment with imlifidase and transplantation, subject to meeting required eligibility criteria and converting from cross-match positive to cross-match negative. It was planned to enroll 50 patients into this treatment group. Moving down the schematic, there were 2 noncomparative reference groups. It's important to note that patients were not randomized to these reference groups, and there are no statistical comparisons made between the imlifidase treatment group and the reference groups. Furthermore, patients in these 2 reference cohorts have different baseline characteristics when compared with the imlifidase treatment group. The noncomparative concurrent reference group comprises 50 to 100 contemporaneous kidney transplant patients enrolled at the same sites at approximately the same time as patients enrolled in the imlifidase treatment group. These patients were not sensitized and had a negative cross match to the diseased donor organ offer. Rationale for inclusion of this reference group is to understand outcomes at the same sites when undertaking matched kidney transplants. Finally, the non-comparative historical reference group comprises 100 kidney transplanted patients randomly selected from a patient registry from 2010 onwards. Selection of patients was performed by the registry administrators and was completed prior to the start of the enrollment of the main study. Patients in this cohort were sensitized but to a lesser degree than patients in the imlifidase treatment group and were crossmatch to negative to the donor organ offer. Again, to emphasize, the primary objective to determine the 1-year graft failure-free survival in highly sensitized kidney transplant patients applies to the imlifidase treatment group only. Next slide. In this slide, we summarize the treatment schedule for patients enrolled in the imlifidase treatment group. Following the prescreening and screening steps, patients meeting eligibility requirements and with a positive crossmatch to a donor organ offer were treated with imlifidase. Prior to administration of imlifidase, all patients received premedication in the usual way with intravenous methylprednisolone and then antihistamine. A second dose of imlifidase could be administered within 24 hours if crossmatch conversion was not achieved after the first dose, which is in keeping with other imlifidase trials. Patients converting to a negative crossmatch were transplanted and then immediately went on to receive standard post-transplant immunosuppressive treatment comprising tacrolimus, mycophenolate mofetil and corticosteroids. Transplanted patients also received rabbit anti-thyroglobulin on day 5, rituximab on day 7 and IVIg on day 9 to 10. Next slide. The study enrolled the first patient in May 2022. There have been 22 participating sites in a total of 11 countries in the EU and U.K., and we expect database lock next month. Next slide. Now moving on to discuss Hansa's plans for its next-generation IgG cleaving enzyme, HNSA-5487, which I'll hereafter refer to as 5487. This is a rapidly acting IgG cleaving endopeptidase. This highly specific IgG degrading enzyme that includes all human subclasses of IgG, whether free or bound, antigen or cell membranes and no substrate other than IgG has been identified. Next slide. First, I'd like to provide a brief overview of Guillain-Barré Syndrome or GBS. This is a rare, rapidly progressive monophasic immune-mediated neuropathy where the immune system attacks peripheral nerves often following a viral or bacterial infection. The disease affects 1-2 in 100,000 people annually with approximately 3,500 to 7,000 cases annually in the U.S. There are also seasonal and geographical variations in the disease prevalence. GBS is characterized by rapid onset muscle weakness, tingling and numbness, typically starting in the legs and moving symmetrically upward. Symptoms can escalate to paralysis, breathing difficulties requiring assisted ventilation and consequent immediate hospitalization. GBS is an antibody-mediated disorder in which complement fixing IgG antibodies directed against gangliosides play a key role in the pathogenesis. Disease progression is typically rapid, reaching a nadir within 4 weeks in most patients with many attaining maximal weakness within 2 weeks. Although many patients recover from the acute phase, long-term morbidity is common and approximately 20% of patients remain unable to walk independently at 6 months. Current standard of care treatments include intravenous immunoglobulin or IVIg infusions or plasma exchange in addition to supportive care such as respiratory support and management of complications such as infection and thrombosis. It's estimated that approximately 25% of patients require mechanical ventilation for days to months following the acute autoimmune attack. Next slide. Experience with imlifidase, our first-generation IgG cleaving enzyme followed by IVIg provides relevant clinical precedent for the proposed 5487 development in GBS. Specifically, a Phase II single-arm open-label clinical trial has previously evaluated imlifidase followed by IVIg in patients with GBS enrolled within 12 days of symptom onset and followed for 12 months after imlifidase treatment. In this study, a single dose of 0.25 milligrams per kilogram of imlifidase rapidly cleaved IgG in 28 out of 30 patients. At a group level, treatment with imlifidase followed by IVIg led to early improvement of the patient's functional status. The median time to walking independently was 16 days. Most patients improved markedly in motor function early after imlifidase treatment by 1 week after imlifidase dosing, 37% of patients were able to walk independently. 4 weeks after treatment with imlifidase, 52% of patients were able to walk independently and 33% were able to run. Next slide. Results from the imlifidase Phase II trial in GBS have been compared to patient data from an external prospective cohort treated with IVIg known as the International Guillain-Barré Syndrome Outcome Study, or IGOS. The figure in the slide presents an unadjusted comparison of muscle strength as measured by MRC sum scores between the imlifidase treatment group and the reference cohort, demonstrating the rapid improvement in imlifidase-treated patients. Further, a matching-adjusted indirect treatment comparison or MAIC has been performed. The MAIC confirmed that the patients treated with imlifidase and IVIg walked independently, that is a GBS disability score of less than 2, 43 days earlier than those in the IGOS cohort treated with IVIg alone. In the same MAIC analysis, the median number of days required for patients to improve one grade in the GBS disability score was 6 days for patients treated with imlifidase and IVIg compared to 31 days for patients treated with IVIg alone. And this difference was statistically significant with a p-value of 0.002. Next slide. Now turning to the current status of the program. The first time in human study in healthy participants has been completed. In this study, it was shown that circulating IgG was efficiently and rapidly reduced by a single dose of 5487 by more than 95% within a few hours. There was a positive correlation between dose and duration of reduced IgG levels where a higher dose resulted in a longer duration of effect. In other words, there was a clear dose response relationship. There was also a significantly reduced antidrug antibody or ADA response when compared with imlifidase and the treatment was at least as efficacious as imlifidase in reducing total IgG levels. Furthermore, 5487 was shown to be safe and well tolerated across all tested doses and no serious or severe adverse events were reported from the trial. Based on these data and the clinical experience with imlifidase in GBS, the clinical development program for 5487 in GBS has been designed and submitted to FDA in the form of a briefing document. The response to this submission is expected in May. Based on the current plan, the clinical phase of the development program will start by the end of this year. I'd now like to hand over to Hansa's Chief Financial Officer, Evan Ballantyne. C. Ballantyne: Thank you, Richard. Q1 sales performance. Total revenue for Q1 2026 was SEK 34.6 million, representing a 48% decrease compared to Q1 2025 of SEK 66.3 million. Product sales for Q1 2026 were SEK 33.9 million, also representing a 48% decrease as compared to Q1 2025. We continue to see fluctuation in our quarter-over-quarter performance and quarterly volatility reflects the unpredictability of the organ allocation market. Next slide, please. For Q1 2026, SG&A expenses totaled approximately SEK 106 million and were essentially flat compared to Q4 2025 of SEK 102 million. Compared to Q1 2025, SG&A expense of SEK 76 million were SEK 29.6 million higher. This variance was driven by noncash LTIP expense of SEK 6.1 million, fees associated with securing the convertible note of almost SEK 10 million, investments in commercial activities associated with the U.S. launch and improvements in the company's quality systems. R&D expense in Q1 2026 totaled approximately SEK 57 million and were 11% or SEK 7 million favorable compared to Q1 2024. The decrease in R&D expenses was primarily driven by the wind down in clinical trial activities and restructuring actions taken in 2025. In Q1, the loss from operations was SEK 143 million compared to SEK 125 million in the prior quarter Q4 2025. Next slide, please. Headcount for the period totaled 122 compared to 138 in Q1 2025. Headcount was essentially flat compared to Q4 2025 of 125. Cash used in operations in Q1 2026 totaled SEK 157 million compared to SEK 152 million in Q1 2025. In Q1 2026, cash and cash equivalents totaled SEK 677 million, on March 19, 2026, the company entered into a USD 30 million convertible note purchase agreement with Athyrium Capital Management. The convertible note has a fixed rate of 3% payable on a semiannual basis in cash beginning on September 15, 2026, and a maturity date in March of 2031. This transaction extends Hansa's cash runway and strengthens the company's balance sheet in advance of the FDA approval and a subsequent U.S. launch. And now I'd like to turn the presentation back to Renee for closing remarks and the Q&A portion of the call. Renee Aguiar-Lucander: Thank you very much, Evan. Next slide, please. So in summary, we're looking forward to the continuation of this quarter as it brings many exciting updates for the company, and I'm proud to be able to sit here today and say that we're now operating from a strong and stable foundation with a clear road map ahead. We have a robust financial position with an extended runway and access to multiple future financing options should they be required in the future. We are in full execution mode and with a very experienced team in place, I look forward to the rest of the year with great excitement and enthusiasm. This includes the readout of the PAES study with database lock expected next month. Feedback from FDA regarding the GBS study design, presentation of the ConfIdeS Phase III data at ATC a Capital Markets Day with input and discussions from U.S. and European KOLs covering ConfIdeS and PAES top line data, which we expect will be available by that time. And finally, in Q4, we plan to file for full approval with EMA Idefirix and look forward to the outcome of the PDUFA date in December. Next slide, please. As I mentioned, we hope to share some of this information with you towards the end of this quarter at our Capital Markets Day, which will take place following the ATC conference in June in New York. It will also be possible to follow this event virtually and a full agenda will follow. Next slide, please. So with this, this concludes the presentation, and we can open up for questions. Next page, please. Thank you. Operator: [Operator Instructions] The first question comes from Farzin Haque with Jefferies. Farzin Haque: I wanted to ask on the U.S. approval process. How are the interactions with the FDA going so far? And have they signaled any key focus area or questions during the review of the BLA filing package so far? Renee Aguiar-Lucander: So I will take that question initially and then see if Richard has anything to add. I would say that the FDA BLA review process is going very well. There has not been any kind of, I would say, odd or strange kind of key questions or any kind of area for that matter that would kind of be out of the scope. So I would say that it's really going quite well and kind of as expected. I don't know, Richard, if you have anything to add. Richard Philipson: No, I agree. Everything is going well. It's going as expected, as Renee has said, and nothing untoward so far in our interactions, and we've been able to address any questions from the FDA so far. Farzin Haque: Makes sense. And then for EU sales, the 1Q impact, it makes sense. And for the second quarter, you said that you had a strong start. Any color on the ordering trends, center feedback that gives you confidence that sales will rebound? Renee Aguiar-Lucander: So I don't really want to get into any kind of very specific details on this, and I know better than to kind of assume that what has kind of started really well will necessarily be continuing in the same very, very positive manner going forward. But I would say that we're very encouraged by what we've seen so far. Obviously, it's kind of 20 days into the quarter. So it's -- again, it's not going to be able to kind of judge what the final kind of quarter outcome is going to be. But I do think that what we're seeing is a significantly different trend than what we saw in Q1. Operator: Your next question comes from the line of Douglas Tsao from H.C. Wainwright. Douglas Tsao: I guess, Renee, maybe as a follow-up on what you're seeing so far in the quarter, is this sort of a direct result of some of the changes you made in terms of the commercial organization? And I'm also just curious, are they across all the regions? Or is it again seeing strength in some of the core regions where we've seen pretty good use of imlifidase over the last few years, in particular, France? Renee Aguiar-Lucander: I'll have Maria provide any additional detail, but I would say that I think that this is a kind of -- it's a follow-on from the initiatives that we have launched. I think that, that is clearly how we see it. And again, we don't expect this to -- I mean, we know it's going to take another couple of months for it to be fully kind of implemented and rolled out. But I do think that we have established better kind of transparency, more focus. We provided some system support, some investments, which I think are very important. And with regards to kind of the breadth of that, I'll leave it to Maria to cover the kind of the general just kind of brief trends that we're seeing to date. Monika Tornsen: Yes. I would just echo what Renee said. I mean, we are very encouraged by the trends that we're seeing in the first 20, 22 days of the quarter. It is not unique to one country. Without going into further details, we're seeing that across multiple markets. I think in particular, what I think is critical is what we have managed to accomplish in Spain in the Catalonia region. As I mentioned, that region contributed to 1/3 of the enrollment in the PAES trial. And now that we've resolved the reimbursement there, as I mentioned earlier, we saw our first sales there. And I think that is a very strong sort of indicator of that the actions that we have taken are starting to turn into results. And it will take, as we mentioned before, a few months for everything to settle, but we are seeing that what we are doing is starting to have an impact. And I think that is the most encouraging in this. Douglas Tsao: Okay. Great. And then just if I have a follow-up question for Richard, in terms of the GBS program, 5487, I guess, do you intend that to be a registrational study? And then also, just given the opportunity to redose, is there -- do you see clinical value in perhaps redosing patients, which is something that you weren't able to do with imlifidase in the original Phase II study? Richard Philipson: Okay. So thanks for the questions. We're still at a relatively early stage in terms of the overall clinical development plan. As I mentioned, we have submitted this to the FDA. We are waiting for feedback from the FDA that we're going to receive next month. And I think it would always be our sort of strong wish to be able to put in place a plan that gets us efficiently through to registration, let me put it like that. But we really need to get those comments back from the FDA before we really start kind of explaining how we're going to do that. And I think redosing is an interesting component of a development program. I think for GBS, we're very much focused on that acute treatment. It's an acute disease. So we don't necessarily see in that specific acute scenario a strong need for subsequent repeat dosing. Operator: The next question comes from the line of Romy O'Connor from Kempen. Romy O'Connor: This is Romy on for Suzanne. Two questions. In Q1, Idefirix sales were particularly strong in France. Just wondering if these were at the same level as in Q4 last year and was France not impacted by the new initiatives? And secondly, are you able to expand on the multiple system and process initiatives in Europe? Is it beyond regional authorization in Catalonia and the work that the German KOLs are doing? Renee Aguiar-Lucander: Sure. I will have Maria cover these questions. Monika Tornsen: Yes. Thank you for the questions. So first, when it comes to France, I think France has since launch been a very strong contributor to the European sales, and we've talked about that in previous calls. We haven't gone into the details exactly what we are selling in each country, and I'm not going to do that. But I can say that we continue to see a strong growth in France. And that is attributed to the fact that we have many physicians in France that had early experience with the product. We also had one center that participated in the Phase II trial. So going back to what I mentioned before is that clinical experience is critical, and we have that early on in France, and that has sort of spread into many transplant centers in France. We also know, as an example, that France is about to publish some data from the real-world experience that we look forward to seeing when that gets published. But the sales trend in France continues, and that is very encouraging. And I think it proves that if you put the efforts behind the right type of educational initiatives and you get strong clinical experience, you'll see that growth in the product. So those are some of the things that we are putting in place for other markets as well. And to your second question on systems and processes, these are not just this sort of processes that you asked about in Catalonia and in Germany, but it's also things like CRM systems that we haven't had at Hansa historically. It is new dashboards that enables the teams to have greater insight into performance and numbers and opportunities. So it's sort of a broad across Europe system. And the other thing that we are doing is just trying to drive that clinical education. So we have more pan-European webinars, educational sessions to really drive that clinical discussion and clinical experience and spread some of that positive momentum that we're seeing in countries such as France, but also many other smaller countries in Europe. Romy O'Connor: Great. And if I may, one more. I'm just wondering what we can expect from the confirmatory PAES study and what your thinking is on the impact of Idefirix sales? Renee Aguiar-Lucander: So I think in terms of the -- what we can expect, obviously, we're going to report out kind of top line data. And I think Richard laid out kind of how the study is designed. And that's the data that we're going to share is kind of primary and kind of like the top line data as well as whatever kind of secondary information we might have at the time. As I'm sure you're aware, we are under MAR in Europe. And so we really have to kind of publish the data once we get it, and we don't always have all the actual kind of data at hand when we go out and have to report the actual kind of top line outcome. In terms of kind of the impact, and I think following on to Maria's point, I think my personal view is that this will be very, very important. It will, as always, take a little bit of time to kind of get that information into the kind of hands and minds of kind of physicians and patients in Europe. But I do think that there's a lot of expectation and people are waiting to kind of see that data because it is kind of a truly a European-based kind of clinical experience that we're going to be able to see, which really I don't think has really been the case previously. It's been very small amounts of clinical data that kind of really has come from the European region. And so I think that data together with ConfIdeS, together with the real-world data, I think all of this data is going to just bring additional kind of comfort kind of characterize kind of efficacy and safety of imlifidase and Idefirix. And so I think it's always important in my view, to really be able to share clinical outcomes with physicians, particularly in these kind of situations where there really hasn't been a way of treating these patients before. There isn't a lot of understanding in some places in terms of what do they do with these patients. And so I think having as much kind of clinical information data as we can, I think, will be very impactful in general. Operator: We now have a question from the line of Thomas Smith from SVB Leerink. Thomas Smith: Looking forward to the detailed ConfIdeS data at ATC in June. I was wondering if you could just help frame expectations for the detailed data? Like what additional analyses can we expect to see? And will this include any additional patient follow-up beyond what was available at the top line? Renee Aguiar-Lucander: Rich, do you want to take that? Richard Philipson: Yes, sure. So I mean, we would anticipate a comprehensive description of the outcomes of the study at ATC detailing -- giving more detail around some of the other endpoints that were included in the study relating to outcomes such as antibody-mediated and cell-mediated rejection and antibody responses, et cetera. So as well as some other efficacy endpoints and also, of course, the safety outcomes of the study. We won't -- there will not be any additional follow-up on those patients. The cut of the data occurred last year, and there's been no further cuts of the data since then. So we won't have any additional follow up. Thomas Smith: Got it. That makes sense. And then with respect to the ongoing BLA review and maybe as a follow-up to that point, Richard, can you just remind us, I guess, plans for submission of an additional cut of the data from ConfIdeS to FDA, I guess, when that would take place? And then has there been any indication from FDA whether they would look to convene an advisory committee meeting to discuss the application? Richard Philipson: Okay. So there won't be any further cuts of the data submitted to the FDA other than the standards 120-day safety update. That's a standard part of any submission. So that will be submitted. We've had absolutely no indication of the requirement for an advisory committee. Thomas Smith: Looking forward to the presentation at ATC. Renee Aguiar-Lucander: We are too. Operator: The next question comes from the line of Matthew Phipps from William Blair. Matthew Phipps: Let me also offer my congrats on that late breakthrough for ConfIdeS. I was wondering, as we see data this summer from both the PAES and ConfIdeS, any key differences in the baseline of these patients such as cPRA levels or maybe differences in the post-treatment immunosuppressive regimens that we should keep in mind to help kind of compare and contextualize those data sets? And then I realize it might be too early to discuss this, but I guess, any color on the labeled indication you're seeking in the U.S. or discussions with the FDA around cPRA cutoffs in the label at this point? Renee Aguiar-Lucander: So I'll have Richard talk about, so there are some differences in terms of kind of the patient profiles between the 2 studies, which I'll have Richard cover. We have not yet had any kind of interactions with the FDA with regards to the label. Richard? Richard Philipson: Yes. So can you hear me? Renee Aguiar-Lucander: Yes, I can hear you now. Richard Philipson: So there were some -- essentially in both the ConfIdeS study and the PAES study, patients enrolled into the study are highly sensitized. It is true to say that there were some minor differences in how that is defined dependent on the country in which patients are enrolled in Europe. But overall, they can still be considered to be highly sensitized. And in general terms, the post-treatment immunosuppressive regimens used in Europe and the U.S. were the same. Operator: The next question comes from the line of Georg Tigalonov-Bjerke from ABG. Georg Tigalonov-Bjerke: This is Georg from ABG. I have 2 questions. First, a follow-up on France. I'm curious to whether there was any considerable contribution from lung transplants. And secondly, in which particular regions do you expect particularly strong positive effects from the PAES data? Renee Aguiar-Lucander: Maria, do you want to take that? Monika Tornsen: Sure. So when it comes to France, our contributions in Q1 was attributed to kidney transplant. I'm not aware of a lung transplant as of yet in France. And could you repeat the second question? It was related to PAES? Georg Tigalonov-Bjerke: Yes, sure. I was wondering if you can elaborate on which particular regions you would expect particularly strong positive effects from those data, for example, PAES with many patients included in the trial, but -- yes. Monika Tornsen: Yes. I mean that is a great question. And I think if you look back to how the product was launched in Europe, we only had 2 centers that have participated in the Phase II trial. So across Europe, there has been many physicians and transplant centers that have been waiting for additional data. As Richard mentioned before, we have 22 centers that have participated, and they are one of the largest centers in Europe. I would say all of them are waiting for this data. And they obviously know they've seen the product used in their clinic, but they're waiting for that pool data of the 50 patients being rolled out. So I expect this to have a positive impact across all markets. I think for France, it will confirm what they already know. I mean they have a lot of experience in France. But we know that there are many markets where physicians have been waiting for this and to see the outcomes of a larger trial with European patients. I think this will have a positive impact across all of our European -- the largest markets, the U.K., but also some of the smaller markets where there may be 1 or 2 centers in each clinic. So that is why, as Renee mentioned before, like having the PAES readout this year, more data from ConfIdeS in June, that is why we are very excited about the opportunity in front of us in Europe because this is really what the physicians have been waiting for, for a very long time. Operator: We now have a question from the line of Richard Ramanius from Redeye. Richard Ramanius: I have a follow-up question to one I asked at the last Q&A regarding your accounting definition of sales, namely how representative are your quarterly revenue figures of real-world use of imlifidase in actual transplantations? Renee Aguiar-Lucander: Evan, do you want to take that question? C. Ballantyne: Sure. Yes. We recognize revenue on the transfer of product from Hansa to a potential hospital. So I think the revenue recognition reflects actual sales very well. Richard Ramanius: I was wondering the transplantation could occur much later than the actual sales. So how do actual transplantation track revenue? C. Ballantyne: So most of our customers pay us within pretty common terms of 30, 60 or 90 days once the product has been transferred. And some of our customers, a small portion, pay us based on transplantation. And we break accounts receivable into 2 groups, groups that pay us on standard terms are current accounts receivable and groups that pay us based on transplantation are categorized as noncurrent. Renee Aguiar-Lucander: I think this is obviously an issue in terms of the fact that we can't -- because they have to have the product available because obviously, by the time that they decide to delist a patient, there is not known the time period that will elapse between the act to delisting a patient and receiving an organ is completely unknown. So that could be a couple of days, it could be a couple of weeks, it can be a couple of months. But obviously, once kind of the drug has been used, obviously, it's generally replaced immediately by the hospital. But there isn't really a way of kind of having a 100% kind of immediate kind of connection because you will have to have some of that -- just have it accessible because the time lines are so short that this is not a drug that you can just kind of order once you actually have the organ in the clinic. So hopefully, that addresses your question. Operator: We now have a question from the line of Christopher Uhde from SEB. Christopher Uhde: I have a few, if I may, but stop me if we're running out of time. The first one is on Germany and Eurotransplant. And maybe if you could say anything about what your expectations are for the guidelines, what they'll actually contain with respect to use of Idefirix or perhaps what we should be watching for? And then a follow-on to that would be then what are your expectations in terms of the time to actually implementing any such changes? That's my first question. Renee Aguiar-Lucander: Maria, do you want to take that? Monika Tornsen: Sure. So the consensus recommendations that have been put together in Germany have been written by all the major key opinion leaders in Germany. They have rolled them out among the clinics on a webinar in March, and they have -- so they have the German version of those guidelines in their hands right now. They have submitted it in English for -- to an international journal to be published. And it's -- we are not controlling the publication, but our expectations is probably mid of this year that we will see that publication in English. But in addition to the webinar that was held in March to discuss these new recommendations, our German team are also hosting different roundtables and KOL sessions with immunologists, with transplant surgeons, et cetera, to discuss the practicalities of these guidelines. But the good news here is that all of the German KOLs are standing behind the guidelines. They put their name behind those recommendations. Christopher Uhde: And so -- are we to understand that it's basically to begin to reuse Idefirix in... Monika Tornsen: Yes, yes. So yes, so this -- sorry for not answering that question. So the guidelines are written keeping in mind the ETKAS program in Germany. As we mentioned before, the priority program was paused by the German Bundesärztekammer. However, 2/3 of German highly sensitized patients are in the normal ETKAS program. So this consensus guidelines practically speaks about how to use Idefirix within that ETKAS program. Go ahead. Christopher Uhde: No, sorry, I guess you feel free to add. But otherwise, my second question would be on what are your expectations for how the PAES study data will look out -- look like? Renee Aguiar-Lucander: That's the crystal ball question. So I guess that, I mean, I'm happy to have Richard also weigh in on this. But I mean, I think at this point in time, there's been a lot of transplant taking place with this drug. I think that what we've seen is a very, very consistent behavior of this drug. It is highly targeted. We know what it does. We know that it works. And so I think my view is that we certainly don't expect any surprises from the PAES study at all. And -- but obviously, we don't have any access to the information. We don't have -- we've not seen any part of any data. So obviously, we are kind of in the same place as you are in terms of we'd be very interested in seeing it. But again, I feel very comfortable with all of the kind of clinical experience and what we've seen in other clinical trials and also obviously, in real world. So again, I don't expect any surprises there. But Richard, I don't know if you have another crystal ball that you can look at. Richard Philipson: I don't have a crystal ball, but I agree. I mean I think we don't expect any surprises. The outcome of the ConfIdeS study was -- we were really pleased with the outcome of that study. As I've said in answering a previous question, the patient populations are very similar in the ConfIdeS and the PAES study in terms of patients receiving imlifidase in the PAES study. So I think we haven't got a crystal ball, but agreeing with Renee, I mean, I really don't anticipate any surprises. Christopher Uhde: Great. And then if I could ask then third question would be on Italy and Spain and the outlook there in terms of the rollout across the remaining regions. How do you see that progressing in terms of, let's say, the time line? Renee Aguiar-Lucander: Maria, do you want to take that? Monika Tornsen: Yes. So Spain and Italy are obviously 2 of the important markets in Europe. What I am observing are positive changes in those markets, both in terms of the rollout of reimbursement, which in both Italy and Spain is first on a national level, but then on a regional level. And we have made progress in all of the key regions where the major transplant centers are. I'm also seeing more physicians sort of adjusting to delisting patients and understanding how to delist. And I'm also observing more utilization in -- by meaning more centers that are starting to adopt the product post the sort of PAES trial enrollment finishing. So I think those are sort of positive lead indicators. Both Italian and Spanish physicians are obviously waiting for the data. They participated in the PAES trial. So I think that will be important as we get the data middle of this year, both from ConfIdeS, full data and also PAES part of our actions in both Italy and Spain is making sure that all of these centers that both participated in the PAES trial and did not that they have access to this information. I think that will confirm again the clinical confidence in the product. But we're seeing positive momentum, I would say, in both markets. So I'm sort of cautiously optimistic about the future in those markets. Christopher Uhde: And if it would be okay to squeeze in one last question. I'd just like a little bit more -- if you could explain a little bit more the CAR-T analog that you mentioned for the U.S. That's it for me. Monika Tornsen: Sure. Happy to. Yes. So imlifidase will be an inpatient drug in the U.S., meaning it's being used in the hospital setting. Obviously, as the patient is going through a major surgery. The CAR-Ts were also used inpatient. And that means that the way the products are paid and reimbursed is very similar. So like the reimbursement pathway that they took when they launched will be very similar for imlifidase. Specifically, these drugs are covered by DRG codes as an inpatient drug. And when they launched the CAR-Ts, the DRG code, I think Renee will correct me, was very low, around USD 40,000. And the hospitals needed to apply for Outlier payments. And in addition, the manufacturers of those products applied for NTAP, new technology add-on payment to give that extra reimbursement to the hospitals. And eventually, after a few years, they got their own assigned DRG code. So when you think about how imlifidase will be used in the U.S., it will be inpatient. We will apply for NTAP, new technology add-on payment. The hospitals will do Outlier payments, with Outlier payments to CMS. So that's why we say that the CAR-T launch and the uptake of the launch and how it was managed from an access and reimbursement perspective is a very good analog to look at if you want to sort of think about how the financials work for these inpatient drugs in the U.S. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Renee Aguiar-Lucander for any closing remarks. Renee Aguiar-Lucander: Thank you very much. Thank you very much for listening to this Q1 review, and we definitely look forward to our Q2 review, where we will have a lot of things happening between now and then. So thank you again. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Bolsa Mexicana de Valores, S.A.B. de C.V. First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ramon Guemez, Chief Financial Officer. Thank you, sir. You may begin. Ramón Sarre: Thank you. Good morning, and welcome to Bolsa Mexicana de Valores First Quarter 2026 Earnings Conference Call. Before proceeding, I'd like to provide a brief safe harbor statement. This presentation contains forward-looking statements and information related to Bolsa that are based on the analysis and expectations of its management as well as assumptions made and information currently available at Bolsa. Such statements reflect the current views of Bolsa related to future events and are subject to risks and uncertainties. Many factors could cause the current results, performance or achievements to be somewhat different from any future results or performance that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic, political, governmental and business conditions, both in a global scale and in the individual countries in which Bolsa does business, such as changes in monetary policies, inflation rates, prices, business strategy and various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary considerably from those described herein as anticipated, estimated, expected or targeted. Bolsa does not intend and does not assume any obligation to update these forward-looking statements. I'd like to remind participants that today's call is being recorded with a replay available online on April 23 at Bolsa's corporate website, www.bmv.com.mx. The press release and slide deck can also be accessed in the Investor Relations section in the same site. This call is intended for the financial community only, and the floor will be open at the end to address any questions you may have. Joining us for today's call are Jorge Alegria, our CEO; Claudio Vivian, Chief Information Officer; Roberto Gonzalez, Chief Post Trade Officer; Gabriel Rodriguez, ICAP CEO; Alfredo Guillen, Managing Director of Equity Markets; Jose Miguel De Dios, Managing Director, Derivatives Markets; Luis Rene Ramon, Managing Director of Sales and Marketing; Hanna Rivas, FP&A and IR Director; and myself, Ramon Guemez. With that, I'd like to turn the call over to Jorge Alegria. Jorge Formoso: Thank you. Thank you, Ramon. Good morning, everyone. As you are likely aware yesterday, besides the financial results, we also announced that after 18 years in the exchange and 13 years as a CFO, Ramon has decided to seek early retirement from BMV and focus on new personal and professional endeavors. I want to thank him for his many contributions during his tenure as both as IRO and CFO. On a personal note, I started collaborating with Ramon during the IPO roadshow back in 2008. So I wish him well, and I am very proud and happy to see him leave as a good friend of the Mexican Stock Exchange. Also yesterday, as mentioned, we released our earnings results, including a detailed review of our performance in these first 3 months of 2026. To begin with, I would like to highlight strong operating results achieved this quarter. These were driven by market volatility also from international geopolitical events as well as a market that continues to show increased dynamism generating favorable effects across the entire value chain from financing to settlement and custody. Financing activity rose by 84% in the first quarter of 2026 when compared to the same period of 2025, representing an additional MXN 105 billion of financing and reaching a total of MXN 230 billion. This is led by a 270% increase in long-term debt financing, which reached MXN 146 billion, while the number of new listings increased 200% from 11 to 33. Additionally, we had 2 FIBRAS or REIT deals for MXN 9 billion, the new Fibra Park Life and a follow-on on Fibra Monterrey. Short-term debt listing remained constant even though the amount financed was lower than last year. The financial impact of these operations and this activity is partly reflected in a 53% or MXN 8 million growth in our listing revenues. However, we will see the largest impact next year reflected in maintenance revenues for 2027 onwards. We now have 580 long-term programs totaling MXN 1.8 trillion, both are record numbers. And as you know, I mentioned, the revenue impact for this year is limited due to the cap we have on listing fees. This strong performance reflects issuers growing trust and highlights the role of the Mexican Stock Exchange in efficiently channeling capital towards productive investments. In the equity market, we saw both local and global momentum with average daily trading volume and value approaching MXN 21 billion. This is over 20% when compared to 2025 and one of the highest levels in recent years. Along these same lines, activity in our CCP, CCV for equities, also grew by over 20%, both in amounts and operations cleared. Growth was also evident in futures trading, particularly in the dollar peso contract, where the activity doubled when compared to Q1 2025. This is supported by peso appreciation and other market and volatility factors already explained. We have continued with our efforts to list new equity contracts, joining the ranks of previously listed names such as Apple, Meta, Netflix, NVIDIA and Tesla from our SIC, cash equity trading division. But in derivatives clearing growth, this was impacted by our reduced margin deposits. So in spite of the increased trading volumes, we had a small net negative impact in Asigna because of the reduction of the margins managed. Indeval reaffirmed its strength during the quarter, excelling in 3 key areas: assets under custody, settlements and cross-border transactions through the SIC. Assets under custody rose 14%, driven mainly by funds, pension managers and equities, reaching MXN 47 trillion. Settlement averaged MXN 11 trillion per day, and this is a 25% increase in market instruments -- in equity market instruments, reflecting the segment's dynamism. Volatility during the period provided additional momentum to cross-border transactions of UCITS and ETF via the SIC, which grew 29% in traded value and 47% in the number of operations, consolidating Indeval's role as a key player in international market integration. Overall, Q1 2026 was particularly solid for Grupo BMV with outstanding operating performance across multiple business lines. This confirms the resilience of our business model, which remains robust and consistent across diverse scenarios. And this performance is reflected also in our financial results as follows: Our revenues grew 7% or MXN 83 million, driven mostly by the volatility mentioned before. Growth was concentrated in Indeval, which saw a strong growth in assets under custody as explained, settlement activity and cross-border transactions. Cash equity trading and clearing, which combined grew 19%, as explained. This is due to the daily average trading volume increased. And we are maintaining our market share of around 80% in equity trading. Listing revenues are 53% above Q1 '25 due to the strong listing activity I mentioned. And as I said, the most important impact for this will be next year reflected as maintenance revenues. In derivatives, we saw strong performance in MexDer with the peso-dollar contract driving revenue growth of 24%. However, reduced margin deposits are affecting a little bit revenues in Asigna. SIF ICAP's good results are worth mentioning. In Mexico, revenues grew 12%, and we had very good results in our bond and on our D2C desks. While in Chile, even though the revenues are down, we had a very, very strong activity in March. Expenses are growing by 10%, led by personnel and technology costs, both of which reflect investments in our strategic projects made last year. This expense level is in line with our plans for this quarter, and the growth rate is also in line with our expectations, which we have shared with you in the past, along with the investments in our strategic projects where we continue and will continue with our cost control efforts across the company. CapEx for this quarter was MXN 41 million and not because we are slowing down in any way, but because of the timing of the payments to be made in our CapEx plans for this year. With this, we have an EBITDA of MXN 685 million, 6% above last year, while the margin is 56.5%, 1 percentage point below. To properly analyze this number, we have to take into account the appreciation of the currency, almost MXN 3 versus Q1 of 2025. This is an impact of around MXN 40 million in our EBITDA. Our net income was MXN 437 million, same as last year. And the difference between the EBITDA growth and the flat net income is explained by the lower interest rate income. Interest rates, as you may recall, for the quarter fell from 10% last year to 7% this year. Looking ahead, our priority for 2026 is the execution of our strategic projects that will strengthen our infrastructure, broaden our product portfolio and deepen our integration into global markets. Building on this priority, I would like to share progress on the 2 main initiatives scheduled to release -- to be released by year-end, the new derivatives market platform and the new repo clearing segment. The derivatives platform is a transformative project for our group. It integrates MexDer operations, Asigna clearing, market surveillance and a new data offering, all supported in the cloud. Execution follows a defined plan. Technical testings begin in June and will be followed by functional testing with market participants in September. This will progress from isolated trials to comprehensive system-wide validations. The project is set to conclude on Q4 2026 and go live on Q1 2027. Currently, we have working groups with trading firms and clearing members, which are addressing anticipated changes, the challenges, the implications and market alignment. The repo clearing segment will be incorporated into our CCV service portfolio. End-to-end industry testing is scheduled for Q3 2026 as well with design completion targeted for December this year. This initiative, the repo clearing follows the same agile methodology applied to other projects. So we expect to have a much faster adoption in this segment because of the reduced capital requirements and benefits it will bring to market participants. Both of these projects are supported by a dedicated project management office and multidisciplinary teams, including experts in operations, products, technology and data, alongside representatives from compliance, internal audit, finance and legal. So this structure ensures orderly execution, comprehensive risk and opportunity assessment and a strict adherence to corporate governance standards. So beyond these initiatives, we are also advancing on our broader portfolio of projects within the digital evolution program. Altogether, they represent a comprehensive transformation for BMV Group, modernizing our infrastructure, expanding our reach and reinforcing our role as the backbone for Mexico's financial system. With discipline, innovation and a clear vision, we are shaping the future of market infrastructure and creating lasting value for all participants. With that, I'll conclude our remarks for the quarter. We remain focused on executing our priorities with discipline, advancing our key initiatives and adapting to evolving market conditions. Thank you again to all of you for joining. And together with my colleagues, we are more than glad to address any questions you may have. Thank you very much again. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo with Bank of America. Ernesto María Gabilondo Márquez: Ramon, we will miss you and good luck in your next chapter. So I have 3 questions from my side. I will do the first one, and then I can elaborate the other 2. My first question will be on your revenues. You mentioned in the press release that revenues benefited because of the volatility experienced during the quarter. And you do not discard this to moderate in the next quarters. So having said that, how do you see revenues evolving this year? Should we expect around mid-single-digit growth? And what will be the drivers behind your revenues? Jorge Formoso: This is Jorge Alegria. Yes, you're right. I mean I think it's fair to say that this quarter, we have seen quite a lot of volatility and changes, I mean, globally and locally as well, interest rate movements, FX. So that has impacted positively our volumes. Also, we saw very strong issuance activity due to interest rate movements as well as FX helping domestic participants to be more active in the peso market than in the U.S. market. So this is something is good for us. We cannot assume that will continue. We never know. So I guess here is Ramon, but I think, yes, you're right in mid-single digits is a fair assumption. Ramón Sarre: Yes, that's correct, Ernesto. We had a very good month of March. Last year, revenues were relatively stable, around the MXN 1.1 billion. So around mid-single, I think, is good. It also depends on the volatility we get. If we get more help from volatility, you could see that increase to high single. Ernesto María Gabilondo Márquez: Perfect. Perfect. And then my other 2 questions. The second one is also related. So how should we expect the evolution of revenue growth versus expenses growth given your investment plan, how are you seeing both of them? Should we expect OpEx to be a little bit higher versus revenue growth? Any trend that you can guide us could be very helpful. And then my last question is in terms of regulation. I don't know if there's any update on discussions related to a potential market still related to hedge funds? And also if there is any other type of regulation in the pipeline? Ramón Sarre: Expenses, we are projecting them to grow at high single digits, Ernesto. So depending on how revenues perform this year, as we have said before, we would be expecting a slight decrease in margins, just like we saw this Q1. Jorge Formoso: We are working very close to authorities because mainly -- because of our project, Ernesto, and we have heard again quite often that the authorities, mainly the treasury and the Mexican Securities Commission are moving now faster to the hedge fund regulation. So hopefully, we will see something this same year. As you know, the law is there. The law was approved. So it's the secondary market ruling. We are working together also with the Mexican Brokers Association on this. And yes, we agree this will be great news on the hedge funds to increase the market participants. I'm not aware of any other rules coming on the market from the regulators. Operator: Our next question comes from the line of Daniela Miranda with Santander. Daniela Miranda: Congrats on the results. Just a very quick one from my side. Just wondering if you could help us better understand the sensitivities affecting performance. On one hand, for financial income, how should we think about the impact of further rate cuts and lower cash balances? And how much additional downside could we expect on that line? And on the other hand, FX appreciation had negative impact across your P&L. So how should we think about FX sensitivity going forward? And do you hedge any of these exposures? Ramón Sarre: Thank you, Daniela. Interest income, it's going to be impacted by the reduced interest rates on a year-on-year comparison. So the best way is just straight off the cash balance. It's not all in Mexico, but I think that's the best approximation you can have, just the interest rates to the cash balance. On FX, we have 2 impacts on the -- first of all, on the P&L, we have for each peso, the currency appreciates we get around MXN 50 million or MXN 60 million less in EBITDA. That means our operation is long U.S. dollars. So for us, in the short term, a peso depreciation helps our P&L. Roughly, as I said, MXN 1 is equivalent to MXN 50 million, MXN 60 million on a full year basis. On the balance sheet, we started hedging this quarter. We had a bit of an effect still, but we'll continue with our efforts to reduce the impact on the balance sheet, on the difference between assets and liabilities in the balance sheet. Operator: Our next question comes from the line of Edson Murguia with SummaCap. Edson Murguia: Specifically about the expenses and the investment projects. Just trying to figure out and join the dots about CapEx. Those projects that Alegria mentioned it in the call are the main one or related to this increase in expenses and the CapEx? And my second question is, could you give us more detail about the deferred income? It seems odd to try to understand why this quarter increased MXN 525 million. Ramón Sarre: Edson, yes. Our main projects are the ones Jorge mentioned, this technological evolution, upgrading basically all of our technology in derivatives, trading and clearing, in post-trade, the cash equity CCV, the Indeval, having the new technology for the bond and the repo CCV, new data and moving to the cloud. Those are our main projects. That's where our expense is concentrated on those efforts, and that is the majority of the CapEx. On your second question, I didn't quite get it. Could you repeat it, please? Edson Murguia: Yes. This quarter, there is a MXN 525 million in deferred income in the balance sheet. But historically, the deferred income, it's a low single digit between 8, 11. Ramón Sarre: No, what you have seasonality, Edson. The maintenance fees from issuers is collected in advance. We have seasonality in the cash balance. You usually have an increase in cash balance in Q1 because we collect all these annual fees on a onetime basis in Q1. What you collect, we recognize the income on a linear basis throughout the year. The net of the balance is in deferred income. So if you look at historical, you're going to see this deferred income and it goes down every quarter to get very close to 0 for -- towards Q4. Operator: [Operator Instructions] Our next question comes from the line of Carlos Gomez-Lopez with HSBC. Carlos Gomez-Lopez: First of all, thank you for your service of many, many years, Ramon. You have been the face of continuity and good humor from Bolsa. So we will all miss you enormously, and I'm very sad to hear that we will no longer be talking to you. Ramón Sarre: Thank you, Carlos. Carlos Gomez-Lopez: I have -- in the spirit of an analyst, I have 3 questions. The first one is to Jorge, what are you going to do without Ramon because that's a difficult decision to make. On the numbers thing, last year, you had a margin of 56.2%. And I want to understand correctly, you expect that margin to go up or down this year because even with single-digit -- high single-digit revenue growth, I mean, given your expenditure plans, it would seem that the margin should go down rather than up. So we would like to understand that. And finally, we understand that you have started to hedge the foreign position on the balance sheet. We understand that. Does that also impact the income statement and that is why perhaps the impact of the appreciation of the peso has not been as extreme in this quarter? Ramón Sarre: Thank you, Carlos. On a full year basis, EBITDA margin was 57% last year. And as I said, yes, it could go down. We need to have volatility to maintain the margins. If we don't have volatility, margins could be coming down. On the hedging efforts, what we're doing is managing our long position. It means trying to sell the dollars that we have at the end of the month. We're not, as of now, doing any derivatives or any derivative or efforts on that side. It's just trying to net the balance to 0. Carlos Gomez-Lopez: Okay. So that shouldn't have an impact on the P&L? Ramón Sarre: No, it should not. Operator: Our next question comes from the line of Yuri Fernandes with JPMorgan. Yuri Fernandes: Thank you, Ramon, for all the help those years. Good luck. I have a question regarding -- just a follow-up on CapEx. If anything has changed for your previous guidance of MXN 500 million, given this quarter started a little bit soft. I think you are doing less than 10% of the budget for the year. So just checking if -- I know the investments are still there and the modernizations are still there, like the big scheme of things, but if maybe stronger peso, I don't know if maybe the CapEx budget will be less than the MXN 500 million you mentioned in the previous call. And then a second question regarding competition on equities. I think like this was a quarter that -- I know this is volatile, it change all the time, but you gained some market share. So just on competition dynamics and if anything has changed between you and the competitor? Ramón Sarre: Thank you, Yuri. No, CapEx is still expected to be around MXN 500 million. We had a slow start. As Jorge said, it's basically the payment -- the timing of payments. But we're still expecting to finish the year close to MXN 500 million in CapEx. And for competition dynamics, I'll let Alfredo Guillen take that one. Alfredo R. Lara: Yuri, yes, we have been experiencing improvement in market share, explained by some initiatives that were requested to us by our brokerages, mainly 2 initiatives. First, the improvement in block trading dissemination in real time, which is very important for traders to make decisions, and we were lacking detailed information on that. And then we also were requested an improvement in trading reports that are now released by our central counterpart. And this information now includes block trading. So this gives brokers accurate information regarding their place in the equity markets and therefore, driving more trades to the Mexican Stock Exchange. So basically, we experienced better information to the market and better decision-making regarding the depth of the books and trading activity at the Mexican Stock Exchange. Operator: Our next question is a follow-up from the line of Carlos Gomez-Lopez with HSBC. Carlos Gomez-Lopez: Just a follow-up on the dividend. Have you decided what dividend level you will recommend? And what should we expect in terms of buyback for the year? Ramón Sarre: The dividend is what we had said, Carlos, MXN 2.50 per share. That's going to be proposed for the general assembly, which is going to be next Monday. Alfredo R. Lara: Next week. Ramón Sarre: Next week. And for the buybacks, we don't have a fixed amount. As we said, our purpose was to give back 80% of net income. The dividend amounts to 70%. If the buyback does not cover the remaining 10%, we will be proposing an extraordinary dividend for Q3. So more than a specific amount for buybacks, we have a specific amount for overall capital return, which is 80% of net income from last year. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Alegria for any final comments. Jorge Formoso: Well, thank you very much to all for joining. We had a pretty interesting quarter. We will continue to strengthen the -- our initiatives on the technology side, keeping a very strong control on costs and expenses. I want to reiterate my appreciation to Ramon Guemez for all those years working with us. In the meantime, while we made a definitive appointment, you all will be dealing with Luis Rene Ramon, that I'm sure pretty much all of you know. He has been working for the company more than 10 years, specifically in the finance area. He was in charge of Investor Relations for many years, and he led our marketing and sales and commercial efforts for almost 2 years now for the exchange with extraordinary positive results. So he will be, in the meantime, taking over the CFO role. So I'm sure that he will have plenty of things to deal with and happy to answer your questions moving forward. So thank you, Ramon, again. We certainly are going to miss you on a lot of things, not on your humor, definitely, but we wish you well. And above all, thank you all for your time and listening to our remarks and see you and talk to you soon, if not in the next quarter. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the Sigma Foods First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. A replay will be available on Sigma Foods Investor Relations website later today. I will now turn the call over to Hernan Lozano, Sigma Foods IRO. Hernan Lozano: Thank you, operator, and good morning to everyone joining us today. Further details regarding our first quarter results can be found in our press release and earnings presentation that were distributed yesterday. Both documents are available in the Investor Relations section of our website. Before we begin, please note that today's discussion will include forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially. Sigma Foods undertakes no obligation to update these statements. It is my pleasure to participate in today's call together with Rodrigo Fernandez, Chief Executive Officer; and Roberto Olivares, Chief Financial Officer. Our agenda today is straightforward. Rodrigo will begin with a strategic and operational overview of the quarter. Roberto will then review our financial performance in more detail, and we will conclude with a Q&A session. With that, I'll turn the call over to Rodrigo. Rodrigo Martinez: Thank you, Hernan, and good morning, everyone. 2026 started on a strong note with record first quarter volume and revenues as well as the second highest comparable EBITDA for the period. Results were supported by disciplined execution, early signs of improvement in certain raw materials and stronger currencies benefiting our operations outside the U.S. Sigma operates from a position of financial strength. Our investment-grade balance sheet has no material debt obligations over the next 2 years as we proactively refinance those maturities through a successful issuance of the local notes during the first quarter. From a capital allocation perspective, we recently held our first Annual Ordinary Shareholders Meeting at Sigma Foods, where shareholders approved total cash dividends of $150 million for 2026. This reflects our strong cash generation, which supports our balanced approach to drive growth while returning capital to our stockholders. Disciplined investment in high-return strategic projects is fundamental to continue growing our core. Let me highlight several key developments on this front. In Mexico, we continue expanding yogurt capacity to meet strong demand. Our yogurt team has done an outstanding job recently climbing to the #1 position of this product category nationwide. In the United States, we're advancing the expansion of our cheese operations in California, supporting the continued growth of our Hispanic brands as they gain traction in mainstream channels. In Europe, we're encouraged by the steady improvement in profitability and the progress of our capacity recovery in Spain. The expansion of La Bureba facility is almost complete and our new packaged meats plant in Valencia is on track to start operations in 2027. Both projects are key to restoring lost capacity and further strengthening our competitive position through efficiencies. Turning briefly to the global macro environment. Conditions remain fluid given the broad effects of the ongoing conflict in Iran. The recent spike in oil prices increases uncertainty and pressure for consumers across many markets. We are actively managing to mitigate short-term headwinds related to energy, plastic packaging and transportation, among others. At the same time, we're encouraged by positive external developments around meat, raw material cost and foreign exchange trends. Combined with the diversification and scale of our operations, these factors provide flexibility as well as we navigate the current environment. Overall, the balance of external headwinds and tailwinds remain supportive of our 2026 guidance, which remains unchanged. With that, I will now turn the call over to Roberto for a more detailed review of our first quarter financial results. Roberto Olivares: Thank you, Rodrigo, and good morning, everyone. Our consolidated results reflect solid execution, complemented by a favorable currency translation effect. Total revenues increased 13% year-on-year. Supported by volume growth and higher average prices in Mexico, Europe and Latin America. Similarly, comparable EBITDA increased 18% year-on-year, driven by robust growth in Mexico, Europe and LatAm. Regarding performance by region. Mexico was a standout once again this quarter, delivering record first quarter volume, revenues and EBITDA. Growth was mainly driven by strong results in the dairy category across all channels as well as solid packaged meat performance in proximity retail channels. By brand segment, our value-oriented brands continued to grow at a higher pace than the rest of the portfolio. Europe delivered solid progress with volume increasing 4%, supported by double-digit growth in the fresh meat business, which benefited from temporarily lower live hog prices in Spain. EBITDA was $25 million, marking Sigma Europe's highest first quarter figure since 2021. Regarding the Torrente plant floating insurance, let me remind you that we received 2 types of reimbursements, property damage and business interruption. During first Q '26, we received reimbursements exclusively related to business interruption, which replicate the plant's operation and therefore, are considered part of our operating results. Only property damage reimbursements are considered extraordinary items for purposes of comparable EBITDA. For the avoidance of doubt, we did not receive any property damage reimbursements in first Q '26. On the strategic front, we continue advancing to obtain regulatory approval for the previously announced fresh meat transaction in Spain as soon as possible. In the United States, the consumer environment remains softer relative to other regions. Yet continued progress in Hispanic brands across mainstream channels helped offset lower demand in national brands. Sequential improvements in volume, revenues and EBITDA were in line with expectations as pricing actions continue to better align with cost. We expect this trend to accelerate in the second quarter as seasonal effect kicks in. Latin America continued its positive trend recovery trend, delivering year-over-year growth in volume, revenues and EBITDA, supported by ongoing operational initiatives and improved execution. Turning to the balance sheet. We continued strengthening our debt profile during the first quarter, successfully issuing approximately $580 million in local notes and extending our average tenure to 8 years by refinancing short-term term maturities. These notes received the highest local credit ratings from Fitch and Moody's and attractive demand of roughly 3x the initial target. We benefit from a diversified financial structure that provides flexibility to meet our funding needs across different currencies, maturities and credit instruments. Net debt totaled $2.8 billion at the close of the first quarter, up $127 million year-to-date. The increase was mainly driven by higher net working capital, reflecting supplier payments related to year-end CapEx projects and seasonal inventory investments. Importantly, net working capital investments was 18% lower compared with the first quarter of 2025. Regarding leverage, our net debt-to-EBITDA ratio ended the quarter slightly above our long-term target of 2.5x, reflecting the previously discussed working capital dynamics. This concludes our prepared remarks. I will now turn the call back to Hernan for Q&A. Hernan? Hernan Lozano: Thank you, Roberto. [Operator Instructions] We will now open the line for questions. Operator, please. Operator: [Operator Instructions] Our first question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Keeping this to one question, I want to ask you, I mean, based on the volatility of whole prices that you highlight in the initial remarks, can you give us some color of the potential impact that this could have on margins and how relevant are from your cost structure, the freight cost? Roberto Olivares: Fernando, this is Roberto. Thank you for your question. Regarding the Iran conflict and the potential and the impact that it has on the market, the potential effect will depend on the conflict duration. Yes, we have some exposure to -- in some categories, particularly in the packaging category. So we have some plastic packaging. We have the freight costs as well as some utilities. In regards to utilities, particularly in Europe, where we are seeing that the markets are -- have more volatility, we're mostly hedged for the year. We have around 80% of the utilities hedged in Europe. And in regards of the other categories, the impact so how that we have seen has been manageable through other efficiencies and initiatives within the company. Let me just put this into relative context. We are seeing as well favorable raw material dynamics, particularly in the Turkey segment as well as fresh field. And also the FX has continued to help during this year. So we do not expect any material impact coming from the conflict. And as we mentioned, we remain confident to reach our guidance for the year. Operator: Our next question comes from Enrique Maguero of Morgan Stanley. Enrique Maguero: My question will be on Mexico EBITDA margins. We were a bit surprised to see a margin decline in Mexico this quarter, given the current Mexican peso level and the raw material benefits you just mentioned as well. So on that matter, if you could just dive a little bit deeper on the drivers behind this margin decline in Mexico. It would be very helpful. So for instance, if you saw any tailwinds from the stronger Mexico peso this quarter, if you should -- maybe if we should see that only later on, any relevant raw material or SG&A components this quarter as well? And still on Mexico margin, if you could comment on how you're seeing the latest developments on raw materials? And how does that affect your initial expectations on Mexico profitability for the year as well would be very helpful. Rodrigo Martinez: Let me start and then Roberto can complement. We see Mexico very strong. And something important to mention is that dairy has been growing at a higher pace and the margins between dairy and packaged meats, both are very positive, but there is a mixed part on that. And if you want to complement, Roberto? Roberto Olivares: Yes, sure. And not only will be a mix in categories, but also in brands, we have been seeing value brands growing a little bit more than premium and mainstream brands. So that will also have an effect on mix. On the part of raw materials, as we have mentioned, we have seen particularly since the start of the year, Turkey bad decreasing sooner than we expected. And positively, we've recently seen Turkey ties start to move. In the last couple of years, the market of Turkey tie has decreased so far MXN 0.02, but it's signaling that we do expect the Turkey market to decrease in the coming months. That will -- particularly Turkey will potentially have a benefit in COGS. We, as always, will take a more balanced approach in terms of margin and volume. We want to incentivize volume. So particularly this year, as we're seeing the consumer a little bit softer than in previous years. So we will take a balanced approach to see how much of that potential improvement in COGS will be go up down to the margin. Enrique Maguero: Let me just give a quick clarification about the tie price increase. This is a very recent development over the last couple of days. Rodrigo Martinez: Correct. Operator: Our next question comes from Froylán Méndez Solther of JPMorgan. Fernando Froylan Mendez Solther: Is there anything that makes the first quarter in terms of margins and cash generation seasonally weaker versus the rest of the year? Because my question comes because if we extrapolate the margin performance seen in the first quarter, it would be hard to think that guidance is achievable. And my second question, if I may, you mentioned improved penetration of Hispanic cheese in the mainstream channels. Should this be margin accretive? Are you able to price Hispanic products in the mainstream channel as, let's say, more premium product that should command a higher margin? Rodrigo Martinez: Let me just very briefly start that we do see a good start of the year. And as Roberto mentioned, we're actively managing to mitigate impacts from the conflict, so that shouldn't be a problem. We do see lower raw materials cost going forward. We do see favorable FX trends within the geographies. We do see by the end of the quarter, positive strength within each one of the geographies. So with that, we feel comfortable with the 2026 guidance. Roberto Olivares: And I will only complement for that there's usually a seasonality effect in terms of EBITDA generation, particularly coming from the U.S. and Europe during the second quarter is a stronger quarter for the U.S. And as the year advances, Europe generates more -- generally more EBITDA. In particular in the fourth quarter, it's a very strong quarter for Europe. So yes, there is a seasonal effect on EBITDA. As we have mentioned, the $260 million that we delivered during first Q is in line with what we expected for the first Q and what we are seeing, as Rodrigo mentioned, will be to very align or aligned with our guidance. In terms of -- you also mentioned cash generation, there's usually more investment in net working capital during the first quarter that has to do with either CapEx payments of projects that were approved in the fourth quarter of last year and seasonal investment in inventories that we do expect that investment in net working capital to normalize a little bit through the year. Fernando Froylan Mendez Solther: And regarding Hispanic... Rodrigo Martinez: I would say that the margins are -- I don't think that you will see a change in the mix by Hispanic [ press ] or Hispanic cheese compared to packaged meats. At the same time, I would say that as of today, we have a very good position on the unitary margin on packaged meats in the U.S. in anticipation of the seasonal demand, including the bulk of this year. So we feel very comfortable with the margins going forward. Operator: Our next question comes from Ulin Sarawate from Santander. Ulin Sarawate: I think it's -- you partially mentioned this in the previous question, but I wanted to get maybe some more thoughts there on the working capital dynamics, maybe understand a bit more where these investments and where this pressure that we saw in the quarter was coming from. And just to understand also going forward, Roberto, you alluded obviously to some seasonal effects there as well, the first quarter being a bit more heavy or loaded there on the investments on working capital. So just to understand if this is something specific to this year and how you're thinking about it? Or is this kind of the run rate that we should think about for the following years kind of model-wise? Rodrigo Martinez: I'll let Roberto talk about seasonality, but let me start just commenting on the part of inventory within working capital. We found a couple of good opportunities to secure some Turkey and some beef for both the retail on the side of Turkey and for be for the food service during last year. So we have more inventories at the beginning of the year. That will translate -- definitely, we're in a better position, but that would translate that during the year, we might be buying a little less on that, especially more on the Turkey's more breast more than the Turkey type. So again, that will allow -- that leaves us today with a little more inventory, but with good prices. And during the year, we should buy a little less of that. And by the middle of the year, end of the year, we should be lining [ gap ] Roberto Olivares: And just to complement, Rodrigo, Luis, in general, the working capital has a seasonality effect. Usually, it is similar to what Rodrigo mentioned during the first quarter, we built up some inventory because usually prices of raw materials are higher in summer because of supply. I'm talking specifically about, for example, pork, pork during summer usually is higher because of the weather and that makes the pigs to gain less weight and that implies less kilos of supply, et cetera. So you should see this dynamic usually through the year, and we will delever net working capital by the end of the year. In terms of this particular investment for the first quarter, as Rodrigo mentioned, there's this investment in inventory as well as payments that we did regarding CapEx of projects that we approved at the end of last quarter. And you will see that number to normalize through the year. Hernan Lozano: Thank you very much for your question. And I think we can move on to a question that we got from our chat from the webcast. And this is from Vanessa Quiroga asking about any changes in consumer behavior we have identified in the U.S. or Europe resulting from rising inflation recently. Roberto Olivares: Thank you, Vanessa. So in general, if you see -- I mean, I will talk about 2 different markets, the U.S. and Europe. Let me first approach the U.S. If you see the consumer sentiment in the U.S. is the softest that we've seen relative to other regions. And also within the U.S., I think it's record low in many, many years. That has exacerbated with the gasoline prices recently increasing in the U.S. and all that dynamics. In terms of what we are seeing with our consumer stories, the U.S. consumer is taking more -- much more affordability approach to grocery shopping and that is -- I mean, moving the dynamics of the market, we have been following those dynamics and trying to change our strategy as the consumer changes. I think we're well positioned with our brand portfolio to take over a lot of the consumption of our categories. if the consumer or as the consumer trade down within our categories. Our biggest brand in the U.S., Bar-S is positioned as a smart choice more on the mainstream to value segment of the consumers. In regards of the U.S., I would say -- in regards of Europe, I'm sorry, I will say a little bit different particularly last year and through the beginning of this year, we have not seen as much inflation yet. I mean, obviously, this conflict with Iran will and depending on the duration will potentially change that. But actually, branded volume growth has consistently grown in Europe, and that is a signal for us that consumers in Europe are not necessarily that focused on affordability and more focus on the value that they receive from the products. So we see different dynamics in both regions. Rodrigo Martinez: And just important to complement, if you see the categories where we participate, it's a great [indiscernible] quality at a very good price. So we should be in a good position within the categories where we participate in those geographies. Operator: [Operator Instructions] We got a follow-up question of Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Sorry, I was muted. Can you hear me now? Yes, right? Rodrigo Martinez: Yes. Perfect Fernando. Fernando Olvera Espinosa de los Monteros: Now I have just 2 quick ones. The first one is if you can explain the higher tax rate that we are seeing in this quarter? And what should we expect in the quarters ahead? And the other one is if you have any update regarding the Grupo GAL transaction in Europe. Roberto Olivares: Fernando. This is Roberto. Yes, regarding the tax rate, first, let me say that first Q tax rate is not representative of the annual tax rate as there is some volatility from quarter-to-quarter. Factors behind this volatility may include the FX and some other adjustments, particularly labor liabilities and others. The income taxes are comprised of incurred taxes and deferred taxes. Let me first start with the incurred tax and the incurred tax of the operation reflects a lower rate, which is very aligned with the statutory rates. This quarter, we have a deferred tax effect that we recognize, and that is the one that is raising the implied rate to the figure. And that deferred tax is related to a labor liability change that was the effect of the end of ALFA's transformation process. And regarding the update on the fresh meat transaction with Grupo GAL, we are advancing. We actually are moving forward in the process of -- with the competition authorities. We were seeing the transaction to closes to soon. It has taken a little bit more time, not because there has been anything related to the process, but just because of the time the transaction was reviewed by the competition authorities. We do expect to close hopefully during the second quarter of this year. Fernando Olvera Espinosa de los Monteros: Okay. Great. Roberto, regarding what you mentioned about labor liability, I mean, is it something that we can see in coming quarters or it was just this quarter? Roberto Olivares: No, no. Thank you, Yes, it was a nonrecurring effect. So we do not expect that to see in the coming quarters. We do expect the tax rate to lower in the coming quarters -- the implied tax rate to lower in the coming quarters. Operator: Our next question is a follow-up from Froylan Mendez Solther of JPMorgan. Fernando Froylan Mendez Solther: Could you help us just frame how has the reaction of the consumer been so far in Mexico? I remember you saying that part of the benefits from raw materials would be translated into the consumer, probably being a little bit more promotional, more strategic given the health of the consumer. But how would you frame the consumption environment and the reaction of the consumer in Mexico versus your original expectations? Roberto Olivares: First, let me say that -- I mean, if you see volume in Mexico is increasing around 2%, and that has more to do with the retail channels than the foodservice channel. And within retail, particularly dairy is increasing mid- to high single digits versus packaged goods. In general, we're seeing good dynamics in most of our categories where continue improving the position of our brands with consumers. As Rodrigo mentioned in his initial remarks, for example, in the case of yogurt, we are now the #1 player in the yogurt category, and that has to do a lot with our portfolio and that consumers are preferring our brand and our products. In regards to other dairy categories, cheese, particularly coming from value-added cheeses, slice and shredded cheese, and that has also helped us capture more clients. And in the case of packaged meats, particularly those segments that are more value segments and those regarding to specific needs. For example, everything that is regarding grilling has increased a lot in Mexico recently. So we have take this careful approach of incentivizing volume, but also protecting margins as particularly as this very recent improvement in the tight market evolves, we do expect to continue looking into other ways to incentivize volume and also maintain margins. Rodrigo Martinez: And Froylan, I will just complement if you see the unitary EBITDA in Mexico, we have been able to maintain or even grow a little compared to last year. And we have done that with a lot of cost increments of raw materials. So what we're thinking going forward is that balance between maintaining our unitary margins that are very important to make sure that the short-term results are there. But at the same time, the volume that will allow us to keep growing within the geographies. And we do plan to maintain that balance between those 2. And hopefully, with that, we'll be able to keep giving good results in Mexico in the short, medium and long term. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: Just a quick one on SG&A. Just wondering if there was any unusual seasonality for the quarter? Or do you expect any unusual seasonality throughout the year with your expenditure and marketing? And just wondering more or less what level of SG&A as a percentage of sales you guys are thinking about for the rest of the year? Roberto Olivares: Thank you, Felipe. This is Roberto. Yes, regarding SG&A, we don't necessarily see a lot of seasonality other than usually, S&A changes a little bit with sales mix. So whenever -- let me give you an example of Mexico. So whenever there's changes even in the categories or the channel mix or even the region where in Mexico, there are some changes in SG&A as we're now selling a little bit more yogurt than relative to the other categories, particularly sales expenses are a little bit higher. Even with that, yogurt margin has increased significantly in the last years due to a better mix coming from value-added products. But yes, there's some changes in SG&A regarding mix. But seasonal effects not necessarily. So yes, Rodrigo. Rodrigo Martinez: And within marketing, Felipe, I would say that we have been -- we have a very strong position in all the markets we participate, but we still see that there might be opportunity to do things even better. We have been putting a lot of effort on the marketing side of the company. We have a couple of good campaigns on the pipeline that should be coming out. In the long term, we definitely will be investing more money in marketing, but this is not something that is going to be radical. What we're seeing is pushing some new products that will be coming out of the market and gradually be spending more time on that, more money on that. So with that, the idea is to put some effort on campaigns that will also bring more volume and more margin and at the net of that should be positive. But again, I don't think that it's going to be anything that will be outside of the [ gradually ] way of saying it. And with that, I don't think that you should see any spike or any change within market, even though as time goes by, we should be spending more on that side. Felipe Ucros Nunez: Okay. Great. So we should expect SG&A levels to be similar to the last 2, 3 quarters for the short term for the next couple of quarters? Rodrigo Martinez: Yes, correct. Operator: There being no further questions, I would like to return the call to management. Hernan Lozano: Let me turn the call back to Rodrigo for a closing comment. Rodrigo Martinez: Thank you, Hernan. We're encouraged by the strong start of the year. These results underscore the resilience of our business model and a high-performing team. We remain focused on operational excellence to stay ahead of consumer needs and preferences in a dynamic environment. We greatly appreciate the continued support of our investors and business partners. We look forward to updating you next quarter. Operator: Thank you all for your interest in Sigma Foods. This concludes today's conference call. You may disconnect.
Operator: Good day, everyone, and welcome to the Fibra Danhos First Quarter 2026 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by for assistance. Now I'll turn the call over to your host, Rodrigo Martinez. Please go ahead, Rodrigo. Rodrigo Chavez: Thank you, Elise. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos 2026 First Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate in contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin our call today, I would like to remind you all that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance to IFRS standards and are stated in nominal Mexican pesos unless otherwise noted. Joining today from Fibra Danhos in Mexico City is Mr. Salvador Daniel, CEO of Fibra Danhos; Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning. Thanks for joining us today. Fibra Danhos posted sound financial and operating results for the first quarter 2026. Fixed rent, an 8% growth explained by the full contribution of Cuautitlan and Palomas industrial projects, indexation of lease agreements and improved occupancy levels in our office portfolio. Overage and parking revenues increased almost 13% and 18%, respectively, based on strong sales from our tenants and tariff adjustments in our properties. Consequently, total revenue during the quarter increased 9.4% year-over-year, while operating expenses did so by 7%, resulting in a 10% increase in net operating income and 11% on EBITDA with margin improvements. AFFO per CBFI accounted for MXN 0.76, equivalent to MXN 1.2 billion and almost 16% high year-on-year. Distribution was determined at MXN 0.45 per CBFI, that represents a payout ratio of 59%. GLA on our operating portfolio increased by 15% year-over-year. And overall occupancy level grew 220 basis points, reaching almost 92%. Lease spread on 20,000 square meter renewal agreements on our operating portfolio was 4.3%. Our CapEx pipeline continues to gain momentum, particularly in Palomas and EdoMex III industrial projects that are due to deliver by year-end. While Parque Oaxaca and Nizuc are making progress and running on schedule as well. Balance sheet remains with only 13.6% leverage. During the quarter, Fitch ratified a AAA rating for Fibra Danhos CBFIs and our debt bond issuances. Fibra Danhos shareholders' meeting took place on March 27, with a general quorum of assistance of more than 80% and resulting on the approval of all the agenda items with a favorable vote of more than 95% on each of them. Thanks, and we may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Igor Machado of Goldman Sachs. Igor Machado: So the first one is on lease maturities. You have a significant amount of lease maturities coming due for retail portfolio, so 28% of total. And your leasing spread is around 7% this quarter. So just want to better understand what could we expect the lease spreads going forward with the lease-up. And also given the significance of the maturities... Jorge Esponda: Something happens with -- we cannot understand well. Can you repeat the question? Igor Machado: Yes, sure. Can you hear me well? Jorge Esponda: We can hear you, it's distortion. I mean we did not hear you clearly. Igor Machado: Can you hear me? Jorge Esponda: Yes, that's better. I think you're closer now to the microphone. Igor Machado: Yes. So the first question is on [ lease maturities ]. So you have a significant amount of maturities due this year for the retail portfolio. So I just want to understand why could we expect the lease spreads going forward with the lease-up? And also given the significance of the maturities, if you see this is an opportunity to do a material change in your tenant book for the retail portfolio? Elias Mizrahi: Igor, this is Elias Mizrahi. So the maturities for our retail portfolio, historically, we have a weighted average term of approximately 4 years. So around 25% of our contracts expire every year, and we actually do renovations on a 3- to 5-year renewals at the most precisely to have these renovation windows, and that's where we can push rents up and have leasing spreads. So on retail, we continue to see lease spreads above inflation in general. And I think that's the question, right? Igor Machado: Yes. Operator: Was there anything further, Igor? Igor Machado: Sorry, if it's possible, I have another question here. Could you comment on why are you seeing the potential increase in construction costs given the conflict in the Middle East? Elias Mizrahi: We haven't seen an impact in costs because of the war in the Middle East. Let me pass this to [indiscernible] to give you some further remarks. Salvador Daniel Kabbaz Zaga: I mean we haven't still seen a significant change in prices. None of our contractors have let us know that we have to be prepared for it. So we're not expecting a big change on the increases in cost of construction, at least for the moment. Operator: Our next question today comes from Gordon Lee of BTG Pactual. Gordon Lee: Two questions. I was wondering on the industrial side. Now that, that segment is becoming more relevant for you, will you be looking at any sort of potential M&A opportunities? And I'm not thinking of Macquarie, but I'm thinking more of -- this is the expectation that there will be a pipeline through the maturation of [indiscernible] properties hitting the market. Would you look to acquire properties? Or do you prefer to focus 100% on developing them? And then the second question is just on Torre Virreyes, that's one of your sort of flagship office properties where we really haven't seen sort of improvements in occupancy in the last 2 or 3 quarters. So I was wondering whether you think that's still something that's just cyclical? Or do you think there's something about the property that may require more work, repositioning, something of that nature? Salvador Daniel Kabbaz Zaga: This is Salvador. I mean, talking about Torre Virreyes, it's 100% leased. Gordon Lee: Sorry, I meant Toreo. I said Torre Virreyes, but I meant Toreo. Sorry about that. Salvador Daniel Kabbaz Zaga: Okay. I mean, Toreo, we've been working very hard. It was hit by the pandemic and we lost some tenants. But we're seeing a gradually increase in occupancy, and we expect it to be even better in the next trimester. So we feel comfortable with it. And we're going to see -- we believe we're going to see good numbers in the next years to come. So as you know, the office segment is still just recuperating after the pandemic. But we've seen a lot more movement in clients and interest in spaces, especially in the last trimester. I mean, I hope this -- we can -- we were able to fulfill into contract [ with ] expectation. But we're -- I mean, happy with it. And in terms of industrial, of course, we are always open to new opportunities. As you know, we prefer to develop because in that way, we can actually get much higher yields with it. But -- but if we find a good opportunity in the market, we'll take advantage of it. Operator: And from JPMorgan, we have Felipe Barragan. Felipe Barragan Sanchez: So we've seen a good uptick on the office occupancy, now coming close to 80%. I just want to get an update from what you guys commented last quarter. If we could see perhaps you guys breaking above the 80% threshold that you guys have been struggling to recover. Salvador Daniel Kabbaz Zaga: Yes. We are expecting this to grow. I mean it's not an easy task. Office, it's much better, but it's not still, I mean, driving. So we expect it to be a better number each trimester and to actually fill up our buildings in the next year, something like that. Felipe Barragan Sanchez: Okay. And I have a second question real quick. So last quarter, you said there was a softer consumer demand that wasn't extremely prominent. Could you guys give us an update on what you guys are seeing on the consumer environment for this quarter? Salvador Daniel Kabbaz Zaga: I mean, we're seeing it to be basically just based on the line, not increasing, not decreasing. It's not a high consumer option, but we believe that things are getting much better, especially with the World Cup coming into Mexico. We expect that -- as you know, our shopping malls are in Mexico City, so we expect this to contribute in a positive way to the portfolio. But the truth is that we're basically just flat online. Operator: Next, we have Alan Macias of Bank of America. Alan Macias: Just a question on land bank. If you can remind us your strategy of acquiring land in Mexico City for the industrial sector? And what are you seeing there in terms of land prices? And perhaps has anything changed in terms of licensing and permits? Salvador Daniel Kabbaz Zaga: I think we're on a good place on acquiring some land with licensing and permitting. We're working very hard on it. We've been doing it in the past couple of years, and they're getting just mature to be almost ready to be developed. So we expect to give good notice in the next probably 6 months about it. But we're going to continue into the industrial development. We feel comfortable with it. I think we're doing a good job with it. And we are working very hard to basically just be able to -- in the next few months or 4 months or 2 trimesters able to give a good notice to the market on it. Operator: [Operator Instructions] And we have no further questions at this time. Rodrigo, back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Elise, and thank you, everyone, for joining us today. Please do not hesitate to contact us, Salvador, Elias, Jorge and myself for any further questions. We are always available, and we'll see you on the next conference call. Thank you very much. Operator: That concludes our meeting today. Thank you for joining. You may now disconnect.
Aki Vesikallio: Welcome to Hiab's First Quarter 2026 Results Call. My name is Aki Vesikallio. I'm from the Investor Relations team. Today's results will be presented by CEO, Scott Phillips; and CFO, Mikko Puolakka. As a reminder, please pay attention to the disclaimer in the presentation as we will be making forward-looking statements. Before handing over to Scott and Mikko, let's take a look at the highlights of the quarter. Book-to-bill was positive in all three geographical areas. Our sales were still impacted by low order intake in the U.S. during the previous three quarters. However, our comparable operating profit margin increased sequentially to 13.5%, and we continue to deliver strong cash flow. The new operating model announced in January was successfully implemented in the beginning of April. We also specified our outlook for full year comparable operating profit margin from above 13% to above 13.5%. Let's then view today's agenda. First, Scott will present the group level topics. Mikko will go through reporting segments, financials in more detail and the outlook. After Mikko, Scott will join the stage for key takeaways before the Q&A session. With that, over to you, Scott. Scott Phillips: Greetings, everyone, and a warm welcome to our first earnings report for 2026. I would like to start out sharing 3 developments highlighting our execution of our profitable growth strategy. So during third quarter earnings report, as you'll recall, we shared our plans to reduce our cost by EUR 20 million within this year as a result of the increased uncertainty that has led to a more challenging demand environment in the U.S. as well as the overall development of the order backlog. Consequently, we have announced plans during the quarter to evolve our organizational structure and our operating model targeting to create three positive outcomes. Number one, to evolve to further clarity on our end-to-end accountability through further decentralization by reducing layers of complexity within our overall organizational design. That should help us to attend to a few issues that occasionally come to light in terms of suboptimal customer support. And then third, overall, it allow us and enable us to reduce our fixed cost in line with our plans, which should create much more improvement in our value creation resiliency. So core to our strategy is our aim to lead the sustainability transition for on-road load handling industry. So I'm really pleased to share the second development here in the execution of our strategy, and that's the fact that we have validation in our science-based targets to achieve our commitment to be net zero by 2050. The third development I would like to share with pride is another example of a key outcome-based innovation co-created with our distribution partner, MYCSA, together with key customers in Spain, aiming to optimize productivity for dump-over column lift tippers by developing a new DEL brand lightweight lift gate. So another great example of our focus on developing new innovations together with our customers and our partners that's purpose-built to solve our customers' most challenging problems. So let's get into the headline results of our group financials for the quarter. So starting off with our order intake development. I'm pleased to see that our organic order intake increased by 7% in constant currencies versus the comparison period. In actual exchange rates, order intake reached a level of EUR 402 million or EUR 419 million in constant currencies for an 11% positive variance. ING contributed EUR 15 million in the quarter, so in line with our business plan. And all regions contributed a solidly positive book-to-bill, increasing our backlog sequentially. Now unlike prior periods, we didn't get the advantage of large lumpy orders as we've -- myself and Mikko and Aki have talked about in the past, but rather resulting from a number of increased activities that manifested in smaller order intake or midsized order intake. So no real large orders of note to report within the period. So overall, a good start to the year despite the uncertainty in the macro environment. So let me turn your attention to the regional breakdown of our order intake profile for the quarter. Now as you can see from the table, we had growth in all regions with the exception of Asia Pacific. Europe, Middle East and Africa increasing from EUR 203 million to EUR 207 million or 2 percentage points. The Americas grew by 15% from EUR 145 million to EUR 166 million. And Asia remained relatively flat at EUR 29 million compared to EUR 30 million in the comparison period. Europe continues to show signs of steady demand growth, which we do see in all businesses, but most notably our lifting solutions. The growth in the Americas was primarily driven by ING acquisition, but at the same time, we certainly did not see further declines in the U.S. Now overall, the environment remains highly uncertain with ongoing trade tensions in the U.S. and heightened geopolitical tensions in the Middle East. So let's turn our attention to the revenue results for the quarter. Our revenues were down 7% year-over-year due to the EUR 114 million lower order book we started the period with. Now in line with our expectations, revenues were on the level of EUR 383 million, as you can see on the table on the left-hand side. Our rolling 12-month revenues are now converging towards our order intake level of prior periods at EUR 1.528 billion. Now our share of services and actual exchange rates increased a percentage point due to the decline in equipment sales. However, as Mikko will explain, we had a nice increase in service sales in constant currencies, and ING contributed EUR 13 million in sales or 3% and currencies overall had a negative impact of 4% on group results. Now geographically, our share of sales were impacted by the positive order intake development in the second half of 2025 in Europe, while the Americas was negatively impacted by the decline in the U.S., but partially offset by ING. Now in addition to the increase in Europe, our Asia Pacific region was also slightly up, improving to EUR 26 million or 7% year-over-year. And I'm pleased to see the development of our ECO portfolio sales as they increased by 23% to EUR 176 million or 46% of sales overall. Now with our year-over-year decline in sales, our comparable operating profit was negatively impacted, so I'll guide you through the numbers. For the period, we delivered EUR 52 million on sales of EUR 383 million, which is a 22% decline versus the comparison period. But all in all, a good start to the year. On a relative basis, the group was on a level of 13.5% versus 16% last year. Now the factors most impacting comparability were lower sales in the U.S., lower indirect costs affecting gross profit and lower fixed costs affecting operating profit. Now consequently, our operative return on capital employed declined due to the reduction of profit, items affecting comparability and the ING acquisition. Now Mikko will further guide you through the bridge. Now wrapping up on our quarterly check-in for how we are performing versus our long-range targets. Our last 12 months -- our 10-year CAGR is now at 5% versus our long-range targets of 16% of comparable operating profit, our last 12 months is at 13% and versus our long-range target of greater than 25%, we're in line at 27%, albeit a decline sequentially for the factors that I shared earlier. So with that, I would like to turn the stage over to Mikko to share with you results for the reporting segments. Mikko Puolakka: Thank you, Scott, and good morning also from my side. Let's start first with the Equipment segment performance in quarter 1. So the equipment orders were EUR 284 million during the quarter. This is 10% increase year-on-year. But if we exclude the currency impact, the growth would have been 14%, so in constant currencies. Lifting equipment grew very nicely. Growth came mainly from Americas, like elaborated already by Scott, very much driven by the ING Cranes acquisitions. The delivery equipment orders were flat year-on-year. I would say that taking into account the market situation in the U.S. and the fact that we did not book any major key account or defense orders during the quarter, I would say that the Equipment segment performed well in terms of orders during quarter 1. Sales were EUR 266 million. This is minus 9% year-on-year. And again, if we exclude the currency impact, the decline would have been minus 6%. Lifting equipment actually grew in all three geographies, and the decline in sales is coming solely from our delivery equipment, especially in the U.S. market. The U.S. decline is very much due to the past quarters below one book-to-bill caused by the volatile tariff environment and the delayed decision-making by the U.S. customers. Equipment comparable operating profit was EUR 32 million or the margin 12.1%. And the biggest driver for the lower profitability was the decline in the delivery equipment sales in the U.S. Like I mentioned earlier, equipment profitability was very much impacted by the lower sales as can be seen in the bridge on the right-hand side. Lower sales affected gross profit margin as the gross profit margin includes also fixed production overhead, so the factory overheads. We had a slight positive impact coming from the lower SG&A costs. But I would say that the cost savings from the early announced EUR 20 million cost savings program are not yet visible in our quarter 1 results. Then let's have a look on service performance. And I would say that currencies had a significant impact on services orders and sales during quarter 1. Service orders were EUR 119 million. With constant currencies, actually service orders would have grown 4%. Sales was EUR 117 million. And again, with constant currencies growth would be plus 5%. So in absolute terms and in constant currency services, quarter 1 revenues would be EUR 123 million. Really nice development in our recurring services like spare parts and maintenance. Those sales grew in quarter 1. However, installation services sales declined. So I would say that the recurring services growth was able to offset really nicely both the currency headwinds as well as the decline in the installation services. The number of connected equipment and maintenance contracts also continued to grow in quarter 1. So really nice performance in executing also the services strategy. Services profitability was stable at EUR 28 million or the margin 23.6%. If we look at the services bridge on the right-hand side, services sales growth would have been actually EUR 6 million with constant currencies instead of the EUR 1 million decline as we have reported. Recurring services growth very much offsetting the decline in installation services. And then the negative FX impact, mainly coming from the weaker U.S. dollars offset the volume growth. Next, let's have a look on Hiab's total financials. The overall Hiab profitability decline came from equipment volumes as you were able to see from the previous bridges. Lower volumes affected gross profit margin as the gross profit includes fixed production overheads. Our SG&A costs were stable in constant currencies. Like mentioned, the cost savings program effects are not yet visible in quarter 1. Those start to be more visible in the second half of this year. Currencies had a notable impact on quarter 1 profitability, mostly stemming from the weak U.S. dollar. We booked EUR 11 million restructuring costs during quarter 1 as items affecting comparability. So this is below the comparable operating profit. These items affecting comparability, they are related to the ongoing EUR 20 million cost savings program, headcount reduction, including also the ZEPRO tail lift production move from Sweden to Poland. And our quarter 1 tax rate was 26%. Our cash generation continued on a very good level in total, EUR 75 million in quarter 1. The cash conversion was really high, 186%. Our inventories decreased slightly, but I would say that the main contribution to our cash flow was coming from the net working capital like accounts receivable decline and the VAT receivables collection. So those were the main contributors to quarter 1 cash flow. Hiab has a very, very strong balance sheet with a net cash of EUR 219 million at the end of March. Our gearing was stable at minus 23%. And thinking the target to keep our gearing below the 50% threshold, this would allow us to raise more than EUR 700 million debt. So really strong balance sheet to execute the inorganic growth strategy. We paid the EUR 75 million dividend in April 2. So this is not yet -- the dividend payment is not yet visible in our quarter 1 numbers. And then on the right-hand side chart, you can see that we have only one major debt item that's the EUR 150 million bond, which is maturing in quarter 3 this year. And today, we have also revised or specified our outlook for the 2026 based on a very good start for the year. So we estimate that the comparable operating profit margin for this year exceeds 13.5%. This is up from the earlier above 13%, what we announced in February. The key assumptions behind this outlook are more or less unchanged what we said in February. We expect EMEA to continue to grow. U.S.A., not further declining from the previous quarters. However, the customer decision-making continues to be still slow and difficult to predict. 2026 has started with EUR 114 million lower order book. Also, the March '26 order book was almost EUR 40 million lower than what we had a year ago. We have factored in the outlook also, the EUR 20 million cost savings materializing in 2026, as mentioned, mainly effective from second half onwards. And then our group admin underlying costs would be more or less on 2025 level, plus then approximately EUR 5 million investments in process and systems development, mostly in the second half this year. So with those words, then I would hand the word back to Scott, please. Scott Phillips: Thank you, Mikko. So just closing with a few key takeaways summarizing the quarter. I'd say, first and foremost, we certainly continue to see a gradual recovery in lifting equipment in Europe, Middle East, Africa, which is great to see. Our delivery equipment market in the U.S. is expected to be in a cyclical trough. Third key takeaway is we are on track to achieve our EUR 20 million lower cost level in 2026 versus the prior year. We continue to nicely execute on our profitable growth strategy with a keen focus on where we can take advantage of opportunistic growth. As Mikko mentioned, our strong cash flow and balance sheet position us nicely to catalyze growth in the coming periods. And we're really pleased to see the solid good start to the year in 2026. So with that, I'll turn it back over to Aki. Aki Vesikallio: Thank you, Scott. Thank you, Mikko. With that, we are ready to start the Q&A session. Operator: [Operator Instructions] The next question comes from Antti Kansanen from SEB. Antti Kansanen: And I'll start with a bit of a long-winding one on the U.S. demand. I mean, backing out kind of your Americas orders, the FX impacts and the acquisition impact, it still looks quite good organic order growth for the quarter. Then again, if we look at kind of the quarter, you flag increased geopolitical uncertainties. There was a bit of a back and forth on the Section 232 tariffs and things like that. So how would you kind of describe the demand environment that you saw on the first quarter? Did you start to see a gradual recovery in some sense? Or is it kind of the heightened uncertainties adding kind of an extra layer of slower decision-making versus what you kind of saw going into the quarter? Scott Phillips: Just starting that one off. In the U.S., I think one of the key factors to note is that there was a bigger impact towards the second half of Q1 last year impacting both of our at-scale Delivery Solutions business within the U.S. So we're coming off of, I'd call it, a relatively low comp. So therefore, I'd say that was a driver in terms of the positive variance that you see slightly in the U.S. year-over-year. But on the other hand, I'd say from the combination of still the factors that existed prior to the trade tensions and then subsequent to the trade tensions and even with the geopolitical unrest notwithstanding, we are seeing a bit of stability, albeit as Aki characterized and Mikko as well, that the decision-making is still on a similar level in terms of customers being cautious. Having said that, I think it boded quite nicely for us in the quarter that similar to what we saw here in EMEA, the composition of the order profile in the period was more skewed towards smaller midsized type orders. So the overall activity level was quite strong. And I'd characterize the sales funnel within the quarter also nicely positive variance compared to last year. Having said that, we still have the same level of uncertainty. We have the added variable of geopolitical unrest. So therefore, we're trying to stay quite balanced in terms of managing expectations that -- which is why we made the note of where we think we're in a situation where we don't see it imminently getting worse. And so therefore, I think there is a potential to be stable to slightly improving. And certainly, you see that supported nicely in some of the reports from the truck OEMs. And then as has been noted in some of the analyst reports, there will be a bit of a lag in terms of the impact for our business compared to what you see at the truck OEMs. So the factors at least are lining up to be, I think, skewed more positive versus negative. Antti Kansanen: All right. And then specifically on the changes on the Section 232 tariff start of April, what's your analysis on -- are there any impacts on your clients in terms of truck prices or truck costs? And also what's the direct impact to your specifically? Scott Phillips: Yes. The impact of the change in the tariff code certainly has a negative impact from a customer perspective and that the cost level goes up somewhat. And so we've run through all the analytics and the math, and we've revised our price model vis-a-vis the surcharge as a consequence. So our customers will certainly see that. I don't see it at a level where there would be an imminent negative impact compared to the current demand environment, but certainly an additional factor to consider on behalf of our customers in terms of deploying the budgeted capital within the year. And then as we have highlighted in some of the past periods, one of the key changes that we did see in the U.S. was a tendency to move away from providing longer-term view of demand and capital allocation and rather going to more shorter demand horizons, if you will, in terms of quarter-by-quarter or biannual, if you will. So we still see that trend continuing. Antti Kansanen: Sure. And then kind of talking about pricing and surcharges, how much would you say that the U.S. orders in Q1 benefited from pricing in terms of year-over-year basis? Mikko Puolakka: Yes. The U.S. orders benefited approximately EUR 10 million from the surcharges during quarter 1. Antti Kansanen: All right. That's very clear. And then just a housekeeping question on the savings program on the EUR 20 million. So would I model it correctly if I kind of add a full run rate impact for Q4. So it's a little bit of a benefit on Q3 and then in a similar fashion first half of next year as well on a year-over-year basis? Scott Phillips: Yes, I'd say that's about right. Mikko Puolakka: Yes. Operator: The next question comes from Panu Laitinmaki from Danske Bank. Panu Laitinmaki: I would have two questions around the guidance. So firstly, what kind of triggers the upgrade? I mean, is it that you have now more visibility towards the end of the year? Or was Q1 or what you see in the market better than you were expecting? And then the second one is kind of what kind of -- what are you expecting for the U.S. market for the rest of the year in your guidance assumptions? Scott Phillips: Do you want to take the first part, and I'll take the second part. Mikko Puolakka: So basically, what triggered the specified outlook is that we had, of course, a solid start for the year, and we have now basically 3 months better visibility for the year. We don't see in customers' behavior at the moment any change. So that -- those are basically the elements which basically made us to slightly specify the outlook from above 13% to above 13.5%. Scott Phillips: Yes. And just adding one more to that one, Panu, is also the view that Europe continues on the positive glide path that we've seen. So better visibility to the order book now as we have an additional 3 months coverage, positive variance to the start of the year versus expectation or plan and then the continued good development in Europe and offset, of course, by a more or less stable situation in the U.S. Then the second part of your question was with regards to the U.S. demand, yes. Yes. So in terms of U.S. demand, just to reiterate the prior comments, we certainly see the similar factors coming into the year that we did for the second half of last year, where you had the environment where there was already a bit of a slower level of decision-making, or let's say, a longer time horizon to deploy capital based on changes in the cost levels and the inability of our customers to know, let's say, upon the time of taking possession of the equipment, what their forward-looking cost curves would look like. So then naturally, you would, if you could delay the decision-making until you have better visibility there. We see that continuing within the year. Having said that, we did see a bit of recovery, of course, in the Delivery solution business in the U.S. and activity level bodes well as the composition of the order intake was, again, rather than being skewed towards a few lumpy key account orders, but rather a number of small to midsized orders. So the key account orders are also still in the pipeline. So overall, we see a situation where we feel a bit more comfortable, given that we still have a lack of coverage to the end of the year, which then will further clarify potentially in line with our Q2 earnings report. But for now, given those three factors that I talked about earlier and this U.S. situation that we think is on quite a stable level or we don't see it imminently declining, supported by the data that we're seeing with the truck OEMs, key factor for us to be able to bump up the outlook for the year slightly. Panu Laitinmaki: My final question is on the European market. So it continues to recover, but could you kind of tell a bit more like which segments are looking better for you? And what about construction, which I understood has been still slow, but do you see any pickup there? Scott Phillips: Yes. For us, the quick answer on the construction side is not yet. But what we do see is we see a pickup on special logistics, a bit of infrastructure, a little bit of retail last mile, but significantly, of course, in our Waste and Recycling segment, somewhat offset by a slight decline in the defense logistics, as that's a consequence of timing of fulfilling past very large orders that were won in the past and then the fulfillment schedule is starting to wind down a bit. So overall picture with the exception of construction is all moving somewhat in the positive direction and somewhat steady. We're not seeing big swings period-over-period or sequentially within the quarter, but rather a nice steady improvement. Operator: The next question comes from Mikael Doepel from Nordea. Mikael Doepel: Just starting off following up on the EMEA question there. Any specific countries you would like to flag here that are looking particularly strong where you're seeing some kind of improvement, maybe some early signs into Q2 or any specifics you could add there? Scott Phillips: Yes. If you think about our demand environment in Europe, it very much follows along with the countries that have the highest or the most at-scale GDPs. And those were certainly the countries that had the most positive variance for us within the Europe, Middle East, Africa region. So of course, U.K., France, Germany, Benelux, France, Spain, all were nicely positive. Mikael Doepel: Okay. No, that's clear. And then also coming back to what you mentioned on defense. How would you describe the pipeline there currently? And also maybe a specification, did you book any orders there in Q1? And then the pipeline and potential, how you see it going forward? Mikko Puolakka: Mikael, was your question concerning Middle East or because the line was a bit... Mikael Doepel: On defense, yes, I was asking, did you book any orders related to that segment in Q1? And also how would you describe the pipeline and potential here going forward? Scott Phillips: Yes. A quick answer, yes, we did, albeit I'd say, overall, there was a slight negative variance on the defense orders from the comparison period. Pipeline looks really healthy. And as we've called out in the past, it's challenging to call the timing of converting the orders. But Hermanni, Frank, the team are doing a great job managing the pipeline, and we feel really good about how we're positioned to convert the pipeline. The question is around the timing. Mikko Puolakka: The defense orders were roughly 4% of the total order intake in quarter 1. So as we have said earlier, they are a bit lumpier than the kind of typical commercial orders. So from quarter-to-quarter, it might fluctuate a bit. But like Scott said, solid pipeline and something to come most probably later this year, so yes. Mikael Doepel: Okay. No, that's fair. And then just finally, on the M&A, I think you, Mikko mentioned the EUR 700 million firepower here. How would you describe the pipeline? I mean, which regions would you say are most active right now? And what are the key hurdles to get the deals done? Scott Phillips: Yes. So let me start out and take that question. Pipeline is quite active, as we have consistently called out in the past. Of course, it's always all a matter of timing. Our focus is in line with our focus segments. Similarly, from a geographic perspective, I'd say there's an active pipeline, of course, in both of our core markets, both within Europe as well as the Americas. And of course, that's a critical area of focus for us. At the same time, we continue to look for opportunities to help us scale quicker in regions where we're subscale. And so we still like the APAC region and are investing a lot of time and expense in analyzing and understanding the opportunities in that part of the world. And similarly, we still see opportunities in Latin America as well. Mikael Doepel: Okay. And then just a follow up, I mean, what would you say are kind of the key hurdles to get the deals done? I think you said valuation question more or is it something else that's kind of stops? What are the key kind of things being discussed? Scott Phillips: Yes. Sorry for -- just to give you a bit of context around the history. So the first key factor was just needing to work our way through the merger and then the demerger process, as we were certainly constrained for good reasons to take actions during those years. So post-completion of the demerger, then the key constraint really has just been a matter of timing of working the processes. Operator: [Operator Instructions] The next question comes from Antti Kansanen from SEB. Antti Kansanen: Yeah. Thanks for taking my follow-up, which would be on the U.S. distributor. So Scott, maybe could you talk a little bit about where you are with this kind of a growth strategy, adding the distributor network or expanding the distributor network in the U.S. and expanding geographically? What type of a revenue potential should we think about from these actions in the next, let's say, 12 to 24 months? I mean, if the demand in the U.S. is starting to bottom out, I guess, the fact that you have a wider distributor network today than, let's say, a year ago, would add a little bit of a bigger potential for you going forward? Scott Phillips: Yes. Thank you very much for the follow-up question, Antti. I'd love to provide some color on this follow-up. So quite pleased with where we are relative to executing on our growth strategy in North America vis-a-vis activating a hybrid model, whereas in the past, we were almost entirely direct with the exception of our Princeton branded truck mounted forklifts. So over the past 2 years, we've activated 16 new dealers, of course, very much back-end loaded towards that time period. So great companies at scale. For the first time, it gives us real coverage in all 48 contiguous United States. And so that's a key milestone for us. And then I'd say number two, and I couldn't emphasize this one enough that the quality and capability within these dealers is extremely good and proud that they've elected to work together with us as real partners, and they're going to certainly help our overall growth strategy as well as to develop the overall Hiab brand in the U.S. Now having said that, we're in the mode of developing and going through the training and activating the dealers. And so that's a bit of a step-by-step process. Hard to exactly characterize the amount of positive variance certainly within this year, but we expect some positive variance to our order intake development in the U.S. as a consequence. And over the time series, if I think about '27, '28 and beyond, then that should steadily pick up. We believe that we'll end up somewhere around 20 to 22 distributors overall. So we still are in the process also of adding new dealers in areas where either we're undercovered and/or we're looking for the capability, be it for a lifting solution or a delivery solution as some of our dealers are quite specialized and others are more generalists covering the whole portfolio. Antti Kansanen: Is there any way for me to kind of compare from revenue potential-wise, say, 20 to 22 distributors versus your prior direct model, kind of how much does it expand the addressable market? Or how much kind of a dollar revenue potential would it give you down the road when all are fully activated and selling your equipment? Mikko Puolakka: Difficult. Scott Phillips: Yes. On the spot, no probably, but however, as we work -- progress through subsequent periods, and of course, as we certainly have touch points with all of you that cover our business, we certainly would be able to start to give better and better color on just that point. Operator: There are no more questions at this time, so I hand the conference back to the speakers. . Aki Vesikallio: Thank you for the telephone conference questions. We have at least one question from the iPad. This one is related to the Germany infrastructure package. Did we see any impact in the quarter? How would you characterize the situation or the stimulus money from the German infrastructure package? Is it visibility better, the same or worse than in the beginning of the year. Scott Phillips: Well, certainly, better visibility compared to the beginning of the year. Timing-wise, I'd say, too early yet. But we do anticipate having nice opportunities in the future, and we're starting to get visibility in the opportunity funnel. Aki Vesikallio: Great. How about then the supply chain? Do you see any constraints, especially in the hydraulics or electronics, I think this must be related to the Middle East situation. Scott Phillips: Ones, a great question and it gives me an opportunity to put the spotlight for a second on our supply chain teams. I think they've done a great job, both in terms of our factories and in collaboration with our sourcing team. So really pleased to share that no impact. Now, that picture, of course, looks a lot like the duck on top of the water. But of course, below the surface, there's a lot of activity behind the scenes, both internal to Hiab, but also in our partner network vis-a-vis our suppliers as well as the logistic shipping companies. But overall, no negative impact within the quarter. But a lot of organizational bandwidth that's been redirected to make sure that we secure and stabilize the overall supply chain. Aki Vesikallio: Indeed. The next one here is that do we see any potential considering new trade agreements between Europe and South America or then potentially how about India, do we see any potential there? Will this lead to Hiab's new equipment production service units in the medium term, impacting sales year-on-year growth rate in these regions? Any color you could provide? Scott Phillips: Yes, we haven't seen yet any impact at this point as a consequence of the new trade agreements. However, I would say that markets such as India are a great example of those that we are constantly pulsing and checking for what's the right opportunity for us to better participate in the market? Is that an import opportunity? Or is it a produced local opportunity? And certainly, I anticipate that a market such as this will play a key and ever increasingly important role in the future of our business. Aki Vesikallio: And I think we have still some more questions from the telephone line. So let's turn back to the moderator. Operator: The next question comes from Mikael Doepel from Nordea. Mikael Doepel: Just very briefly a question around your service business. Just talk a bit about how you see the environment there, the dynamics there? I mean, where are we currently on the spare parts capture rate? And how do you see the kind of the overall growth here going forward? Scott Phillips: In terms of the services business, what I would still say is that Mikko and his team are progressively working towards better and better partnership training and development of how to, one, make sure that as a result of having new or current activated connected units that, that gives us great control then over the installed base, which is the first key factor, and that's why that's one of the critical KPIs that we track relentlessly each period. Then that enables to have the dialogue of converting the management of those assets in the installed base wrapped around ProCare contracts that we do both for direct as well as through indirect. And we know that we have a significantly different outcome of capture rate and revenue per unit on those units that are captured in ProCare. And the good news is that our Net Promoter Score and feedback from the customers are on a significantly higher level as well. So the team is doing a good job getting better and better control of the overall installed base. But it will take time as given the top line split between what we sell direct versus indirect. The biggest opportunity for us is to continue to increase the share of capture on the indirect sales side. And so a lot of good progress is being made there. Overall, in terms of the capture rate versus what we shared in 2024, we continue to step-by-step make good improvements sequentially and throughout each period. The limiting factor so far, potentially, and this is a bit of opinion as it's quite variable, has been around the utilization rates of the equipment. And we have seen a lot of variability through the period where some period, some geographies is up and some within the same geographies may be down, and that might have a bit of a factor if I think about the past 2 years. Moving forward, our expectation is that given the age of the installed base, the replacement rate should continue to increase. And at the same time, the level of service events or the frequency of the service events should get slightly increasing as well, which bodes well for our recurring revenue business. So overall, good progress there. When we come back on our next Capital Markets Day, we'll give a lot more color on how we're progressing relative to the three KPIs that we shared in '24 as well as the overall capture rate. And I'd say the last comment I would add is, I think I did share in either Q3 or even in February in the Q4 earnings, our share of recurring revenue is now on quite a good level at around 75%, 76% level. Operator: The next question comes from Tom Skogman from DNB Carnegie. Tomas Skogman: I know you have sensors installed in your equipment. Can you open up a bit what you see, how customers are using the equipment sequentially year-on-year and between different geographies. What can you read about your customers from this? Scott Phillips: We get quite a lot of data-driven insights off of our connected equipment and really pleased by the fact that we are able to provide condition-based monitoring services, so we can see any number of data points from the amount of how they're being utilized, the time under load, the type of loads, whether it's overload, under load, time in idle, even if an operator has not buckled the seat belt and attended to some of the basic requirements around safe operations. So a whole host of variables that we're able to see relative to most of the units that we have connected. And then quite pleased to tell you that at least before the end of the year, you'll start to also see quite a nice uptick in connected units in our tail lift business as well. Tomas Skogman: But what do you see in customer activity, like in the U.S. where we have this kind of both kind of uncertain demand situation. Do you see positive signs in how customer equipment is used, for instance. Scott Phillips: Sorry, now I understand a little better than what you're getting at there, Tom. So in terms of utilization, we see quite a lot of variability. I'd say, overall, we don't see any real negative or positive trends, but some periods, utilization or activity levels are up. And then in the next period, it might be down. So overall, I'd call it quite stable. And I'd say it's the same roughly applies here in Europe as well. In some periods, it's trending more positive and then in another period, it will trend slightly negative. Tomas Skogman: All right. And then about your M&A pipeline, do you have any targets you would like to share? How many companies you would like to acquire this year or how much sales you would like to add in through an M&A in 1 year or 3 years period or so? Scott Phillips: Yes. I mean I'll stick to my same answer as before. I think that given we're a business configured of 6 divisions and a number of business units, I would love to get to a steady state where we're able to do a bolt-on at least 1 per year per division per business unit. And similarly, if you think about then the composition of our business, managing 1 or 2 more transformative or, let's say, business unit or division size acquisitions per year would be a great steady state to get to. But to go from where we are to that steady state, then it's going to take some time as we now are, what, 9 months or so into being able to now action opportunities that we weren't -- we were constrained in action until we completed the demerger. So we'll also share a lot more color on that as we progress towards the next Capital Markets Day. Tomas Skogman: And when is the next Capital Markets Day? Scott Phillips: We haven't set the date yet, but we will share that as soon as we do. Tomas Skogman: But it's already this year, you plan to have it or... Scott Phillips: Yes. My sense is that it's likely to be in 2027, yes. Mikko Puolakka: Not yet decided, yes. Scott Phillips: Yes. Tomas Skogman: Yes. And perhaps a bit more on this service sales target. You have EUR 700 million as a target. I realize this downturn probably was a bit steeper and longer than you expected. But just on a general level, how do you feel about this? Because, I mean, that would really demand exceptional sales CAGR to reach that number. Scott Phillips: Yes, you're exactly right. There is that element if you think about the -- especially on the nonrecurring revenue piece, there is a significant element there of when does the equipment demand recover relative to the way we modeled the demand curve in Q4 '23 when we established the current strategy period. So a lot will be understood depending upon how the balance of this year and the beginning of ' 27 plays out, of course. Mikko Puolakka: But of course, one should still -- if we think quarter 1 service development, so sales up by 5% with constant currencies. At the same time, we saw a decline in the installation services. So if the installation services, i.e., new equipment sales, then attached with the installation sales would improve, then that would, of course, have had in this quarter a nice further addition to service revenues. Scott Phillips: Yes. Tomas Skogman: And then finally, these new U.S. distributors, do they wish that you would expand your product portfolio to some certain direction? Scott Phillips: I think at this point it's too early to tell. They're still in the mode of getting themselves up and running on understanding the scope of the portfolio that they're responsible for, how to work within our processes and systems and with the support staff that's available to them. But I am confident that as we look forward, they will certainly and frequently share insights where they see that we have opportunities to fill gaps within the portfolio. But at this point, I'd say it's too early. Operator: The next question comes from Antti Kansanen from SEB. Antti Kansanen: Just a quick follow-up on the U.S. order side. I mean, I just wanted to get a reminder like last year, your Americas orders declined by 14% on euro basis, but I'm sure that there was a pricing contributor on a positive side. So how much did the volumes last year decline? Or how much your pricing was up with the surcharges and all of that during '25? Mikko Puolakka: The surcharge impact, if I recall correctly, was something like between EUR 20 million, EUR 30 million for last year. A bit less than EUR 30 million, around EUR 25 million, yes. Antti Kansanen: Do you have any view kind of how much the volumes are currently. The order volumes are below, let's say, what you booked on '24, which was kind of the previous peak? Mikko Puolakka: You mean in the U.S.? Antti Kansanen: In the U.S., just trying to kind of think about that if there's a recovery on the market, what is kind of the upside in terms of your order intake, given that your prices are quite much higher now than they were a few years back? Mikko Puolakka: Of course, it's good to remember that the surcharges are something which, I mean, they change all the time as tariffs change. So of course, depends on the tariff landscape, whether one can use that as a, let's say, permanent price increase or we have communicated to the customers that the tariffs will -- if the tariffs change, then the surcharge will change. But all in all, last year roughly that EUR 25 million, let's say, impact in the order intake. It's a bit difficult to -- because to -- because there are so many different products in the U.S. market. There are tail lifts, loader cranes, truck-mounted forklifts. So one cannot count those together. It's like calculating apples and bananas together. So from that point of view, it's a bit difficult to say the kind of volume impact. Antti Kansanen: Sure. I mean, it's a simplification, but it seems like the pricing had a mid-single-digit impact and then that would kind of suggest, almost 20% down on volume. Scott Phillips: That's the right way to think about it, yes. Mikko Puolakka: Yes. Overall, it's the biggest impact is coming from the customers' overall demand, the pricing having a quite small impact. Operator: There are no more questions at this time, so I hand the conference back to the speakers. Aki Vesikallio: Yes. Let's still take a couple of questions from the iPad. So firstly, on the services. So do we always nowadays offer service agreement when we sell a new piece of equipment? And what is our hit ratio with service agreements with new equipment sales? Scott Phillips: The quick answer to that is that's certainly our expectation that it's one of our key strengths. And certainly, if I think about the 50 or 60 customer meetings that I have a year, that's usually the first topic of conversation is services and the availability of services proximity to installed base and the high need to secure uptime as most of our customers are understanding that they're paying a premium on the margin in order to secure the service outcomes that they need to keep them going. So therefore, it's critical for us to offer the services concurrent with the opportunity to sell a new piece of equipment. The hit rate or, let's say, the attachment rate of the service contract varies depending upon region. So I would kind of come back to Mikko's comment earlier. It's a bit -- it's not a great metric if you just aggregate it all together and say, here's our percentage of attachment because it's much higher in certain areas depending upon how we're configured with our own organization and the personnel that we have, but it varies, I'd say that overall, I can say that is one of the key opportunities for us to continue to not only drive our services business, but more importantly, a key factor for us to increase our Net Promoter Score or customer satisfaction. So the teams are working quite diligently together and with our partners to ensure that we feel like we have all the tools, processes and capability and training in order to not only offer the services, but then most importantly, to execute successfully in delivering against those service contracts. Aki Vesikallio: Then we have two more questions this. I think these are quite quick ones. The first one is on the M&A, any preferences in geographical regions? I think you, Scott, already mentioned that we like EMEA, Americas, our key regions, but we also seek for opportunities in the APAC region. So that was the answer already. And then the final one, which one of you remembers the numbers, how large proportion is the U.S. out of our Americas sales? Of course, we provide that on an annual basis, the North American sales, but we don't split U.S. separately. But of course, it's a significant share out of the Americas and also on the North American side. Mikko Puolakka: Yes, I don't remember now the exact percentage, but it's -- I would say U.S. is the majority of the Americas revenues. Aki Vesikallio: Exactly. Scott Phillips: Yes. Yes. A very high percentage. Aki Vesikallio: Yes. And of course, for this year, the rest of the Americas is somewhat higher due to the ING acquisition impact. So the Brazil market is proportionately higher than last year. Scott Phillips: Yes. Aki Vesikallio: Okay. That then concludes our Q&A session. Thanks for the great questions and for the great answers. We will be back with our second quarter results in 22nd of July. So stay tuned. Scott Phillips: Thank you. Mikko Puolakka: Thank you.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Westport's Fourth Quarter 2025 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Ms. Ashley Nuell. Ashley Nuell: Thank you. Good morning, everyone. Welcome to Westport Fuel Systems' conference call regarding its fourth quarter and full year 2025 financial and operating results. This call is being held to coincide with the press release containing Westport's financial results that were issued yesterday after market close. On today's call, speaking on behalf of Westport will be Chief Executive Officer and Director, Daniel Sceli; and Chief Financial Officer, Elizabeth Owens. You are reminded that certain statements made on this conference call and our responses to certain questions may constitute forward-looking statements within the meaning of the U.S. and applicable Canadian securities laws, and as such, forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. With that, I'll turn the call over to you, Dan. Daniel Sceli: Thank you, Ashley, and good morning, everyone. I want to begin by addressing recent events, and we appreciate the patience and support of our shareholders as we work through our recent cybersecurity incident. Our priority was to ensure the integrity of our IT systems, business continuity and financial reporting, and we are pleased to confirm that this review has been successfully completed. With this behind us, we're looking forward to executing on our strategy and delivering on the next phase of our business objectives. Turning to our financial results. The past year has been a defining one for Westport, marked by the successful divestiture of our light-duty business, the recent receipt of a $6.5 million payment and further strengthened by Cespira's agreement with a leading OEM to manufacture and deliver HPDI components for a truck trial assessing the future commercialization. These accomplishments, combined with ending the year with over $27 million in cash and very low debt reflect the meaningful progress we have made in sharpening our strategic focus and building a stronger company. The global heavy-duty transportation market is increasingly recognizing natural gas as a practical lower emission solution available today. This is evidenced by Volvo's recent milestone of delivering more than 10,000 natural gas trucks on the road, underscoring the accelerating adoption of Cespira's HPDI fuel system technology and validates the strategic direction we have taken. From a market perspective, the U.K. leads to the adoption of HPDI powered LNG trucks, followed by Germany, Sweden, the Netherlands, Norway and France. Emerging gas markets such as India and Latin America are also gaining momentum with volumes seeing steady growth. When we introduced our proprietary CNG fuel storage and delivery system several months ago, we emphasized its potential to significantly expand our addressable market, particularly in North America. Development has progressed well, and our confidence in the commercial opportunity continues to build. We look forward to showcasing this solution at the upcoming Advanced Clean Transportation Expo, ACT, where we will have the opportunity to show up our technology to industry partners and customers. By integrating advanced high-pressure CNG storage with Cespira's field-proven HPDI fuel system, we match or exceed the performance and efficiency expected from diesel engines with compelling economics in markets where CNG is the natural choice like North America. We believe this innovation meaningfully enables Westport and Cespira to capture new opportunities as we move into field testing. Our GFI brand through our high-pressure controls business has also delivered important operational milestones. The opening of [ our China facility is one ] of the fastest growing hydrogen markets, and in Canada represents a step in localizing manufacturing, reducing costs and improving competitiveness. As the transportation industry continues to balance economic realities with sustainability objectives, we are confident that alternative fuel systems, including Cespira's HPDI technology and our high-pressure components provide real-world solutions that deliver both performance and affordability. With the completion of our strategic transition and only a few milestones remaining, a growing market validation of Cespira's expansion, a path to address the North American market and a clear strategic focus. Westport is excited to drive into this next phase. Now I'll have Elizabeth to run through some financial details and then come back afterwards. Over to you, Elizabeth. Elizabeth Owens: Thank you, Dan. Before I dive into the details, I'll just touch on a few key milestones that has achieved. The first of which is our strong cash position, reflective of the successful divestiture of the Light-Duty segment. As of December 31, 2025, our cash and cash equivalents position increased by $12.4 million to $27.2 million compared to $14.8 million at December 31, 2024. The increase in cash was primarily driven by the sale of our Light-Duty segment, as I mentioned, partially offset by cash used in our operating activities and debt repayments. Exiting 2025 with the proceeds from the disposition of Westport's Light-Duty segment, our long-term debt, including the current portion, reflected a 57% reduction to $2.9 million as at December 31, 2025. This was compared to $6.8 million in the prior year period. Including the long-term debt from discontinued operations, reduction was more than 90%. This improved financial position provides Westport with greater flexibility to concentrate on markets that are best suited to our current strategy. Cespira continues to drive meaningful improvement in our results. In the fourth quarter of 2025, total revenue was $29.3 million, compared to $22.9 million in the same period last year, representing an increase of 28%. This progress is supported by strong market adoption, including Volvo reaching the milestone of more than 10,000 natural gas trucks on the road equipped with Cespira's HPDI fuel systems. We are also encouraged by the continued progress of a second OEM that is currently conducting truck trials. We are excited about the opportunities ahead as we target an improvement in Cespira's capital requirements. Turning to the details of our 2025 results. Westport reported revenue of $23.3 million for the year ended 2025. Compared to $40.7 million in 2024. The 43% decrease in revenue was primarily due to the end of the transitional service agreement for inventory and contract manufacturing between Westport and Cespira. Our adjusted EBITDA for 2025 was negative $17.3 million in as compared to the negative $11.4 million reported for 2024. We reported a net loss from continuing operations in 2025 of $29.6 million compared to a net loss from continuing operations of $31.3 million for the prior year, with the decrease in net loss attributed to lower operating expenditures across R&D and SG&A and a favorable change in foreign exchange rates, partially offset by a full year pickup of Cespira's operating results in 2025 compared to the 7 months in 2024. Looking at our specific business units. High-Pressure Controls revenue for the fourth quarter of 2025, increased 20% to $1.9 million compared with $1.6 million in the prior year quarter and decreased to $8.3 million for the year ended December 31, 2025, from $9.4 million for the prior year. The decrease in year-over-year revenue for the period ending December 31 was primarily driven by the general slowdown in the hydrogen infrastructure development, leading to a slower adoption of automotive and industrial applications powered by hydrogen. In Q3 2025, we kicked off the move of our manufacturing capacity from Italy to our new facilities in Canada and China, which required shutting down our operations. In late Q4 2025, we resumed selling products to our customers to meet the backlog demand from the aforementioned shutdown. Gross profit for the year ended December 31, 2025, decreased by $1.3 million to $0.9 million or 11% of revenue, compared to $2.2 million or 23% of revenue for the prior year. Moving on to Cespira. Total revenue generated in Q4 2024 -- or 2025 was $29.3 million compared to $22.9 million in the same period last year, an increase of 28%. Cespira product revenue of $23.4 million increased 30% compared to Q4 2024, driven by higher volumes. Gross profit was negative $1.1 million for Q4 2025 compared to $0.5 million in Q4 2024, and with a negative variance, driven primarily by an obsolete inventory provision of $1.7 million and a recognized loss on one of our contracts valued at $2.8 million. As I previously mentioned, we had a cash and cash equivalents balance of $27.2 million as at December 31, 2025. Net cash used in operating activities from continuing operations was $14.2 million for the year ended December 31, 2025, compared to $5.8 million in the prior year, an increase of $8.4 million. The decrease in net cash provided by investing activities was mainly driven by $21.7 million in capital contributions to Cespira. And purchases of property, plant and equipment of $2.7 million, partially offset by proceeds from the sale of the Light-Duty segment. As noted, we also strengthened our balance sheet with total outstanding debt of $2.9 million, down from $6.8 million while reducing the complexity of our corporate structure in 2025. Our business is focused on the right markets for us, and we are continually looking at ways to streamline our operations. With that, I'll pass it back to you, Dan. Daniel Sceli: Thank you, Elizabeth. As we look to 2026, we see a transportation market increasingly grounded in economic reality. Operators are seeking solutions that deliver measurable emission reductions without sacrificing durability or operating economics. Natural gas is playing a larger role in that equation, not as a transitional concept, but is a fuel that can compete on performance and cost today. The HPDI platform delivered through Cespira is centric to that opportunity. By pairing compression ignition performance with the advantages of natural gas, including the potential to incorporate hydrogen blends over time, we are providing OEMs and fleets with a pathway that aligns emission reductions with commercial expectations. As I mentioned earlier, Volvo's milestone of more than 10,000 natural gas trucks on the road in over 30 countries, featuring Cespira's HPDI fuel systems, highlights our combined success in helping drive this path of success. We are encouraged by the progress of a second OEM conducting a full truck trial throughout 2026, which we further believe validates additional commercial potential. 2026 will be a pivotal year as we advance demonstrations and fleet trials. Present this exciting new platform at the ACT conference this spring and follow with targeted show-and-tell sessions with Canadian fleets through the spring and summer. Together, these initiatives position us to build momentum across our portfolio and translate technology progress into tangible commercial interest. I can appreciate the investment community's interest in our 2026 outlook. We are focused on delivering disciplined execution, continued advancement of OEM programs and converting technical validation into new commercial opportunities. In our High-Pressure Control segment, we're optimistic that volumes can increase as customers facilities ramp up production, while we actively pursue cost reduction opportunities in China through greater total sourcing and supply chain optimization. With a focused organization and technologies aligned with market demand, we believe 2026 represents an important step forward and we intend to deliver. Thank you. Operator: [Operator Instructions] Our first question or comment comes from the line of Amit Dayal from H.C. Wainwright. Amit Dayal: So Dan, just on the margin side of things, it looks like inventory issues and relocation issues were sort of pressuring margins in the fourth quarter. Do you think we see some bounce back in 1Q and the rest of 2026 on the margin side? Daniel Sceli: Yes, for sure. I think this transition, I'll start with the High-Pressure Controls transition from Italy to Canada and China, launching the two new production facilities, moving the equipment over, managing the inventory transfer starting up, getting the plant certified, which is quite an extensive process, that put a lot of pressure on margins, and we do expect margins to improve. And volumes as well. We're already seeing some pickup in volumes as we move through the year. Amit Dayal: Understood. For the High-Pressure Control segment, can you talk a little bit about sort of how maybe the China market or the Indian market, et cetera, the international opportunities you highlighted could start ramping for you? Like what should we expect in terms of like go-to-market sort of strategy in these geographies? Daniel Sceli: Sure. So I'll start with China. I think everybody knows that China is the fastest-growing hydrogen market. The government goals that they set out are driving volume increases. We're in a bit of a lull right now where volumes globally have slowed down on hydrogen, but we expect them to begin to pick up again at some point here in China. Having our plant there allowed us to compete locally. It allowed us to have local costs, source local suppliers. It's -- for us, it's the right strategy to compete in China for the Chinese market. shipping from Italy or from Canada just didn't make sense. The comment on India. India is really a huge opportunity for Cespira in the long-haul trucking market. India has now put in a multistate highway system. They're investing in clean fuel stations. And we see that a number of trucking OEMs look at India as a beachhead for growth, and that market is going to pick up, we believe, pretty significantly. Amit Dayal: Understood. Just last one for me. Any opportunities or possibilities in the power gen or backup power space for you guys? Daniel Sceli: Well, interesting you asked. So we've been looking into power gen. We currently supply into power gen today. We have a customer that used to be Kohler, Rehlko, that we supply out of our High-Pressure Controls business. we see that opportunity growing with the investments going into Power Gen across North America and, of course, globally, we think that there's an opportunity to build out that business. And are expected to grow there. Operator: Next question comment comes from the line of Rob Brown from Lake Street Capital Markets. Robert Brown: First question is on the OEM trial at Cespira, the second OEM. I know you can't give a lot of detail, but I think you said this year is sort of when the trial is happening. What's sort of the decision point on that? Is it sort of work this year and then just make decisions and then start potentially ramping into a production model or just sort of the outlines of the process would be helpful. Daniel Sceli: Sure. Sure. I mean, I wish I could say who it was, but in this commercial truck world, they're very, very careful about their commercial information. But the trial is ongoing right now, right? There's trucks on the road running there's discussions about expanding it, but we believe decisions will be made in the second half of the year at some point. We don't know the exact timing. It depends when they get the miles on the trucks but our expectation is that in the second half of the year, we're going to start getting feedback. And of course, if it all goes well, we're hoping this is going to lead to a commercial launch. Robert Brown: Okay. Got it. And then back to the High-Pressure Control business run rate. to get a sense of what's the sort of revenue run rate now that you've gotten the production transition? Is it sort of growing off the Q4 run rate? Or is it I guess how much of the Q4 run rate was depressed from that, I guess, just a sense of the run rate in that business. Daniel Sceli: Sure. The Q4 run rate was depressed. Number one, the market has slowed down somewhat. But also with shutting down the equipment in Italy, moving it all to the two new plants. Obviously, we weren't producing for some time while that transition happened. But yes, we do see that market starting to grow we see volumes increasing over what we expected for 2026 already. So it's on a good path, and we believe that the I think specifically the Chinese market is the one that will take off first as the Chinese government puts those goals in place for hydrogen transition in both automotive and in the industrial markets. Operator: [Operator Instructions] Our next question or comment comes from the line of Mr. Eric Stine from Craig-Hallum Capital Group. Eric Stine: Dan, you touched on HPDI in India and in your prepared remarks, Latin America and some other markets. But in terms of in North America, I mean, I know that's a very high priority. You did mention some trials that you are planning or that the joint venture is planning. In Canada. Could you maybe go into that a little bit? Anything you can share? And should we assume then that Canada is kind of the initial spot in North America that you would target? Daniel Sceli: I think if [Audio Gap] for CNG is a Westport product, not a Cespira product. Obviously, Cespira has the on-engine HPDI technology that will be part of the solution. But the -- in the back of cab, High-Pressure storage, smart storage system is a Westport product. We have already got the first truck, Volvo got us a truck, and we've already put the back of cab system on it. It's been running miles developing data. And the reason that is that we're not having to redevelop any of these systems. It's a matter of putting these systems together. And so it's not a huge development project. It's more of a market development that's required. The truck, as I said, is on the road, the truck will be on its way shortly to Las Vegas for the ACT show. I hope you're going to be there, Eric, and see it. We have a booth right next to Volvo there. And as you know, this CNG storage system is primarily focused on the North American market. We will be doing the initial trials in Canada. And -- but we will, at some point, here, be moving to the U.S. for trials as well. Eric Stine: Got it. Okay. I misunderstood that. So then I guess the follow-up then would be just about bringing HPDI, the joint venture, since you just talked about back of cab, but HPDI to North America. And I would assume that, that would be Volvo, right? Daniel Sceli: Well, as a starting point, for sure, but this whole CNG, I mean, HPDI is growing fast globally. The difference is that all the growth of 10,000 trucks are on LNG because that's how those countries receive their natural gas. Natural gas in North America is primarily delivered through compressed, right? It's a CNG market. So what our on-engine system really doesn't care whether it's compressed or liquid, the system adapts to that. the storage system is the big difference going from a liquid storage to a compressed storage. And that's what we're bringing. And the first truck on the road is a Volvo truck. It's their new truck, and we're very excited to have it showing up at ACT. And this is pretty exciting for us. We're finally getting to execute on this strategy. And any growth we have on this back-of-cab system obviously pulls through HPDI for Cespira. Eric Stine: Yes. No, absolutely. Okay. And just housekeeping for my last question or questions. Just I might have missed it, but did you quantify or estimate what you think the move did in terms of limiting Q4 for the High-Pressure segment? Daniel Sceli: Oh, sure. I mean we -- I think we lost probably a couple of months of production. And we had built up some inventory. But when you lose a couple of months production, you got to play catch up. And that coincides with a bit of the market pause that had happened. But we've launched both plants, both plants are up and running and shipping products. So we've gotten through that transition hump through the launch hump, and we're pretty excited about where that's going to go. We have the control in our hands. All right. Thanks, Eric. Well, that's all the questions we have for today. I want to thank you for your time, everyone, and have a great, wonderful weekend. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.
Operator: Greetings, and welcome to the Bolsa Mexicana de Valores, S.A.B. de C.V. First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ramon Guemez, Chief Financial Officer. Thank you, sir. You may begin. Ramón Sarre: Thank you. Good morning, and welcome to Bolsa Mexicana de Valores First Quarter 2026 Earnings Conference Call. Before proceeding, I'd like to provide a brief safe harbor statement. This presentation contains forward-looking statements and information related to Bolsa that are based on the analysis and expectations of its management as well as assumptions made and information currently available at Bolsa. Such statements reflect the current views of Bolsa related to future events and are subject to risks and uncertainties. Many factors could cause the current results, performance or achievements to be somewhat different from any future results or performance that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic, political, governmental and business conditions, both in a global scale and in the individual countries in which Bolsa does business, such as changes in monetary policies, inflation rates, prices, business strategy and various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary considerably from those described herein as anticipated, estimated, expected or targeted. Bolsa does not intend and does not assume any obligation to update these forward-looking statements. I'd like to remind participants that today's call is being recorded with a replay available online on April 23 at Bolsa's corporate website, www.bmv.com.mx. The press release and slide deck can also be accessed in the Investor Relations section in the same site. This call is intended for the financial community only, and the floor will be open at the end to address any questions you may have. Joining us for today's call are Jorge Alegria, our CEO; Claudio Vivian, Chief Information Officer; Roberto Gonzalez, Chief Post Trade Officer; Gabriel Rodriguez, ICAP CEO; Alfredo Guillen, Managing Director of Equity Markets; Jose Miguel De Dios, Managing Director, Derivatives Markets; Luis Rene Ramon, Managing Director of Sales and Marketing; Hanna Rivas, FP&A and IR Director; and myself, Ramon Guemez. With that, I'd like to turn the call over to Jorge Alegria. Jorge Formoso: Thank you. Thank you, Ramon. Good morning, everyone. As you are likely aware yesterday, besides the financial results, we also announced that after 18 years in the exchange and 13 years as a CFO, Ramon has decided to seek early retirement from BMV and focus on new personal and professional endeavors. I want to thank him for his many contributions during his tenure as both as IRO and CFO. On a personal note, I started collaborating with Ramon during the IPO roadshow back in 2008. So I wish him well, and I am very proud and happy to see him leave as a good friend of the Mexican Stock Exchange. Also yesterday, as mentioned, we released our earnings results, including a detailed review of our performance in these first 3 months of 2026. To begin with, I would like to highlight strong operating results achieved this quarter. These were driven by market volatility also from international geopolitical events as well as a market that continues to show increased dynamism generating favorable effects across the entire value chain from financing to settlement and custody. Financing activity rose by 84% in the first quarter of 2026 when compared to the same period of 2025, representing an additional MXN 105 billion of financing and reaching a total of MXN 230 billion. This is led by a 270% increase in long-term debt financing, which reached MXN 146 billion, while the number of new listings increased 200% from 11 to 33. Additionally, we had 2 FIBRAS or REIT deals for MXN 9 billion, the new Fibra Park Life and a follow-on on Fibra Monterrey. Short-term debt listing remained constant even though the amount financed was lower than last year. The financial impact of these operations and this activity is partly reflected in a 53% or MXN 8 million growth in our listing revenues. However, we will see the largest impact next year reflected in maintenance revenues for 2027 onwards. We now have 580 long-term programs totaling MXN 1.8 trillion, both are record numbers. And as you know, I mentioned, the revenue impact for this year is limited due to the cap we have on listing fees. This strong performance reflects issuers growing trust and highlights the role of the Mexican Stock Exchange in efficiently channeling capital towards productive investments. In the equity market, we saw both local and global momentum with average daily trading volume and value approaching MXN 21 billion. This is over 20% when compared to 2025 and one of the highest levels in recent years. Along these same lines, activity in our CCP, CCV for equities, also grew by over 20%, both in amounts and operations cleared. Growth was also evident in futures trading, particularly in the dollar peso contract, where the activity doubled when compared to Q1 2025. This is supported by peso appreciation and other market and volatility factors already explained. We have continued with our efforts to list new equity contracts, joining the ranks of previously listed names such as Apple, Meta, Netflix, NVIDIA and Tesla from our SIC, cash equity trading division. But in derivatives clearing growth, this was impacted by our reduced margin deposits. So in spite of the increased trading volumes, we had a small net negative impact in Asigna because of the reduction of the margins managed. Indeval reaffirmed its strength during the quarter, excelling in 3 key areas: assets under custody, settlements and cross-border transactions through the SIC. Assets under custody rose 14%, driven mainly by funds, pension managers and equities, reaching MXN 47 trillion. Settlement averaged MXN 11 trillion per day, and this is a 25% increase in market instruments -- in equity market instruments, reflecting the segment's dynamism. Volatility during the period provided additional momentum to cross-border transactions of UCITS and ETF via the SIC, which grew 29% in traded value and 47% in the number of operations, consolidating Indeval's role as a key player in international market integration. Overall, Q1 2026 was particularly solid for Grupo BMV with outstanding operating performance across multiple business lines. This confirms the resilience of our business model, which remains robust and consistent across diverse scenarios. And this performance is reflected also in our financial results as follows: Our revenues grew 7% or MXN 83 million, driven mostly by the volatility mentioned before. Growth was concentrated in Indeval, which saw a strong growth in assets under custody as explained, settlement activity and cross-border transactions. Cash equity trading and clearing, which combined grew 19%, as explained. This is due to the daily average trading volume increased. And we are maintaining our market share of around 80% in equity trading. Listing revenues are 53% above Q1 '25 due to the strong listing activity I mentioned. And as I said, the most important impact for this will be next year reflected as maintenance revenues. In derivatives, we saw strong performance in MexDer with the peso-dollar contract driving revenue growth of 24%. However, reduced margin deposits are affecting a little bit revenues in Asigna. SIF ICAP's good results are worth mentioning. In Mexico, revenues grew 12%, and we had very good results in our bond and on our D2C desks. While in Chile, even though the revenues are down, we had a very, very strong activity in March. Expenses are growing by 10%, led by personnel and technology costs, both of which reflect investments in our strategic projects made last year. This expense level is in line with our plans for this quarter, and the growth rate is also in line with our expectations, which we have shared with you in the past, along with the investments in our strategic projects where we continue and will continue with our cost control efforts across the company. CapEx for this quarter was MXN 41 million and not because we are slowing down in any way, but because of the timing of the payments to be made in our CapEx plans for this year. With this, we have an EBITDA of MXN 685 million, 6% above last year, while the margin is 56.5%, 1 percentage point below. To properly analyze this number, we have to take into account the appreciation of the currency, almost MXN 3 versus Q1 of 2025. This is an impact of around MXN 40 million in our EBITDA. Our net income was MXN 437 million, same as last year. And the difference between the EBITDA growth and the flat net income is explained by the lower interest rate income. Interest rates, as you may recall, for the quarter fell from 10% last year to 7% this year. Looking ahead, our priority for 2026 is the execution of our strategic projects that will strengthen our infrastructure, broaden our product portfolio and deepen our integration into global markets. Building on this priority, I would like to share progress on the 2 main initiatives scheduled to release -- to be released by year-end, the new derivatives market platform and the new repo clearing segment. The derivatives platform is a transformative project for our group. It integrates MexDer operations, Asigna clearing, market surveillance and a new data offering, all supported in the cloud. Execution follows a defined plan. Technical testings begin in June and will be followed by functional testing with market participants in September. This will progress from isolated trials to comprehensive system-wide validations. The project is set to conclude on Q4 2026 and go live on Q1 2027. Currently, we have working groups with trading firms and clearing members, which are addressing anticipated changes, the challenges, the implications and market alignment. The repo clearing segment will be incorporated into our CCV service portfolio. End-to-end industry testing is scheduled for Q3 2026 as well with design completion targeted for December this year. This initiative, the repo clearing follows the same agile methodology applied to other projects. So we expect to have a much faster adoption in this segment because of the reduced capital requirements and benefits it will bring to market participants. Both of these projects are supported by a dedicated project management office and multidisciplinary teams, including experts in operations, products, technology and data, alongside representatives from compliance, internal audit, finance and legal. So this structure ensures orderly execution, comprehensive risk and opportunity assessment and a strict adherence to corporate governance standards. So beyond these initiatives, we are also advancing on our broader portfolio of projects within the digital evolution program. Altogether, they represent a comprehensive transformation for BMV Group, modernizing our infrastructure, expanding our reach and reinforcing our role as the backbone for Mexico's financial system. With discipline, innovation and a clear vision, we are shaping the future of market infrastructure and creating lasting value for all participants. With that, I'll conclude our remarks for the quarter. We remain focused on executing our priorities with discipline, advancing our key initiatives and adapting to evolving market conditions. Thank you again to all of you for joining. And together with my colleagues, we are more than glad to address any questions you may have. Thank you very much again. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo with Bank of America. Ernesto María Gabilondo Márquez: Ramon, we will miss you and good luck in your next chapter. So I have 3 questions from my side. I will do the first one, and then I can elaborate the other 2. My first question will be on your revenues. You mentioned in the press release that revenues benefited because of the volatility experienced during the quarter. And you do not discard this to moderate in the next quarters. So having said that, how do you see revenues evolving this year? Should we expect around mid-single-digit growth? And what will be the drivers behind your revenues? Jorge Formoso: This is Jorge Alegria. Yes, you're right. I mean I think it's fair to say that this quarter, we have seen quite a lot of volatility and changes, I mean, globally and locally as well, interest rate movements, FX. So that has impacted positively our volumes. Also, we saw very strong issuance activity due to interest rate movements as well as FX helping domestic participants to be more active in the peso market than in the U.S. market. So this is something is good for us. We cannot assume that will continue. We never know. So I guess here is Ramon, but I think, yes, you're right in mid-single digits is a fair assumption. Ramón Sarre: Yes, that's correct, Ernesto. We had a very good month of March. Last year, revenues were relatively stable, around the MXN 1.1 billion. So around mid-single, I think, is good. It also depends on the volatility we get. If we get more help from volatility, you could see that increase to high single. Ernesto María Gabilondo Márquez: Perfect. Perfect. And then my other 2 questions. The second one is also related. So how should we expect the evolution of revenue growth versus expenses growth given your investment plan, how are you seeing both of them? Should we expect OpEx to be a little bit higher versus revenue growth? Any trend that you can guide us could be very helpful. And then my last question is in terms of regulation. I don't know if there's any update on discussions related to a potential market still related to hedge funds? And also if there is any other type of regulation in the pipeline? Ramón Sarre: Expenses, we are projecting them to grow at high single digits, Ernesto. So depending on how revenues perform this year, as we have said before, we would be expecting a slight decrease in margins, just like we saw this Q1. Jorge Formoso: We are working very close to authorities because mainly -- because of our project, Ernesto, and we have heard again quite often that the authorities, mainly the treasury and the Mexican Securities Commission are moving now faster to the hedge fund regulation. So hopefully, we will see something this same year. As you know, the law is there. The law was approved. So it's the secondary market ruling. We are working together also with the Mexican Brokers Association on this. And yes, we agree this will be great news on the hedge funds to increase the market participants. I'm not aware of any other rules coming on the market from the regulators. Operator: Our next question comes from the line of Daniela Miranda with Santander. Daniela Miranda: Congrats on the results. Just a very quick one from my side. Just wondering if you could help us better understand the sensitivities affecting performance. On one hand, for financial income, how should we think about the impact of further rate cuts and lower cash balances? And how much additional downside could we expect on that line? And on the other hand, FX appreciation had negative impact across your P&L. So how should we think about FX sensitivity going forward? And do you hedge any of these exposures? Ramón Sarre: Thank you, Daniela. Interest income, it's going to be impacted by the reduced interest rates on a year-on-year comparison. So the best way is just straight off the cash balance. It's not all in Mexico, but I think that's the best approximation you can have, just the interest rates to the cash balance. On FX, we have 2 impacts on the -- first of all, on the P&L, we have for each peso, the currency appreciates we get around MXN 50 million or MXN 60 million less in EBITDA. That means our operation is long U.S. dollars. So for us, in the short term, a peso depreciation helps our P&L. Roughly, as I said, MXN 1 is equivalent to MXN 50 million, MXN 60 million on a full year basis. On the balance sheet, we started hedging this quarter. We had a bit of an effect still, but we'll continue with our efforts to reduce the impact on the balance sheet, on the difference between assets and liabilities in the balance sheet. Operator: Our next question comes from the line of Edson Murguia with SummaCap. Edson Murguia: Specifically about the expenses and the investment projects. Just trying to figure out and join the dots about CapEx. Those projects that Alegria mentioned it in the call are the main one or related to this increase in expenses and the CapEx? And my second question is, could you give us more detail about the deferred income? It seems odd to try to understand why this quarter increased MXN 525 million. Ramón Sarre: Edson, yes. Our main projects are the ones Jorge mentioned, this technological evolution, upgrading basically all of our technology in derivatives, trading and clearing, in post-trade, the cash equity CCV, the Indeval, having the new technology for the bond and the repo CCV, new data and moving to the cloud. Those are our main projects. That's where our expense is concentrated on those efforts, and that is the majority of the CapEx. On your second question, I didn't quite get it. Could you repeat it, please? Edson Murguia: Yes. This quarter, there is a MXN 525 million in deferred income in the balance sheet. But historically, the deferred income, it's a low single digit between 8, 11. Ramón Sarre: No, what you have seasonality, Edson. The maintenance fees from issuers is collected in advance. We have seasonality in the cash balance. You usually have an increase in cash balance in Q1 because we collect all these annual fees on a onetime basis in Q1. What you collect, we recognize the income on a linear basis throughout the year. The net of the balance is in deferred income. So if you look at historical, you're going to see this deferred income and it goes down every quarter to get very close to 0 for -- towards Q4. Operator: [Operator Instructions] Our next question comes from the line of Carlos Gomez-Lopez with HSBC. Carlos Gomez-Lopez: First of all, thank you for your service of many, many years, Ramon. You have been the face of continuity and good humor from Bolsa. So we will all miss you enormously, and I'm very sad to hear that we will no longer be talking to you. Ramón Sarre: Thank you, Carlos. Carlos Gomez-Lopez: I have -- in the spirit of an analyst, I have 3 questions. The first one is to Jorge, what are you going to do without Ramon because that's a difficult decision to make. On the numbers thing, last year, you had a margin of 56.2%. And I want to understand correctly, you expect that margin to go up or down this year because even with single-digit -- high single-digit revenue growth, I mean, given your expenditure plans, it would seem that the margin should go down rather than up. So we would like to understand that. And finally, we understand that you have started to hedge the foreign position on the balance sheet. We understand that. Does that also impact the income statement and that is why perhaps the impact of the appreciation of the peso has not been as extreme in this quarter? Ramón Sarre: Thank you, Carlos. On a full year basis, EBITDA margin was 57% last year. And as I said, yes, it could go down. We need to have volatility to maintain the margins. If we don't have volatility, margins could be coming down. On the hedging efforts, what we're doing is managing our long position. It means trying to sell the dollars that we have at the end of the month. We're not, as of now, doing any derivatives or any derivative or efforts on that side. It's just trying to net the balance to 0. Carlos Gomez-Lopez: Okay. So that shouldn't have an impact on the P&L? Ramón Sarre: No, it should not. Operator: Our next question comes from the line of Yuri Fernandes with JPMorgan. Yuri Fernandes: Thank you, Ramon, for all the help those years. Good luck. I have a question regarding -- just a follow-up on CapEx. If anything has changed for your previous guidance of MXN 500 million, given this quarter started a little bit soft. I think you are doing less than 10% of the budget for the year. So just checking if -- I know the investments are still there and the modernizations are still there, like the big scheme of things, but if maybe stronger peso, I don't know if maybe the CapEx budget will be less than the MXN 500 million you mentioned in the previous call. And then a second question regarding competition on equities. I think like this was a quarter that -- I know this is volatile, it change all the time, but you gained some market share. So just on competition dynamics and if anything has changed between you and the competitor? Ramón Sarre: Thank you, Yuri. No, CapEx is still expected to be around MXN 500 million. We had a slow start. As Jorge said, it's basically the payment -- the timing of payments. But we're still expecting to finish the year close to MXN 500 million in CapEx. And for competition dynamics, I'll let Alfredo Guillen take that one. Alfredo R. Lara: Yuri, yes, we have been experiencing improvement in market share, explained by some initiatives that were requested to us by our brokerages, mainly 2 initiatives. First, the improvement in block trading dissemination in real time, which is very important for traders to make decisions, and we were lacking detailed information on that. And then we also were requested an improvement in trading reports that are now released by our central counterpart. And this information now includes block trading. So this gives brokers accurate information regarding their place in the equity markets and therefore, driving more trades to the Mexican Stock Exchange. So basically, we experienced better information to the market and better decision-making regarding the depth of the books and trading activity at the Mexican Stock Exchange. Operator: Our next question is a follow-up from the line of Carlos Gomez-Lopez with HSBC. Carlos Gomez-Lopez: Just a follow-up on the dividend. Have you decided what dividend level you will recommend? And what should we expect in terms of buyback for the year? Ramón Sarre: The dividend is what we had said, Carlos, MXN 2.50 per share. That's going to be proposed for the general assembly, which is going to be next Monday. Alfredo R. Lara: Next week. Ramón Sarre: Next week. And for the buybacks, we don't have a fixed amount. As we said, our purpose was to give back 80% of net income. The dividend amounts to 70%. If the buyback does not cover the remaining 10%, we will be proposing an extraordinary dividend for Q3. So more than a specific amount for buybacks, we have a specific amount for overall capital return, which is 80% of net income from last year. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Alegria for any final comments. Jorge Formoso: Well, thank you very much to all for joining. We had a pretty interesting quarter. We will continue to strengthen the -- our initiatives on the technology side, keeping a very strong control on costs and expenses. I want to reiterate my appreciation to Ramon Guemez for all those years working with us. In the meantime, while we made a definitive appointment, you all will be dealing with Luis Rene Ramon, that I'm sure pretty much all of you know. He has been working for the company more than 10 years, specifically in the finance area. He was in charge of Investor Relations for many years, and he led our marketing and sales and commercial efforts for almost 2 years now for the exchange with extraordinary positive results. So he will be, in the meantime, taking over the CFO role. So I'm sure that he will have plenty of things to deal with and happy to answer your questions moving forward. So thank you, Ramon, again. We certainly are going to miss you on a lot of things, not on your humor, definitely, but we wish you well. And above all, thank you all for your time and listening to our remarks and see you and talk to you soon, if not in the next quarter. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Alan Gallegos Lopez: Good morning. Welcome to Megacable's First Quarter 2026 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernández, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed at today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin. Enrique Robles: Thank you, Esau. Good morning, everyone, and thank you for joining us today. With the solid beginning of the year, we are pleased to announce the results of the first quarter of 2026, which came in line with our expectations once again, evidencing the resilience of our operations and the strength of our market position. These results reflect outstanding performance in an economic environment that presented diverse challenges at the outset of the year, marked by uncertainty around trade policy, among other factors, reaffirming our ability to create value. In this context, we managed to present a period with continued subscriber growth, consolidating our presence in the new territories and maintaining subscriber levels in legacy territories. Outstanding mass market revenue increase, including ARPU expansion accelerated net profit growth and a seasonal CapEx increase supporting a higher cash generation. Operationally, broadband remains the main driver of business growth. Net additions of Internet subscribers remained within the quarterly range that we have been discussing in recent periods, and we expected -- we expect to increase the pace of the -- in the next quarters, as a result of better service and a very competitive commercial offer. At the same time, we continue strengthening our network, we have evolved into a predominantly fiber-based company in the few areas that still rely on legacy infrastructure would continue to migrate over time. These advancements reflect our approach to competition, capitalizing on the quality and capabilities of our network beyond just pricing. We're convinced that our infrastructure will continue to be one of the main sources of differentiation and sustainable value creation for Megacable. In terms of financial results, our consolidated revenues and EBITDA continue to grow at a single high digits, while the quarterly figure for net profit recorded one of its best performances in the last 2 years. Moreover, our balance sheet remains strong with a decreasing leverage ratio that implies that Mega has a privileged position to take on investment opportunities that might arise. Regarding CapEx, it is worth noting that CapEx for the first half of the year is typically lower as a percentage of revenues. This quarter, CapEx as a percentage of revenues reached one of the lowest levels since the launch of our expansion and evolution projects. Despite pressure stemming from geopolitical situations and the related price increase in some inputs, we successfully offset these challenges through greater efficiency in the execution of our investment and a strategy focused on a more selective CapEx deployment in the expansion territories. As a result of the above, we can expect 2026 full year CapEx to be around 24% to 27% of revenues for 2026. We have demonstrated that our growth trajectory is advancing according to the 5-year plan that we set and that we have successfully transitioned from a phase of intensive investment and growth to a phase of returns. Our efforts continue unchanged. It is clear that the next phase will be marked by pursuing operational efficiency, consolidation and digitalization. Also, advances in artificial intelligence and digitalization are a core pillar of Megacable's innovation. Under our Mega concept, we are achieving efficiencies that we'll, with no doubt, yield significant results in the coming quarters. These processes will make us more competitive in the market and open up new areas of opportunity. Before concluding, following the resolution approval -- approved yesterday at the shareholders' meeting, the company will distribute a dividend of MXN 3.2 billion. This reflects our confidence in Megacable's cash generation capacity and our commitment to delivering value to our shareholders. We expect this distribution to represent one of the highest dividend yields in the market, in line with previous periods. In summary, the first quarter will consistent -- was consistent with the seasonal trends we usually see at the beginning of the year, although we faced some challenges, none have altered our confidence in the business outlook. We remain focused on execution, capital discipline and strengthening Megacable's competitive positions in the Mexican telecom market, reinforcing our role as a key industry player with an evolving infrastructure that supports a more connected, sustainable and innovative future that with that, let me turn the call over to Raymundo for the operational review. Raymundo, please go ahead. Raymundo Pendones: Thanks, Enrique, and good morning, everyone. As Enrique mentioned, the first quarter developed broadly in line with the seasonal trends we usually see at the beginning of the year. In that context, operating trends remain sound and commercial execution continued to support growth across the business. Starting with network development, our footprint reached 19.5 million home passed at the end of the quarter, up 11% year-over-year, while our network expanded to approximately 110,000 kilometers, an increase of 7%. These figures reflect the scale we have built and more importantly, the platform we now have to continue monetizing recent investments. Fiber migration also continued to advance with approximately 86% of our subscriber base served through fiber technology at quarter end, compared to 77% in the same period last year. We have already reached a level of operational and commercial maturity comparable to that pure-play fiber operator. Turning to subscriber trends, Internet subscriber reached 5.9 million at quarter end, up 9% year-over-year, equivalent to 495,000 net additions over the last 12 months. Sequentially, we added 101,000 subscribers consistent with the range we have communicated in previous quarters. Telephony subscriber reached 5.2 million, increasing 7% year-over-year or 353,000 net additions over the last 12 months. During the quarter, net additions totaled almost 65,000. Telephony continues to play an important role within our bundle offering by reinforcing the value proposition of the mass market. In mobile, our MVNO operation continued to gain traction. We closed the quarter with 740,000 lines, representing a 29% year-over-year increase equivalent to 164,000 net additions over the last 12 months. Sequentially, net additions totaled 61,000 lines, making the best performance since early 2022, result of a commercial strategy with lower ARPU, but higher growth rate. We continue to see mobile as a relevant complement to our fixed services and as an additional tool to strengthen customer loyalty, which now also contributes with a reasonable revenue stream. In content, subscribers stood at 4 million as we continue adapting the product mix toward a broader digital proposition that is more aligned with how customers increasingly consume video. During the quarter, 3.8 million subscribers correspond to traditional video, while the remainder was contributed by the more than 2.2 million streaming app users recorded at quarter end. Our focus is on building a broader content proposition that combines linear video, apps and other nontraditional consumption models. We believe that remains an important differentiator in how we position the service and maintain value perception at the household level. Overall, RGUs reached 15.2 million an increase of 8% versus the same period last year, supported by the continued expansion of the subscriber base and the relevance of bundled services within the mass segment. Regarding churn, trends remain under control. During the quarter, churn stood at 2.0% in Internet, 2.4% in Video and 2.1% in Telephony. These levels remain manageable and do not indicate any deterioration in the underlying business. In fact, Internet, Video, Telephony improved versus first quarter '25, despite the price adjustments implemented during this quarter. On the revenue side, ARPU continued to trend positively supported by the aforementioned price adjustment. Under the new disclosure methodology adopted last quarter, ARPU calculated over Internet subscriber stood at MXN 440.9, up 2% year-over-year. We believe this methodology provides a clearer benchmark for investors and improves comparability with peers. Finally, in the Corporate segment, revenue remained softer on a year-over-year basis. The above was mainly due to the current market conditions, leading to lower average revenue along with a more competitive environment in expansion areas, which requires us to be more creative and efficient going forward. The underlying operation continue to execute, and we remain focused on service quality and commercial discipline that will allow us to go back to revenues levels before 2025. Overall, the first quarter was consistent with the operating trend we have seen in recent periods. Our platform remains strong. Our network continues to differentiate the company, and our priorities remain centered on improving penetration monetizing the scale we have built, and adapting our commercial and content offering to what customers value most. Thank you for your attention. I will now turn the call over to Luis for the financial review. Luis Zetter Zermeno: Thank you, Raymundo, and good morning, everyone. Megacable delivered another quarter of solid top line performance. Total revenues reached MXN 9.4 billion during the quarter, an increase of 9% versus the same period last year. This result was mainly supported by the continued strength of the mass market segment, where revenue rose 11% year-over-year to more than MXN 8 billion, reflecting continued subscriber growth and a positive ARPU trend. As in prior quarters, mass market remain the main driver of the business and more than offset the softer performance in corporate. Below the revenue line, cost of services reached nearly MXN 2.5 billion, an increase of 9% compared with the first quarter of 2025, while SG&A also increased 9% year-over-year to a little over MXN 2.5 billion. These movements were mainly attributed to a larger operation, including higher labor costs driven by annual minimum wage adjustments and the expansion of our workforce, particularly in newer territories. From a profitability standpoint, EBITDA reached more than MXN 4.3 billion, up 9% year-over-year with an EBITDA margin of 46.2% in line with the same period of last year. We expect margin to strengthen on a comparable basis as the year progresses. In this context, net income totaled MXN 841 million, increasing approximately 16% versus the same quarter of last year. This was one of the strongest quarterly results since the second quarter of 2023, as interest rates reduced, and despite the continued impact of depreciation associated with recent infrastructure investments. Turning to the balance sheet. Cash and investments closed the quarter at MXN 5.6 billion, while net debt stood at MXN 20.4 billion, down 3% year-over-year. The debt-to-EBITDA ratio decreased from 1.41x in the first quarter of 2025 to 1.25x this quarter, while our interest coverage ratio closed at 6.38x. This performance confirms that Megacable continues to operate with a strong liquidity position and a conservative balance sheet. Our leverage profile remains one of the strongest in the sector and continues to provide high flexibility for both operations and capital allocation decisions. Quarterly CapEx totaled MXN 2 billion, a decrease of 14% compared with the same period of 2025, as we continue moving past the peak of our expansion and network evolution cycle. In this respect, CapEx represented 21.3% of total revenues compared with the 26.8% in the prior year. It's important to note that this figure is in line with annual seasonality with a softer first half of the year, followed by an increase in the last 6 months. At this point, although we are maintaining our full year CapEx guidance of 24% to 27% of revenues, we are monitoring the potential effect of the geopolitical and trade-related developments on equipment and deployment costs. If those conditions persist for several months, we could see an increase versus the original CapEx plan. Even in that scenario, we retain enough flexibility to rephase part of the program if needed without compromising our broader strategic objectives for 2026. Finally, regarding the dividend payment approved by the shareholders' meeting, even after the distribution, we expect leverage to remain at healthy levels with the usual temporary increase in the second quarter and sequent normalization thereafter. In summary, the first quarter showed resilient revenue growth, healthy profitability, strong net income generation and continued balance sheet strength, the business remains well positioned, focusing on improving profitability and cash flow generation. Thank you for your trust. I will now open the floor for questions. Alan Gallegos Lopez: [Operator Instructions] The first question comes from the line of Marcelo Santos from JPMorgan. Marcelo Santos: The first question is regarding the CapEx. So how do you see that progressing? If you could provide us an update for the next couple of years? How do you see that going down? And the second question would be regarding, you made a comment on pursuit of consolidation. How are you seeing this? What are the opportunities you see? What kind of consolidation would you be seeking out? Raymundo Pendones: Luis, do you want to go ahead with the CapEx? Luis Zetter Zermeno: Yes. Thank you, Marcelo, for your question. On the CapEx, as we have stated, we are leading the investment cycle of the expansion and the GPON evolution project. So we are in a reduction, and also with the revenues increasing, we, for sure, continue to state that CapEx will go down as a percentage of revenues. This year, we still foresee 24% to 26% or 27%, depending on inflation created by geopolitical effects. And next year, we are seeing a reduction of 22% to 24%, and thereafter also going down in 2027, 2028. Raymundo Pendones: The second question was regarding consolidation. I believe that, that was mentioned by Enrique in his speech. It is what we meant, Marcelo, is that we have a strong period of expansion investment and an investment for the GPON evolution. Both projects has been critical, and we believe we did it in the right time. We have been able to grow in the organic markets with the GPON evolution we did, and we have expanded our footprint in the expansion territories. What we're saying about consolidation is that the period of intensive CapEx has passed by, and now is the period of consolidate our operation into continued growth and better efficiency operation in the markets where we grow. That's what we try to send the message is consolidate our operation with a much more efficient way after all this period of huge investment CapEx provided. That's what we meant. Operator: And the next question comes from the line of Phani Kanumuri from HSBC. Phani Kumar Kanumuri: The first one is regarding the AI impact on efficiency. What are the areas that you are expecting to see the impact from AI on the cost? Or do you see even the impact from revenues because of AI? The second one is regarding your Corporate segment. You mentioned that you need to be more creative in your offerings to go back to the revenue levels before. So if you could expand on that comment, it would be great. Raymundo Pendones: Thank you, Phani. Very interesting question both, as all the questions we received, but the impact of AI is going to be strong on this, but in every industry, but it's going to be strong in our industry, too. We're very happy to the process that we have, the period that we have implementing AI within Megacable. That's part of the consolidation I was talking before, because we're implementing AI in the majority of the functional and operational areas of the company. We already have virtual agents working in our contact center. We already have all the knowledge of the Megacable to be trained and to be interactive with our employees, and we already have that to have all the analysis and analytics on the NOC and the core. More than that, we've been having a third party looking at our rate of maturity of AI during -- within Megacable. And I'm really, really proud to say that we are one of the highest in terms of implementing AI within Megacable. And that what we see in the future is nothing, but continues to improve our margins and EBITDA and be a much more efficient company. On the other side, the AI market will continue to increase data center and continue to increase consumption on the cloud, and we do expect to adapt ourselves to that and bring that offer within the corporate segment that we have. Second question regarding the Corporate segment. Still, we are above the MXN 5 billion mark per year that we have -- that we passed in 2024. We haven't decreased that in that part, even though the results are not what we wanted are soft. We expect that to change because we are doing some adjustments in terms of the market that we are approaching with a new product offer that we're sending to the enterprise and the corporate segments. We've been soft in government sector that's been hurting us. We have not been able to increase the revenues coming from that segment. And overall, that's why we keep the MXN 5 billion level that we have. We expect to go this year above what we had in 2025, and trying to go back to the trends that we have before. That's the explanation of the corporate and how we see the AI. Phani Kumar Kanumuri: Excellent. Maybe can I just follow up on the -- on your comment on cloud and data centers. Are you trying to be a reseller of the cloud? Or are you trying -- would you also be going into building the data centers in Mexico? Raymundo Pendones: Good to be clear on that. No, we are not investing into cloud, as I said, the period of strong investment for Megacable has passed by. We will continue to meet what Luis was saying, a lower trend of CapEx of revenue to the future. We already have data center in the western part of Mexico, and we have a big amount -- a huge amount of data center edge for the purpose of getting into the mid- to large cities that has already been invested and ready for the future. In the years to come, data center will -- data consumption will be decentralized and will come from the central part of Mexico and the U.S., more and more into the edge, first into the north part of Mexico, and then into the western part. That one is going to give us a big value for our data center. And in the next years, that one will continue to be decentralized into the regions. Those investments has already been made, and we will be part of that data center growth, not as a significant part of Megacable, I want to say. When I meant cloud and collaboration, those are the services that we sell in MCM business Tech-Co. MCM business Tech-Co not only sales connectivity or infrastructure, but also sells cloud and collaboration under a brand name of Megacable called Symphony, that's our product, where we have the best of different suppliers to provide collaboration. And that's what I meant that we will continue to implement AI to our customers over that cloud and collaboration segment that we have. Alan Gallegos Lopez: The next questions come from Isaac Gonzalez from [indiscernible]. Unknown Analyst: I have one question only. How much traction have you seen in your price increase? And one of your main competitors recently increased speeds without raising prices. So could we interpret that margin expansion is being constrained by these competitive dynamics? Raymundo Pendones: Thank you, Isaac. Yes, we know we are aware of competition. We keep track of them like they do of us, but let me tell you that the speed, the rate -- speed that they increase, the speed they increase, we already did that and way above what they did. Our minimum amount that we are commercializing right now is 200 megabits, and we are the highest speed in the market for the low entry package of any of the companies that are in the fixed segment. So speed is something that normally we're the leaders on that part, and we continue to have that for the price that we're receiving. On the other hand, we have a price increase over this period because we have different segments of subscribers with different packages and rates. And normally, we have some space to increase rates to some of those subscribers while keeping the lowest ARPU in the market. When we see our competitors getting into a new broadband service with an aggressive price, we already have that price, and we're commercializing on that one. So I believe we are the strongest and well-positioned company of the market right now because we have a high speed, a good network and the best price, and also, I'd like to say the best service. All our indicators continue to provide that Megacable, Mega on the Máximo side continued to improve the Net Promoter Score and the customer satisfaction. So it's a killer combination when you have a good price, a good product, good service, the -- everything all around. And that's the secret of our success so far. We continue to provide good results in revenue and subscribers, and that's what we look into the future recycling. Thank you for the question. Alan Gallegos Lopez: The next questions come from Miriam Soto from Scotiabank. Miriam Soto: My question is regarding about the -- if the company could consider entering the wireless business directly by acquiring AT&T? And what is your opinion on the asset valuation? Raymundo Pendones: Well, what we're aware, it's public that it might be an intention of one of our competitors to enter and get into the AT&T. We are not moving from what we know how to do the best. We believe that we have the right size and the right technology to be a good player on this one. And as I said before, we are going to capitalize that into the future. On the other hand, we are on the wireless market. We have Mega Mobile as a service, only aimed to postpaid. We have a terrific quarter, increasing our subscriber base, better is a historical growth on that part. We almost reached the three-quarters of a million subscribers. We expect to get close to 1 million by the end of the year, slightly below that part. With no CapEx for the company, getting the best of the service, the coverage coming from two companies. One is exactly AT&T. The other one is [indiscernible]. And we are looking into how to integrate more players like to sell into the future. So our customers will have the best of the 3 companies on that part and make it competitive. So without having to invest into the frequency, we already have a good MVNO in our part. So we are happy with that, and we are providing our subscribers with the quadruple play already. Alan Gallegos Lopez: The next question comes from Emilio Fuentes from GBM. Emilio Fuentes: My question is regarding your CapEx to sales guidance for the year around 24% to 27%. I was wondering if a higher range of -- if the higher range already incorporates potential supply chain disruptions, or could we expect a worst-case scenario where it could go above this 27%? Luis Zetter Zermeno: Well, as you have seen, normally, the first half of the year, we have lower CapEx and intensifies in the second half. That's why we have to be cautious on the 21.3% that appears in this first quarter. So that is very well aligned with the results of the year that we expect around 24% to 26% or 27%, 26%, but we are just being conservative in case of additional inflation comes, if the global situation does not improve in the short term. We want to be sure that we have the right spot for our CapEx. And also, we have some buffer in the investment phase. We don't need to spend CapEx at the same speed that we're doing in the past. So we have flexibility on leverage or ways to leverage that number and be sure that we don't let that out. Raymundo Pendones: And let me complement Luis, on that part. Yes, the 24% to 26% already integrates the increase that we might receive or might have prices on the worldwide cost of products that we have. It does include exchange rate, what we know so far, it does include the increase that we might have, and it does increase the reduction of CapEx per kilometers and production that we have in the past. So you can have that 24% and 26% with a clear idea that includes everything within the reasonable amount of knowledge that we might have as of April of this year. Emilio Fuentes: Really clear. And if I may, I answer -- ask a second question on the AI, you mentioned the benefits. Do you have any rough estimate of the potential size and timing of those benefits or maybe on basis points from the margin, like what can we expect from these programs you're implementing? Enrique Robles: Yes. What you can expect, I mean, on and it's good. I don't believe that everybody knows and can check the amount of what is going to happen with AI in the next 5 years or 10 years from that, but talking about the present, what we're implementing is operational efficiency, and that aim to bring the margin of Megacable to better levels to what we have right now, even though we have the highest margin in the industry. Remember that, in the last quarters that passed by, we've been having a lot of pressure into labor as all the industry on that part plus all the maintenance and support that we need from all the CapEx that we wrote in the past. And even though that we've been managed to keep our margin and increasing margin as penetration of expansion will come into the future, and AI and efficiency will come on the organic markets, our operating margin will continue to increase in the years to come. Okay? Luis, do you want to complement? Luis Zetter Zermeno: No, that's okay. Alan Gallegos Lopez: The next question comes from Ernesto Gonzalez from Morgan Stanley. Ernesto Gonzalez: It's two. The first one is -- in the past, you had mentioned that if some of your competitors don't raise prices, you could face a more challenging outlook or ability to increase prices going forward. So I wanted to get your thoughts on this. And the second question is on with all the rumors of M&A in Mexico, potentially a competitor of yours acquiring AT&T operations. Does that change your outlook for fixed consolidation in Mexico? Raymundo Pendones: As I said before, we have the lowest ARPU in the industry. So we still have some room to increase prices according to markets, according to packages that our subscriber has into that part and not raising the prices might not good to say, but it hurts the competition more than us. There is one competitor that doesn't increase prices, which is Telmex, that's the one that's been having that, even though it has higher, higher packages. The one that they commercialize stay at the same price with lower speeds. What we've been doing is increasing our speed to those subscribers significantly, we have 200 megabits on the single package, which is broadband and Telephony. And that one will allow us to have a better price in that part than what we have with the competition. So we will continue to increase prices at the rate that we have in the past, bad to say, but it's not around the 5% per year. Normally, we increased 2% to 2.5% prices. We are more aiming to growing the EBITDA and the revenue year-over-year than just to increase prices. But I believe on a defensive move, we are the best to continue to grow because of our market price and structure that we have. The other one was the question regarding the outlook of consolidation. Enrique, I don't know if you want to say something, it is related to the AT&T on the wireless on that part. And if that is going to affect how we see everything in our position. Enrique Robles: Really, I don't really want to make any -- a lot of comments about that. Obviously, the only consolidation that is in the horizon is the AT&T decision to leave the country. They will leave the country. We don't know who is going to, at the end, keep that operation. As we saw in the past also that Telefonica finally sold its operation to a newcomer, a new player in the country. And well, we don't see a lot of consolidation in the horizon, not at this moment, other than the AT&T and what happened about a month ago with Telefonica. Raymundo Pendones: I'd like to add also regarding the market. Market has been increasing the penetration of broadband on that part. We still believe there is room to growth in Mexico. Every time that passes by, it's dry, we all know about that, because of the levels of penetration. But it's good to say for everybody that out of the penetration of the homes when you see at our industry and you look at 4 players because I don't believe we're 5, we're 4. Satellite is not part of our market. It doesn't compete significantly in our market. It does sell or 4G or 5G more than satellite, even though we respect that. We have 4 companies, but we don't have the same footprints. There is one that has the largest footprint. So there is a big percentage of comps in Mexico that only has one player, some percentage that has two, some three and very few that has four. So in those markets where there is only one, we have room to grow some markets where it's two with a lower and legacy technology compared to what we have. We have the ability to grow. So for Megacable, still, we have room into the market to grow too. Regardless whether consolidation of not, we are very focused into growing what we know how to do best. I wanted to complement that, Ernesto. Alan Gallegos Lopez: And we have a follow-up from Marcelo Santos from JPMorgan. Marcelo Santos: My question would be regarding the mobile operation that you have. Do you perceive important improvements in churn when you sell that mobile bundle together with your fixed line operation? Just wanted to get a feeling of how helpful that is to your overall operation. Raymundo Pendones: Well, remember that we have 740,000 shops out of the 5.9 million so far. What we know is that churn on the mobile comes from the promotions that we might be aggressive more than the people leaving. And yes, we have seen that those subscribers has slightly better churn than the ones that don't have the quadruple play. Marcelo Santos: Okay. So it's a slight improvement that you put in so far on this bundled plan. Raymundo Pendones: At the end, Marcelo, economics get a lot into the markets where we grow in that part. And even so when they don't have money for the fixed, they don't have money for the mobile on that part, and they go to a prepaid. Remember that we sell postpaid. But the packages that we have cover the majority of the market. And that's how we've been so successful in the last quarter. I believe it's going to increase. Mobile is going to be a terrific year for us. And those subscribers will help us to keep or reduce the churn that we have right. Remember that we also have into the churn, the content division that we have, the video content, but is not only focused our aim to the traditional video live channels and offline channels, but also to the apps, and we have a really, really good offer to the apps. And that one, we expect also to help us to keep and reduce the churn of the subscribers that has the triple play with us, not only the quadruple play. Marcelo Santos: Okay. Okay. So same idea bundling in. People have more difficulties to leave. Raymundo Pendones: Yes. That one is tough because we are not successful in keeping live traditional TV as well as the whole industry, but we've been very successful in providing apps to our subscribers. So content at the end will help us if we are continuing to be smart in how to market those apps and stream it to our subscribers. Alan Gallegos Lopez: The next question comes from Alejandro Azar from GBM. Alejandro Azar Wabi: A lot of questions on consolidation, and this is the last one, probably. In the case that consolidations were to happen in the fixed market, how do you think about the competitive position of the third smaller player that is left out? Enrique Robles: You mean what happened if one of our competitors acquirers AT&T or? Raymundo Pendones: No, no. Alejandro Azar Wabi: No. I mean. Raymundo Pendones: Third is smaller. Alejandro Azar Wabi: I mean in the case that either total play with us or with Televisa, what do you think happens with the other player? Raymundo Pendones: Okay. When you say -- yes, yes, I kept thinking about the third smaller player. There are different measures. Enrique Robles: The way I see it is that any consolidation will benefit the whole market, everyone. Raymundo Pendones: Everyone is going to be benefited from that. Enrique Robles: Not only the two that consolidate, but everyone. Alan Gallegos Lopez: Now we're going to pass some questions from the platform. We have the first one from [indiscernible]. Please could you share the average penetration rate for the expansion regions older than 12 months? Raymundo Pendones: Thank you. Yes, the penetration that we have on the expansion of territories is around 14% to 15%, 16%. We expect to reach above the 20%. Enrique Robles: It is very variable because it depends on the seniority of the areas. I mean the areas that we activated or we started to commercialize the service 3 years ago, the penetration there is above 20%, 25%, yes. That's why -- but on the average, since we've been adding new areas, the average is around 14%. Raymundo Pendones: That's why we aim to have above 20% penetration as long as those neighborhoods and areas continue to mature. Alan Gallegos Lopez: The next question comes from -- also from [indiscernible]. You mentioned that your strong balance sheet offers you flexibility to pursue investment opportunities. Are you targeting any specific opportunities at the moment? Raymundo Pendones: No. We're targeting to improve still sequentially our revenues, EBITDA and CapEx of revenue and free cash flow that looks really, really good for 2026 and 2020 and above. Enrique Robles: But that doesn't mean if the opportunities, any opportunities arise, we will look at them. That's what we mean is that any arises, we're up. Alan Gallegos Lopez: And now we have a question from Marco Battaglia from Temujin Fund Management. Can you quantify how much margin improvement you expect this year? Luis Zetter Zermeno: Yes. We have been mentioning that as the expansion territories improve on the margin, it will impact the overall margin for the company. And the organic territories stay with the same margin as they were before. So we basically are expecting 0.5 point improvement on the margins for 2026, and also for maybe a little bit higher for next year. Alan Gallegos Lopez: Okay? And we have a final question. What adaptations have you made to your expansion strategy as you have progressed in terms of regions, target customers and pricing? Raymundo Pendones: Well, the adaptations that we have is we have special offers over in the expansion of territories. We have a special motivation to the sales force and different channels that we have right now. We're adapting that the segment that we're adapting more is corporate because corporate has a stronger, stronger competition in the expansion territory, and that's why we have a growth at the same speed that we have in the massive market. That's where we create new products, low-end products for the enterprise SMBs that includes cloud and collaboration. But in the massive market, our strategy continues to be the same. The best speed 200 megabits, better than the competition, with aggressive price entry that increases into the futures and symmetry into the broadband that we have there. That's our strategy. Alan Gallegos Lopez: Okay. We have no more questions in the queue. So I pass the line to Mr. Enrique Yamuni for final remarks. Enrique Robles: Thank you, Esau. As always, it is a pleasure to discuss our results with you. Please contact our Investor Relations department if you have any more questions or concerns regarding the company. And please have a wonderful day and weekend, very, very nice weekend. Thank you. Luis Zetter Zermeno: Thank you all. Bye.
Fredrik Ruben: Right. It's 9:00. Good morning, and welcome to this earnings call where we will cover the first quarter in 2026, summarizing our business in January, February and March. I'm Fredrik Ruben. I am the CEO of Dynavox Group. Linda Tybring: And I'm Linda Tybring. I'm the CFO of Dynavox Group and will cover the financials. Fredrik Ruben: All right. And before -- for some of those of you who have participated in this call before, you might be familiar with, but we'll start with a quick recap about what Dynavox Group does. And then we will summarize the main takeaways from the quarter. We will then dive deeper into the financials, and thereafter, there will be a Q&A session. And you can submit your questions during the Q&A session in the function here in Teams or you can ask them live by raising your hand in Teams and of course and of course unmute yourself, when we will invite you to speak. And of course, you're always welcome to offline questions sent by e-mail to the above e-mail, which is Linda's, linda.tybring@dynavoxgroup.com. So a brief overview of Dynavox Group. First and foremost, it's important to reiterate our mission and our vision, which I know is very dear not only to our now over 1,000 colleagues around the world, but also to our ecosystems of partners and investors. And our vision is a world where everyone can communicate, and we will contribute to this via focusing on our mission, which reads to empower people with disabilities to do what they once did or never thought possible. And this also summarizes 2 of our main user stories. The first one, the do what you once did, that may refer to a person who led a normal life until a diagnosis such as ALS, which rendered her then unable to control the body or communicate like before. The other one, the never thought possible can refer to a child with a condition such as autism or cerebral palsy, where thanks to our solution, she can do much more than the world around him or her ever thought possible. On the picture here, you have Linnea. She's a 12-year-old girl from Gothenburg here in Sweden, and she was diagnosed with cerebral palsy at early age, and she's a great example of this. And Linnea presented at the Women in Tech Conference here in Stockholm earlier this week together with our colleague, Griet, that you see on the picture. And thanks to our solution, she was able to fulfill one of her dreams to give a lecture about assistive communication in front of thousands of people, and Linnea has been a user since she was about 2 years old. The market that we service is hugely underserved. Some 50 million people have a condition so grave, they simply cannot communicate unless they have a solution like ours. And every year, some 2 million people are being diagnosed, and yet we estimate that only 2% of those are actually being helped and the rest literally remain silent. And the main reason for this spells lack of awareness, also among the professionals and the prescribers that are tasked to assist these users and combined with poor healthcare reimbursement systems. We operate this company on a global footprint. Today, almost 3/4 of our business stems out of the U.S., largely because of a reasonably well-functioning funding system that was established some 20, 30 years ago. And our comprehensive solutions are sold in more than 65 markets around the world, which 12 are markets where we sell directly, while the others are serviced by a network of some 100 reseller partners. Our staff is distributed in a similar way as our revenue, meaning some 50% of our staff are based in North America with our U.S. headquarters in Pittsburgh in Pennsylvania. And then our second largest office is our headquarters here in Stockholm, but we also have branch offices in several European countries as well as in Suzhou in China, in Adelaide in Australia. And as of today, as I mentioned, we're just over 1,000 employees in total in the group. We provide a comprehensive portfolio of solutions that ranges from the content and the language system, such as the world's leading library of communication symbols, they're called PCS, and a leading solution of off-the-shelf custom-made synthetic voices of the highest quality and a large diversity, of course, of languages, ages, ethnicities and so forth. We also make highly sophisticated communication software that's tailored to the type of user, and that can, of course, vary greatly based on the needs. Three, we develop and design devices with cutting-edge technology, and they're typically medically certified and very durable, and that includes communication aids that are controlled via eye tracking and accessories such as the Rehadapt mounting systems. If we move on, we have a services portfolio to help our users through the complexity of obtaining and getting funding or reimbursement for their solutions. And then last but not least, we're there to help our users, the therapists, the caregivers through a global system of support resources. And we operate this model globally. And it's important to note that each piece on this picture is critically important and also a significant differentiator for us, making us absolutely unique. Our go-to-market model is predominantly as prescribed aids. So that means some 90% of our revenue comes from public or private insurance providers. And that also means that we have solid paying customers and have always been resilient towards changes in the overall economic climate. But now we will go back and focusing on the main topic of today, namely our earnings report for the first quarter in 2026. If I just look at the highlights, we delivered a solid start to the year with continued revenue growth in the quarter. The growth compared to the same quarter previous year sums up to 15% after adjusting for currency effects. North America, our largest market, was hit, however, by unusually severe winter weather in January and in February. And that led to closures among schools and institutions. And this, of course, impacted our ability to meet with customers and deliver products. These effects are, however, expected to normalize and the deferred business to be regained during the remainder of this year. The month of March isolated, for example, was back at historic growth levels in North America. Our business in markets outside of North America continued on the good trajectory from the previous quarters. The demand -- the underlying demand for our solutions remains high, and that's proving the solidity of our underlying business, and we see robust underlying growth across basically all markets where we operate. EBIT came in at SEK 57 million, and that's a 35% increase compared to the same quarter last year despite continued FX headwinds and, of course, the named weather impact in the U.S. Our Product and Solutions development hub, which was formed last year here in Stockholm is now fully operational. And then the global rollout of our new ERP system is now almost concluded. And now with also our Swedish parent company successfully transitioned earlier this month here in April, leaving only a few small local entities remaining. On 1st of April, we also completed the acquisition of our Italian reselling partner, SR Labs Healthcare, and we welcome new colleagues to the team. That's very exciting. And then last but not least, we announced a couple of changes to the executive management team. On March 1, we welcome Marie-Josée Leblond or MJ, as we refer to her as the new Chief Digitalization and Information Officer. And also, we welcome Luis Mustafa, who joined as our new Chief Operating Officer. He's replacing Tony Pavlik, who is about to enter retirement. We also announced that Linda here will leave her position as our CFO, but will remain in full capacity until the end of January, next year, 2027, hopefully boding for a smooth and structured transition after we have recruited her replacement. And now I actually do hand over to Linda, who indeed is still here and on top of things to take us deeper into the financials. Linda? Linda Tybring: Thank you, Fredrik. Yes, still live and kicking. Let's take a closer look at the Q1. Revenue for the first quarter, which is typically our seasonally weakest quarter, came in at SEK 588 million, a 15% year-on-year growth after adjusting for currency effects. Recent acquisition contributed with 3% and the organic growth was 11%. Currency fluctuations had a 14% negative impact on revenue. Sales continued to grow across all markets and the gross margin ended up at 69% (sic) [ 67% ], a decrease of 0.9 percentage points. Gross margin benefit from favorable currency effect, but was offset by higher component costs and higher cost base following increased staffing to support the continued growth journey. Fredrik Ruben: I'll make one correction. The gross margin was 67%. Linda Tybring: 67%? Okay. Did I say something wrong? Fredrik Ruben: Yes. Linda Tybring: Okay. Sorry about that. Before we move on, I would like to take a little bit deeper dive into our typically seasonality patterns. Over the past couple of years, we have seen a recurring pattern over the quarters that is slightly connected to our access to public and private reimbursement system. We maintain some 675 contracts with private and public payers. And Fredrik mentioned before, 90% of our revenue comes out of that. In January, many payers, specifically in U.S., are resetting their insurances, which means that the funding process slowed down in the beginning of the year, which impacts our revenue in the first quarter. The pace is then picking up, and we normally see an acceleration over the following quarter that end with the sprint in Q4, when the fiscal year closes. Hence, the fourth quarter is typically our strongest. As you know, there is no rules without exception. And as you can see in the chart, we had an exceptionally strong Q1 last year. This was due to good business momentum and the successful product launch that we did in Q3 2024. And we then allow existing orders to be replaced. Consequently, deliver and revenue was pushed forward to the following quarter. This is a pattern that we recognize and have seen before in conjunction when we do product launches. So to sum up, we have a clear seasonality pattern impacting our revenue distribution. This is also why our financial growth target is set to annual average growth of 20%. We clearly see variations over the quarters. So moving back to the Q1. EBIT for the quarter was SEK 57 million, and the EBIT margin was 9.8%, which is a growth of 56% FX adjusted. Our OpEx increased by 7% organically. The OpEx increase relates mainly to continued investments in sales and marketing staff, but also within our IT organization. During the quarter, we continued investing in system and tools, including a new ERP platform to strengthen scalability. These nonrecurring investments totaled to SEK 9 million, a decrease of SEK 5 million versus last year. Acquisition contributed with SEK 14 million increase of our operating expenses versus prior year, and we saw a decline in long-term incentive cost of SEK 5 million year-on-year. Costs for research and development after capitalization and amortization decreased by SEK 24 million compared to the same quarter last year, mainly driven by higher costs in prior year related to organizational restructuring, higher capitalization related to launch of new products and lower amortization contributed further. In addition, the currency effects both from lowering exchange rates versus prior year and together with transactional timing effect had a negative impact of SEK 7 million on our EBIT for the period. If we look at the basic earnings per share, it totaled to SEK 0.33 (sic) [ SEK 0.36 ] per share to compared with last year SEK 0.23 per share, which is close to 60% improvement. For the quarter, cash flow after continuous investment was positive with SEK 56 million, more than doubled. It's encouraging to see that our work on improving processes and operations have had positive effects on our cash flow compared to last year. Cash at hand by the end of the quarter was SEK 243 million. Net debt was SEK 865 million. The total unused credit facility at the end of the quarter was SEK 300 million. And the net debt over last 12 months EBITDA was 1.7x. Fredrik? Fredrik Ruben: Yes. Linda Tybring: Back to you. Fredrik Ruben: Thank you, Linda. Okay. So before we open up for questions, I'd like to reiterate some of the main takeaways and bring further nuance to our performance and outlook. So we continue on our strong growth trajectory, a trend that started early spring of 2022, so that's almost 4 years ago. We grew revenue by 15% adjusting for currency and despite the North America being temporarily impacted by severe weather in January and February. And we see that sales continue to grow across all our markets. Our profitability and cash flow improved notably, reflecting strong operating leverage as investments-related to cost -- as investment-related costs continue to taper off. We also note that the currency headwinds have decreased, as we enter now into Q2 with the SEK versus the U.S. dollar fluctuations seemingly having stabilized. We delivered a very strong cash flow, further underscoring the improved operational efficiency, which we have put a lot of energy into achieving. We continue to expand our direct market presence by closing the acquisition of our Italian reseller partner. Our overall exposure to import tariffs to the U.S. remains limited since our products are classified as medical certified assisted devices, and that exempts them from tariffs under the Nairobi Protocol. We continue to monitor, obviously, all macroeconomic and policy changes development closely. And while currency effects and the broader macro environment, I mean, can create volatility quarter-to-quarter, Dynavox Group is well positioned to continue delivering long-term sustainable growth in a severely underpenetrated market while, of course, advancing our mission to provide life-changing solutions to those who need them the most. And we reiterate our current financial targets, which were communicated in February of 2024 with a time horizon of 3 to 4 years. And the first target reads to, on average, grow revenue by 20% per year adjusted for currency effect, including obviously then contributions from acquisitions. And in local currencies, the first quarter growth was 15%, which means we continue on the growth trajectory. And as Linda talked about earlier, we have clear seasonality variations over the years. We -- the market that we serve remains hugely underserved, but also quite immature. And with the example of growth levers such as sales teams expansion, adding direct markets and then, of course, operational excellence, we continue to build on our growth journey. The second target reads to deliver an annual EBIT margin that reaches and exceeds 15%. So we feel that we have proven to build strong growth within -- with incremental improvements in profitability this quarter too. We need to continue to invest in future growth with improvements in scale, but the recipe for achieving this is rather simple, continued revenue growth, high and stable gross margins and then operating expenses that increase at a lower pace than the revenue growth. And as a consequence, we see good opportunity to further leverage how revenue growth translates to reaching and exceeding a full year EBIT of 15%. And then lastly, we expressed our dividend policy, and we have an attractive cash flow profile. And given the growth opportunity, we need to maintain a capital structure that enables strategic flexibility to pursue growth investments and also, of course, acquisitions. But it's still expected to, over time, generate excess cash. And our policy is, therefore, to distribute at least 40% of available net profits to the shareholders via either dividends, share purchases or similar programs and when so allows and when we deem it's the right prioritization. And as you could see for the Annual General Shareholders Meeting that is happening on May 8 this year, the Board of Directors earlier proposed that a cash dividend of SEK 0.5 per share shall be distributed for the shareholders. All right. With that said, we are now inviting our Corporate Communications Director, Elisabeth Manzi, who will help to moderate and also enable us to take questions from the audience. Hi, Elisabeth. Elisabeth Manzi: Hello. Thank you very much. [Operator Instructions] So we do have people -- a couple of people who have raised their hands, and I will then start with the first one, who is Daniel Djurberg. Daniel Djurberg: Yes, I have a question on the growth. And importantly, you said that March growth level was back at historical levels in the U.S. I was wondering, is it possible to quantify what is the historical growth level in the U.S. and/or possibly also quantify the negative effect from the winter storms in terms of deferred revenues or the impact on the organic growth level is seen in the U.S., it would be super helpful. Fredrik Ruben: I understand that. I can't quantify it precisely. But what I can say, if you look at historic growth levels, I mean, we are leaving a period where we've had -- we've been actually quite well above our FX-adjusted target of 20%. And we saw obviously that in total, the revenue growth, FX adjusted for the quarter was, how should I say, only 15%. And that is a consequence of weak order growth in January and February and then to some degree, partially mitigated by a strong March, but not all the way back to kind of where we think that the business should operate at. But I don't have specific numbers in dollars or SEK to help you quantify them, I'm afraid. Daniel Djurberg: Okay. And would it be fair to assume that you have deferred revenues coming from Q1 into Q2 then? Or... Fredrik Ruben: Yes. Our assumption is that none of the lost revenue, if you will, that didn't happen due to weather impact, et cetera, are actually lost. They will happen later on in the year, whether it happens in Q2 or further down in the year, I cannot specify that because there are -- these are quite slow and I don't know, call it, bureaucratic systems. And of course, if you miss the first date, it might take some time before you get a second chance. But typically, we do not see that weather or these kinds of short-term impacts have lasting impact. So there will be a rebound one way or the other. Daniel Djurberg: Perfect. And if I may ask you also on Europe, showing off 40% organic growth. Can you comment a little bit on the variation seen in various segments like Nordics, Germany, France, Italy, et cetera, and if needed to secure a little bit higher growth also in Europe? Fredrik Ruben: I think if you take Europe as an example, it's actually quite difficult to quantify the difference between organic and acquired growth because of the fact that when we acquire companies, we acquire our own resellers. It's not like we buy a completely new business unit where there's new revenue. So in totality, if you adjust for FX in Europe, the underlying growth was 32%. But of course, part of that was us acquiring a reseller, but it's the same products being sold in the market by the same people. It just happens to be that they are now employees of ours and not owned by a third party. So -- but if I would kind of answer your question on where do we see growth, there is still a fair amount of -- these markets differs from quarter-to-quarter and market-to-market. The market that we currently feel maybe the most excited about is for sure, Germany, where we are going direct since -- it's September 1, right, Linda? Linda Tybring: Yes. Fredrik Ruben: Yes. So that's a market where we believe there is a lot of potential in many, many ways. And that's also a market that did perform well. Daniel Djurberg: Fantastic. And I will just finish off with the ERP, it was SEK 9 million in the quarter. Should we expect a similar level in Q2? Or will it be even a bit lower than this SEK 9 million? And will Q2 be the last quarter with any highlighted negative impact? Fredrik Ruben: It's very much within that... Linda Tybring: Yes. It will fall off during Q2. And our hope is that the majority of our existing entities will be over in the coming months. Daniel Djurberg: Congrats to a strong ERP implementation then. Linda Tybring: Thank you. It's a fantastic work by all the members in the team, I would say. It's a true team effort. Elisabeth Manzi: So thank you very much, Daniel. And I also have a question here from Mikael Laseen, who's asking, "Gross margin was 67% in Q1 versus around 69% in H2 2025. Could you break down the key drivers behind the decline and comment on how we should think about the gross margin ahead?" Linda Tybring: A couple of things. Comparing with H2, then you have a higher revenue as part of that, which means some of the set cost is still the same going into Q1. So we're going into a new quarter. We also added more people to be able to handle the growth. I think the gross margin will continue to be stable. Of course, we also -- we wrote that in the report, seeing some challenges when it comes to components and freight. But we should remember, it's a small part of our gross margin considering that it's close to, I mean, 67% and 78% (sic) [ 68% ]. Fredrik Ruben: I think we sometimes try to help that what's the portion of fixed cost as part of our COGS? Linda Tybring: About 20% is fixed cost. Fredrik Ruben: And that should scale quite well, as revenue go up and then, of course, the remaining is related to how many products we ship, et cetera. Linda Tybring: Yes. Elisabeth Manzi: Good. Thank you. And then we have someone else who would like to ask a question. So I do invite Jakob Lembke. Jakob Lembke: I have a few questions. I'll start maybe on North America. If you can elaborate on the weakness you saw in January and February, let's say, how much sales declined in those months? Fredrik Ruben: And this is the same response as to Daniel then. No, we don't quantify exactly the weakness, and it's not -- it's actually a little bit difficult to quantify what was the consequence of that, et cetera. But we can just summarize that in totality of 2 highly impacted months of January and February and then a normal month in March didn't bring us all on top of the bar. At the same time, we don't see any changes in reimbursement. We don't see any changes in demand. So we believe that the effects are more or less temporary and exactly how temporary something is. In a different setting earlier this morning, we also quantified the fact that if you think about our North American business, we deliver every day. We ship devices almost -- I mean, up to USD 1 million per day. And of course, if you have a day when roads and streets and institutions are closed, we will not ship anything that day. The question is how much can we kind of make up for when the business is back to normal, and that is difficult to quantify. But that's how vague I can be on that, Jakob. Jakob Lembke: Okay. Then a follow-up on that, I guess, is just the growth you're seeing now in North America, is that in line with your sort of targets or above your target sort of implying that catch-up effect? And also if you're seeing the same trends into March -- or into April from March? Fredrik Ruben: I think we do a pass on commenting on the current quarter, but I just want to reiterate the fact that we believe that this is a business that should deliver an FX adjusted or in local currencies growth of 20%. U.S. is a market where we do not have resellers to acquire, et cetera. So it is kind of same-store sales also going forward. We believe in that. I think we can definitely say that 2025 was a very strong year, and we obviously then delivered way above the 20% FX-adjusted growth. We still -- we reiterate our target, and we believe in it. Jakob Lembke: Okay. And then another one, just -- I don't know, can you see that -- let's say, that in California, the growth is exactly in line with the targets or normal and that in maybe Massachusetts, it's way down. Do you see those sort of variations? Fredrik Ruben: Now you're putting us on the spot here, as I actually don't have that. What we did learn was that the winter weather, that was unusually in that, was affecting 50% of the U.S. states. You had sub-zero Celsius degrees in Texas and some of our biggest states. So it was a nationwide, but I don't have a number on top of my head whether California was kind of untouched. I think we need to also understand that our operation, which is based out of Pennsylvania, that was probably in one of the epicenters of the storm. So it's not necessarily just on the client side, it's also our capabilities. Jakob Lembke: Okay. And maybe one more is that you seem quite confident that you will regain all of these sales, but on the other hand, you don't really know sort of how much you have been impacted. So just maybe some more comments on that you are confident in regaining this and how you can be that? Maybe, I don't know, can you see internally that you have a larger backlog now or more processes ongoing or something like that? Fredrik Ruben: Sure. One of the reasons why we can't tell whether a specific order was not happening because of weather because there is no such kind of check in the box in our CRM systems, et cetera. So we don't know whether it was that or something else. What we can say is that nothing has changed. The reimbursement rules and laws are the same, reimbursement levels are the same. The underpenetrated market remains as underpenetrated now, as it was a year ago, et cetera. So none of the fundamental fact -- and there's no new competitor or other type of macroeconomic impact that affects us. So all things alike, we should be able to deliver on the target. And we do indeed remain confident. But I also want to stress the fact that we express our targets on a full year basis. There will be fluctuations between quarters and months, et cetera, and that's part of the business. And we also have then the more seasonality patterns that Linda talked about. So we look at this business on a full year basis, and hence, we do reiterate the target. Jakob Lembke: Okay. Maybe just a final question... Linda Tybring: Well, final? Jakob Lembke: Yes, sorry. Just on the R&D expense, both the sort of gross expense looks lower and then there's also higher capitalization. So just the question is, what is behind that and if that is representative going forward? Linda Tybring: I mean mainly the big discrepancy is that we don't have the restructuring costs that we had last year, the same period. But then we also launched more products, which means that you have a higher capitalization. We launched the product in beginning of April. And then we are also rolling out there some -- not end of life, but from an amortization is actually lower amortization in the quarter as well. Fredrik Ruben: I think you can read between the lines that the new R&D organization that we have here in Stockholm is not just kind of fully staffed, they're obviously also delivering and hence, there is more innovation coming out of that. And that's obviously quite reassuring. Linda Tybring: Very good point. Elisabeth Manzi: Thank you very much, Jakob. And I think this was also the answer to a question that Mikael Laseen had on the capitalization of R&D. So I hope you also got that answer, Mikael. But we do have some more people that would like to ask questions. So I invite [indiscernible] to join. Unknown Analyst: Just one short one on sales. I know it's repeating, but how does like the paying pattern look like from customers? I mean, if sales accelerated in March, shouldn't trade receivables be up more? Linda Tybring: Yes, absolutely. But you had a strong Q4 as well, and it takes a little bit longer to see that. And so we've also received payments during the quarter for our trade receivables, since Q4 is higher in that perspective. Unknown Analyst: Got you. And then you touched a little bit on the R&D being down, but I also noticed the selling and admin expenses being up quite a bit in percent of sales from previous quarters, comparing quarter-over-quarter and year-over-year. What's the reason behind that? And yes, some color on that would be really helpful. Linda Tybring: Yes. A couple of things. When it comes -- you have to remember going into a new year, you kind of enter into -- with the same OpEx level as you had in Q4, which means that if you have lower sales, the ratio will then go up. But of course, we continue to invest in sales and marketing to be able to continue to grow. That's one of our key. And we have also invested more in our IT organization. Unknown Analyst: Can you say anything about how big part of selling expenses and admin expenses? They are fixed or variable? Linda Tybring: Majority of our OpEx is salaries. I would say almost 80% of our OpEx is salaries. Fredrik Ruben: And maybe to add on that, commissions is obviously, specifically, in North America. But then you need to kind of take it down to just the field reps, et cetera. We typically say that commission as a part of salary is in the range of 5%... Linda Tybring: Yes, 4% or 5%. Unknown Analyst: But then if you sold less in Q1, shouldn't selling expenses have been down a little bit then? Fredrik Ruben: But we have more people. Linda Tybring: But we have more people. Elisabeth Manzi: Thank you, Philip. And then I would like to also invite [ Nicola Kalinowski ], who is on the line. Unknown Analyst: Yes, just a few questions of a clarifying nature from my end. Would you say that the U.S. -- or the bad weather in the U.S. in Q1 has also caused a delay in the recruitment or, say, onboarding of new U.S. solutions consultants? Fredrik Ruben: What a good question... Linda Tybring: Yes, that's a good question. I would say no. It hasn't. Unknown Analyst: Yes. Fair enough. Fredrik Ruben: No, you got feeling, I agree. We have no chart to prove that, but that's... Linda Tybring: You have to remember a lot of our -- I mean, majority of our salespeople are remote in that perspective. Fredrik Ruben: Yes, true. So they don't necessarily have to come in physically for interviews, et cetera. It's a remote machine to a large degree, already from the start. Unknown Analyst: Yes. That sounds very good. And just -- this is maybe a more difficult question, but has there been any notable direct or indirect impacts from the situation in the Middle East in your case at all? Is there anything we should keep in mind going forward that you think, just so we don't miss anything? Fredrik Ruben: I can look at kind of more of a macro. I think the uncertainty that we are looking at, that affects us all. We are, of course, waking up every morning to new news, et cetera, and then you start to kind of -- how will this impact us. As our infrastructure look like, the markets that we are exposed to, but of course, cost base. I think Linda covered a little bit on freight costs and inflation components that might have some impact. I don't know if you want to quantify that more, but it's nothing... Linda Tybring: It's not material... Fredrik Ruben: Major material, yes. Unknown Analyst: Yes. So there's nothing direct to keep in mind, at least? Fredrik Ruben: No. And I think you should also -- if you -- just from a very practical perspective, our products are typically produced in Southeast Asia. Taiwan is a big market. They are shipped predominantly by boat to the U.S. West Coast. Hence, they don't go through any straits. I mean, they pass Hawaii. That's how exciting that trip is. So there is no kind of physical impact on our ability to produce and receive products. But of course, it's likely so that the part of our COGS that is represented by freight costs will, to some degree, go up. Elisabeth Manzi: Thank you so much, Nicola. and then we have a question from Erik Larson. He's asking, "How do you think about the balance sheet here, acquisitions versus giving back to shareholders?" Linda Tybring: I mean we are -- the Board is proposing to AGM, which is in 2 weeks that we are doing a dividend of... Fredrik Ruben: SEK 0.5. Linda Tybring: SEK 0.5 per share. So we are definitely -- that's part of our dividend policy, and we have said that net available profit of 40% should be either paid back in dividend or share buybacks. Fredrik Ruben: And I think we can say, if you look at the cash flow in this quarter, for example, it's very strong. It pretty much more than doubles compared to the same period last year. We have what we feel is a totally acceptable debt leverage. We have additional credit and RCFs that we can use. But more importantly, the type of acquisitions that we're doing, they are small. We don't buy massive companies, which will affect us. It's largely these reseller acquisitions, and these are small companies, and that's a business which, a, has a very low risk in terms of acquisition. We know exactly how to do it, and it's -- we pay it more or less through our own cash flow, at least over quarters. So we feel quite confident in our ability to going forward, being able to share whatever is left or the excess cash with our shareholders in some clever way. Elisabeth Manzi: Good. And we also have another question on acquisitions from an anonymous user here. But the question is the acquisition of SR Labs Healthcare in Italy was completed shortly after the quarter. Given your stated strategy of increasing local presence to organically scale the business, are there other key European markets where you still rely on resellers and where we should expect similar direct acquisitions during the remainder of 2026? Fredrik Ruben: Good question... Linda Tybring: Good question. Fredrik Ruben: We're probably not going to open up our M&A playbook fully. With that said, I think it's also important to us that we feel that the big markets with well-functioning reimbursement systems are still very underpenetrated. So we have very little reason to go far away and kind of try to find new money elsewhere because most of our growth for a long foreseeable future will probably happen in the established markets. And then I think it's a function of GDP, population and the reimbursement system. And if you look at the markets where we currently operate, the Nordics, U.S., obviously, and Canada, adding now France, Italy and maybe most notably Germany, that's where we feel that there is ample opportunity to grow. So our stress levels to just for the sake of doing it, add more markets, is if there is a good opportunity, we will do it. Otherwise, we feel that we can keep ourselves busy and run both fast-growing and profitable company. Linda Tybring: And remember that when we acquired this company, it's important of the organic growth after acquired them. Fredrik Ruben: Correct. I think that's maybe one thing that should be deciphered from this report. When we acquire a company, like I mentioned, it's mainly just the difference between what we sold to that reseller and what then they sell out on the street in that specific market, that's actually what's gaining and it's quite small. Elisabeth Manzi: And I do believe the question was actually from Jessica at Redeye, who also has another question. You reiterate that the rules have not changed for financing. Furthermore, the weather affects the sales. What, if any, would indicate that there are more competitors taking market share? Fredrik Ruben: We don't feel that. I think if there is anything, I think, that the biggest competitor that we have is lack of awareness and then bureaucracy is probably a competitor, too. But we cannot say that there is any changes to the dynamic on the players of the market, and we don't see that there is any changes in market share or anything like that. So that's as good of an answer, Jessica, that I can give at this point. Elisabeth Manzi: And also a question from Jessica. Last year, you communicated every quarter that the demand was constant throughout the quarter. Am I understanding it right now that this was not the case in Q1 due to weather and other? Fredrik Ruben: Yes. Linda Tybring: Yes. Fredrik Ruben: 100% correct. With a small nuance, demand indicates that -- I think the demand is definitely -- it's the ability to turn demand into orders that was impacted. Elisabeth Manzi: Yes. And Mikael Laseen has another question. Could you elaborate on how you are leveraging AI across your offering, specifically to enhance speech generation, language, personalization and user experience and whether you also see opportunities to streamline clinical workflows and the reimbursement process? Fredrik Ruben: Sure. If I start with the product and et cetera, AI has been -- machine learning has been part of our DNA for decades. Obviously, we, in the same way -- specifically now with a partly brand-new organization on product and development here in Stockholm, we also see the magnificent impact of Claude Code and the likes to basically speed up the ability to increase quality, but also launch new features. In all honesty, though, I don't think that is the biggest impact on us. The biggest impact that we currently feel and see in -- with AI is more on the administrative functions, the reimbursement systems, which is -- it's a perfect example for how to operate AI. You have complex, high volumes of bureaucracy, et cetera, where, of course, up until now, we need to have human eyes and humans sitting in phone lines, reading 50,000 pages of fax every month. The advancement that we're doing on applying AI to that, I am genuinely excited and it's -- the engineer in me is quite excited. That being said, we can also apply it on how we operate more efficiently within the company, with a new ERP system, with a much more kind of data-driven platform. There's, of course, all kinds of operational improvements that we can do on anything from accounts receivable to financial reporting or data. Linda Tybring: Which we already see... Fredrik Ruben: Which we already see. Yes. So I would say that to summarize, AI within our products, well, that's what we do. We can just do it faster, but I think we have a high degree of -- we're quite mature and have a good understanding, whereas to me, at least the bigger impact is operating leverage on the internal processes, doing more with less. Elisabeth Manzi: Good. Thank you for that answer. Jakob Lembke has a follow-up question here also. When you say that growth has normalized, does that mean that we should expect you to grow in line with target in coming quarters or that you should go faster than your target to recover the lower growth in Q1? Fredrik Ruben: We believe that we will meet our financial targets on a full year basis, and that is 20% in local currencies. And if you start the quarter with 15%, that obviously means that there is -- there needs to be some sort of acceleration there. Elisabeth Manzi: Good. And let's see, there was actually another question here, and I think it might be also from Jessica. I asked about the demand during the full quarters. If the awareness increased day-to-day, which is totally reasonable in such an area of which you operate, then the demand for new sales would increase from any given time to any given time. Fredrik Ruben: Yes. I mean you're right, Jessica. I think what -- if you compare this quarter with last quarter, the underlying demand is obviously higher. We also have more people on the street to kind of educate the market, et cetera. Maybe I'm kind of a little bit stuck on the word demand because in my world, the demand is enormous. It's just our -- the market isn't really there to capture it. And that is unfortunately, to a large degree, our responsibility because this is not a market that kind of happens by itself. We have to be out there, educate, train and to some degree, handhold the prescribers of these products, at least for the first couple of times they work with the patient. But in absolute terms, the activity level, which is maybe a better term, is higher this quarter versus the past quarter. It -- just as you note, it's higher in March than it was in January. But this is not a pattern that is different this year. This is our kind of standard operating model. Elisabeth Manzi: And last curiosity question here relating to the AI also from Jessica. How effective is your clone within the organization? Does it actually help solve problems and support employees? Fredrik Ruben: So Jessica is referring to the fact that I have taken the leading flag of creating an AI version of myself that is available to every staff member. I think that we should read that as a conviction that AI has to happen, and I want everyone in our organization to fully embrace it. And the way for me to lead by example as the CEO is to make an AI clone of myself. I would doubt that a huge part of our current or future revenue or profitability growth is a consequence of that. But hopefully, indirectly, by having an organization where everybody feels that automating, digitalizing and applying AI to pretty much every piece of work in this company is not optional. It's something we have to do, and it's part of us being able to meet our targets. That's how I see it. But as of today, no, it's not a magnificent revenue nor profitability driver. Elisabeth Manzi: Very well. Fredrik Ruben: Yes. Elisabeth Manzi: I think that was all. Fredrik Ruben: Okay. Thank you. I love that there is so much questions. Glad that technology seem to be with us today. So now we're going back and delivering -- continue to deliver every day. The next time that we will meet in this fashion will be on the 22nd of July when we will present our quarters and our earnings -- or quarterly earnings for the second quarter of this year. Thank you very much. Linda Tybring: Thank you. Elisabeth Manzi: Thank you.
Operator: Thank you for standing by and welcome to Comfort Systems USA's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead. Julie Shaeff: Thanks, Latif. Good morning. Welcome to Comfort Systems USA's First Quarter 2026 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, Chief Executive Officer; Trent McKenna, President and Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks. Brian Lane: All right. Thanks, Julie. Good morning and thank you for joining our call today. We had a fantastic quarter and a strong start to 2026, driven by continued outstanding performance by our field teams. Our same-store revenue grew by 51% and quarterly gross margins hit a new all-time high. We earned $10.51 per share this quarter, more than double our strong first quarter in 2025. We also ended the quarter with record backlog of $12.5 billion, reflecting persistent demand, including strong demand from our tech customers. And we entered the second quarter of 2026 with total backlog that is $5 billion higher than it was 1 year ago. We also announced another increase to our quarterly dividend to $0.80 by adding $0.10 per share and we remain committed to consistently rewarding our shareholders while maintaining a strong balance sheet. Trent will discuss our business and outlook in a few minutes. But first, I will turn the call over to Bill to review our financial performance. Bill? William George: Thanks, Brian. So yes, we had a really great start to 2026. Our first quarter revenue was $2.9 billion, an increase of 56% compared to last year. Same-store revenue increased by 51% or $943 million. Revenue increased in both segments with an increase of 88% in our Electrical segment, while our Mechanical segment revenue increased by 47%. Both segments also continue to benefit from strong demand in the technology sector, although we will face higher comparables in the second half of 2026, we believe same-store revenue for the full year 2026 is likely to be higher than 2025 revenue by percentage growth in the mid- to high 20% range. Gross profit was $754 million for the first quarter of 2026, which is $351 million higher compared to a year ago. Our gross profit percentage grew to 26.3% this quarter compared to 22.0% for the first quarter of 2025. Gross profit in the quarter benefited from $43 million in favorable developments on late-stage projects, including change orders, especially in our Mechanical segment. Quarterly gross profit percentage in our Mechanical segment improved to 26.9% this year compared to 21.7% last year. Margins also moved up by almost 2 full percentage points in our Electrical segment to 24.9% as compared to 23% in the first quarter of 2025. We currently expect that gross profit margins will continue in the strong ranges that we have averaged over the past several quarters. SG&A expense for the quarter was $269 million compared to $195 million in the same quarter of 2025 as we grew people and rewarded our busy teams in markets across the nation. With the large jump in revenue, SG&A as a percentage of revenue was 9.4% this quarter compared to 10.6% in the prior year. Our operating income increased by 132% from $209 million in the first quarter of 2025 to $486 million for the first quarter of 2026. With improved gross profit margins and SG&A leverage, our operating income percentage increased sharply from 11.4% to 17.0%. Our quarter-to-date effective tax rate was 23.2% compared to 18.6% in 2025. Our prior year effective tax rate was lower due to interest we received on a prior year tax refund. We expect our full year effective tax rate to be around 23%. After considering all these factors, net income for the first quarter of 2026 was $370 million or $10.51 per share and that compares to net income for the first quarter of 2025 of $169 million or $4.75 per share. EBITDA increased by 116% to $524 million this quarter from $243 million in the first quarter of 2025. And our trailing 12-month EBITDA at the end of March 2026 is $1.74 billion. Our free cash flow was a positive $242 million in the first quarter. Capital expenditures were $147 million in the quarter compared to $22 million in 2025. CapEx was 5.1% of revenue compared to 1.2% in 2025. Expenditures included a large modular assembly building purchase in Texas and other investments in our modular capabilities. We plan similar capital investment for the remainder of the year and we estimate full year CapEx will be in the range of 5% of revenue. We're also happy to note that during March, we entered into a definitive agreement, subject mainly to regulatory approval to acquire another highly skilled electrical contractor. The transaction is expected to close in early May and we expect our new partner to initially contribute annualized revenues of roughly $250 million with EBITDA margins in the 8% to 10% range. And that's what I've got. Trent? Trent McKenna: Thanks, Bill. Brian has asked me to comment on our business operations and provide an assessment of our outlook. Backlog at the end of the first quarter was a record $12.5 billion, a same-store sequential increase of just over $500 million and a remarkable same-store year-over-year increase of $5.3 billion. First quarter bookings were especially strong in the technology sector. Our companies are collaborating more than ever to deliver superior mechanical and electrical solutions for our customers. Our revenue mix continues to be led by the industrial sector with that sector accounting for 75% of our volume in the quarter. Advanced technology dominated by data center work increased to 56% of our revenue and advanced technology remains the largest driver of pipeline and backlog. Institutional markets, including education, health care and government are also solid, comprising 17% of our revenue. The commercial sector now accounts for about 8% of revenue with most of our commercial sector revenue flowing through our service activities. Construction accounted for 90% of our revenue with projects for new buildings representing 75% and existing building construction 15%. Modular revenue was 17% of total revenue in the quarter. We are on track to have 4 million square feet of modular capacity by the end of 2026 and we are actively evaluating additional capacity investments. We include modular in new building construction and in our Mechanical segment. Service revenue was up 8% this year but with faster growth in construction, service is now 10% of total revenue. Service profitability was strong this quarter and service continues to be a growing and reliable source of profit and cash flow. Before we turn the call over for questions, I want to join Brian and Bill and the team here in Houston in thanking our over 23,000 employees for their hard work and dedication. Comfort Systems USA's success is a direct result of the people that serve our customers every single day. We're now going to turn this call back to Latif for questions. Thank you. Operator: [Operator Instructions] Our first question comes from the line of Adam Thalhimer of Thompson, Davis. Adam Thalhimer: Bill, the CapEx forecast for the rest of the year, can you give a little more color on what that is? And is that more geared towards projects you've already booked? Or are you getting ready to handle future orders? William George: So just as it's been for the last really couple of years, the answer to that question is, all of the above. So we did buy our biggest building ever in Houston in the first quarter. Once you buy them, you then have to spend tens of millions of dollars putting cranes and robots and various turn tables and paint booths and stuff like that into the building. One of the reasons we're buying these buildings now is because we've become a lot more automated and we put so much money into the building that it doesn't make sense to make those big investments into a building you don't own. We are looking at other building investments later in the year. We are -- this building was part of getting to the 4 million square feet. But of course, we definitely have the demand from our existing largest customers and from new customers that we're doing trial -- large -- very large trial orders with -- adds additional capacity if we become comfortable with that later in the year. Adam Thalhimer: Okay. And then the other one for me, Geographically, I'm curious where you are seeing more of the data center demand these days and how that matches up with your capabilities? William George: Well, I would say, by far, in a way, the biggest epicenter of demand is Texas, right? And it's really, really strong. But we're seeing data center -- I don't know that there is a strongest place. I mean there's certainly the Mid-Atlantic, Carolinas and Virginia continue to have a ton of activity. And then you've got stuff in places like Mississippi and I don't know, up in the Upper West, there's stuff going in. So I just kind of -- it's kind of amazing just the sheer sort of span of it. Brian Lane: And Adam, we can handle the geographies because we have a significant traveling workforce. So where they want to build them, we pretty much can accommodate them. Operator: Our next [Audio Gap] comes [Audio Gap] William Blair. Samuel Kusswurm: This is Sam Kusswurm, on for Tim. I want to dig a bit more into your new guidance here. Mid- to high 20% organic growth for the year would obviously be a great result. It does imply though a fair amount of growth moderation through the year. And I understand the comps get a bit harder here but you had great momentum in the first quarter and your backlog growth continues to outpace revenue growth. I guess given this, I think it would be helpful for us to understand a bit more how you came to the mid- to high 20% organic growth rate for the year here. William George: So at Comfort, the way that we come up with this is very organic. We get projections from our field and we know what our work that's committed is. We -- obviously, if we give guidance, it's at levels that we feel have very good reasons to believe are extremely achievable. Having said that, I'm not sure I agree with you that to get to something like the high 20s or something, you still got to be above 20% on average for the next 3 quarters. And I know you acknowledge this but we had some really big revenue quarter -- revenue quarters in the third and fourth quarter. And then the last thing I'll say is, revenue is never our goal. Our goal is profit. And so we just want to make sure that we take the amount of work we can do, that we get paid fairly for the unbelievable productive capacity that we have and the risk that we take is also well compensated. Samuel Kusswurm: Yes. That makes sense. That's helpful. Maybe another one on the data center topic here. But several states have begun talking about data center bans or even limiting access to power. I guess I'm wondering, for the regions you're more exposed to on the data center side, are there any pieces of legislation or proposals that you're actively tracking or closely following that could put some of your projects or backlog at risk? Trent McKenna: At this point, no. There's no states where we're involved that have proposals out that we've been tracking as they just don't impact our geography. And then the other thing I'd add to that is, any time a large project that has a big footprint is getting put into some sort of community or state and there's a lot of build occurring, there's always been pushback on these things historically. So this is something that we've been able to work around for years. It's not, I don't think, a high level of concern. Additionally, we have a very good nexus of work in the states that are not currently in any sort of discussions. In fact, they're encouraging the build-out in the states that we are primarily focused on right now with where our geographies are. So in the long term, something we'll continue to keep an eye on but it's not a pressing concern in the current environment. Brian Lane: And as we sit here today, the demand, the data centers still exceeds the supply. Operator: Our next question comes from the line of Sangita Jain of KeyBanc Capital Markets. Sangita Jain: Can I ask one on the electrical acquisition that you just mentioned, maybe the geography of that acquisition, the core end markets it participates in or any other information that you can help us with? William George: So this is a company that is right in our sweet spot. It's the kind of company that is incredibly strong in its market. Its market is in the West. I can't get too specific because, obviously, until we announce it, you don't need to know about it before the people there know about it. But it's in a core market that we love where we already have a mechanical. It's going to be a great acquisition. I hope that helps a little. Sangita Jain: Got it. And appreciate you giving us more details on how you came up with the guidance for this year. So as you are planning for your guidance for the remainder of the year, can you talk about where you found the biggest pinch points for growth? Is it labor? Is it procuring the equipment that you need or maybe something else? Any color would be helpful. William George: I mean it's always and forever for us, it's labor. That may change someday. But as of today, we have unbelievable workforce but they can only do so much work. And they basically tell us they take the work that they can confidently deliver for their customers. If you look at our same-store growth, it's unbelievable what these -- our workforces are accomplishing. -- the additional work they're able to take. Our headcount, if you look at the headcount in the first quarter of 2025, it's 3,000 or 4,000 people higher in the first quarter of 2026, depending whether you include or don't include sort of travelers and temporary workers that aren't always W-2 employees. That's a very, very big source of that increase. In addition, our materials and equipment as a percentage of our revenue is up by a couple of hundred basis points and that drives -- a lot of that increase in headcount last year happened from the first to the second quarter. So a lot of the, sort of the 23,000-plus level that were -- we were much closer to our current level of employment by the end of the second quarter last year than we were -- we had a great spring hiring season last year. So we're just comfortable mid- to high 20s. Obviously, if you average that, it's well above 20% on average a quarter for the next 3 quarters. In the real world, what will happen, we never know but we feel like we should give you guidance based on what we see and we're confident in. Operator: Our next question comes from the line of Josh Chan of UBS. Joshua Chan: Congrats on a really good quarter. I guess I was wondering if you can talk about the project pipeline. So basically, the future projects that could enter the backlog in the future. I guess I'm asking this because book-to-bill this quarter was like 1.2, which is pretty normal for Q1. But for the last 4 quarters, you have been running massively strong book-to-bill. So I was just wondering if there's cadence change or how you're thinking about the market? Brian Lane: Yes. So Josh, we -- the high-level answer is the pipelines are still very full, very strong, coast to coast. So there's no issue with the pipelines and availability of work. What I am -- what I -- and we're really happy to see is, we're maintaining our discipline in the selection of work we're taking. There is no sense overcommitting ourselves on work that we can't do properly. So I think the way we're approaching this is the way we've always approached it, is just to make sure we can deliver a good product and service to our customers. And that means staying within our lanes, the work we're taking is in our wheelhouse and it's evidenced in the margins we're delivering. So pipelines are good and we're really comfortable with the backlog we have. William George: In the 30 years I've been watching this industry, almost the whole time, whenever you saw deceleration or whenever you saw limitations until the last couple of years in sort of the ability to convert revenue or book work, it was a demand issue. Today, I think it's really important for people to understand that it's a supply issue. We -- there is plenty more work we could take if we could possibly do it. And so it's very, very hard to really internalize that paradigm after it never having been true in living memory. But today, when you see somebody like a prognosticator like McGraw-Hill or FMI revise downward their number for next year, especially if it's anything remotely close to the super cycle and in the kind of markets we're in, in the Mid-Atlantic and the Southeast and Texas and the really, really hot Rocky Mountain states, it is not that suddenly people don't want to build buildings. It's that only a certain amount of buildings can be built and that's what's going on. Joshua Chan: Yes. Great color. And then maybe my second question on CapEx. So I know that for the modular capacity, you've historically leased your buildings and you mentioned why you're purchasing them now. I guess like what does that mean in terms of what you think about the durability of the cycle now that you're willing to kind of actually put your own money into the buildings? And does that suggest you have much more confidence in the outlook? William George: Well, so for one thing, you know us well enough to know that we don't go invest in buildings without being very, very confident that we have customers for those buildings. And for many of these buildings, we are insisting as a condition of us committing our capacity that customers make multiyear commitments at volume levels. And that allows us to give them better pricing, right? We would have to demand higher pricing if we were certain that the capacity we were building wouldn't have a longer period to pay off. And it also tightens our relationship with these customers, right? We try to find out what they need and we try to help them every way we can to get what they need. Operator: Our next question comes from the line of Brian Brophy of Stifel. Brian Brophy: Congrats on another nice quarter here. I wanted to ask about the $43 million change order closeout benefit you mentioned in your opening comments. Just any more color on what drove that benefit this quarter? And I guess to the extent, was this more of kind of a onetime benefit from your perspective? Or is this more of a reflection of the environment we're in, the favorable T&Cs? And is there an opportunity to continue to get these kind of benefits more consistently moving forward? William George: So I'll talk about it numerically. And then if Trent wants to, he can talk -- he's the one who would be able to talk about sort of what's happening in the jobs. But essentially, the reason we called this out, put it in the MD&A, quantified it, is because there really were a few unique things that we don't believe are just business as usual. We had late-stage jobs where we received change orders. You may recall we had something like this 2 or 3 quarters ago where we collected some money on a job based on a negotiation that we didn't expect. Where we see something that -- like we get the question from shareholders like you, was there anything special in the quarter? We like to be able to answer that truthfully. So to answer it truthfully, we have to disclose it in this forum. And those really are not repeatable things. Things like that. Things like that can happen in the future. They have happened in the past but they don't happen every quarter. If you take that $43 million and you back it out, it's almost $1 a share and it takes our gross margin and it puts it sort of at something like 25.2%, which sequentially is much, much closer. It's still very high but it's much closer to what you would expect in the first quarter. And so we just felt like the disclosure would be -- we don't like to give information but we do, do that when we feel like we owe it to you guys. So that's -- hopefully, that helps. Trent McKenna: It was just a mixture of change orders from a descope and then also additionally some really favorable closeouts on some work that was new to the operating companies that were performing it. And they just recognized disproportionate gains at the end of the job because of their ability to deliver. It's really just a -- it's really a credit to the teams that were working so hard to make sure that they deliver for their customers. So that's what it boils down to. Brian Brophy: Yes. That's helpful. And then I guess just looking at electrical growth, it was about 80% organic this quarter. It's been around that range for a few quarters now. I realize some of that is price and productivity but obviously, headcount is a big part of that as well. I guess maybe just touch on where are you finding all these electricians? And just how sustainable do you think your ability to grow headcount at this pace is? Brian Lane: Well, I think we're finding them everywhere. But as we've said, there is some -- we're a really good place to work. We pay people well. We do a lot of training. We have a lot of work that attracts people. So the type of work we're getting is attracting a lot of electricians throughout the country. Can we keep the pace? We're going to try to. We're full-court press on recruiting and hiring. And so far, we've had good luck doing it. But we'll continue swinging away at it, Brian. Operator: Our next question comes from the line of Julio Romero of Sidoti & Company. Julio Romero: Bill, you mentioned earlier that Comfort's goal and focus is on the gross profit dollars and still the 26.3% gross margin percentage you put up this quarter, eye-popping, even backing out the $43 million change order, as you said, 25.2% is still very strong. Just asking about the sustainability of those gross margins on a core basis going forward. And then kind of related to that, as you take on these additional larger projects, are we seeing any change in the mix of activity versus cost pass-throughs that flow through the revenue line that might cause gyrations in the gross margin line on a percentage basis? William George: So the answer to the second one is no. Actually, we're seeing, if anything, more uniformity in the work that we're taking and more repeatability, which is one of the reasons that we're doing so well. We're able now to sort of -- we have a much stronger ability to pick our counterparties to make sure that we do work with people we've done similar work with, people who have proven that they're constructive when issues come up. And so I would say, if anything, we probably feel more comfortable than ever with that sort of structural internal cadence. As far as the ability to maintain the margins, we said we expect to stay at the high margins that we've averaged over the last several quarters -- for the next several quarters. Everything else we said on this call is super supportive of our ability to extract high margins and to get rewarded for the work we do. And I -- as much as Brian Lane likes to complain and cry, we're in a pretty good market and we got the best teams in the world. And so at some point, we just have to take the win. Brian Lane: I want to keep crying, Bill, on that. Trent McKenna: And Julio, only one thing I'd like to tack on to that is just we wouldn't be achieving these types of results if it wasn't for the teams in the field and their commitment to constant improvement. It's really our companies, especially our company's field leadership that foster a culture of continuous improvement and that is -- it shows in these results, right? It's just hats off to the teams out there that are making this happen. Julio Romero: Really helpful and insightful. And then secondly, related to kind of your point earlier, Bill, about partnering with repeat customers and choosing your customers and repeat end-use customers. Kind of a broader question about the longer-term revenue opportunity on these technology construction projects. Is there an opportunity or have you thought about an opportunity to expand wallet share with the owner-operator of the data center beyond the initial construction scope by cross-selling any adjacent solutions related to monitoring sensors or just overall optimization of the data center? William George: I think there's a wonderful maintenance and service opportunity that -- think about the installed base that's being created and then sort of think about the companies that are doing it, the advantage we have in understanding it. And even if you take our modular stuff, the modular units that we build are built to be maintained. They're built to have great accessibility to the parts and pieces that we'll need in the future. There are also -- there's a lot of consideration that's going into the work we do today about what -- in what ways things might need to be retrofitted in the future. For example, if they were to achieve chips that do not need to be cooled as much, then at some point, you would -- you could keep high levels of cooling but you would still have to add electrical capacity in order to add additional servers. And I know for a fact that in some cases, consideration is being given much more than it has in the past about the ways that the technology might change in the future and making sure that you can't exactly future-proof stuff but you can give yourself options and a lot of that's happening. It's really -- what's one of the great advantages of doing something on this scale, you -- and for us, right, doing it in so many states with so many great companies that talk to each other, we can bring something to our customers that is pretty close to unique. Operator: I would now like to turn the conference back to Brian Lane for closing remarks. Sir? Brian Lane: Thank you. In closing, I really want to thank our amazing employees again. We are truly fortunate to have the people that work at all levels of this organization. It's a real privilege to be here. We appreciate all your interest in Comfort Systems and then we look forward to having a really strong 2026. Thanks again and I hope you all have a great weekend. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Leonardo Karam: Good morning. Welcome to the conference call of Usiminas in which the results of the first quarter of 2026 will be discussed. I'm Leonardo Karam, Investor Relations Officer at Usiminas. [Operator Instructions]. This conference call is being recorded and simultaneously broadcast on the Usiminas YouTube channel. We would like to remind you that this conference call is intended exclusively for investors and market analysts. We kindly ask you to identify yourself so that your question can be addressed. We also request that any questions from journalists be directed to the media relations team at Usiminas via e-mail, imprensa@usiminas.com. Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business as well as projections, operational and financial goals related to its growth potential constitute forecasts based on management's expectations regarding the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation on international markets. So they are subject to change. With us here today is our President, Marcelo Chara, the Vice President of Finance, Investor Relations, Diego Garcia; and our Commercial Vice President, Miguel Homes. First, Marcelo will make a few initial remarks, then Diego will present the results. Afterwards, the questions asked in the Q&A session will be answered. Now I give the floor to Marcelo. Please, Marcelo. Marcelo Chara: Thank you, Leonardo. Ladies and gentlemen, good morning, everyone. It's a pleasure to be here with you to share the results of the first quarter of 2026. We started the year with an improvement in the results of our company, recording a consolidated EBITDA of BRL 653 million that accounts for a growth of 56% in relation to the previous quarter. As to steel sector, there was an increase of 5% in the net per ton, especially as a result of the better mix of sales, the better share in the automotive sector and a reduction of the COGS. And this was driven by the appreciation of the real and the higher efficiency in our industrial activities. In mining, we had a reduction as a result of the rainy season in the region that impacted the production and the logistics. And also due to the prioritization of mining activities with better performance. Considering the present moment, we see a challenging scenario for the next quarters, especially due to the adverse effect of the Iran war at the global economy. And this is due to the expressive increase in the natural gas and oil prices, higher inflation and lower speed in the drop of interest rates and also the maritime aspects that have been impacted. In spite of this complex scenario, we have expectation of consolidated results relatively stable. In steel sector, volumes of sales should remain at the same levels maintaining the segment in the automotive due to the high level of imports. The increase of cost, especially of energy and logistic inputs should be accompanied by the increase in the net revenue per ton. We expect sales volumes to be recovered and also considering the freight prices and fuel prices. There are positive measures that were imposed by the government with antidumping duties related to coated steel, and this should strike a balance in the future. Considering the perspective of the changes, importers responded internalizing an expressive volume of steel in February and March that increased the inventory levels of imported materials in the Brazilian market. In addition to the measures that have been implemented, there is an investment of in China, and we believe that we are going to close them in July 2027. It's important to mention that there's a risk of the oversupply at the structural level with an increase of imports of steel from Asia and China and with an increase of 78% when compared to the first quarter of 2025, especially from South Korea and Vietnam. In addition to Egypt, Internally, we continue with our focus and safety and a continuous improvement in our environmental performance in our operations, increasing competitiveness so as to reduce costs and also have a higher industrial efficiency and basically with a strong financial discipline. In relation to investments, we continue executing priority projects of the company, such as the PCI plant who is to complete it in the second quarter -- second half of 2026. But the benefits have already been captured in the first half of 2026 and also the retrofitting of the coke [ oven ] and also all the activities on the way. We would like to thank all our employees for their efforts, for the engagement as well as the suppliers, clients and shareholders and the community at large for the confidence and for the solid relationship we have been building along those years. Thank you very much. And I turn the floor to our CFO, Diego. Diego Garcia: Thank you, Marcelo. Good morning, everyone. And before beginning the presentation of the results, I would like to remind you that these are the first results that were converted in reals from dollars. Let's move on to the highlights. Steel sales were decreased by 7% in relation to the fourth quarter '25. And this is a result of the strategy of giving more importance to the most effective activities. So there was a lower production due to the stronger rain during the period. EBITDA shows a significant moment in relation to the previous quarter. This was driven by a better mix of products in the steel sector and higher profitability that more than offset the drop in volumes. This improvement in the mix is reflected in an improvement of nearly 5% of the revenue per ton in the steel sector as the increase more than offset the drop in the mining activities. The cost per ton had a slight drop due to the expenses with retrofitting, and this is the impact of the appreciation of the real against the dollar. Let's move on Leo to talk about the consolidated results. Net revenues reflects the significant reduction in the iron ore and also steel products that were not totally offset by the increase of the increase per ton. This is an improvement of the steel unit as a result of the better mix, reaching to levels that the company had reached since the first quarter of last year. Consolidated net income reflects in addition to the best operating results, the positive FX fluctuation in relation to our operations and also an accounting impact and noncash of deferred taxes due to the appreciation of the real as well. Steel sales recorded a drop of 6.9% concentrated in industry, distribution and exports and partially offset with a significant increase in the automotive area, leading to a better sales mix. And there was also a better mix in exports due to a better share in the Argentinian auto market. This better mix led to a better mix of revenue per ton. And as for exports, there was an improvement of nearly 9%. Adjusted EBITDA more than improved and it was very much in line with the first quarter of 2025. This was a result of the better mix, as we mentioned, and the best cost per ton. A better cost per ton. And here, we can see the effect of the improvement in EBIT over EBITDA. COGS was positively impacted by reduction of maintenance costs and major retrofitting, as we mentioned. In addition, we have a better mix that was offset by the lower exchange rate when converting to reals. This positive result apply especially by lower sales of prices and costs and higher volumes. In the mining sector, during the quarter, we had a significant reduction of 21% in the sales volume as it was driven by the seasonal rainfall on production and also on logistics. We also prioritized some areas with best operating performance. Net revenue reflects this drop in volume and the net revenue per ton was maintained stable at $87, the same level as last quarter. The reference price were practically stable with a slightly increase of 0.9%, but they were offset by the higher level of discounts and the different -- differentials as prescribed by the market. Adjusted EBITDA per ton reflects especially the impact of the absorption of fixed costs as a result of lower sales. And now in relation to the financial indicators for the quarter, Usiminas frozen an operating cash flow of BRL 370 million was driven by the EBITDA generation, partially offset by the increase of working capital of BRL 120 million. The working capital variation is associated to a lower accounts payable and an increase of receivable accounts and also due to a reduction in inventory levels. We had a reduction of BRL 67 million in [ trading ] in order to reduce the cost of expenses for the company. It's a movement that we want to continue implementing along the next quarter. We had a CapEx of BRL 285 million, a reduction of 23% in relation to the previous quarter. As a result, we ended the quarter with a free cash flow of BRL 84 million. We ended the quarter maintaining a net cash position at levels which were very similar to the previous quarter. This movement reflects a proportional reduction in the gross debt and also to the cash level influenced by the appreciation of the in relation to the dollar, considering the conversion in the statements. The indicator of net debt over EBITDA also remained stable, reinforcing the consistency in our capital structure. Finally, we have a debt profile, which is very comfortable without relevant maturity in the next years and with the cash and investments enough to cover the indebtedness of the company. Leo, over to you. Thank you. Leonardo Karam: Thank you, Diego. Now we're going to start our Q&A session. Our first question is for you, Diego. Now we have most questions about costs. So we are going to try to address them all, breaking them down so that we can avoid confusion. So the first question comes from Caio Ribeiro from Bank of America. And this is what they ask from XP. Could you provide more color about the cost evolution of the input of the second quarter in relation to the first quarter? Which are the main drivers? How do you expect the cash per ton to increase? [ Guilherme ] completes -- asking for more details about the impact in the context of the increase in inputs and raw materials and freight that you mentioned in the outlook. Diego, over to you. Diego Garcia: Thank you very much for the question. In relation to the inputs for the next quarter, all raw materials will have an increase. We have already been seeing in slabs and this has no impact in the previous quarter due to the timing considering the moment when the slabs were purchased, but there will be an impact for the next quarter. And we also see that higher price in cokes and also in the coal. And Marcelo has mentioned that we see an impact caused by the freight increases that would affect mining activities, especially. However, as of the second quarter, they will start causing impact on the supply of raw materials. So these are the main drivers. Leonardo Karam: Thank you. Still about costs Rafael Barcellos, Bradesco, Gabriel Barra from Citi, and [ Emerson ] from Goldman Sachs. They ask the following. So what's the magnitude of cost reduction when you reduce maintenance costs? Is this something we are going to have an effect in the next half of the year? And the retrofitting will be offset in the next quarters? Or do you see that the cost will have some level of sustainability? And is there a space for room for better performance in the operations in terms of energy and raw materials? Diego? Diego Garcia: The cost per ton was at $15 per ton. So divided by ton, we made some savings. In relation. Leonardo Karam: I'm sorry, Diego, just to specify that you're talking specifically about major repairs, right? Unknown Executive: Yes, major repairs and maintenance. Yes, these are the 2 factors that explain the savings that we had. So I mentioned, we have $15 per ton. So it's an temporal or permanent effect. This was the question. We believe that this is going to be permanent. We have no expectations of anything changing unless something unexpected change happens. So this -- the cost may come back in the future, and this will be reflected in the activities. And these are the activities we are trying to do more efficiently. And to add Diego's comments, as I had mentioned in the previous calls, we are deeply focused in improving industrial efficiency, and we started important initiatives in order to improve efficiency. We have adopted tools to optimize and make all the repairs in a more effective way, especially the planned repairs. And in terms of cash control and in terms of asset controls, we have [ mentioned ] all the dimension in order to optimize all the flows and all the related costs. And we can see the results because we have been doing this for more than 2 years. And this is a continuous process as the expectation is to continue improving efficiency along those lines. Leonardo Karam: We have here another question related to cost, but I believe it's more directed to Miguel. Caio Ribeiro from Bank of America. He asks if the price increases were enough to offset the cost pressure? Or do you think more increases will be necessary? Miguel Angel Camejo: I think your question is very important so that we can clarify and apply the dynamics that we use for our prices along the quarter. And also for the present moment. The increase of January had the purpose of improving the margins of the steel sector after a long period of lean margins, considering that we were in conditions of unfair competition as we have observed in the last 3 years in Brazil. After the beginning of the war in 28th of February, we saw the pressure on costs, as Marcelo and Diego mentioned. And this leads the need for increasing prices as of April. As of now, we are always mentioning the negotiations in relation to spot businesses and the distribution. So we are in a scenario of high volatility and uncertainties. So we are going to be analyzing very cautiously the profitability of each operation in terms of imposing new prices for the spot prices. The industrial sectors will continue this trend. We'll continue making adjustments in the spot prices as we renew the agreements. Leonardo Karam: Thank you, Miguel. Diego, still related to costs. Now focusing on the ForEx. We have questions by Gabriel Barra and Ricardo Monegaglia from Safra. He says, should we expect 2-digit levels? Or should there be any pressure should the ForEx fluctuation revert? The functional currency helped us in nonrecurring manner. Or how -- what were the changes? And what were the exchange rate used? Ricardo ask saying the following. What was the estimated impact on the COGS price for the first quarter, considering this FX rate? And can we think about the aid of BRL 50 million in the EBITDA of the quarter compared to the previous methodology? And what's the evolution that we can expect in relation to the FX fluctuations? Miguel Angel Camejo: Thank you, Gabriel and Ricardo. In relation to the margins that we are -- what we are estimating for the next quarter, as Marcel has mentioned, we are expecting an EBITDA level, which should be stable. And we are likely to have an improvement in the steel sector to offset the mining activities. In relation to the functional currency effects, the main effects that we can see is on the one side, we should consider the net position in reals in a consolidated way. Because that will lead it to FX gain of BRL 110 million. And also, there is an impact in the deferred credit, which was something very significant, amounting to BRL 450 million, which is a very large -- a large share of the net income. And that will depend on the future FX variation. If there's no variation, we are going to see the effect on the results. If the FX is maintained what we saw yesterday, for sure, we are going to have a very similar result. And then the type of FX rate used. If I'm not mistaken, -- at the end of December, it was 5.5. And at the end of the March, it was 5.2. It had an impact on the cash cost of the steel sector in dollars. So it is cash cost. It's in dollars, so there will be no changes. So when we convert into reals, we use FX, FX rate, which was lower in relation to the previous period. Leonardo Karam: So there was another question. No, that's it. Okay. The next question is still about costs. Diego, Edgard and Daniel from Itau, [indiscernible], would like to understand this line in our cost of others. So they are asking us to give more color because when we look at the history track, there may be a seasonality influencing. So what can we expect for the second quarter? Is this already considering the outlook of the cost increase that was shared with us? So from BRL 240 million, we saw a drop of BRL 89 million in the line. And what can we expect? So they want details about this reduction, and this is what [ Guilherme ] asks us. Diego. Diego Garcia: This line is very pulverized, but we're not likely to see a seasonality influence. Now answering your last question in relation to the bonus payment. So except for this, all the others are very [polarized]. Leonardo Karam: Now Miguel, about third-party slabs, [indiscernible] they say it attracted our attention, the level of purchases that you made of slabs. So how does slab price has impacted the production of rolled steel in Cubatao. So how do you use the blast furnaces of Ipatinga? And can we expect the slab price level to be maintained at the same level? So the question is, is the level of purchase likely to be maintained? Miguel Angel Camejo: Of course, you have been following the international indicators for slabs. We have been suffering a lot of pressure since the Iran war started. And based on this, we can simulate the allocation of our production between Ipatinga and Cubatao. Of course, this will be a result of the best economic decision. Obviously, so we have to meet the need of each client at a certain moment. So what to expect for the future, we can expect our production to increase in Ipatinga with the blast furnaces and a reduction of activities in Cubatao in the short term. We are going to continue monitoring the market opportunities and alternatives so that we can go back to the levels at Cubatao that we want or to look for profitable alternatives for the company. Leonardo Karam: Thank you, Miguel. Marcelo There's a question by Gabriel Barra from Citi about the Iran conflict. This is a question. The effect of conflict did not affect the quarter of the steel sector is not so affected by the war. Marcelo, could you answer this? Marcelo Chara: Gabriel, thank you very much for the question. We all know the impact of the gas, of the oil barrel, which has a significant increase. And this impacts the cost of transportation and energy in all the logistics and production chain in general. In the first quarter, we hadn't seen this reflected on the results yet. But as we update all the indicators and all the contracts related to the indicators, we are sure to see those impacts. All industrial sector will have this impact and other sectors in the economy will also have the impact. The freight will have a significant impact. So the maritime transportation imports and exports will be impacted. I would say that this is inevitable. So the cost will be impacted eventually. Leonardo Karam: Thank you, Marcelo. Miguel -- now about sales. We have many questions about sales, and I'll try to concentrate them. of Goldman Sachs, [ Guilherme ] of XP and Caio Greiner of UBS asked the following questions. Considering the stable volume of production, considering the strategy of the company, is there room for gain in market share? The focus would be in maximizing the revenue per ton and profitability. And the expectation -- what's the expectation to imports to drop? And what you expect the stable volumes? And the first quarter was lower than we expected. Do you see any deterioration of the demand and [ Guilherme ] adds about the performance of the domestic market. And if we already have a tighter scenario for some specific products, especially those related to antidumping. And Caio Greiner also asks about the strategy. Are you going to continue with the same strategy? Or are you going to go for higher market share? Are you going to prioritize the old over volume? Miguel Angel Camejo: I'm going to give answers. And Leo, you can help me if I did not answer some questions. In relation to the market, we see a very important resilience of the main consuming sectors of steel. The first would be the automotive sector with an increase in production of auto and also in the formalization of those cars. And ANFAVEA estimates a 4% increase in production. Sectors related to consumption has a very resilient level with the expectations of growth, not very high, but following the macroeconomic indicators of the country. On the other hand, we have sectors that are being affected more in relation to consumption. And they have been facing tough times, especially the sector related to the agribusiness, roads implements, agricultural machineries, which have been drops in consumption. Considering this context and since imports have been increasing in the first quarter, in spite of the measures that have been implemented by the government, especially antidumping and cold rolling mill and coated rolling mill, but we see that the inventories will be very high. And as a consequence, there will be a stability in the apparent consumption of steel that could be better in the second half of the year when the inventory levels are more normalized. And then we expect a stability in the sales in the second quarter. In relation to the share, it would be fair to think we can talk about the second half of the year. We can talk about export -- import of steel, especially those with unfair competition will have some improvements. And Usiminas will then be a very important player in increasing the share of supply of local or domestic market. In relation to the prioritization of value over volume and profitability, it's fair to think that in a scenario of high volatility after the year on war, we tend to be more demanding in our decisions. so that we can make spot negotiations and also in relation to important projects in the medium and long term. Leonardo Karam: Thank you, Miguel. There is a follow-up on the functional currency. [ Gabriel Simoes ] and Marcelo Arazi from BTG. So what would be a follow-up on the cost and the function currency, especially those which have higher consumption. For example, the change of functional currency helped to reduce the cost of the raw materials after the conversion in real. And Marcelo asks us to quantify the effect of this variation should the function of currency remains intact, if there were no changes, what would be the evolution of the cost? What would be the cost behavior? Yes, Diego. Diego Garcia: Thank you, Ricardo and Marcelo. The costs are in dollar, the slab cost, coal or they were all converted into dollars. And the costs are accounted for. And then what happens is the conversion into real that happens every month. If the currency is lower, the cost will be shown in real. But it doesn't mean that the functional currency helped to reduce the cost. So we convert into real that will show this effect. In relation to the second question, if you're going to make a quantification, it's something very complex to be done because we would have to redo of the previous quarter that used a different functional currency. We -- it's not something that is required to be done. So it's very complex to redo the previous accounting of the previous quarter. Leonardo Karam: Thank you, Diego. Miguel, now about exports. [ Rodolfo Angele ] JPMorgan and Igor from Genial asks about exports. Steel sector volumes were lower. So what do you expect for the next period? And Igor asks more details about the prices. And he says that there was a better mix, especially what happened in Argentina. So are you going to continue with this price over volume now in the external market? Are you going to apply this as well to the external market? So what are the expectations for exports? Miguel Angel Camejo: Thank you, Leo. Our expectations for the second quarter of this year is to maintain a stability, both in terms of mix and the market -- exports market. So we don't see a lot of changes, a lot of variations in this regard. The higher average price is a result of the better mix. As we anticipated in the fourth quarter of last year in the call, we ended the deliveries of oil and gas that we had in the past. We maintain a positive expectation in the sector of oil and gas, especially in Argentina. In the short term, we do not see any closures. For the second half of the year, we have been negotiated important projects that we hope to have -- to be very successful in the negotiations. Leonardo Karam: Thank you, Miguel. Still about imports. Gabriel, Barra, Citi, [indiscernible] JPMorgan, they ask the following. In spite of the expectation of normalizing the exports, galvanized products has high levels still. So how do you see the competitive dynamics in this specific segment? Should we expect an accommodation of exports in the short run? And Igor says he understand that there was a raise of importers in order to go for the volumes before the measures were applied. So how long do you believe that the market will absorb this excess volume? And lastly,[ Thais ] asks about cold rolling products. So we saw that the volumes dropped, but we still have some inventories in the chain. So some volumes in other regions were also coming in. And we heard about volumes coming in, in other regions. Could you provide some more information about this? Miguel Angel Camejo: Gabriel, Igor Guedes. For sure, imports of the first quarter were very high, increasing by 30% when we compare to the previous quarter. This suggests a very big pressure in the inventories in the chain. And this will cause impact in the apparent consumption of steel, especially in the domestic market in the next months. The inventory levels cannot be calculated very accurately. But there is an expectation of increasing consumption. But -- so we believe it will take some levels. We believe that this inventory levels will be normalized in the second half of the year. And at that moment, the steel industries, including Usiminas will have more chances of opportunities in relation to the steel consumption in Brazil. What was the other question, Leo, please help me. The question was very relevant. In addition to the increase in imports, we can see an increase of imports, especially in the Southeast Asia. It's very relevant to understand that the world oversupply will be maintained. Even though the Chinese steel in March stands at BRL 120 million per year and generate an imbalance in different countries. This situation generates an indirect impact in the Southeast Asia countries that is to direct those oversupply to Brazil. So it's very important to continue monitoring together with the government, and we must take the right measures so that we can avoid the indirect impact generated by the Chinese oversupply. Leonardo Karam: Miguel still for you. A question about automotive. [ Diego Mora ] from Goldman Sachs says Ricardo Monegaglia from Safra has 2 questions. The stronger sales mix is sustainable. What are the negotiations of the agreements related to prices? What were the agreements for the automotive industry in April? And what are the impact of the coated and galvanized products in relation to agreements? In the first quarter, we had a big influence of the automotive sector. So how do you expect this to play out in the future? Miguel Angel Camejo: So let's start from the agreements. The agreements have showing reductions of 2% or 3%, similar to what we negotiated with the agreements that we had in January. We expect the automotive sector to continue the way it is. March was a very relevant month in production, especially in the first 15 days of April, we see this materializing. And ANFAVEA expects an increase of 4% for the year. However, it's very important to mention that both the steel sector and the automotive sector and other sectors of the economy and the Brazilian industry have been facing challenges in relation to imports, both for final products and also in relation to business models that will that are coming to Brazil. So we have a lower impact and lower impact in the production chains in Brazil. It's important, therefore, to continue with our agenda of reindustrialization and also with the public policies to reinforce the productive chain in different sectors. The galvanized products in the auto sector and also the coated products account for 70% of our installed capacity. So 30% of this is impacted by spot businesses and also other industrial sectors. that follow their own agreements. In relation to the favorable mix of the first half of the year, the expectation is to maintain this favorable mix for the second half of the year. In the second half of the year, we have to understand the dynamics of different sectors, the potential reduction of imports in Brazil after the implementation and also the inspection of the measures that were to be implemented by the government. Leonardo Karam: Thank you, Miguel. Miguel and Diego now. In relation to the outlook that we provided, Rafael Barcellos with Bradesco and Ricardo Monegaglia with Safra asked the following. What is the magnitude of price increase and cost in the steel sector as we're projecting in the outlook? So it's the same questions. They want to know the magnitude. They want to know about the cost and the price for the next quarter. Miguel Angel Camejo: I'll start, Diego. In terms of price, we have already mentioned, there was an increase in price as of April 1 for the distribution and the spot prices, as we mentioned previously. As -- in relation to the industry, the industrial agreement as of April will follow the trend of the mix of spot prices as we observed in the first quarter of the year. In the automotive sector, we continue with the agreements that we mentioned previously according to the negotiations that have been completed. So we are looking at the raw materials, especially plates and also Coke and coal. And this will have an impact that we will try to handle. However, I cannot provide you with exact numbers or precise magnitude. Leonardo Karam: Still about outlook related to prices, Guillermo [indiscernible] from JPMorgan and Carlos from Morgan Stanley, they said, what is the domestic performance along the second quarter? And do you see a more positive impact for the dumping -- for the local industry during the antidumping measures? So when will the price pass-through will happen? And how has this been impacted by the imported products? And [indiscernible] asks for more color about the increases in April that you have already mentioned. And if you expect any price changes for May and June, do we expect movements to happen, Miguel? Miguel Angel Camejo: In relation to the positive scenario for the local industry based on commercial measures, we do not see the impact of the measures that were defined in the beginning of the year. Why? Because as we mentioned previously, there were there was an increase of the import of there was an increase of the inventory level. So the results will take a bit longer. So there was a drop in the local production. So as the local mills cannot increase their share in the apparent consumption of steel in the country. Of course, the measures will then have the expected results. In relation to prices, we implemented a 5% increase in the spot sector as of April 1 and we're going to continue monitoring the pressure of costs in the international market, the cost of energy. And based on that, we will see the -- what will happen to the new adjustments for the next months. We still do not have the adjustments already defined, but we are monitoring all the situation very closely. And this will also be related to higher volatility in our local costs. Leo, did I miss anything? Leonardo Karam: No, I think you answered his questions. I said that the cost would be the most successful question, but no, there's a very long section about the commercial aspect. Carlos asks if you could mention this percentage of increase in April for the spot price as distribution and industrial segment industrial agreements. Miguel Angel Camejo: For the distribution sector, the adjustments implemented was at 5% as of April 1, the industrial agreements that start as of April should follow the dynamics that was observed in the spot price in the first quarter that had a very similar level of 5% or 6% in the distribution sector. Not all the agreements are updated on April 1. Some of them will have the update only on July 1. Leonardo Karam: Thank you, Miguel. We're moving towards the end, and I still have a lot of questions here with me. So I'm going to try to select the main ones. Miguel, about price parity. As Brian and Marcelo has asked about what's the import parity for the rolling and coated product? And what are we to expect for the future? The calculation of the parity is very interesting and why is that? Miguel Angel Camejo: Because different from what we saw in the past, when we talked about parity, the calculation used to be made based on market prices and outside of unfair competition and oversupply situation. When we compare, for example, the domestic market price against the price -- domestic price in Europe and the United States, we still are at lower levels that have defense -- commercial defense so as to balance the commercial market in the -- internally. So you can make recalculations. So it could be about 15% nowadays. But with impact on this price which is a price, which is impacted by the oversupply conditions of the international market. Leonardo Karam: Now, Miguel, commercial defense, Gabriel Barra, [indiscernible] of UBS ask the following: Gabriel asks about the hot rolling product. When the antidumping was not implanted, can we see this reflected in imported volumes? Do you think there will be other drop in hot coils and what are the measures to be implemented along the year? Marcelo completes asking about the share. If you have seen alternative routes for the imports of steel, such as Korea or Vietnam. And the price -- have the prices being more competitive than those are Chinese products. And could this increase the parity of the industries and [indiscernible] completes, asking about the vision about the implementation of the antidumping measures. After the implementation of antidumping measures, we will see an increase of prices and how you see the import parity of coated products? Yes, please. Miguel Angel Camejo: It's very relevant to implement the antidumping measures for hot rolling product. So we see what we saw in the cold rolling and coated products that have been very important. We still do not see a reduction in the results. So we are likely to see this when the -- there was a raise for anticipating those purchase of those materials. In terms of Vietnam and Korea, as an alternative route, we have observed a significant increase of imports from other origins China, especially Korea, Vietnam and other countries from the Southeast Asia. In commercial conditions, very similar to those offered by China. So this is a result of the high pressure that China has in the local market, leading those countries or leading those industries to have unfair competition in their exports. So this is very relevant, and we are very attentive to those cases so that we can activate the tools that we have for commercial defense so as to avoid the impacts that we have seen in the last 3 years, with a high increase of Chinese imports. So it's very important to keep monitoring and working with the local authorities, so that we can make -- adopt the right measures of defense. In relation to the price, I think I answered previously in relation to the parity and how we see the prices to play out in the future. Leonardo Karam: Thank you, Miguel. There is a follow-up. But I think you have already answered. Luis from -- asks about the price of Asia, you have heard Asia about Vietnam and Korea. So we are moving towards the end. So let's try it a bit quick. Diego, about deferred, Gabriel Barran says, the income was very favored by deferred tax credits and FX effects. How can we expect the effective tariff or liquid for the next quarter. How can you see that? Gabriel? Miguel Angel Camejo: The impact of the tax credit with deferred taxes will depend on the type of FX rate because the accounting base is in dollars and when the real is appreciated against the dollar, there's an increase. And then this credit is increased. We have the inverse movement we would have a negative result on this. So that will depend the kind of effects. In relation to the financial result, and this is more linked to the net position in reals will also depend on the evolution of net cash in reals that we have. So we are going to continue monitoring this, so that we can minimize the effect. Leonardo Karam: Marcelo, one question for you about compacters. Gabriel Barra from Citi, and Ricardo from Safra ask the following: what are the analysis of compact analysis can be done in phases, which is the most likely scenario and the friable, what the duration of the life of the mine. Is there any decision to be made still this year and the environmental permitting and all the documents at MUSA, what would be the expected timing for those -- and for the FID and approval? Marcelo, can you answer that? Marcelo Chara: Thank you, Leo, Rafael, Gabriel and Ricardo. I'm going to try to summarize. As we have been mentioning, the permitting is working well. According to the time line, considering magnitude and complexity of the project. In 2026, we believe we can have the confirmation, so that we complete all the permitting process. In relation to the friables, we have been making a new sizing of all the reserves and by using different strategies, we have been able to extend the useful life of the friables. And this is very important for us, the strategic view in addition to optimizing the assets that are already existing for the operation of friables. I would say that these are the main components. And as we evolve and we continue with the process of permitting, so at the end of 2026 and the beginning of 2027, we expect to have a proposal and also to analyze the alternatives. And this is a highly complexity project. And we have different alternatives. We have very good engineering team in order to optimize each of the possible steps. And we are very likely to have a very competitive and efficient split. So this proposal can be callinated in phases. Leonardo Karam: Thank you, Marcelo. Marcelo and Diego. We have questions about projects. So Gabriel Coelho Barra . Gabriel asks about the advances of the PCI project. Can it give an additional upside in the margin still this year. Can you comment on the evolution of other projects of the efficiency of the company, such as Coke batteries and gas holders. And how can we think about the PCI implementation leading to lower cost per ton. What can we expect in terms of efficiency after the implementation? And would it would reduce the purchase of still called for by third parties -- from third parties? Miguel Angel Camejo: The PCI project is a project that is in the final stage. And as I mentioned in the remarks, we are already capitalizing on it because there's a part in the blast furnace that has already been completed and that helps us to make the distribution of fuel and blast furnace in a very efficient manner. So we have been able to implement our PCI and our blast furnace 3 is where this investment is mostly concentrated. So we have already started to capitalize on this on the efficiency of the field as of this quarter, the second quarter and we are likely to capitalize it on full as of the fourth quarter without a doubt. And this will allow us to reduce the purchase of external Coke because this is going to be a replacement from this coal to Coke because this is a field that we are going to be applying internally. And the other projects are moving in alignment to our plan in a very efficient manner. For example, our Coke plant has two main sectors. One of the sector is undergoing hot repair. We have already advanced by 50% in this activity. So this will improve our environmental performance and we also have a very good thermal efficiency and there is a complete construction destruction of the other section of the Coke plant. And next month, we'll be able to see the construction works. So we had auction process and also the technical part, the technical dimensions in order for the implementation to happen. And the engineering side is also very advanced. So in 2 years' time, 2.5 years' time, we will have a very good improvement. And also for gas holders, we will see a very important evolution of the gas holders that will allow us to recover a large quantity of internal gas and we improve the overall efficiency. The sum of all those projects -- we'll be capitalized in a progressive manner in the next quarter until the full completion. In the calls, we are going to share with you the progression of all those activities. And Marcelo, in fact, the hot repair and the PCI plant used up most of the CapEx for the quarter. Leonardo Karam: Okay. Last question now, we are running out of time. It's about sales at MUSA. Caio Ribeiro with Bank of America, they ask the following: and the mining sector, then with increase of cost and freight, will there be a decrease in the shipping to the external market. MUSA operations were affected in the volumes because of the rainfall. And in the second and third quarters, which are dryer periods, do you believe that you can recover the volumes at the same levels that we had in 2025? Yes, Diego? Diego Garcia: In fact, we exported to Asia, but those cost increases impacted our profitability, but it's still profitable. As we can see in the results of MUSA. The diesel cost impact has not had a significant increase. So the higher consumption was associated with internal movement. So in terms of volume, as we mentioned at the beginning of the presentation, we expect a recovery volumes, especially due to higher production. And we are going to prioritize the area with higher grades so that we can continue exporting. Leonardo Karam: Thank you very everyone. We end the Q&A session now. We would like to thank you for taking part in this event. And if you have any questions, we would like to remind you that the IR team is available to take your questions. Have a good day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to today's Covenant Logistics Group First Quarter Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. I would now like to turn the call over to your host. Mr. Grant, you may begin. James Grant: Good morning, everyone, and welcome to the Covenant Logistics Group First Quarter 2026 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at www.covenantlogistics.com/investor. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Our first quarter was unique in that it included 2 of the worst and one of the best months we have experienced in the last 3 years. The trajectory was positive and has continued into April, leaving us with conviction that the change in the market is structural, not seasonal. Our Expedited segment was most negatively impacted by both weather and fuel costs in the quarter, with improved rates and volumes in March and April, which we believe will continue to improve throughout the year, giving us plenty of operational leverage. Our new business pipeline for committed truckload capacity continued to strengthen in the quarter for both our expedited and dedicated fleets. Revenue trends during the first 3 weeks of April remained strong across all of our business units. In our view, we are finally feeling the impact of declining industry-wide driver and truck capacity and improving demand in certain segments and geographies. With that background, I will move on to the quarter's statistical review. Year-over-year highlights for the quarter include consolidated freight revenue increased by 15.9% or approximately $38.7 million to $281.9 million, primarily as a result of the assets acquired in the fourth quarter of 2025 that are now being operated as Star Logistics Solutions. Consolidated adjusted operating income shrank by 11.5% to $9.6 million, primarily as a result of margin compression in our Expedited segment, which was particularly challenged with reduced utility from severe weather and higher net fuel costs. Our net indebtedness as of March 31 decreased by approximately $51 million to $245.3 million compared to December 31, 2025, yielding an adjusted leverage ratio of approximately 1.8x and debt-to-capital ratio of 37.6%. The reduction in net indebtedness was a result of selling a significant amount of used equipment in the quarter and buying very little new equipment. With equipment deliveries concentrated in the last 3 quarters, leverage ratio may increase modestly in the next couple of quarters depending on the timing of deliveries and the prices for used equipment. Ultimately, we expect improved cash flow and disciplined capital allocation to reduce the leverage ratio over time, excluding acquisitions and other strategic options. The average age of our tractors at March 31 increased to 26 months compared to 20 months a year ago, consistent with year-over-year reductions to our high-mileage expedited fleet and growth in our less capital-intensive dedicated fleet. On an adjusted basis, return on average invested capital was 5% for the trailing 4 quarters versus 7.6% for the same period in the prior year. Now providing a little more color on the performance of the individual business segments. The Expedited segment reported an adjusted operating ratio of 99.1% for the quarter, performance that fell well short of our expectations. Severe weather and rising fuel costs adversely impacted this segment more than any other in the quarter due to its linehaul nature, requiring high utilization to cover the fixed cost for the operation. Going forward, we have line of sight to sequential improvement in this segment throughout the year. Over time, our goal was to average a double-digit adjusted operating margin across the freight cycle to generate an accepted return on capital. Dedicated's 95.5% adjusted operating ratio was an improvement compared to the 98.1% achieved in the prior year. Although this segment also encountered cost headwinds in the current period, those headwinds were not as severe as the impact of avian influenza in 2025. Going forward, our goal is to restore adjusted operating margin to double digits, grow the fleet serving high service niches and reduce the fleet that is exposed to more commoditized end markets where returns are inadequate. We were pleased with Managed Freight's performance for the current period, growing both revenue and adjusted operating income compared to the prior year. While the growth in freight revenue outpaced the growth in adjusted operating income, the cost to secure quality brokerage capacity has remained elevated from the fourth quarter of 2025. Due to the asset-light nature of this business, we note that an adjusted operating margin in the mid-single digits generates an acceptable return on capital. The Warehouse segment successfully grew freight revenue 14.6% compared to the prior year as a result of organic growth with a new key customer in the fourth quarter of 2025. Despite the growth in revenue, adjusted operating income declined slightly, primarily due to increased start-up costs and operational inefficiencies associated with a new customer. Looking ahead, we remain committed to driving organic growth within this segment and are focused on enhancing our adjusted operating margin with a target of reaching high single digits. Our minority investment in TEL contributed pretax net income of $3.7 million for the quarter compared to $3.8 million in the prior year period. Regarding our outlook for the future. We believe 2026 will be known as a transition year in the freight market with sequential incremental financial improvement to occur each quarter. During the first quarter, we secured rate and lane improvements with existing customers and developed a mature pipeline of new customers with attractive pricing on a level that has not occurred since 2022. We expect this trend to continue as the year unfolds. The nature of these bids is the new rates and lanes take effect a few weeks after being negotiated. So the first quarter activity will begin to show up in the second quarter and so on. It will take time for our 2026 efforts to be fully reflected in our financial results. This explains why the market impact was more than offset by the softness we experienced in January and February. Nevertheless, for the first time in multiple years, we have line of sight to capturing operational leverage from these environmental tailwinds. Our team is refreshed, energized and ready to execute. Thank you for your time, and we will now open the call for any questions. Operator: [Operator Instructions] Jason Seidl: It's Jason Seidl. I didn't hear the operator introduce me. Sorry about that. James Grant: We didn't either. It's kind of weird. Jason Seidl: Yes. No, I was wondering what kind of happened. Well, listen, a couple of quick questions. You guys are sort of in a unique position in that you have some product lines that are not exactly traditional OTR dry van. I was wondering maybe you could dive into some of the dynamics going on in the poultry market as well. Maybe give us an update on the DoD business. M. Bunn: Yes, Jason, a couple of things. I would say on the dedicated side in general, Tripp talked about it, we're really happy with our pipeline, poultry and non-poultry. And I would say we continue to lean in on that space to specialized equipment, niche. It doesn't mean that, that's all we're doing, but it means that's a heavy percentage of what we're doing. And so just excited for both sides of our dedicated business, poultry and the non-poultry on how the pipeline is building. Dedicated rate increases are going pretty well as well. So excited about that. The DoD business, as you know, rolls up in Expedited, and that business was pretty good in February, better in March and better in April than it was in March. So it's rolling pretty good right now. Jason Seidl: All right. Glad to hear that. One of your competitors out there noted that they're starting to have peak season capacity discussions now and it's sort of unprecedented to happen in early April. Are you guys having the same discussions with customers? And then I have another follow-up. M. Bunn: Yes. I would say we haven't gotten as far as talking about peak now. But I would tell you, some of the capacity constraints in some markets are -- remind you of peak a little bit. It's kind of market dependent, day of week dependent. What I would say, and Dustin just reminded me of this, is that we're seeing more people want to talk about dedicated capacity on the team side than we've seen since '21 or '22. And so there's -- we still got a long way to go on that, but having a lot of discussions with folks around dedicated team capacity as opposed to OTR team capacity. So that could be some of what these folks are feeling is -- but just so you know, we're looking at it more on trying to more of a multiyear, longer-term type deal than just peak season. Jason Seidl: That makes a lot of sense. And finally, before I turn it over to the next person, how should we think about driver pay increases? Because we're hearing about a much -- a tightening market in general by getting some of the questionable capacity off of the road. Once we start seeing a little help in the economy, which it appears that industrial is recovering somewhat, there's obviously going to be increased demand for those remaining drivers. So how should we think about that as we move throughout the year? M. Bunn: Here's what I'd tell you. You're definitely right. Dustin and I were texting last night about driver pay. I was with -- been with 2 of our larger customers, one this week, one last week, and driver pay came up in both of those conversations because for the first time in 40 months, drivers are starting to get tied out there. And so there are definitely targeted driver pay discussions that are going on. As far as how much of it is retention pay versus sign-on bonuses versus rate pay or weekly minimums, that's going to -- I think that's going to bounce around based on the business unit and maybe even down to the account level. But there's no doubt you're talking something in that mid-single digits probably on driver pay, maybe high single digits if this thing gets really hot. Operator: And our next question will come from Jeff Kauffman with Vertical Research Partners. Jeffrey Kauffman: I was wondering what was going on with the question queue there for a minute. Question for David. Everybody is starting to talk about positive things for the first time in about 3 years in terms of fundamentally tightening up, margins getting better, et cetera. And your company is executing, I think, in a lot of areas where others aren't. Managed freight looks good, warehousing looks good, Dedicated looks good. What excites you the most about kind of what's going on in the direction things are heading? And I guess as a second part of that, what do you think can go right better than we're thinking as optimistic as we might be getting? And what do you think might go wrong that we might not be giving enough weight to? David Parker: Jeff, yes, I am more excited right now than I have been in 48 months. Last March is when all this downward spiral started. I mean it's been 4 years since we've been in this trough that the industry has been going through. And so it's been a very difficult time. But I'm here to tell you that it is absolutely turning around. And I remember back in October on the third quarter earnings call, someone asked the question, and we -- A, we didn't know. But B, we just said we believe it's kind of an April event to get through the first quarter and what we were seeing in October, we think that April will really be sensing that. It really started -- excluding the fuel that kicked everybody's bottom in the month of March, it really started turning around nicely in March. And we have seen that continue into April. And you're really starting to get a lot of staff that are backing that up as I think about the last 4 months of PMI and those kind of things that manufacturers really starting to make a nice play because before then, it was all related to capacity, I believe, November, December, January, February, again, excluding weather, but just the feel of the business was, in my mind, capacity related. And now you have got manufacturing that is really starting to kick some bottom. And so that's nothing but a cherry on top of how I'm feeling here about the business environment. And I think that I would say a couple of things, positives, negatives. I was up in Washington 2 days, a couple of days this week and continuing to work. Washington DOT [Shaun], Secretary Duffy [indiscernible] and they are doing unbelievable jobs, and I've told them that, that they are taking the bad drivers, the people that should not be on a truck, they are in the process of taking them off trucks. I believe to the tune right now that somewhere around 2% to 3% of capacity has been eliminated. And keep in mind, 2% to 3% capacity increase or decrease changes the market. You take out 2% or 3% of capacity and we're not raising rates and you take out those 2% to 3% of capacity and the market is tight. And so 2% to 3% is a major number. And I think they're just at the beginning stages of it. So what could the upside be is that. I think drivers are going to continue coming out of the market. Therefore, capacity is going to continue to come out of the market. I personally feel we're just at first base. I think it's going to be an industry-changing environment in the near future. I mean April is better than March, and I expect May is going to be better than April and those kind of things and especially in particular, when we get into third quarter, there's going to be a great opportunity as capacity gets tighter to raise pricing, evident by the fact that we all need it, evident by the fact that we got 20% capacity -- excuse me, 20% inflation in everybody's P&L in the last 4 years, I can look at any one of our customers in the eye and say, let me tell you, we need 10%. We need whatever, whatever double-digit numbers, they need to be there. And I think that the industry that we -- none of us are interested in just buying another white truck or red truck or blue truck. That's not the desire. We've got to replace earnings that we've lost for the last 4 years. And I think everybody is really committed to saying that's the game plan that we're on. And so that's going to be interesting. What could go wrong? I want the war to get over with because capacity is increasing. I mean, manufacturing is increasing even there in the sense of the war, but the longer it lingers and lingers and lingers does it start affecting the economy. That's a concern that I've got. I believe if it gets over in the next whatever, in 1 month, 2 weeks, 4 weeks, 6 weeks sometime, it's going to get better. It's going to take a while for oil to go down, but you let oil get down from $95 a barrel down to $75 a barrel, and it reduces gasoline by $0.50 a gallon. The American people will sense that and feel that, and I think they'll continue to spend. And so I could not be any more excited than I have been in these 4 years. I think that we got our company exactly where we need it in the segments that we're in. And I'm just excited about adding to what already is happening in the industry. Jeffrey Kauffman: That was awesome. One follow-up kind of following a little bit on Jason Seidl's question is how much of the rate increases do you think end up being leaked out because we got to pay more wages to get drivers and taking into account your other cost inflation? Kind of what can you net on these rate increases to help margins get back to where they are? David Parker: Well, I'll let Paul and Dustin answer some of that. But that said, no doubt, I do believe that driver pay is going to go up because we can sense that as we speak, the industry is and that is DOTs taking out drivers, and it has a domino effect. It's not that we hired any of those drivers. We got English-speaking things that go on in our company, we would never hire them. They got to be legal immigrants, et cetera, et cetera. But it has a domino effect on the industry. And so I think that we're just at the beginning stages of feeling that. And I don't know what that means from a standpoint of increases because I think the first thing you're going to do is, hey, you stay with me, I'll pay you this and I'll pay you a bonus to get new drivers in. I don't know that it's going to be -- here's a 5% driver pay increase. I think we'll be around the edges until we know that we know that we know how difficult it will be. So that part, I think, going to say, for the second, third quarter, I think that everybody is just going to be around the fringes, and it will be a number, but it's not going to crazy -- I say crazy, these drivers deserve everything they get. But from a cost standpoint, it's not going to be a crazy number. And I truly believe if capacity continues to tighten, whatever we got to get, we're going to get more than that in increased rates. M. Bunn: I mean, Jeff, historically, driver pay is 30% of maybe total cost, give or take, depending on the exact team or dedicated or regional or whatnot. But if driver pay is in that 30% of your total cost range, I think it probably eats up 30% of your -- 30%, 40% of your wage of what you get from the customer, not immediately, but over the first 6 months or so. But if -- as there's more pressure on driver pay, then you'll go back and get more rate again as a second bite in the apple because, as David said, driver pay is not the only inflation item that we're trying to cover for that where we've had significant inflation over the past few years. And there's some inflation items. I mean the areas around trucks and insurance and some of those that have had a lot of inflation parts the last few years, I don't see that inflation slowing down. And so I think it will be multiple rounds of rate increases. And so you'll probably end up netting 60% to 70% maybe of bottom line without other inflation items. Jeffrey Kauffman: And one last follow-up question. This one is for Tripp. Tripp, the Section 232 tariffs made a little challenging for some of your truck OE partners to be able to quote good prices for vehicles this year. Has that clarified yet? Or is it still a situation where the [indiscernible] that are selling your trucks or manufacturing in Mexico still can't quite get the pricing down? James Grant: No. I would say, Jeff, we do have pricing for next year, and that is a big question for us. So we've got so many like near-term opportunities in terms of how we're thinking about managing our portfolio of business and our assets on the road today. we just unloaded a lot of extra capacity or a lot of extra trucks that weren't being efficiently used, which is one of the reasons why cash flow was so good. But the things we've talked about is the notion of a prebuy in Q4, and I don't think we're leaning towards that because I think our goal is to try to buy capital or buy equipment as smoothly throughout the year as possible with the exception of Q1, it was just a really light buying quarter, which it typically is. And so we are looking at probably a $7,000 to $10,000 probably cost increase, I would say, on the average across all the different types of trucks that we buy for next year. And we'll be factoring that into account as well when we think about rate increases. It's another -- we've seen -- it's just one more thing that Paul and David were talking about in addition to driver pay that has not slowed down, and it's compounded in a loose market where used equipment has never been sold cheaper. And so when you're buying stuff at the highest points and you're selling stuff at the lowest points, it -- it's not the perfect equation for a great profitable quarter. And so we're seeing some strengthening, I would say, or bottoming, I would say, in the used equipment market, and I expect it to strengthen throughout the year as this economy -- or as this freight market turns. So we're optimistic. I mean we'll get some help on the used equipment side, but I think the new stuff is going to continue to go up. And we're going to continue to focus on using our stuff efficiently with the right customers, and it will be what it will be. M. Bunn: Jeff, let me clarify when Tripp talks about the increases next year, those are not tariff-related increases. They're more price [indiscernible] OEMs because of emissions. Operator: [Operator Instructions] We'll move next to Scott Group with Wolfe Research. Scott Group: David, you mentioned -- you just mentioned you were in D.C. I'm hoping maybe you can share a little bit of insight of what you learned. Is there a path forward to Dalilah's Law, Dalilah bill to become a law this year? Anything on Montgomery case and how you think that may or may not impact the industry or anything else that you think is interesting? David Parker: We're going down 2 roads in Washington. On e road is CDLs, immigrants, CDL schools to make sure they -- the bad ones are shut down and the good ones are still producing, insurance requirements. Those are one road that we're going down and the other road we're going down is Tort reform. And I would say on Tort reform, we've gone from a 0% chance to -- my number is 25% chance that, that is going to happen. And the only reason why I say 25% is because President Trump has been affected so much by warfare and law fare or whatever word you want to use there that at least the administration recognizes that. And the administration cannot lead it, but the administration can support it. And so we're working Congress awfully hard to get behind it, and we got some folks that are definitely behind it. And we're just at the infinite stages of dealing with Congress. We did -- we had good meetings this week with judiciary committee. And I think that we're going to be presenting to them in the future. And so that's good. I mean, if you can't get to the judiciary committee, you're never going to get us to the floor. And so we'll see where that goes. But again, to me, we're at 25% that we're able to get to reform, but it was at 0 a year ago. So we'll see. And then the other one, again, is that to me, the DOT is doing exactly what they need to do. So ours is to continue to encourage them and continue to support them and all the things they're doing, again, CDO school, ELD is unbelievable. The amount of cheating that happens in this industry, unbelievable. And -- but they're on top of it. And so to me, the message that DOT is hearing from us is sustainability. We got to continue to sustain this effort that you're going and I'm thinking they've taken out 2% or 3%, I mean, guys, it could be easily another 5% or 6%. I mean it's a big number, whether it's 3% or 4%, 5% or 6%, but whatever it is, it's a big number that is out there. They said my phone just died. Can you all hear me? Scott Group: We got you. David Parker: Okay, good. Tripp texted me there, said my phone died, so good. As long as you all can hear me that's all that matters. So anyway, it could be a large number on capacity coming out. So that's what my efforts in Washington and others is there, but we're definitely getting in front of the right people that can help and they can see us and we'll carry the football. The question is, will we get across the goal line. And I think DOT is a given again, sustainability, Tort reform is 25% chance, and we'll see what happens there, Scott. Scott Group: So is your point there that whether or not maybe Dalilah's law speed things up, but even without that, that the Department of Transportation is going to -- may take a little bit longer, but they're working on all the stuff on their own even without this law. David Parker: I didn't answer your question. I believe Dalilah's law will pass. I do believe that. But I'm going to tell you that they are doing the things in DOT that is really the Dalilah's law without it being rectified in Congress, which would be great because then becomes law versus the next DOT Secretary that doing whatever they want and not paying attention to it. So you wanted to get it codified as a law, but they are doing the Dalilah's law as we speak virtually. Scott Group: Yes. Okay. And then just in terms of your business, right, you've got in the Expedited segment I think still pretty meaningful LTL exposure. Are you seeing the same sorts of improvements on that side of the business? Maybe are you seeing some life in the LTL volume? Just any thoughts on that. David Parker: Yes. I would say in the last couple of months, you started seeing the LTL side coming back. I think it relates to PMI being 4 months above 50, et cetera. I think that they're starting to sense that because we went -- if you remember, Scott, we went, I don't know, last summer, fall, and we started seeing some trends that were not good year-over-year for our LTL freight that we do anyway. And we started seeing that upticking now, and we're starting to sense that the LTL side of the business is starting to get better out there for us, and I think for them probably as an industry. Scott Group: Okay. And then maybe just last thing real quick. Tripp or Paul, whoever, I know you talked about some longer-term margin targets for the different businesses. Any sort of -- I don't know, just near-term thoughts about how to think about margins for the businesses, Q2, Q3? David Parker: Okay. I think we probably found that -- we probably found out Scott. They died and me and you're talking to each other. I would tell you, yes, you're going to continue to see margin improvement. I think that second quarter is going to be -- April is better than March, and March wasn't bad, but we're not going to be -- we're not getting out of rate increases April 15 either. So April, May and June is going to be layered in on whatever we're getting as we speak. And so I think that you'll see second quarter definite improvement over first quarter. And then I think you'll see third quarter improvement over second quarter. Operator: [Operator Instructions]. And it appears that there are no further questions at this time. I'll turn the conference back to our presenters for any additional or closing remarks. James Grant: Yes. Thanks, Jen. And I just want to thank everyone on the call for your interest in Covenant and our Q1 earnings, and we look forward to speaking with you again in Q2. Thanks very much, and have a great week. Operator: And this concludes today's conference. Thank you for attending.
Operator: Ladies and gentlemen, welcome to the Kuehne + Nagel Management AG Q1 2026 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Stefan Paul, CEO of Kuehne + Nagel. Please go ahead, sir. Stefan Paul: Thank you very much, Sandra. Good afternoon, and welcome to the presentation of Kuehne + Nagel's First Quarter 2026 Financial Results. I'm CEO, Stefan Paul, and I'm joined today, as always, by our CFO, Markus Blanka-Graff. Page #2, first quarter 2026 results. Recurring EBIT exceeded our guidance. The recurring EBIT of CHF 308 million in Q1 exceeded the guidance we communicated with Q4 results. That is a result that would broadly match the CHF 285 million we achieved in Q3. We attribute most of the upside to first signs of visible cost reduction with phasing running ahead of plan. We had announced this cost reduction program in Q3 and booked provisions, as you all know, for it in Q4. We still expect to achieve at least CHF 200 million of annualized gross savings by year-end 2026. At the close of the first quarter, we are running ahead of plan and confident in our ability to reach our target. Our successful cost management in Q1 mitigated some of the effects of volume impacts from the conflict in the Middle East. Also, the year-over-year comparison was high, especially in Sea Logistics, where underlying volume growth last year was 6% in the first quarter. That was due in part to front-loading before Liberation Day. The net effect in Q1 was a year-over-year decline of 17% in group EBIT. Recurring group EPS declined by 18% year-over-year on the same basis, excluding consideration of negative currency effects and a one-time CHF 35 million gain on a real estate sale and leaseback transaction. The combined Sea & Air conversion rate was 26%. Free cash flow generation in Q1 exceeded that of last year, supported by disposal proceeds linked to the real estate sale. Excluding these, underlying free cash flow conversion of 40% in Q1 reflects typical seasonality as the first quarter is normally the weakest of the year. Before moving on, I would like to address the current market situation. With respect to market share, it is currently more difficult to assess our progress versus peers in Q1, given the spike in volatility set off by conflicts in the Middle East. Pending further clarity, we are assuming that recent trends continued and that our market share was stable or slightly greater in the period. In terms of expectations for near term, we expect a Q2 EBIT result greater than that of Q1 on the back of higher and sustained service intensity during a period of supply chain disruption. As such, we are modestly raising the lower end of our full year financial guidance, a topic which Markus will cover in more detail shortly. Now let's turn to our performance by business unit. Page #3, Sea Logistics. Cost control drives recovery of unit profitability. As always, volume on the left-hand side, GP per container unit in the middle and EBIT per TEU on the right-hand side. In Sea Logistics, unit profitability recovered significantly versus the last couple of quarters, thanks to our cost reduction efforts. You can see this underlying improvement in the last 2 quarters in the middle and in the right-hand chart on the slide. Sequentially, the Q1 volume performance was better than the average change over the last 5 years. Volumes in Q1 declined by 2% year-over-year, mainly due to the events in the Middle East. This pace matched that of Q4, but with a tougher comp. Underlying volume growth last year in Q1 was plus 6% versus plus 4% in Q4 2024, Enhanced by front-loading effects ahead of Liberation Day, European imports volumes from the Far East were once again robust, extending the strong trend we saw in Q4. Transpac volumes remained under pressure on a year-over-year basis. Average yields were stable sequentially for the second consecutive quarter, in line with the expectations we shared during our last earnings calls. This stability has continued thus far into the second quarter. As we mentioned at the time of Q4 results, we do not foresee a repeat of the yield pressure we saw in Q2 and Q3 2025. The Q1 EBIT improved sequentially by 7% to CHF 113 million as cost management efforts more than offset the volume decline. This resulted in a plus 13% increase of EBIT per TEU quarter-on-quarter basis. The Sea Logistics conversion rate was at 25% in Q1. This compares to 23% in Q4 and a 35% conversion rate in Q1 last year. Let me turn now to Page 4, Air Logistics. Stable unit profitability is supported by cost control and mix. In Air Logistics, strong cost control was the most prominent factor supporting stable unit EBIT during the seasonally weak first quarter. You can see this development in the third figure on the slide. Favorable mix shifts also contributed to the stability. Volumes in Q1 were flat year-over-year. This marked a declaration from plus 7% growth in Q4, chiefly due to reduced perishables and Apex e-commerce volumes. Excluding these lower-yielding segments, we achieved upper single-digit volume growth. On a quarter-over-quarter basis, the volume decline exceeded the 10% seasonal decline we have averaged since Apex was acquired in 2021. Volume growth was most robust in Asia-Europe trade lanes, followed by North American exports. North American imports were relatively weak, especially from Europe. Average yields increased by 2% quarter-on-quarter, a notable improvement on the result we usually expect coming out of Q4. From Q4 to Q1, demand for higher-yielding cargo usually softens while lower-yielding perishable volumes tend to remain stable. As I just explained, this was not the case in the most recent quarter as the mix shift resulted in positive yield effects. EBIT rose by 7% to CHF 111 million year-over-year in Q1, excluding FX headwinds. The Air Logistics conversion rate was at 27% in Q1 versus 26% in Q1 last year. That was Air Logistics. Now Page #5, our business unit, Road Logistics. EBIT growth supported by ongoing volume recovery. In Road Logistics, the signs of demand recovery we highlighted in Q4 extended into the first quarter and supported our EBIT growth. Net turnover grew by 9% year-over-year in Q1 or 5% organically, both excluding currency headwinds. This affirms our view that Q4 marked a positive inflection point for shipment demand after a sustained weaker period in the European market. Demand for custom solutions also remained robust, a consistent trend since Liberation Day in April last year. Additionally, we reinforced our services to the UAE in response to supply chain disruption from the conflict in the Middle East. EBIT rose sharply to CHF 25 million in Q1, a 42% improvement on last year or 35% on an organic basis. Please follow me to Page #6, our Contract Logistics business unit. Strong underlying profitability impacted by FX headwinds. In Contract Logistics, recurring EBIT increased modestly year-over-year, offsetting material currency headwinds. The net turnover grew by 5% year-over-year in Q1, excluding these currency effects, in line with the underlying rate of growth over the previous 4 quarters. We saw continued market share gains across geographies with a particularly strong contribution from our North American business. Recurring EBIT totaled at CHF 59 million in Q1, which is 4% higher year-over-year or 11% higher, excluding the currency effects. This figure excludes the CHF 35 million gain from a real estate sale and leaseback transaction. The recurring conversion rate of 6% is in line with the prior year result. With the Q1 results, the trailing 12 months ROCE for Contract Logistics alone is stable at a level of 25%, excluding the effects of exceptional items. And lastly, we are confident in the growth trajectory with more than 30 new contracts currently in the implementation phase. This overall concludes my comments on the performance of the business units, and I will now hand over, as always, to Markus. Markus Blanka-Graff: Thank you, Stefan, and good afternoon all. Thank you once again for your interest in Kuehne + Nagel and taking the time today to review our financial results for the first quarter 2026. First, we see on our profit and loss statement a pronounced 7% foreign exchange headwind at both EBIT and net earnings level. That is because the prior year benefited from a stronger U.S. dollar ahead of Liberation Day. Second, the material cost reductions in the first quarter, which are part of our restructuring program, helped mitigate this impact of the headwinds. Third, while Sea Logistics yield stabilized over the last 2 quarters, the first quarter year-over-year comparison for gross profit reveals some pressures. And lastly, Stefan already mentioned a nonrecurring CHF 35 million EBIT gain related to the real estate sale and leaseback transaction in Germany, a factor to consider when evaluating recurring profitability. Turning to working capital. We saw the base increase to more than CHF 1.5 billion over the past quarter or an increase of 9%. With this, net working capital intensity sits at 6% or above our guidance corridor of 4.5% to 5.5%. This compares to 5.2% at the close of the fourth quarter or 5.1% at the end of the third quarter last year. You can see the spread between DSO and DPO narrowed as DSO deterioration outpaced the DPO improvement due to a temporary shift of business mix. Additionally, the share of multinational customers with extended payment terms in contract logistics is growing. The net CHF 129 million increase of core working capital in the first quarter 2026 was comparable to a CHF 132 million increase over the same period last year. All business units contributed to this expansion, except for Air Logistics. So let's now have a look at how this fits into overall free cash flow generation in the first quarter 2026. We produced CHF 194 million of free cash flow, bolstered by CHF 105 million of cash proceeds from the real estate sale and leaseback transaction just mentioned earlier. Excluding the proceeds, free cash flow sits at CHF 89 million, and that compares to CHF 167 million from last year in Q1, also excluding modest disposal proceeds. For a closer look at cash conversion, let me move on to the next slide. Here, we see the usual comparison of free cash flow conversion in the most recent quarters versus the historical average. The first quarter is typically the weakest cash conversion quarter of the year with an average 48% conversion. In the first quarter 2026, conversion was 40%, including some material cash flows linked to our cost reduction program. Accounting for these, we view the first quarter cash conversion as very much in line with the historic average. We expect a continuation of normal underlying free cash flow conversion trends over the coming quarters. Turning to our financial guidance for 2026, and Stefan mentioned that we have raised the lower end of our 2026 recurring EBIT guidance to reflect both our current expectations and the better-than-expected Q1 results. As such, our guidance range is now CHF 1.25 billion to CHF 1.4 billion, up from the previously communicated CHF 1.2 billion to CHF 1.4 billion. For the second quarter, we expect the recurring EBIT results to exceed that of the first. This is also consistent with the historical long-term average seasonal development from Q1 to Q2. And we consider the seasonal impact of any wage increases, the bulk of which take effect in April. As a reminder, our underlying core guidance assumptions include the global GDP will grow, but with persistent uncertainty across geopolitics, macroeconomic policy and trade. As a base case, global sea and air freight volume demand will grow no faster than GDP. And as we have already highlighted, our cost reduction program remains and is on track, and we still expect more than CHF 200 million of gross savings on an annual basis. These savings will ramp up over the course of 2026 with an estimated impact of at least CHF 100 million in the current year. There is no change to the assumed 5% currency translation headwind reflected in our EBIT guidance nor is there any change on our expectation for a 25% effective tax rate. With this, I would now like to close our presentation with a summary of our key takeaways. Our focus remains on market-beating growth in targeted attractive sectors. At the same time, we are striving to meet the heightened market demands and complexity borne out of the conflict in the Middle East. Yields in both sea and air logistics remain stable and slightly improved. Our cost reduction program is on track with continued confidence in targeted savings, whereby the progress in the first quarter was ahead of plan. We have a strong foundation to achieve AI productivity gains and foresee material traction from 2027 onwards, a view that we shared on our last call. We have seen continued progress over the past few months with AI adoption expanding across our operations, empowering our workforce in their daily work. We will share a more comprehensive update, including further details on operational integration and next steps alongside our second quarter results. Lastly, we are raising the lower end of our full year earnings guidance range to reflect the better-than-expected first quarter results and current expectations for the rest of the year. With this, I want to thank you for your attention and hand back to the operator to open the Q&A session. Operator: [Operator Instructions] Our first question comes from Alex Irving from Bernstein. Alexander Irving: Two for me, please. First one, what impact on earnings do you expect from the recent events in the Middle East? Given the small narrowing of the guidance range, the answer looks like none or at least net none to get your perspective on that. Second, regarding the cost cuts, how far into those and especially how far into the expected headcount reductions are you now? How much is still to be done? And how significant do you take the execution risk to be? Stefan Paul: Alex, Stefan speaking. I take the 2 questions. First of all, in the first quarter, just to reiterate, there was no no impact to be seen on GP or EBIT level from the Middle East crisis. Moving forward into the second and third quarter, mainly into the second quarter, we do not believe there is a significant impact to be expected other than the volume trajectory in sea freight. We see bookings currently are down by 70%, 80% in and out for the GCC. We have mentioned in the numbers that, that had an impact of 1.5% approximately, particularly in March on the volumes. The yield will be stable, as Markus mentioned as well. Yield will be stable in sea freight moving into the second quarter. What you will see more and more coming into the second quarter and the result to be expected is the fuel adders, which we transparently pass forward to our customers. And I want to reiterate very transparency, very transparent. So we definitely will share that on a regular basis with our customer base in order to ensure that everybody understands what is happening. So overall, from a volume perspective, we expect air freight slightly picking up. Volumes overall in sea freight, most probably flattish. We are confident that we can move forward with certain other trade lanes and piggyback on certain other trade lanes and growth, particularly coming in from Asia to Europe and to a certain degree as well to the U.S. to offset the decline in the Middle East. So overall, not a huge impact to be expected from the Middle East crisis, rather not negative, not neither positive. And the main focus in terms of the EBIT improvement will come from the cost efficiency and cost-cutting program. That now focuses on the -- or let me focus on the second question, how many FTEs, what has been executed already by end of March this year, end of March 2026, we have executed in full, and there will be no further reduction from that particular program to be expected in terms of additional FTEs in the second or third quarter. Operator: Next question comes from Muneeba Kayani from Bank of America. Muneeba Kayani: I just wanted to follow up a bit more on the air market, which is clearly tightened because of the Middle East disruption, a bit surprised to hear you say that, that hasn't had an impact and you don't expect it to have an impact. So I just want to understand how you're seeing that. And I wanted to clarify on air yield expectations for 2Q. Do you think there could be a further pickup from the strong performance we've seen in the first quarter on air yields? And then secondly, just on the guidance. So I appreciate you've raised the lower end. But based on what you've said on kind of 2Q expectations, that would imply a second half EBIT lower than the first half, which is seasonally not what happened. So really kind of what needs to happen to reach the second -- the lower end of your guide? And why did you raise the upper end of your guide by a similar CHF 50 million? Markus Blanka-Graff: Muneeba, let me just take the second question first on the guidance. I think I even mentioned it, I think, in my presentation, we expect the second quarter to be seasonally as well stronger than the first quarter. So there is no concern that the second is going to be lower than the first. Why we increased and raised the lower end of the -- the lower end of the guidance is basically because we exceeded on the first quarter and we adjusted the lower end to that effect with a little bit of an add-on on top of it. But it actually means we are consistent and remain with our assumptions and conclusions for the guidance for the rest of the year. Stefan Paul: Yes, Stefan speaking. Muneeba, so clarification or more clarity on the air yield. So what we expect is a slightly higher yield into the second quarter versus the first one on Air Logistics. I mentioned Sea Logistics most probably rather flat in terms of volume and yield. Air will be slightly up. Same is expected for volume. Remember what I said during the call 6 weeks ago in the first quarter in March, when the crisis started, when the war started in the Middle East, we missed roughly 16% to 18% of the total volume, the capacity, which was grounded from the Middle East carriers, that is now back. Single digit still is missing, but this is back. And why do I state that we believe there is a little bit higher EBIT to be expected or yield per 100 kilo expected is based on the product mix, based on the better mix, which we have seen in the last couple of weeks, less perishable, significantly less e-commerce and a better basically gain ratio in the hard cargo segment where we traditionally see a higher yielding paired with the surcharge adders, which will increase the rate level as well to a certain degree. Muneeba Kayani: That's clear. Markus, actually, my question on guide at the lower end was on the second half, not the 2Q, which 2Q is very clear, but how you thought about the second half of the year in that guide? Markus Blanka-Graff: As I said, we are not changing our assumptions for the rest of the year. Operator: The next question comes from Parash Jain from HSBC. Parash Jain: My question is more into -- in your discussion with your customers, both on air and sea, what kind of commentary are they sharing with you given we have seen U.S. retail sales to inventory has come down. But at the same time, do you think that higher inflation will dent the business sentiment or consumer sentiment as it is shown in the U.S. Michigan index. So going into the second half, do you have certain assumptions by when this crisis will be over or where the oil price will be to get to the numbers, the range that you are offering? Stefan Paul: Yes, Stefan speaking, Parash, thank you for the question. So as mentioned, so the Transpac, so the volume, the consumer volume and the sentiment mainly from Asia into the U.S. is rather soft. And I think depending on where you are in the U.S., $1 -- up to $1.50 more per gallon basically and the inflation overall is impacting the consumer sentiment, and you mentioned that quite rightly so. This is definitely ongoing. We do not see any signals that the Transpac market, the U.S. market is recovering soon as long as we have that situation. But that was baked into the updated outlook and forecast that will be offset to a certain degree by other trade lanes and in particular, by our cost measures. But your main question was about the consumer sentiment, and we see that is still rather soft. Parash Jain: And then just in terms of -- has the duration of the war or oil prices has gone into your assumption? Or you think that oil price irrespective will be passed through almost on a real time? Stefan Paul: It will pass through, yes. As I mentioned before, I think that was the question. It will be passed through. And at the beginning of your question, you mentioned how our customers are reacting, right? I think we have very open, transparent discussions and 99% of the customers fully accept and expect it, right, and accept the discussion, and we do not see a significant topic in regards to the fuel price and the adders. But as I said again, and I'm repeating myself, we are extremely transparent. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: I have one follow-up question on your Q2 outlook. So you have talked about sea yields stable quarter-over-quarter. And then you have talked about volumes also stable. Now the question is, is that year-over-year stable or stable quarter-over-quarter? Because generally, Q2 has got better seasonality versus Q1. So yes, wondering if that's year-over-year or quarter-over-quarter. And actually, same question for air freight volumes, where you -- when you said slightly up for volumes, were you referring to year-over-year or quarter-over-quarter? And then my second question, again, another follow-up question is on your cost savings. Clearly, the peak in Q1 was all driven by -- or mostly driven by cost savings. Now are you able to quantify where are you in terms of run rate compared to the CHF 50 million run rate by year-end? Because I mean, if the beat versus the CHF 285 million guidance is all coming from cost savings means that, yes, you achieved CHF 30 million basically more of cost savings than what you expected. So that's a run rate of -- yes, rate compared to the CHF 50 million by Q4. So yes, that would be helpful. Markus Blanka-Graff: Marco, it's Markus. And I'll start with the cost saving part. I appreciate your reverse engineering calculation and you are relatively close to reality. So we had a head start, I would call it, into the first quarter with the cost savings. So it's not a linear development as we anticipated still at year-end. I would say that from our ambition of a CHF 50 million per quarter cost reduction, so CHF 200 million annualized, we are probably just past the 50% on a quarterly basis cost reduction. So you talked about CHF 30 million. We're probably somewhere in that ballpark. That also means we might not see the same linear development going into the CHF 200 million run rate. We might see the second quarter being a bit flatter. We have already talked about inflationary impact on April through the manpower cost. So we might see a bit of a slower progression. But then from then on, we will continue into the third and the fourth quarter. As I said, I think our CHF 100 million ambition for this year, we should be able to exceed that. On your first question, the comparatives had all been on a year-on-year basis. So every comparison on volume and yield had been on a year-on-year basis. Marco Limite: Sorry, just to -- I think it's quite an important point. So also your comment on air yields of small up is on a year-over-year basis, okay, which was CHF 770 million, right? Does not make -- if I can, does not make sense, does not make the outlook for Q2 quite positive, especially in air if you have quarter-over-quarter, let's say, based on normal society, 10% more volumes on higher yields means that Air EBIT will be significantly up quarter-on-quarter versus Q1 in your view? Stefan Paul: I would say the likelihood is there, yes. Short and crisp. Operator: The next question comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I just wanted to ask a little bit more on your air business. Can you talk about your approach to buying capacity? Obviously, there's a huge amount of volatility in the market. And so I just want to get a better understanding for how you're risk managing some of the potential impacts around spot rates for your business. So how are you positioned, net long, net short? Maybe a little bit of color by region would be helpful. Stefan Paul: Yes. What we do is, as you know, we have a combination of block space agreements long and short with the commercial carriers. And we have since years now, a charter operation together with our subsidiary, Apex, where they operate on our behalf as well. So what we do is we have secured in addition the last couple of weeks, we have secured additional charter operation, especially when you look into the Southeast Asian markets where the technology comes from large demand from the hyperscaler, semicon industry and the other tech companies, mainly from Thailand, from Vietnam, to give you 2 main examples, Taiwan, Taipei is as well, very hot in terms of the volume demand is concerned. And we don't only piggyback on the normal commercial flights, the uplifts directly airport to airport from these destinations into the -- or from that locations into the receiving countries. We will operate or we already operate with charter capacity point to point. But additionally, with capacity, which we utilize from Southeast Asia to China, and then we take from China, from Western -- from an airport in the West China region, we take uplift, significant additional uplifts from China in order to ensure that we always promise or keep the promise towards our customers to have enough capacity and to guarantee a certain transit time even if there is a problem on the commercial flights, we add and balance this with additional charter capacity for the customers. Operator: The next question comes from Kulwinder Rajpal from Baader Europe. Kulwinder Rajpal: So 2 questions on my side. First on Road Logistics. So I wanted to better understand how much of the EBIT growth actually came from going to road from sea in the Middle East and how much actually came from the demand recovery in Europe? Just a qualitative flavor there would help. And secondly, I'm not sure if I missed it, but when we look at the decline in air volumes in Q1 on the lower-yielding side, was there some selectivity at play here? Or if there are some other factors behind the scenes. So could you please elaborate on that? Stefan Paul: I'll take the road question first. So it was mainly 90%, 95% coming from additional volumes in the European marketplace plus the U.S. and only to a smaller degree based on our size of business, book of business from the Middle East crisis. Markus Blanka-Graff: Raj, on the second question on the decline in air volumes in Q1 compared to last year, major contribution is coming from a reduction on e-com business, e-commerce business that in the first quarter 2025 was still let's say, there in a simple world. And right now, it has declined by over 50% in volumes. So that's really the volume impact and also the mix impact. Kulwinder Rajpal: Right. So just to clarify, I mean, would we expect some sort of a catch-up? Or would it be determined by customer behavior in the future as to how these volumes trend? Markus Blanka-Graff: But it's not only customer behavior, I think it's also how attractive that volume is for our profitability and how it matches with capacity, right? Operator: The next question comes from Hugo Watkins from BNP Paribas. Hugo Watkins: Just to go back to airfreight. Can you give any insight on potential jet fuel shortages, whether that's from yourself or what you're hearing from carriers and just what that might mean for airfreight capacity more structurally for the remainder of the year? Stefan Paul: Yes. We all know, and this is not a secret that especially in Southeast Asia, I think lowest capacity is in Indonesia, followed by Vietnam, Thailand to a certain degree. I think China has significantly more reserves. I would not worry about China currently. And as I said before, with our strategy to balance charter block-based agreements and own capacity operated by FX, I think we are well positioned to manage that crisis if it would even come. But repeating myself, the highest risk in terms of mitigating lies in Southeast Asia, where some of the countries do not have buffer beyond end of May or so. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Just firstly, you mentioned you are targeting growth in other trade lanes to offset the Middle East pressure. Can you tell us which trade lanes you're working on? And what gives you confidence that there is kind of growth to be captured there? And then secondly, I'm aware that usually wage deals reprice every April. What is your target or I guess, your assumption for wage inflation this year, considering the CHF 100 million or over CHF 100 million is a gross cost saving target? Stefan Paul: Yes, I tackle the growth question, trade lanes, we have started, and I think I mentioned it now 2 times, we have started heavily to look from a sea freight perspective into the prepaid China market. You have a lot of new Chinese giants who are asking for support and they always call it help me to become global. So we have reiterated and dedicated additional sales force in the Shenzhen area, for instance, where a lot of these customers are located. And we are confident from what we have seen already in the last couple of weeks in terms of business gains are concerned that we can offset with China prepaid additional volume coming in from new customers and existing customers, the mid prices from a pure volume perspective. Markus Blanka-Graff: Alexia, it's Markus. On the inflation base, so as you can imagine, we try obviously to address inflation topics and compensation on the larger workforce on the ground. And I think overall, we usually have a compensation for inflation also for Contract Logistics business. That is usually a pass-through. So where we really have cost impact that is also impacting the bottom line is on the sea and air freight basis. And here, I can safely say we remained below the global inflation values, but I don't want to disclose precise numbers. Alexia Dogani: And can I just ask a follow-up on this prepaid China market? Is that intra-Asia or kind of ex China to the world? Stefan Paul: No, it's ex China to the world. As I said a couple of times, we are not focusing so much on intra-Asia. The volume is huge, but the profitability is rather low on the low-end side, $50, $60 per container unit. So it's always focusing on China long haul to the world. Operator: The next question comes from Gian-Marco Werro from ZKB. Gian Werro: I have 2 questions. The first one is a follow-up really on what you discussed already on this kerosene potential shortage in the belly capacity. So can you tell us, are your clients already planning alternatives to Air Solutions with you, which might be beneficial to you, I think? And then also the charter situation, how does that work with the kerosene availability? Does some of the charters already have their own stock fuels? And then the second question is just on your AI potential that you mentioned already 6 weeks ago. Can you so far already give us a bit more details here about the potential cost cutting that you see there? Stefan Paul: So on the jet fuel, I would say, yes, of course, we have with certain customers different models. And what we do is -- and don't get me wrong, we are -- we cannot do something which is not possible at all, but we can do proper planning. And then with our charter capacity, as I mentioned before a couple of minutes ago, Gian-Marco, so we refill certain charter flights in China. We have access to certain capacity in China. So we bring cargo from Southeast Asia into China and then we refill our aircraft on the way back to Vietnam, for instance, in China. And on the long-haul flights, we refill as well in China. And remember what I said, China capacity will last significantly longer than in Southeast Asia, just in case something is happening. And I'm not saying that we will see a significant shortage. It remains particular on how fast the straight of homes will be reopened and we come back to a normal situation. But just in case this is going to happen, then we are already in close contact with some of our very large customers to do certain planning and scenario planning in order to help them to maintain a certain supply chain accuracy. Markus Blanka-Graff: And Gian-Marco, on AI, so clearly, that's an ongoing development, and we see continued progress over our last couple of weeks. But between our last announcement and today, it's really just a couple of weeks. And I would ask you to wait until we get into the half year results in July. And I think we should be -- you can expect from more tangible report and numbers, I think, at that point in time. But between the last 6 weeks and now, really not much has changed. We have expanded our use cases, and we are more and more seeing the benefits in empowering the workforce and making really their work more or supporting their work in a much better way. Operator: The next question comes from Lars Heindorff from Nordea. Lars Heindorff: The first one is on the road business. It sounds like you actually see maybe a little bit of sign of improvement in the European market. Maybe just if you can sort of elaborate a bit on that. We've seen Maut statistics in Germany still being down. So this increase in the organic revenue growth, is that caused by price increases? Is it volumes? Or where do you see any pockets because I mean, feedback on Germany is still pretty big in my view. And then the second part, which is what most of the other questions have been around, which is still regarding the yield development, the bunker surcharge, particularly in sea freight. To what extent is that affecting the yields positively or negatively? In sea freight, I'm hearing that the carriers are, to some extent, struggling a bit passing through the emergency bunker surcharges and maybe that many customers are waiting for the regular BAF to kick in sometime in the third quarter? And how will that affect your yield development if we look a little bit further beyond just what goes on right now? Stefan Paul: Yes, Lars, it's Stefan. I'll tackle the first one. It is mainly market share gains, right, in the U.S., in particular as well in Europe. We have seen a pretty good development in the last 6 weeks. We have gained additional volumes in Germany and France in the large domestic markets, but as well international. I think it has to do with what we have started last year on the back end of the softening when we saw that the market has really started to soften quite a bit. And then we increased our sales efforts. This is paying off now. And then with you, overall, the German economy is still pretty challenging, but even so we see good development from customers and new customers and the volume is coming in much better than expected. Markus Blanka-Graff: And Lars, I'll take the question on -- I think your general question is any fuel bunker or any surcharges beneficial to the yield. And I can answer, I think, for all 3 business units, if it's road, sea or air, that is neutral to the yield. I think what is important is what Stefan also mentioned a couple of times, there is transparency from that impact towards the customers. And I think that is the most important thing we can do being transparent and straightforward. It's not a yield topic. It's a cost pass-through. Operator: The last question comes from Marc Zeck from Kepler Cheuvreux. Marc Zeck: Last question then would be actually on the macro situation in Europe. We talked about the U.S., I guess. But let's say, volumes into the U.S. were kind of sluggish for the last 2 years and most of the volume growth, at least for the entire market was driven by volumes into Europe. And now the energy crisis is probably more of an issue for Europe as we are not really self-sufficient on energy over here. So what is the latest really that you see for April or that you see forward bookings for May? How is the energy crisis affecting Europe? And why would you be kind of positive that -- yes, that you will get over this rather without a major slowdown in European activity towards peak season in ocean freight in August and September? That's my question. Markus Blanka-Graff: Mark, this is an interesting question because it's, I think, nearly impossible to answer correctly. So I take the risk of being wrong, right? So I think on energy crisis and what is the impact on the macroeconomics, the first question for us is, and I have -- we have talked about a little bit what is the expectation of how long energy prices are going to stay at such a super elevated level, much connected to how long the crisis in the Middle East is going to continue. What -- what we can see is that at the current stage, the trade lanes, Asia to Europe are basically holding up strong. How much the inflationary impact is going to put on customer confidence in the U.S. remains to be seen. But again, here is a question more like how long is it going to persist. So I think too early to say if there is already an impact into the third quarter peak season expectations. I think we really have to sit here and look at the development for the next couple of weeks before we have any idea what's going on. You know better than certainly us, oil price volatility is a topic on the day. And obviously, for us, as I said in the previous answers, we are passing through this impact towards the customers. Their behavior, I think, cannot and has not reacted on a daily basis. How that's going to be going forward, I think, as I said, we have to wait a bit. Marc Zeck: Understood. If I just have a chance to follow up on that one. If you compare the current situation to how things played out during the Ukraine crisis, let's say, from a current perspective was pretty similar end of February, right? When -- then when did you see from European customers really the action that they put back a bit on the other side? Markus Blanka-Graff: Well, I think my first answer would be the magnitude or the impact on economy, on macroeconomics of the Middle East crisis now is far bigger than what we have seen on the Ukraine war. So the energy prices and the severity, I think we have talked about even the potential of jet fuel shortages. That has never been a situation from the -- coming from the Ukraine war. So I'm not sure if that is comparable. What we can generally say is when there is such severe disruption in supply chains, there is a certain period of a couple of weeks, so maybe 6, 8 weeks where alternatives, we spoke about how alternative supply chains are being designed are being done. And then if that new situation persists, then slowly that becomes that new situation to deal with. But I think we are far away from any of that stage right now. We are still in a stage of disruption. Operator: We have a follow-up question from Marco Limite from Barclays. Marco Limite: So I just want to go back to one of your statements, which is the Middle East had no real impact in Q1 and potentially into Q2. Was that referring to the sea freight business or to all the divisions? Yes, I would say this is the question and then in case I've got a small follow-up. Stefan Paul: So my answer was -- Stefan speaking. My answer was that the impact from an EBIT perspective in Q1 was not to be seen from the Middle East crisis. just piggybacking on what I said before, we will see an impact on the overall freight rates due to the fuel surcharge adders, which we transparently hand forward and put forward to our customers, and I talked about that as well. From a yield and from a volume perspective, you might see and I mentioned it as well that the second quarter in air freight will have a little bit of a better yield. Is that coming from the crisis or from a better mix? I would say it's more coming from a better mix and less from the crisis. But overall, one thing is clear due to the fuel surcharge adders, the freight rates overall are getting higher. Marco Limite: That makes a lot of sense. And when we think about the better mix, is that market-driven? Or is you guys trying to... Stefan Paul: Nothing to do with the market. It's us we decide basically based on verticals and higher profitability, where do we play and where do we want to play. Marco Limite: That makes sense. Is that because in a period where capacity there is shortage of capacity, I guess you prefer to go with better yield volumes. Is that the logic or... Stefan Paul: Some of the logic, yes. some of the logic that and we put much more emphasis on the general cargo on the hard cargo, right? And with our service, with our product offering, with the quality we offer, we have the choice to basically go for the higher-yielding business. Operator: Ladies and gentlemen, there are no further questions. Back over to you for any closing remarks. Stefan Paul: Thank you very much, as always, for your interest, listening for the good questions, and we speak to you then when we communicate the Q2 figures. Stay tuned and healthy. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Ben Jenkins: Good morning, everyone. Thank you for joining us. There's obviously a lot to get through in the announcements today. So alongside the presentation, the Aura-Qoria team is going to be in the ground in Australia next week, meeting with as many of you as possible. In terms of the call today we have Peter, Tim, Ben and Crispin joining from Qoria alongside Brian from Aura. Everyone's going to be available with the line of Q&A at the end of this call. Hari is unfortunately, already in transit to Australia. But we do have some comments from him played shortly. So with that, Peter, I'll pass over to you to make a start. Peter Pawlowitsch: Thanks, Ben. And good morning, and thank you all for joining us. So today, we announced some changes to our merger arrangements with Aura. These changes reflected deliberate set of decisions by our respective boards to ensure that the combined group AXQ is positioned for long-term success in a rapidly evolving global technology landscape. We've announced that Aura secured binding commitments for an increased equity placement of USD 100 million. That's a significant increase from the original USD 75 million. And importantly, it's fully supported by existing Aura shareholders, demonstrating their confidence and strong conviction to the mission. Also it ensures that we have a strong balance sheet for the group on when the merger completes with only a modest dilution. We also announced today a new organizational structure, one designed to get the best out of the capabilities of the group, combining U.S.-based technology and growth leadership with Qoria's global market presence, regulatory expertise and customer footprint. Hari, Sujay and Brian have all agreed to continue in their current roles as CEO, Chairman and CFO, respectively, of Aura. And the group has been secured by the continued service of Tim to drive our ambition to be the global trusted name in online safety and Ben to support Brian as Australia's CFO. The Qoria Board is delighted to announce today's changes and continues to unanimously recommend the transaction. They ensure that Aura enters the ASX as a well-capitalized global platform, has the ability to execute through integration and invest in growth and is unconstrained in this area of significant technological change. We believe this structure, both capital and ownership gives shareholders the best opportunity to participate in the long-term value creation. Regretfully, Hari is currently on a plane coming to Australia to meet with investors. We wish he could have joined us on this call and has recorded a few comments. Tim, can you please roll the play? Timothy Levy: Sure. Hari Ravichandran: Hello, everyone. I'm really disappointed. I cannot be on this call live as I'm on my way to Australia to meet our investors and the Qoria team. I'm extremely excited and looking forward to meeting with the investors and engaging with all of you over the course of next week. What we are building here is something very significant. This is a global platform for digital safety and security at a time when the problem set is accelerating, it's not slowing down. The change announced today will reflect a very thoughtful and conscious decision to prioritize strength. The markets have moved, everyone in global SaaS knows that. We want to position Aura to win with both capital and capability. Sujay and I are excited to get behind the merger and commit a further $25 million to its success on top of our previous investments. The leadership structure here also reflects our commitment with me and Sujay continuing. My role here is to bring the businesses together and ensure that we hit our numbers and to drive global innovation, replatforming and growth. I'm also really looking forward to continuing my work with Tim Levy, who will support me at Aura through a leading Aura Alpha. Aura Alpha is a critical part of our strategy. This is how we will build new growth vectors across partnerships, markets and corporate development. This is not a site initiative. It focuses Tim on his unique vision, his global relationships and his skill set. And this is how we'll ensure that we stay ahead of the market as it evolves. We now have the platform, the leadership and the capital to build a global category leader. Again, I'm very sorry I'm not live on this call. However, I'm sure I'll get some baseline with many of you next week. With that, I'd like to now hand it over to Tim, Brian and Ben to deliver our results. Thank you all. Timothy Levy: Thanks, Hari. Thanks, Peter. That's great. So what I'll do now is I'll do a highlights of the Qoria, Aura and the group, and then I'll hand over to Brian DeCenzo who's going to run through Aura's results, which are fairly impressive. And then we'll cover off our typical Qoria results operational update with Crispin and Ben and then a brief Q&A at the end. So I guess if I was to summarize this slide, which is becoming increasingly complex. The overall thematic here is that the Qoria business, if you look through FX movements for the falling U.S. dollar and the transactional costs that we've been spending is actually performing extremely strongly. In the March quarter, it was probably a surprise to all of us. I think we outperformed analysts' expectations in terms of ARR added and net ARR growth at 49% improvement on what we did in the equivalent period last year, so that was pretty remarkable and not just in K-12. And one real highlight actually, which I do want to call out now is the K12 business in the U.K. that's been battling some headwinds for a while, particularly around funding and the lack of product. Now both of those things seem to be solving themselves. And so we had over a 60% PCP improvement in the performance of the U.K. operation in the March quarter. So it was tremendous. But really the But really the standout clearly continued to be still Qustodio's $2.7 million of ARR, which is more than double what they did in the equivalent period last year. So Victoria and the team are doing an outstanding job there with very modest increases in investments. On a constant currency basis, we ended at -- we would have ended at $169 million of recurring revenue, which would have been beyond everybody's expectations, I feel. But of course, we were buffeted by FX. The FX in our -- when we started the year was $0.64, that is $0.72 now. Now turning to Aura, if I can speak just briefly for Brian. Let me speak with admiration, added $26 million of recurring revenue in the quarter, 40% up versus the prior period with less marketing spend, improved AOV, improved CAC. It's an astonishing result. Just to remind everybody, when we started talking to Aura, I think they had $180 million or thereabout of recurring revenue. This is in October, November last year, ended the year with $216 million and now at $241 million. That's astonishing. And the businesses in combination now have $345 million in ARR. And if you extrapolate the March result, you get to a very big number. And remember, for those people that know Qoria well, the June quarter is our biggest period of growth. Last June, we added $14 million recurring revenue, around $10 million we added in the June quarter. If we replicate that, then a very big number will appear on the right-hand side of the screen in July. So all of those numbers are really, really strong. The unit economics of Aura in particular, I would like you to note because they're the things that give us the confidence as to why this deal is the right thing for our shareholders to do. So that being said, I might hand over to Brian. Brian DeCenzo: Yes. Thanks, Tim. So as Tim alluded to, very pleased to report that the performance that we had indicated through February on the call that we had about a month ago at this point, continued through the end of March. So GAAP revenue or statutory revenue was $59 million for the quarter with ARR ending at $241.5 million. That represents 31% up year-over-year for both metrics. Again, sort of reiterating some of the themes that we talked about at that March session, a lot of this has to do with strong unit economics in our D2C business, not only the CAC that Tim talked about, but really being able to mitigate the burn on account of the sales within our D2C business and then the deliberate upsell motions that we were able to employ to drive incremental AOV. Adjusted EBITDA for the quarter was negative AUD 14.3 million. So that was an improvement of AUD 1.1 million year-over-year. And while that is an improvement over last year, we would note that it does not reflect the full run rate impact of the cost actions that we executed in February, which we discussed on that call about a month ago or any additional planned cost savings, including the performance marketing spend pullback that we've indicated to the market we will do in the back half of the year. So just to summarize, I think these results reflect our ability to achieve the targets that we've set out and very much as we think about the performance in the first quarter and as we roll forward in the year, aligned with the prior communication that on a combined basis, we will be free cash flow positive from the time of closing through the end of 2026. On the next slide, if you turn there -- thank you. So as Tim noted, what we wanted to highlight here was when we first spoke with the market in February around this transaction, we indicated a commitment, again, free cash flow positive on a combined basis from the time of closing through the end of the year. And one of the ways that we would get there was through improved efficiency in our performance marketing spend. And so what we want to highlight here is we were able to both bring CAC down and then on account of the reduction in CAC and that improved AOV that I referred to on the prior page, we were able to see a very dramatic improvement, not only in CAC, but also in the overall burn rate through the first quarter at that $5 million number. If you flip to the next 2 pages, Tim, I also wanted to provide the market just a roll forward of the metrics that we've shared in prior sessions, so people can get a sense of how everything is trending. Obviously, as we talked about, we'll be in front of investors over the coming days and happy to answer any further questions. So with that, I'll turn it back to Tim. Timothy Levy: Thanks, Brian. So yes, I'll quickly skip through the quarter highlights. Obviously, I'm sure there are going to be a lot of questions and thorough side of things is probably less interesting, but I'll go through them. At the end of the year, actually, it should be 31 million children now. So we've added a further 1 million students since we last reported 10 million parents. All of the kind of operational metrics within Qoria are performing really well. Growth within the regions, U.S. is growing north of 26%. We expect to improve that through June. Qustodio is a standout, 30%. I think we're talking at the beginning of the year, 30% growth, and that's comfortably doing that. EMEA is the U.K. and now operation in Spain called Qoria Spain that's starting to target international schools globally and now recently in the Middle East. It's subdued at 6%, but you'll see that really picking up, particularly as we're launching this Qoria Connect product, the unified Qoria K12 platform is literally rolling out now. We've got customers using it now. So this year, I think I've said many times, for Qoria, it's about retention in the U.K. and next year, it's about growth. and we're seeing some really, really positive signs. The team there are doing outstanding work. And as I said, for now about a year, Australia is our best-performing K12 market with the community proposition of selling parental controls through schools in the Australian private school system. It's an outstanding performance. I think their PCP performance was like 80% above what they did in the prior year. That's just extraordinary growth out of this market here. So the contributors to ARR, obviously, Qustodio is a standout there at $2.7 million. Remember, that's net of churn, so that's a fabulous result. There's a modest amount of price optimization in that. They run a number of price optimization trials in January, February. They launched those at the back end of February. They've had to pull them back a bit tweak because it was elevating churn, but you will definitely see a flow through the year, particularly in that key renewal period in back-to-school and Christmas period. So there's something like a 5%, possibly 10% natural growth rate, net dollar retention and price increases coming to that business. So that's really exciting. And then the K12, as I said, a big contribution from new, increasingly strong contribution from existing cross-sells and upsells. I think our target was 33% or 34% contribution of growth through existing customers, and we're easily outperforming that. So Crispin and his team are doing a fantastic job. Obviously, the big story is the big red line on the right-hand side, we are being buffeted by the FX movement of the U.S. dollar. But the underlying business is really strong. And fortunately, for us, from July, we'll be reporting in U.S. dollars. So that will become much less of a problem for us and much less of an issue to explain to analysts. K12, I mean the numbers here speak for themselves. The real highlight for us, given our focus on that back to -- so the June quarter in the U.S. is the pipeline. $40 million of pipeline with a weighted value of $19 million. It is the highest I think we've ever had or equivalent to the highest that we had last year. We're set up really well. And of course, we have a number of [ whales ] that are outside that pipeline that give us a lot of confidence to outperform. So feeling really good about that. I think I touched on all these metrics, everything else is pretty stable. Average sales order, average price per unit, they really -- the June quarter is a really important period for us. So you'll see a turn in that chart down the bottom, average sales price per order, you'll see that click up in the June quarter again, as you saw last year. Qustodio performing on all metrics, profitable business growing really well. As I said, there's been price optimizations. We've given Victoria an extra 30%, 40% in marketing spend, and she's spending it very, very wisely. She's -- as compared to the -- and I'm not being disparaging but the Qustodio business is selling parental controls, they have the benefit of a positive cash burn in marketing. And so we've told Victoria, you can spend up to that burn and no more. So basically manage your cash flow and grow as hard as you can. And she is doing very well. School promotions continuing to grow. The old community stuff that we spoke about is going really well, 540 districts now. So I think we're now about 18% of our districts on that program, which is equivalent to 1.3 million parents. So the parents of 1.3 million students are being promoted Qustodio. That's pretty exciting. We're still getting those schools that launched our program north of 20% taking up the freemium offer and of those 1% taking up the premium offer. We're launching monthly subscriptions to those customers literally this quarter actually. So we're now starting to get into the cadence of promoting and seeing how we can monetize that pretty big audience. So stay tuned. Okay. It's obviously very, very cyclical. I would urge investors to not read too much into our December quarter or March quarter -- sorry, the March quarter or June quarter cash flows because really the key selling period for us, the key is June and the cash comes in, in that December half. 65% of our growth is typically in the June quarter. So I should be on our ARR performance for June. And you can see in this chart that the business is growing every year, and there's a high cyclicality now in our numbers. These charts are hard to interpret given the FX movements and what we've tried to do is show that our net ARR is growing, which is the -- on the bottom chart is the green box, the green shaded area. And the column on the right-hand side is our FX adjusted underlying cost structure. And you can see that there is -- it's moderated now with these -- we announced some changes in the last couple of months. We're pulling some costs out of the business, essentially reducing new hires and replacements to make sure that any operational cost expansion in our business is covered by cost outs or any delays in cash flows are similarly covered by very careful spending. But I'll let Ben talk more about that at the end of this deck. Over to you, Ben. Ben Jenkins: Thanks Tim. I'll just touch on a couple of things here quickly so that we can get into questions sooner rather than later. One of the main things that people will notice is the customer collections, the cash receipts are only slightly up year-on-year. Tim has touched on the seasonality of that. The December quarter is what feeds the March quarter receipts, so December sales and the December quarter is -- the U.S. is about 5% of its business in that quarter. And so it's more about Australia and New Zealand. So it's very hard to shift the March cash flows. But as noted here, the U.K. had a good quarter. That was largely in the month of March. So very little collections, if any, related to that in the March quarter, and that will flow through to a good growth in year-on-year comparisons for cash collections in the June quarter. On to a little bit more of the detail around the costs. Obviously, you can see direct costs in the quarter were up significantly. There's 2 things at play there. December quarter was down. It's just timing of cash flow payments falling into January. So some of that related to December. But also there's an annual billing cycle for some of the Google costs and that occurs at the end of November, invoiced in December, paid in the March quarter. So you'll see the direct costs come back down into line with the June, September quarter from last year. There's nothing structural that's changing that spend to be up on an annualized basis. It's a little bit in line with growth in students, but it's not linear. So we do get economic benefits there as we grow. Marketing costs are obviously up year-on-year, but as we flagged in the December quarter would be down from December, which is one of the biggest spending periods. The June quarter should be a similar number and staff costs well under control, some changes made during the March quarter that we announced as part of the half year results. So we've taken some cost out of the business, a slowdown on recruitment, and we've got that well under control, fixed other down as well and leases down as well. So overall, costs very much under control. And if you project that forward with the growth in ARR that Tim is talking about in the June quarter, you'll be able to see the growth in cash flows and cash generation over that period. So very comfortable with where we're at the moment, got line of sight through to July where the cash starts to flow strongly again and comfortable that the June quarter will significantly outperform the March quarter in terms of free cash flow. That's probably all I'll cover on that and happy to jump into questions there. Unknown Executive: We can. Ben Jenkins: Thanks a lot. We have some restrictions in place given around what we answer given the scheme booklet publication late May, early June. However, that being said, happy for you to ask whatever is top of mind around the update today. And if we're restricted from answering it, we'll just take it on notice and address later on. So with that, I think we'll go to Lindsay for our first question. Lindsay Bettiol: I think like probably today's results, there's kind of 3 parts to it. So maybe like first question just on the stand-alone Qoria business. Your pipeline is $44 million and your weighted pipeline is $19 million, which more or less is the exact same numbers you printed this quarter last year. So like how should we think about the June quarter in terms of -- if I'm just taking the pipeline as a gauge, it doesn't look like you're going to have much improvement year-over-year in the June quarter. Could you just maybe talk to that and explain where I'm not wrong, please? Timothy Levy: Crispin, you want to take that? Crispin Swan: Yes. So it is the biggest pipeline we've had, as you correctly state marginally. Yes. So from the North American market, as we know, it's the biggest selling period, and they are on track to have their largest ever quarter, Lindsay. We've also -- I don't know if you remember, we changed the structure of the team with an individual call Adam leading that team recently. And he's really implemented a lot of additional focus on deal management. So we're seeing extremely strong conversion ratios at this point in time as well. And as an example, we've got 30 deals in the pipeline with over 40,000 students each, which represents 2.5 million students with a [ fee ] of $350,000. So it will be our biggest ever quarter in the U.S. And then if you add the U.K. on top of that, as Tim said, they've had a really strong performance. They've essentially hit their annual budget year-to-date with 1 quarter to go and are projecting a strong Q4 as well and similarly for Australia. So all in all, I'm incredibly confident where we're at and the pipeline is definitely sufficient for us to have -- if you're focusing on the U.S., our biggest ever quarter. Lindsay Bettiol: Okay. So summary is absolute dollars is the same, but they're probably higher quality dollars. Crispin Swan: Yes. Lindsay Bettiol: Very good. Okay. Maybe a question on that. You've given us some updated figures versus, say, the Feb update. I look at the CAC that you've given for the first quarter, it's $169 in the D2C business. It was $173, I think, in the last update you gave, but that was only weeks ago. So just backsolving it implies like the CAC has collapsed in March. So one, like is that math correct? And two, could you just talk to what you're seeing on the CAC front, please, in the D2C business? Brian DeCenzo: Yes, absolutely. So yes, that math is correct. We saw some really favorable CACs towards the last few weeks of March. The prior update that we had given was only through the February month. So we had a full another month of performance, and it was a favorable month from a CAC standpoint. Look, it's a dynamic market. And so you look at what channels you're in, who is bidding on words in certain of those channels at different rates at different points in time. And then ultimately, there's the end market demand that exists at any point in time. And so based on those combination of factors, I think we were able to meet demand at a really attractive rate over the course of the month of March. Lindsay Bettiol: Okay. Brilliant. And I'll sneak in a third question just on the merger update. I think like probably one of the biggest critiques on the proposed merger I got is that it didn't make a lot of sense for what is essentially a U.S. business to run out of Perth. So you've obviously changed that. But my question is like is there not maybe an element of overcorrecting here? I mean Qoria is still going to be 1/3 of the combined business. And it just feels like -- I guess my question is who runs the legacy Qoria business inside the combined entity with both Tim and stepping back a bit. Timothy Levy: I'll take that one. So the structure, not everyone on this call will understand kind of the organizational structure of our businesses. But Crispin, who you see here on the call, who runs K12, he'll be reporting to Hari in the structure. So that's signaling the importance, the critical importance of K12 in this broader strategy. Victoria, who runs our Qustodio business will fall under Tom Clayton, who runs is the COO, current COO of Aura. And so he will essentially be looking after all of the consumer-facing revenue. And then our kind of functional product and engineering kind of security people and finance people will fall under their functional head. So in many ways, it's BAU to Crispin in particular, he's running his team. They're responsible end-to-end for revenue. And he has a product person, Nabil, and he has an engineering person, Rick, that will keep doing the things that he needs done, with their new reporting line. So but below the surface, not much difference. And the message internally is constantly reiterated, we're hitting our numbers, road maps aren't changing, plans aren't changing, hit your numbers, hit your numbers, don't break, [ it is not broken ]. Ben Jenkins: Thanks Lindsay. Owen, over to you. Owen Humphries: A quick question for me. Just we're getting to know the Aura business a bit better. I'm keen to learn more around the seasonality of that business. A critique this morning has been around the Jan and Feb run rate when you gave an update in March, running at around $11 million per month for Aura and then stepped down to, call it, $3 million for the month of March. Just keen to understand a little bit around seasonality of that business. What was March last year? Brian DeCenzo: I don't have those numbers. I don't have the March numbers at my fingertips. Ben Jenkins: Yes. Year-on-year ARR added is 39% up. So it's significantly up. Growth was around about $16 million in the March quarter last year. So it's not all seasonality. It's a really good quarter from the Aura business. Owen Humphries: So I guess the concern in the market has been around run rating a March number -- the March net add number? Brian DeCenzo: Yes. So there's a high degree of recurrence in that number. The -- when you look at the business, we have the big step up in January on the employee benefit side. And in the -- on the consumer side, there does tend to be some seasonality in the business. It actually tends to correlate a little bit more with a couple of things. One is the holiday period when you have people getting new devices and wanting to bring protection on those devices. You tend to see in the U.S. actually in the March and early April tax quarters around tax season with tax day being April 15, so anticipation of people getting their return checks. And then there are certain historical events that have driven excess demand. We've talked about those in prior forums, in particular, data breaches and so what you'll see is you'll see a little bit not necessarily on a new cash basis, but on a P&L overall basis, including renewal, you'll see slight bumps in late April and then a bigger bump in sort of the August, September period every year because of a prior event in 2024, if I'm understanding your question the right way. Crispin Swan: Yes. I think if I can jump in. This chart here, I think, shows you what you need to see, which is the EB business has an annual step change in the first quarter of the year, and that's magical, like it just -- they sell new logos and then they do essentially upselling within existing employers. That's a great business. So that's probably what the question is actually -- answering the question that you received. I think that's the answer to it, which is the March comp there was definitely step changes in that kind of more enterprise motion of the EB channel. And then the light blue is the typical consumer model. There is cyclicality far less than in the Family Safety business. But you also see in that Q1 '25, a jump that I think it was Q1 '25 when there was that big data leak in the U.S. And so there's also a consumer bump in that period as well. But they're the 2 cycles that flow in. Owen Humphries: And I guess a question for you guys then is just to understand the confidence of ARR growth. I understand the Qoria side of the growth in ARR in the second quarter of the calendar year. Maybe, Brian, if you can give us an indication of the expectations of where ARR growth would lie in the second quarter? Brian DeCenzo: Yes. Look, we continue -- so we grew at 31% year-over-year through the first quarter, as we talked about. We wouldn't necessarily view that as being the year-over-year run rate going forward. But we -- I think what we would say is we anticipate it growing sufficient to achieve the objectives that we put out to the market in terms of growing 20% on a combined basis year-over-year. Owen Humphries: So that is rolled over on the same ARR in the second quarter of last year, I'm not sure of the nuances in the D2C business. I'm guessing you'd expect to exceed that in the second quarter this year? Brian DeCenzo: Yes. So there were some issues around, frankly, Google algorithm changes and then also the shift to AI search that occurred in the second quarter of last year that I think we don't expect to see those same types of headwinds this year. Ben Jenkins: Sorry, I just realized you were asking about the March month. But the March quarter last year was $18.5 million. The March month last year was $1 million. So the $3.5 million of written this year is significantly up on last year as well. [indiscernible] over to you. Unknown Analyst: Just a couple of questions from me. Just with the new products flagged with Aura Enterprise, for example, can you just talk through how big the potential is there, sort of when that should be contributing to revenue? And then more broadly, just the road map and the opportunity across the 1.75 million subscribers that you've got and sort of what you think you can do with that over time? Brian DeCenzo: The first question, James, specifically relates to the Aura MSP business, if you will? Unknown Analyst: Yes. Yes, that's right. Brian DeCenzo: Yes. So that business is early days. We just moved the product out of beta. It's a sales channel that we find very compelling from a sales dynamic standpoint because it's a very large sales channel in the MSP network. We've seen estimates 30,000 MSPs plus in the United States alone. And then there's a multiplier effect underneath those 30,000 MSPs where they'll each have a number of small business clients who will each have a number of endpoints for each one of their SMB customers that are addressable. And it tends to be a very levered sales channel because these 30,000 MSPs, many of them don't compete with one another because they don't cover either the same industry or in the same geography. But they do tend to get together at large sort of conference-type events and sort of compare notes. So we find that to be a very interesting and levered sales channel when you can tap something that really appeals to that customer base. Again, early days, the feedback and the early returns have been good. It's growing off a base of 0. So I'd say it would take a period of time before it's going to be a material contributor. I think we'll start to see more momentum in that next year and then really start to see some ramp in sort of '28 and '29. Unknown Analyst: Excellent. And then second part of the question, just in terms of monetizing the existing user base over time with additional functionality and the like, maybe things like pace or locations and these type of things. Brian DeCenzo: Yes. Look, I think I'd say core to the discussion between the 2 of us, say Qoria and Aura is how do we deliver more value to the customer in the first instance based on the things that we each bring to the table today. And so as we go through and think about the back half of the year operating as a combined entity, we're thinking a lot about how to deliver value across the 2 different customer bases, one to the other, how do you take a Qustodio customer as an example, and make them an Aura customer. And then as we go forward, I think we're going to be very deliberate in terms of adding new products and features that they can deliver value to the existing customer base as well as new customers and also be very thoughtful about the way that we merchandise new product features, I'd say, in line with the merchandising that we have demonstrated with our upsell motion over the past couple of 6 months or so as we've talked about with the boost in AOV. I don't know, Tim, would you add anything to that? Timothy Levy: I think you answered it perfectly. Unknown Analyst: No, that's great. That all makes sense. Maybe just a couple more. Just on the rationale for taking the extra cash. I suppose the merged group is slated to be breakeven on completion. So strategically, is there a pathway to accelerating some strategic ambitions or just the thinking on taking that cash given the breakeven? Brian DeCenzo: Yes. So the way I would characterize it is given the dynamic operating environment that I think we all find ourselves in, we feel it's prudent from a balance sheet standpoint to capitalize ourselves in that way. Unknown Analyst: Okay. Great. And then just last one, I think you might have touched on it with Owen's question a little bit. But just with the ARR growth ambition of 20% this year and the performance marketing rolling off, I suppose you're growing at 28% currently, and we're 1/4 of the way through the year. So I suppose how do you get visibility in terms of what the growth does sort of post deal completion with that performance marketing reduction? Brian DeCenzo: Yes. So again, I didn't fully grasp Owen's question while he was asking it. And I think one of the things to highlight that's sort of embedded in the ARR growth year-over-year is the step-up, as I think Tim mentioned, around our employee benefits business that happens really in January and then a little bit of an incremental effect in February. Because of -- there is ballast from that business that continues through the course of the year on a year-over-year basis. So that gives us some visibility into the overall ARR growth. And then the remaining visibility that we have is it's very formulaic the way that we think about modeling out spend versus return in the D2C business and ensuring that we spend in order to be able to hit certain top line performance targets that we have. Unknown Analyst: Great. And maybe just last one, I'm not sure if we touched on it during the presentation, I dropped off. Just in terms of time line and catalysts and I suppose what we can expect to hear out of the company forward over the next 6 months? Brian DeCenzo: Yes. So in the first instance, I think the -- we have the deal process to get through. We've highlighted the time line to get through that process. So you'll be hearing a lot from us, frankly, through a regulatory lens over the course of the next 2 months, scheme booklet, et cetera, which will be published. And so you move forward with that. In terms of other announcements, we will be obviously having the Qoria fourth quarter announcements at some point in July, I would assume. And at that point, I think we'll have more updates, obviously, on the deal process, which should be near hopefully completion as well as incremental actions that we've taken to sort of put the business in the position what we've indicated to the market we will get it in. Ben Jenkins: Wei-Weng, go ahead. Wei-Weng Chen: I guess one of the announcements today was the creation of Aura Alpha, which is, I guess, a strategic sort of corporate dev-type division. Given the near-term sort of post-merger is very much about driving the path to positive free cash flow. Wondering what the near term looks like for that division? Timothy Levy: Yes, that's a good question. Thanks for that. There's seems to be things that we can -- we have to do actually that unlocks. And that when you're busy -- and we've been through this, Crispin and I have been tortured by a unification process that's been running way too long, probably 4 years. You don't get to do them when you're in BAU or the grind of unifying businesses. So what Hari wants me to do is to not get distracted by the day-to-day operations, hitting quarterly numbers, restructuring and so on and focus on those things that unlock value and not on the quarterly results, but unlock value in 2 or 3-year horizons. Some of those, of course, are going to be corporate, but they don't have to be. Some of those will definitely be partnerships. A lot of that is in relation to the work that I've been doing in a sense,, part time in advocacy, government relations, competition law reform, safety law reform, things that are really starting to change. One -- something that came up today is not -- I wouldn't claim in any respect that I or Qoria drove this, but there is this push for digital safety globally, and that's now manifested in California with an obligation for schools to limit screen time. And that's everything we've been talking about for 10 years in our business, and now that's coming to law in California. And who is better placed to organize to respond to that opportunity or that challenge than us with the parental control tools we have with the Octopus acquisition that allows us to measure time, use of on school devices, on school and other apps, like it's such an opportunity, and we're in the right place at the right time. So my job is to look for those opportunities and where I can internally or externally, make sure that we're pursuing them. We're already in discussions and have been prior to this deal, but since the deal was announced, we've opened up some new discussions with some really interesting strategic partnerships. So look, there is -- my problem actually is there's too much opportunity, not too little. As this business comes together and we get the confidence of the capital market, so our cost of capital comes down, then I think there's probably more corporate things that we can do. But for now, look, there's some really interesting stuff that I can do in my day-to-day and partnerships that will add a lot of value, I think, pretty quickly. So look, that's a stay tuned thing, but I'm hoping to very regularly update the market on that progress. Wei-Weng Chen: Yes, cool. And there's been, I guess, a few changes to the structure of the deal announced today. At the time of the announcement, I guess -- would it be correct to say, firstly, that you had no intention for, I guess, your announcement to be in negotiation, but it seems like you've taken on some feedback and kind of obviously restructured things in what I view as kind of a pretty logical manner. But I guess is the work now on, I guess, negotiating the structure in terms of the deal now kind of over and now it's just all about just kind of executing on the deal? Crispin Swan: Do you want to take that? Peter Pawlowitsch: Yes. So it wasn't an intention to have that, but a lot has changed since January, we're finalizing this what's happened with Claude AI, what you can now do from a development point of view and the AI stuff coming through is a dramatic change. And I think what we want to be known as a dynamic organization that adapts to what's happening to the market quickly. So there's a factor of that tied into it. We're not -- right here today, we're not expecting other changes. And we think we've got the structure that can handle that dynamism for the next period of time. So we're confident with that. And now it's just let's get this thing done and execute as quickly as we can. We put our timetable today. Obviously, some of these changes take a few weeks, but we're pushing [indiscernible] to get it done as quickly as we can and hit that strong growth. Wei-Weng Chen: Yes. And then just one more, just, I guess, to follow up on a prior question. The upsized raise, the $25 million, is that additive to your prior net cash guidance of $65 million to $70 million post transaction? Or -- and I guess, if not, does this reflect potentially higher-than-expected deal costs or... Brian DeCenzo: It is additive to the anticipated net cash position. Ben Jenkins: Possibly to be higher, we're still tracking in line with what we're expecting originally. So strong net cash position is the -- I guess, the outcome of the higher placement. Owen has a followup question. Owen Humphries: Yes. Just hitting directly on that, can you guys give an indicative guidance on -- or an update or reiteration around what the cash balance will be post transaction, noting that your guidance is free cash flow positive in the second half or July or close in July to December. So what the cash balance would be and then the undrawn debt facility? Brian DeCenzo: The cash balance at the time of the transaction, like in pro forma for day 1? Owen Humphries: Yes. Brian DeCenzo: Yes. So I would say that is still moving around on the basis of, I'd say, balance sheet management with respect to the various debt facilities that are in place. But we're currently anticipating somewhere in the order of magnitude of net cash of $20 million. Owen Humphries: Which is? Peter Pawlowitsch: At the time of merger, we said [ 0.5 negative ] so plus 25... Ben Jenkins: I've got a written question come through. So on today's announcement, the additional funds from the Aura founders, a figure of $0.40 was mentioned. I'm unclear as to what the jargon means. Will Qoria's shareholders still receive 1 AXQ share for average 17.2 Qoria shares? Unknown Executive: Yes, they will. There's no change to the relative valuation of the merger still a 35-65 split preplacement money. So the 17.2 exchange ratio that was disclosed when we originally announced deal still holds. Ben Jenkins: Awesome. I think that's all the questions I can see in the queue. Lindsay just put hand up actually. Lindsay Bettiol: Yes, I might just ask a third way on the balance sheet piece. So like rather than looking at it from a net debt perspective, just think about like the available liquidity. So you're going to raise $100 million, you have a debt facility of $100 million. Could you just remind us again like what the plans are in terms of existing debt facilities and like how much liquidity you're thinking you're going to have on day 1 post merger completion, please? Brian DeCenzo: Yes. So the anticipation is as quickly as practicable to consolidate all forms of debt that we choose to have outstanding into the new facility with the Banc of California. Again, as you highlighted, that would be a $100 million facility. And so I guess the math on that liquidity-wise would be we'd have, let's call it, $80 million drawn and $20 million of cash, so about $40 million of liquidity. $20 million of net cash. So $100 million of cash total and an additional $20 million of liquidity from the facility. Ben Jenkins: Tim, I'll pass back to you for closing remarks. Timothy Levy: Yes, cool. Thank you. Look, so this might be my last time closing one of these sessions. So first, I'd like to say thanks for everybody for supporting us to where we've got to. I'm very excited about this merger. I guess if I could position the bringing together these businesses and the most recent changes, what we're trying to do here is concentrate on setting up something that is globally significant. And the moves of the last announced today are really about setting this company up for success to tackle that immense opportunity with a heightened focus on the speed of pace of change in valuations, [indiscernible] and so on. So setting the organization up with the right division of labor with the right focus on engineering capability, where our revenue is based in the U.S., but also having an eye to the future with the role of Aura Alpha, setting up the business with the right capital structure, taking advantage of the extraordinary network of connections that the Aura team have, which is something I'm incredibly excited about. And so yes, that's what this whole thing is about is not creating a nice little business that's growing and making a little bit of profits, but to solving a global challenge and doing so in a really big way. And that's really the underlying message. And one final thing I'd add is the Aura leadership team are here with us in Perth. The senior leadership team of Aura are going to be in Sydney talking to investors next week. So please find the time to speak to them and be as excited about what we're creating. I'm sure we will be loving that process. Thanks for your time, everybody. I'll see you all very soon.
Operator: Good day, everyone, and welcome to today's Nomura Holdings Fourth Quarter and Full Year Operating Results for Fiscal Year Ended March 2026 Conference Call. Please be reminded that today's conference call is being recorded at the request of the hosting company. [Indiscernible] Please note that this telephone conference contains certain forward-looking statements and other projected results, which involve known and unknown risks, delays, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions. With that, we'd like to begin the conference. Mr. Hiroyuki Moriuchi, Chief Financial Officer. Please go ahead. Hiroyuki Moriuchi: This is Moriuchi, CFO. Thank you for joining us. I will now give you an overview of our financial results for the fourth quarter and full year for the fiscal year ended March 2026. Please turn to Page 2. First of all, our full year results. As you can see on the bottom left, group net revenue increased 15% year-on-year to JPY 2,167.7 billion, while income before income taxes grew 14% to JPY 539.8 billion, and net income increased 6% to JPY 362.1 billion, setting a record high for the second consecutive year. We achieved full year ROE of 10.1% on target for the second year in a row since we set our ROE target range of 8% to 10% or more by 2030. Four segment income before income taxes reached an all-time high of JPY 506.9 billion. Wealth Management and Wholesale drove company-wide earnings while both divisions achieving their highest income since their respective establishments. Wealth Management achieved growth of 23% in income before income taxes as the recurring revenue-based business model gained further momentum and major KPIs also saw substantial growth. Investment Management saw its assets under management rise by more than 50% over the year to around JPY 137 trillion, with a substantial increase in the stable business revenue base. Meanwhile, wholesale saw revenue growth across all regions and both Global Markets and Investment Banking achieved record high revenue, resulting in income growth of 21%. As for banking, it has steadily expanded its business base since the division was established and is making solid progress toward implementing deposit sweep. In view of our strong performance for the period ended March 26, we expect to pay an ordinary dividend of JPY 24 per share. This brings the annual dividend to JPY 51 per share for a dividend payout ratio of 41%. Next, let me give you an overview of the fourth quarter results. Please turn to Page 3. All the percentages I mention from here on are quarter-on-quarter comparisons. First of all, group net revenue rose 5% to JPY 577.2 billion. Income before income taxes fell 20% to JPY 107.7 billion, and net income was down 19% at JPY 73.9 billion. Earnings per share came to JPY 24.34 and ROE was 8%. While four segment net revenue rose income fell due to factors, including a decrease in the amount of profit recognized from affiliates in the Other segment as well as an impairment loss at an investee company in Investment Management. Next, please turn to Page 7, and I will present an overview of each business in the fourth quarter. As you can see in the top left, in Wealth Management, net revenue was more or less flat versus the previous quarter at JPY 133.1 billion, while income before income taxes exceeded the strong previous quarter, rising 5% to JPY 61.2 billion. The recurring revenue cost coverage ratio reached 72%, and the division achieved a high level of profitability with the margin on income before income taxes remaining above 40%, which is higher than the industry average. As shown on the bottom left, recurring revenue reached an all-time high of JPY 56.8 billion. Net inflows of recurring revenue assets remained at a high level, exceeding JPY 400 billion once again this quarter. Flow revenue was down slightly, but at JPY 76.4 billion remain high in absolute terms, second only to the level of the previous quarter as we were able to effectively support customers' need amid volatile market conditions. Next, I will give you an update on total sales by product. Please turn to Page 8. Total sales rose 75 quarter-on-quarter to around JPY 11.7 trillion. This was largely due to major tender offers totaling JPY 4 trillion. But even excluding this factor, total sales remained at a high level by product. Excluding the tender offers, sales of Japanese stocks remain high, thanks to a contribution from primary deals. Sales of bonds fell by 5%, while demand for foreign products was solid, sales of Japanese bonds fell slightly in the absence of primary deals. Sales of investment trust and discretionary investments, which constitute recurring revenue assets saw some fluctuations but remained at a high level as a flow from savings to investments continued. In insurance, meanwhile, sales of foreign currency-denominated products declined on weaker yen. Next, we take a look at KPIs on Page 9. Net inflow of recurring revenue assets shown on the top left were JPY 422.8 billion, the 16th straight quarter for inflows to exceed outflows. Recurring revenue assets at the end of March, shown on the top right, were down owing to market factors, but recurring revenue came to JPY 56.8 billion, a record high even when factoring out the receipt of half yearly investment advisory fees. As shown on the bottom left, number of flow business clients rose by around 200,000 from the previous quarter, reaching 1.74 million. Business was -- has been growing against the backdrop of high market volatility, primarily in face-to-face channels. Next is Investment Management. Please turn to Page 10. As seen on the top left, net revenue increased 42% to JPY 86.2 billion, and income before income taxes was more or less flat at JPY 18.1 billion. Business revenue, which is a stable type of revenue, was at an all-time high, owing to growth in existing business and the expansion of international business through acquisitions. At the same time, expenses related to acquired businesses and losses on impairment of our equity stake in an investee company were recognized. As an explanation of the breakdown of net revenues can be found on the bottom right. Solid asset management business in the aircraft leasing business, Nomura Babcock and Brown both contributed to the increase in business revenue, while investment gains related to American Century Investments rose quarter-on-quarter. Moving on to Page 11, we look at our asset management business as a backbone of business revenue. The graph on the upper left shows that assets under management hit an all-time high of JPY 136.9 trillion at the end of March. Shifting our focus on the bottom left, we see there were net outflows of JPY 279 billion. In the domestic investment trust business, which had inflows of JPY 816 billion, funds went mostly into Japanese equity products in the ETF category and into balanced funds, Japan equity active funds and private asset-related products in the investment trust category. In the domestic investment advisory international business, outflows came to about JPY 1 trillion, mainly from business targeted for acquisition. In line with the industry trends in the U.S., we expect funds to continue flowing from active-type mutual funds for now, but we aim to grow assets under management by boosting total sales and bringing net flows close to neutral as soon as possible with enhancements to making capabilities and expansion of active ETF SMA business opportunities. Alternative assets under management on the bottom right grew to a record high JPY 3.6 trillion, an increase of about JPY 300 billion from the end of December, of which fund inflows account for more than half. Next, wholesale. Please refer to Page 12. On the top left, you can see that wholesale net revenue fell 2% to JPY 308.1 billion and income before income taxes declined 31% to JPY 43.2 billion. Looking at the breakdown on the bottom left, Global Markets net revenue split 2% and Investment Banking net revenue fell 3%. Discussion by business line can be found on Page 13. Global Markets net revenue was down 2% at JPY 252.5 billion. Please find the middle section on the right. Fixed income revenue declined 8% to JPY 125.3 billion. In macro products, rates revenue was weak in the Americas with weak volatility rising, but rose in Japan. FX emerging revenue offset some of the weakness in rates revenue as client flows were accurately captured. In spread products, securitized products revenue remained high, mainly in Americas and fell quarter-on-quarter in AEJ. Credit revenue was unchanged despite widening spreads. Equities revenue was up 6% to JPY 127.2 billion. Equity products revenue reached a record high as revenue rose sharply in Japan and AEJ on strong financing and derivatives performance. Execution Services revenue rose in all regions, benefiting from a pickup in client activity. Please go to Page 14 next. As shown on the bottom left, investment banking net revenue came to JPY 55.6 billion, down 3%, but still at a high level. By product in advisory, revenue growth momentum continued based on involvement in many M&A deals, chiefly in Japan. The range of deals was varied and included domestic realignment, privatization and cross-border deals in financing and solutions, et cetera. ECM revenue rose slightly on contributions from large-scale CB and PO deals. Solutions business continued to perform well as it tapped demand for unwinding of cross-shareholdings holdings. Let's continue to banking on Page 15. On the top left, banking net revenue was up 6% at JPY 14.5 billion, and income before income taxes was down 27% at JPY 3.0 billion. Loans outstanding accumulated steadily due to -- during the quarter as recognition of loan products on offer grew. The investment trust balance grew, thanks to both market factors and establishment of new trust. Income fell as expenses rose, including spending on IT and a part of the standardization of business processes and recognition of taxes and public charges. We would like you to view this as an upfront investment aimed for future business expansion. Next, expenses page -- on Page 16. groupwide expenses were JPY 469.5 billion, a quarter-on-quarter increase of about 13% or JPY 53 billion. Extraordinary factors that boosted expenses include impairment losses associated with our equity stake in investee company, compensation and benefits accompanying changes to remuneration regulation and effects from changes to the method of presentation of financial statements. When these factors are excluded, we think it's evident that the cost structure in place is appropriate for the revenue growth. We aim to balance revenue growth and cost controls while making steady investment in growth. Next, Page 17 for financial position. As you can see in the bottom left, the common equity Tier 1 ratio stood at 12.9% at the end of March, down 0.1 points from 13.0% at the end of December. This concludes our overview of our fourth quarter results. In closing, we announced which -- lastly, please allow me to briefly talk about the situation related to private credit. First, our group's exposure is properly diversified and managed, breaking down our exposure in wholesale business, lender financing for private credit funds comes to about $800 million. and direct lending to SMEs comes to about $1.2 billion, while in investment management, investment holdings related to private credit come to about $400 million. Lender financing is backed by a diversified corporate credit portfolio and the credit fund counterparties are, by and large, supported by long-term capital provided by institutional investors and the like. Direct lending is diversified across more than 40 companies and investment management investments are also suitably diversified and have been performing stably. In closing, we announced reaching for sustainable growth, our vision for business in 2030 in May 2024 and set as numerical targets, a consistent attainment of ROE of 8% to 10% or more and income before income taxes of more than JPY 500 billion with the targets attained now in the span of 2 years. Great strides have been made to build the franchise required to realize sustained growth of the Nomura Group. I would like to briefly touch upon the situation as of now in April. In Wealth Management, net revenue is largely at the same level as in the fourth quarter. Uncertainty remains in the market due to geopolitical risk, but the flow of funds into products and services, assuming the long-term diversification of investments remains firm and client sentiment has been recovering. In wholesale, net revenue has been trending much higher than in the fourth quarter with equity markets rebounding sharply from the end of March and rising to new all-time highs. Client activity has picked up and equity products revenue has been strong. The rates has also been steadily monetizing client flows amid moderate market volatility. We aim to monetize business opportunities while keeping mindful of appropriate risk levels and cost controls. Your continued support is appreciated. Operator: [Operator Instructions] The first question is from SMBC Nikko Securities, Muraki-san. Masao Muraki: SMBC Nikko Muraki, I have 2 questions. First, international asset management company control. On Page 10, on the footnote, 4 years ago, investment had been made forest-related asset management investment was done and JPY 12 billion of losses have been booked this time around. Can you explain the backdrop? And on Page 11, Macquarie Asset Management. Regarding the cancellation of the agreement, there is a comment. But against the plan, how is the actual performance? That's my first question. Second question is with regards to capital, Page 17. The short question is, in the next quarter, what would be the CET1 ratio? This is the new fiscal year. So I think this is a quarter where you can quite easily leverage your balance sheet. In equity derivatives, you are taking significant credit risk and private credit, U.S. division portfolio has been increasing in the past few years, which is using your balance sheet. So what's your idea regarding the use of balance sheet? And how will that impact your CET1 ratio? Hiroyuki Moriuchi: Muraki. Then let me take the first question. First, international asset management-related question. You touched upon 2 points. The forestry asset management company, we made an investment 4 years ago. And what about the loss and the history that had led to this loss. Back then, when we made the investment, ESG -- global ESG trend was on the rise globally and in the United States. And we expected that this will become a major trend. And we were also advocating public to private, and we were trying to expand our private asset business. So those have been the objectives based upon which we made a decision to make an investment into this company. On the other hand, after the investment was made, as is well known to all of you, the ESG environment had significantly changed mainly in the United States. So that had triggered some difficulties in fundraising. This company itself, AUM is top 5 in forestry. So the health doesn't change. But in comparison to the plan we had drawn back when we made the investment, the growth has decelerated. So we had to book that based upon accounting standards, and that is why we've decided to book for impairment this time around. Carbon offset requirements from operating companies, there are funds that will be introduced and those initiatives are under study. So we are hoping to further accelerate this business in the coming months and years. So that's the backdrop. Now this company is booking profits at the moment. However, the growth of profit is slower than we had expected. And international Asset Management, your second point, net outflow, I touched upon that in the initial presentation. Against the plan, what is the current situation? That was your question. Net outflow itself. From the acquisition, U.S. traditional asset management company was the industry trend. So that had been factored into the valuation in making investments. And based upon that, what about the performance? In principle, onetime of investment or excluding onetime of costs, the original revenue and expense and EBITDA expected in the CEO Forum in December, we made a presentation at the pure earning power a quarter. So 1 quarter worth has been booked. On the other hand, -- as we mentioned on that occasion, towards integration, onetime of expenses have been booked and amortization of intangibles have also been booked. So more or less -- we are more or less in line with the original expectations. But in the mid- to long run, this net outflow will be minimized, and we have to achieve net inflow. So back when we hosted the CEO forum, active ETF transition, and we will also be making J-curve investments in order to expand the business. On your second question, CET1 ratio for the next quarter. Wholesale equity and SPPC balance sheet, use of the balance sheet. Those were the points that you touched upon. Regarding wholesale, as you know, self-funding -- based upon self-funding within the border of additional capital, balance sheet is used, RWA leverage exposure is used within that framework. So based upon the earning power, they are hoping to grow business in that quarter. But additional capital within self-funding -- additional capital is within self-funding. So CET1 ratio impact through business expansion is not that significant. And then within that, what would be the positioning of equity PC and credit business? In the mid- to long run, we want to have a balanced portfolio, and that policy remains unchanged. Of course, we want to grow equity, but regarding SPPC, we will be looking at certain opportunities, and we will not deviate from that policy and quantitative control will be in place as we try to manage our portfolio. I hope I answered your question. Masao Muraki: Then in Q1, top line performance was good. CET1 ratio will not decline so significantly and ROE will improve. Is that the right interpretation? Hiroyuki Moriuchi: CET1 ratio will not decline due to this factor. We don't think so. As you rightly pointed out, we are also hopeful that this will lead to improved ROE. Operator: Next question comes from BofA Securities, Tsujino-san. Natsumu Tsujino: Regarding personnel expense on a Q-on-Q basis, it's up by more than JPY 6 billion. But in the U.K. regulatory change, there was regulatory change. And from the third quarter, there has been a change made to the deferred compensation. So what's the impact coming from them? That's my question. And also, then in the first quarter, what is going to be the impact coming from them? Could you explain? Another question relates to global markets. In April compared to the fourth quarter, wholesale outperformed compared to the fourth quarter. In other words, I believe that's due to thanks to global markets performance and Japan equity was mentioned, and it may be the case for overseas as well. But could you speak more about geographical split, equity or FIC and something like that? Hiroyuki Moriuchi: Thank you, Tsujino-san, for your questions. Regarding personnel expense, in the fourth quarter, as you pointed out, or in the third quarter, we made the announcement, but deferred compensation change, so that had an impact. And as a result, in the fourth quarter, we booked a relevant impact. Compared to the third quarter, the impact, the amount is smaller. However, it's about the same as in the third quarter. In the third and fourth quarters, deferred compensation related expense is booked. But in the third quarter, I explained it, but there is a timing gap, timing difference in terms of bookings. So for the fourth quarter, in terms of the amount, it's smaller. And this year, the impact is going to get closer to 0. As for the compensation regulation relaxation in the U.K., I am skipping details, but it's one-off in nature. So it's similar to the difference, quite a slight in the booking timing. That's my answer regarding personnel costs. Regarding April, when wholesale performance improved compared to the fourth quarter. The main factors are as follows: In wholesale, mainly rates, equity products drove the outperformance. And in the fourth quarter, rates, especially from the middle of March based upon the turmoil in the Middle East, the risk had to be controlled. So it's not just about the end of year factors, but due to risk control, revenue slowed down. And in April, we saw the significant improvement. Equity product is continuously performing well. As for nations, please give me a moment. As for the geography -- geographical split, all regions compared to the fourth quarter, we see outperformance, but regions other than the U.S. are particularly outperforming. The U.S. is performing well, but compared to other regions, growth rate is relatively lower. I hope I answered your question. Natsumu Tsujino: I have not captured everything, but U.S. was doing well as of the end of fiscal year -- previous fiscal year, if I am not mistaken, the U.S. business was strong. On the other hand, compared to the U.S. in the first quarter, growth is limited. Hiroyuki Moriuchi: Tsujino-san, sorry, I did not explain clearly, but bottom right on Page 12, you can find revenue by geography. In Americas, in the fourth quarter, revenue has come down relatively significantly in Americas compared to other regions. That's partially due to seasonality and also due to the impact from the Middle East. Since the middle of March, we had to control business. So especially macro business in Americas was particularly impacted and the timing didn't work well, especially the last 1 week of the month. And those -- that happened. And then the situation got relaxed. And then there has been a less tension after April, and we saw recovery. Operator: The next question is Daiwa Securities, Watanabe-san. Kazuki Watanabe: Daiwa Securities, Watanabe. I have 2 questions. First, private credit, $2.4 billion you explained. You also said diversification is in place, software by sector, can you give us some more detailed breakdown? And retail, private-related products, what is the redemption call? And what is your policy of sales going forward? And secondly, capital policy. You didn't announce any new buyback program. RSU, JPY 40 billion, it would be JPY 20 billion about buyback, 50% total return -- total payout ratio to shareholders. Is that the right interpretation? Hiroyuki Moriuchi: Watano-san, thank you very much. First of all, private credit sector diversification. So what is the picture? Overall, health care, business service, software and computer service, consumer, engineering and construction, these are the sectors included. Mostly health care and business service occupy quite a large proportion. Software, not necessarily high in terms of percentage. And on top of that, there is regional diversification in place as well. And regarding the second half of your first question, retail customers, private credit, what about the redemption and regarding sales policies, as client sentiments, there is some conservativeness. But at the moment, we are not seeing any calls for cancellation or requests. Originally -- or to begin with, when we sell to retail customers, we tell them that it's based upon the assumption of mid- to long-term investment. And when we obtain their understanding, we sell those products to them for the first time. So I think those communications have been effective so much so that there hasn't been any significant run. And on buyback and total payout ratio, first half, second half put together, full year RSU included 58%. Excluding RSU, it's beyond 50%. So I hope that answers your question. Kazuki Watanabe: Regarding buyback, announcement timing, if there's an announcement in 4Q, that would be fiscal year '25. Hiroyuki Moriuchi: The JPY 60 billion buyback program we announced in Q3, in Q4, we assumed the Q4 profit and we defined the amount based upon our assumption. Operator: The next question comes from JPMorgan Securities, Sato-san. Koki Sato: I am Sato from JPMorgan Securities. I have 2 questions. First question is about wholesale and wealth management expense outlook. In wholesale, performance was strong, and there was an adjustment made to the bonus, I believe. And as you explained, and there were onetime factors. So 83% of our cost-income ratio for the year and next following year onward, if top line is at the same level, then what kind of a level can we expect? And on the other hand, for wealth, in the fourth quarter, the performance was solid. The quarterly expense came down. So in this strong performance, I believe you are doing the payout to employees. And even in light of that, if this is the level you are achieving, then when recurring asset growth are bigger, then can we expect more leverage? So could you explain your outlook for expense for those 2 divisions? Secondly, in the third quarter related to laser digital loss was booked. At that time, risk control and net exposure reduction were explained. But in the fourth quarter period, what was the market situation -- based upon the market situation in the fourth quarter and based upon the result of the third quarter and what is the update on the effects achieved as a result of the countermeasure you have taken? Hiroyuki Moriuchi: Thank you for your question. First, outlook for -- the outlook for expense first, wholesale in the fourth quarter on a Q-on-Q basis, plus JPY 13 billion. Out of this increase, 30% is due to the compensation regulatory change and also end of the year performance-linked bonus adjustment. And then the last part is increase in the professional fee and the payment for services received. So the expense rate increased, but fixed cost was suppressed. So this fiscal year in the sense of the review of expense in the fourth quarter, wholesale, they had a few onetime items and also fees paid or professional fees. For example, SPPC pipeline -- so cost was incurred before the deal as we hired lawyers and the revenue recognition got delayed. So compared to the fourth quarter, we expect the expense level to come down. As for wealth management, we booked high level of margin. And can we expect the same level this year? As for this year, advanced investment in AI, also corporate cost increase due to inflation are expected. But continuously in Japan, for wealth management, we are going to tightly control cost. So even though there are timings when cost increases due to advanced investment, but it depends on revenues, but we expect we will be able to deliver a certain level of margin. And finally, regarding laser, in the third quarter, we troubled you and we got you worried with loss related to laser. But as you said, we have controlled risk volume and we have taken a more conservative stance. And in the fourth quarter, when we look at the market, Bitcoin and crypto market decline was the same level as in the third quarter. In terms of profit and loss, impact on consolidated result was limited. I hope I answered your question. Koki Sato: Regarding the latter part of your answer, the situation in the crypto market and the impact on your profitability. Simply put, you've reduced the exposure. So the benefit you've received is as a result of reduced exposure and hedging or different ways of conducting market making. In other words, what I'm getting at is previously, you said you are not intending to downsize the business. So the exposure level, I think, will increase in the future. Even with that, you have a structure in place to prevent impact on profit? Hiroyuki Moriuchi: Thank you very much. Regarding trading, the market making, the absolute amount of risk has been reduced. And of course, there are venture capital investments and asset management seed capital with our own fund. So for those areas, in nontrading areas, we have long positions. So when we have progress in asset management business, then from seed capital, we will see that transfer to equity capital by investors -- LP investment. Operator: The next question, SBI Securities, Otsuka-san. Wataru Otsuka: Otsuka of SBI Securities. Is my voice coming through? Operator: Yes. Wataru Otsuka: Could I do one question and one answer. The first question is just for confirmation purposes, but wholesale, quarter-on-quarter basis, profits declined. What's the reason? Can you recap that? Revenue, as you had explained, global markets fixed income, Q4 seasonality factor and Iran had been quite significant and expenses, expertise fee and performance -- pay for performance. And so due to the revenue and expenses, 30% decline in profit. That's quite significant, but it wasn't a surprise to you. So that's my first question. Hiroyuki Moriuchi: Thank you very much. And you've made the situation very clear. So if we divide it between revenue and cost, as far as revenue is concerned, seasonality due to the end of the fiscal year, risk position was controlled. And on top of that, due to the Middle East situation, in the mid- to late March period, there was exacerbation quite rapidly. So we had to control defensive position, and that's the big factor for the reduction of revenue. And on the cost side, I slightly touched upon this in my presentation. But due to the review of the compensation regulation and also being the end of the fiscal year, part of it is timing gap, and there has been a onetime of increase. And the remainder is increase of fees payable to experts and for transactions. But regarding this factor, the original understanding regarding SPPC we were to add one product to the lineup. So the initial investment, that was within our control. But professional fees, we paid it earlier than booking the revenue. So this was a relatively high cost increase higher than we had expected. That's my personal view. I hope I answered your first question. Wataru Otsuka: Sorry. One follow-up question. 86% expense ratio is slightly high. So there was the timing gap, but 83% for full year -- is that a normalized basis ratio? Hiroyuki Moriuchi: Q4, 86%. Obviously, it's quite significantly higher. And regarding expense ratio, rather than expense side, the impact from revenue is quite heavy. But at any rate, 86% is slightly higher than normal. Wataru Otsuka: Second question, at the end, you mentioned ROE, 10% full year basis. And 8% to 10% or higher and stably performing such ROE, you've achieved that goal. On the other hand, if we look at banks and other Japanese financial institutions or more so regarding overseas financial institutions, 8% to 10% ROE isn't that high. So plus, don't you have an intention to elevate your goal? Isn't that discussed at the Board of Directors meeting? Can you touch upon such aspects? Thank you very much. Hiroyuki Moriuchi: Otsuka-san. Your point is very true, of course, in comparison to mega banks, Japanese for financial institutions and peers overseas from the perspective of being in the investment business, 8% to 10% plus level is just a midpoint. It's not the ultimate goal. Regarding this matter, in the deliberations for the budget, there is intensive discussion on this matter. So if there are any points that we need to review, in late May, we will have the Investors Day, so we may touch upon that aspect. Thank you. That concludes my response. Wataru Otsuka: So your answer is you're discussing that point heavily, right? Hiroyuki Moriuchi: Yes, exactly. Operator: The next question comes from UBS Securities, Niwa-san. Koichi Niwa: I am Niwa. Can you hear me? Yes. Regarding wholesale cost and private asset initiatives of Nomura, I have a question about them. First, regarding wholesale cost this year and next year, on a run rate basis, what's the percentage? I do understand you have a medium-term goal. But given the environment where there is a strong cost increase pressure, what is your outlook? My second question is more long term than the earnings result. But in Americas, what's the future outlook of private asset market in the U.S.A. And on that basis, what is Nomura's strategy? So if it's in the initial phase, then there will be the room for expansion. And in the call today, listen to the tone of your explanation, it appears you remain positive. But looking at your peers, they are switching gears. So if you could give me some perspective on this, that's appreciated. Hiroyuki Moriuchi: Thank you very much. Regarding your first question on wholesale cost control and cost/income ratio target, what is the rate of progress and what is our outlook for this year? And the cost pressure may be high, as you said. But as you said, the group-wide cost control has an important theme of how to manage inflation. So certain parts of this are unavoidable, but rather than absorbing taking them 100%. The theme is to look at where we can reduce cost in other areas. For example, through location strategy, offshore can be more effectively used. So we are considering approaches, including structural approaches so that we can suppress cost increase to a certain level. And regarding cost/income ratio, we would like to grow revenue at a rate that beats inflation. That's an important factor. And for business, this is more important. So in wholesale, ROI against additional capital needs to be increased to increase ROE. That's our intention. Secondly, regarding our outlook for private credit, we need to separate my answer for midterm and long term. Regarding private credit market itself, our view is positive. In the medium to long term, market has the potential to grow. On the other hand, both the bracket and our peers have pointed out repeatedly that in the short term, credit cycle needs to be monitored closely and the risks must be controlled tightly. We do acknowledge the need to do so. So earlier, I answered to a previously asked question. But in SPPC, we have a rich pipeline with attractive opportunities, but our stance is to take selective approach and medium- to long-term portfolio, in wholesale as a whole, we would like to control so that no single product stands out too much. So that kind of control will be needed, and we have an agreement in our approach with wholesale. That's all. Koichi Niwa: Just one more thing from me. So mainly impact on you in terms of division, the impact is happening mainly in wholesale, not really in investment management, but wholesale is mainly impacted. in terms of product line? Hiroyuki Moriuchi: So as for the existing P&L, especially risk side, wholesale portion is the biggest. So your understanding is fine. But as we think about medium- to long-term growth, asset management is the area. As we have said since 2020, we are closely looking at the market opportunities and not just private credit, but we look to grow private business. And as part of that, hopefully, private credit will grow. And wealth management based upon the principle of suitability, based upon the needs of our clients, we would like to steadily accumulate assets. And going back to the previous point, in the short term, we need to control risk for wholesale, that's as you pointed out. Operator: We'd like to conclude question-and-answer session. If you have some more questions, please ask our Nomura Holdings IR department. In the end, we'd like to make closing address by Nomura Holdings. Once again, thank you for joining us. Hiroyuki Moriuchi: As I have said a few times, for 2 successive years on a full year basis, we've renewed the net profit and ROE. Yes, there were some voices saying that this may not be enough, but we exceeded 10% and we were able to achieve the goal towards the 2030 vision 2 years upfront. Recurring asset increased banking division establishment, Macquarie asset management, acquisition, these investments were done in order to make a robust platform for future growth. That was what we've done in the past 12 months. So I think we will begin to monetize out of those initiatives, and therefore, we call upon you to provide your continued support. That was Moriuchi, CFO. Thank you. Operator: Thank you for taking your time, and that concludes today's conference call. You may now disconnect your lines.