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Operator: Greetings, and welcome to the Gentherm First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gregory Blanchette, Senior Director, Investor Relations. Thank you. You may begin. Gregory Blanchette: Thank you, and good morning, everyone. Thanks for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website. During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance and actual results may differ materially. We undertake no obligation to update them, except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other significant assumptions, risks and uncertainties underlying such forward-looking statements. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Bill Presley, President and Chief Executive Officer; and Jon Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we made available in the Investors section of Gentherm's website. After the prepared remarks, we'd be pleased to take your questions. Now I'd like to turn the call over to Bill. William Presley: Thank you, Greg, and good morning, everyone. Let's begin on Slide 3. I want to start by saying that the Gentherm team demonstrated strong execution in the first quarter. Over the last year, we spent a lot of time improving our operating system. We've been focused on fundamentals that are core to operating in an efficient, consistent manner in all aspects of the business. I visited Gentherm sites in multiple countries over the last 3 months and was able to observe changes in how we operate in all locations versus last year. The teams are engaged in targeted actions for growth in new markets, factory floor space occupation and efficiency are increasing and the teams are adopting tools we put in place to drive financial rigor. I was pleased to see these efforts starting to produce tangible results in the quarter. The first quarter also demonstrated our ability to execute in a dynamic environment, and we are confident in our ability to continually improve our operations. After spending the year with the team putting tools and processes in place, we concluded that realigning our operating model and structure will drive increased speed and transparency across the organization. Therefore, during the quarter, we initiated an organizational realignment that reduced spans and layers to increase agility and provides a concentrated focus on internal improvements as well as the ability to accelerate our growth platforms. This realignment positions us well to deliver key financial and operational priorities going forward. Strategically, this quarter marked an inflection point in our journey to transform Gentherm. We took action to position the company for sustainable, profitable growth with our announcement to combine with Modine Performance Technologies. This transaction transforms the company with an expanded product portfolio and broader end market exposure. We continue to execute our priorities and strategy even though the environment around us remains dynamic. Since our prior earnings call, the macro and geopolitical environment has changed significantly and is creating an increased level of economic uncertainty. Despite these recent events and other macro issues over the last year, light vehicle production schedules have remained relatively stable, which has allowed us to focus on operational improvements. We continue to assess key data inputs, including dealer inventory levels and customer schedules as well as collaborating directly with our customers to get real-time insights on future demand. That said, headwinds are beginning to emerge across the globe. These include direct cost increases in logistics due to lane disruptions and fuel surcharges as well as cost increases of petrochemicals used in raw materials. In addition, we are now starting to see cost inflation flow through to other materials, which are being indirectly impacted due to increases in processing-related costs. We continue to monitor developments in real time, and we are working closely with our suppliers and customers on a variety of mitigation strategies. We are preparing to implement pass-through or reimbursement mechanisms on applicable costs. We have actions ready to execute both commercially and operationally. We will remain agile, and we are confident in our ability to navigate through volatility and uncertainty. Now please turn to Slide 4, where I will discuss some of our first quarter highlights. The first quarter financial results were above our expectations. We secured $395 million of automotive new business awards, which were well balanced across region, customer and product. The pursuit pipeline looks robust for the remainder of the year. We made significant progress on our organic growth initiatives, including key announcements with KUKA Home and our new medical product, ThermAffyx, both of which I will discuss further in a few moments. Our product revenues for the quarter were $394 million, a quarterly record for the company, driven by strong Automotive Climate and Comfort Solutions growth over market. We delivered solid first quarter margin performance, driven by continued progress on our operational excellence initiatives. The business systems we put in place are beginning to have a meaningful impact, driving improved execution and expanded margins. As we build on this momentum, we remain confident in our ability to deliver sustained performance improvements over time. Turning to Slide 5. One of our top priorities over the last year has been scaling our existing products and technologies with new markets, new applications and nontraditional customers deliver strategic profitable growth. During the first quarter, we continued to prove the broad applicability of our technology beyond automotive through our achievements in home and office as well as medical. We officially launched and began supplying production parts to KUKA Home, which is a leading global furniture manufacturer. Since mid-2025, Gentherm played an important role as a collaborative innovation partner with KUKA, which led to co-branding of Enhanced Comfort by Gentherm. The launch this quarter also demonstrates our ability to generate revenue quickly in home and office market by utilizing our core assets and standard kit methodology to maintain the performance, quality and consumer experiences established in automotive applications. In March, Jon and I spent time in China at KUKA headquarters with their CEO and senior leadership team discussing our partnership. There is mutual interest in scaling Gentherm products across additional KUKA Home platforms. Beyond KUKA, our momentum in home and office is accelerating. Earlier this month, we were selected by a leading North American furniture brand to supply our climate and comfort products. This marks our fourth consecutive quarter securing a new home and office customer. We anticipate starting production with this customer later this year. Separately, in our medical business, we announced our FDA 510(k) submission for a new innovative product that is expected to redefine the standard of care for robotic surgeries. Our patented ThermAffyx system combines conductive air-free patient warming with securement technology to help prevent both hypothermia and patient movement on the inclined surfaces used during robotic procedures. We have been vocal about the importance of refreshing our product portfolio in the Medical segment and believe this innovative new solution will be a key contributor to accelerating our annual revenue. The regulatory approval process remains on track, and we expect the ThermAffyx system to begin generating revenue later this year. Overall, we remain committed to repositioning the company for growth by taking our technologies outside of light vehicle markets, and we achieved several important milestones during the quarter. Let's turn to Slide 6. In January, we took a major step in transforming Gentherm by announcing our agreement to combine with Modine Performance Technologies, creating a market leader in thermal and precision flow management. The more we work with the Modine team, the more excited I get about bringing this business into the Gentherm family. This is a well-run business with a great team. Through our work together, we are learning techniques and processes that Modine used to transform their business, and we intend to harness those lessons for the good of Gentherm. We have emphasized the importance of expanding our business beyond the light vehicle segment, and Modine is accelerating our access to critical growth markets, including power generation, commercial vehicles and heavy-duty equipment. This intentional shift in our end market exposure positions us for increased value creation. We are particularly excited about the new product and market opportunities this partnership unlocks and are more confident than ever in our combined growth trajectory. When we map out the next 5 years as a combined company, we see a clear path to generating $3.5 billion in revenue and more than $0.5 billion of earnings. I will now hand it over to Jon to discuss an update on the transaction and highlights for the quarter. Jonathan Douyard: Thanks, Bill. Now turning to Slide 7. Since the announcement, we have been working diligently with the Modine team to define and execute a project plan that ensures a timely, seamless closing of the merger. We have established an integration management office comprised of key stakeholders. And in March, we held a kickoff Integration Summit with business and functional leadership from both teams at our headquarters here in Michigan. Through the summit and ongoing interactions, the teams are focused on ensuring that the business can operate effectively on day 1 and that we are well positioned to deliver on value creation opportunities post merger. As we talked about that announcement, we intend to operate Modine Performance Technologies as a stand-alone division of Gentherm, similar to how the business is managed within Modine today. Given this structure, the primary integration areas relate to corporate systems and functional support, not on highly complex integration of facilities or organizations. In terms of other recent transaction highlights, we were pleased to receive HSR clearance to close from the Federal Trade Commission in March, a key regulatory milestone. Our teams continue to prepare for the S4 filing and the inputs into that process remain on track. Overall, we still expect this transaction to close later this year and are excited about the potential for the combined business. We will continue to keep you updated as the year progresses. Please turn to Slide 8 for a review of the first quarter financials. Overall, first quarter results were above expectations as revenue was higher, driven by stronger automotive volumes and outperformance in China. Revenue of $394 million was up 11.3% compared to the same period last year. Revenues, excluding foreign currency translation increased 7.2%. Automotive Climate and Comfort Solutions revenue increased 13.6% year-over-year or 9.8% ex-FX as we continue to see strong growth over market across all regions and product categories. We had particularly strong performance in China during the quarter, driven by the ramp-up of production on new program launches with domestic Chinese OEMs. This comes as a result of our intentional focus to shift revenue mix and better represent the local market. In addition, we saw increased take rates in China from global OEM customers as they look to remain competitive in the market. From an automotive product perspective, it was another strong quarter of revenue growth for our lumbar and massage comfort solutions, which grew 33% year-over-year. As we have discussed in the past, we expect to see the strong growth trend continue in this product into the future as we continue to launch previously won programs. Turning to profitability. We delivered $49.3 million of adjusted EBITDA or 12.5% of sales compared to 11.1% of sales in the first quarter of last year. The 140 basis point increase was primarily driven by operating leverage and strong net material performance, partially offset by annual price reductions and higher labor costs. On a reported GAAP basis, diluted earnings per share were $0.14 in the first quarter. This was impacted by approximately $0.70 per share related to merger and restructuring expenses. Adjusted diluted earnings per share were $0.84, up 65% compared to $0.51 per share in the first quarter of last year. Cash flow continues to be a point of emphasis for the company. And while we did have a typical seasonal operational cash outflow, the team delivered an $8 million improvement year-over-year. Additionally, CapEx purchases of $5.6 million were down $9.2 million year-over-year as we continue scrutinizing new investments. From a balance sheet perspective, we ended Q1 with net leverage of 0.2 turns, and we had liquidity of $456 million, giving us ample capacity to support our strategic priorities moving forward. Please turn to Slide 9, where I will discuss our 2026 guidance, which excludes any impact related to our planned combination with Modine Performance Technologies. As Bill mentioned in his opening remarks, the operating environment has been dynamic since we introduced guidance in February. Despite the stronger first quarter performance, given the high level of uncertainty in the macro environment, we are maintaining our full year guidance at this time. We expect revenue to be between $1.5 billion and $1.6 billion, representing approximately 3% growth for the year against the recent industry report where our key markets are expected to decrease approximately 2%, positioning us to deliver mid-single-digit revenue growth over market. For adjusted EBITDA, we expect to be in the range of $175 million to $195 million, which implies a midpoint adjusted EBITDA margin of approximately 12%. From a quarterly perspective, we expect the revenue profile to be spread fairly even throughout the year. However, we do expect margins to be depressed in the second and third quarter, and there are a couple of factors driving this. First, building on Bill's earlier comments, inflationary impacts stemming from the current geopolitical environment are expected to drive approximately $20 million in incremental costs during the year, recognizing that this estimate remains fluid and is evolving real time. Although we expect to mitigate a meaningful portion through commercial and operational initiatives, including benefits from the realignment, timing differences between cost realization and recovery are likely to create additional margin pressure. Additionally, as we work to finalize our global footprint transition later this year, we will begin depleting our inventory bank build in the second quarter, which will have a negative impact to gross margins. Turning to cash. Our estimate of adjusted free cash flow remains between $80 million and $100 million with CapEx in the range of $45 million to $55 million or approximately 3% of sales. Overall, we were pleased with our start to the year and are focused on strategic actions to accelerate profitable growth and reinforce operating discipline to drive long-term value. With that, I will hand it back to Bill for some closing remarks. William Presley: Thanks, Jon. Turning to Slide 10. I want to outline what we've accomplished, the key priorities today and how we will evolve. We are on a multiyear journey to deliver sustainable value creation. 2025 was reinforcement of the foundation that we will build on going forward. We established our strategic framework to deliver shareholder value, which focuses on profitable growth, operational excellence and superior financial performance. This drives everything we do. To drive profitable growth, we simplified and segmented into 4 technology platforms to clearly define our core competency and identify attractive markets outside of the light vehicle market where our products are applicable. This product and market alignment was a catalyst for reshaping our M&A funnel. We also saw opportunities in the business to operate more efficiently. During 2025, we focused on building core components of an operating system through business process standardization and increased utilization of assets to drive margin and cash generation improvements. We started reaping some of the benefits of that stronger operational rigor during the first quarter of 2026. With this foundation now in place, Gentherm is at an inflection point. The addition of Modine Performance Technologies accelerates our transformation. This action is the first step in establishing a product portfolio of mission-critical components across broad end markets. Our shared core competency of precision thermal and flow management allows us to scale into attractive markets together through cross-selling and integration. In addition, our complementary product expertise allows us to gain broader customer insights and provide more integrated solutions to pursue new high-growth opportunities. Gentherm continues to focus on the core business as we are confident in our ability to scale revenue and expand margins. We are actively launching products into new markets to deliver profitable growth while realigning the organization to drive speed, efficiency and accountability. As we move into the future, Gentherm will scale into attractive markets while improving profitability and cash flow, and we will leverage best practices from Modine Performance Technologies to outperform our peers. Despite the risk we may have in front of us during the months ahead, we are confident we have the right strategic plan established to drive performance improvements in the long run. We have built the foundation, we have a clear vision, and we are focused on execution. We will continue our relentless pursuit of building a more resilient company. We are at the beginning stages of transforming Gentherm into more than an automotive component supplier, where we will grow sustainably with differentiated and scalable technologies. With that, I'll turn the call back to the operator to begin the Q&A session. Operator: The first question is from Nathan Jones from Stifel. Nathan Jones: I guess I'll just start off with a question about the $20 million incremental costs you talked about. Can you just maybe provide us a little more color on how much of that passes through contractually to customers versus what you've got to go out and renegotiate versus potentially methods that you can offset that internally? Just any more detail you can give us on that. William Presley: Yes. Contractually, we're not on a simulator or escalator with any customers just because the scale of what we buy in any one product isn't large enough to be meaningful to them. So we'll have to go out, Nathan, and we'll have to work through recovery mechanisms with the customers on all of that. We will give some perspective... Nathan Jones: And so you'll -- sorry, the cost will hit pretty much immediately or it will take a couple of quarters to catch up with that pricing? William Presley: Yes. Timing-wise, we expect the costs to start hitting in Q2. So we think Q2 is going to be a definition of recovery mechanisms with the customers that we agreed to. And then there'll just be that timing disconnect that will start flowing in Q3, Q4. Nathan Jones: Okay. I guess my second question then I'm going to ask one about the internal operating structure changes. I think those are kind of important things to highlight. You talked about reducing spans and layers to increase focus. Can you maybe just provide a little more color on what you're doing there, how you think that catalyzes either whether it's growth or it's margin expansion or it's both? Just more color around those changes and how you think they improve the business, please? William Presley: Yes, absolutely. So it's intended, first of all, to do a couple of things, as we mentioned, and I'll get into some quick detail for you, Nathan. A lot of -- if you remember, Jon and I both started at the same day last year, right? So we took a year to thoughtfully understand the plumbing of the organization and how things were running. And one of the big messages we got from the broad organization was there's too many hoops. There's too many barriers. We're not moving fast enough. We're not making decisions fast enough. So we went through an organizational realignment, and we realigned it really based on product. So we segmented out valves as a business unit. So now we have Climate Comfort, Valves and Medical as a business unit within Gentherm Technologies. And over top of that, we'll have a very lean corporate structure. So that was intended to put focus on high-growth opportunities that was intended to drive continual improvement on key initiatives. So we're more aligned functionally now as opposed to a complicated matrix across regions. And we did -- we do expect that, that will have cost benefits. But it primarily was to segment the business to focus on high-growth opportunities, to continue to push the operational improvements and the sustainability there. For the year, though, it will -- annual run rate will be about $10 million-ish better on the OpEx, and we expect half of that to hit this year. Operator: The next question is from Ryan Sigdahl from Craig-Hallum Capital Group. Ryan Sigdahl: I want to start with the outperformance versus light vehicle production. This is as strong as we've seen in many years here, which was nice. Curious when I look at guidance, so 14-point outperformance in Q1, you're guiding to 5 points on the year. It implies a pretty meaningful deceleration kind of throughout the rest of the year versus the industry. Curious if you could elaborate on what the outperformance in Q1 was, why that's going to decelerate, anything from a onetime production orders, et cetera, standpoint? Jonathan Douyard: Yes. We wouldn't point to anything from a onetime perspective, and we really did see strength across all products, all regions. We pointed to China in particular. There was some outperformance there based on some launches that we did in the fourth quarter for some of the domestic OEMs that continue to show strength through the first quarter. As we look at the balance of the year, we certainly do not expect to outperform in the teens range. We'd expect it to moderate. I think at the top end of our guidance, it could push into that high single-digit range. But there's nothing specific to point to in terms of Q1 outperformance other than really just broad growth across regions and products. Ryan Sigdahl: And then GM yesterday or earlier this week, I guess, is suspending its next-gen electric truck program that was set to launch or start in 2028. Curious how much Gentherm's award backlog was from this program? Do you think you can offset that from a shift with more volume back to the ICE programs? Just curious kind of net positive, neutral, negative, how you guys think about that? William Presley: Yes. Overall, we just think it's neutral for us, Ryan. We've also won the ICE content for the platforms. So we just anticipate and based on everything we're seeing, the ICE volumes will compensate for the EV losses. Ryan Sigdahl: Very good. Maybe just a quick clarification, and then I'll hop back in the queue. But the $20 million of cost increase, is that a gross number? Or was that net of mitigation? Jonathan Douyard: That's a gross number and our best view of annualized impact or annual impact based on what we see today. Operator: The next question is from Matt Koranda from ROTH Capital Partners. Matt Koranda: Not to beat the dead horse here with the $20 million on incremental cost that you highlighted. But I guess I was curious, how much of that is incremental shipping versus material cost inflation that you're factoring in? And then on the pricing front, is it all offset via pricing? Or are there operating efficiencies that you think you'll offset the $20 million with as well? Jonathan Douyard: As you look at it, certainly a big piece of it is freight related. I'd say maybe 1/3 of it with the rest coming from commodities, and it's commodities that Bill -- or the product that Bill called out specifically, but it's also incremental processing costs. And so there's a downstream impact from increased petroleum prices. I think as we look at it, our mechanism from a recovery perspective will primarily be from recovery with the customer. We did point to the fact that the $5 million benefit that Bill talked about from the realignment will likely help offset pieces of that as well. I think we'll continue to push operationally, but we've got our teams focused on commercial recovery at this point. Matt Koranda: Okay. That makes sense. And then curious to hear a little bit more about the furniture market opportunity and how it's developed this year, I guess, just given the announcements around KUKA and the incremental wins that you highlighted. Have those catalyzed more discussions for you? Any way to characterize the opportunity funnel and how that contributes to '27 revenue? William Presley: Yes. I mean we'll start -- and again, we like the furniture business because of just super quick time to revenue that the industry has accepted and really bought into our standard methodology, our standard kit methodology. So we're getting good scale there on our assets with little to no investment. So we expect by '28 that that's clipping somewhere between $50 million and $100 million. So you can probably draw a line between now and then to figure out where '27 is. But we expect that to add 1 or 2 points of growth at accretive margins in the coming years. Operator: There are no further questions at this time. This concludes the question-and-answer session as well as today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by, and welcome to the Old Republic International Corporation First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Joe Calabrese with the Financial Relations Board. You may begin. Joe Calabrese: Thank you, Rob. Good afternoon, everyone, and thank you for joining us for the Old Republic International Corporation conference call to discuss first quarter 2026 results. This morning, we distributed a copy of the press release and posted a separate financial supplement. Both documents are available on Old Republic International Corporation’s website at oldrepublic.com. Please be advised that this call may involve forward-looking statements as discussed in the press release dated 04/23/2026. Assumptions, uncertainties, and risks exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on these assumptions, uncertainties, and risks, please refer to the forward-looking statements discussion in the press release and the company’s other recent SEC filings and the risk factors discussed in the company’s most recent Form 10-Ks and other recent SEC filings. We may also include references to net income excluding net investment gains, or net operating income, a non-GAAP financial measure, in our remarks or in response to questions. GAAP reconciliations are included in the press release. Presenting on today’s conference call will be Craig Richard Smiddy, President and CEO; Francis Joseph Sodaro, Chief Financial Officer; and Carolyn Jean Monroe, President and CEO of Old Republic National Title Insurance Group. Management will make some opening remarks and then we will open the line for your questions. At this time, I would like to turn the call over to Craig. Please go ahead, sir. Craig Richard Smiddy: Okay, Joe. Thank you very much. Good afternoon, everyone, and welcome again to Old Republic International Corporation’s First Quarter 2026 earnings call. In the quarter, we produced $211.5 million of consolidated pretax operating income compared to $252.7 million, and our consolidated combined ratio was 96.6% compared to 93.7%. For the quarter, our operating return on beginning equity was 11.5%, and growth in book value per share including dividends was 2.6%. Specialty Insurance grew net premiums earned by 4.7% over 2025 and produced $209 million of pretax operating income compared to $260 million. Specialty’s combined ratio was 94.8% compared to 89.8%. Title Insurance grew premiums and fees by 12% over 2025 and produced $16.7 million of pretax operating income compared to $4.3 million. Title’s combined ratio was 100% compared to 102%. Our conservative reserving practices continue to produce favorable prior year loss development in both Specialty Insurance and Title Insurance, and Frank will provide more details on that topic. So with that, Frank, I will turn the discussion over to you, and then you can turn it back to me to cover Specialty Insurance, and then we will have Carolyn cover Title Insurance. Francis Joseph Sodaro: Thank you, Craig, and good afternoon, everyone. In this morning’s release, we reported net operating income of $171 million for the quarter compared to $[inaudible] last year. On a per share basis, comparable quarter-over-quarter results were $0.68 compared to $0.81. Starting with investments, net investment income increased just over 4% in the quarter, primarily as a result of a larger investment base and higher yields on the bond portfolio. While our average rate on corporate bonds acquired during the quarter was 4.7% compared to the average yield rolling off of about 3.8%, the total bond portfolio book yield held fairly steady with year-end at about 4.75%. With the current interest rate environment, we expect net investment income growth to remain in the low- to mid-single digits throughout the rest of 2026. Turning now to loss reserves, both Specialty and Title Insurance recognized favorable development in the quarter, leading to a 1.5 percentage point benefit in the consolidated loss ratio compared to 2.6 points of benefit last year. While this level of favorable development was lower than we had experienced in recent years, it is within our expectations. For Specialty Insurance, Property continued to have favorable development and led the way this quarter, with a slightly higher level than last year. Commercial Auto and Workers’ Comp had solid favorable development in the quarter; however, both were at lower levels than last year. General Liability had a moderate amount of unfavorable development that spanned several more recent accident years; it was partially offset by favorable development in older years. We ended the quarter with book value per share of $24.53, which inclusive of the regular dividend equated to an increase of 2.6% since year-end, resulting primarily from our operating earnings. In the quarter, we paid nearly $77 million in dividends and repurchased $161 million worth of our shares. Since the end of the quarter, we repurchased another $52 million worth of shares, which leaves us with about $640 million remaining in our current repurchase program. I will now turn the call back over to Craig for a discussion of Specialty Insurance. Thanks, Craig. Craig Richard Smiddy: Thanks, Fran. Specialty Insurance net premiums written were up 3.4% in the quarter, coming from strong rate increases on Commercial Auto and General Liability, some new business writings, and increasing premium in our newer Specialty operating companies, partially offset by a decline in our renewal retention ratios as we continue to prioritize rate in certain lines of coverage within our portfolio. We appear to be leading the market, specifically within Commercial Auto, by driving mid-teens rate increases. As mentioned in my opening remarks, in the quarter, Specialty Insurance pretax operating income was $209 million, while the combined ratio was 94.8%. The loss ratio for the quarter was 63.6%, and that included 1.6 percentage points of favorable prior year reserve development, and that compares to a 61.7% loss ratio in the first quarter last year that included 3.3 points of favorable development. The expense ratio for the quarter was 31.2%, and that compares to 28.1% in the first quarter last year. Our continued investments in new Specialty operating companies, technology modernization, data and analytics, and AI placed some strain on the expense ratio this quarter, but we remain confident that all of these investments will provide significant long-term upside. Turning to Commercial Auto, net premiums written were up just over 1% in the quarter, while the loss ratio came in relatively flat with the first quarter of last year at 70.4%. As I referred earlier, rate increases remained steady with the fourth quarter that we reported, and that is at a 16% rate increase level, which is in line with [inaudible]. Workers’ Comp, on the other hand, net premiums written were also up just over 1% in the quarter, while the loss ratio came in at 62.3% compared to 58.7% in the first quarter last year, and most of that difference is due to the difference in the level of favorable prior year loss reserve development. Rate decreases for Workers’ Comp were about 2%, and here too, that is in line with loss trends, with severity remaining relatively consistent and frequency continuing its downward trends. So while we are seeing some top-line pressure along with some pressure on the expense ratio, we remain confident that our underwriting approach to focus on risk-adequate rates will continue to produce profitable combined ratios, which is the foremost priority for us. We also expect to see continuing growth in top-line contributions from our newer Specialty operating companies. Additionally, in the quarter, we announced the formation of another new operating company, Old Republic Property, led by Patrick Hagerty, who has assembled a highly respected team of underwriters that will specialize in very selective property placements. Just this week, the executive team here at the holding company in Chicago met with Patrick and his team, and they are currently focused on building out their operating platform. Ultimately, we expect this new venture to produce solid underwriting profits, very similar to what Old Republic Inland Marine has delivered over the last couple of years. We also announced the rebranding of Lodestar Claims and Risk Services, which is now set up as a separate stand-alone operating company focused on growing fee income for our portfolio. And finally, as we mentioned in the release, we expect to close on the ECM acquisition around July 1, which will also contribute to the top line and bottom line in the second half of this year. That concludes my comments for Specialty, and I will now turn the discussion over to Carolyn to report on Title. Carolyn Jean Monroe: Thank you, Craig, and good afternoon. Title Insurance reported premium and fee revenue for the quarter of $678 million. This represents an increase of 12% from the first quarter of last year. So far in 2026, we have seen continued strong commercial activity. Consistent with prior years, the first quarter is seasonally slow in the residential market. The start of the 2026 home-buying season was marked by higher inventory levels, lower interest rates, and moderating price growth compared to 2025. While interest rates spiked during the last month of the quarter due to uncertainty and inflation concerns, they did ease slightly in April. The premiums produced in our direct title operations were up 6% from this time last year. Our agency-produced premiums were up 14% and made up nearly 80% of our revenues during the quarter, which is up from 78% in the first quarter of last year. Commercial premiums increased this quarter and were 27% of our earned premiums compared to 24% in the first quarter of last year. During the quarter, we entered into a new excess-of-loss reinsurance agreement that will expand our capacity to underwrite large commercial deals. Investment income was also up this quarter by 4% compared to 2025, driven by a higher invested asset base and higher investment yields. Our loss ratio improved to 2.6% this quarter, including 1.1 percentage points of favorable prior year loss reserve development, compared to 2.7% in 2025 that included 0.8 percentage points of favorable development. Our expense ratio improved nearly two percentage points to 97.5% from 99.4% in 2025. While our combined ratio of 100% is still elevated, the improvement reflects increased revenues and the margin expansion efforts we have been working on. Our pretax operating income increased to $16.7 million this quarter compared to $4.3 million in 2025. As we look forward to some long-awaited improvement in residential housing, we remain focused on operational efficiency and efforts to expand our margins. We are committed to equipping our agents with the latest fraud prevention tools and other technological solutions to help them succeed in all market conditions. Internally, we are busy continuing to execute on the rollout of our new operating platform across the title operations. We are also progressing with ongoing enhancements to our commercial structure and enhancing our ability to service the elevated level of commercial transactions taking place in the market. With that, I will give it back to Craig. Craig Richard Smiddy: Okay, Carolyn. Thank you. That concludes our prepared remarks. While we are seeing some top-line pressure along with some expense pressure in Specialty Insurance, the fundamentals in Specialty remain very strong, and the investments we are making will contribute to continued profitable growth. In Title, we are well positioned for a turn in the residential real estate market while we continue to reduce expenses in the short term. We will now open the call for questions. Operator: Thank you. We will now begin the question and answer session. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Paul Newsome from Piper Sandler. Please go ahead. Paul Newsome: Maybe just a little bit more color on the expense drag. Do you have any thoughts about when some of these new efforts will be able to directionally impact the expense ratio in a positive way? Is it something that we should expect to happen very gradually, or is there some sort of moment when you think some of this stuff will kick in in a meaningful way that we will see in the results? Craig Richard Smiddy: Yeah, Paul. Hello, and thanks for the question. I am happy to respond. Really, there are two main drivers that we referenced in the release, and that is the start-up operating company expenses, and then what I will throw into a second category even though there are three subsets, and that is information technology with systems modernization coupled with data and analytics coupled with AI. I will speak first to the new start-up operating companies. We have about eight of the companies that we would put into the category of new, three of which are at a maturity level that we consider to be at scale. On the other end of the spectrum, we have three new companies that have yet to produce premium. The nature of these start-up businesses, of course, is that the initial people you are hiring are the new leaders of those companies, and with that comes a higher level of compensation. Therefore, it is a matter of time for all of the companies to get to scale. Some in the middle will be reaching scale in the next year to two years, and then the latter three that have not produced any premium yet are still two to three years out before they get to scale. That is the dynamic around the start-up company expenses. It is a matter of where we will be at the end of the day, and again, we think profitable businesses will be the end result. When it comes to information technology, data analytics, and AI, to give you some feel for that, about half of our 20 companies within the Specialty Insurance group are in the process of core system modernization. As you may know, accounting rules are such that initial expenses need to be expensed immediately. We are at the beginning stages in a lot of these core system modernization efforts, so a lot of the costs are falling directly to expense. Then in the midterm, we will hit a point where we are able to capitalize certain costs, and that happens when the system is ready for production. At that point, we will capitalize those costs and amortize them over a period of, Frank, ten years? Francis Joseph Sodaro: Ten years, usually, on the core systems. Craig Richard Smiddy: Yeah. So that is what is happening there. On data analytics, we have built out a pretty significant team. I think we have most of the staff in place. For AI, we are still building out that team, and there will be more cost there to come. There are a lot of moving pieces. I know it is hard to put it all together, but it will take a little bit of time for it all to get to what I would call a run rate that will be an expense ratio less than 30%. Paul Newsome: I guess pulling this all together, you had almost a 35% expense ratio in the first quarter, I think—well, 31% as you adjust it. Is that a good starting point for the following quarters, and then we should see some of these other efforts kick in over time and it kind of goes away? Or is there anything one-time in there that we should consider? Craig Richard Smiddy: I follow your question, Paul. Unfortunately, it is a hard one to answer because so much is also dependent on what is happening with premium. If we had a crystal ball, we could give a much more firm answer if we knew what exactly was going to happen with premium. As you saw, and as I mentioned a couple of times in my comments, while we still have some growth, if you look at net premiums written, they are coming in a bit lower than net premiums earned, which is, of course, a leading indicator. If you compare those growth rates to last year, the growth rates are lower than the robust growth rates we have had over the last couple of years. Premium is the wildcard here. With respect to just thinking about the expense ratio, if we can continue to grow at, say, a 3% to 5% clip for the rest of the year, I would think that an expense ratio that is at or below where we came in the first quarter is reasonable. Paul Newsome: Well, that is great. Thank you. Much appreciate the help as always. I will let some other folks ask questions. Operator: Your next question comes from the line of David Smart from Citizens. Your line is open. David Smart: Hi. Thank you for taking my question. This is David on for Matt. Just a question on the accident-year ratio. It looks like what was booked in Q1 was a couple of points lower. Can you help us understand how you got to that? Any pieces to think about within that? Craig Richard Smiddy: David, just so that I make sure I understand your question correctly, you are looking at the current accident-year loss ratio for Specialty? I am looking at page two of the supplement. We are at a 65.2% compared to a 65% last year. So the current quarter was— David Smart: Last quarter or last year? Craig Richard Smiddy: Right. Okay. Are you comparing it to the full year? David Smart: Yes. Craig Richard Smiddy: Okay. Thank you. I now understand your question. Sorry about that. It makes perfect sense. It is a bit lower in the first quarter than it was for the full year of 2025. But as you can tell by comparing first quarter to first quarter, it is actually 0.2 points up. As we get through the year, it could be closer to where the full year 2025 was. But starting where it is at, even if we were to assume it stays at a 65.2% for the rest of the year, coming in at about a point and a half better than where we were in the last couple of years would be the rationale. We have had cumulative compounded rate increases in numerous lines of business. On Workers’ Comp, we have given up, frankly, less rate than trends would suggest we could give up. Sticking to our underwriting discipline, we are willing to give up top line to maintain loss ratios. We are going out and pushing rate, particularly on Commercial Auto and General Liability where we know we need it, even though a lot of others in the marketplace are still looking in the rearview mirror and not obtaining the rate that we know is necessary. We are going to continue to get the rate we need relative to the trends that we are observing in order to maintain the loss ratios that we have been able to get to through our compounded rate increases, or on Workers’ Comp through our very measured level of rate decreases. David Smart: Great. That is helpful. Thank you very much. Operator: Your next question comes from the line of Greg Peters from Raymond James. Your line is open. Greg Peters: Good afternoon. I am going to focus on the Commercial Auto segment for my first question. Specifically, you talked about the continuing progress on rate increases in that line of business being in the double-digit range, and if I look at the written growth and the earned growth on a quarter-over-quarter basis, it does not seem to square with what seems to be strong pricing conditions for that line. Maybe you could give some perspective on what is going on on the competitive front. Are you losing business? We hear anecdotally stories about MGAs getting more active in the space. We hear other carriers becoming more interested in the space. Just curious about how you see your top-line results in Commercial Auto and how you see the competitive outlook going forward. Craig Richard Smiddy: Yeah, Greg. Great question. In my comments and in the release itself, we talked about the challenges we are having with our retention ratios. For us, what we call a challenge is probably, for others, routine, but we have been able to maintain 85% to 90% retention ratios. That has slipped this quarter for sure. Growing net written by only about 1% in Commercial Auto is a reflection of that lower retention ratio, and that also ties to my comments that our approach is to require the rate increases needed to keep up with the severity trends we are seeing, be disciplined underwriters, and focus on the bottom line—focus on loss ratio. If top line is more muted, then so be it. We think there are competitors that, as I mentioned a little bit ago, are looking in the rearview mirror and are not looking forward as best as you can look forward. If you observe, where we saw severity trends last quarter and where we see them this quarter are almost identical, in the 15% range, and we are going out and we have to get rate increases that are in that same range. With competitors, MGAs are not who we are competing with so much, so I would not say that MGAs are a reason for our lower retention ratio. But there are a lot of other competitors, and I know I have talked about this on previous earnings calls—we pride ourselves on pricing precision and making sure we are on top of trends and reacting quickly, and others just frankly are not as good at that, especially if they are relying on ISO data. ISO is not going to be as current as we are. There are competitors out there that we think are willing to write Commercial Auto at levels that will ultimately be unprofitable. The proof is in the pudding. We have prided ourselves on being an outlier for the last three years or so, putting up favorable development on Commercial Auto while a lot of our competitors are putting up unfavorable development. If you then take what I am saying about where we sit today in the competitive environment, they are going to continue to put up unfavorable development because they are not getting the rates they need to keep up with the trend. It is competitive. It does not help that the trucking industry has been under pressure for the last several years when it comes to their margins. They are under pressure, and the continued need for rate is difficult for them. At the end of the day, it is all about legal system abuse, which we have talked about on prior calls. The industry is very focused on it. We are working with the Triple-I and the Chamber of Commerce to educate the public that plaintiff attorneys and litigation system abuse are costing everybody at the end of the day. But we have to deal with it, and we have to get the rate that is needed to pay for that abuse. Greg Peters: Thanks for that color. As I think about what you are talking about, two things come to mind. You talk about profitability pressures for the trucking business. I am curious if you have a perspective, given the recent jump up in gasoline and diesel prices—if there is any spillover consequence to your company? And then, secondly, on the competition side, is it your risk management business that is being affected where you are losing share, or is it the traditional risk transfer when speaking on the Commercial Auto piece? Craig Richard Smiddy: I will answer the last part first. It is not our risk management—Old Republic Risk Management—business. The majority of it is coming from where we write most of our Commercial Auto, which is Great West. We do write Commercial Auto in several of our other businesses as well, and similarly, they have challenges as well trying to get the rate they need relative to the trend. With regard to trucking, we are very closely aligned with the trucking associations and industry, and there were some reports that spot rates were improving—maybe some indication that, for them as an industry, they had bottomed out. But then, as you pointed out, add on top of that increased costs for them relative to higher diesel fuel and gasoline costs. I do not know enough to tell you if the better rates they might be getting are offsetting the higher fuel costs they have or not. There are some indications that maybe that industry will be better, but as I said earlier, it is not helpful when our clients are under pressures of their own and we have to get more for our product as well. It does create a challenge on the top line. Greg Peters: Thanks for that detail. I will pivot just for a second—I have taken up more than my fair share of time. But, Carolyn, I want to ask you about your comments on commercial, and you highlighted the excess-of-loss reinsurance arrangement and the opportunity set for writing larger commercial accounts. Can you size that up for us as we think about the growth of your commercial business over the next twelve months? Or provide some ideas of what you are thinking about when you talk about larger account opportunities? Craig Richard Smiddy: Carolyn, I will be happy to kick it off and then let you fill in. We are seeing a large amount of opportunity on data centers, energy production facilities—large accounts that actually require more than one title insurance company to coinsure the risk. We wanted to be in a position to comfortably deploy limits that made us a significant participant on those placements. That was a good reason behind why we decided to put in place a reinsurance treaty to give us “sleep at night” coverage, so to speak, to go ahead and write more large-limit accounts, because the frequency at which we were seeing these opportunities has continued to grow over the last two years. Carolyn, I will turn it over to you to provide details on what is happening there. Carolyn Jean Monroe: Sure. Greg, there are some states that tell us what our limit can be, but in a lot of states it is really just up to us. That was a lot of the discussion behind getting this—just feeling a little more comfortable. We have spent a number of years growing our commercial presence, and it just became a time that it would really help us elevate what we are able to do in the commercial market. We really see commercial continuing to grow because, if you think about it, there was not a lot of commercial during the pandemic years and for about a year and a half coming out of that. Commercial properties—something has to happen with them over five to seven years. We are starting to see a lot of portfolio projects come through, not just the data centers like Craig talked about, but a lot of other large projects that we are a lot more comfortable taking on now, knowing that we have the reinsurance. Greg Peters: Fair enough. Thanks for the answers. Operator: There are no further questions. I will now turn the call back over to management for closing remarks. Craig Richard Smiddy: We are happy to have provided these comments and updates relative to the first quarter. We have three more quarters to go for the year, so we are optimistic that things will continue to progress along as planned, and we will continue to deliver solid profitability to our shareholders. We look forward to seeing you at the end of the second quarter, giving you another update, and having another discussion. Thank you all very much. Have a good day. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to Selective Insurance Group First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Brad Wilson, Senior Vice President. Please go ahead, sir. Brad Wilson: Good morning. Thank you for joining Selective's First Quarter 2026 Earnings Conference Call. Yesterday, we posted our earnings press release, financial supplement and investor presentation on the Investors section of selective.com. A replay of today's webcast will be available there shortly after this call. Joining me are John Marchioni, our Chairman, President and Chief Executive Officer; and Patrick Brennan, Executive Vice President and Chief Financial Officer. They will discuss results and take your questions. During the call, we will reference non-GAAP measures used by insurance and investment professionals to evaluate financial and operating performance, including operating income, operating return on common equity and adjusted book value per common share. Reconciliations to the most comparable GAAP measures are available in our financial supplements on our Investor Relations page. We will also make forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements and projections about future performance are subject to risks and uncertainties that we disclose in our SEC filings. We undertake no obligation to update or revise any forward-looking statements. Now I'll turn the call over to John. John J. Marchioni: Thanks, Brad, and good morning. We delivered a solid start to the year, demonstrating the strength and consistency of our operating model in an increasingly competitive market. Our reserves remain stable across all insurance segments and lines of business, and our underlying profitability reinforces our confidence in achieving our full year guidance. As the industry continues to wrestle with elevated commercial casualty loss trends, we believe our efforts over the past 2 years have us well positioned moving forward. We generated an operating ROE of 12%, consistent with our long-term target. This was our seventh consecutive quarter of double-digit operating returns, which reflects disciplined execution across all our operations. As we have emphasized in prior quarters, we continue to prioritize underwriting margins over top-line growth. Our pricing posture on commercial casualty in both standard commercial and excess and surplus lines fully reflects our view on current loss trends. Despite ongoing industry-wide reserve pressure in this segment, market pricing, particularly in other liability occurrence, has not adjusted upward. As a result, our premiums declined 1% year-over-year with E&S up 1% and Standard Commercial Lines down 1%. In Standard Personal Lines, premiums declined 6%, while our target mass affluent market business grew by 1%. We believe heightened discipline is essential in today's environment. Across the industry, social inflation continues to pressure recent accident years, particularly in general liability, commercial auto liability and umbrella. Based on historical patterns, this could imply further deterioration in run rate industry profitability. In contrast, we believe our planning and reserving processes have been responsive to these trends, and we have taken meaningful action to ensure our assumptions remain aligned with emerging data. Our view of loss trends is integrated into our pricing strategies and underwriting decisions. This allows us to have conviction about where we write business and where we step back. In general liability, for example, we have delivered renewal pure price increases in the 10% range over the past 7 quarters, even as industry surveys show mid-single-digit rate increases. In commercial auto liability this quarter, we delivered renewal pure price increases approaching 12%. This discipline is impacting our competitive positioning on certain casualty-oriented accounts, but we do not believe pursuing inadequate casualty returns will create long-term value. While taking these deliberate disciplined actions amid increased competition, we are fully committed to the long-term opportunity to meaningfully expand our market share. We continue to execute on expanding our Standard Lines geographic footprint, and we remain focused on growing with existing agency partners and strategically appointing new agency locations within our existing footprint. We are also seeing positive shifts in our portfolio mix. Our relative exposure to contractors has declined within our new business mix, reflecting our efforts to diversify and improve margin durability. Contractors remain an important industry vertical for us, and we maintain differentiated expertise in serving them. However, a more diversified portfolio positions us better for long-term performance. On renewals, we have the tools and operating model to continuously improve portfolio quality, taking appropriate and granular rate actions. This results in lower retention on underperforming cohorts and stronger retention on well-performing accounts. The expected loss ratio benefit of these mix improvement actions accelerated over the course of the quarter as we leverage this capability more meaningfully. We believe these actions, combined with the continued earning of strong renewal pricing are appropriate given our market context and will drive improved underlying margins over time. We continue to invest in capabilities that support scale, diversification and profitable growth. Artificial intelligence strategically enables these efforts. Early AI achievements in claims, underwriting and risk management are delivering measurable outcomes in accuracy, speed and productivity, positioning us to responsibly scale AI across the organization. A significant portion of our strategic technology investments in 2026 is focused on improving risk selection, pricing accuracy and productivity. While we have deployed many AI tools and are evaluating more, I would like to highlight 2 that are having a meaningful impact in driving better, more consistent outcomes while also improving productivity. Our AI claims ingestion tool has processed more than 0.5 million documents, letting our adjusters focus on higher-value work. We also have deployed automation to support evaluation of contractual risk transfer adequacy, a key element of the underwriting process for contractors with over 90% of results returned by the tool within 2 minutes. These tools are supported by a governance program with a cross-disciplinary AI and model governance committee and a focus on human-in-the-loop engagement for AI outputs. These safeguards help us drive accuracy, quality and trust as we scale AI responsibly across the enterprise. We are excited about the opportunities ahead and confident in our ability to execute with discipline. Now I'll turn the call over to Patrick. Patrick Brennan: Thanks, John, and good morning. For the quarter, we reported fully diluted EPS of $1.58 and non-GAAP operating EPS of $1.69, resulting in an 11.2% ROE and a 12% operating ROE. Our GAAP combined ratio was 98.3%, including 6.2 points of catastrophe losses. Importantly, we had no prior year casualty reserve development at the segment or line of business level. We're pleased with this stability, and we'll continue to evaluate emerging data with rigor and discipline. Our underlying combined ratio was 92.1%. As a reminder, the first quarter typically runs a higher combined due to normal seasonality, and we expect our full year underlying combined ratio to fall within our original 90.5% to 91.5% range. Standard Commercial Lines net premiums written declined 1% as lower policy counts offset 7.1% renewal pure price increases and stronger new business pricing. We remain disciplined, focusing on growth in areas that meet or exceed our risk-adjusted hurdles and support our business mix diversification goals. Our first quarter general liability underlying combined ratio was 2.3 points higher than full year 2025 as we continue to embed elevated severity growth into our assumed loss trend for the line. In commercial auto, the underlying combined ratio for the quarter was 98.0%, 1.1 points better than full year 2025, driven by lower non-catastrophe property losses. Commercial auto liability picks remain consistent with full year 2025 as earned renewal pure price continues to offset severity pressures. Excluding workers' compensation, renewal pure price increased 8%. General liability pricing increased by 9.8% and commercial auto pricing increased 9.1%, up 50 basis points from the fourth quarter. Auto liability price increases approached 12%. Property renewal premium increased 10%, including 3.7 points of exposure growth. Retention was 82%, stable with recent periods, but down 3 points from a year ago due to pricing and underwriting actions to improve profitability. We are intentionally driving higher point of renewal retention on our best-performing accounts and meaningfully lower retention on underperforming businesses. These actions accelerated through the quarter and should contribute to improved underwriting margins in Standard Commercial Lines going forward. Excess and surplus lines premiums written grew 1% in the quarter with average renewal pure price increases of 4.1%. We continue to push higher rate levels in E&S casualty based on our view of general liability loss trends. Property pricing was slightly negative, reflecting heightened competition and strong margins. The E&S combined ratio was a profitable 89.5%, 3 points better than a year ago. In Personal Lines, the combined ratio improved to 92.8% for the quarter from 98.0% first quarter 2025 and 100.6% for full year 2025. Results are even stronger outside of New Jersey. Personal Lines net premiums written declined 6% year-over-year with target business up 1%. Nearly all new business came from our target mass affluent markets. Renewal pure price was 10.6%. Turning to capital management. We continue to prioritize profitable growth and aim to return 20% to 25% of earnings to shareholders through dividends. We also consider repurchasing shares when our capital position and stock price make it attractive to do so. During the quarter, we repurchased $30 million of common stock, building on the $86 million we repurchased in the full year 2025. At quarter end, $140 million remained on our authorization. We will continue to balance opportunistic repurchases with maintaining capital to support profitable underwriting and investment opportunities. After-tax net investment income was $113 million, up 18% from a year ago, generating 13.3 points of return on equity. Our portfolio is conservatively positioned with an average credit quality of A+. We modestly extended the duration of our fixed income portfolio to 4.3 years to support the durability of our book yield. Turning to guidance. We are reaffirming the guidance we communicated in January. For 2026, we expect to see a GAAP combined ratio between 96.5% and 97.5%, assuming 6 points of catastrophe losses. As a reminder, our forward guidance assumes no future reserve development as we book our best estimate each quarter. We continue to expect after-tax net investment income of $465 million. Our guidance assumes an effective tax rate of approximately 21.5% and a fully diluted weighted average share count of approximately 60.5 million, which reflects first quarter share repurchase activity, but does not make assumptions about future activity. With that, operator, please start our question-and-answer session. Operator: [Operator Instructions] our first question comes from the line of Michael Phillips from Oppenheimer. Michael Phillips: John, you touched on the GL and commercial auto top-line in your opening comments. I guess I want to dive into that a bit here. A little surprised by the downturn in premium growth. I mean maybe you can help us parse out the impact of how much was from what you call the competitive environment, maybe more greedy players at this stage of the cycle versus in your other comments, you talked about kind of deliberate actions. So which one had more of an impact there, I guess, is the first question. John J. Marchioni: Yes, sure. Thanks for the question, Mike. With regard to -- and I'll focus on commercial overall, you highlighted auto and GL. And clearly, those are the 2 lines that from a pricing perspective, I think we've really shifted our posture over the last couple of years. New business is the biggest driver of the drop in premium, and that's really, I think, predominantly driven by hit ratios. And as we've talked about over the last couple of years, as we've developed conviction in our view of loss trends and therefore, our view of rate need, we've applied a consistent approach and philosophy to how we think about pricing new business. And as a result of that, we've seen hit ratios come down. Retention on the commercial line side at 82% has been stable with what we saw for the last 3 quarters of 2025. And I think that really reflects our ability to be granular in the execution of our pricing strategy and maintain strong overall retentions, but really drive retentions down in the cohorts of business that we have a view that forward profitability is not where it needs to be. And as a result of that, when you think about deliberate action, I think that's more of a deliberate action focus, sort of maximizing retention on the business we have the strongest forward view of profitability on and maximizing rate and you're seeing retentions come down in those other cohorts. And that's how I piece together what we're seeing there in terms of overall premium growth. Michael Phillips: Okay. That's helpful, John. I guess maybe sort of sticking with that theme in a different angle. You give us your slide on the retention cohorts, the retention groups. And this is the first quarter, there was kind of a dramatic change, I think, and the average one came way down. But I guess anything to read on the excellent above average shifted up a bit, good news. The average came way down, 27%. And then the below average and very low sort of ticked up a bit as well. So I don't know if that's a short-term thing, but any comments there? Because you talked about the different contractor stuff in your opening comments, but quite a bit of a shift there in those retention cohorts. John J. Marchioni: Yes. I would say, generally speaking, the way you want to think about that is there's a modeling output and then there is an underwriting overlay on a segmentation basis that will move those buckets around a little bit to make sure that we're aligned across the board in terms of the business we really want to target. I think the bigger focus area should really be at those extremes, both good on the excellent and above-average buckets and the low and very low buckets, and that's where you really want to see the differentiation between rate and retention. And you're seeing that shift in a positive direction, and I would expect to see that continue on a go-forward basis. Operator: And our next question comes from the line of Michael Zaremski from BMO Capital Markets. Michael Zaremski: Just kind of, John, thinking about your prepared remarks about kind of the loss trend for the industry, maybe not pricing not reflecting kind of the current loss trend and seeing the -- you pull back in new sales. Is this -- to what degree would you be willing to continue pulling back and pulling back even more? Just trying to think about the pace of the top line change this quarter. Typically, the industry moves, I think, fairly slowly on kind of their view on loss trend. You guys have taken a lot of -- done a lot of deep dives and taking a lot of corrective actions. So I guess, would you allow the top line to start declining if the market doesn't move your way? John J. Marchioni: Yes. I would say a couple of things. And again, I appreciate the question, Mike. We've been through this before. And you look back to 2010 to 2012, and it was a pretty similar environment. And over the long term, that short-term pain that we felt on the top line positioned us to really outperform significantly over the following decade. And I think we're in a similar situation. Now that said, I think we have the opportunity to continue to mitigate that top line impact through the execution that we talked about in terms of granular segmentation of our renewal portfolio, which should allow us to maintain solid retentions overall and the same philosophy around how we think about new business and new business selection. There are opportunities to write new business in this market and write it profitably and our ability to target those and the depth of relationships we have, I think, will allow us to pivot and maintain strong new business performance. With regard to your comment on industry trends, though, I just want to reinforce one point, and I alluded to this in the prepared comments. I think if you look at where auto pricing is -- auto liability pricing is in the industry, that has been firmer and has stayed there on an industry basis. I think that's -- there's a better recognition of not just where trends are, but where run rate profitability is. And if you look at where run rate profitability is in commercial auto, the AM Best estimate is just over 103 for 2025. And if you were to split that between liability and physical damage, liability is probably in the 107, 108 kind of range. So the starting point is not great for the industry and the trends are elevated, so that rate need is there. And I would say the industry is more responsive. I think the bigger challenge is on the GL side, and I pointed to that in the prepared comments. If you look at where GL is, and this is other liability, both products and non-products, and again, there are different estimates out there on an industry basis, but AM best has GL at the 108 range. And I would say when you look at what happened in 2025, there's another $8 billion of adverse emergence booked by the industry. And even so, a lot of that was still '23 and prior. And I don't know that you've seen that fully reflected in 2024 and '25. I think that's the part of the market that hasn't been as responsive. And I think when you look at the way the claims come through and the shorter tail on commercial auto liability versus general liability, I think it's a quicker recognition, but I would expect that recognition to start to come through on GL in the next couple of quarters. And we see where -- how our peers comment and a couple of peers that have already released and made comments around where they think the direction of pricing is and needs to be on commercial casualty, I think that's in line with what we've been saying and what we would expect to see going forward. Michael Zaremski: Okay. That's interesting and helpful commentary. Switching gears a bit to the expense ratio guidance from last quarter about some of the investments. Should we be thinking through any operating leverage implications too on the expense ratio from the change in top line? Patrick Brennan: Yes, Mike, thanks for the question. As we look forward, obviously, we're focused on growing our business the right way. But I would say to the extent that we do see a tempering of growth, we're obviously going to be very mindful of our expense ratio and ensuring that we are continuing to compete with a competitive expense ratio. So that will definitely be a focus. But I would say our focus right now is really ensuring that we can grow the business in a way that meets our overall expectations. John J. Marchioni: And just to further that point, I think Patrick is exactly right. As we manage the expense side of the equation in light of the top line, we can't lose sight of the fact that the increasing technology investments we pointed to over the last couple of quarters will increase capacity, and I think will be a positive directional item with regard to expense ratio on a go-forward basis. Michael Zaremski: Got it. And just lastly, real quick, it was great to see no overall reserve development. I think that was a welcome sign. Just curious under the hood on the long-tail casualty lines, was there any thing worth calling out on vintages or changes? I know you're booking your '24 and '25 picks on social inflation at kind of looks like conservative levels. Just curious if there's anything you want to call out. John J. Marchioni: No, there's -- and we pointed to the line of business as well if there was nothing notable from a line perspective. But to the rest of your question, from a vintage perspective, there was nothing there either with regard to movement across vintages. Operator: And our next question comes from the line of Rowland Mayor from RBC. Rowland Mayor: Congrats on the quarter. I wanted to quickly ask on the capital return and if you could walk me through your strategy. As we look at lower growth, we start to see the payout ratio climb? Or are there other factors we should be looking at? Patrick Brennan: Yes, Rowland, thanks for the question. Look, I'd say our overall capital management philosophy is unchanged. We continue to invest in a growing and profitable business. That's our first and best use of capital, as you would expect. Our overall capital management philosophy also contemplates a dividend that is in the 20% to 25% of long-term earnings. And as and when we have capital over and above what we think we need to run the business, that provides us with a lot of flexibility, of which could include share repurchases. When we think about share repurchase activity, it's really a function of what our valuation is relative to our own view of where our stock should trade and as well as that our future needs for capital. And so I don't think there's anything particularly different about what we've done this quarter relative to the last couple of quarters. Certainly, we've seen our stock trade off. And on a relative valuation perspective, we are coming in at attractive levels at a time when we have additional capital to do that. Rowland Mayor: That's super helpful. And then I was wondering if you could help me understand the difference between the high end and the low end of the combined ratio guide for the year. Is it largely pricing and competitiveness? Or are we -- is there some non-cat losses that are kind of assumed between the difference between the 96.5% and the 97.5%? John J. Marchioni: I think it's intended to be reflective of the normal variability in non-cat property. That's the primary driver. Operator: And our next question comes from the line of Meyer Shields from KBW. Meyer Shields: I guess a question on workers' compensation. If you go back to 2023, there was sort of steady, modest favorable development just about every quarter. And I'm wondering whether the absence that we're seeing in the first quarter of '26, is that because you're not seeing the same delta or you're taking a more conservative approach to acknowledging it? John J. Marchioni: I would say just in terms of the trend of favorable emergence in workers' comp, if you look back over the last 2 calendar years, the majority of our action on workers' comp with regard to favorable emergence came in the fourth quarter of the last 2 years and was generally associated with our annual tail study that we do at the end of the year. There might have been some small releases in other quarters, but generally speaking, that's where it came from, and it was -- it was at the end of each year. So I don't think that trend has really shifted. There's no question. I think our view when you see it in our book loss ratios, our view has been that with regard to the continuing negative price environment and our view of where we believe severity trend to be, you want to take a more conservative stance relative to how you think about those more recent accident years, and that certainly feeds into our view and our philosophy. Meyer Shields: Okay. That's very helpful. And then I had a separate question. If you go back to the, I'll call it, the portfolio chart with the different cohorts of performance, when you look at the better performing accounts, are the loss trends different there? I understand the loss experience is different, but I'm wondering whether the trends vary by quality of account? John J. Marchioni: I would say there might be some nuance there. But generally speaking, especially when you think about why we see elevated trends, they're social inflationary in nature. And as we've said on a geographic and a segment basis, fairly widespread. So I think it's a pretty good assumption that you would expect your severity trend to be pretty consistent across cohorts. I would expect on the flip side, you would see some frequency improvement that might give you a better trend view on a forward basis with regard to that preferred bucket because they're better controlled accounts, generally speaking. So you would expect to see potentially some favorable frequency influencing your view of trends there. Meyer Shields: Okay. And if I can throw in one last question really quickly. Does the -- I guess, the mix change away from contractors, does that have any implication for the surety book? John J. Marchioni: I would say not really. There is some association there, but it's not that significant. We like the surety business. We think there's an opportunity there for us to continue to grow that segment over time. But I also want to reinforce the point, we like the construction business, and we've got a long history there of strong performance. This is really about optimizing other segments which will benefit the mix overall. But we are not walking away from the construction segment by any stretch. It helps us manage our overall catastrophic exposure to property cat. We think we've built up a lot of skills and experience in those -- in the various contractor segments. So we plan on continuing to be a strong player there. We just see opportunities to further diversify segments, which will also help us diversify by line of business over that same timeframe. Operator: [Operator Instructions] Our next question comes from the line of Paul Newsome from Piper Sandler. Jon Paul Newsome: Just a couple of actually kind of follow-on questions. Within contractors, obviously, there's a ton of different kind of contractors. Is there any sort of differences within the trends that we would see in that regard? And I guess I'll ask my second question too. Can we also think about or talk about some of these at least from a competitive advantage or business advantage on a state-by-state basis? Do you still have some states that New Jersey was a problem at least one point. So yes, any areas of those 2 kind of broad buckets? Any color would be great. John J. Marchioni: Yes. So -- and I was having a hard time hearing the end of the question, but it sounded like it was mostly focused around geographic hotspots with regard to loss trends. I would say, other than what we've previously pointed out, and remember, I think that was -- those comments were more around auto than they were around general liability, and that continues to be our view. Frequency and severity trends in New Jersey, auto on both personal and commercial, but we're talking commercial here have remained elevated. And I think we see that across the industry as well. We pointed to a couple of other places, sort of lesser issues, but we pointed to South Carolina. So I would say there's no change there, and that's all reflected in our view from an underwriting and a pricing perspective in terms of how we manage the business going forward. With regard to contractors, and you're right. I mean that's a very broad classification. But within that -- and our focus tends to be on the artisan contractors. So it's not a lot of the large construction outfits, although we do write some of that, but it's really the artisans. And I would say that the differences we see tend to be more around geography as we're talking about here than it does anything else from a loss trend perspective. Performance is certainly different and the auto relative to the GL exposure is going to be different by classification in terms of the size of the auto fleets in certain construction classes being bigger than in others. So you've got a little bit of a GL versus auto distributional difference. But generally speaking, the way you underwrite construction is pretty similar in terms of understanding safety practices and making sure those safety practices are employed on a consistent basis across all job sites and also making sure that when you have contractors who are involved on either a subcontracting or a general contracting basis, you've got really good information around the contracts that are in place to understand whether or not you're assuming risk from another party to the contract that you didn't anticipate and your ability to underwrite that effectively, I think it's a pretty consistent consideration across all segmentations within construction. Operator: And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Marchioni for any further remarks. John J. Marchioni: Well, as always, we appreciate your interest and engagement. And if you have any follow-up items, please feel free to reach out to Brad. Thank you very much. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Welcome to the Liberty Energy Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anjali Voria, Vice President of Investor Relations. Please go ahead. Anjali Voria: Thank you, Chloe. Good morning, and welcome to the Liberty Energy First Quarter 2026 Earnings Conference Call. Joining us on the call are Ron Gusek Chief Executive Officer; and Michael Stock, Chief Financial Officer. Before we begin, I would like to remind all participants that some of our comments today may include forward-looking statements reflecting the company's view about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in our earnings release and other public filings. Our comments today also include non-GAAP financial and operational measures. These non-GAAP measures, including EBITDA, adjusted EBITDA, adjusted net income, adjusted net income per diluted share, adjusted pretax return on capital employed and cash return on capital invested are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net income to EBITDA and adjusted EBITDA, net income to adjusted net income and adjusted net income per diluted share and the calculation of adjusted pretax return on capital employed and cash return on capital investments as discussed on this call are available on our Investor Relations website. I will now turn the call over to Ron. Ron Gusek: Good morning, everyone, and thank you for joining us to discuss our first quarter 2026 operational and financial results. Our first quarter results were driven by outsized demand for Liberty's premium completion service offering, outstanding operational execution and technology-driven efficiency gains. Revenue of $1 billion and adjusted EBITDA of $126 million reflected record pumping efficiencies and high fleet utilization, while absorbing the full realization of pricing headwinds and winter weather disruption. Despite a 3-year slowdown in industry completions activity, Liberty has continued to deliver record performance quarter after quarter, an achievement that is no small feat. I want to thank the team for the hard work and dedication throughout this period that has prepared us well for the next phase of the cycle. We are confident that the North American oil and gas industry has established a cyclical floor. We are seeing an accelerating shift in momentum, driven by unprecedented oil and gas supply disruption and renewed focus on the importance of energy security. By strategically investing through this period of frac industry softness, we are well positioned to generate superior returns as the focus shifts to secure North American supply. Distributed power generation demand continues to build as grid interconnection bottlenecks, utility imposed operational constraints and system congestion drive hyperscalers towards on-site power as the preferred long-term model. This shift is reinforced by extraordinary hyperscaler investment in infrastructure, supporting voracious demand for AI-enabled productivity increases. Widening policy mandates to expand generation capacity and provide grid resilience within local communities further encourage distributed power solutions. As customer requirements grow more complex, Liberty is experiencing more direct collaboration with hyperscalers, expanding beyond the developer ecosystem. Large load customers are increasingly prioritizing fully integrated end-to-end power solutions that brings together land, fuel sourcing, midstream and generation infrastructure, grid interconnection, on-site power delivery, load optimization and life cycle operations. LPI provides seamlessly delivered power through a single trusted partner. Onsite power is a complex operational symphony that requires a sophisticated ecosystem of telemetry, logistics and technical readiness. At LPI, we have built a comprehensive execution solution designed to manage this complexity at scale. From a globally integrated supply chain and a mobilized workforce to an AI-driven technology overlay to ensure peak performance. Our commitment to reliability is anchored by our lab advanced testing facility, where we rigorously validate the integration of hardware, software, and dynamic load following performance for real customer load profiles in a controlled, low-risk environment. Our microgrid testing facility in El Reno is designed to evaluate how complex multisource energy systems within the Forte offering perform under dynamic operating conditions using our simple proprietary control system that governs overall system behavior. It is structured around three phases of validation. First, a software phase evaluate system performance from a first principles perspective, allowing us to understand how generation, storage and power electronics respond to dynamic customer load while also supporting system resiliency and equipment lifetime. This work informs control tuning, system architecture and the type and size of supporting assets required. Second, a hardware in the loop phase applies these learnings using the physical control system operating against simulated generation, storage and load assets. This allows us to assess response times, control logic and system coordination by validating how real controller decisions interact with dynamic system behavior before physical equipment is introduced. Third, Integrated system validation brings physical generation, storage and power electronics together on a common bus to serve representative load profiles at meaningful scale. While not full plant capacity, this step ensures that control logic, hardware interfaces, protection schemes and dynamic response translate correctly on to real equipment and operating conditions. By progressing from modeling to controller validation to integrated system testing, we identify integration risks and control issues prior to field deployment, providing our customers with the operational certainty required to support the next generation of data center demand. In completions, we are at the leading edge of equipment innovation and design, redefining how systems are built through our digiTechnologies platform. We are excited to reach commercial deployment of the latest digiPrime technology, the only 100% natural gas engine with variable speed capabilities in the oilfield. In addition, we now have a path to upgrade our engine control software to enable variable speed on our early digiPrime Rolls-Royce mtu pump systems. Upon completion of the update, over 70% of our digiPrime fleet will have variable speed capabilities and increased horsepower. Simply put, these developments mark a major advancement in the design and engineering of mechanical power systems, improving overall efficiency and reducing total cost. This is purposeful and focused evolution of technology, a continuous improvement where we design, test, validate and deal across our fleet. We are building upon years of experience in designing complex engineering systems and equipment innovation from digiFrac electric fleets to digiPrime direct drive systems and now variable speed capabilities. That foundation of engineering expertise empowers not only the oil field, but also our power applications. Liberty is pushing frac efficiencies to new heights through integration of real-time execution control and continuously learning intelligence. StimCommander, our advanced fleet control software automates rate and pressure control in real time to improve stage consistency and use variability. While Forge, our cloud-based optimization platform, continuously learns from fleet-wide data to enhance performance over time through closed-loop feedback. Together, they create a system that compounds efficiency across every stage of execution delivering more consistent operations and a lower cost per barrel of oil. In today's high oil price environment, operators are increasingly focused on total fuel consumption and well site efficiency, and our integrated system delivers meaningful reductions in fuel intensity and optimization of natural gas substitution in dual fuel systems. The performance gap between industry frac fleets is increasingly defined by the strength of this digital intelligence layer, allowing us to support improved well economics. Liberty's success is based on innovation and disciplined investment consistently seizing opportunities through every phase of the cycle. We have strengthened our platform and enhanced our ability to deliver differentiated performance, positioning us well to benefit from both cyclical recovery in the oilfield and the secular growth in power demand. During the first quarter, we executed $1.3 billion in convertible debt offerings, further strengthening our financial flexibility and positioning us for durable long-term growth. Concurrently, we entered capped call transactions at a 150% premium to the reference share price designed to preserve substantial upside for shareholders by meaningfully reducing potential dilution from these offerings as we execute on our growing power opportunity. This enables the necessary investment for long lead time items to achieve our 2029 goal of reaching 3 gigawatts of deployed power. The structural disruption in the Middle East has catalyzed a fundamental shift in global supply side dynamics, establishing a higher baseline for energy security and recalibrate a risk profile of regional supply. In oil markets, the conflict in Iran has driven a tax on regional energy infrastructure, and the unprecedented effective closure of the Strait of Hormuz inducing higher oil prices and raising the prospect of a sustained increase in supply side risk premiums. In parallel, global LNG markets may face multiyear supply constraints following attacks on Qatar's Ros Lafane hub and other regional gas infrastructure. The resulting shock is most acute in Asia, where high import dependence is forcing demand rationing amid constrained physical supply. The shale revolution has allowed the U.S. to become the world's largest oil producer and LNG exporter, securing our energy future while providing a reliable supply source for consumers worldwide. Over time, geopolitical dynamics may support structural tailwinds for North America as global consumers reevaluate energy supply chains and diversified sourcing with greater reliance on U.S. and Canadian sourced oil and refined product supply. As the market's way rising concerns over physical oil and gas supply shortages against potential cease-fire implications, North American E&P companies are evaluating a range of macroeconomic scenarios. The recent rise in oil prices is well above early year expectations, now driving substantially better E&P economics with greater potential for increased free cash flow generation. Entering the year, service companies recalibrated frac fleet supply for flattish activity expectations, resulting in a tighter balance to meet expected demand. Pricing pressure and softer activity over the past few years led to accelerated equipment cannibalization, fleet attrition and underinvestment in its generation technology. Emerging strength in frac markets, driven by more price responsive private E&Ps and accelerated DUC activity is enabling earlier than anticipated pricing recovery from cyclical lows at the start of the year. Moving to the core outlook. U.S. demand estimates continue to accelerate, exemplified by ERCOT's recent projections that Texas grid demand could quadruple by 2032. This significant expansion is being met by a fundamental shift in the commercial landscape. Hyperscalers and other large load customers are increasingly relying on distributed power service providers to self-generate and bypass traditional grid constraints. LPI is uniquely positioned as the enabling infrastructure provider, supporting customers as they transform from large-scale power consumers to more localized on-site energy users rather than grid dependent power users. LPI's scalable, decentralized power solutions provide a critical operational infrastructure for these large load customers with the ability to support local grid stability. In the second quarter, we expect sequential growth in revenue on increased utilization and corresponding improvement in profitability. While a challenging market in recent years led many to retrench, we chose to lean in and accelerate strategic investments. We have fortified our competitive advantages in power and completion technologies and are well prepared to meet the rising demand for our services that Liberty is seeing today. Recent events have reinforced the importance of energy diversification for global consumers, and we are proud to support the growth of reliable energy sources worldwide, including through our alliances and investments in Okla, Fervo and the Australian Beetaloo Shale Basin. I will now turn the call over to Michael to discuss our financial results and outlook. Michael Stock: Good morning, everyone. The first quarter set a strong tone for the year. We overcame significant January weather disruptions and quickly returned to strong efficiency and utilization as the quarter progressed. We closed the quarter delivering record level output, generating more horsepower hours in the quarter than ever before in our 15-year operating history. Let's turn to the earnings results. In the first quarter of '26, revenue was $1 billion, slightly below the prior quarter, but modestly higher than the year ago period. Our results reflected the full realization of pricing headwinds and winter weather challenges, partially offset by strong operational execution and customer demand for Liberty fleets. First quarter net income of $23 million compared to $14 million in the prior quarter. Adjusted net income of $10 million compared to $8 million in the prior quarter and excludes $12 million of tax-effective gains on investments. Fully diluted net income per share in the first quarter was $0.14 compared to $0.08 in the prior quarter and adjusted net income per diluted share was $0.06 compared to $0.05 in the prior quarter. First quarter adjusted EBITDA was $126 million. General and administrative expenses totaled $60 million in the first quarter compared to $65 million in the prior quarter and included noncash stock-based compensation of approximately $6 million. Excluding stock-based compensation, G&A decreased $5 million, primarily due to higher variable compensation costs recognized in the fourth quarter. Other income items totaled $10 million for the quarter, inclusive of $17 million of gain on investments, offset by interest expense of approximately $8 million. First quarter tax expense was $9 million, approximately 29% of pretax income. We expect tax expense for the remainder of 2026 to be approximately 25% of pretax income and do not expect to pay material cash taxes in the year. We ended the quarter with a cash balance of $699 million and net debt of $579 million. Net debt increased by $360 million, primarily due to convertible debt issuances. Total liquidity at the end of the quarter, including availability under the credit facility, was $1.2 billion. First quarter uses of cash included capital expenditures and $15 million of in cash dividends. Net capital expenditures and long-term deposits were $133 million in the first quarter, which included investments in digiFleets, capitalized maintenance spending, power generation and other projects. We had approximately $24 million of proceeds from asset sales in the quarter. Recent geopolitical developments have introduced both volatility and opportunity, shifting market momentum and reshaping our outlook. We are seeing customer demand inquiries accelerate with customers turning to Liberty for fully integrated services to support their goals. With demand for Liberty fleets exceeding capacity, we are working diligently to plan to accommodate this demand and selectively deepening relationships with strategic customers who value differential services. Our second quarter is expected to see early benefits as customers accelerate DUC activity and evaluate future plans. As a reminder, our 2026 completions CapEx investment moderates meaningfully from prior years, but includes ongoing investment in digiFleets that have structurally advantaged economics versus competing next-gen technologies. Our completions free cash flow is strengthening. In power, we are similarly seeing customers -- more customers gravitate to LPI. Our collaborative framework and turnkey power solutions are gaining traction as end users prioritize fully integrated one-stop solutions that reduce the complexity of finding and securing powered land. To advance these efforts, we currently have planned contract milestone payments of approximately $300 million in the second quarter or early part of the third quarter. That secure generation capacity in support of our 3 gigawatt plan for 2029. Power opportunities inherently carry longer duration time horizons with multiyear execution cycles, and these costs will ultimately be funded by project finance as discussed on our prior calls. We remain focused on driving long-term value creation, positioning our Premier Completions business to lead through market cycles and scaling our power infrastructure platform to meet the growing demand for power services. I will now turn it back to the operator for Q&A, after which Rob will have some closing comments at the end of the call. Operator: [Operator Instructions] The first question today comes from Scott Gruber with Citigroup. Scott Gruber: I was wondering if you guys could just kind of unpack the completion fundamentals from here. Obviously, activity is improving. white space is kind of getting squeezed out of the calendar. It seems like pricing is improving. And obviously, you'll lap the winter storm burn impact from last quarter. Maybe you can just kind of walk through those pieces and any color you can provide on the activity uplift and if you'll start to see some pricing in the second quarter or whether that's a second half phenomenon? Ron Gusek: Thank the question, Scott. I think you characterized most of that very, very well. We are in a different position than we would have anticipated going into this year. So as I said in my opening remarks, we definitely feel like the market is quite tight today from a utilization standpoint. We went through the end of the calendar year, us and our peers rightsized fleets for the outlook on work. And as a result, have relatively well utilized capacity prior to any uptick in activity. Now that's not to say there aren't some fleets on the sidelines. We believe there is some capacity that could come back. But I think the message is pretty consistent that that's a relatively limited amount of equipment and that there's going to be a meaningful capital investment for that to happen. As a result, I would say, if you start to look forward, there's a few things in play. Number one, we went into the year with a relatively strong calendar to start with. We already had pretty strong utilization. We've had inbound calls around accelerating activity at this point. So those customers who had DUCs in their inventory are reaching out and asking about the opportunity to get those on to the calendar sooner rather than later. On top of that, you're starting to see some reaction from the privates. You've heard some announcements around the commitment to increase drilling activity over the remainder of the year. And well, we don't feel that impact immediately. Those inbound starts to come for planned completions activity later in the year, again, just starting to absorb any remaining white space that was left on the calendar. As that white space gets soaked up, then comes that conversation around restarting capacity. as we've said, we don't have any capacity on the fence. We have no additional pumps that we had signed. And so for us, that conversation really starts to look like a price conversation. Our sales team has been out in the market today, engaging in that conversation with our customers, recognizing that their economics have changed meaningfully over the last number of weeks. And that while we were responsive on the way back down, we feel it's reasonable to ask for some of that on the way back up. I would say that they are having great success in those conversations and that we will start to recognize some of that price here in the second quarter along with a bit of utilization improvement to the extent we had white space on the calendar. The biggest impact of that is going to be felt in the back half of the year. But we're certainly going to feel a little bit of that here in the second quarter. I would say -- it's still early days for the bigger picture stuff to play out. We haven't yet heard really any of the publics make a statement around increasing their expected spend this year. I think they started to hint at it. You've heard some companies that some of the most recent conferences talk about that idea, but they've not yet acted on that. And so we will wait to see how that plays out and then start to plan for the back half of the year and potentially early '27 accordingly. Michael, do you have anything to add there? Scott Gruber: Yes. No, I was -- I didn't know if you had any additional comments there, Michael. Okay. Also a follow-up on the power business, if you don't mind. It seems like initially in power, you guys were focused on a broad set of opportunities. And then I don't know, maybe call it over the last 6, 12 months, there's been a focus more on the data center opportunity, which probably reflects not wanting to tie up capacity on smaller shorter-term deals as bigger projects and bigger contracts are coming down the pipe. And maybe my perception is off on that a bit. But just how do you view kind of where you should put your marketing efforts in power? Are you comfortable with the focus that's kind of mainly on data centers or do you think about taking a broader approach to establish a kind of more diversified business? Just how do you think about the -- where to put your marketing efforts in power? Ron Gusek: So, we definitely not chosen to focus specifically on one area. While data centers, of course, are all the talk. They are all the news today and certainly what gets all the front-page headlines just given the massive growth and the incredible amount of capital being deployed there. Our marketing efforts certainly remain broad-based. We fully anticipate doing work not only with the data centers, but also outside of that space in other commercial and industrial opportunities. I would say that as you would expect, the demand for power generation co-located behind the meter just continues to get larger and larger and larger. And while that's happening in the data center space, it's also happening outside of that space. Everybody is facing the same constraints that you hear around trying to get connected to the grid. The time lines get longer, the upfront capital commitments get stronger and stronger and stronger. As a result, it doesn't matter whether you're a commercial or industrial applications, I think remote mining or something in oil and gas or whatever the case might be or a data center, you're facing those same constraints. And as a result, they're having the same conversations with LPI. And so we remain focused on all of those opportunities. if you looked at our sales pipeline, the largest share of that remains data centers. But I absolutely expect that we are going to be doing work for commercial and industrial opportunities as well. Just given where we are in conversations with them at this point in time. So I think you're going to see our contractual nature as it plays out represents a good cross-section of business that well we're going to be while we're going to have a large percentage of our assets dedicated to data centers, we're absolutely going to be having some megawatts put to work outside of that space. Michael Stock: Yes. And Scott, I just would add a little color on that side of the world. You were right in sort of a subpart of your question. In this time when generation is limited, our focus is definitely on longer-term contracts, right? That is the key -- that is also the key part in both sectors, whether it be data centers or the C&I industrial, mining, critical minerals, et cetera, of the world. So it's focusing on that, not on the short term. These are long-term build-w-operate contracts, 10 to 20 years in duration. So that's where the focus is. Operator: The next question comes from Arun Jayaram with JPMorgan. Arun Jayaram: Good morning, gentlemen. Ron, you discussed in your prepared remarks some trends towards perhaps the disintermediation of the developers and you're having more direct interaction with the hyperscalers. Could you talk about that trend? And could that be a favorable trend for Liberty in particular, like how you've commented how there's been a move towards more fully integrated solutions. Ron Gusek: Yes, that's a great question. And it certainly is a very, very important trend. Of course, if you look at the landscape, there's a huge number of land opportunities being developed. That's not where the challenge lies in this world. So lots of potential sites. It's ultimately up to the hyperscaler to evaluate those sites and find the ones that meet all of the criteria that they are looking at to ultimately build and operate a data center. And we can work very closely with them alongside of them to help work through that checklist and understand the sites that represent the best possible opportunity going forward. That list is a long one. We've talked about that in the past. But you think about things like access to gas, community engagement, surface access rights, some surface access rights. The list goes on and on and on. And the hyperscalers are recognized that, that list is a complex one and that they have choice in land. What they want is a great partner on the power generation side of things that can help them navigate things like the community engagement, the air permitting, the gas access and the things that LPI has worked very, very hard to bring to the table. And so what we found over the last little while is that while we initially started engaging with the developers that were effectively a bit of an intermediary between us and the hyperscalers, we've seen a lot more interest in the rec conversation there. And now our conversations at LPI tend to be directly with the hyperscalers evaluating a range of land opportunities, recognizing that not all of those will get across the finish line, but helping them to high-grade those and then standing alongside them as a partner to bring all of the skills and capabilities that we have to the table. Michael Stock: Yes. I'd sort of characterize it as we want to become -- if we go back, I'm showing my age, the Intel and side. right? Sort of really what the difference here is you've got the land developers and you've got the land opportunities, you've got the data center developers who are bringing -- are going vertical and building the buildings. Ultimately, it's all getting paid for by the hyperscalers. And we are the key element in there. And so being involved with all three of those stakeholders at the table is the key part. And now we're more directly involved with the hyperscalers because multiple vertical developers are coming to the hyperscalers and they're going, okay, Liberty -- Liberty is our power solution. They're now comfortable with it. Land developers are going to the developers and going and say, I've got 1,000 acres. Liberty is going -- can be our power on this land, both the vertical developers and the hyperscalers are comfortable with that. But think about it that way, and that's how the conversations have kind of moved over the last 3 months or so. Arun Jayaram: Great. And my follow-up is just in completions. On the last call, you mentioned how you're adding kind of three to four kind of digiFleets in calendar 2026. I wanted to see if those were planned to be incremental units or replacement units. And just thoughts on -- obviously, you guys have been pretty busy in frac for some time. Do your agreements with your dedicated customers provide for openers, where you can start to move pricing, particularly on some of those large, more dedicated agreements? Ron Gusek: All right. I'll take the first part of that first. As we think about digiPrime, I would say that as we went into the year, it was fully our anticipation that those pumps that equipment would be replacement equipment. We are working hard to transition away from the last of our diesel equipment. I think it's some 10% of what we have left operating in the field today. And so it was our expectation we would have retired the last of that and replace that with digiPrime, making our entire fleet dual-fuel or better going forward. We do have optionality there, however, to the extent the right opportunity presented itself and that opportunity would have to be the right combination of price, margin and really duration outlook on that work before we would consider turning that equipment into a new fleet, hiring the people to support that and going forward with that idea. But we do retain that flexibility. And so at this point in time, I would say we continue to watch the market. We'll see how the broader market chooses to move forward given the dynamics that are at play today. And to the extent there is support for that, we would consider making that choice to add a fleet rather than make it all replacement. As far as pricing going forward, of course, we do operate typically on a year-to-year arrangement. But that said, I think we work hard to maintain an open conversation with all of our customers. That's critical in a partnership. It was critical on the way down as the market evolved, our customers would come to us. And recognizing where the market had gotten to ask for a pricing adjustment that reflected that. We don't view that as any different on the way up. It's reasonable for us in times like this where their economics have moved meaningfully. The price of WTI has climbed significantly to go back and have that conversation again in the other direction. So while we do have some that have very fixed definitions around how that pricing evolves. For the most part, that is an open conversation with our customers that works both on the way down and again on the way back up. Operator: The next question comes from Stephen Gengaro with Stifel. Stephen Gengaro: I think following up on the prior question a little bit. When you think about the arb between diesel and gas burning assets, what are the supply demand look like for non-diesel assets in the market right now? And how do you think that sort of the tightness plays out? I think what I was getting at, and I appreciate the answer you just gave, Ron. But when we think about -- like when -- if you were us, when would you start to expect the pricing impact to show up on the income statement. Ron Gusek: I would say meaningfully in Q3 is the right way to think about it. We'll start to feel maybe very modest impact this quarter. But in reality, given time to have those conversations and then to work through pads and get to a place where we can enact that step in pricing, really expect that to start to show up in Q3. I would say to the first part of your question that if there is capacity that has some ability to consume natural gas, it's in high demand today. We've talked in calls on past about that delta between the cost of running a fleet on diesel fuel versus the cost of running a fleet on natural gas. And that ebbs and flows, of course, depending on exactly where diesel prices are. But anybody who's driven by a gas station today knows where the price of diesel has gone to of late, and it is highly elevated. That pushes that spread back up to probably something north of $20 million annualized in potential fuel savings going from 100% diesel to 100% natural gas. And so as you can imagine right now, dual fuel or 100% gas is in high demand. Fuel is effectively a pass-through on a location. That's a cost that the E&P absorbs directly. And so they're doing all they can to mitigate that. I talked about in our -- in my opening remarks, our focus on even maximizing the substitution on those fleets about eating out that incremental couple of percent of gas substitution because that's meaningful to our customers today and they see that as critical to helping out their economics over the long term. So lots of focus on that particular area and certainly a huge amount of interest in gas-fired equipment. Stephen Gengaro: And then on the power gen side, we get a lot of questions about this, and just curious if you could clarify. When we think about the arrangement with Vantage, and kind of what it means for you. Can you talk about how we should think about that impacting power contracts and then what exactly does the contract pay you starting with the renovation fee? How does that work exactly? Michael Stock: Yes. So we've released some details on it, but let me give you the general overview. We have committed to them 400 megawatts starting in the beginning of '27 that's available for them to put on any project. So think about this as saying, okay, this is a developer, we're working with them very, very closely on 9 or 10 different projects, looking at gas, looking at land availability, working specific kind of their permits on a specific project, et cetera, that we're going to be developing. And they can do that very much so because as they choose -- want to see which -- as they're going to pitch to the hyperscaler and they're going to choose a piece of land, they know that they have this early power they can commit. Now that 400 megawatts, right, which is not under an ESA because that will be signed with the hyperscaler -- they know that they could do that in one single site, and that would be -- that's landed in the U.S. and therefore, that would be starting to go in service late '27, early '28. So they can develop that site with surety that they have that early power or they can develop 2 sites, split it in 2 and have early power on both those sites without having to commit to us for any more power, right? Now in exchange for that, we have a payment stream that, as I said in our press release, mirrors the equivalent of an ESA over a 5-year period for that portion of the capital expenditures that the generation relates to. So what we've committed to on our balance sheet versus the full build-out. And as you know, kind of generation is approximately 55%, 60% of the full power in general, right? So ultimately, that's what they've committed to. So it gives them surety to be able to go out and do this development track. And that is the focus of that. So it's a long-term development partnership, and those discussions are ongoing with others as well. So it's a great way to deeply embed. So we become a little bit of their part of their internal power group, looking at gas, looking at gas availability, working on land sites, they want to evaluate, seeing which ones work, which ones don't, what the power cost would be there, what that long-term view would be. So that's how that agreement works. And that's really how you want to develop infrastructure across the board in the future, right, because there are so many moving parts, whether it's air permits, whether it's local engagement, whether it's the fiber access, whether it's sort of what's happening specifically in that area of generation, if you end up wanting to have an interconnection, et cetera. So a lot of moving parts, right? So that's the right way to do it to have these deep long-term partnerships to develop infrastructure. And I think you've seen in some ways, and I think people will realize, it mirrors exactly the way that we built our completions company, right? It was these deep, long-term relationships. Our biggest customers are our oldest customers. We were completely engaged with them in their underground engineering, even though that was service we gave for free. We had sort of like the best database in the world, everything that happened underground. And we were deeply engaged in their completions design, allowing them to get to what Lane Byers, our VP of Technology, would always call the Happy Valley, right? The lowest cost to bring a barrel of oil to the ground and the lowest net cost, right? Because ultimately, if the oil price goes up like now and sand prices are low, it's good value to pump more sand. When sand prices are high, you pump less sand because it's that net. So working with that same partnership mentality in the power business is what we're doing. Operator: The next question comes from Josh Silverstein with UBS. Joshua Silverstein: First question on the power side for me. Given the kind of 6- to 9-month time duration to deploy capacity, I wanted to see if you've already taken receipt of some of this inbound to go and support the Vantage 400 megawatts for next year. I know there's some technology things that you guys have to do in-house before deploying it. So I just wanted to see what sort of milestones you could talk about along the way there. Ron Gusek: We certainly are taking delivery of power generation equipment already. It started arriving late last year and has been arriving through this year. We're working on packaging that right now. As Michael has alluded to in some of his comments, these deployments tend to happen in larger blocks, hundreds of megawatts at a time in some cases. And so it means that we ultimately build up a bit of a backlog of assets and then they will deploy it and be deployed in a relatively large tranche of equipment. Specific to the Vantage assets, those are assets that are arriving in '27 that are allocated to them. So this generation that we're taking delivery of today is allocated to other opportunities in our sales pipeline. Joshua Silverstein: And then on the frac side, there's been a lot of uptick in discussions about increased energy security globally now. You guys do have some frac equipment outside the U.S. I'm curious if you're starting to have discussions with any international oil companies or any other countries or U.S. companies with international assets that are bringing some of the frac equipment you guys have here abroad. Ron Gusek: We certainly have. We continue to get inbound calls with an ask for Liberty to go and be a presence elsewhere in the world. Of course, we took the step in Australia and excited about the opportunities there. I think we'll have first gas celebration there, a little bit later this summer, maybe August, I think, is the plan for that pipeline to get connected. And of course, you've seen a lot of momentum in that area. I think Australia very well situated to serve the growing LNG needs in Asia, but that's certainly not the only place. Of course, there's lots of excitement elsewhere in the world. We continue to field inbounds to be a partner in that development elsewhere in the world. And we look at each and every one of those opportunities. We'll continue to evaluate them on a case-by-case basis. And when we see an opportunity that we think makes good sense, a place where we can add real value and be a great partner to either a North American E&P or a national oil company elsewhere, we're prepared to take that step. What I would say is that at this point in time, we just -- we don't have spare equipment. And so it's always been a challenge for us to say yes to that one. We're still working hard to meet the needs of our customers here in North America. Maybe one other thing to add on top of that beyond just the oil and gas opportunities is the enhanced geothermal. Of course, we're a partner with [ Pergo ] here. that idea of taking directional drilling horizontal wells and hydraulic fracturing and advancing geothermal is also of interest around the world. Lots of folks evaluating their energy stack and opportunities to have that grow, and that's a piece of the puzzle as well. So we've seen some inbound in that area as well. Operator: The next question comes from Derek Podhaizer with Piper Sandler. Derek Podhaizer: Maybe a little bit of a bigger picture question on the frac side. I know, Ron, you've discussed a lot about how we've underinvested and we've been in this maintenance mode or below maintenance mode for U.S. frac fundamentals. But in the name of energy security, if we do get this call on short-cycle barrels out of U.S. shale, how should we think about the tightening frac fundamentals over the next 1 or 2 years if we actually want to flip back to more of a growth or stay at this plateau that we reached that? And what could it mean for availability of equipment and maybe further conversations as we start to continue to high-grade the equipment base just because you said there's really not much available supply out there in the market. Just trying to think further down the line in '27 and beyond about what the frac supply and demand could look like. So maybe just some thoughts around that. Ron Gusek: I think a very interesting question to look at. I would suggest it would be a market that would tighten very, very rapidly. There have been some folks in the industry who've done their best to count available capacity that could come back to the table. And of course, that's not next generation capacity. That's older diesel equipment that tends to be against the fence. But that is just a handful of, we'll call it, conventional fleet set that could do zipper frac work. Most of the work we're doing today is simul frac work. And so you probably cut that number even in half from that. I could anticipate that getting soaked up very, very quickly. There is not, as you -- I think you've heard in the last number of calls from folks in the industry, a huge commitment to CapEx in this space. There is not a pile of new equipment being built at this point in time. And as a result, you're talking about a meaningful amount of lead time for the industry to be able to react to that call on additional equipment, probably takes 9 months or something like that to get a fleet built and then staffed and stood up and ready to go. So there is a scenario where we start to see a very, very tight market here in the coming months, and ultimately, years, just given the lead time that's going to be required to react to that. We'll see that first on the drilling side of things. Ultimately, we get a little bit of a lag on that. So we get a bit of warning. But I think while it might not be the ramp out of COVID, it certainly could get us back to some very, very strong economics like that. Derek Podhaizer: Got it. That makes sense. I appreciate that. And I guess flipping to the power side of things. I know in your recent deck, you highlighted that 330-megawatt data center expansion was canceled. I think you're still working with that developer. But maybe just an update around that, kind of what happened there, how we should think about those megawatts moving forward? You totally appreciate the extended time lines withstanding these power project stuff you just spoke about the Vantage megawatts being deployed, but how should we think about that other contract you announced and then just future contracts, future deployments outside of the Vantage one? Michael Stock: Yes, that was working with one specific hyperscale developer who was working with a specific hyperscaler on a campus expansion. And we were deep in the heart of contractual negotiations on both the U.S.A. and the technical side of the world. Ultimately, the hyperscaler decided to delay that campus expansion. And that reservation agreement with the developer, the way those work is they have quickly ratcheting cancellation fees to have us take megawatts off the market, which is like guaranteed off the market potentially. We have this kind of ratcheting reservation fee and it changes sort of goes up significantly each month. And so they paid a multimillion dollar cancellation fee for that. But we're still working with that developer. And on that campus, I think long term, it will probably go. But those -- that 330 megawatts have been associated with a different opportunity that will execute in the same time frame. Operator: Next question comes from Keith Mackey with RBC Capital Markets. Keith MacKey: Maybe if we could just stay on the power side for a moment. Can you just speak to the pipeline of opportunities that you're seeing? I'm guessing it's maybe a little bit more weighted towards the data center space, but are you seeing an acceleration of these opportunities or things slowing down a little bit? And are there any opportunities you might be closer to the finish line than others for some of the incremental capacity that you've got coming? Ron Gusek: Yes, I would say certainly accelerating. Urgency continues to strengthen in that space. Our recognition behind the meter power just continues to get better and better and better. We continue to be served well by the challenges that people face on the grid and really the additional commercial constraints that are being added to those. So our sales pipeline is getting larger and larger and larger. We've added even in the last couple of weeks, a number of campuses that have the potential to be gigawatt scale or larger to our sales pipeline. As you might expect, they're all in different states of progress towards completion. We have some of those that are targeting power generation by 2027. Some of those out towards 2028. And we're working closely alongside of them to meet those timelines. I think at this point in time, we remain comfortable that we have the ability, given that we've leaned in on this to meet those time lines. And so -- but I would say that our sales pipeline is still manyfold larger than what we're going to be able to deploy. We will not be able to take all of these campuses across the finish line. And so we'll ultimately end up a little with a number of keepers. And to your -- the very early part of your question, not all in the data center space. I mean if you look at the sales pipeline, the largest percentage of that, we'll be focused at data center campuses, but there are in our sales pipeline, and I think clearly probably pretty close to the finish line, some opportunities that are outside of that in the commercial and industrial space that we will execute on as well. Keith MacKey: Okay. Understood. And just following up on the frac technology side, specifically the variable speed to G Prime pump. I think one of the solutions that companies have been working with to solve a single speed issue is just mixing a 100% gas recip engine with some Tier 2 or Tier 4 dual fuel equipment. So what is different about what you're doing? And how does having a variable speed 100% gas pump provide an advantage for you going forward? Ron Gusek: Well, effectively, it ultimately removes the need to have that diesel -- that dual fuel equipment on location at all. It was a challenge in the early days as we really pioneered this path towards direct drive natural gas equipment was overcoming that constant speed situation and really the limiter of just a change in gear to allow a change in rate. But now, first of all, with Cummins and subsequently with mtu, we will have a variable speed natural gas leak. And that means that for all intents and purposes, we have a path towards 100% natural gas on location and we'll remove the need for diesel entirely on that site. That's the long-term goal is to get to that place where we're running on 100% clean burning natural gas. It offers obviously, huge economic benefits, but it certainly comes with an emissions benefit as well that our E&P customers value tremendously in their conversations as they think about working around communities and things like that. So there's a huge amount of benefit there, and we're excited to be on that path to a place where for those fleets. Digi focused, we will not need any dual-fuel equipment. Operator: The next question comes from Saurabh Pant with Bank of America. Saurabh Pant: Ron, you talked about how quickly the market can tighten, and I heard you talk about pricing headwind and pricing recovery on the same call, right? So that answers the question, I guess, to some extent, how quickly the market can tighten. -- right? Just the nature of the market, I guess, right, in both directions. But if I just focus on the very near term, just to calibrate numbers a little bit, Ron, Mike, maybe you want to step in is -- as we think about the second quarter, Ryan, Ron, correct me if I heard you wrong, right? But you talked about potentially there's a little bit of pricing upside in 2Q as well, more in second half, but maybe a little bit in 2Q. And then seasonality helps you on the utilization side, granted you're coming off of a record high in the first quarter, right? But how should we think about 2Q? Maybe just some guideposts around how to think about what to expect for EBITDA in 2Q? Michael Stock: Yes. I mean I thought the easiest way to think about it is, yes, there will be a very small amount of pricing. So I'd say high single digits kind of up on the revenue side, but mostly activity like pull-throughs. Saurabh Pant: Okay. Okay. I got it, right? And then obviously, utilization is better, so you get some benefit from that. Okay. Okay. That makes sense. And then the other one for me, right? I'm just thinking kind of bigger picture on the power side of things, Ron, like you described in your remarks, on-site power is a complex operational symphony, right? I think that's a good way to put it. And you are doing a lot of things that you are in, right, integrated packaging, you are putting together a microgrid testing facility, but there's a lot of things that are still outside of your control, right? And like Derek pointed out, a data center campus expansion gets delayed, you got a preliminary ESA going to be terminated. And then again, you go back to the drawing board, right? But how do you think about the risk from a timing standpoint, Ron, Mike, right, as you are in discussions on future contracts, right, just given the timing of these things, right, they're more likely to shift to the right than the left. Ron Gusek: It certainly is an accurate statement to say that not all of those factors are in our control. There are variables that are at play on any given site that remain beyond our what we're focused on. And so yes, we have to be cognizant of those variables. I would say that as a partner to the hyperscalers, we have worked hard to understand many of the variables. And I think we can be a value add in a lot of those cases, not for everything, but for a lot of them, just given the experience we bring from the from the oil and gas side of the world. We've been through a lot of this stuff that hyperscalers are navigating today. emissions permitting, community engagement and all of those things. That stuff we know and understand. [indiscernible] haven't been in that space before. They haven't had to navigate the world of community engagement to understand what it means to it up in front of a community town hall and have them realize the benefit of having a data center or, in our case, an oil and gas operation presence in the community and then to understand all that we're doing to make that a benefit, not a detractor from the area. But we, of course, have an immense amount of experience there. And I think it's one of the true benefits of now being engaged directly with the hyperscalers is we're able to stand beside them. Help them work through this check list of opportunities. We get a little bit clearer line of sight into those things, but we can aid where possible. I would say that recognizing that risk, we have a sales pipeline that's meaningfully larger than the amount of generation that we are going to bring to the table. And that's true because we understand that not all of the sites will get across the finish line. Michael noted that we're working with Vantage on quite a number of sites that they are trying to move forward. Not all of those sites will get to the finish line, but a handful of them will. And the same is true with the other parties that we're working with. And so we remain very, very confident in our ability to deploy that 3 gigawatts by and have that working in 2029. I don't think sitting here today, Michael and I see any concerns with that all. There remains an incredible of urgency around getting AI up and running at larger scale. You continue to hear the success stories from businesses every time a business takes something that was a pilot project and scale that up to full deployment across their company. There is no benefit of scale there that the amount of compute required grows linearly with the number of people that are putting that technology to use. And the hyperscalers are seeing that firsthand. And as a result, I remain confident that while we will have some of these sites like to the right. Our ability to put 3 gigawatts to work in the next couple of years is, I think we remain very confident in that. Saurabh Pant: No, that makes a kind of sums on. I get the fact that you're working directly with the health care is only going to help, right, just to iron out the pieces. Ron Gusek: It certainly is. Yes. Nice to be right at the table with them as well. As Michael alluded to, there's a number of parties at the table and critical to be at having a conversation with each and every one of them. . Operator: The next question comes from Dan Kutz with Morgan Stanley. Daniel Kutz: So Michael, I think I caught that you said maybe 2Q revenue could be up high single digits sequentially. So correct me if that's wrong. And then wondering if you guys could share anything on what kind of incremental margins you could see on that revenue increase, if there's any factors we should be thinking through that kind of could support above or below normal incrementals into the second quarter. I guess one example could be that the 1Q winter storm impact, I could see that maybe driving some above normal incrementals into the second quarter. But yes, just anything you could help us with there as we're thinking through what margins could look like this quarter? Michael Stock: No, I just said high single digit on the top line, normal incrementals through the EBITDA sideline for activity incrementals is probably the best way to look at it. But now that's kind of the view we give. Daniel Kutz: Super helpful. And then maybe if I could ask on the two convertible notes offerings. Just wondering if you could share any incremental color around strategy there and the timing, I guess, you had the first offering in early February and then relatively shortly after that in late March for the second offering. Was that just opportunistic? I've heard that the convertible market, especially paired with the cap calls is actually a pretty inexpensive and kind of favorable source of capital at this time. So wondering if that was just opportunistic or if anything changed in kind of the power funding requirements or time lines there that catalyzed the second notes offering. Michael Stock: No, it was opportunistic. I mean, I think you've got to think about the fact that we've got a significant amount of forward payments that we're making on generation that will flip into project finance and then that money will recycle onto the corporate balance sheet. And that's what we're using the converts for. The first convert was incredibly successful, kind of 8x oversubscribed, 0% coupon, and we're up -- we bought a cap call. So sort of we don't get any dilution until we get to a significant high share price. And really, we're at probably a net between the 2 calls that's slightly below -- even with the cap call cost, less than 3% net cost of capital for that $1.2 billion. So it's an incredibly cost-effective way of raising money. And the second one, obviously, as we looked at the world economic situation with the strength of [indiscernible] being shut, you've got to be aware of the fact that there can be knock-on effects of these global -- this war and the potential to affect the financial markets and making sure that we had the capital available to execute on our growth plans was key. The financial market was completely open. The second follow-on was about the same on the oversubscription, again, a 0% effective interest rate. And so it's just a great way of raising capital to allow us to grow our power business. Operator: The next question comes from Marc Bianchi with Cowen. Marc Bianchi: I'll just ask one in the interest of time. The CapEx, I think, was originally guided to $1 billion. Michael, I know you mentioned there's this $300 million milestone payment in second quarter or early third. But how are you thinking about that CapEx guide at this point? Do you see a chance for being above or below? And can you maybe remind us of the components? Michael Stock: Yes. As we look forward, I mean, it really hasn't changed at the moment. We'll probably revisit that in July as we look at the power business and where things are going. But we're still on target for about where we were on that CapEx guide. kind of about $0.25 billion of that $250 million was on the completion side of it. And as Ron alluded to, if there's an opportunity, if that market strengthens significantly, maybe that will go up here if we are keeping -- making one of the digi fleets a new fleet, and we're keeping some of the older equipment running. But at the moment, no change to our guidance. Operator: The next question comes from John Daniel with Daniel Energy Partners. John Daniel: And keeping with Marc's comment, I'll just keep this to one question. But Ron, for a dedicated fleet, which is either dual fuel or 100% gas powered, is pricing somewhat formulaic in that there's -- that it's tied to diesel price such that if you see a rapid escalation in diesel, you get an immediate upward trigger in the price? And conversely, does it -- would there be a trigger on the downside, too? Ron Gusek: I would say that it's not necessarily formulaic. John, of course, we recognize the opportunity there as do our customers recognize the value that comes with that technology. And so that is certainly part of the conversation. But as in all of our relationships with our customers, we typically find this formulas aren't a great answer. There will always come a time when the formula doesn't quite solve to the right outcome. And so inevitably, it ends up becoming a conversation. So I would say that for us, while that certainly informs the conversations that the sales team is having with our customers to deploy that technology or to recognize the value of that technology, it's not the only piece of the conversation. John Daniel: Fair enough. And I'm going to squeeze one more out. I apologize. But sorry about it. The diesel prices, as you guys know, up like 50% or something. I don't know what the exact math is over the last couple of months, but it's a lot. I mean that would seemingly imply a very material price uplift for your higher quality fleets. I mean I know you can't quantify and don't want to quantify, but is that a wrong assumption? Ron Gusek: It's not, John. But what I would say is that those speed fleets were also a little less or a little more immune to the pricing degradation that's happened over the last number of years as we put new technology to work we have expectations around the return on that invested capital with our customers, and they recognize the value of that. And so we probably didn't see the same level of erosion in pricing there that we might have in the other technology. And as a result, despite diesel prices jumping meaningfully, we're not going to recoup the entire value of that jump in opportunity set. Operator: The next question comes from Eddie Kim with Barclays. Edward Kim: Just one question for me. Just could you remind us of the 3 gigawatt target by 2029? How much of that has been ordered to date and what's left to be ordered. In terms of what's left to be ordered, do you anticipate placing those orders before the end of this year? Or will some of that fall into 2027? I'd imagine there might be some concerns about the cost of the equipment getting more expensive. So there might be a preference to accelerate those orders as quickly as possible, but just any thoughts there. Michael Stock: Yes. I mean as you know, we started ordering in '26. So the vast majority of it is either ordered or in contractual negotiations at the moment, where we're just kind of finalizing the -- is and dot the Ts for that 3 gigawatts. So that's all going to be kind of in flight this year. Operator: I will now turn it back to Ron for closing remarks. Ron Gusek: It is unfortunate that it takes a war in the Middle East to give the energy security conversation the attention it deserves. For years, many of the lucky 1 billion have taken energy for granted. Enacting policy decisions that showed a complete disregard for the importance of access to abundant, affordable, reliable energy. Now as the realities of a global energy supply disruption set in, I wonder if there are people looking back and asking, what have we done? Make no mistake, this is not just about high gasoline prices and expensive airplane tickets, fertilizer prices and even just availability of that product are forcing crop switching or under application, threatening harvest yields by an estimated 10% to 15% this year. Cold chains, the shipment of refrigerated goods are breaking down in Asia due to lack of diesel fuel. Meaning people will do without access to groceries. Factories are being forced to run at 50% of capacity due to lack of energy supply. Those using diesel generation for backup, assuming they can get diesel, have seen their overall operating costs climb by as much as 30%. The implications are far reaching. We are fortunate here in the United States with the exception of a few states we are insulated from the worst of the impact. The shale revolution has ensured access to abundant quantities of oil and natural gas, ensuring we can not only look after our own but also play a meaningful role in supporting others around the world. We would be in a very different situation where it's not for the hard work, dedication and ingenuity of the people in the oil and gas industry. Not all countries are in the same position. Some have no choice. By virtue of not being blessed with abundant natural resources, they rely heavily on partners like the United States and Canada for access to energy they so desperately need to fuel their economies. Some did have a choice, however, and it is with them that I am more disappointed and frustrated. Their policy decisions have meant that critical energy resources are not being developed or have been shut in prematurely. These decisions were made without meaningful, if any consideration for the broader global implications. Without thought for those who rely on energy imports to either enable their current way of life or even more importantly, provide the much needed energy to plot a path out of poverty and towards a life like the one each of us leads here. I can only hope that this is a defining moment for the course of energy policy going forward. And if there is an awakening to the truly devastating impacts of misguided decisions focused on net zero policies rather than energy abundance and that we see a pivot towards support for development of oil and gas resources with the goal of ensuring no one has to go without. Thank you again for joining us on the call today. Have a great rest of your day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Popular Inc. First Quarter 2026 Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Investor Relations Officer at Popular, Inc. Paul Cardillo, please go ahead. Paul Cardillo: Good morning, and thank you for joining us. With me on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge Garcia; and our CRO, Lidio Soriano. They will review our results for the first quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings credit quality, expenses, taxes and capital as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are discussed in today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to Javier. Javier Ferrer-Fernández: Thank you, Paul, and good morning, everyone. Please turn to Slide 4, where we share highlights of our strong operating performance in the first quarter. We reported net income of $246 million and earnings per share of $3.78, up $12 million and $0.25 per share from the fourth quarter. The improvement was driven by higher net interest income, margin expansion and lower operating expenses. Net income and EPS improved by 38% and 48%, respectively, compared to the first quarter of 2025. We continue to invest in our businesses and expand our capabilities in support of our strategic objectives. When we deliver for our customers, our franchise strengthens and our shareholders' benefit. Overall credit trends remained favorable with lower NPLs and improved NPL ratios. Quarterly net charge-offs increased primarily due to a single previously identified commercial relationship. We also demonstrated our commitment to returning capital to our shareholders by repurchasing $155 million in common stock and paying a quarterly common stock dividend of $0.75 per share. Our ROCE was 15.5%, up from 14.4% in the fourth quarter of 2025 and 11.4% a year ago. We are very pleased with these returns and remain focused on reaching our 14% through the cycle objective. Before turning the call over to Jorge, I will comment on the business environment in Puerto Rico. Business activity in Puerto Rico remained positive, supported by steady trends in employment and consumer activity with manufacturing, construction and tourism leading the way. We're closely monitoring ongoing geopolitical developments as sustained higher oil and commodity prices can impact our customer base. As of the end of the first quarter, we have not seen significant signs of economic stress. The labor market remains healthy with the unemployment rate at 5.6%, stable near historic lows. Three sectors have outperformed the broader labor market. Construction, transportation and warehousing and leisure and hospitality. Consumer spending remains healthy. Combined credit and debit card purchase by Banco Popular customers increased by approximately 5% and compared to the first quarter of 2025. We continue to see healthy demand for homes in Puerto Rico. Mortgage balances at Banco Popular increased modestly during the quarter. Momentum in the construction sector continues to be solid with public and private investment fueling higher employment and strong liquidity. We're optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds. On the private side, real estate and tourism development projects and the renewed focus on reshoring to Puerto Rico by global manufacturing companies should continue to support economic growth on the island. The tourism and hospitality sector continues to be an important contributor to the Puerto Rico economy. Year-to-date through February, hotel occupancy increased to 83%, up from 76% in the same period last year. Over the same period, RevPAR increased 6%. Hotel demand averaged roughly 400,000 room nights, representing 10% growth versus the same month in 2025. Passenger traffic at Luis Munoz Marin International Airport was down 2% in the first quarter after a record year in 2025. JetBlue also announced an expansion of its San Juan Hub with 5 new nonstop domestic routes beginning in the spring of 2026. Cruise activity has also been a meaningful tailwind after record cruise arrivals in 2025, arrivals accelerated sharply in the first 2 months of 2026 with year-to-date arrivals through February up 40% year-over-year. In addition, the Puerto Rico Tourism Company announced a strategic partnership with Royal Caribbean, beginning in July of this year that would establish San Juan as the cruise lines home port. Moving to our strategic framework. We continue to advance our 3 objectives, a growing number of initiatives are gaining traction simultaneously and the pace of execution is accelerating. One of our objectives is to be the #1 bank for our customers, by delivering exceptional service and products. A key part of that is making it easier for customers to engage with Popular through our digital channels. We recently launched an integrated marketplace within our digital app Mi Banco, one of Puerto Rico's most widely used mobile apps. The platform gives our retail customers access to exclusive offers, discounts and benefits from a wide variety of merchants while enabling businesses, many of them small and medium-sized to reach a high volume of potential customers. This allows us to create meaningful connections between our retail and commercial customers and strengthens the value of banking with Popular. We also launched 2 new corporate credit cards designed to facilitate payments and optimize cash flow. Both have gained traction and driven purchase volume. In addition to our core, retail and commercial efforts, we are advancing targeted segment strategies to improve service, enable more personal relationship-based engagement and position Popular as the primary bank earlier in our relationship with our customers. A recent example is our newly launched program designed to meet the unique financial needs of doctors, dentists and veterinarians. The momentum behind these initiatives reflects the energy and focus of our teams. We are encouraged to see that execution translating into stronger results, and we expect the benefits to become more visible over time. And with that, I turn the call over to Jorge for more details on our financial results. Jorge Garcia: Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $12 million to $246 million, and our EPS improved by $0.25 to $3.78. Compared to adjusted net income in the fourth quarter, which excluded a partial reversal of the [ SDIC ] special assessment reserve, net income increased by $22 million. These results were driven by better NII, higher NIM and lower expenses partly offset by a slightly higher provision for credit losses. Our objective is to deliver sustainable financial results, and we are pleased to have generated a 15.5% roughly for the period. We will continue to use all levers to position the company as a top-performing bank when compared to our mainland peers. Please turn to Slide 7. Net interest income of $670 million increased by approximately $13 million, driven by fixed rate asset repricing and a higher balance of investments due to higher deposit balances and lower deposit costs at both banks. Net interest margin expanded 5 basis points to 3.66% on a GAAP basis. On a taxable equivalent basis, the margin improved by 11 basis points to 4.14%, driven primarily by lower interest expense, including a meaningful reduction in the cost of Puerto Rico public deposits. Ending loan balances were essentially flat at $39.3 billion, down about $38 million from the fourth quarter, driven primarily by lower balances at Popular Bank due to paydowns in the construction segment and runoff from the exited residential mortgage business. At BPPR, modest growth in the mortgage and commercial segments were somewhat offset by weaker trends in auto lending. Given the slower demand in the consumer and auto segments, we expect consolidated loan growth in 2026 to be at the low end of our original 3% to 4% range. In our investment portfolio, we have maintained our strategy of reinvesting proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $1.9 billion of treasury notes with a duration of 2.6 years at an average yield of around 3.7%, taking advantage of a modestly steeper curve. Deposit balances ended the quarter at $67.6 billion, $1.4 billion higher than the fourth quarter. Retail and commercial deposits increased by $1.2 billion, driven by tax refund activity. On an average basis, total deposits increased by $1.1 billion or by $384 million when excluding Puerto Rico public deposits. Puerto Rico public deposits increased by $250 million to end the quarter at $19.7 billion. We continue to expect public deposits to be in the range of $18 billion to $20 billion for the year. Total deposit costs decreased by 12 basis points quarter-over-quarter to 1.56%, with improvement in both of our banks. Excluding Puerto Rico public deposits, total deposit costs decreased by 5 basis points to 1.09%. At BPPR, deposit cost decreased by 11 basis points mostly as a result of Puerto Rico public deposits repricing lower by 31 basis points due to lower short-term rates. At Popular Bank, the 16 basis point reduction in deposit costs was primarily related to lower online savings deposit costs and repricing of time deposits. Given positive deposit trends in Puerto Rico, we now expect 2026 net interest income growth at the upper end of our 5% to 7% guidance range. Please turn to Slide 8. Noninterest income was $166 million, in line with Q4 and at the high end of our quarterly guidance, with solid performance across most of our fee-generating segments. Compared to the first quarter of 2025, noninterest income improved by 9%, driven by growth in debit and credit card fees of 14% and 6%, respectively, as well as 13% increase in asset management and insurance fees, demonstrating our ability to benefit from our breadth of product offerings. We continue to expect quarterly noninterest income to be in the range of $160 million to $165 million. Please turn to Slide 9. Total operating expenses were $467 million, a decrease of $6 million when compared to Q4. Excluding the FDIC reversal in Q4, operating expenses decreased by $22 million. The decrease was primarily driven by lower personnel costs, as the fourth quarter included a profit-sharing accrual of approximately $13 million, along with the impact of fewer calendar days in the first quarter. This quarter also benefited from lower employee health care-related costs. We also saw lower seasonal business promotion expenses and lower professional fees, partly offset by higher technology and software expenses, reflecting our continued investment in technology and transformation initiatives. We expect full year expenses to increase by 2% to 3% compared to our original guidance of 3%. We will continue to prioritize investments in our people and technology and continue to target expense efficiencies. Our effective tax rate in the first quarter was 16%, unchanged from the fourth quarter. We now expect the effective tax rate for the year to be at the low end of our original 15% to 17% guidance range due to higher projected excess income. Please turn to Slide 10. Tangible book value per share at the end of the quarter was $84.98, an increase of $2.33 per share driven by our net income and offset in part by our capital return activity. During the quarter, we repurchased approximately $155 million in common stock. We ended the quarter with $126 million remaining under our active repurchase authorization, which we expect to exhaust during the second quarter. As we have said in the past, we seek to maintain an active repurchase authorization in place and we are targeting an update on capital actions before the second quarter's earnings call. In addition to common stock repurchases, we also expect to continue evaluating capital optimization alternatives and pursue a dividend increase during the year. Of course, our plans are subject to market conditions, regulatory considerations and any required Board approvals. With that, I turn the call over to Lidio. Lidio Soriano: Thank you, Jorge and good morning to all. Credit quality metrics remained stable during the first quarter with lower early delinquency, NPLs and inflows and higher net charge-offs. Despite the uncertain economic environment, our consumer's businesses remain resilient. We continuously monitor our portfolios for signs of stress where our data remain consistent with normal seasonal behavior and no deterioration. Turning to Slide #11. Nonperforming assets and loans decreased by $37 million and $40 million, respectively, mainly due to Banco Popular de Puerto Rico. NPLs in BPPR decreased by $39 million. This was driven by reductions in the commercial portfolio due to an $11 million charge-off related to a commercial real estate facility classified as NPL in the third quarter of 2025 and consumer due to lower auto NPLs driven by increased payment activity. In the U.S., NPLs decreased by $2 million. Inflows of NPLs decreased by $7 million, with an improvement of $5 million in the U.S. and $2 million in BPR. The ratio of NPLs to total loans held in portfolio was 1.17% compared to 1.27% in the previous quarter. Turning to Slide #12. Net charge-offs amounted to $60 million or annualized 61 basis points compared to $50 million or 51 basis points in the prior quarter. Last quarter results included $5 million in recoveries from the sales of previously charged-off auto loans and credit cards. Excluding this, the net charge ratio for the fourth quarter was 57 basis points. Net charged-off in EDPR increased by $10 million driven by the $11 million commercial net charge-off mentioned previously. Based on current trends and macroeconomic outlook, we reiterate our 2026 annual net charged-off guidance of 55 to 70 basis points. The allowance for current losses increased by $16 million to $124 million. The change was mostly in BPPR which had higher results in the commercial portfolio due to loan modifications and additional specific reserve for a single power in the telecommunication industry. Additionally, the [ ACL ] for the mortgage portfolio increased slightly due to changes in the macroeconomic scenarios. These increases were offset in part by a reduction in the ACL for consumer loans, mainly in the auto portfolio, reflecting improvements in credit quality. In the U.S., the ACL increased by $1.4 million from the previous quarter. The cooperation ratio of the ACL to loans held in portfolio was 2.10% compared to 2.05% in the previous quarter, while the ratio of the ACL to NPLs held in portfolio increased 180% from 162%. With that, I would like to turn the call over to Javier for his concluding remarks. Thank you. Javier Ferrer-Fernández: Thank you, Lidio and Jorge, for your updates. We're happy with our strong first quarter results. We grew an interest income, expanded our margin and reduced operating expenses, all while continuing to invest in the franchise and advance our strategic priorities. While we are very pleased with the quarter, we remain focused on execution, growing deposits, regaining loans and maintaining strong expense discipline. We are confident that the sustained execution of our strategy will advance our ultimate goal to be a top-performing bank with excellent talent, delivering sustainable profitable growth and long-term value to our shareholders. On a more personal note, this past February marked a milestone for Popular. We brought together our 9,200 employees for the first time in over 20 years. And I have to say it was awesome. The event reminded each one of us, what it means to be part of Popular and connected us with our history. The excitement was palpable, and it was simply an unforgettable day. On behalf of my colleagues, I thank our clients and shareholders for their continued trust and support. We are very proud to be the leader in the Puerto Rico market. We're ready to answer your questions. Operator: [Operator Instructions] And our first question comes from Jared Shaw of Barclays. Jared David Shaw: Maybe just starting with the great growth on the deposit side, how should we think about average in end of period deposits sort of over the next few quarters as some of the tax refunds maybe get spent? Unknown Executive: Yes. So traditionally, we do see increases in ending deposits in the first quarter. This quarter, we saw also increases in average deposits that we're bringing in to strength from the fourth quarter results. Historically, in the second quarter, we would also expect ending balances to trend lower, but average balances higher after tax season overlaps the March and April and people kind of spend that money through the quarter. And then as you know, the third quarter is where we actually see ending balances coming down and then in the fourth quarter, we tend to see ending balances come back up historically. So our guide increased towards the higher end of the guide because we are expecting more retention of those deposit balances. Our teams are very much focused not only retention but also in deposit growth. And so we -- while we would expect ending balances to perhaps come down from these levels, we do not expect them to see a runoff as we saw like in 2024, for example. Jared David Shaw: Okay. So I mean overall, though, I mean, you're still feeling like average account size is stabilized at a higher level and sort of like the magnitude of what, like you said in the past may not be as severe? Unknown Executive: Yes. So I think we saw the peak in 2022, those averages are like 40% higher. Those have come down to like the third -- low 30s, 30%, 32% and has been stable for the last couple of years. We are bringing in new clients that's resulting in higher balances. We're seeing strength across not only the retail, but commercial, we see strength in our small and middle market clients. Our corporate clients also have a lot of liquidity, but they tend to be managing their treasury excess cash a little bit better. So overall, we've been very happy with the trends. Jared David Shaw: Okay. And then in the past, you've talked about looking for potential acquisitions in the mainlands that match up with your geographic focus. Any update on your thoughts there? And if you're not able to find something that fits would we -- could we expect maybe more of an organic de novo expansion utilizing some of your capital? Unknown Executive: Javier, I'll go for the first one. No change in our outlook on M&A. Our primary focus continues to be our transformation efforts and growing profitability of the institution. You want to take the second one? Javier Ferrer-Fernández: in terms of de novo growth strategy, I mean, it's tough to compete in the U.S. markets in retail, which is what normally would see with de novos. We have been successful in expanding some of our national businesses through either team acquisition or team hires and maybe that's opportunity. It's not unusual for banks our size to be looking at that, leveraging those niche businesses. But I think at this stage, we have opportunity to improve profitability in our U.S. operations organically, but not necessarily through investing in a big branch de novo expansion. Unknown Executive: And in Puerto Rico, frankly, I mean we are the strongest in the market given our branch footprint. It's a differentiating factor for us, continues to be. In the United States, as Javier saying, our strategy is more commercial led. So I mean it's going to be difficult to actually expand in any major way our footprint in terms of branches. Jared David Shaw: Okay. And if I could just ask one final one. Just have you been seeing any spread compression on the loan portfolio or on new loans and were you putting on new loans in the quarter? Javier Ferrer-Fernández: If you look at the levels and yields, we continue to be successful in expanding and are keeping our loan yields fairly flat even with rates coming down. So we have not seen that broad-based. I mean we talked in the last call how competition, particularly in Puerto Rico and auto. And you've seen kind of with the trends in that portfolio that we could see it potentially maybe more competition in pricing. But so far, we've tried to get our teams to focus, particularly in the U.S. business, where we see maybe particularly the beginning of the year, more competitive pricing. We've tried to push our teams to be smart and provide profitable loan growth, not just loan growth and focus on relationship banking, making sure that those relationships are coming in with deposits. So that gives us kind of a fresh start on making sure that we're not chasing irrational pricing on loans. Operator: And our next question comes from Brett Rabatin of StoneX Group. Unknown Analyst: Good morning, everyone. Wanted to start on the NII guide. And it was great to see the first quarter higher NII than expected lower expenses. Just thinking about the high end of the guide, with the slight growth in balance sheet would kind of imply the margin is fairly flattish, but you still have securities that are maturing. Any thoughts on -- I know you don't like to give market guidance, but any thoughts on the margin? And then just as you see it, maybe the opportunities relative to NII growth from here? Javier Ferrer-Fernández: We do expect the margin to grow by the end of the year. We had a nice expansion in the first quarter, driven a lot by the repricing of the public deposits. We don't expect that level of repricing to occur. That's going to be dependent on what happens to short-term rates. And certainly, the price with a lag -- so I think I would expect the expansion of the margin to be slower in the second quarter, but then continue to expand as we drive to that higher NII guidance. So as you said, we do have the tailwinds of the fixed rate investment portfolio to continue to reprice. So that hasn't changed. Unknown Analyst: Okay. And if the Fed doesn't cut interest rates, would that put you above the higher end of the range on NII? Jorge Garcia: Our current guidance assumes no further cuts in 2026. For us, I'd love to see the steepening of the curve, but margin really depends on the mix of deposits, we are heavier on public deposits that we'll have an impact on that margin. Really, the NII guidance is kind of how we see the front now. Deposit balances will -- as we said, and the deposit costs are really kind of the drivers of that spread and being able to get above the -- our current guidance. Unknown Analyst: Okay. That's helpful, Jorge. And then the other question I had was just around capital and 15.9% CET1. It sounds like you're going to give a lot more color in 2Q. And I think it's great that you guys have kind of acknowledged that investors have wanted to see the capital base deployed. Any color that you can give us just around your thoughts on end of your capital ratios or targets or anything that as you're working through this, if you could share with us on your progress there? Unknown Executive: We want them to be lower than they are now, unless we make a lot of money and not. But no, I mean, we really -- we are committed. We obviously have said in the past that we want this to be -- we want to do it in kind of over time in a controlled manner, but we certainly are committed to doing that. We're trying to be more intentful in our language and how we communicate about this. And we are committed to executing. Operator: And our next question comes from Timur Braziler of UBS. Timur Braziler: Going back to the profitability comment. 2 straight quarters now above that 40% objective I guess, Javier I was a little surprised to kind of hear you reiterate that comment on remaining focused on reaching that 14% through the cycle objective. Are we not there yet? And I guess that phrase through the cycle, like how far out are we looking in terms of that level of sustainability? Javier Ferrer-Fernández: Thank you for your question. I think that -- I mean 2 quarters, 2 great back-to-back reps quarters, a trend doesn't necessarily make. So I mean, we like that to continue obviously. And I think that through the cycle comment refers to a period when, of course, we were seeing stress -- major stress in the economy. And so that we actually demonstrate that facing the sort of more sort of headwinds we deliver on profitability targets. So that's how we're thinking about it. Again, I think the teams are doing great, but we don't want to -- remember that we also use the concept of sustainability. It needs to be sustainable. So that will take a little bit longer for us to claim victory. And of course, once we get there, we're not stopping there. And that's important. I mean, remember that we used the 14 when we launched a little bit over 3 years ago, our transformation program. So again, very happy with the mindset at shift and what we're producing for shareholders, but we're not there yet. Timur Braziler: Got it. Okay. That's good color. I appreciate that. Maybe sticking on the capital question. Any kind of color you can provide on just Basel III proposals, what type of impact that might have on your capital day? Unknown Executive: Yes. So first, we're not subject to the category 4 with [ AOCI ]. So we're small enough that, that doesn't impact us. We've done the preliminary review, Timur. And basically, we're -- our estimates are consistent with what the Fed guidance is that will be the impact for smaller banks. Obviously, the end result will depend on our balance sheet when that goes into place and whatever the final rule has. But right now, it's consistent with the estimates. And that's a reduction in risk-weighted assets, basically. Timur Braziler: Yes. Okay. And then just one more for me. I appreciate the full year guide on public funds. Just wondering, second quarter specifically, if there's any reason why we shouldn't be penciling in kind of a historical type run rate for the planned increase in public funds in 2Q? Unknown Executive: I mean I don't want to speculate. I mean, as you know, it's over 200 different clients, thousands of accounts. We talk to our clients, our relationship officers talk to our clients. We have some visibility, but some of these are big numbers that move around. So we're going to stick to the $18 billion to $20 billion range. Timur Braziler: Okay. And then sorry, I just want to make sure I'm understanding the Basel III impact. I think it was around 7% was the Fed guidance? Is that kind of what you're alluding to in terms of impact on RWA? Unknown Executive: That is correct. Operator: And our next question comes from Arren Cyganovich of Truist. Arren Cyganovich: Just want to hear your views on onshoring manufacturing in Puerto Rico. Obviously, last year, there were a lot of large announced investments. I haven't really seen any kind of new wins yet this year. Anything that you're hearing in terms of new potential investments in -- have you seen any actual benefits yet from the ones that were announced last year? Unknown Executive: You're right, there hasn't been any new public announcements by the government, so we don't want to get in front of them. But they continue working through the great line. They continue working on more entities coming in. There's 2 more entities that we've heard about. So -- but yes, looking at what's happening in the world, it's totally rational to believe that the momentum in continued investment, be it in big operations that are already located in Puerto Rico or new entities coming into Puerto Rico nor in United States also from Canada and the Far East and Europe, even should continue. So we are, again, expecting announcements from Puerto Rico government on it. But we don't want to get in front of rumors, but -- so far, all the rumors we've heard before, the actual announcement from last year, the Eli Lilly is the Ambience of the world found out. So we have our fingers crossed that the momentum will continue on reshoring for Puerto Rico. And as you know, manufacturing represents approximately 44% of our GDP. So it's an important contributor to our economy. I don't know direct jobs are also indirect jobs, most importantly. Arren Cyganovich: Have any of the ones that were announced last year started to get produced yet or any movement there? Is it going to take some time? Unknown Executive: Yes, it take some time. We have seen some new ones coming in and opening accounts with us and purchasing property and stuff like that. So they're setting up, typically it's a process where once they announced -- the government announced that means that they've got into an agreement with the companies and then the companies after that, start opening bank accounts, investing in real estate, getting third-party service providers coming in and doing the work. So we've seen some of that. So it has started. But as we've always said, it's going to take 3 to 5 years to actually get the actual numbers and the impact. Javier Ferrer-Fernández: And the largest announcements are expansions of facilities so they will require some significant construction investment in time. So we will first see that impact on the construction side. Arren Cyganovich: Great. And then lastly, just, Lidio, you had mentioned some loan modifications in commercial. Are these anything new abnormal increases, decreases? Just curious if you could give us a little color on that. Lidio Soriano: I mean nothing that I would characterize as being affecting the broader portfolio just one-offs, some clients are having some financial difficulty and we executed some non modification, but nothing that impacts the whole portfolio. Operator: And our next question comes from Kelly Motta of KBW. Kelly Motta: Maybe to kick it off on expenses. I see -- I think you were very well controlled in the first quarter and the guidance range is brought down a bit. Just wondering if you can opine upon the drivers of that variance I know there's some transformation efforts in play, wondering if some of those investments have been kicked out another year or 2. Unknown Executive: Thank you, Kelly. I mean there's always part of projects that maybe are slow to start. I wouldn't say that anything has been canceled or that is resulting in that reduction. But we are seeing -- we did benefit from a handful of things, better negotiations, some adjustments to expected expenditures that were lower in the first quarter, we reduced some excess accruals from the incentive payouts for profit sharing from last year. So those are all the things that you see the benefit in the first quarter, and that benefit will sustain for the year. There's others that are timing differences and -- but we'll continue to invest in technology. We'll continue to invest in people. We will continue efficiency efforts. Our expense targets for the year already included around $50 million of efficiency efforts. We continue to improve upon some of those. So that's all part of our embedded guidance. So there's just a lot of things going on, but at no moment, are we like pulling back on our technology and transformation efforts. There are shifts. For example, we went live on our ERP in January. So there are shifts in how those costs translate in terms of expenses, the things maybe were being capitalized before, now they're being amortized. But overall, we are happy with the level of focus of our teams on cost control and in execution. Kelly Motta: Got it. And just as a point of clarification, I guess. This guidance range doesn't include any of that excess profit sharing. So if you were to say, beat your NII outlook, that's the type of thing where those expenses would kick in. Is that the correct way to think through that cadence? Unknown Executive: That is the correct way. I mean we love to be able to pay profit sharing. We believe that those programs are aligned with our shareholders. That means that we are performing better than expectations. And if you assume that our original guidance are based in part by our expectations and budgets, and our interest should be aligned. Our current guidance does not include any profit sharing expense. But remember last year, even with a near $40 million profit sharing expense, we were able to deliver on our original expense guidance and of course, we always want to challenge our teams to be able to do more and absorb any incremental expenses that were not part of our plan. Kelly Motta: Got it. Maybe last question, if I can just slip it in on the size of the balance sheet. Cash money market investments have come down year-over-year. They were relatively flat about $4.8 billion, $4.9 billion-ish the past 2 quarters. Is that a good level on a go-forward basis? Or would you anticipate continued role into securities and loans off that [4.85 ] level? Unknown Executive: I think we've had that level for the last 2 or 3 quarters. We're comfortable with where we're at on that. We still have -- yes, I'll leave it at that. Operator: And our next question comes from Gerard Cassidy of RBC. Gerard Cassidy: If I recall my credit ratings correctly, and looking at your slide deck, you showed that S&P and Moody's have you on watch list with a positive implications. And it looks like you're notch below investment grade by those 2 rating agencies. I know Fitch, I think, is an investment grade. Can you share with us when do you think they'll determine whether they're going to lift that credit rating? And can you also remind us what is the last time Popular rated investment grade by Moody's or S&P? Unknown Executive: Well, I'd love to be able to guess the answer the first question, Gerard. What I would say is that we are focused on discussions with the rating agencies. We had an advocacy effort to make sure we continue to educate them and spending time, making sure that they are up to date and everything that's going on with Popular and Puerto Rico. But I cannot begin to guess. We believe that our ratings should be better, frankly. But -- and how long has it been? And my guess is probably go back to 2005, 2006 before the financial crisis. Jorge Garcia: It's an insightful question. I think that if you -- we have sort of retaken the efforts to make clear S&P and Moody's and visit with the inventory was suggesting. If you look at the purely numerical thresholds for us to be considered investment grade. I mean, we were there. But there are other things that may come into their consideration of us as Puerto Rico's largest financial institution as they see Puerto Rico -- and so -- but I think, again, if you only -- if you were to look at us as a peer banks, given our performance, we would definitely be [indiscernible] rated. Unknown Executive: But we'll take our positive outlook. We'll take that as momentum. Gerard Cassidy: Yes. I agree. As a follow-up question, I know you guys talked about the price of oil. You haven't seen any significant signs of economic stress at these elevated price levels. Can you share with us a couple of things? Do you recall in the first quarter of 2022, when Russia invaded Ukraine, obviously, the price of oil shot up. What kind of impact did that have on credit quality back then? And then second, if oil stays elevated at $125 a barrel, let's say, throughout the year, it would appear to weigh on the -- not only the Puerto Rican economy, but the U.S. economy as well. And what do you think that could do to credit quality? And then lastly, can you also remind us, I know the island is very dependent upon oil for its energy but I thought the island was moving to other alternative sources, maybe, natural gas, LNG, if you can update us on anything if I remember that correctly. Lidio Soriano: I would say, Gerard, this is Lidio. I will say that the answer to that is going to depend on the length where the first of all stays at this level. I mean, similar to the -- in 2022, I mean, the situation was -- or the increase in oil prices was short list, and that had a very minimal impact in terms of the delinquencies and the credit quality portfolio. So for us, I think the key is the -- and the impact for Puerto Rico and our portfolio is going to be the length of time in which we have elevated oil prices in the island. As we noted in our prepared remarks, we are very comfortable with our portfolios. We have seen no deterioration in the credit quality. We've seen normal seasonal patterns. And actually, our delinquencies are better than the last quarter, obviously, and much better than this time last year. So we're very, very pleased with our portfolio. Unknown Executive: The premise of your question is spot on. I mean we're no different than financial institutions in the United States. If the content continues for a long time and oil doesn't come down, as you know, dependent on that to create generate electricity in Puerto Rico. There's been growth in other sources of energy for Puerto Rico, but I don't think we're going to be able to switch quick enough not to have higher oil prices for longer impact us and our customers. So far, we haven't seen it. I think the second quarter will be -- will tell the tale more accurately if, in fact, the country continues and the price continues to go up or stay higher for longer. Gerard Cassidy: Very good. And Lidio, can I just circle back on your comment about delinquencies. Is it as simple as the health of the economy being as good as it is? You guys mentioned the unemployment rate is near record lows. Is it that straightforward that the health of the economy is the underlying factor that the delinquencies and credit are as strong as they are in the consumer books? Lidio Soriano: As always a combination of factors. But certainly, I mean, the driver for the performance of consumer books is employment. In addition to that, as alluded by Jorge in his remarks, you also have them in the first quarter, refund activity in Puerto Rico, we have given -- based on data provided by the local IRS. They have returned -- refund to customers around $2.2 billion, which is slightly up ahead of the pace of last year, about $300 million ahead of the base of last year. That's obviously impacted the liquidity of consumers in Puerto Rico and their ability to pay their loans. Operator: [Operator Instructions] And our next question comes from Manuel Navas at Piper Sandler. Manuel Navas: I think this builds off a little bit of the last commentary. But you added reserves on the commercial NPL from the third quarter. But most other loan buckets had lower reserves, especially with the auto and consumer, especially with delinquencies down, could there be some upside in provisioning from here? Reserves coming down? Or what do you -- how do you feel the progression should come -- go forward from here in credit costs? Lidio Soriano: Mean I like your thoughts. But I mean, I agree with you. I mean we had very strong performance from our consumer books, and that led to like the release of reserves, particularly in the [ older ] portfolio. We have done a lot over the last few years in order to improve the performance. So it is not by chance, it's also by the work that we have done in the commercial book, as we have said in the past, this is mostly corporate book. So every now and then, we have a situation or one-off clients that we may need to reserve for. We haven't seen anything that indicate that we have rock-based issues with our portfolios. We have dealt as we mentioned that in the third quarter of last year and to some extent in the first quarter of this year with 2 particular case, one related to commercial real estate in the U.S. and one related to telecom company in Puerto Rico. But we think if the economy stays where we are and that includes this level that there might be an opportunity in the quarters ahead. So we'll see. Manuel Navas: And that opportunity could show up in a couple of different places. And I'm going to probably ask a question that has already been asked a couple of times is, do you anticipate the buyback accelerates? Unknown Executive: I mean we'll be consistent. We'll come back to you and to the levels, we'll be consistent in trying to bring down the level of capital. But frankly, I mean, we're looking at it over a multi-quarter period to try to get to levels -- target levels that make sense. And I'm not sure that any given quarter, any provision really changes in our projected provision or where we're at is going to make a difference in our repurchase strategy. Manuel Navas: Understandable. Is the update that we're expecting at some point this quarter, would it include business line changes anything beyond just an update on a reauthorization of shares? Unknown Executive: We're talking about just our traditional kind of update on kind of authorization from our Board and perhaps dividend increases, et cetera. Operator: I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Heritage Financial 2026 Q1 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Bryan McDonald, President and CEO. You may begin. Bryan McDonald: Thank you, Angela. Welcome and good morning to everyone who called in and those who may listen later. This is Bryan McDonald, CEO of Heritage Financial. Attended with me are Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our first quarter earnings release went out this morning premarket, and hopefully, you have had the opportunity to review it prior to the call. In addition to the earnings release, we have also posted an updated first quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. As a reminder, during this call, we may make forward-looking statements, which are subject to economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are disclosed within the earnings release and the investor presentation. We closed the merger with Olympic Bancorp during the first quarter, better positioning our company for growth in Puget Sound market. I want to highlight a couple of items as we look forward. First, as a reminder, we are converting systems in late September, and we'll be carrying higher expenses until after the conversion. Don Hinson will provide additional color on our estimated expense levels post conversion of units. Second, seeing the expected improvement to our net interest margin resulting from the addition of Olympics' balance sheet and continued asset repricing. We expect the upward trajectory to continue, primarily driven by new loans and repricing within the existing loan portfolio. We will now move to Don, who will take a few minutes to cover our financial results. Donald Hinson: Thank you, Bryan. I'll be reviewing some of the main drivers of our performance for Q1. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the fourth quarter of 2025. I will also be incorporating the impact of the Olympic merger into [indiscernible]. Starting with the balance sheet. Total loan balances increased $939 million in the first quarter. Loans acquired in Olympic totaled $954 million. Q1 yields on the loan portfolio were 5.73%, which was 19 basis points higher than Q4. The Olympic merger had a significant impact on the yield for the quarter as we brought over their loan portfolio at current market rates. In addition, approximately 6 basis points of the increase was due to the recovery of interest on nonaccrual loans. Bryan McDonald will have an update on loan production rates in a few minutes. Total deposits increased $1.33 billion in Q1. Deposits acquired in the Olympic merger totaled $1.39 billion. The decrease in deposits ex the acquired deposits was partially due to the maturity of $29 million of brokered CDs that were not renewed. The cost of interest-bearing deposits decreased to 1.71% from 1.83% in the prior quarter. This decrease was due partly to the merger as Olympic had a lower cost deposits and partly as a result of the Fed rate cuts in Q4, which resulted in lower deposit rates. Investment balances increased $388 million from the prior quarter, also due to the Olympic merger. Although we have reported that only $312 million was acquired in the merger, a portion of Olympic's investment portfolio as part of our restructuring strategy was sold prior to the merger date and reinvested subsequent to the merger. The yield on the investment portfolio increased 17 basis points due to acquiring the portfolio at current market rates. Moving on to the income statement. Most categories increased from the prior quarter due to the merger. I will cover a few areas of note. In addition to the impact of the earning assets acquired in the merger, net interest income also benefited from an increase in the net interest margin. The net interest margin increased to [ 3.96% ] and from 3.72% in the prior quarter and from 3.44% in the first quarter of 2025. The increase was due primarily to the previously mentioned increases in yields on the loan and investment portfolios and a decrease in the cost of deposits. The previously mentioned recovery of interest on nonaccrual loans had a 5 basis point impact on the margin for the quarter. We recognized a reversal of provision for credit losses in the amount of $1.03 million in Q1. This reversal was due primarily to adjusting the allowance from 1.10% at the end of 2025 to 1.06% at the end of Q1. This decrease in allowance was due to the acquired Olympic loan portfolio, requiring a lesser allowance based on the specific attributes of that portfolio. In addition, net charge-offs remain at very low levels. Tony will have an additional information on credit quality metrics in a few moments. In addition to the scale of a larger organization, the increase in the noninterest expense was also due to merger-related costs of $5.2 million versus $385,000 in the prior quarter and intangible amortization expense of $2.1 million to $285,000 in the prior quarter. Due to the fact that the systems conversion for Olympic is scheduled for late Q3 of this year, we expect elevated expense levels until Q4. Based on the current forecast of staffing levels and merger-related costs, including the fact that Q1 only included 2 months of combined operations with Olympic, we are expecting quarterly noninterest expense levels to increase to an average of approximately $64 million to $65 million in Q2 and Q3 before decreasing to a range of $56 million to $57 million in Q4. And finally, moving on to capital. All of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TCE ratio was 9.6% at the end of Q1 compared to [ 10.1% ] in the prior quarter. The decrease in the TCE ratio was expected due to the impact of the merger. I will now pass the call to Tony, who will have an update on our credit quality. Tony Chalfant: Thank you, Don. I'm pleased to report that credit quality remained strong and stable in the first quarter. With the addition of the Olympic portfolio during the quarter, the high quality of these loans had a positive impact on our credit metrics at quarter end. Nonaccrual loans totaled $15 million at quarter end, declining by $6 million during the quarter. This represents 0.26% of total loans and compares to 0.44% at the end of 2025. Most of the improvement came from the full repayment of $5.8 million residential construction loan and a $1.5 million multifamily term loan. Partially offsetting the improvement was the movement of a $2.6 million [indiscernible] to nonaccrual status. Within our nonaccrual loan portfolio, we have just under [ $4.2 ] million in government guarantees. Notably, there were no nonaccrual loans in the acquired Olympic portfolio at quarter end. With the decrease in natural loans, the ratio of nonperforming loans to total loans improved to 0.26% from 0.44% at the end of 2025. During the quarter, we acquired an ORE property through a foreclosure action. This is a single-family residence with a book balance of $755,000. The house will be marketed for sale in the second quarter. This is the first ORE property we've held since 2020. Criticized loans, those rated special mention or worse, moved higher during the quarter by $37 million with $18 million coming from the inclusion of the Olympic portfolio. As a percentage of total loans, criticized loans were stable at 3.9%, the same percentage that we experienced at the end of 2025. When looking at the severe substandard category, we saw an improving trend during the quarter. Substandard loans to total loans dropped to 2.1% at quarter end versus 2.4% and at the end of 2025. Most of the improvement was from the [indiscernible] of the 2 nonaccrual loan relationships mentioned previously. It should also be noted that the Olympic portfolio had lower levels of criticized loans relative to their total loans, which had a positive impact on the combined ratios. Page 18 in our investor presentation shows the stability in our criticized loans over the past 4 years. As of quarter end, our ratio of total nonowner-occupied CRE loans to total loans moved just above the regulatory guidance level to [ 301% ]. The increase in the ratio was due to the inclusion in the Olympic portfolio and the fair value accounting for the acquisition. While growth in CRE loans was modest during the quarter, the lower combined capital level from the fair value marks resulted in a higher total CRE ratio. The increase was expected from our acquisition model, and we anticipate the ratio will decline to historical levels over time. During the quarter, we experienced total charge-offs of $583,000. Approximately 70% came from our commercial portfolio, with the remainder coming from our consumer loans. The losses were partially offset by $31,000 in recoveries, leading to net charge-offs of $552,000 for the quarter. On an annualized basis, this represents 0.04% of total loans and is consistent with the 0.03% ratio that we achieved for the full year 2025. While we are pleased with the stability in our credit metrics through the first quarter, we are aware of the emerging risks in the economy and the potential impact on our credit quality. We remain consistent in our disciplined approach to credit underwriting and believe this is reflected in the strong credit performance we have maintained over a wide range of business cycles. I'll now turn the call over to Bryan for an update on our production. Bryan McDonald: Thanks, Tony. I'm going to provide details on our first quarter production results, starting with our commercial lending group. For the quarter, our commercial team closed $166 million in new loan commitments, down from $254 million last quarter and down slightly from $183 million closed in the first quarter of 2025. Please refer to Page 12 in the investor presentation for additional detail on new originated loans over the past 5 quarters. The commercial loan pipeline ended the first quarter at $631 million, up from $468 million last quarter and up from $460 million at the end of the first quarter of 2025. Loan balances increased $939 million during the quarter. Majority of this increase was due to the merger, but Heritage loan balances, excluding any impact from Olympic, were up $20 million in the quarter. Based on the current pipeline, we expect an annualized loan growth rate in the mid-single-digit range in the next couple of quarters. Deposits increased just over $1.3 billion due to the merger. Excluding the merger, deposits decreased $61 million, which included a $29 million decline in brokered CDs. The first quarter decline is typical of our deposit seasonality, with declines often occurring in the first quarter and through the end of April due to tax payments. The deposit pipeline ended the quarter at $81 million compared to $108 million in the fourth quarter, and average balances on new deposit accounts opened during the quarter are estimated at $33 million compared with [ $45 million ] last quarter. Moving to interest rates. Our average first quarter interest rate for new commercial loans was 6.11%, which is down 45 basis points from the 6.56% average for last quarter. This rate average is based on outstanding balances. Using average commitment balances, the average was 6.41%. In addition, the first quarter rate for all new loans was 6.16%, down 27 basis points from 6.43% last quarter. In closing, as mentioned earlier, we are pleased to have the Olympic merger closed, which strengthens our position in the Puget Sound. And overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Angela, we can now open the line for questions from call attendees. Operator: [Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson. Jeff Rulis: I wanted to circle back on the expenses. I wanted to -- it seems kind of high. I understand that you've got Olympic for the full quarter, but, by chance, are you including additional merger costs in that 60% -- I think you said 64% to 65% in the next couple of quarters? Donald Hinson: Jeff, yes, yes, that includes the merger-related expenses. If you take out merger costs, we're more in the $57 million to $58 million range for the next 2 quarters and then dropping to about $55 million by Q4. So that -- I was not putting everything in that. Jeff Rulis: So $55 million post-deal ex merger is the run rate that you're pointing to in Q4? Donald Hinson: Yes. Jeff Rulis: Okay. And if you could -- Don, the you offered some rough detail on where those merger costs were by line item, but do you have a dollar figure just to kind of really carve those out, if possible? Donald Hinson: Like over the remaining 3 quarters? Or -- is that what you're looking for? Jeff Rulis: No, no, no. In the trailing quarter, the 1Q to -- just over $5 million. The book, if you could just point as to where that -- by line item, that was mapped? Donald Hinson: Well, professional services would be a big one on that. And then also the compensation because of severance would be some. And then we -- I think we also have some contract stuff that would show up in potential data processing. But those are the bigger ones. I don't have it broken out by type, that $5 million. Jeff Rulis: Okay. That's helpful. We'll just kind of give up that. Great. And then on the margin, did you say it was the interest recovery was 5 or 6 basis points beneficial to the margin? Donald Hinson: To the margin? It was -- for the quarter, I think, it was[ 5 ] in the quarter. For the interest reversals? . Jeff Rulis: Yes. Donald Hinson: Yes. On the interest reversal, it was [ 5 ] Jeff Rulis: Okay. And moving.. Donald Hinson: [ 6 ] on the lower. Jeff Rulis: Okay, [ 6 ] on the loan yield. [ 5 ] the margin. I appreciate it. And then I guess Don, do you have the margin average for the margin, maybe . Donald Hinson: I've got that. Yes. I knew you ask for. So I know somebody would ask for it. the margin -- if I take out the interest reversals for March NIM, it was 395%. But if we take out the interest reversals that we had because a lot of them have happened in March, it was 395%. Jeff Rulis: Okay. And the 395% will include accretion that's part 1 and then part 2? Okay. And then I guess your -- is there any kind of heavy handed accretion upfront? Or could we kind of . Donald Hinson: Yes. I mean there's always a chance that you're going to get a large payoff that will cause it to increase, but I don't expect to be anything unusual we've been experiencing so far. And of course, we've had 2 months of experience. But I don't think it's going to be -- I think anything happened in March that was unusual compared to the rest of the going forward. Jeff Rulis: And then leaning back to the introductory comments about upward trajectory from here. We'll kind of do what we will with accretion, but the core sounds fairly positive. Any sort of further comments on how you have a 4% plus or -- anything on the forward margin expectations with that upward trajectory in mind? Donald Hinson: Yes. I think we're going to continue to see margin expansion not going to be significant, but again, depending on things like how much we can leverage the balance sheet and the loan growth we'll get a little bit of increase every quarter due to the fact that, again, the loans are repricing every quarter. So the ones that are either adjustable or are the new ones coming on are higher, I expect to reach the 4% by the end of the year or before. Operator: Your next question comes from the line of Jackson Laurent with Stephens. Jackson Laurent: This is Jackson on for [ Andrew Terrell ]. If I could just start off on the balance sheet. I appreciate the color on the updated growth trajectory for loans. I was just wondering where you guys are seeing signs of strength in the portfolio? What you guys are seeing from the Kitsap bankers early on? And then maybe just a little bit of color on what caused the change in expectations. I think we were talking about upper single digits in January after kind of low single digits in the first quarter? Bryan McDonald: Sure. Maybe I'll go to Tony Chalfant first, just for comments just on credit in general, and then I'll pick up on the Kitsap commercial bankers and loan pipeline and outlook. Tony Chalfant: Yes. Thanks, Bryan. This is Tony. Yes, Jackson, with the merger, the credit crises were pretty similar. So we haven't really had to make any real changes in our approach with the Kitsap bankers, they're -- they look at credit very similarly to how we look at it. I think there's going to be some opportunities for some of their better borrowers to have some higher borrowing limits, which will probably help extend those relationships a bit more. But generally, we're feeling pretty comfortable on a go-forward basis on a combined basis. Areas of strength really continue to be just a lot of opportunities in the owner-occupied CRE space and continuing to really push as hard as we can on the C&I space just because it comes with the relationship and deposits and such. Bryan, I'll let you kind of cover the pipeline things. Bryan McDonald: Yes. Really, the primary driver behind the change in loan growth from last year was the larger level of construction loan costs that we had in 2025, which we mostly work through before the end of the year. Those were the larger ones that we had been expecting, and that was really related to just a bulge in construction loan activity in prior years that then converted to payoffs last year. We did have a few payoffs in the Kitsap portfolio that were not unexpected, but a few larger ones than that transpired before and after close. The driver behind the go-forward growth rate is really the change in the pipeline. It was the pipeline had been growing when we did our Q4 all in January, and we've seen it continue to grow. The pipeline is up 35% over where it was at the end of Q4 and up a little more than that when you compare it to Q1 a year ago. And we did see some of the deal closings push a little bit from first quarter, expect them to close in the second quarter. So we didn't close quite much as we anticipated we might when we were on the Q4 call. But regardless, we're still seeing a good pipeline and absent some change in borrower behavior related to outside factors. We feel good about that pipeline driving kind of mid-single-digit loan growth in the next couple of quarters. Jackson Laurent: Got it. That's all super helpful. And then maybe just switching to deposit costs. I mean, we've all heard a lot on competition recently. And we personally would track CD promotional rates, and it looks like you guys raised your highest rate recently. So just kind of given your already low cost of deposits, I was just wondering how you guys are thinking about deposit repricing going forward. And if you guys think there's any risk to upward migration in deposit costs throughout this year? Bryan McDonald: Don, do you want to start and I'll add some comments after you're done. Donald Hinson: Sure. Yes, the competition is out there. We did raise our very highest rate, some on the CD side. While we're talking about cost deposits for the quarter, it's [ 171 ] or -- for March, it was [ 168 ]. So it came down a little bit. But I really don't expect it to move a whole lot. Now I think we'll get a little bit of help from some higher CDs coming down and -- but I think there will also be upsets to potentially if you're bringing in some maybe new customers or new -- with full relationships, there could be high rates you're paying there. So I think it's going to offset, and I think we're to stay right around that were [ 168 ] now again for the -- for March, I think we'll stay right around that for the remainder of the year, hovering around [ 170 ]. It's not going to move much, I don't think, at this point, [indiscernible] does something . Bryan McDonald: And [indiscernible] I would just add, you're right. As Don confirmed, we are seeing stronger deposit competition out there for kind of any excess dollars going into money market accounts or CDs. We're having good success with our relationship strategy, which is really the way that we're driving our deposit growth. So we are having to continue to compete for those kind of those extra funds, if you will, but still winning good quality operating relationships, and that's what's allowing us to keep the overall mix in alignment with where it's been before. and the cost at these levels? Jackson Laurent: Got it. That's helpful. And then maybe just lastly, switching over to capital. I know you guys focus is probably still on for integration and the conversion in 3Q, but just wanted to get your updated thoughts on the buyback and maybe potential future loss trades going forward? Donald Hinson: Sure. We don't -- at this point, any loss trades, things things can change on that, but we will be always looking to manage capital to keep it. I think we're in a pretty good range right now where it's at. So we may be doing things such as being involved in buybacks to kind of manage our capital levels. We still have about 800,000 shares left in our current repurchase plan. And so we may be active this quarter in that. Operator: Your next question comes from the line of [indiscernible] with KBW. Unknown Analyst: This is Charlie on for Kelly Motta. Just wondering with the ongoing disruption across Pacific Northwest banks and think that your employee count jumped with the addition of Kitsap here. Are you seeing opportunities to recruit any commercial banking teams or individual producers beyond Kitsap app? Is there any incremental like hiring embedded in expense run rate 2026? Bryan McDonald: We are out recruiting. We would traditionally add high-quality bankers as they be available across the footprint. We're not seeing necessarily an increase in total banker head count just because we continue to have retirements of our long-time makers. But we have been adding bankers in a number of our teams, just 1 or 2 to a particular team but those have been largely netted out so far with retirements. We are continuing to talk to folks, certainly would be open to doing teams if the right opportunities came our way like we have in the past. But so far, it's been on to spread out amongst various teams. Unknown Analyst: Great. And then I guess just on a step down on the acquisition, understanding conversions in 3Q. Just wondering like where if anywhere execution has kind of run, ahead of or behind schedule, just kind of maybe stepping back on? Customer retention, producer retention, any like synergy realizations, just how things are holding up that integration? Bryan McDonald: Yes. I would say we're right on track. Obviously, there's many components to the integration plan. But we look at those status every week and right on track. I think from a customer impact standpoint, it's been really -- there hasn't been any kind of negative customer response to the combination. But I think we'll learn more on that when we actually go through the systems conversion. But of course, we've retained all the branch teams, the commercial bankers. And so for the customers, they haven't had any sort of disruption as Tony Chalfant mentioned, a good fit between credit culture, so no disruptions there. So overall, going as we had hoped and anticipated. Operator: Your next question comes from the line of [indiscernible] with Raymond James. Unknown Analyst: This is Evan on for David Feaster. Just sticking on loan growth. I just was kind of curious. The color on the pipeline was really helpful. But maybe more broadly, I'm curious how borrower sentiment has been holding up within your markets, especially with some of the macro insertion we've been experiencing. And then maybe a follow-up to that, just like on payoffs and pay downs. I know they've been a headwind to the industry broadly. Good to see those pressures abating this quarter. So I'm kind of expecting what you expect to see on payoffs and paydowns going forward as well? Bryan McDonald: Sure. We've really seen the pipeline build since last summer after the big beautiful bill passed just incrementally. And we did see some delay in deals closing, but -- and that's part of the growth in the pipeline, maybe a little bit lower closings in Q1 than what we potentially could have had. But overall, continuing to see good growth in the pipeline after the increase in disruption related to the war. So we're watching it really closely. Typically, when you have disruption, there's some of the customers that just decide to hold for a little while or delay. We're not seeing that so far. But it may be a little early to tell what the final implications will be in terms of how many deals fall out of the pipeline. But as we got to the tail end of the quarter and even coming into April, we've continued to see strong new deal flow into the pipeline. And then on your second part of the question, just on payoffs and prepaid. Slide 15 in the deck has detail on last year and then Q1 of '26. And if you look at the prepayments and payoffs, last year, dividing that number by 4 to get a quarterly number, it's -- we're running a little lower in Q1 than we did on average last year, although we've got a much larger portfolio with the addition of the Kitsap and some of the payoff activity in Q1 was a couple of chunky deals on the Kitsap side. So overall, that payoff activity is lower than what we encountered last year. We'll obviously continue to update everybody on that as we go quarter-to-quarter and get a better sense of if there's some chunkier deals in Kitsap portfolio that are going to going to pay off as we continue through the year. But now it's looking like that trend is going to be something lower than last year on prepays and payouts. Unknown Analyst: That's really helpful. And then maybe switching to credit. Credit trends were really good during the quarter. Non-accruals and standards were down. And it sounds like Kitsap is additive to your credit profile. But I'm just curious if you're seeing any specific sectors or business lines that are exhibiting maybe some outsized pressure or you're watching a little bit more closely than others? Bryan McDonald: Sure. Tony, you want to take that on? Tony Chalfant: Yes. Yes, Evan. I think we've seen over the last year the nonowner-occupied loan space has been really strong, really, really a solid part of our portfolio. Where we have seen a little more pressures, in the C&I portfolio. If you look year-over-year, we've had a bit of an increase proportionately in our special mention and substantial loans in the C&I category. And a lot of that -- it's not really tied to none specific industry or one specific situation, but it all ties back to just the uncertainty in the economy. I mean, whether it's tariff issues, higher labor costs, supply chain issues, all of the above. And as you find in those kind of situations, companies -- some companies are just better positioned with management and balance sheet strength with [indiscernible] at than others. So we've just seen some weakness in that area as we go forward. So here, we'll be watching closely, but it's really difficult to sort of pinpoint it to one specific industry or one specific issue. And it's -- but it's probably worth noting. Does that cover your question, Evan, do you have more -- you want me to hit on? Operator: That concludes our question-and-answer session. I will now turn the conference back over to Mr. Bryan McDonald for closing remarks. Bryan McDonald: Thank you, Angela. If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support and your interest in our ongoing performance. We look forward to talking with many of you in the coming weeks. Have a good day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. Thank you for standing by, and welcome to AppFolio, Inc. First Quarter 2026 Financial Results Conference Call. Please be advised, today's conference is being recorded, and a replay will be available on AppFolio, Inc.'s Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations. Lori Barker: Thank you, operator. Good afternoon, everyone. I am Lori Barker, Investor Relations for AppFolio, Inc. I would like to thank you for joining us today as we report AppFolio, Inc.'s First Quarter 2026 Financial Results. With me on the call today are Shane Trigg, AppFolio, Inc.'s President and CEO, and Timothy Eaton, AppFolio, Inc.'s CFO. This call is simultaneously being webcast on the Investor section of our website at ffolioinc.com. Additionally, an audio replay of the call and a transcript of the prepared comments will be posted to the website. Before we get started, I would like to remind everyone about AppFolio, Inc.'s safe harbor policy. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections, or other characterizations of future events, financial projections, future market conditions, business performance, or future product enhancements or development, is a forward-looking statement. AppFolio, Inc.'s actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. AppFolio, Inc. assumes no obligation to update any such forward-looking statements except as required by law. For greater detail about risks and uncertainties, please see our SEC filings, including our Form 10-K for the fiscal year ended 12/31/2025, which was filed with the SEC on 02/05/2026. In addition, this call includes non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in our first quarter earnings release posted on the Investor Relations section of our website. With that, I will turn the call over to Shane Trigg. Shane, please go ahead. Shane Trigg: Thanks, Lori, and welcome to everyone joining us today. AppFolio, Inc. is off to a strong start in 2026. First quarter revenue reached $262 million, a 20% year-over-year increase and up from the 16% year-over-year increase we delivered in Q1 2025. Non-GAAP operating income grew 36% and was 27.3% of revenue, and GAAP operating income increased 50% and was 19.4% of revenue. We had the best first quarter in company history for residential new business unit acquisition, and units on platform grew to 9.5 million in line with our expectations and typical seasonality. This is an exciting time for our business and our industry. AI is powerful, and we are putting it to work across every dimension of our business, accelerating performance for our customers while driving greater efficiencies across our own operations. At our annual FUTURE conference last year, we introduced Real Estate Performance Management, what we call RPM, a new way of thinking about value creation in real estate. RPM represents a fundamental shift from reactive, task-oriented property management to a holistic practice of delivering value across the entire real estate ecosystem: residents that love where they live, investors that see consistent strong returns, property management businesses that grow, serving communities that thrive. Achieving that requires a performance platform that provides the harness for intelligent AI orchestration in real estate, with an AI-native architecture of three interconnected systems: a system of record, a system of action, and a system of growth, all accessible through one unified experience. There is a unique advantage in operating a mission-critical platform in a vertical market, sitting at the center of how our customers operate their business. Compliance is embedded in how our platform works, not layered on after the fact, and the domain knowledge we have encoded across residential real estate is sharpened by tens of thousands of customers. Our RealmX Performers are fully operational AI agents built directly into the platform, taking ownership of entire workflows and doing the work with and for our customers. And by reimagining the resident experience with the services renters demand, we turn AppFolio, Inc. from a cost center into a growth driver—one whose value deepens with every customer we serve. The RPM discipline we have introduced and the performance platform we have built are redefining what it means to win in real estate. It is gratifying to see the market embracing RPM and our customers turning it into daily practice. Dan Rubenstein puts it well. He is the CEO of Hampton Management Associates, a 3,000-unit Bay Area property management company that this quarter signed a three-year renewal on our Max plan. I quote, “AppFolio, Inc. is attacking the friction in our business by consolidating our tech stack into a single platform. By integrating Realmex performers to automate core workflows, we have transitioned our team from manual administrative tasks to high-value resident engagement. Partnering with AppFolio, Inc. allows us to spend less time on system maintenance and compliance and reallocate resources towards scaling. It provides one source of truth where everything is simplified, so we can stop reinventing the wheel and get back to the business of bettering our properties.” End quote. Dan’s experience reflects the type of customer outcomes we pursue through the pillars of our company strategy. Our first strategic pillar is differentiate to win. Starting with our system of action, our AI strategy is producing measurable commercial outcomes at scale. More than 99% of our nearly 23,000 customers are now using some form of our AI-powered Realm suite. AI actions are up 7x year over year, and Performer adoption has grown almost 500% quarter over quarter. The Business Intelligence Group has recognized this momentum, naming AppFolio, Inc. a 2026 Artificial Intelligence Excellence Award winner in the agentic AI category. Maintenance Performer is a good example, since it tackles a workflow that is universal in property management. Resident issues do not stop at 5 PM and neither does AppFolio, Inc. Over half of all work orders are submitted after hours, and RealmX Maintenance Performer is there to respond to residents in an average of six seconds, triaging and troubleshooting the issue and automatically creating a work order when needed. This quarter, we enhanced the Maintenance Performer with new vendor follow-up capabilities. It now proactively contacts vendors, monitors open work orders, confirms completion, and logs every interaction automatically. Turning to our system of record, AppFolio, Inc. Stack is deepening what customers can do directly within AppFolio, Inc. while continuously expanding the categories it covers, most recently adding cloud communications through SimpleVoIP. We have surpassed 5 million units connected on Stack, creating a powerful network whose value grows with every connection. The depth of these integrations is what sets them apart. Through our partnership with AvidXchange, Plus and Max customers can now manage their entire accounts payable life cycle—bill payment, real-time status tracking, reconciliation, and fraud protection—directly within AppFolio, Inc. This is not just a data handoff between systems; it is the full workflow inside our platform. In our system of growth, we start with one conviction: the resident is at the center of the real estate ecosystem. When they thrive, so does everyone in the industry. And the data is clear on what that means for business performance. Our national study of more than 3,000 renters confirms that a modern resident experience is a strong driver of satisfaction. The research shows satisfied residents are 72% more likely to renew and 34% less likely to plan a move, directly impacting NOI and property performance. But we are measuring something deeper than satisfaction—the impact on the daily lives of renters. Residents on our platform with access to resident services score 14% higher on the Cantril ladder for life satisfaction. The highest-leverage moment to deliver that value is at move-in. It sets the tone for the entire resident journey. It is where offering easy access to the right services becomes a differentiator for property managers. Resident Onboarding Lift transforms that moment. Rather than a checklist of manual tasks, move-in becomes a streamlined, transparent, digital experience covering renters insurance, utility setup, and other essential services. The result is a 95% attach rate at move-in compared to 64% without it, and more renters with insurance coverage that protects their personal property. Our recent addition of group-rate Internet to Resident Onboarding Lift gives residents convenient, affordable connectivity from the moment they move in. And in the same rental research I mentioned a moment ago, 97% of group-rate Internet users say it saves them money and improves their financial well-being. Brad Randall, the President of Welsh Randall and a nearly 6,000-unit AppFolio, Inc. customer headquartered in Ogden, Utah, explains it this way, and I quote, “Residents complete the entire move-in on their phone. It walks them through each step clearly so they understand exactly what they are signing up for and why. The result is faster lease execution, fewer questions, and residents who feel confident and set up for success from day one.” End quote. Our second strategic pillar is deliver performance efficiently. Let us start with how we are delivering for our customers. As the industry shifts towards RPM, ambitious operators are choosing AppFolio, Inc. to drive increased performance. Mandy Management, a New Haven, Connecticut-based operator managing more than 3,000 units, is one of our newest customers. They selected AppFolio, Inc. to consolidate their disparate systems into one unified platform. By replacing clunky interfaces and manual accounting with integrated AI workflows and real-time reporting, they are streamlining everything from maintenance coordination to resident communications to accelerate performance. New customer momentum is one measure of our success. Equally important is the retention and growth we are driving within our own customer base. Since 2017, West Des Moines, Iowa-based Newbury Living has grown its portfolio to 2,300 units on AppFolio, Inc. They continue to consolidate new acquisitions under our platform, driven by our high-performance AI tools. Rich Overhaull, Technology Implementation Coordinator at Newbury Living, explained, and I quote, “We evaluated a specialized AI leasing solution alongside RealmX Leasing Performer and chose AppFolio, Inc. What won us over was how much AppFolio, Inc. already understood about how we operate. Other solutions required us to bring all that context to them. With AppFolio, Inc., it was already there. Since deploying Leasing Performer, our inquiry-to-completed-showing conversion rate has increased 20%, and Leasing Performer is now driving 57% of all completed showings, freeing our on-site team to stay focused on closing high-intent tours.” End quote. We are successfully attaching AI products when customers sign, expand, or renew with us, reflecting the growing value they see in our platform and continuing to drive growth for AppFolio, Inc. That value is rooted in how AppFolio, Inc. is built. A unified platform that tightly connects the system of record and the system of action provides the harness for intelligent AI orchestration. Our AI agents operate directly on governed real-time data and transaction workflows, reducing latency, avoiding connector fragility, and improving accuracy and security. AppFolio, Inc.'s AI data architecture gives agentic capabilities native access to the underlying data model and execution layer, enabling more reliable automation, better orchestration, and faster results. The same discipline we bring to our customers’ performance we apply to our own. AI-native engineering is changing how we build. We are compressing the time from concept to deployment, enabling our teams to design, code, test, and refine products with greater speed and precision. That means more value in the hands of our customers faster. This shift is freeing our engineers to pursue the work that compounds long-term platform value, including market and customer opportunities that otherwise may have taken us longer to address. Our growing efficiency is reflected in our financial performance as we reduced R&D as a percentage of revenue year over year, which Tim will speak to shortly. Our third strategic pillar is great people and culture. I am consistently inspired by our team’s ability to innovate at an exceptional pace and make a real difference for our customers. It is their dedication that makes our vision to power the future of real estate a reality. I am pleased to share that AppFolio, Inc. has been recertified as a Great Place to Work for 2026. That recognition is a reflection of the people at the heart of this company, AppFolians who exemplify our values, live the AppFolio, Inc. way, and deeply care about our customers. On that note, I am delighted to announce that Kyle Triplett has been promoted to Chief Product Officer. Many of you know Kyle from his leadership across our product organization, where he has been instrumental in delivering the AppFolio, Inc. performance platform and our RealmX AI capabilities. In this expanded role, Kyle will continue to lead our product strategy and design, advancing AppFolio, Inc.'s innovation leadership and ensuring our platform continues to set the standard for our industry. The RPM discipline we have introduced and the platform we have built are turning property managers into performance managers. And when they win, everyone in the real estate ecosystem does as well. With that, I will hand it over to Tim to share more about AppFolio, Inc.'s Q1 financial results. Timothy Eaton: Thank you, Shane. I am pleased with our first quarter results and strong start to 2026, which demonstrate how our performance platform continues to deliver outcomes for our customers, and that customer value is increasingly visible in our financial results. In the first quarter, we delivered revenue of $262 million, growing 20% year over year, compared to $218 million in Q1 2025. Subscription services revenue, previously called core revenue, grew 18% year over year to $58 million, compared to $49.5 million in Q1 2025. This growth was driven by winning new customers, growth in total units under management, and an increasing number of customers upgrading to our Plus and Max premium tiers. This tier-upgrade trend reflects the growing value customers are finding in RealmX Flows, our AI-powered workflow automation engine currently available in premium tiers, our expanding Stack partner ecosystem, and mixed product, mixed portfolio capabilities, such as student and affordable housing. First quarter revenue from value-added services grew 22% year over year, to $201 million, driven by increased adoption of our FolioGuard risk mitigation services, FolioScreen offerings, and online payments, as well as growth in units under management. Resident Onboarding Lift and Realmex Performers—comprising our Leasing, Maintenance, and Resident Messenger AI agents—are also increasing their contribution to value-added services revenue. We continue to be pleased with our acquisition and retention of customers and units. At the end of the quarter, we managed approximately 9.5 million units, compared to 8.8 million units a year ago, representing an 8% increase. Customers grew to 22,520 from 21,105, a growth rate of 7%. Customer and unit retention continues to be strong and in line with historical averages. In summary, first quarter revenue of $262 million, growing 20% year over year, reflects our continued strength in winning new business and driving adoption of our products and services. Turning to margin, in the first quarter, GAAP operating income, which includes stock-based compensation expense, grew 50% year over year to $51 million, or 19.4% of revenue, compared to $34 million, or 15.5% of revenue, last year. Non-GAAP operating income grew 35% to $72 million, or 27.3% of revenue, compared to $53 million, or 24.3% of revenue, in 2025. Continuing with non-GAAP measures, cost of revenue exclusive of depreciation and amortization was flat year over year at 36% of revenue. Efficiencies in our operations were offset by our payments product mix and additional data center spend to support our customers’ growing usage of our AI product capabilities. As a percent of revenue in the first quarter, sales and marketing was consistent with 2025 at 13%, as we continue to invest in additional sales capacity and go-to-market initiatives to drive new unit acquisition, premium-tier upgrades, and value-added services adoption. R&D spending declined as a percentage of revenue to 16% from 17% in the prior year. The use of AI tools and systems is increasing the velocity of our innovation and the productivity of our engineering teams, particularly in areas such as the resident experience and AI product capabilities. G&A expense declined to 7% from 8% as a percentage of revenue, reflecting the benefits of scale and continued operational efficiencies. We exited the quarter with 1,721 employees, an increase of 4% from 2025, primarily reflecting growth in sales capacity, as we continue to invest to win new business, drive premium-tier upgrades, and increase adoption of value-added services such as Resident Onboarding Lift and Performers. In the first quarter, we deployed $125 million to repurchase 702,500 shares. Our opportunistic share repurchase strategy is one component of how we are driving long-term shareholder value. In 2025 and 2026 to date, we have repurchased nearly 1.4 million shares and have another $125 million remaining of our existing share repurchase program. Our balance sheet remains healthy, providing financial flexibility as we continue on our mission to build the platform where real estate comes to do business. Now turning to our 2026 financial outlook. We are raising our guidance for annual revenue to a range of $1.11 billion to $1.125 billion, for a full-year midpoint growth rate of 17.5%, fueled by adoption of our premium-tier offerings, growth in new business units, and increasing adoption of our products and services, including agentic AI Performers and new resident services. We continue to anticipate 2026 revenue seasonality to be mostly consistent with 2025. We are also raising our guidance for non-GAAP operating margin and expect to deliver between 26% and 28%, compared to 2025 at 24.7%. Cost of revenue exclusive of depreciation and amortization is expected to be relatively flat as a percentage of revenue compared to 2025. While we expect to continue hiring in areas including sales, operating expenses as a percent of revenue are projected to decline modestly as we scale and leverage AI to drive efficiency across our internal operations. Diluted weighted average shares outstanding is now anticipated to be approximately 36 million for the full year. To close, Q1 reflects continued long-term shareholder value creation through revenue growth, margin expansion, and disciplined capital allocation. Together, these priorities are designed to grow operating cash flow over time, manage dilution, and drive durable customer performance. We are pleased with our results and remain focused on executing on our vision to power the future of real estate. Thanks to all of you for your support and interest in AppFolio, Inc. Operator, this concludes today’s call. Operator: Thank you. Ladies and gentlemen, that concludes today’s conference call. You may now disconnect. Goodbye.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Please standby. Your program is about to begin. Welcome to the SLM Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode for the prepared remarks. If you should require operator assistance, please press 0. I would now like to turn the call over to Melissa Bernat, Managing Vice President, Strategic Finance. Please go ahead. Melissa Bernat: Thank you, Erica. Good evening and welcome to SLM Corporation’s first quarter 2026 earnings call. It is my pleasure to be here today with Jonathan W. Witter, our CEO, and Peter M. Graham, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here due to a variety of factors. Listeners should refer to the discussion of those factors in the company’s Form 10-Q and other filings with the SEC. For SLM Corporation, these factors include, among others, results of operations, financial condition, and cash flows as well as any potential impacts of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations, or forward-looking statements to reflect events or circumstances that occur after today, Thursday, 04/23/2026. Thank you. And now I will turn the call over to Jonathan. Jonathan W. Witter: Thank you, Melissa and Erica. Good evening, everyone. Thank you for joining us to discuss SLM Corporation’s first quarter 2026 results. Our performance in the quarter was strong as we continue to reap the benefits of the strategy we have been pursuing for the last several years. Diluted EPS in the first quarter was $1.54 per share, as compared to $1.40 in the year-ago quarter. Loan originations were $2.9 billion, up 5% from the prior-year quarter. These results were driven by strength in our loan disbursement funnel. Importantly, this performance precedes the expected multiyear growth in both undergrad and graduate lending tied to federal reforms, which we believe could increase our originations by up to 70% over the next several years. We have been actively preparing for this opportunity, driving improvements across our full delivery system—from products and features to enhanced client acquisition strategies and improved servicing and fulfillment capabilities. We have already rolled out several of these enhancements, including our new medical and dental school offerings, with more to come. Our goal is to serve as many students, families, and university partners as possible as the higher education sector navigates this time of change. Net charge-offs and delinquencies were consistent with or slightly better than our expectations. Net charge-offs were $89 million, driven by continued underwriting discipline and the ongoing optimization of our loss mitigation, collections, and recovery strategies. In 2025, the granting of disaster-related forbearance tied to the California wildfires and the North Carolina floods temporarily suppressed both net charge-offs and delinquencies, creating tougher year-over-year comparisons. Shifting gears, you will remember customers started exiting our new loan program at the end of 2025. I am happy to report that their performance has been slightly better than what we assumed in our loss outlook, although we will need to see several more months of data to develop full confidence in these trends. These results support our belief that we have built a business and are executing a strategy that is capable of performing in almost any environment. We have sharpened our customer acquisition strategies to extend our market-leading position. We have enhanced our underwriting practices and strengthened our credit and collections capabilities to better support borrowers during times of financial distress. We have built an efficient cost structure with diversified, efficient funding sources that continues to support strong net interest margins. We have developed a strong capital allocation framework by adding strategic partnerships to our existing portfolio loan sale capabilities, giving us greater ability to grow recurring earnings and return capital. Our belief in our strategy, coupled with the desire to act nimbly and decisively when market opportunities arise, led us to accelerate our already robust capital return program. We executed a $2 billion seasoned loan portfolio sale during the quarter, coupled with a planned 10b5-1 share repurchase plan, and also launched a $200 million ASR—all to take advantage of what we believe to be the disconnect between the premium from our whole loan sales and our equity valuation. Peter will now take you through some additional details. Peter? Peter M. Graham: Thank you, Jonathan. Good evening, everyone. During the first quarter, we executed $3.3 billion in loan sales, generating $146 million in gains at attractive economics. This included $1.3 billion of planned new origination sales through our strategic partnerships business as well as a $2 billion seasoned loan portfolio sale executed at gains in the mid- to high-single-digit range. As we have done in the past when our equity valuation disconnected from the market value of our loans, we deliberately leaned into our capital flexibility to advance shareholder value. Following the loan sale, we entered into a $200 million accelerated share repurchase program, and year to date, we have repurchased approximately 12 million shares, 6% of the outstanding shares at year-end 2025, at an average price of $21.50 per share. Since 2020, we have reduced shares outstanding by approximately 58% at an average price of $17.15 per share, underscoring our disciplined approach to long-term value creation. We expect to fully utilize our $500 million share repurchase authorization during calendar year 2026. Strong ongoing investor demand in the structured finance markets continues to support capacity for both seasoned portfolio sales and our strategic partnerships business. We have already completed meaningful groundwork for our next strategic partnership, which we expect to launch before the end of this year. Turning to earnings, net interest income for the first quarter was $375 million, consistent with the prior-year period. Net interest margin of 5.29% increased both sequentially and year over year, reflecting the benefit of lower funding costs and continued discipline in balance sheet management. As we progress through this year, we expect NIM to moderate modestly, reflecting the higher liquidity we are carrying following the loan sale we executed in March. We recorded an $11 million negative provision in the first quarter, driven primarily by a $131 million release of reserves associated with loan sales and loans held for sale, partially offset by growth in loan commitments and updates to our economic assumptions. Our reserve rate was 6.05% at the end of the quarter, modestly higher than the prior quarter and reflective of seasonal origination patterns rather than changes in underlying credit performance. Credit quality across new originations remained strong, with cosigner rates increasing to 95% and average FICO approval rising modestly to 754. It is interesting to note that just five years ago, our cosigner rate was 86% and our average FICO approval was 750. The change reflects a deliberate multiyear and persistent focus on enhancing credit quality. Across the portfolio, delinquency trends were stable. Loans delinquent 30 days or more were 3.98% of loans in repayment at the end of the quarter, modestly lower than at the end of 2025, with later-stage delinquency buckets remaining steady at 1%. Net charge-offs for the quarter were $89 million, modestly ahead of our expectation. First-quarter noninterest expenses were $171 million compared to $155 million in the year-ago period. This increase primarily reflects targeted investments to support growth, particularly across our graduate lending programs, while maintaining a strong efficiency ratio of 30.6% for the quarter. Finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 21.2% of total assets. Total risk-based capital was 13.7% and common equity Tier 1 capital was 12.4%. We continue to believe we are well positioned to grow our business and return capital to shareholders. I will now turn the call back to Jonathan. Jonathan W. Witter: Thanks, Peter. We are pleased with our first-quarter performance and the momentum it provides for the year ahead. Let me conclude with a few thoughts about the higher education environment and an update on our guidance. We believe students and families continue to see strong value in higher education. Our upcoming How America Plans for College report will show that nearly 90% of those surveyed view higher education as an investment, over 80% believe it is worth the cost, and nearly three-quarters would rather borrow than forgo college. This sentiment is also reflected in improving recent college enrollment trends and FAFSA completion rates that are up almost 20% from this time last year. Colleges, universities, and other higher education institutions are continuing to innovate to ensure that their students have the skills to compete in the future economy. We see schools integrating AI-related coursework into new and traditional programs. Students are also responding by better aligning their majors and skill sets with those likely needed in an AI-enabled future. The employment picture for recent college grads remains resilient even during times of economic uncertainty. While unemployment among recent graduates temporarily rose last summer, the gap versus historical norms closed in March. Reflecting this confidence, a recent National Association of Colleges and Employers survey indicated employers expect to increase new graduate hiring this academic year by 5.6%. With this backdrop, we feel well positioned as we look ahead to the balance of the year and beyond. Let me now turn to our 2026 guidance. We expect our diluted earnings per common share for 2026 to be between $3.10 and $3.20. This revised outlook assumes the full utilization of our $500 million share repurchase authorization and roughly $1 billion of incremental loan sales beyond our initial plan. At the same time, we are reaffirming all other elements of our 2026 outlook, including originations growth, net charge-offs, and net interest expense metrics. With that, let us open the call for questions. Thank you. Operator: Thank you. The floor is now open for questions. We will start our questions today with Terry Ma from Barclays. Please go ahead. Terry Ma: Hey, thank you. Good evening. So you mentioned we should expect another partnership by year-end. Any kind of early color on how we should think about it? And then as we kind of take a step back with an additional partner, and I think you just mentioned an incremental $1 billion of loan sales, are you transitioning more to a capital-light model and should we expect the balance sheet to shrink a little bit more this year? Jonathan W. Witter: Yes. Thanks for the question, Terry. On the first part of that, when we launched the inaugural partnership with KKR last year, we indicated that it was our intention to build this into a business. So that has been part of our plan all along. We have started discussions with some of the folks that were involved in our process last year and were not the final partner that we went with. Those are early days but well underway, and we are confident that we will get something done by the end of this year. In the context of growing the partnerships, I will remind you that the initial KKR partnership was really sized and scoped to deal with our traditional undergrad student loan product. We always knew that we were going to need to expand and grow that to be at scale for the grad opportunity, and we are working on getting ahead of that so that we have something in place well in advance of when the major increase in volume from grad comes online. Terry Ma: Got it. And then maybe just on credit, it sounds like the borrowers exiting mod are performing a little bit better than expected. Any color on new mods thus far this year—whether or not that is in line with your expectations? And then as we look forward, should we expect the percentage of borrowers in mod to start to come down this year? Any way to think about that? Jonathan W. Witter: Yes. In the context of the exits, as we said, we are pleased with the early performance and in line with the outlook that we had when we set that charge-off guidance for the year. The absolute value of increased demand will fluctuate as the payment waves come through and depending on the overall size of those payment waves. Nothing really out of the ordinary in that regard for this, and the overall level of mods we believe will begin to stabilize as we move through this year and into next. Operator: Thank you. Our next question will come from Moshe Ari Orenbuch from TD Cowen. Please go ahead. Moshe Ari Orenbuch: Great. Thanks. Jonathan, could you talk a little bit about how you see the developing competitive environment in the Grad PLUS market? Saw some announcements this week from one of your major competitors but have not seen that many across the board. Maybe you could add a little finer point on that? Jonathan W. Witter: Yes, Moshe, happy to. Obviously, I think everyone understands the opportunity that the PLUS reform provides. Different competitors certainly look at the market opportunity and the segments of the market opportunity differently. There are some who have expressed more interest for certain segments than for others. We certainly do expect there to be a heightened level of competition as a new kind of market normal shakes out over the next couple of years. We see a little bit of early evidence of that in things like some of the digital marketing spend. We can see some activity from some players and begin to understand a little bit of the testing and the programs that they are looking to develop. More importantly, we have tremendous confidence in our incoming position and in the work that we are doing to prepare for this opportunity. The credit models, the relationships with schools, the organic marketing channels that we have really pioneered here over the last five years serve as a really important foundation. All of those will need to be enhanced, grown, and expanded in particular to get after the grad opportunity. While there are a lot of similarities, there are differences. As you heard in my prepared remarks, we are leaving no stone unturned in preparing to compete rigorously. Whether it is a lot more competitive, modestly more competitive, or not more competitive at all, we feel really great about what we are doing, how we are going to show up, and, most importantly, our ability to serve students, families, and our important university partners, because we know every loan we do is enabling someone’s higher education. Moshe Ari Orenbuch: Got it. Thanks. Maybe as a follow-up, just on the loan sale process—kudos to you and the team for recognizing to do a loan sale and take advantage of that arbitrage. How do you think about the outlook and balancing the various types of loan sale opportunities as you go forward, probably adding in the potential for an incremental partner that you talked about? Peter M. Graham: Yes, thanks, Moshe. That is a good question. Just a reminder, the KKR structure—again focused on traditional undergrad product—was sized at a $2 billion per academic year commitment. As we think about this next partnership, we are looking to build upon that to create capacity for loan sales of grad originations and start to build capacity for the real growth in the grad space that will come in 2027–2028. As we get that started, I would expect that we will do it similar to how we did the first transaction, which is enter into a flow agreement but also start the process with some sort of a seasoned portfolio sale. That is within our expectation for the latter part of this year. In terms of overall balance sheet size, our original guidance and initial plan was a flattish balance sheet. With the shift in our approach on accelerating capital return, as Jonathan said in his prepared remarks, it is probably an incremental $1 billion of loan sales over our original plan. So that would be flat to down-ish overall balance sheet. We will fine-tune that as we see the origination levels coming in during peak and we have a better line of sight to overall levels of growth in the business. Operator: Thank you. We will go next to Jeffrey David Adelson with Morgan Stanley. Please go ahead. Jeffrey David Adelson: Hey, good evening, Jonathan and team. I am curious—you made the comment on the recent college graduate unemployment trends headed in the right direction once again, and you brought up the survey of employers intending to increase hiring by about 5.6% this year. How do you think about the benefit of that flowing through to SLM Corporation? Is that something you think can really start to flatten out your delinquency trends, which look like they kind of continue to uptick a little bit at these levels? Jonathan W. Witter: Maybe a couple of thoughts here, and Peter, jump in if you want to add anything. I am not sure we yet see the unemployment trends and the hiring as a tailwind. What we are really describing is that the slight air pocket that we saw in employment through the course of last summer has normalized. We have talked for a couple of calls now about the resiliency of students and the fungibility of the skills that are afforded by higher education and their ability to figure out a changing employment landscape, and we have seen the evidence of that. But I am not sure we are in a positive enough territory versus historical norms that I would classify it as a tailwind. In terms of delinquency trends, we are very comfortable with the delinquency rates where they are. As I said in my comments, they are in line with and slightly better than expectations. If you look at the stability of the later-stage delinquency trends, they are where we thought we would be. You always have to be a little bit careful looking at any ratio because there is both a numerator and a denominator. When you sell a couple of billion dollars of loans earlier in the year than you expected, that can have a denominator effect. Prudence would suggest that be considered in interpreting the results. We feel very solid about where we are from a delinquency perspective. Jeffrey David Adelson: Okay, great. Thank you. And maybe just a quick follow-up on Grad PLUS. Obviously you are looking for that to start kicking into gear come July. You spoke a lot about how you are preparing for that and your ties to the schools. Maybe just a quick update on what you are seeing on the ground and how you think those expectations are going to play out as you hit the back half of the year, recognizing that it is still pretty early? Jonathan W. Witter: Yes, Jeff. It is very early; the season really has not started at all yet in the grad segments we are talking about. A couple of thoughts. Our conversations with schools have been extremely positive. As you can appreciate, their number one concern post-PLUS reform was what this would mean for their ability to fill their classrooms and support their students. The work we have done around product design, underwriting, and terms and conditions—as we have gone through that with schools—has been well received. They have been impressed by the customer-back thoughtfulness that we have brought to really thinking about these as new products and new businesses deserving of a fresh set of eyes. As we have implemented—grad has been a part of our portfolio for a long time, but a small part—we are starting to see impressive and meaningful percentage increases in our performance. Those are super leading indicators and trends based on small sample sizes, but we are seeing it flow through in early origination numbers and the like. We feel good about the guidance we have put out around originations. We have not seen anything that leads us to believe it is not achievable. We are going to continue to soldier away and put ourselves in the best position to win. Operator: Thank you. We would like to take our next question from Donald Fandetti with Wells Fargo. Please go ahead. Donald Fandetti: Hi, good evening. I know it is early, but I was wondering if you could talk a little bit about 2027. I think last quarter you provided some thoughts. Obviously you are going to have a higher base here in 2026. Jonathan W. Witter: I think the only thing I am really prepared to talk about with regard to 2027 is the opportunity that we see from grad. We have sized that as roughly a $5 billion incremental opportunity over time. The way that will size in will be modest this year and then grow more exponentially as we go to 2027 and into 2028. In terms of overall guidance around earnings or anything like that, I would not feel comfortable this early giving any reads on that. Donald Fandetti: Okay. And I heard the comments on the potential new partner. Obviously there has been a lot of dislocation in private credit. It sounds like you are not seeing any hesitancy or different terms. Is that maybe just because it is a consumer product, or what are your thoughts on the future demand from private credit? Peter M. Graham: Yes, I think there have been pockets of private credit that have been challenged. Even within the structured finance or ABF part of private credit, there have been areas where there have been frauds or other issues. That has really caused more of a flight to quality, and we have a very high-quality asset type that still has very strong demand, particularly in the consumer space, given the ability for us to provide duration as well as high yield and low losses. We have continued to see strong demand both for our own funding securitizations and for the securitizations that we do on behalf of the loan buyers. They have been well subscribed and well priced, and we expect that to continue. In the context of beginning the dialogue for setting up next partnerships, we have had great engagement from interested parties and feel like the market demand is still really there for our product. Operator: We will take our next question from Sanjay Harkishin Sakhrani. Please go ahead. Sanjay Harkishin Sakhrani: Thank you. Jonathan, maybe put a finer point on some of the initiatives you have and the step-up in expenses in 2026. It sounds like you feel pretty good about it. How do we see it unfold and measure it as we look across this year and next? I know Peter talked about a step-up in originations next year from the opportunity, but how do we see it unfold, and do we get leverage off of that into next year? Jonathan W. Witter: Sanjay, thanks, and great question. I would refer back to comments I made during the fourth-quarter earnings call. Our view is, yes, expenses are elevated this year—both marketing, as we start to go after the expanded opportunity, and fixed costs around products, systems, customer experience, and the like. What we have committed to and still believe is that the rate of expense growth will moderate this year. We may see a slight uptick in our efficiency ratio, but we actually expect at the end of the growth period for our efficiency ratio to be better than it was at the starting point. To put rough justice math to it, if we were at a mid-30s efficiency ratio historically, during this time of growth we may get up to the high 30s, which is still a compelling efficiency ratio. If the market evolves the way we think it is going to and if our share evolves the way we think it is going to, by the end of the growth period we would hope to be back down in the low 30s. That is the very definition of operating leverage. We recognize the need to invest against what we think is both a great market opportunity for us and a real need for students and university partners. We think that is a relatively short invest-ahead-of-the-curve with real leverage coming not very many years after that. Sanjay Harkishin Sakhrani: Got it. And then, Peter, just so I have the numbers correct in terms of the guidance raise and the fact that you are selling another $1 billion—if you use the 6% or so gain and then the reserve release, it sounds like most of that raise is just the mechanics of the $1 billion being sold at some point in the rest of the year. Any idea on timing? Thanks. Peter M. Graham: Sure. In the context of the full-year guidance, the increase in the EPS guidance for the full year is roughly split half and half between share count reduction and incremental gain from the incremental loan sale. If you think about the mechanics of what has happened in the first quarter, we really accelerated that through the actions we have taken and have a much lower share count for a longer period during the year. We have not updated any other elements of our original guidance. The impact is really just the incremental loan sale gain and the share count reduction—roughly half and half for the full year. Operator: Thank you. We will take our next question from Mark Christian DeVries with Deutsche Bank. Please go ahead. Mark Christian DeVries: Thanks. Jonathan, I believe you indicated that the FAFSA completion rates are up almost 20% from this time last year. Have a sense for what is behind that? Is this a reflection of a significant increase in demand for higher education? Is there something wonky behind that? And if it is demand, what does it say for your conviction around your origination guidance? Jonathan W. Witter: Yes, Mark, I think it is probably too early to know exactly all the different factors that are driving that rate. If you exclude two years ago when the Department of Education rolled out a new FAFSA form and had a few implementation hiccups along the way, I think what this reflects is a continued steady drumbeat of growth, which matches well with what we have seen around general trends in the percentage of eligible high school seniors who are choosing to go to college. A lot has been made around demographic trends, but the “batting average” of how many people actually go has also been a nice contributor to the growth in enrollment over a period of time. If I broaden it out and look at our soon-to-be-released survey, because that gives a little more detailed insight, it shows the promise and dream of higher education continues to be key for many students and families. There has been a lot of talk about the changing cost of higher education and whether it is worth it; our survey says pretty conclusively that the vast majority of American families see that it is—understanding the key to job creation, skills, and economic mobility, and the role higher education has played historically and will play going forward. I look forward to the survey coming out—likely next week—with a lot of great data that will give you even more insight into your question. Operator: Thank you. We will take our next question from Caroline Latta from Bank of America. Please go ahead. Caroline Latta: Hi, guys. I think you mentioned last quarter that you expect after 2026 that the private education portfolio will impact up to 1% to 2% growth. Has that expectation changed if you were to add another private credit partner, or did that comment contemplate another potential partner? Peter M. Graham: Thanks, Caroline. In our original low-range planning that formed the basis of our original guidance for this year, we assumed a flattish balance sheet this year and that kind of 1% to 2% growth going into 2027 and getting up to mid-single digits over time. With the change in approach around acceleration of the share repurchase this year, we will probably be a little down this year—call it $1 billion lower than flattish—and we would look to step back into growth over time. I do not think the creation of a new partnership really changes that dynamic. We still have a broad opportunity around originations growth that would, if we did not do those partnerships or other types of loan sales, drive a much higher rate of balance sheet growth than that. We have lots of different levers we can use to optimize. What it will impact is the mix of seasoned sale versus new origination sale as we step into 2027 and beyond. That is purposeful because the grad opportunity—for which we do not currently have a flow arrangement—will become a much larger portion of our originations as we move into 2027 and then again into 2028. We want to make sure we have a good complement of funding capabilities to meet that need. Caroline Latta: Great. Thank you. And then, given the buyback this year—if you complete the plan it will be a pretty big step-up—should we be thinking about the cadence of buybacks and capital return further out into 2027 and 2028? Peter M. Graham: If you look at our original plan, we were targeting roughly 5% to 6% of outstanding share count as part of the buyback within a year. As we start to normalize, that is probably a reasonable benchmark going forward. As always, as market conditions change, if there is an opportunity to do more than that, we would do what we did in the first quarter—accelerate some loan sales and take advantage of that market dislocation. Operator: Okay. Thank you. We will take our next question from John Hecht with Jefferies. Please go ahead. John Hecht: Yes, thanks, guys. Maybe relative to our forecast, there was upside EPS and lower OpEx. Can you talk about the cadence on investments in the PLUS program over the year? Peter M. Graham: Sure. We are getting ready for peak season, which starts in the summer. If you think about the comments we made at year-end when we talked about expenses for this year, of the increase year over year we said roughly a third was an increase around marketing and customer acquisition, and roughly a third was preparation for the opportunity in terms of the things Jonathan talked about around program design, customer experience, and some of the tech changes we will need to enable. That readiness will be more front-loaded before peak, and the marketing spend will be more in the moment in that peak season. Our staging of expenses and our plan for expenses—we were modestly ahead of plan for the first quarter, but we still feel comfortable with our overall guidance range for the full year. John Hecht: Okay. And then second question is the evolution of the program management and servicing fees. Was there anything in this quarter with that, and how do we think that grows over the course of this year? Peter M. Graham: The inaugural partnership that we linked with KKR in the fourth quarter of last year has the program management fee built into it. As we have completed sales of assets into that, those program management fees will start to earn on the AUM, if you will, under management. We did another $1 billion of sales to that partnership in the quarter, and we will continue to build on that. As we grow the next partnership, our anticipation is that something akin to those program management fees will be part of the economics of those deals as well. Our intent is to continue to build more recurring fee-based revenue over time and give ourselves a different capital allocation capability with these forward flow sales. Operator: Thank you. We will go next to the line of Richard Barry Shane with JPMorgan. Please go ahead. Richard Barry Shane: Hey, guys. Thanks for taking my questions this afternoon. I would like to talk a little bit about credit. You provided an update on your net charge-off guidance for the year and reiterated your prior guide. I am curious, when you think about the credit performance of the portfolio, whether it is where it is in your targeted range. Is it within the range? Above? Below? Long term? And to the extent it is varying from the range, is there anything you are doing on the underwriting side to either tighten or widen the credit bucket in order to meet that efficient frontier? Jonathan W. Witter: Rick, a couple of thoughts—tell me if this gets to your question. We are operating within the long-term credit range that we talked about. We said a couple of years ago we thought the right destination was high 1s to low 2s. We spent time in the fourth-quarter earnings call, when we laid out guidance, doing a crosswalk around that percentage to the charge-off guidance that we have given for this year. The wildcard there was the shift in strategy to sell new originations versus seasoned portfolios and a bit of the distortive effect that had on our legacy ratio. We believe we are operating within that range and feel good about the guidance. It is important to remember how we got there. Three or four years ago, we started a persistent, purposeful program to look at and adjust the credit buy box to make sure we felt great about originations. The changes had a meaningful impact on origination volume, and one of our great sources of pride was our ability to grow both nominal levels of originations and share while still tightening the credit box during that time. There is still a tail to come—we still have people who took loans as freshmen and sophomores under the old underwriting regime who have not entered full P&I yet and are still coming into their maximum stress period. In some respects, the full effect has yet to be felt in the portfolio. We feel great about the underwriting changes we have made and how our loss mitigation programs are performing, and we think we are generating the loss profile we would hope for during a time that has been relatively stressed for some borrowers, with the elevated unemployment rate I talked about over the last six months. All in all, we feel really good about these results and look forward to the portfolio continuing to season. Richard Barry Shane: I appreciate that. Do you provide an average loan-in-repayment number anywhere in the disclosures? The reason I ask is, this quarter when we calculate a net charge-off rate as a function of loans in repayment, I am trying to understand how much that might be distorted by loan sales. Are there seasoned loans in repayment that are part of the pools that you are selling, or should we assume it is predominantly new originations that are less than 12 months seasoned? Peter M. Graham: All of our portfolio sales are representative samples of the book. The only exclusions are loans that are in later stages of delinquency, which are typically excluded from those pools. As we make portfolio sales, as Jonathan said, that can have an impact depending on when in the quarter or year we make those sales, because it does impact the denominator of some of those ratio calculations. I would also highlight commentary we made in the fourth quarter surrounding our disclosures in the 10-Ks. Because we calculate most of our loan disclosures on loans held for investment, and we are moving loans to a held-for-sale status in association with these forward flow agreements, that also has a nominal impact on some of the calculations. Jonathan W. Witter: Just for avoidance of any confusion, Peter laid out in his talking points the new origination sales, which were $1.3 billion. Those are, as the name suggests, new originations. We try to break it out separately and understand the importance of continuing to do that, both for understanding credit metric impacts and premium impacts. Operator: Thank you. This concludes the Q&A portion of today’s call. I would now like to turn the floor over to Mr. Jonathan W. Witter for closing remarks. Jonathan W. Witter: Erica, thank you, and thank you to everyone who joined this evening. We appreciate your interest in SLM Corporation and look forward to updating you again when we get together in three months for our second quarter earnings call. With that, Melissa, I will turn it back to you for some closing business. Melissa Bernat: Thank you all for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today’s call. Operator: Thank you. This concludes the SLM Corporation first quarter 2026 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.
Operator: Welcome to today's event. The call will begin in one minute. Welcome to the Q1 2026 Earnings Call. My name is JL, and I will be your conference operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 1 on your touch-tone phone. As a reminder, the conference is being recorded. I will now turn the call over to Stephanie Rabe. Stephanie, you may begin. Stephanie Rabe: Welcome to Ameriprise Financial, Inc.'s first quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. Following their remarks, we would be happy to take your questions. Turning to our earnings presentation materials that are available on our website, on Slide 2 you will see a discussion of forward-looking statements. Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations. Reconciliations of non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website at ir.ameriprise.com. Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our first quarter 2026 earnings release, our 2025 annual report to shareholders, and our 2025 10-K report. We have no obligation to publicly update or revise these forward-looking statements. On Slide 3, you see our GAAP financial results at the top of the page for the first quarter. Below that, you see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. Many of the comments that management makes on the call today will focus on adjusted operating results. And with that, I will turn it over to Jim. Jim Cracchiolo: Good afternoon, and thank you for joining us. As you saw in our earnings release, Ameriprise Financial, Inc. delivered a strong start to the year, driven by our disciplined execution and the benefits of our diversified business. While the first quarter was marked by ongoing market volatility and economic uncertainty, contributing to more cautious client behavior, our value proposition continued to clearly differentiate us. Across the firm, we remain deeply engaged with clients and delivered excellent financial performance. We are focused on maintaining a high-quality, well-positioned business while continuing to invest and innovate to support deep long-term client relationships. Our business generates consistent earnings across market cycles. Equally important, we maintain a disciplined approach to capital allocation that enables Ameriprise Financial, Inc. to deliver strong value to shareholders. For the quarter, adjusted operating revenues were up 11% to $4.8 billion. Earnings and EPS were also up double digits, with EPS up 19% to a record $11.26. And we continue to deliver best-in-class ROE, which increased to more than 54%. In addition, our assets under management, administration, and advisement grew 12% to $1.7 trillion, driven by our client net inflows and positive markets. The consistency of these results reflects the strength of our integrated business and the benefits of our approach. Very clearly, Ameriprise Financial, Inc. is distinguished by the compelling experience we deliver to both clients and advisers. Across the firm, we remain focused on serving client needs and best interests exceptionally well. That differentiation is reflected in consistently earning excellent client satisfaction, which continues to be 4.9 out of 5, and also by the recognition our firm receives year after year. On the adviser side, our distinctive value proposition drives sustainable practice growth, higher productivity, and recurring revenue over time. Turning to our results, total client assets grew 12% to $1.1 trillion, with wrap assets growing 16% to $664 billion. In the quarter, we were lighter on flows based on more cautious client behavior and some lumpiness in recruiting and terminations. We ended the quarter with $6 billion of wrap net inflows. Importantly, underlying activity was good. For the quarter, we kept clients closely engaged and delivered strong transactional activity, up 10%. Our cash business remains stable with nearly $30 billion in sweep balances. As you saw, our advisers again generated meaningful productivity and revenue growth, with productivity increasing another 10% in the quarter to a record $1.2 million per adviser. Our strategy remains grounded in organic growth—built, not bought. Advisers consistently value Ameriprise Financial, Inc. for the depth of our value proposition and the strength of our partnership. We continue to prioritize our core adviser team productivity, and we complement it by recruiting high-quality advisers who view us as a strategic partner supporting strong client outcomes and practice growth. Sixty-one advisers joined during the quarter, and we are seeing a pickup of activity in the second quarter. And in AFIG, we continue to expand this channel as a premier platform for banks and credit unions. During the quarter, we signed a multiyear agreement to become the retail investment program provider for Huntington Bank. This relationship is expected to add approximately 260 advisers and $28 billion in assets, with onboarding beginning later this year. Huntington selected Ameriprise Financial, Inc. for our leadership in advice, strong culture, and capabilities. As we shared, we consistently invest across the firm to meet client needs today and further strengthen the business for the future. These are intentional multiyear investments across technology, systems, and new capabilities. We are focused on clear, high-impact outcomes that deepen engagement and deliver relevant and actionable information while enabling highly personalized, quality experiences. In particular, we have designed our tech platform around how advisers work, not individual tools. It connects multiple capabilities like our CRM platform, eMeeting, Advice Insights, and practice workflows into an intelligent ecosystem enhanced with embedded AI and automation. To that end, we feel good about the progress we are making at scale. Our focus is on using AI and intelligent automation capabilities that help advisers deliver a consistent, high-quality client experience while improving how they operate day to day. In terms of investments and solutions, after the initial launch of Signature Wealth UMA mid last year, we are now expanding the product capabilities and seeing positive early asset movement and engagement. There is meaningful upside as we continue to add capabilities, including the introduction of SMAs and as we broaden the strategy set over time. With regard to our bank solutions, which complement our overall offering, bank assets now exceed $25 billion, with continued strength in pledge lending. With the recent introduction of products including HELOCs and checking accounts, we now offer a complete suite. As we reach more of our advisers and clients, we expect this will present opportunities to bring additional assets to the firm. To close out AWM, we received new recognition in the quarter. For the 2026 J.D. Power U.S. investor satisfaction study, Ameriprise Financial, Inc. ranked third out of 23 firms overall—a terrific result that underscores the quality of the experience we deliver. Turning to our Retirement & Protection business, as advisers deliver more comprehensive advice, they are thoughtfully incorporating annuity and insurance solutions to address clients' increasingly complex needs. Sales were solid in the quarter, supported by continued demand across annuities and B-UL. In addition to meeting client needs, this business continues to generate attractive margins and consistent earnings over time, with RiverSource again recognized as one of the most profitable insurers in the industry. Moving to Asset Management, assets under management and advisement increased 8% year over year to $706 billion in the quarter. Investment performance remains a strength. More than 70% of our funds are performing above the peer median over the 1-, 3-, and 5-year periods, and 85% are above the median over 10 years. This sustained performance continues to be recognized externally. In the most recent Barron's Best Fund Family rankings, Columbia Threadneedle placed in the top 10 across all time periods. And our U.S. fixed income team recently earned four 2026 Lipper Awards. Importantly, net outflows improved significantly year over year to $5.9 billion, reflecting better trends across both retail and institutional channels. Gross retail sales in North America continued to improve, up 26% even in a volatile market environment, and we are seeing nice sales within Ameriprise Financial, Inc. from good initial sales in Signature Wealth. Retail flows in EMEA also improved; however, they were impacted by headwinds from geopolitical volatility during the quarter. On the product side, we continue to advance our strategy across ETFs, SMAs, and alternatives, with a clear focus on scale, consistency, and performance. Our ETF platform surpassed $10 billion in assets under management, supported by a differentiated offering across North America and EMEA. In SMAs, we benefit from longstanding track records and remain a top 10 provider with continued positive flows. In alternatives, our technology and healthcare hedge fund strategies delivered strong performance and sales momentum, and we see good opportunities ahead. Consistent with our approach in wealth management, we are applying advanced analytics and technology within asset management, including in investment research where these capabilities are contributing real value. At the same time, we are transforming how we leverage our global platform. We are driving greater efficiency across the front, middle, and back office while continuing to strengthen our data foundation. We are also making good progress on back-office outsourcing, with a substantial portion of the conversion expected to be completed later this year. These initiatives complement our broader efforts to streamline systems and support operating leverage over time. Now for Ameriprise Financial, Inc. overall, our focus is having a premium, branded, client-focused business that delivers strong financial performance and attractive returns. Over the past year, we have achieved record earnings and generated best-in-class return on equity now exceeding 54%, as I mentioned. Given this performance and our current valuation, we continue to view our shares as an attractive buying opportunity. As a result, as you know, we increased our share repurchases in the fourth quarter and continued our strong return to shareholders with 88% returned in the first quarter. And our board just approved another 6% increase in our dividend. Ameriprise Financial, Inc. is built to perform across market cycles. We are well positioned to deliver meaningful value over time, manage risk responsibly, and generate resilient performance. Before I close, I want to highlight that the iconic Ameriprise Financial, Inc. reputation remains an important competitive advantage. We are proud to have a company that continues to be widely recognized in the marketplace for who we are and how we operate. In the minds of consumers, employees, and investors, Ameriprise Financial, Inc. has been named one of America's Most Trustworthy Companies in 2026 by Newsweek. And from Fortune, Ameriprise Financial, Inc. is also one of America's Most Innovative Companies for 2026, affirming our leadership in technology and driving transformational change. In closing, Ameriprise Financial, Inc. offers a differentiated combination of an excellent client and adviser value proposition, sustainable, profitable growth, and an attractive capital return. With that, I will turn it over to Walter to discuss our financials in more detail. Walter Berman: Thank you, Jim. Ameriprise Financial, Inc. delivered strong financial results in the quarter, with adjusted operating earnings per share up 19% to $11.26 and an operating margin of 28%. These results reflected the strength of our diversified earnings profile and the operating leverage embedded in our businesses as well as the return from significant investments we have continued to make. Our ability to generate attractive growth and margins across cycles underscores the durability of our platform and the discipline we bring to execution. Total assets under management, administration, and advisement increased 12% to $1.7 trillion, which, coupled with strong client engagement, drove an 11% increase in revenues to $4.8 billion. In the quarter, we returned 88% of operating earnings to shareholders through share repurchases and dividends. Our balance sheet remains exceptionally strong, with $2.3 billion of both excess capital and holding company available liquidity. Let us turn to Wealth Management financials on Slide 6. Adjusted operating net revenues increased 14% to $3.2 billion. The core distribution business is performing well given the value of our planning model and the multiple touch points we have with the client to meet their needs holistically. Our fee-based and transaction revenues remain quite strong, increasing 17%, benefiting from growth in client assets and higher activity levels. In addition, our bank revenues increased 6% from business growth, including the expansion of our lending products, while revenues from cash sweep and certificates declined. Adjusted operating expenses in the quarter increased 12%, with distribution expenses up 14%. I will note that adviser compensation within distribution expenses increased in line with the revenues advisers generate. G&A expenses were up 4%, primarily driven by volume and growth-related expenses, including investments in Signature Wealth and banking products. This level was consistent with our expectations. Pretax adjusted operating earnings increased 20% to $951 million, with continued strong contribution from core distribution and core cash earnings. In the quarter, Comerica exercised their option for early termination of their relationship with us. This resulted in a one-time $25 million make-whole payment for onboarding cost and future earnings, which finalized all payments that were due to us for this termination. Excluding this benefit, earnings increased 17%. Our core distribution earnings grew in the mid-30% range, benefiting from higher client assets and advisory fees as well as strong activity levels. The strong level of core distribution earnings that we generate is unique relative to other independent wealth managers and demonstrates our focus on ensuring that our growth is profitable. Bank earnings grew 6% in the quarter, while certificate earnings declined. In total, core cash earnings were essentially flat from a year ago. We continue to take actions to build the bank portfolio in a way that supports stable earnings contributions going forward. The overall bank has a yield of 4.6% with a four-year duration, with now only 7% of the portfolio in floating-rate securities. In the quarter, new purchases at the bank were $1.9 billion at a yield of 5% with a 4.1-year duration. Lastly, our aggregate margins remained excellent at 30%, up from 28% a year ago. Underlying that, our core distribution margin is over 20%, with a solid contribution from cash. Let us turn to Slide 7. Advice & Wealth Management generated solid asset growth in the quarter. Client assets grew 12% to $1.1 trillion, and wrap assets increased 16% to $664 billion, driven by solid organic growth, strong adviser productivity, and equity market appreciation. Our new Signature Wealth program continues to gain momentum; a significant portion of the assets are new money to Ameriprise Financial, Inc. Client flows were $4.2 billion, and wrap flows were $6 billion in the quarter. This reflected several moving pieces that I will explain. Same-store sales levels remain strong and consistent aside from the normal seasonal impacts and client caution resulting from volatility in the quarter. However, in the quarter, we had some lumpiness in our flows caused by a combination of the aggressive recruiting environment, which drove higher adviser departures, as well as the acceleration of Comerica advisers departing as a result of their acquisition. We anticipate the higher pace of outflows related to Comerica will continue in the second and third quarters, culminating with the conversion occurring near the end of the third quarter. While we have significant capacity to recruit, the recruiting deals we are seeing today in this perceived risk-on environment exceed what we believe is a balanced risk-return approach, given the long cash paybacks and marginal P&L benefits over the extended life of these arrangements. We will continue to evaluate the facts and circumstances—whether for recruiting or retention—to assess the trade-offs between sustained profitability versus flows and associated risk. This approach will ensure decisions are driving sustained shareholder value creation. Lastly, I will note that in the latter part of the quarter, we have seen improving trends. As we look ahead, the addition of Huntington Bank is anticipated in the fourth quarter and will bring approximately 260 advisers and $28 billion of client assets onto our platform. Separately, we are further enhancing our adviser succession strategies for both internal and external advisers, including expanding and leveraging Ameriprise’s Personal Wealth Group, our centralized adviser group, as a potential succession option. Let us turn to Slide 8. Advice & Wealth Management generated solid productivity growth. Our adviser productivity continues to grow, reaching a new high of $1.2 million, up 10% year over year, driven by strong growth in wrap assets and related fees as well as enhancements to adviser efficiency from the integrated tools, technology, and support we provide. In addition, transactional activity remains strong, increasing 10% compared to the prior year. This is primarily from nice growth in annuity products and brokerage transactions. Total client cash of $86 billion was essentially flat year over year and sequentially. Bank assets increased 6% year over year to $25.5 billion, with the bank representing a stable source of earnings going forward. Cash sweep balances decreased slightly to $29.4 billion compared to $29.9 billion in the prior quarter, which is consistent with the seasonal tax pattern we would expect to see. Certificate balances declined to $7.6 billion from $8.2 billion in the prior quarter, given the interest rate environment. We continue to have elevated cash balances in third-party money market funds at nearly $48 billion. We had seen that decline for the first time in January and February, but with the volatility later in the quarter, we saw cash levels build modestly again. This remains an important opportunity, when rates decline, to see these cash balances deployed into other products on the platform. Turning to Asset Management on Slide 9. Financial results were strong in the quarter. Operating earnings increased 13% to $273 million. Results reflected asset growth and the positive impact from transformation initiatives. Total assets under management and advisement increased to $706 billion, up 8% year over year from higher ending market levels. As Jim mentioned, net outflows improved in the quarter. Revenues increased 8% to $910 million, and the underlying fee rate remained stable at approximately 47 basis points. Expenses increased 5% in total. In the quarter, general and administrative expenses were up 4%, driven by volume-related expenses and unfavorable foreign exchange translation. Margin reached 44% in the quarter, which is above our targeted range of 35% to 39%. Let us turn to Slide 10. Retirement & Protection Solutions continued to deliver strong earnings and free cash flow generation, reflecting the high quality of the business that was built over a long period of time. Pretax adjusted operating earnings were $190 million, which reflected higher distribution expenses associated with strong sales levels and continued outflows from variable annuities with living benefits partially offset by higher equity market levels. However, we continue to expect earnings over time to be in the $800 million range per year. This business has excellent risk-adjusted returns and continues to be an important part of AWM's client value proposition. Turning to the balance sheet on Slide 11. Balance sheet fundamentals and free cash flow generation remain strong, which is core to our ability to invest for growth on a sustainable basis while also continuing to return capital to shareholders. We have an excellent excess capital position of $2.3 billion. We have $2.3 billion of available liquidity. Our asset and liabilities are well matched. And our investment portfolio is diversified and high quality. We have no exposure to middle market lending directly or through funds and BDCs in our owned assets. Similarly, we have limited direct exposure to broadly syndicated loans in our owned assets. Our disciplined capital return is a key element of our ability to consistently generate strong long-term shareholder value. In the quarter, we returned $936 million of capital to shareholders, which was 88% of operating earnings. This included the opportunistic repurchase of 1.6 million shares to take advantage of the decline in our P/E multiple in the quarter. We also raised the quarterly dividend by 6%. These actions are a demonstration of the confidence we have in our continued free cash flow generation and commitment to return capital to shareholders. As we go through 2026, our strong foundation, coupled with our capabilities and decisioning framework, positions us well to continue investing for growth in a targeted way and return capital to shareholders at a differentiated pace. In summary on Slide 12, Ameriprise Financial, Inc. delivered solid results in the first quarter. Over the last twelve months, revenues grew 8%, adjusted EPS increased 12%, return on equity grew 140 basis points, and we returned $3.6 billion of capital to shareholders. We had similar growth trends over the past five years, with 9% compounded annual revenue growth, 20% compounded annual EPS growth, return on equity improving over 17 percentage points, and we returned $14 billion of capital to shareholders. These trends are consistent over the long term as well. We have an excellent foundation and capacity moving forward that enables consistent and sustained profitable growth. With that, we will take your questions. Operator: Thank you. We will now open the call for questions. We will now begin the question-and-answer session. If you wish to be removed from the queue, simply press 1 again. If you are using a speakerphone, you may need to pick up your handset first before pressing the numbers. Once again, if you have a question, please press 1 on your touch-tone phone. Your first question comes from the line of Wilma Burdis of Raymond James. Your line is open. Wilma Burdis: Hey, good afternoon. First question, why did not Ameriprise Financial, Inc. lean in more—return more than 88% of operating earnings in 1Q 2026? Especially given the stock was back to kind of Liberation Day levels at certain points? And should we expect 2Q 2026 capital return levels more in line with 4Q 2025 if the stock stays at the current level? Thanks. Walter Berman: As we indicated, we will be buying back 85% to 90%. Certainly, looking at the P/E ratio and where we are right now, it is a reasonable expectation that we would take advantage of that and be approaching us up to a higher number, and then evaluate it, because we certainly have the capacity to do that and invest in the business continually. Wilma Burdis: Okay. Thank you. And could you quantify the outflows from the Comerica advisers just to help us arrive at a more normalized net flow number for 1Q 2026? And along similar lines, if you could talk about the remainder of the year, should we expect additional outflows from Comerica and talk a little bit about the Huntington Bank inflow expectations? Thanks. Walter Berman: The Comerica outflows started as it relates to the acquisition in the fourth quarter and certainly continued in the first. They were a reasonable portion of the outflows that we had. We are seeing, because of the acquisition, a more accelerated pattern. We expect that pattern to continue and accelerate in the second and third quarter. And as I indicated, based on our current plans, we should finalize the contract by the end of the third quarter. We are seeing that activity. Jim Cracchiolo: The contract was executed and finalized, and so any financial impact from that is already in what we collect. We booked the $20-some-odd million in the quarter for a make-whole. And so it will come through the flows, but the impact financially to us is immaterial. We cannot give exactly how they will transfer it, but when we are mentioning it, it is the flow. Maybe as we go forward, we will try to break things to be a little clearer on it. But assume that all of it will be out by the end of the third quarter. And then Huntington will come in in the fourth quarter, and that will be moved in in the fourth quarter, and that would be, as I indicated in my remarks, about $28 billion. Wilma Burdis: Okay. Thank you. Operator: Your next question comes from the line of Brennan Hawken of BMO Capital Markets. Your line is open. Brennan Hawken: Hey. Good afternoon, Jim and Walter. Thanks for taking my question. I would like to follow up on that last one. I would like to get a mark-to-market on Comerica. I believe it was $18 billion of assets. I think you said that it started to come out in the fourth quarter. You saw a little this quarter, and you expect some the next two. I know you chose not to quantify, but is it reasonable just to take that $18 billion and allocate it across four quarters and call it a day? Or will there be some lumpiness and concentration in particular quarters? Thanks. Jim Cracchiolo: It is hard to know exactly what that trend line is. This is Fifth Third that has taken over the activity. The deal was concluded; we received what we needed to receive back and the reimbursements, etc. We booked the $20-some million in the quarter for a make-whole. It will come through the flows, but the impact financially to us is immaterial. We cannot predict exactly how they will transfer it, but we understand the need for clarity, and we will try to be clearer as we go forward. You should assume that all of it will be out by the end of the third quarter. Walter Berman: We are getting advisers giving us notice on terminations. That is why I say it has built up. We cannot really predict the amount, but we are seeing heavier activity take place in the first and starting now in the second quarter. Brennan Hawken: Okay. But is my $18 billion at least right? Jim Cracchiolo: $18 billion is right in total. Correct. Absolutely. Brennan Hawken: Okay. Cool. And then there is a lot of focus within the wealth space on the cash and whether or not these AI tools are going to allow for optimization of cash. It is not a huge central feature for you guys in your business model. But how are you thinking about that as you move forward? I know you have the bank as part of the strategy now. Have you considered looking at some of these tools within your own network, and how are you considering that development that is likely to come down the pike? Jim Cracchiolo: Good question. First and foremost, as Walter outlined, the cash contribution this quarter adds a certain amount to our margin, but the bulk of our earnings and profitability is from the real wealth management part of our business with the fees and the transactions we conduct on behalf of clients. Our revenue from the sweep is a very small part—only a few percent. From our perspective, it is not the bulk of our earnings. We have developed the bank in a way that we can add value from both lending activities and savings programs, including checking. The amount of cash that will still be in transactional balances, whether AI-assisted or not, will be so low that money will be moving in and out, just like a basic checking account. We already provide significant capability and ease for our advisers and clients to move cash efficiently. That is why our cash levels that we maintain in transactional accounts are, on average, about $100 per account. We are not as concerned. If there are other capabilities that come about that make sense, we will look at them, but we are not looking at that as a major change to what is being held there. Walter Berman: Our average transactional balance now is about $6,000. As Jim said, it is very active and at transactional levels that meet the minimum standards in the account. The percentage of our earnings that come from cash is lower than most of our peers and therefore certainly manageable. Brennan Hawken: All fair. Thanks very much for taking my question. Operator: Your next question comes from the line of Michael J. Cyprys of Morgan Stanley. Your line is open. Michael J. Cyprys: Great. Thanks for taking the question. I wanted to ask about the bank with the new initiatives that you have across lending and savings. Hoping you could elaborate on how those are contributing today—I realize it is early days. Could you talk about the steps you are taking to drive broader engagement, how you see that ramping, and what are some of the other initiatives you are thinking about in the coming quarters? Jim Cracchiolo: Thank you for the question. The one that we had launched previously that is growing nicely, and there is still a very large opportunity for us, is pledge lending. As more of our advisers get familiar with it and activate their activities around it, that continues to grow, and compared to some peers, there is a lot more opportunity for us there. We just completed the launch of the checking account, which is a core component of banking, and, in complement with HELOCs, mortgages, and savings programs, we are starting to ramp that up as we get it out to advisers and make information available for clients. This is at the early stages of what we think we can do. We see some early signs from initial launches, and advisers like what we are providing and the benefits. We hope this becomes a stronger contribution as we go, but we are at the early stages. Michael J. Cyprys: Great. And then as a follow-up on AI, could you update us on the AI tools that you have available for advisers today, how you see that evolving over the next year or so, and where you see some of the biggest opportunities? How meaningful could this be as you think about adviser productivity and, ultimately, efficiency savings for Ameriprise Financial, Inc.? Jim Cracchiolo: We view AI as an extension of our total technology strategy that we have been building for many years. It is not a standalone initiative. What differentiates what we are doing is that these capabilities are embedded in an integrated platform built around how advisers work, supported by the data foundation—which is critical in a highly regulated business—and the governance for it. The integration allows us to deploy AI directly into everyday workflow across advice, operations, and service, rather than layering it as a tool in a fragmented system. The result is greater efficiency, better insights, and more time that advisers can spend on client relationships, which drives the outcomes you are looking for. In the near term, we see productivity gains and selective automation. Longer term, we see capabilities supporting growth by enabling advisers to serve more clients with a higher standard of advice. This is embedded into many of the tools we have: client acquisition, meeting planning and scheduling, meeting preparation, goal-based advice, products and solutions, meeting follow-up and summarization, and business planning. Our eMeeting capability, for example, is already integrated and can pull all the data from adviser engagement with the client, past cases, and the opportunities that we get from Advice Insights to suggest next best actions based on the client's financial situation. Over time, we will introduce more AI agents to do some of the actual adviser work where appropriate to increase productivity rather than adding staff. We are also embedding capabilities at the company level. Michael J. Cyprys: That is helpful. Just curious if you are able to quantify any of the productivity gains that you have seen so far. Jim Cracchiolo: We see clear productivity where advisers have enabled it. For example, our eMeeting takes away hours of work within an adviser practice every week. We have not extrapolated what advisers then do with that, but those are things we will try to quantify as appropriate. Operator: Your next question comes from the line of Suneet Kamath of Jefferies. Your line is open. Suneet Kamath: I wanted to come back to AWM organic growth. If I remember correctly, last quarter you expressed some confidence in the 4% to 5% target for the year. I think three quarters now we have been talking about increased competition—you are talking about it again now. Based on what you are seeing, do you still think you can achieve that 4% to 5% this year, or is the increase in competition taking you off that glide path? Thanks. Walter Berman: When we talk about the organic, the same-store, we are seeing good growth. The area that deviates is on the attrition side. Certainly, in this quarter, Comerica contributed toward that. That is the variable that affects when you look at these arrangements that are being offered at this stage—both on the retention side and on the recruiting side. But the solid core of our growth is there, and we feel very comfortable with it. Then managing the net on the inorganic is the element that deviates. Last quarter, we were up. This quarter, it was down. It will be lumpy as we manage through it, depending on how aggressive we see the environment and how we gauge the appropriateness of responding. Our objective remains, because we think that is a good objective—the core is solid. Now it is a matter of the environment as it relates to aggressive bidding on recruiting or on retention. Jim Cracchiolo: People over-index to one metric sometimes. Our core assets grew strongly over the year. We generated the revenue that translated into real profitability we brought to the bottom line. You can always add growth—be an acquirer—but we would never pay way more on an acquisition just to grow size if we do not see an appropriate return over time. Advisers who take a big check may not stay after that check is up. We want to recruit people who know we can help add value and give them strong practice support and a strong client value proposition. Our firm stands out in that regard—client satisfaction, trust. We have a lot of capital, but we do not look at buying firms as the best way to deliver strong premium value and culture. Some advisers will take a big check, but our pipeline is ramping up again for the second quarter. Underneath, our focus on productivity growth across 10 thousand advisers is what will drive true profitability. Suneet Kamath: That makes sense. People sometimes over-index to one number in one quarter. My other question: I wanted to drill into this AFIG opportunity. It seems like the cost of being in this business is going to go up. If you have banks that want to be in wealth management but do not want to make the required investments, it seems like that plays into your hand in terms of AFIG opportunities. Will we likely see more of these? Jim Cracchiolo: You are 100% correct. Huntington Bank kicked the tires and looked for the best provider. Their goal is excellent banking complemented by wealth, and they wanted a partner who could provide the support, capabilities, culture, and environment to deliver great outcomes for their clients. They clearly chose us for those reasons. We think we will have a great partnership. Comerica was working fabulously for the bank—their executives would attest to that. Advisers loved us and would love to stay. We did not lose the business; Fifth Third purchased them and kept it with their operating platform. There will be more opportunity for us. Walter Berman: One of those is really the deepening of the relationship—what we do with our clients. They recognize our capability to do that with their bank clients. Operator: Your next question comes from the line of Analyst of Piper Sandler. Your line is open. Analyst: Thank you. Good afternoon. I appreciate you taking my questions. First, the operating margin in the asset management business was very strong at 44% in the quarter. Are the expense management actions from that segment complete or still ongoing? And any other key callouts for the margin strength? Is that level sustainable, or would you expect it to trend back to your 35% to 39% targeted range? Walter Berman: The transformation is working its way through, and the back-office transformation has not taken hold yet. You will see it as it goes through. As part of the way we operate, you will see continual transformation and streamlining. Operating expenses will also go up with volume and other related items. We are committed to the transformation and improvement of our processes and getting the benefit of that. The biggest one right now—back office—has not worked its way through the numbers yet. Jim Cracchiolo: We are advancing—extending our product line in ETFs and SMAs, adding capabilities. We will continue to drive progress on leveraging our global platform with a strong backbone, while investing. We will keep the expense base in check and aim to maintain good margins. Analyst: Thank you. And then on the Huntington Bank win you announced earlier in the quarter, can you give more color? Was this a competitive takeaway? An overview on the process or competition to get this win, and how long did it take to get over the finish line? Jim Cracchiolo: This was actually Huntington Bank running their own activities—broker-dealer, etc. They were very cautious because they did not want to give that up unless they had someone who would really provide what they were looking for and take it to another level for them. We love clients that really care about their clients. Walter Berman: The process was over a year, by the way. Analyst: Great. Thank you. I appreciate you taking my questions. Operator: Your next question comes from the line of Steven Chubak of Wolfe Research. Your line is open. Steven Chubak: Hi. Good evening, Jim and Walter, and thanks for taking my questions. I wanted to double click into the discussion around M&A and appreciate the disciplined approach to recruitment, the reluctance to chase given the more aggressive packages in the market. Our channel checks indicate that TA rates have been and should remain relatively sticky. I want to better understand, one, how that informs your outlook for core NNA over the course of the year, ex the noise related to Comerica, but also the interplay with the distribution expense, which surprised positively and declined about 100 bps year on year. Walter Berman: We have been fairly stable on that rate, as you saw. We will continue to compete where appropriate and move up within our tolerances. You should see that number pretty much stay in that range as we go through the year. We will participate where appropriate, including compensation. It is pretty much going to be in that range. Steven Chubak: Thank you. And then on the interplay around M&A expectations? Walter Berman: As I said, on the NNA, the core is there. Comerica will play through that. Recruitment should marginally affect it going up, but it should be aligned with our objective set as it relates to NNA and that correlation to that rate. Jim Cracchiolo: The bulk of our activity is organic, so it should be pretty stable. Steven Chubak: Got it. And for my follow-up on Signature Wealth, you highlighted strong momentum. Could you provide some KPIs—the level of penetration across the platform, the pace of adoption, attachment rate—and how we should think about the incremental fee opportunity as adoption builds? Jim Cracchiolo: We initially launched in the second half of last year, and with rollout and getting advisers initially engaged, it is starting to really take hold. Any new platform takes time. Advisers who activate it like it and are moving more assets in. A lot of the money going in includes new money. Some comes from other platforms, but repositioning takes time. We are adding capabilities like SMAs. My team says that versus previous wrap launches, this is one of the quickest, and it is progressing nicely against expectations. As we get further along, we will provide more information. Steven Chubak: That is helpful. Thanks so much for taking my questions. Operator: Your next question comes from the line of Thomas George Gallagher of Evercore ISI. Your line is open. Thomas George Gallagher: Hi. First question is on the competition and how you are approaching it. If there are irrational deals being offered in the market and you are holding the line, what is the scale of this activity? Is it limited enough where you are not that worried, or is there a risk that this becomes bigger and could meaningfully impact the size of your adviser base? How broad is this right now, and is it still limited enough that you think you can achieve your objectives, or is it something you will have to react to more forcefully? Jim Cracchiolo: You could have an RIA where a team thinks that is where they want to move based on what they are being offered. You get a few of those. Then you have competitors offering big checks and promising what they have. When we bring in advisers from some of those platforms, they look at our technology and capability compared to what they had, and it is night and day. What people sell as a story with a big check sounds wonderful, but that is what will occur. We talk to our advisers, explain the reality, and most of them stay. People dangle big checks; some jump, some listen. It is not large in scale. Our net recruiting, less what we lost last year, was still very positive. This happens in cycles; aggressive packages can blow up later. Some are getting credit for top-line growth, but whether it pays back in a number of years, I do not know. We focus on core profitability, not just cash earnings that the market might overvalue. Walter Berman: Looking at client growth in client assets—very strong—based on organic growth. When you evaluate growth coming from new assets via aggressive packages and you look at the differential on payback, you almost have to be twice as much to get marginally close to what we are doing organically. The impact factor must be considered given our size and the growth and profitability we have from organic. Turnover in the industry shows when someone leaves for a big check, they most likely leave again. If they leave for a better environment, culture, support that they and their clients relate to, they usually stay. Thomas George Gallagher: That is helpful perspective, Jim. Level-setting this: if I exclude the Comerica attrition in the quarter, are the advisers that left outside of that under 100? Can you dimension that? Jim Cracchiolo: There were not a lot of advisers. There were some adviser practices that left, and with that, you get a couple of billion dollars of flows—just like when we brought people in in the fourth quarter, you get a couple billion the other way. It was not a large movement of advisers; that is why Walter said it is lumpy. What you should be looking at is our growth of total asset base and total revenue base, and that translated to very strong bottom line—consistent with that. That is what I would pay for if I am investing. If I have a lot of top-line growth but it is not translating after expenses, amortization, financing, etc., that is different. Thomas George Gallagher: Got it. And then for my quick follow-up, how should I compare the Huntington deal with a normal 10- to 20-person adviser practice that you would hire and the type of package you give them? Is it comparable? I assume with more scale, you can offer better terms to Huntington. How would you compare the IRR on that deal versus a normal smaller deal? Walter Berman: It is a 10-year deal—a growing deal with a strong adviser base. The paybacks are within our ranges and make sense for both of us. This is a large transaction that will stay with us and grow with us, with stability. You cannot compare it to a one-off. The IRRs are very good and appropriate, with strong stability and growth potential. Operator: Your next question comes from the line of Kenneth Lee of RBC Capital. Your line is open. Kenneth Lee: Hey, good evening. Thanks for taking my question. One follow-up on the Huntington deal: just for completeness, fair to say that the $28 billion in AUM is going to materialize in either client inflows or wrap inflows after the fourth quarter and throughout the next couple of quarters? Walter Berman: Most of that will occur in the fourth quarter. Kenneth Lee: Okay. Great. And one follow-up, if I may, in terms of the G&A expense, recognizing the back-office optimizations still ongoing within Asset Management. Any updated outlook around overall G&A expenses there? Walter Berman: In Asset Management, G&A should track in the range of neutral to a small negative. We are getting momentum, and as I mentioned, we have the back office coming through. So it is in that range. Kenneth Lee: Got it. Very helpful. Operator: Next question comes from the line of Alexander Blostein of Goldman Sachs. Your line is open. Alexander Blostein: Hey, good afternoon. This is Anthony on for Alex. To follow up on the recruiting discussion, what channels are you seeing the most aggressive recruiting packages? I appreciate you holding the line there, but at what point would you need to revise your payout packages if the industry continues to trend in that direction? Walter Berman: You are seeing it in both the W-2 and the franchise channels—both have gotten extremely aggressive on fronts and commitment levels. It is across the board. We gauge payback and the risk-return of it. We rely on organic growth. Any adjustments must make sense with payback across all factors, not just trying to get volume. Alexander Blostein: That is helpful. For my follow-up, certificate balances continue to trend downward. How are you thinking about the trajectory of balances from here? Walter Berman: That is strictly a spread play. We will probably see it stabilize and stay in this range or increase a little more—again, strictly spread depending on where rates are going. Operator: Thank you. We have no further questions at this time. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the RLI Corp. First Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for questions and answers. Before we get started, let me remind everyone that through the course of the teleconference, RLI Corp. management may make comments that reflect their intentions, beliefs, and expectations for the future. As always, these forward-looking statements are subject to certain factors which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the Annual Report on Form 10-K as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing first quarter results. During the call, RLI Corp. management may refer to operating earnings and earnings per share from operations which are non-GAAP measures of financial results. RLI Corp.'s operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses, and after-tax unrealized gains or losses on equity securities. Additionally, equity in earnings of unconsolidated investees and related taxes are excluded from operating earnings and operating EPS to present a consistent approach in excluding all unrealized changes in value from equity investments. RLI Corp.'s management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available at rlicorp.com. I will now turn the conference over to RLI Corp.'s President and Chief Executive Officer, Craig Kliethermes. Please go ahead. Craig Kliethermes: Good afternoon, everyone. We appreciate you being with us today. With me are Aaron Diefenthaler, our Chief Financial Officer, and Jennifer Klobnak, our Chief Operating Officer. I will begin by saying we feel good about how we started 2026 and the position we are in as we move through the year. For the quarter, we generated an 86% combined ratio, premiums grew 3% led by casualty, and net investment income increased 15%, continuing to be a meaningful contributor to overall results. Compared to a very strong first quarter last year, results were still excellent, but a bit more tempered, driven primarily by catastrophe activity, disciplined growth, and normal variability that comes with taking on insurance risk. Stepping back, the underlying business is performing well and consistent with our expectations. The insurance marketplace continues to be dynamic. We are seeing more competition in some areas from broker-owned facilities and MGAs that operate with incentives that are not always aligned with long-term underwriting profitability. In the most competitive spaces, we are picking our spots, finding rate adequacy on accounts where it is still available, focusing on producer relationships, and adding value to customers that want our expertise and service. We are seeing rate acceleration and market disruption in wheels-based products. There is opportunity here when done with discipline and vigilance. Our underwriting and claims expertise positions us to select the right accounts, achieve the rate we need, and drive better claim outcomes over time. Adding to the general market disruption is the emergence and rapid adoption of artificial intelligence, along with the regulatory uncertainty that comes with it. We are encouraged by what we are seeing with AI, not as a headline, but as a tool. It is helping us put better data in the hands of decision makers, making us more responsive, more efficient, and easier to do business with, while keeping human intelligence and judgment at the core of everything we do. Market dislocation creates opportunities for those with the confidence and financial strength to act. We have both. Our efforts will continue to be grounded in the same timeless core values that have guided RLI Corp. for over sixty years: community, customer focus, and continuous improvement. We like the position we are in, we are seeing opportunities in the right places, and we believe we are well positioned to continue delivering consistent, profitable results over time. With that, I will turn it over to Aaron to walk through the financials in more detail. Aaron Diefenthaler: Thanks, Craig, and good afternoon, everyone. Last evening, our first quarter release reflected an increase in gross premiums of 3% with strong contributions from our casualty segment. Operating earnings were $0.83 per share compared to $0.89 last year and were supported by solid underwriting performance and a 15% increase in investment income. As a reminder, in 2025, we began to exclude earnings of unconsolidated investees from our definition of operating earnings. All comparables in our release reflect that change. Underwriting income was $58 million in the quarter, benefiting from $35.5 million of favorable prior-year reserve development, offset by $16 million of catastrophes and a higher underlying combined ratio. On a GAAP basis, first quarter net earnings totaled $0.60 per share, compared to $0.68 in the year-ago period. As was true in 2025, the largest driver of the differential from operating earnings was the negative return in our equity portfolio and the associated $39 million of unrealized losses. At the segment level, casualty growth totaled 10% for the quarter, with significant contributions from personal umbrella and commercial transportation, both of which continue to benefit from rate increases. In terms of the underwriting results, casualty posted a 97% combined ratio, outperforming 2025 by 2 points and inclusive of higher levels of favorable prior-year development at $14.5 million. Casualty reserve development was broad based, with executive products, general liability, professional services, and transportation contributing to the release. It should be noted that of the $16 million of catastrophe losses disclosed in the quarter, $2 million was attributed to packaged businesses in casualty. Property experienced a 9% decline in gross premium, largely due to rate decreases in E and S property, while marine and Hawaii homeowners again offered offsets. Contributing to the bottom line in property’s 62% combined ratio was $20.6 million of favorable prior-year reserve development on these shorter-tailed lines, offering a 16-point benefit to the segment loss ratio. Catastrophe events, including the recent storms in Hawaii, totaled $14 million for property, up a bit from events in Q1 2025. Surety’s top-line gross premium was down about 1% from last year, and the segment reported a 94% combined ratio, largely attributable to limited favorable prior-year development compared to a strong release last year. As a reminder, surety loss activity can be variable and can have a significant influence over shorter periods. Operating cash flow in Q1 totaled $43 million, down $60 million from last year, and was influenced by some tax credit purchase activity, bonuses paid, and higher paid losses. The tax credit purchase is notable, as it had a significant impact on the 18.5% effective tax rate in the quarter. Despite more modest cash flow, we still had reinvestment opportunities, with fixed income purchase yields averaging 4.8% in the portfolio, approximately 50 basis points above our book yield. Recent capital market volatility has moderated and we have primarily focused on putting money to work in investment-grade fixed income. Total return for the portfolio in the quarter totaled a negative 0.4%, with income partially offsetting price declines for both stocks and bonds. Turning to the liability side of the balance sheet, we found an opportunity in late February to access the capital markets and raised $300 million of long-term debt. With our history of consistent financial results, we believe RLI Corp. has a terrific credit story. This issuance carries a coupon of 5.38% and a ten-year maturity, and returns our leverage profile to our historic average. Alongside the long-term debt, we repaid and resized our revolving credit facility with PNC Bank. That backstopped liquidity in our line of credit is now $150 million in size and replaced the prior transaction. Looking at overall results, when we isolate comprehensive earnings of $0.32 per share and adjust for dividends, book value per share increased 2% from year-end 2025. Finally, I will mention the recent rating action from AM Best, which upgraded the RLI Corp. group of companies to A++. This puts RLI Corp. in a distinguished category of high-quality P&C companies that have similar financial strength. We view the action from AM Best as a recognition of our long track record of underwriting results. All in, we are very pleased with the start to the year. And with that, I will turn the call over to Jennifer for more details. Jennifer Klobnak: Thank you, Aaron. We are pleased to report another quarter of underwriting profit, and we were able to achieve some growth even as market conditions have become more challenging in many of our businesses. Casualty segment premium increased by 10% and rates were also up 10% for the quarter. Personal umbrella led the way with 23% premium growth. Rate increase for the quarter was 16%, and we expect increases to continue as recent rate approvals earn into the book. Our investments in data and analytics are paying off in that we can make local, targeted improvements to the book over time. Our new business growth has shifted from more hazardous states like California, Florida, and New York to less litigious states like those in the Midwest, as we have increased rates, selectively reduced commissions, and worked with our producers to proactively manage growth over the last few years. We expect growth to persist as the new business pipeline remains strong and as we continue to ensure adequate rates are earned throughout the book. Transportation premium grew by 27%, with auto liability rate increases on renewals up 15%. In addition to rate, the growth was driven by several new business opportunities with insureds who invest in superior risk management and where we can achieve adequate return. Submissions were up 15% as competitors in some classes within the book are pulling back. New claim counts were down 14% compared to 2025. We believe our investments in loss control and claim service are valued by our customers and will have a positive impact on their bottom line and ours. E and S casualty premium was down 4%, with a slow start to binding business this year due to concerns with the economy, supply chain, interest rates, and inflation impacting investment decisions in the construction industry. Despite this, new business submissions are up 14% as continuous in-person marketing is keeping us on our producers' radar. Calls are up as well, reflecting a solid pipeline of construction projects. As expected, there can be significant delays between the time we release a quote and when that business is bound. We believe construction activity will rebound as economic conditions stabilize, and we are well positioned to respond. Recognizing ongoing severity in the commercial auto liability coverage, our appetite is more limited for auto on excess liability business. This appears to be a more conservative stance than our competition, but we believe it is a disciplined approach to underwriting in this environment. The theme with our package businesses is that the growth is being driven primarily by rates. Both premium and rates are up 5% to 6%, with higher increases related to the auto exposure. This business focuses on architects, engineers, and contractors and rounds out our diversified construction industry portfolio. In surety, premium was down 1% in a very competitive market. Single-digit growth in contract and transactional was offset by a small decline in commercial surety. Within contract surety, growth is occurring at the top end of the market, driven by large infrastructure projects, including data centers. Our focus, however, is on small to mid-sized contractors who work on smaller projects, or subcontractors working on those large projects. While bid activity is increasing in our space, we are not yet seeing that translate into meaningful growth. Our bottom line was impacted by one large contract surety loss arising from a prior-period claim. This was an isolated incident and is not indicative of a change in risk or approach for the broader book. In commercial surety, our renewable energy portfolio portion is maturing with fewer new business opportunities due to slowing investments in that industry. Across our surety division, we are well positioned with local expertise, continued producer engagement, and new transactional surety system functionality that provides full lifecycle capabilities to our producers. Our opportunity pipeline is healthy; we are focused on execution. The property segment's premium was down 9% as the business mix shifted from catastrophe to non-catastrophe premium. The top line reflects the continued competitive environment; our underwriters are still finding profitable opportunities. We had an excellent start to the year, producing a 62% combined ratio despite increased catastrophe activity in parts of our book. E and S property premium declined 16% in the quarter as market capacity remains plentiful. Consistent with market commentary, rate change on renewal business was down 19% for hurricane and 16% for earthquake. While new business submissions are up, winning business has become more challenging. We are seeing increased competition from the admitted space, where programs have been created for certain classes like hotels and restaurants. These programs were available before the last hard market with similar terms and conditions. We will remain disciplined and patient and wait for those opportunities to come back to the E and S market over time. While we are giving back some rate, the accounts we bind are priced above our technical benchmark pricing, meaning we believe we are achieving adequate returns on the business. We also saw some benefit from reduced reinsurance costs and experienced manageable spring storm losses, resulting in a material contribution to the bottom line from this division. Marine had their largest premium quarter since inception with almost $47 million of premium, an increase of 4% from 2025. Submissions and quotes continue to increase, particularly for our inland marine business. Loss activity came in as expected, and we again benefited from favorable reserve releases, which allowed marine to contribute meaningfully to our bottom line. Hawaii homeowners premium and rates each grew 12% in the quarter. Our service-oriented teams continue to identify growth opportunities on the island. We responded to several Kona storm events, which were a combination of high winds and excessive rain, deploying our local claim examiners to visit impacted insureds and address their needs. While these events affected our bottom line results in the quarter, past experience shows that this timely in-person response drives stronger relationships and results in increased opportunities over the long term. Overall, our insurance portfolio is very healthy. We achieved modest growth driven primarily by rates, and we realized another quarter of underwriting profit. We continue to make investments that we believe will drive long-term profitable growth. On that note, we are always looking for talented underwriters and claim professionals who are ace players and are interested in contributing to a true underwriting company where they can be creative, make long-term bottom-line decisions, and collaboratively improve our products for our insureds and our relationships with our producer partners. They own their results with their compensation and shared rewards based on their decisions, and they will become RLI Corp. associate owners who benefit from our diversified product portfolio that has produced solid, stable results over time. Adding to our team is one way that should help us continue to achieve profitable growth over the long term. We are encouraged by our positive start to 2026 and remain optimistic about the year ahead, knowing that our team is capable of navigating this evolving market. We will now open the call for questions. Operator: Question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press 1 on your telephone. If you wish to withdraw your question, your question will be taken in the order that it is received, and your line will remain open for follow-ups. Please stand by for your first question. Our first question comes from Michael Phillips from Oppenheimer & Co. Michael, please go ahead. Michael Phillips: Thanks. Good afternoon, everybody. Curious how you would classify in your GL book the overall competitive environment this quarter versus recent previous quarters? Jennifer Klobnak: I would say for GL, we have personnel around the country that are working with our wholesale partners, and it does vary by region a bit. We have noticed, because the construction industry is a bit paused in the Northeast where we have a fairly sizable book, I think the political environment there caused people to pause on investing for a period of time. We also had quite a bit of weather in the first quarter, and so I think the start of construction projects is paused. We write a lot of our policies on a project basis, so it is very specific to when that project kicks off. With the weather improving, we are hoping that we will see more business bind as those projects do get kicked off as we are into the spring. On the West Coast, it has been a healthy spring. We have ramped up a bit our focus on project policies, as opposed to a practice policy where we cover that contractor for the whole year with whatever they are doing, and more contractors seem to be buying coverage in that manner. So we have seen some success in that region. Our GL pipeline is full. We have more quotes out there; we did have more quotes for the first quarter than we did last first quarter. It is just a matter of that business binding, and some of those quotes can remain outstanding for six to twelve months. Our wholesalers will keep us up to date on the status and then we wait. Sometimes we have to revise those quotes when the time comes, but at other times we are comfortable with those terms and go forward. So it was a bit slow. We heard from our wholesale producers that they were a good slow in the quarter as well. We feel like we are not an outlier there, but we are hoping that the construction industry does pick up a bit going into the rest of the year. Michael Phillips: Okay, Jen, thank you. You mentioned in your earlier comments about your plans for more state diversification in your personal umbrella book. Any early impacts you have seen? You took a pretty big rate hike in California there. Early impacts of what is happening in California from that? Jennifer Klobnak: Yes. Our last rate hike in California was effective on December 1, and we did get a 20% rate increase there. We are still seeing some growth in California, but it is at a much smaller pace than it was before. Keep in mind, we have made a few different changes to how we approach that business in California. A couple of years ago, we increased our attachments so that our underlying attachment is at $500,000 versus previously $250,000. We have also selectively reduced commissions, and that has been a more recent change that is being digested by our producers now. That could potentially further impact that growth rate. However, the business seems to keep coming to us. We are not seeing a lot of back activity by either primary carriers or other competitors that is too successful in that space. So it seems that the opportunity continues; we just want to bind that business on our terms and make sure that we are comfortable that the terms we are providing are going to equate to an underwriting profit for the book of business. Michael Phillips: Okay. Thank you, Jen. And then just lastly, you have talked for the last couple quarters about the transportation claim count information coming down. To play devil’s advocate, is there anything that would cause more of a delay in the claim reporting and maybe pick up later, or is that truly a reduction in ultimate counts that you think could happen? Jennifer Klobnak: I am going to guess here because I do not know exactly, but I am going to guess that they are down for a good reason. Part of that is that our policy count has reduced a bit, particularly in places like public auto where you have a bus and you might have multiple claimants impacted. With a smaller policy count, and continued investment in loss control activities where we are monitoring those insureds and really trying to engage with folks who appreciate risk management—whether it is the telematics and the cameras, and then also training their drivers and reacting to what they are seeing in terms of their driver behavior—I would say that probably is translating to reduced claim count. I think that is a legitimate data point, but obviously we continue to watch that over time. We cannot control when an accident happens; we are going to respond to it when it does. So my answer is: cautiously, I believe that is a real trend. Michael Phillips: Okay. Wonderful. Thanks so much for your time. Thank you. Operator: Our next question comes from the line of Mark Hughes with Truist. Mark, please go ahead. Mark Hughes: Thank you. I wonder if you could talk a little bit about the property business. You were still down this quarter, a little bit less than last quarter, though. Is the market still adjusting, which is to say pricing continues to decline sequentially? Is it at a point where maybe it might stabilize in the second half? How do you see that kind of near-term trajectory? Jennifer Klobnak: It is a good question. We are in the market every day, hoping that it becomes more stable, but at this point we are not seeing signs of that yet. Competition remains very active in that space. As you saw, our rate decreases continued a bit. We individually underwrite that business, so for every account we are looking at how we can win the account. We look at the individual risk characteristics. It appears that some of our competition probably has more global mandates on how they approach accounts. As an example, we might find an account where we think that the valuation is not up to date, and we are going to want to put coinsurance on that account to make sure that when the loss happens, that valuation is reflected in the results of how that claim is handled. Some folks appear to be waiving those types of terms across the board, and that is where it gets difficult to win that business. By individually underwriting it, we can decide where it makes sense to waive certain coverages or exclusions and where it makes sense to be a little more aggressive and win that business. We try to protect our renewal book. We are increasing limits that we are willing to offer a bit. We are not a big line player; we probably offer between $10 million and $20 million of limit for the most part. We can selectively go above that, but that is our sweet spot. Others do have more limit, but I will tell you some of the brokers have determined that it is in their best interest to have multiple carriers on an account. In some cases, while we might want the whole account limit, they are trying to share that so that when the next hard market comes, they have a variety of carriers to choose from. For us, again, it comes down to each account and trying to battle it out to win that business if it is a good account. We are, on the edges, moving some business to the admitted market, as I mentioned. Some of that—what we call E and S light business—where it is in the market for E and S only because it is located in Florida, for example, is coming back to the admitted space. We recognize there could be an event; there is likely to be an event this year, and some of that business then will flow back into our space. We have been doing this a long time. We are not excited about being patient about the market improving, but we can be patient. That is what we do, and that is what we will continue to do. Mark Hughes: Understood. On the surety—and I am sorry if you did touch on this before—reserve development, the favorable development in Q1, definitely still on the positive side of the ledger, but not quite as much as you had seen in the first quarter in prior years. Was there anything that you saw that drove that—any particular claim or two—or what was the driver behind that? Aaron Diefenthaler: Both in my commentary and Jennifer’s, we referenced the fact that results in surety can be variable around a small number of losses. As Jennifer mentioned, one particular loss on the contract side was in prior years, so that was a headwind to the results we saw there. If you look back at last year’s release, it was a very robust prior-year release in last year’s Q1, so there is a comparable issue going on, and there is some loss activity as well weighing on this year’s outcome. Mark Hughes: Understood. Thank you. Then just one clarification: I think you were talking about what you heard from the wholesalers being a bit slower in the quarter. Was that on the construction GL part of the business, or did I mishear that? Jennifer Klobnak: Yes, that was specifically for our construction-related GL business through the wholesalers. Mark Hughes: Okay. Thank you very much. Aaron Diefenthaler: Thank you. Operator: Our next call comes from the line of Andrew Anderson with Jefferies. Andrew, please go ahead. Andrew Anderson: Hey, good afternoon. Looking at the casualty ex-cat, ex-PYD loss ratio and taking into account the $2 million of cat that you had mentioned, it seems like the casualty underlying loss ratio was up slightly. Would you characterize that as just business mix, or was there any change in loss trend assumption? Aaron Diefenthaler: Absolutely business mix more than anything else, Andrew. If you think about where we are growing, there is a mix influence. Andrew Anderson: Okay. And transportation growth was quite strong. Jennifer, I know you talked about it a bit, but despite a cautious industry backdrop, how are you balancing exposure unit growth here with still severity concerns, recognizing you did get quite a bit of rate as well? Jennifer Klobnak: It comes down to risk selection. Our transportation team is part of a very strong feedback loop with both claim and the data that supports what is going on in their business. They are committed to getting rate above trend for the year, and you can see they are demonstrating that they are doing it, but they are also being very selective on risk. They tend to be picky regardless, but I think they are probably even more focused on that this year. They are finding some accounts that have good risk management where we can get the rate we need. In this business, you have a little bit more transparency because people tend to have loss activity. You can see actual loss history for accounts, and you can evaluate what their safety practices are and what the cost of those would be going forward so you can loss-rate these accounts, which is helpful. We are winning a few pieces of business with a few folks pulling back in places, and some producers are finding us helpful and are looking for more business that we can help them with. We get a lot of submissions in; we still decline 90% of the submissions that we receive, so you can see we are still being selective. We are considering that severity is up, looking at rate being adequate, but then it all comes down to that risk selection and picking the right accounts. There is nothing magical about it. It is about due diligence, doing your underwriting, asking a lot of questions, and not broad-brushing it. That is our approach, and hopefully, it will work out for the year. Operator: Thank you. Our next call comes from the line of Gregory Peters with Raymond James. Mitchell Rubin: Hey, good afternoon. This is Mitch Rubin on for Greg. In surety, with the large contract loss in the quarter, should we expect any further development on that claim in coming quarters, or is the impact largely contained in this quarter? Thanks. Jennifer Klobnak: I would say that we reserved for basically the worst-case scenario on that claim, so I would not expect adverse development on that claim. I would also reiterate that that is a single claim. We do not see a systemic issue in the book. It was just one individual circumstance for a particular contractor. Mitchell Rubin: Got it. Thank you for the answer there. And as a follow-up, some peers have pointed to recent softening in financial lines. Are you seeing similar pressure in your executive products or professional services books? Jennifer Klobnak: The executive products group that focuses on directors and officers and other fiduciary and management liability coverages has been in a soft market for a couple of years now. I would say that market is actually stabilizing. If you look at rates in that book, they were flat for the quarter, which in this case is a win. There has been a little bit of consolidation among carriers in that business. It would be nice if that translated into less capacity and maybe a more stable and even hardening market, but that has not happened yet. There are just a few folks that are buying each other out and it has not impacted capacity. In the professional lines space, where we write errors and omissions coverage, I would say that continues to be a very competitive environment, but we are winning business. We did see some growth in that space and a little bit of rate. Again, individual underwriting and long-term relationships with these producers—we have been doing that business almost twenty years. It is a stable marketplace, and we try to get a few more new accounts each year. That is the trend we have been on for several years now. Aaron Diefenthaler: Thank you. Operator: If there are no further questions, I will now turn the conference over to Mr. Craig Kliethermes for some closing remarks. Craig Kliethermes: Well, thanks, Aaron and Jennifer, and thank you all for your questions. Before we wrap up, I want to leave you with a few thoughts on how we are thinking about the business going forward. The current environment presents both opportunity and temptation. There are always ways to grow if you are willing to stretch. We also know that not all growth is created equal. Our focus remains on underwriting discipline, understanding the risk, pricing it appropriately, seizing market opportunities, and having a willingness to step back if conditions do not support our expectations for risk-adjusted returns. That approach has stood the test of time. It is how we deliver consistent results through the peaks and troughs of the market cycles. We do not expect it to get easier. As Kara Lawson, Duke’s women’s basketball coach, said, it never gets easier. You just have to handle hard better. That is part of the job. The challenges are what prepare you for success. As we look ahead, we are optimistic not because the environment is easy, but because we know how to operate in environments like this. Our ownership culture makes us different, and we are willing to do the hard work. We are staying true to the vision that has guided this company—building a strong community, helping our producers and customers solve real problems, and taking responsibility for continuously improving and making RLI Corp. better every day. We are proud of what we have built, but we are even more focused on what comes next. We like our position, trust our process, and we are confident in our ability to deliver differentiated performance over time. Thank you for your time and continued interest in RLI Corp. We look forward to speaking with you again next quarter. Operator: It looks like we had a couple of folks queue up while you were offering those final remarks, Craig, so we will afford a couple more opportunities to ask questions. Apologies for the back and forth. Our next question comes from the line of Hristian Getsov from Wells Fargo. Hristian, please go ahead. Hristian Getsov: Hey, good afternoon. Thank you for fitting me in. I just had a question on the net retention in property that ticked up 5 points. I wanted to confirm that the uptick was purely reflective of lower reinsurance costs. And as we get to the midyear renewals, are you thinking about any changes from a reinsurance strategy standpoint, given the lower cost? Jennifer Klobnak: That is correct that the savings from reinsurance cost is why we retained more of our premium for the property business in the first quarter. For midyear renewals, what we have coming up is mainly on our D&O and errors and omissions coverages—those specialized coverages I just spoke about—as well as a little bit of an earthquake cover that we have. Most of our reinsurance costs are renewed on 1/1—about 60% or so. We have just completed our surety renewal, and we have marine coming up. I do not anticipate any huge changes in reinsurance the rest of the year. I think the reinsurance market is a bit soft, so it is definitely a buyer’s market, but I am not going to predict anything material in terms of change for those renewals. Hristian Getsov: Got it. Thank you. And then I had a question: given the private credit concerns we have seen in the market, a lot of the MGAs out there are PE-backed or backed by other forms of alternative capital. Have you seen any alternative capital injections in the space start to moderate, or do you think that will not really turn the market until we get a large cat event? Aaron Diefenthaler: I do not know that it has necessarily moderated as a form of capital to the MGA space, but I will say that there are MGAs that have been backed by private capital in which that private capital is coming to the end of the life of its particular fund that the MGA sits in. There have been a few more opportunities showing up with MGAs that would like to exit and move on to new ownership. That is the influence that we see. Hristian Getsov: Got it. And if I could sneak one more: for the increased admitted competition that you flagged, is that dynamic mainly on the property side, or are there any other lines, particularly in casualty, where you are also seeing an increased level of activity? Jennifer Klobnak: We are seeing it a little bit on the casualty side—not to the extent of property—but we do see with some of our contractors, where we are being a little pickier on the auto coverage, that some standard markets say, “We like the GL,” and so they will cover the auto as well. We might lose it for that reason. I would not call that a material impact on our book, but we are seeing that on the edges. Hristian Getsov: Great. Thank you. Operator: Our next call comes from the line of Meyer Shields from Keefe, Bruyette & Woods. Meyer, please go ahead. Meyer Shields: Thanks so much, and thanks for fitting me in. Aaron, is there anything quantifying the large surety loss so we can get a sense of what the underlying results are like in that segment? Aaron Diefenthaler: If you look at our retention around surety today, that retention is $5 million in terms of reinsurance picking up any additional loss, and that is where Jennifer put her comment in around any further development being somewhat contained. Meyer Shields: Okay, that is helpful. Second question—and I am not sure that this is a legitimate one—but we have seen property premiums declining for a few quarters. The underlying operating or underwriting expenses are still going up. I understand that underwriters are going to be retained, but are there any opportunities worth pursuing so that, assuming that premium volume in that segment keeps falling, you do not have a consistent upward headwind of underwriting expenses? Jennifer Klobnak: We are always looking for opportunities, and I would say our E and S property underwriters are out in the market. We have had a number of events and one-on-one meetings with producers to look for other ways to participate in that marketplace, and there are some. We are hitting on some of those. It is not enough to offset some of our main business, but it is there. I will say we are also looking more broadly. Obviously, marine is growing and Hawaii homeowners as well, to help round out our property exposure because we do think property is still well priced in general. So we will use the tools within the business unit, but also outside of the business unit, to make sure that we are seeing enough business and trying to offset some of that decline. Meyer Shields: Okay. Perfect. Thank you so much. Operator: Ladies and gentlemen, if you wish to access the replay for this call, you may do so on the RLI Corp. homepage at rlicorp.com. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
Operator: Hello, and welcome to Banc of California, Inc.'s First Quarter 2026 Earnings Conference Call. I will now turn it over to Ann Park DeVries, Head of Investor Relations at Banc of California, Inc. Please go ahead. Ann Park DeVries: Good morning, and thank you for joining Banc of California, Inc.'s first quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information are available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone that today's call will include forward-looking statements, including statements about our targets, goals, strategies, and outlook for 2026 and beyond. These statements are subject to risks, uncertainties, and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation as well as the Risk Factors section of our most recent 10-Ks. Joining me on today's call are Jared M. Wolff, Chairman and Chief Executive Officer, and Joseph Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would now like to turn the conference call over to Jared. Jared M. Wolff: Thanks, Ann. Good morning, everybody. We are pleased to report another strong quarter for Banc of California, Inc. with year-over-year earnings growth, net interest margin expansion, and continued positive operating leverage. First quarter earnings per share grew 50% from a year ago to $0.39, driven by continued net interest margin expansion and positive operating leverage. Pretax, pre-provision income increased 28% while our adjusted efficiency ratio improved by nearly 500 basis points year over year. More importantly, the quarter reinforced our confidence in the earnings trajectory ahead. We continue to see durable momentum across the core drivers of the franchise, including margin expansion, deposit mix improvement, disciplined expense management, and embedded balance sheet remixing that should support profitability and shareholder value for the coming quarters. Efficient use of capital remains an important priority for us. In the first quarter, we repurchased 1.7 million shares, extended our buyback program through March 2027, and increased our dividend from $0.10 per share to $0.12 per share. We also announced our plans to redeem $385 million of subordinated debt in May. These actions reflect both our confidence in the long-term value we are building and our commitment to deploying capital thoughtfully and opportunistically for the benefit of shareholders. Our core earnings engine continues to generate capital at a healthy pace. With a CET1 ratio of 10.18% at quarter end, our tangible book value per share increased 1.5% quarter over quarter to $17.77. Core deposit trends were constructive during the quarter with continued growth in average noninterest-bearing deposits of 4% annualized quarter over quarter and an improvement in deposit mix with NIB representing about 29% of total average deposits. We continue to steadily attract new business relationships and are also seeing noninterest-bearing deposit balances ramp up in previously opened accounts, with average balances per account up 2.5% from the prior quarter. That reflects the quality of the relationships our teams are bringing in and the strength of our relationship-based deposit strategy. Loan production and disbursements remained strong at $2.1 billion in the quarter, with healthy and broad-based activity across the portfolio. Strong production levels continue to drive the remixing of the balance sheet toward higher-rate loans from lower fixed-rate legacy CRE loans. This remixing has helped protect our overall loan yield and net interest margin despite a declining rate environment. We expect the margin benefit from remixing to continue as new production comes in at meaningfully higher rates than maturing loans, providing embedded earnings upside in the portfolio. New production in Q1 came in at a rate of 6.65%, while fixed-rate and hybrid loan repricings or maturities by year end have a weighted average coupon of 4.7%. We view that ongoing remixing as an important driver of future net interest income growth. This quarter, we continued to manage credit proactively—remaining quick to downgrade and slow to upgrade. This resulted in some credit migration during the quarter, which was concentrated in a few specific real estate credits and does not reflect a broad change in portfolio performance or underwriting standards. We believe this disciplined approach to managing credit is important because it allows us to address issues early, helps reduce the risk of larger surprises later, and should keep credit from becoming a more meaningful headwind as we continue to grow earnings. As in the past, we will migrate credit when appropriate to take proactive action. We expect the ratios to improve over several quarters; importantly, such migration will not disrupt our earnings trajectory. This quarter's delinquency and special mention inflows were primarily driven by a limited number of credits with defined resolution paths. Special mention inflows and delinquency inflows were driven primarily by LIHTC, or low-income housing tax credit, loans tied to a longstanding customer where we have had a relationship for more than 20 years with no historical losses. The loans have low loan-to-values, personal guarantees in place, and strong collateral values, and we expect them to be made current before the end of the second quarter. Classified inflows were tied mainly to two multifamily loans in a single relationship to a longstanding customer of the company. These loans were restructured with credit enhancements and are not expected to result in any losses. Overall, we do not expect losses to appear with migrated loans based on our strong collateral and defined resolution paths. Net charge-offs were $13.8 million, or 23 basis points annualized, and were driven by two specific situations that had already been identified and actively managed. Net charge-offs also included a partial charge-off related to a hotel property that migrated to nonperforming status in 2025 and an office loan where the balance was adjusted to reflect an updated appraisal, while the loan remains current and performing. We do not view these items as indicative of a broader deterioration trend in any of our portfolios. Importantly, reserve levels remain solid. We increased reserves where appropriate in the areas that saw migration. Taken together, we do not expect this quarter's credit migration to disrupt our earnings trajectory. The balance sheet remains strong with healthy capital and liquidity positions. We are also encouraged by the constructive backdrop from proposed regulation around capital requirements, which, if finalized substantially as proposed, could provide $150 million to $160 million of additional CET1. That would create additional flexibility as we evaluate attractive capital deployment opportunities, including further optimizing our balance sheet to accelerate our earnings trajectory, supporting prudent balance sheet growth, and returning capital to our shareholders. $150 million to $160 million is a baseline projection; it could be higher under various scenarios. Overall, this was another strong quarter for Banc of California, Inc. We continue to build the company the right way with disciplined execution, a strong and resilient balance sheet, and a clear focus on sustainable growth and long-term shareholder value. Let me now turn it over to Joe for some additional financial details, and I will return afterwards. Joe? Joseph Kauder: Thank you, Jared. For the quarter, we reported net income of $62 million, or $0.39 per diluted share, which was up 50% from $0.26 per diluted share in the comparable prior-year period. Net interest income of $251.6 million increased 8% year over year and was relatively flat versus the prior quarter. The increase in net interest income from a year ago reflects materially improved funding costs, while the linked-quarter variance was mainly due to two fewer days in Q1 versus Q4. Q1 interest income from securities also increased due to the purchase of high-yielding securities and a $1.3 million special dividend on FHLB stock. Net interest margin expanded to 3.24%, up four basis points from Q4 and six basis points from a year ago, driven primarily by lower funding costs. Our spot NIM at March 31 was 3.22% after normalizing for the FHLB special dividend. We expect NIM to continue expanding through the remainder of the year supported by strong production, ongoing balance sheet remixing, and disciplined deposit pricing and mix. These tailwinds are evident in our portfolio today. As a result, we continue to expect average quarterly NIM expansion of three to four basis points, though the path may not be perfectly linear. As always, we do not assume any Fed rate cuts in our outlook. Average loan yield declined nine basis points to 5.74% versus the Q4 loan yield of 5.83% and was relatively flat to the December 31 spot yield of 5.75%. The Q1 loan yield reflects the full-quarter impact of two Fed rate cuts on the rates for new production and on our floating-rate loan portfolio, which represents 38% of total loans. Our spot loan yield at the end of Q1 remained stable at 5.75%. Total average loan balances increased 4% annualized. While Q1 loan production was strong, end-of-period loans declined modestly from the prior quarter mainly due to higher payoffs and paydowns, which were primarily in warehouse, fund finance, and other CRE. We continue to expect full-year loan growth in the mid-single digits, depending on broader economic conditions. Deposit trends remain solid, with average noninterest-bearing deposits continuing to grow in the quarter and average core deposits, excluding one-way ICS deposit sales, also increasing modestly. We use one-way ICS sales to move deposits off balance sheet and manage excess liquidity. In the first quarter, average balances swept off balance sheet through one-way ICS sales were $271 million. End-of-period deposits declined slightly from the fourth quarter due to lower brokered deposits and retail CD deposits. We continue to expect deposits to grow mid-single digits over the course of this year. Deposit costs declined 11 basis points to 1.78%, driven by the benefit of Q4 Fed rate cuts and the continued runoff of higher-cost deposits. We remain disciplined on pricing and achieved an interest-bearing deposit beta of 57% in the first quarter. Spot cost of deposits at March 31 was 1.78%. Our balance sheet remains positioned to perform well across rate environments and is largely neutral to changes in rates from a net interest income perspective. Sitting at neutral, we have the flexibility to manage our balance sheet to optimize results in any interest rate environment. For example, in a rising rate environment, we would expect to manage deposit betas to be more measured than in a down-rate cycle, and the interest-rate impact would be outpaced by the impact on interest income of the contractual repricing of our variable-rate loans. At the same time, we expect ongoing balance sheet remixing to continue to support net interest income expansion across rate environments. Fixed-rate and hybrid loan repricings or maturities by year end have a weighted average coupon of 4.7%, well below current production rates. Approximately $3.2 billion of multifamily loans are expected to mature or reprice over the next two and a half years. That embedded repricing opportunity remains an important earnings tailwind. Noninterest income was $35.3 million, which was relatively flat quarter over quarter when excluding the $6 million lease residual gain in the fourth quarter. Noninterest expense of $181.4 million was relatively flat from the prior quarter and down 1% from a year ago. Compensation expense increased linked quarter due to seasonality, which includes Q1 resets for payroll taxes and benefits. Customer-related expenses declined $1.1 million quarter over quarter due to the impact from Q4 rate cuts on ECR cost. The broader expense base remains well controlled, and we continue to target positive operating leverage through revenue growth, margin expansion, and disciplined expense management. Turning to credit, reserve levels remain solid, with the ACL ratio stable at 1.12% and the economic coverage ratio at 1.6%. Provision expense of $9.8 million reflects the Q1 migration and impact of other credit activity. While the Moody’s updated economic forecast, which included a significant improvement in the CRE price index, would have supported a reserve release, we continue to maintain a more conservative outlook for purposes of our methodology and increased the weighting of adverse scenarios, offsetting that benefit. We continue to believe overall loan reserve levels are appropriate, particularly given the continued shift in growth towards historically lower-loss categories, which now represent 34% of loans held for investment. We are pleased with the strong start to the year and the progress we are making in building the company's earnings power. As we look ahead to the rest of 2026, we are reaffirming our guidance for pretax, pre-provision income growth of 20% to 25% and noninterest expense growth of 3% to 3.5%. Our net drivers of earnings growth remain firmly in place, including continued loan portfolio remixing, disciplined expense management, healthy client activity, and further benefits from deposit repricing and mix. Taken together, those levers give us good visibility into continued earnings growth through the balance of the year. And with that, I will turn the call back over to Jared. Jared M. Wolff: Thank you, Joe. This was another strong quarter for Banc of California, Inc., with continued progress in key areas—positive operating leverage, growth in our core earnings drivers, strong balance sheet fundamentals, disciplined expense and credit management, and, of course, thoughtful capital deployment. The consistency of our results reflects the quality of the franchise we have built and the discipline with which our teams continue to execute. As we look ahead, we remain mindful of the uncertainty created by the conflict in the Middle East and the potential for second-order effects on growth, inflation, and client activity. That said, what we are seeing today across our business lines is very positive, with strong pipelines, a resilient client base, and a healthy balance sheet. Our teams continue to win relationships in all areas of our business. We remain very optimistic with strong pipelines. Importantly, our outlook is supported primarily by company-specific levers already in motion, rather than by the need for a more favorable macro environment. We remain confident in the path ahead as our drivers of earnings growth are tangible, diversified, and already underway. We have a valuable deposit franchise, attractive business segments, strong pipelines, and a healthy balance sheet. We also have meaningful embedded earnings opportunities over time, including, as Joe mentioned, the runoff of approximately $8 billion of lower-yielding assets, the redemption of expensive capital, including our preferred stock, and the opportunity to further optimize the balance sheet as the regulatory backdrop improves. These levers provide additional flexibility to accelerate earnings growth and compound shareholder value. We are also making strong progress in deploying AI tools broadly across the company, with nearly universal employee access, a robust Copilot active user rate, broad developer adoption, and more than 80% of our developers using AI in their daily workflows. We see AI as a practical enabler of productivity, operating leverage, risk management, and scalable growth, and we are already seeing early signs of efficiency gains across code development, reporting, compliance support, and workflow automation. We also have a number of targeted use cases underway, including BSA review support and customer service applications. Over time, we expect these efforts to contribute to a more efficient operating model and improved client service. Our focus remains the same: to continue growing high-quality, consistent, and sustainable earnings by serving clients well, adding strong new relationships, maintaining disciplined underwriting and expense management, and further optimizing the balance sheet to drive long-term shareholder value. We like the momentum in the business, we see multiple embedded levers for future earnings growth, and we believe Banc of California, Inc. is well positioned for continued progress in 2026 and beyond. I want to thank our employees for everything they are doing to move the company forward. Their execution, commitment, and focus continue to set us apart in all of our markets. With that, operator, let us open up the line for questions. Operator: Thank you. We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question comes from David Cioverini with Jefferies. Please go ahead. David Cioverini: Hi. Thanks for taking the questions. Good morning. I wanted to start on credit quality. You touched on this a bit, but can you walk through what the plan is for working out the increases in special mention and nonperforming loans? You mentioned the two credits that were restructured with credit enhancements. Can you talk about what those enhancements were? Did these borrowers contribute more equity into their projects? Jared M. Wolff: Yes, they contributed more equity in both cases in those loans that were downgraded. They brought more equity. What we want to see is more time; we want to see them work according to plan. We have every expectation that they will. But when we talk about being quick to downgrade and slow to upgrade, we do not immediately make a change to the rating just because they provided a credit enhancement. We want to see performance over time, and we expect that these projects will return to normalcy over time and be upgraded with improvement over several quarters. We also have visibility to other projects in those classifications that we expect to be upgraded. And so that is why, over time, we expect to see benefits not only from those projects but other projects in those categories. David Cioverini: Got it. Very helpful. And then shifting over to the net interest margin, it sounds like you have some good tailwinds in place, especially with the 6.65% production versus the 4.7% rolling off. The three to four basis points of quarterly expansion—how linear should that be? And remind us of the sensitivity to rate cuts to the extent we do get some rate cuts later this year? Jared M. Wolff: I will start, and I will let Joe jump in. We sit today relatively neutral, and we believe, as Joe mentioned, we have the ability to pivot depending on the rate environment. We have already seen that in a down-rate environment, our net interest margin expands. In an up-rate environment, we would expect deposit increases to trail and go much more slowly, and we benefit from rising rates in our floating-rate loan portfolio and new production. We would expect to benefit in a rising-rate environment as well, and we think that those benefits would more than offset any contribution that ECR would take in an up-rate environment. Joe, do you want to comment specifically on how linear our NIM should move? Joseph Kauder: In theory, it should be pretty linear through the year, picking up as the year goes on. As we grow our balance sheet and as we add more higher-yielding loans and continue to manage our funding costs, the NIM improvement and benefit will expand as the year goes on. What we do not have in there is accelerated accretion. We have this $8 billion of loans which we know are going to pay off or pay down at some point, and when that happens, we will get the accelerated accretion from the portion that was marked during the merger. David Cioverini: Thank you. Operator: The next question comes from Matthew Timothy Clark with Piper Sandler. Please go ahead. Matthew Timothy Clark: Hey, good morning. The expense run rate—relative to last year you are on pace to be flattish, and you maintained the 3% to 3.5% growth guide. What are the things coming online that would cause that run rate to grow from here this year? Joseph Kauder: As we look into the next couple of quarters, you will see a little bit of a continued increase in compensation expense as year-end inflation adjustments and those items kick in. They will be somewhat mitigated by the payroll taxes and other benefit adjustments rolling off, but they should step up just a little bit. We are also making some more investments in our platform, so you will see a little bit of an increase potentially in some professional fees and other things as we move forward in some of our really important projects to grow earnings and help the balance sheet. Jared M. Wolff: I would just add that we are going to continue to be disciplined. It is normal to expect those increases through the year. If we find ways to offset them, we will do that because we believe that we can keep finding efficiencies. The AI initiatives are real, and we are seeing some early signs and some early wins. We will not lose the opportunity to manage expenses as we always have. Matthew Timothy Clark: Okay. And then just on the ECR deposit balances—understand the sensitivity to rate—but with no rate cuts this year, assuming there are no rate cuts, is there any effort to try to remix away from those deposits or to try to incrementally push those costs down? Jared M. Wolff: We are looking for ways to improve our deposit costs across the board. The biggest and most important way to do that is to bring in noninterest-bearing deposits that have no expectation of yield and that rely on our services. We have a lot of efforts underway and continue to make progress there. I am really pleased with what our teams are doing. I see stories every day of clients coming to the bank and bringing more. For example, this morning we heard about a client that was acquired, and the company that acquired them decided to keep all of the deposits at our bank because we were providing better service, and they brought more deposits in. Another example: a customer that left after the merger to a large bank was not getting the service they expected and brought back $3 million of deposits. These stories are meaningful. So first, we can grow operating accounts, and our teams are doing a great job. Second, we are very proactive on deposit costs regardless of Fed moves. As it relates to ECR, those contracts generally come up annually, and when they come up, depending upon our deposit flexibility, we will negotiate to improve our positioning. That has been the case the last two years as our deposit positioning has improved, and we have been able to negotiate those accounts to our benefit. Matthew Timothy Clark: Okay. Great. Thank you. Jared M. Wolff: Thank you. Operator: The next question comes from David Pipkin Feaster with Raymond James. Please go ahead. David Pipkin Feaster: Hey. Good morning. Jared M. Wolff: Morning. David Pipkin Feaster: Jared, I wanted to follow up on your commentary on the capital side with the regulatory capital relief. What are your top priorities? Obviously, buybacks are extremely attractive, but are there other capital optimization opportunities that you are considering? Jared M. Wolff: We run a lot of different scenarios. Buybacks are a big part of it. Using it to redeem preferred is also in our plans; we would not need other funding sources if we did that. We will also look at our balance sheet for low-hanging fruit and suboptimally priced items and assess the earn-back. The $150 million to $160 million is a very conservative estimate of what we could achieve under these new rules. We are still doing the analysis, but a third party reviewed it and they think we will get more than that. I feel very good about that opportunity and the number of things we could do. David Pipkin Feaster: That is helpful. Switching gears to loan growth—you reiterated the loan growth guide. How do you get to your mid-single-digit pace of growth this year? Production was solid and diversified, but how do you think about production over the course of the year, and how do ongoing payoffs and paydowns play into expectations? Jared M. Wolff: We added a new chart in the deck—page 15—that shows production and disbursements as well as paydowns and payoffs, so people can see how heavy and broad-based production actually was and the average rate. One of the best things about that chart is it shows our weighted average rate on loans has stayed flat since the first quarter of last year despite a declining rate environment, which demonstrates that remixing our portfolio as deposit costs have dropped has resulted in our margin expansion and making more money on a flat balance sheet. We know that will continue. Whether or not we have net growth or just remixing from high production, we will continue to make more money. If we also grow the balance sheet, earnings will grow even faster than projected. Our budget hits our numbers without needing fast balance sheet growth, and if we grow faster, we will make even more money. We have line of sight into payoffs; they were elevated in the first quarter. Whether they remain elevated is hard to know, but right now, production looks set to outpace payoffs and paydowns for the foreseeable future. There are certain loan pools we can buy to improve the balance sheet if necessary. Overall, we still expect mid-single-digit loan growth. Even if net growth were lower than our estimates, we still hit our earnings targets based on our ability to remix the balance sheet. David Pipkin Feaster: That is helpful. Thanks. Jared M. Wolff: Thank you. Operator: The next question comes from Jared David Shaw with Barclays. Please go ahead. Jared David Shaw: Hey, everybody. Thanks. Sticking with production, numbers are relatively stable—what would have to happen to really see that grow? You have spoken about the strength of your economies and competitive disruption. What is keeping production from growing more? Jared M. Wolff: First quarter is generally a little bit lower. We were at $2.1 billion versus $2.2 billion last year; in the fourth quarter we were at $2.7 billion. Those are pretty good numbers on a loan portfolio that is about $24 billion—to do $8 billion of production annually on a $24 billion loan portfolio. Could we move faster? We probably could by asking certain business units to increase sizes or take larger positions, but we believe it is necessary to grow in balance. We look at deposit flows and our balance sheet overall. We are at a very comfortable loan-to-deposit ratio; we could move that up. I am not looking to grow as fast as we can; we are looking to do it in a sustainable, reliable way so earnings are repeatable—consistent, reliable, high-quality earnings. We could move faster, but it feels like we are at a good pace and moving a little faster than the economy around us. Jared David Shaw: On the $8 billion of identified target runoff—how long does that take to move through the system? Jared M. Wolff: We have $6 billion of multifamily loans that will reprice or mature; about half of those mature or reprice in the next two and a half years. We show this on page 16 of our deck. Less than one year is $1.7 billion, one to two years is $1.1 billion, and then a big chunk—$2.3 billion—is more than three years. We see $2.8 billion in the next one and a half to two years, and then about $1 billion in the next two to three years. That is how you get to $3.2 billion over two and a half years. Jared David Shaw: And on the deposit side, how have flows been early in the second quarter? Jared M. Wolff: We are up this quarter relative to last quarter at the same point in time. Inflows have been higher early this quarter versus last quarter. Last quarter, our averages were pretty up. Oftentimes in the first quarter, balances come down for taxes; we focus on averages because they move the balance sheet, and it was a really good quarter. So far, we are higher this quarter than last quarter at this point. Jared David Shaw: One more on the allowance—you talked about utilizing more of the adverse scenario to prevent reserve releases. With the loan book the way it is right now, is 96 basis points a good level to expect for the rest of the year, assuming no broader macro change? Joseph Kauder: Our ACL is 1.12% and our economic coverage ratio is about 1.6%. That feels very comfortable. That assumes we continue provisioning around this quarter’s level—$9 million to $9.5 million—and, depending on production, it could be $10 million to $11 million. It feels like the right level. Jared David Shaw: Great. Thank you. Jared M. Wolff: Thank you. Operator: The next question comes from Robert Andrew Terrell with Stephens. Please go ahead. Robert Andrew Terrell: Hey, good morning. Jared M. Wolff: Morning. Robert Andrew Terrell: On brokered time deposits, over the past year they are up about $500 million. As we think about mid-single-digit deposit growth this year, should we expect more brokered deposit additions to support that growth, or is there opportunity to remix the brokered position? Jared M. Wolff: We focus on overall deposit costs and keep brokered within a band. We will opportunistically use brokered, especially when we see paydowns in certain areas or big chunks of deposits running off, and we will selectively go into the brokered market when pricing is attractive relative to alternatives. We continue to move our cost of deposits down, so we do not mind selectively using brokered. Joseph Kauder: Brokered was 9.3% of total fundings this quarter compared to 9.7% in the fourth quarter—pretty flat year over year. Brokered also depends a bit on loan growth. If loan growth accelerates and we can put really good high-quality loans on the books, we need to keep balance with deposits, but we are not afraid to dip into brokered a bit to help put those loans on, knowing deposits will catch up. Jared M. Wolff: To that point, we saw loans coming in late and average balances moving down, so we grabbed some brokered to keep our loan-to-deposit ratio in balance. If we have excess, we will invest it. Our team is pretty good at balance sheet management, and we can let our loan-to-deposit ratio float up as well if we want. Robert Andrew Terrell: Understood. Do you have any term in the brokered deposit portfolio, or is it all shorter or floating rate? Joseph Kauder: We do a little bit of term, but it is largely within three to six months. All is less than a year, with a little that goes out to nine or twelve months. Robert Andrew Terrell: Okay. Great. Thanks for taking the questions. Joseph Kauder: Thank you. Operator: The next question comes from Christopher Edward McGratty with KBW. Please go ahead. Christopher Edward McGratty: Hey. Jared, on credit, you went through a similar set of portfolio downgrades last year where you ultimately worked things through. What is different or similar this year as you go through this process? Jared M. Wolff: It is pretty similar. These are some larger legacy relationships where we are trying to migrate them down to more manageable levels. Similar to last year, we migrated this, it did not get in the way of earnings, and we earned through it. Gradually, our ratios improved. Is this the last chunk? Probably—it is pretty close. You never say never because something else can pop up, but I feel pretty good about where we are, and it was time to move some things around. You have conversations with borrowers and say, “We do not want these relationships to be this large anymore,” and ask them to move faster—that was the case in a couple of loans. In other loans, they did not manage well; we watched them and held their feet to the fire. As we mentioned, we have personal guarantees and plenty of support. These LIHTC loans are very valuable, really good projects, and housing that is sorely needed with tax benefits. I am not worried about the outcome. Sometimes this is just the right thing to do. So, similar to last year, we expect the ratios to migrate better over several quarters. These are large relationships, and we set expectations a little more aggressively than perhaps in the past. Christopher Edward McGratty: While we are on credit, could you speak about the legacy Square 1 book from PacWest? Software is a big topic, but remind us of the makeup and how you are thinking about tech. Jared M. Wolff: Our venture ecosystem overall—outlined in our deck—includes more than just “tech.” Fund finance, which is capital call lines of credit to private equity and venture capital firms, is approximately $1.4 billion, and deposits are about the same. The rest of our venture and Square 1 ecosystem is about $950 million of loans, split evenly between tech and life sciences—call it roughly $475 million each. They have about $5 billion of deposits against that $950 million of loans. Of the ~$475 million in tech, we analyzed potential AI disruption—whether business models or funding could be negatively impacted. We ran this a couple of ways and identified a handful of loans with a little over $40 million of outstanding that we put on a high-risk watch list. We will keep monitoring, but we do not see material disruption to our portfolio today. It is important to remember that out of our $24 billion of loans, the tech group is about $450–$475 million, a small portion of which is attached to software that could be disrupted—against $5 billion of deposits between tech and life sciences. Christopher Edward McGratty: That is great color. Thank you. Jared M. Wolff: Thank you. Operator: The next question comes from Gary Peter Tenner with D.A. Davidson. Please go ahead. Gary Peter Tenner: Thanks. Good morning. A follow-up on NIM—Joe, you mentioned the pace of NIM expansion. Is that expansion pretty exclusively driven by the asset yield side, or is there any material contribution from further reduction of funding costs over the course of the year? Joseph Kauder: It is a combination of both. There is definitely benefit from loans continuing to grow and remix at higher rates. We also have deposit growth in conjunction with loan growth, and we really focus on bringing in noninterest-bearing deposits—there is little we can do that is more profitable than adding NIB. You saw the NIB percentage grow slightly this quarter, and we expect that to continue to grow this year. As our deposit mix shifts toward NIB and other lower-cost interest-bearing, we expect to pick up NIM from that as well as from loan growth. Jared M. Wolff: This quarter, we saw more contribution from the full-quarter benefit of deposit cost reduction from the Fed cuts in the fourth quarter, and the fact that our loan portfolio yield stayed flat in a declining rate environment is pretty powerful. In an up-rate environment, you would see more from loan yield; in a down-rate environment, more from deposits. Gary Peter Tenner: Thinking about a neutral environment for the rest of the year, is there more room on one side versus the other? Jared M. Wolff: In a neutral environment, a lot of it is probably loan-based because the loans we are putting on are at much higher rates than the loans coming off. That is a fair way to think about it. Gary Peter Tenner: Makes sense. Any updated thoughts you could share on the BankEdge product after bringing on Chris Healy to head that business? Jared M. Wolff: Chris is doing a great job with the team. I am getting an updated budget this week on expectations for BankEdge, which is our merchant acquiring platform, as well as our card products where we are issuing. Both are doing extremely well. We expect to provide more guidance in the back half of the year on how these will contribute. I am pleased with our focus, and I think Chris will bring ideas he used at his prior institution to accelerate growth in both card and merchant acquiring through partnerships and direct selling. More to come. Gary Peter Tenner: Great. Thank you. Jared M. Wolff: Thank you. Operator: The next question comes from Anthony Elian with JPMorgan. Please go ahead. Anthony Elian: Hi, everyone. On NII, last quarter you gave a range of up 10% to 12% for the full year, including accretion. Does that still feel like the right level? And can you talk about the cadence of NII over the course of this year? Joseph Kauder: We still feel pretty comfortable about all of our guidance we provided at the end of 2025. As loans pick up, we do have some seasonality—the first quarter is historically one of our weaker quarters. It usually picks up in the second quarter and continues throughout the year. We still feel confident about those numbers and the cadence. Anthony Elian: On comp expense, can you quantify how much the seasonal resets contributed to 1Q, and how much of that do you expect to come out going forward? Joseph Kauder: You can see it on the noninterest expense page—the increase in compensation from the fourth quarter to the first quarter is substantially all driven by the resets. Not all of it will come out; over the year, maybe half to two-thirds of those increases roll off as people hit their Social Security limits or 401(k) match limits. Anthony Elian: Thank you. Operator: This concludes our question-and-answer session and Banc of California, Inc.'s First Quarter 2026 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Enova International, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova International, Inc. Please go ahead. Lindsay Savarese: Thank you, operator, and good afternoon, everyone. Enova International, Inc. released results for the first quarter 2026, ended 03/31/2026, this afternoon after market close. If you did not receive a copy of our earnings press release, you may obtain it from the investor relations section of our website at ir.enova.com. With me on today's call are Steven Cunningham, Chief Executive Officer, and Scott Cornelis, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Steven, I would like to note that today's discussion will contain forward-looking statements and, as such, is subject to risks and uncertainties. Actual results may differ materially as a result of various important risk factors, including those discussed in our earnings press release and in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today. We undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova International, Inc. reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I would like to turn the call over to Steven. Steven Cunningham: Thank you, Lindsay, and good afternoon, everyone. I appreciate you joining our call today. Our first quarter results marked a great start to the year. Strong originations growth and solid credit across our portfolio once again drove outstanding financial results that were in line with or better than our expectations and highlight the power of our balanced growth strategy and our experienced team's ability to drive differentiated and consistent performance by leveraging our diversified product offerings, scalable operating model, and advanced risk management capabilities. Our results also highlight the resiliency of our consumer and small business customers despite recent market volatility and concerns about potential impacts from geopolitical or domestic policy issues. First quarter originations increased a healthy 33% year over year to nearly 2.3 billion dollars. As a result of the strong originations growth, the portfolio increased 28% year over year to nearly 5.3 billion dollars, with small business products representing 70% of our portfolio at the end of the quarter and consumer products accounting for 30%. Strong demand and solid credit performance enabled us to be more aggressive, with revenue increasing 17% year over year to a record 875 million dollars in the first quarter. Profitability metrics grew even faster, as adjusted EPS increased 30% from 2025, driven by strong credit and our significant operating leverage. SMB revenue increased 37% year over year to [inaudible], and our consumer revenue increased 3% year over year to 446 million dollars, both quarterly records. In addition to our strong growth this quarter, credit metrics across the portfolio reflect stable or improving performance, with the consolidated net charge-off ratio for the first quarter falling both sequentially and year over year to 7.6%, our lowest consolidated quarterly net charge-off rate since 2023. Looking at our consumer business, year-over-year growth in originations accelerated to 10% as we continue to lean into the strong demand and stable credit that we discussed last quarter. As expected, credit metrics for the consumer portfolio were stable or improved both sequentially and year over year. Our SMB business continued to deliver remarkable growth and stable credit as our leading brand presence, scale, and strong competitive position drove 42% year-over-year growth in originations to a record 1.7 billion dollars. Our SMB portfolio has grown 37% over the past year and remains intentionally well diversified across geographies and industries. In addition, the SMB net charge-off ratio remained in a tight range consistent with the past two years. Our performance this quarter and external data reflect a stable and resilient macroeconomic environment despite recent concerns about rising energy costs as a result of the Iran war. The most recent Federal Reserve Beige Book released last week continued to highlight increases in economic activity across most districts. In addition, our most recent small business cash flow trend report released in conjunction with Oculus found that 93% of small businesses expect moderate to significant growth over the next year, which is consistent with prior surveys. Similarly, the most recent NFIB Small Business Economic Trends report indicated that the number of small business owners rating the health of their business as excellent or good is mostly steady. And the April ADP National Employment Report noted that small businesses have been the engine for hiring across the country for the second consecutive month. Supported by a stable labor market and growth in real wages, consumers continue to spend and participate in the economy. The March unemployment rate ticked down to 4.3%. New and continuing weekly unemployment claims remained relatively low and manageable, and March hourly earnings increased 3.5% compared to a year ago. While March consumer confidence remained stable, consumers as well as small businesses expressed concerns about the future impact of the recent spike in gasoline prices. During our more than twenty-year operating history, we have successfully managed our business during several energy price spikes, including as recently as 2022. During that energy shock, we observed that significant gas price spikes do not necessarily translate into higher spending, as today's consumers have more methods to manage gas price spikes than in the past with the advent of more fuel-efficient autos, electric vehicles, ride-sharing services, and on-demand delivery. A review of the electronic bank statement data we collect across our consumer businesses supports this. Prior to the start of the Iran war, our consumer borrowers were spending roughly 2% of income on gas, and even with a meaningful increase in gas prices, we have seen only a small increase in spending on gas relative to income as consumers adapt their behavior to higher costs at the pump. This trend is similar to what we observed during 2022 when geopolitical issues sparked an even sharper rise in gas prices that persisted for many months during a period of much higher overall inflation. Importantly, during that period in 2022, we did not observe material impacts to our consumer or SMB originations or credit performance as a direct result of the energy price spikes. Notably, historically, we have seen that demand for our products typically increases as customers look to bridge temporary cash flow gaps that could arise from spending due to transitory higher prices. Before I wrap up, I would like to spend a few moments discussing our strategy and key focus areas for the remainder of 2026. We have demonstrated a long track record of consistent and profitable lending while navigating a wide range of economic environments. We thoughtfully diversified and built our operating model to be resilient in any economic environment. We are confident in our ability to continue our success by following our focused growth strategy and by leveraging our diversified product offerings, advanced technology and analytics, and disciplined unit economics approach. One key to our success for many years has been the extensive application of machine learning models, automation, and other advanced technologies, including applied and generative AI, across our company to remain nimble, improve the customer experience, manage risk, and increase efficiency. This tech-forward and innovation mentality is ingrained in our culture; it is how we have approached our work every day for many, many years. While we have taken a more understated approach to highlighting our innovation compared to others, preferring to let the results speak for themselves, make no mistake that we have embraced the opportunities to apply generative AI across our business to defend and extend our competitive advantages and enable our teams to move faster with powerful insights while working smarter and more efficiently. Finally, we are excited about our combination with Grasshopper Bank later this year. Since our last update, we have continued to make great progress and remain engaged in a constructive dialogue with both the OCC and Federal Reserve as we progress through the typical application process. Internally, our teams are deep into integration planning, and we are highly encouraged by the readiness we are building to ensure we hit the ground running on day one to deliver on the significant synergies for geographic expansion of our existing products and lower funding costs from Grasshopper's deposit businesses. As a reminder, we expect net synergies to drive adjusted EPS accretion of more than 25% once the synergies are fully realized, in the first two years post closing. We continue to anticipate closing the transaction during the second half of this year. To wrap up, we are pleased with the strong start to the year and, based on what we are seeing today, are raising our outlook for the year, which Scott will describe in more detail. We believe our diversified product offerings, nimble machine learning credit risk management capabilities, talented team, and solid balance sheet position us well to continue to drive sustainable and profitable growth this year and beyond. With that, I would like to turn the call over to Scott Cornelis, our CFO, who will discuss our financial results and outlook in more detail. And following Scott's remarks, we will be happy to answer any questions you may have. Scott? Scott Cornelis: Thank you, and good afternoon, everyone. As Steven noted in his remarks, we are pleased to deliver another solid quarter of top- and bottom-line financial performance. We started 2026 with strong growth in originations, receivables, and revenue, along with solid credit, operating efficiency, and balance sheet flexibility. Turning to our first quarter results, total company revenue of 875 million dollars increased 17% from 2025, exceeding our expectations, driven by 28% year-over-year growth in total company combined loan and finance receivable balances on an amortized basis. Total company originations during the first quarter rose 33% from 2025 to 2.3 billion dollars. Revenue from small business lending increased 37% from 2025 to 418 million dollars, as small business receivables on an amortized basis ended the quarter at 3.7 billion dollars, or 39% higher than the end of 2025. Small business originations rose 42% year over year to 1.7 billion dollars. Revenue from our consumer businesses increased 3% from 2025 to 446 million dollars, as consumer receivables on an amortized basis ended the first quarter at 1.6 billion dollars, or approximately 8% higher than the end of 2025. Consumer originations grew 10% from 2025 to 559 million dollars. For the second quarter of 2026, we expect total company revenue to be 15% to 20% higher year over year. This expectation will depend on the level, timing, and mix of originations growth during the quarter. Now turning to credit, which is the most significant driver of net revenue and portfolio fair value. Consolidated credit performance for the first quarter was solid, with year-over-year improvement in the net charge-off rate and the 30-plus day delinquency rate, and a stable fair value premium. The consolidated net revenue margin of 60% for the first quarter was at the higher end of our expected range and reflects continued solid credit performance across our portfolios. The consolidated net charge-off ratio for the first quarter of 7.6% declined 100 basis points from the first quarter a year ago, as the consumer net charge-off ratio decreased to 14.3%, 90 basis points lower than the first quarter last year, while the small business net charge-off ratio remained stable at 4.6%. These results underscore the strength and consistency of our credit risk management and the quality of our originations. Importantly, we expect future credit performance to remain stable as demonstrated by the year-over-year stability in the consolidated 30-plus day delinquency rate and the consolidated fair value premium, which at 115% remained at levels we have seen over the past two years, indicating a stable risk-return profile and strong unit economics. Looking ahead, we expect the total company net revenue margin for the second quarter of 2026 to be in the 55% to 60% range. This expectation will depend upon portfolio payment performance and the level, timing, and mix of originations growth during the second quarter. Now turning to expenses. Total operating expenses for the first quarter, including marketing, were 36% of revenue compared to 33% of revenue in 2025. As Steven noted, our marketing spend continues to be efficient, driving strong originations growth. Marketing costs increased to 22% of revenue, or 189 million dollars, compared to 19% of revenue, or 139 million dollars, in 2025. We expect marketing expenses to be around 20% of revenue for the second quarter, which will depend upon the growth and mix of originations. Operations and technology expenses for the first quarter increased to 8.7% of revenue, or 76 million dollars, compared to 8.4% of revenue, or 62 million dollars, in 2025, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense, sequential increases in O&T costs should be expected in an environment where originations and receivables are growing, and should be around 8% to 8.5% of total revenue going forward. Our fixed costs continue to scale as we focus on operating efficiency and thoughtful expense management. General and administrative expenses for the first quarter were 48 million dollars, or 5.5% of revenue, compared to 42 million dollars, or 5.7% of revenue, in 2025. The current quarter includes 2.7 million dollars of one-time deal-related expenses associated with the pending Grasshopper acquisition. Excluding these items, G&A expenses were 45 million dollars, or 5.2% of revenue, reflecting continued operating leverage and disciplined expense management. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will be around 5% of total revenue excluding any one-time costs. Our balance sheet and liquidity position remain strong, giving us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to drive long-term shareholder value through both continued investments in our business and opportunistic share repurchases. We ended the first quarter with approximately 1.1 billion dollars of liquidity, including 436 million dollars of cash and marketable securities and 654 million dollars of available capacity on our debt facilities. Continuing our track record of strong capital markets execution, during the first quarter we upsized four of our secured consumer and small business warehouse facilities by 377 million dollars at existing terms, providing additional capacity to support our growth. Our cost of funds for the first quarter was 8.2%, down from 8.3% in the fourth quarter, reflecting strong execution in recent financing transactions. During the first quarter, we acquired approximately 110 thousand shares at a cost of approximately 16 million dollars. We continue to believe there remains additional upside in our valuation given our track record of consistent growth in earnings, our expectations for 2026, and the significant future opportunities associated with the Grasshopper acquisition. With that in mind, we will continue stock repurchases opportunistically while ensuring we are prepared to close the Grasshopper Bank acquisition and transition to a bank holding company later this year. Finally, we continue to deliver solid profitability this quarter. Compared to 2025, adjusted EPS, a non-GAAP measure, increased 30% to 3.87 dollars per diluted share. To wrap up, let me summarize our near-term expectations. For the second quarter, we expect consolidated revenue to be 15% to 20% higher year over year, with a net revenue margin in the 55% to 60% range. Additionally, we expect marketing expenses to be around 20% of revenue, O&T costs of around 8% to 8.5% of revenue, and G&A costs around 5% of revenue. With a more normalized tax rate, these expectations should lead to adjusted EPS for 2026 that is 20% to 25% higher than 2025. For the full year, we expect growth in originations compared to the full year of 2025 of around 20%. We expect that the resulting growth in receivables, with stable credit and continued operating leverage, should result in full-year 2026 revenue growth similar to originations growth and adjusted EPS growth of at least 25%. Our second quarter and full-year 2026 expectations will depend upon the path of the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level, timing, and mix of originations growth. As a reminder, our 2026 financial expectations do not assume any contribution from the pending acquisition of Grasshopper Bank, which, as Steven noted, we continue to expect to close in 2026. We are confident that the demonstrated ability of our talented team, combined with our world-class technology and analytics, has us well positioned to adapt to an evolving macro environment and continue to generate meaningful and consistent financial results. Our resilient online-only business model, diversified product offerings, nimble machine learning-powered credit risk management capabilities, and solid balance sheet support our ability to continue to drive profitable growth while also effectively managing risk. And with that, we would be happy to take your questions. Operator? Operator: We will now open the call for questions. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. The first question will come from Moshe Orenbuch with TD Cowen. Please go ahead. Moshe Orenbuch: Sorry, I was on mute there. Thanks very much. I guess for starters, you have very strong results overall, but it has tilted a little bit, certainly from an asset growth standpoint, towards small business. Could you talk a little bit about your originations in both consumer and small business and relate it to the respective marketing costs—where were those higher marketing costs incurred, how did it drive the originations, and whether there is an outlook for that consumer or any reversal, if you will, of that kind of disparate growth between the two businesses? Steven Cunningham: Moshe, thanks for the questions. A couple of comments. Number one, our SMB business has been growing plus 20% every quarter over the past two years. Sometimes it is more than that, like we have seen over the past couple of quarters, or sometimes a little bit closer to that—so pretty consistent, pretty steady. There is nothing remarkable to call out as it relates to marketing. Our marketing remains very efficient, and we lean into that marketing where we see opportunities to drive really good growth with strong unit economics. On the consumer portfolio, if you look at the year-over-year trends, we have been reaccelerating growth as we have talked about over the past couple of quarters. If you recall, back in the middle of last year, we were making sure that we had credit where we wanted it. There was a product that we slowed that slowed our overall consumer growth down a bit, but that has been picking up. The pace has picked up. In particular, our consumer installment growth has been very healthy now for quite some time on a year-over-year basis, and the LOC product year-over-year growth has been accelerating over the past several quarters as we expected. You should expect to continue to see consumer year-over-year growth accelerate as we lap some of the quarters last year where we had purposely slowed down. I expect we will continue to see healthy SMB growth, but I also think we will continue to see that acceleration in consumer. So the disparity, all things being equal and with the strong operating backdrop, should diminish. Similar to SMB, on the consumer side our teams do a great job of identifying the channels that deliver the best marketing value for the growth that we can achieve against that unit economics framework. We feel very good about the quarter, the growth that we were able to deliver, and, as Scott highlighted, we nudged up our outlook based on what we see today. Moshe Orenbuch: Got it. Thanks. And clearly, you have one of the better lenses into repayment given the shorter term that you have. Just talk a little bit about what you are seeing both on consumer and small business side. We see the delinquency rates at the end of March, but has that continued into April, and what are you seeing on the repayment side? Steven Cunningham: The results speak for themselves. At the end of the quarter, credit looks really strong. SMB has been operating in a tight range for charge-offs for quite some time. Our consumer charge-offs are operating toward the lower end of the range that we typically would see for a first quarter. A few weeks into the second quarter, we are pleased with what we are seeing as it relates to portfolio performance and demand. Regardless of the volatility and the headlines out there, sometimes what people are actually doing versus the backdrop and the headlines is very different, and we are encouraged with what we are seeing as we move into the second quarter. Operator: The next question will come from David Scharf with Citizens Capital Markets. Please go ahead. David Scharf: Hi. Good afternoon. Thanks. Steven, maybe just following up on Moshe's comment about the mix of originations. Can you remind us, as we think about the unit economics between consumer and SMB, are we as investors basically indifferent as it relates to the asset mix? Are the unit-level returns, risk-adjusted, pretty much the same? Are you underwriting to similar economics still? Steven Cunningham: Our unit economics and ROE frameworks are designed to be mix-agnostic. We go where the demand is and where we can efficiently underwrite and market to drive volume. We have talked about this a lot over the years, and you have seen us do that. There are some slight differences between the two—yields are different, charge-off rates are different, which means net revenue margins are a bit different, and you can work your way down through financing intensity across the two—but ultimately you get back to a pretty similar ROA across the two portfolios. We feel really good that our approach to meeting demand works well whether SMB grows a bit faster, like we have seen over the past year or so, or consumers grow faster than SMB, which we have also seen at times. Most recently, the mix has been impacted by the reacceleration as we got consumer rolling again after the middle of last year. We feel really good about where we are headed and about the economics across both portfolios. David Scharf: Got it. That is helpful. Switching to credit, I have a question about gas prices and spending based on the bank data you started purchasing several years ago. I just wanted to make sure I heard what you said—that as a percentage of income, you are not seeing any noticeable change in how much your borrowers are allocating to gas or energy-related expenditures. And are they spending more in total when you look at bank account information and debit charges, or is gas spending pulling from other categories of spend? Steven Cunningham: Overall spending compared to income is about where it has been on average. The proportion spent on gas is pretty small—around 2%—and we saw only a slight increase, so it is not materially crowding out other categories of spending. That is also what we saw in 2022. Consumers and small businesses adapt to the environment and change their behaviors if it becomes a pressure for them. We have a track record, we have a handle on what we expect to see, and we will keep an eye on it and adapt if we see something different. Right now, we are not seeing anything that would cause concern about the recent gas price increases for our consumers. David Scharf: Okay. Got it, which is consistent with what pretty much all lenders have been saying thus far. If I could squeeze just one more in: there has been talk this reporting season about changes in digital commerce and search, particularly around integrating with AI platforms. How do you see your digital marketing evolving as traditional search transforms, and are there integration plans underway? How should we think about customer acquisition changing over the next few years? Steven Cunningham: Our marketing teams have been very active on this for quite some time, looking at shifts where users may leverage AI models for discovery versus traditional browsers. We use tools that allow us to understand where we stack up, similar to search. It is not dissimilar from the shift from traditional TV to social media and much more targeted marketing. Our teams are very good at understanding where our customers are trending to find products like those we offer, and we are making great progress migrating and leading in those channels so we can maintain our competitive advantage and continue to meet customers where they want to be met. Operator: The next question will come from William Ryan with Seaport Research Partners. Please go ahead. William Ryan: Good afternoon, Steven and Scott, and thanks for taking my questions. Just following up on the consumer loan origination side—specifically on the line of credit. It looks like it was up about 3% to 4% year over year on what was, arguably, a very difficult comp a year ago, up 22%. The comps are getting easier as the year progresses, but overall, what changes have you made that give you more confidence about stepping back into that market? Steven Cunningham: We have talked about this over the past couple of quarters. The line of credit segment you are referencing was impacted by our purposeful tightening in the middle of last year to slow growth and make sure we were calibrated correctly and meeting our unit economics. Then we started reaccelerating. We have reopened, and we are back to business the way we historically have been. I feel confident with what we are seeing thus far into the second quarter. We are making good progress getting back to business, very different from where we were in the second or third quarter of last year. A lot of it has to do with the demand we are seeing, the credit metrics we monitor every week, and the results we have been able to generate, not just this quarter but so far into the second quarter. William Ryan: Okay. Thanks for that. And just one follow-up on the consumer loan yield—not overly material—but it looked like a little bit of a dip in the yield, about 300 basis points quarter over quarter. Any specific callouts on that? Scott Cornelis: Bill, it is Scott. As Steven mentioned earlier, some of the mix on the consumer side—more installment, which has a lower yield than the line of credit—that is most of it. We expect that to flip back a little bit toward the norm as mix normalizes. William Ryan: Okay. Thank you. Operator: Again, if you have a question, please press star then 1. The next question will come from Vincent Caintic with BTIG. Please go ahead. Vincent Caintic: Hey, good afternoon. Thanks for taking my questions. First, going back to the origination volume and marketing discussion. Really strong origination growth, 33%. Marketing expense as a percent of revenues was a bit higher than your guidance, which is fine with the origination growth you were able to get. After you gave the guidance last call, what did you see that drove the incremental originations? Is the originations you are seeing a better margin business than what you typically plan for—maybe less competition—or where did the outsized growth come from? Steven Cunningham: Sometimes it is hard to pinpoint any one factor. The demand we saw reflects that our consumer and small business customers have been resilient as they navigated some market volatility and concerns about the future. The macro environment right now is actually in pretty good shape and really good for driving customer demand to us. Nothing really changed other than we saw healthy demand from those customer bases, and we were able to underwrite that with our unit economics approach. Regardless of headlines—and sometimes what customers say about the future can snap back quickly when things stabilize—their behaviors have been relatively stable over the past several quarters. Vincent Caintic: Great. That is helpful. Second question on the funding side. I know once you have Grasshopper this will be less of a concern, but can you talk about the funding appetite right now from your partners for small business loans or subprime consumer loans, given concerns in the quarter about private credit and funding appetite? How are your spreads and your funding partners? Scott Cornelis: You saw us increase four different warehouse facilities across both consumer and SMB. That is a testament to the performance and track record in those portfolios. We upsized those warehouses by 377 million dollars in total to give us room to grow. Spreads held firm, and we did that at existing terms with no widening like you may have seen in some other funding markets. We feel good about where we are. Vincent Caintic: Okay, great. And just sneaking one more in. Any update on the process for the Grasshopper Bank acquisition—regulatory or close process? I know you are still planning for a close later this year. Steven Cunningham: It is actually 2026, not the second quarter, Vincent. We were clear in our remarks on that. There is a process you go through when you file a formal application with the regulators; we are going through that process now. It is typical for applicants for a bank charter or to become a bank holding company. As I mentioned in my remarks, we are making progress and remain engaged in what I would call a typical application process. More importantly, our ability to work with the Grasshopper team—we have been really pleased with the progress we are making to be ready to go when we have approvals, close the deal, and hit the ground running to deliver on the significant opportunities we expect from the combination. Second half of the year is still our expectation. Vincent Caintic: Great. Thank you. Operator: The next question will come from John Hecht with Jefferies. Please go ahead. John Hecht: Afternoon, guys. Congrats on another good quarter. First, was the origination flow pretty consistent during the quarter, or was it back-weighted from a seasonal perspective? Did anything, like geopolitical events, accelerate or decelerate demand during the quarter? Steven Cunningham: I would describe our origination pattern as consistent with prior first quarters. SMB does not have the same type of quarterly seasonality that we see on the consumer side. There tend to be month-to-month variations, but in the quarter we did not see anything unusual relative to the typical January-to-March pattern. On the consumer side, as we mentioned last call, we saw some post-holiday strength into January, but that fades quickly into the tax refund season, and then you start to see some of that come back later in Q1 and more in earnest as you move into the second quarter. So pretty typical origination patterns, and we did not see any influence related to macro or geopolitical issues. John Hecht: On a similar topic, do you see any impact from higher fuel prices on small businesses, similar to consumers? Steven Cunningham: In 2022, the fuel spike was greater than where we are today and lasted quite a while. Both consumers and small businesses adapt to cost pressures if they have them. To the extent it impacts specific industries, we have talked before about industries like trucking, where input costs are a large part of the business. We have been careful there for quite some time. Our exposures are manageable, and we focus on high-quality operators that we believe can manage the credit we extend to them. John Hecht: Okay. Great. Thanks. Operator: The next question will come from Kyle Joseph with Stephens. Please go ahead. Kyle Joseph: Thanks for taking my questions. Most have been answered, but looking for an update on the SMB side in terms of the competitive environment—where you have been taking share, from whom, and, given the growth, your overall share in that market. Steven Cunningham: The SMB market is large, and new business formation over the past five or six years has been really strong if you look at new business applications. Those companies that are a couple of years into their life and have shown staying ability become potential customers. So the market is growing, probably a little faster than the overall consumer market. Regarding our presence, brand, scale, and capabilities, our set of competitors has not really changed much over time, and we believe we have a lot of advantages. It is a great setup: a large, growing market and competitive advantages that allow us to be selective and generate growth that creates strong returns for us and our shareholders. Kyle Joseph: Got it. Really helpful. Thanks, Steven. Operator: This concludes our question and answer session. I would like to turn the conference back over to Steven Cunningham, CEO, for any closing remarks. Steven Cunningham: We thank everyone for joining our call today, and have a good night. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the S&T Bancorp, Inc. First Quarter 2026 Earnings Conference Call. After management’s remarks, there will be a question and answer session. Now, I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead. Mark Kochvar: Thank you, and good afternoon, everyone. Thank you for participating in today’s earnings call. Before beginning the presentation, I want to refer you to our statement about forward-looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the first quarter 2026 earnings release as well as the earnings supplement slide deck can be obtained by clicking on the materials button in the lower right section of your screen. This will open a panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbancorp.com. With me today are Christopher J. McComish, S&T Bancorp, Inc.’s CEO, and David G. Antolik, S&T Bancorp, Inc.’s President. I would now like to turn the program over to Christopher. Christopher J. McComish: Mark, thank you, and I want to welcome everybody to the call. Good afternoon. We appreciate the analysts being here with us, and we look forward to your questions. I am going to begin my comments on page three. Before I do that, I want to reflect on the busy week that it has been here in Western Pennsylvania and in Pittsburgh, as Pittsburgh is the center of the sporting universe with the NFL Draft taking place starting today. Mark, David, and I are actually coming to you from the S&T Bancorp, Inc. draft headquarters in downtown Pittsburgh. There has been quite a buzz. We have significant customer engagement events going on, which started yesterday evening, and it is very gratifying to see the impact S&T Bancorp, Inc. has on the markets we serve and the customer relationships that we have built. A big thank you to our employees and teammates who are leading the charge building our People Forward bank. We are seeing it firsthand this week with all of these interactions. Turning to the quarter, our $35 million in net income equates to $0.94 per share, up almost 6% from Q4 2025 and 8% from the first quarter a year ago. Return metrics were strong again this quarter, highlighted by a [inaudible] ROA, up seven basis points, and an ROTCE of 13.22%, which was up almost 1% over Q4 2025. Almost $50 million in buybacks in the quarter played a key role in this ROTCE improvement. Our NIM and efficiency ratios remained solid at [inaudible], and Mark will provide more color here. Asset quality showed good improvement over the last quarter, and David will provide more color on both asset quality and loan growth. Turning to page four, I would like to focus on our strong deposit growth. For the quarter, our customer deposit growth was up over $300 million. We achieved the highest level of customer deposit growth in the 125-year history of S&T Bancorp, Inc., surpassing $8 billion. This growth was broad-based, with all lines of business contributing and all product categories showing growth. In fact, we showed growth in more than 80% of our branches in the market, which is a real testament to the great work our employees are doing with customers every day and the disciplined customer engagement processes that we have built. It really is a strong reflection of the customer relationships that we have. This deposit growth allowed us to reduce wholesale funding by almost $200 million in the quarter, and the quality of the growth was quite strong, with our DDA levels relative to total deposits increased to 28% in the quarter, up 1% from Q4 2025. While I would love to be able to tell you that we will be able to repeat another 16% annualized growth in Q2, we want to make sure that we are realistic, as there are always temporary fluctuations in deposit balances. We have done an analysis, and we do see some seasonal or temporary growth in these balances. However, our analysis would tell you that $150 million to $200 million of this growth is what we define as solid core growth in our customer deposit base. Again, even at this level, it would be one of the best quarters we have had in our history. I will stop there and turn it over to David, and he can cover asset quality and loan growth. David G. Antolik: Great. Thank you, Christopher, and good afternoon, everyone. Continuing on page four of the presentation, loan balances declined in Q1 by $113 million. Several factors impacted this outcome. First, we entered the new year with a reduced commercial pipeline as a result of solid activity in Q4 of last year. This, along with increased competition for new commercial deals, especially related to pricing, contributed to lower-than-anticipated new fundings in the first quarter. Second, commercial real estate payouts were higher than anticipated, primarily as a result of permanent market offerings from insurance companies and other nonbank lenders who offer more aggressive pricing and structure. Third, we did see a slight reduction in utilization rates on our revolving credit commitments. Q1 construction fundings were negatively impacted by poor weather, particularly in February, but we anticipate increased draw activity in Q2 as projects move forward. Our unfunded construction commitments remained at similar levels to year end. In our consumer loan categories, we saw reductions in our residential mortgage balances, including construction. We anticipate this level of reduced activity in Q2. Based on current pipeline and activity, we expect increased growth in our home equity balances in Q2, and we continue to focus on mortgage and home equity products as key components to enhancing customer engagement. Looking forward, we are adjusting our loan growth guidance to low single digits for the second quarter. In response to growth pressures, we are focused on adding talent and building for the long term, with the goal of increasing our commercial banking team in 2026, primarily focused on C&I additions and some geographic expansion in the CRE space. During the first quarter, we hired four new commercial bankers and saw a modest increase in our pipeline. Turning to page five, credit results for the quarter were in line with expectations. Nonperforming assets were down $5.7 million and remain at a manageable level of $50 million, or 63 basis points. This reduction was a result of our ability to execute on well-defined asset resolution strategies, primarily related to one C&I credit that was mentioned last quarter. Loan charge-offs were low at $1.7 million, or 9 basis points. We saw criticized and classified assets increase during the quarter as compared to year-end 2025 when we were at historically low levels. Criticized and classified loans remain at a very manageable level, and when factored into our reserve methodology, our allowance for credit losses remained stable at 1.17%. I will turn the call over to Mark. Mark? Mark Kochvar: Thanks, David. First-quarter net interest income declined by $2.6 million, due primarily to fewer days, which accounts for about $1.4 million, and we also had an interest recovery in 2025 that was $0.9 million. In addition, strong deposit growth and loan decline led to a higher cash balance as we adjusted our wholesale borrowing levels. The interest recovery in 2025 and higher cash flow in the first quarter were the main reasons behind the net interest margin rate decline in the first quarter of seven basis points, to a still very strong 3.92%. With muted expectations for Fed moves in 2026, we expect relative NIM stability to continue and believe we are well positioned for the remainder of this year should interest rate conditions change. Tailwinds from our maturing receive-fixed swaps, along with securities, fixed-rate loan, and CD repricing, all contribute to stability in the face of somewhat heightened loan and deposit pricing competition. As we look into 2026, we expect relative stability in the net interest margin around the current level, with net interest income growth coming from a return of loan growth. Next, noninterest income decreased by $700,000 in the first quarter. Debit and credit card activity was seasonally slower, and “other” includes timing related to letter-of-credit fees and distributions from some SBIC investments that happened in the fourth quarter. Our expectations for fees in 2026 remain at approximately $13 million to $14 million per quarter. On the expense side, they were in line in the first quarter, down about $500,000 compared to the fourth quarter. The largest change was in salaries and benefits. Within that, medical costs were lower with the reset of deductibles, and salaries were lower due to the number of days. Occupancy was impacted by higher seasonal snow removal costs and utilities. Other taxes were also a little bit higher due to Pennsylvania shares tax, which is based on equity levels. We expect to manage our 2026 noninterest expense year-over-year increase to around 3%, which implies a quarterly run rate of right around $58 million. With capital, the TCE ratio decreased by 43 basis points this quarter, primarily due to the share repurchases that we completed in the first quarter: over 1.146 million shares at an average price of $43.30, totaling just under $50 million. That brings our total repurchases over the last two quarters to $85.8 million over 2 million shares, approximately 5.5% of outstanding shares. Our regulatory ratios continue to be very strong with significant excess capital. We have just over $50 million remaining in our authorized repurchase program. We are comfortable with these levels, even considering additional repurchases. We have more than sufficient current capital and generation capabilities to position us well for the environment and enable us to take advantage of organic or inorganic growth opportunities. Thanks very much. We will now open the call for questions. Operator: The floor is now open for questions. If you have any questions, please press 1 on your telephone keypad. To remove yourself from the queue, press 1 again. We ask that while asking your question, please pick up your phone and turn off speakerphone for enhanced audio quality. We will go first to Justin Frank Crowley at Piper Sandler. Justin Frank Crowley: Hey. Good afternoon, everyone. Just wanted to start out on the loan growth. I think you touched on it, David, but can you give a little more detail on how origination versus payout activity fared in the quarter, and then a sense of where the pipeline ended the period? David G. Antolik: Yeah, sure. Relative to origination activity in Q1, as I mentioned, we entered the year with a lower pipeline. We built pipelines, but the fallout from the early-stage pipeline was a little higher than what we anticipated, primarily as a result of increased competition relative to pricing. We had some lower utilization that impacted balance growth, and some construction draws were delayed due to weather. We know those will happen, and we anticipate utilization to improve as we move throughout Q2. Payouts were lower than what we had expected overall, and there is no specific reason for that other than some specific paydowns, including large draws that happened in Q4 and then repaid in Q1. The pipeline is up modestly—when I say modestly, 10% to 15% over year-end. As we onboard new bankers and continue to be disciplined around pricing, that all boils down to a little lighter loan growth than what we had expected back in Q4. Justin Frank Crowley: And then you mentioned some of the hires and adding bankers. Is that coming across the board, or is it more weighted towards C&I? David G. Antolik: The hiring in Q1 was more C&I-focused, but we are hiring both C&I and CRE bankers. We still feel really good about our ability to grow CRE—we are good at it, and we have historically built a brand in that space—so we are adding to that staff as well. Based on our geographies, there are significant opportunities in the C&I space for us. The CRE space, as I mentioned in the prepared comments, might include some geographic expansion, particularly in Ohio. So it is a combination of the two. We are also adding business bankers and treasury management officers—really growth-focused positions—to the organization. Justin Frank Crowley: Okay, great. One last one, pivoting a little. On the margin guide calling for stability here, we think a higher-for-longer environment is beneficial, but trying to square some of the puts and takes as far as loan repricing and anything that offsets that on the funding side—maybe starting to see upward pressure. What are some of the underlying assumptions there? And where are new production spreads versus what is repricing or rolling off? Mark Kochvar: I think we are back to thinking that there is not going to be a lot of rate increase. Given that, we would have some natural improvement in margin, but as David mentioned, we have seen some higher competitive pressures, particularly on the loan side. Factoring that in gets us to more of a flatter NIM as we move throughout the year. We still have those tailwinds, but a lot of that might get absorbed by the more competitive loan environment. David G. Antolik: On spreads, we are kind of in the mid—like a 2.00% to 2.25%—range, and we saw that slip probably 5 or 10 basis points over the last quarter. In the bank competition, we saw two deals that were sub-2% that we decided not to move forward with, so we lost those to the competition. For us, it is about getting more looks, which leads to adding more bankers, and that will allow us to accelerate growth. But we also want to be cognizant of the impact that growth has on the NIM and net interest income. Justin Frank Crowley: Understood. Great. I will leave it there. Thank you so much. Christopher J. McComish: Thank you, Justin. Operator: We will move next to Daniel Tamayo at Raymond James. Daniel Tamayo: Thank you. Good afternoon, everyone. Maybe starting first on the capital and the buyback side. You did about $50 million in the first quarter, and you have a similar amount remaining in the authorization. Capital is still really strong—CET1 over 14%, really by any measure. Do you think it is in the cards to re-up that authorization and continue the repurchase further out than just the second quarter? How are you thinking about the trajectory of buybacks given the level of capital you have and the growth expected? Mark Kochvar: Yes, we would definitely take a very hard look at the remaining authorization. I think we will see how that goes before we look at the next leg. Our internal target ratios—the next $50 million will put us quite a bit closer to that—so we may enter more of a maintenance phase in terms of target capital ratios at that point. Going forward, it might be more dependent on the growth trajectory from there and how much capital that uses. Daniel Tamayo: Okay. And remind me what the target capital ratio is? Mark Kochvar: We are looking to be approximately—across the different ratios—above median peer level, between median and 75th percentile. They vary for the different ratios, but we want to make sure that we have enough to grow and enough to take advantage of a merger that might arise or present itself. Christopher J. McComish: Daniel, this is Christopher. I want to reemphasize that having financial flexibility is a real benefit for us. Being able to think about this in an organic growth lens while at the same time having the financial flexibility should an inorganic opportunity present itself is important. As we were getting north of 14%, it made sense to dial that back and, as Mark said, bring those ratios closer to the 50th to 75th percentile, which makes more sense to us long term. Daniel Tamayo: Understood. And then, diving in a little on the hirings—you mentioned new geographic expansion, including Ohio. Could you provide a little more detail on the markets where you are hiring? David G. Antolik: Sure. We have a group of bankers in Columbus, and we are looking westward, like the Cincinnati market perhaps, and then in Northeast Ohio, expanding more towards Cleveland. There are opportunities in those two markets that we think we can take advantage of as we grow. Also, in our Eastern Pennsylvania franchise, we have done a lot of work into Maryland and Delaware, particularly in the CRE space, and we think there is more opportunity there for us to grow as well. Operator: We will take our next question from Kelly Ann Motta at KBW. Kelly Ann Motta: I would love to follow up on that capital question since you mentioned M&A. If you could, Christopher, give us an update on the pace of conversations. Clearly, there is an M&A window open at this time. How is this going? Christopher J. McComish: I would describe that we are consistently having discussions, and we look at opportunities. We are disciplined, as you can tell, and we are going to remain so. But I think you are right, Kelly; there is a window here that seems to make sense, and we would like to capitalize on the right opportunity should it present itself. We have not slowed down at all in the number of conversations that we have had. Quite honestly, the financial performance and the returns that we are able to deliver open up windows for conversations for us, and we want to be able to capitalize on those. Kelly Ann Motta: Great. I would like to switch back to the deposit growth because that was a major highlight of the quarter and something you have been working diligently on. Was there one or a couple of things that really drove that outsized growth? Any market dynamics? It clearly was a remarkable quarter for you. Christopher J. McComish: Thanks for that recognition, Kelly. It is a real point of pride for our employees. I am coming up on my fifth year here at S&T Bancorp, Inc. in another couple of months, and we have been unrelenting in our focus on the importance of building a high-quality core deposit franchise. We have seen positive momentum over the last 18-plus months on the consumer side. We have talked a lot about the rigor and discipline of the customer engagement process we define as CARE. If you think, how do you know it is working, I go back to the anecdote I provided: broad-based growth in 80% of our branches in the quarter tells me the right customer interactions are taking place. We have also talked a lot about the way that we manage exception pricing and the need to be dynamic while responsive. That is a process built over the past couple of years that continues to work in a rising or declining rate environment. On the commercial and business banking side, we have spent the past few years enhancing our treasury management capabilities and the number of teammates, both in commercial banking as well as business banking. We are seeing good momentum there, and we know a portion of this in the commercial space was true new customer acquisition. We also analyzed the impact of tax law changes. Tax receipt deposits into our accounts showed year-over-year growth of about $30 million, and higher tax refunds contributed to some of this. That is why we guided that all $300 million probably is not going to stick forever—there is some fluctuation in it. But we feel really good about that $150 million to $200 million, which by itself would have been a really strong quarter. Operator: We will move next to Tyler Cacciatore at Stephens Inc. Tyler Cacciatore: Good afternoon. This is Tyler on for Matt Breese. Maybe just a follow-up on the M&A commentary. Can you update us on what the ideal target would look like, and if there is any ideal size or whether you want to dive into new markets or complement existing ones? Christopher J. McComish: I will be consistent with what we have talked about in the past. We look geographically at the core markets we are in and adjacent markets, and we are active in building relationships throughout that geography. From a pure acquisition standpoint, given our size, you are talking about banks probably in the $1 billion to $6 billion–$7 billion range—it makes sense from a size standpoint. Our focus is on the quality of the core deposit franchise, cultural fit, and the ability to accelerate growth in the company—those are the criteria we look through. Tyler Cacciatore: Thank you for the color. Moving to credit—nice to see the charge-offs move much lower, which led to a lower provision than expected. What are you seeing from a credit perspective going forward, and what levels of charge-offs are you comfortable running at, to help model the provision from here? And a quick one on deposit costs—do you have the spot cost of deposits at quarter end or in the month of March? David G. Antolik: In total for 2026, we would expect similar total results relative to 2025. We are targeting to reduce NPLs from where we are now, modestly. As I mentioned, we did see a slight uptick in our criticized and classified assets; it did not have a significant impact on provisioning or a large increase in the ACL. There is nothing outside of normal movements that we anticipate. We are a commercial-focused bank; when something happens negatively from a credit perspective, it tends to be a little larger than a bank with a bigger consumer base, and we acknowledge that. We have fine-tuned our methodology and spend a lot of time internally discussing how we can get ahead of things and forecast better. Externally, we are watching the environment—gas and oil prices have run up. That has not really impacted the economy dramatically in the short term, but if it continues, it could have impacts down the road. We are not outsized one way or another, but there is a lot we do not control that we have to pay attention to. Mark Kochvar: On deposit costs, for the month of March, our total deposit cost was right around 2.47%. Tyler Cacciatore: Thank you. I will step back here. Operator: As a reminder, if you would like to ask a question, press 1. We will go next to David Jason Bishop at Hovde Group. David Jason Bishop: Hey. Good afternoon, Chris. Excited for the draft as well down here. Christopher J. McComish: We are excited for the draft down here. We are not going to say anything about Baltimore, David. I am sure you are waving your terrible towel up there. David G. Antolik has his eye black on right now. He is locked in. I am wearing a Steelers helmet as well. David Jason Bishop: A lot of my questions have been asked, but I would be curious: you had the good growth in deposits and maybe some cash flows from the loan portfolio sitting in cash at the end of the quarter. Is that sort of earmarked for funding expected loan growth? Do you see any line of sight to maybe temporary deposits outflowing? How should we think about cash levels moving into the back half of the year? Mark Kochvar: We do expect that to decrease. We still have some wholesale borrowings that we have an opportunity to reduce, so that would be the first priority. As Christopher mentioned, we do expect some of that to potentially roll off, at least temporarily, in the second quarter. We will keep some cash powder dry for that and then for the return to loan growth—some in the second quarter, but perhaps more in the back half of the year. So that cash level will not stay where it is, for a combination of reducing wholesale, natural deposit fluctuation, and a return to loan growth. David Jason Bishop: Got it. Final question: as you look across your fee income segments and categories, any areas you are most bullish about for augmentation as you look out into the rest of the year? Mark Kochvar: We have seen some encouraging pickup on the treasury management side. There is a group within that—kind of the non–account analysis group—where we have seen improvement in the last couple of quarters, and there is a renewed emphasis in the bank, especially in our business banking group. On the basic treasury management side, in account analysis, we did some price adjustments that helped in the first quarter, and that group is making headway in the market as well. So deposit fees on the treasury management side probably offer some potential. Financial services has been solid for us as well. Christopher J. McComish: On the non-analyzed treasury management services, that is really the result of work we started a couple of years ago. We built a product for the small business banking space that provided a combination of, call it, six to eight important treasury management products—anything from information reporting to collection and disbursement services, fraud protection—packaged into basically one price. We rolled that out a couple of years ago, trained our teams, and put it in the market. We believe it was a differentiating factor, and we are seeing balance growth come from it as well as some treasury management fee income and the annuity nature of that. It is nice to see something go from concept to reality and start to produce results. David Jason Bishop: Got it. That is great color. That was all I had. Thanks. Operator: That concludes the question and answer session. I would like to turn the call back over to Chief Executive Officer, Christopher J. McComish, for closing remarks. Christopher J. McComish: Thank you for your interest in S&T Bancorp, Inc., your good questions, and the relationships you have built with us. They are really important to us. We are proud of the performance we are showing and are looking for continued growth and impact in the marketplace. Spring is here, so the weather has turned and there is a lot of optimism in the air. Thanks for your time, and have a great rest of the day. Operator: That concludes today’s conference. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to Globe Life Inc. First Quarter Earnings Release Call. My name is Morgan, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Stephen Mota, Vice President of Investor Relations, to begin today's conference. Thank you. Stephen Mota: Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release and 2025 10-K on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank. Frank Svoboda: Thank you, Stephen, and good morning, everyone. In the first quarter, net income was $271 million or $3.39 per share compared to $255 million or $3.01 per share a year ago. Net operating income for the quarter was $274 million or $3.43 per share, an increase of 12% over the $3.07 per share from a year ago. We are very pleased with the results of our operations this quarter. Despite the challenges faced by working class Americans in the current economic environment, Globe Life has now produced double-digit growth in net operating income per share in 7 of the last 8 quarters and the 1 quarter that didn't have double-digit growth was close at 8%. On a GAAP reported basis, return on equity through March 31 is 17.9%, and book value per share is $77.3. Excluding accumulated other comprehensive income, or AOCI, return on equity of 14%, and the book value per share as of March 31 is $98.56, up 12% from a year ago. Now in our insurance operations. Total premium revenue in the first quarter grew 6% over the year ago quarter. For the full year, we expect total premium revenue to grow approximately 7%. Life premium revenue for the first quarter increased 3% from the year ago quarter to $853 million. Life underwriting margin was $349 million, also up 3% from a year ago. For the year, we expect life premium revenue to grow between 3% and 3.5%. As a percent of premium, life underwriting margin was 41%, same as the year ago quarter. While we anticipate life underwriting margin to be between 42% and 45% for the full year 2026, we do expect it to be around 41% for both the second and fourth quarters and higher in the third quarter due to the anticipated remeasurement gain from assumption updates that will take place in the third quarter, as Tom will discuss in his comments. In health insurance, premium revenue grew 13% to $417 million, and health underwriting margin was up 12% to $95 million. For the year, we expect health premium revenue to grow in the range of 14% to 17%. This is due to premium rate increases in our Medicare supplement business as well as strong sales activity in both our United American and Family Heritage divisions. As a percent of premium, health underwriting margin was approximately 23% in the first quarter, same as the year ago quarter. For the full year, we anticipate health underwriting margins to be between 23% and 27%. Administrative expenses were $94 million for the quarter, an increase of approximately 8% over the first quarter of 2025. As a percent of premium, administrative expenses were 7.4%. For the year, we expect administrative expenses to be approximately 7.3% of premium. Over the long term, we anticipate that expanded implementation of AI applications across the company will help drive this ratio lower. We believe Globe Life is positively positioned to benefit from AI due to the high-volume nature of our business, including the number of applications received and policies issued calls received by our customer service representatives and number of claims reviewed in pay. Of course, these AI-driven improvements would not be limited to administrative expenses, we expect enterprise-wide benefits including significant benefits to our distribution and underwriting activity in particular. I will now turn the call over to Matt for his comments on the first quarter marketing operations. James Darden: Thank you, Frank. We had strong first quarter sales results as the total Life net sales grew 6%, and the total health net sales grew 58%. I'm pleased to point out that we have seen growth in net life sales in each division for the last 2 quarters. Given the current economic environment, these results are indicative of the resiliency of our business model. Now I'll discuss the trends at each distribution starting with our exclusive agencies. At American Income Life, life premiums were up 5% over the year ago quarter to $459 million and the life underwriting margin was up 7% to $209 million. Net life sales were $101 million, up 3% from a year ago due to improved agent productivity. The average producing agent count for the first quarter was 11,064 down 4% from a year ago due primarily to a decline in new agent retention. Short-term declines in agent count are not necessarily a problem as we can see improved sales productivity among our veteran agents when they have more time to focus on sales. Now that being said, long-term growth is dependent on agent count growth. As we discussed in the last call, at the beginning of the second quarter, we have implemented compensation adjustments for our middle management team that is designed to emphasize new agent recruiting and retention of new agents. We expect these adjustments to have a positive impact on our overall agent count during the second half of this year. Despite these short-term challenges, I am very pleased with the improvement in agent productivity we have seen over the last several quarters. Our investments in branding, lead generation and technology are paying off. And overall, I'm very optimistic regarding the long-term prospects for American Income. At Liberty National, the life premiums were up 4% over the year ago quarter to $100 million, and the life underwriting margin was up 11% to $35 million. Net life sales were $25 million, up 13% from the year ago quarter due primarily to agent count growth. Net health sales were $7 million, down 3% from the year ago quarter as more emphasis has been placed on life business. The average producing agent count for the first quarter was 4,031, up 9% from a year ago. I'm excited about the strong life sales and agent count growth we are seeing and confident we will continue to see growth at this agency as we move forward. In Family Heritage, the health premiums increased 10% over the year ago quarter to $123 million, and the health underwriting margin increased 11% to $44 million. Net health sales were up 22% to $33 million, and this is due to increases in agent count and productivity. The average producing agent count for the first quarter was 1,561, up 10% from a year ago. We continue to see strong agent count growth at Family Heritage. This is resulting from the continued focus on our recruiting and growing agency middle management. Now in our direct-to-consumer division, the life premiums were down approximately 1% over the year ago quarter to $244 million, while the life underwriting margin increased 15% and to $74 million. Net life sales were $27 million, up 8% from the year ago quarter. Now as we've discussed before, the value of this division extends well beyond DTC sales and due to the support it provides to our agencies. We've seen improved conversion of the direct-to-consumer leads shared with our agencies, which has also led to margin improvement. This allows us to invest more heavily in advertising and other lead generation activities, further increasing lead volume, which in turn leads to additional sales in both our direct-to-consumer and agency channels. We expect this division to increase leads generated for our 3 exclusive agencies during 2026 by approximately 5% to 10%. At the United American General Agency, here, the health premiums increased 22% over the year ago quarter to $194 million, and the health underwriting margin was $5 million, up approximately $4 million from the year ago quarter. Net health sales were $62 million, and this is an increase of approximately $34 million over the year ago quarter. Sales were strong across the division in both the Medicare supplement and the [indiscernible] business due primarily to tailwinds from the continued movement of Medicare beneficiaries for Medicare Advantage to Medicare supplement and the further development of our group worksite business. As an additional note, I would remind everyone that we do not market Medicare Advantage plans. Now I'd like to discuss projections. And based on these recent trends and our experience with the business, we expect the average producing agent count trends for the full year of 2026 to be as follows: at American Income, low single-digit growth; and then at both Liberty National and Family Heritage, low double-digit growth. Our life sales for 2026 we expect the following: at American Income, mid-single-digit growth; Liberty National, low double-digit growth; direct-to-consumer, low single-digit growth. For health sales for 2026, we expect to be as follows: Liberty National, mid-single-digit growth; Family Heritage, low double-digit growth, and United American high teens growth. I'll now turn the call back to Frank. Frank Svoboda: Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which we define as net investment income less required interest was $37 million, up approximately $1 million from the year ago quarter. Net investment income was $290 million, up 3%, while average invested assets grew 2%. Required interest grew 3%, slightly lower than the 4% growth in average policy liabilities over the year ago quarter. Net investment income also increased 3% from the fourth quarter as we had higher returns from our limited partnerships. As a reminder, the income reported from these investments is based on income earned by the partnerships in the quarter and will vary from quarter-to-quarter. For the full year, we expect both net investment income and required interest to grow around 4%, resulting in excess investment income growth between 4% and 4.5%. In the first quarter, we invested $419 million in fixed maturities, primarily in the industrial and financial sectors. These investments were at an average yield of 6.23% and an average rating of A and an average life of 42 years. We also invested approximately $147 million in commercial mortgage loans and other long-term investments with debt-like characteristics. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our overall conservative investment philosophy. In the first quarter, the earned yield on our total long-term invested assets, which includes our fixed maturity, commercial mortgage loans and other long-term nonfixed matured investments, was 5.5%. For the full year, we expect the average yield earned on our long-term investments will be between 5.45% and 5.5%. For just the fixed maturity portfolio, we anticipate the earned yield for 2026 will be around 5.3%. While we do own some floating rate investments, they are well matched with floating rate liabilities on the balance sheet. Now regarding the investment portfolio, invested assets are $22 billion including $19.1 billion of fixed maturities and amortized cost. Of the fixed maturities, $18.6 billion are investment grade with an average rating of A. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Of our total investment portfolio, only 1% is in senior direct lending and asset-based finance [indiscernible] and another approximately 1% is in traditional private placements. Our fixed maturity investment portfolio has a net underlying loss position of $1.6 billion due to current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position and is mostly the interest rate driven and currently relates entirely to bonds with maturities that extend beyond 10 years. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB comprised 41% of the fixed maturity portfolio compared to 45% from the year ago quarter. This percentage is at its lowest level since 2003. As we have discussed on prior calls, the BBB securities we acquired generally provide the best risk-adjusted capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. That said, our allocation of BBB-rated bonds has decreased over the past few years as we have found better risk-adjusted, capital-adjusted value in higher-rated bonds given the narrowing of corporate spreads. While the concentration of our BBB bonds might still be a little higher than some of our peers, remember that we have little or no exposure to other higher risk assets. Low investment-grade bonds remained near historical lows at $511 million compared to $506 million a year ago. The percentage of below investment-grade bonds to total fixed maturity is just 2.7%, consistent with year-end 2025. The total exposure to both BBB and below investment-grade securities as a percent of our total equity, excluding AOCI, is at its lowest level in over 25 years and is among the lowest of our peers due to our low overall leverage. Due to the long duration of our fixed maturity liabilities, we predominantly invest in long-dated assets. As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles. While there may be uncertainty as to where the U.S. economy is headed, we are well positioned to withstand a significant economic downturn due to holding historically low percentages of invested assets in BBB and below investment-grade bonds as a percentage of equity. In addition, we have very strong underwriting profits and the long-dated liabilities, so we will not be forced to sell bonds in order to pay clients. With respect to our anticipated investment acquisitions for the remainder of the year, at the midpoint of our guidance, we assume investment of approximately $800 million to $900 million of fixed maturities at an average yield of between 5.9% and 6.1%. Including the expected investments in commercial mortgage loans and other long-term investments with deadline characteristics, we expect to invest approximately $1.1 billion to $1.2 billion across all asset classes at an average yield of 6.3% to 6.5%. Now I will turn the call over to Tom for his comments on capital and liquidity. Thomas Kalmbach: Thanks, Frank. First, let me spend a few minutes discussing our available liquidity, share repurchase program and capital position. The parent began the year with liquid assets of approximately $80 million and ended the quarter with liquid assets of approximately $85 million. We anticipate ending the year with liquid assets within our target range of $50 million to $60 million. During the quarter, the company purchased approximately 1.4 million shares of Global Life Inc. common stock for a total cost of approximately $205 million at an average share price of $141.24. We accelerated a portion of our 2026 anticipated share repurchases given favorable market conditions in the first quarter. Including shareholder dividend payments of approximately $20 million, the company returned approximately $225 million to shareholders during the first quarter of 2026. In addition to liquid assets held by the parent, the parent will generate excess cash flows during 2026. The parent's excess cash flow, as we define it, primarily results from the dividends received by the parent from its subsidiaries less interest paid on debt and is available to return to shareholders and the return in the form of dividends or through share repurchases. We continue to in the growth of our -- invest in our growth through making investments in new business, technology and insurance operations. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made these substantial investments and acquire new long-duration assets to fund their future cash needs. We will continue to use our cash as efficiently as possible. We believe that share repurchases provide the best return yield to our shareholders over other available options. Thus, we anticipate share repurchases will continue to be the primary use of the parent's excess cash flow after the payment of shareholder dividends. In our guidance, we anticipate distributing approximately $90 million to our shareholders in the form of dividend payments over the course of the year, which reflects the recently announced 22% increase in the annual dividend rate per share. In addition, we have increased the range for anticipated share repurchases to $560 million to $610 million for the full year. As a reminder, our excess cash flow estimates for 2026 do not anticipate any additional cash flows to the parent resulting from the establishment of our new Bermuda entity in 2025. As discussed in our last call, we anticipate filing for a simple jurisdiction in the second quarter and we'll provide an update on our next call. With regards to the capital levels at our insurance subsidiaries, our goal is to maintain capital within our insurance operation at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. Although this target range is lower than many of our peers, it is appropriate given the stable premium revenue from a large number of in-force policies, the nature of our protection products with benefits that are not sensitive to interest rates or equity markets, our conservative investment portfolio and strong consistent underwriting margins, which result in consistent statutory earnings at our insurance companies. As of year-end 2025, our consolidated RBC ratios of our U.S. subsidiaries was 316%, which provides approximately $95 million of excess capital above what is needed to meet our minimum target capital level of 300%. For 2026, we intend to maintain our consolidated RBC within the targeted range of 300% to 320%. Now with regards to policy obligations for the current quarter. For the first quarter, life policy obligations as a percent of premium declined from 36.3% in the year ago quarter to 35.4%, slightly favorable to management estimates and is consistent with the continued favorable trends in mortality. Health policy obligations as a percent of premium were 56.3% compared to 55.6% from the year ago quarter. This was consistent with management estimates for the quarter, reflecting first quarter claims seasonality at United American. As a reminder, we intend to update our life and health assumptions annually in the third quarter. And thus, we have -- there have been no changes to our long-term assumptions this quarter. Finally, with respect to our 2026 guidance. For the full year of 2026, we estimate net operating earnings per diluted share will be in the range of $15.40 to $15.90, represent 8% earnings growth per share at the midpoint of the range. The increase in our prior guidance is probably primarily due to the impact and timing of anticipated repurchases for the share, refined estimates of potential positive impacts of third quarter life assumption updates and increased estimates of full year investment income. The guidance range reflects the estimated before tax benefit from anticipated assumption updates of $70 million to $110 million expected in the third quarter. This range is higher and narrower than last quarter's call due to continued refinement to estimates. Given the estimated benefit from assumption updates in the third quarter, we anticipate the third quarter life margin as a percent of premium will be in the range of 49% to 54%. We anticipate recent favorable mortality trends will continue through 2026 with full year normalized life underwriting margin as a percent of premium, which excludes the impact of the third quarter assumption update, of approximately 41% at the midpoint of our guidance. As previously mentioned, we expect health premium to grow in the range of 14% to 17% for the full year. This health premium growth is benefiting not only from strong growth in Medicare Supplement sales in 2020 by -- and anticipated in 2026, but also from approximately $65 million of additional premium from approved rate increases on individual Medicare supplement policies that will be received in 2026, primarily in the last 3 quarters of the year. Our full year guidance, we anticipate United of Americans health margin as a percentage of premium to be in the range of 8% to 9%. However, we anticipate the average underwriting margin as a percent of premium to be approximately 10% over the last 3 quarters of the year as the impact of premium rate increases are realized. Finally, I do want to point out that at the midpoint of our guidance, normalized EPS growth, which removes the impact of assumption updates in both '25 and '26 is approximately 11%. At the midpoint of our guidance, the projected 3-year compound annual growth rate of normalized EPS is 11.5%. Those are my comments. I'll turn the call back to Matt. James Darden: Thank you, Tom. Now those are our comments, and we will now open up the call for questions. Operator: [Operator Instructions] Your first question comes from Jack Matten with BMO Capital Markets. Francis Matten: I said one on lapse rate trends, which takes higher. I think especially for first year lapses at American Income. I guess can you talk about what you're seeing in terms of consumer behavior? Is this more kind of macro-driven affordability issues or anything related to distribution? And any thoughts on your outlook for lapse rate trends from here? Thomas Kalmbach: Yes. Thanks for the question. Yes, we do expect lapse rates to remain elevated for '26 versus the pre-pandemic. And we've seen that over the past few years as well. And I think the experience we expect is going to be more consistent with last year, given the economic stress that is on our policyholders from the current economic environment and overall price inflation. With regards to AIL, first quarter lapse rate, they definitely were high relative to recent experience. We consider this more of a fluctuation at this point, and we'll continue to monitor it. But no -- really just considered a fluctuation. James Darden: I think as we've indicated before, is that we do have impacts from macroeconomic environments. The resiliency of the business, though, is that I would say what we're seeing now is consistent with historical norms and other economic cycles. So we'll get a little bit of fluctuations based on what's going on in the economy. But overall, fairly resilient as that moderates between a fairly narrow band of our experience. Frank Svoboda: Yes. And Jack, the other thing I was just going to add is that I think when you kind of look at some of the trends at Liberty and even DTC a little bit, some of that is just mix of business. So we do know that the worksite as L&L has continued to grow that site, that worksite business as it's growing some of the lapse rates in the early issue years are always higher than the later issue years. And so is that -- as you continue to grow the sales there, then you -- those renewal lax rates just tend to drift up a little bit. So we do think that we're seeing that a little bit. And then we talked a little bit just -- some of the lapse rates at DTC on the internet business are just historically higher than what they are. So as that becomes a greater proportion of our total sales, that probably moved that up a little bit. But it is interesting. I think when you look at some of the economic forces, the renewal rates at DTC are continuing to be right in line with prepandemic experience. And so we're not seeing it consistently across the board on all the agencies. [ So that to us ] while the economy has some impact, surely, there's some other factors that are going on with the business that's being written today. Operator: Got it. That's helpful. And maybe just follow up on some of the AI benefits that you referenced in your prepared remarks. I mean any way you could maybe unpack or quantify some of those benefits you expect over time, whether it's on the expense ratio or for productivity? I guess to what extent are you kind of seeing those already? I think you talked about higher productivity at American Income along with agent count trends there. I just wonder if you could talk about how you're seeing that play out so far? James Darden: Sure. On the administrative side, what we anticipate is over time as those things get implemented, that we should be able to moderate our expense growth commensurate with our premium earnings growth. And so we would expect a little bit of margin expansion over time as those things get implemented as we're able to grow our revenue faster than our expenses. And so as we implement those right now, we've got a variety of different in addition to what we've deployed pilots going on. So we're very optimistic on the future, as Frank had mentioned in his prepared remarks on where we're headed. On the sales side, we do anticipate that there will be a benefit. And it kind of shows up in a variety of different areas. We've talked about in the past, our investments in technology, and we have seen improvements in that. So we know that to the extent that we can deploy technology that improves our agent experience and that can be in multiple facets from the fact to the extent that we can onboard and train agents quicker and more effectively and get them producing and more effective sooner. We know our agent productivity will go up, but we also know our agent retention will go up as well. And so anything that we can do there to deploy technology that helps on that agent recruiting and onboarding as well as just overall efficiency, we'll have longer-term gains. And we anticipate that to be a tailwind as we think about what our overall sales growth is going to be in the future. So those are embedded for '26 in our projections, and I anticipate that '27 will be -- continue to benefit from those technologies as we get those rolled out. Thomas Kalmbach: Yes. I would just add from an admin expense perspective, we're really looking at the margin improvement, bringing that 7.3% of admin expenses as a percent of premium down closer to 7% a bit over the next few years. And so that's kind of really how we're talking about some of those improvements to be reflected in admin expenses. Operator: Your next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Could you provide some clarity on what's driving the higher buyback for '26? Just maybe a little bit more color there. Is it related to higher capital generation and other source? Maybe just get into a little bit more detail. Thomas Kalmbach: Yes, Wilma, we were able to finalize our 2025 statutory earnings. And as we looked at excess cash flows, it still within the range that I provided on the last call, $600 million to $700 million, but it was just a little bit higher and that allowed us to the opportunity to have some additional share repurchases. Frank Svoboda: Yes. And then Wilma, I'd just add as far as the kind of the timing was concerned, we really did take a look at the opportunities that kind of presented itself during the first quarter, and there was a period of time where the shares had dropped below $140 per share and really saw that as a good opportunity for us and the shareholders. And so we did take that opportunity to accelerate, do a little bit more in the first quarter than what we had anticipated originally in that quarter. Wilma Jackson Burdis: And then it seems like the life sales agent count and even premium growth are coming in a little bit lower than your prior expectations. Could you just give us a little bit more color on what's driving that, whether it's macro, just something in that kind of [indiscernible] process? Just a little bit of color would help. James Darden: Sure. I'd say we need to break it down between the components of our distribution. Liberty is growing both the agent count and the sales growth and consistent with earlier expectations, and we're really pleased with the trend that we're seeing there. From an American income perspective, I've mentioned this before, but our -- when we talk about our incentive compensation at the agent level, we're always trying to strike a balance between incentivizing and rewarding for recruiting and onboarding and training of new agents versus sales. And so what we're seeing is that we're -- the compensation structure is driving a little bit more sales than the sales productivity. And so that's why we have some sales growth, but it's the agent cap growth is behind a little bit of where we had originally anticipated. We do, as I've mentioned in my prepared remarks, believe that some of the changes that we've made that will be -- that are implemented here at the beginning of the second quarter, those don't turn around things that immediately the day you put them in, takes a little bit of time for that to get into the agency operations and change behavior because when we talk about recruiting new agents, there's a time line and a pipeline associated with that. So we anticipate over the second half of the year, we'll start getting that agent count growth we're looking for. And then if I talk about the life sales at our direct-to-consumer channel, what's going on there is just we looked at what happened in Q1, we're pleased with the continued sales growth that started the last half of last year. But we just looked at really our comparables of how strong the growth was in Q3 and then into Q4 for 2025. And so we just tempered, I'll say, slightly our sales projections there. Overall, we're still very pleased with the sales growth that we're getting at our direct-to-consumer channel. And so the nice thing about having the 3 different agencies, particularly if you look at recruiting, is we go to market very similarly on agent recruiting between the 3 agencies. And so when I see growth at 2 of our agencies and strong growth, I know that it's really not a macroeconomic environment concern or issue. It's much more specific to the particular agency growth aspects that we have there. And so that's why I feel very confident about the overall environment provides a good environment for us to continue to grow our agent count across the agencies. So a little bit of tweaks in our compensation system, we think, will play out well because the overall macroeconomic environment, we believe will still be strong for growth going forward. Operator: Your next question comes from Wes Carmichael with Wells Fargo. Wesley Carmichael: I had a question on United American. I think the guidance there. I think your guide for health sales was in the high teens, but you had, I think, 122% growth in the first quarter. Are you thinking that sales growth might be a little bit negative over strong growth last year? How are you thinking about the remaining quarters of 2026? James Darden: Yes. You may recall that on the last call, we guided to kind of flat sales, just considering the significant growth that we have in 2025. And really the dynamics that are going on there looked at our strong growth in sales during the first quarter of '26. And that, as a reminder, is a elevated premium levels because our price increases went in for new sales in the first quarter, even though a lot of the in-force premium increases come in primarily in the second quarter. And so we really want to see how the market played out. And so very pleased with that. So we upped our guidance related to our overall year for 2026 sales. But we are cognizant that when you start looking at our fourth quarter, in particular, sales for the General Agency division, we nearly -- where we over -- we doubled our sales last year. And so really, the sales growth above that is just cognizant that we've got a real high level to continue to grow. And it will be interesting to see is the continued tailwinds that we're seeing right now of the Medicare Advantage market and the benefit that we're getting from Medicare supplement sales, how that plays out for the rest of the year. So it's really not, in our view, a softening over the remainder of the year, just recognizing the high hurdle to overcome to continue to grow on top of that significant growth we had last year. Frank Svoboda: Yes. I would just say, Q2 and Q3 are probably still slight improvements over last year, but Q4, as Matt said, is what's just a little bit -- right now, we anticipate not quite at that same level. Wesley Carmichael: All right. That's very helpful. And then my follow-up on Bermuda, I know in the prepared remarks, you mentioned that you're working to file reciprocal jurisdiction in the second quarter. But I just want to see, have there been any other developments around that initiative since the last earnings call, either with regulators or expectations around cash flow or near-term reinsurance sessions? Thomas Kalmbach: There are really no other developments. We're working through getting our financial statements. The audits complete on those. And so really no changes to kind of our thoughts around the business plan and our expected capital generation. James Darden: And I think on the next call, we should have a more significant update based on the activity plan for here in the second quarter. Operator: Your next question comes from Andrew Kligerman with TD. Cowen. Andrew Kligerman: My first question is around the assumption updates, just fantastic to see that come through. You talked about an estimate of 49% to 54% life margin third quarter versus the full year at 41%. So I'm wondering, is this the gift that's going to keep on giving? What should we be thinking about assumption update potentials in 2027, '28, '29? Just it sounds like things have gone really well in terms of your assumptions. And I would like to know how you're thinking longer term about it. Thomas Kalmbach: I think, Andrew, first of all, we take a really disciplined approach as far as how we update assumptions and want to actually see the results emerge before we actually make some of those changes to our long-term assumptions. So I think this year is, we are seeing some continued mortality trends that multiple quarters of favorable mortality trends that are informing our assumption update this year. I think if we continue to see those current mortality at these current levels, I think there's always the opportunity or the potential for additional assumption updates as we move forward. So no real quantification of those at this point, but I think there is potential for those. James Darden: Well, I think the other thing that is important, past just the third quarter assumption updates and the benefits that we're getting there, which most likely will moderate over time. But that means that we're setting our new long-term assumption at a higher margin, right? So we should have earnings on the book of business overall at a little bit higher level on a go-forward basis because it's just indicative that we don't need as much reserves as we originally thought on that book of business. So that's how I kind of think about it as just the long-term stability and the growth of that underwriting margin, those are kind of indicators that we're resetting to a new higher level since they're positives in the last several -- in Q3 as we've looked at the last several years. Unknown Executive: And I think you can really see that, Matt, and looking at normalized underwriting margins over the past few years by moving the impact of the assumption update, you can really see the trend in the overall improvement in underwriting margins. Frank Svoboda: That's right. The one thing -- Andrew, I was just going -- on your Q3 comments, and as Tom noted, the range on that is in that 49% to 54%. And so if we kind of take that assumption update of 70 to 110 that Tom had in his comments, so you have in that one quarter and 8% to 13% kind of bump, if you will, in that underwriting margin in that quarter, which off of the 41% kind of normalized margin that we're really expecting over the rest of -- in each of the quarters. Yes, I just -- if we continue to see the current mortality levels that we're seeing today as we continue to see that come in over time, that will work its way into those longer-term assumptions. Andrew Kligerman: That was very helpful. And my follow-up is around the health underwriting margin, 23% in the first quarter. And then you guided to 23% to 27%, which is kind of wide. Agent's wise, could you kind of walk us through the next few quarters? Would it be more likely closer to 23% in the second and then we could see a significant bump in the last 2 quarters? How do you think about the cadence? Frank Svoboda: No. I think, Andrew, that actually in the remaining 3 quarters, as you would expect that full health margin to be north of 25%, at least we anticipate to be north of 25%. And in fact, you're probably a little bit lower out of those 3 in the fourth quarter just because that's, again, a little bit higher seasonality. So you have a little bit higher claims in that fourth quarter. So that's probably more closer to that 25% range. But then over the -- so that kind of brings up where we were at around 23% up to, again, the midpoint of that range that we give is around 25%. And so I think you'll see -- we expect to see pretty good margins over the next 3 quarters. Operator: Your next question comes from Pablo Singzon with JPMorgan. Pablo Singzon: First question is with insurance moving in larger volumes from [indiscernible], is there a greater risk of anti-selection from your end? I know most cases, you can underwrite, but I was just wondering if higher sales might have contributed to some of the margin compression you experienced in the health business? Thomas Kalmbach: Yes. I don't think it's a function of selection that's impacting the margins in the first quarter. I think it really is some seasonality of claims in the first quarter as well as the fact that the rate increases that we filed last year will largely come into effect in the second, third and fourth quarter. As I mentioned on our last call, the premium increases that we filed for was $80 million to $90 million on a 12-month run rate. And we expect about $65 million to be received over the course of 2026 and then the remainder being received in 2027. And so we didn't receive very much of that in the first quarter. We'd expect to be on average about $20 million of additional premium in each of the next 3 quarters, which will help improve overall margins. But I don't think it's any selection at this point. So I don't think that's one of the drivers. Mike Majors: Well, yes, there was higher utilization across the entire industry for Medicare supplement over the last couple of years. What is unique to us... Thomas Kalmbach: And we have been seeing medical trends really stabilize and be relatively flat over the last couple of quarters. So that actually bodes well as well. Pablo Singzon: Got it. That makes sense. And then for my second question, so mortality has been a net contributor to your assumption updates in your quarterly [indiscernible] gains. I was wondering if you could speak about the lapse component of your [indiscernible] gains as well as the morbidity side for the health business. Have those factors been generally positive or negative? But clearly, [indiscernible] has been good, but I was just curious about how those other assumptions have been playing out for you? Thomas Kalmbach: Yes. On the Life remeasurement gains, it's largely mortality claims, mortality claims that are driving the remeasurement gains. I think it's about kind of in our in our work, we look at kind of how much is mortality and how much is all there, and it's about 70% mortality and 30%, all other things from a remeasurement gain on a quarterly basis. And on the health side, it's -- I think a lot of that is being driven by kind of what the future rate increases are doing to result in remeasurement gains. So that's -- it's more on the impacts to premium -- future premiums than it is on claims, although claims are positive as well overall, providing some health remeasurement gains. Operator: Your next question comes from Randy Binner with Texas Capital. Randy Binner: It's a follow-up to Andrew Kligerman discussion with you on the -- I think you kind of answered more of the quantitative changes with the mortality assumptions. But I was wondering if you could share kind of more like qualitative assessment of like lifestyle behavior. It's just it's a significant shift. It's obviously very positive. But is there something changing with the cohort of insureds that's kind of worth noting in this change in the numbers? Thomas Kalmbach: I don't think it's really a function of the cohort changing. I think it is just continued trends and we see continued favorable mortality and part of circulatory [indiscernible]. We see continued trends and favorable cancer death, nonlung cancer gets, which are really favorable. And then the other thing that's maybe happening on a macro basis is the non-medical deaths are actually really seem to be improving, and that would include suicide and homicide and the drug and alcohol abuse. So I think that's probably one area where we're seeing a little bit more improvement from a [indiscernible] purpose that actually impacted the overall mortality. Frank Svoboda: Yes, I was going to note that on the nonmedical side because in the late teens and then especially in the early days of COVID, we had really seen a spike a lot of the opioid and just some of the other suicides and that type of a thing. And so we really did see a large increase there. It's probably been 7, 8 years ago now and had that for a few years, and that's been really good to see that temper here the last couple of years. And we've seen really -- even though the nonmedical accounts for only about 20% of our claims, we're seeing some really significant changes in that. And I think that does have some impact, as Tom mentioned, they're a result of some of the societal impacts and that type of thing. And maybe some of the battles against the opioid crisis and that type of thing has maybe been a benefit there as well. Randy Binner: That's great color. And then one more, if I could, as a follow-up to the discussion on the American Income agent count. I guess I heard about the initiatives, and I think it was going to describe more of an issue of getting agents in the door. But is there is the retention of folks they are changing at all kind of after year one? Are you kind of keeping the same percentage? Or has that changed as well? James Darden: The -- it's a little bit of both. It's a little bit of just recruiting activity, and it's more of the agent retention in the first 6 months. And we really focus on our agent retention in the early days because we are recruiting folks that are new to the industry, some are new to direct sales. And so we know that the extent of people getting onboarded, trained and producing and having a sustainable income really drives that long-term agent retention. So we really focused on the early days. And so again, it's not our -- from a corporate perspective, we're doing all that activity. That is our middle managers out in the field that are spending time, recruiting agents, training them and the whole onboarding process and in addition to they're doing their own direct sales. And so that's what I'm describing when I say we're trying to make sure that our incentive compensation system appropriately rewards between those 2 activities because it is a balance. There's only a certain number of hours in a day as they would say. And so when I talk about we're tweaking that a little bit, what I really like to see, as I've mentioned, is we've got 3 quarters in a row where we've got improvements in our agent productivity, just that agent count and a little bit higher turnover in that first year than what we've historically seen. So we know we need to move the pendulum. We want to pin on a swing back a little bit and move the incentive a little bit more on focusing on getting those agents trained and onboarded. So that's kind of the overall dynamics of what's going on with American Income. But like I said, if you look at the growth and the retention at the other 2 agencies that tells us that it's really specific to this particular distribution versus a more macro view. Frank Svoboda: Randy, I was going to add one more thing to our discussion around some of the mortality trends that we're seeing and that just before we leave that. I think a question that we get fairly often to when we are talking to folks, do we think that the new drugs that are coming out and weight loss treatment and those type of things are, is that being -- having an impact -- and we really do think that's probably a little bit too early, especially for our insured population, just getting access to those drugs and affordability over time. I mean we're really optimistic that over time that, that -- that could have some really positive benefits to our mortality experience especially some of the side effects from diabetes and those type of things, if they're able to kind of delay death from some of those [indiscernible] health benefits and causes. And then I kind of look at 2, and I don't think we have this empirically, but you look at the higher utilization that we've been seeing on the [indiscernible] subside and so you have a lot of more senior folks that are going to the doctor more often, they're getting with the doctors. I think people post-COVID -- there's been an increase in just taking care of themselves and getting some of that. I see that in just some of the utilization numbers. And so I tend to think that maybe that has a little bit of some impact on that as well. Randy Binner: Okay. And thanks for the clarification on American Income. Operator: Your next question comes from Suneet Kamath with Jefferies. Suneet Kamath: I wanted to come back to this idea of the resiliency of your customer base. Clearly, showing up in the first quarter results, but if I just think about what's going on macro-wise with the war, a lot of those developments on things like gas prices sort of happened later in the quarter. So I guess the question is, are you seeing anything as we start traveling through 2Q that suggest that maybe there's incremental pressure? Is it too early to see the pressure from things like higher gas prices? James Darden: I think what we've seen historically during different economic cycles is, there might be a little bit of pressure, particularly in that first year. What happens, what we've seen through like early 2000s, great financial crisis, those type of cycles is -- we actually see a benefit a lot of times in growth in sales, growth in agent recruiting. And what we see with the in-force is it's very resilient because after that policy has been in the customers' budget, for a couple of years, it's very resilient. And the renewal persistency rates just do not move very much. And I think that gets back to the affordability of our policies, the average premium, depending on the distribution for a rounding sake is $40 to $60 a month on average. And so that's just not a significant component of a consumer's wallet that they're spending on other things really, that's really not the first or the second place that we've seen that they look to scale back just because it's not significant dollars on a monthly basis as well as it's been in their budget for quite some time. And the consumer also knows that is kind of a security perspective is that periods of uncertainty or high inflation or things like that, my coverage for my family and the protection orientation of how we sell these products is not something that I really want to get rid of as well as I know if I cancel my policy, but I want it long term, I have to go back through underwriting, requalify and the policy may be more expensive because my age is older, my health may be in a different spot than I originally took it out. So from our perspective, as we look at it over decades, we see slight movements, but we do not see significant movements from that resiliency perspective. Frank Svoboda: And I would just say what we're really hearing from the field in more recent times. And is that while there might be a little bit harder, you're not really seeing a major pushback from the consumers at this point in time. And maybe it's an extra call we get the sales. I mean the thing that helps having the exclusive distribution and contractors wanting to make their own money. And so they're maybe they have to make an extra call or 2 during the week in order to get a sale, but they're continuing to work because they want to have their level of income. And then I would say Matt noted on prior calls as well, and we've been seeing this quarter too where that average premium just continues. We would think that if we're seeing to a lot of stress within the consumer that they would choose down, and they would say, maybe I can't afford $35 a month. I really want to have this. Let me add something for $25 a month, but we're really not seeing that. We're still continuing to see the average premium monitor issues holding steady, if not decreasing just a little bit. Suneet Kamath: Okay. That's helpful. And then I wanted to circle back to AI real quick. It was helpful to get some of your thoughts on where the expense ratio could go. But are you seeing any additional threats emerge in terms of your target customer base or your distribution channels where new entrants are coming in, that may have a different distribution strategy to sort of attack your target market? James Darden: Yes. I think what's important there is a vast majority of our growth in sales are coming through exclusive agency channels. We don't see or experience a lot of competition in those channels at the at the time of sale. Our agents are out generating their own activity, referrals, working leads, those type of things. And so it's not sold to consumers that are actively looking for a supplemental health policy today or basic protection life products today. The direct-to-consumer channel is more subject to competition because that is going after consumers that are actively looking and shopping and things like that. And so we do recognize there's a little bit more challenges as AI comes into play from entrance. And frankly, that's an easier market to get into from a new entrant perspective, the barrier to entry, the cost of entry is a lot less than agency sold business. And so that's why I mentioned earlier, we think AI is going to be a benefit to our agency sold business. It's not subject to a lot of competition. It's harder for new entrants to get into that market. And the beauty about our marketplace is that a significant number of people in our targeted demographic is not -- income demographic is not saturated. So when we sell more we are not having to take market share from somebody else. Over 50% of that population doesn't have life insurance and then it's even more significant when you talk about underinsured or they just get a little bit through work that doesn't travel with them because it's a group policy. And so we're very optimistic of where that goes, and we are focused on more direct competition in our direct-to-consumer channel. That's why you'll hear us over time, we think that's more of a low single-digit growth because there is going to be a certain subset of the population. We believe that's smaller that is more active and looking than the majority of our agents sold business. Operator: Our next question comes from Mark Hughes with Truist. Mark Hughes: Just a quick one for me. You talked about the investment in lead generation. Can you talk about the trajectory you're spending there, whether they're are any new technologies or new approaches you're using? And does AI have any meaning for lead generation? James Darden: Yes. And so a lot of our lead generation is coming through our direct-to-consumer advertising. And so the benefit that we've had over the last year or 2 has been capitalizing on that investment spend and not just converting that advertising spend into sales of just the direct-to-consumer channel, but a lot of the leads and inquiries that we're getting, we're moving that to an agency channel that has a higher conversion rate. So we have significant growth in just the total volume of leads, which would be equating to the spend in that area last year. And as I mentioned in my prepared remarks, we're probably going to be another 5% or 10% growth in the number of leads. The dynamic going on there is, over the last several years, until 2025, you heard me talk about we continue to scale back our advertising spend because the costs were going up and the lease conversion was going down. Well, now that our overall aggregate conversion ratio is going up when I look across both our direct-to-consumer and agency channel, that gives us more money to spend on generating more leads. So we're increasing our advertising spend to generate more leads. And that will be something that continues to grow in itself. So to the extent that we have this better conversion, we have more leads being utilized by our agencies. I anticipate throughout '26 and then into '27, if that trend continues, to continue to spend more on advertising that benefits both sides of the equation, meaning both our direct-to-consumer and agency channels. So as far as the AI business in that -- no, I was going to say, I think you had a comment about AI is that on the consumer channel -- as you might imagine, the way consumers may be looking for life insurance or responding to ads, I believe that a lot of these AI platforms are going to convert into some sort of advertising revenue model. And we will be there as part of that. And I think that's where our deep experience in advertising in these online channels will come into play. And frankly, the volume of dollars that we spend is very significant. With some of the big platforms we participate in their beta programs, and we're there with the seat at the table, so to speak, with these advertising platforms as they look to convert and monetize some of this AI technology. And it's much like what we saw in some of the early days with Facebook and some of the others as they convert into advertising platforms. Operator: Your next question comes from Ryan Krueger with KBW. Ryan Krueger: Just a quick one. On the life margin, and maybe this is -- there's some rounding here, but I think you said you expected 41% in the fourth quarter. I would have thought there would be some improvement given the lower net premium ratio after you factor in the remeasurement from the assumption review in the third quarter. So just curious how you're thinking about the benefit on a go-forward basis from the assumption for [indiscernible]? Thomas Kalmbach: Yes. Right. I think fourth quarter is one of those quarters that also has a little bit of seasonality in it. So that offsets some of the benefit that you get from a lower net premium ratio. And then also, the net premium ratio changes are relatively small. I mean, there are small incremental changes that happen each time we make an assumption update. But I think for the fourth quarter, it's probably more of a seasonality thing. Ryan Krueger: Okay. Maybe just one follow-up on that issue is -- would you expect -- do you think 41% roughly is the right margin at this point, stripping out assumption review impacts? Or could there be some upside as we go out further? Thomas Kalmbach: I do. I think that's a pretty good normalized underwriting margin. We've seen mortality come down, so obligation ratios have come down. We've talked about amortization coming up a little bit, but it's really kind of aligning around that 41%. Frank Svoboda: And I think, Ryan, you got to think of it as around that. So if it's 40%, it could be if it 41.1%, 41.2% we're still thinking of that as being around 41%, same as 40.8% or something like that. So it's going to move by a few tenths of a point, but it's going to be pretty close to around that. So you do have some of the impact of the amortization that's coming into play as well. I'd just add that, and that continues to grow just a little bit each quarter, just as the new renewal commissions at American Income come into amortization. So you'll see some benefits on the policy obligation percentage a little bit more than that. I think that gets offset a little bit by the higher amortization. Operator: Your next question is a follow-up from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Just wanted to confirm. I know you mentioned earlier that the cash flow generation was a little bit towards the higher end of the range. So if you could just give us a little bit more clarity on where the cash flow generation ended up? Just remind us of the range? And then if there was anything in particular that drove it towards the higher end? Thomas Kalmbach: Yes. Last quarter, excess cash flow, I said was going to be between $600 million and $700 million. I think as I look at it now, probably narrow that range to $650 million to $700 million. And so that excess cash flow, the midpoint of that is right around the $675 million side. Frank Svoboda: We got -- we have a better visibility, clearly, on the amount of dividend distributions coming out of the sub from that perspective. So you're down -- the downside clearly is much less, but -- and we're able to kind of get the sense of that as Tom said, in that upper part of the $600 million. Operator: That concludes our Q&A session. I will now turn the conference back over to Stephen Mota, Vice President of Investor Relations for closing remarks. Stephen Mota: All right. Thank you for joining us this morning. Those are our comments, we'll talk to you again next quarter. Operator: That concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.
Operator: Greetings. Welcome to LSI Industries Fiscal 2026 Third Quarter Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jim Galeese, Chief Financial Officer. Thank you. You may begin. James Galeese: Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning, detailing our fiscal '26 third quarter results. In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate website. Information contained in this presentation will be referenced throughout today's conference call included are certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of GAAP and non-GAAP results is contained in our press release and 10-Q. . Please note that management's commentary and responses to questions on today's conference call may include forward-looking statements about our business outlook. Such statements involve risks and opportunities and actual results could differ materially. I refer you to our safe harbor statement, which appears in this morning's press release for more details. Today's call will begin with remarks summarizing our fiscal third quarter results. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark. James Clark: Thank you, Jim. Good morning, everyone, and thank you for joining us today. Before Jim Galeese walked through the numbers for Q3, I wanted to take a few minutes to step back and frame what you're seeing this quarter in the context of the journey we've been on. When I joined LSI in late 2018. We were a company doing just under $300 million in revenue with EBITDA margins in the low single digits and a stock trading around $2.5. We were fundamentally a lighting company. A good one, but just a lighting company. The question at that point was whether we could build something more durable, more differentiated and ultimately more valuable. . In 2019, we introduced our 2025 plan with a goal of reaching $500 million in revenue and 10% of EBITDA by 2025. We achieved that plan early in fiscal 2023, and that gave us the confidence to move forward with our Fast Forward plan, targeting $800 million in revenue and $100 million in EBITDA by 2028. But the more important change was not just in the numbers. It was in how we thought about the business. We made a deliberate decision to organize around vertical markets instead of products. That changes how you operate. how you invest and how you grow. It also changes how you show up with the customers. We chose markets where there is a sustained need to reinvest in the physical environment driven by the consumer experience. When one brand raises the bar, the competitors have to respond. That creates an ongoing cycle of investment, and that dynamic continues to work in our favor. As we've discussed before, we grow in 2 ways: first, by adding new vertical markets; and second, by expanding what we provide within the markets we already serve. When we can provide lighting, display, mill works, graphics, and program management as a single integrated solution, we become more relevant to the customer. We participate in more of the projects, and we build deeper relationships over time. That is where we create real value for our customers and for our shareholders. Over the last 5 years, we've deployed more than $500 million across 4 acquisitions, including Royston. Each one has added the capability and strengthened our position in the verticals we serve. Just as important, we have done this in a disciplined way, supported by the cash flow of the business. We've been very intentional about what we buy, how we integrate it and how it fits into our broader platform. Today, with roughly 3,000 people in LSI and 23 U.S.-based manufacturing locations and a pro forma revenue run rate approaching $900 million, the platform we set out to build is taking shape. It's broader, it's more capable, it's more resilient than the business we started with. The focus is now on execution and continuing to scale what we have built. One of the things I'm most proud of is our high CD ratio this team has built over time. We set our expectation carefully, we deliver against them, and that consistency has been a key part of building credibility with our customer and our investors, and it's something we work hard to protect. The acquisition and integration of Royston is a significant opportunity. It expands our capabilities and strengthens our position across multiple vertical markets. Our approach will be disciplined and consistent with how we've managed prior acquisitions. We will take the time to integrate it the right way, align it with our operating model and make sure we're capturing the value we expect. As we move through that process, we will evaluate the business through the lens of our vertical market strategy and our focus on margin quality. Where there is strong alignment, we will invest and grow where there is less alignment, we will be thoughtful about how we serve those areas going forward. That is the part of how we built this business and it will not change. That discipline has been a defining characteristic of the company, and it will continue to guide us. We believe the platform we built is the right one. The markets are there, the capabilities are in place, and the team is strong. The opportunity now is to execute and to continue to build on that foundation. Now before I turn things over to Jim Galeese, I wanted to make a few brief comments on the quarter. We delivered solid third quarter results with growth across segments and continued strong cash generation. The performance reflects ongoing momentum in our key vertical markets and the operational discipline of the team. We are seeing the benefit of the model we've been building with more consistent activity across our core customers and improved execution across the business. Looking ahead, we expect a solid fourth quarter, and we feel good about how the business is positioned as we move into the next year. While there will always be moving pieces in the near term, the underlying demand drivers in our vertical markets remain intact, and we believe we are well positioned to continue to build on the progress we have made. It's an exciting time for LSI. We have a lot of opportunity in front of us supported by a stronger and more capable platform than we've had at any point in our history. I still feel like we're in the third inning of a 9-inning game. And our job is to stay disciplined and continue to execute. With that, I'll turn it over to Jim for a more detailed walk-through of our Q3 financials. James Galeese: Good morning, everyone. Fiscal Q3 was an eventful quarter for LSI. Successfully delivering solid operating results and taking the next step in advancing our vertical market strategy with the acquisition of Royston Group. The 6-day Royston stub period is included in our third quarter performance and key metrics, including and excluding Royston, are contained in the press release and as follows: Total sales increased 14% versus prior year to $150.5 million. and increased 9% excluding Royston. Adjusted earnings per share were $0.28 and $0.27 excluding Royston, or $0.07 above the prior year quarter of $0.20. Adjusted EBITDA was $15 million or 10% of sales. Adjusted EBITDA, excluding Royston was $14.1 million above prior year, with adjusted EBITDA margin of 9.8%, an increase of 130 basis points over last year. Free cash flow for the quarter was $11.8 million excluding acquisition-related costs, continuing a high conversion of earnings to cash. Post transaction, our pro forma TTM net debt-to-EBITDA is 2.7x. Now a few comments on the performance of our 2 reportable segments. All segment comments exclude the Royston stub period. Our Display Solutions segment had a strong quarter, with sales and adjusted operating income increasing 14% and 64%, respectively, versus last year. Grocery vertical sales increased double digits over last year. We conduct business with over 15 sizable change in this vertical, representing thousands of combined locations, and we're experiencing increased activity with many of these customers. Refrigerated display case products are the lead in our solution set to this vertical, but we've been successful in growing our position in nonrefrigerated or ambient product placements as well with improved margins. Orders in the grocery vertical were 20% above last year, and we exit the third quarter with a backlog also above prior year. The refueling C-store vertical generated high single-digit sales growth over record Q3 sales realized last year. The mix of large multi-quarter, multiyear programs, along with a growing mix of shorter-term medium-sized projects is driving the increase. Orders for the quarter were double digits above prior year with a book-to-bill over 1. Included is over $5 million of program work awarded to LSI by the largest C-store chain in North America. All to be completed by the end of the calendar year. We are encouraged to see this customer begin increasing investment levels after several years of low activity. Total sales for the QSR vertical were down versus last year, reflecting a mix of growing chains, continuing to invest and other chains taking a bit more cautious approach as they finalize plans to adapt to changing consumer habits. Concept and development work remains high in this vertical. Shifting to lighting. Sales increased 2% despite changes in market environment. While code activity remains active, the quote-to-order conversion period lengthened in the quarter. after several quarters of improving time lines. We had a sizable number of quotes expected to convert to orders in the third quarter, which have been extended. We believe macro developments are influencing project proposal and approval activity. Our focus on national accounts continues to move forward with both the number of accounts and projects expanding, both sequentially and to last year. We continue to effectively manage margins, aligning project pricing to changes in material input costs. Lastly, a few comments on our outlook for the fiscal fourth quarter. Our Display Solutions segment, including both LSI and Royston is expected to have a solid quarter. Sales are projected to increase on a mid- to high single-digit percentage basis when compared to the prior year quarter reflecting ongoing favorable customer program activity in the grocery and refueling C-store verticals. This builds on the strong fourth quarter of fiscal '25 which generated 13% year-over-year comparable growth. Conversely, near-term softness is expected in the Lighting segment, impacted by a lengthening project quote-to-order conversion cycle macro factors as well as challenging prior year comps. Recall that lighting sales increased 12% year-over-year in Q4 fiscal 2025. Q4 Lighting segment sales are expected to decline mid-single digits versus last year. As a result, on a consolidated basis, we expect net sales growth in the low to mid-single-digit percent range in the quarter versus prior year. Importantly, we continue to maintain both our price and cost discipline across the organization, ensuring that we continue to realize healthy margins across both of our segments, consistent with our focus on profitable growth. I'll now turn the call back to the moderator for the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Aaron Spychalla with Craig-Hallum Capital Group. Aaron Spychalla: Maybe first for me on the guidance. Can you just kind of, Jim, unpack that a little bit? I just want to make sure I heard it's apples-to-apples as if you owned Royston last year. And then maybe just following on that, almost 2 months since the acquisition has been announced. Can you just talk about the response you've seen from customers, how quickly you can maybe capture some of the revenue synergies from the expanded offerings you have now? James Clark: Aaron, this is Jim Clark. Thanks for being on the call. Jim Galeese will give you a recap here in a second, but I just want to make a comment on one thing. You're right, we announced Royston in late February, but remember, it was not a simultaneous Simon close. I know you're aware of it. We've only had Royston for about 28 days today marks 28 or 29. So a little patience on how Royston contributes going forward. I think we picked up 6 days here in but the graph that Jim put in the release and everything shows the difference between Royston and with and without Royston. But I know your questions were more about forecast forward. So I'll let Jim kind of comment on what he had to say. James Galeese: Yes, with regards to the -- as you know, the Royston Group will from a reporting perspective to go into our Display Solutions segment. And so when I comment the Display Solutions segment will be up high single -- mid- to high single digits. That is on a comparable basis. So that's pro forma comparing Royston their expectations for Q4 to last year. and LSI expectations for Q4 to last year. So it is comparable. And I will say both pieces of that business will realize growth in the fourth quarter. So I hope that helps. So yes, I know that we've disrupted the equilibrium here a bit with the acquisition and the metrics. So some clarity is required. Aaron Spychalla: No, that's great. I appreciate the color. And then on the $5 million program work on C stores, can you just talk about that? Is that part of a larger multiyear program? And just how do you see growth broadly in that vertical in the coming years? James Clark: Well, Aaron, Jim Clark again. I mean I think it's just a normal part of our business. I mean I think we're calling it out because it -- as a customer we've been pursuing to get some recarby here for quite a few years. I don't want to go into who the customer is, but we're encouraged by it. And that's why we called it out. But it's a nice program, and it's the first of customer that's been absent for a few years. So we're excited about it. James Galeese: And Aaron, I take just another proof point as to the overall level of activity that's going on in the C-store vertical. You're very familiar with [indiscernible], contributing to our growth and undergoing change, the sheets, the wall loss, quick trips with a [indiscernible], et cetera. The whole vertical, the environment remains very positive. So it's encouraging to see this large customer, start to begin to invest because, frankly, they're a bit behind. Aaron Spychalla: Understood. And then maybe one last one on the EBITDA margin for Display Solutions, 12%. Can you just talk about some of the drivers there and confidence sustainability? And just maybe talk a little more broadly on some of the cost synergies you think you can realize with Royston in the coming years. James Clark: Yes. I mean, first of all, this is normal course of business, right? We've talked about this for years. The more -- the greater share of wallet we get, the more customers we get engaged, the larger the projects become the bigger our share of wallet becomes with each of those customers, that creates efficiencies that are realized in the business, and we've been making continual progress on that. There's also a lot of behind-the-scenes activity that are going on. I think I mentioned about 15 years ago, we hired a procurement lead that has been phenomenal. He's been a phenomenal asset for us. He's doing a great job with the whole team, really energize that, really looking for opportunities. Same thing on the operations side. We are operators at our core. I'm a commercial guy, but we're an operating company. All of the changes, all the investments, although they are small, they're meaningful. We make those investments to get those improvements. And I think you're seeing a lot of those things pay off. The jump on the display side is obviously Royston is unlike EMI who was dilutive from a rate standpoint, Royston is accretive. So we get the benefit of Royston coming on board. We get a pretty significant number from Royston and we get an accretive rate in dollars, those combinations help there. But I want to make sure I'm underlining the fact that we've been doing our own work and we'll continue to do our own work in improving the core LSI margins prior to Royston. And it's a combination of both of those that is kind of responsible for that number. James Galeese: To recognize what Jim said, our operations team just did a terrific job this quarter. You may recall this quarter a year ago, we were dealing with the surgeon business on the post Kroger Albertsons scenario. So we are taking that business to meet customer demand, but we are fulfilling it on a very inefficient basis. given we were bringing people back that we had to shed resources that we had to shed so building our capabilities back. So the demand patterns have become much more predictable, if you will, allowing our factories now to really get into a very solid rhythm. And I think that was quite evident in our fiscal Q3 results in display. Operator: Our next question is from Min Cho with Texas Capital Securities. Unknown Analyst: Congratulations on your strong quarter here. Just a follow-up on Craig's question a little bit. So it sounds like the that you have pretty good visibility into the timing of your current rollout. So you do expect to see the efficiencies that you saw this quarter continue for the next several quarters, if not longer. James Clark: Yes. Thank you for calling in. Thanks for the question. Yes, I mean we -- these are -- we generally look at these as kind of permanent improvements, right? We look at it as a ratchet that goes up, but it doesn't come down. Now obviously, there's things that affect that. But these type of improvements we do operationally tend to be long lasting and sustainable and the answer is yes, we expect them to continue to provide benefits into Q4 and into Q1, and we are focused on continuing to improve those even further. Now with all of that said, though, I do want to mention, we just acquired a very large company. Part of our secret sauce has always been our integration rhythm and how we come up to speed with these companies, and we try to use the resources we have within our business to do all of those activities. So I'm not worried or concerned about anybody's efforts being diluted or moving backwards but we will maybe perhaps shift priorities to help bring Royston on a little bit faster than maybe we would have and that maybe slows down some of our future activities on improvements in operations. But I think the takeaway message would be that we still see a lot of opportunities, areas for improvement in operations, and those will be ongoing. We see opportunities with Royston. We like the way the company operates. We like the people that are there. We like the culture that's there. We're going to learn from them as much as they learn from us. So we'll be working that together and those combinations -- that combination will continue to persist in terms of opportunities for many quarters to come. Unknown Analyst: Great. Excellent. And in terms of your Lighting business, I know you've been growing your national accounts base, but do you have a general breakout of what percentage of sales is coming from national accounts versus non because your commentary almost sounds like it's suggesting that it's mostly that the softness is really in your nonnational accounts. James Clark: Yes. I mean, we don't break it out and probably it's more for convenience than anything else. I mean we track these numbers, obviously, we track how they perform independently. But to start breaking them out, I mean, we could get into the weeds really fast. But I think your comment is spot on. We do expect to continue to grow in the areas we're investing in. And some of the larger -- we're back to this larger project activity, which is we don't feel as though any of it's in jeopardy. We don't feel as though any of it will go away. We do see a disruption in timing right now with some of the larger project activity just kind of slowing down to make sure that all the other elements are catching up and they're not paying a premium to rush something while another element is delayed or something like that. So I don't -- I'm happy with the progress we've made in Lighting. As Jim mentioned, it was 12% growth last year in this quarter. we've maintained growth in pretty much every quarter over the last year or more. I think this is just a reflection in some slowdown in the 90-day window of the Q4 period right now. I don't look at it as something systemic or something to worry about long term. James Galeese: Yes. As best we can tell, our Q3 performance, 2% growth was clearly a market outperformed as compared to the competitive environment and the competitive environment is seeing the same things. We are and we will continue to generate market performance, driven in some context because of our increased penetration in national accounts activity, which we identified about a year ago is a real opportunity for our business. and our sales leadership is doing an excellent job in pursuing that. And it is, as Jim just mentioned, some of these more sizable projects in the general C&I side of the equation that is just a question of timing. Unknown Analyst: Got it. Also, I know that you've both been spending some time reaching out to some of Royston's largest customers. Can you just talk about the general feedback that you have received? And also given the closing opportunities -- cross-selling opportunities. Is there a difference in how you expect to bid for projects going forward? James Clark: Yes. So I think I did mention in the call that we were actively reaching out to Royston as top customers. And thanks to Royston on that and our own team, they work together extremely well and the customers on Royston side were more than generous with their time and taking the time to talk with us. And our biggest thing is we were working to make sure there wasn't a misinformation out there. what kind of changes, how do we normally operate. And some of these customers, as we talked about before, they're completely new or distant from LSI. We also called some of our own customers. It was a great exercise and one that was met with a great deal of interest and a great deal of opportunity, I think, going in front of us. So I think that there was a number of questions, but probably the #1 question was, what can we expect for change. And our answer was, listen, whatever -- however you have been doing business with Royston in the past, you can continue and we'll be able to continue to do it like that in the future. The second question tended to be around -- we had some customers ask if there were going to be changes to billing and invoicing and things like that. And no, there will not be. We'll force any customer to do anything in the short term, but we will look for opportunities to be more efficient and to serve the customers in a way that they want to be served. And if that is separate billing, we'll continue to do that. And if that's a combined billing opportunity, we will do that. And then probably the third question was, what about how will the company run differently? And the answer was much like the first question. We don't anticipate the company running any differently. We take a very deliberate approach to our integration. We want to preserve the culture that is at Royston, we want to learn from each other. We want to respect the work that they've done and we don't want to destroy any of the value that they bring to their customers or we bring as a bigger entity. So those were the big questions kind of summarized and I will say it's not the first time we've done this, but it was probably the best coordinated, and I think that speaks volumes to the experiences that LSI is gained. And I think it speaks volumes to the professionalism that offered the team was fantastic to work with. Operator: Our next question is from Amit Dayal with H.C. Wainwright. Amit Dayal: Congrats on the execution so far, guys. Most of my questions have been asked, but I'll try to touch on sort of the macro drivers. Jim, you commented earlier, but it was a very different business when you came in as CEO, and today, it's a very different business. So in that context, like what are the macro drivers we should sort of keep in mind while it's sort of thinking about the future of the company? James Clark: Yes. I mean, as I said in my comments, it is a very different business, but it's still fundamentally based on the same strategy that we launched in 2019, 2020, '23, where we perfected our Fast Forward plan, it is a new category as far as we're concerned. And it does make it difficult from a public market standpoint, I think we're always caught in that mix. Are we construction materials? Are we building materials? Are we clean tech with LED lighting? Or are we -- what are we exactly? And I'm always concerned that we get penalized or that we could get penalized for a lack of understanding. But I think as you look at the evolution of what we've done, it's becoming more and more clear that we're a cuter experienced company, right? We are -- there's a creative element, there's a manufacturing element. There's an operations element, there's a service element and it's how we're executing across all of that whole band, if you will, that's really separating us. We're solving problems for customers that never had a solution like LSI offers, one stop, one call, one shop, we're able to come in there and be more efficient and be more integrated and provide a more uniform package, look and feel, and that could go all the way down to the type of wood species we use across multiple this level, and it's us being on site delivering multiple solutions and being visible that I think is the most rewarding aspect from a customer standpoint. We're there, we understand the project better. We understand the people better. We understand how it all fits together better, and we're able to deliver it as one company. So it's really a unique proposition. And I do feel like we're creating a category of one. And the definition will continue to become clearer and clearer as we move forward. Amit Dayal: Understood. And then just on the cadence of revenues with this acquisition now under your belt. How should we think about quarterly revenue flows that may change from sort of the historical way the company has performed? James Clark: I mean, I think Jim had brought it up briefly. I think it's going to -- with the activity we did with the acquisition, having a few more shares out there looking at all the assumptions we had 3 months ago where it's going to be kind of a refreshed look. But in terms of revenue, I think it stays completely on point to the way we've been operating the LSI business continually. We want to have a high safety ratio. We want to continue to execute and perform to the numbers that we project and that we think we're going to reach. They are growth oriented. The company is still very much growth-oriented, so you can continue to look for us to focus on growth, both top line and bottom line. I think with any acquisition and certainly with the acquisitions we've done and as I commented a few minutes ago in my opening comments, we'll look very closely at the business that Royston brings to us and look for very effective ways to serve those customers and look for ways that we can continue to work on this concept of greater share of wallet instead of providing 1 or 2 items, how do we provide 4 or 6 or 8 items. So I think we have a really good opportunity to make this -- to create revenue growth in front of us. With that said, I also feel like we're in the third inning of a 9-inning game. It takes time to get engaged in projects and do go through the customer education process anybody that's expecting that we pick up a new customer or a great new revenue stream in 30 days, that's not the timing, right? I mean it typically takes us 12 to 18 months to get engaged with the project to make sure that we've provided the design... Unknown Executive: Network and the concept phase, et cetera. James Clark: Yes, that concept phase, that piloting phase, and then that turns into a project. So believe me, nobody is more impatient than I am and nobody respects speed as an asset greater than I do, but there is a natural flow to these things. With all of that said, you're going to see LSI continue to grow. Obviously, this is a relatively large acquisition with Royston. Like I said, we like the people that are there. We like the culture. We like to hustle that we feel like it's very similar to ours. And I think we can go do great things together. Amit Dayal: Just last one, maybe. Are you using any AI capabilities to potentially accelerate the integration, accelerate cross-selling opportunities. Any background on maybe using new technologies to accomplish these things a little faster? James Clark: I mean I think there's lots of things that can be done specifically with new technology tools that are available. There are things that are kind of mechanical things that can be done much faster. There's another resource there to model things. But at the end of the day, it comes down to people. And I will tell you that in every acquisition we've done, the greatest asset we have acquired is the people of the businesses that we've acquired. I mean, I have to be honest, there isn't any business that we've acquired there aren't competitors to and there aren't other companies that can provide it. The real value in the acquisitions we've done has been the people that we've acquired and had become part of the LSI team. And I don't know if that can be rushed without exposing too much room for breakage. And we don't want to do that. We want to learn collaboratively. We want everybody to have a voice. We want to have a greater level of understanding why are they doing it this way? This is the way we do it. They do it different, which is best should both processes exist? Is there a way to trim one or the other? Should we melt these 2 processes. And that comes through thoughtful conversations and that comes through giving everybody an opportunity to have a voice and I think that certainly, Amit, you've been covering us long enough. You know speed is something that I wanted to -- I always want it to happen faster. I always want it to happen faster. But we'll do it in a way that's responsible and we'll do it in a way that it creates an opportunity for everybody to contribute. So I think that we're going to have some -- we have a great compelling story. We're going to continue to have growth and I don't know if the risk to accelerate something for short-term gains is worth the long-term opportunity here. But believe me, we'll be looking for every opportunity to make it go faster than we can. Operator: We have reached the end of our question-and-answer session. I would like to turn the floor back over to Jim Clark for closing comments. James Clark: Listen, I would just say, first of all, thank you for everyone that dialed in. I will say we ran into a little technical issue here today where the population of our call actually exceeded the line limits we had. So we'll be expanding that a little bit going forward, and I apologize to anybody that may have had a hard time getting on. We're a different company today, and that's another element we needed to do adjust. I appreciate the questions that everybody answered. I'll close with just a few thoughts. We feel really good about where we are as a company. The strategy is clear. The platform is taking shape and most importantly, the team continues to execute. I think the third quarter reflects that with solid performance and really continued momentum in our key vertical markets. I can guarantee we're going to stay disciplined, particularly as we integrate Royston and we continue to make decisions that support long-term value creation. We set our expectations carefully and we deliver against them. Looking ahead, we're very confident in the direction of the business and on our ability to continue to deliver focused execution. And so with that, I'll say thank you, and thank you for your time and interest in LSI. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Greetings, and welcome to the First Quarter 2026 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead. Emily Tadano: Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2026 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2025 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Steven Hilton: Thank you, Emily, and welcome to everyone joining today's call. Today, I'll begin with a brief overview of market trends and highlight our first quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we are cautiously optimistic that lower interest rates and tenant demand will translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks in the year, many of our markets were impacted by a severe winter storm where sales activities were halted for several days. As we were starting to recover from the lost phase of sales, military operations in Iran commenced at the end of February, increasing interest rates, price -- gas prices and inflation, all of which negatively impacted consumer confidence. Despite these challenges, our first quarter 2026 sales orders totaled 3,664, 5% below last year's first quarter as our slower absorption pace was almost fully offset by our increasing community count. While we still believe the long-term fundamentals for the home industry are strong, we also acknowledge that the current market conditions are causing potential homebuyers to hesitate and that capturing demand for the near term will require higher-than-anticipated use of incentives. Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. However, the slower start to the spring selling season and increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share. As of March 31, 2026, our book value per share increased 6% year-over-year. And with that, I'll now turn it over to Phillippe. Phillippe Lord: Thank you, Steve. Given the current under in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities which we then grew to 345 by March 31, another company record. In the near term, we expect total volume and top line results will largely be driven by increased community count, not higher per store absorptions. Our first quarter 2026 ending community count of 345 was up 19% year-over-year compared to 290 at March 31, 2025, and up 3% sequentially compared to 336 at December 31, 2025. During the quarter, we brought on 40 new communities throughout all of our regions. We reiterate our expectations of 5% to 10% full year community count growth for 2026. We continue to lean into our strategy in this competitive market. Through our 60-day closing guarantee, move-in ready homes and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that you've mentioned, we believe that long-term demand remains supported by favorable demographics and undersupply of affordable homes in the U.S. and when demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share. In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026, taking advantage of the significant discount to intrinsic value for our share price. Additionally, we increased our dividend 12% to $0.40 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to Slide 4. First quarter 2026 orders were 5% lower year-over-year, primarily due to an 18% decline in average resort space, which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue 4 net sales per month where community level market dynamics would not support it. While other long-term -- while over the long term, we strive to be a 4 net sales per month in all markets as we believe we best leverage our fixed cost at that volume. In geographies where demand is meaningfully inelastic due to affordability or competitive attention, we moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts as well as geographical mix shifting from the higher ASP West region into lower ASP each region. We saw a nice uptick in March. [indiscernible] quite as strong as typical spring selling season. After a slow start, April is feeling the same as March. Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional level trends on Slide 5. As always, sales performance was driven by local market conditions in the first quarter. All markets require additional incentives in some markets such as Dallas, Houston and Phoenix, consumer demand is comparatively more elastic where incremental volume is achievable with only small incremental incentives. New other markets such as Austin, parts of Florida and Charlotte continue to be tougher selling environment. Turning to Slide 6. We've been rightsizing our start pace, and we have inventory to align with our faster cycle times. We maintained a sub-110 calendar day instruction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences. In Q1, we moderated start to approximately 2,500 homes. 30% less than last year's Q1 and 6% lower than Q4. We traditionally align our starts pace with our sales pace, but due to faster cycle times and you need to work through from inventory in certain locations, we reduced our start pace this quarter. We expect our go-forward start pace to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 7% year-over-year from approximately $2,000 as of March 31, 2025, to approximately 1,900 homes as of March 31, 2026. We reiterate our long-term backlog conversion target of 175% to 200% as respect to carry fewer fair specs in the future. Internally, we look at our inventory as a combined total specs and backlog because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy 6 quarters ago. We had around 6,600 spec and backlog units at March 31, 2026, 25% less than the approximate 8,800 units we had at March 31, 2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year and down 90% sequentially from Q4. The 14 specs per store this quarter was a huge level -- lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under 4 months of intentionally at the low end of target of 4 to 6 months supply specs due to the slower demand expectations and improved cycle comps. Comparatively, in the first quarter of 2025, we had 23 specs per store or 5 months of supply. Although our completed specs units decreased 17% year-over-year, our completed specs as a percent of total specs were 46% at March 31, 2026, down from 50% in the fourth quarter of 2025. Still above our target of approximately 1/3 complete specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hilla to walk through our financial results. Hilla Sferruzza: Thank you, Phillippe. Let's turn to Slide 7 and cover our Q1 results in more detail. First quarter 2026 home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting a tougher demand environment this quarter. As Phillippe noted, with nearly 70% closings also sold in the current quarter, the events impacting Q1 performance are already mostly reflected in our P&L, while our closings and revenue reflects our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASP and closings were still impacted by the increased use of incentives as well as the geographic mix shift towards the East region. For closing gross margin of 17.5% for the quarter was 400 bps lower than prior year's 22% as a result of the increased use of incentives, higher lot costs and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense and faster cycle times. First quarter 2026 home closing gross margin included $2.4 million of real estate inventory impairment and $1.4 million in terminated land a walkaway charges compared to no impairment and $1.4 million in terminated land deal walkaway charges in the prior year, coupled with about 20 bps from lost leverage unanticipated higher closing revenue. These impairments also impacted margins by about 30 bps. Our current land basis is primarily from 2022 through 2024 and will continue to negatively impact margins in 2026. Based on what we're seeing in the market today, we expect some margin relief will start at the tail end of 2027, and due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct cost savings of nearly 5% per square foot on a year-over-year basis as we were able to flow to the income statement, the lower costs from our extensive vendor negotiations, However, lumber costs have started to trend higher this quarter, and as a result of the Iron conflict, we are monitoring any potential long-term inflationary impact on oil prices. Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5% to 23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A as a percentage of home closing revenue in the first quarter of 2026 was 11.8% compared to 11.3% for the first quarter of 2025 despite curtailing discretionary spend. Although SG&A dollars declined year-over-year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key digger to our success. Our broker relationships remain strong with co-broke percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by repeat sales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year-over-year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The first quarter's effective income tax rate was 23.7% this year compared to 23.3% for the first quarter of 2025. We expect a minimal impact in the second half of 2026 after the elimination of the energy tax credit program at June 30 as our eligibility for such credit was significantly reduced starting in 2025 when the higher construction threshold went into effect. Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in first quarter 2026 diluted EPS to $0.82 from $1.69 in 2025. Before I move on to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain consistent with our historical averages. Despite market volatility, we haven't seen much movement in these metrics over the last year or 2, validating our belief the hesitation in the market is at least partially a psychological decision versus a purely financial one. On to Slide 8. Our balance sheet remains healthy at March 31, 2026, with cash of $767 million, nothing drawn under our credit facility and a net debt to cap of 17.4%. As a reminder, the ceiling for net debt-to-cap ratio remains in the mid-20% range. As we've been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $326 million in Q1. Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the first quarter or 2.7% of shares outstanding at the beginning of the year for $130 million, nearly 3x more than Q1 of 2025 as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value. With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buying back $100 million in shares for each remaining quarter in 2026, assuming no additional material market shifts. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $32 million. For the first quarter of 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide 9. In the first quarter of 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. In the first quarter of 2025, we put nearly 2,200 net new lots under control. As of March 31, 2026, we owned or controlled a total of about 75,500 lots, equating to 5.2 year supply of the last 12 months closings. In today's market conditions, we believe that this is the right amount of the needed year supply of lots to meet our growth targets. We also had approximately 14,600 lots, though we're still undergoing diligence at the end of the quarter, which is another potential 1-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots. About 70% of our total lot inventory at March 31, 2026 was owned and 30% options compared to prior year, where we had a 62% owned inventory and then 38% option lot position. As we shift more land to off balance sheet, we are doing so very slowly and cautiously remaining hyper-focused on margin and IRR and only considering land yields with sufficient margin to absorb the additional costs as we do not believe that all or most land today belongs off book. While we have set 40% of our initial off-book target, our actual percentage will be solely turned higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I'll direct you to Slide 10. Based on current market conditions, we are updating our guidance for full year 2026 on closing volume and revenue to at or within 5% of full year 2025 results. For Q2 2026, we are projecting total home closings between 3,650 and 3,900 units, home closing revenue of $1.37 billion to $1.47 billion, pump closing gross margin around 18%, an effective tax rate of 24.5% to 25% and diluted EPS in the range of $1.18 to $1.46. With that, I'll turn it back over to Phillippe. Phillippe Lord: Thank you, Hilla. In closing, please turn to Slide 11. Before we conclude, it's worth reinforcing what sets Meritage apart. We are a top 5 homebuilder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differences from peers and is anchored on 3 tenants, our 60-day closing guarantee, moving ready inventory and strong realtor engagement together, who we are and how we operate, give us a competitive advantage in the intel space to provide homebuyers, certainty and consistency. Amid today's market backdrop, our priorities are central on balance sheet strength and disciplined capital allocation. We are maintaining a to cap construction land deals off balance sheet where appropriate. This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends. . We incur our strategy with our growing community count, faster cycle times and a disciplined cash commitment framework, we believe Meritage is well positioned to capture incremental market share as demand conditions improve and normalize and to continue creating long-term shareholder value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Operator: [Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research. Trevor Allinson: First one is on your spec count, which you noted a little lost it's been in several years. I think we've heard other builders talk about a reduction in specs across the industry helping take some pressure off of margins here. So appreciating you guys operate a spec model. Are you seeing both your lower spec count and also kind of industry lower spec count is the market pressure here? And is that something you expect the support of the margins moving forward even if demand makes choppy? Phillippe Lord: Yes. Thanks, Trevor. I think that's absolutely the condition we're seeing. A lot of builders are either pivoting away from carrying as much inventory -- finished inventory as they did before during COVID and supply chain environment and they're moving to reduce finished inventory, selling loans earlier in cycle. And then some folks are pivoting more to a BPO model, which is clearing out a lot of inventory in the market. So I think we saw across all of our markets, less finished inventory that we were competing with and we're optimistic as we move throughout the year, that creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build stacks and carry them to a later stage. Trevor Allinson: Okay. That's really very helpful. And then second one, you guys talked about your off-balance sheet portfolio. Can you talk about what portion of that portfolio is held by land banks versus more traditional land options or other structures. And then any detail on how those agreements are structured with an eye on your ability to walk away? And then just generally, your view on use of land bankers moving forward for your off-balance sheet needs. Hilla Sferruzza: Yes, I can take that one. So about 38% of our total inventory control is off book. Of that, about 1/3 is with land bankers. So all in, only about 10% of our total land supply is with traditional land bankers at this point in time. As far as structure, we don't cost collateralize. So we always have the ability, if any deal go sideways to walkaway from that deal without maybe some other hooks and implications that would make us state in a transaction that doesn't structurally work or financially work any longer. So we're very cautious from that perspective. So the only thing at risk for us would be the deposit and any other ancillary costs. Phillippe Lord: And the only thing I would add is, as Hilla said, it's a very small percentage with true lot financing. But because it's not cross collateralized, I think working through those deals on a one-by-one basis is much easier. We have had some scenarios that have gone back to our land bank finances and asked for some more time to stabilize the market, stabilize our inventory levels. And again, working on one deal creates more of an opportunity to do so. Hilla Sferruzza: Yes. And I think we addressed this in our prepared remarks, because we're very selective at the get-go as to what deals even go off book, they typically have a little bit of breathing room on the margin versus having arbitrary targets where we're forcing deals off book to hit a percentage. So for us, the ability to work with our partners, our off book partners is pretty high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them. Operator: Our next question comes from Stephen Kim with Evercore ISI. Stephen Kim: If I could follow up on the land bank question. Can you give us a sense for roughly what percent of your land bank deals you've been -- you've extended your takedown schedules. And am I right in thinking that in a typical land bank deal, any individual land bank dealers to extend, let's say, 6 months that, that might drive roughly 100 basis point lower gross margin on the remaining loss versus the initial expected lot price? Phillippe Lord: Thanks, Stephen. So first part, again, we have such a -- such a small percentage of our land book is land banker lot financing. So even as you look at what percent of our deals required us to restructure. And when I see restructure, maybe we needed a quarter delay in the next take to buy sometimes to get to do some inventory or stabilize kind of margins or what not, for the most part, that was very small as well. Most of our deals are performing fine. We're continuing to take back down, and we're moving through the inventory as we planned. As far as your other question, I think it's a little bit of an oversimplification. It really depends on the deal, how many lots are buying per quarter, the structure of the deal. In some cases, I think some land bankers are willing to actually give you a take for no carry just to keep you in the deal rather than taking back the lots and owning the loss. I think we're sort of in that environment today, at least with our folks. So it's just -- it's hard to answer. It really depends on your relationship, and it depends on the deal. I guess if all things being equal, they were going to charge you for those delays. Your math might be closed. I don't know, Hilla, if you want to add anything to it? Hilla Sferruzza: Yes. I mean, it depends what part of the cycle and how many assets you still have on book part of that math and, of course, what your interest rate is. But for us, when you look at it, good thing -- bad things don't get better with age. So if we're asking for sold, it's typically for us to rework a product lineup or to value engineer something we're not just holding and crossing our fingers and thinking something arbitrary is going to get better in 3 to 6 months. So again, that's kind of the [indiscernible] of being very selective as to what deals you're putting in an off-book structure in the first place. But yes, I mean, there's definitely -- if you can't work a free be, it's typically in to cost you whatever your interest burden is for that 6 months hold. So yes, there needs to be an implication, but 100 bps a little heavy. Stephen Kim: Okay. Appreciate that. Yes. And I also appreciate your comments about how there's a human component to this. It's not all just simply math. I think that's an important point to make. If I could also talk about your long-term gross margin target of 22.5% to 23.5%, which obviously is where you weren't that long ago and is but something that's quite above where you are currently. You've talked in the past, Hilla, about the importance of volume in achieving your level of gross margin. And so am I right to assume that, that long-term target is consistent with at least 4 per community absorption rate? Or do you think there's an opportunity to hit that gross margin level long term with a lower level of absorptions than you had envisioned in the past? Phillippe Lord: Steve, I'll take part of that question. This is Phillippe. So I think it's a lot easier to get to our long-term goal around 22.5% at 4 net sales per month. We're just way more efficient at that level we leverage our fixed and variable overhead much more meaningfully. We're able to navigate cost, the cost -- the vertical cost environment more effectively. So the path at 4 net sales per month is much easier. If we were to run it at something less than that, then the offset would have to be in margin, direct margin, which you might be able to hold on to your margins at a slower pace and try to drive it. So there is a path at [ 3.5 ], if you will, versus 4. But I think long term is the way to get there. Hilla Sferruzza: Yes. I think, Phillippe is exactly right. There's 2 components. The first is just absolute value -- absolute volume and the second is volume per store. We're much more efficient at 4-plus. So we definitely want that because costs at the local store level, the superintendent and the cost of running that location are leveraged better, but there's also costs at the division level that get better leverage period with volume. We think that there is an opportunity for both. Right now, the opportunity for us is at a higher store count. So hopefully, you'll see that improvement just between Q1 and Q2, right, the volume that we are guiding to on closing on Q2 is nicer than where we are today, and we guide to a higher margin than where we ended the quarter and part of that is going to be the incremental leverage. But once we get back to that for net sales per store average, there is another bump for us on incremental leveraging above that. Phillippe Lord: And we see our path from where we are to where we want to go both this year and the future years is really driven by the following things, but the volume, we have the higher store count, so we think we can get incremental volume, less inventory in the market to compete with, so a stronger pricing backdrop and then reducing our incentives over time, a lot of the incentives that are currently in the market are psychological. We're trying to convince folks that it's a good time to buy. It's part of affordability and part psychology. So we're optimistic that as long as nothing from the macro environment continues to erode, we can see a path there. Operator: Our next question comes from Alan Ratner with Selman. Alan Ratner: First question on the margin guide, and I think you, Phillippe, kind of touched on it in Steve's question, but I just want to dig a little deeper. So immutably I was pleasantly surprised to see that you expect to hold margins roughly steady quarter-over-quarter. I would have thought just given kind of what we're hearing from other builders, what we're seeing in the macro environment that there might have been some additional pressure there, at least flowing through in [ 2Q ]. So it sounds like some of that is top line leverage, but I'm curious if you feel like now that you've reset some of the absorption goals at least for the near term, whether the kind of 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today. Phillippe Lord: Yes. A lot of questions in there that I'll answer all of them for you because they're all very good. I do think that -- there's a couple of things we see that feel like it's forming sort of a potential floor. Now this is, again, I don't know what's going to happen geopolitically. I don't know what's going to happen with a lot of things that are outside of my control that can impact this. But in the industry, we see a couple of things. Number one, we see inventory levels stabilizing, which I think is really good for pricing stability and confidence for the consumer. When there's less inventory out there, I think consumers feel a little bit more urgency than when there's a lot out there. So I think that is helpful. . I think the volume is critical. We have the highest community count we've ever had. We're projecting more community count growth through the rest of this year. And even at these slower absorption paces, we think we can get there and not have to give up more margin to get there. So we're optimistic about that. And then look, in the beginning of this -- of Q1, we actually started feeling better about things, the weather kind of [indiscernible] off, February was okay. We had the war in Iran and people took a step back in certain markets. But March was pretty good. So we started feeling like we had some stability and some predictability in the market. It's just really hard to tell every week, whether that's going to be something that's maintained and sustainable? Or there's going to be something else that drove the consumer off their game. But I feel a lot better about where inventory levels are, and I feel a lot better about the communities that we've opened and the opportunity those give us to gain volume throughout the year. Hilla Sferruzza: Two other points on margin, Alan, the first -- and we talked about it a little bit on our last earnings call that as we continue to improve on our direct costs, as we work through our finished spec inventory, you're going to start to see even better direct costs coming through. So that's a benefit that you'll see starting in Q2 and continuing through the latter part of the year, obviously, all new communities are all with the new cost. So the more volume we have from those, the better that piece is. And then just kind of doing math, if you look at our closings this quarter and what we're guiding to for next quarter, the back half of the year is going to be higher volume at our current projections. Even at the low point of the full year guidance that we provided. So again, that leveraging component that we're talking about is going to have an even more material impact for us through the back half of the year. Alan Ratner: Great. All right. Perfect. I appreciate all the detail there. Second question, I know you don't give specific cash flow guidance, but the last couple of years, cash has been a drag as you've been ramping the spec supply as you've been gearing up for this very significant community count growth it feels like both of those are kind of hitting an inflection point here where spec inventory is coming down a little bit. Community count is still going up, but not at the same rate it was. Pretty strong cash flow in the first quarter, at least seasonally speaking. So can you give any guidance or color on where you expect the cash flow to shake out for the year? Are we past kind of the biggest burn period and maybe cash should start to improve even if earnings are under pressure on a year-over-year basis? Hilla Sferruzza: Yes. I mean we don't have specific cash flow guidance, as you noted, but the discipline to get down to $14 million specs per store is an incredible effort by the team, especially if you think that just a year ago, we were at 23 specs per store, that's relieved a lot of cash. That was kind of a more measured approach on land development while definitely increasing shareholder returns, but not by an equal offset is letting us kind of hold steady. So if you think about the fact that we have these faster cycle times and we're trying to time start with sales pace, you really shouldn't see something too detrimental occurring on the cash flows and any cash position where we are is probably a good place for us with the size of the balance sheet that we have. So I think that you're going to see this kind of maintenance of cash flow. The outsized return to shareholders for the balance of this year, as we've already articulated in our programmatic repurchase plan. But I think that you should see a more measured cash utilization as we're bringing stores online, but a lot of the spend has already been incurred, and we're definitely monitoring the WIP units and the stick some brick costs that were spending before we close the home. Operator: Our next question comes from Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to start off with just kind of broader thoughts around the demand backdrop. So far, this earnings season, we've heard slightly different narratives across the spectrum. Some builders kind of more leaning towards kind of a net commentary that maybe trends are a little bit more stable. Also incentives and levels maybe also kind of stabilize and you kind of noted also a little bit about maybe inventory coming down somewhat, which has been helpful. At the same time, you've kind of highlighted some choppiness across your footprint, notwithstanding perhaps March coming back a little bit stronger. But I was hoping to get a sense of with what it sounds like from your commentary, maybe a little bit more on the cautious side, if I'm interpreting that correctly. Is it certain markets that you're exposed to? You highlighted parts of Florida, Charlotte, Austin, is it maybe the price point that you're offering or the fact that you're maybe still in kind of that spec area, which I think, by definition might cause a little bit more competition. Just trying to reconcile kind of where you are within the industry and how to better understand your positioning and how that relates to your commentary? Phillippe Lord: Yes. Thanks. I feel like you kind of answered your own question, but I'll try to add some more to it. I think we're more cautious than maybe the opposite of being cautious. I think a part of it is our buyer profile seems to be lacking the confidence that may other buyer profiles have. They're stressed more from an affordability standpoint, cost of living. So it does feel like the procurement of those sales is very high, which makes us there cautious. I think the other thing is our footprint, we're in the Sunbelt states, primarily those were the states where prices got the most stretched during the last 5 years. Affordability got the most stretched. There's probably higher levels of inventory that we compete with. We're going to head-to-head with a line of other entry-level builders that do similar things to us. So for all those reasons, I think when you look at our buyer profile and our geographical footprint, we feel cautious right now. Michael Rehaut: Right, right. No, understood. Secondly, there was a question earlier about cash flow and community count. And obviously, we reiterated your outlook for this year and you still have very strong growth kind of flowing through in 2026. How should we think about '27, '28 given your current land position, particularly since with volumes being such a big driver of leverage and maybe you're a little less confident at least in the near term around getting significant improvements in absorption? How should we think about community count growth over the near to medium term, 2 to 3 years out? Phillippe Lord: Yes. Great question. I feel really good about 2027. I mean, as I indicated in the script, we will have 5% to 10% community count growth this year over last year. So we're going to 2027 with that, I feel like we'll be able to hold or grow that incrementally in 2027, really hard to pin that down just yet until schedules are dialed in and whatnot. So I don't want to commit to anything in 2027, but we have the ability to grow our community count in 2027, if it makes sense. We're obviously rationalizing all new land or as Hilla said, we're phasing developments a lot more slowly these days. So we'll have to see how that all plays out in the back half of this year. 2028 is pretty far out there. We have 75,000 lots. So we have the ability to grow in 2020 as well. We're being very conservative on new land deals, although land prices have stabilized in some places come down, terms are better, they're still somewhat difficult to underwrite in the turn incentive environment. So we've been very slow to ramp up new land, and I think we'll continue to do so. We have enough land to get where we need to go. And I think if we need to do things to plus up 2028, I think the opportunities will be there. So I don't have a lot of visibility in 2028 right now, but I feel good about on 2027. Hilla Sferruzza: The goal is not to shrink right? We have the ability to maintain or grow and we'll take our cues from the market. Operator: Our next question comes from Susan Maklari with Goldman Sachs. Susan Maklari: My first question is on the cancellation rate that you saw in the quarter. I think you mentioned in your prepared remarks that it stayed low. Can you talk to how your strategy of quick close is helping buyers even though they are seeing -- you are seeing a lot more caution in there and how that came through in that cancellation rate this quarter? Phillippe Lord: I mean it's really low. So until it rises, we're not getting to kind of tension to it. I think a lot of the cancellations that are happening have a lot more to do with the buyer stepping away and just [indiscernible] a good time. But again, it's a very low amount because we have such a quick sale to close. We got a closing ready guarantee because homes are ready to go. So as you buy it, you're picking up your furniture our can rate is extremely low, and we expect it to remain that way given our strategy. I think when people can start to imagine moving into the house 60 days, they start planning their lives. And so it's extremely low. We expect it to remain very low. I'm not sure I'm answering your question. If there's another question, let me know. Hilla Sferruzza: Just Susan, I think, everything we said is dead on pretty much the amount of time that it takes them to the time we enter into the sales contracts until the time they close the house, they spend getting documents to the mortgage company. There's not a lot of time rethink and tour other homes that maybe get convinced away from the commitment that they already made. So they're so hyper focused on just getting everything to the finish line that that's really helpful for us and a cancellation rate perspective. And even though our commitment is 60 days, it actually happening much faster than that at 254% backlog conversion, we're getting folks from sales to movement in less than 60 days. So they literally don't have any time to second guess decision to fall out is typically an event outside of not watching the home that's causing them to have a cancellation. It's something that occurred either in their financial position or in their personal life. That's causing the cancellation rate. It's very rarely that they still continue to tour homes thinking they're moving at that house in 40 days. And they fall along with something else and walks away from the deposit. Hopefully, that's helpful. Susan Maklari: Yes. No, that is helpful. That gets to my question. You're not seeing any change there. Obviously, the strategy of that quick close is helping you keep those people engaged and get them through that process, which is great to hear. So that's good. My second question is on the SG&A. You mentioned that obviously, there was some impact of less leverage overhead leverage that you saw this quarter. I guess, as you think about the back half of this year, how are you expecting that to come through to -- or what will that address SG&A? And then as we think over time, can you talk a bit more about the back office automation and other savings that you're implementing? Hilla Sferruzza: Yes. So we definitely -- typically, Q1 is our high watermark for SG&A, we have some certain retirement compensation triggers that disproportionately skew expenses into the first quarter anyway. And based on our full year guidance for closings, it's going to be our lowest level quarter on closings. So definitely some lower leverage opportunities for us on SG&A costs in Q1. So you should definitely see an improvement in that target for the balance of the year in every one of the upcoming quarters. As far as the back-office automation, there's a tremendous amount that that's still done in homebuilding, taking one piece of paper and typing it into another system, whether it's a closing document, something for title, escrow, mortgage, a lot of people doing things that are not their job decryption, right, their job is an analyst, it's not a typist. So we're finding ways for AI and technology to interpret documents and auto feed, a lot of data into our systems, which should help us gain efficiencies and is part of the path for us on getting to that 9.5% SG&A target in the future. Obviously, those numbers become being more meaningful at higher volumes, it would require -- would have required more manhours to do some of those tasks. It helps you not just with cost, but also with accuracy and rework. So we're pretty excited about [indiscernible] initiatives. There's also a lot of customer-facing initiatives, whether -- it's something that we'll be rolling out. I don't want to steal the thunder from our sales and marketing teams so stay tuned for some fun announcements about some of our customer-facing solutions that we have, both back-office and customer-facing tools. that should both drive SG&A leverage benefits in the very near term. Operator: Our next question comes from John Lovallo with UBS. John Lovallo: So you opened 40 new communities in the quarter, which I think is a pretty solid result. We typically would think of these newer communities having a higher absorption just given higher levels of interest and wait lists and things of that nature. So the question is, I mean, did you experience higher absorption in these new communities and then how many more communities should we expect as we move through the year? Phillippe Lord: Thanks, John. I think most of the communities we opened up in Q1, a lot of them opened up the last month of the quarter. They kind of hit what we bought and met our expectations, that would they exceeded our expectations. I wouldn't say they underperformed, they kind of did what we thought they were going to do. Probably Q2 will tell us more about whether they're hitting their stride, but they've seen -- they're all very good locations, strong position, strong margins, strong pricing. So I think we feel really good about them. And then as we said on the script, we expect 5% to 10% range of growth year-over-year. So I think you can expect a little bit more here in the back half of this year to get us to that number. We'll see how everything goes around opening those up. But we're committed to a 5% to 10% year-over-year growth in our community count this year. John Lovallo: Okay. That's helpful. And then in the prepared remarks and I think in the press release, you guys called out some storm impact in the first quarter, which makes sense. Curious if those deliveries were actually captured in the quarter? Or do you expect those to be captured in the second quarter? And if there's any way to quantify the number of units? Phillippe Lord: Yes. I mean, January was softer than we thought. And I think the primary reason for that, given what we saw in February and March was the storm there were multiple markets that were impacted by that storm. In some cases, mobility was impacted. And so we just didn't see the traffic that we would have thought we would have saw towards the end of January. And as you can see from our guidance, we missed our guidance, and we think that was why. I think that incremental volume that we thought we were going to see in January didn't materialize and if we would have closed an extra 200 to 300 homes, we probably would have been a lot closer to what we thought we were going to do. Those buyers are March depending. And so they'll probably close in into Q2, but our business doesn't really work that way. And we later -- so whether we got that buyer or not, it can either happen next month or the month after that, and we're really just a just-in-time business at this point. So hopefully, that's helpful and answers your question. Hilla Sferruzza: Yes. I mean it's lost days of sale. You don't double up when the stores open back up and you capture 2 days of sale in 1. So there are basically 3, 4, 5 lost days of sale in a large portion of our markets in January. And that -- those are sales that are -- we're not somehow recaptured in the next month. So we were trying to press on the gas and figure out a way to accelerate that. And then as we mentioned, the kind of consumer confidence, maybe put a little bit of a damper when inflation and interest rates and gas prices increase. So we view those as true lost days. Now we're working to catch up. You see our projections for Q2 are a lot healthier than Q1, but I don't know that they were like somehow recaptured in February. Operator: Our next question comes from Jay McCanless with Citizens. Jay McCanless: First question I had, Hilla, in script, I think you talked about land vintages mostly being 2022 to '24. But I missed some of your other comments around that. I guess how much of either total lots now or owned lots running at that vintage or in that vintage area? Hilla Sferruzza: That's pretty granular. So I mean we always have like some long-term communities that we're in Phase 6, and we have some new communities and we're probably buying 25 that we're selling at right now. So we're not giving that level of breakout, but for the most part, it was only just commentary as to why the lot cost is running a little bit hotter. We tend to have community sizes between 100 and 150 and at about [ 3.5 ], [ 4.5 ] net sales per store, you can do the math as to how quickly we burn through those. So for the most part for us, everything is live. I think was the intensive that comment, what we're experiencing and what we have been experiencing at the elevated land development cost burden, that's running through our numbers currently, but hopefully, we should be a tail end of that by the end of '27. Jay McCanless: Okay. That's great. And then the second question I had on the West segment, a fifth quarter in a row were orders down year-over-year and kind of stuck at this mid-80s community count maybe what's the strategy near term? Are there some older dated communities you have to sell through there before you can start to grow that again? Just maybe a quick take on what you're doing in the West segment. Phillippe Lord: Yes. I think you talked about the Western region, which is California, in Colorado and Utah, those are certainly some of the more challenged markets. I think the narrative on Denver is pretty clear. The narrative on what's been happening in Northern California is pretty clear. Arizona is kind of what it is, Sokol's been okay and you take a pretty strong market. But just in general, the West region has been in a tougher place to do business. The affordability has been a lot of pressure on the buyers. There's a lot of competition. land prices are super sticky. Regulatory environment is really high. So we've been intentionally trying to reallocate a significant part of our business to the east of the West region. It doesn't mean we're not in those markets. We don't believe in those markets, but we're being much more strategic. The value of your land book is high and it's very irreplaceable. So we're willing to run that region at a slower pace and try to maximize the margin. of that land book because it took a long time to put together. And so you'll continue to see the West region be a smaller part of our business long term. Jay McCanless: Okay. Great. And if I could sneak one more in. Phillippe, I was encouraged to hear what you're saying about external inventories. I mean if we think about time, whether it's 12, 18 months, any commentary you have on when you think external expect inventories to be down to a level that will give you guys some better pricing power? Phillippe Lord: Yes. Great question. I think the builder group in general did a great job these last quarters navigating some of their aged inventory. I think there's still a little bit of overhang out there. Even our numbers were still a little high on the finished spec that we're carrying like to carry a little bit less. I think there's still some other folks that are navigating as well, but the effort was significant. So I already feel better in general, as we go into Q2 that the environment is less competitive. But I do think there's still some more to go. But I think as we work to got the rest of this year, I can see going into 2027, but a much different sort of competitive inventory environment. I think the other thing I mentioned is important is just there's a pivot away from specs in general in our industry for a lot of reasons, depending on who your consumer segment is and the markets you're in. So I think that's helpful for us because we're not hitting away from stacks. That's our business. And so less competition in the spec entry-level business, move-in ready business, it creates a better and competitive environment for our products specifically. Operator: And our final question comes from Jade Rahmani with KBW. Jason Sabshon: This is Jason Sabshon on for Jade. I wanted to ask you about AI across various surveys, the construction industry ranks quite low in terms of the expected AI impact. And you commented on deployment opportunities in back office automation potentially customer acquisition. But are you seeing any other areas of the business where it could potentially make a difference, be that supply chain management or construction management? Hilla Sferruzza: I mean, AI is going to have a place in every sector of every business. I think it's just deployment and low-hanging fruit. So I think we're starting off with some very easy pieces and hopefully making the mistakes and things that are easily -- easily fixable as we grow a new muscle in our skill set. But yes, eventually, it's going to be a component of everything, everything that we do, the more that we manage our data and are able to use AI on -- in a holistic way in all of our data. We try to also look at things as limited by a system. So if you think about your data and a data warehouse and then you can clearly everything in AI from that perspective, then there is no limit as to what functional area is benefiting for your AI initiatives. So yes, it's definitely something that we're hyper focused on the opportunities for savings on the cost side are massive when you're thinking about it from that perspective. But we're going to walk -- or crawl walk run, right? So we got to take the easy steps first and then advance on to beyond that. Jason Sabshon: Got it. And then just as a final question. Is there a certain level of mortgage rates or the tenure that you'd expect to drive an inflection in buyer activity? Phillippe Lord: Good question. It feels like as being sort of moved that to [ 6 ] or slightly below [ 6 ]. We really see buyer psychology change below that level. And I think anything below that on your way to [ 5 ] will just be really unleashed demand because of the affordability piece. So that's kind of how we yield about it [ 6 ]. It's sort of lower is good for our business. Below that just provides more tailwind for our industry. Thank you operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you. Operator: This concludes today's Meritage Homes First Quarter 2026 Analyst Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead. Zack Moxcey: Good morning, and thank you all for joining us as we discuss the first quarter 2026 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Chief Accounting Officer; and Shannon O'Callaghan, Senior Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. And now if you please turn to Page 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page in our press release and in our SEC filings. You should listen to today's call in the context of that information. Now please turn to Page 3. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets and financial impacts associated with our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now if you please turn to Page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Neil Hunn: Thank you, Zack, and thanks to everyone for joining our call. As we turn to Page 4, you'll see the topics we will cover today. We'll start by highlighting our Q1 enterprise performance, then Jason will walk through the enterprise financials, our balance sheet and provide an update on our share repurchase program. Then we'll discuss our segment highlights and outlook and introduce our Q2 and increased full year 2026 guidance. Finally, we'll close with a few summary points before opening the call for questions. So let's go ahead and get started. Next slide, please. As we turn to Page 5, I want to highlight 3 takeaways for today's call. First, we delivered a strong start to 2026 and are raising our full year debt guidance. Our Q1 results exceeded expectations across every key metric. Total revenue grew 11%, organic revenue grew 6%, EBITDA grew 8%, free cash flow grew 11% and DEPS was $5.16. Importantly, enterprise gross retention remained strong, consistently in the mid-90s area. On that foundation, enterprise software bookings were also strong, core up low double digits on a TTM basis. This continues the momentum from our last call and bolsters our confidence for the balance of the year. On the back of this quarter's performance, we're raising our full year DEPS guidance to a range of $21.80 to $22.05, up $0.50 at the midpoint and more on this later. Second, we're continuing to accelerate AI velocity across the portfolio. In Q1, AI innovation continued to broaden across our businesses, move deeper into core products and increasingly show up in both product road maps and customer conversations. Businesses like CentralReach, ConstructConnect, Vertafore, iPipeline, Aderant, DAT, Subsplash and SoftWriters all released meaningful new AI-enabled product capabilities during the quarter. The signal from our own portfolio that AI can be a meaningful growth driver in vertical software keeps getting clearer by the day. On the AI accelerator team at Roper, as a reminder, this is a central strike team that partners directly with our operating company to accelerate AI product development and capture reusable patterns for deployment across the portfolio. The team is ramping quickly. The team's first partnership was with Vertafore, helping deliver AI agents unveiled at their customer conference last week. This is exactly the kind of portfolio impact we envisioned when we invested in this team, and we expect the pace of partnerships with our operating companies to accelerate throughout the year. And our third takeaway centers on capital deployment. Since November last year, we've repurchased 6 million shares for $2.2 billion, including 4.9 million shares for $1.7 billion year-to-date in 2026. Importantly, our Board authorized an additional $3 billion of repurchase capacity, giving us $3.8 billion of remaining authorization and north of $5 billion of total capital deployment capacity over the next 12 months. Our approach remains unchanged. We're disciplined and unbiased between acquisitions and opportunistic buybacks, focusing on driving the best risk-adjusted long-term cash flow compounding per share for shareholders. Our M&A pipeline today is targeted, focused on high-quality strategic opportunities where we're developing deep relationships and real conviction, and we expect to remain active and disciplined long-term buyers. Before I turn it to Jason, one theme you will hear throughout today's call, organizational velocity across our portfolio continues to build. The investments we've made over the past 2 years in leadership, in AI, in modern engineering practices and operational rigor are working and demonstrating meaningful results. Our businesses are releasing innovation faster, executing sharper and moving with more confidence. And that's what gives us conviction in the balance of the year and beyond. So with that, Jason, let me turn the call over to you. Jason Conley: Thanks, Neil, and good morning, everyone. I'll take you through our first quarter financial performance, starting on Slide 6. As you heard, we delivered a strong first quarter, finishing well above the high end of our DEPS guidance range and ahead of expectations on organic growth. Revenue of $2.1 billion was up 11% with organic growth of 6% and acquisitions contributing 5%. Importantly, recurring software revenue growth across our software segments was again strong at 7%, which continues to be the best indicator of business health and durability. EBITDA of $797 million was up 8% over prior year. EBITDA margin was 38.1%. Our core EBITDA margin was down 70 basis points in the quarter, driven by lower gross margins in our TEP segment due to mix of more consumables at NDI and Verathon, coupled with higher input costs at Neptune. Core EBITDA margins in our software segment expanded 40 basis points, which includes continued investment in AI. DEPS of $5.16 was above our guidance range of $4.95 to $5 and up 8% over prior year. The upside was driven by the combination of stronger organic growth, a lower tax rate and the benefit of lower share count resulting from our net purchasing activity in Q1. Free cash flow of $562 million was up 11% over prior year. On a trailing 12-month basis, free cash flow is now $2.5 billion and has compounded at a 19% CAGR over the last 3 years or 15% excluding the impact of Section 174. We continue to view free cash flow per share as the most important metric in evaluating our progress. And on that basis, we were up 15% versus the prior year, given the combination of growing cash flow and a declining share count. Relatedly and for modeling purposes, we exited Q1 with [ 102.4 ] million shares outstanding. Now if you turn with me to Slide 7, I'll walk through our financial position and capital deployment update. We exited Q1 at 3.1x net debt to EBITDA, which is up modestly from 2.9x at year-end, given the $1.5 billion we deployed towards share repurchases in the quarter. We have $383 million of cash and $2 billion drawn on our $3.5 billion revolver. Importantly, we closed on a new 5-year $3.5 billion revolving credit facility during the quarter, which provides ample liquidity and improved pricing and terms. This also enhances our cost of capital strategic advantage in the face of an increasingly constrained private credit market that other market participants looking to make acquisitions will be facing. Even after significant repurchase activity in Q1, we maintained over $5 billion of annualized capacity for capital deployment, which speaks to the strength of Roper's cash generation engine. Neil highlighted the share repurchase activity in the opening. To put it in perspective, our cumulative 6 million of share repurchases is about 6% of shares outstanding and brings us back to a share count we have not seen since 2017. Additionally, our Board approved expanding our share repurchase authorization by another $3 billion, which provides capital deployment flexibility and reflects continued confidence in our vertical market software position, enhanced capabilities and execution velocity to capture the AI opportunities in front of us. On M&A, the pipeline of high-quality opportunities remains very attractive. As we've discussed, we believe the structural dynamics in the PE-backed software market and a constrained private credit market continue to create a compelling environment for Roper. We remain active and disciplined. With that, I'll turn it back over to Neil to discuss the segment performance and outlook. Neil? Neil Hunn: Thanks, Jason. As you turn to Page 9, let's review our Application Software segment. Revenue for the quarter grew 12% in total and organic revenue growth was 5%. EBITDA grew 13%, EBITDA margins were 42% and core margins improved 50 basis points year-over-year. The quality growth here is notable. Recurring and reoccurring revenue, about 85% of the segment grew in the mid-single-digit plus range, while nonrecurring was essentially flat. Stepping back at the segment level, 3 themes stand out for the quarter. First, enterprise gross retention remained strong, consistently in the mid-90s area. On that foundation, enterprise bookings were also strong in the quarter, consistent with the momentum we described in our January call and supportive of our confidence for the balance of the year. Second, our SaaS transitions continue to advance meaningfully. Several of our larger businesses made real progress on ground to cloud conversions and on bringing new cloud-native products to market. And third, AI progress continued to build to signal of shifting from product investment to product shipping and you'll see this clearly in the 3 company highlights to follow. First, Aderant delivered a record quarter, strong revenue growth and a new Q1 bookings record. Strength was broad-based with particularly strong SaaS momentum on Sierra, Onyx and viGlobal. Aderant also launched AI-driven talent evaluation within viGlobal, continued the rollout of a Stridyn AI platform and completed a record number of Sierra Cloud migrations in the quarter. Simply put, Aderant is winning in the legal market and doing so from a position of strength. Second, Vertafore delivered a solid quarter, steady mid-single-digit revenue growth with EBITDA ahead of revenue. Recurring revenue continued to build across agency, MGA and carrier with MGA again leading on double-digit growth driven by strong bookings and high retention. And last week at their Accelerate user conference in Las Vegas, Vertafore unveiled its new Velocity AI platform, along with a suite of AI agents embedded across the product portfolio from reference connect and reconciliation to submission processing and e-mail agent automation. AI is a meaningful TAM expansion opportunity for Vertafore, and they're quickly moving to capture it. As I mentioned earlier, this is where the Roper AI Accelerator team had its first impact and is exciting to see. And third, CentralReach continues to execute ahead of our deal model. Recurring software revenue grew well north of 20% with margins expanding, demonstrating the operating leverage in this business as it scales. And most importantly, CentralReach continues to be one of our strongest AI proof points. AI-generated session notes have dropped from 5 to 10 minutes to about 30 seconds, giving clinicians back roughly 8 hours a week to work with autism learners. BCVAs are saving 140-plus hours a year on report authoring and review and daily claim generation is 6x faster. Customers are responding. AI and AI influenced bookings were 75% of new business in the quarter, up from 0 2 years ago. This is a textbook example of how the AI right to win, we believe exists across our portfolio. CentralReach sits inside mission-critical workflows, has proprietary data and is translating that advantage into real growing AI revenue. Prior to turning to the outlook for this section, I'll provide an update on Deltek and the GovCon market. Importantly, Deltek grew recurring revenue in the mid-single-digit plus range in the quarter, driven by strong private sector demand, partially offset by continued softness in GovCon enterprise. SaaS remains strong with ground-to-cloud conversions trending positively. Consistent with January, we're still waiting for the GovCon inflection. This is not new. We continue to work through the tail of last year's disruption to federal procurement, agency reorganizations and broader budget uncertainty, which has delaying decision-making, particularly on large enterprise perpetual deals. Longer term, we remain encouraged. The One Big Beautiful Bill is a meaningful positive for defense and government contracting spend, but the benefit reaches us only after our customers win awards and invest in systems, and that takes a bit of time. Consistent with January, we are not baking into our guidance any GovCon inflection or any OBBB benefit and rather we'll adjust as conditions warrant. Turning to our outlook for Application Software. We expect organic growth for the balance of the year to be in the mid-single-digit plus range, lower in Q2 on some nonrecurring timing, improving in the back half of CentralReach turning organic and easing nonrecurring comps. Please turn us to Page 10. Total revenue growth in our Network Software segment was 14% and organic revenue grew 5% in the quarter. The quality growth mirrored application software. Organic recurring grew mid-single-digit plus, nonrecurring declined mid-singles as customers move to our cloud offerings and bookings remained strong here. EBITDA margins were 50.7%, down 460 basis points year-over-year, while core margins held steady, down just 20 basis points. The gap reflects 2 dynamics: our acquisition of Subsplash, a faster growth business with a lower but steadily improving margin profile and our ongoing investment in DAT, particularly Convoy. Stepping back at the segment level, we see similar themes playing out here that we described in Application Software. First, enterprise bookings were strong and gross retention remained high across our network businesses, together giving us improved visibility into the balance of the year. And second, AI progress is tangible and shipping to customers today. Let me highlight 3 businesses in this segment. First, DAT is executing well against a mixed freight backdrop. ARPU expansion continues and adoption of our digital freight marketplace solutions remain strong. On the macro, spot rates are up 20% to 30% year-over-year and the carrier side of our ecosystem grew in Q1 for the first time in several years, real green shoots, particularly in the second half of the quarter. That said, a sharp diesel spike compressed carrier margins late in the quarter, and our guidance continues to assume no meaningful freight market recovery. Our early-stage investment in Convoy inside DAT represents a material TAM expansion opportunity. Today, DAT is a subscription-based 2-sided network. Brokers and carriers pay to access the largest freight marketplace in North America. With Convoy, DAT is evolving into a full end-to-end agentic and ML-powered marketplace, participating in the workflow and the economics of the transaction itself, a meaningfully larger and more valuable business over time. The innovation that enables this transformation exists and is working in the market, and we continue to enhance and extend the tech. In the most recent quarter, DAT's RateView AI agent moved into live production, replacing manual rate lookups with instant conversational lane rate guidance. Convoy's [ Load Notes ] is turning brokers freeform emails and chat messages directly into bookable loads eliminating manual data entry and Loadlink's voice-to-post is enabling hands-free load posting. [ The AI ] work at DAT is not theoretical, it's shipping in production and delivering incredible value to customers today. Turning to ConstructConnect, another strong quarter with recurring revenue up double digits and continued breakout from Boost, their AI-based takeoff solution. AI Auto Count, which reads construction schedules, launches this quarter. Most importantly, ConstructConnect has now moved its entire product and engineering organization into agentic coding processes and tools shipping 4x the features versus a year ago. Broadening this across the portfolio to drive multifold product velocity gains is a key priority and an exciting one for enterprise. And third, Foundry returned to year-over-year revenue growth in Q1 with Nuke closing the quarter at record ARR. Net retention returned above 100% for the first time since the 2023 actors and writers' strikes and our recent Griptape acquisition extends Foundry's leadership into AI orchestration across the visual effects and animation pipeline, enabling studios to securely coordinate multiple AI models and agents in their production and post-production workflows. Finally, and prior to turning to our segment outlook, I'd like to make a couple of quick callouts. SoftWriters launched its AI-enabled order entry product last week, a meaningful workflow enhancement for long-term care pharmacies and Subsplash released Trends AI, giving ministry customers the ability to generate custom data insights through natural language prompts, a key unlock for this customer constituency. Turning to our outlook for network software. We expect organic growth for the balance of the year to be in the mid-single-digit plus range. A couple of quick callouts. Subsplash turns organic in Q4 and margins will reflect continued investment in our freight platform acquisitions for the balance of the year. Now please turn to Page 11, and let's review our technology-enabled products segment. Revenue here grew 9% in total and 7% organic, significantly better than expected, driven by strength at NDI and Verathon. EBITDA margins were 33.6%, down 260 basis points year-over-year, reflecting 2 dynamics: first, input cost pressure at Neptune, principally bronze ingot inflation; and second, a mix shift at both NDI and Verathon towards faster-growing consumables, which carry lower gross margins but more durable reoccurring revenue profiles. Let me start with NDI. Another record quarter driven by exceptional demand for their electromagnetic tracking solutions across cardiac, neurological and orthopedic precision measurement applications. The EP market, in particular, is a strong multiyear growth vector for NDI. Procedure volumes continue to grow, leading OEMs are introducing new tracking-enabled catheter platforms. NDI has a unique right to win as a sensor layer. Great job by Dave and the entire team at NDI. Turning to Neptune. Revenue declined low single digits in the quarter, which was better than expected, driven by strong execution from Don and the entire team in [ Tallahassee ]. The market dynamics were largely as expected with lower mechanical meter volumes partially offset by strong static meter growth. Importantly, Neptune's cloud-based software adoption continues to scale nicely, though off a small base. Consistent with our Q4 commentary, we're not underwriting a Neptune recovery in our 2026 guidance, and we'll continue to monitor underlying demand. Rounding out the segment, Verathon delivered solid growth, supported by strong BFlex and GlideScope demand, and we're optimistic about new product launches planned for the balance of the year. Turning to our TEP outlook. We expect organic growth for the balance of the year to be in the mid-single-digit range, lower in the second quarter as we face a tougher Q2 comp. We expect net raw material pressure to continue in the second quarter and improving in the back half of the year. With that, please turn us to Page 13. On this slide, we'll cover our Q2 and full year 2026 guidance. Specifically, we're raising our full year 2026 DEPS guidance to $21.80 to $22.05, up from $21.30 to $21.55, a $0.50 increase at the midpoint, which passes through our Q1 beat and the impact of our already executed share buyback. We're maintaining our full year total revenue growth guidance of approximately 8% and organic revenue growth of 5% to 6%. For the full year, we continue to assume a tax rate in the 21% area and a bit below that in Q2. For Q2, we're establishing our adjusted DEPS guidance of $5.25 to $5.30. To reiterate key assumptions from our segment commentary, full year guidance assumes no meaningful improvement at Deltek's GovCon market or DAT's freight market and modest top line weakness at Neptune versus a year ago. Finally, on capital deployment, we're entering the balance of 2026 with meaningful optionality. We have $5 billion of firepower available over the next 12 months, a targeted M&A pipeline and $3.8 billion of remaining share repurchase authorization, giving us substantial flexibility to act opportunistically. We will remain disciplined and unbiased between acquisitions and opportunistic buybacks based on what drives the highest and most durable cash flow per share compounding. Now please turn to Page 14, and then we'll open it up for your questions. We'll conclude with the same 3 takeaways with which we started. First, we delivered a strong start to 2026 with 11% revenue growth, 6% organic revenue and 11% free cash flow growth. Retention and bookings remain strong and position us well heading into the balance of the year. Based on this, we've raised our full year DEPS guidance by $0.50 at the midpoint. Second, we are accelerating AI innovation across the portfolio. CentralReach, ConstructConnect, Vertafore, DAT, Aderant and others continue to move AI deeper into their products and increasingly into customer activity, and our AI Accelerator team continues to build velocity across the portfolio. Finally, on capital deployment, as we discussed earlier, our Board authorization of an additional $3 billion of share repurchase capacity gives us $3.8 billion of remaining authorization. Alongside that, we have $5 billion of capital deployment firepower available over the next 12 months, supporting our targeted M&A pipeline. We will remain disciplined and unbiased between acquisitions and opportunistic buybacks based on what drives the highest and most durable cash flow per share compounding. As we wrap up, some additional color on the M&A market. A quarter ago, our pipeline was at record levels. Shortly after our call, the broader public software valuation drawdown caused sellers to pause most active processes. We remain active and our pipeline leans more proprietary. That said, we expect M&A activity to pick back up, timing of which is still to be determined. But when it moves, a large number of opportunities are likely to emerge and we're in an advantaged position to capitalize on this. We remain very bullish about being a high conviction acquirer of vertical market software businesses with deep proprietary moats where AI accelerates growth. The signal on that thesis from our own portfolio is becoming clearer and clearer. So in closing, the ingredients for accelerated cash flow per share compounding are coming together. Our portfolio is the strongest it has ever been. Our organizational velocity is accelerating. AI is both TAM expanding and growth enabling, and we're excited to see our product work translate into higher growth. Our capital deployment capacity and flexibility are significant differentiators and our discipline is unchanged. This is how we compete and win and how we continue to compound for our shareholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Dylan Becker with William Blair. Dylan Becker: Nice job here. Maybe, Neil, starting for you. I think it was clear in your commentary, you kind of talked about the accelerating pace of innovation and the right to win and TAM expansion -- kind of TAM expansive nature of AI. But if we think about kind of the embeddability piece and monetization of the platform, I guess, maybe how that layers in incremental conviction as well, too, right? Is that something that can lower friction around adoption? Is that something that can increase kind of the likelihood of success and value alignment with customers, but maybe how the platform positioning and embeddability of agents maybe layers in kind of incremental confidence in that right to win around agents? Neil Hunn: Yes. I just want to -- so if you're asking about embeddability, I want to make sure you're a little muted on that. I want to make sure I'm answering the right question. Dylan Becker: Yes. So the ability to kind of embedded it into the existing platform, right, and kind of the [indiscernible] value. Neil Hunn: Yes. So a few things I'd start with on this. So it really starts with what sort of we talk about internally all the time about the AI, the product magic. We're able to create products now across many, if not all of our software businesses or when the customer sees in early betas and early trials like what the product can do, like their eyes sort of pop out of their head. It's like truly like a magical experience. [indiscernible] know software could do that, right? So that's what gets us like really excited. We just saw it last week, for instance, at the Vertafore Customer Conference, just sort of as an example. So in terms of monetization, generally -- so that's one. I'll start there. Second is we believe that the right to win here is sort of on-stack AI embedded natively in workflows is a winning play, a huge incumbent advantage. So it is the second thing. Third thing, monetization, I think, for us is -- there's not going to be a one size fits all. There are some businesses today that already price on a consumption basis, think like SoftWriters and pharmacy automation or what Convoy does at DAT. So I think those will be monetized on a consumption basis. Also those customers' unit economics generally are driven on their own consumption, so it aligns with the customer unit economics. I think more broadly, though, the monetization is going to be one that sort of, as you alluded to your question, balances adoption and long-term monetization. So I think that's going to not be largely consumption-based. Our customers very much are saying very clearly, they need to be able to plan for and budget what the spend is going to be. So it will likely be some sort of a subscription with an overage based on utilization of the AI tools. I think that aligns nicely with adoption because then the customers are going to be focused on how to realize the magic value, if you will, and not be worried every time they press a button, it costs money. But then when that gets fully adopted and there's like deeply embedded in workflows, we'll be able to sort of grow with that utilization. Jason Conley: I would just add that our CentralReach business is furthest along in this journey. They've been out in the market with AI products for 1.5 years or 2 years, and all of their AI is incremental. It's based on learners, which you could say is some form of consumption, right? It's not based on practitioners but learners, but that's been -- and customers are seeing real value, as Neil highlighted on the prepared remarks in terms of workflow efficiency and better revenue realization. Dylan Becker: Very helpful. And maybe, Jason, kind of just sticking with you quickly as well, too. Obviously, kind of reiterating the full year revenue guide, 5% to 6% organic. We just did 6% this year. We've got some mechanics kind of layering in and easier comps in the back half as well, too. But maybe kind of just give us a broader sense of how the start of the year kind of layers in conviction and maybe that kind of conservative view that we continue to take to the guidance framework here going forward. Jason Conley: Yes. Yes. Look, it's a strong start to the year, very encouraged by what we've seen. But we're just one quarter in. So we want to sort of see how things play out. As Neil talked about, we have a couple, like you said, mechanical things in the second quarter nonrecurring in AS will be a little bit more impacted than the first quarter. And then we're just -- in TEP, we're comping a high watermark in Q2, but that will ease off in the second half. And then as we've talked about, the second half will improve in software with Subsplash and CentralReach turning organic. And then we have just some easing comps in AS. So all that just sort of blends into our sort of holding the range at this point, but we'll see how it plays out. Operator: Your next question comes from Brent Thill with Jefferies. Unknown Analyst: This is Leah on for Brent Thill. Neil, just curious to hear your thoughts on the private markets given ongoing volatility. Can you just tell us a little bit more about what you're seeing right now and if it's changed your outlook at all? Neil Hunn: Talking about private markets on M&A? Talking about? Unknown Analyst: Correct. Neil Hunn: Yes, sure. So as I mentioned in the prepared remarks, it's definitely been with the public market drawdown. It's been -- it's gone from the busiest we've been in a long time to the least busy. We're still busy. We're still active. As I mentioned, it's more proprietary. It's certainly more targeted. But it's actually -- we think the M&A setup has actually improved a bit for us over the last 90 days in the context that the LP pressure that we've talked about now for a couple of years continues to exist. That does not change in any capacity. If anything, it's maybe increased over the course of the next 90 days. The other thing that's happened that's been -- everybody is widely reported, people understand is now we got the private credit dynamic that also is putting pressure on the asset class. So for us, it's -- we think the combination of those 2 will likely service more quality assets in the processes, and we're a very advantaged buyer in that regard. But the timing is still to be determined. We're modeling out what these maturities look like on the private credit side. There's not a meaningful maturity cliff this year. But if you're a private equity sponsor seller, you want to think about divesting an asset well before maturity. So that's something that [ Jen ] and her team are sort of lining up. So we think there's an opportunity here to get potentially, I should underscore potentially to acquire AA+ assets at differentiated values given the backdrop and the dynamics here. The timing of this is to be determined, but we'll stay active in process and prosecute the opportunities in front of us. Jason Conley: Yes. And I would just reiterate, we refinanced our 5-year revolver this quarter at a very good cost of capital, sort of tightened up the spread a little bit. So shout out to Shannon and Dave Baker for getting that done this quarter. Just a great job there. And just positions us well. We have a lot of balance sheet flexibility, and we'll be able to move quickly when the opportunities arise. Unknown Analyst: Got it. That's helpful. And then just on Deltek's government contracting business, did you see any impact in the quarter at all from the war in the Middle East? And is it having any impact on your outlook for the remainder of the year? Neil Hunn: Yes. We asked that very specific question on our call down with Deltek. And the short answer is very little, if any. There certainly is a sliver of the sort of aerospace defense subsector of government contractors that are focused on munitions and sort of war efforts. So that's a small sliver of the population of the broader, I'd say, contractor population. So it had, if in effect, a minimally negative impact just in terms of those contractors are focused on the war efforts and not on contracting for ERP software, but it wasn't material in the quarter. Operator: Your next question comes from Joseph Vruwink with Baird. Joseph Vruwink: I think all Application Software is facing this question around whether AI-related spending grabs an outsized wallet share and maybe the incumbents get squeezed along the way. I think the interesting thing about Roper is you have exposure to markets like legal and health care. I think those are the 2 biggest vertical AI adopters so far. And then I think your respective software exposure there is still doing pretty well. What's your take on this topic? And have you seen any changes year-to-date as we've also seen the big ARR numbers come through from the frontier model providers that make you more concerned in coming quarters? Neil Hunn: I would say we're -- the punchline on that, the TLDR is no. No impact on sort of the budget budgetary spend that we sort of compete for. I think the double-click on that is the obvious answer, which is -- and this is a personal opinion that I think a lot of these surveys around IT spend are a little misleading because the whole point of the AI effort is we get to go monetize labor spend. So it's about a whole different bucket of opportunity to capture and provide value to the end market. In the particular -- in the -- across the whole platform, we're not seeing sort of an impact to us relative to allocation of budget, especially not in legal and health care as we talked about Aderant, which is amazing in the quarter. It's been an amazing few years here at Aderant. Unknown Analyst: Great. That's helpful. And then I heard enterprise bookings up low double digits over the trailing 12 months. I'm curious what they were in the quarter? And I think your definition excludes price. Maybe can you just comment on pricing power in the aggregate? Jason Conley: Yes. So it was certainly above the double digits. We had an easier Q1 comp last year. I think the TTM is definitely the right way to think about it. Yes. And then in terms of -- it does not include price, you're right. And prices held up very well. I think what we've said historically, we're very thoughtful across the portfolio about pricing, and you have to earn the right, and companies are doing that as part of our strategic plan work that we do is understanding that dynamic. And so we've continued to do that methodically over the last half decade or so. Neil Hunn: Yes, I would -- the only thing I'd add on pricing in addition to what Jason said is we actually think relative to what the market will bear on pricing, we have underutilized that lever in growth. And so it's not like a pan portfolio [ go raise ] pricing. That's not how we operate at Roper. But as Jason said, it's like where you have earned the right with your product, your product value and your customer relationships to take a little bit more pricing then we are doing that. And -- but it's a very strategic. It's a very earned process. And we would hope that we would see a little bit, I don't know if it's 50 or 100 basis points over the portfolio of software and pricing impact or increase over the next couple [ of 3 ] years. Operator: Your next question comes from Terry Tillman with Truist. Terrell Tillman: I wanted to build on the prior question on legal tech because, yes, it's in the media reports and some remarkable growth from some of these SaaS natives there. But I'm curious, though, Neil, you've called out Aderant, a couple of years of amazing. And it does seem like it's like clockwork showing up in the segment level slides every quarter on record this or that. How much more sustainability is there in terms of just the momentum in terms of getting folks to move to SaaS? And just can this train keep going just on the momentum with Aderant? And then I had a follow-up. Neil Hunn: Sure. So it's -- Chris and the team there have done a great job. I mean I'll give you a little bit -- a longer answer here. Aderant has been really good for a very long time for us. But what's been happening underneath the hood has evolved to sort of keep it good. It started with how do we just -- how do we just take it to our competitor and outcompete them in the marketplace. And that's how we went from 35%, 40% market share in large law to 60%, 65%. We just absolutely compete in one, and Chris and his predecessor team did a wonderful job in that sort of era of growth. Well, that era of growth we could see was going to end at some point, so we had to evolve. That's where we sort of said, okay, let's -- we have this installed base of customers, how do we sell them more things? And so we then prosecuted both an organic and inorganic strategy to add the number of bolt-on products that we could or sort of integrate in modules that we could sell to this large law customer base that made strategic sense. So we prosecuted -- are prosecuting that strategy. Then came along cloud, right? This was a constituency that did not want to move to the cloud and COVID happened. So we rapidly cloud-enabled the totality of the product set. And then we're now in the -- still early innings, maybe third or fourth inning, maybe not even that late of moving this customer constituency to the cloud of that lift and shift. And now we have the tailwind of the AI benefit in terms of being able -- so there's -- it's a multiple growth driver story and I think there's quite a long way to go on this. But part of the benefit of owning any business for the long arc of time is you're always looking out horizon 2 and horizon 3 for what you have to build either organically or inorganically to sustain or improved growth rates. Terrell Tillman: Yes, that's very helpful. And the follow-up is just what we're seeing though is with particularly -- not necessarily generative agentic. I mean, that's a pretty big lift in shift in change management, customers being comfortable having things to go autonomous and even getting it beyond kind of the experimental space. So are you seeing with some of the businesses, you actually have to hire -- put in forward deployed engineers or kind of change how you go to market or help the customers and it does create some kind of incremental costs or just handholding? Just anything about how you help them consume this agentic stuff? Neil Hunn: Yes, I think that's -- the short answer is yes. I think we mentioned last quarter that this year is going to be just a massive learning year for us across the enterprise on -- I'll put in like the commercialization bucket of these AI tools, of which FTEs are certainly a component. How do you position it? How do you sell it? How do you price it? How do you get it implemented? How do you get utilization pull-through? How do you drive renewal rates high? I mean that whole customer journey is going to be across the portfolio, a huge set of learnings for us. We have -- I'll spare you the details on inside the portfolios, but we have portfolios where -- businesses where the uptake has just been very natural. We haven't had to have the 4 deployed engineers because when you press the magic button and you get productivity savings that immediately that productivity savings has taken in the customers' operation is something that they can go do tomorrow. In other cases, there's some trepidation. If I press this button, do I lose my job, and you've got to sort of go through the whole change management process of that. I think in almost every case, folks don't -- our customers, they don't lose -- it's not -- lose their job. It's how do you sort of do task replacement, task augmentation and they can go play offense inside their customer to go compete and win. But it's certainly sort of an expect -- sort of something you have to overcome in that regard. So yes, we do expect across a certain part of the portfolio to do some version of a forward deployed engineer. Yes. Final thing I'd say on that is I think it's kind of from an investment point of view, it's probably more of a reallocation or rebalancing of investment from customer support, customer service to FTE. So I don't know if it's like a huge cost increase. It's just a resource allocation dynamic. Operator: Your next question comes from Joe Giordano with TD Cowen. Joseph Giordano: Just curious on your talk about like embeddability and subscription plus overage in the future. Like I get the view of like I don't want our customers to think every time they click a button and it cost them money. I fully get that. If these things become embedded and like the efficiencies potentially require less people at your customers, like how do you kind of judge the ROI of the investment necessary to kind of -- I say -- maybe not saying to kind of stay in the same place. Like the product is getting better, but you're getting like the same kind of subscriptions and it's like costing you more to maybe achieve that now than it did in the past. So how do you kind of evaluate the ROI on the required spend to kind of get to that place? Neil Hunn: Yes. I think it's -- so this is -- these are very hard dollar ROIs. I mean we've said publicly, for instance, at DAT Convoy to manually broker load, it's somewhere between $100 and $200 of labor to do that. You use our load automation, it's somewhere in the $40 range. So it's a demonstrable hard dollar ROI. Similar things can be said that, for instance, at Vertafore, one of the agentic tools they released last week. It's a reconciliation tool, the time and motion study is it's like 17 minutes per reconciliation. Our tool does it in 30 seconds. Then you do these like the scores of these a day. So you can sort of see the time savings and then you can get to a financial ROI. So these are pretty hard ROI and products and that sales teams are taking that message to the market and the customer base. Jason Conley: Yes. And I would just say that -- sorry, Joe, I would just say we're using local smaller language models, maybe even older versions. So you're not consuming a lot of tokens when you're doing this activity. So it's -- and you can continue to change the prompts to make it more efficient over time. And so we've even -- even at Vertafore, we've taken that cost of goods down meaningfully in a matter of weeks. So I think it's still very accretive from a margin perspective. Joseph Giordano: Yes. That's kind of what I'm getting at more of the ROI from Roper standpoint. I get how -- I get the ROI from the customers. It's more like if we're spending money to develop new AI tools that are then embedded in the product that we're already offering, like how is the ROI on the increased investment do you need in 2026 versus the investment you needed in 2021 to get the same customer and keep the same customer happy. Jason Conley: Well, and I would just say on the development front, I mean, we're seeing demonstrable efficiencies, right, with the frontier models itself. So we're getting a lot more output and a lot more road map to consume. So if you talk about just OpEx investment, we're not assuming -- we're assuming productivity, but we're taking that back into the road map. So I don't think it changes fundamentally our P&L structure and our margin profile. Neil Hunn: Joe, apologies for missing the point -- the thrust of your question. Operator: Your next question comes from George Kurosawa with Citi. George Michael Kurosawa: On the AI strike team, led by Shane and [ Eddie ] that you put together, it sounded like they completed their listening tour last quarter and have now been put out into the field. It sounds like some really success at Vertafore. If you could just touch on how they ended up sort of stack ranking the opportunities that they see in front of them and then maybe the scope of their involvement and how much it's led to an improvement in Velocity? Neil Hunn: Yes. So I'm delighted to double-click into that. So just to remind everybody sort of the 3 objectives of this AI, this Roper sort of accelerator team. One, and first and foremost, is to sort of coach and teach, right? This is about enablement of our 21 software companies to do what they've already learned on their own relative to AI and agentic development and then do it even better. So that's number one. Second is to partner shoulder to shoulder and build. And then the third one is to, where appropriate, build sort of shared componentry that we can -- where we can share some common run time or routines on the AI front across the Roper companies where it makes sense. So that's sort of the goal and focus of this group. In terms of the -- where we're allocating the team, this is very much an executive leadership team focus. It is basically size of prize and impact is how we're sort of force ranking of this. In terms of Vertafore, it is one of our largest opportunities, if not the largest opportunity we have from an agentic automation point of view. I think there was 6 or -- 6 agents released last week at their Accelerate conference. That is just the very, very beginning. The model that -- and then we -- this quarter, we'll sort of broaden that from one engagement with one business to be -- it's now 6 as the team grows and we have the now 5 additional businesses that are sort of in the early stages of partnering with. And the final thing is about speed. I mean, I think the unlock here is, at least, I think Amy and the team at Vertafore would agree is our team, the Roper team sort of partner -- very much partnered. So you can imagine leadership resources in our team working hand-in-hand with engineers on the Vertafore team on how to do this AI development, one, because there's a little bit of art to this and not just science. Number two, there is a speed coefficient that our team brings given their history about sort of modern day, like current very contemporary practices of agentic development and just the pace. And then there's just good old-fashioned change management. How do you sort of break bottlenecks and barriers to go fast. And we saw literally, I know it's sort of an overused term, but 10x kind of productivity gains partnering with Vertafore on some of this development in terms of speed and quality. So we're super encouraged. It's very early days. I don't want [ Shane and Eddie ] to hear this and think they've manifested fully. They've got a lot of work to do, but it could not have gone better, in my view, in the first 6 months. George Michael Kurosawa: Okay. That's great to hear. And then I wanted to ask kind of more broadly, when you look across the portfolio, it seems like AI commercialization is in sort of different stages. You've got businesses like Aderant, CentralReach that seem to be resounding successes. When you -- others seem to be coming up right behind them. When you look across that landscape, any pattern matching in terms of why some of these businesses seem to be moving a little faster than others? Is it primarily customer-driven? Or what would you attribute the relative successes there to? Neil Hunn: I think it is -- Jason, I'll give an opportunity if he wants to add anything. I think if there's a pattern match there, when you have -- there's 21 software companies in the business. And while we want everyone to be going as fast as they possibly can, you have an array of where people are in their maturity. And where we're most advanced, they're the ones that got after and we're able to sort of get the agentic SKUs into the just in development first into the market first. And sort of now the next wave of this -- we talk a lot about CentralReach and Aderant and Convoy and DAT, they're the tip of the spear. Now we have like 10 or 12 companies, maybe couple more like just now just getting to market with real agentic magic SKUs versus like chatbots and embedded sort of GenAI search inside of existing products where the value unlock is. And so we can -- and we also think a little bit offline about sort of more deeper operational pattern recognition, but that's what I would say about the commercialization phase [indiscernible] you sort of had product ready first. Jason Conley: That's right. Yes. And I think the benefit of being part of Roper, we set our [ President Summit ] a couple of months ago, and we did an AI sort of showcase for those that are further along. So it just helps with the learning acceleration. But I would agree with Neil, that it's those that embrace and saw a true customer problem early on and they got after it a little sooner, but others are coming up the curve very quickly. Operator: Your next question comes from Clarke Jeffries with Piper Sandler. Clarke Jeffries: I just wanted to follow up on the comments around ground to cloud conversions advancing meaningfully. I'd love to understand the impact of SaaS transitions broadly in the Application Software segment? Is that contributing points of growth today? You made the comment around 85% of the segment is in the mid-single-digit plus range in growth, while nonrecurring was essentially flat. So I just wanted to know if it's something that would be of increasing benefit or already playing out in that segment? And then one follow-up. Jason Conley: Yes, happy to take the question. So just as you think about the percentage of products that are cloud-enabled, it's 2/3 or so today. So we have about $1 billion of maintenance. And we think that, that will convert over, say, the next 5 to 10 years or so, and that should convert at 2 to 2.5x lift from maintenance to SaaS. And so today, we're kind of -- if you think about the percentage that we have to go, we're sort of in the first or second inning of that journey. And so it does add, call it, 50 to 100 basis points of growth a year should for the next 5 to 10 years. Neil Hunn: The only thing I'd add is we -- when we talked about this in the past, Clarke, we've also said we are very much pacing this ground-to-cloud conversion at our customers' pacing. We're not like forcing it to them. I'll say with the advent of AI, I should have mentioned earlier on the monetization, another monetization method for AI is embedding the AI sort of features in the cloud product. And that is a very compelling pull to make this transition go a little bit faster. So instead of 8 to 10 years, maybe it's 4 to 6. I don't know what the right number is, but we would expect to see that go a little bit faster. The other thing is we made a tremendous amount of investment over the last 3 years getting product enabled that was because we're going to our customer pacing, there was an urgency to get products enabled and now we are extraordinarily product-enabled. So basically feature parity, if not more so in the cloud product than on-prem. So I think the setup here is a little bit better than it was a few years ago. Jason Conley: Yes. And I would just say it's mostly -- and it's going to be Aderant is a little further along. As you know, power plants in the early innings, but definitely much more cloud-enabled today than they were. And then when you think about those are a little bit further behind, it's more health care, but that's our Clinisys business and labs. That's just kind of the nature of that end market. And so those -- so we see the areas of Aderant and [indiscernible] being those that will be more near term in terms of cloud migration. Clarke Jeffries: Perfect. All makes sense. And then one thing that kind of stood out to me was the margin impact in the Application Software segment. The margin impact of businesses owned for less than 4 quarters was actually positive year-over-year. Just wanted to unpack that. Is that -- is the takeaway here that even the earlier-stage acquisitions last year are getting to margin parity quickly? Jason Conley: So in Application Software, it's our CentralReach business, and that business is -- it's a very -- the business has ample R&D investment. I think R&D as a percent of revenue is like 20%, but they just have extremely strong incrementals. They're very cloud-native platform. And so as they expand, they have very good incrementals there. And when we talk about the acquisitions in our network software segment, we've talked about our -- the business Convoy that we added on to DAT. It's a technology investment. We're super committed to that investment to automate the spot freight market over time. So that actually has a drag on margins. That plus our Subsplash business, which is a lower margin, faster-growing business that as they grow, they will scale margins. But you can see in our network segment, it does have a pretty meaningful drag on margins. Now over time, as Convoy continues to grow, that should be a tailwind as we go into the out years. But this year, it is a little bit of a drag on margin. Operator: Your next question comes from Josh Tilton with Wolfe Research. Joshua Tilton: And congrats on a really strong start to the year. I will keep it to one given the hour. But my question is just basically you're very clear that the guidance still doesn't assume a recovery at Deltek and DAT for the rest of the year. Can you just remind us the confidence that you have in the rest of the application network software business and kind of offsetting that weakness throughout the year? Jason Conley: I'd say just to go through the segments. So that Application Software, we feel good about sort of what's going to happen in the second half. We just talked about CentralReach just having a set a really strong start under our ownership and a lot of that's recurring. And so that's just going to flow through in the second half. We've talked about being 80 basis points or so of accretion in the second half for that segment. We still feel good about that. And then in network, DAT is looking good in the first quarter. We'll see sort of how things play out. Foundry will continue to be sort of getting better throughout the year. They had a great start to the year. And then some turns organic in the fourth quarter, and that's sure accretive to the segment. So yes, I feel good about the rest of the segment or the rest of the business. Operator: Your next question comes from Ken Wong with Oppenheimer. Hoi-Fung Wong: Just one for me. sounds like the kind of the downtick in 2Q is just purely due to tough comps, but just wanted to kind of make sure and clarify any geopolitical macro dynamics that you guys baked into that assumption as well, given kind of the current situation that arose? Jason Conley: No, not at all. I mean this is just like timing really in the AS segment. It's our nonrecurring perpetual activity. And so that's squarely what it is. We have clear visibility to that. And then on in TEP, no, I think we're comping 9% quarter as a high watermark last year. So it's just sort of a comp in the second quarter in TEP. It will get better in the second half. So nothing geopolitical at all. We are mostly U.S., as you know. So we don't see anything in the Middle East. Operator: Your next question comes from Julian Mitchell with Barclays. Julian Mitchell: Maybe first off, I just wanted to try and put a finer point on the full year guidance. So is it fair to say that the sort of core EBITDA guide is essentially unchanged and it's really a kind of share count-driven guide? And maybe help us understand what the share count assumption is now at the sort of guidance midpoint. And I think the guide embeds has no extra buybacks beyond today. Just wanted to check that. Jason Conley: That's correct. Yes. So we had about a couple of hundred million of share repurchase between the end of the quarter and today. And so I think as I mentioned, the ending share count for Q1 is 102.4 million and then you've got some, obviously, dilution to add on top of that. So that's what we're assuming. But yes, you're right, it's -- we've mainly flown through the first quarter beat and then the buyback activity for the balance of the year. Neil Hunn: In the first quarter beat for us, Julian, was partially from our [indiscernible] operating and partially buyback. Julian Mitchell: That's helpful. And within the network business, DAT has had a very tough sort of demand or macro backdrop and it's been executing well within that. Finally, the last 6 months, there's better signals in the freight markets in the U.S. maybe sort of flesh out a little bit more what you're seeing in that business? And sort of what's dialed in for that transport linked business in the U.S. for the balance of the year, please? Neil Hunn: Yes. So as we mentioned in the call, we're not in the guide, there's not an assumption for improvement. Also, I'll just double-click a little bit on the prepared comments. So for the first time in -- look -- Jason, in a couple, 3 years, we've had carrier, the carrier count side of the network increased which is certainly a green shoot that we've been waiting quite a time. Now we've had some head [indiscernible] intra-quarter on that number in the past. And so we're going to remain cautious also the input costs or diesel costs certainly not helpful. So carrier margins or profitability would be a little bit challenging. And so -- but we're cautiously optimistic that there might be a freight recovery rejection rates got better, the rates got better as we talked about, 20% or 30% better. So we'll see how it plays out, but we've underwritten no improvement in the outlook. Operator: Your next question comes from Deane Dray with RBC Capital Markets. Unknown Analyst: This is Kenny [indiscernible] on for Deane. I wanted to ask about Neptune business. So one of your peers have some meaningful project delays disruption in the quarter for their water meter business. Have you seen anything similar in terms of the industry dynamic or even any market share changes during the quarter? Neil Hunn: Yes. I appreciate the question. So for us, on our Neptune business, we would say largely no. We've not seen a project -- any project delays. Now the backdrop on that is slightly different than the competitor you described. And Neptune plays in the segments that are on the smaller municipalities. So it's -- we have never had a large amount of project-based work, generally speaking. So it's really not an apples-to-apples sort of question. The other part of this is we had a pretty decent sort of short-cycle demand in the quarter. I think that's largely because we -- and I'm not commenting about our competitor because we don't know their business the way they do. But we -- Neptune did a good job managing channel inventory in 2025. And so the hope or expectation is we'll be able to ship closer to retail in 2026 on the short cycle side, and I think we saw that play out at least early in the year in Q1. Unknown Analyst: If I can have a follow-up. If you just if you could unpack the cost pressure dynamics for the Neptune business or even at the overall TAP segment level, either in the magnitude or the time line to offsetting those that will be helpful as we kind of think about the segment's incremental margins moving forward? Neil Hunn: Sure. Let me -- I'll take a crack at this, but I definitely want to ask Jason to sort of correct and sort of amplify anything. So in Neptune, it's really the ingot cost. And what we decided to do, I think [ Don and the ] team did a very sort of wise thing here. We did -- if you remember, 3Q, really July of last year, we pushed the sort of, call it, tariff or a raw material sort of surcharge into the market. It really had a negative demand impact in the short run. The signal from the customer was, hey, we certainly appreciate, we've got to onboard sort of global price inflation, but we'd rather do it through regular weight pricing versus surcharging. And so we will sort of -- we expect, by the way, a cost -- the baseline assumption we have is ingot cost is going to stay high. I mean, this is with all the data centers and just the demand for copper, this is a derivative impact to that. So our baseline assumption is this input cost is going to stay high for a while. So it will just be corrected or the margin will be captured through regular way pricing, which takes a couple of quarters to sort of work through backlog and get into the market. So we're taking a longer view on that. In terms of the balance of the segment, it's really -- it's both Northern Digital and it's Verathon. These are businesses that are per our strategy for the market opportunity are becoming more reoccurring in nature, reoccurring consumables, which is a great thing about the predictability of growth and the absolute levels of growth in the businesses, but the consumables come with a lower GP percentage. So GP dollars are going up, the GP percentages may be a little pressured on those 2 businesses. Now they also do a very good job managing below GP to EBITDA ROP, where we don't think there'll be a lot of OP compression over the long arc of time because they do have natural leverage in the business. Those are the mix at play. Jason, anything you want to amplify there? Jason Conley: No, I think you have covered it. Thanks. Operator: This concludes our question-and-answer session. We will now return back to Zack Moxcey for any closing remarks. Zack Moxcey: Thanks, everyone, for joining us today. We look forward to speaking with you during our next earnings call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Acme United Corporation First Quarter 2026 Financial Results Call. At this time, I would like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir. Walter Johnsen: Welcome to the first quarter 2026 earnings conference call for Acme United Corporation. With me is Paul Driscoll, our Chief Financial Officer, who will first read a safe harbor statement. Paul? Paul Driscoll: Forward-looking statements in this conference call, without limitation, statements related to the company's plans, strategies, objectives, expectations, intentions, and adequacy of capital and other resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, among others, those arising as a result of a challenging global macroeconomic environment characterized by continued high inflation, high interest rates, and the imposition of new tariffs or changes in existing tariff rates. In addition, we have experienced supply chain disruptions in the past, and we may experience these disruptions in the future. We are also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission and in our current earnings release. Walter Johnsen: Thank you, Paul. Acme United Corporation had a difficult 2026. While our net sales increased 14% to $52.3 million, our net income was $985,000 compared to $1.6 million last year, and earnings per share were $0.24 compared to $0.41 last year. As you may remember, we purchased MyMedic for $18.6 million during 2026. The company sells directly to consumers and is cyclical, with most of the profits generated in the fourth quarter of the year. It also generates high gross margins, which it spends on advertising, promotions, new product development, and customer support. Our sales increase of 14% in 2026 includes approximately 8% from MyMedic, which was at breakeven in the P&L. Revenues excluding MyMedic increased 6%. The company's gross margins in 2026 were 39.7% compared to 39% last year. When the impact of the high gross margins at MyMedica are removed, the core gross margins declined due to higher costs and tariffs. We turn our inventory about twice per year, so the costs reflected in the first quarter were from products made and purchased when the tariffs were at their peak. We expect to run through these items during the second quarter with a return to normal levels in the third quarter. Shortly after the war in Iran began, we started purchasing higher-than-normal quantities of raw materials and finished goods inventory. So far, we have purchased approximately $10 million of incremental inventory. While we hope for a quick end to the war, we are planning and acting to be prepared for increasing costs and shortages. Operationally, we are working to increase the revenues of MyMedic by expanding its retail distribution and building a strong core of nonseasonal business. Our teams are integrating product lines, leveraging our purchasing strengths, and reducing duplicate expenses with the goal of generating significant profits throughout the year. The project is well underway. We are completing the move into our new Spill Magic facility in Mount Pleasant, Tennessee. Production has begun there even as additional equipment is being installed. Orders for the business are strong, and we are experiencing record growth. In Europe, sales increased 19% in local currency to €4 million. Our growth there includes the acquisition last November of Schmidaglet, a small direct-to-consumer company, which is exceeding expectations. Our first aid business in Europe had record performance, and we continue to expand its product line and sales team. The Westcott cutting tool business overcame market headwinds and increased 10% in Europe. In Canada, First Aid Central had a strong quarter and the cutting segment also grew. Overall, our Canadian business increased 16% compared to 2025. I will now turn the call to Paul. Paul Driscoll: Acme United Corporation's net sales for 2026 were $52.3 million compared to $46 million in 2025, a 14% increase. Excluding Miemetic, sales increased 6%. Net sales in the U.S. segment increased 12% in the quarter, driven by higher sales of first aid and medical products, including MyMedic products. Net sales in Europe for 2026 increased 19% in local currency compared to 2025 due mainly to the new line of cutting and sharpening tools. The base business had a good performance with a sales increase of 12%. Net sales in Canada for 2026 increased 11% in local currency due to higher sales of first aid products. The gross margin was 39.7% in 2026 versus 39% in 2025. The favorable mix from higher-margin direct-to-consumer mimetic products was mostly offset by the impact of increased tariffs. SG&A expenses for 2026 were $19 million or 36% of net sales compared with $15.5 million or 34% of net sales for the same period of 2025. The higher SG&A was primarily due to the addition of the Mimetic business. The higher percentage of sales was due to the higher amount of advertising needed for the direct-to-consumer MyMedix business. Net income for 2026 was $1 million or $0.24 per diluted share compared to net income of $1.7 million or $0.41 per diluted share for the same period of 2025, a decrease of 40% in net income. The decline in net income was primarily due to the higher tariff and MedNav costs we experienced in the first quarter of this year. The higher tariff spending commenced in July 2025; however, the costs were capitalized into inventory and we started to realize the full impact to earnings as the high-cost products were sold in 2026. We expect the tariff impact to gradually lessen over the next three quarters as the tariff rate declined in November 2025 and again in February 2026. Additionally, the incremental cost to enhance the quality assurance protocols at the MedNap facility will not repeat in 2026. Now to the balance sheet. Net debt increased from $27.2 million at 03/31/2025 to $38.6 million at 03/31/2026. During the twelve-month period ended 03/31/2026, we paid $146 million for the acquisition of the assets of MyMedic, distributed approximately $2.4 million in dividends, and purchased the cutting and sharpening line of products in Germany for $1.6 million. Additionally, we generated approximately $14.2 million in free cash flow before the purchase of a new $6 million manufacturing and distribution facility in Tennessee in July 2025 to expand our Spill Magic business. Walter Johnsen: We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press 2 if you would like to remove your question from the call. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Richard Dearnley with Long Park Partners. Please proceed with your question. Richard Dearnley: Good morning. Could you put a dollar amount, or a rough dollar amount, on what the quality assurance protocols are involving? Walter Johnsen: Sure. Some background on that: last March, the FDA inspected our facility in Brooksville, Florida, where we make alcohol prep pads and BZK wipes, and lens wipes. They found a number of deficiencies, mostly in our documentation of good manufacturing practices, or documentation of some of the equipment being qualified. It is a lot of work to get it to the state it needs to be to address the U.S. hospital market, and that is our goal. We hired a consulting firm to work with us to upgrade in response to the FDA audit, which was very helpful, to upgrade the entire facility. Paul, last year it was about $1.2 million? Paul Driscoll: It was about $1 million in consulting last year, in addition to some equipment we purchased. In the first quarter of this year, it was about $300,000. Walter Johnsen: For example, we have upgraded the microbiology lab that we really did not have before, and we have upgraded the chemical laboratory for testing. In total, it is about $1.25 million to $1.3 million so far. That is all aimed at qualifying the MedNap products for hospital use. Paul Driscoll: Well, it is not getting approval per se. We could sell them now, but we wanted to have it done right. Walter Johnsen: In fact, our products do get sold into hospitals now. But when we get done with the project, and we are about three-quarters done, we will have a facility that we will be very proud to take major distributors in the United States to visit and do their own audits, and we will have confidence that we have done the best job we can for the quality of the products that will go out. We are three-quarters through. It is all expense, but I view it as an investment. Richard Dearnley: That tags along to the comment about investing in automation everywhere. Could you size the other investments? Last year, you were talking about $2 million, and I believe the year before was $2 million. Is that the current run rate? Those investments tend to have large productivity payoffs. Walter Johnsen: You are addressing something that is important to us. The automation we have been doing over the past few years has been with robotics. One of the big projects is taking the bulk product—for example, bulk BZK wipes that we produce at MedNap—and putting them automatically in packages that then go into the refills in our first aid kits. As you know, the refill business is an important part of our company, and by automating it, we are reducing cost on a product line that is very consistent and growing. Some of the projects we are doing right now relate to automating, in the Spill Magic facility, the packaging of the Spill Magic powder and putting it into different-sized packages, and that has a pretty big payback. I do not remember the exact number, but maybe it is about $500,000. It is important because we have business that will keep that machine going. Another area is in our Rocky Mount facility. I would not call this automation, but we have reconfigured the entire process flow so that we have fewer people, and we have some small automation that we can put in—for example, drones that are doing daily cycle counts. When we are doing our numbers, we tend to have high confidence that the cycle counts hold, and when we do physical audits at the end of the year, it speeds up the time we are down while we are doing them. There are other things. You may have seen robotics that can vacuum your floor in a home. There are industrial ones like that which scrub the floor in our 340,000 to 370,000 square foot facility in Rocky Mount so that it is a very clean warehouse handling a lot of medical items. It is now done with some robots. There is another robot machine that we are working on in Brooks, Florida. That has all been purchased, and we have some business for lens wipes. The repetitive loading into the boxes can be done with robotics with sight sensors, and that is being worked on and should be online by June. Those are some examples. Richard Dearnley: The MyMedix DTC business—does any of their expertise in DTC translate over into either your first aid or Westcott business somehow? Walter Johnsen: Our last two acquisitions, the small Schmiedelgla acquisition in Germany and MyMedic, are both direct to consumer. As you may know, that means you are using social media as a selling tool, and you are putting ads in places like Twitter, Facebook, and LinkedIn. Of course, there is Google search. There is a consistent pattern of videos that are delivered onto the site, and the purchases are coming directly off the website. In the case of MyMedic, that is our first step in the United States to do direct to consumer. It lends itself to selling things like craft items because you can demonstrate there is a lot of differentiation in the product. When we do new product introductions, you have a ready platform of potential customers who are following you. The benefit of MyMedic is we are not establishing a social media base; we have a half-million social media followers today, and we put out videos every two days. Sometimes it is how to use first aid kits. Sometimes it is success stories and life-saving stories on what the use of a bleed control kit did and how it saved somebody’s life. In other cases, it is for training or new products. As we get experience with it, I hope that we broaden the amount that we bring of our other product lines, and I think in the Westcott line that would be in the craft area. Richard Dearnley: I see. Good. Thank you. Walter Johnsen: Thank you. Operator: Thank you. Our next question comes from the line of Timothy Call with The Capital Management Corporation. Please proceed with your question. Timothy Call: Congratulations on so many accomplishments within just two quarters. You can handle the short-term volatility, and long term you have completed two complementary acquisitions. You have consolidated facilities, expanded capacity, allowed for future capacity expansion, and immediately expensed upgrades in technology and automation. Do you see all of these achievements made within the last six months adding to your long-term sales, margins, and earnings growth over many years? Walter Johnsen: Well, Tim, you try so hard to have your accomplishments, and then when you get a setback because of a tariff or changes that you are not priced for, it is frustrating. But you right it the best you can. As I hope we laid out, as we look through the coming quarters, the impact of the tariffs will be less, and we are hedging by buying $10 million of inventory for potential shortages or price increases as a result of the war in Iran. Hopefully, that is just extra inventory and we sell it over due course, but we are preparing in case this is an extended conflict. Yes, we certainly see these achievements contributing to long-term growth. As an example, we spent $6 million to buy the facility in Mount Pleasant, Tennessee, for Spill Magic, and Spill Magic now has room to grow. For those that may need a refresher, the products we sell there are used to clean up oily spills, bodily fluids, and blood. The opportunity to create some new products and hit them in scale and do it in that facility is exciting. We are out of the Smyrna, Tennessee, facility at the end of this month, and Spill Magic will be fully operational—basically there now—in Mount Pleasant. As I mentioned earlier, the automation we are putting in is expensive and heavy, and you want to do it once. Now we have a home to be able to place it properly. I would not say this is a trend, but we have been having very good success with Spill Magic since we purchased the property. It is almost like it has willed itself to say, “We have room to grow, so let’s do it.” This past quarter it was up, I think, over 30%, Paul? Paul Driscoll: Yes. Walter Johnsen: It was a good quarter and it is making progress. Timothy Call: With these two new acquisitions—your past acquisitions have benefited from cross selling and your wider geographic footprint. They are getting new retail channels and distribution networks. How long could it take these two recent acquisitions to experience sales growth from these different avenues? Walter Johnsen: I was just on the phone with First Aid Central, our Canadian subsidiary, literally an hour ago. We were talking about MyMedic and its product line. We would produce them in Canada, meeting Health Canada specifications, and we are very excited about launching that way sooner than we expected. The reason is because the name recognition is actually carrying over into Canada, and we had no idea. You have name recognition and a half-million followers, and when we put the products into production in Canada, we are expecting some growth, and that would be happening this year. As an aside, having spoken to our Canadian team literally today, we are about to add another 30% capacity to our operation in Laval, outside of Montreal, because of growth. Timothy Call: Well, thank you for all your hard work and success. Looking forward to the long-term growth of the company. Walter Johnsen: Thank you very much, Tim. Operator: Thank you. Our next question comes from the line of Georgy Vashchenko with Freedom Broker. Please proceed with your question. Georgy Vashchenko: My question is about the cutting and sharpening segment. It was under pressure in 2025. What were the revenue trends in Q1? Did they recover? Walter Johnsen: The cutting and sharpening area last year was impacted when the tariffs were instituted in April. You may remember it was called Liberation Day, and it was April 2—a day I remember. At that point, the tariffs stopped a lot of things that would have been going forward as promotions because you could not price product when there were costs as high as 145% in tariffs. The retailers could not price, so the promotional activity for things in the summer, the fall, and the winter were basically stalled. That was one of the reasons that Westcott, in particular, had a decline. Paul, what was the decline last year? Paul Driscoll: It was about 10% overall on the company line, and Westcott was down about 10%. Walter Johnsen: In the first quarter, you are going up against comparables without the tariffs having been put in place. Westcott was down, what, about 8% or 10% this first quarter? Paul Driscoll: I think it was fairly small—maybe 2%. Walter Johnsen: So it is coming back, but the big part coming back is really second, third, and fourth quarters where last year we had no promotions. This year, unless something happens dramatically with the war, we are expecting good promotional activity, and in fact we are actively quoting. That is a roundabout way of saying I think we have easy comparisons coming in the second, third, and fourth quarter for the cutting and tool measuring area, and we should be showing growth. Georgy Vashchenko: Thank you. Operator: Once again, our next question comes from the line of Jake Patterson with Helanta Investment Group. Please proceed with your question. Jake Patterson: Hey, just a couple quick ones because most of them got answered already. On SG&A, I know you said there was $300,000 of one-time expenses in there. Is $19 million minus that—so about $18.7 million—a fair run rate to look at for the rest of fiscal 2026? I know you said you had some savings you could pull out of MyMedic, but I am just curious. Paul Driscoll: As a percentage of revenue, it is probably around 33% for the full year as a target. Jake Patterson: Got it. I think the gross margin in the legacy business was down. Is there any way you can give a number for that? Paul Driscoll: I would say about 200 basis points, driven primarily by tariffs. Jake Patterson: And then CapEx for 2026—you mentioned some automation investments and Canada expansion. Do you have any range for CapEx expectations? Paul Driscoll: We are looking at about $7 million. Jake Patterson: Okay. Thanks. That is it for me. Paul Driscoll: Thank you, Jake. Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Johnsen for any final comments. Walter Johnsen: I would like to thank the audience for asking some very probing questions. Having hopefully given some very thoughtful answers, this call is complete. Thank you for joining us. Goodbye. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the MaxLinear, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leslie Green, Investor Relations. Thank you. You may begin. Leslie Green: Thank you, Maria. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear, Inc.'s first quarter 2026 financial results. Today's call is being hosted by Kishore Seendripu, CEO, and Steven Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions. Our comments today include forward-looking statements within the meaning of applicable securities laws, including statements relating to our guidance for 2026 including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP interest and other expense, GAAP and non-GAAP income taxes, and GAAP and non-GAAP diluted share count. In addition, we will make forward-looking statements relating to trends, opportunities, execution of our business plan, and potential growth and uncertainties in various product and geographic markets, including without limitation statements concerning future financial and operating results, opportunities for revenue and market share across our target markets, new products, including the timing of production and launches of such products, demand for and adoption of certain technologies, and our total addressable market. These forward-looking statements involve risks and uncertainties, including risks outlined in the Risk Factors section of our recent SEC filings, including our 10-Q for the quarter ended 03/31/2026, which we filed today. Any forward-looking statements are made as of today, and MaxLinear, Inc. has no obligation to update or revise any forward-looking statements. The first quarter 2026 earnings release is available in the Investor section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including but not limited to gross margin, income or loss from operations, operating expenses, interest and other expense, and income tax on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our website. We do not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future changes, including stock-based compensation and its related tax effects as well as potential impairment. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures. We are providing this information because management believes it is useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast and the replay will be available on our website for two weeks. And now let me turn the call over to Kishore Seendripu, CEO of MaxLinear, Inc. Kishore? Kishore Seendripu: Thank you, and good afternoon, everyone. Q1 was a strong and important start to the year, and we believe it marks the beginning of a multiyear growth phase for MaxLinear, Inc. led by our optical data center business. Revenue grew 43% year over year, reflecting strong execution, accelerating adoption of our newest products, improving visibility in bookings, and sustained momentum across our infrastructure programs. Infrastructure is now our largest revenue category, growing 136% year over year in Q1, driven by robust production ramps in optical data center–oriented platforms. We see this momentum continuing to build as hyperscalers rapidly scale AI-centric architectures. Based on customer orders and rising visibility of the program ramps, we are increasing our expectations for 2026 optical data center revenue to a $150 million to $170 million range. We also expect a step-function data center revenue increase beginning in Q2 with expected strong run rates expanding into 2027. At the center of this data center momentum is our Keystone PAM4 DSP optical transceiver platform. Keystone is now ramping at multiple major hyperscale customers across both the U.S. and Asia, supporting 400G and 800G PAM4 deployments for scale-up and scale-out applications. These ramps validate our differentiation in performance, power efficiency, and integration. At OFC this year, we showcased our 1.6 terabit data center platform featuring Rushmore, our 200 gigabit-per-lane PAM4 DSP; Washington, our matching 200 gigabit-per-lane TIA; and Annapurna, which is our 1.6 terabit AEC and 3.2 terabit onboard electrical retimer platform for scale-up applications. Rushmore and Annapurna are foundational to the next wave of data center optical architectures, including LPO, LRO, AECs, XPO, and co-packaged optics. With Keystone validating our ability to execute at scale, customer engagement in our Rushmore platform has accelerated faster than expected. We anticipate production ramps beginning in late 2026 with revenue growth expected to continue strong through 2027 as the next-generation speed and bandwidth cycle unfolds. We are also expanding our footprint beyond PAM4-based optical and electrical interconnects. We have secured our first XGS PON design win at a U.S. hyperscale data center through a tier-one OEM partner as cloud operators deploy resilient, dedicated, PON-based control plane architectures spanning multiple data centers. Adjacent to compute, we have also won USB bridge controller designs with two major hyperscalers to support rack-level AI system management, which opens the door to increasing content per rack over time. Our Panther hardware storage accelerator SoC family continues to build momentum with growing design win activity among tier-one network appliance and cloud service providers. Persistent memory constraints are highlighting Panther advantages in hardware-accelerated compression, high throughput, and ultra-low latency memory access. We are actively sampling next-generation Panther 5 with key customers, and based on current engagement, we expect storage accelerator revenue to at least double in 2026 compared to 2025. Beyond data centers, wireless infrastructure momentum is improving as carriers increase investment in 5G RAN, access, and backhaul to support cloud-connected and edge AI functionality. Our Sierra single-chip radio SoCs are now deployed with multiple North American operators, with expanding opportunities as 5G networks continue to evolve. In broadband and connectivity, we are executing large-scale deployments of our single-chip fiber PON and Wi-Fi 7 gateway platforms with a second major tier-one service provider in North America, with additional ramps expected later in the year in Europe. These long-cycle deployments provide a stable foundation and leverage the same integration and power efficiency that clearly differentiate MaxLinear, Inc.'s data center portfolio. In summary, we are very pleased with the strong start to 2026 and are especially excited by the momentum accelerating in our optical data center business. With multiple customers entering meaningful ramps of our 800G Keystone family and broader engagement across our 1.6 terabit Rushmore and Annapurna product families across scale-out and scale-up AI architectures, we believe MaxLinear, Inc. is exceptionally well positioned for sustained transformative growth. Our disciplined focus on execution and innovation gives us confidence that 2026 will be a pivotal year as we continue to evolve our strategy and deliver long-term value for customers and shareholders. With that, let me now turn the call over to Steven Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steven Litchfield: Thanks, Kishore. Total revenue for the first quarter was $137.2 million, up from $136.4 million in the previous quarter and up 43% from $95.5 million in 2025. Infrastructure revenue for Q1 2026 was approximately $63 million. Broadband revenue was approximately $44 million. Connectivity revenue was approximately $19 million, and Industrial & Multimarket revenue was approximately $12 million. GAAP and non-GAAP gross margins for the first quarter were 57.5% and 59.5% of revenue. The delta between GAAP and non-GAAP gross margin in the first quarter was primarily driven by $2.6 million of acquisition-related intangible asset amortization. First quarter GAAP operating expenses were $96.1 million, and non-GAAP operating expenses were $59.9 million. The delta between GAAP and non-GAAP operating expenses was primarily due to stock-based compensation and performance-based equity accruals of $28.5 million combined, and acquisition-related costs and other costs of $6.5 million. GAAP loss from operations in Q1 2026 was 13% of revenue, and non-GAAP income from operations in Q1 was 16% of revenue. GAAP and non-GAAP interest and other expense during the quarter were $1.4 million and $1.3 million, respectively. In Q1, net cash flow used in operating activities was approximately $8.9 million. We exited Q1 2026 with approximately $89.9 million in cash, cash equivalents, and restricted cash. The primary use of cash was due to substantial prepayment for wafers supporting rising demand for our data center low-geometry products for which we have increasing order backlog in the second half of the year. Our days sales outstanding was down in Q1 to approximately 27 days. Our inventory was up by approximately $8 million versus the previous quarter, with days of inventory improving to approximately 128 days. This concludes the discussion of our Q1 financial results. With that, let us turn to our guidance for Q2. We currently expect Q2 2026 revenue to be between $160 million and $170 million. Looking at Q2 by end market, we expect to see growth from all four of our business segments with particular strength in Infrastructure, driven by data center optical interconnects. We expect second quarter GAAP gross margin to be approximately 56% to 59% and non-GAAP gross margin to be in the range of 58% to 61% of revenue. We expect Q2 2026 GAAP operating expenses to be in the range of $91 million to $97 million. We expect Q2 2026 non-GAAP operating expenses to be in the range of $61 million to $66 million. We expect our Q2 GAAP interest and other expense to be in the range of approximately $1.8 million to $2.2 million. We expect our Q2 non-GAAP interest and other expense to be in the range of $1.8 million to $2.2 million, with FX volatility being the primary risk. We expect a $2 million tax benefit on a GAAP basis and a non-GAAP tax provision of approximately $1 million. We expect our GAAP and non-GAAP diluted share count in Q2 to be approximately 95 million each. In summary, with strong growth in our data center optical business and several additional high-value products still early in their market ramp, we have transformed MaxLinear, Inc. into an infrastructure-focused company. Our investments over the past several years have brought us to this point where we are well positioned to deliver sustained growth, operating leverage, and increasing shareholder value. We are excited about the opportunities ahead and confident in our ability to execute. With that, I would like to open up the call for questions. Operator? Operator: Thank you. We will now open the call for questions. We ask that analysts limit themselves to one question and a follow-up so that others may have an opportunity to do so as well. One moment, please, while we poll for questions. Our first question comes from Tore Svanberg with Stifel. Please proceed with your question. Tore Svanberg: Yes. Thank you, and congrats on the momentum here. Kishore, you mentioned optical DSP revenue now tracking to $150 million to $170 million. That is about $30 million to $40 million higher than what you had expected before. Just wondering what transpired in the quarter to see such a steep increase. Is there new customers? Are you basically just seeing steeper ramps at existing customers? Any more color you can add on that additional revenue would be great. Thank you. Kishore Seendripu: Thank you, Tore. Yes. At the time when we set the guidance, we were looking at a number of ramps and a number of customers, and we were being conservative. At the same time, we were also fairly optimistic internally that we should be seeing strong growth coming in the latter half of this year. Now, with all the visibility and the lead times that are necessary for providing the product, we have very good visibility, and the ramps are setting in very nicely both across 400G and 800G solutions. So I think it is all about timing of the ramps and the scale of the cohorts and their ability to scale up to meet the surging demand we are seeing now. Tore Svanberg: Very good. And as a follow-up for you, Steve: you mentioned the prepayment for wafer capacity. Are you sort of done with that now, or should we expect more cash outflows in the coming quarters? And I also noticed you increased the revolver by $30 million. Anything you can say here on the balance sheet and cash position going forward? Steven Litchfield: Yes, sure, Tore. Consistent with what we raised back in Q4 of last year, we knew we would have some working capital needs going into Q4 as well as Q1, and that certainly played out the way that we expected. Are we through it entirely? To some degree, it depends on how much demand continues to improve. As demand improves, we may continue to see some prepayments, but you will start to see this inflect as revenues increase. On the revolver, we did have a revolver that was expiring in June, so we renewed the revolver and took it up slightly—a pretty minor move for the size and direction of the company. Operator: Our next question comes from Joseph Quatrochi with Wells Fargo & Co. Please proceed with your question. Joseph Quatrochi: Yes, thanks for taking the question. Maybe just a follow-up on that. Can you talk about your supply chain and capacity to support the growth that you are seeing? Clearly, the mix of your growth is a bit different than previously when you were at similar revenue levels. Steven Litchfield: Yes, Joe, I will take this. It is no surprise there are some supply constraints out there, but we planned well for this and worked really closely with partners. We have seen really good support and expect to continue to see that going forward. Joseph Quatrochi: And then as a follow-up, can you talk about the puts and takes in the gross margin guidance? Why would we not see a little bit more leverage on the sequential revenue step-up that is pretty significant here? Steven Litchfield: Obvious question. This is consistent with what we have been seeing. You have heard my caution on this, Joe, and it is a little bit of the input cost—wafer cost, packaging, etc.—moving up. In a lot of cases, the industry, ourselves included, has been able to pass along these costs, and we expect that to be the case. But given the uncertainty, we want to remain cautious. You are absolutely right that Infrastructure typically drives a higher gross margin. We are very optimistic as we look at the rest of this year and into next year, with Infrastructure being a positive influence on gross margins. Operator: Our next question comes from Timothy Savageaux with Northland Capital Markets. Please proceed with your question. Timothy Savageaux: Hi, and congrats on the results and especially the guidance. Question on the Infrastructure side—I know that is mostly data center driven—but it looks like you grew something mid-30s sequentially in Q1, and I imagine data center was a big driver there. Given what you are guiding to, do you expect similar sequential growth in Q2 in Infrastructure? Steven Litchfield: Thanks, Tim. We do not typically guide end markets in that level of detail. We did say that Infrastructure was going up, and we emphasized in our prepared remarks that, as we look at this year, Infrastructure has much bigger growth drivers. We have a lot of new products ramping with some new customers, so we would certainly expect Infrastructure to be a much bigger driver of growth in the coming year. Timothy Savageaux: And to follow up, given the step-up we are seeing in Q2, do you have any comments about overall revenue growth expectations for 2026? It looks like we could be tracking, I do not know, 35% to 40%, but any comment from the company? Steven Litchfield: We have only guided one quarter, and we are not going to change that here today. We are very excited about the growth potential that we have and the new customers and product ramps, and with the visibility we have, we start to roll into 2027 as well. We are excited to see the growth in 2026 and even backlog starting to build into 2027. Operator: Our next question comes from Ananda Baruah with Loop Capital Markets. Please proceed with your question. Ananda Baruah: Yes, good afternoon, guys. Really appreciate the question, and congrats on doing all the work to get to this place with DSP. It is cool to see it play out. Kishore, you mentioned to one of the prior questions, around the magnitude of the step-up in guide, that you had baked in some conservatism around program starts and ramps. Can you tell if the market ramp feels bigger than what you had originally anticipated, as distinct from conservatism? Do you have any sense if the market TAM feels bigger? And then I have a quick follow-up as well. Kishore Seendripu: On the first question, the TAM expansion is real—or the SAM expansion even more so. The PAM4 DSP expansion is very real as both U.S. and China hyperscalers are deploying very rapidly. Depending on the architecture implementation, the amount of PAM4 DSP used can vary based on the GPU configurations, and scale-up and scale-out are both growing strongly. Our conservatism is a general positioning as a company. Do we expect more upside? Absolutely. We do expect more upside as all the programs reach full run rates. Your second question, please. Ananda Baruah: On Panther, you mentioned Panther is benefiting from memory dynamics. Can you walk us through the ways Panther is holistically benefiting? Is it as simple as memory is short and Panther provides performance, or are there more nuanced reasons as well? Kishore Seendripu: There is nuance to Panther. Sixty percent of data center spend is in memory, but all memory is not equal. As the AI engine accelerates, low-latency, high-capacity memory access is super important. The big benefit of Panther is it is an accelerator, so it reduces latency dramatically and improves power efficiency. It enables much more capability than just memory compression. Thus far, our use of Panther has been at the enterprise appliance level, but these enterprise storage appliances are increasingly deployed into mainstream cloud centers. There is much more to come with Panther 5 and Panther 6. We expect this year the revenues to double, and hopefully next year as well, based on the visibility we have. Ananda Baruah: With all that said, do you feel bigger about the ultimate TAM potential for Panther, big picture? Kishore Seendripu: In the big picture, absolutely, Panther has a lot of potential. But Panther as it is today would not be sufficient as deployment models evolve. There will be more investment required, but the TAM is huge, and we will keep converting more of the TAM into our SAM, and that will drive our roadmap. Operator: Our next question comes from Christopher Rolland with Susquehanna International Group. Please proceed with your question. Christopher Rolland: Hey, guys. Thanks for the question. Congrats on the strong results. In your prepared remarks or the press release, you talked about optical at multiple hyperscalers, and previously I think your messaging around optical was very broad based across module vendors. This seems like a change and might be changing customer concentration. Are you now diversifying around these key hyperscaler opportunities? Is it one or two or all of them? If you could elaborate, that would be great. Kishore Seendripu: Thank you, Chris. It is pretty broad based. We have design wins across essentially all of the module vendors. It has taken a while to map the module vendors’ victories to various end data centers, while we did the business development work to create pull at the end customer. Even at the end customers, it is broad based. Obviously, we will be concentrated with a few during the initial ramps, and as we ramp into 2027, other data centers will come online. There is more work to do to expand further—we are only halfway there to full end data center diversification across all hyperscalers. Keystone provides an affirmative statement of MaxLinear, Inc.’s ability to successfully get through interop, supply product at scale, and establishes our credibility as a world-class chip supplier. Christopher Rolland: Thank you for that, Kishore. Maybe a quick follow-up. If you could talk about 1.6T—do you think design wins and the ramp will go there? Is 800G just the beginning, where they qualify you at 800G and then have plans to use you at 1.6T? And you also mentioned scale-up optical; I do not think there is a huge transceiver usage for scale-up right now, mostly scale-out. Can you talk about that and what it means for you? Kishore Seendripu: There will be different deployment models for scale-up. Today, about 30% of optical transceiver TAM is for scale-up and 70% is for scale-out. Our participation in scale-up derives from optical transceivers as well as our 1.6 terabit electrical retimers—onboard retimers and active electrical cables. On 1.6T, there is enormous confidence out there from shipping Keystone to major data centers, and they are ramping strongly in 2026. We have rolled out our 1.6 terabit Rushmore and Annapurna family for electrical applications. This execution, plus success with module partnerships and interop completion, is creating far more pull for our 1.6T participation than I would have guessed at this point. We hope that by the end of the year, we will have completed key 1.6T milestones and start transitioning into volume; 800G and 1.6T will likely be among the most long-lasting interconnect applications in data centers, and 1.6T will expand our ability to garner more revenue and market share. Operator: Our next question comes from Richard Shannon with Craig-Hallum Capital Markets. Please proceed with your question. Richard Shannon: Thanks for taking my question. Following up on DSP, your 400G and 800G with Keystone are going very well, and I heard positive comments about Rushmore. Since you seem to be gaining nice share with Keystone, to what degree does this convey directly to success in Rushmore? How do you view the potential revenue trajectory over time relative to Keystone? Kishore Seendripu: Thank goodness for Keystone. Everything valuable takes time. It has been a long journey of investment, and now we are into Rushmore. The success of Keystone makes us an incumbent. The power of incumbency brings relationships with cloud customers and module makers, confidence in supply capability, and product quality. On the 1.6 terabit solution, I would say we are in the top tier on performance, and customers acknowledge that. They are readily developing solutions that can quickly move to the next phase of evaluations with data center folks. We are not the first with 1.6 terabit relative to two incumbent competitors, but it bodes very well. With 1.6 terabit, ASPs increase, and as the mix becomes more 1.6 terabit, I believe that will have an uplifting effect on our revenues and gross margins, even as our market share expands. Richard Shannon: Thank you. My following question is on cable and broadband. Last call you talked about a soft first half and calendar 2026 being down, and wondering about any update on that and whether you have visibility into when DOCSIS 4.0 starts to have an impact. Kishore Seendripu: We had a spectacular growth year in 2025 for broadband—about 75%—so we had a pullback in Q1 with some seasonality. Looking forward, all our businesses are growing, which is a tailwind alongside Infrastructure. We expect our Broadband business to start growing from Q2 and into 2027. DOCSIS 4.0 certification happened, but some operators are still delayed on network readiness. A big growth is coming with Ultra-3.1 and 4.0 into 2027. Post-COVID, during the down period, we won market share in broadband, which bodes well for our fiber play. Our Fiber PON business continues to grow through Q1 and Q2, and we started major deployment with a tier-one operator in North America in the second half of the year with preshipments already done, and later we have European deployments. It is all growing, and we feel very good about that recovery. Operator: Our next question comes from Karl Ackerman with BNP Paribas Asset Management. Please proceed with your question. Karl Ackerman: Thank you. I have two clarifications. Kishore, going back to cable and broadband, could you be more specific with respect to the June guide? It seems like most of the growth is coming from Infrastructure, but can you talk about your outlook for Broadband, Connectivity, and Multimarket—whether they can all grow sequentially in Q2? And I have a follow-up, please. Steven Litchfield: Hey, Karl, it is Steve. Yes, all four end markets will be up. We do expect a lot of that growth to be from Infrastructure, particularly some of the data center products, but all four segments are expected to grow sequentially. Karl Ackerman: Got it. And then just to follow up on Chris’s earlier question, is much of your optical DSP growth coming from hyper-owned designs such that you are qualifying with them directly, or is your hyperscaler exposure predominantly through module vendors providing a merchant solution? Kishore Seendripu: Both. Operator: Our next question comes from Quinn Bolton with Needham & Co. Please proceed with your question. Quinn Bolton: Hey, guys, congratulations on the nice results and outlook. Kishore, I wanted to follow up on Tim’s question about the breadth of growth in Infrastructure. In Q1, was it predominantly from optical DSP, or did you see good contribution from Panther and the wireless access products as well? Steven Litchfield: Quinn, I will jump in. Really across the board—we saw good growth from all of the products within Infrastructure. From here, data center will really break out. The other product lines absolutely contribute. Kishore mentioned Panther; Panther is going extremely well. Wireless Infrastructure, which was pretty soft last year, is improving, and we expect to see more of that this year. Those are probably the top contributors. Quinn Bolton: Thanks. And then I know sometimes gross margin takes a couple of quarters to reflect product mix because of inventory. You had about a 30% increase in Infrastructure in the quarter and maybe a 25% decrease in Broadband quarter on quarter; I would have thought that would be a nice tailwind. Gross margins were relatively flat. Was there anything that held back gross margin given the mix shift, or do you think it is just a timing issue? The go-forward mix of Infrastructure sounds like a nice tailwind; when might we start to see it show up? Steven Lictchfield: We came in right at our guidance. The mix is definitely continuing to improve. As I mentioned earlier, input costs are rising, and we are trying to be cautious as we look forward. But yes, it is a tailwind, especially as we move into 800G and 1.6T—those have higher gross margins. We will continue to see nice benefits on gross margin as Infrastructure grows as a percentage of our business. Operator: Our next question comes from Suji Desilva with ROTH Capital Partners. Please proceed with your question. Suji Desilva: Hi, Kishore and Steve. Congratulations on the progress here. You talked about 2Q optical stepping up. Are the programs all commencing ramp now, or are other programs phasing in and starting in 3Q/4Q? Just to give us a sense of layers across the year—are we off and ramping for all key programs already? Kishore Seendripu: There are different product cycles with different drivers, and they are all kicking in now, with more catching up later in the year. It took a while for them to start deploying with the required evaluations complete. We are seeing strength in each of these layers based on the bookings we have. Suji Desilva: Thank you. And, Kishore, you mentioned in the prepared remarks wireless infrastructure having a part in data center connectivity—perhaps interconnect or backhaul. Can you help us understand that opportunity and how big it is? Can it become a mainstream opportunity? Kishore Seendripu: In my prepared remarks, I talked about 5G access and transport. There are a number of announced investments where there is a lot of AI at the edge and AI-enabled network infrastructure. We see telecom infrastructure players in wireless gathering momentum in deployments, which changes transport/backhaul and certain elements of access. This should provide a tailwind for wireless infrastructure. The rates of ramps will never match data centers, but you now see interest to move toward AI in the DU side of the network at the edge on the wireless side as well. We should benefit as one of the top two players in the wireless infrastructure space. Operator: Our next question comes from Tore Svanberg with Stifel. Please proceed with your question. Tore Svanberg: Just two quick follow-ups on your new products. Kishore, first on Annapurna—this starts with 1.6T, but can you talk about MaxLinear, Inc.’s positioning there? Are you going to go after all the standards? There are Ethernet standards, there is UALink; are you going to participate with some NVLink/Fusion protocols? Just trying to understand where you are intersecting the market with Annapurna, especially in retimers. There is a lot of hoopla about AECs because of the success of one very successful company in AECs, but what about the retimer market? Kishore Seendripu: The market size opportunity for a silicon player in electrical retimers inside the compute server is humongous as speeds increase. You are going to see a lot of retimers. Currently, our retimer offering is Ethernet-based, naturally. However, the fundamental physics and challenges of doing a very demanding PHY for the retimer application are done now. With regard to adding various standards, that is primarily an interface game. This also lends itself to other links and stories. We are laying the framework for a platform with optionality to chase where the SAM and TAM go. At this point, we are in the electrical retimer market for Ethernet-based solutions. Tore Svanberg: Very helpful. And on Washington, I assume that gets sold with either Keystone or Rushmore. Are you seeing designs where your TIAs are participating on other people’s DSP platforms? Kishore Seendripu: Rushmore and Washington are sampling now. Customers are very excited about the performance. The TIA is a fundamental block not only for Rushmore-based modules but also for LPO and LRO strategies. MaxLinear, Inc. is very well known for its great RF/analog skills. For CPO, if they go bare-bones, the TIA and driver are a natural fit; if they go more sophisticated DSP-based, we already have the platform offering. As you go toward XPO/CPOs and various manifestations, the full offering is important. Washington is the first step in building a fundamental platform that will have multiple derivatives. Operator: Our next question comes from Timothy Savageaux with Northland Capital Markets. Please proceed with your question. Timothy Savageaux: Thanks. Quick follow-up from me on the hyperscale win for PON—the data center control/management application. Can you talk a bit more about the timing and how significant this opportunity could be? When would you expect this design win to ramp, and could it be a needle mover? Kishore Seendripu: We just secured the win, and we expect the ramp—after qualifications—to start sometime in 2027. It is one of the first of its kind, where data centers see the value of a dedicated, reliable link to control the entire data center network. We expect this TAM to be in the hundreds of millions of dollars. Our expectation is that it can be quite a needle mover even next year in the second half on a run-rate basis. Operator: Our next question comes from Richard Shannon with Craig-Hallum Capital Markets. Please proceed with your question. Richard Shannon: Just one follow-up to dig in on the DSP side. How big could the other applications outside duplex optical DSP be—LRO, LPO, CPO, AEC, retimers, etc.—in a year or two? Could that be 10% or even 20% of the total portfolio? Kishore Seendripu: We are still in the early innings of how this market plays out—CPOs and others are likely three years out from determining broader adoption. At this point, it is a very small share of the market from a silicon units point of view. I do not expect it to be a huge part of our revenues near term. From a TAM perspective, I would rank optical transceiver PAM4 DSPs as number one, substantially outweighing the rest; second would be electrical retimers as that happens; and third would be AECs. AECs are more point-in-time application–driven and will evolve. Near term, revenues will be massively outweighed by optical transceiver PAM4 DSP. Operator: We have reached the end of our question and answer session. There are no further questions at this time. I would now like to turn the floor back over to Leslie Green for closing comments. Leslie Green: Thank you all. This quarter, we will be presenting at several financial conferences, and the details will be posted on our Investor Relations page. Thank you for joining us today, and we look forward to speaking with you again soon. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, everyone. Welcome to VeriSign, Inc.'s first quarter 2026 earnings call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I would like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir. David Atchley: Thank you, operator. Welcome to VeriSign, Inc.'s first quarter 2026 earnings call. Joining me are Jim Bidzos, Executive Chairman, President and CEO, and John Callis, Executive Vice President and CFO. This call and presentation are being webcast from the Investor Relations website, which is available under About VeriSign, Inc. on verisign.com. There, you will also find our earnings release. At the end of this call, the presentation will be available on that site and, within a few hours, the replay of the call will be posted. Financial results in our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q. VeriSign, Inc. does not update financial performance or guidance during the quarter unless it is done through a public disclosure. The financial results in today's call and the matters we will be discussing include GAAP results and two non-GAAP measures used by VeriSign, Inc.: Adjusted EBITDA and free cash flow. GAAP-to-non-GAAP reconciliation information is appended to the slide presentation, which can be found on the Investor Relations section of our website, available after this call. Jim and John will provide some prepared remarks, and afterward, we will open the call for your questions. With that, I would like to turn the call over to Jim. Jim Bidzos: Thank you, David. Good afternoon to everyone, and thank you for joining us. I am pleased to report that VeriSign, Inc. delivered strong results in 2026, both operationally and financially. The combined .com and .net domain name base is now at a record 176.1 million names. New registrations are the largest we have seen since 2021, combined with very strong renewal rates. On the financial side, revenue was up 6.6% year-over-year, and EPS increased 11.4% year-over-year. After seeing to the needs of our operations, we returned over 100% of our free cash flow to the investing public in the last twelve months for a total of $1.13 billion through share repurchases and dividends. Our financial and liquidity position remains stable with $556 million in cash, cash equivalents, and marketable securities at the end of the quarter. Also at quarter end, there was $863 million remaining available under our current share repurchase program, which has no expiration. As announced in today's earnings release, VeriSign, Inc.'s Board of Directors approved a cash dividend of $0.81 per share of VeriSign, Inc.'s outstanding common stock to stockholders of record as of the close of business on 05/19/2026, payable on 05/27/2026. VeriSign, Inc. intends to continue to pay a cash dividend on a quarterly basis, subject to market conditions and approval by VeriSign, Inc.'s Board of Directors. VeriSign, Inc.'s performance in the first quarter shows sustained demand for domain names. During the quarter, the domain name base for .com and .net grew by 2.54 million from year-end 2025. New registrations for the first quarter were 11.5 million compared with 10.7 million last quarter and 10.1 million for the first quarter of last year. The renewal rate for 2026 is expected to be 76.3% compared to 75.5% a year ago. The positive domain name base trends of 2025 continued to build strength to start 2026. We saw growth across our three main regions, with most of the strength coming from the U.S. and EMEA. It is clear to us that end users are seeing value in domain names and the domain name system, as evidenced by our strong domain name metrics and the increasing reliance on our infrastructure. We see ongoing registrar focus on customer acquisition and engagement with our marketing programs. Also, we see a positive impact from AI tools, which make content and website creation faster and easier. With the trends we have observed thus far in 2026 and our expectations for the next three quarters, we are increasing and narrowing our guidance for domain name base growth to be between 3.1% and 4.3% for 2026. As a reminder, you can monitor the progression of the domain name base on our [inaudible], which is updated daily. As announced in today's earnings release, we have given notice of a $0.71 increase to the annual wholesale price for .com domain names, which raises the wholesale price from $10.26 to $10.97, effective 11/01/2026. Even after this increase, we believe .com will remain highly competitive with other TLD choices. I would note that this is the first allowable price increase since the notice two years ago in February 2024 of a $0.67 increase. As a reminder, VeriSign, Inc. is prohibited from selling .com registrations to retail buyers. We may only sell to accredited registrars and only at a capped, regulated price. The new $10.97 price that will become effective November 1 is the maximum price that we can charge registrars. Registrars, however, are entirely price-unrestricted and can sell .com registrations at any retail price they choose, and those prices often differ significantly from the price we are limited to. I would now like to turn the call over to John. I will return when John has completed his financial report and closing remarks. John? John Callis: Thank you, Jim, and good afternoon, everyone. For the quarter ended 03/31/2026, the company generated revenue of $429 million, up 6.6% from the same quarter a year ago. Operating expense in Q1 2026 totaled $135 million, which compared to $140 million last quarter and $131 million for the first quarter a year ago. As noted last quarter, Q4 2025 results included an impairment charge. Operating income totaled $294 million, up $22 million, or 8.3%, from the previous year. Operating income was up $9 million, or 3.1%, on a sequential quarter basis. Net income for the first quarter totaled $215 million, compared to $206 million last quarter and $199 million for the same quarter a year ago. This resulted in diluted earnings per share of $2.34 for the first quarter this year, compared to $2.23 last quarter and $2.10 for the first quarter of last year, representing increases of 4.9% and 11.4%, respectively. Operating cash flow for the quarter was $272 million; free cash flow was $265 million. Compared with [inaudible] and [inaudible], respectively, in the year-ago quarter. I will now discuss our updated full-year guidance for 2026. Revenue is now expected to be between $1.73 billion and $1.745 billion. Operating income is now expected to be between $1.17 billion and $1.185 billion. Interest expense and non-operating income, net, which includes interest income estimates, is still expected to be an expense of between [inaudible] and $7 million. Capital expenditures are still expected to be between $55 million and $65 million, which includes some modest structural improvement projects at our HQ facility. The GAAP effective tax rate is still expected to be between 22% and 25%. I will now turn the call back to Jim for his closing remarks. Jim Bidzos: Thank you, John. As I said, we are pleased to have delivered another solid quarter of operational and financial performance. We extended our record of 100% service availability. We saw strength in all metrics: new registrations, renewal rates, and solid financial performance, including paying our fourth quarterly dividend and additional share repurchases to return over 100% of our free cash flow to the investing public. We have seen broad participation in our marketing programs, which are now better tailored to our diverse and evolving channel. In short, we focused on what we can control and influence. We also benefited from some tailwinds that include AI, which, as I said, has made it easier to find a good domain name, build a website, and get online. However, as we have said many times before, the delivery of our services is our primary mission. That is VeriSign, Inc.'s priority. In addition to .com/.net DNS, our services include the DNS root zone publication and the operation of two of the 13 global Internet root servers. Our employees are dedicated to support that mission, and the vast majority of them are highly skilled technical specialists directly engaged in the design, development, operation, maintenance, support, and protection of our unique, purpose-built, high-assurance critical infrastructure. As we approach 29 years of uninterrupted availability—in fact, 100% availability spanning four decades—certainly one important aspect is availability. Performance and accuracy are equally important for many reasons, including for security. Our authoritative DNS answers are cryptographically protected, and over 95% are processed in milliseconds globally, more than 600 billion transactions per day on average that we see across our infrastructure. That is 7 million transactions per second every second of every day on average. Given the ever-increasing reliance on a global Internet, we believe high assurance, as we define it, will become increasingly important. In the coming weeks, we will share a series of blogs about how we view the future of high-assurance infrastructure, the role it will play in enhancing online trust, and introduce enhanced security components. Thank you for your attention today. This concludes our prepared remarks. We will now open the call for questions. Operator, we are ready for the first question. Operator: If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Once your question has been stated, please mute your line. We will take our first question from Rob Oliver with Baird. Rob Oliver: Great. Thank you. Good afternoon, Jim. First question, and I had a couple of questions. First one for me is around, clearly, marketing programs that you guys announced that you intended to pursue—I think it was back in Q1 of 2024—are really starting to gain traction. You also called out tailwinds from AI, and so I am wondering the extent to which you could help us understand, as you look at the strength in domains, which I think you said we have not seen now in many years, what sort of the contributing factor balances are there. Is it more AI? Is it more things you can control, marketing? How should we think about the mix of those contributions? Jim Bidzos: That is a good question, Rob. The way we see it, it is difficult to really separate the two. The reason is that they sort of collide in a good way with each other and blend together. The registrars benefit from the tailwind from AI, which essentially makes it easier for the registrars to service folks who can quickly find a domain, get online, and build a website. That gets easier. I believe that engagement with our programs, which we know for a fact is a significant contributor—but to what extent is difficult because that demand and our programs sort of collide. We put together programs that were responsive to what we heard from the channel. The channel is evolving and diversifying constantly, and, as I have said before, we put together programs that were responsive to their diverse needs, and they are absolutely engaging with them. So there is greater drive from the tailwind engaging with more carefully tailored programs. Trying to separate those is really difficult. I wish I could give you a better answer, but they are both good news. Rob Oliver: Okay, great. That is helpful color. Thanks, Jim. Second question for me is around your comment that you have been pleased—I cannot remember your exact language—about renewal rates and what you have seen. I just wanted to double down on that a little bit. We are, I think, around the two-year anniversary of when you guys called out these marketing programs. So it is a little early to know if it was a two-year cohort, but I would specifically love to hear from you what you are hearing about the renewal cohorts around post those marketing changes and how those are holding up relative to your typical renewal rates on new domains. Jim Bidzos: Yes, good question. John has been looking into that. John? John Callis: Certainly, our renewal rate at 76.3% was very strong. Our programs, as we have talked about in the past, do have elements of design that incentivize our customers—our registrars—to sell and promote names to their customers that have a better renewal-rate characteristic. We do expect continued good, solid renewal rates through 2026. As we mentioned last quarter, the strength of new registrations in 2025 will present a little bit of a challenge this year because we will have a higher proportion of first-time renewing names through 2026. Our first-timer renewals are still averaging in the mid-40% range. Our previously renewed names are in the mid-80% range but have showed some improvement over the last year. I think we are pleased with what our programs have delivered there and are seeing some improvement. Rob Oliver: Okay. Thanks, John. I appreciate all that detail. And then I guess, last one for me, and then I will hand it over to others. Jim, I do not know the extent to which you will comment, but I wanted to ask about the upcoming round of ICANN TLD programs that is going to be coming up—I think the process may be kicking off even here in April or imminently. Any color you can provide on how we should be thinking about how you are thinking about that potential opportunity around the new TLD program? Thank you. Jim Bidzos: Sure. Yes, ICANN is opening another round of applications for new gTLDs. The last one was in 2012, and you are right, this one opens up at the end of this month for submission of applications. ICANN is opening a window for a new round. We expect it to be a long process. The new generic TLDs that come out of this process are likely not launched until 2028. There are a lot of steps ICANN goes through after the application window. There is also a potential in this new round of multiple applicants for the same TLD. In this case, ICANN will run an auction process to sort out the winners of different contention sets. So there is a lot of process to go on. We get asked a lot about VeriSign, Inc.'s participation, and we are taking the necessary technical steps to be ready should we choose to be an applicant in this round. As a reminder, in the 2012 round, we obtained several new gTLDs, some of which we have not yet launched. Also, .web, which we are continuing to pursue, was from the 2012 round. We are still evaluating our participation in this current round—the 2026 round—with the window of applications slated to open on the 30th of this month and not close until August 12. We will update you as appropriate as we get closer to the end of the application close in August. Rob Oliver: Okay. That is great. Thanks, Jim. Thanks, John. I appreciate all the color. Thanks a lot. Operator: We will move to our next question from Citi. Analyst: Good afternoon. Thank you for taking my questions. First off, with the upcoming .com price hike, what are your expectations for the price elasticity or renewal trends for these newer domains following the hike? I understand wholesale domain prices are fairly nominal relative to the end-customer costs, but any color there would be very helpful. And then also, how are you thinking about .net pricing? John Callis: Yes, so if I understood your question, you are asking us what our expectations are around renewals post price increase. It is very dependent on what our retail registrars do with pricing. If they do take price increases, that could have an effect on either new registrations or renewals, and we have seen a little bit of that in the past. But we are still pretty confident in the trends that we are seeing in renewals at this point in time, and we will see what happens come, I guess, November 1 and thereafter. Jim Bidzos: I would just add the new price—the $10.97 per-year price for a .com—works out to about $0.03 a day. I think for most registrants who are engaged in online activities, it is a relatively modest amount. Analyst: Makes sense. And then any [inaudible] .net pricing? Jim Bidzos: We have available 10% annual price increases on .net. We do not guide to pricing, of course. We take a lot of factors into consideration when we decide how to price the TLDs. I can tell you a couple of things. Number one is we have not, at this point today, announced a price increase for .net. We consider it to be a well-known, competitively priced TLD, and we invest in marketing programs for .net. If we announce a price increase, we will certainly give notice, but we have not at this point. Analyst: Got it. Thank you very much. Follow-up question here on your infrastructure build-out. In context of the over 600 billion transactions per day that VeriSign, Inc. sees, AI agents and LLMs scraping the web at an accelerated rate—Is your current infrastructure sufficient to handle this expanding Internet? Were there incremental investments you might need to ensure that 100% uptime? Jim Bidzos: Sure. There are many qualitative and quantitative improvements that we are constantly making and adjusting to our network. The best answer I can give you is that we have multiple orders of magnitude in excess capacity as one component of our resiliency planning and execution. Analyst: Great. Thank you. Jim Bidzos: Sure. Operator: We will take our last question from JPMorgan. Analyst: Hello, Jim. I appreciate the commentary at the very end of your prepared remarks about the new services. Can you maybe provide a bit more color on what those new services will solve for your customers—maybe some additional insights on the security and stability mission that you are looking to achieve there? Jim Bidzos: Sure. I can say a few more things about the foundational reasons that I alluded to concerning additional security services in high-assurance infrastructure like ours. Putting aside AI for a moment—which is, of course, a significant, major development—well, maybe not quite putting it aside, simply making the observation that with Anthropic’s research, we have seen that AI is capable of revealing vulnerabilities in various systems. So security is continuing to be important. In the many years that I ran the RSA Conference, my observation in every keynote was that the security situation provided more job security for the audience than any industry I could think of. And here we are 35 years since that conference began, and it certainly turned out to be true. High-assurance infrastructure becomes important for a lot of reasons. AI is not only beneficial for all the reasons that it is, but it reveals vulnerabilities. With the increased reliance and use of the Internet—it is such a deep part of all of our lives, with so many different infrastructures now relying on it—we think high assurance will be important. I mentioned the components. The components I talked about are our own 100% availability record—100%, not five nines—now for 28 going on 29 years. That is one. But also our performance: that we can deliver accurate, cryptographically protected answers to queries in milliseconds anywhere in the world, at a rate of 600 billion per day on average, and have multiple orders of magnitude capacity beyond it. The accuracy part is important, and the performance part is important because these are windows of vulnerability. The delays in answering queries related to secure navigation are important. We believe that there are additional security tools that would be synergistic with the type of high-assurance infrastructure that we have. I have alluded to services that we have been examining. They need to fit certain requirements: they need to fit well into our infrastructure, and work well within our channel. Nothing significantly changes in offering them other than they benefit from the properties of our infrastructure, and we think that some of them are worth considering as an offering as a service. As I said, we will have a series of blogs that roll this out, starting as soon as next month, so you will have more information then. That is probably what I am comfortable saying right now. Analyst: Okay. Perfect. Thank you, Jim. And I appreciate all the comments that you made around your own marketing activities, but can you comment on how registrar promotional intensity in Q1—for example, for GoDaddy, your biggest customer—or for other registrars, how it compared with 4Q, and how you think about promo-driven volume versus sustainable underlying demand? Jim Bidzos: There are a lot of different ways that question could be answered. I will give you one way, and John can add if he has another. I mentioned the evolving and diverse nature of our channel. This is all true. Some website builders have turned into registrars. Some have been acquired. Some have merged. Some have a different focus. All of them have different models. That evolving part led us to take a careful look at our programs and make sure that we offered those that actually work for these different models. Different models bring about issues like different lead times to prepare marketing campaigns, and so, as we learned and adapted, it was driven more by what the diverse needs were and the need to find something that could work for a larger group rather than a one-size-fits-all. We are also bound by some restrictions in how we market. We have to be careful to treat registrars equally and fairly. That is also a factor in that design. Our channel for .com and .net—I believe VeriSign, Inc.’s channel—has the broadest reach because of the popularity of .com and .net TLDs, so we service a very large number of registrars. We thought that was the path that would lead to the most productive results in the short term: simply addressing the needs of a very large, diverse, and evolving channel. We concentrate on listening to them, learning what they are doing, engaging with them, returning, assessing, adapting, revising, and presenting—and we get engagement. So it is less driven by what we think a program will do and more by what they really need to go out and market our products, which are really great, reliable, trusted products. Analyst: Makes sense. Thank you very much, Jim. Operator: That concludes today's question and answer session. I will turn the conference back to David Atchley for final comments. David Atchley: Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening. Unknown Speaker: Okay.