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Operator: Good day, and welcome to the AZZ Inc. Fourth Quarter Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Phillip Kupper, Managing Director of 3 Part Advisors. Please go ahead. Phillip Kupper: Good morning. Thank you for joining us today to review AZZ's fiscal 2026 Fourth Quarter and Full Year Results for the period ended February 28, 2026 joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast of today's call is available at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including delays in the annual report on Form 10-K. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson. Thomas Ferguson: Thanks, Philip. Good morning, everyone, and thank you for joining us today. We delivered a strong close to the year and achieved record sales and profitability for the third consecutive year. I'm especially proud of how our teams recovered from the major winter storm in late January to finish a strong fourth quarter. Full year sales totaled $1.65 billion adjusted EBITDA surpassed $367 million and adjusted earnings per share grew 19% year-over-year to $6.19. Our performance reflects the strength of our strategy disciplined execution, operational excellence and commitment of teamwork and values-based culture across the organization. During fiscal 2026 we further fortified our competitive position by driving market share gains across our segments. AZZ continue to win by delivering superior customer service and operating with discipline and consistency while leveraging our proprietary technologies and galvanizing research capabilities to create differentiated value. Throughout the year, we made organic investments across both of our segments to enhance operating efficiencies and support our long-term growth. A key milestone was the completion of our greenfield precoat metals facility in Washington, Missouri, this investment advances our organic growth strategy and strengthens our free code Metals segment, expanding AZZ's participation in the growing alminum coatings and beverage-related end markets. We further expanded our Metal Coatings platform last year through the acquisition of a galvanizing facility in Canton, Ohio, which extended our footprint and broadened our service offering for new and existing customers. At the same time, we continue to evaluate acquisition opportunities through a disciplined capital allocation framework while growing an active strategic pipeline of deals. Jason will cover our fourth quarter results in detail. So I'll focus my remaining comments on the significant secular tailwinds that continue to propel our long-term growth. We are seeing momentum across our end markets driven by infrastructure-related investment themes that are reshaping the industrial landscape. These include industrial reshoring, bridge and highway investments, hyperscale data center expansion, investments in power generation, transmission and distribution and continued growth in renewable energy. Each of these trends are structural multiyear and increasingly central to our customers' capital spending priorities. As we've seen throughout the year, these markets rely heavily on galvanized steel and coated metal solutions areas where AZZ brings meaningful scale, deep coding experience, operational reliability and exceptional value. Our diversified portfolio positions us uniquely to be able to support large-scale complex projects across multiple end markets and states often simultaneously, and to do so with consistency and speed. Together, these demand drivers and our differentiated operating model allows AZZ to capture market share and deepen existing customer relationships. Dave will share additional details on how industry dynamics translate into project activity in just a moment. We continue to drive incremental improvements across our network using our digital galvanizing system in metal coating plants and coal in precoat metals these systems [indiscernible] customer engagement, while driving productivity and margin improvement across our operations. together, these custom digital capabilities reinforce our competitive advantages and support consistent profitable growth. With that, I'll turn it over to Jason. Jason Crawford: Thank you, Tom, and good morning. Starting with a summary of results for the year. In fiscal 2026, which ended February 28, 2026, we reported record sales of $1.65 billion up 4.6% from the prior year. For our core segments, we increased metal coating sales 14.1% and generated strong EBITDA of over $235 million or 31% of sales. For pre-court metals, despite a modest 2.3% sales decline driven by industry-wide softness in residential and other key markets we generated solid EBITDA of $176 million or 19.8% of sales. Consolidated gross margins remained robust at 23.9% and operating income from the year rose by 12% to $165 million. Also, for the full year, GAAP net income comparisons included 2 noteworthy matters. First, in 2026, our Vail joint venture generated equity and earnings from unconsolidated subsidiaries totaled $210 million, primarily driven by successfully divesting businesses within the joint venture which I will discuss in more detail in a moment. Second, for the fiscal year 2025, GAAP net income available to common shareholders included our preferred stock redemption premium expense totaling $75 million. Adjusted net income, excluding these items, plus intangible asset amortization and restructuring charges resulted in adjusted EPS of $6.19, an increase of 19% on the prior year. In addition, consolidated adjusted EBITDA increased year-over-year to $367.6 million or 22.3% of sales, up from 22% of sales a year ago. Shifting to our quarterly results. We reported record fourth quarter sales of $385.1 million represent a 9.4% increase from $351.3 million in the prior year period. This was supported by strong double-digit sales growth from our Metal Coatings segment, up 25.7% year-over-year. Compared to the prior year, Q4 results benefited from continued momentum from higher infrastructure-related demand and less impact from inclement weather. Precourt metal sales were down 2.4% for the same quarter of the prior year, primarily due to continued lower end market demand and pockets of construction, transportation and HVAC. The company's fourth quarter gross profit was $87.6 million or 22.7% of sales, up 30 basis points from 22.4% of sales in the same quarter of the prior year. Selling, general and administrative expenses totaled $30.5 million in the fourth quarter or 7.9% of sales. This compares favorably with last year's fourth quarter which reported $38.2 million or 10.9% of sales, inclusive of $6.7 million in accrued costs related to legal, retirement and severance expenses. Operating income for the quarter was $57.1 million or 14.8% of sales and exception 330 basis point improvement compared with $40.4 million or 11% of sales in the fourth quarter of the prior year. Also in the fourth quarter, we reported a net loss from the AVAIL joint venture equity and earnings of $21.7 million primarily reflecting a loss in the sale of the welding services buses and an unfavorable prior period adjustment from AVAIL. Excluding the loss on sale and prior period adjustment transactions, the Val joint ventures, equity and earnings for the quarter was approximately $700,000 compared with $3.7 million for the fourth quarter of the prior year. Interest expense for the fourth quarter was $11.2 million, an improvement of $6.2 million from the prior year, driven by debt paydown from continuing operations debt paydown from the Vale joint venture distribution, the issuance of an AR securitization loan with favorable pricing and a favorable repricing of the term loan. The fourth quarter's income tax expense was $8.7 million and GAAP net income was $5.9 million compared to GAAP net income of $20.2 million for the fourth quarter of the prior year. We reported adjusted net income of $40.4 million, excluding intangible asset amortization and valet loss discussed earlier resulting in adjusted diluted EPS of $1.34, up 36.7% versus a year ago. Fourth quarter adjusted EBITDA was $81.3 million or 21.1% of sales compared to $71.2 million or 20.2% of sales for the same period last year. Turning to our financial position and balance sheet. Consistent with our capital allocation priorities for the year, we executed with discipline across our balance sheet, growth investments and shareholder returns. We reduced debt by $385 million and ended the year with a net debt-to-EBITDA ratio of 1.4x providing significant financial flexibility moving forward. We continue to invest in the efficiency of the core buses. During the year, we invested $80.8 million in capital expenditures, a growing portion of which was dedicated to internal growth initiatives. Also included in the year within our capital expenditures was approximately $7.9 million on our new Washington, Missouri facility over the past 3 years, we've invested approximately $125 million in this aluminum coil coating facility with the team delivering the project on time and on budget. With the facility now fully operational, volume continues to ramp in alignment with our partner customer and was profitable at the contribution margin level in Q4. Finally, winning offer investments for the year. We further strengthened our Metal Coatings segment by acquiring a galvanizing facility in Canton, Ohio for approximately $30 million, demonstrating our commitment to grow the core businesses organically and inorganically. At the same time, we remain committed to returning capital to our shareholders. During the year, we paid $23 million in cash dividends and repurchased $20 million and shares at an average price of $98.28 per share. Together, these actions reflect a disciplined approach to capital deployment and our focus on creating long-term shareholder value. For the remaining AVAIL joint venture invent, we account for our 40% interest as equity and earnings on unconsolidated subsidiaries, which also constitutes a separate operating segment. In 2026, Arval generated equity and earnings of $210 million, which includes the sale of its electrical and welding businesses and provided cash distributions of $287 million during the year. ESG's cash flows from operations of $525 million includes $273 million of cash distributions from Aval net of the associated taxes paid. The remaining $14 million of cash distributions from AVAIL were classified as cash flows from investing activities. Finally, as expected, 2026 cash taxes were higher in the year associated with higher equity and earnings from Avail offset somewhat by positive effects from the 1 big beautiful Bill Act on depreciation, R&D expenses and interest expense. With that, I'll turn the call over to David. David Nark: Thank you, Jason. Good morning, everyone. Consistent with our disclosures found in the company's 10-K, Total sales for the full year grew at 5% as compared to the prior fiscal year. Construction, our largest end market, grew at 3%, while Electrical & Industrial delivered strong double-digit sales growth, resulting in 17% and 15% growth rates, respectively. As Tom noted, AZZ continues to benefit from early stages of a longer investment cycle driven by sustained U.S. infrastructure-related spending and the continued expansion of large data centers. These often pair with the construction of significant co-located power generation, driving our electrical, industrial and construction end market results. Our consumer end market performed well, growing at 6% on higher volume of coated aluminum, driven by the shift from plastic to aluminum in the beverage market and the continued ramp of the new Washington, Missouri facility while our transportation category declined by 3% due to weaker overall on-demand for semitrailers. Looking forward, industry research characterizes the AI data center build-out as more structural rather than cyclical and the U.S. data center electricity demand is expected to roughly double by the end of the decade. Despite ongoing geopolitical and interest rate uncertainties, we believe AZZ's demand is driven by fundamental shifts in the economy rather than traditional construction cycles. External forecasts indicate that the U.S. hyperscale data related spending will be approximately $700 billion in calendar year 2026, with AI investments accounting for the majority of that capital. This infrastructure heavy spending environment aligns well with our end markets. Modern data center construction requires advanced corrosion protection and usually drive significant investments in on-site power generation, grid reinforcement and transmission infrastructure. These are complex multiyear projects that require substantial hot-dip galvanized content. As a result, our Metal Coatings segment is well positioned to support this expanding market. Excluding data centers, we anticipate nonresidential construction will continue to remain subdued in fiscal year 2027, primarily driven by interest rates, geopolitical and lingering tar-related uncertainties. Within the residential housing market, current industry research indicates that single-family housing starts are expected to be at to down low single digits as a large stock of homes already under construction dampens new starts. Additionally, Current estimates project 30-year fixed mortgage rates will remain above 6%, limiting affordability and slowing demand for new construction. As a result, builders are increasingly focused on finishing existing projects and offering incentives to reduce current inventory. We expect the softness in both residential construction may provide a headwind for our precoated Metals segment in the current fiscal year. With that, I will now turn the call back over to Tom. Thomas Ferguson: Thank you, Dave. We anticipate the number of data center projects entering the construction phase in 2026 will increase, which will drive further infrastructure build-out. Importantly, our customer demand is not isolated to data centers. We are seeing continued strength across key end markets, including bridge and highway construction, power generation and electrical transmission and distribution all of which are supported by long-term secular tailwinds. These projects drive sustained demand for hot dip galvanizing services and may create incremental opportunities for pre-coated metal solutions. . We win in competitive markets because we provide delivery, reliability, high quality and speed of execution. While we are off to a good start in the first quarter, it is early in the year. So today, we are reiterating our fiscal 2027 guidance. Sales are expected to be in the range of $1.725 billion to $1.775 billion adjusted EBITDA in the range of $360 million to $400 million and adjusted diluted earnings per share in the range of $6.50 to $7. We estimate debt reduction in range from $130 million to $170 million in fiscal 2027. We are confident that our strong financial and market positions will enable us to capitalize on strategic growth opportunities, while executing on our broader capital allocation plans. Due to our strong balance sheet and desire to provide above-market growth, we will remain selectively aggressive in our approach to M&A opportunities. We focus on investments to strengthen our metal cans and precoated metal segments, expand our geographic reach and deepen customer relationships. Using a proven disciplined playbook, we are pursuing opportunities that reinforce our competitive advantages and deliver sustainable returns for our shareholders. As we look ahead, we are confident in AZZ's ability to consistently improve performance and execute at a high level, while delivering profitable growth and long-term value for our shareholders. Finally, I'm proud to recognize AZZ's 39th consecutive year of growth and profitability from continuing operations. This achievement is a direct result of the dedication, expertise and commitment of our employees across the organization. Our focus on safety, quality, customer service and execution continues to differentiate AZZ and I want to sincerely thank our teams for the outstanding work they do every single day. Now operator, we would like to open the call for questions. Operator: [Operator Instructions] The first question today comes from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess, first off, on Metal Coatings, obviously, a very big year last year from a volume standpoint, including what you delivered in the fourth quarter. If you could just share with us, what are you embedding for growth specific to fiscal year '27 for the segment? And then for pre-code, if I understood you correctly, I know you called out some headwinds as it relates to residential construction. Are you expecting a worsening of the trend in terms of volumes or just headwinds that may be offset with other tailwinds, including your Washington a Missouri plant. . Thomas Ferguson: Yes. I can pick that up. So from a metal coatings point of view, if you look at the projections for the next year, somewhere in the mid-single to upper single digits for that business. Obviously, ending the year very strongly, and that builds momentum coming into the year. As you look at the pre-cometals business, probably in and around where we've seen them. So relatively flat year-on-year as you look at the overall market, where the benefit is, obviously, they've got better comps year-on-year to compare against versus the pre sorry the Metal Coatings business, we've got a little bit more difficult comps. So on high mid- to high single digits, they are relatively flat. Ghansham Panjabi: Okay. And then for pre-code, just to clarify, what is your exposure towards residential construction for that segment? Thomas Ferguson: Yes. I think if you look at overall, the market that they cover, so if you look around 75% of their end markets are driven by construction. And then around about 1/3 of that has that residential exposure. Ghansham Panjabi: Okay. And then just for my second question, as it relates to zinc prices and just maybe you can comment on your rumtrial basket trends in context of what's been happening with commodities more broadly, obviously, the events in the Middle East, et cetera. What are you seeing at this point? And how are you managing through that? Thomas Ferguson: Yes. I think from a zinc perspective, there hasn't been much effect. Prices were trending up before all of the disruption. And as you know, that's about to months in our kettles and we were feeling that coming into the year anyway. So we've but there's general inflation going on within both segments, whether it's pay prices going up, which also which is more of a pass-through on the precise side, but on the albanizing side, it's acids, caustics, chemicals, as I like to call it, super open do all that stuff is inflating. And we that's why we come value pricing. We try to keep up with pricing. The 1 thing we're doing from a surcharge perspective is in relation to transportation, fuel costs, things like that because we do have a large fleet of our own trucks and trailers. So there were using surcharges to offset that and make sure we protect our margins. We're not seeing that change. There's hardly a day goes by anymore that we don't get some price increase from suppliers. And so both segments are pushing price to offset that and maintain margin. And it seems to be expected in the marketplace now because everybody is facing the same issues. Operator: The next question comes from Daniel Rizzo with Jefferies. Daniel Rizzo: So just thinking about the preco market, obviously, higher interest rates are an issue, but are there other meaningful affordability issues that you can pinpoint for the commercial market. I mean, I think we all understand what happens with residential, but for nonres, I was wondering if there's other things that are kind of a factor that are hindrance besides, again, high interest rates. David Nark: Yes, Daniel, really pretty much everything we've described in the remarks. When you think about nonresidential, we've seen project costs overall from some of our end markets and customer go slightly up and get inflated due to some of the things that Tom mentioned. Obviously, when we put our budget together, the war in Iran had not started yet. But so we've seen some escalation there. And again, interest rate uncertainties, I think, are going to be the main thing on the residential side. Thomas Ferguson: And I would add that 1 of the things we are facing is availability is sub-grade. It's with tariffs on imports, domestic supply ramping up there are some constraints in terms of available sub strength to be painted. So some of our customers are experiencing that. So which drives them to wait and probably to inventory less wait until it's closer to the demand for the season to go ahead and place orders to be able to best utilize the substrate that's available. So that's 1 of the things we're seeing, which tends to drive us to it fits our profile, quick turnarounds, small lots, lots of customization. So it's that's a little bit of an underlying trend, which does increase cost on projects and also makes demand a little less harder to predict because they're not buying to normal inventory trends. Daniel Rizzo: More so for metal coatings, are backlogs a thing, just given the size of your projects and what people are planning out, I assume years ahead. But I was wondering if you have a sizable backlog or that's not something that's not part of your business. Thomas Ferguson: Yes, it's really not part of our business. We I say this jokingly. A lot of our sites, they look out on the yard and then that's their demand and backlog for the week. But and we're really good at turning stuff. And so our customers depend on the fact that we're very, very reliable. They get it to us on Monday. We're going to have it back to them on Friday. So we're aware of it because in our sales process, we're forecasting it. So as customers are communicating to us what their demand is going to be month in, month out. and even week out. So we feel really good on the metal side right now. Most of our customers it's a broad-based growth profile in infrastructure. So it's not any 1 whether it's data centers, pull our substations and then all the stuff that has to go in, whether it's roads, lighting, electrical systems to support data centers in substations and things like that. So it's a really broad-based market and our network of facilities plays well to it. So we don't record backlog that way, but we can look forward and say, our customers are bullish on demand in the metal coatings space. Operator: The next question comes from Adam Thalhimer with Thompson Davis. Adam Thalhimer: Congrats on the strong quarter and the strong year. On the data center piece, how are you guys handling the demand? I mean, do you have certain facilities that seem to be dedicated towards those projects? And then from a disaggregated sales standpoint, do you put that revenue into construction or into industrial or some other bucket? Thomas Ferguson: I'll let David answer the second part of it. On the first part, we just had our annual Metal Coatings, plant managers and sales managers meeting and so we've got 120 folks in there, and there was hardly a 1 single plant manager or sales manager, I talk to that isn't working on one, 2 or 3 data center projects at any given time right now. So very, very broad-based. It's what they like about us is we've got a network of facilities and so we can handle large projects across multiple facilities or in many cases, on facility can handle the entire project. So gives them surety of delivery, reliability of execution, all those kind of things that just play well for pick and AZZ for your galvanizing. In terms of how we coat it. That gets a little dicier, so I'll turn that over to David. David Nark: Yes. Thanks, Tom. There's some variation in how it gets coated based upon how the order really comes to us, whether it's from a general fabricator or a dedicated project development team, et cetera. So sometimes you'll see that show up as you can see in our results by electrical and industrial because we know we can visually see it. And we know that, for instance, it's a monopole and that's obviously going to be in electrical whereas some of the structures, and you've been to some of our plants, Adam. So you've seen some of the things that we're working with. It can be a little more unclear as to if it's going into a data center or if it's going into an LNG project, for instance. So that sometimes we'll get a little bit more clouded and will go into either construction or industrial as a result. Adam Thalhimer: Okay. Good color on that. And then I wanted to ask about M&A potential M&A. You mentioned a pipeline of deals. Can you just update us on what the pipeline looks like and potential timing? Thomas Ferguson: Yes, the pipeline is looking good, particularly on the Metal Coatings side. They're mostly what we're looking at, they're one-off sites. And so if you just kind of take our average fleet sales and EBITDA, call it $15 million in sales. $4 million to $6 million in EBITDA. That's kind of the size that we're looking at in terms of bolt-ons. . We've got 3 or 4 in fairly active discussions. We've got 1 underway in due diligence. So love to get 1 closed in before we talk again and then see if David and his team can get a couple more close this year. On the precut side, we've got 1 that I'll call in active discussions. It's not a big one. So it's kind of a single line sort of thing. And that bot sums it up. There's obviously the bigger things that we're looking at, but they're going to be further out. I don't know that I project any of the larger ones for this year. Operator: The next question comes from Nick Giles with B. Riley. Nick Giles: My first question was just CapEx is around $90 million at the midpoint. I saw in the assumptions that hot dip capacity expansions are part of that. Can you just speak to what the potential EBITDA impact could be? And how much of those expansions are embedded in this year's guide versus something that may be more visible next year? Thomas Ferguson: Yes. I think as we're looking at adding kettles, we're adding 1 here in North Texas because of demand. It will be starting up here in the next month or so. So it's going to have some impact. I'm struggling to want to publicly say what a new cattle is worth in terms of EBITDA. But it is going to have an impact. It's at a large site. So it's going to give us incremental capacity. The other things we're doing, and we are looking at other locations to add kettles those are fairly quick. We could put them in, and we approved the 1 I talked about just a few months ago, and it will be up and running this quarter. or June 1. So not long cycle times on these things. hopefully has a couple of million impact in EBITDA. If you ask the Metal Coatings team, they would say it's embedded in their forecast. If you ask me, I'd say maybe, maybe not other things we're doing in ground line coating that's common with poles and towers and things like that. So doing more of that just because transmission distribution continues to boom. So adding that capability. Once again, $2 million or $3 million investments for nice incremental sales and EBITDA. Jason, do you want to add any color to that? Jason Crawford: I mean, I think it's if you look at the growth in that business continues to go in the right direction and some of these cats are getting ahead of the curve and making sure when the volume hits then we're in the right place to go deliver against that. I would say the forecast and guidance that we have at the moment, plus or minus includes it. Really, you look, it's more kind of long-term returns. Thomas Ferguson: I mean the good news is they're really low-risk investments because the demand is already there. . Nick Giles: Understood. Appreciate that, guys. And you know the stock has obviously been on the nice run. So just was curious to ask about your appetite to do more buybacks here? Or would you prefer to keep more cash on the balance sheet just for some of those M&A opportunities that you mentioned? Thomas Ferguson: Yes. I think given the activity we've got on the acquisition side, we're committed to minimizing the dilution with stock buybacks. And so we remain committed to that. so that remains in terms of capital allocation strategy. Given the list of possible or even becoming more probable deals that we can get done. I like using the cash for that because that's going to set us up. It brings immediate EBITDA uptick for us. And as you know, our guidance does not include the M&A incremental that we would pick up. Operator: The next question comes from Gerry Sweeney with Roth Capital. Gerard Sweeney: Tom, Jason and Dave, the we've hit upon Metal Coatings quite a bit. But just 1 follow-up question, especially on the transmission and distribution. It sounds like you talk a lot to some of the metal fabricators, et cetera. But I'm just curious as to do you ever talk to some of the end users or the end purchasers and how much visibility you have on that? Or how forward out do you can you see or at least some discussions in general terms? Thomas Ferguson: Yes, I'd say we look at the general end user trends in terms of their spending and where they're going to be adding capacity and things like that. David can add more to it. But we attend a variety of conferences where we're in touch with that. And a lot of that is generally available capacity additions in terms of gigawatt additions so that kind of stuff. We're in contact with them. We compare that to what our customers are telling us and then we look at the general available market trending data. And David can put some color on it. David Nark: Yes. Thanks, Tom. Yes, Gerry, I would add to that. We've been more active than we have in the past and marketing directly to the industry and end users of it. Metal Coatings team, in particular, has put together a nice bit of marketing materials. And as Tom mentioned, has recently been to some industry conferences as well to showcase our capabilities for that market. So we're pretty pleased with what we're seeing there. And again, it shows up in the results and it also shows up in some of the backlog that those GCs and others that are calling on them share with us that give us a good forecast. Gerard Sweeney: Got you. And then just 1 more quick question. Just on the Washington facility. I think you mentioned that it was profitable on a contribution basis. And in the fourth quarter. What utilization is that running at? And how should we think about that sort of ramping up through the rest of the year, if it's not already there? Thomas Ferguson: I'd say it's at about 40% now. It's going to continue to ramp and we've got yes, it's got to produce around 45,000 to 50,000 tons this year and we're feeling pretty comfortable with the trends that it's going to get there. And so that's really going to ramp up as we get to second quarter, third quarter, fourth quarter. But we're watching that positive trend month in, month out, Jason, I don't know if you want to add something there. Jason Crawford: Yes. No. I mean it's very much ramping up to our expectations, getting to that 40%, 50% here in the first quarter or sorry, getting beyond the 40% closer to the 50%, there's 3 different processes and the 3 processes are at slightly different stages. But all signs in terms of the plans for the year are very much in alignment with expectations. Operator: Next question comes from John Franzreb with Sidoti & Company. John Franzreb: Congratulations on a great year, guys. Just want to stick with the Washington facility. What was the revenue contribution of that business in fiscal 2026? Thomas Ferguson: I think it was about $11 million or so in revenue. . John Franzreb: For the full year? Thomas Ferguson: Yes, for the full year. I believe that's... John Franzreb: All right. And I'm curious about filling the balance of the plant. I think you had about 75% of it allocated where do you stand on the remaining 25%? Thomas Ferguson: We've got a lot of interest in it. We're trying to make sure we take care of our partner first. And so, so we're continuing to ramp their volume up. As you know, the aluminum business is booming. So but yes, we won't have any trouble filling that capacity once we've taken care of our partner first. And so we would hope to by, call it, by the end of the third quarter to be in a position to start filling the balance of that. John Franzreb: Got it. Got it. Understood. And I just got off a conference call where the company mentioned that there was a concern about municipality spending in the coming year. Is that something that you share? Any kind of commonality with? I'm just kind of curious about your thoughts there. Thomas Ferguson: Yes, it's interesting because a lot of the communities we're in. We tend to be heavily concentrated in the Midwest, the South and the West, a little bit up in Canada. Most of the municipalities we're talking to are in good shape. They've still got like here in DFW, there's still a lot of growth in housing, multi-unit housing commercial construction. So we still got a lot of companies moving. And that's kind of the story throughout as, which is our biggest concentration of capacity for galvanizing. So every 1 of those communities is struggling with their budgets, but every 1 of the communities has to make these investments. So it's yes, it just is what it is. As you move up further through the Midwest. Mostly, I'd say 2/3 are very comfortable. They're moving forward with these infrastructure projects because they have to and then even in the other areas, the difficulty, I think the difficulty here is if you've got a big data center moving in, and it's going to require you to expand roads, you're going to have different means on your electric utilities. I think those are still being sorted out. So not that we're having direct conversations with those municipalities, but just kind of looking at the challenges that they're facing, how do they balance their budget when you've got this big facility coming in, which and it's going to require infrastructure. It's going to require water is going to require electricity some of the bigger data centers, they're building as David pointed out, they're now building the power generation concurrently with it. But you still got to give roads and other infrastructure, things to it. So I don't know. It's a challenge. I don't see it creating problems for us this year. But I think as you go out further, that's going to become a bigger question for a lot of these municipalities. Operator: [Operator Instructions] The next question comes from Eric Boyes with Evercore. . Eric Boyes: First, could you please remind how paint pass-through is typically incorporated in pre-code. Is it directly itemized for customers? And how many months of paid inventory does precoat generally carry? Thomas Ferguson: Yes, Eric, I can pick that up. So generally, the paint is not itemized and obviously, the end customers have a very good understanding and typically have a relationship with the paint companies. So any paint pricing that comes from the paid companies has generally passed on for 1 through to the end customer. And that's something that's within the industry and not just within AZZ. Eric Boyes: Great. I appreciate that, Jason. Thomas Ferguson: And then sorry, you asked about inventory, sorry. We have very, very tight in inventory. All inventory is bought to customer order. So as you can appreciate there isn't any speculation in terms of the manufacturing within that business. given it's all custom colors, et cetera, et cetera. So generally, we have around about 3 or 4 weeks' worth of inventory on hand. We hold a little bit more of the common product in terms of primes and backers, but when you really get to the top coats and the customization, then it's pretty much coming in the door to align with the production schedules. Eric Boyes: Got it. I appreciate that. And then second follow-up. I think you said earlier on the call that Precoat is expected to be roughly flat year-over-year. But on kind of a quarterly cadence, is that assuming some contraction in the first half? And then in the back half, we see some end market normalization? Or is that more kind of flattish across the year? Thomas Ferguson: Yes. I mean I think we're looking at it more flat across the year. And I would say, from a conservative point of view, we keep getting signals, things are turning and not quite a transition into results, et cetera. The only thing I feel to mention in the first part of that question, that Girsham had provided is the addition and growth associated with the new Washington facility really. So when you start to add that into the equation, then Precoat should show growth quarter-on-quarter as we go through the year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks. Thomas Ferguson: I just want to thank everybody for joining us today. Hopefully, what you're taking away is we feel like we're off to a good start this quarter, feel good about the year at this point, even with all the external things that may be going on out there, what's within our control, we feel very good about, and we feel that we've got great teams working real hard to do everything they can for our shareholders. So look forward to talking to you at the end of the first quarter. Thank you. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Limited's First Quarter 2026 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, 04/23/2026. I would now like to turn the conference over to Emma Chapman, Vice President, Investor. Please go ahead. Emma Chapman: Thank you, Operator. Good morning, everyone, and thank you for joining us for Teck Resources Limited's first quarter 2026 conference call. Today's call contains forward-looking statements. Actual results may vary due to various risks and uncertainties. Teck Resources Limited does not assume the obligation to update any forward-looking statements. Please refer to Slide 2 for the assumptions underlying our forward-looking statements. We will reference non-GAAP measures throughout this presentation. Explanations and reconciliations are in our MD&A and the latest press release on our website. On today's call, Jonathan Price, our CEO, will provide highlights for the first quarter 2026. Crystal Prystai, our CFO, will follow with further details on our operational performance and financials in the quarter. Jonathan will then wrap up with closing remarks and an opportunity for Q&A. And with that, over to you, Jonathan. Jonathan Price: Thank you, Emma, and good morning, everyone. We will start with the highlights from the first quarter 2026 on Slide 4. We delivered a very strong start to the year with robust financial results reflecting both disciplined execution across our operations and the cash flow generation potential of our portfolio. Our adjusted EBITDA more than doubled to $2.1 billion in the quarter, driven by record quarterly copper sales volumes, higher commodity prices, and the continued success of our optimized feed strategy in Trail Operations. This has supported robust cash generation with $1 billion in cash flow from operations contributing to a $338 million increase in our net cash position over the quarter. And with ongoing cash generation into April, we further increased our cash by nearly $300 million since March 31, and our current liquidity is $9.8 billion as of yesterday. Throughout the quarter, we made considerable progress against our key near-term priorities. Our merger of equals with Anglo American obtained regulatory approval from South Korea and advanced integration readiness. We have strong performance across all operations and are tracking well against our plans with no changes to our previously disclosed annual guidance. At QB, the team delivered consistent performance, production in line with Q4 2025, and record quarterly copper sales. We also made significant progress on the tailings management facility, or TMF, including completion of Rock Bench 4. And we continue to advance the Highland Valley mine life extension project with detailed engineering now over 90% complete and procurement nearing completion; our capital guidance of $2.1 to $2.4 billion is unchanged. All in all, it has been another strong quarter of performance in which we demonstrated the resilience and potential of our assets and further improved our strong balance sheet. Turning to an update on the merger of equals with Anglo American on Slide 5. We continue to make progress with regulatory approvals. As mentioned, we received approval from South Korea in the first quarter and the approval from China is advancing. At the same time, we are making good progress on our integration planning work to ensure readiness to close and to position the combined business to hit the ground running from day one. We are moving steadily closer to creating a leading global critical minerals champion and realizing the significant value creation potential of Anglo-Teck. We continue to expect closing of the transaction within twelve to eighteen months from the announcement last September. Turning now to safety on Slide 6. Teck Resources Limited had very strong safety performance in the first quarter. Our high potential incident frequency rate for Teck Resources Limited-controlled operations remained low at 0.05 in the quarter. This is below our 2025 annual rate of 0.06, which matched Teck Resources Limited's best ever annual result. Health and safety remain core values for Teck Resources Limited; we are focused on continual improvement and our vision of everyone going home safe and healthy every day. Turning to QB's performance in the first quarter on Slide 7. I was at QB last week, and I am incredibly pleased with the performance of the team there and the progress we are making at this tier-one asset, executing on the TMF action plan and driving operational stability. In the first quarter, we delivered robust and consistent performance with strong production at 56,000 tonnes. This was in line with Q4 2025 despite a planned maintenance shutdown and a shorter operating month in February. Mill availability of 92% was lower quarter-on-quarter; we completed our planned scheduled maintenance in January, which also had a slight impact on overall asset utilization in the quarter of 87%. Despite this, asset utilization in the quarter remained above the range assumed in our 2026 guidance. Throughput improved slightly quarter-over-quarter, reflecting enhancements in operational discipline and integration across the mine and the plant. Recoveries at 83% benefited from stable, continuous operations. Overall, there was continued operational stability in QB, with enhanced reliability and consistency in plant operations during the quarter. Slide 8 highlights the development of QB's TMF. At site, I was able to see the significant progress the team has made in advancing development of the facility. These photos show the progress that we have made since many of you visited QB in November 2025. In the first quarter, we successfully completed Rock Bench 4. You can see that the dam crest has widened significantly, which enabled the raising of the dam wall with no associated downtime of the mill. We also advanced construction of the paddocks and development of the sand dam, as evidenced in the picture on the right-hand side, as sand production and quality improved from the installation of new cyclone technology late last year. Overall, sand deposition rates improved in the first quarter, and continued improvement is expected throughout the year as we progress construction of the sand dam. Slide 9 summarizes the status of QB's TMF development work, which remains on track. Construction of the mechanical rock benches is aligned with our plan, with the completion of Rock Bench 4 in Q1. We now expect to complete Rock Bench 5 by the end of the second quarter, adding further width to the dam crest. With the installation of the new cyclone technology late last year, and the associated improvements in sand deposition, we expect to continue to advance development of the sand dam and enable steady-state operations by year-end. We have decided to install a secondary sand cyclone system to further improve sand quality. The timing of installation will be determined in the second half of this year. And finally, the schedule for installation of the permanent infrastructure remains under evaluation and will be confirmed later in the year. While we have made significant progress on the TMF, there is still much work to be done throughout the remainder of the year, importantly, completion of the development of the sand dam, and we remain acutely focused on closing out all remaining objectives. Turning to the Highland Valley mine life extension on Slide 10. The project includes enhanced mine infrastructure, an expanded mobile equipment fleet, and a new maintenance shop. The infrastructure work includes a new tertiary grinding mill and replacement of an AG mill with a SAG mill, upgrades to the flotation circuit, and upgraded power and water systems. Construction activities continue to ramp up across these work fronts and are progressing to plan. We have commenced construction of the new maintenance shop, made substantial progress along the tailings corridor, and advanced installation of pilings for the new tertiary mill. The early productivity indicators are positive. Detailed engineering is now over 90% complete, and procurement awards are now over 95% complete, with our focus now shifting to expediting the fabrication and then ensuring that timelines for delivery to site are maintained. We invested $188 million in the project in the first quarter. Our capital expenditure guidance for the project is unchanged at $900 million to $1.2 billion this year, which is a peak year for project spend, and $2.1 to $2.4 billion overall. There is also additional capitalized stripping at HVC to develop future mining areas, and this is expected to continue to ramp up over the remainder of the year. While we expect some impact from higher diesel prices, our 2026 guidance for capitalized stripping is unchanged at $450 to $500 million for the entire copper segment. This project will enable average annual copper production of 132,000 tonnes per annum at Highland Valley and extend the life of this core asset to 2046. With that, I will hand over to Crystal. Crystal Prystai: Thanks, Jonathan. Good morning, everyone. I will begin with our financial performance in 2026 on Slide 12. As Jonathan mentioned earlier, our adjusted EBITDA more than doubled to $2.1 billion in the quarter, with margins expanding to 53% from 40% in the same period last year. This was driven by our highest ever quarterly copper sales volumes and significantly higher commodity prices, with copper prices averaging a record $5.83 US per pound in the quarter. There was also a meaningful contribution from increased by-product revenue, particularly from silver. We continue to focus on cash flow generation through our optimized feed strategy at Trail Operations. This strategy continues to deliver positive results. Gross profit before depreciation and amortization from Trail significantly improved to $258 million in the first quarter compared with $80 million in the same period last year. We continue to assess our feedstock strategies and remain agile to implement initiatives that will enhance Trail Operations' profitability and cash flow. Slide 13 summarizes our financial performance in 2026 compared to the same period in the previous year. The 125% increase in our adjusted EBITDA was primarily driven by higher primary and by-product prices, resulting in a total increase in adjusted EBITDA of over $1 billion. Lower smelter processing charges remained a tailwind as the concentrate market continues to be tight. Controllable factors made a positive contribution to EBITDA, with higher sales volumes resulting in a $232 million increase. Higher copper volumes were marginally offset by lower zinc sales from Red Dog, which were in line with our expectations. Now looking at each of our reporting segments in greater detail, starting with copper on Slide 14. In the first quarter, our gross profit before depreciation and amortization in copper increased 158% from the same period last year to $1.8 billion, primarily driven by record quarterly average copper prices and copper sales volumes and lower net cash unit costs. Gross profit margin before depreciation and amortization improved substantially to 52% from 47% in the same period last year. Operational performance was strong across all assets in our copper segment. Copper production increased 32% from Q1 2025 to 140,000 tonnes, including the significant increase in QB's production to 56,000 tonnes. We also achieved record quarterly copper sales at QB, which exceeded production at 70,000 tonnes, drawing down inventory built at the end of 2025. These sales were supported by normal operations at the ship loader at QB's port facility following the completion of repairs and return to service in February. Highland Valley's production increased 11,000 tonnes from Q1 2025 due to increased mill throughput and higher grades, partially offset by lower recoveries as mill feed continues to be dominated by softer ore from the Lornex pit. Antamina's production grew 41,000 tonnes due to higher-grade copper-only ore, as expected in the mine plan. And Carmen de Andacollo's production increased to 14,000 tonnes due to higher copper grades and recoveries. Our copper net cash unit costs were significantly lower than the same period last year, down $0.27 US per pound, reflecting higher production, lower smelter processing charges, and higher silver and molybdenum by-product credits at QB and HVC. Looking forward, all of our annual guidance for 2026 to 2028 for our copper segment is unchanged. This year, we continue to expect further growth in copper to 455,000 to 530,000 tonnes compared with 454,000 tonnes last year. Turning now to our zinc segment on Slide 15. In the first quarter, gross profit before depreciation and amortization increased 72% from the same period last year to $387 million, driven by higher commodity prices and, as I mentioned previously, our continued focus on our optimized feed strategy at our Trail Operations. Gross profit margin before depreciation and amortization expanded to 37% compared to 29% in the same period last year. At Red Dog, zinc production of 106,000 tonnes reflected lower grades as expected in the mine plan, and zinc sales were above our quarterly guidance range at 52,000 tonnes. Despite the lower production, we reduced our zinc net cash unit cost by $0.08 per pound compared to the same period last year, due to higher by-product revenue, largely driven by increased silver prices, as well as lower smelter processing charges. Refined zinc production at Trail Operations increased 16,000 tonnes compared to Q1 2025, as the zinc electrolytic plant was running at full capacity in the quarter. Looking forward, we expect Red Dog zinc sales for Q2 2026 to be between 30,000 and 40,000 tonnes, consistent with the normal seasonality of sales. Our annual zinc guidance for 2026 to 2028 is unchanged, and we continue to expect zinc in concentrate production of 410,000 to 460,000 tonnes and refined zinc production of 190,000 to 230,000 tonnes in 2026. Looking more closely now at our unit costs on Slide 16. In the first quarter, our net cash unit costs in both our copper and zinc segments decreased significantly compared with the same period last year. This was a function of disciplined execution at our operations with higher production and improved by-product pricing. The current conflict in the Middle East results in some inflationary and supply chain risks, largely from diesel prices and, in particular, diesel imports into Chile. This inflationary risk to cost needs to be seen in the context of the material benefit on our unit costs from additional by-product revenue, which currently more than offsets the impact of higher diesel prices. Our annual net cash unit cost guidance embeds conservative by-product prices below those achieved last year and below current spot prices. If current commodity prices persist, this would be a benefit to our realized net cash unit cost for the year. Our annual 2026 net cash unit cost guidance ranges for both copper and zinc are unchanged, and we have provided sensitivities for our net cash unit cost to by-products and WTI prices. The largest sensitivities are currently expected to be from silver and the WTI oil price as a proxy for diesel. In our copper segment, our annual net cash unit cost guidance for this year remains $1.85 to $2.20 per pound, compared with $2.03 US per pound last year, and reflecting the growth in copper production that we continue to expect this year. For every $10 US per ounce change in the silver price, our copper net cash unit costs are expected to move $0.02 US per pound. Our 2026 guidance range embeds an assumption of $36 US per ounce, and the spot price is currently trading at around $80 US per ounce. For every $10 US per barrel change in the WTI oil price, our copper net cash unit costs are expected to move $0.03 US per pound. Our 2026 guidance is based on a WTI oil price of $65 US per barrel, and the spot price is currently around $93 US per barrel. In the zinc segment, we continue to expect our annual net cash unit cost for this year to be between $0.65 and $0.75 US per pound, compared with $0.30 to $0.33 US per pound last year, reflecting the expected decline in zinc production volumes this year. For every $10 US per ounce change in the silver price, our zinc net cash unit costs are expected to move $0.05 US per pound. And for every $10 US per barrel change in WTI, our zinc net cash unit costs are expected to move $0.01 US per pound. At Red Dog, we take delivery of all of our required diesel during the shipping season, and we are still consuming fuel shipped in 2025. We are continuing to actively monitor the situation for any potential for further disruptions, including in the cost and supply of inputs. Turning now to our operating cash flow outlook on Slide 17. With the cash flow we have already generated from operations in Q1 of this year, our illustrative EBITDA and cash flow from operations have further improved based on several copper pricing scenarios. Assuming an average copper price of $5.50 US per pound for the rest of the year, we could generate $6.6 billion in EBITDA and $5.5 billion in operating cash. And if copper prices remain at current levels close to $6 US per pound for the remainder of the year, this could increase to around $7.1 billion in EBITDA and $5.9 billion in operating cash flows. These cash flows are primarily driven by our copper segment, including QB, with a significant contribution from our zinc segment. This illustrates the cash flow potential of the business, particularly if current copper prices are sustained. We expect strong operating cash flow conversion, particularly at QB. Turning to our balance sheet on Slide 18. Cash flow from operations in the first quarter was strong at $1 billion. This was despite an $834 million build in working capital due to seasonal working capital outflows throughout the quarter, including payment of the NPI royalty, as well as an increase in receivables at the end of the quarter due to higher sales volumes and higher commodity prices. As a result of our strong operating performance, we are building cash, with a $338 million increase in our net cash position in the quarter to $488 million. We have continued to generate cash into April, with a $276 million increase in our cash balance from March 31, and our current liquidity is $9.8 billion as of yesterday. The cash flows generated from operations also support our capital investments as we continue to execute the HVC MLE project this year. We continue to maintain investment-grade credit ratings and to pay our regular base annual dividend of $0.50 per share, or $61 million in the first quarter. Overall, robust cash flow generation is strengthening our balance sheet and ensuring our resilient position. With that, I will hand back to Jonathan for closing remarks. Jonathan Price: Thanks, Crystal. I will come back to our key near-term priorities to wrap up on Slide 20. First, we are working on securing the remaining regulatory approvals for our merger of equals with Anglo American while advancing our integration planning. Second, we are focused on continuing to deliver safe, stable, and predictable operational performance against our plans and guidance. Third, we are pushing hard to progress the TMF development to achieve steady-state operations at QB this year to underwrite the full value of this extraordinary asset. And finally, we are advancing construction of the Highland Valley mine life extension project. With these key near-term priorities, we are setting a strong foundation for our next chapter at Anglo-Teck as a global top-five copper company, as we continue with our relentless focus on unlocking value for our shareholders. With that, over to you, Operator, for questions. Operator: Certainly. You will hear a tone acknowledging your request. We ask that you please limit yourself to one question and one follow-up. If you are using a speakerphone, please ensure you are using the handset before pressing any keys. The first question comes from Liam Fitzpatrick with Deutsche Bank. Liam, you may go ahead. Liam Fitzpatrick: Good morning, Jonathan and team. First question, just on QB, around the installation of the permanent infrastructure. Can you outline some of the key factors that will drive the timing there? And does it pose any risk to the production guidance that you have given? Jonathan Price: Liam, thanks for that question. Firstly, I will say it poses no risk to production guidance, but I will let Dale Webb, our SVP of LatAm, talk through some of the timing considerations. Dale Webb: Thanks for the question, Liam. I think the primary drivers are really our progression in terms of getting the tailings dam to steady state, and that is on track to achieve by year-end. Once we are able to achieve that, then we will find an operating window where we have an extended period of time where we do not need to do additional lifts, at which point we can implement and install that infrastructure. We would be looking at a period of time in 2027 to do that. That would be preliminary at this stage, and it is under constant review as we progress the build of the tailings dam. Liam Fitzpatrick: Okay. Thank you. And my follow-up is on the Trail asset. This has not been my biggest focus when looking at the numbers, but it has become quite material. Can you help us understand what a sustainable level of EBITDA for this asset will be moving forward? Q1 does look exceptional, but how should we think about 2026 and beyond? Jonathan Price: Yes, thanks, Liam. I will get [inaudible] to just start with a little bit on the operating strategy at Trail, and then perhaps Crystal can comment on the financial outcomes. Unknown Speaker: Good morning, and thank you, Liam. As Crystal stated in her opening comments, our strategies have remained consistent for the past eighteen months. There are two key drivers to profitability. One is our feedstock from concentrate and non-concentrate sources. We work closely with the commercial team to set up the feed strategy in advance to optimize pricing. Also note it is an integrated zinc business; our principal feed source is from Red Dog. The second driver is capacity of the plant. We are focused on operating discipline. We have plant shutdowns this year in May and October, approximately 15 to 20 days each. Crystal Prystai: Thanks. Look, I think the future profitability of Trail as we think forward every quarter is going to depend heavily on commodity prices, the TC environment, and FX rates. Those are all going to be drivers. And as noted, the feedstock is going to be really critical to that. So what you are seeing is by-products really driving the profitability in the quarter. I think it is challenging to measure that sort of EBITDA, but you really have to think about your views on commodity prices. We can have further discussions about the modeling offline if that is helpful. Liam Fitzpatrick: Okay. Thank you. Operator: The next question comes from Myles Allsop with UBS. Please go ahead. Myles Allsop: Great, thanks, and congratulations on a good quarter. Maybe just firstly on the merger with Anglo. How are the discussions progressing with the Chinese regulators? Is there anything untoward? And how quickly, once approval comes through from China, can you actually complete the merger and move forward? Jonathan Price: Yes, thanks, Myles. On the first point, the interactions with SAMR, the regulator in China, are proceeding very much in the normal course. We continue, both ourselves and Anglo American, to respond to information requests, which is quite typical at this point in time. Right now, we have not received any requests for remedies arising from this process. So it is very much a normal, two-way, technocratic process, if I can put it that way, and we will continue to remain very engaged in that. As I mentioned before, we do not see any change to the timelines for closing of the transaction, with the twelve to eighteen months from the date of announcement still remaining our best and current view. With respect to completing or closing the transaction post the receipt of the China approval, of course we would look to do that as quickly as possible. There will be a number of considerations that flow into that, but I think you could expect to see one following the other in pretty short order. Myles Allsop: Okay. Thank you. And then on the TSX index, how have those discussions been progressing? Is it looking like you may get index inclusion now? Jonathan Price: There have been a few green shoots coming in that conversation of late. As you know, it is something we have been focused on since the announcement of the transaction, but I will let Emma provide a little bit of an update as to where we are right now. Emma Chapman: Hi, Myles. The good news is we have seen some really positive momentum coming from S&P and the TSX to find a practical solution to enable Anglo-Teck to retain indexation as a combined entity on the TSX. This is ultimately being driven by market participants who really want this outcome. There is currently a consultation process ongoing which could help shape what the potential framework could look like to enable that indexation. At the moment, we are hearing pretty positive feedback from the market that there is an incentive to try and find a positive solution. We just need to establish the timing of what that process could look like and hopefully see a conclusion reached ahead of close of the deal. We will work closely with the market, and we will work closely with S&P and the TSX to try and get that determination for investors. Myles Allsop: Great. Thanks. I will jump back in the queue. Jonathan Price: Thanks, Myles. Operator: The next question comes from Anita Sarney with CIBC. Please go ahead. Anita Sarney: Hi, good morning, Jonathan and team. Thanks for taking my question and congratulations on a good quarter. Just a couple of questions. I want to follow up on the indexation. I think S&P was soliciting feedback from investors. Do you have any idea when you would hear whether or not you would be included in the index? Is there any timeframe? Emma Chapman: We have not had any specific timeframe, Anita. I think there are obviously some variables that are uncertain, such as the closing of the transaction. From the feedback that we have received from the market, there is a desire to try and accelerate getting a conclusion done so that it is in advance of the close of the deal. But I do not believe that a set process or timeline has been established at this point. We will again try to work as closely as we can to facilitate an accelerated decision from S&P and TSX. Jonathan Price: I think all we know in addition to that, Anita, is that they make these decisions on a quarterly basis, and there is a consultation period ahead of each quarter. So to Emma’s point, it is about timing that consultation to be as close as possible to completion of the transaction. Anita Sarney: Just on QB as well. Is there anything that we need to be thinking about as the year evolves in terms of capacity within the tailings dam? At this stage, is there sufficient capacity ahead of you for Q2 and Q3, or could that be a bottleneck going forward? I understand the mill is running well, but I am just thinking about the capacity for deposition. Jonathan Price: At a very high level, we have signaled that we expect Rock Bench 5 to be completed within this quarter, within Q2. Assuming we deliver that, then we expect to be able to operate throughout the remainder of 2026 unconstrained by the dam and by tailings capacity. Anita Sarney: Another question. The NPI at Fourmile has come up. Are there any plans for you to monetize that, or how are you thinking about that royalty that you have? Jonathan Price: No specific plans for that right now. We view that as a valuable asset that we have in the portfolio, and it is a reflection of what is actually quite a large portfolio of various royalties associated with prior exploration projects that we have had in the Teck Resources Limited stable. We are obviously very pleased to see how that project will advance over time. There is a lot of technical work that has to still be done around the Fourmile development, and that will further inform the value of the royalty that we hold. It is something that we will remain very close to, of course, but that is one for the future. Anita Sarney: Thank you. That is it for my questions. Operator: The next question comes from Craig Hutchinson with TD. Please go ahead. Craig Hutchinson: Just on the potential for the JV between QB and [inaudible]. I think you had mentioned in Q1 that you are starting to have discussions there. Can you provide any updates on where things stand with regard to a future JV between those two assets? Jonathan Price: Thanks for that, Craig. We remain very focused on unlocking the full potential of QB and Collahuasi for all shareholders and stakeholders. We are absolutely convinced that that combination will offer the fastest route to new copper growth; it will have the lowest risk, the lowest capital intensity, and therefore the highest returns relative to any standalone alternatives for either site. However, progressing with QB–Collahuasi and the synergies there will not in any way preclude further expansion of either QB or Collahuasi in the future. We see that district as one that will be able to offer a significant expansion of multi-decade copper growth for all parties. There is a lot of work going on around that right now. We are progressing with scoping studies, we are progressing with permitting strategies, and we are having engagements between the parties and stakeholders more broadly. So lots happening on that front, but, of course, nothing concrete to announce at this point. Craig Hutchinson: And then one more question for me. On Highland Valley, it was really strong grade this quarter. What does the cadence look like from a grade perspective for the balance of the year? Does it drop off fairly significantly in Q2, or is it steady state and then rolls off in the second half? Anything on grades would be helpful. Thanks. Jonathan Price: We do expect to see some reduction in grades, but perhaps I will ask [inaudible] to comment a little more. Unknown Speaker: Thanks very much, Craig. The grade in Q1 2026 was expected and in line with our plan and within our annual guidance range. Grades in the first quarter were slightly higher than projected; that was a function of sequencing within the mine plan. We do expect some additional downtime in the second half of the year associated with the mine life extension project. As Jonathan mentioned, we are going to convert the autogenous mill to a SAG mill and install the tertiary grinding mill, so connecting those two things will impact capacity, but all is consistent with guidance. Jonathan Price: Guidance is unchanged, Craig. Craig Hutchinson: Great. Thanks, guys. Operator: The next question comes from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Yes, thank you. Good morning, everyone. Sorry if this question was asked before or the topic was addressed; I joined a little bit late. Have the Chinese authorities indicated any potential request in terms of asset divestitures or something of that nature as they go through the review of the proposed transaction? Jonathan Price: Hi, Carlos. Yes, we did address this earlier. Essentially, that process is unfolding under the normal course in terms of the regulatory review.
Operator: Good morning, and welcome to the Ryder System First Quarter 2026 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions]. I would now like to introduce Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin. Calene Candela: Thank you. Good morning, and welcome to Ryder's First Quarter 2026 Earnings Conference Call. I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website. Presenting on today's call are John Diez, Chief Executive Officer; and Cristy Gallo-Aquino, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, President of Fleet Management Solutions; and Steve Sensing, President of Supply Chain Solutions and Dedicated Transportation Solutions, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to John. John Diez: Good morning, everyone, and thanks for joining us. The Ryder team delivered solid first quarter results that exceeded our expectations. Our performance was driven by better-than-expected used vehicle sales results in fleet management. I'll begin today's call by providing an update on our balanced growth strategy, and an overview of our Port-to-door logistics offering. I'll also provide you with key highlights from our first quarter performance. Cristy will then provide you with an overview of our segment performance, and we'll discuss our capital spending and capital deployment capacity. I'll then review our raised outlook for 2026. Let's begin with a strategic update. I'm proud of the team's ongoing execution and our balanced growth strategy, which remains consistent and focused on clear priorities. We're building upon our transformed business model and the actions taken to derisk the portfolio, enhance returns and cash flow and strengthen the model's resiliency. Derisking actions included significantly reducing our reliance on used vehicle proceeds to achieve our targeted returns. Our multiyear lease pricing and maintenance cost savings initiatives continue to contribute meaningfully to our increased return profile and positive free cash flow over the cycle. Accelerated growth in our asset-light supply chain and dedicated businesses, has resulted in a more resilient business mix that is less capital intensive. We remain focused executing on our strategic priorities of operational excellence, customer-centric innovation and profitable growth. Operational excellence is where we stand out and what enables us to leverage our full end-to-end capabilities to solve our customers' toughest logistics and transportation challenges. We're investing in customer-centric innovation that enables a proactive supply chain. Giving our customers a competitive advantage. In RyderShare and RyderGyde, we're embedding a genetic AI in order to enhance capabilities and drive the evolution of these proprietary platforms. We're also leveraging AI use cases across the company, including FMS customer service and roadside assistance where Gentek AI is enhancing the customer experience while improving effectiveness. Additionally, we continue to deploy automation and robotics in our warehouses to drive operating efficiencies. We remain focused on profitably growing our contractual relationships. Over 90% of our revenue is generated by long-term contracts. Our high-quality contractual portfolio has proven to be a key driver of business model resilience over the cycle. Our transform model has demonstrated the effectiveness of our balance growth strategy by outperforming prior cycles. Our 3 complementary business segments are leaders in North American logistics and transportation with secular trends that support further growth opportunities. We're encouraged by the earnings power and resilient performance of our transformed business model. And believe that executing on our balanced growth strategy will continue to enable us to outperform prior cycles and position us well to benefit from a cycle upturn. Our scaled port-to-door logistics and transportation offerings provide rider with significant opportunities for long-term revenue and earnings growth by addressing many of our customers' toughest challenges. Our port-to-door solutions give customers end-to-end control from pickup at any North American port to final delivery. We combine warehousing, fulfillment, cross-border cross stocking, lease and maintenance, transportation logistics, contract packaging and last mile delivery with powerful technology and our supply chain experts to give real-time visibility, flexibility and speed. Whether our customer needs a complete solution or support at any discrete step, Ryder can provide a solution that aims to perfect their supply chain. As we continue to pursue profitable growth opportunities, we're focused on higher-return segments and verticals and increasing our share of wallet with our port-to-door offerings. By executing relentlessly, investing in our future, and growing our contractual relationships, we're well positioned to profitably grow our businesses, creating value for customers and shareholders. Turning to Page 6. Key financial and operating metrics have improved since 2018, reflecting the execution of our strategy. In 2018, prior to the implementation of our balanced growth strategy, the majority of our $8.4 billion of revenue was from FMS. Ryder generated comparable EPS of $5.95 and return on equity of 13%. Operating cash flow was $1.7 billion. This was during peak freight cycle conditions. Now let's look at Ryder today. In 2026, we expect our transformed business model to deliver meaningfully higher earnings and returns than it did during the 2018 peak. Through organic growth, strategic acquisitions and innovative technology, we shifted our revenue mix towards supply chain and dedicated, with approximately 60% of 2026 expected revenue generated by these asset-light businesses compared to 44% in 2018. Our 2026 updated comparable EPS forecast range of $14.05 to $14.80 is more than double 2018 comparable EPS of $5.95. Our return on equity forecast of 17% to 18% is also well above the 13% generated during the 2018 cycle peak. As a result of profitable growth in our contractual lease, dedicated and supply chain businesses, forecasted operating cash flow of $2.7 billion is up approximately 60% from 2018. In 2026, the business is expected to outperform prior cycles, even when comparing the pre-transformation peak to the current market environment. Moving to key performance highlights from the first quarter. The Ryder team delivered our sixth consecutive quarter of comparable EPS growth in a challenging freight environment. Comparable EPS for the quarter was up 3%. Results reflect the strength of our contractual portfolio and resiliency of our transformed model. Return on equity was solid at 17%, in line with our expectations given where we are in the freight cycle. We're on track to deliver $70 million in incremental benefits from strategic initiatives during 2026. These initiatives are part of a $170 million multiyear program launched in 2024. Consistent execution on these initiatives is the key driver of expected earnings growth in 2026. And finally, freight cycle conditions in the first quarter were better than our expectations. Used vehicle sales results were higher year-over-year for the first time since third quarter of 2022. Out performance was driven by higher retail volumes relative to our expectations and retail pricing was stable sequentially. The sequential change in commercial rental demand was in line with historical seasonal trends for the first time in 3 years. We also experienced improved contractual sales activity. Supply Chain generated record sales in the first quarter, continuing the momentum from prior year record sales and reflecting the value of our solutions. We're also encouraged by stronger sales in fleet management and dedicated, segments which have been experiencing sales headwinds reflecting freight market conditions. Sales for both segments during the quarter were above prior year and ahead of expectations. That said, these conditions remain below normalized levels and geopolitical and macroeconomic factors continue to influence the pace and durability of the recovery. I'll now turn the call over to Cristy to further review our first quarter performance. Cristina Gallo-Aquino: Thanks, John. Total company operating revenue of $2.6 billion in the first quarter was in line with prior year as contractual revenue growth in supply chain was offset by lower revenue in Dedicated. Comparable earnings per share from continuing operations were $2.54 in the first quarter, up 3% from the prior year, reflecting benefits from share repurchases, partially offset by lower earnings. The decline in earnings was due to lower supply chain performance compared to a robust prior year, partially offset by a lower tax rate driven by discrete items in the quarter from stock-based compensation tax benefits. Return on equity, our primary financial metric was 17%, in line with the prior year. Free cash flow increased to $273 million from $259 million in the prior year, reflecting reduced capital expenditures, partially offset by higher working capital needs. In Fleet Management Solutions, operating revenue was consistent with prior year. Earnings before taxes were $99 million up versus prior year, reflecting continued execution on our strategic initiatives. Used vehicle results reflect a year-over-year improvement and better-than-expected performance. In rental, demand remained below prior year, but we are encouraged that the sequential seasonal decline was in line with historical trends, as mentioned earlier. Lower rental activity was partially offset by higher rental power fleet pricing, which was up 3% year-over-year. Rental utilization on the power fleet, was 68% and up from the prior year of 66% on an average fleet that was 13% smaller. Fleet Management EBT as a percent of operating revenue was 7.9% in the first quarter, up from prior year, but below our long-term target of low teens over the cycle. In used vehicle sales, year-over-year used tractor pricing increased 6% and truck pricing declined 5%. On a sequential basis, pricing decreased for both tractors and trucks, with tractors down 3% and trucks down 4%. Sequential pricing reflected a lower retail sales mix as retail pricing remained stable. In the first quarter, 61% of our sales volume went through our retail channel, down from 69% in the fourth quarter. Our retail mix was above prior year levels of 56%. During the quarter, we sold 4,600 used vehicles, up 1,000 units sequentially and down versus the prior year. However, volumes for trucks, our largest inventory class were up year-over-year. Used vehicle inventory of 9,500 vehicles is slightly above our targeted inventory range. Used vehicle pricing remained above residual value estimates used for depreciation purposes. Slide 21 in the appendix provides historical sales proceeds and current residual value estimates for used tractors and trucks for your information. In supply chain, operating revenue increased 3%, driven by new business in omnichannel retail, partially offset by lost business and lower volumes in automotive. Earnings before taxes decreased 17% from prior year due to lower automotive results and, to a lesser extent, productivity of new business ramping up. Year-over-year comparisons were challenging in supply chain due to record first quarter performance in the prior year. Supply Chain EBT as a percent of operating revenue was 7% in the quarter at the segment's long-term target of high single digits. In Dedicated, operating revenue decreased 5% due to lower fleet count reflecting the prolonged freight downturn. Earnings before taxes were below prior year, reflecting lower operating revenue, partially offset by strategic initiatives [indiscernible] Dedicated EBT single-digit target. Next, let me cover capital expenditures. First quarter lease capital spending of $314 million was below prior year, reflecting the timing of replacement activity. In 2026, we're forecasting lease spending to be $1.9 billion, reflecting higher replacement activity versus the prior year. First quarter rental capital spending of $37 million was below prior year as expected. In 2026, we're forecasting rental capital spending of approximately $100 million. reflecting lower planned replacement activity. Our ending rental fleet is now expected to decrease 3% during 2026, and our average rental fleet is now expected to be down 11%. The rental fleet remains well below peak levels as we manage through an extended market slowdown. We continue to closely monitor market conditions and may increase our planned capital expenditures if improved market conditions persist. In rental, in recent years, we shifted capital spending to trucks versus tractors as trucks have historically benefited from relatively stable demand and pricing trends. At quarter end, trucks represented approximately 60% of our rental fleet. Our full year 2026 capital expenditures forecast of approximately $2.4 billion is above prior year. We expect approximately $500 million in proceeds from the sale of used vehicles in 2026, in line with prior year. Full year 2026 net capital expenditures are expected to be approximately $1.9 billion. In addition to increasing the earnings and return profile of the business, our transformed contractual portfolio is also generating significant operating cash flow. Improving the overall cash generation profile of the business is one of the essential elements of our balanced growth strategy. Better earnings performance is driving higher cash flow generation and, in turn, is delevering our balance sheet at a more rapid pace. This momentum is creating incremental debt capacity given our target leverage range of between 2.5 and 3x. As shown on the slide, over a 3-year period, we expect to generate approximately $10.5 billion from operating cash flow and used vehicle sales proceeds. Our operating cash flow will benefit from increased contractual earnings. This creates approximately $3.5 billion of incremental debt capacity, resulting in $14 billion available for capital deployment. Over the same 3-year period, we estimate approximately $9.5 billion will be deployed for the replacement of lease and rental vehicles and for dividends. This leaves around $4.5 billion, which equates to approximately 60% of our quarter end market cap available for flexible deployment to support growth and return capital to shareholders. We estimate about half of our flexible deployment capacity will be used for growth CapEx, and the remaining will be available for discretionary share repurchases and strategic acquisitions and investments. Our capital allocation priorities remain focused on profitable growth, strategic investments and returning capital to our shareholders. Our top priority is to invest in organic growth. Aligned with these priorities, in the first quarter, we funded lease and rental replacement CapEx of approximately $400 million and returned $272 million to shareholders through buybacks and dividends. We've been executing under our discretionary 2 million share repurchase program authorized in the fourth quarter of 2025. Our balance sheet remains strong with leverage of 269% at quarter end, in our target range and continue to provide ample capacity to fund our capital allocation priorities. With that, I'll turn the call over to John to discuss our outlook. John Diez: Thanks, Cristy. We've increased our full year 2026 comparable EPS forecast to a range of $14.05 to $14.80, above prior year of $12.92. Our increased forecast reflects stronger-than-expected first quarter performance, a modest improvement in used vehicle market conditions and continued strong contractual performance. Our 2026 ROE forecast is unchanged at 17% to 18% and is in line with our expectations given current market conditions. Our free cash flow forecast of $700 million to $800 million is also unchanged from our prior forecast and reflects higher replacement capital expenditures. Our second quarter comparable EPS forecast range is $3.50 to $3.75 above prior year of $3.32. Our transform model is well positioned for earnings growth. We continue to expect 2026 earnings growth to be driven by incremental benefits from multiyear strategic initiatives, which began in 2024, with total expected benefits of $170 million. These initiatives represent structural changes we're making to the business and are not dependent on a cycle upturn. Through year-end 2025, we realized $100 million in benefits, leaving $70 million of incremental benefits expected in 2026. In Fleet Management, we expect our multiyear lease pricing and maintenance cost savings initiatives to benefit 2026 results. In Dedicated, we expect benefits from margin improvement actions related to our Flex operating structure in 2026. In supply chain, we continue to focus on optimizing our omnichannel retail warehouse network through continuous improvement efforts and better aligning our warehouse footprint with the demand environment. In 2025, we downsized and exited select locations, which will benefit future performance. In addition to driving outperformance relative to prior cycles, our transform model also provides a solid foundation for the business to meaningfully benefit from the cycle upturn. By the next cycle peak, we expect to realize meaningful improvement in pretax earnings. We estimate that this potential benefit could be $250 million with the majority expected to come from the cyclical recovery of rental and used vehicle sales in FMS, with additional benefits from higher omnichannel retail volumes, leveraging our rationalized footprint. We expect to recognize these benefits over time as freight market conditions improve. Based on our increased forecast, we expect to realize approximately $10 million of upterm benefits in 2026 and primarily from higher used vehicle sales results. In addition to benefiting our transactional businesses, we also expect additional opportunities for profitable contractual growth as freight conditions normalize. We've been pleased by the business's resilience and performance during the prolonged freight market downturn and are confident each of our business segment is well positioned to benefit from the cycle upturn. Our transformed business model continues to deliver value to our customers and our shareholders. We continue to outperform prior cycles, and our results are benefiting from consistent execution and the strength of our contractual portfolio. We continue to see significant opportunity for profitable growth, supported by secular trends, our operational expertise and ongoing momentum for multiyear strategic initiatives. We remain committed to investing in products, capabilities and technologies that will deliver value to our customers and our shareholders. That concludes our prepared remarks. Please note, we expect to file our 10-Q later today. At this time, I'll turn it over to the operator to open the call for questions. Operator: [Operator Instructions]. We will take our first question from Ravi Shanker with Morgan Stanley. Unknown Analyst: This is Nancy on for Ravi. I know you had sort of pointed to roughly $10 million of benefits in 2026 from upturn conditions. What are sort of keeping you from being able to unlock more of the $250 million that you pointed to at peak with sort of your current momentum in the year? Or is there some conservatism embedded in this $10 million expectation? John Diez: Nancy, John here. Yes, we had set out that we had about a $250 million opportunity as we saw cycle conditions to improve. We did see in the first quarter good activity from UBS from our used vehicle sales. Primarily retail volumes came in better than what we had expected, and we also saw stability I would say, in UBS pricing, that stability was a little bit sooner than what we had expected coming into the year. So both of those components is really what's taken us to a higher expectations for the balance of the year and part of the reason for the raise in the guide. As to your question, what is, I guess, preventing us from raising it further at this point. Clearly, a big component of the $250 million is attributed to rental and another component attributed to used vehicle sales. There may be opportunities with used vehicle sales to continue moving up. Obviously, we're seeing capacity continue to exit the market. We have also seen that -- we do expect later on this year that we're going to see significant increases on new equipment, which will provide support for higher used vehicle sales pricing. We just haven't put that into the forecast because we need to see more development on that side to kind of get confident in that activity. On the rental side, which is a big component of that $250 million, I would say it's probably as big, if not bigger, than the used vehicle opportunity. We continue to see rental kind of get to normalized levels. We saw a seasonal trend in the current quarter. Nothing for us to get excited about. And that's why you probably didn't see from us any sort of upside momentum on rental for the balance of the year. We do expect that as things continue to improve. And if market conditions continue to improve, customers are going to need rental activity and rental assets in the months ahead. But none of that is -- that rental upside is contemplated because we just didn't see any breakout performance or anything in the Q1 that led us to believe that's going to hold. Unknown Analyst: That's helpful. And then one more quick question on used vehicle sales. With sort of the supply side regulations cracking down, is there a risk to use vehicle sales as trucks potentially flood the market from these carriers exiting? Or is there enough strength from an improving market to offset? John Diez: Well, I kind of mentioned I do think there's some structural changes happening in the marketplace that are going to provide upward momentum irrespective what you're seeing in the regulatory side on drivers. The driver impact that you're seeing is primarily on the over-the-road activity and for-hire carriers, which will impact our sleeper class. We think we're well positioned with our used truck inventory. If you look at it, 60% of it is comprised of trucks with 40% being tractors. And I would say a bigger portion of our inventory on the tractor side is CAPS, which is a different application than the over-the-road activity. So I think we're pretty well calibrated there. We don't think that's going to be a meaningful impact even if things continue to or there's pressure on the sleeper class moving forward. Operator: [Operator Instructions]. We'll take our next question from Jordan Alliger with Goldman Sachs. Jordan Alliger: Question on Dedicated. Sorry, getting back to this capacity and trucking is tightening driver situations tightening, I'm just sort of curious, have you or do you expect to see a significant step-up in inquiries around the Dedicated business, the dedicated pipeline, I would think that this could work to that business operations advantage. John Diez: With regards to what we're seeing in the marketplace and Dedicated, clearly, we've talked about the fact that a tighter driver market is good for dedicated long term. We did see in the quarter, and we mentioned that on Slide 7. We did see stronger sales activity in both Dedicated and Fleet Management. We have seen a number of inquiries and the level of commitment and activity from customers to sign up for longer-term contracts up in the quarter. which was very encouraging. So clearly, there are signs out there that we are seeing pressure on that side. That's going to bring more demand for us. So we're pretty excited if, in fact, the market changes from a driver perspective and driver availability has shown even as we exited the quarter, the level of activity and turnover and also increase has gone up, but certainly, we're excited about the opportunity to be able to sign more dedicated activity as the market becomes more challenging. Jordan Alliger: And just as a dedicated follow-up, given where margins start at the first quarter, started at the first quarter and then sort of the the longer-term high single-digit sort of target. I mean, can you maybe give a little thought or color around potential step-up trajectory in Dedicated as we look ahead to the balance of 2026 from a margin standpoint? John Diez: Yes. So typically, Dedicated does have some seasonality when you look at the quality of earnings. Second and third quarter are typically our strongest quarter. So you should see a meaningful step-up of 200 to 300 basis points as we get through the middle part of the year. And then Q4 typically has a little bit of a step back. We do expect to get to the high single-digit level for the full year. And that business has consistently done that. In fact, I think 8 out of the last 10 years, the Dedicated business has delivered to high single digits, and we're confident that we're going to get back to that level as we get through the year. Operator: We'll take our next question from Harrison Bauer with Susquehanna. Harrison Bauer: Great. I was curious if either John or Tom, if you could provide some maybe demand commentary as it relates to trucks versus tractors -- you mentioned some strengthening and maybe some lease signage on the FMS front. So curious if that's truck or tractor base. John Diez: Yes. I'll make some general comments here, Harris, and I'll turn it over to Tom. I will tell you One of the things that we did see in the quarter was on the used vehicle side, we saw better pricing on the tractor side. So retail pricing was up both sequentially, which was very encouraging for us. And then when you look at the activity across the different classes and the different services that we offer, -- we continue to see good demand across the truck class in both rental and lease, but I'll let Tom maybe give you a little bit more color on what he's seeing within the lease space. Tom Havens: Yes. So as we mentioned earlier, demand and the fleet were both down year-over-year. But as Christie mentioned earlier, we are seeing a trend that's a little bit better than what we had expected. And particularly on the truck classes, the demand was higher than what we had expected. So that was the a bigger driver of the uplift versus what we had expected. We also saw pricing up in rental was up about 3% year-over-year as well, which was coming from both classes really, but that was good to see that our pricing discipline held as we saw the demand maybe tick up just slightly versus our expectations and as mentioned earlier, kind of in line with what we would typically see historically. Harrison Bauer: And then maybe could you provide some updated thoughts on any potential prebuy for either tractors or truck, how that might be affecting your business and then what's contemplated in your guide for this year? And then maybe even potentially some early thoughts on how that could affect 2027 and your investment next year. John Diez: Yes. I'll make some comments and have Tom weigh in as well. With regards to the prebuy in our guidance, we don't have any meaningful pre-buy activity contemplated. Typically, where the pre-buy comes into play for us is on the sales side, we'll typically see a front-loading of sales activity for lease. And then you'll see the benefits of that play out a little bit sooner. Obviously, with used vehicles, we do expect, and we haven't seen yet what the OEM's price increase will look like. We do think that price increase will be meaningful, certainly in that 10% to 15% range at a minimum, which will provide some support for used vehicle sales. But I'll let Tom add some additional color on the prebuy activity. Tom Havens: Yes. We've been obviously out talking with our customers about this and the potential price uplift that are expected in 2027. But as John mentioned, those aren't in the marketplace yet. and our customers, very few some have, some have looked and have taken advantage of what you would expect to be lower pricing than going into 2027 and have ordered vehicles, but we haven't seen any like large uptake in any way or any large volumes in that area. And then maybe just one other point for us, if we do see things starting to turn, particularly in rental, we still -- we would expect to potentially place an order and believe we have slots to be able to get vehicles, maybe not necessarily driven by a pre-buy but driven by any demand that we would see coming here in the second quarter if things change. Operator: We'll take our next question from Rob Salmon with Wells Fargo. Robert Salmon: A quick follow-up in terms of the contractual sales activity that you had noted the improvement in FMS and DTS. Could you give us some kind of color about what that's up and when you'd expect to see kind of the fleet to start to grow in those 2 end markets? Obviously, the cyclical factors are continuing to pressure fleet sizes here. So just curious for some color on the activity, how that's compared to recent quarters and when we can kind of inflect a positive growth. John Diez: Yes, Rob, the contractual sales, a few highlights there, which I think are meaningful. Number one, we did see strong sales activity across all 3 segments. And I know your question was aimed at DTS and FMS, but our supply chain business really saw robust sales activity with another record performance in the quarter, which really demonstrates the value from our solutions that the customers are seeing as most of the activity came from expansion business. So our existing customers are seeing the value we deliver for them. and are awarding us accordingly. On the Fleet Management and Dedicated side, we did see a reversal trend. If you look at where we've been the last several quarters with stronger sales across the board. We saw some numbers we haven't seen in several years. So that's really encouraging for us. Whether or not that will continue, obviously, we would like to see that continue, but the start of the year was stronger than what we had expected. And the more important piece for us is we started seeing customers begin to commit to long-term leases at a higher rate. And then we did see, as I mentioned earlier, more dedicated activity with our pipeline and dedicated being at the highest levels we've seen. So we did see good activity. First quarter was strong. And we're hopeful that will continue. As far as lease fleet growth at both dedicated and fleet management, these have significant lead cycles, I would say, so as we start putting together a few quarters back to back, you'll start seeing the fleet level off at the end of the year and into next year, you should start seeing the growth assigned to those wins. So that's the trajectory of how we see the fleet growth moving. Robert Salmon: Really helpful. And in your prepared comments, I didn't hear you mentioned kind of the SCS. You talked about the momentum in terms of the business, but I didn't hear you reiterating kind of getting back to the double-digit targets towards the end of the year. Maybe can you give us an update on that? -- what you saw from the lost customer that was alluded to in the presentation and how we should think about margins trending from 1Q. John Diez: Yes. I'll let Steve comment on what he's seen. We did make mention of the record sales. We do expect, as we exit the year, we're going to get back to near low double-digit target levels on growth. And clearly, based on the last quarter's performance, Q4 of last year and Q1 of this year, as we look ahead to 2027, I think we're well positioned to hit our target growth levels. But I'll let Steve add a little bit of color what you're seeing on sales and the progression of the revenue base. John Sensing: Yes, Rob. Again, a healthy pipeline continues to strengthen. As I said last quarter, it's all about our relationships from our vertical leads all the way through our sales team and more importantly, the frontline operators and how they execute, focus on continuous improvement and innovation. So those deep relationships allow us to expand with our customers. As John said, last year was a record sales year. Q1 was record this year. We should be exiting at low double digits or we're approaching in Q4 of this year. So we feel really good about that. You also asked about margins. Last year, Q1 was 8.7%. That was a record quarter. While we had some challenges last quarter due to -- we did have some lost business in automotive where a customer was trading dedicated service for truckload. As that tightens back up, we could see that come back around in the upcoming years. We still were challenged with volumes across OEMs as they retool and balance through EV and ice production. So that will continue here through the first half, and we expect that to return close to normal in the back half. So we feel really good about that. And again, Q1 of this past year was the second highest Q1. So still performing in a high single-digit range. Operator: We'll take our next question from Ben Mohr with Citi. Benjamin Mohr Mok: Wanted to just ask more about your guide raise, which is on the used vehicle sales and strong contractual performance. you had guided last quarter to -- for 2026, UBS having kind of being flat versus the $22 million from last year -- congrats on the strong $12 million in 1Q. How do you expect used gains to trend through the rest of the year? And what would you see as an updated target for the full year? John Diez: Yes, Ben, with regards to our used vehicle sales and the guide, a few things. Number one, really excited about the fact that we came out of the box really strong with our initiatives are really on track for the $70 million. So the majority of the year-over-year improvement is still tied to our strategic initiatives and the execution on the team. As far as used vehicle sales, which is part of the reason for the rate, I would say we do expect used vehicle gains to come in about $10 million higher. We pointed to that in our slide with regards to the $250 million, we put in $10 million in the current 2026 year. How that will play out over the course of the year. It really depends on the level of wholesale activity. There may be quarters where we may do more wholesaling than retailing. So it's not going to be a linear, I would say, progression and be a little bit lumpy. You saw a pretty strong print in the first quarter. That may stay at that level or if not may come down a little bit as wholesale activity goes up in the latter part of the year, but we do expect the full year to be up about $10 million, up from the $20 million that we gave last year. Benjamin Mohr Mok: Great. And on the other part, the strong FMS contractual business performance, can you parse out what part of that is volume? What part of that is price what part of it is the strategic initiatives in 1Q and then maybe a similar kind of parse out for the remainder of the year? John Diez: Yes, I would say the majority is going to be driven by the strategic initiatives. Tom, I'll let Tom give you a little bit more color. But if you look at the 2 biggest components are pricing initiative that continues to deliver strong results coming into 2027. That was the reason why we upsized our strategic initiative overall target and the catalyst for raising it to $70 million in 2026. So that's behaving as we would expect. And then if you look at our maintenance initiatives, that continues to be a big part of the story. As far as volumes, we haven't seen outside of the volumes we saw in used vehicle sales, we haven't seen a big move there from our original expectations, but I'll let Tom give you a little bit of color here. Tom Havens: Yes. John is right on it. There's no fleet increases that impacted the results in FMS, it's all related to the strategic initiatives around pricing and maintenance. And I think your specific question was around how much of each, and it was about of each. 50% of the benefit was from price, 50% of the benefit from the maintenance initiatives. Benjamin Mohr Mok: Great. Appreciate the time and insights. Operator: We'll take our next question from Scott Group with Wolfe Research. Scott Group: So can you help us think about the progression from Q1 to Q2? I think you said dedicated margins should improve 200 to 300 basis points sequentially, but -- how should we think about the other 2 businesses sequentially within the guide? And I don't know any thoughts on how fuel is impacting the the P&L right now, I think it's generally a pass-through, but I don't know if there's a big wholesale retail spread. I don't know if that's sort of helping the numbers right now or not. Unknown Executive: Yes. So Scott, a few points there. I think you could expect all 3 businesses are going to continue to get better as we get through the year. Clearly, our fleet management business in rental, in particular, a return to seasonal progressions will help that business, and that's a part of it. If you look at our fleet, our lease portfolio, certainly, the pricing and maintenance initiatives are playing a big part in that as well. So you should expect all 3 of the businesses, fleet management, dedicated and our supply chain business as volumes typically are stronger in the middle part of the year. for all 3 of those businesses, they're going to benefit from higher revenue base going into the year. As far as Steel, we did see a few, which is generally a pass-through for us, not be a meaningful part of the story. We do benefit every now and then when we have rapid changes in energy prices, and we saw that in Q1. So that benefited a little bit the Q1 results, but nothing meaningful as we look forward. Scott Group: Okay. Helpful. And then I just want to follow up on rental. I don't know if you -- maybe I missed this, but can you just talk about the utilization trends throughout the quarter, what you're seeing so far to start Q1. And then just looking at the rental fleet, it's about as small as a percentage of the relative to the full-service lease fleet as I think we've ever seen. How do you think about starting to grow the rental fleet again in an up cycle? just that's the question. John Diez: Yes. So on the -- I'll pick up where you left off, the rental fleet clearly is significantly lower than the peak fleet levels I think we're down nearly 10,000 units from peak levels. So as demand comes back, we're more than ready to implement our asset management actions. I'll let Tom talk through those. And then clearly, even if we see activity rise here over the next several weeks, we have the ability to go out and put some orders in and take advantage of vehicles that can be delivered later in the year and meet that demand. But I'll let Tom make a few comments with regards to that and utilization. Tom Havens: Yes. So from an asset management perspective, the first lever you pull is you stop sending trucks to the UTC to our used truck centers, so you can immediately increase the fleet and capture demand with existing fleet that you have in the business, which gives you time then to place orders and allow the OEMs to deliver new vehicles to you. So we're obviously looking for those trigger points to to start making those decisions. As we said, we haven't started to do that yet. Hopefully, we'll have to. And then just looking at the utilization trends. You asked about the utilization trends. So I will point out, and we've mentioned it on the call that demand and fleet obviously down quite a bit, double digits on both year-over-year. But the utilization was better than what we had anticipated in -- so the January, February, March number is just the trend. We started in January at 67%. And that went to 79% in February and then just slightly above 70% in March. -- the Sorry, today. So 67%, 69% to 70%, sorry, I misstated that. And that was about 270 bps above prior year in the quarter. And then here going into April, we're still about at that 270 number better than last year going into April. So that's what we're seeing. So we're kind of seeing that same trend rolling into April. Operator: We will take our next question from Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Just coming back to the sales in SCS, it sounded like a lot of that was just expansion of business with existing customers. you could share some color in terms of what verticals those would be? And then what is it taker, you're expecting to see some pickup and maybe some new customers, new logos. Is that in the pipeline? Do you have visibility to that? John Diez: Yes. Brian, I'll let Steve add color. The majority was expansion, but we did see a number of new names also added to the portfolio. John Sensing: Yes. Last year was about 80% expansion. So you had 20% of new names. We've had several new names that have started here in Q2 that we sold late last year. So we'll continue to do that. I think the great story there is any time we get a new name in within the next 2 to 4 years, because of our execution, innovation, continuous improvement, we expand with those. So those numbers are typically expansion is typically about 70%. So last year, it was just a tad bit higher than normal. Brian Ossenbeck: Any vertical... John Sensing: Yes. The majority of it was coming out of the omnichannel retail over the past, call it, 6 months. We're still seeing good pipeline activity in CPG and solid pipeline activity in our transactional businesses. That's our co-pack co-man type business. We're seeing good activity in our e-com I'd say last mile right now is a little slower than normal, but good diversification there. Brian Ossenbeck: Okay. Steve, just to make sure I understand the outlook and expectations for UBS for the rest of the year. It sounds like the first quarter was a little bit better and you're expecting some improvement from here, but it doesn't I didn't hear that you're expecting some big ramp-up from here on out. But I just wanted to make sure I understood what the -- what your guidance assumes right now and if there's any distinction between truck and tractor considering your mix is a little bit different than it has been in prior years. John Diez: Yes. What we guided to here is a modest improvement, and we did exit Q1 with higher pricing than what we had expected. So we reached stability on pricing a little bit sooner relative to our previous guide. And we are seeing improved pricing across both tractors and trucks relative to where we expected to exit Q1 originally. So a little modest improvement for the balance of the year, driven by higher levels of pricing across both tractors and trucks. Operator: We'll take our next question from Jeff Kauffman with Vertical Research Partners. Jeffrey Kauffman: And John, congratulations Pleasure to have you leading our call. So a lot of questions have been asked, but I want to go back and kind of hammer a little bit on what gives you confidence? And you talked a little bit about customers are coming back for longer contracts. Some things like that. But in terms of metrics, I mean, the rental fleet utilization was up 200 basis points in the first quarter, but 6% is a pretty low number historically for the first quarter. And the rental state is down 11%, you've shifted the mix to trucks from tractors. So one of the questions I have is does this give you a little less bounce into the up cycle than you would traditionally have. So it was a little safer on the downside, but does it rob some of the potential upside to both gains on equipment sales and operating margins in the next up cycle. So I guess my 2 questions are, what metrics can you look at that tell you hey, things really, really feel like they're turning here. I mean the truckload guys are pointing to a lot of things. What can you point to? And then does this strategic shift to favor trucks more. Is that more a function of the environment, and that's just the way it is? Or did you make that decision? And is it going to cost us a little bit of upside when the cycle does turn? John Diez: Yes. So I think I think a few points to take stock of before I get into our metrics specifically, we are looking at broad market conditions. And when we look at what's happening with capacity, and active truck utilization, we've seen 3 consecutive months of truck utilization above 95%. We haven't seen that in some time since 2021. And so that's a great indicator that capacity is coming out of the broad market. We are seeing and we do expect higher costs for new equipment later in the year, which is going to put a premium on existing units and I think we're well positioned to deal with that with our rental fleet, as you called out, a very low utilization levels. So I have plenty of upside there to take advantage of the equipment that's sitting today and deploy that for customers. As far as evidence that things are turning, we to normalized levels, I would say, in rental, but it's still soft as you indicated, and we agree with that. But the things we could point to, clearly for us are UBS, we saw retail producing sequentially stabilize with tractors up 1%. We did see rental even though it's still below normal levels. Sequentially, kind of we saw that seasonal uplift that we would see coming out of Q4 into Q1. Contractual sales was the best we've seen in a few years. That really gave us some confidence and encouragement that, hey, customers are coming back in. They're looking to add fleet and make commitments. You see if you go to our stats in the back in the presentation, if you look at redeployments and extensions, they were built up. That's a good indication for us. So I would encourage all to take a look at those statistics, which really pop when you start seeing things move up. And then lease power models, even though not a meaningful improvement, we're up in the quarter year-over-year. We did see our lease power miles start coming back up. So those are all great indicators for us that things seem to be looking to get some steam. Obviously, we would need to see that progress as we get into the year before we could start making decisions on adding fleet, especially to our rental fleet over time. Jeffrey Kauffman: And the second part of the question on leverage this cycle with a larger percentage of trucks versus tractors. John Diez: Okay. Yes. With regards to rental, clearly, for trucks, we've seen that market activity. It's kind of more of a secular move with last mile coming out of COVID. We're seeing more truck demand. That has moved us to reshape some of the things we do on our rental fleet and even as we go to market with our lease activity. With regards to tractors, obviously, there's going to be a little bit of pressure there with what we're seeing on the over-the-road space with drivers, regulations, et cetera. that may put a little bit of pressure. But clearly, if the tractor market comes back, that's the 1 asset class that we can order and get the equipment quickly. So that is something that will participate in that space as well. But I think we're well positioned to take advantage of the secular trends and what we're seeing on the truck side. Operator: Thank you. At this time, there are no additional questions. I'd like to turn the call back over to Mr. John Diez for closing remarks. John Diez: All right. Thank you, everyone. Appreciate everyone joining us today, and we look forward to seeing you out on the road. Take care. Operator: That concludes today's call. We appreciate your participation.
Operator: Greetings, and welcome to the Third Coast Bank 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 for today, Natalie Harrison, Investor Relations. Thank you. You may begin. Natalie Hairston: Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our first quarter 2026 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McCarter, Chief Financial Officer; and Audrey Spaulding, Chief Credit Officer. First, a few housekeeping items. There will be a replay of today's call, and it will be available by webcast on the Investors section of our website at ir.thirdcoast.bank. There will also be a telephonic replay available until April 30 and more information on how to access these replay features was included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, April 23, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K to better understand those risks, uncertainties and contingencies. The comments made today will also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures were included in yesterday's earnings release, which can be found on the Third Coast website. Now I would like to turn the call over to Third Coast Founder, Chairman, President and CEO, Mr. Bart Caraway. Bart? Bart Caraway: Good morning, everyone, and thank you, Natalie. Welcome to the TCBX First Quarter 2026 Earnings Call. I'll begin by discussing the company's progress in the quarter. John will cover the financial performance in more detail, then Audrey will provide a credit quality update. Then I'll close with a few thoughts on management's outlook. As we look at our first quarter, let's start with the broader context. This quarter marked a significant milestone for Third Coast highlighted by a successful addition of Keystone Bank shares to our platform. The Keystone merger acquisition had a substantial impact on our results this quarter, driving solid growth in loans and deposits, expanding our customer base and strengthening our presence in the key markets in Central Texas. which translated into an expanded balance sheet. Specifically, assets increased by 23.2%, loans by 19.5% and deposits by 23.5% from year-end. Equally important is the strength of our underlying business. Our loan pipelines are robust, customer activity is healthy and the strategic investments we continue to make in our platform are already gaining traction. This includes enhancements to our leadership team and the purposeful build-out of several key divisions. Within our corporate banking group, we have added seasoned best-in-class relationship bankers in Houston and Dallas, including experienced teams focused on select dedicated verticals. We also launched our asset-based lending platform, adding to our credit product suite. We believe these will be an important contributor to our loan growth and fee income. In addition, we have expanded our public funds and correspondent banking teams, further diversifying our funding base and expanding our reach across Texas and Beyond. While many of these teams are still early in the ramp up, we believe these combined investments position us to drive organic growth at meaningful levels. reinforcing our long-term goals of scalability, disciplined growth and sustainable profitability. Overall, we believe the first quarter demonstrates headway in building a stronger franchise while staying true to our fundamentals that have consistently driven our success and performance. With that, I'll turn the call over to John to walk through the financial results and provide additional details on the quarter. John? John McWhorter: Thank you, Bart, and good morning, everyone. As Bart mentioned, the Keystone transaction is the primary factor influencing the quarter-over-quarter changes in our financial results. Keystone added roughly 20% to our loans and deposits and roughly $3.3 million in merger-related nonrecurring noninterest expense. I'll focus my comments on providing clarity around those impacts, along with our underlying trends. Starting with expenses. Our noninterest expenses were higher during the quarter, largely due to Keystone related items as well as sign-on bonuses for several recent senior-level hires. During the first quarter of 2026, the company recorded $3.3 million in Keystone merger-related noninterest expenses, primarily consisting of $1.6 million in legal and professional, $1.3 million of salary and benefits and $400,000 miscellaneous. Additionally, the company recorded $644,000 in salary and benefits attributable to sign-on bonuses during the first quarter. This is the second consecutive quarter of above average hiring. These expenses are nonrecurring and reflect the near-term cost of integrating Keystone and onboarding new talent. Diluted earnings per share for the quarter was $0.88, but excluding merger expenses, would have been $102 million. Also excluding merger expenses, return on average assets would have been 1.25%. Net interest income was $53.6 million for the first quarter, marking a 2.7% increase from the previous quarter. driven by higher than average earning assets following the merger and offset by a lower net interest margin. The margin decline resulted primarily from the merger, but also from the reversal of $996,000 in accrued interest from 2 loans placed on nonaccrual. Turning to loan growth. Excluding Keystone, loans were up approximately $45 million for the quarter, whereas quarterly average balances were up over $100 million. and the second quarter has started even stronger with April month-to-date loans already up over $100 million. Pipelines are full, and some of our new lenders are just getting started. Lastly, I might mention that tangible book value ended the quarter at $31.7 which compares favorably to 31.69, which was the guidance that we gave in October of last year when we announced the acquisition. Most of our expense savings will be realized in the third and fourth quarters of this year. With that, I'll turn the call over to Audrey to discuss asset quality. Audrey Duncan: Thank you, John, and good morning, everyone. I'd like to provide a summary of asset quality for the first quarter. Nonperforming assets to total assets increased by 11 basis points from the prior quarter. The increase in nonperforming assets was primarily due to 1 CRE loan of approximately $17.1 million being placed on nonaccrual as well as the addition of $1.8 million in purchased credit impaired loans from the Keystone acquisition, which are on nonaccrual. This increase was partially offset by a $5 million decline in loans over 90 days past due and still accruing. When placing the $17.1 million loan on nonaccrual as well as a $602,000 loan, we reversed $996,000 in accrued interest which impacted our margin. On April 7, the bank foreclosed on the property securing the $17.1 million CRE loan. Our LTV on the property based upon a 2026 appraisal is just under 70%. It is also worth noting that $5.3 million of our nonaccrual loans are fully guaranteed by the SBA. The allowance for credit losses totaled $51.5 million, representing 0.98% of gross loans as of March 31, 2026. compared to $43.9 million or 1% as of the previous quarter end. The increase was primarily due to the day 1 allowance related to the Keystone acquisition. We recorded net recoveries of $4,000 in the first quarter. Our loan portfolio remains well diversified and reflects organic production as well as contributions from the Keystone portfolio with actions consistent with the prior year. Commercial and industrial loans are 42% of total loans while construction development and land loans were 17%, owner-occupied CRE was 11% and nonowner-occupied CRE was 18%. I'd be happy to answer any questions regarding asset quality during our question-and-answer session. With that, I'll turn the call back to Bart. Bart? Bart Caraway: Thank you, Audrey. As we move further into 2026, we are increasingly confident in the direction of the franchise and the strategic foundation we have put in place. We believe we are building 1 of the best platforms in the country and across our footprint. With our expanded corporate banking, including ABL, along with our public funds and correspondent banking capabilities, which position us to continue scaling the company in a disciplined and thoughtful way. We believe these groups combined with our core teams represent durable long-term growth engines that will drive organic growth, diversify our balance sheet and deepen client relationships over time. We believe when these teams gain scale, they will drive even stronger pipelines and profitability, with the potential to generate over $1 million in fees per month and extend our quarterly loan growth target range to $75 million to $125 million. Underpinning all of this is our continuous improvement mindset, which is now deeply embedded across the organization. was started as a 1% improvement challenge has evolved into a culture centered on execution, accountability and delivering consistency across outcomes for our stakeholders. And we believe that continues to be a key differentiator for Third Coast. Ongoing consolidation across the banking sector continues to strengthen our scarcity value and positions us at the early stages of unlocking additional upside for our franchise. Finally, I want to thank our team for their exceptional work this quarter and extend a warm welcome to our Keystone customers and shareholders. We appreciate your continued support in Third Coast and look forward to building on this momentum. With that, I'll turn the call back over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] And your first question comes from Matt Olney with Stephens. Matt Olney: I'll start with the net interest margin as you guys mentioned some noisy results this quarter with Keystone, and I heard the commentary about the nonaccrual impact to the margin as well. Any color you can give us as far as expectations for the margin in the near term? John McWhorter: Sure. So Matt, this is John. Last quarter, I guided to a number in kind of the 390 range. And I think Third Coast stand-alone before this interest reversal, that's exactly where we were. So the interest reversal is worth about 4 basis points. And then, of course, we merged with Keystone. their margin was about 350. So you average kind of all that out and assuming nothing unusual next quarter, and I think we're about 3.75 for the margin going forward. Matt Olney: Okay. Perfect. Appreciate that, John. And then on the loan growth front, it sounds like 2Q is up to a really strong start. We'd love to hear more about the drivers of what you're seeing there. Any of this from the new producers hired or market disruption? Just more commentary on the pipeline would be helpful. Bart Caraway: Yes. That very observational obi. I think it's both what you mentioned. One, we have both some new team members and some team members that are last year that are obviously have some good volumes. And at the same time, we are seeing some opportunities from some of the disruption in the market. And I think the combination has actually basically really got a -- really robust pipeline. A matter of fact, I think the first quarter maybe have masked a little bit of how good it was because we had an exceptional number of payoffs or otherwise, our loans would have been up quite a bit more. So we're still seeing the pipelines grow right now, and we feel pretty good where we stand. The market is good. These producers that we're bringing are highly productive and have a loyal customer base. And at the same time, some of the disruption is starting to play out, where we're able to basically compete and win some business that we've been after for a while. So all in all, despite all the other macro headwinds, it's actually looking really good for us in terms of our growth and volumes. John McWhorter: Yes. And Matt, I might add that with the market disruption, that's really what's given us the opportunity to hire a lot of these people that we've talked about over the last couple of quarters. So we've paid sign-on bonuses to some of these people, again, 2 quarters in a row, I don't necessarily envision that happening in the second quarter of this year, but many of the people that we hired were exceptional. They were great opportunities, just ones that we couldn't pass up that will very much contribute to our growth going forward. But it's not an every quarter sort of thing. I think, I said the expenses related to that were about $650,000 and we likely -- I mean, who knows, maybe we have other opportunities, but I don't think it will be of that magnitude. I think most of who we wanted to hire recently, we've hired in the last 6 months. Bart Caraway: And if I could add on to that, like the folks that we've hired are people that have had long-term relationships with the existing leadership here. So these aren't new people that are unknown to us or people that either worked with before or had long-time relationships with, that we've been after for a while. And once again, similar to what happened right after the pandemic, there's a lot of dislocation and disruption that's allowed us to finally get them over the fence. Matt Olney: Yes. Okay. Makes sense. And you guys seem to be in a nice spot to take advantage of all disruption. All back in the queue. Thank you. Operator: Your next question comes from Michael Rose with Raymond James. Michael Rose: Maybe just following up on mass loan growth. Question, it looks like in the quarter, if I exclude Keystone, you were kind of below that $75 million to $100 million range that you talked about previously. Was there any sort of elevated pay downs or anything that may have impacted the organic growth? Or maybe if you can just parse out what it is. And then, I think, Bart, I heard you say given some of the hires that you've made over the past couple of quarters that, that -- maybe that range on a go-forward basis is $75 million to $125 million. So a nice kind of uptick there. I assume that there's some time that it will take for some of the newer hires to get ramped up. So should we expect an acceleration to kind of the mid to higher point of that range in the back half of the year? Just trying to frame out the loan growth outlook? Bart Caraway: Yes. Good comments. Early in the quarter, we actually had such strong loan growth that we thought were going to be above budget on it. But then we had some significant paydowns that came through, and it was -- the timing of it we thought was going to be kind of spread out over a few quarters, and it just happened to be kind of all in 1 quarter. And they were significant enough that they offset a lot of that growth. So I don't expect that to continue. Those headwinds probably kind of came first quarter. We'll maybe have a few -- I always have a few surprise paydowns of somebody sales or what have you. But I think the pipeline has grown that if we even mirror what we did last quarter, we're going to have pretty strong net loan growth. So that's why John and I in order talking that we feel like it's probably going to be this year is going to turn out to be a little better than what we even anticipated on the loan growth. Having said that, obviously, it's always lumpy. I can't control the timing of when these loans close. But prospectively, we look like it's going to be a very strong loan year for us. Michael Rose: Very, very helpful. And then just as it relates to the $17.1 million credit that was added to the nonaccruals. Is that a credit that you previously talked about? I just -- I don't remember or recall and then it seems like you have an appraisal on the property. I mean, what's kind of the expectation here for resolution? Is it a couple of quarters? I know it's hard to kind of parsed out individual credits, but just given the magnitude of size here, just trying to better understand the -- when it could eventually come out of the run rate. Audrey Duncan: Sure. I can give you some more color on that. I don't think we have talked about the loan previously, but it is a seasoned loan and we originated it in 2021. So it's been on the books and paying for many years. They had a significant decline in occupancy due to a tenant bankruptcy. So that kind of precipitated the issue there. The LTV adds just under 70% based on a new appraisal within the last 90 days, and that's the as-is value. on the current occupancy. We're getting ready to list it with a national broker, and we're working on some additional leases to increase the occupancy. But yes, I would think, yes, it's probably going to be a couple of quarters. Michael Rose: Okay. Perfect. I appreciate that, Audrey. Maybe if I could just slip in 1 more. It looks like on the deposit side, the growth on an organic basis was actually pretty strong. Obviously, some of the mix change was due to the acquisition. But just as we kind of think about deposit growth as we move forward, I think, Bart, you previously talked about it kind of somewhat matching loan growth. Is that kind of still the expectation there? John McWhorter: Yes. So Michael, 1 thing that I wanted to point out there, we had a lot more cash at quarter end. And the reason for that is we sold the Keystone investment portfolio, 100% of it. thinking that we were going to fund up a bunch of loans and replace it before quarter end and that didn't happen because we had those big loan payoffs. But -- so their investment portfolio, it was roughly $75 million in April. Our loans were up more than $100 million. So that's going to be a big help to the margin. And just the fact that the loan-to-deposit ratio was lower for the quarter. We do try to fund to the extent that we can just in time funding, and we really thought we were going to have more loan fundings. We weren't expecting the payoffs. They almost all came out of 1 lenders portfolio who's no longer with the bank, and we weren't sad to see those loans pay off. But going forward, I'd expect the loan-to-deposit ratio to creep up a little bit more and we've already reallocated that cash into loans, so that should help the margin as well. Operator: And your next question comes from Wood Lay with KBW. Wood Lay: I had a couple of follow-ups on credit. I was just curious, are there any trends to note and criticized or classified loans this quarter? Audrey Duncan: Well, obviously, the $17.1 million, that was an increase in classifieds for the quarter. We had a couple of CRE loans that were downgraded during the quarter, but they are both current now. We've got low LTVs on current appraisals. Those LTVs are closer to the 50%, 60%, and we're not expecting any issues there. Those are actually moving in the right direction. Wood Lay: If you take out $17 million, it really is pretty moderate. Audrey Duncan: Yes. If you take out the $17 million, in fact, classifieds were up about $15 million. So we actually had some net reduction there if you excluded that $17 million. Our NPAs actually would have declined 15 basis points had it not been for the $17 million loan. Bart Caraway: So I think I would comment that I still feel the portfolio looks really good. I mean, we're not seeing any macro trends or any micro trends on it. I think the story was the 1 property we took back other than that, I think we're seeing some really strong economic environment for us. We're seeing basically our customers pretty stable and navigating through all the chaos and disruption that's out there. portfolio looks pretty good, I think. Wood Lay: That's great to hear. And maybe just last for me. We're just looking for an update on how the integration of Keystone is going, when core conversion is scheduled? And do you still feel good about all the assumptions that were laid out at deal announcement. Bart Caraway: Yes. I mean I think it's actually going better than expected. It's a good cultural fit. We love the market. And thus far, the teams really kind of rallied and kind of worked well together. I'd say the conversion is going to be in July. And thus far, it's been going very, very well. If you remember, we did do a core conversion last summer. And so I guess everybody is already acclimated to change, and we're very familiar with our system. So converting a bank onto our system versus doing a whole bank conversion is a whole lot easier. So -- and by the way, we have a whole ERM team and project management team that kind of rides heard on this. And so it's very organized and we feel like everybody has the up-to-date training to be able to make this pretty seamless. John McWhorter: Yes. And Woody, as far as the assumptions and the cost saves, we're running 2 different banks today on 2 different systems. So obviously, that's more expensive. So we won't realize any of the cost saves from data processing until August, will be the first month of savings there. Keystone needed a full-blown financial statement audit, so we didn't have any savings there. So going forward, we do expect more. We obviously don't need auditors out there anymore. We won't have examiners obviously, the data processing will happen in the third quarter. So most of the expense saves are are still to come. I think we had forecast $6 million in savings and a lot of it is those couple of categories is the professional fees and the data processing fees and things like that. Operator: Your next question comes from Bernard Van Gist with Deutsche Bank. Bernard Von Gizycki: Maybe just on expenses from here, how do we think about maybe whether it's the quarterly run rate for the rest of the year? Or how to think about it just from here until the end of the year, just given some of the lumpy M&A-related costs, which I believe they're nonrecurring that you've highlighted. I'm not sure if there's any spillover in other merger-related costs that you want to highlight. And then just as those cost saves as they come in, are they fully realized in 3Q and 4Q? Or does that spill over in 2017? Just any thoughts you can break out in expenses. John McWhorter: Yes. So the last thing first. I think by January 1 of the next year, we will have 100% of the cost saves, but some of them we won't have until year-end, some things that we're accruing for an some expenses. But as far as expense run rate, it's hard to put a handle on. I mean, obviously, you could take this quarter and minus out the $3.3 million and then maybe the extra bonuses that we paid out, that's another $650,000. I mean that's kind of a good starting point for that, but we're spending time and effort on conversion, merger-related stuff. So we're not quite to a point where I can give you a good run rate number, but it's certainly this quarter minus the merger expenses and probably more than that. Bernard Von Gizycki: Okay. Got it. And then what about like fee income? Just any thoughts on -- with the new hires, obviously, the Keystone. Just anything we should be thinking about going forward or how we can think about for the rest of the year in fee income? John McWhorter: Yes. So we guided to $4 million for the quarter, and that's almost exactly where we were, I think it will be a little bit higher going forward. But again, we're not a huge fee income shop. So it's not going to be materially different. I think it's going to be between that $4 million and $4.5 million range. Operator: Your next question comes from Matt Olney with Stephens. Matt Olney: Just want to go back to the net adverse margin outlook. John, I think you said that $3.75. I was struggling to get to that number. I heard your commentary about the liquidity and the impact of that kind of late in the quarter and so far, early what you're seeing in April? Any other color that can help us get to that $3.75 number. Was there any impact of securitization or anything else that can help -- can I speak to the noise that we saw in -- moving from the results in the first quarter to that $3.75 million in 2Q? John McWhorter: Yes. I think if you add back the reversal of interest, that's going to be worth about 4 basis points. So it's not too terribly far from the $3.75 million, just to start with. I think the rest of where I'm thinking we get there is through better loan fees. The loan fees were a little late this quarter. It looks like they're running heavier. We didn't talk about securitizations. We obviously didn't do 1 in the first quarter, but we are -- we're always looking at it working on them. I can't say for sure that we'll do 1 in the second quarter, but I think the odds are probably more likely than not that we will be able to do another securitization this quarter. And if -- if we do, it will look similar to the last ones where there's a fair amount of fee income associated with it, and that goes into the margin. And I'm not considering that in the $3.75 number that would push it even higher if we were able to do that. Bart Caraway: And when we start running a little bit higher loan-to-deposit ratio, that will certainly help. Again, we had such a strong start, the first part of the quarter, had the payoffs. I think that would have made somewhat of a difference on the margin as well. And as we're able to kind of dial that in a little bit, I think that's going to kind of help our margin over the next couple of quarters. Matt Olney: Yes. Well, definitely some noisy trends given all the moving parts, but I appreciate you kind of walking through all the items. Operator: Your next question comes from Dave Storms with Stonegate. David Storms: Just wanted to maybe start with maybe some underwriting following the merger. Has there been anything that's been learned either from the Keystone way doing things or doing things or maybe any synergies that can be picked up in underwriting? Bart Caraway: I think it's all kind of in process. So they had a few products a little different from ours. It's been kind of interesting that we might be able to take and evolve at the same time, I think being able to overlay our bigger legal lending limit and some of the things that we do, particularly on the corporate side of it is going to open up some business for them on some probably bigger loans and bigger relationships. So -- but it's only been a few weeks since we brought them on board. And I think that's going to play out as we kind of get this thing integrated. And it will be a lot easier when they're on our system as well. David Storms: Understood. And then just thinking about the long-term NIM trends, before Keystone, you're trending in the plus 4% range. I guess what would it take to get the portfolio back to that again, thinking over the longer term? John McWhorter: I'm sorry, I didn't follow the question, Dave. David Storms: No, sorry. Just long-term NIM trends. I know you're talking about maybe 3 quarters, but just before the merger, you were around 4%, low north of that, is it possible to get back to that range? And kind of what would that take? John McWhorter: That's probably optimistic at that point because we have a relatively high cost of funds. I mean, the way we would get there would be through more loan fees, which we think is possible. I mean that certainly would be a goal and an aspirational sort of goal number. We think as we get bigger and lead more deals, there'll be more loan fees associated with it that will help the margin, but 4% is probably pretty optimistic for our way of doing business. And I think it's a way of upper anyway. Operator: Thank you. And there are no further questions at this time. I'll hand the floor back to Mr. Caraway for closing remarks. Bart Caraway: Well, thank you, Diego, and thank you, everybody, for joining us for our earnings call for 2026 and look forward to talking to you all next quarter. Thank you for your support. Operator: Thank you. This concludes today's call. All parties may disconnect.
Operator: Good day, and welcome to the first quarter investor conference call. [Operator Instructions] Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information is filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is April 23, 2026. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. D. Patterson: Thank you, Olivia. Good morning, everyone. Thank you for joining our Q1 conference call. We reported solid results this morning that were generally in line with expectations. I'll provide a high-level review, touch on some highlights and then pass to Jeremy Rakusin for a more in-depth discussion of the results. . Total revenues were up 5% over the prior year, with the organic growth accounting for over half of the increase. [ EDA ] for the quarter was up 2%, reflecting a modest an expected decline in our consolidated margin. Jeremy will walk through the detail in a few minutes. And finally, our earnings per share for the quarter were $0.95, up 3% over the prior year. Looking at our divisional results. FirstService Residential revenues were up 4% in the seasonally weak first quarter. All of the growth was organic. We had a solid core contract wins and renewals in our core management business at the upper end of expectations. And as we discussed in our year-end call, divisional growth was tempered by modest declines in ancillary services, including pool construction and renovation and contracted labor for commercial maintenance. Looking forward at FirstService Residential, we expect similar or slightly better organic growth in Q2 and some sequential improvement for Q3 and Q4. Moving on to FirstService Brands. Revenues for the quarter were up 6%, balanced between organic growth and tuck-under acquisition. Organic growth was again this quarter driven by increases at Century Fire. Organic revenues within restoration, roofing and home services were all approximately flat with the prior year. Looking more closely at our segments, our restoration brands, First ONSITE and Paul Davis together were up mid-single digit over the prior year, and as I said, flat organically. We're pleased with the performance in Q1 after entering the quarter with a soft pipeline relative to prior year due to the mild weather we experienced in Q4. We saw increased activity from winter storm work that benefited both our brands. The work was primarily quick-turn water mitigation and very little carried into Q2. As a result, our overall restoration backlogs at quarter end are at similar levels to year-end and down modestly from the prior year. Based on current activity levels and the quarter end backlog, we expect Q2 revenues to be flat to slightly down from prior year levels. Moving now to our Roofing segment. Q1 revenues were up 7% over the prior year, driven by tuck-under acquisitions, primarily Lakeland, Florida based Springer Peterson during Q3 last year. Organically, revenues were flat with the prior year and in line with our expectation. We expect a similar result in Q2 with single-digit top line growth from acquisitions and approximately flat revenue organically relative to a year ago. Outside of data center work, the new construction market remains depressed, and the commercial reroof market is flat to slightly up while becoming increasingly competitive. We have a strong team in our roofing platform and solid underlying branch operations. We firmly believe we're in a position to accelerate when the market improves. Moving to Century Fire. We had a strong quarter with total revenues up over 10% and organic growth at a high single-digit level. The Century results continue to be balanced between strong growth in repair, service and inspection revenues supported by solid growth in installation and contract revenues. The backlog is robust we expect a similar result in Q2 and for the balance of the year. Now on to our [ Home Services ] brands, which as a group generated revenues that were up slightly from year ago levels, modestly lower than our expectation. We started the quarter with an uptick in lead flow and some optimism. However, this dissipated moving into February and reversed with the onset of the Middle East conflict. Leads and activity levels dropped immediately. Our teams made a decision to increase promotional spending and marketing spend to maintain momentum and capacity utilization as we ride out the storm. We were successful in holding our revenue, driving higher conversion rates and larger job size and certainly taking share in a tough margin. It did impact our margin for the quarter, and Jeremy will speak to this in his comments. Our lead flow for Q1 was down double digit with a steeper decline in March. It remains at depressed levels and is moving in line with consumer sentiment, which is 10% lower than a year ago. It's expected to increased gas prices and inflation in general will dampen home improvement demand in Q2 beyond what we foresaw at the beginning of the year. Based on our sales and backlogs currently, we expect to get close to prior year revenues in Q2. This outlook is impressive in the current environment and again, reflects on the tenacity and commitment of our teams. We do remain optimistic that there is pent-up demand in the market and believe we could see a pop in activity with stability in the Middle East and reduced concerns around inflation. On the acquisition front, we acquired 2 of our larger franchises during the quarter. Our Paul Davis franchise covering the Cleveland and Akron markets and our California Closets operation that owns the franchise territories encompassing Indianapolis, [indiscernible] Lexington and Cincinnati. As a reminder, we've had company-owned operations at Paul Davis and California Closets for many years now. We selectively acquire franchises if we believe we can drive incremental growth in the market in partnership with local operators, always in the best long-term interest of the brands. We have other tuck-unders in the pipeline across our segments and expect to complete further deals over the balance of the year. I will now pass over to Jeremy for his comments. Jeremy Rakusin: Thank you, Scott. Good morning, everyone. We reported consolidated first quarter results in line with the outlook we provided on our prior year-end call. And in particular, top line performance in each of our brands matched our expectations, as you just heard from Scott's walk-through of each business line. Highlights of the consolidated quarterly results included revenues of $1.32 billion, reflecting 5% growth over the $1.25 billion last year. Adjusted EBITDA of $106 million, up 2% year-over-year, with an 8% margin, down 30 basis points versus the 8.3% margin in Q1 '25 and adjusted EPS at $0.95, a 3% increase over the prior year. Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are consistent with our approach in prior periods. Turning now to the segmented results for our 2 divisions. I'll lead off with FirstService Residential. The division generated revenues of $546 million, up 4% over last year's first quarter while EBITDA was $46 million, a 10% growth rate over the prior year. This resulted in an EBITDA margin of 8.4%, a 50 basis points increase over the 7.9% level in Q1 '25. The margin expansion was driven by broad-based labor cost efficiencies across our operation. This encompassed both a continuation from last year of the initiatives around our client accounting and portfolio management functions as well as other productivity gains across our teams. Now to FirstService Brands, where we reported revenues of $771 million for the current quarter, up 6% over last year's Q1. Our EBITDA for the division was $64 million, a 5.5% decline versus the prior year quarter. The resulting margin was 8.3%, down 100 basis points compared to last year's 9.3% level and primarily driven by our Roofing and Home Services businesses. The [indiscernible] in our roofing platform was expected. As we indicated on our February year-end call, the forecast decline was due to job margin pressures in a heightened competitive environment against the backdrop of dormant commercial new development activity. At our Home Services business, we saw the need during the quarter to increase our marketing spend to preserve our top line performance in the face of macroeconomic uncertainty and the weakening consumer sentiment that Scott referenced. Remodeling spending in our home improvement brands is influenced by interest rate levels and consumer sentiment and home affordability indices, all of which have been undermined by recent geopolitical developments. Periodically, in the past, when we have encountered these types of exogenous challenges impacting our key performance indicators, we have tactically deployed promotional initiatives to support the brand and our market share. We expect to continue with these investments at least over the short term, covering the second quarter but we'll be keeping a close pulse on our leading indicators to pull back the spending once the environment improves. A second factor contributing to the first quarter margin compression at our Home Services brands was reduced capacity utilization of our frontline teams. While we delivered revenues in line with prior year, job volumes declined, and we were reluctant to flex our labor cost down in portion to these reduced activity levels until conditions stabilize, and we have greater clarity of market demand trends. With respect to our consolidated operating cash flow we generated $88 million during the first quarter, a sizable level during our seasonal trough first quarter and up more than double compared to Q1 2025. Capital expenditures during the quarter were $28 million, slightly below prior year, and we now expect to have our full year CapEx coming modestly lower than the initial guidance of $140 million. The resulting high free cash flow conversion rate is a function of our business model and focus around generating cash even when we have periods of more tempered growth on the P&L. This translated into further deleveraging on our balance sheet, where our leverage is measured by net-debt to EBITDA ticked down to a very conservative 1.5x compared to 1.6x at prior year-end, and versus the 2x level at Q1 last year. We have a well-balanced mix of floating and fixed rate and varying maturities of debt instruments. And lastly, our liquidity reflecting cash and undrawn credit facility balances exceeds $1 billion, the highest level in the history of the company, which puts us in a strong financial position to deploy capital as opportunities in our acquisition pipeline arise. Looking forward, in the upcoming second quarter, we are forecasting similar year-over-year trends as we just saw in Q1 across both divisions. We see a continuation of similar EBITDA margin expansion and growth in the FirstService Residential division. This will be largely offset by brands division declines, reflecting the ongoing margin pressures in Roofing and Home Services I referenced earlier and which are dictated by the current uncertain geopolitical and macroeconomic environment. This all aggregates on a consolidated basis for Q2 and to mid-single-digit top line growth and EBITDA performance flat to slightly up compared with the prior year. That concludes our prepared comments. Olivier, you can now open up the call to questions. Operator: [Operator Instructions] Our first question coming from the line of Stephen MacLeod with BMO Capital Markets. Stephen MacLeod: Thank you. Just wanted to ask about the roofing vertical, which obviously you're seeing some pressure and both in the end markets as well as from competitive intensities. And I'm just curious, are you still expecting that some of those reroofing jobs are being delayed into later points in the year or beyond this period of geopolitical and macro uncertainty? D. Patterson: I think, Stephen, it has delayed a rebound. The reroof market, certainly stabilizing, but stubbornly weak. I think the persistent uncertainty does continue to impact decision-making around major projects, I mean we're seeing it in some of our other businesses. So we do believe we'll grow organically this year. We expect to. We expected to see some organic growth in Q2, but I think that the rebound has been pushed out. We do expect to see sequential improvement in Q3 and Q4. There are opportunities that were delayed last year that we're seeing scheduled now. We're bidding work, we're winning work. Generally, we're feeling optimistic. We believe that we're -- we have a very solid branch network, and we're poised to really take advantage when the market improves. Stephen MacLeod: Okay. That's helpful color, Scott. And then maybe just with respect to capital allocation. You have a strong free cash flow. Leverage is not very high. You do have an NCIB outstanding. Just curious if you would consider a buyback in -- or being active on the buyback in this -- given where the stock is and given sort of some of the weakness in terms of the outlook. Jeremy Rakusin: Yes, Stephen, it's Jeremy. Yes. No, it's 1 of the alternatives that's always in the forefront of our minds, particularly over the current environment. And as you said, leverage giving us ample room. First and foremost, we're a growth company and we're looking to deploy capital towards those growth initiatives and supporting the brands where we have capital allocation opportunities. So I think that's our primary focus. You're right, we can pull the trigger on the NCIB at any point in time. we have given consideration to -- but I think for now, it's a pause just given potential opportunities in the pipeline, the growth mindset and really where the uncertainty is in the geopolitical and it influences stock market valuations. Stephen MacLeod: Okay. That's great. And then maybe just finally, just on the M&A. Scott, you referenced that you have done some tuck-ins recently. I guess when you think about M&A and the outlook from here, would it mostly be kind of bringing in those company turning franchises into company-owned? Or do you see other alternatives in your other verticals as well? D. Patterson: No, I really think it's tuck-unders in the other verticals. Nothing has really changed as we approach the company-owned strategies at Paul Davis or California Closets. Those will be very episodic, 1 or 2 a year at each brand. So we're not looking to accelerate that. Operator: Our next question coming from the line of Daryl Young with Stifel. Daryl Young: I just wanted to touch on Century Fire for a second. It seems to continue to defy gravity and amid a soft commercial construction market. So I'm just wondering, has there been any regulatory changes that might help explain some of the growth here in terms of maybe frequency of inspections or system retrofits or anything else that can explain that growth? D. Patterson: No. The growth has really been in the service repair and inspection side has been very consistent in the last number of years, and it continues to be a driver for them. There's just a real focus on it across all the branches. And they're still in the process of layering in service expertise at some of the branches that were primarily installation focus. So there's nothing on the regulatory environment, certainly that we're aware of that's accelerated the growth in the service side. It's just a continued focus on it. Daryl Young: Okay. And then with respect to restoration, the outlook is maybe a little bit lighter than I would have expected in the short term. Is there any loss of market share or anything going on with national accounts that might explain that as well? Because I would have thought there's a lot of white space from a geographic expansion perspective. D. Patterson: No. I mean I think we are definitely holding our own. These storm events are all very, very different from 1 to the other and what areas they impact, where we have branches relative to the affected areas. So we feel -- we continue to feel very good about our position in the marketplace as it relates to national accounts. And it's just -- this is a weather influence business. And it's hard for us to call from quarter-to-quarter. We do see some activity. We have some large loss opportunities. So there's potential upside. But based on where our backlogs are, we do think the revenues will be flat, perhaps even down a bit in Q2. Operator: Our next question coming from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Nice to see strong margin improvement once again in the residential segment with the labor efficiency gains we've called out. So curious if you see opportunities to leverage AI and other businesses and segments, similar to what you've done in potential around client accounting and call center operations. Jeremy Rakusin: Yes. Stephen, Jeremy. In our brands businesses, obviously, we've done it in residential, as you're aware, and that's part of the efficiencies. And the brands businesses, all of them are exploring tools to be more efficient on the front lines. I can point out 1 example of restoration where walk-throughs job estimating and scoping. AI tools are being used to speed the process, be more productive for those estimating teams and also helping enhance the accuracy, making sure nothing is missed and we captured in that scoping exercise. That would be 1 example to call out, but all of our brands are using AI in an early stages, incremental way as we speak. Stephen Sheldon: Got it. Makes sense. And then on roofing, I guess how are you thinking about the margin trajectory over the coming years? Those activity hopefully picks back up? Are there still a lot of levers to pull where there could be structural margin improvement over the medium term and a better backdrop with more pricing power and things like that? I guess what -- how are you thinking about the long term or the medium term margin trajectory there? Jeremy Rakusin: Yes. I think short to medium term, meaning 2026. We've called the margin compression right on the outset again largely due to competitive pressure. So once we get through that and once new construction, new development sort of resumes its normal course, we think the competitive pressures in reroof will abate, we'll get more pricing power. The other thing that's tempering our margins a little bit. We're pulling together 1 ERP financial reporting platform for all of our branches. That's a bit of investment that we knew about into '26 and '27. And once we get that and again a better environment, I think there are opportunities. There could be opportunities even on the cost synergy side around procurement, using our scale to garner materials at better prices and just as we scale up the platform. But I think that's too early to map out at this juncture. But directionally to your question, yes, there would be opportunities medium to long term. . Operator: Our next question coming from the line of Erin Kyle with CIBC. Erin Kyle: Jeremy, just a follow-up on the margin side on the residential side. Good to see that margin strength in the quarter. Could you maybe expand a bit more on the labor and cost efficiencies we achieved. It was my understanding that most of those cost savings are EBIT implemented in 2025. So is it the AI efficiencies that you're speaking to that's kind of contributing to the efficiency in the quarter? Or how do we think about that? Jeremy Rakusin: Yes. So a portion of the 50 basis points would have been a continuation of last year's initiatives around client County that's offshoring a lot of some of the financial statement and accounting functions, lower cost opportunities there as well as AI-driven portfolio management efficiencies where we can reduce head count in our call centers and enhanced portfolio manager productivity. So that's just a continuation. And then a little bit on the mix. Scott spoke about the exit from low-margin accounts at the beginning of the year around ancillary, commercial maintenance and pool reno services. Those are lower margins. So we get a little bit of a tick up. And then really, a little [indiscernible] we're a 20,000 associate division, very labor-intensive. So both the timing around contract wins and when we add head count to support that as well as just incremental pockets of efficiencies across our 100-plus offices. Those would be the sort of 3 or 4 reasons that aggregate to the 50 basis points. We'll see more of it in Q2 and then I believe, it will flatten out to second half of the year. . Erin Kyle: That's helpful color. And then maybe just on the M&A side. If I go back to M&A spending and looking forward for the rest of the year here, you touched on the tuck-in acquisitions of franchise operations that was announced a few weeks ago. Just wondering, maybe more broadly, what you're seeing in terms of the broader market valuations remain elevated and what the strategy would look like and keep that. If deals do remain elevated, do you expect to do more of those franchise operation, acquisitions? D. Patterson: I think this year will play out similar to last year where we allocated about $100 million for acquisitions. Multiples do remain high across all the platforms. And the market, it's still active, but it's still slower than we've seen in previous years. I think many sellers are waiting for more stability in the [indiscernible]. Certainly, in roofing and restoration, we've seen deals pull back. Results are generally down. So sellers are waiting until there's a rebound. But we do have prospects in the pipeline across most of our segments and believe we will close incremental tuck-unders over the next 3 quarters, not -- probably not incremental franchise acquisitions because we're just not aggressively pursuing those. Those -- I mean, we obviously know all our franchisee owners and we're taking that 1 step at a time as a transition makes sense for those owners and families. Operator: Our next question coming from the line of Tim James with TD Cowen. Tim James: First question, just returning to the residential segment. You mentioned some headwinds there in property management related to pool construction and some commercial maintenance, I think it was. I was wondering if you could elaborate on what the drivers of that are or what you think they may be? And kind of how sustainable that you expect that pressure to be as you go through the balance of the year? D. Patterson: Right. We've been in the pool management, renovation construction business for many, many years. And the renovation construction side of it is facing the same headwinds we're facing in roofing in many of our businesses just with the reluctance to allocate CapEx to major projects and the deferral. We are entering seasonal period, and we'll see a resumption of that activity, probably not at the same level as prior year. So it will continue to be a bit of a drag on our organic growth. And then the we referenced the other ancillary service, which is the provision of janitorial front desk personnel to the multifamily market, primarily in the Northeast, and there were a few contracts and with -- they tend to be REITs and owners of several buildings. And often you -- when you win or lose a contract, it can be for a number of buildings. And we just made a decision on price to move away from some contracts, which will continue to be a drag of a -- modest drag. But we feel very good about where we are with our core management business, solid quarter and end of '25 in terms of renewals, retention and wins, and expect that it will -- the core business will hold our growth in this division at mid-single digit, and we expect to see incremental sequential improvement through the year. Tim James: Okay. That's super helpful. Just turning to the home services and the promotional activity that you kind of kicked up in the first quarter there. It sounds like that's due to sort of the macro environment, the overall demand environment. I'm just trying to understand when you step up promotional activity in an environment that's impacting all your competitors, is the idea here that your competitors are getting more aggressive on pricing and therefore, you're trying to offset some of that and sort of get the brand back in front of them? Or I'm just trying to understand, I know you've had experience with this in the past, so maybe it's more a matter of refreshing on kind of the success that, that drove and how it works. D. Patterson: Yes. Certainly, there's some of what you suggest. The key -- the real key for us is try to maintain momentum and take share in a very tough environment, and then keep our teams busy. I mean, we invest a lot in training our people. And with the lack of clarity we have today, we don't want to move quickly to adjust that unless we have more clarity about the market that we're dealing with. And as I said in my prepared comments, we do believe it could turn positive quickly. with some stability and clarity around the Middle East and inflation. So we're currently trying to ride out the storm, as I said. We've got our fingers on the dial around the marketing spend and the cost structure. And if we -- Jeremy mentioned it in his prepared comments, if we do see [indiscernible] that this is a prolonged downturn, we will adjust quickly. Tim James: Okay. The last question, just turning back, and you've touched on the kind of the M&A environment. But I just wanted to kind of focus in on 1 particular aspect here. And I'm wondering if you're seeing any evidence or hearing of any evidence that kind of the recent challenges related to funding for private equity, if that's had any impact on their approach to M&A in the markets, in the industries where you're looking in terms of their activity levels, their pricing behavior? Just if you're seeing any sort of knock-on effect from that at all? D. Patterson: The 1 thing I would say that while it appears that the multiples are not trending up or downward they remain very high. But the number of bidders for opportunities is probably lower right now. As you suggest, some funds and buyers have pulled back. So there aren't as many people at the table but the valuations appear to be holding. The other thing I would say is that for the first time, we're seeing and hearing about distressed platforms, particularly in the roofing space where the bank is getting involved either through their special loans group or in 1 instance even taking control. Operator: Our next question coming from the line of Himanshu Gupta with Scotiabank. Himanshu Gupta: So first on the restoration business. It looks like organic growth is likely to be flat in the first half of the year. What are your expectations for full year 2026. I think previously, we got an impression that it could be high single-digit growth business for the year. D. Patterson: Jeremy, why don't I let pass that to you. Jeremy Rakusin: Yes. I mean, Himanshu, our expectation is mid to high historically, we've looked at it since we've owned the commercial restoration business, and we've averaged about 8% organic growth. But it's not a business that goes in a straight line. Scott spoke about the weather-driven events where we're positioned, where our branches are. So a quarter-to-quarter fluctuation is 1 thing that people should realize this business can be a little more -- have greater fluctuations in terms of top line and bottom line from quarter-to-quarter. And also, we exited we exited '25 on a very mild weather year. So the backlog that Scott mentioned, entering 2026 we're quite low. We did get a shot in the arm from winter storm [indiscernible], but it was a small event. So it's still an early part of the year, the backlogs from last year, again lower due to mild weather. And we just think that the randomness of weather is 1 aspect. But on average, we do expect weather events to resume their normal level of activity, and we've captured share over the years. So that's why we feel confident in doing better in the half of the year and for the year than we do in the front half of the year being flat. Himanshu Gupta: Got it. through the color Okay. And then now moving on to roofing segment, and I know a bit of discussion already has happened so far. Can you speak about the roofing backlog? I mean in terms of quality of the backlog or directionally, how is it trending? D. Patterson: Yes. It's down modestly from a year ago, really due to the shift from having some new construction of backlog down to primarily reroof. And -- but it's stable the last few quarters and starting to build. Our branches are bidding work and generally active and winning. And as I said, we're feeling optimistic that we just need to battle through this period of uncertainty because the reroof market, the fundamental demand drivers are there. And we feel like we're in a great position to capitalize on it. Himanshu Gupta: Got it. And is the new roofing mostly tied to industrial warehouses, new supply, construction cycle? Is it a thought to add exposure to data center here, I mean, given that you're seeing a fair amount of construction? D. Patterson: I mean the new construction outside of data centers, office, retail, industrial, those markets are all weak if you look across North America, there are pockets of activity. But generally, those areas are weak. Data centers is -- it's a big driver of the new construction market. Himanshu Gupta: Yes, fair enough. And I assume you don't have much exposure to the data center within the roofing segment? D. Patterson: Not on the roofing side, no, we don't, Himanshu. Himanshu Gupta: Yes. And there is no thought to add exposure in that segment anytime soon? D. Patterson: Well, it's not so easy to add exposure. The operations that comprise Roofing Corp of America, have not historically participated in data centers. And part of the reason is that the focus has been reroof and repair and maintenance. That's our strategic focus long term. So I mean we will be opportunistic, but it's not something we're aggressively pursuing, no. Himanshu Gupta: And my last question is on FSR on the residential side. I mean, do you have visibility in terms of new contract wins or losses in the next 3 months or 6 months? Any color there? D. Patterson: Yes. We have visibility in that business, absolutely. And as I said in my comments, I believe, will be -- show growth at similar or up in Q2 and for the balance of the year. Operator: Next question in queue coming from the line of Daryl Young with Stifel. Daryl Young: Just 1 quick follow-up. You mentioned some distress in roofing. What would your appetite be to take on a more complicated acquisition that maybe has some distress? And then secondly, has your appetite in roofing to deploy capital into roofing changed at all just given the market dynamics you've seen over the last 12 months? Or is it still a core vertical for the long term? D. Patterson: It's very much a core vertical for the long term. We're focused on an active in terms of looking at opportunities. And certainly, most of these businesses were familiar with and have a have a view on in terms of their position in their local markets. So we're keeping a finger on the pulse of all the activity in the roofing space and absolutely interested in opportunities as they present. Operator: Our next question coming from the line of Stephen MacLeod with BMO Capital Markets. Stephen MacLeod: Just 1 follow-up question. I just wanted to ask about -- I just want to confirm on the FSR margin side. Because I believe you talked about inorganic sales growth being up and sequentially improving through the year. So just on the margin side, would you expect a similar trend on margins. Just noting that last year, you had very strong kind of margins in the 11% range in Q2 and Q3. Were there -- were those anomalies to the high side? Jeremy Rakusin: Well, I said in my prepared comments and in some of the Q&A, we expect the trend in Q2 to resemble Q1. So we're up 50 basis points, something of that order [indiscernible] wouldn't assume anything more than that. And then I think we've flattened out in the back half of the year of Q3 and Q4 on a year-over-year basis. . Operator: And I'm showing no further questions in the queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Banner Corporation First Quarter 2026 Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Mark Grescovich, President and Chief Executive Officer of Banner Corporation. Mark, please go ahead. Mark J. Grescovich: Thank you, Tiffany, and good morning, everyone. I would also like to welcome you to the First Quarter 2026 Earnings Call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking safe harbor statement? Rich Arnold: Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. These statements include descriptions of management's plans, objectives or goals for future operations, products and services, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available in the earnings press release that was released yesterday and our recently filed Form 10-K for the year ended December 31, 2025. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark? Mark J. Grescovich: Thank you, Rich. As is customary, today, we will cover four primary items with you. First, I will provide you high-level comments on Banner's first quarter 2026 performance; second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders; third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet. Before I get started, I wanted to thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and our communities. Banner has lived our core values, summed up as doing the right thing for the past 135 years. Our overarching goal continues to be to do the right thing for our clients, our communities, our colleagues, our company and our shareholders and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I am very proud of the entire Banner team that are living our core values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $54.7 million or $1.60 per diluted share for the quarter ended March 31, 2026. This compares to a net profit to common shareholders of $1.30 per share for the first quarter of 2025 and $1.49 per share for the fourth quarter of 2025. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make in order to improve operating performance have positioned the company well for the future. Rob will discuss these items in more detail shortly. The strength of our balance sheet, coupled with the strong reputation we maintain in our markets will allow us to manage through the current market uncertainty. To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings, excluding gains and losses on the sale of securities, changes in fair value of financial instruments and building and lease exit costs. Our first quarter 2026 core earnings were $66.3 million compared to $58.6 million for the first quarter of 2025. Banner's first quarter 2026 revenue from core operations was $169 million compared to $160 million for the first quarter of 2025, an increase of nearly 6%. We continue to benefit from a strong core deposit base that has proved to be resilient and loyal to Banner, a very good net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.37% for the first quarter of 2026. Once again, our core performance reflects continued execution on our super community bank strategy, that is growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits continue to represent 89% of total deposits. Reflective of this performance, coupled with our strong regulatory capital ratios, and the fact that we increased our tangible common equity per share by 11% from the same period last year, we announced a core dividend increase of 4% to $0.52 per common share. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 Best Banks as well as one of the best banks in the world by Forbes. And Newsweek named Banner Bank, one of the most trustworthy companies both in America and the world again this year. And just recently again, named Banner one of the best regional banks in the country. Additionally, J.D. Powered Associates named Banner Bank the Best Bank in the Northwest for retail client satisfaction for 2025. Our company was certified by Great Place to Work, S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets. And as we've noted previously, Banner Bank again received an outstanding CRA rate. Let me now turn the call over to Jill to discuss trends in our loan portfolio and for comments on Banner's credit quality. Jill? Jill Rice: Thank you, Mark, and good morning, everyone. As detailed in our press release, we again had a strong quarter of loan originations, in line with that reported in the fourth quarter and 61% higher than that reported in the first quarter of 2025. Still, significant commercial real estate payoffs coupled with expected paydowns within the ag portfolio, offset production such that portfolio loans decreased $14 million when compared to December 31, 2025. Year-over-year loan growth was modest at 2.4%. Production within the commercial real estate portfolio continued to be meaningful with owner-occupied CRE up 3% in the quarter and 15% year-over-year and investor real estate up 1% in the quarter and nearly 8% year-over-year. Those increases, however, were almost entirely offset by the significant commercial real estate paydowns within the multifamily portfolio, down 6% in the quarter and 9% year-over-year as stabilized properties moved into the secondary market. Within the construction portfolios, the 12% increase quarter-over-quarter in commercial construction reflects the continued funding of previously approved projects. In addition to the multifamily payoffs noted previously, we had two large land development projects payoff, which resulted in a 7.5% decrease in balances this quarter. We are continuing to see an elongation of the days on market within the for-sale 1-4 Family construction portfolio, given the elevated interest rate environment and general economic uncertainty. Still, the level of completed and unsold inventory remains within historical norms and the builders continue to have strong balance sheet and profit margins to work with. In total, the 1-4 Family construction portfolio continues to represent a modest 5% of the loan portfolio, and the total construction portfolio, including land and land development continues to be acceptable at 14% of the loan book. After declining 3% last quarter, C&I line utilization moved closer to normal, increasing 2% this quarter. In total, commercial loans were up a modest 1%, both in the quarter and year-over-year. Agricultural balances as expected, were down 6% in the quarter as crop proceeds reduced line balances and the decline reported year-over-year reflects the collection and payoff of multiple classified ag balances. Shifting to credit quality. Our credit metrics remained strong. Delinquent loans increased 2 basis points and now represents 0.56% of total loans which compares to 0.63% reported as of March 31, 2025. Adversely classified loans increased by $42 million in the quarter, representing 2% of total loans and total nonperforming assets at $51.7 million represent a modest 0.32% of total assets. The increase in adversely classified assets is centered in three relationships, operating and manufacturing, residential construction and wholesale agricultural deposits. As of March 31, the allowance for credit losses totaled $160.4 million, providing 1.37% coverage of total loans, consistent with prior quarters. Loan losses in the quarter totaled $1.5 million and were offset part by recoveries totaling $253,000. The risk rating migration discussed previously coupled with the net charge-offs resulted in a provision of $1.3 million to the reserve for credit losses loans. This was offset by a release from the reserve for unfunded commitments of $2.1 million for a net provision recapture of $796,000. The first quarter of 2026 continued to be impacted by economic uncertainty given persistent inflation, the higher for longer interest rate environment and increasing geopolitical issues. Through this, we have maintained consistent underwriting standards, which include a focus on strong sponsors, properly margin collateral, seasoned repayment sources, and in the vast majority of cases, personal guarantees, and we continue our practice of robust quarterly portfolio reviews in order to identify any emerging issues early. We remain well positioned to weather the uncertain economic environment ahead. With that, I will hand the microphone over to Rob for his comments. Rob? Robert Butterfield: Thank you, Jill. We reported $1.60 per diluted share for the fourth quarter compared to $1.49 per diluted share for the prior quarter. The increase in earnings per share compared to the prior quarter was primarily due to the current quarter having lower expenses, a recapture of provision for credit losses. In addition, the prior quarter included a decrease in the valuation of financial instruments carried at fair value and a loss on the disposal of assets. Core pretax pre-provision income for the current quarter increased 13% or $7.7 million compared to the quarter ending March 31, 2025. Our performance metrics remain solid as we reported a return on tangible common equity for the current quarter of 14% and return on average assets of 1.37%. As Jill previously mentioned, loan balances were essentially flat during the quarter as the good loan production was offset by an increase in payoffs. The loan-to-deposit ratio ended the quarter at 85%, giving us ample capacity to continue to support existing clients and to add new clients. Total security balances were relatively flat as normal portfolio cash flows were mostly offset by security purchases. Deposits increased by $97 million during the quarter due to core deposits increasing $165 million or 5.5% on an annualized basis. The increase in core deposits was partially offset by time deposits decreasing $67 million, mostly due to $50 million of brokered CDs maturing during the quarter, ending the quarter with no brokered deposits. Core deposits ended the quarter at 89% of total deposits. Total borrowings decreased $142 million during the quarter, ending the quarter with no outstanding FHLB advances. The tangible common equity ratio increased from 9.84% to 9.97%. As a reflection of our robust capital and strong liquidity positions, Banner repurchased 250,000 shares during the quarter and declared an increase in the quarterly dividend of $0.52 per share. Net interest income decreased $2.3 million from the prior quarter due to a combination of lower earning assets and 2 fewer interest earning days in the current quarter. Partially offset by an 8 basis point increase in net interest margin. The decrease in average earning assets was primarily due to average interest-bearing cash and security balances decreased to $953 million. Tax equivalent net interest margin was 4.11% for the current quarter compared to 4.03% for the prior quarter. Funding cost decreased 9 basis points due to deposit costs decreasing 8 basis points. Deposit costs benefited from a full quarter of the deposit pricing reductions implemented in the fourth quarter of last year. We also benefited from an improved earning asset mix as lower-yielding cash and security balances or a smaller percentage of earning assets. The improved earning asset mix offset the 3 basis point decline in loan yields. The average rate on new loan production for the current quarter was 6.69% compared to 6.88% for the prior quarter. Noninterest-bearing deposits ended the quarter at 33% of total deposits. Total noninterest income increased $3.9 million from the prior quarter, primarily due to the prior quarter, including a loss of $1.4 million on the disposal of assets and a fair value decrease of $2 million on financial instruments carried at fair value. While the current quarter had a $1.7 million fair value increase on financial instruments carried at fair value, partially offset by a loss of $1.2 million on the sale of securities. Total noninterest expense was $1.5 million lower than the prior quarter, with decreases in occupancy and equipment, marketing and legal expense being partially offset by an increase in salary and benefits. Our strong capital and liquidity levels continue to position us well to support our existing clients and to add new clients. This concludes my prepared comments. Now I will turn it back to Mark. Mark? Mark J. Grescovich: Thank you, Jill and Rob for your comments. That concludes our prepared remarks. And Tiffany, we will now open the call and welcome questions. Operator: [Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson. Ryan Payne: This is Ryan Payne on for Jeff Rulis. Just starting on the margin, had some deposit fluctuations and lower CD balances this quarter benefiting the NIM. But just trying to gauge your thoughts on expectations for the margin ahead. Robert Butterfield: Yes, sure. This is Rob. So we typically see an increase in funding costs during the second quarter as clients start to use deposit balances to make tax payments early in the quarter, and we supplement that temporary decline in deposit balances with some FHLB advances. We think that this should be mostly offset by an increase in loan yields as adjustable rate loans continue to reprice up and the new loans coming on are still coming on at higher yields than the average overall portfolio yield, which suggests that NIM would be relatively flat probably in the second quarter, which is similar to what we saw last year where the Q2 NIM was flat compared to the first quarter. We could see some expansion in NIM in the third quarter due to funding costs coming back down as FHLB advances are replaced by deposit increases in the typical seasonality we see in the third quarter. And in addition, we would expect that loan yields would increase in the third quarter as well as long as the Fed remains on pause. So we would expect some net interest margin expansion in the second half of the year. Ryan Payne: Helpful. With the loan production impacted by payoffs this quarter, where do you see payoffs trending from here and maybe your overall expectations for growth? Jill Rice: Sure, Ryan. So we had anticipated that the headwinds of commercial real estate payoffs would potentially offset growth into 2026. I expect that they will slow. I'm not prepared to tell you that they're done coming in, but I think that the rate of payoffs will slow down. Still, the loan production volumes, which were solid and indicative of future loan growth, the strong backlog of construction fundings we have is meaningful and our pipelines are strong. So we're still sticking with the mid-single-digit growth rate for 2026. Ryan Payne: Got it. Last for me, capital priorities. We have the dividend increase and buyback. What's your appetite for continued buybacks here? And where would you see M&A on the list of priorities? Robert Butterfield: Yes. It's Rob again. So as you know, we did increase the core dividend by 4% this quarter, which was the second increase we've done in the last 3 quarters. Our goal from a dividend perspective is to pay out 35% to 40% of earnings as a core dividend. And in addition, we did do those share repurchases again in the first quarter. That's the third quarter in a row that we've done that. As we think about capital priorities, we always look at the different opportunities we have there, which certainly include additional share repurchases that we could consider in the second quarter. But ultimately, it's really depending on market conditions on where the stock price is trading and other things as we evaluate the best use of our capital. And as always, we just continue to look at different ways we can deploy capital. Mark, as far as M&A, do you have any? Mark J. Grescovich: Yes. Thanks for the question, Ryan. Our position on M&A hasn't changed since I've been here, which is we look and try to partner with folks that will be a great fit for Banner, add additional density to our market and be very good core deposit franchises. and it has to be very opportunistic. And so we're very selective on the M&A front. We feel very good about our organic opportunities to continue to grow the bank and improve profitability. But if an opportunity exists in which we can add additional density with a good core deposit franchise and a strong bank, we certainly would look to do that. Operator: Your next question comes from the line of Matthew Clark with Piper Sandler. Matthew Clark: Good morning. On the funding side of the equation for the margin outlook, on the deposit side, if you had the spot rate on deposits at the end of March? And then how are you thinking about deposit pricing going forward with the Fed on hold, do you think you'll just be managing as best you can to hold that level? Or do you feel like there are opportunities to trim exception-based pricing in CD rates? Robert Butterfield: Sure. Thanks, Matthew. It's Rob. So the spot price the cost of deposits from March was the same as the quarter. It was pretty much across the board at that 135 basis points. Early in the quarter in January, we did make some additional rate reductions really in response to the December Fed rate cut that we saw, and we did that in early January. So really, the whole quarter benefited from that. As we think about going forward, while the Fed is on pause, I don't think you're going to see much change in our core deposit pricing for our core products. Where we might get a little bit of benefit is on the CD pricing side of it just because the cost of our CD book, we would expect to continue to trend down for the next few quarters as the lag effect of the rate cuts that we saw the Fed do in the fourth quarter. The average rate of the new CDs coming on is around 3% right now. The CDs rolling off are around 330. Approximately 40% of our CD book matures in the second quarter. So we would expect some there. But what I'd say is what happened is now that the expectation is the Fed will be on pause through the remainder of the year, maybe seeing the rate cut late in the year, fourth quarter or something like that. We are seeing some additional pressure on deposit pricing right now where we are seeing some competitors start to increase some of their promotion specials on deposits right now. So I'll caveat with that as we ultimately we'll have to respond to what the market is doing. Matthew Clark: Okay. Great. And then on the service charges and fees line this quarter, up pretty nicely in a quarter with 2 less days. Did you do anything -- did you change your product pricing there at all? Or what can you attribute that to? And is that sustainable? Mark J. Grescovich: Yes. So we didn't change any of our pricing there. We did renegotiate our MasterCard contract. So we're seeing a little bit of benefit from that from the first quarter. So otherwise, I think if you look at the trending there, the first quarter is probably a pretty good trending when you look at that. Matthew Clark: Okay. And then on the noninterest expense run rate, down nicely pretty broad-based outside of the seasonal increase in comp. Anything unusual there? Is that more partly a seasonal decline relative to the fourth quarter? I'm just trying to get a sense for that run rate going forward. Robert Butterfield: Yes, there certainly is some seasonality to that. Typically, the first quarter, we have lower advertising and marketing expense in the first quarter than the campaigns that we run throughout the year start to ramp up. So that's a bit lower. And the fourth quarter did have kind of a legal settlement charge in there of around $1 million that didn't carry forward into the first quarter. If you think about the remainder of the year, we've talked about expecting normal inflationary increase in '26 compared to '25. And I think if you look at the full year, that's still my expectation. And Q2 will be higher from a salary and standpoint and benefits just because we do our annual salary increases really in mid-March. So you didn't really see that impact in the first quarter. So I would expect expenses to be a bit higher as we move throughout the year. Matthew Clark: Okay. Last one for me, just back to M&A. Have there been -- have you seen or heard of an increase among sellers or maybe being more willing to talk. Just trying to get a sense for a change relative to last quarter. Mark J. Grescovich: I don't -- Matthew, this is Mark. Thank you for the question. I don't think that there's been a change in behavior. I think there are a number of folks that are trying to strategically figure out what the best next step is. And as you might expect, given my earlier comments about who we think would be a good partner with Banner in which we could leverage our balance sheet to service their clients in a more robust way. The universe is still fairly limited. on the West Coast. And we know that the partners that would make a lot of sense for Banner. So I wouldn't suggest that there's been an increase in conversations, but I wouldn't be surprised if folks as they go through and are delivering on their first quarter strategic plan are trying to figure out what the best thing to do for their organizations are. Operator: Your next question comes from the line of David Feaster with Raymond James. David Feaster: I wanted to maybe touch on, I guess, two things. From -- on the loan growth side, originations have held up pretty well. How is demand? Like have you seen any -- I mean, obviously, there's a lot of macro uncertainty. I'm curious if that has impacted demand and pipelines at all from your standpoint? And then just -- I was hoping you could give some color on the payoffs and paydowns that you're seeing. Like what's driving that? Is it deleveraging, asset sales, competition and losing some deals? Just kind of curious on those two fronts. Jill Rice: So in terms of pipelines, David, -- everybody is telling me that they're busy. They're having good conversations and moving things forward, whether it's early on in the discussions or whether it's my credit team busy working through deals. So demand is out there. I can't say that the level of economic uncertainty doesn't cause -- give some pause, but there is still demand. And as we move through them, we certainly see pricing being pushed and multiple banks going for these same deals. So it's tough out there, I guess, I would say, in terms of getting to the close, and I feel good about what we have been pulling through in terms of originations and what that means for our future growth. As to -- what was the second part driving the payoff... Yes. So if you think about it, they're just delayed. Many of these loans we ultimately expected to pay off, we expected them to pay off 18 months ago, and they sat waiting for what was going to be the lower rate environment in those mini perm loans that we offer at the end of the construction and/or as they were stabilizing and getting stronger. So it is delayed payoffs, not losing because we don't want them or to competition, but to the secondary market that offer terms that most regional banks don't offer, long-term interest only, nonrecourse, those sorts of things. So again, expected, they just are lumpy because of the delay from 18 months ago. David Feaster: Okay. That's helpful. And then there's been a lot of disruption across your footprint. I mean, over the past 12, 18 months, I mean, really from top to bottom, right? I wanted to get a sense of how you've been capitalizing on that, your appetite for new hires potentially coming out of some of those deals or just hires in general? And what markets or segments you might be interested in adding talent to? Jill Rice: So I'll start and then if Mark or Rob want to jump in behind me. If you think back to the last several quarters, we've talked about the personnel we've added because of the disruption in the -- across the footprint. And really, when we find good strong bankers in the markets, we want to add them. This last quarter, we've added a commercial banking center manager. We've added multiple portfolio managers and some treasury management personnel. So it isn't about one business line or one market. When we find the right people, we're adding to improve our talent. Mark J. Grescovich: And David, I would just follow up with that. This is Mark. It's been across the geography. So it's not specific to any particular area. I think we've done a very good job of adding talent into the organization. And as you've heard me say before, we tend to do this as a rifle shot, not a shotgun shot, right? So that we end up doing this because we know who the good bankers are, we court them over time. And when the timing is right, because there is disruption, we find that we are a good source for them to join our organization. David Feaster: Okay. And Mark, maybe just another higher-level one. I'm curious how you and your team are thinking about technology. I think investors, when I have conversations and there's a lot of conversations around AI and stable coin or digital deposits in general. I'm just kind of curious, how are you thinking about those two issues today? And what are some of the things that you're working on? And how do you see this kind of playing out for Banner? Mark J. Grescovich: Thank you for the question, David. I'm going to ask Rob to answer that because we've made some -- a series of investments. But at the same time, we've set up a governance structure, I think, that will help guide us as a lot of this technology and AI infrastructure is evolving. Rob? Robert Butterfield: Yes. Thanks for the question, David. So as Mark mentioned, we do have a fintech council committee that we have internally that evaluates all the different kind of new AI type technology or even different technology products that are being offered by fintechs out there. And so we try to stay on top of what the current pulse is on that stuff. And we have started to adopt some AI technology. At this point, it's more turning on AI within existing software platforms. And of course, we've made some significant investments that we've talked about recently with the new loan and deposit origination system that went fully live last year. And then we also have a lot of conversations around tokenized deposits, stable coin, that type of stuff as well. We -- as part of our annual strategic planning process, we've brought in different experts in those fields to talk to our executive committee to make sure we understand what's out there. And so while we haven't necessarily have any plans to roll that out in the short term, we're really staying on top of what all the different kind of payment channels are out there and keeping our pulse on that kind of stuff. Mark J. Grescovich: So David, just to follow up on that. When you think about regional banks like us have to -- we want to be very cautious and make sure that we're protecting the data integrity of our clients. So examples of AI would be BSA AML in which you can really utilize some of the tools there and certainly the call center which will allow you to be more responsive to your client base over a 24 period of time. So those are the kinds of things, I think, when you think of regional banks, the investments we'll be making in AI. Operator: Your next question comes from the line of Andrew Terrell with Stephens Inc. Andrew Terrell: Most of mine were addressed already, but just on the margin, and you guys have kind of consistently been outperforming the kind of margin expectations you laid out. I know in the past, we've talked about no rate cuts better for kind of the near, medium-term margin trajectory. It seems like kind of the backdrop we're getting now, but still sounds like relatively flattish in 2Q and maybe some back half expansion opportunities. I guess the question is why not more constructive on the margin? And can you walk us through the puts and takes and specifically kind of the limiting factors for the margin term? Robert Butterfield: Yes. Thanks, Andrew. It's Rob. So if you think about the second quarter, and I talked about it a little bit, I'm just looking at normal seasonality there. We always see deposit outflows early in the quarter. You have to supplement those with FHLB advances. And typically, the second quarter has been a little bit better for us from a loan growth standpoint as well, and we're going to be funding those loans with FHLB advances. So I think just naturally, you're going to see funding cost increase in the second quarter. And some of that will be offset by the repricing of loan portfolio. So that's why I'm thinking more flat for the second quarter. And if you look at last year, it's the same seasonality we saw last year. First quarter last year, we saw net interest margin expansion. Second quarter was flat. Third quarter is typically one of the better margin expansion quarters for us. So I think that's where you're going to see some additional expansion again, would be in the third quarter because funding costs will come back down as deposit flow in. So we'll pay off FHLB advances. We'll get the benefit of the asset growth that we saw in the second quarter. And so -- and then in addition, naturally, you're going to see loan yields also increase in the third quarter. So I think the third quarter will probably be the strongest quarter for the remainder of the year from a net interest margin expansion standpoint. And we -- if the Fed is on pause, then we would expect some additional margin expansion in the fourth quarter. But I don't think you're going to see the benefit on the funding side at that point. What you're going to see is just kind of the loan yield continuing to reprice up, which is repricing up about 3 basis points a quarter right now while the Fed is on pause. Andrew Terrell: Great. No, I really appreciate it. And then last question for me. Just I guess, looking back, last time you were generating a comparable, call it, 130-ish ROA consistently was back in 2018, 2019. Your stock was trading 4x higher on an earnings multiple, call it, 40%, 50% higher on tangible book value multiple then. Your capital is 200-plus basis points better today, your allowance is 30 basis points higher. The growth environment feels a little bit slower than then. I guess with that as a backdrop, why not get more aggressive on the buyback here? Mark J. Grescovich: I mean I think any time you look at the capital priorities, we're weighing all the different options there, Andrew. We've certainly had the conversations around the level of share repurchases and where they should be, where we repurchased shares at last quarter. The earnback on that is attractive. The multiple is attractive. So we're just trying to balance the different ones. But to your point, if we think about the TCE ratio right now approaching 10%, that's above where we'd like it to be. So we will have to address that over time as we think about different capital actions. Ideally, we'd like that to be about 100 basis points lower than it is today. So we're continuing to have those conversations and think about the best use. Operator: Your next question comes from the line of Charlie Driscoll with KBW. Charlie Driscoll: This is Charlie on for Kelly. Most of mine have been answered. Just kind of want to give you guys the opportunity to take a step back on credit here and talk about what you're seeing. It feels like NPAs kind of stabilize here, but just any color you can give us on what's in that portfolio? Any areas of concern if things do take a downturn? Just high level here. Jill Rice: So I'll just start by saying that when the portfolio is as clean as it is, you're going to see fits and starts of things moving in and out of adversely classified and NPAs. When you look at the nonperforming loans, relatively flat this quarter, but centered in consumer and small business and ag-related businesses. Average loan size of nonaccrual loans is less than $250,000 and the largest loan is approximately $3 million. So nothing that is extremely worrisome in terms of that portfolio. And in the substandard, we're early to downgrade. We work them as fast as we can. And so some of them may sit there a little longer because we're slower to move them on up and out. We don't want them bouncing around. But when you think about that portfolio, the changes when they've gone in there, it's idiosyncratic. There's no one industry that's raising alarms. And we just are beginning to see the impact of the higher interest rates and wage inflation and other economic factors strained certain business operations. Operator: That concludes our question-and-answer session. I will now turn the call back over to Mark Grescovich for closing remarks. Mark J. Grescovich: Great. Thank you, Tiffany, and thank you all for your questions and your attention today. As I stated, we are very proud of the Banner team in our first quarter 2026 performance. It's been a strong kickoff to the full year. Thank you for your interest in Banner for joining our call today. We look forward to reporting our results to you again in the future. Thank you, again, everyone, and have a wonderful day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the First Industrial Realty Trust, Inc. First Quarter 2026 Results Call. [Operator Instructions]. I would now like to turn the conference over to Art Harmon, SVP, Investor Relations and Marketing. Please go ahead. Art Harmon: Thanks very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our first quarter 2026 results and our updated guidance for 2026, please note that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, April 23, 2026. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter. Peter Baccile: Thank you, Art, and thank you all for joining us today. I'd like to express my congratulations and gratitude to our team for their efforts in getting 2026 off to an excellent start. We delivered some significant development leasing wins and signed a key renewal in Southern California for our largest remaining 2026 expiration. . We're also capturing significant value creation via a pending $131 million land sale that I'll detail shortly. Turning to the overall market. Industry fundamentals continue to steady. According to CBRE, national vacancy was stable at 6.7% at the end of the first quarter. Net absorption was a solid 43 million square feet modestly below new deliveries of 55 million square feet. New supply nationally continued to be disciplined with starts remaining muted at 39 million square feet. The national construction pipeline is 237 million square feet and highly pre-leased at 39%. In our portfolio, overall touring activity has increased for our availabilities with decision-making accelerating for space sizes under 200,000 square feet within our development portfolio. With respect to potential economic and demand consequences from the conflict in the Middle East, thus far, we've seen no discernible impact to leasing activity, but this is a risk we'll continue to monitor. From a portfolio standpoint, our in-service occupancy at quarter end was 94.3%, in line with our expectations. Since our last earnings call, we made further progress on our 2026 rollovers. We've now taken care of 61% by square footage and our overall cash rental rate increase for new and renewal leasing is 41%. This includes our largest remaining 2026 expiration, the 556,000 square footer in Southern California for which we achieved a cash run rate change that significantly exceeded the top end of our annual guidance range of 40%. Moving now to development leasing. We saw some broad-based success across several markets, inking 383,000 square feet in total. These included a full building lease for our 155,000 square foot first Wilson 2 project in the Inland Empire. We also signed several sub-100,000 square foot leases in the markets of Chicago, South Florida, Central Florida as well as Central Pennsylvania. There, we leased a 54,000 square foot space at the recently completed first phase of First Park 33 in the Lehigh Valley. As I noted in my opening comments, we're pleased to share with you that the ground lessee of 100 acres of land in the 303 quarter in the Phoenix market exercised its option to purchase the site for a sales price of $131 million. The proceeds are approximately $30 per land square foot, which is more than 3x industrial land values in that market. We expect this transaction to close in June. Before I turn it over to Scott, I would like to remind you of two upcoming property tours we will be hosting. On May 12, we will tour our Inland Empire portfolio, and on June 4, we'll be touring our Central New Jersey assets. Please reach out to Art Harmon to register or for more information. With that, I'll turn it over to Scott. Scott Musil: Thank you, Peter. First quarter 2026 NAREIT funds from operations were $0.68 per fully diluted share compared to $0.68 per share in the first quarter of 2025. The first quarter 2026 FFO per share was negatively impacted by $0.04 per share of advisory costs related to the contested proxy campaign that was initiated by landed buildings. . Excluding these costs, our FFO per share was $0.72. As we noted on our fourth quarter earnings call, FFO in the first quarter was impacted by higher G&A costs due to accelerated expense related to an accounting rule that requires us to fully expense the value of granted equity-based compensation for certain tenured employees. Our cash same-store NOI growth for the quarter, excluding termination fees, was 8.7%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, lower free rent and contractual rent bumps, partially offset by lower average occupancy. Summarizing our leasing activity during the quarter, approximately 2.4 million square feet of leases commenced. Of these, 300,000 renew, 2 million were renewals and $100,000 were for developments and acquisitions with lease. Before I discuss guidance, let me update you on the 3PL tenant on our credit watch list. If you recall, we were collecting rent directly from a subtenant while working through the collection process. We are pleased to announce that we signed an agreement with the 3PL that required a lump sum payment of approximately 60% of the balance Otis at December 31, 2025, which we received in March. In addition, the agreement calls for scheduled payments to pay off the remaining past due rent by the end of 2026. Now moving on to our guidance. Our guidance range for 200 NAREIT FFO is down $3.05 to $3.15 per share, reflecting $0.04 per share of incremental advisory costs relating to the land and buildings contested proxy campaign. 2026 FFO guidance range, absent these advisory costs is $3.09 to $3.19 per share, which is unchanged compared to our last call. Our other major operating metric guidance assumptions are as follows: average quarter-end in-service occupancy of 94% to 95%. This range now reflects approximately 1.3 million square feet of incremental development leasing and the 708,000 square footer in Central Pennsylvania, all to occur in the second half of the year. Cash same-store NOI growth before termination fees of 5% to 6%. Guidance includes the anticipated 2026 costs related to our completed and under construction developments at March 31, for the full year 2026, we expect to capitalize about $0.08 per share of interest. Our G&A expense guidance range is $42 million to $43 million which excludes the $5.6 million of incremental advisory costs related to the content proxy campaign. And our guidance assumes that the aforementioned forecasted land sale in Phoenix will close in June. Let me turn it back over to Peter. Peter Baccile: We are optimistic about the activity levels we are seeing across our availabilities. As always, our team is focused on taking care of our customers gaining new ones and sourcing and executing on profitable investments to drive long-term cash flow and value for shareholders. . Operator, with that, we're ready to open it up for questions. Operator: [Operator Instructions] The first question comes from Craig Mailman with Citi. . Craig Mailman: Peter, you mentioned that touring activities improved, velocity in the 200,000 square feet has improved. Could you talk about other of your peers have talked about the data center adjacent demand. Could you talk about how much of this improvement is that segment of demand versus just either e-commerce or other broader industrial demand? Peter Baccile: I mean, from what we're seeing, most of it is just broader industrial demand, 3PLs continue to be very active. Manufacturing has picked up, and that includes data center tech aerospace, et cetera. So that's picked up but it looks more like broader demand for industrial than completely data center-driven. . Craig Mailman: And then -- sorry, Scott, I know you had mentioned the Central PA is now second half. Could you just talk about kind of the activity you're seeing at Denver and Central PA and kind of the prospects today versus maybe on the fourth quarter call? Scott Musil: Craig, it's Scott. I think you mentioned that we pushed it to the second half, the 708,000 square footer. That's always been in the second half of the year for our 4Q guidance call. So I wanted to clarify that -- and then I'll turn it over to Peter for an update on that vacancy in the Denver development. Peter Schultz: Craig, it's Peter. So in Denver, we continue to have interested prospects for our large vacancy there. Activity or decision-making, I would say, for larger users has been slow. Limited competitive supply. There were just 2 buildings that came back that will compete with us 1 from a business failure from another landlord and another from a lease expiration. But we continue to have prospects. They're just very slow in their decision-making. Smaller midsized tenants in Denver continue to be pretty active. Moving to Pennsylvania. To the second part of your question, Pennsylvania probably is our most active or certainly one of our most active markets across the country in terms of prospect activity across a range of sizes in the industries, including Peter's comments about 3PLs being very active. We have several prospects for our 708,000 square foot building in Central Pennsylvania . All but one of which are full building users and all of those continue to be engaged in discussions with us. Operator: The next question comes from Nick Thillman with Baird. Nicholas Thillman: Maybe touching a little bit, Peter, just thought process on starting some new projects here given the land bank is a little bit more heavy concentrated in, say, the i.e., you did sign a lease there. But just how you're viewing the landscape and just thought process on overall activity and if that would warrant some starts here in the back half of the year? Peter Baccile: Sure. We continue to evaluate opportunities for new starts. We're not going to guide on volume, of course. -- and the markets that we're focused on continue to be markets like Dallas, Delaware, which is really the South Philly submarket. Lehigh Valley PA, we have opportunity, South Florida -- and of course, we're continuing to try to acquire additional opportunity in the way of land and some of the other markets that we've been in and most active recently. So -- that's -- those are the markets we're focused on. Yes, we do have very good sites in Southern California, but those markets still have a number of availabilities. So they are markets where we're going to be starting projects anytime soon. Nicholas Thillman: And then, Scott, maybe just on the 3PL tenant. What was the lift in same-store from that within first quarter? And then can you just provide an update on what the bad debt expectations are for the full year? And I know boohoo, from the standpoint of just the credit agreement that you're covered for the full year, but just any updates on that kind of as well. Scott Musil: Okay. So the 3PL tenant, no impact to same-store -- we never reserve that tenant back in 2025 when we discussed it being on our watch list. We just made you guys aware of it. We always thought it was collectible. . We updated you on this call with the big payment we received and the agreement we reached with the tenant. So again, there's no impact to FFO or same-store related to that. On boohoo, they continue to be current on their rent. They pay right at the end of the month, every month. And Peter, I'll turn it over to you to update them on the sublease potential in this space. Peter Schultz: Thanks, Scott. Boohoo continues to market the building for sublet. There are a declining number of available 1 million square foot plus buildings in Pennsylvania activity. As I mentioned a few minutes ago, continues to be very good at that level as well. . Amazon is about to ink 2 more million square foot plus buildings in Pennsylvania as of today. So that's in process. And there are relatively few options. There likely will be some more starts in that size range given the strength of demand, but boohoo continues to market the building for sublet. Scott Musil: And Nick, you had one other part of the question, our bad debt expense was $100,000 in the first quarter compared to our guidance of $250,000, and we kept our guidance the same in 2Q, 3Q and 4Q at $250,000 per quarter. Operator: And the next question comes from Nicholas Yulico with Scotiabank. . Viktor Fediv: This is ViKtor Fed on with Nick. So you posted really strong Q1, and it seems like year-to-date activity is also solid. So just trying to understand what's driving your decision to maintain your full year FFO and same-store NOI guidance instead of raising it? Scott Musil: Okay. So Nick, this is Scott. We did lease up 400,000 square feet of development leasing. It did have slightly positive impact on our FFO compared to guidance. That's being offset by a couple of things. One is we have in our guidance, the land sale that's expected to close in June. That's the lease piece of land. So there's slight dilution from that sale because we're assuming the funds are used to pay on the line of credit. And the other piece of it is like what we do every quarter when we update guidance. We look at all of our leasing assumptions and guidance and we update them accordingly, and we make adjustments as we see fit. So that's the reconciliation. Viktor Fediv: Got it. And then a quick follow-up on the disposition of land, -- so how does this transaction kind of inform the time line and strategy for unlocking like similar higher and better use value for the rest of your land bank? Just how many similar opportunities you might have within your portfolio? Peter Baccile: Yes. As you know, we have taken a pretty close look at every asset that we own, land and income-producing real estate properties. And -- we've narrowed it down now to about a handful of opportunities where we think we might be able to push forward and create significant value. We're in the process now of trying to secure power. That's a very lengthy process. And so we'll see where that goes. If we're successful with that, that would add significant value above and beyond the value of the industrial value for those particular assets. Operator: And the next question comes from Todd Thomas with KeyBanc. Todd Thomas: First, I just wanted to follow up on the Central PA vacancy. I was just curious where things stand with the tenants that you're engaged with the regarding a lease or a sale is a sale still a potential outcome that's being contemplated? Peter Schultz: Todd, it's Peter. All the prospects we're engaged with or for lease only today. Todd Thomas: Okay. And then you talked about the increase in demand from tenants looking for space 200,000 square feet or less, that generally aligns with some of the more recent development starts. And I'm just wondering what the holdback is from increasing starts here a little bit more meaningfully. What are you sort of looking for in order to increase development start a bit further? Peter Baccile: Yes, that's a market-by-market question. For example, as you know, we've got a number of availabilities in South Florida. We also have a number of opportunities to -- for new starts there. We want to make sure that we're not too concentrated with development in any one market at 1 time. And we just completed the project in the first phase of the project. in Central Pennsylvania. And that we've signed a small lease, a 54,000 square foot lease there. We'd like to see a little bit more leasing there before we begin Phase II. So it's really more of a concentration question. Operator: And the next question comes from Michael Carroll with RBC Capital Markets. . Michael Carroll: Scott, I wanted to circle back on your comments regarding the land sale. I mean how much rent is the JV paying on that land today? I mean just given the sale is 3x the industrial land value, I think that the corresponding cap rate would be pretty low and not dilutive to earnings. Scott Musil: Well, it's not in the JV. This is on balance sheet. And in the supplemental Mike, if you look, we disclosed the cap rate, it's about a 5.3% cap rate. We got a great rent from the tenant when we leased the land to them back a couple of years ago. Dave Rodgers: Okay. And then I just wanted to confirm, too, that you didn't change the expected timing of the 1.3 million square feet remaining development leasing in the PA space. Those are still the same timing as it was in the prior guidance that you provided in 4Q? I believe it was, but I just wanted to confirm that. Scott Musil: That's correct. The only difference is the development leasing in the fourth quarter was $1.7 million. Now it's $1.3 million, and the decline has to do with the 400,000 square foot of development leases that we signed. . Operator: The next question comes from Rich Anderson with Cantor Fitzgerald. . Richard Anderson: So on the release 556, Kay, can you go through the economics of that transaction? I don't know if that's been provided some place, if I missed it, I apologize. . Peter Baccile: So John, do you want to cover that? . Johannson Yap: We can really go through the lease rate or the economics. But I can tell you, it's long term, we're very happy about the long-term renewal -- the space is very critical to the tenant, and it significantly exceeds the high end of our rent change guidance of 40%. . Richard Anderson: Okay. So okay. up more than 40%. Is that right? . Art Harmon: Yes. Yes. . Richard Anderson: Okay. Second, I asked this question on EastGroup, I kind of buttered the question and see if I could do it better here. On the -- on the data center demand that you're seeing, I'm wondering how siloed that is in the confines of your broader business. I mean, to what degree is the data center demand sort of informing your core tenants, your kind of consumption-oriented tenants. -- and telling them I better act now because space is getting taken by this other way of using industrial space. And from your point of view, how does it change your strategy from a development point of view? Does it does First Industrial have to go about things differently depending on the customer, whether it's a supplier or it's a consumption-oriented or e-commerce or whatever, like I'm curious how this is disruptive in any way or it's just pure new demand, and that's -- it's as simple as that. Peter Baccile: We've talked in the past about what would be a catalyst for tenants to begin to make decisions faster. The decision-making now for a couple of years has been fairly slow, especially on the kind of larger spaces. And that -- the topic that you're discussing does create a cost to waiting. So it does help on the margin. The other topic, of course, is power. And while data centers need a lot of power, warehouses need their fair share as well. So that's also a topic. So these are both helpful on the margin to get tenants to make decisions sooner. But it hasn't really created a wave of new lease signings. Peter and Joe, do you want to add anything to that? . Peter Schultz: The only other thing I'd add to that, Rich, is there is a little bit of incremental demand as we commented earlier, from tenants that are supporting the construction of data centers and infrastructure. So we are seeing a little bit of that, but I wouldn't call it material to the overall demand profile. Johannson Yap: Just to add just a little bit more detail there. If you look at the data center development, there's a lot of infrastructure-related switch gear, semiconductor, hikes, electrical supply, a lot of that and that has to be manufactured and distributed. And data center involved businesses need space to either distribute that equipment start at equipment and fulfill that equipment in or out of place in the U.S. So at the end of the day, they need warehouses where they can store these goods or do some light assembly. So that is the incremental demand that both Peter have mentioned. But if you look at the Q1, '26 they are not the biggest users. In fact, I think they're growing, but that didn't even make the top 10. The biggest ones are the 3PLs, consumer goods, like Peter mentioned, broad-based construction and food and beverage. Richard Anderson: I guess just to finish the question. From your point of view, when do you need -- if you're building something spec, when do you need to know that you're going to have an alternative user in the building? And how does that inform your development process? Or can you just -- or do you not need to know necessarily any specific time frame? . Peter Schultz: That's not going to change our process or our philosophy around the quality location features and functionality that we build. . Operator: And the next question comes from Caitlin Burrows with Goldman Sachs. . Caitlin Burrows: Maybe it lines up with the markets you mentioned you'd be most interested in building. But can you go through which markets maybe three are strongest versus weakest today on demand and rents and what's driving that difference? Dave Rodgers: Do you want to talk about PA? . Peter Schultz: Sure. Caitlin, it's Peter. I would say, as I mentioned a couple of minutes ago, Pennsylvania is probably our most active market from a tenant perspective across really all size ranges reflective of the deal we signed in our just completed project in the Lehigh Valley. The activity we have on the 708, the activity from market participants for large buildings over 1 million square feet. Very, very active. We're seeing good activity in South Florida. We're seeing a little less activity in Nashville than we've seen in the last couple of years, but pretty tight from a supply standpoint. And as I mentioned, in Denver, slower decision-making from larger tenants. But overall, markets are performing well. along the East Coast, rents are stable and still trending up a little bit? So pretty good shape there. Jojo, you want to talk about the West. Johannson Yap: Yes. Thank you, Peter. If you look at gross leasing, Dallas, Houston and Phoenix have exhibited significant gross leasing. And that's been really continuing since the second half of '25 through Q1 of '26. What's most interesting is that gross leasing actually in the IE has been positive from Q-to-Q. And if you look at just activity from the large spaces over there, that's been pretty good in IE. But at the same time, in i.e., you have space ranges from 200,000 to 400,000 square feet is abundant in the market today that the -- basically the market has to digest antennas in that size range, 200 to 400 has quite a bit of choices. Caitlin Burrows: Got it. Okay. And then maybe to talk about SoCal a little bit more. So you mentioned that other leases you guys did with the rent spreads meaningfully above 40%. I guess, can you go through what you're seeing more broadly from a leasing spread perspective in SoCal, I imagine some are up, some are down. Is it mostly a function of lease vintage certain building space types act 1 way versus another. Just what's the range you're seeing there? Johannson Yap: Sure, sure. In terms of rent spreads, we will continue to see rent change, positive rent change in SoCal because when you look at it, it has come down from the high of Q1 2023. But the growth from recolte coal significantly still exceeds that. So over the next couple of years, we will still see positive rent change. In terms of actual Q-to-Q -- quarter-to-quarter in terms of rent growth, it's been flat. There are some deals that actually have shown some growth, but overall, it's been flattish. Operator: The next question comes from Jason Belcher with Wells Fargo. Unknown Analyst: Wondering if you could talk a little bit about your investment or capital allocation preferences in the current environment and how you're thinking about deploying capital for, say, acquisitions versus development versus share repurchase? Peter Baccile: Sure. Look, we're going to -- the primary driver of our growth will continue to be speculative development. We're also always in the market, making offers for opportunities to acquire cash flowing buildings in the past that you've seen the majority of our capital go into development. So maybe 20% -- 25% cash flowing buildings. And with respect to the share purchase opportunity, the share authorization Look, again, the primary use of our capital is going to be to support the growth of development and acquisitions. But there have been several market disruptions in the recent past where our stock price has been pretty negatively impacted to levels that belie fundamentals and our long-term prospects. And we have a very strong belief in the long-term value of our shares. So in those periods of dislocation we've concluded that would be value-enhancing to shareholders to opportunistically acquire shares. You can figure out, I suppose, on your own, what that means in terms of allocation to that versus the other 2 categories. Unknown Analyst: Great. And then just as a follow-up. Can you give us an update on how your embedded rent increases are trending and what you're incorporating into newly signed leases. And if you can touch on any shifts you've seen there in recent quarters? Christopher Schneider: Yes. If you look at where we're at on the completed 2026 deals that we've signed the overall bumps are about 3.6%. And if you look at the entire portfolio as far as in-place funds in 2026, we're at about 3.4%. So we're still holding pretty strong. Scott Musil: And if you're asking about the rental increase side of it, we're still consistent with our cash run rate change guidance of 30% to 40% for 2026 is I think we -- as Peter mentioned in the script, I think we're at about 41% for the leases that we've signed already in 2026. The reason that's a little bit higher is that 556,000 square foot renewal that Jojo spoke about that was significantly higher than the top end of our 40% range. Operator: Our next question comes from Vince Tibone with Green Street Advisors. . Vince Tibone: Some of the development leasing this quarter was for smaller suites within larger buildings. Curious if that reflects any change in strategy and kind of willing to carve up some of these boxes have taken a little longer to lease into multi-tenant spaces or suites? Or was that always the business plan for those properties? . Peter Schultz: It's Peter. Yes, that was always the plan for those buildings. So they're all designed for multi-tenant use. Certainly, over the last several years, we've been fortunate to see some full building users. . But we always design flexibility into our buildings. As I mentioned on the question about our building in Central Pennsylvania for 708 just to contrast that size range really good activity there that we're seeing today, and there's a lot of activity for larger buildings from tenants in Pennsylvania and some of the other big markets. So I wouldn't take that tenant demand is limited to under 200,000 we built those buildings because we felt those pockets were underserved, and we're seeing the results of that. The Lehigh Valley building that Peter mentioned, we just completed and we've seen good activity there and already have our first deal signed. Vince Tibone: No, that's really helpful color. I appreciate that. And then maybe staying on development a bit. It seems that the 1 million square foot plus box is where you're seeing the most favorable kind of changes in supply/demand dynamics right now in most markets. . I'm curious, are you willing to kind of go spec at that ultra-large size range? I know you've done some of that in the past, but generally have been a little smaller billing size, like if demand stays strong for this ultra large box, could you pivot or don't go a bit more larger ultra large box when you're doing more some of these new spec deals?. Peter Baccile: Sure. I mean we're always looking to maximize value of our land. We continue to seek out new land investment opportunities and some of which would involve large-format properties -- large-format buildings. It's part of the game plan. As you know, we do own some sites in SoCal that could accommodate very, very large format buildings. And we continue to evaluate those in light of the economic realities and leasing realities of that market. Operator: The next question comes from Vikram Malhotra with Mizuho. . Vikram Malhotra: I guess just first one to clarify, you're ahead on your development lease-up. You've got good rent growth, like rent spreads that you cited and good visibility. . So I'm wondering two things that you can maybe be more specific, like one, why not move up the occupancy guide specifically like what's the offset to not moving that up given the leasing? And then can you be more granular on like why the guide didn't go up because even what you described, it would still suggest you should be trending at least $0.01 or $0.02 higher. Scott Musil: Vikram, this is Scott. And -- so the answer is, yes, we did pick up a little bit of FFO due to the 400,000 square feet of development leasing we announced -- that was offset by two items. One had to do with the projected land sale that we have in our guidance, that's a lease parcel. So when we sell that land parcel, we lose the NOI and we're paying down the line of credit. So there's a little bit of dilution there. And then the other item has to do with just our normal process of going through our lease availabilities and our leasing assumptions on a quarterly basis when we update guidance. We made assumptions to some of those -- we did not make changes, though, to the 1.3 million square feet of development and the 700,000 square feet that we have in our guidance. So it's more some changes in some of the quarter leases. So those are the pieces. Vikram Malhotra: But just to clarify, the occupancy piece, I don't think the land would sale would impact that, right? Like what offset the occupant? Is it just you've assumed lower real . Scott Musil: We made some slight adjustments to some core lease-up assumptions as well. And also keep in mind that occupancy, we provide a range to it and we're comfortable with that occupancy range. Vikram Malhotra: Got it. Okay. And then just maybe stepping back, you announced the buyback, you're doing use property tours. There's a change in sort of the Board as well. I'm just trying to understand, like can you walk through kind of each of these actions, like what are you sort of aiming for? There's obviously in the background, the quasi, I guess, activist that's pushing I'm just trying to understand like all these different actions, like are they related? Are they independent? What are driving those three things? Peter Baccile: A lot of topics in one question. Okay. So the whole topic around the new director, as you may know, we unexpectedly lost a director last year who passed away. Again, unexpectedly. At that point, we determined it would be prudent to go ahead and start a process for a new one. That process was extended on two occasions. First, to consider the candidacy of the LNB nominee, Pass nominee and then again to consider the canadacy of the two individuals that the L&B nominee suggested we talked to. So that whole process was well underway long before those conversations began. With respect to the share buyback, Look, we took a look at what happened to our stock in certain periods, okay, such as COVID, such as when Amazon announced they were pulling back in April of '22. The tariffs impact on the shares, less so the war in the Middle East. And when you look at those time periods, you see significant falloff in share price when the fundamentals and long-term prospects for our shares did not. And those are times that will continue to happen with the volatility that we have experienced and will continue to experience. And so it just simply makes sense to be in the market supporting the long-term value of our shares during those time periods. That, again, is a conversation that we have had with the Board for a long time. I've now forgotten the rest of your question. Vikram Malhotra: Property tour . Peter Baccile: Property tours. I would say, look, yes, we want to do whatever we can to get the word out on not only the transformation that we have completed, but also what's going on right now in some of our markets, we want you guys to be able to get to know our market leaders it just makes sense to take the opportunity to enhance shareholder engagement. . Operator: The next question comes from Brendan Lynch with Barclays. Brendan Lynch: You mentioned winning concessions contributed to the strong cash NOI growth in the quarter. Can you provide some more additional color on the current trends that you're seeing with concessions and what we should expect going forward? . Peter Schultz: Yes, Brendan, it's Peter. Generally speaking, we're seeing rent concessions at half of 1 month to 1 month of rent per year of term. And I would say that's drifted upward a little bit, which is more of a market by market and in some cases, asset by asset, and that's on new leases. TIs have been roughly the same, just depends upon the specific requirements of the tenant. Johannson Yap: And renewals have been pretty steady, still very low renewals and TIs -- in over renewals. . Brendan Lynch: Okay. Great. And another question. We've seen a lot of discussion recently about how brokers are going to be disintermediated by AI or at least the broker fees are going to be pressured lower -- what is your view on how that cost dynamic will evolve for First Industrial and for the industry in general going forward?. Peter Baccile: View on that, Joe. Johannson Yap: Yes. There's -- we don't see material impact right now on AI in terms of brokerage services. Again, when we hire brokers, I mean, we feel we hire the best. They bring value to the table in terms of our leasing efforts. We've seen more very quick flow, efficient flow of information back and forth in the industry. but brokers play a key role in the industrial leasing business. Peter Baccile: Yes. AI is going to provide a lot of data maybe these transactions happen more quickly for that reason, but intermediaries do bring value. And those negotiations, it always helps to have some distance. And we don't see the value of that community lessening over time because of AI. Operator: [Operator Instructions] Our next question comes from Michael Mueller with JPMorgan. Michael Mueller: I guess first, are the light assembly data center users that you've referenced -- are they generally shorter-term lease takers of space? Or are you seeing long-term leases there? And I guess at the completion of the data center, are they expected to kind of stick around or just that's the end of the lease may go away and space goes to a different type of user? Johannson Yap: Let me give you some color there, Michael. The light assembly, usually, they're long -- midterm to longer-term leases because the assembly of the equipment -- it depends on how much data center development, a particular tenant is fulfilling. And if you have a multi-facet for example, development going on that the tenant is falling, that would take anywhere for a couple of years to long term as much as 10 years. So it really depends on what they're fulfilling. It also depends on how many regions that particular prospect will be serving. As you know, data center development and data center buildings take a longer time than industrial buildings. So that's another piece of color there. But yes, so in terms of data center development, we cannot predict. You know as much as we do, if you look at the industry news and how much the hyperscalers 1 we will put out in the marketplace, and that's pretty -- it seems like a pretty long term, pretty huge dollars. Michael Mueller: Got it. Okay. And then just a quick second one. Are there any notable disposition expectations beyond the Phoenix sale that's expected to close this year or just expected to be nominal. Peter Baccile: No, there's really nothing else in the hopper that looks like that. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Bacilli for any closing remarks. Peter Baccile: Thank you, operator, and thanks to everyone for participating on our call today. You've got -- if you have any follow-ups from our call, please reach out to our Scott or me, and have a great day. . Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings and welcome to Comcast's First Quarter 2026 Earnings Conference Call. Please note this conference call is being recorded. I will now turn the call over to Executive Vice President, Investor Relations, Ms. Marci Ryvicker. Please go ahead, Ms. Ryvicker. Marci Ryvicker: Thank you, operator, and welcome, everyone. Joining us on today's call are Brian Roberts, Mike Cavanagh, Jason Armstrong and Steve Croney. I will now refer you to Slide 2 of the presentation accompanying this call, which can also be found on our Investor Relations website and which contains our safe harbor disclaimer. This conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, during this call, we will refer to certain non-GAAP financial measures. Please see our 8-K and trending schedule issued earlier this morning for the reconciliations of these non-GAAP financial measures to GAAP. With that, I'll turn the call over to Brian. Brian Roberts: Good morning, and thanks, Marci. We're off to a good start. We've taken a hard look at both where the market is and how we're performing and made some real changes. With our new leadership structure, Mike as Co-CEO and taking the day-to-day lead on improvements and Steve off to a fast start fully running connectivity and platforms, I really like our team. Steve has brought in key new talent and is quickly restructuring a lot of the operations. And equally important, we have better aligned everyone across the entire company around a clear set of priorities with a sense of urgency to work in harmony toward the important company-wide initiatives. We've gone top to bottom in the businesses, looking at how we operate, how we serve customers and where we need to reset. As you'll hear from Mike, Jason and Steve, it's still early, but the initial results are encouraging. We're starting to see signs that our efforts are working, and we're shifting the businesses in the right direction. I'm also convinced that we have absolutely the best products in each of our markets. So the opportunity in front of us now is making sure customers really see that and feel it in every experience and touch point. There is a real energy across the company now to work together in different ways to take advantage of the big moments we have, whether it's the mobile launch we just announced, the Olympics, the Super Bowl or Xfinity's new membership program. These are opportunities to show up for consumers in a way that only Comcast can and connect that across all of our growth businesses. Net-net, I feel encouraged about where we are. We've got the right leaders. We're making meaningful but important improvements, and I feel good about these early results. Mike, over to you. Michael Cavanagh: Thanks, Brian, and good morning, everyone. Our focus as we begin 2026 is on executing against the priorities Brian just highlighted. We are just 1 quarter into the year, but are pleased with the progress, so let me highlight some of the first quarter achievements. First, despite what remains an incredibly intense competitive environment, broadband net losses improved by more than 100,000 year-over-year, the first year-over-year improvement since the fourth quarter of 2020. We also delivered the best wireless net additions of any quarter in our history. Together, these are early signs that the strategic pivot we've made in our connectivity business is underway. Second, in Parks, another area of consistent and disciplined investment, we generated healthy underlying EBITDA growth driven by robust consumer demand at Epic Universe. And third, we had a real company-wide moment with legendary February. We outperformed across audience, engagement and monetization. And importantly, we leveraged this massive reach to market our connectivity products at scale, a proof point that when we really lean in, we can move the needle. Stepping back, this was our first quarter post VERSANT, and we're already seeing the benefits of a more focused portfolio. Our 6 major growth drivers now represent well over 60% of total company revenue, up from 50% when we introduced this framework 3 years ago, supported by consistent organic investment and deliberate portfolio actions, including the spin of VERSANT Media. Now going deeper on our Connectivity & Platforms business, the competitive environment remains intense. Fixed wireless continues to market aggressively across our footprint. Fiber overbuild is moving at a rapid pace and promotional convergence offers remain elevated. We're not assuming this gets easier anytime soon. Against that backdrop, we're investing to compete effectively, whether it's against fixed wireless, fiber or any other alternative such as satellite. To do this, we're staying focused on what we can control and what matters most to consumers, exceptional connectivity powered by the most reliable WiFi, best-in-class products and a simpler, more transparent experience that's easy to buy, activate and support. Our confidence is building in the strategy and actions that are underway, including the execution of our go-to-market shift that we amplified through the reach of our sports portfolio. We aligned the full company across Xfinity and NBCUniversal around clear offers, focused messaging and sharper targeting, and we saw that combination contribute to improved broadband and wireless performance this quarter. We also used these tent-pole moments to launch real-time 4K, a meaningful differentiator, enabling us to deliver live sports with lower latency and at a higher quality than our competitors. And we continue to see our customers consume more video online, which is driving network demand higher with monthly data usage on our network up 10% this quarter. Given the scope of the changes we've made across the business, the early signs of progress are: connect volumes are up for the first time in more than 4 years, voluntary churn continues to improve and NPS is moving in the right direction. Customers are responding to our go-to-market strategy with roughly 40% of our residential broadband base already on our simple, transparent packaging and the majority still expected to migrate by year-end. Wireless is a central lever in our convergence strategy. It increases engagement, reduces churn and strengthens customer lifetime value. Wireless accelerated meaningfully this quarter even as the competitive environment remains intense. And we like what we're seeing both in the momentum we're generating and in the quality of the customer relationships we're building. Our free line offer continues to perform well and is doing exactly what we intended, building awareness, increasing attachment and expanding the top of the funnel across our broadband base. We're managing that base of customers with a clear life cycle playbook focused on usage, engagement and the overall product experience with the goal of converting a meaningful portion to paid relationships starting in the second half of the year. At the same time, we're gaining traction in premium wireless. We launched Premium Unlimited a year ago to broaden our offering for customers who want a more feature-rich mobile experience, including unlimited talk, text and data in the U.S. and internationally. Since launch, adoption has increased meaningfully. Uptake is now around 30% and the premium base is up roughly fivefold. And we're building on that momentum with Mobile+, our new premium plan we launched just yesterday. Mobile+ includes everything customers already value and adds lifetime device protection for all devices. We're the first in the industry to include this feature at no additional charge as part of the core offering, a disruptive shift away from the traditional pay-per device model used by incumbent carriers. Mobile+ strengthens our value proposition and reinforces our product and pricing advantage. Shifting to content and experiences. Legendary February was a remarkable 17-day stretch for our Media business. More than 225 million Americans watched across the Milan Cortina Winter Olympics, Super Bowl 60 and the NBA All-Star game. That scale drove record advertising sales, roughly $2 billion over the 17 days and helped accelerate momentum at Peacock. We added 2 million net new subscribers in the quarter with revenue up more than 70%, putting Peacock on track to approach profitability for the first time next quarter. The Olympics continue to be a meaningful differentiator for us. Milan Cortina was the most watched games since Sochi, averaging 23.5 million viewers. Peacock streamed a record 16.7 billion minutes, more than double all prior winter games combined. And NBC closed out prime time #1 on the closing ceremony night, marking our 143rd consecutive Olympics night at the top. The Super Bowl averaged 125.6 million viewers, the most watched in our 100-year history and the second most watched program ever. And the NBA All-Star game delivered its largest audience since 2011 with 8.8 million viewers across NBC, Peacock and Telemundo peaking at 10 million. Turning to Studios. We're off to an exceptional start with Nintendo and Illuminations, the Super Mario Galaxy movie, which has crossed $750 million globally, the biggest title of the year worldwide, and the franchise has now grossed $2 billion at the global box office. We have a strong lineup for the rest of the year with Steven Spielberg's Disclosure Day, Illuminations' Minions and Monsters, Christopher Nolan's the Odyssey and Universal's Fuccer & Law, among others. Lastly, at parks, Orlando continues to perform extremely well with Epic driving strong resort attendance and higher per cap spending. We're continuing to invest behind a pipeline of growth. This year, we opened Fast and Furious Hollywood Drift in Universal Hollywood and our first-ever kids park in Frisco, Texas this summer. Internationally, our U.K. park is progressing through final planning approvals as site stabilization begins, and we're building on our strength in Japan with immersive Pokemon experiences. With that, let me turn it over to Jason. Jason Armstrong: Thanks, Mike, and good morning, everyone. Let me start with a high-level overview of our consolidated results and then get into more detail on our businesses. Before I begin, I want to note we recently issued updated pro forma trending schedules, which we filed in early March. The most significant change is the removal of VERSANT from our financials, along with a few smaller updates within Connectivity & Platforms and Content & Experiences. As a result, when I refer to our results today, all year-over-year comparisons will be presented on a pro forma basis. In the first quarter, revenue increased 11%, in part benefiting from NBCUniversal's highly successful airing of the Milan Cortina Winter Olympics and the Super Bowl. Excluding these events, revenue was up low single digits. As we've discussed, this is an investment period for us. We continue to execute our broadband go-to-market pivot and customer experience improvements with the goal of stabilizing our customer base and returning the category to revenue growth over time. At the same time, we're absorbing the full cost of the first year of the new NBA contract in Content & Experiences, and this quarter included the peak dilution from that. As a result, adjusted EBITDA declined 9%. Earnings per share were $0.79, and we generated $3.9 billion of free cash flow in the quarter, of which we returned $2.5 billion to shareholders, including $1.25 billion in share repurchases. Now turning to our businesses and starting with Connectivity & Platforms. Before diving deeper into the results, I wanted to begin with a high-level overview and share some perspective on the direction we're heading. As we've consistently emphasized, we made a decisive and strategic pivot in this business to position ourselves more competitively within the evolving broadband market. This transformation hasn't just been about minor tweaks. It's been a comprehensive shift. We prioritize simple and transparent pricing. We've dialed up our investments in both current and future customer experience. and double down to ensure our network and product offerings remain best in class. Another significant change has been how we're leveraging wireless to support and enhance broadband, far more expansively than we have in the past. The encouraging news is that the early indications suggest this pivot is not only gaining traction, but is absolutely the right move. Our new go-to-market offerings are clearly resonating with customers. For instance, this quarter, we saw a notable improvement in broadband performance, narrowing our losses by over $100,000 versus the prior year, while simultaneously achieving record wireless net additions accompanied by a meaningful improvement in how our customers perceive and rate us as measured through Net Promoter Scores. Of course, with any major strategic shift, there are inevitable costs, simplified pricing and the inclusion of bundled free wireless lines have put pressure on broadband ARPU, and as a result, have also weighed on EBITDA growth, which is evident in our 4.7% decline this quarter. We were transparent about this last year, flagging that these pressures would intensify into the early part of this year, including the quarter we're reporting now and some incremental pressure in the second quarter. That expectation remains unchanged. However, we anticipate some relief as we exit this year, particularly as we begin to lap the initial investment pressures and monetize the free lines at the 1-year anniversary mark of the start of our Freeline rollout. Looking ahead, like others in the industry, a key metric for success is increasingly shifting toward consumer purchase intentions around bundled broadband and wireless offerings. To support this, you'll notice in the trending schedules we published in March, we started to break out wireless revenue into service and equipment revenue. And we're now grouping broadband revenue and wireless service revenue together into a new convergence revenue view. Our convergence ARPA, or average revenue per account currently stands at roughly $85. For context, our telecom competitors are roughly double this amount on the same metric. This really underscores the significant growth opportunity in front of us, especially as we stabilize broadband and look to accelerate growth through wireless. Now let's get into more details on the quarter, starting with broadband. Broadband subscriber losses improved by 117,000 year-over-year to 65,000. This improvement reflects traction from our new go-to-market strategy, including improved connects year-over-year, lower voluntary churn, a step-up in take rates on gig plus speeds and the continued uptake of our free wireless line offer. In addition, we leaned into the unique moment that legendary February created across our company by amplifying Xfinity brand awareness on a national platform with particular emphasis on gig speeds and our 5-year price guarantee. We estimate these specific offers accounted for over half of our year-over-year improvement in subscriber losses. Broadband ARPU declined 3.1%. This is consistent with the pressure we signaled on our fourth quarter call, and reflects the absence of a rate increase at the beginning of the year, our new go-to-market pricing, including the legendary February offers and the impact from strong adoption of free wireless lines, which initially has a dilutive impact on broadband ARPU. We expect incremental pressure on broadband ARPU for another quarter until we start to anniversary early go-to-market transition efforts as well as the impact of free lines starting to roll into paying relationships which will happen in greater volumes as we exit this year. Convergence revenue declined 2.8% with convergence ARPA down 0.8%, reflecting the pressure on broadband revenue and partially offset by 15% growth in wireless service revenue. We added 435,000 net wireless lines, our strongest quarter on record with nearly half of our residential postpaid phone connects coming from customers taking a free line. We're deliberately leaning in as our free line offer expands awareness and ultimately widens the base of customers we can drive into paying relationships. We also continue to see a strong uptake in our new premium unlimited wireless plans, accounting for about 30% of our postpaid phone connects reinforcing that we're competing effectively in the higher-value segment of the wireless market. We ended the quarter with 9.7 million total lines at 16% penetration of our domestic residential broadband customer base. Looking ahead, in the second half of the year, many of the free lines will come up for monetization Early engagement and usage trends are encouraging in that respect, and we expect to convert the significant majority of free lines into paying relationships, which should provide a tailwind to Convergence revenue and ARPA growth over time. Turning to Business Services. Revenue grew 6% and EBITDA increased 4%. Growth continues to be driven by strong momentum at our Enterprise Solutions business as we add customers and deepen our relationships through a strong mix of advanced solutions. And looking ahead, we're excited to expand our business mobile relationships through the launch of our T-Mobile MVNO, which adds another differentiated capability to the portfolio as we compete for business customers at every level. In content and experiences, there are a few items I'd like to highlight. At Theme Parks, we delivered another quarter of strong growth with revenue up 24% and EBITDA increasing 33%. Adjusting for the roughly $100 million of preopening costs at Epic in last year's first quarter, Parks' EBITDA grew over 7%. Under the hood, we had very strong growth in Orlando, where Epic continues to drive higher per cap spending in attendance across the entirety of the resort. We are really pleased with Epic's performance since its launch. It's expanding the overall guest experience and helping to position Universal Orlando as a true weeklong destination. Partially offsetting strong growth in Orlando is some pressure at our other parks. Specifically, in Osaka, we're seeing some impact from China-related inbound travel trends, which is putting pressure on attendance. And in Beijing, we're navigating a more challenging macroeconomic environment. Turning to media. Revenue increased over 60%, including strong contributions from the Milan Cortina Winter Olympics and the Super Bowl, which together drove $2.2 billion of incremental revenue. Excluding those events, Media revenue growth remained strong, up 13%, driven by 21% growth in distribution and 5% growth in advertising. The strong growth in distribution was driven by Peacock with paid subscribers of $5 million year-over-year and $2 million sequentially, reaching $46 million. In advertising, underlying demand remains solid, supported by a record upfront and a strong sports lineup, including the NBA. In the second quarter, we'll continue to benefit from sports, including the NBA playoffs and the FIFA World Cup on Telemundo and Peacock. Media EBITDA was a loss of $426 million, consistent with the dilution we've been expecting in the first season of the NBA as we straight line the amortization of these rights with quarterly seasonality driven by game counts. The first quarter was the peak volume with about 50% of the games played and the corresponding costs flowing through. So as a result, this quarter represents our peak EBITDA dilution from NBA costs. This dynamic flowed through to Peacock as well, where EBITDA losses were $432 million. Importantly, we expect the set up to improve from here, with second quarter reflecting a meaningful inflection point with Peacock expected to approach profitability. So stepping back, the first quarter was the high watermark for NBA-related dilution for media, and we feel good about the direction from here. At Studios, we had really strong growth this quarter. This was in large part driven by content licensing deals led by the successful renewal of the office on Peacock. While that benefits Studios this quarter, it drives larger eliminations at the C&E level. Now let me wrap up with free cash flow and capital allocation. In the first quarter, we generated $3.9 billion of free cash flow. We did that while continuing to invest meaningfully across our businesses, including broadband go-to-market pivot and customer experience work in connectivity, further strengthening our domestic broadband network and onboarding the NBA. Stepping back, our capital allocation framework has been and will continue to be balanced and consistent. With the VERSANT spend now complete, our portfolio is more streamlined, and our capital priorities continue to start with investing organically behind our growth drivers. We ended the quarter at 2.3x net leverage. Just as a reminder, leverage is calculated on a 12-month trailing basis. So as VERSANT exits the calculation over the course of this year, we expect leverage will tick up a bit. And as I said last quarter, our intention is to bring leverage back to 2.3x. And we continue strong capital returns to shareholders. This quarter, we returned $2.5 billion, including $1.25 billion of share repurchases and $1.2 billion of dividends. And over the past 12 months, we've returned $11 billion to shareholders, which includes a significant and well above market dividend yield, along with strong and methodical share count reduction. This balanced approach has served us well, and it continues to guide how we allocate capital as we execute through this transition period. With that, let me turn it over to Marci for Q&A. Marci Ryvicker: Thanks, Jason. Operator, let's open the call for Q&A, please. Operator: [Operator Instructions] Our first question today is coming from Craig Moffett from MoffettNathanson. Craig Moffett: I guess the obvious place to start is with broadband. Your broadband ARPU rate of decline actually moderated sequentially a little bit. I wonder if you could just elaborate a little bit on how much lower do you think broadband ARPU might have to go to maintain the kind of stabilization that you've seen? And then if you could just broaden the lens perhaps just to talk about where the improvement came from, was it relative to FWA? Was it relative to fiber? Was it relative to all of the above? Steven Croney: Craig, it's Steve. Thank you for the question. As Jason said and we previously have highlighted, broadband ARPU pressure would intensify in the early part of the year. We do see some incremental pressure in Q2, but we do expect relief as we exit the year, and we talked about it. The primary drivers of the decline include the absence of a broadband rate increase, free wireless lines and migration to our simplified pricing I talked about it earlier, we were not competitive enough. We need to adapt our approach and pivot the business, and our focus is on getting to the other side of as soon as possible. We'll talk about a few of the areas where we see improvement. Our continued mix shift to higher speed tiers. We're seeing a significant improvement in our gig plus tier speed mix. Our higher mobile attachment, '25 was our best year in mobile net adds -- line net adds that we've had and it's our -- Q1 was our largest quarterly net adds on record. And we're seeing the early cohorts of our free line conversion, and we expect significant majority of those to convert to paid relationships that will accelerate in the back half of the year. Mike touched on in his script, we've launched new premium products, and we're very happy with the sell in there on the mobile side. And we do maintain our pricing flexibility. So we can adjust the rate and acquisition pricing as the market evolves, and we're lapping the period and we will have a period of elevated transactional activity tied to plan migrations, and we expect those volumes to normalize over time and that will reduce our dilution going forward. So I think we will see improvement as we exit the year this year. And in reference to your second question, overall, I touched on it in the last call, 4 key objectives I'm focused on. It's improving broadband performance year-over-year driving higher mobile penetration, creating better customer outcomes and returning to revenue and EBITDA growth. And we're really encouraged by Q1. We did see benefit across all of our competitive environments, and we did see both tech and disconnects improve. Jason highlighted, though, half of the about -- a little over half of the improvement was tied to our investment in Legendary February. That was a unique opportunity for us, and we really took advantage of it. But foundationally, our new pricing and packaging is resonating, and we're supported by clear messaging, better creative, driving greater awareness across our prospects and our base. And definitely, we're leaving no stone unturned. I'm challenging everything we're pushing hard. A few examples of that are, we're leveraging our data more effectively than we ever have; we're using AI to improve transactional outcomes; we're currently running hundreds of models with thousands of attributes to optimize our acquisition or upsell or win back our retention; and we're enhancing our marketing tech stack to enable greater customization and personalization, leveraging those models to drive better outcomes. We'll continue to focus on the customer experience, and we're driving improvements across the entire customer life cycle that includes simplified buy flows, simplifying our activation, focusing on same-day order to activation with broadband, improving our unassisted channels, taking out customer effort and continuing to improve reliability across the entire network and very, very pleased with the results where we've upgraded the network. So we're seeing early and measurable progress in NPS. And we're also hyper focused on sales effectiveness. We hired a new head of sales, and that individuals focused on sales development, training staffing models, compensation models and tools and once again, pleased with the early results there. So I'd say in summary, we're building a more stable customer base with our new pricing and packaging. We're seeing higher gig tier mixes, accelerating mobile attach and higher NPS, all of which will benefit us into the future. Craig Moffett: Steve, that's super helpful. Can you just comment on the FWA versus fiber part of that? Steven Croney: Yes. Like I said, we saw improvement across all of our competitive environment. Michael Cavanagh: And Craig, I would just add to that, I think to step way up, the improvements equal parts, execution and then leveraging the totality of this company. On the execution side, as Steve said, I said in prepared remarks, our connect activity was better, our churn activity was better, customer perception of us was better. So all sort of taking place in the quarter are expected to repeat, amplifying across the company through legendary February, that a little bit more of a one-off event. We'll obviously look for opportunities to do that again in the future, but nonetheless, put the full weight of the company behind us in the quarter. Operator: Next question is coming from Michael Rollins from Citigroup. Michael Rollins: I'm curious if you could expand further on some of the success you're seeing in wireless in terms of kind of moving up into larger families, you mentioned the business opportunity that's coming up with new MVNO. And also just within this context, what is Comcast doing to simplify the migration process for customers. And if carriers start to pull back on subsidies, your competitors do less on that. Does that help you get a better hit rate to move customers over to Xfinity Mobile? Steven Croney: Good question, Mike. I strongly believe we have the right to compete and win when it comes to mobile. We have 2 strong MVNOs covering consumer and broadband. We have largest converged footprint. We have the nation's largest WiFi network. We've talked about it. We offload about 90% of XM traffic, and we have lower acquisition costs because we're selling to our base. continued operational focus, Q1 was great. Our largest line net add quarter since launch. We've really rallied the organization around mobile. And this has helped create awareness within the organization. We're mobile-led and really helping with our sales effectiveness. We're also doing a much better job in life cycle management. So we're selling more to our existing customer base. We're selling more to our mobile customer base. About 30% of our connects line net adds are coming from existing mobile customers adding more mobile lines, which is really important for us. We're focused on continuing to improve the customer experience. We have a long way to go here, but we've made great strides improving the customer experience once again, across the entire customer life cycle. And has been the case the last few quarters, about 50% of our lime connects are free lined, and we're really, really pleased, as I touched on the last question with the early retention rates for that free line roll-off. And then on top of that, have the TMO MVNO, which will be launched in the near future, bringing mobile availability to our mid-market and enterprise customer base. So -- and then in reference to your question on the subsidy side, we primarily compete on price and value. So really, really focused there. And we will use subsidies selectively, new product launches, key moments. But that's an area that we'll continue to watch and target -- also target throughout the customer life cycle. And then the last one, which Mike touched on a bit, is our premium plans. So we launched that about a year ago. And we really were not competing well for those that wanted to feature rich product. And we've done a great job. About 30% of our connects are premium customers. And as of yesterday, we launched a new premium plan that has device protection included. We think that's a significant differentiator. No one else in the marketplace is doing that. So not only will it help our premium upsell, it should also help our conversion rates when it comes to mobile. So overall, when you look at it, I think our MVNO relationships, it's a capital-efficient model, we have a cost structure that supports profitable value proposition and it's really resonating with our customers. And with about 16% penetration, we have a long runway ahead of us, I'm very bullish. Michael Cavanagh: And it's Mike. I'll just pile on. I think if you look at the journey over multiple years in mobile, it's been a steady compounding effect basically of improving products from -- by the gig and a focus on a certain type of household at the beginning to now, we're fully competitive right up to the top of the need of a household at the higher end. Plus the passage of time, I think and Steve's bringing the focus to the whole organization of attaching mobile and using free lines and being hyper focused as we're in this year of the processes and life cycle management, they mentioned to make sure we do a great job converting to paid because, as you said, once we see that happening, we're doing a nice job getting paid mobile customers to add more lines down the road. So that all is -- this is not a fleeting moment for us these past few years. I think we've been steadily building and letting the effect of our progress in mobile compound itself and it's going to continue to be a big area of focus for Steve and his team going forward. Operator: Our next question is coming from John Hodulik from UBS. John Hodulik: Two, if I may. Maybe first for Steve. From Jason's comments, it sounds like after the benefit of the year-over-year improvement in broadband subs is due to the sort of legendary sea promotions and the half was sort of organic based on some of the efforts you've had. If we expect those efforts to sort of gain more traction through the year. Can we expect the high-speed data subscriber losses for the year to improve versus last year? That's my first question. And then second, maybe for Brian. We spent about a year talking about media consolidation. But I think the conversations have shifted towards cable consolidation. Just what are your thoughts on the potential landscape and maybe regulatory framework and sort of just backdrop on further consolidation in the cable industry. . Steven Croney: Thanks for the question, John. Yes, I would say we do expect improvement year-over-year, but more than half of the benefit in Q1 was tied into the legendary February. We really leaned into that from a marketing investment and an offer investment. It was like I said, it was a great moment, and we took advantage of it. Brian Roberts: Let me start and maybe Mike wants to -- this is Brian, jump in as well. Look, really pleased, as I said in my opening, with the energy, I think you can feel it in the team the broadband business, I think, frankly, we've corrected and perhaps way too much negativity. So I think we have a great company and we're going to operate even better in the months and quarters ahead. That's the plan of record. Part of that is believing in the assets you've got, we've made the change with VERSANT, and I think we feel really good about and comfortable. But as we said on the last call, and I think we've always thought if we can find ways to create shareholder value, the bar is high, but we're always focused on looking at those kind of creative situations. And -- but that said, I also just really do like the direction of the company and don't want to create a lot of distraction. But Mike, what are your thoughts? Michael Cavanagh: Yes, I think you said it. I think the opportunity we have, given the negativity around the cable segment and the changes we've made and the progress we're seeing and the road map we see ahead, I think, is a rich path to drive value. I think we're undervalued, frankly, and the negativity on the business is something we need to work on changing people's sentiment towards a period full stop. And I think doing that by continuing to run the play that Steve just articulated really well is Plan A. I think, in addition to that, we've got plenty of opportunities and have worked with others in the industry to partner around video or mobile or otherwise. So there are ways to benefit ourselves through scale in partnership terms, and we're open to doing that. And then ultimately, there's always bigger ideas that, as Brian said, open to strategic possibilities to create value. But we've got -- the focus is really on what we can do ourselves and the list is long, and we're underway on that. Operator: Our next question is coming from Jessica Reif Ehrlich from Bank of America Securities. Jessica Reif Cohen: I guess turning to NBCU. As you also said, your assets are more streamlined following diverse spend, and you've locked in basically all major sports charge like everything at this point. So as you look at your key assets in Universal Studios, Peacock, Theme Parks, they all seem strategically very important. How are you thinking about allocating capital across these assets [indiscernible], what gives you confidence the returns will become more visible in your consolidated earnings over time? And you said Peacock will be profitable next quarter. But is that -- should we expect consistent profitability? Michael Cavanagh: Sure. It's Mike, Jessica. So I think zooming out, I think we feel great about NBCUniversal, both it's -- how it's set up post VERSANT with each business that's within it, Parks, Studios and Media set up to be growers. It's our -- you look at parks, and we're really pleased with the big initiative last year was Epic. And ahead of us is a U.K. park and the expansions of the kids parks in the U.S. and more to come. So I think the creative plans inside our Parks business to keep driving growth, and that's one of our 6 important growth drivers is a good one, and we love that business, and we'll allocate -- recycle the capital that they create back into the business over time. to keep growing that business and creating value above our cost of capital. So no question that, that's a leader. Commented on Parks earlier -- I mean, on Studios earlier in the script, in the call. I think we're off to a great start with Mario, and we've got several great further movies coming out the rest of this year. We've been #2 in the box office, top 2 for the last 3 years, and I expect that to continue under the great leadership that we have, and that's a part of the flywheel of creating franchises and feeding parks. And fits right into what makes a media company great alongside parks. And then on the Media side, now that we are post VERSANT in first quarter out of the gates, we are very, very focused on making that business a business that the combination of NBC Broadcast and Peacock. And as Jason said, Peacock should approach profitability in the second quarter. And then because of our straight-line amortization of NBA rights as we look to the next season, so to speak, of NBA lapping itself I think the prospect for ongoing and durable profitability for Peacock is what we have our sights set on. And that, combined with really putting it together with the linear media business in is how we're going to manage the media business going forward is what is the revenue opportunity as we look at consumers and what they're willing to pay across the landscape that they're faced with, how broadcast sustains, which I think we feel very pleased when you look at the power broadcast in this legendary February and what it means to marry great broadcast together with a stream platform like Peacock. So I think there's obviously work to do on all those fronts. But I think we have a very elegantly designed media business where we've gotten it focused to 3 parts, Parks, Studios and Media that are going to work together for years to come, and we're going to be focused on driving value and putting capital to work against the opportunities that we have there. Operator: Next question is coming from Sean Diffley from Morgan Stanley. Sean Diffley: You had alluded to satellite being kind of a new thing to be concerned about. I was curious if you could compare and contrast the fixed wireless learnings versus the satellite learnings. Do you expect that to change meaningfully the way that regulators could look at the definition of the market? And to John's question earlier, potentially have a more favorable view of larger scale M&A in the cable sector. Steven Croney: Thanks for the question, Sean. Our assumption is that the market will stay highly competitive, fiber, fixed wireless and now satellite is getting more promotional. And what we focus on is what we can control and what matters for the customer anchored by the following. We have a great network that is on par with fiber and it does exceed the capabilities of fixed wireless and satellite, both of which are capacity constrained. We're focused on price value. Our new go-to-market strategy and free wireless lines is really resonating in the marketplace. We have a differentiated WiFi experience that ranks #1 for reliability in our footprint, hugely important for the customer. and we're improving the customer experience. But the tremendous amount of focus that we have, we are taking a vulnerability and I believe, creating an opportunity in an area where we can win. If you take it from the customer's lens, what the customer is solving for is broadband is a product that's incredibly relevant to their lives, with consumption growing about 10% year-over-year, and that lends itself to prioritizing a WiFi experience that leans into speed and reliability. And we stack up incredibly well there. Other customers don't prioritize simplicity. And this is where Fixed Wireless did really well. They changed the game on ease of install, simple pricing. As I touched on earlier, that's exactly where we've been investing. And I see no reason why we can't win there as well. So to me, if you put all these together, I feel we have a great hand. We either have a leadership position or we have a path to a leadership position on the things that matter most to our customers, and that is how we intend to compete, no matter who the competitor is. Brian Roberts: Okay. Well, this is Brian. Let me just -- on the second part of that question. Look, I think what makes -- what you count on us to do is to reevaluate the market, the technology and the landscape. And I think as the government, we'll perhaps do that based on what actually happens here in the years ahead. That's why we have -- that's what we've done for 50 years. And it makes it interesting and intellectually an opportunity to see this changing landscape, what opportunities that open up for the company and what's real, what's not real. So I think what matters most of what Steve just said. And again, I echo I think he's off to a fabulous start with the team in being -- trying to control the things we can control, and that's making our customer experience better and making sure we have the absolute best product in as many customers' homes as possible. And then we'll see where the market evolves to and what doors that opens and what situation that creates. But we're hopeful that through that changing landscape, the last 50 years, we've managed to position the company in a place where we can grow, where relevant, we can return capital to shareholders, all the things Jason said. So first order of business is make sure we execute really well. That's what's so important about this quarter. Operator: Next question today is coming from Sebastiano Petti from JPMorgan. Sebastiano Petti: I guess just given some of the headlines we're seeing on a macro basis and consumer sentiment kind of at all-time lows. Just any color you might be seeing domestically in the parks or from maybe some of your ad partners if you're sensing any tone shift perhaps in the economic weakness is that translating to [indiscernible], et cetera? I know you did talk about Epic driving higher attendance and per caps. And then maybe just more of a housekeeping question. I think, Mike, in your prepared remarks, you did say fiber builds are accelerating. Obviously, you see all the announcements out there from your competitors, not surprising, but any update in terms of where you guys stand today, perhaps on a fiber overlap basis across your residential footprint? Michael Cavanagh: Sure, Sebastiano. So I think in terms of the macro and the geopolitical and how it's affecting our domestic business, Jason commented on some of the impacts on international parks of just changing in travel patterns. And I think the inbound international travel to the U.S. parks is something that has not ever gotten back to the level we saw pre-COVID. So those are -- those factors continue to exist. I think inside the U.S., domestic to domestic, we haven't yet seen any significant impact in the parks business caused by higher oil, but I think that does not mean that it may not happen depending on the duration of the effect on price of gas and the like and airline tickets and so forth. So more to come, but thus far, not seeing a pullback of any level that's concerning in the current results. But like I said, that we'll see what the coming quarters look like and pretty much the same on the advertising side. We felt, obviously, had an excellent quarter just finished on the advertising front best ever. And so I think the underneath it, aside from the special events that we had during the quarter, it was strong advertising results at a baseline level. And as we sit here now, that's sustained. Brian Roberts: In reference I just want to comment that the compelling nature of the Olympics pulls forward our relationship with advertisers, obviously, the same for NFL Sunday and the Super Bowl. So as we look forward to L.A., and we've got tremendous enthusiasm and excitement for how that could also keep the ecosystem very, very robust. It's -- we have a good road map ahead of us. In reference to the second part of your question, about 55%. Marci Ryvicker: Operator, we have time for one last question. Operator: Our final question today is coming from Michael Ng from Goldman Sachs. Michael Ng: I just wanted to ask about the wireless line to paid strategy in the second half. First, could you just talk a little bit about what you've seen in the free line roll-offs to date and the strategy that gives you the confidence in the successful conversion later this year. And then second, I was just wondering if you could talk about the related impact from the wireless monetization strategy on broadband subscriber trends. Could this also help broadband ARPU stabilize later this year? Steven Croney: Yes. So in reference to the wireless free line to paid strategy. We're early in that role. But as I mentioned, we're really focused on life cycle management, managing those customers all the way throughout. And in the early cohorts, we've seen a significant majority of those customers rolling to paid. So we're -- we feel that will continue as we move forward and more of the lines roll in the back half of the year. And yes, it will have a direct impact on broadband ARPU based on revenue recognition as those lines rolled to paid in the back half of the year, and that will be a tailwind. Marci Ryvicker: Thank you, Mike. That now ends our call. Thank you, everyone, for joining us this morning. Michael Cavanagh: Thanks, everybody. Operator: Thank you. That does conclude today's question-and-answer session and today's conference call. A replay of the will be made available starting at 11:30 a.m. Eastern Time today on Comcast Investor Relations website. Thank you for participating. You may all disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2026 First Quarter Conference Call. [Operator Instructions] I would now like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President of Investor Relations. Mr. Tejada, you may begin. Rafael Tejada: Good morning, and thank you for joining us. On the call with me today is Marc Casper, our Chairman and Chief Executive Officer; and Jim Meyer, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com under the heading, News Events and Presentations until July 22, 2026. A copy of the press release of our first quarter earnings is available in the Investors section of our website under the heading, Financials. So before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q under the heading, Risk Factors. These forward-looking statements are based on our current expectations and speak only as of the date they are made. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even in the event of new information, future developments or otherwise. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter earnings and also in the Investors section of our website under the heading, Financials. So with that, I'll now turn the call over to Marc. Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our first quarter call. As you saw in our press release, we delivered a strong start to the year. Our end markets are progressing in line with our expectations. We continue to strengthen and add to our capabilities by executing our proven growth strategy and completing the acquisition of Clario. Our progress in the quarter further advances our leadership position as the trusted partner to our customers. And as you know, we're actively managing the company, leveraging our global scale and the strength of our PPI Business System to create value for our stakeholders and position our company for a very, very bright future. To start, let me recap the first quarter financial results. Our revenue grew 6% to $11.01 billion. Adjusted operating income grew 6% to $2.4 billion. Q1 adjusted operating margin was 21.8%, and we grew adjusted EPS by 6% to $5.44 per share. Turning to our end markets. performance played out as we expected. I'll briefly cover each end market, starting with pharma and biotech. We delivered mid-single-digit growth during the quarter. Performance was driven by strength in our bioproduction business, our clinical research business and our research and safety market channel. In academic and government, revenue declined low single digits driven by muted macro conditions in the U.S. and China. In Industrial and Applied, growth was flat during the quarter. Growth was led by our chromatography and mass spectrometry business as well as the research and safety market channel. Finally, in Diagnostics and Health Care, revenue declined in the mid-single digits. We delivered another quarter of strong growth in our transplant diagnostics business. As I look ahead, we see our end markets progressing as expected in our original guidance. When I think about the broader macroeconomic environment, there is added complexity, of course, given the conflict in the Middle East and we expect this to create some modest level of inflationary pressure. Our customers remain focused on advancing their priorities, and we expect our end markets to prove resilient. We are well positioned to navigate through this period, leveraging our experienced management team, global scale and the strength of our PPI Business System. Let me now provide some highlights from our growth strategy this quarter. As a reminder, our growth strategy consists of three pillars: high-impact innovation, our trusted partner status with customers and our unparalleled commercial engine. Starting with the first pillar of our growth strategy, high-impact innovation. We had an excellent start to the year. Our innovation enables customers to advance science and improve lives around the world. During the quarter, we launched a number of new technologies across our business that strengthen our industry leadership and help customers break new ground in their important work. In our Analytical Instruments business, we introduced the Thermo Scientific Glacios 3 Cryo-TEM, a next-generation cryo transmission electron microscope that features AI-enabled workflows. What's really exciting about this launch is that it further democratizes access to cryo-EM through the robustness of the instrument that allows us installation in a broader range of lab spaces, bringing high-end structural biology capabilities to more customers. In Mass Spectrometry, we introduced the Thermo Scientific TSQ Certis Triple Quad Mass Spectrometer. This advanced platform delivers faster, high-quality results helping customers enhance productivity and reliability in pharmaceutical and applied markets. We also launched the Thermo Scientific Niton, XL5E handheld XRF analyzer, which is a great addition to our handheld portfolio. This new instrument enables industrial and applied customers to identify materials in the field, helping them drive productivity and speed decision-making. In Life Science Solutions, we launched the Gibco CTS Compleo fill and finish system. This automated system helps address manual fill and finish challenges in cell therapy manufacturing, enhancing productivity and reliability while enabling scalable manufacturing. In laboratory products, we introduced the FluidEase Pro ClipTip electronic pipettes, which improves precision and efficiency in everyday lab work helping customers generate more reliable results. Let me now cover the remaining pillars of our strategy. Our trusted partner status provides us with unique insights to guide our strategy and continually strengthen our capabilities for our customers. At the same time, our industry-leading commercial engine enables us to deliver those at scale. During the quarter, we continued to strengthen our leading position in both of these areas. Earlier in the year, we announced a strategic collaboration with NVIDIA, combining our leadership and laboratory technologies with NVIDIA's advanced AI capabilities. The team is making great progress working together towards the commercialization of new workflow solutions that will enhance scientific instrumentation and help customers work faster, improve accuracy and get more value out of each experiment. To further strengthen our U.S. drug product manufacturing capabilities for our pharma and biotech customers we formed a strategic collaboration with SHL Medical, a leading provider of advanced drug delivery systems. We will be leveraging our recently acquired Ridgefield new Jersey Sterile fill-finish site to offer fully integrated sterile fill-finish and device assembly solutions for our customers. Another great example of our trusted partner status is the continued adoption of our unique accelerated drug development offering which combines our leading capabilities in pharma services and clinical research. This competitive differentiator is translating into strong performance and share gain in our clinical research business which delivered strong revenue and authorizations growth once again in the quarter. We also continue to invest in our commercial engine to ensure we're meeting the current and future needs of our customers. Let me share an example. We opened a new Cryo-EM Drug Discovery Center in San Francisco. It provides pharma and biotech customers with hands-on access to further accelerate adoption of our advanced Cryo-EM technologies to advance drug development. So wrapping up on our growth strategy, we made great progress during the quarter, and we're continuing to advance our leadership position. Let me now turn to capital deployment. We continue to successfully execute our disciplined approach to capital deployment, which is a combination of strategic M&A and returning capital to our shareholders. In late March, we completed the acquisition of Clario and had a terrific kickoff with our new colleagues. Clario is a market leader in digital endpoint data solutions. This technology business is an outstanding strategic fit and highly complementary to our clinical research capabilities. It enhances our ability to serve pharma and biotech customers by enabling deeper clinical insights and helping improve the productivity of the drug development process. This acquisition is a great example of the value that our proven M&A strategy creates for the company. Clario further strengthens Thermo Fisher's position as the trusted partner to pharma and biotech customers delivering important benefits to enable their success. And the acquisition has a very attractive return profile for our shareholders. We're also very pleased with the progress we're making with our filtration and separation business, which we acquired from Solventum. I had the chance to visit the team in Germany recently. The business is performing very well. The integration is going smoothly and customer enthusiasm for these capabilities is very high. Finally, in terms of return of capital during the quarter, we repurchased $3 billion of shares and increased our dividend by 10%. Let me now give you a brief update on our PPI Business System because of its relevance to our success. PPI is deeply embedded in our culture and empowers colleagues across the company to operate with agility. The mindset of finding a better way every day is a core part of our culture and gives me great confidence in our ability to manage through the current environment. We have a proven track record of actively managing the company and consistently delivering strong operational performance. As a reminder, a few areas of focus for the PPI Business System in 2026 are driving an accelerated level of cost productivity, deploying AI at scale to run the company better, and the continued mitigation of tariffs. Our teams are proactively working to mitigate any potential impacts from higher inflation given the current macro environment. Now I'd like to review our 2026 guidance at a high level. We are raising our guidance for the full year on the top and bottom line, incorporating the positive impact of Clario and the strong first quarter earnings performance. We are raising revenue guidance from a range of $46.3 billion to $47.2 billion to a new range of $47.3 billion to $48.1 billion, which represents 6% to 8% reported revenue growth over 2025 and continues to assume 3% to 4% organic revenue growth for the year. And we expect adjusted earnings per share to be in the range of $24.64 to $25.12 which represents 8% to 10% growth over 2025, an increase from our original guidance of $24.22 to $24.80. Jim will take you through the details in his remarks. So to summarize our key takeaways, we delivered a strong start to the year. We're raising our full year revenue and adjusted EPS guidance. Our end markets and our business are progressing in line with our expectations and we're on track to deliver a strong year. We've advanced our long-term competitive position in the quarter with high-impact innovation and important strategic collaborations. We're incredibly excited about the addition of Clario to our capabilities and we'll continue to leverage the strength of our PPI Business System to create value for our stakeholders while building an even brighter future for our company. With that, I'll turn the call over to Jim. James Meyer: Thank you, Marc, and good morning, everyone. I'll start by thanking Marc and Stephen for their support during my transition into the role. I've appreciated meeting many of you on the call over the past few months and look forward to continued engagement with the investor community. In my remarks today, I'll take you through an overview of our first quarter results for the total company and then provide color on our 4 business segments. And finally, I'll share details on our updated guidance for the year. Before I get into the specifics of our financial performance, I'll provide a high-level view on how the first quarter played out versus our expectations at the time of our last earnings call. As you saw in our press release, we have a strong start to the year. We advanced our proven growth strategy, closed the acquisition of Clario and delivered strong earnings growth. Let me begin with Clario, which was not included in our previous guidance. We were excited to complete the acquisition in late March and the business added $30 million of revenue and $0.01 of adjusted EPS to our first quarter results. The business is on track, and the integration is progressing well. Turning back to the total company, both revenue and organic revenue growth were in line with our previous guidance for the quarter. On the bottom line, we delivered adjusted EPS in the quarter that was $0.14 ahead of our previous guidance. This included the $0.01 from Clario and $0.13 from strong operational performance, demonstrating our continued active management of the company and the power of the PPI Business System. So a strong quarter with excellent execution by the team which enabled us to deliver Q1 financial performance ahead of what we'd assumed in our prior guidance. I'll now provide you some additional details on our performance. Starting with earnings per share. In the quarter, adjusted EPS grew by 6% to $5.44. GAAP EPS in the quarter was $4.43, up 11% from Q1 last year. On the top line, Q1 reported revenue grew 6% year-over-year. The components of our reported revenue change included 1% organic growth, a 3% contribution from acquisitions and a 2% tailwind from foreign exchange. As a reminder, in Q1, we had one less selling day than the prior year quarter. This impacted organic revenue growth by approximately 1 percentage point. Turning to organic revenue performance by geography. In Q1, North America grew low single digits Europe was flat and Asia Pacific was flat, with China declining low single digits. With respect to our operational performance, we delivered $2.4 billion of adjusted operating income in the quarter, an increase of 6% year-over-year and adjusted operating margin was 21.8%, 10 basis points lower than Q1 last year. This includes approximately 80 basis points of headwind from tariffs and related FX versus the prior year. In the quarter, we delivered very strong productivity. This enabled us to fund strategic investments to further advance our industry leadership and largely offset the impact of unfavorable mix and the headwind from tariffs and related FX. Total company adjusted gross margin in the quarter was 40.8%. The drivers of adjusted gross margin are similar to those of adjusted operating margin. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 16% of revenue. Total R&D expense was $340 million in Q1, reflecting our ongoing investments in high-impact innovation. R&D as a percentage of our manufacturing revenue for the quarter was 6.9%. Looking at our results below the line, Q1 net interest expense was $120 million. The adjusted tax rate in Q1 was 10.5%, and average diluted shares were $373 million in Q1, $6 million lower year-over-year, driven by share repurchases, net of option dilution. Turning to free cash flow and the balance sheet. Q1 cash flow from operations was $1.2 billion and free cash flow was $830 million after investing $370 million of net capital expenditures. During the quarter, we completed the acquisition of Clario for approximately $9 billion plus potential future performance-based payments. The business is now part of our Laboratory Products and Biopharma Services segment. In Q1, we also deployed $3.2 billion of capital to shareholders through $3 billion of share buybacks and approximately $160 million of dividends. We ended the quarter with $3.3 billion of cash and equivalents and $43.2 billion of total debt. Our leverage ratio at the end of the quarter was 3.8x gross debt to adjusted EBITDA and 3.5x on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 11%. Now I'll provide some color on the performance of our 4 business segments. In Life Sciences Solutions, Q1 reported revenue increased 13% versus the prior year quarter and organic revenue growth was 1%. The growth in this segment was led by our bioproduction business, which had another quarter of excellent organic growth. Q1 adjusted operating income for Life Sciences Solutions increased 14% and adjusted operating margin was 36.2%, up 60 basis points versus the prior year quarter. During Q1, we delivered very strong productivity, which was partially offset by unfavorable mix and the expected impact from the acquisition of our filtration and separation business. In the Analytical Instruments segment, Q1 reported revenue was flat, and organic revenue decreased 2% year-over-year. Performance reflects muted demand for instruments from academic and government customers in the U.S. and China. In this segment, Q1 adjusted operating income decreased 11% and adjusted operating margin was 20.7% down 250 basis points versus the year ago quarter. The majority of the margin change was driven by the expected impacts of tariffs and related FX. Beyond that, we delivered good productivity. It was more than offset by lower volume and unfavorable mix in the quarter. Turning to Specialty Diagnostics. In Q1, reported revenue declined 1% year-over-year and organic revenue declined 3%. Performance in this segment reflects the impact of one less selling day in the quarter and a strong year-over-year comparable. In Q1, growth in this segment was led by our transplant diagnostics business. Q1 adjusted operating income for Specialty Diagnostics increased 3% and adjusted operating margin was 27.4%, 90 basis points higher than Q1 2025. During the quarter, strong productivity and favorable mix were partially offset by lower volume. Finally, in the Laboratory Products and Biopharma Services segment, reported revenue increased 7% and organic growth was 4%. In Q1, growth in this segment was led by our clinical research business and our research and safety market channel. Q1 adjusted operating income in the segment increased 6% and adjusted operating margin was 12.9%, 10 basis points lower than the prior year quarter. In the quarter, we delivered very strong productivity, which was more than offset by unfavorable mix, strategic investments and expected headwinds from foreign exchange. Turning to guidance. As Marc outlined, we're raising our 2026 full year guide to reflect the strong start to the year and the acquisition of Clario. We now expect revenue to be in the range of $47.3 billion to $48.1 billion and adjusted EPS to be in the range of $24.64 to $25.12 representing 8% to 10% adjusted EPS growth. Our updated guidance for the year continues to assume 3% to 4% organic revenue growth. The midpoint of our organic growth guidance continues to be slightly above 3% and we continue to assume a $300 million tailwind to revenue from foreign exchange for the year. At the midpoint, the guidance includes $900 million higher revenue, 20 basis points of additional margin expansion and $0.37 higher adjusted EPS compared to our previous guidance. This incorporates the acquisition of Clario, which increased our 2026 revenue guidance by $900 million and added $0.32 of adjusted EPS net of financing costs. At the midpoint, the increase in adjusted EPS reflects the contribution from Clario and the strong operational performance in Q1, partially offset by an assumption for higher inflation in future quarters that we are actively working to mitigate. In terms of adjusted operating margins, our guide has increased to 70 basis points of expansion for the year, including the addition of Clario and the strong performance we delivered in Q1. We are continuing to actively manage the company and drive excellent operational performance, enabling us to increase our guidance for the year while navigating a complex macro environment. Let me provide you some of the modeling elements for the full year. We expect approximately $660 million of net interest expense, which now includes financing for the Clario acquisition. We continue to assume that the adjusted income tax rate will be 11.5%. We expect between $1.9 billion and $2.1 billion of net capital expenditures and free cash flow in the range of $6.9 billion to $7.4 billion for the year, both reflecting the addition of Clario. In terms of capital deployment, we're assuming $3 billion of share buybacks, which were already completed in January and that we'll return approximately $700 million of capital to shareholders this year through dividends. We estimate the full year average diluted share count will be between $370 million and 375 million shares. Now let me provide some color on phasing for Q2. Aligned with the quarterly progression in our original guidance, we are assuming organic revenue growth of about 3% for the second quarter. We expect Q2 adjusted EPS to be between $0.25 and $0.30 higher than Q1. So to conclude, we had a strong quarter. We executed very well to deliver on our commitments. We are thrilled to have welcomed Clario to the company, and we are raising our adjusted EPS guidance for the year. With that, I'll turn the call back over to Raf. Rafael Tejada: Operator, we're ready for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Michael Ryskin from Bank of America. Michael Ryskin: Great. Marc, let me start with sort of a high-level one. A lot of questions from investors, both this morning and just over the last couple of weeks has been -- the acceleration as you go through the year. Investors are increasingly worried about the ramp given some of the end market concerns lingering macro pressures. You touched on a couple of those when you were talking about the first quarter. So what would you say to sort of [indiscernible] some of those fears about the ramp needed to hit the full year guide. You talked about -- you did 1% in the first quarter, as Jim just called out, 3% for the second quarter. I think a lot of people are assuming sort of like 3% in the third quarter and then 5% in the fourth. You've got days [ impact ] in there. But beyond that, just sort of talk about the confidence of the improvement in performance as you go through the year. Marc Casper: Yes. So Mike, thanks for the question. When I step back and look at the quarter, I had the opportunity to see many customers during the quarter. And of course, the macro is challenging with the war in the Middle East and so forth. But it's actually not actually even in the customer's thinking in a good way. They're focused on their pipelines. They're focused on the scientific advances. I mean it's an incredibly exciting time about what's going on in our industry. The markets played out as we expected in the first quarter. We understand the ramp, but the ramp is not really assuming a change in the underlying market conditions. This happens to do with comparable days, things of that sort. So it's nice to have a good quarter behind us. And then we step up in a logical way from there. But Jim, maybe you want to talk a little bit about the phasing? James Meyer: Yes. When you think about the phasing from Q1 to Q2, you have the impact of the headwind from days in Q1 that doesn't exist in Q2, and you also have a significant comparable change in analytical instruments. So that's really the step-up is those two drivers, Q1 to Q2. And then if you think about the first half to the second half, you obviously have the impact of days, the headwind in Q1, the tailwind in Q4 and you have a meaningfully different revenue phasing profile in pharma services that impacts both to this year. in last year. So our Pharma Services business delivers much stronger growth in the second half of the year aligned with kind of how we modeled the year to start it. Michael Ryskin: Okay. And then a follow-up, if I could. I mean, it sounds like you had another good strong quarter in Pharma and Biotech. You called out bioproduction, you called out clinical research continue to do well. Is there anything in particular that kind of offset that? I think you touched on weaker U.S. A&G and in China, maybe a little bit softness in diagnostics. so is there just any moving pieces in terms of what came out worse than expected to offset some of the strength in pharma and biotech? Marc Casper: No. I mean as I think about the end markets and the growth that we delivered even by the various 4 end markets, they pretty much were what we expected to happen during the quarter. So we knew that pharma and biotech would be the strongest growth of that end market. That was our expectation. It was. The strength actually was broad-based in terms of the momentum there. So I don't think there was really anything that was materially different, I'd say, in the tiny categories, you have a weaker respiratory season, but it's really in the irrelevance in terms of the scale of it. So that probably shows up in -- all positive to that, this shows up elsewhere in some minor numbers. But pretty much a very predictable quarter that our team did a nice job executing against. Operator: Our next question comes from Tycho Peterson from Jefferies. Tycho Peterson: Marc, just maybe picking up on that biopharma thread, Curious if you could talk on PPD. I think one of your peers had light bookings last night, obviously, you're coming off a very strong fourth quarter. So curious what you saw in the quarter on PPD. And then is the biotech funding, which has been okay here. Is that starting to translate into spending? And then just early feedback on Clario too from customers and how we think about the combination there. Marc Casper: Yes, Tycho, thanks for the question. Clinical Research has had an excellent quarter. And whether you're starting to say sequentially, how is the business progressing nice step-up in organic growth. But then when you look at it year-over-year, really nice growth organically, both in revenue and authorizations, the customers really value our capabilities. So early read is we're continuing our share gain momentum. And the conditions are actually improving. It's not a surprise, but you're seeing biotech environment is improving from a funding perspective. That's a good thing from our perspective. And I'd say the sentiment continues to get stronger from that perspective. And there's lots of good opportunities that we've been able to close, but also a nice funnel of activities as well. When I think about our accelerated drug development capabilities, where we simplify the process, we reduce complexity, take time out, that's highly valued by our customers. It's unique to us because we're able to leverage the insights of our development and manufacturing organization as well. So that's going very well. And we're embedding AI into our capabilities per that collaboration we had announced some time ago with OpenAI and customers value that, and that positions us very well. So business is quite healthy and our trusted partner status is really progressing. If I think about just the amount of dialogue I've had with our biotech customers and our pharma customers recently, they're really excited about what we're doing together. Clario is exciting, right? We just closed it. I think it was March 24, when I was there for day 1. And the early feedback from customers even from announcement to close is they're very excited about the technology that Clario has and how we think about bringing the major endpoints together in an easier way for them to execute their clinical trials. So I actually am very excited about the acquisition and looking forward to the value unlock that is going to bring for the company and for our customers. Tycho Peterson: Great. And then maybe just a quick follow-up on analytical instruments. Obviously, everybody has kind of been dealing with the academic government headwinds. I guess as we kind of think about that business for the remainder of the year, how are you feeling about a recovery on the instrument side? Marc Casper: Yes. So when I think about the instruments business, as you said, the market conditions are kind of below the normalized level, it's really driven by the academic and government environment in the U.S. and China. Our innovation is super strong. So I actually feel very good about what's ahead. If you just think about how much time I spend in my script just on product innovation out of the instrument business, whether it's the next cryo-EM, whether it's our new mass spectrometer or new handheld, just a small sampling of what we launched. And ASMS is going to be awesome for us in June. So really, that's going to be exciting in terms of what's ahead. The comparisons are a little odd this year. We know them. So there's nothing new, but the comparison for analytical instruments, as Jim said, is much easier in Q2 because it was affected by the implementation of tariffs. So you'll see the growth normalize in the first half, in a certain respect, in the business. Operator: Our next question comes from Jack Meehan from Nephron Research. Jack Meehan: Marc, I wanted to get your thoughts around AI as you -- this is obviously a huge topic for the market. As you look across the business segments, can you talk about how adoption might be influencing your customer spending behavior? And I'm not sure if you're planning an Analyst Day or not, but any color you can share on new offerings you might be able to highlight that leverage your data in Clario? Marc Casper: Yes. So Jack, thanks for the question. So I was going to have in my closing remarks that we're going to have our Analyst Day the morning of May 20. So we will do that, and we're quite excited to see our analysts in New York that day. In terms of artificial intelligence, super exciting, actually. And when I think about the role that AI is playing with our customers, it's accelerating scientific discovery. It's deepening understanding and it's ultimately going to accelerate bringing new medicines to patients faster to address significant unmet medical needs. And when I think about what it means is we believe that AI is going to improve the returns on investment for the drug development industry. That means that there'll be more products that will be coming through the pipeline and ultimately will create an enhancement of funding interest in the biotech community. So we actually think it's a meaningful positive. And for our company, obviously, the good end market matters, and that will help us. But we see it as a significant positive for Thermo Fisher Scientific as we're exceptionally positioned to shape it and benefit from it both in our clinical research business, we talked about that in the past with OpenAI, NVIDIA is really across our technology businesses, our instrument businesses, parts of Life Science Solutions. And it's going to make our portfolio of capabilities stronger and really amplifies what differentiates us, our scale, our portfolio breadth, our trusted partner status and obviously, great execution. We believe that AI is going to accelerate and enhance our durable competitive advantage that we've had. So it's an exciting time, and we're looking forward to continue to drive the adoption that makes a huge difference for our customers. Jack Meehan: Cool. Yes. I'm looking forward to May 20. Jim, one follow-up. You called out higher inflation a few times in the script. I was wondering if you could just elaborate like what areas you might be seeing that in and what the strategy is around offsets and productivity? James Meyer: Yes, Jack, thanks. Given the daily variability in oil prices, we felt it appropriate to put a placeholder in the guide for future quarters. for the risk of inflation that we aren't fully able to mitigate within a year. The teams activated to offset it and mitigate it, and we expect to be able to do that, but just a wide range of outcomes that was prudent to put something in there. The areas you see it first is in the shorter-term kind of supply chain logistics and transportation. And we started to see some of that and seems actively executing against that. But right now, it's just a placeholder, given the variability. Operator: Our next question comes from Dan Arias from Stifel. Daniel Arias: Marc, last quarter, the way that you and Stephen framed the year was to sort of say that you're looking to retire risk as you go along here. When you're answering Mike's question, you talked to some of the moving parts on the macro that have sort of cropped up as new, but I'm curious if you think there's anything that's sort of an offset there that maybe 90 days later, you're feeling a little bit better about and would sort of consider being retired at this point. Marc Casper: You know every year we have expectations of how things are going to play out based on our experience and our deep knowledge of working with our customers. When it goes exactly as we thought, which is what Q1 was, that retires risk, right, in terms of the world was as we thought it would be. Our operating discipline was even stronger than what we embedded in our guidance, which is allowing us to raise our earnings outlook. And customer sentiment is actually quite strong. If I think about what pharma customers and the biotech customers are interacting with us on, they are excited about their pipelines excited about the improving environment from their own end markets, the fact that they've reached agreements with the U.S. government, things are good in that industry and getting better, and that bodes well. So I feel from that perspective, retire risk. In one of our normal conventions, if I think about the earnings side of the equation, normally, we would have beat by the $0.13 operationally. We largely just flow it through the P&L. The only reason we didn't do 100% of that is there's volatility, as Jim said, in inflation. Nobody has a crystal ball exactly how it is. What I do know is our team is fully focused on offsetting it with all the levers. I believe that if it's relatively modest, we will offset it all, and that will all flow through the bottom line, what we held back. But if the world gets really challenging from an inflation perspective, then we've given ourselves a little bit of a cushion to deal with it. So I feel good as we sit here in late April about what the year is. We obviously raised our outlook and excited to deliver a great year. Daniel Arias: Okay. Helpful. And then, Jim, for the quarter, you had the selling days issue that was mentioned, but I think that there might have been also some phasing in pharma services that was material. Is that a quantifiable amount? And I think you characterized the combination of those two as a couple of points. So it's a normalized number, for 1Q is more like 3%, and you're pointing to 3% or so for 2Q, is the general assumption that it's kind of status quo across the board when it comes to end market conditions? Or is it more puts and takes some improvement in one place, maybe a step back and other places? And so that's kind of where you net out. I guess I'm just kind of curious about how you see 1Q to 2Q in the context of where a more normalized 1Q number might be. James Meyer: Yes, thanks. Your characterization is correct. So the 1% growth in Q1 was impacted by about 1 point from the impact of selling days and about 1 point by the impact of the timing of revenue phasing in the Pharma Services business. In Q2, there's puts and takes, but in the aggregate, your summarization is correct. Operator: Our next question comes from Matt Larew from William Blair. Matthew Larew: Just wanted to follow up on Jack's question on AI, but also the instrument innovation highlights you shared. It seems like there's going to be an enhanced emphasis on scale, automation, connectivity and auditability or proof of work both for large-scale generation of biological data and in autonomous labs. I think the threat of your portfolio alone may be an advantage, but as you think about the way your instrument exists today and what kind of enhancements or changes you might make in the future, how does -- how customers might shift the way they are using your instruments affect the way that you're thinking about developing them? Marc Casper: Yes. So Matt, excellent question. So if I think about one of the real interesting aspects, and I like the way you characterize it, of the adoption of AI in the research aspects of the lab work, you're seeing experimentation scale up and will scale up in areas that it would never have happened in the past, right, which is just large-scale generation of biologic information to effectively create biology models, right? So as opposed to what people normally do, which is they're looking at their particular area of interest, you're not seeing very wide scale large volume labs that are just trying to build biology models, if you will. And so when you think about what those customers need, they want the instruments to be more automated or more automated-ready, and they want it to be easy to effectively have the data be able to populate their own models, right? Those are a couple of the trends, it's not a -- it's a trend that we've been aware of for actually a number of years long before generative AI, right, in terms of what customers would have in the past called it the lab of the future or lab in the loop. That's not a new thing, but you're seeing very scaled facilities coming online and our technologies are being adopted. So as part of our R&D road maps about how do we create better connectivity and we feel good about what we're doing there. Matthew Larew: Okay. Great. And then on reshoring, I think that was probably a 2027 and beyond item. I think an industry conference this week heard that people are seeing RFPs. Would just be curious your level of confidence that, that will remain a tailwind? And what sort of the activity level has been like for Thermo? Marc Casper: Yes. So when I think about the reshoring activity, it's actually a nice tailwind, right, in the '27, '28 time frame what we've been able to already secure, start first with our CDMO business, right? A number of customers have decided that leveraging our capabilities is the best way to meet their production requirements in the U.S. So you've seen on the -- some announcements and some topics that we've talked about there. And in fact, President Trump visited our drug product site in Cincinnati, Ohio as part of -- when he was talking about health care, which was really about reshoring in a way in terms of what we're doing, and that's a site that would benefit from those growth in jobs and so forth. So there's real momentum and contracts signed. In bioproduction, we expect that the revenue is largely a '27 and '28 activity. We've won some business already in terms of in kind of industry parlance, brownfield facilities that are scaling up. So you see some of that. So that increases the confidence that you'll see even more revenue in '27 and '28. So really a nice positive. And then what I would say is our bioproduction business had a phenomenal quarter, but phenomenal in terms of just very strong growth from what we've seen, of what others have reported for in excess of that. So the team is doing a great job in terms of delivering on our customers' needs, and we feel very good about the prospects of our business. And view reshoring as an incremental tailwind that will develop over the next couple of years. So thank you for the question. Operator: Our next question comes from Dan Brennan from TD Cowen. Daniel Brennan: Congrats on the quarter. Maybe just on pharma, Nice quarter again. I'm just wondering on the preclinical side market, it's hard for us to track, but I know it's a big part of the business, and I think maybe that's been an area that was not invested in as much with MSN and IRA. Can you just speak to a little bit what you're seeing in that part of the business? Has it been a bit of a drag on your business? And is that something that we could see get better this year? Marc Casper: Yes. So Dan, thanks for the question. So when I think about the business serving, I'll call it, the lab-based portions of pharma and biotech. And it's a little bit hard for us to -- we don't discern in our own data, whether it's going to a QA/QC lab or it's going to a research lab because customers don't manage that segregation so much, but I think it's a rough proxy. We're seeing good momentum in the channel business there in the, what I'll call the higher tech portfolio of the life science reagents a little bit softer but still progressing in the right direction. So I would say that of the businesses, that's one that we're seeing the signs of a pickup. And I feel okay about how that's progressing going forward. So hopefully, that's helpful. Daniel Brennan: No, it is, Marc. And then just on U.S. academic and government, just wondering if you can elaborate a little bit on how that's been progressing. Obviously, I think there's hopes that things hopefully are bottoming out and starting in a little bit better. So I'm just wondering if you -- are you seeing any signs of that? Just remind us how you think about what you're assuming for the rest of the year in U.S. academic and government? Marc Casper: Yes. So Dan, in terms of the conditions in the U.S., when I think about the quarter played out as expected, muted conditions for sure. The passage of the budget in late January is good in terms of being a positive. We saw funding flows start to improve during the quarter. That's also a positive. Our assumption is that for the year, we would see greater stability in the U.S. end market improving modestly over time. But not back to normal is what we've assumed kind of in aggregate, similar to what we saw last year. Operator: Our next question comes from Casey Woodring from JPMorgan. Casey Woodring: Maybe if you can just walk through the specialty diagnostics performance in the quarter and the mid-single-digit decline there. I think you called out strength in transplant and minimal impact from respiratory but maybe just walk through where the softness occurred in the quarter. I think we've seen a couple of reports of a weaker microbiology market in China. So just wondering if that contributed there. And then any color on Pacing and Specialty Diagnostics for the rest of the year? I think you have an easier comp coming up in 2Q and tougher comps in the back half. So just how do we think about the growth cadence there? Marc Casper: Yes. So Casey, probably stepping back on the business. Where we play in Specialty Diagnostics, a highly differentiated, profitable business, really focused on high-value clinical insights. And so the technology capabilities are very strong. And when you think about that, we cover the range from immunodiagnostics, transplant diagnostics, biomarkers, protein diagnostics for multiple myeloma. All of those things are incredibly important to the health care systems around the world. When I think about the particulars of Q1 performance, this business is almost entirely consumable. So it has the more significant impact from the days. It also had a tougher comparison versus the prior year because of respiratory, which obviously doesn't repeat in the second quarter. So the phasing is that, that business improves as the year progresses. And so it's performing in line with what we would expect. Casey Woodring: Got it. That's helpful. And then maybe just a quick follow-up on China. Just curious to hear how performance in the region played out relative to your expectations across your different businesses. I think you called out a bit weaker academic in the region. So maybe just walk through the sort of portfolio, particularly the pharma end market in China. And then curious if you'd expect China to return to growth at any point this year? Marc Casper: Thanks. So as a reminder, China is about 7.5% of our revenue. We had low single-digit decline in the quarter. Conditions are muted in aggregate as you mentioned, academic and government, [indiscernible] pharma and biotech performing well in the country and we're well positioned to capture opportunities as the conditions improve. I was in China in March, I participated in the China Development Forum incredibly productive visit, right? And I had the opportunity to engage with a number of our customers, our team, with government stakeholders, I actually left China incrementally more positive coming out, particularly as what I did see is that China pharma and biotech customers, the innovators see the value in doing more work with a company like us because when they're competing with another Chinese company, actually, our technology and capabilities is a differential advantage for them, and they're trying to license some of these technologies to the West. And therefore, I actually think we're very well positioned to benefit from that trend. And so I came a little bit incrementally positive on China. We're not assuming any meaningful growth coming out of China this year. And when I think about upside over time, China will be an upside that we didn't embed even into our longer-term viewpoint that if that returns to stronger growth, and obviously, that will create an incremental tailwind. Rafael Tejada: Operator, we'll take one more question. Operator: Our final question comes from Justin Bowers from Deutsche Bank. Justin Bowers: So Marc, the research and safety market channel was a strong contributor to growth in 1Q. Can you help us understand how indicative of that is in a recovery in the end market versus ongoing market share gains? And likewise, the clinical business has also recovered nicely, PPD is taking share. Can you help us understand the appetite for customers to reinvest in early stage and for your upstream in R&D and what you're seeing there? Marc Casper: Justin, thanks for the questions. So on the first one, on our research and safety market channel, business is doing well. And it is actually a blend of both improving end market conditions as well as market share gains, there's both. And so I feel good about how that business has performed for quite some time and continues to progress in a very nice direction. So that one is well positioned and is benefiting from a combination of market conditions and good execution. In terms of clinical research, and we're seeing it in strong -- in terms of customer interest and reinvestment in those things. We had a strong quarter of authorizations growth, and we actually have a very strong pipeline as well, right? So authorizations of what you've signed up, pipeline is what's -- what you're working on that is not yet in the decision process. Both are -- have moved nicely in terms of how that business has been progressing. And actually, that business is progressing as we thought it would this year, right, in terms of stepping up in performance. And it was good to see that not only that those wins that we've been talking about for a few quarters have actually translated into good growth in terms of what we delivered as well. So good news on both fronts. So let me wrap with a quick -- thank you so much, Justin. So let me wrap with a quick couple of comments. First, thank you to everyone for participating in our call. We're pleased to deliver a strong quarter, and we're on track to deliver a strong year as we continue to create value for our stakeholders and build an even broader future for our company. We look forward to updating you at our Investor Day, which we've scheduled for the morning of May 20 as well as the year progresses. As always, thank you for your support of Thermo Fisher Scientific. Have a good day, everyone. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good day, everyone. Thank you for joining Packaging Corporation of America's First Quarter 2026 Earnings Results Conference Call. Your host for today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. Please also note today's event is being recorded. I would now like to turn the floor over to Mr. Kowlzan. Please proceed whey you're ready. Mark Kowlzan: Thanks, Jamie, and good morning, everyone. Thank you all for participating in Packaging Corporation of America's First Quarter 2026 Earnings Release Conference Call. Again, I'm Mark Kowlzan, Chairman and CEO of PCA. With me on the call today is Tom Hassfurther, President; and Kent Pflederer, our Chief Financial Officer. As usual, I'll begin the call with an overview of the first quarter results, and then I'll be turning the call over to Tom and Kent, who will provide further details. And then I'll be wrapping things up, and then we'll be glad to take questions after. Yesterday, we reported first quarter net income of $171 million or $1.91 per share. Excluding special items, first quarter 2026 net income was $215 million or $2.40 per share compared to the first quarter 2025 net income of $208 million or $2.31 per share. First quarter net sales were $2.4 billion in 2026 and $2.1 billion in 2025. Total company EBITDA for the first quarter, excluding special items, was $486 million in 2026 and $421 million in 2025. First quarter net income included special items expense of $0.49 per share primarily for the Wallula Mill restructuring charges as well as for costs relating to the acquisition and integration of the Greif containerboard business and also costs related to the closure of corrugated products facilities. Details of the special items for the first quarter of 2026 and 2025 were included in the schedules that accompanied the earnings press release. Excluding the special items, our earnings increased by $0.09 per share compared to the first quarter of 2025. This increase was driven primarily by higher prices and mix in the legacy packaging segment for $0.17, lower fiber costs in the legacy packaging business, $0.11, lower maintenance outage expenses of $0.09; lower labor and operating costs in the legacy packaging business for $0.08, higher prices and mix in the Paper segment, $0.02, favorable volume in the paper segment for $0.01, lower tax rate, $0.01 and lower share count, $0.01. These items were partially offset by higher freight costs of $0.13, lower production and sales volume in the legacy packaging business, $0.11, higher depreciation expense in the legacy packaging business, $0.05, higher labor and operating costs in the Paper segment for $0.03, higher corporate and other expenses, $0.03. Also, the acquired Greif operations, including interest on acquisition indebtedness, generated a loss of $0.06 during the first quarter but primarily as a result of lower volume and higher costs due to the January storm that affected the Riverville and the corrugated operations as well as higher-than-forecast freight and recycled fiber costs and unfavorable mix. We exceeded our guidance of $2.20 on the strength of our operational and commercial performance during the quarter. including favorable volume and mix in the legacy packaging business and better-than-expected operating cost performance and lower labor and benefits costs. These were partially offset by higher freight costs and lower-than-expected earnings from the Greif business. Looking at the Packaging business. EBITDA, excluding special items in the first quarter of 2026 of $482 million with sales of $2.2 billion resulted in a margin of 22% versus last year's EBITDA of $409 million and sales of $2 billion or a 20.8% margin. We ran at full capacity during the quarter and completed the outage on the Counce #1 machine during the quarter and completed the outages on the Counce #2 machine and at the Jackson mill earlier in April. The Wallula mill reconfiguration was successfully completed, which immediately helped us reduce our cost of fiber, power and labor. For the quarter, we produced 1,398,000 tons of containerboard during the quarter. The legacy mills produced 1,210,000 tons of containerboard which was 25,000 tons less than the fourth quarter of 2025 and 40,000 tons less than the first quarter of 2025. System-wide, our inventories were down 39,000 tons from the end of the fourth quarter and we meaningfully reduced the inventories carried by the acquired Greif plants. Operational performance during the quarter was exceptional with improvement in corrugated demand heading into a very busy outage schedule in the second quarter and an increasingly tight linerboard situation, we needed to run well and their mills delivered. Jackson set new production and speed records. We safely completed the Counce outages over the last month, and we're able to bring both machines up earlier than scheduled and make up for some of the weather issues earlier in the quarter. while helping us keep up with corrugated demand. In February, we saw Riverville produce at approximately 10% higher rate than what it was capable of doing when we completed the acquisition. Our Board of Directors approved the gas turbine projects for the Jackson, Alabama mill and Riverville, Virginia mills that we talked about on the last call. and we're scoping a third project for the DeRidder, Louisiana mill, which we will be submitting in the period of May at the Annual Board meeting. I'll now turn it over to Tom, who will provide further details on the containerboard sales and our containerboard business in general. Thomas Hassfurther: Thank you, Mark. Our corrugated operations turned in a very strong quarter in all areas. Domestic containerboard and corrugated products prices and mix were $0.17 per share above the first quarter of 2025 and up $0.06 per share compared to the fourth quarter of 2025 and up approximately $0.12, excluding the Greif operations. This is mix related as mix improves in the legacy PCA business 4Q to 1Q, but declines in the Greif business during the first quarter. . Export containerboard prices were flat with last year's first quarter and down $0.01 per share from the fourth quarter of 2025. Export sales volumes of containerboard was up 6,500 tons from the fourth quarter of 2025 and down 13,000 tons from the first quarter of 2025. In the legacy business, corrugated shipments per day were up 2.8% versus last year's first quarter, a new record on a per day basis. With 1 fewer day, total shipments were up 1.2%. We saw good growth across our entire book of business with legacy shipments running consistently 2% to 3% ahead of last year from the middle of January through the rest of the quarter and very strong so far in April. Even with the situation playing out in the Middle East and higher fuel prices here in the states, we're seeing a resilient economy and continued strength in our customer ordering patterns across the board. We expect the second quarter to shape up similarly to the first in terms of demand and year-over-year growth. As Mark alluded to earlier, we are tight on containerboard, and we will need continued exceptional performance that we have come to expect from our mill operations to support our customers. Including the acquisition, shipments were up 22% per day and 20% in total compared to last year's first quarter. We began to see the seasonal pickup in the volume and improvement in mix from the acquired operations as the quarter progressed. We're off to a great start in April. We expect to see good sequential improvement in both volume and mix during Q2. We intend to complete systems integration by the end of the third quarter with all operations running on PCA's decentralized systems. As we progressed on our integration efforts, we focused on inventory reduction at the Greif plants and made great progress reducing carried inventories by around 10,000 tons during the quarter. We have room for further improvement and we'll continue these efforts in the second and third quarters. We will be working to implement our price increases during the second quarter. Reported containerboard prices are up net $50 per ton from the beginning of the year. Due to the timing of how things played out, we did not get a meaningful benefit during the first quarter. We have had a lot of individual negotiations with our customers on how to implement this increase, and we are not going into any detail on that. What I can say is that, in general, we expect to start to see the benefit during May with the normal implementation period beginning in June. So we expect some benefit during Q2 with the majority coming during Q3. I'll now turn it back to Mark. Mark Kowlzan: Thanks, Tom. Looking at the Paper segment, EBITDA, excluding special items, in the first quarter was $38 million, with sales of $160 million for a 23.6% margin compared to the first quarter 2025's EBITDA of $40 million and sales of $154 million or a 26.1% margin. Sales volume was approximately 3% above the first quarter of 2025 and approximately 4% above the fourth quarter 2025. Prices and mix were up 1% from the first quarter of 2025 and flat with the fourth quarter 2025. We remain very pleased with the performance of the paper business, which continues to generate high margins, driven by strong commercial and operational performance. We are working to implement the previously announced price increases and expect to benefit in Q2. I'll now turn it over to Kent. Kent Pflederer: Thanks, Mark. Cash provided by operations was $329 million. And after $165 million of CapEx, free cash flow was $164 million. In addition to CapEx, the primary payments of cash during the quarter included dividend payments of $112 million, share repurchases of $59 million, cash tax payments of $18 million and net interest payments of $11 million. We expect higher cash payments for taxes and interest in the second quarter. We repurchased 266,000 shares during the first quarter at an average price of $228.78. We have approximately $224 million of remaining repurchase authority. Excluding special items, our effective tax rate during the first quarter was just under 23%. This is lower than our forecasted 2026 full year book effective rate of 25% due to favorability from the vesting of employee equity awards during the first quarter. We expect our second quarter to be approximately 26%. We continue to forecast $840 million to $870 million of CapEx and $700 million of DD&A for the year. I'd now like to give you an update on the annual outage schedule and the earnings impact for the year. Our outage expense was $0.14 during the first quarter. We now expect $0.36 in the second, $0.31 in the third and $0.64 in the fourth, totaling $1.44 for the year. In the Packaging segment, the Counce and Jackson outages were completed earlier this month, and outages are scheduled at Tomahawk, Filer City and Wallula later in the second quarter. In the Paper segment, the International Falls mill outage is scheduled for the third quarter. Finally, before Mark provides commentary on our second quarter forecast, I want to give you a little bit of detail on some of the sequential differences in costs from 1Q to 2Q. I just mentioned that we will incur approximately $0.22 of additional outage costs in Q2 with maintenance outages at 5 of the packaging mills. We are also expecting less sequential benefit from 1Q to 2Q and the reversal of cost increase for labor and benefits than we would normally expect. Our employee stock compensation expense will be approximately $17 million higher for 2026 then for 2025 due to a change in timing of the recognition of expenses beginning with the awards we made earlier in the year. This will be evenly split between the second, third and fourth quarters. and this higher expense will time out over the next 2 to 3 years as old awards vest. In addition, we were favorable in the first quarter on benefits costs, which we believe was timing related, and do not expect to repeat in the second quarter. As for operating costs, we normally benefit from lower fuel costs and better fiber and chemical yields as we move out of winter. This year, fiber and chemical usage benefits will be more than offset by higher input prices across the board on chemicals as well as recycled fiber and to a lesser degree, wood fiber. Our overall cost in these areas will be higher in the second quarter than in the first. Natural gas prices have remained fairly stable, and we expect to see normal seasonal energy cost improvement on fuel costs with slightly higher purchased electricity costs. And obviously, we will have higher freight costs with higher diesel fuel prices expected to continue into the second quarter. And with that, I'll turn it back over to Mark. Mark Kowlzan: Thank you, Kent. As we move from the first quarter into the second quarter, we expect demand in the Packaging segment to remain strong and corrugated volume to increase with 1 more shipping day and some seasonal improvement, particularly in the acquired Greif operations. . Prices for containerboard and corrugated products will move higher later in the quarter with the implementation of our previously announced price increases and improved corrugated mix. Packaging mill production will be slightly higher with 1 more operating day and improvements at some of the mills more than offsetting the production impact of maintenance outages across the system. Mill maintenance outage expense will be higher. We expect flat volume and higher prices in the paper segment as we continue to operate at full capacity and implement our previously announced paper price increases. Cost for freight, fiber and chemicals will be up due to higher prices and energy costs are expected to be seasonally lower. The sequential improvement in expenses for wages and benefits that we normally experience from the first quarter to the second quarter will be less than in the past years due to the higher stock compensation expenses and benefits costs in the second quarter that Ken called out earlier. Finally, our tax rate will be higher due to the tax-related benefit of share-based compensation awards that vested in the first quarter. Considering all of these items, we expect second quarter earnings of $2.33 per share, excluding special items. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute forward-looking statements. The statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to open up the call for questions, please. Operator: [Operator Instructions] Our first question today comes from George Staphos from Bank of America. George Staphos: I appreciate the details. I guess the first question maybe to start, as always, can you talk a bit about bookings and billings into April? Any granularity that you're seeing that you can relay in terms of growth or declines in the quarter so far? And any sense of prebuy that you're seeing, Mark, just because the price increases have been discussed since January? Thomas Hassfurther: George, this is Tom. Now I'm going to -- I'll give you the legacy bookings numbers are up at 4.5%, bookings and billings are up 4.5%. Now that I want you to keep in mind that with the Greif assets, we are moving some business back around -- within the system and primarily more from the legacy to the Greif assets as opposed to the other way around. So we view the business environment as being very good right now. Regarding prebuy, we see no pre-buy at all right now. In fact, this has been muddy waters, as you might say, regarding the price increases and that sort of stuff going at the moment. So we see no pre-buy at this point in time. Our customers continue to operate with very lean inventories, and I think they'll continue to do so. George Staphos: Next question. Can you talk a bit about why Greif was a loss of $0.06 in the quarter? I think that was down -- that was a little bit worse than the fourth quarter figure, which I think was $0.05. And how is the business performing as the company typically relays, you're doing better on production, the mills are looking better. yet we still had some losses there? What's happening there? How is performance, when does that improve? And I had 1 last follow-on. Mark Kowlzan: George, as we called out on the January call, the January storm impacts were very significant. And quite frankly, the Riverville mill was the most impacted mill in the system. For the better part of the week, we didn't move any production out of there. And we called out at your meeting down in Fort Lauderdale we were probably around $0.05 of impact as a result of the storm. But Ken, why don't you gave a little more color to that? Kent Pflederer: Yes, that's right, George. So we had about -- we had weather impacts that hit not just Riverville, but corrugated operations were disrupted as well, and they don't come back on the sheet feeder side, as well as able to make up in the corrugated side. Greif is -- and Tom can elaborate on this a little more. Greif is a seasonal business. Mix was a little lower than we had forecast in January and February, but returned nicely in March. So all that in, that was a -- throw-in higher recycled and freight costs and we came in with the number that we reported. Now on the positive side, Greif operations in February were about as good as we've seen them. The productivity at the mills was, as Mark called out in the script, about 10% higher than we'd seen prior to acquisition. And it was so good, we actually dialed it back a little bit in March in order to bring the inventory levels in where we brought them in. So Tom, do you have any further on that? Thomas Hassfurther: I'll just add that -- just to add a little color to it. we did not expect, and we're not aware of the seasonality, especially related to the box business side of Greif in terms of the first quarter. So that first quarter is by far their weakest quarter in terms of volume, and then it accelerates after that all the way through the year. So that was a bit of a surprise to us. But the good news is it's returned in the second quarter quite nicely and exactly as they had forecast. So that's the good news. And then this also is allowing us some flexibility in the system to really move some business around to be more efficient in terms of our operations. And also don't forget that there was a lot of activity and a lot of work still going on in the mill system of Greif during that first quarter. George Staphos: Understood. Last one, and I'll turn it over, if possible. Is there a way to provide some further quantification or at least direction on the sequential changes? So we know what the outage hit will be 2Q versus 1Q. You talked about the stock comp expense being up, I think, $17 million. But what does that mean in terms of the 1Q to 2Q variance? And is there a way to, if not precisely, maybe ballpark a bit for us, freight, energy, other costs, what that inflation looks like 1Q to 2Q? Tax, I think, is like a, call it, $0.06, $0.07, $0.08 effect 1Q to 2Q. Have a good quarter. . Kent Pflederer: Okay. George, I'll tackle that one. So on the stock comp expense, we called out we'd be $17 million higher. So that means 2Q is going to look much more like first Q -- much more like 1Q than it has historically in the past where you were beneficial 1Q to 2Q. Okay? So we'll be running maybe $6 million higher in 2Q than we were in '25. On some of the others. So freight fiber chemicals, estimate maybe $0.15 higher 1Q to 2Q. Normally, we're flat to slightly beneficial in those areas, okay? So that's a little bit of a drag there. And George, I'm sorry, I think I'm missing one of the other sub parts of your question. George Staphos: Yes. tax, I think, is we can do our own calculation, but that's probably a nickel, dime . Kent Pflederer: Yes. Operator: Our next question comes from Michael Roxland from Truist Securities. Niccolo Piccini: This is Nico Piccini on for Mike. Just first off, kind of to piggyback off the cost question. What do you have at your disposal outside of price to offset those costs, recognizing that in 2Q, it seems like you might have some uncovered costs with the price impact really hitting later in the quarter? Mark Kowlzan: As far as levers to deal with cost, I mean, obviously, the only thing you can do is run incredibly well, very efficiently and just execute at the top of your game, which we generally do that. But that's what we're facing with the headwinds on some of the price escalation. Tom? Thomas Hassfurther: I think the other thing that we're doing is we are optimizing the mill system now, now that we have Massillon and Riverville running much better and much more reliably. So we're moving that mix around to the mills that are best suited to run that mix and from a freight standpoint are better off. Then we also were doing that in the box business as well. Within the Greif system, as I mentioned, we are moving quite a bit of business around to optimize that system and to optimize our freight opportunities. Outside of that, as Mark said, we have to operate incredibly well. And that's the gist of what we've got in our arsenal to offset some of these cost increases. Niccolo Piccini: Got it. Understood. I appreciate that. Just quickly on Greif, having owned, I guess, the business for 8 months now, maybe, putting quite a bit of work into the mills. Do you have any sense of upside to the original $60 million synergy target now that you've kind of progressed through integration and getting the mills on the system? . Kent Pflederer: So without upside, but I think I should give you at least an update of what we're looking at right now. Based on what we saw and what Riverville and Massillon could do in February, we're going to be at a run rate of about $15 million to $20 million of just productivity improvements from those mills. We will then start layering in over the next few quarters, freight optimization. And actually, I mean, that's ongoing right now. That's not a future thing. That's ongoing right now. But freight optimization and then integration opportunities from additional tonnage from PCA into the Greif system as well as from Greif into the PCA system. So that work is ongoing. But at least I wanted to give you an update on kind of where we were at from a run rate standpoint right now, we're well on target to be at that $30 million run rate by the end of the year. Mark and Tom, anything further to add there? Mark Kowlzan: No. work continues on a daily basis to take advantage of all these opportunities. Operator: Our next question comes from Mark Adam Weintraub from Seaport Research Partners. Mark Weintraub: Great. Maybe just first starting a little bit more on Greif, trying to square. So if we look at the last 6 months based on kind of the EPS number, I mean, it seems to me it's probably a little less than $100 million in EBITDA from the business. And I believe kind of coming in, the base was close to 240 and then we were going to get synergies on top. And I realize maybe synergies show up in the legacy business as well. So maybe this is kind of complicating the analysis. But I'm really sort of just trying to gauge the magnitude of upside from things like seasonality, et cetera, et cetera. How much additional firepower is there relative to what we've seen in Greif over the last 6 months when you think about the contribution the business can be providing on a kind of full year basis as the synergies, et cetera, are fully layered in and the mix and seasonality issues are come to bear more favorably? Kent Pflederer: Okay. Mark, it's Ken. I will start and then Tom will add some color on this, okay? Going from 1Q into 2Q, we believe now we're going to get the full performance out of this business. with the mills running consistently at higher productivity rates and entering a seasonally stronger business and start to pull some more integration through. We're forecasting sequentially improvement conservatively about $0.10, 1Q to 2Q. So we expect to be accretive in the second quarter and going forward. Most of that improvement is from mix improvement and productivity improvement and then a little bit of price increase layered on top of that. We expect them to continue to improve 3Q just as the business and the seasonality even improves more. Tom? Thomas Hassfurther: Well, I would just remind you, Mark, that when we finalized the acquisition, and we got involved in taking a good hard look at the assets, primarily the mills, we knew there were some difficulty and some hard work to do, and it turned out that we were right, okay? And so it's -- we get off to a start that says, we're going to have to shut some time down at the mills and get some work done and make a big investment, do all those other sorts of things associated with it. . And now we're coming on the other side of that, and things are significantly better, and they're performing very, very well. So this will accelerate as we go forward. And as I mentioned earlier, and I think this is really vital to our system because we need some extra capacity on the box side as well. and they're providing that, and that's going to be some significant upside. Mark Weintraub: Okay. Great. And I'm not going to try and drag you through kind of all the delta drivers. But I guess, as I think about what seems to be embedded on the upside because you told us some of the downsides going from 1Q to 2Q. It doesn't seem like there's a huge amount of upside being given for some variables, which in particular, pricing in the 2 quarter numbers. Is it fair to say that you would, at this juncture, assuming things continue along the path they are that you're going to see the real big change is going to be 2Q to 3Q. That's where the earnings are going to really -- and to the extent that you're comfortable providing any color on that, that would be helpful. I realize you don't give guidance more than 1 quarter ahead, but it does seem in this particular instance that the good stuff is really showing up in 3Q in a big way. Mark Kowlzan: Mark, you're exactly right. We'll start seeing some benefit later in the second quarter with some price movement, but the big benefit comes into the third quarter. Thomas Hassfurther: That's right. That's exactly correct. . Operator: Our next question comes from Anojja Shah from UBS. Anojja Shah: I had a question on D&A. It was actually much higher than we expected in Q1, but you maintained $700 million guidance. So how come it's not a straight line first of all for the quarter? And second, what's embedded in 2Q in that $2.33 guide? Kent Pflederer: Our depreciation reported for the first quarter includes a chunk that's attributable to basically completion of Wallula restructuring, okay? So I think that explains the large reported number increase that you're referring to. So on the excluding special items basis, we're looking at about a $0.03 increase 1Q to 2Q in DD&A. Anojja Shah: Okay. And then going back to demand in April, you talked about you're seeing very strong demand. Any particular end markets showing strength or weakness? And what I'm really trying to get to is if you're seeing any early signs yet on GLP impact? And I realize you might not see it as much as some other types of packages, but just are you hearing anything on this from your customers? Thomas Hassfurther: This is Tom. That's a very good question. I'll take the second half first. Our food and beverage customers continue to perform quite well. And of course, that's the largest segment in corrugated. And so I think there's a lot of sensitivity around that, especially GLPs. But they adapt quickly. And we're seeing a lot of products come out with protein in them and all these other sorts of things that are that didn't have such in the past and they're performing very well. So there's a lot of things going on in that segment that I think are very positive as our customers have adjusted quickly to varying demands and it's still performing very well for us. In addition, I think that I've called out building products probably for the last few years that has been down. but it's starting to show some resurgence as well, which is an important segment for us. Those are probably the biggest movers I can talk about. Operator: Our next question comes from Anthony Pettinari from Citi. Anthony Pettinari: Just following up on the timing of the price hike. I guess Pulp & Paper Week had prices down in February and then up in March and up in April again. And as you implement the price hike, is this sort of a, I don't know, like a negotiation around the net price? Or could you have some instances where prices actually go down before they go up? I know it's kind of a strange question, but I just can't remember a time where Pulp & Paper Week had 3 consecutive months where it was down before it was up and then up again. Thomas Hassfurther: Well, it's hard for me to remember too, Anthony, and I've been in this business a long time. But all I can tell you is that we're not really going to comment much on at all about what we're doing relative to our customers and our negotiations. I'll just call it muddy. How about that? And that's about all that's about all I can tell you. Anthony Pettinari: Okay. Okay. Sounds good. And then just, Kent, on the 1Q to 2Q bridge, you outlined some, I guess, sequential headwinds that we typically don't see around the share-based comp and then the tax rate lower in 1Q. Should we think about these as sort of like onetime things just for 2026? Or if we think about seasonality going forward or seasonality next year, is that share-based comp going to have a similar kind of profile? Kent Pflederer: Okay. So share-based comp is going to run at a higher level this year. It will run at a higher level next year, but step down a little bit as 1 tranche of the old awards vest, and then it will do similarly in '28. So you're going to be a little bit higher, but it's going to time out through '28 basically. On the other items, the costs, it's just going to kind of depend on the market basically. And we're expecting them at least to be elevated during the second quarter, and we'll continue to manage through it. Anthony Pettinari: Okay. That's helpful. Maybe just one last one, if I could. Like you obviously increased your exposure to recycled board with Greif. You had a large competitor that just bought a recycled mill out West. I'm just wondering, if you think about PCA's pass for the next 3 to 5 years, and you obviously are going to need more board, do you think the incremental opportunity is in recycled? I mean, it's obviously probably lower capital cost just from like what your customers are asking a view, you have historically had a great virgin kraft liner offering. But is recycled kind of the direction going forward in terms of if you were to put in an incremental ton from a capacity perspective? Mark Kowlzan: You take advantage of the opportunity that comes along, whether it's a recycled opportunity or a virgin kraft opportunity. And so really the decision we made when you look at the various options you have. But we're certainly not -- we can take advantage of recycled as we've done for decades and also we know how to run integrated operations extremely well also. Tom? Thomas Hassfurther: Yes. Anthony, I'll just add that directionally, we want to be able to optimize whatever properties fit our customers' demands. But I want to remind you that, I mean, we are still primarily virgin kraft, and we're not going to change that because one of the things that it does for us, as I've mentioned in the past, is we can optimize performance a lot better with virgin kraft than we can with recycled. . Operator: Our next question comes from Phil Ng from Jefferies. Philip Ng: A question for Kent. I appreciate the color that you gave in terms of some of the step-up in costs, whether it's freight or chemical sequentially. When we think about that for the back half, is the 2Q run rate like on a year-over-year basis, like a good way to think about the rest of the year? Or does that potentially step up just based on timing of how these contracts were potentially on freight or chemical costs and stuff of that nature? . Kent Pflederer: No. Phil, I think the best you can do right now is take 2Q and apply that to the rest of the year. That's the -- and we'll do the best we can to manage through freight optimization activities and running our operations as efficiently as possible. But in terms of how the market is on what we're buying, again, I would look at 2Q right now, that's the best you can do. Philip Ng: Okay. All right. That's helpful. Just that's a good run rate. And then I guess a question for Tom. I know you used the word muddy a few times in terms of implementing this box price increase. And that feels like it's just more timing if someone knows, but when we think about the net 50, you've been in this business for a long time, is your expectation the implementation of the box side all said and done, how does that feel? Does this feel more challenged just because the macro is tougher or kind of business as usual? Thomas Hassfurther: No, it's more business as usual. I mean there's not -- it's not -- none of these are easy, but it's -- we were obviously very disappointed with the downturn at the -- the announced downturn at the beginning. We didn't see it. But hey, it is what it is. And we're dealing with it. But our expectation is to implement this in the same time frame that we typically always implement, both our noncontract and our contract business. And Phil, I'll add one thing that I think is really important is that the consumer has been very resilient in these times. And our customer base feels very good about their business going forward. And there's a big factor coming in also that we haven't even talked about, and that is the tax refunds that are coming to the consumers, and that will show up in the economy as well. So I think that's another positive for us that's going to help us in the second half. Philip Ng: That's great color, guys. When I bring those 2 pieces together, I know there's a timing dynamic in 2Q. Should we expect price cost to be neutral or positive, how do we think about it? I know there's definitely noise in 2Q, but as we look at the back half, can you help us think through that? Thomas Hassfurther: Well, like we said, I mean the price will impact at the end of Q2, and then we'll really roll in, in Q3. That's when you'll see the big difference. Philip Ng: Okay. And just one last one for me. You guys are running hard, mills are running tight. I know you guys are bringing on capacity in time with Jackson and Counce. How is that ramping up? And then anything that we should be mindful in terms of noise to the P&L or whether to step up the start-up cost, D&A? And then Greif, you guys are working to add inventory down, which makes sense you want to be more efficient. But if you're that tight, why don't you use that inventory to kind of meet some of that demand? Mark Kowlzan: Let me talk about your first part of your question. Again, we just executed the 2 big outages at Jackson and Counce and executed them very well. A lot of that work was to gear up Jackson as an example, to hit the next productivity opportunities with the speed on the machine. And so where we want to be, that was done well. Counce, we just executed the first phase of a rebuild our #2 paper machine. That machine had been rebuilt 35 years ago. And so we executed that and finished that work 4 days ahead of schedule and started up running very well. So we continue to bring on this capability to deliver more quality product as we need it. And also just the Greif system, we fully have recognized the opportunities that we saw when we did the due diligence. We're running -- basically the last couple of months, we've been in that 97% plus performance and as far as uptime efficiency on the machines out of the Massillon and Riverville system, and we continue to work through opportunities there. So that will continue to see benefits. So Tom? Thomas Hassfurther: Yes. One of the reasons that we reduced the inventory and we're working down the inventory quickly is because we want those sheet feeders and box plants to be running the correct grades that run for the PCA system, so we can optimize the fiber in terms of performance for the customer. They're not just stuck with running whatever 1 of their 2 mills might run. So that was -- that's really important to us from a cost standpoint going forward, as I mentioned earlier, is to optimize those assets. And so therefore, that's why we're doing what we're doing. But you make a good observation. I mean it is tight and especially in linerboard. So we're cognizant of that. And that's why we -- that's as an example, also why we moved Counce outage up into the first quarter to make sure that we're going to be in good shape going forward from a linerboard point of view. Operator: Our next question comes from Hillary Cacanando from Deutsche Bank Securities. Hillary Cacanando: So you mentioned a third gas turbine project in Louisiana. Could you just provide more details on that project in terms of additional CapEx and time line? And any update on the gas turbine projects in Jackson and Riverville facilities? Mark Kowlzan: Yes. We did get the Board approval on the gas turbine projects at Riverville mill and Jackson mill at the last Board meeting, and then we're planning on seeking approval for this third same -- it's a duplicate unit that will be going in those 2 mills for the future DeRidder project. . The capital, it's in the same ballpark. I don't want to give you numbers right now until after we've we reviewed this with the Board, but same capital allocation and the same type of return metrics that we're looking at, very, very good opportunities too, which would give us Jackson, Riverville and DeRidder would be electricity independent off the grid in the same manner that Valdosta is, So we'd have 4 of our 10 mills that are electricity independent, which would be a huge benefit to us. So that's really all I want to say about that. Hillary Cacanando: Got it. Great. And then just on the high level, what needs to change to bring the cost down? I mean, do you think hypothetically, if the war is war ends tomorrow, hypothetically, like does that change anything for you in terms of cost outlook or because it takes time for supply chain to adjust like if that really wouldn't change anything? Mark Kowlzan: Well, again, I think what the conflict has done in the Middle East is raw materials such as various chemicals that depend on petroleum, we've seen chemical costs increasing. So the question is, does that ramp down over a period of time if the supply-demand balance for petroleum products comes into balance again, we'll have to wait and see. Natural gas, we've been fortunate here in the United States. We have plenty of supply. So we're not impacted by that. Transportation fuels has been the big increase on diesel up over 50% in the last few months. So that definitely, for all intents and purposes, should normalize over a period of time if the conflict winds down. And so I would expect for what we would see would be the transportation cost in terms of diesel impacts. Thank you. Jamie, are there any other questions? I don't see anybody else on the queue. Anybody want to follow up? Operator: [Operator Instructions] This question comes from Pallav Mittal from Barclays. Pallav Mittal: Just one for me. So at start of the year, you had said you expect the total industry demand to be up in 2026. So just wanted to follow up on that. I mean, 4 months almost done. Anything that you can add on that or quantify in terms of industry demand for 2026? Thomas Hassfurther: I think I understood your question regarding demand. And demand, yes, we think demand is up and I gave you the number, at least for legacy, is running at about 4.5% right now. And that's a very good number, and I think that will continue through the quarter. and we'll continue to -- and we've got some positive things going on in some of our key segments as well. So yes, we see demand improving. . Pallav Mittal: My question was more on the industry demand for the year. Any comments on that? Clearly, I think you are gaining share in terms of industry demand for 2026. Mark Kowlzan: I'm not sure we understand what you're asking. Pallav Mittal: I'm just trying to ask, anything in terms of overall industry demand for 2026, up 1%, 2% for the year. Mark Kowlzan: No, we don't get into forward discussions about demand expectations. Thomas Hassfurther: Other than our own. Mark Kowlzan: Other than this quarter and what we're looking at for this quarter. Jamie, I think that pretty well wraps it up. Anything else? Operator: We do have a follow-up from Mark Adam Weintraub from Seaport Research Partners. Mark Kowlzan: All right. We've got time. Go ahead, Mark. Mark Weintraub: So my phone cut out. So I think you might have addressed this a little bit, but did you buy back stock? I think you were saying something again, my phone cut out. I just wanted to confirm that you did buy back some stock during the quarter. And if so, what prompted that? . Kent Pflederer: No, Mark, we did. We bought back 266,000 shares roughly. Really, the prompt was we'd awarded earlier in the quarter and just to take out the dilution from the awards. Operator: And in showing no additional questions. Mr. Kowlzan, would you like to make any final closing comments? Mark Kowlzan: Yes, I'd like to thank everybody for taking the time to be with us today and look forward to speaking with you at the end of July regarding the second quarter results. Have a good day, everybody. Thank you. . Operator: And with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Union Pacific's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, and slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin. Vincenzo Vena: Well, good morning, everyone. Thanks for joining us. It's a wonderful morning here in Omaha a railroad and a little bit of rain coming down, but nothing that wouldn't stop men and women of Union Pacific from going out there and delivering. So really excited to be here and excited to review our first quarter and then take your questions. So of course, I'm joined here by the regular crew. We have the Chief Financial Officer with me, Jennifer Hamann. Got Eric. Eric railroad looks pretty good this morning. So excellent job our Executive Vice President of Operations. And of course, Executive Vice President of Marketing and Sales, Kenny Rocker. Now why don't we just go through the highlights real quick before I turn it over to Jennifer. If we go over to Slide 4, 2026 started strong as we delivered record first quarter results. Again, we showed who we are executing on new opportunities and raising the bar on what's possible for ourselves and the industry. And it's really important that we see that strength reflected in our bottom line as we reported first quarter records in operating income and net income. For the quarter, reported net income of $1.7 billion grew 5%, earnings per share of $2.87 increased 6%, and we've improved our operating ratio. Excluding merger costs, our adjusted net income was up 7%, EPS of $2.93 increased 9%, and our operating ratio improved 80 basis points to 59.9%. These are strong results that reflect what's possible when the team consistently executes at a high level. Now I'll let the team walk you through the quarter in more detail and then come back and wrap it up before we go to Q&A. Jennifer? Why don't we do the first quarter financials, please? Jennifer Hamann: All right. Thank you, Jim, and good morning, everyone. Let me begin with the walk down of our first quarter income statement on Slide 6, where our operating revenue of $6.2 billion increased 3% versus last year as freight revenue of $5.9 billion grew 4% on 1% lower volume. Digging into the drivers, lower volume reduced freight revenue 75 basis points. Fuel surcharge revenue of $608 million increased $43 million reflecting the impact of higher year-over-year fuel prices and a 100 basis points to freight revenue. Core pricing combined with business mix to drive 325 basis points to freight revenue improvement. As we committed, our quarterly pricing dollars exceeded inflation dollars. Specifically, coal pricing remained positive but at a lower rate than last year for business index to natural gas prices. And as we noted in January, we continue to see impacts from the competitive and global environment in select agricultural markets. Fortunately, we are well positioned to compete as our strong operating performance and productivity initiatives enable us to continue to win new business at good margins. Our first quarter business mix was positive, although not as favorable as we might have expected, due to the higher volume in our lower average revenue per car businesses, such as coal and rock combined with lower volume on some of the higher arc businesses, such as food and refrigerated and forest products. Upping up the top line, other revenue declined 4% to $324 million, driven by lower subsidiary revenue as we have now lapped the metro transfer completed in the first quarter of 2025. Turning to expenses. Our appendix slides provide more detail, but let me discuss the key drivers as total operating expense increased 3% to $3.8 billion. Compensation and benefits expense increased 1% as we almost entirely offset the impact of inflation with record first quarter workforce productivity that enabled a 5% smaller workforce. First quarter cost per employee increased 6.5%, driven by higher wages and benefits, along with increased incentive compensation. We continue to expect full year compensation per employee to increase between 4% and 5%, as we work to offset cost inflation with process and technology improvements. Fuel expense grew 7% on a 7% increase in average fuel price from $2.51 to $2.69 per gallon. Purchase services and materials expense increased 7% as a result of merger-related costs, while equipment and other rents declined 9% with record first quarter cycle times. Reported first quarter 2026 net income totaled $1.7 billion and was a first quarter record with earnings per share of $2.87. Adjusted for the merger costs, our earnings per share totaled $2.93 and operating ratio came in at 59.9%. Overall, we delivered strong quarterly results to start the year, and we are confident in the ability to continue delivering for all of our stakeholders by successfully executing on the fundamentals of our business. Turning then to cash returns on the balance sheet on Slide 7. First quarter cash from operations totaled $2.4 billion, up 10% versus last year, and we generated free cash flow of $630 million after making significant investments in the network and returning an industry-leading dividend to our shareholders. Net debt decreased $1.2 billion as we repaid our long-term debt. We ended the quarter with an adjusted debt-to-EBITDA ratio of 2.5x, while we continue to be A rated by our 3 credit rating agencies. Looking ahead, we are affirming our 2026 outlook. This includes our expectations for reported earnings per share of mid-single-digit growth and operating ratio improvement. Our original diesel fuel estimate of $2.35 per gallon established in January is now much harder to predict as we have seen quite a bit of volatility recently. And all the fuel prices seem to be coming down for the month of April, we will likely average over $4 per gallon. Beyond 2026, we remain committed to attaining our 3-year CAGR target of high single-digit to low double-digit EPS growth throughout 2027. I'll now turn it over to Kenny to provide an update on the business demand. Kenny? Kenny Rocker: Thank you, Jennifer, and good morning. In the first quarter, freight revenue grew 4%. And if you exclude the impact from fuel surcharge, freight revenue increased 3%, both first quarter records. Core pricing gains, higher fuel surcharge revenue and favorable business mix more than offset the 1% lower volume in the quarter. Let's walk through the key drivers. Starting with our bulk segment, revenue for the quarter was up 10% compared to last year, driven by a 12% increase in volume. Strength in coal was driven by sustained utility demand and favorable natural gas pricing supported by strong service execution as well as new business with LCRA, which started in April of last year. In grain, first quarter delivered record volume driven by strong export demand, including a rebound in shipments to China and continued expansion into Mexico, such as Bartlett's new facility in Monterrey. Grain products continue to benefit from business development tied to renewable fuels and associated feedstocks. Turning to Industrial. Revenue was up 5% for the quarter on a 4% increase in volume, delivering a record first quarter and outperforming the market. Strong core pricing, both best ever quarterly average revenue per car. We continue to see strength in demand for construction projects driven by new LNG terminals and data centers, coupled with our intense focus on business development. Petrochemicals also performed well this quarter, reflecting new business wins and improved demand. Premium revenue for the quarter declined 5% on a 9% decrease in volume and a 4% increase in average revenue per car, reflecting business mix and higher fuel surcharges. As expected, lower West Coast imports and customer shifts had a drag on international intermodal volumes, which declined 28% versus last year. But on a positive, domestic Intermodal delivered its third consecutive record quarter driven by outstanding service and continued commercial momentum. Softening vehicle sales pressured automotive volumes, though having one incremental volume with BMW offset some of the market softness. Looking ahead on Slide 11, we remain optimistic about coal's potential despite current natural gas pricing, we expect full year coal results to be positive. In grain, improving export demand to China, along with continued momentum into Mexico, positions the business well to support growth. For grain products, we expect continued strength driven by business development and expanding renewable fuels and feedstock markets with a clear renewable fuels policy, providing more stable demand. Moving to Industrial, despite a soft housing environment and tepid end market fundamentals, we remain firmly focused on out farming industrial production. We expect the strong volume and construction and petrochemicals to continue based on our customer wins. A great example is the Golden Triangle Polymers Company joint venture with CPChem, where we are encouraged by the upcoming start-up of this new world scale facility in the third quarter. Wrapping up with premium. International intermodal volumes will remain subdued, although we lapped some of the shifts we experienced last year as we moved through the quarter. Domestic intermodal continues to perform well, supported by over-the-road conversions enabled by our strong service product and diverse market reach. While softer vehicle sales are expected to pressure automotive volumes, we expect business development wins will offset some of the impact. Our first quarter results reflect the team's relentless focus on revenue growth, which is achieved through pricing to the service we provide, investing for growth and driving business development. And with that, I'll turn it over to you, Eric. Eric Gehringer: Thank you, Kenny, and good morning. Moving to Slide 13. Our first quarter operating results highlight our focus on safety, service and operational excellence. Last year, we led the industry in employee safety. We carried that momentum into the first quarter as we improved both employee safety and derailments versus their respective 3-year rolling averages. We set first quarter records in all 6 of our key performance and efficiency metrics on Slides 13 and 14. Freight car velocity increased 9% to 235 miles per day. This performance was driven by best-ever terminal dwell of 19.7 hours, 11% better than last year and our second quarter below 20 hours. Every day, we continue to challenge ourselves to find new and innovative opportunities to reduce car touches, leverage existing technology in our terminals and implement new technologies. For service, both intermodal and manifest SPI finished at 98%, a 4 and 5-point improvement, respectively. These results compare to our best service lines, which were achieved in 2025 as we continue to raise the bar for success. We also demonstrated that maintaining a buffer of resources is critical to recovering from weather and incidents as customers trust us to provide consistent, reliable service. Moving to Slide 14. Locomotive productivity improved 6% and was a best ever quarter. Notably, our average active locomotive decreased 4% with higher gross ton miles, highlighting efficiency gains from our combined efforts related to locomotive dwell, train length and capital investments that increased locomotive pulling power. Workforce productivity, which includes all employees, increased 7%. Our active train engine and yard workforce decreased 4% on a 1% reduction in car load levels, demonstrating our discipline as we remain more than volume variable. Looking ahead, we continue to hire for attrition and to support our service. Train length grew 3% compared to last year. Proprietary technologies such as physics train builder combined with mainline investments and solid execution of the fundamentals enable us to safely grow train length. In closing, we had a very successful first quarter. We operated safely, efficiently managed our resources and consistently served our customers. As we progress throughout the year, we will remain nimble and continue to build on our strong momentum. With that, I'll turn it back over to Jim. Vincenzo Vena: Thank you very much, Eric. Fantastic results. If we're going to turn to Slide 16, before we get to your questions, I'd like to quickly summarize what you've heard so far. We had a strong first quarter and start to the year. Our network is running well and we are delivering on commitments to our customers. When you put it all together, we are doing what we said we would, the industry in safety, service and operational excellence, and that further translates in affirming our long-term guidance of high single digit to low double digit CAGR through 2027 with best-in-class operating ratio and return on invested capital. Before we turn to your questions, just a quick merger update. We are 100% on track with filing a revised application on April 30. We are confident the additional information we are providing meets the STB's expectations and we look forward to moving toward approval and the real exciting part of operating in America's fist Continental Railroad. With that, we're now ready to take your questions. Rob? Operator: [Operator Instructions] And the first question is from the line of Scott Group of Wolfe Research. Scott Group: So Jim, I wanted to ask on the merger. We were supposed to be 6 months or whatever into this process. And I guess we're about to restart the clock. Does the fact that we are taking this long. Does this give you any more or less confidence in the -- and your ability to sort of to get this approved. And I don't know, just maybe confirming we're -- yes, so that's the -- I guess that's the crux of the question. . Kenny Rocker: Listen, Scott, great question, and I appreciate it. It's a good way to start off. I thought for sure, you'd start with Jim and the team, a pretty good quarter, but I think top of mind for a lot of people is the merger. So let's talk about merger. We were not we were disappointed but we were not surprised with looking at historical events of how the process works to put the railroads together that we were going to get some things that we foresaw in what we thought was going to happen, didn't happen on the time line we like. But we knew that this was not going to be a process that's going to happen as quick as I would like okay, to be done I was hoping it was going to be done for my birthday this year. So we're going to miss that date in August. But at the end of it, when we look at the fundamentals, we look at the facts of what this combination will deliver for both the country and being able to expedite, take trucks off of the highway, be able to move products in a much more seamless open up new markets for customers be able to provide service to some underserved markets that today, optionally, they end up going with trucks instead of going by rail, we are more convicted now than we ever have been when you take a look at what's in the merger application and all the detail that we're putting forward. So at this point, we are much more convicted. I'd be concerned leading this company if we have lost our way in how we operate and what we do every day because of the merger. And as you can see, we've been very clear. Our time is spent on operating the railroad every day, finding ways to grow our business, finding new markets, finding new customers, adding to the customers we have. And you can see that even with all the economic uncertainty with everything that's going on in the world and with tariffs that we had to go through and our customers did, we delivered again a quarter that moves us ahead. So because of that, let's turn to the merger itself and what's in the -- what we are going to put forward in the application and why it's such a compelling case, a much more compelling case now. The experts that we've hired are clearly going to show where their opportunity is. We know that on a service level, a seamless railroad is able to move products at less cost. Therefore, even the pricing is going to be beneficial for our customers because of our less cost. And we're going to be able to serve our customers with a product that allows them to save on their own costs internally, whether it's railcar inventory and be able to move to their end product and end user faster. For our employees, we were real clear and we've been clear right from the start that our employees, our unionized employees. They should be part of the win of a new railroad that goes across the country, and we've guaranteed a job for everyone. And that commitment is are on glad, and we're very happy to make that with agreements or without agreements, even though we have a number of agreements. So service is going to be better. We provide more opportunity. We take trucks off of the highway and our employees are guaranteed jobs. I think we're more convicted now that this is good for the country and good for Union Pacific. And financially, it is good for our shareholders. We see a lot of growth opportunity there, lower cost movements, much more fluidity. So I'm more convicted today than I was when we put the application in the first time, Scott. Operator: Our next question is from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: I hope everyone is doing well. I guess maybe to sort of think about the guidance. So that was helpful on the merger, and I think it gives us a good sense of how you're thinking about it. As you think about the outlook for this year, particularly the operating ratio improvement, obviously, a good first quarter, but fuel is going to be a headwind here of fuel surcharges will be a headwind from an operating ratio perspective. So I guess if you could maybe give us a little bit of color, are there incremental productivity sort of opportunities that are becoming more apparent to you as you guys have been operating so far through the year. Can you just sort of talk a little bit about that because I do think that there's a headwind there, but maybe there's been some incremental positive offsets? Vincenzo Vena: Jennifer, why don't you talk about the fuel and everything that we're doing on that piece? Jennifer Hamann: Yes, sure. Thanks for the question, Chris. So you're right, fuel will definitely be a headwind, particularly here in the second quarter with -- again, I mentioned on the call, in the prepared remarks, we're paying a little north of $4 a gallon right now here in April. So that will certainly pressure margins, particularly here in the second quarter. But we have a lot of opportunities to drive efficiency in our railroad. We have opportunities and Kenny and his team are driving in terms of business development. With that great service product, we are also being very consistent in terms of pricing for the value of that service. And when you put all those things together, we are still confident for the full year that we will be able to improve our operating ratio. And we reiterated that to make sure that everyone understood if we have that confidence and we have line of sight to be able to do that. Fuel, again, pressure here in second quarter, and we feel good about the rest of the year, though. Operator: Our next question comes from the line of Jonathan Chappell with Evercore. Jonathan Chappell: Jim and team, a pretty good quarter. So my question is really for Kenny or Eric, whoever wants to answer it. We look at the numbers that Eric's team is putting up on slides 13 and 14, and then we understand there's obviously a lot of macro headwinds that you're facing across different end markets. Is there an estimate for spare capacity or maybe another way to ask it is what kind of volume growth can the current system handle without needing to add extra resources if some of those macro headwinds turn to talents? Eric Gehringer: Yes, Jonathan, thank you for that question. And certainly, a topic that we review on a consistent basis. We've always said from the railroads perspective, you have 5 critical resources, mainline capacity, terminal capacity, crews, locomotives and cars, and you're obviously hitting on one of those 5. Now as we look at the railroad today, we have latent capacity. Now we've driven that through a couple of different ways. Number one, and I reported this morning on top of all the improvements we've made train length, we did it again, 3% improvement best quarter ever, that train length is generating lane capacity. After a number of other reasons why we do train length, that's right up there at the very top for being able to generate that capacity. In addition to that, we still invest between $500 million and $700 million a year in capacity projects. And you've heard us talk about those in the past. They're citing extensions, they're citing constructions. They're the expansion of terminals. So the Union Pacific is positioned and will remain positioned with that capacity to bring growth that Kenny and the team are working on every single day to bring this railroad. Kenny Rocker: The only thing I'll add, Eric, is 2 tangible ways to see that capacity really bearing fruit. One is on the equipment side, where we're able to go in and insert more equipment into a facility and/or spot at 100% of their order fulfillment, which allows us to go out and capture more business. But then more importantly, on the capacity -- and I've talked about this before, is the ability to shift in different lanes or geographic areas. So maybe we're going from the Gulf to the Southeast or from the Midwest shift down to the Gulf of Mexico. That's the kind of capacity benefits that we seem to really take advantage of. Eric Gehringer: And that's a really good example, too, when we think about the grain this year. So last year, you recall when we were talking about volume opportunities. Kenny and I were talking about the shift of grain into Mexico. But we've seen some of that shift back to the Pacific Northwest as China has become more open to receiving American commodities, and we didn't have to go in and build 5 more sidings. We went in with the capacity we had and took advantage of it and very successfully delivering on it. Kenny Rocker: And nor was that clearly forecasted. So we had to be agile. Vincenzo Vena: So Jonathan, if I can just add what the team already said was is we build the railroad, both capacity-wise and with asset-wise with a buffer. But what's really important for us is today, with the business level that we have, and I looked at in detail every morning, we're operating with over 100 locomotives on the mainline less just because of our speed and what we've been able to improve. So we parked them. So they give us a nice buffer of locomotives and assets. On the people side, we figured out both by technology, by investments by how we operate the yards, by how fluid we try to stay, we've been able to get more cars switched per employee real important. And we see line of sight to be better at that. On the capacity of the railroad to add 10% more business, let me say this. We've invested hundreds of millions of dollars, especially in our terminals to make them more resilient and able to recover faster and have a higher level of capacity, both by the speed that we're moving the railcars through and the way we're handling them and touching them less, moving less touches. The overall network, and this is key of who we are and what we do. So if you turn the clock back, and I hate to look back too far, but in 2019, if we were operating this railroad the way we were in early 2019, we would have 25% more trains out there running this morning than we are today. So we did not remove capacity. So this railroad is operating at the higher volume. But let's say, it's not less volume. It's higher volume than we were in 2019, and we're operating 24% less trains to be able to move that volume. The touches are faster, less touches, the way we operate our terminals is faster. So I'm very comfortable that we have the capacity to add a lot of business without the huge incremental costs that normally would have to, both capital and operating cost because what happens is if you're running up against your capacity, it costs you more operating dollars to be able to try to operate it through because you cause congestion. So I'm very comfortable. We do not sleep until we're comfortable that the railroad is running with the system it has. Now Eric will tell you that we're not done. You go back again to when I came back and joined the company again after my sabbatical, some people were asking me the question, what's left. And I think you could see what was left. There was lots of opportunity, and we see lots of opportunity as we move ahead over the next few years. So thanks for the question, Jonathan. Operator: Next question comes from the line of Jason Seidl with TD Cowen. Jason Seidl: Obviously, a good quarter, and it's nice to see the railroad operating so strongly. This is probably on Kenny's side. I wanted to sort of dive deeper into your commentary on business development. One of your fellow railroads yesterday, talked about their success. They're seeing new projects grow in excess of 15%, and we're talking about adding maybe 1% to 2% in terms of car loading growth for next year. Could you give us some more color on UP's efforts right now, and where do you think that could go and add your car loadings into the future? Kenny Rocker: Yes. I won't give any guidance on the volume, but we are very bullish, optimistic about the new pieces of business that are coming online. I think you're talking about the industrial development aspect of it. We feel good about the numbers we closed for the quarter. We closed about 20 new construction projects in the first quarter. We feel good about where we're headed in second quarter. And I tell you, we got a strong pipeline that's out there of construction projects that are coming on. Most of those are on the carload side. And you've heard me say in the past that we've really taken a focus on adding new customers, both at the origin and the destination and expanding that capacity. So we're pretty excited about where we are. Operator: The next question comes from the line of Ken Hoexter with Bank of America. Ken Hoexter: Great job on the expenses, and I thought that was an impressive stat on the -- stats some. I don't think we've heard before. But looking at the way the stock is trading, I want to return to the M&A seems to suggest the market is building in maybe larger concessions that might be somewhat destructive to market value. Just again, given where you're trading and the peer,does that make sense? Is there anything in the detailed request for deal terms or discussions parties are having through the process on where you'll come out on concessions? And then, Jen, any reason you switch the language to reported outlook from adjusted in you're calling out merger costs or does that mean your long-term target still includes some merger cost. I just want to understand a clarification there. Jennifer Hamann: Yes. Let me hit that last one. Ken, actually, we added that as a clarification from last time because we didn't have reported and that generated a lot of questions. And so we wanted to be clear that when we talk about the EPS growth that of our reported. So that includes the headwind to your point, that we do have from the merger cost that we didn't originally anticipate as well as the fact that we're not buying back shares right now. So it is on reported. Jim?. Vincenzo Vena: Okay. Reported. Jennifer thought she was helping, and I love it, Ken, that you caught the change in words, so that was perfect. Listen, as far as the stock and conviction on that, the market is the market, okay? I can't control the market I wish I could, but I can't. But I'll tell you, fundamentally, as a business, we see growth in opportunity with customers, whether we're building in on some customers. And those will be new products that we add or the amount of investment that our customers are making in different parts of the country to grow their business and be able to export and the move within the U.S. economy. So we're real comfortable with that. On the merger, Ken, and concessions. This is truly an end-to-end merger with a small little piece of overlap that we'll take care of as we go through in the application and say how we're going to handle that to make sure that no customer. In fact, the number of customers that are going to go from 2 to 1 is like a handful out of all the thousands of customers we have. So it's a very small piece in the hand. It's pretty hard to come up with concessions that make sense. Now some of our competitors are out there very, very loudly talking about what this business is. And let's put the framework of where we are today and what our competition is. CSX reported yesterday, great results. I was impressed. They did a great job, okay? And they are going to compete hard and they will still be a competitor in the eastern part of our network. They will compete every day against everything we try to do as a seamless railroad. And they'll do that through price, they'll do that through innovation, They'll do that through being able to be more efficient. And that's what they need to do to compete against us. But if anybody thinks they're not going to compete, and you could see what they've done to try to compete already just with the announcement that we had on the merger and what they've done. In the West, people get this wrong. We are not competing against Burlington Northern Santa Fe. They're owned by Berkshire that this morning is over a $1 trillion company. Berkshire has the monetary capability with $300-plus billion in cash plus they have the capability to invest in the railroad and they're going to be a strong competitor for us after. So if you take a look at the 2 biggest pieces of competition that we have in the U.S., we're very comfortable that they will compete hard against us, but we are going to be able to provide a level of service with less touches that speed up products moving across the U.S., that's why it's so compelling. So Ken, I'm not sure, and I don't see a big change in the amount of concessions. Are we talking to people? Yes, we are. We're talking to customers. We're talking to to competitors across the spectrum to see that we could come up with something reasonable, but we're not prepared to really give concessions to the level that basically just opens up our railroad for no reason at all other than they want to gain something through this process. That's not the way America works. America works and that if it's truly detrimental to customers, the real world combination, then you need to do something about it. But when you speed up things, give more opportunity, it's pretty hard for us to see any major concessions that we have to give. Operator: The next question comes from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Maybe I'll follow up on that because I think your more skeptical competitors and maybe even some investors would say yes. But this combination at a very high level is going to drive more than 40% market share to your network relative to now much smaller competitors and regional competitors. And how do you push back on that criticism of a transaction of this size? Vincenzo Vena: Well, I think what you have to look at is the entire market that's out there. People want to look at the railroads and say, combined Union Pacific and the folks Southern is going to have a combined 38% or 39% actually is the number of GTMs, but we're not going to be that much bigger than our Western competitor at that level with gross tons that were both going to be moving. As far as the local market. Listen, I think short lines do a great job and an excellent job of handling that first mile, last mile and ICS strengthening them, we'll be able to drive more business to them with this combination. So they're not going to lose in the long run. There's always some that are going to be affected because of if we don't stop cars or hand them off somewhere, we can take them to a longer route or a different route that will help. But at the end of the day, listen, the 40% or actually the 39% number when you take a look at the entire market, railroads are in the low double digit. Capture of the true mark that moves by land or by water here in the United States of America. So that opportunity is huge for all of us to be able to swing that a little bit. And I think that's a better way to take a look at it, Brandon. Operator: Your next question comes from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I think I'm going to ask maybe a different question theme here. But Jim, I wanted to get your opinion in terms of how you think about just the value of Union Pacific's physical network at a time where look, investors are increasingly focused on AI-driven disruption. So what do you think the market is missing about just the intrinsic value of the network, especially post deal? And then also maybe talk a little bit about what you're doing in this world of just a lot more technology opportunities, AI-enabled efficiencies and what you're already doing in the yards and operations to drive better results? Vincenzo Vena: Great. Thanks for the question. Listen, Eric, why don't you start about how we're using information AI technology to operate the railroad and what we see coming down the pike? Eric Gehringer: Absolutely. So our conversations inside UP when we talk about AI or equivalent tools, really focused first on making sure that we're not doing it just to do it. We're instead focused on what is the actual thing we're trying to solve and what's the associated value, whether that's removing car touches, dropping dollars to the bottom line, improving our service. And I think it's important that you all hear us say that because you see in other cases where that's not it. They treated as a hobby. We're not in the business of hobbies here. We're in the business of delivering value. Now if you think about how we're using that, some of the ones that are most important because they're foundations to our service and their foundations to our productivity, which allows us to grow. It's how we think about using AI inside of our dispatching center. We have an automated movement planner is a program that we call that's informed by AI, and it's continually evolving. Automated movement planner really focuses on driving an even more consistent and reliable service by providing support to our dispatchers in real time and looking out 12 hours in advance to lay out their railroad. If you just even look at 200 miles of railroad, there's a lot that happens in not just the movement of trains, we have to have people go out and maintain the track and then we also have variability events, unfortunately, some days. And we have to plan for that, and AI has been a great resource for us to do that. Now when we think about inside our terminals, we've talked in the past about technologies like Mobile NX that allow us to automate part of that. There's some AI components to that, and there's certainly value in that. Even more valuable is the tools that we've provided like terminal command center to our teams that are actually on the ground operating those terminals. That provides them an even higher level of intelligence and being able to not only forecast what's coming at them, but for what they have in their yard, how do they see problems right? If you're going to go out and you're switching a bunch of cars and now you've got a trim, but you accidentally have the wrong car in one of those cuts, okay? Well, that's a big hit to the productivity and thus impacts our [indiscernible] product. We can see that ahead of time. Well, then we can plan that even 2 hours ahead that says, "Well, I'm going to be in that track. Let me grab that car then. So even in the case of mistakes, which we work tirelessly to avoid, you can even be more efficient in how you're able to address those, if you can see that risk ahead of time, and that AI tool allows us to do it. And I'd say in total for the whole company, I mean, there's at least 8 or 10 really major projects that we're using. I've given you 2 examples, but they really represent how we're using it to, one, improve our service product and to, drive efficiency. Vincenzo Vena: The nice part about technology and how fast it's changing with AI. And what it really drives for us is we always talk about the big things, trains, assets, big locomotive weigh in 434,000 pounds and how we move it. But fundamentally, across the company, whether it's how we're going to be able to communicate with customers, how we're -- the number of people you need to be able to communicate with customers and how you get information better. We're working hard on that using AI tools and information tools to be able to do that. Even in the finance department, how do we get better being able to get information out. So it's across the board that we're doing that. Stay tuned. We're going to be implementing and have the capability to implement our locomotives to make them even more autonomous than they are today so that they can operate to give us more fuel conservation. Those tools are driven by technology in the background that allows the locomotives to operate in a smarter, much more fuel-efficient manner. And we're getting pretty close to be able to roll that out, not yet today. Eric will get real excited if I start to announce things a little bit ahead of them. But those are the things. Big things, how fast we can change with the different flow of business. I talked about at the very start this morning about a railroad being a little bit of rain coming down in Omaha. It's rather cool in Green River this morning. It's below freezing. So we got a whole bunch of snow up at the top of the Danner Pass. We have rather breaking warm weather in other parts of the railroad. The nice part about it is we get a little bit of everything. So how you react to the weather and how you react to be able to change the network and be able to change the way we operate every railcar in a faster manner, we use tools to be able to get to the point where we're going to be able to react much quicker. We're talking about trying to get to the point where we can do that in days instead of weeks the way it takes us right now. The way we manifest and use employees to make sure that we optimize the entire system. So it does touch a lot. We're a simple old business with big hardware. But at the end of the day, we've got a whole team and Rahul who leads that for us and is doing a spectacular job for us to look at opportunities to embed the latest in information, manipulation and get us an answer quicker and be able to be able to automate as much of this railroad as we can. So good question. Love it. Hopefully, I answered your question. Operator: The next question is from the line of Brian Ossenbeck with JPMorgan. . Vincenzo Vena: Brian, how many pounds do you have in your back now lots. Brian Ossenbeck: We're up to 65 and climbing. So just trying to keep up. Vincenzo Vena: Impressive, Brian. Brian Ossenbeck: Maybe I'll put a copy of the next merger document in there as well. . Vincenzo Vena: That's more than 60 pounds. You'll need a trailer behind you. Brian Ossenbeck: I just might. Well, in terms of -- just 2 quick follow-ups on Jim question on integration technology, kind of dovetailing that last discussion. So are you still assuming first half of '27 approval, and it doesn't sound like it, but I just wanted to confirm that you're not really expecting to address some of these concerns from your peers, just so addressing what the STB has asked for and the new application out next week. And then just would love to hear more about maybe from Eric and you, Jim, about clear concern about integration based on prior issues that the industry had quite a long time ago. Clearly, things have changed some of that you just mentioned with technology. So what can you give us in terms of new ways, new processes, new new abilities to really get ahead of what's been a huge concern in the industry, but we would assume it should go a little bit better this time around. So I know you can leave you so much on that part right now, but would love to hear how you're planning for that this time around with some new tools? Vincenzo Vena: Brian, you are on it this morning. There were 5 questions in there. I love it. But let's start with the timing. Yes, we're working off of the timing that we know of that the STB has put out. So it will be second quarter next year, we would expect to be able to be at the place where they approve it, then we can move ahead. So that's the timing. Now it's not finalized. We're hoping that they can speed it up and get it -- get through the process. I think they should be able to. Again, it's Jim Vena. The way I do things, we make decisions pretty quick. But I understand they want to look at it. They want to do a thorough examination and we're ready for it because we're operating the railroad the way it should be operating, and it's not affecting what we're doing for the Union Pacific stand-alone today. I'm going to pass it over to Eric here in a minute on integration. Our competitors, what we're doing with the application is we are answering, and given the information that the STB asked for, they were very specific on the information that they required from us, and we're answering those questions, whether it's the EPRA, whether it's market share and the amount of business that we built in. So we've done that. And we're absolutely sure that we've answered the questions that -- and how we're going to handle it. We've decided to release 5.8 really at the end of the day, I never thought that our competitors should know exactly what that document held. But when we looked at it, listen, at the end of the day, it's not going to make a big difference. So that's going to come out. So we will answer the 3 key points plus the other point that they, in general, wanted some more information. So that's what we're answering. As far as our competitors, you're a smart guy, Brian, and everybody on this call are smart people. Competitors are always looking to get an advantage that they can't get or they don't want to spend the money to be able to get. If a railroad wants to build in, which we are building into customers, they have every right to do that. They have every right to go through their own merger, small and large, which they have. So at the end of the day, if we built this transaction against satisfying what the other railroads, absolutely Canadian Pacific would love to get access to the West Coast of the U.S. Well, I'd love to get the Toronto. If they want to give up Toronto in markets in Eastern Canada and into the Canadian Prairies, I would love to do that, too. But it would be pretty hard for me to ask for that. So it's really some of the stuff that they've asked for is not fundamentally about competition. It's about trying to gain for their own railroad. And we're not going to answer that. We don't need to answer that, but we're more than willing to sit down and talk. Like I would be more than willing to trade Toronto for access to Denver as somebody who wants it tomorrow. So anybody who's listened in that wants to do that, give me a call, and I'm ready to do that. I'll run the Toronto, you can run the Denver, okay, and we'll match that up. So some of the stuff that they're saying is just not fact-based and I find it hard to believe. If you step back, though, let's talk about competition. I was just in Canada, visiting my family went out to one of the ports and terminals in Vancouver, and we talked through with one of the largest world operators of terminals, and you know what Canada is spending money to compete against the U.S. ports. In Prince Rupert, there's a plan to expand and double. In Vancouver, there's a plan to expand and double. At Contrecœur, there's a plan to expand and double the capacity for imports. That's who we're competing against. We sometimes have a narrow view of what competition is without looking at really what's happening in the marketplace. Our intermodal product, our international and domestic product is in competition with product. The size of the investment that's being made by the Canadian government, they expand the ports in Canada, the Canadian economy that cannot and does not need that much. It's purely to compete against U.S. ports and U.S. movement of goods in the U.S. That's the real competition and sometimes we're too narrow the way we look at it. Eric, on integration? Eric Gehringer: Perfect. So Brian, on the integration side, you're right. You certainly want to learn from the learnings of past mergers. Now we got to be a little careful there, right? You hear some people go back and reference challenges from mergers 30 years ago. And to your point, right in your question, you said it, a lot has changed in 30 years. But let's hit the most important 3 items when you look back in time and then think about how we already are planning to do it differently. So one of the things that certainly caused challenges in the past was technology. When you had 2 railroads merging together with 2 different transportation systems. It wasn't the technology itself that caused the problem. It was the pace at which the integration occurred. In other words, there was an intentional thought and change management around what is the pace you cut that over. Well, we've got a huge advantage, right? We, Union Pacific, have already demonstrated a very strong ability to change over systems, including our full transportation system called NetControl, just a little less than 2 years ago very successfully not a blip, no customer was impacted. It was seamless, it was very effective. So we've got that experience. In addition, when you move past the technology and you think about timing, you've seen in the past with some mergers where a KPI right out of the gate is the pace of implementation. Now look, we're not in the business of going slow. We're in the business of understanding exactly what we have to on day 1, day 90, day 180. And I'll tell you on day 1, you're not going to see a lot of difference, right? We will operate these 2 railroads, largely independently, at least for the first few months. And then we'll thoughtfully because of all the planning that we're doing, implant 1 action, once that action is implemented, we'll make sure that it worked effectively and then we'll move to the next. And then I save the most important one for last. If you look at past mergers, often, the premium railroad was buying a railroad that was operating very poorly. That's not the case here. The Norfolk Southern is a good railroad. They're good in how they think about their infrastructure, they're good in how they think about technology. Together, we're going to be even stronger, but we're not buying some railroad that's been in disarray for a decade. We're buying a really good railroad, combining it with another really good railroad. And obviously, as Jim has pointed out today, the net outcome is a positive for all of our stakeholders. So that work is all underway. It's being done very intentionally, and we're going to be the most comprehensive integration of any 2 railroads that this country has ever seen. Vincenzo Vena: Brian, I appreciate the question. Thank you very much. Operator: The next question is from the line of Walter Spracklin with RBC. Walter Spracklin: I just like to go back to the Kenny slide, I guess that's Slide 11. And when I compare that outlook slide to the same slide, the quarter before. It looks like you've added 3 new positives. You've had construction as being a plus, you deleted forestry as a negative and you improved auto from negative to neutral. So 3 positive inflections there. And then we're hearing from trucking peers that it sounds like the freight recession might be overall together. So my question is that and your Q1 results and volume are pretty good. Your railroads were operating well. If the volume is indeed looking better compared to where it was in the fourth quarter, why wouldn't your EPS guide be up as well. And I don't think your team would have an issue getting operating leverage, but it doesn't -- that logic kind of implies you are. So just love to get some clarity there on those topics. Vincenzo Vena: Walter, I love the question. I'm going to pass it over to Kenny because I'll tell you, you must have been listening in because we have had that same discussion. So I can hardly wait to hear his answer. Go ahead, Kenny. Kenny Rocker: Yes. So first of all, you heard my comments, lumber is still challenged. It's just a smaller volume that we're talking about there. And yes, we're looking at autos. And I'll tell you, we highlighted the fact that we have won some incremental pieces of volume. The SAAR for lumber is still negative, call it, 3%. The SAAR for auto is still negative, call it, 2% or 3%. So we're winning our way here to get to a point that we can fill a little bit better about those markets. There was a second question, I believe you had more on the intermodal side. And you're right, we've seen the jump up in the fuel here. Now that happened here pretty weekly, call it, mid-March. And -- we'd like to see that sustain a little bit more from a timing perspective. We'd like to see the sustained tightening of the truck market. We're looking at the prices, just like everyone else. And as we progress throughout the year, if those sustain, then you're right, we should see a little bit more uplift on the volume there. So it all begins with the service product. Eric and his team have done a fabulous job, and you're seeing us win. And again, our size is -- our goal is to increase the size of the pie here with over the road, and we're accomplishing that. Vincenzo Vena: So Walter, no advance or but you gave the same answer to me as he gave to you this morning. But the next thing I said to them was pretty clear is if you have a railroad running at a high level of service and you're delivering for customers and the economy is still it's not been as impacted as some people would say because of all the ins and outs that are out there at this point, that it's his job and our job and his job and his team specifically to go sell that service level that we have, look for opportunity to grow the business. And I like it, though, he's got more positive than negatives on there. So I'm real comfortable with that. So Walter, I know fellow Canadian, okay, spent -- you spend your time in Canada, and I go back every so often I'm not sure what the heck is going on with the Canadian teams at hockey, but most of you are probably in bed, but I stayed up to watch the oilers last night and they lost. So tough times. Hopefully, your team is winning. Operator: Our next question comes from the line of David Vernon with Bernstein. David Vernon: So Jim or Kenny, I'm wondering how you guys are thinking about this -- tackling this issue of proving that this merger enhances competition. You've been out in the market for a couple of months now with this concept of commute gateway pricing. I'm just wondering how or what kind of feedback have you gotten from customers Obviously, we've heard the other railworks, but how are you thinking about that idea and its ability to kind of help meet this fairly ambiguous notion of how the merger enhances competition? Vincenzo Vena: Well, let me start. We're not ambiguous. I think how do we have competition and how do we enhance competition pretty straightforward. We're going to be able to move products across the country faster than anybody with less touch points. If people want to compete against that, okay, they're going to have to either be able to enhance their service and be able to move it with less touch points with whichever way they can do that or they're going to have to do it in price. That's what they're worried about is some lanes that are only going to be able to do it with price. We're going to enhance competition to be able to have products that move right now that are consumed mostly in the East, it's going to be able to move across the country in a much more seamless manner. They open up more markets for it. It enhances the capability to sell in markets and move the way products are supposed to move. We're going to enhance so that we can compete better against the -- like I mentioned with the intermodal, but I could do that with the carload business, I could do that with soybeans. We're going to be able to move their product in a faster, much more efficient manner that allows them to open up markets. Again, our competitors, whether it's trucks because a large piece of the growth that we see is intermodal is we're going to be able to remove and give our customers optionality to look at do they want to go intermodal with the railroads or do they want to go by truck. The committed gateway gives the railroads both the Western and the Eastern Railroad, the optionality to have a set price that they can offer to go out to customers and those products that we've identified. We've said that we're going to keep every gateway open. If somebody wants to get to the Southeast through the CSX at New Orleans, they can have that. It is the faster road in some markets. Why would we ever limit that capability. So the base is the base, and we are enhancing the movement. Kenny, why don't you talk about the conversation with the customers or... Kenny Rocker: Jennifer, if you point -- I'm going to see you trying to jump in first. So let me just kind of remind everyone, 520 customers that have signed a letter of support 700 commercial partners signed a letter of support, 2,000 in total that signed a letter of support. And I'll tell you, Jim and I have spent a lot of time together going out and seeing customers. Here's what's undisputed. The customers see the value on the transit improvement. They see the benefits of an interchange going away, they are excited about the fact that their supply chains. I'm talking those that invest in equipment and those that use our system equipment that, that will become more valuable to them and will increase the cycle times there. The things that as we move throughout the journey, we do know they want to see what we're going to be filing. They want to see this process as we go through it with the STB and other stakeholders, but we are staying close to them throughout this whole journey. Let me double down real quick on something that Jim said, though, that's how we're able to win the day. Now I didn't mention this in Jim's last comments about domestic intermodal book, we've got 3 consecutive quarters where we have really put together a record quarter. And we've done that, Eric, through first service which is what you need, and you'll see that with single line service from this merger. And then a lower cost structure allows us to open up new markets. The margins look a lot better for new pieces of business. Customers see that, customers appreciate that and that excites the customer base. Jennifer Hamann: And the only thing I was going to add to what you have said is with committed gateway pricing, we're actually extending the benefit of the merger to customers that would otherwise not be impacted. And so that absolutely enhances competition. . Vincenzo Vena: Yes. Good point there, Jennifer. Listen, great question. Thank you very much. Go ahead. Operator: Our next question is from the line of Tom Wadewitz with UBS. Thomas Wadewitz: I wanted to ask you about just how you think about the key things you need to execute on? You said kind of if you're looking at like maybe 2Q '27 for approval. So you got some runway ahead, you want to execute well, and your service is strong, your rail network operation is very good, which I think would be supportive of the case you can make it all work, right? How do you think about volume growth? Is that also important for you to deliver volume growth as you continue to build your case that you can handle what's a heavy lift of integrating 2 large railroads. So I think that's just like -- is that an important piece, too? And then I guess related to that, how do you think about volume versus price? I mean you are more -- you've got efficient operation, low cost structure. Do you intentionally like say, "Hey, we just want to do a little more volume think you may be intermodal and grain markets where I think there's been some question about price versus volume. Vincenzo Vena: Listen, we want to increase volume, no way answer, but that's a goal. So don't have to expose or talk about that for too long. We want to increase revenue. So we do that by having more business, being able to move more products on our railroad, drive more business to our railroad, but also be very diligent on price and making sure that we price in the right way to increase revenue. And you could see that again this quarter. We've done a great job of it in the last few quarters of where we are on revenue. So that is key. And remember, I separate what we're doing for the merger versus what we're doing for the railroad today. The railroad today's job is, is to run at a real high level, and I give Eric and the entire operating team a lot of credit. I look at it and I'm an old operating guy, okay, I spent a lot of time in this 48 years I've been railroading to be able to look at railroads and what we can do. And I'm very impressed, and I see more runway there to be able to make ourselves more efficient and be able to move the products. And that way then can go sell or sell our customers on what we can do better. So for us, absolutely, we need to increase revenue, which we've done, and we have good line of sight on it, and we have to price at the right level for the service that we're providing, for the value we're providing. And I think there's a lot of runway left in there that we can show what we're delivering for our customers with better speed, better flexibility, better timing that they can win in the marketplace and we can grow together. There are certain markets we react and we have to react. We've had to react on the movement of some grain products, okay, just because of where the market is. We've done it with soda ash. So it is a -- if it was easy, my mother would be here running the railroad. So it's not easy. But our key goal is increase volume and increase revenue drive it to the bottom line, high level of service for our customers and operate as efficiently as possible. I think that's a good summary of the way we are, Jennifer. Jennifer Hamann: That's an excellent summary. And even with some of the high truck competition we've seen in the last couple of years that have compressed it. Truck pricing is still a more expensive option than rail. And so what we're doing to be more efficient and get into new markets and offer new services to our customers just positions us very well to grow going forward. . Vincenzo Vena: Kenny, anything you want to add or you're good? . Kenny Rocker: No, I think you covered it all. Okay. . Vincenzo Vena: I was trying to pass it over to you. Next question. Operator: Next question is from the line of Richa Harnain with Deutsche Bank. Richa Talwar: So I wanted to ask about headcount. I think you made this comment record on few workforce productivity, and this is indeed the lowest quarter or headcount levels we've ever seen. And that's as growing top line. So maybe you can just update us, is this the new normal? Or could it be better? I think Jim, you made a comment that you have line of sight to be better than that, and Eric is holding us to that. So maybe talk about that and drilling to effectively how this is possible, how are you achieving these productivity initiatives? What are you doing differently? And as you think about maybe the pending merger with NS, do you think these productivity gains are transferable? Or do you think there's something unique about the U&P network, allowing you to achieve these levels of productivity more easily than maybe alternative networks. Vincenzo Vena: I'm going to pass it over to Eric here in just 1 second because he has the largest amount of employees. Of course, we look at everything that we're doing on our management and how we operate the railroad from a management side, and we've done a good job of being able to be more efficient and through attrition and be able to size it the right way, and we see more benefit on there. As far as the combination, absolutely, I don't have to talk about it a lot. That's -- we do see substantial improvement in how productive we can be when the 2 railroads are combined. You only need 1 Chief Marketing Officer, and you only need 1 CEO. So some of those things are real easy. So I'm just joking, cannot worry about it. But at the end of the day, yes, we see a lot of that. And Eric, on the day-to-day operating the railroad, what do you see moving forward? Eric Gehringer: Yes. And Jim got it exactly right, that they absolutely are transferable. So 7% improved workforce productivity. When you think about how we did that, like -- and then you think about tomorrow and a week from now, a month from now, it's the same thing. Really, one of the greatest strengths of Union Pacific, yes, it's all the initiatives that we execute successfully, but it's more our mindset right? Because when you have a mindset that says productivity drives growth, and then you can drive alignment within the whole company of why do we work every day to be productive. And we have that. We do that exceptionally well. And then you combine that with operating kind of mindset of perpetual dissatisfaction. And you can look at it every single day, like it doesn't matter. I can look at any scorecard and the team can look at any scorecard and they can have lots of conversations just like I do, and you see things. Now sometimes those things are big and they take a while because maybe you have to make a bunch of changes, but when you look at our productivity over the last handful of years, a lot of them have come just straight from the fundamentals. Why is one terminal at 19 hours of dwell but another terminal is at 15 hours a dwell. We can't 19 be 15. And so we go and we grind on that. And we grind and we grind until we can get that terminal as good as the other one. Now that's what I mean by fundamentals, and it expands across our entire network. You layer on top of that the technology that Jim had mentioned and Jennifer mentioned and I mentioned in a previous question that was asked, well, now you got a multiplying factor right? Now you're actually getting even more out of those initiatives. And that's what we do. I could not be more proud of what the team has accomplished in productivity because, again, we do it to position Kenny and the team in the best possible position to win in the marketplace. And there is no finish line to that. Vincenzo Vena: Thanks for the question. Operator: The next question is from the line of Ari Rosa with Citigroup. Ariel Rosa: Nice quarter here. I actually wanted to stay on the headcount point because it is truly impressive what your -- the efficiency gains that you're able to achieve here. But Jim, you've made this commitment to the unions that all the union jobs are going to be protected. I'm wondering, given the kind of productivity gains that you're seeing, is there any dimension in you worry that, that could slow down actually some of that that progress? Or how are you thinking about that commitment against -- weighed against the very impressive productivity gains that you're achieving? And then just kind of broadening out, is there anything that you think you would be doing differently in terms of how you're operating the railroad currently if the merger process were not going on? Vincenzo Vena: Let me answer that last question. No. we operate the railroad the best we can today and always look for improvements. So we're not changing. And I'm telling you, I've sort of tried to tell everybody this real clear and people will tell you at Union Pacific. There's people that are dealing with the merger, dealing with the applications, dealing with how we look at putting it together when it gets approved because it's going to get approved. It's such a compelling case. But bottom line is most of the people at Union Pacific, their job is to operate the railroad. If anybody thinks I'm going to let people get lost and travel into some place to go talk about the merger, okay? That's not going to happen. We're talking -- we're railroading the Union Pacific, the way we are today, okay, now ifs and or buts. So I'm very comfortable that we're doing the right thing. The commitment with the unions. I thought about this, I didn't wake up one morning have my cup of coffee sitting out in the balcony looking at 6:00 in the morning at the metrics and said, maybe I should just protect every employee. When we make these big decisions like that, we looked at attrition numbers, normal attrition numbers for both railroads. We've looked at how fast we think that we can put this together and get the -- optimize it so that the service is not impacted for the customers on both railroads, and we're very comfortable that the commitment that we gave will not limit our capability to move ahead and be productive, but it also guarantees people a job. We're very comfortable with that with just the attrition numbers. And remember, this is a story. We see the opportunity to grow the business in intermodal, for example, there's areas in the country where we just don't move intermodal, it gets trucked that we know we can give the optionality. And if our service stays high, we can win more business and bring it on the railroad. So I'm very comfortable with the attrition numbers plus what we do for growing the business, that, that commitment is strong. It's set in stone, but we're very comfortable when we made that commitment that it was made with a thoughtful process. So I don't see any issue with that commitment at all impacting us as we move ahead. Operator: Our final question is from the line of Ravi Shanker with Morgan Stanley. Madison Pasterchick: It's actually Madison on for Ravi. Just one more to kind of end the call. Just wondering, given your current network utilization and service levels and kind of current levels of inflation, was wondering what does operating leverage and incremental margins look like in the up cycle? Vincenzo Vena: Well, listen, we love upcycle. Jennifer would scold me if I got into too much detail. But it's -- Madison, that's exactly the way we're thinking about it is there are so many things that are going on that are sort of holding back all the railroads, truck pricing, all those things that would be helpful. So higher natural gas, we love it. Now anybody who heats a pool like I do in Phoenix, Arizona, I don't like it. But at the end of the day, for the railroad, I like it. So I think we're in a good place. We operate in a good manner and Madison, I see us up cycle would be very beneficial. And if everything in the world settled down and we had the economy growing, would really help us because we grow with America and the businesses in America. So -- thank you very much for the question. Operator: Thank you, Mr. Vena. There are no additional questions at this time. I'd like to turn it to you for closing comments. Vincenzo Vena: Well, listen, thank you very much. I know there's lots going on. There's lots of many companies reported, and I'd like to thank you all for joining us this morning. As far as our shareholders, our owners, you can be rest assured that we look at this railroad every day to make sure we operate in the best way possible move ahead. I'm very comfortable that we're doing that, have the right team. I joke around with Kenny about only needing 1 Chief Marketing Officer. But at the end of the day, him and his team are doing a good job I can't be prouder of Eric and the team, the way they're leading and Jennifer and her whole team that keeps our feet to the fire and making sure that we're doing the right things. So with that, looking forward to putting the application in on the 30th, getting it accepted and moving ahead with this transaction that will just build on the results of Union Pacific and make us a stronger railroad and a strong competitor to move the products that Americans use every day. Thank you very much. Appreciate everybody joining us. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.
Operator: Good morning, everyone, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, please note that the company's press release comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2025, as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Please go ahead, sir. Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call. Yesterday afternoon, we reported a strong start to 2026, including first quarter records across revenue, EBITDA and EPS. I was very pleased by the growth, margins and fleet productivity we reported, as the team continues to execute against our North Star of putting the customer first. The momentum we're carrying into our busy season, along with our customers' feedback for their business, supports our expectations that this will be another record year, as further evidenced by our updated guidance. This is all attributed to our 28,000 team members who are laser-focused every day on serving the customer and delivering against our goal to be their partner of choice. What exactly does this mean? Well, it means we have a broad unmatched offering of both gen rent and specialty products. We invest in industry-leading technology to make both the customer and our own operations more productive and efficient. And most importantly, we have a track record of providing superior service our customers can depend on. This didn't happen by accident. We've developed sustainable competitive advantages through our differentiated value proposition and operational excellence, allowing us to deliver consistent performance and shareholder value. Now having said all this, today, I'll give a quick recap of our first quarter results, followed by what's driving our optimism for the year. And then Ted will go into more details around the numbers, before we open up the call for Q&A. So let's start with the quarter's results. Our total revenue grew by 7% year-over-year to nearly $4 billion. And within this, rental revenue grew by almost 9% to $3.4 billion, both first quarter records. Fleet productivity of 2.3% contributed to OER growth of 6.5%. Adjusted EBITDA came in at $1.8 billion, resulting in a margin of 44.1%, a 60 basis point improvement year-over-year when you exclude the H&E benefit. And finally, adjusted EPS came in at $9.71, up 10% year-over-year and another first quarter record. Now let's turn to customer activity. We continue to see healthy growth across both our gen rent and specialty businesses. Within specialty, which grew 14% year-over-year, we saw growth across all lines of business and opened 17 cold starts. By vertical, our construction end markets saw strong growth led by nonresidential construction and infrastructure. And on the industrial side, power and mining and minerals were notable standouts, with power continuing to post double-digit growth. We saw a wide variety of new projects kick off in the quarter, spanning health care, infrastructure, power, industrial manufacturing and, of course, data centers. And for you soccer fans out there, we expect to be a key partner for the World Cup starting here in the second quarter. Now turning to the used market. We sold $680 million of OEC at a 51% recovery rate. We're on track to sell approximately $2.8 billion of fleet this year supported by strong demand for used equipment. In conjunction with these sales, we spent $874 million on rental CapEx. This was spread across replacement and growth CapEx, with a focus on specialty and bringing in additional gen rent equipment where we see strong demand. Subsequently, we generated free cash flow of $1.1 billion. We're set up for another strong year of cash generation, which is a critical feature of the company. As a reminder, the combination of our industry-leading profitability, capital efficiency and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle, which can be redeployed in ways that allow us to create long-term shareholder value. Finally, we allocated capital in the quarter consistent with our framework, which starts with a healthy balance sheet. After supporting both organic and inorganic growth, we returned $500 million to shareholders during the quarter through a combination of share buybacks and our dividend. Our leverage of 1.9x remains well within our targeted range, leaving plenty of dry powder to support growth and return excess capital to shareholders. Now let's turn to the rest of 2026. As evidenced by our updated guidance, the year is playing out better than we expected just a few months ago. Feedback from the field continues to be optimistic, particularly for large projects. We're carrying a strong momentum into our busy season and we feel confident we're positioned to win in the marketplace. So to sum it all up, our unwavering focus on our strategy, which includes our differentiated value proposition, positions us well to compete effectively in the marketplace. Our customers know they can depend on us. And our team is executing with strong capabilities. We see multiyear tailwinds for large projects and believe we're well positioned for these opportunities. And we'll continue to monitor and manage our cost structure and operate with capital discipline. I'm confident the combination of our resilient business model, prudent capital allocation and balance sheet strength will allow us to continue to drive profitable growth, generate strong free cash flow and deliver compelling returns to our investors. And with that, I'll hand the call over to Ted to review our financial results, and then we'll take your questions. Over to you, Ted. William Grace: Thanks, Matt, and good morning, everyone. As Matt just shared, we're off to a strong start to the year with first quarter records across total revenue, rental revenue, EBITDA and EPS. More importantly, we're pleased to be raising our full year guidance based on the momentum we're carrying into our busy season and strong customer sentiment. Before we get into the details of the outlook, let's dive into the first quarter numbers. As you saw in our press release, rent revenue increased $274 million year-over-year, or 8.7%, to a first quarter record of over $3.4 billion, supported primarily by growth from large projects and key verticals. Within this, OER increased by $163 million or 6.5%, driven by 5.7% growth in our average fleet size and fleet productivity of 2.3%, partially offset by assumed fleet inflation of 1.5%. Also within rental revenue, ancillary and re-rent grew by nearly 18%, adding a combined $111 million as ancillary growth continues to outpace OER. Pivoting to used, we sold $680 million of OEC in the quarter, generating $350 million of proceeds at an adjusted margin of 47.4% and a 51.5% recovery rate. So solid used results overall. Next, let's turn to EBITDA. Excluding the $52 million net benefit we realized with the termination of the H&E acquisition in the year-ago period, EBITDA increased $140 million to a first quarter record of almost $1.76 billion. This was primarily driven by a $160 million increase in rental gross profit, partially offset by a $12 million decline in used gross profits. Excluding the impact of H&E, SG&A increased $16 million year-over-year, but declined as a percent of revenue, while gross profit from other lines of businesses increased $8 million. Looking at profitability, our first quarter adjusted EBITDA margin was 44.1%, reflecting a 60 basis point improvement year-over-year excluding the impact of H&E. As expected, we continue to see geographically dispersed large projects driving much of our growth while customer demand for ancillary services also remains strong. Nonetheless, as you saw this quarter, with the benefit of strong cost management, we expanded our underlying margins year-over-year. And while we'll always have normal quarter-to-quarter variability in costs, it remains our goal to achieve flat margins for the full year. To give you a little more color on the cost controls, I'll note that we recorded $45 million of restructuring charges in the first quarter, which were primarily related to the consolidation of overlapping facilities and head count reductions. Additionally, we took steps across the organization to control variable costs with a significant focus on labor and outside hauling. And while it's still early in the year, we're pleased with the results of these initiatives. Shifting to CapEx, gross rental CapEx was $874 million, translating to around 19% of our full year spend at midpoint and in line with historical first quarter levels. Moving to returns and free cash flow, our return on invested capital of 11.8% remained comfortably above our weighted average cost of capital, while free cash flow for the quarter exceeded $1.05 billion. Turning to our balance sheet. Net leverage remained very comfortable at 1.9x at the end of March, with total liquidity of almost $3.4 billion. On the capital allocation front, we returned $500 million to shareholders in the quarter, including $125 million via dividends and $375 million through repurchases. Now let's shift to the guidance we shared last night, which reflects our confidence in delivering another year of strong results. Total revenue is now expected in the range of $16.9 billion to $17.4 billion, an increase of $100 million versus our initial guidance, while used sales are still expected at around $1.45 billion. At midpoint, this implies full year growth ex used of roughly 7%. In turn, we've also raised our adjusted EBITDA guidance by $50 million to a range of $7.625 billion to $7.875 billion. On the fleet side, we've increased our gross CapEx guidance by $100 million to a range of $4.4 billion to $4.8 billion, reflecting the stronger demand we see. This now implies net CapEx of $2.95 billion to $3.35 billion. And finally, we're guiding to another year of strong free cash flow in the range of $2.15 billion to $2.45 billion, with the increase in CapEx offset by higher cash flow from operations. Shifting to capital allocation, it remains our plan to repurchase $1.5 billion of shares in 2026. Combined with our dividend, this will return roughly $2 billion to our shareholders this year, equating to approximately $32 per share or a return of capital yield of about 4% based on our current share price. So with that, let me turn the call over to the operator for Q&A. Operator, please open the line. Operator: Certainly. Thank you, Mr. Grace. [Operator Instructions] We'll go first this morning to David Raso with Evercore ISI. David Raso: I want to focus on margins and the cost saving initiatives versus maybe some fuel cost concerns. As you mentioned, right, the margins were up 60 bps year-over-year, incrementals were [ 53 ]. The amount of savings in the first quarter, be it labor, some of the real estate you spoke of, I'm coming up with something like $10 million. So even without that, margins were up 40 bps, incrementals were [ 49 ]. And the reason I go through those numbers is the rest of the year, and I'm just using midpoints, I appreciate that, but the rest of the year, you're now implying margins down 20 bps year-over-year, incrementals only [ 42.5 ]. And I just want to make sure how much we should be looking at the first quarter, is a little bit of an anomaly on savings and the margin? And why would we then, if it's not an anomaly, the margins would be down the rest of the year, year-over-year? William Grace: Yes. I'll start there and then we can go from there. So thanks for the question, David. I'd say, as always, we caution people against anchoring to the midpoint. It goes without saying we're very pleased with the start to the year we've had. And certainly, the underlying improvement, excluding whatever the benefit was from restructuring, and you're probably in a reasonable ZIP code assuming around $10 million of benefit in the first quarter, there's still a lot of game to be played. We feel very good about the trajectory we're on, excellent execution in the first quarter, but we've got to sustain that through the busy season, which is to say the second and third quarter. So if you look at the results, it was really kind of all 3 big areas of costs that provided leverage: labor, delivery and R&M. So we feel like there's a broad-based kind of contribution to the improvement. But again, we've got to sustain that through the busy season. And the area that is probably going to be the most important to focus on will be delivery through the busy season. And so we feel really good about the start to the year. The team is incredibly focused, after taking care of customers, focusing on cost is job #2. So Matt, I don't know if you'd add anything? Matthew Flannery: No, I think you covered it, but I want to anchor on the midpoint and, more importantly, the efforts we put in place that we talked about to help mitigate some of the cost challenges that came with the repositioning and some of the other challenges, the team is doing a good job, and we'll continue to run that play. David Raso: And a follow-up on that, then I'll hop off, can you give us any sense of how you're thinking about fleet productivity after the 2.3% in the first quarter? Cadence full year, whatever you want to provide us would be great. Matthew Flannery: Sure, David. Yes, we feel like the supply-demand dynamics in the market are conducive to driving positive fleet productivity. As you know, our goal is always to overcome that 1.5% inflation bogey that we put out there, and I'm glad to see the team did that in Q1. And frankly, that's our expectation in our guidance when we start every year. So on track, feel good about it. And when I think about it qualitatively, we continue to get positive rate. We feel good. Rates is still a good guy. The time utilization, which we've been talking about running at a high level for a few years now and maybe even thought that would be a headwind this year, I'm pleased to say the team are continuing to achieve high levels of time utilization. And then the biggest change when we think about Q4, which got a lot of explaining and a lot of focus, was really an anomaly, and that's why we talked so much about some of the challenges and mix, and we didn't face those mix headwinds like we did in Q4. So we don't expect to have those headwinds again. But once again, we'll continue to update you guys as we go along. Operator: We'll go next now to Rob Wertheimer at Melius Research. Robert Wertheimer: I'm most curious about some of your customer commentary. And I'm curious about whether what the time line is, especially on some of those larger projects, when you go from having conversations about how they feel to preorders or planning for specific projects as some of that start to happen, is that [indiscernible]? And then I'll just ask my follow-up at the same time. Dirt movement -- dirt equipment started moving upwards a quarter or 2 ago. There's a lot of mixed signals in the industry, but some saw that as a leading indicator. I don't know if you think that's a tangible sign that we start at the bottom and working our way up and that's some of the strengthening demand you're seeing. Matthew Flannery: Yes, Rob. So as far as the planning aspects, as you could imagine, the larger the project, the more time in advance the customers need to communicate with their suppliers, and certainly, equipment suppliers, about what they're going to need. So we'll continue to do that. It's a continuous pipeline of projects, as you can imagine, a continuous pipeline of those conversations. So we have more visibility on those large projects and we feel good about not only our positioning, but the overall demand in the large project area. So we feel really good about that. As far as dirt, certainly, it makes logical sense about dirt being a leading indicator, we're seeing strength across our portfolio, quite frankly. You saw a 6% gen rent number, and that wouldn't -- couldn't happen if it was just driven by dirt. Whether that's a leading indicator for even more acceleration, we really -- I would agree that the pipeline is strong. I wouldn't really extrapolate those numbers to us because we're not seeing a separation. But maybe the dealership network is impacting that number as well, which is good. But overall, we feel good about the demand cycle and we feel good about where we are with major projects. Operator: We'll go next now to Mike Feniger with Bank of America. Michael Feniger: I was just hoping, Ted, if you could just talk about ancillary costs, repositioning costs. Just if we think about the bridge, I know this gets a lot of attention, is that pressure intensifying in 2026 versus 2025? How we mark to market with what we're seeing potentially on the fuel side? And clearly, we're seeing the cost savings come through and that should build. Does that kind of offset maybe any increases that you're seeing there if we look at kind of a bridge on the margins for '26 versus '25. William Grace: Yes. There's a lot to unpack there, Mike, but thanks for the question. So ancillary growth, the relative growth to OER kind of held constant with what we saw last year. And so obviously, a big part of what we focus on strategically is taking care of our customers, and the team is doing a great job there. I would say from the standpoint of thinking about the contribution margin from ancillary, probably very much in line with that 20% we've talked about. No appreciable change in the first quarter. And I don't think we'd be looking for any appreciable change at this point for the year. On the repositioning side, the team did a great job managing across those big 3 cost areas I talked about, and that does very much include delivery. If you look at our rental results, the rental gross margin was up 50 basis points year-on-year. And again, all 3 of those contributed. But delivery, which is the area where we see kind of the most focus on execution, improved about 10 or 15 basis points as a percent of revenue year-on-year. So a great job given the fact that we did see almost 9% rental revenue growth. When you dig into the details, the biggest portion of repositioning will be and has been in specialty, and you saw that in numbers. They were still probably about 30 basis points behind the curve, but that's a huge improvement versus what we saw last year. If you think about the drag on margins last year within specialty, it averaged about 150 or 200 basis points year-on-year per quarter. And now we're talking about a number that's probably in the order of 30 basis points. So they're doing an incredible job managing that, because there is a healthy amount of repositioning this year, we've talked about kind of the demand drivers, and we've talked about the focus on capital efficiency, fleet efficiency, and that will continue to be the case. On fuel, something we're obviously monitoring and managing very closely. The majority of our exposure, as you know, Mike, is a pass-through. So that gets managed a couple of different ways, but the delivery calculator is the most obvious one, and that's something that we update regularly to help pass through kind of the higher costs we could incur based on higher diesel prices. And then on the internally consumed diesel, we manage that through an active hedging program. So a lot of focus there. The team is doing a great job, and we feel like we're able to -- we should be able to manage through any reasonable situation there. Matt, anything you'd add? Matthew Flannery: No, I think you covered it well. Michael Feniger: Great. And Matt, just for my follow-up, I know we talked about rate, I mean there's been a discussion around competitive dynamics, particularly on the gen rent side and competition there. You mentioned the fleet productivity and rate being a good guy. Are you seeing anything on the ground on maybe intensifying competition on gen rent? Or is this the one-stop shop model that you guys have been building kind of separates you a little bit from maybe some of that competitive intensity? Just curious if you can kind of comment on that. Matthew Flannery: Yes. I mean I've been doing this for 35 years and there's always somebody that wants what you have, right? So what you need to do is differentiate yourself. And to the end of your point there, we spent a lot of time building a competitive moat around our offering and making sure that we're targeting our customers' needs, but also targeting the customers that value that. And we feel really good about where we're positioned. We think the major project pipeline plays into our opportunity to solve, give more solutions to our customers. So we feel good about our positioning and where we are. And the supply-demand dynamics, as I said earlier, to David's question, we feel good about the supply-demand dynamics in the industry, and that should continue to drive positive fleet productivity. Operator: We'll go next now to Steven Fisher of UBS. Steven Fisher: Congratulations on the quarter. Just a follow-up on the rest of the year. You mentioned, Ted, that delivery is really going to be one of the key focus areas. Can you just talk about what are the keys to making sure that that works out favorably in the way you want it to? And then in terms of just any other additional inflation for the rest of the year, to what extent do you have an expectation that will be addressed by rate? Or will that remaining $15 million or so of planned cost reductions cover that extra inflation? Matthew Flannery: Yes, Steve, I'll take the first part of the delivery because I think it's important just to understand, we're not going to eliminate the challenges of repositioning and delivery. The point is to mitigate it. So the good news is we put some new processes in place, and those have worked in Q1. And I think Ted was referring to the challenge in Q2 or Q3, is to continue to do that when the system gets even busier. And we have a lot of focus there. But there still will be repositioning costs. The other cost actions we've taken are really to also help mitigate that because we still want to drive capital efficiency. We still want to move fleet versus just buy more fleet when you land new deals. So that will continue to be a focus for us. So it will be two-pronged. It will be the execution of doing -- moving fleet more efficiently as well as making sure any other cost opportunities there to help mitigate supporting that demand are there. So we can continue to run the business to support our customers in an efficient manner. And then, Ted, you could talk to other inflationary items. William Grace: Yes, Steve. So I'd say outside of fuel, really the year has played out as expected from an inflation standpoint. The areas that we've talked the most about, obviously, you've got the labor piece, and we've been able to manage that really effectively. You can see that in our first quarter results. If you look at the numbers across the business, we got the better part of about 50 basis points of labor absorption. We talked in January about the importance of that. We're off to a good start. So very pleased there, that even in the face of ongoing inflation on the labor front, we're getting that kind of pull through. The other areas that continue to be inflationary, we've talked about real estate, we've talked about insurance being 2 of the other big ones. Those again were built into the plan that are playing out as expected. So I don't think there's anything to point to there. In terms of the $15 million of cost reductions you mentioned, I'm guessing you're talking about the incremental restructuring expense that we would have called out. So I just want to clarify that, and if that is the case -- okay, perfect. So obviously, you would have seen the $45 million of charges we took in the first quarter. For the full year, we're expecting $55 to $65 million. So at the midpoint, you'd say $60 million. So there's another $15 million to go. When you look at the first $45 million, about 2/3 of that would have been real estate related. That's the closure of overlapping facilities that we did in the first quarter. And the balance, the other 1/3, was head count related. So probably those are the 2 big buckets that we'd be looking at across the rest of the year, although it's more likely to be real estate, probably in headcount, we're in a good position, but we'll have updates there periodically. And all that was built into our expectations. So for the year, just to -- I think David had a pretty good estimate of what the first quarter benefit was, around $10 million, for the full year, we've estimated that the full year benefit would be on the order of $45 million to $50 million. So that is -- that was built into the initial expectations. We're on track, and you'll see that kind of come in, in a linear fashion across the balance of the year. Steven Fisher: That's perfect. And then just maybe a bigger-picture question about these facility closures. I'm curious about the trade-offs here. I assume these are branches closing. Clearly, you get lower cost. But I guess to what extent have you found ways to mitigate the lost revenues or other benefits from having less branch density? And if you have found ways to mitigate that, is that sort of -- is there a broader applicability to your whole footprint or even the whole industry? Or is this a situation where the trade-off, we just needed to lower costs? Matthew Flannery: Yes. There wasn't really -- the good news is there wasn't too much of a trade-off here, other than maybe some shop space because we didn't exit any markets. So no attrition that we're worried about here. 95% plus of our equipment is delivered. So that consolidation didn't have a revenue impact. And we really were specific and surgical in doing it in markets where, through acquisitions, we may have held on some extra real estate. And as we looked at it, we just didn't need it. We still have some headroom even after the consolidation for growth because we do expect to continue to grow. So we're talking about, in a business of 1,700-plus branches, or let's just keep it to North America, right, so a little less than that. we closed a couple of dozen branches. So not a big deal, but it was -- it's a good question because that was one of our points. Let's not hurt the business. But if we have excess that we don't need to utilize, let's not hold on to it. And that's the way we looked at it. Operator: We go next now to Jerry Revich of Wells Fargo Securities. . Jerry Revich: Matt, Ted, I'm wondering if you could just unpack outstanding performance in dollar utilization in the quarter. Saw that accelerated by about 1 point versus normal seasonality, and first quarter tends to be a pretty tough quarter to get rate overall. Can you just unpack the cadence of demand over the course of the quarter? And it sounds like the quarter played out better than what you thought would be when we were together at the end of January for last quarter's call. Could you just unpack what were the positive demand or pricing variances that you saw over the course of the quarter across gen rent and specialty, if you don't mind? Matthew Flannery: Yes. So we won't get into that last part of the question numerically. But even though we don't give the components of fleet productivity, let's be clear, we still focus on it relentlessly at the branch level: capital efficiency to drive high time utilization, and as well as we have a very unique offering, let's make sure we get paid for it. So we still focus on rate and time at the branch level, we just don't call it out that way. But as I said earlier, we -- this only continues to be a strong focus for us. But the demand that's out there is another part of this, with the supply-demand dynamics are good. And we're going to make sure that we utilize that opportunity. As far as the dollar utilization, it's really an output of that, ted, I don't know if there's anything you want to cover specifically on dollar utilization. William Grace: Yes. I guess you're doing the imputed version of this, Jerry, but obviously, it comes back to a lot of things Matt talked about. But we're pleased to build the fleet on rent in the quarter. You can see the rental revenue growth was strong at 8.7%, and we had strong fleet productivity. So it came together, obviously, to support what was a nice improvement in that dollar ut. And another way to express that is the fleet productivity. Matthew Flannery: Right. Jerry Revich: And then in terms of just to circle back on the discussion on fleet productivity over the course of the year, and we can look at dollar, as you said, as a proxy for that. So the comps get pretty easy as we head into the back half of '26 for the industry. And so now that based on the range of industry data, supply-demand having improved, normal pricing on a monthly basis and an upturn does suggest there's potential for fleet productivity to accelerate significantly over the course of the year. I know it's early on and things have to fall in place, but I just want to circle back to the earlier comments about north of 1.5% fleet productivity targets. It feels like our exit rate in the first quarter really points to a sharp acceleration as we head through the year, again, if normal seasonality in an up cycle plays out. Matthew Flannery: Yes. Embedded in our guidance and, frankly, our goal, every year and as we plan with the team is to make sure we overcome that inflation. And in the simplest way, we want to grow rent revenue faster than we grow fleet, right? And it's not any more complicated than that. We'll continue to manage that. But the other components of fleet productivity, then rate, there's a lot of focus on rate. We've been running time at a high level. I'm very pleased to say it's not a headwind for us. But if we get to a point like we did in '22 where it's a negative trade-off, then we'll manage that appropriately. We got to make sure we're responsive to our customers' needs. But we think we can do that. We've been doing it for years. Mix is the wildcard, and that's why we don't try to predict this. We had no expectation of having 0.5 in Q4. That was all mix related. So outside of that, we feel good about the dynamics to drive positive fleet productivity. And as we get the results, we'll explain to you guys if it comes out different than we expected, positive or negatively, with the mix dynamic. That's really the part that's very hard for us to predict. But we do feel good as embedded in our updated guidance about the opportunity to outpace inflation. Operator: We'll go next now to Ken Newman of KeyBanc Capital Markets. Kenneth Newman: So maybe going back to the inflation piece here. I know there's been some broader market worries around some of these new Section 232 methodologies, and I'm assuming you're already protected from any potential surcharges from suppliers just given that you locked in those prices at the end of last year. But when I think about the fact that you are seeing a little bit stronger growth to start the year out, can you maybe just talk a little bit about your ability to maybe accelerate fleet growth if needed? And if you can still be price/cost positive if inflation starts to ramp further from here? Matthew Flannery: Sure, Ken. Well, as you accurately mentioned, right, we do lock in our prices for the year. And embedded in that, we talk to our key suppliers, but most of our vendors, but about we want the ability to flex up, and we certainly have contractually the ability to flex down, although that certainly doesn't need -- seem to be in our immediate future. But that flexibility and our vendors' ability to respond to those flexes is a real important part of the relationship we have with our vendors. So we do think if the end market plays out that way and demand continues to outpace our expectation, like it did here in Q1, we certainly have the opportunity to flex it. Kenneth Newman: And just to clarify on this last question, I mean, are you -- again, I mean, I know it's early in terms of people trying to look through this, but are any of your suppliers coming to you and -- or pushing for surcharges at this point? Or is it just still too early? Matthew Flannery: Well, we don't talk about our negotiations with our partners, but we are very, very disciplined about sticking to our original deal. So I would -- we're not really -- we're not worried about that. Kenneth Newman: Makes sense. Okay. And then for the follow-up here, it's -- maybe just talk a little bit about the M&A pipeline. The free cash flow profile still seems pretty strong here. How active is the pipeline versus when we last talked to you a quarter ago? And I'm curious if the macro environment today makes it harder or easier to do deals. Matthew Flannery: Yes. I wouldn't say the macro -- the pipeline hasn't changed really over the last couple of years, with the exception of COVID. The deal pipelines remain pretty consistent. The real challenge for us isn't how many deals to look at, it's expectations and how many get -- of us, of what we expect to do a deal and the returns we expect on a deal and to get that willing dance partner. But there's no lack of opportunities to look at. And we continue to work the pipeline. We've got a great M&A team and business development team. And as you can imagine, we'd lean towards specialty, specifically adding in new products. But we'll do tuck-ins as well in the gen rent business if it fills a need and gives us capacity in a growing market. So stay tuned. To your point, we have plenty of dry powder and we'll continue to work the pipeline. Operator: We'll go next now to Kyle Menges of Citigroup. Kyle Menges: Great. Maybe first off, could you talk a little bit about just if you're seeing anything particularly in local markets? Any early impacts from the geopolitical uncertainty and a fading rate cut theme impacting those markets? And I think you had embedded roughly flat local market growth in your previous guidance. Any change there? Matthew Flannery: No. We think the local market continues to be stable. It's -- that's a positive thing, right? Whereas maybe earlier last year, the year before, you were seeing some markets that were still being impacted negatively. But overall, I'd say the local markets stabilized, and that was our expectation. And the project pipeline on the major projects as well as our specialty growth continue to drive some of the growth drivers that we've been not only executing on, but that we expected for this year. So we feel good about the end market. Kyle Menges: Great. That's helpful. And then certainly a theme that's had a bit of a resurgence recently is just OEM dealers pushing more into rental or expanding their rental fleets. Just how do you see that impacting competitive dynamics in the industry? And I'm also curious roughly what you think your product overlap is with the typical OEM dealer rental fleet. Matthew Flannery: Yes, really not much overlap there. It's something that we're aware of, and there's a handful of them around the country that do a good job locally and regionally. But it's not something that, in our competitive dynamics or if we were doing a competitive analysis, really doesn't fall high on our radar, unless maybe in a specific local market's competitive analysis. So nothing there really to talk about from our perspective. Operator: We'll go next now to Angel Castillo with Morgan Stanley. Angel Castillo Malpica: Congrats on a strong quarter here. Just hoping to go back to the M&A question, but maybe a little bit backward-looking. Could you just talk a little bit about, I think, the $700 million -- roughly $700-ish million in acquisitions you've done over the last 2 quarters? Just any color on what those assets are? How much they may be contributing to sales? And just any details you can share on those? I guess, in particular, I'm trying to understand if you think about kind of gen rent and specialty organic versus inorganic split this quarter and kind of the expectation, for how much maybe was already baked into the guide versus maybe how much might be partly driving that revenue increase? Just trying to understand the bits and pieces there, and any impact to that or your business on dollar utilization would also be helpful. Matthew Flannery: Yes. Sure, Angel. So on the M&A piece, as you saw, we spent about $400 million in the first quarter, slightly less than that. Those were 4 small deals, the majority of which, 2 of them, the 2 larger ones, were done in the first week of January. So those were already embedded in our guidance. So you're talking about a small amount of impact on the rest of the year for those other 2. And then when you think about deals over the course of all of last year and this year, we're talking about like 1% of revenue growth. So not a huge number, but still, strategically, things that we decided to do. So to answer the latter part of that question, not a -- a contributor in some way, but not the reason for our beat or for our updated guidance. And Ted, anything you have to add? William Grace: The last piece on the impact on dollar ut, I think, very de minimis. I mean to Matt's point, it was a handful of small acquisitions, none of which obviously are even collectively are going to move the needle in any appreciable manner. Angel Castillo Malpica: Very helpful. And then I wanted to go back to the demand question. You talked about seeing I guess, in the mega projects area continuing to see, I guess, strength and things coming in maybe a little bit better than you had expected, as well as strengthening some of the end markets. Could you just give us a little bit more color on kind of the various key end markets, how you're seeing that play out? Any particular pockets where you saw a little bit more strength than you had anticipated than the seasonality? And whether that was projects moving faster, weather allowing it or just perhaps your execution, win rates coming in better than you had anticipated? Just trying to understand, I guess, the underlying demand side versus maybe some more idiosyncratic, again, URI execution, win rate type of things? Matthew Flannery: Well, I think the large project pipeline has been talked about pretty broadly. And everybody, certainly, data center has been a big part of that and everybody focuses on that. But as I said in my opening remarks, it's a lot broader than just data centers. And non-res construction overall, even ex data centers, is still really strong. So the growth in non-res is pretty broad. And then when I think about the other end markets that have added to growth, I talked a little bit in my opening remarks about infrastructure, and power continues to grow at double digits. So power has been a really strong end market that we've been focused on for a while now. So those are really what the drivers are. And then when you think about -- this is without petrochem really picking up yet. That's still a bit of a drag on a year-over-year basis. So we think the project pipeline and then the opportunity in petrochem to pick up will continue to give us growth for the foreseeable future. Operator: We'll go next now to Tami Zakaria of JPMorgan. Tami Zakaria: Congrats on the great results. I'm curious about the World Cup that you mentioned, should we model a sizable maybe onetime tailwind from that in the second quarter? And related to that, do you expect the event to drive demand for both specialty and gen rent or one or the other? Matthew Flannery: Tami, in the scale of our company, I wouldn't model anything extra for the World Cup. It's already been embedded in our guidance. As you can imagine, for large events like that, we knew before the year started that -- what we were going to need to support those folks with. But in the scale of our business, there's not any 1 project or event that's going to make a meaningful difference. That's a great part of having such a broad portfolio. I hope that answers your question. Tami Zakaria: It does. And a quick one, the $100 million increased gross CapEx, is that driven by general rental or specialty? Matthew Flannery: Across the portfolio. Now specialty is growing at a faster clip, so -- and we did 17 cold starts. So it's always going to have a little bit more of our outweighted growth CapEx to support those cold starts and the growth. But we're also going to spend some money on some gen rent products that are tight, specifically for some major project support. And so it will be spread across the portfolio with a little more heavyweight specialty. Operator: We'll go next to Tim Thein of Raymond James. Timothy Thein: The first question, just a follow-up on the delivery cost recovery. I'm just curious, Matt, if you could maybe speak to how the company is positioned today versus, we look back at historical periods when diesel and flatbed trucking rates really spiked, just how the company has evolved in terms of -- it's been some years we've talked about some of the tools that you guys have had built out. So maybe just is there a way to kind of handicap just in terms of how you, again, position today versus how maybe it would have been different in years past when we look at those periods of higher cost inflation? William Grace: Yes. Tim, I can start there and then Matt can definitely fill in some more blanks. But obviously, we've long focused on costs and certainly making sure that we're managing delivery effectively. So I think if you were to look at analogous periods, 2022 would probably be the first one that comes to mind in terms of a year where you saw a meaningful increase in diesel prices, and you could say what happened in that episode. So on-highway diesel prices increased over 50% in 2022 year-on-year. If you were to look at the impact that had on our fuel line, it would have been probably like a 15 basis point increase as a percent of revenue. And so you can see it's something that is -- was highly managed at that point. Delivery costs on the whole moved in a similar amount. And I think if you were to look at our margins in 22 ex used, they increased considerably. So not that you can draw parallels between every period, but certainly, I think it serves as a good example of our ability to manage through these kinds of environments pretty effectively. Matt, anything you'd add there? Matthew Flannery: No. No, I think you covered it well. Timothy Thein: Okay. Then just on the specialty segment, so the revenue is up, I think, call it, 14% year-over-year. If I look at the ending asset base, which maybe wrongfully using as a proxy for OEC, but it was up like 16%. And so I'm just -- my assumption has been that specialty tends to generate higher levels of asset efficiency, which I'm sure you would endorse. So I'm just kind of struggling with why that -- I would have thought that relationship would have been a bit different. Is there something within that that maybe you would call out? I'm just trying to think through why you wouldn't see higher level of revenue relative to the investment in that business. Hopefully, that makes sense. William Grace: Yes. Well, I'd say intuitively, your assumption is correct that you do tend to get stronger dollar in those assets. and you can see that productivity historically. Truthfully, I'll need to come back to you on that. I'm guessing it's probably a function of timing, but I can't think of anything on an underlying basis that would have turned that relationship upside down. So if it's okay, Tim, I'll come back to you on that. Operator: We'll go next now to Jamie Cook with Truist Securities. Jamie Cook: Congrats on a nice quarter. I guess first question, Ted, it was the first quarter in a while I think we've seen the gen rent margins improve year-on-year. So any way -- I mean, should we -- how should we think about the gen rent margins as we progress throughout the year? Is there any reason why the first quarter was an anomaly? And then I guess my second question, obviously, the first quarter came in better than expected. I know there was that pipeline job that had a softer start in the fourth quarter. I'm just wondering how that job is going, whether the first quarter outperformance is because that job restarted and potentially there's a catch-up in whatever we saw in the first quarter then for that reason isn't sustainable too, because it's like you raised your guidance, but you raised it by the beat or sort of less than the beat. So just trying to work through that. William Grace: Sure. So I'll start off, and Matt, please jump in. In terms of the rest of your gen rent margin, we don't provide kind of segment margins, as you know. We talked about the focus the team had starting in January on both sides of the business. But you asked about gen rent, and they really delivered, right? If you look at that gen rent gross -- rental gross margin being up 150 basis points, it was roughly equal contribution from labor, delivery and leveraging depreciation. And within that, still R&M was a positive. So the team really did a great job. And that will continue to be the focus. As I think we talked about earlier, the key will be sustaining a lot of this through the second quarter and delivery being kind of the one that will take probably the most focus. So if you look at that in the first quarter in gen rent, that was about 50 basis points of leverage. The team did a great job. We've got to sustain that through the busy part of the season as we get deeper in the year. But what I would say on the whole, as we've talked about, the goal is flat margins for the full year. excluding the H&E benefit from last year. That's on an EBITDA basis, so it's across the business. Certainly, our goal across both segments would be to perform very well. So that was the first part. On the second part, the matting project that we talked about in January that affected the fourth quarter from a timing perspective, we've been delivering assets to that project. It has not entirely kicked off yet, but we've been mobilized. With that said, as we talked about in the fourth quarter, matting was down year-on-year in the fourth quarter. It was not -- it was up in the first quarter. And so that obviously was a big factor in the swing of fleet productivity that Matt talked about, that headwind we absorbed in the fourth quarter, just as a function of the timing of that start that we thought would have been in 4Q, ended up it will be 2Q. And then as it relates to, I think, the follow-through of the quarter, hard for us to speak to anybody's external expectations. If you think about the $100 million revision to revenue and the $50 million to EBITDA, part of that was by the first quarter being a little stronger. You can see that we raised CapEx, so obviously, that's going to contribute after the first quarter. But we're off to a great start. We feel really good about where we're heading. And those are the 2 big components within that revision. Matt, anything I missed or you'd add? Matthew Flannery: No, you covered it well. William Grace: Jamie, did I miss anything in there? Jamie Cook: No, I'm good. Operator: We'll go next now to Steve Ramsey of Thompson Research Group. Steven Ramsey: On time utilization holding or being a positive, would you say that's mega project driven slowly? Or would you say that local market stabilizing kind of any breakout on time utilization drivers? Matthew Flannery: I mean it's everything, right? Because it's about having the right fleet in the right places for where demand is showing up. So it's good planning. It's good discipline, about only bringing in equipment when you need it, from the branch managers and the district managers out there. So I'd say it's across the whole portfolio. We couldn't drive this level of time utilization from just one or the other end market sector. So it's across the board, Steve. Operator: We'll go next now to Scott Schneeberger of Oppenheimer. Scott Schneeberger: A couple of questions. One on just following up on the branches and, Matt, some of the things you're saying earlier. Just to get a little more clear, was it more gen rent, more specialty? I inferred specialty from the commentary, but just a little bit more clarity. And your -- I think you've said you're going to do fewer cold starts this year than last year. And following up on Steven Fisher's question of your answer there, what is kind of the strategy? Can you do more with less or will we see in kind of out-years a reacceleration of the cold starts? Matthew Flannery: Sure, Scott. So on the first part about the branch closures, it actually wasn't more specialty. And if you think about that, it's a lot of the -- it was split pretty much across the portfolio. But as you think about the acquisitions we did, we just held on to some of those Ahern facilities maybe longer than we needed to as we were going through that integration. And I would think about things like that, and then some of the smaller deals that maybe you guys don't get a visibility to. So you want to work your way through it. We don't buy companies for cost-cutting measures. We buy them to help support growth. And sometimes we hold on to that real estate and find out in the long term we don't need it all. And so it's a couple of dozen branches and against a huge portfolio. So not to make too much about it, but it was very surgically viewed and no risk of revenue there. We wouldn't have closed one if there was risk of revenue. And then as far as on the cold starts, we did 17 in the quarter. I think we had -- in January, said we were targeting around 40. There's a continual pipeline of that. If the team gets ahead of schedule and ahead of that pipeline, we'll raise the number as we go. But I wouldn't say that there's any change in how we're viewing the opportunities. It's just a matter of the execution, of finding the real estate, finding the people, but there's a pipeline for each one of the specialty businesses about where there are opportunities to grow and where the other markets they'd like to get into. And we just work through that in a very methodical manner. Scott Schneeberger: Great. I appreciate that incremental clarification. My follow-up is just on the smaller projects, smaller customers, a lot of talk on this call about a lot of demand activity with the large. Curious what you're seeing and hearing from the smaller customers on their environment. Matthew Flannery: Yes. I think they feel good about the end markets. It's just, in general, I would say it's about where our expectations were, that, as an aggregate, the local market business has stabilized. We're not -- we don't see many markets where there's negative growth or we need to pull fleet out of because their local market is not going to be able to absorb it and they don't have a lot of projects. So we feel good about that across the board. I would continue to call that stable, which is consistent with what our expectations were for the year. Operator: And gentlemen, it appears we have no further questions this morning. Mr. Flannery, I'll turn things back to you, sir, for any closing comments. Matthew Flannery: Thank you, operator, and thanks to everyone on the call. We appreciate your time today and I'm glad you could join us. Our Q1 investor deck has the latest updates. And as always, Elizabeth is available to answer your questions. So look forward to speaking to you all in July. And until then, please stay safe. Operator, please end the call. Thanks. Operator: Thank you, Mr. Flannery. Thank you, Mr. Grace. Again, ladies and gentlemen, this brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to the NextEra Energy, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I would now like to turn the conference over to Mark Edelman, Director of Investor Relations. Please go ahead, sir. Mark Eidelman: Good morning, everyone, and thank you for joining our first quarter 2026 Financial Results conference call for NextEra Energy. With me this morning are John Ketchum, Chairman, President and Chief Executive Officer of NextEra Energy; Mike Dunn, Executive Vice President and Chief Financial Officer of NextEra Energy; Armando Pimentel, Chief Executive Officer of Florida Power & Light Company; Scott Boris, President of Florida Power & Light Company; Brian Bolster, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Executive Vice President of NextEra Energy. John will start with opening remarks and then Mike will provide an overview of our results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of other factors discussed in today's earnings news release and the comments made during this conference call in the Risk Factors section of the company presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. With that, I'll turn the call over to John. John Ketchum: Thanks, Mark, and good morning, everyone. NextEra Energy is off to a terrific start to the year, delivering strong first quarter results. Adjusted earnings per share increased by 10% year-over-year reflecting strong financial and operational performance at both FPL and Energy Resources. Over the past several months, I've been working closely with our customers, policymakers and stakeholders, 2 things could not be clear to me. First, demand for electricity in this country is not slowing down. In fact, it's accelerating. Our customers need power now and speed to power is essential. Second, building new power infrastructure must be done in a way that addresses affordability challenges and keeps bills low for existing customers. NextEra Energy is doing both. We're able to meet this increased power demand while keeping power prices low, and we're doing it by leveraging our common platform. We build all forms of energy infrastructure. We have experience across the entire energy value chain at massive scale with a balance sheet to back it up and we continuously drive operational efficiency across our portfolio to deliver value and affordability to customers. At FPL, our value proposition is clear. Leverage a diverse generation mix and a resilient grid to provide low-cost, highly reliable electricity to our customers every single day. At Energy Resources, customers choose us because -- they know we have an unmatched decades-long track record of building energy infrastructure that delivers cost-effective solutions tailored to their needs. NextEra Energy was built for this moment of extraordinary growth with a service area that spans 49 states and with more than 12 ways to grow, I couldn't be more excited about our ability to deliver for our customers, our shareholders and our country. Importantly, our forecasted growth is visible and balanced between our regulated and long-term contracted businesses. Florida is a prime example of how we reliably serve growth while keeping bills low. The Sunshine State has been one of the fastest-growing states for decade and continues its rapid expansion today. Florida is already a $1.8 trillion economy, the 15th largest in the world, and the growth isn't slowing down. Florida's GDP is forecasted to grow 4.7% annually through 2040. In fact, in the first quarter, FPL added nearly 100,000 customers compared to the prior year comparable period. For perspective, roughly 90% of utilities nationwide serve less than that day to day. FPL added these customers to our system in just the last 12 months. FPL supports this growth by building the right new power generation and the right new transmission infrastructure across the state. In fact, FPL expects to invest between $90 billion and $100 billion through 2032, primarily to support Florida's growing economy. Earlier this month, FPL filed its annual 10-year Ciplan, detailing its approach to reliably and cost-effectively meet the growing need for electricity in Florida. The plan shows roughly 4 gigawatts of new gas-fired generation, complementing over 12 gigawatts of solar and over 7 gigawatts of storage solutions over the next 10 years which would further diversify FPL's generation fleet. Yet even with significant capital investment, bills have actually gone down over time. When you adjust for inflation, the typical FPL residential customer bill is 20% lower today than it was 20 years ago. In nominal terms, FPL's bills are approximately 30% below the national average and only projected to grow on average about 2% annually through the end of the decade. On top of that, FPL delivers customers top decile reliability. That's approximately 68% better than the national average. Low bills and high reliability don't happen by accident. Instead, this performance is a direct result of smart, disciplined capital investments, coupled with the relentless focus on operating efficiently. This is a value proposition that not only best serves our existing customers, but also works really well for new large load customers like hyperscalers who value reliability, cost and speed to market, all things we can deliver. As part of FPL's approved 4-year rate settlement agreement that went into effect in January, we proactively developed a large load tariff to provide the necessary certainty for both customers and regulators, balancing consumer protections with a competitive rate. Again, both things are possible with the right structure and a smart approach. FPL's speed-to-market advantages, combined with its best-in-class service is creating significant large load interest. So far, we have about 21 gigawatts of large load interest at FPL. Of that, we are in advanced discussions on about 12 gigawatts, a portion of which we believe we could begin serving as soon as 2028. We are making good progress on this front, and we continue to expect at least one large load customer to sign up for capacity under FPL's tariff by the end of the year. Initially, we expect every gigawatt of large load under FPL's approved tariff to be equivalent to roughly $2 billion of CapEx and to earn the same return on equity as other FPL investments. Energy Resources continues to grow its regulated electric and gas transmission portfolio. It can't be stressed enough. -- linear infrastructure is absolutely vital to meeting America's electricity demand. Pipelines fuel power plants and transmission lines deliver electricity into communities. NextEra Energy Transmission is one of America's leading independent electric transmission companies. Our scale and experience position us well as we execute on new transmission opportunities across America. In fact, just this week, one of NextEra Energy transmission subsidiaries, Lone Star Transmission received ERCOT approval to build portions of 2 new transmission lines in North Central Texas to improve reliability in the region. Lonestar's investment share of approximately $300 million represents a roughly 40% increase in Lone Star's rate base. NextEra Energy Transmission has now secured more than $5 billion in new projects since 2023. In total, NextEra Energy Transmission has regulated and secured capital of $8 billion almost twice the rate base size of Gulf Power when we bought the company in 2019. We also continue to execute against our plan to grow our gas transmission business. Energy Resources now has ownership interest in more than 1,000 miles of FERC-regulated pipelines. Importantly, it's a portfolio with a number of organic expansion opportunities. All told, we expect our combined electric and gas transmission business at Energy Resources to grow to $20 billion of total regulated and investment capital by 2032, a 20% compounded annual growth rate off a 2025 base. We recently added new senior leadership to our pipeline business to focus on growth opportunities, demonstrating our commitment to expanding our gas transmission business. Turning to Energy Resources' long-term contracted business. As I said at the outset, it simply can't be overstated. Our customers need a lot of power, and they need it now. Renewables and storage continue to be the fastest way to get new electrons on the grid until additional gas-fired generation can be built. This is why we had a record quarter at Energy Resources, adding to backlog 4 gigawatts of new long-term contracted renewables and storage projects. This includes another strong quarter of battery storage origination at 1.3 gigawatts. Importantly, we have 4 growth avenues for battery storage. We build stand-alone battery storage co-locate storage at existing sites, develop storage as a grid solution and expand batteries from 4 hours to 8 hours at existing storage projects. Our stand-alone and co-located battery storage pipeline sits at over 10 gigawatts, excluding expansion opportunities. Bottom line, in a market driven by a significant need for quick capacity solutions Energy Resources remains well positioned to serve customers with battery storage. We are also off to a terrific start executing against our data center hub strategy, which is built on the power of scale. Scale shortens development pipelines reduces execution risk and keeps costs low as we build the infrastructure needed to meet data center power demand. To this end, last month, the U.S. Department of Commerce selected Energy Resources to build 9.5 gigawatts of new gas-fired generation to serve large load. The projects are in connection with Japan's $550 billion investment commitment to the United States as part of the U.S.-Japan trade deal. These are 2 separate projects, 1 located in Texas, and the other located in Pennsylvania. Both are designed to serve large load in each state. The U.S. and Japan would own the projects while Energy Resources would develop, build and operate them. We are actively developing both projects, advancing site development, procurement, permitting and commercial structuring as we work toward definitive agreements with the U.S. and Japan. The projects are drawn from our existing group of data center hubs, a group that totals over 30 hubs with a year-end goal to secure roughly 40. We now have 4 origination channels feeding into our base case goal of securing 15 gigawatts of new generation to serve large load by 2035. These 4 origination channels can also help us achieve our upside case of 30 gigawatts or more by 2035. We are working hard to meet this goal with all forms of energy, approximately 50% from gas-fired generation and the remainder from all other forms of energy. The first channel is working directly with hyperscalers to power their data centers. These are companies we have good, long-standing relationships with. A great example is our collaboration with Google to recommission our Glenora nuclear plant outside Cedar Rapids, Iowa. Our second channel is working with investor-owned utilities. A perfect example is the joint development agreement, which we signed with Excel earlier this week to jointly plan and rapidly deploy new generation, storage and transmission to capture accelerating data center demand across Excel's 8 state service territory. Our third channel comes through our strong relationships with co-ops and municipalities. Our plan to work with Basin Electric to develop a 1.5 gigawatt combined cycle plant in North Dakota is a great example. Our co-op and municipality customers value our skills our capabilities, our customer relationships with hyperscalers and our balance sheet, making us the perfect partner. Working with the federal government to build new natural gas power generation is our fourth channel. On Duane Arnold, we continue to make good progress. Earlier this month, the Nuclear Regulatory Commission approved a license transfer from the plant's minority owners Central Iowa Power Cooperative and Corn Belt Power Cooperative to NextEra Energy. This key federal approval clears the way for Energy Resources to finalize the acquisition of their 30% ownership stake, which will give us full ownership of Duane Arnold. At the same time, the process to regain interconnection rights for an Duane Arnold continues to progress as expected. The plant remains on track to reenter service no later than Q1 2029. We also continued to evaluate Advanced Nuclear closely evaluating the capabilities of various SMR OEMs. We have 6 gigawatts of SMR colocation opportunities at our nuclear sites, and we are working to develop new greenfield sites. Of course, any new nuclear build would have to include the right commercial terms and conditions with appropriate risk sharing mechanisms that limit our ultimate exposure. Given that we built more energy infrastructure over the last 20 over the last 2 decades than any other company, that means we have a lot of operating assets coming off contract. In fact, we have up to 6 gigawatts of renewables and 1.5 gigawatts of nuclear recontracting opportunities through 2032. The timing couldn't be better. The projects were generally built and contracted years ago during much less favorable market conditions. As the PPAs begin to expire over the next several years, we believe recontracting will command a higher price. In fact, in the first quarter, we contracted over 600 megawatts of existing projects, locking in contracts for an average of over 18 years, reflecting the strong electricity demand environment we're seeing today. Energy Resources customer supply business advanced its growth strategy during the first quarter, highlighted by our strategic acquisition of Symmetry Energy Solutions which is 1 of the U.S.'s leading natural gas suppliers. Symmetry operates in 34 states and provides us access to additional physical assets, enabling us to deliver a broad range of solutions for our customers. In fact, across all of our businesses, we now transport and deliver approximately 2.9 trillion cubic feet of natural gas annually or about 8 billion cubic feet per day making us one of the largest and most active gas suppliers serving wholesale, retail and industrial customers nationwide. And while we continue to grow and to deliver value and innovative solutions for customers every single day, we're also focused on making ourselves better and taking steps to redefine the future of the entire electric industry. We're doing this through our new Rewire initiative and a partnership with Google Cloud. Rewire is a company-wide initiative to reimagine how we work and how we do business paired with an enterprise-wide AI transformation that we expect to unlock top line growth and cost savings opportunities for our customers. At the same time, Rewire is serving as our AI product development platform. We believe the new AI tools and solutions that we build will not only redefine how we do business and create competitive advantage, but will also help transform how our industry generates and delivers electricity and serves customers. Partnering with Google, we are delivering these products to the utility industry to unlock savings for American homes and businesses. In the first quarter, we brought to market our first Rewire products. For example, Conduit is an AI-powered tool designed to upskill our already best-in-class renewables workforce, increasing their efficiency in the field and keeping our power plants up and running. Another product called Generation Entitlement proactively identifies abnormal equipment conditions, enabling teams to take early action and optimize power plant performance across the fleet. And a product called Grid Composer uses AI to optimize and orchestrate all aspects of the power generation process. It brings real-time recommendations into one place to enable faster more informed decisions around unit commitment, power and fuel dispatch and maintenance scheduling. Importantly, we believe these tools have the potential to drive significant savings for customers. FPL's bill today is already approximately 30% below the national average. One of the reasons that's possible is because of our relentless focus on technology and driving costs out of the business. FPL's nonfuel O&M is more than 71% lower than the industry average. In fact, we're 50% more cost efficient than the second best utility in America. We believe our Rewire products reinforce our position as the lowest cost electric utility operator in the country. But it doesn't stop there. By working closely with hyperscalers, we're structuring solutions that support growth while keeping power prices affordable for American families. As we've discussed previously, that's why Energy Resources has been focused on the bring your own generation, our BYOD model that ensures large load customers pay their fair share. Not coincidentally, that happens to be perfectly aligned with where the market and policymakers are moving. The concept is simple. We build energy infrastructure for hyperscalers and they pay for it. Everyday Americans do not. That's the way to power America's growth and keep power bills affordable but we believe there's much more to the story. Remember, many parts of the country are starting at real capacity deficits as we approach the end of the decade. BYOD Power Solutions could become critical elements of a resilient grid, if we start to think about them as dispatchable resources during times have extreme demand. It's exactly what we're working on with NVIDIA a collaboration we announced in the first quarter. Just think about being able to temporarily cycle down or shift data center activity for a few hours during extreme cold or extreme heat. That would allow local load serving entities to use that power to meet customer demand when power is scarce and at a higher cost, increasing reliability and lowering power bills for everyday Americans. This is another example of how we're trying to lead and move to where we believe the market is going to be. Bottom line at this unique moment in our industry, scale, experience, innovation matter more than ever. And our common platform provides us with what we believe is an unmatched competitive advantage -- it's more than just our operating scale. We have a robust supply chain. We have global banking relationships. We worked hard to maintain one of the largest and strongest balance sheets in the sector and we use technology and data to deliver solutions for our customers. This platform is what enables us to build all forms of energy across the energy value chain. It's also hard to replicate -- that's because we've been building it, refining it and optimizing it for decades. It's how we deliver customers a reliable and affordable solutions they need when they need it, no matter where they are in America. And as power demand rises, these unique capabilities become increasingly important, all of which is a big one for our customers, stakeholders and shareholders, we are honored to serve. I'm pleased with how we've started the year and even more excited for the rest of 2026 as we execute on our more than 12 ways to grow. With that, I'll turn the call over to Mike. Michael Dunne: Thanks, John. Let's begin with FPL's detailed results. For the first quarter of 2026, FPL's earnings per share increased $0.06 year-over-year. . Regulatory capital and growth of approximately 8.8% was a significant driver of FPL's earnings per share growth versus the prior year comparable quarter. FPL's capital expenditures were approximately $3.2 billion for the quarter, and we expect FPL's full year capital investments to be between $12 billion and $13 billion. For the 12 months ending March 2026, FPL has reported return on equity for regulatory purposes will be approximately 11.7%. During the first quarter, we utilized approximately $306 million of the rate stabilization mechanism, leaving FPL with an after-tax balance of approximately $1.2 billion. This quarter, FPL placed into service approximately 600 megawatts of new cost-effective solar, putting FPLs owned and operated solar portfolio at over 8.5 gigawatts. Key indicators show Florida economy remains healthy. Florida continues to be one of the fastest-growing states in the nation and had 3 of the 5 fastest-growing U.S. metro areas between 2024 and 2025. And as John mentioned, FPL had a strong quarter of customer growth with the average number of customers increasing by nearly 100,000 from the comparable prior year period. FPL's first quarter retail sales increased by approximately 3.4% and year-over-year. After taking weather into account, first quarter retail sales increased by roughly 0.3% on a weather-normalized basis from the comparable prior year period driven primarily by continued favorable underlying population growth. Now let's turn to Energy Resources, which reported adjusted earnings growth of approximately 14% year-over-year. Contributions from new investments increased $0.04 per share year-over-year, primarily reflecting continued growth in our power generation portfolio. Our existing clean energy portfolio increased $0.01 per share during the quarter. The comparative contribution from a customer supply business decreased by $0.04 per share primarily driven by lower production volume in our upstream operations and continued normalization of margins in our full requirements business. Contributions from NextEra Energy Transmission increased $0.05 per share year-over-year, net of financing costs, driven by the sale of a 50% equity interest in a transmission asset located in California. We had no change from other impacts as lower tax costs were largely offset by higher financing costs, which are primarily related to new borrowings to support our new investments. We remain well positioned to navigate the current interest rate environment through our over $43 billion interest rate hedging program. We have also planned for potential trade impacts and positioned ourselves to deliver and execute for our customers. That's why we proactively secured supply to support both FPL and Energy Resources development plans, including the development of our national data center hub footprint. For solar, we have secured panels through 2029. We're also well protected for battery storage with competitively priced domestic supply also secured through 2029. We've secured key wind components domestically for our new build expectations through 2027. And we have sufficient transformer capacity to support our build forecast through the end of the decade. Energy Resources had a record quarter of new renewables and storage origination with 4 gigawatts added to the backlog. With these additions, our backlog now totals approximately 33 gigawatts after taking into account 0.3 gigawatts of new projects placed into service since our last earnings call. This highlights the continued strong demand for renewables and storage. And our backlog additions reflect the diverse power demand we're seeing across our customers. Roughly 30% of our backlog additions are driven by hyperscalers while the remaining 70% comes from power utility customers, including cooperatives and municipalities. Turning now to our first quarter 2026 consolidated results. Adjusted earnings from Corporate and Other decreased by $0.02 per share year-over-year. Our 2026 adjusted earnings per share expectations range of $3.92 to $4.02 remains unchanged, and we are targeting the high end of that range. We expect to grow adjusted earnings per share at a compound annual growth rate of 8% plus through 2032 and are targeting the same from 2032 through 2035. And all off the 2025 base of $3.71 adjusted earnings per share. From 2025 to 2032, we expect that our average annual growth in operating cash flow will be at or above our adjusted earnings per share compound annual growth rate range. And we also continue to expect to grow our dividends per share at roughly 10% per year through '26 and of a 2024 base and 6% per year from year-end 2026 through 2028. As always, our expectations assume our caveats. This concludes our prepared remarks. And with that, we will open the line for questions. Operator: [Operator Instructions] And today's first question comes from Steve Fleishman with Wolf Research. Steven Fleishman: So the -- just a couple of questions on the U.S. Japan projects. First of all, I guess, have anything you could share on milestones and time line to get to a final agreement there? And just do you have the turbines for these projects? And also just like pipeline and transmission access, is that something you might be able to participate in as well helping to build pipe or transmission for these projects? John Ketchum: Yes. Steve, I'll go ahead and take this. This is John. First of all, on the milestones, we continue to be heavily engaged, as you would expect, with both the Department of Commerce and the Japanese government. . Right now, as we negotiate definitive agreements, we're looking to have those completed in the next 2- to 3-month period on both of those projects. So that's the first piece on milestones and time line. And then after those are executed, you can imagine the agreements themselves will contain a series of milestones with payments tied to those milestones as they are achieved. On the second piece, in terms of product development or project development, we are heavily engaged at both sites, both the Texas site and the Pennsylvania site in terms of advancing those sites forward in terms of turbine supply, we'll have ample supply to turbines. Not concerned about that for both of those projects. And in terms of gas pipeline access, obviously, that's one of the skills that we bring to the table. Anderson at Texas is strategically located because it's one of our partners there is Comstock, and so we have [indiscernible] gas supply available in the region, which makes that project extremely attractive. And then as we advance Pennsylvania, that will be a key part of the decision-making matrix as we look to further the development activities there and then, obviously, transmission access on both of those sites is something that we will obtain as we move those projects forward and the development pieces, that's what we do. That's what we do every day. And I think that was a big part of what I was trying to get across in my remarks. When I look at the environment today, and I think a big reason we got these awards with -- from the DoC is there's really nobody that looks like us today. There's nobody out building generation at scale. We intentionally went out and shifted our strategy last year to bring your own generation. We knew that was where the market was heading. We saw it ahead of time. I think based on where our peers are and we set up our strategy around it, our supply chain around it, our development activities around it. And a lot of what we're doing, not only with the federal hubs, but outside of it with the data center hubs is we know the market wants power solutions at scale. And to do that, you have to have a combination of capabilities and skill sets that we've been building for 2 to 3 decades at this company. They're very hard to find. They're very hard to put together if you don't have them today. And so being a builder in today's market across 49 states, with all the know-how and capability sets that we have, I think, really sets us apart from the competition. Steven Fleishman: Great. Just one other unrelated question. Good to see the 600 megawatts of recontracting being done. Do you have any data point on the price increase price change in the new contracts versus the old ones? Jeremy Tonet: Yes, Steve. The pricing on the new contracts is roughly a $20 per megawatt hour on average increase relative to the prior realized pricing. . Operator: And today's next question comes from Julian Dumolin Smith with Jefferies. Julien Dumoulin-Smith: Genuinely. I just wanted to follow up a little bit on the linear infrastructure. How do you think about expanding this business? I mean you talk about hires, et cetera. But can you talk a little bit about -- is this an acquisitive strategy potentially? Or how do you think about building or building, rebuilding, however you want to frame it? John Ketchum: Yes. So I'll take it in pieces. I'll start with transmission, then I'll talk about pipelines. But first of all, when you think about the transmission business, I mean, this is really just leveraging all the skill sets that we have on the generation side because when you think about what it takes to build generation and what it takes to build linear infrastructure. It's a lot of the same skill sets, right? You've got to have a very sophisticated land operation. You have to be able to really understand how to manage the permitting and approval process. You have to have a good ground game in terms of reaching out to local communities, working with stakeholders at the state and the federal level. And you have to find projects that make sense that will result in affordability for customers. And these are the things that we do on the generation side every day that transcend over into linear infrastructure around transmission. And then given all the know-how we already have from FPL and the success we've had building transmission in Florida, all that from an operations standpoint, extends out into what we're doing there. So terrific greenfield opportunities. It's a lot of the same strategic steps we take around generation. So I think those give us a big leg up. In terms of acquisitions, sure, I mean the -- if we found the right project that made sense, we could look at acquisition. It would depend on what stage of development it is. I mean sometimes there are good development assets that make sense that could be a good fit with our overall portfolio. Wallis lean towards greenfield for the reasons I just gave. Buying operating transmission assets, sure. I mean, if we could be opportunistic about that and then they made sense and we're in the right places. That's something that we could continue to look at as well. But where we've seen a lot of success on the transmission side is our ability to partner with incumbents. And the relationships that we've been able to build across the investor-owned utility co-op and municipality space, I think, not only lens and serves us well on generation, but on transmission as well. And we're just seeing a lot of success through those partnering arrangements. So I feel great about where the transmission of linear infrastructure opportunity set sits. And then on pipelines, that's just naturally capitalizing on all those same greenfield skill sets I already talked about around generation and transmission, they equally applied to the pipeline business. And then you think about all the different skill sets that we have just around market knowledge on where transmission can -- where gas transmission can make sense. The Symmetry acquisition being a big part of that. I mean, you're one of the largest movers of gas molecules in the United States, you also probably have more information and more knowledge as to where gas pipeline expansions are required. It really helps inform our decision-making around our data center hubs on where they're going to be most economical and really can be optimized around gas. So all the investments and other pieces that we have around customer supply and symmetry feed in equally well in the pipeline business. And it's a natural extension of our ability to enable data center hubs, right, by being able to build gas or build transmission to be able to serve hyperscalers because we've really moved away from, hey, let's go build 200 or 300 megawatts. That just doesn't get it done for hyperscaler. We're looking at building 2 to 5 gigawatts for hyperscalers. You would just be amazed at the amount of interest and the amount of demand that we are seeing in the -- for that solution we are really unique in the ability to deliver that product because you have to have all the things I talked about in my prepared remarks to be able to do it and to be able to do it right. Julien Dumoulin-Smith: Awesome. And if I can just squeeze in a quick follow-up here, maybe this where Steve was going. I mean, how would you set expectations for other non-Japanese tide projects as far as the BTM effort goes. I mean BTM is obviously linked to this time to power dynamic, creating a little bit of an accelerated time line, I suspect, but I'm curious how you'd frame that. Michael Dunne: Yes. Doug, great question, Julien. I mean -- and so -- we've talked a lot about our ability to work with co-ops and municipalities, and that really helps enable situations where we can move behind the meter in those service territories. -- maybe build something out that ultimately has what I call the extension core, right, the access to the grid over time. A lot of -- because even if you start behind the meter, you have to be able to demonstrate a path to be front of the meter within 3, 4, 5 years. But a lot of the discussions that we're having around our data center hubs are starting behind the meter, right, islanded solutions, I think more and more of the market is going to go there, particularly in areas of the country where the load interconnect process is taking 5 to 7 years to clear. People can't wait. There's too big of an opportunity cost around the data center business model and the cloud storage model to wait 5 to 7 years for load interconnect. We solve that problem with the behind-the-meter solution, but you have to know what you're doing. You have to know where to site those. You have to know how to bring a number of technologies to bear. And you have to have the foresight to the plan and incredibly lay out a situation where you can be interconnected within 3, 4, 5 years because that interconnection allows you to really optimize the value of that data center because I truly believe that we need to be as a country looking at data centers as giant batteries that sit behind the grid. And I talked about our NVIDIA collaboration being able to flex chips in terms of how they consume and use power. And given all the software we've developed around dispatchability of batteries, we're uniquely positioned to design a product. And if you combine it with our customer supply business to firm and shape products are in scarcity intervals, hot summer day, cold winter day, where a data center can be dispatched like a battery and think about what that does for affordability for customers in the region when you're providing that excess supply that really helps to take a big hit out of the bill for everyday Americans that may struggle to pay those during the scarcity times that we have seen over the last 5, 10 years in this industry. So something we're very focused on, something hyperscalers are very interested in. And I think it's unique for NextEra because we have all the expertise around technology, our partnership with Google being a part of that. Operator: Next question comes from Shar Purreza with Wells Fargo. Shahriar Pourreza: John, just on large-scale nuclear. I know the government and hyperscalers have indicated some level of interest in the AP1000. And there seems to be this consortium of regulated utilities forming that could consider new nuclear development as a group with a good portion of the cost inflation above budgeted amounts being borne by the hyperscalers, so the off-takers Turkey Point is obviously under an active review with the NRC. Are you sort of part of this consortium? Is it something you would consider with the right cost overrun protections? Or are you just really focused on recontracting like Point Beach? John Ketchum: Yes. So let me take those in pieces. So the first part, you're right. I mean, Turkey Point is kind of an unusual position because Turkey Point 6 and 7 already have the licenses, right? And so you kind of skipped to the front of line on 7 to 8 years of approvals that would otherwise be required. So we've always had Turkey Point as a what I'll call a natural gas fuel hedge if we wanted to do something there around an AP 1000. That being said, for us, I think we would probably be more inclined to a toe in the water or maybe an SMR down at Turkey Point rather than an AP 1000. And we would do it in a way where we could combine, like I always like to talk about the 4 wallets, right, which is the OEM, the developer, the hyperscaler and the federal government because we asked you have to, one, be comfortable with the technology and the technical feasibility of it will work at the end of the day. And number two, as we keep saying, it has to be structured in a way that protects our customers and protect our shareholders. And so that's what we would look to do. We would not be interested in doing that together with a consortium. We have a lot of experience here. We feel very comfortable in our ability to do this on our own. But you got to get the insurance tower, so to speak, right, in terms of who takes that ultimate cost overrun risk. And so beyond Turkey Point and if you think outside of Florida, we are working closely with OEMs and with hyperscalers. As you know, we have our national collaboration with Google, for example, around advanced nuclear we're looking together with Google where that might make the most sense. We have 6 gigawatts of SMR capacity at our existing sites. We have the ability to greenfield development as well. But again, any of those opportunities have to include those 4 wallets, and we have to get the technical and the commercial risk sharing right for those to advance. Shahriar Pourreza: Got it. So I guess your view is despite the learning curves of Vogtle, the SMRs are still more economical than an AP-1 down? John Ketchum: Yes. I mean, I just -- I look at it there's 2 types of SMRs, right? There's Gen 3, which are just what I would call a downsized AP1000, right? So you're looking at building an AP1000 just in a smaller chunk, a little bit of a smaller bet GE has got the Ontario project going on now, he'll be a lot of lessons aren't coming out of that. And the Gen 4s really are -- you're taking 2 step changes around Gen 4, Gen 4 is the technology, which is not really an extension of an AP1000 that tried proven and you're jumping into an additional fuel risk withthe highly enriched uranium, which we still haven't really perfected in this country. So our focus would be more around the Gen 3 technology. Shahriar Pourreza: Got it. And then just lastly on Point Beach, we're getting close to when a decision needs to be made on the PPA, especially for the offtaker who's going to need to plan ahead on new generation needs if the PPAs aren't renewed. I guess how are the dialogues going with WEC? Do you have an interest there from a hyperscaler? I guess when can we get an update around Point Beach? John Ketchum: Yes. Thanks, Shar. There is a lot of interest for Point Beach, as you might imagine, right? I mean a lot of interest from a number of folks. And so we are just being diligent and making sure that we make the right decision around Point Beach. I'm not going to call out who exactly we're talking to what the names are. But needless to say, just a lot of interest around that asset for obvious reasons, given where it's located and all the hyperscaler opportunities around it. And so discussions are continuing to progress there. And we like what we see, and it's an attractive and a valuable asset. Operator: The next question is from Bill Appicelli with UBS. William Appicelli: Just addressing the backlog update. I think you've seen some strong progression here from about 3 gigs in Q3 to 3.6 to now 4 gig. So would you say this reflects some acceleration of the contracting ahead of the tax credit roll off at the end of the decade? Or is this just underlying demand being exceedingly strong irrespective of the tax credits? Brian Bolster: It's Brian. I'd say at this point, we're actually -- we haven't actually stepped into the acceleration yet. This is just a reflection of some of the growth that we've seen out in the market. And so it's really the reflection of the growth as opposed to acceleration. We'll probably see that as we start to move out here in the coming quarters, but this is just kind of fundamental demand for fundamental growth that's tied to what's the best economic answer for the demand that's in front of us as opposed to people trying to move in, in advance of the tax credits. John Ketchum: Yes. And the other thing I would add to that is I may comment in the prepared remarks about where we stand in our supply chain, right, with solar panels, bought through 29 transformers through the end of the decade, batteries are 29 wind components so on and so forth. We are so well positioned to capitalize on this back-end demand that we see coming, which is again, I think, going to be a fantastic opportunity for this company. And you combine that with the safe harbor position that we already have that we were quite aggressive on a while back. I just can't imagine there's any company in America better positioned to seize upon the demand that we are going to see over the next 3 to 4 years and beyond for renewables. And for storage, particularly given how long it's taking to build gas-fired generation in this country. And like I keep saying, we're building it all. We're a big believer that gas is needed and is going to provide a big impact. But it's not quick, right, to get the market in solar and storage are. And -- and we have positioned our company around the ability to seize upon those opportunities. I think you'll see in the first showing of that here this quarter, and we look forward to many more strong quarters to come. Brian Bolster: So there's upside to 4 gig a quarter run rate, I guess, is another way to put that. Well, you said it, I didn't, but we feel really, really good about where we sit. William Appicelli: Okay. And then just shifting gears outside of the Texas and Pennsylvania projects, can you just speak a little bit to the gas generation build contracting. I know it's sort of subsumed in some of the hub strategy, but it does seem like there's some complexities in the market around getting deals announced on on our new build gas contract to your point that you just made there in those in my prior question. Is there anything you can point to in terms of gating factors? Is it just the complexity around managing fuel risk? Or is it getting the offtakers to be able to commit to that? Just curious there. Brian Bolster: Yes. No. I mean, look, I think that gas build-out continues to advance around the country. But remember, we were starting gas-fired generation development we be in the industry, right, from kind of a standing start a year or 2 ago. And so we've seen manufacturing start to ramp up. We've seen EPC labor respond as well. But I think the biggest constraint that I see in the market right now is getting gas built faster is labor, right? It's EPC contractors. We used to have 9, 10, 11 EPC contractors building gas plants back 10, 20 years ago. Some filed bankruptcy, some pivoted and other businesses. If you look at really what I would call the 4 EPC contractors that we do business with today, a lot fewer than what we've ever had and the squeeze on labor in the market today when you're building a gas plant, pipe fitters, welders, so on and so forth, the same EPC firms are building LNG terminals, they're building data centers there in other parts of the market. And so lining up the labor, getting the labor secured and in place, that's a piece of it. And then depending on where you're building permitting. We keep talking about permitting reform. We have got to get permitting reform done in this country. It is imperative that we get that done, both for linear facilities. And also just to expedite permitting at the state and the federal level. Those are the things more than anything that I think are contributed. The gas will be built, that will come online. And NextEra is one of the companies that will drive that, but it's just not as fast as other other forms of generation. So that's why we keep saying we need it all, right? We need to put it all together. And when you get every electron on this grid as fast as possible, speed to power is essential and that will allow us to unleash American Energy dominance across America. Operator: The next question comes from Nick Campanella with Barclays. Nicholas Campanella: A lot of good updates. So I just wanted to ask quickly on the 1 gigawatt you want to deliver on at FPL. Is that already kind of in the plan? And just we noticed the capital expenditures are now $12 billion to $13 billion for '26 million. And I think at the analyst event, there was $10 billion to $11 billion. So a nice increase there. And -- just wondering if that's for the 1 gigawatt you were already talking about. Is that kind of the new run rate we should expect going forward for FPL understanding that I think you just reaffirmed the total CapEx outlook today. John Ketchum: So a few things on nice Don here, do things on that. I think, firstly, we've not said how many gigawatts or gigawatt of large OE expected I think we've only said that we expect to have a large load transaction finalized this year. And so -- but we have not set at 1 gigawatt or what that number would be. Second piece is, as you do look at the CapEx increase, this is really aligned with what John said earlier about being prepared. So as we brought in and secured solar supply, a piece of that solar supply is bringing that in today at locked-in prices to remove any trade impacts and we'll be able to use that to cost effectively serve our customers in Florida in the future, but that a piece that was pulling in some of those capital expenditures. So FPL situated extremely well for low cost to our customers by taking proactive measures to reduce any trade impacts. Nicholas Campanella: Understood. Okay. And then just maybe if I can one follow-up on the Japan deal and framework. It's just our understanding that, that's a bit of a kind of capital-light opportunity, they're the owners, they're the builders. So just how would you kind of view the return of that opportunity to like the 13% to 20% plus equity IRR that you had out there at the investor conference. It's just the 9.5 gigawatts is a very large number and trying to understand how that supports or accelerates the 8% plus EPS view. John Ketchum: Right. So to your first piece, remember, this is a capital light investment essentially 0 capital for us. So from a returns perspective, it's essentially infinite. We are putting no capital down, and we would potentially receive fee streams for a long period of time. Importantly, in order for us to capture that, our incentives are 100% aligned with the U.S. government and with Japan because we will need to perform in order to receive those payments. And they're also through the duration of the assets. So they are not just development payments or construction payments but also ongoing O&M payments. As you look at what those fees can be and what that value can be to NextEra, I think we'd like to take the time to make certain that we have the contracts in place before we know what that will be. But we are looking at these investments at making this time investment and working through these because they can be value accretive to our shareholders. Operator: And at this time, this concludes our question-and-answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect your lines, and have a pleasant day.
Operator: Greetings, and welcome to Mobileye Global Inc.'s 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, Daniel V. Galves. Mr. Galves, you may begin. Daniel V. Galves: Thank you, Maria. Hello, everyone, and welcome to Mobileye Global Inc.'s first quarter 2026 earnings conference call for the period ending 03/28/2026. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it, including regarding our future outlook. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today are Professor Amnon Shashua, Mobileye Global Inc.'s CEO and President, Moran Shemesh, Mobileye Global Inc.'s CFO, and Nimrod Nehushtan, Mobileye Global Inc.'s Executive Vice President of Business Development and Strategy. Thanks, and now I will turn the call over to Amnon. Amnon Shashua: Thank you, Dan. Hello, everyone, and thanks for joining our earnings call. We delivered very good results in the first quarter. Revenue was up 27% year over year, adjusted operating income was up 61%, and our operating cash flow was again strong at $75 million despite working capital timing that was a modest drag. We have seen upward pressure on demand for our EyeQ product for the last several quarters. That continued in Q1, and is what we expect for Q2 as well. As a result of higher volume and revenue in Q1, we have raised our 2026 outlook toward the high end of our original guidance, leaving the outlook for the remaining three quarters essentially unchanged. The geopolitical and economic environment remains volatile, but based on our visibility for Q2, we believe there is sufficient conservatism baked into the second half. Diving deeper into the drivers of our business, our ADAS business is very strong with very high margins and cash generation. Design wins over the last several years have secured our position with our main customers over the long term. India looks like a meaningful growth opportunity, and our focus over the last couple years on supporting Chinese OEMs on their export ambitions is paying dividends. Finally, the Surround ADAS segment gives us the opportunity to replace many of these base ADAS programs with much higher average selling prices over time. On our advanced product portfolio, the current priority remains execution, and that is going very well. We have a number of production programs running in parallel, two of which start production in the relative near term. These are SuperVision with Porsche, and the DRIVE robotaxi with MOIA, the Volkswagen Group's autonomy division. For both programs, Mobileye Global Inc. is responsible for the development of comprehensive advanced ADAS and autonomy platforms integrating hardware, software, data, and maps into a complete system that must be provably safe, predictable, and verifiable. These solutions need to meet tens of thousands of requirements set by the automaker and need to be homologated to automotive-grade standards. Each program gives us the ability to prove that Mobileye Global Inc. is the leader in developing and executing complex AI-based systems in the physical world at global scale. Systems that can be validated under strict standards, something that many companies talk about, but few besides us are actually executing on this vision. Specific updates as it relates to SuperVision are as follows. Progress is strong with performance tracking well to our objectives. As a concrete example, six weeks ago, we had the first OEM-directed drives in the U.S. for this system, having only tested in Germany and Israel previously. Our first task was a 2,000-plus kilometer drive in a vehicle equipped with production EyeQ6 High SoC and ECU hardware with the latest software engines integrated into the production architecture. We had no prior knowledge of the route, which was across a diverse set of urban, suburban, and highway road types, and severe weather, including heavy snow. The SuperVision system performance was outstanding, with very few interventions encountered. This was an important proof point for our out-of-the-box performance and ability to generalize to a brand-new geography. We have a couple of more software releases to make, and then expect to have the capability to demonstrate to other potential customers in the various key geographies. On robotaxi, we continue to make rapid progress. In Q1, Volkswagen announced the start of pre-series production of the ID. Buzz autonomous vehicle in a Hanover facility, with vehicles coming off the regular assembly line with Mobileye Global Inc.'s fully integrated self-driving system. Volkswagen's ability to produce fully integrated robotaxis at scale from an active automotive production line is very unique. MOIA, the Volkswagen division that will deploy these vehicles, announced that testing had begun in L.A. for the Uber collaboration. They also announced today that Orlando is the first launch city collaboration with BEEP. For both of these efforts, the path to commercialization is as follows. We continue the current process of testing, data collection, and validation. Once we achieve sufficient proof points, we will begin accepting commercial riders with a safety driver until the required level of performance has been proven that allows us to remove the safety driver. That is the point where the scaling advantages of our approach, including crowdsourced mapping, our deep and diverse global dataset, and Volkswagen’s ability to ramp up production rapidly, will be self-evident in terms of our ability to expand geographic areas of operation more rapidly than competitors. And it is another opportunity for Mobileye Global Inc. to prove its end-to-end capability in terms of executing complex physical AI systems at scale. All of this experience over the next two to three quarters would feed back to further improvements and fine-tuning to be ready for scaling in Europe once the ID. Buzz is fully homologated and certified, which is targeted for 2027. Turning to the Menti side, components of version 3.2 of the robot have arrived and will demonstrate incremental capabilities soon. The hardware roadmap for version 4 is nearly complete and is expected to be ready for demonstration by early 2027. This will be the version that we expect to commercialize for use cases and market entry and will be cost- and weight-optimized and offer enhanced dexterity and manipulation capabilities. Finally, on the buyback we announced this morning, we are a cash-generative company, which is unique in this space. That gives us the ability to pursue growth opportunities like we did with Menti, but also be opportunistic with our equity. While we are making strong progress on our advanced products, and conversion of our large future revenue pipeline, the realities of automotive development timelines and OEM confidentiality agreements limit what we can disclose publicly. In an environment where technology competitors are generating significant news flow, we believe that this lack of visibility has weighed on our stock price. While we continue to execute, we see an opportunity to deploy cash towards share repurchase, which will benefit all shareholders by partially offsetting dilution from stock-based compensation and addressing dilution from the Menti transaction at significantly more attractive prices than those embedded at closing. I will now turn the call over to Moran. Thank you. Moran Shemesh: Thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurements. The exclusions in Mobileye Global Inc. non-GAAP numbers are typically amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017, and stock-based compensation. This quarter, we also excluded the goodwill impairment loss referenced in the press release, and transaction costs associated with the Menti acquisition which closed in early February. First quarter revenue of $558 million was up 27% year over year. This compared to the indication we gave on the January call of about 19% growth. We had assumed shipments of approximately 10 million EyeQ units in the quarter, including some recovery of safety stocks at customers which had ended 2025 at a very low level. The upside in the quarter was the combination of higher share and higher ADAS fitment rates at core Western customers and, more meaningfully, robust Chinese OEM volume from the export market, a segment where we have higher share than we do on Chinese OEM vehicles sold domestically. Adjusted operating income was $95 million, up 61% year over year. Adjusted operating margin was 17%, up about four percentage points versus Q1 2025. Profitability was largely as expected. Strong mix to our top 10 customers was a bit of a tailwind, offsetting the higher China OEM volumes which typically carry lower pricing and profitability. Operating expenses were as expected, representing about 25% of our full year expectation of around $1.1 billion, and were up versus Q4 mainly due to engineering reimbursement timing that relates to production program milestones and also the consolidation of Menti expenses as of early February. As I noted on the January call, we have been seeing consistent positive revisions from our customers throughout 2025, and that continued in the first quarter of the year. Regarding the facility that Amnon mentioned earlier, turning to full-year guidance, we are increasing the revenue outlook to $1.975 billion at the midpoint, which implies 4% year over year growth. This is underpinned by about 38 million EyeQ units, which is up a little less than 1 million from the prior outlook, accounting for the upside in Q1. A bit more granularity on the volume is that the forecast assumes the current S&P production forecast of our top 10 customers, which is currently -3.5% year over year. It also assumes that the run rate of China OEM volume in 2026 comes down meaningfully from the first half levels. We are not sure what will happen, but given low visibility on that part of the business, we prefer to stay conservative. We are increasing our outlook for adjusted operating income to $210 million at the midpoint, up from $195 million in the prior outlook. The two items impacting revenue-to-income conversion are: number one, a good portion of the incremental revenue is related to China OEM volume, which converts at lower revenue per unit and profitability than the rest of our volume; number two, on the SuperVision side, volume is consistent with our prior outlook, but we do have some incremental costs for the ECU, particularly related to memory. Our assumption of operating expenses is unchanged at approximately 10% year over year growth to around $1.1 billion. Finally, on the full year, we have now provided an outlook for GAAP operating income. At the time of the January call, the impact of the amortization and stock-based comp from the Menti acquisition was not able to be estimated precisely. Now it is. The only thing to note is a reminder that only a portion of the shares issued as part of the acquisition will show up in the share count this year. That is because the majority are tied to vesting requirements for the multi-year milestones. Therefore, the relevant accruals are included in the projected share-based compensation expenses referred to in the guidance. Another important point to note is that while there will be share-based compensation expense and some impact to the share count associated with these shares in 2026, it will be gradual as full vesting only occurs for 50% of the shares in 2028 and the remainder in 2030. Turning to the second quarter, we are assuming about 9.3 million EyeQ units and for revenue to decrease approximately 6% on a year-over-year basis. We would expect gross margin to be slightly below Q1 level based on the mix of orders we are seeing currently and for operating expenses to be consistent with Q1 level, maybe slightly down. To conclude, we are almost four months into 2026 and continue to see positive demand signals from our customers on the core business. As Daniel discussed, we are also seeing very good execution progress ahead of a large number of advanced product launches over the coming one to two years which we expect to create significant growth for the company. Finally, I am pleased that we are able to begin a share buyback program as we believe it takes advantage of the strong cash flow of our business and benefits all shareholders by offsetting a portion of RSU issuance, which is a critical part of Mobileye Global Inc.’s compensation structure. Thank you, and we will now take your questions. Operator: We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that analysts limit themselves to one question and a follow-up so that others have an opportunity to do so as well. One moment while we poll for questions. Our first question comes from Edison Yu with Deutsche Bank. Please proceed with your question. Analyst: Hi. Thank you. This is Winnie on for Edison. First question is on the ADAS side. It seems like the year’s guide is raised reflective of the Q1 beat. So just curious what conditions you are seeing now in the channel, and because you have given us some guidance for the rest of the quarter, can you just refresh some of that to reflect what you are seeing in the first half of the second quarter? Thank you. Moran Shemesh: I think that basically, in terms of the guidance, we are reaffirming our guidance from the January call and adjusting it for the upside that we are seeing in Q1, as we do not anticipate this upside to impact the rest of the year. So that is the main reason. And as for the upside, I can briefly mention what we were seeing. First, on the China OEM export volume, we think that probably half of the upside is coming from there. We are seeing very strong demand for both Q1 and also incorporated into Q2. For the second half, we are still conservative and this market is volatile, but we are seeing very good demand on that. Some of our customers have very significant year-on-year growth on export. Secondly, ADAS fitment rate is increasing in 2026 for our top OEM customers. We are seeing constant demand here throughout the year, so this is unchanged from our January call. And third is the safety stock inventory adjustment for our customers. We talked about it in 2025 being at a very low level, even below three weeks or so, and they have now increased their respective stock to approximately four to five weeks which is kind of normal. We do not anticipate this volume to reverse this year, as it is a normal stock they need for their ongoing shipments. Amnon Shashua: Just to add on the macro side, there are a few tailwind effects that we are benefiting from. The first one is the increase in export volumes by the Chinese OEMs with our strong customers. Interestingly, these volumes are in emerging markets like Asia and South America and are not necessarily competing with the European volumes that we have. So we can benefit from an overall increase in volumes. The second is that we have increased our market share in our key customers. Although we have been in the majority of the volumes of our top 10 customers, it was not necessarily 90-plus percent in all of them. Over the past two years we have been increasing our market share, replacing older solutions by competitors. So that is also a tailwind effect, and overall, we do not anticipate these two trends to weaken. We expect them to continue as they were, and it is what stands behind the revision to the guidance. Analyst: That is very helpful. Thank you. A follow-up on Menti, I was wondering if you can give us an update on the progress made thus far, and would it be reasonable to assume some kind of proof of concept later in the year with external customers? Thank you. Amnon Shashua: We are making progress on two fronts. One is the hardware. What we have shown a month or two ago was version 3.1, and version 3.2 is being assembled now, with better dexterity and improved hands as well. Software-wise, we are integrating VLMs into the system, designing tasks that are more targeted to home-use tasks or to B2C domains. We have another version 3.5 of the hardware in two months from now, and version 4, which is the hardware to go into mass production, should be ready by end of this year, early next year. Regarding the proof of concept, we are still analyzing the domains. Part of our analysis is the viability of the B2C model rather than B2B, or starting B2C and then B2B. So we are still analyzing the opportunities of the use cases that we are building for the robots. Operator: Our next question comes from Christopher Patrick McNally with Evercore ISI. Please proceed with your question. Analyst: Thanks so much, team. Amnon, I wanted to focus on the upcoming KPIs to the driver-out as you test in Los Angeles and Florida, and maybe what is to come after driver-out with respect to commercial scale. So if I divide it into two parts, on the driver-out, what is left in your timeline to validate the service for that fall in Q4 launch, as you mentioned? Amnon Shashua: Our milestones for the driver-out are first to start validation on the final Level 4 vehicle. There are still a few more months until we get the final vehicle ready for series production, then we will start the validation. Also, there are some things that we need to close with the remote operators, make sure that everything there is running as we plan. Then we start with the commercial drives with a safety driver, and towards the end of the year remove the driver. We are on track with all our plans in that area. What comes after that? Our first priority is driver-out on an SDS system that is fully homologated both software and hardware, automotive grade. This is a huge moat. Once we get that, the second is scale. We want to see 2027 with at least six cities and hundreds of vehicles, at minimum. That is the next real big milestone. Then we will look at the market and see whether we need to simply remain an SDS provider, which at the moment is our plan A, or to extend our vertical integration. We will see what happens by 2027. Analyst: Perfectly clear, and I think you basically hit on the first part of my follow-up. But if we take the second, we all understand driver-out is not really the end of AV development or service. Could we talk about the original ODD expansion? Will the first commercial service go on the highway? And how do we think about those AV improvements which are non-safety-critical, like smoothness of the ride and your service getting better as it ramps, into 2027 in the U.S.? Amnon Shashua: We are talking about robotaxis, so robotaxis is full deep urban point to point in cities. We have the capability also to support the highways, but we will start in deep urban inside the cities and then gradually expand into highways as well. In terms of comfort, this is part of our KPIs today. I do not see us coming out with a commercial service that does not have the necessary comfort level of driving. Of course, the most important is the safety level, but we are, in our KPIs, measuring what would be called roadmanship, making sure that at the comfort level we are also meeting our KPIs. All of that should be in 2026. 2027 is more focused on scaling, both scaling number of vehicles and reducing the ratio of teleoperators to vehicles. That would be the goal for 2027. Operator: Our next question comes from Joseph Robert Spak with UBS. Please proceed with your question. Analyst: Thanks. Good morning. One quick follow-up on the guidance and then a bigger question. Amnon, on the guidance, I know you mentioned that one of the reasons for the EBIT flow-through versus the revenue flow-through was some of the China mix. But if I understood correctly, I thought the better China volume was in the first quarter, and that you are still assuming sort of that low-9 million sort of pace globally for the rest of the year. So maybe just help me understand some of that conversion. And if you could, I think you mentioned Q2 is still trending pretty well there, so maybe some even more near-term expectations on the quarter. Moran Shemesh: For the China OEMs that you mentioned, it is not just in the first quarter. It is also in the second quarter. So in terms of the year, the portion of China OEM has increased by a few hundreds of thousands of chips, which impacts, of course, the conversion of revenue to profitability, as the export volumes in China are for a lower ASP than what we sell in the West. So that is the guidance clarification. Amnon Shashua: Just to add to this, to clarify, these China export volumes do have lower ASP. However, they are for new markets that today, or until today, we did not have any sales in. So it is not that there is a competition between higher-ASP, higher-margin European business, for example, or American business for us that now comes from a lower ASP from China. These China volumes go to, let us say, blue oceans when it comes to ADAS penetration. So it is a net gain for us. Analyst: Thank you. And then just to follow up on Chris’ prior question with the DRIVE product, I appreciate the commentary on the KPIs, but what is really the process here between the different parties? Where does sign-off on moving to the next phase lie? Is it with you, with MOIA, with the TNC? And you did briefly sneak in there at the end, Amnon, that you would look after these launches whether it makes sense to remain an SDS player or extend that vertical integration. The latter clearly gives you more freedom. Is there anything that prevents you from doing that from a partnership or exclusivity perspective? Amnon Shashua: No. Nothing prevents us from pursuing the right business direction. It also depends on how the future plays out. Are there going to be one or two SDS suppliers out there, which is our current assumption, or are there going to be multiple? If there are going to be multiple, maybe the right business decision is to go more vertically integrated. But it is too early to tell. Right now, our focus is on the SDS, on the driver-out, the SDS hardware, the software, the roadmap, the teleoperation. There is a lot going on there. The maps—making sure that the maps scale so that we can scale quickly from city to city during 2027. That is the focus of the company. We have no limitations on how to pursue our business model. As for the first part of your question, the driver-out eventually depends on the customer, which is MOIA and Volkswagen. We are supplying the technology. We do not determine when the driver would be out, but our KPIs and milestones of both parties are targeting 2026. Operator: Our next question comes from Joshua Buchalter with TD Cowen. Please proceed with your question. Analyst: Hey, guys. Thanks for taking my question. I will start with one on the model. I am a little confused on the ASP trends implied in the guidance. You mentioned China tends to be lower ASP, but if I sort of run this low-9 million EyeQ shipments per quarter through the rest of the year, it implies ASPs continuing to trend down through the rest of the year despite China becoming a lower part of the mix, and potentially some advanced ADAS solutions later in the year. Can you help walk me through the ASP trends through the year, and if we should indeed be modeling low-9 million EyeQ shipments per quarter through 2026? Thank you. Moran Shemesh: In the January earnings call, we discussed ASP with regards to the second chip that we have this year. We have approximately one specific program with a dual chip when the second chip is discounted. We have approximately 800,000 units this year. So this is an ASP headwind of about $0.80. And with the China OEMs, we did increase, as I mentioned before, the China portion in terms of volume for 2026. So this is an additional maybe $0.30 to $0.40 decrease in ASP since our last estimation, although volume has increased significantly. So that is the explanation. Daniel V. Galves: It is also pretty difficult to be precise about it because there are other parts of the business as well. And just to be clear, we are not assuming additional advanced product launches for this year. Analyst: Okay. Thank you both. Then maybe a bigger picture one. Amnon, given your position in the industry, I was hoping you could reflect on how the regulatory environment for autonomous mobility broadly and robotaxis has changed over the last year, and when we should expect that to be a more meaningful part of Mobileye Global Inc.’s model. Thank you. Amnon Shashua: In the U.S., it is self-certification, which is very convenient to start ramping up. In Europe, the bar is much higher in terms of homologation, and this is the advantage of our partnership with MOIA and Volkswagen—that they take the homologation part to homologate the vehicle in Europe. I believe that as robotaxis start proliferating from the thousands of units to tens of thousands to hundreds of thousands, we will see more regulation coming in everywhere, not only in Europe, but also in the U.S. So having a very clear and precise and crisp definition of safety—in our case, it is RSS and PGF, stuff that we talked about back in the past—is very important to prepare the company towards an environment in which the regulatory profile is going to be much more risk-oriented. Nimrod Nehushtan: If I may add to this, if you see the communications from other companies on robotaxi launches, it is primarily either in China or in the U.S. You see much less news coming for the European market. We think that some of the reasons for that are the regulatory requirements in Europe that we have been actively working on with VW for the past year and a half almost. Through this engagement, we have exposure to how regulators view this business, and they do require specific KPIs and very detailed explanations on validation concepts and testing methodologies, how you overcome different unexpected events and safety assurances, etc. It is much more nuanced than just the high-level technological debate that is being made on public stages. We think we have a significant advantage in being fairly advanced in this process, and this will prove, we believe, as a competitive advantage in the next few years, being one of the only, if not the only, robotaxi enablers in the European market, which in and of itself has potential of tens of millions of commuters. Thank you. Operator: Our next question comes from George Gianarikas with Canaccord Genuity. Please proceed with your question. Analyst: Hi, everyone. Thank you for taking my question. I was wondering if you could comment on some of the recent traction that NVIDIA has seen with their reference design and what your pitch is to OEMs in terms of total cost of ownership, and why they should pick your solution. Thank you. Amnon Shashua: At the end of the day, it is a combination of performance and cost. If you refer to ALPAMAYO, we downloaded ALPAMAYO—it does not seem like a production-worthy system. It is something nice to play with, but it is not anywhere close to being production worthy. Whether an OEM can take it and upgrade it or refine it for a production-worthy system is yet to be seen. I would add that in 2016 NVIDIA had something similar with pixel labeling that they announced open source for the automotive industry. OEMs did nothing really—there was no real traction for it. Bringing something into production is tough. Taking a demo-ware or a nice demo into production—there is a death valley in between. And this is something that Mobileye Global Inc. is very good at. This 2,000-kilometer expedition that I mentioned in my script is very meaningful. It is an OEM taking a number of competing systems; one of them is the Mobileye Global Inc. system with Porsche, which is not yet ready—it is maturing over time. It is maturing; this year it will be ready for start of production, but it is not yet fully matured. Doing a 2,000-kilometer expedition without us knowing the route in advance, in very significant weather conditions—urban, suburban, highways, day and night, and snow—and our system really excelled. So this shows that going from demo to production is an art and a science, and something that Mobileye Global Inc. excels in. It is not just a matter of “here is an open-source network that does something cool; can we then refine it and bring it to production?” Just to mention, a production program we have with an OEM has about 60,000 requirements. This is what it takes to go from a demo to a production system. One of the strengths of Mobileye Global Inc. is not only that we are experts in AI—that we build an AI system and we are experts in learning—we have cost-optimized solutions and we know how to bring stuff into series production. And this is difficult. Analyst: Thank you. And maybe as a follow-up, there is a lot written about Volkswagen and their future strategy. I just wondered if you could please comment on your relationship there and their commitment to deploy your solutions over time. Thank you. Nimrod Nehushtan: Ultimately, the reality today is that all of the upcoming SOPs, product launches across all brands of Volkswagen Group mostly—spanning from base ADAS in lower-priced vehicles to robotaxi and everything in between—of the upcoming SOPs are with Mobileye Global Inc. products. This is the plan of record. It has been the plan of record in the past couple of years, and it did not change. If anything, we managed to expand our business with Volkswagen in these two years, also winning projects for the base segment, introducing Surround ADAS for the first time with Volkswagen Group on very high-volume vehicles. We are seeing them pulling additional vehicle platforms to the already nominated products we have with them. We need to distinguish between some news that comes out that serves certain interests and the realities of their planning schedules. Our experience in this industry shows that the first thing to change, if there is indeed a decision to take a different product, is these bank schedules, and they did not change. If anything, they changed for the better from our line of sight. We are not seeing any evidence of change of course. We are not seeing risk to our existing projects as a consequence. Of course, we need to finish the execution and get to the SOP date, but the business opportunity remains very significant for us when we finish the execution. Operator: Our next question comes from Shreyas Patil with Wolfe Research. Please proceed with your question. Analyst: Great. Thanks so much. Maybe just to follow up on some of your earlier comments. I am curious what you are seeing in the pipeline amongst OEMs. From the outside perspective, it does seem a bit jumbled. We have seen Mercedes and BMW appear to be pulling back from L3 in Europe, focusing on effectively SuperVision-like products. Ford and GM are talking about deploying their own solutions within the next three years. Others are partnering with AV players such as Nissan and Wayve. So how many opportunities are actually available to pursue in areas like SuperVision and Chauffeur in your view? Or have OEMs sort of laid out their plans for autonomy over the next few years? Amnon Shashua: I think by and large, OEMs have not yet made up concrete plans. We see opportunities for SuperVision. We see even more opportunities for Surround ADAS. With Level 3, I believe we will see the bigger opportunities as we get closer to production with Audi on Level 3, or as we get the driver-out of our robotaxi and also show a significant cost reduction of the robotaxi stack, which we can show by the end of the year. So SuperVision and Surround ADAS—we see significant opportunities, but with OEMs, it takes time, and we cannot predict the timing at this point. Our focus is really the execution. Execution will bring more opportunities. Analyst: Okay, great. And maybe just a quick modeling follow-up. I think you talked about higher DRAM costs for this year. Maybe if you could help quantify that, and is that something you can pass along via price adjustments? Moran Shemesh: The DRAM is the responsibility of our Tier 1s. Mobileye Global Inc. just sells the chip. On the SuperVision area, we buy the memory directly for the ECU. It is a relatively small business. We are talking just about a few million dollars, and we are passing that through to customers. The dynamics there are changing, so it is not something that is expected to significantly impact our costs, but it is a few million currently. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Please proceed with your question. Analyst: Yes, thank you very much for taking my question. The company discussed the performance of its pre-production vehicle in the U.S. with EyeQ6 High. You spoke to that doing well across urban, suburban, and highway settings and achieving your mean time between failure objectives. Can you remind investors what Mobileye Global Inc. is targeting for MTBF for this product, how it compares to competitors, and maybe most importantly, given what you were able to see on the unplanned route, is it catalyzing any incremental OEM business interest? Amnon Shashua: We are not sharing our MTBF goals. SuperVision is an eyes-on system, so MTBF is important but not as crucial as it is for robotaxi. There are other KPIs like comfort, not only disengagements but also comfort, ODDs—what kind of ODDs can you satisfy? There is a long list of requirements. It is not just one number that determines the driving experience of the product. It also changes from OEM to OEM—an OEM has a lot to say about the driving experience because they set the requirements. So it is not only the base technology that determines the driving experience; there is a lot that goes into it. What I can say is that this 2,000-kilometer expedition has shown the excellence of our product even though the product is not yet finished, especially compared to other competing demo systems that were part of this expedition. It shows that the gap—the discrepancy—between all the talk that you hear and the actual performance is huge. Analyst: Thanks. My other question was related to Mobileye Global Inc.’s efforts in AI. Now that you have the Menti Robotics transaction completed, can you speak more to the synergies between the existing Mobileye Global Inc. efforts in AI and what Menti brings? Are you able to work better jointly to accelerate your efforts in real-world AI? Thanks. Amnon Shashua: We are planning an AI Day around July timeframe, where we are going to lay down our complete vision of AI. Just to give perspective, the software running today on our EyeQ6 High—internally we call it Gen 1.5. In about two months, it will be Gen 2.0, and by the end of the year, it will be Gen 3.0. We are working very fast on a rewrite in order to accommodate the best AI has to offer, whether it is GenAI, whether it is simulators—everything—and we will be very transparent about it in our AI Day. So expect around July a consolidated view of how we take modern AI and bring it into physical AI, both in terms of robotaxi and in terms of robotics. Operator: Next question comes from Luke Junk. Please proceed with your question. Analyst: Thank you. First, I wanted to ask, bigger picture, as already referenced, there has been a lot of chatter about OEMs pulling back from L3 applications and refocusing on L2+. Are you seeing any broader repercussions of this, specifically in terms of Surround ADAS and the amount of interest you are seeing at the front end of the funnel? It seems like it is really an area the market is consolidating around right now. Amnon Shashua: We are engaging with OEMs on Level 3, but I would say that Level 2+ or SuperVision is gaining more traction with OEMs, and Surround ADAS is gaining even more traction. I believe that driver-out with the robotaxis, especially when you have a credible cost-down path, will reignite Level 3 and Level 4 consumer programs with OEMs. Nimrod Nehushtan: The debate around Level 3 is not new. It has been going on and off—there have been cycles of excitement versus skepticism—for ten years now. Ultimately, it is a very challenging product because it requires robotaxi performance levels, but for a privately owned vehicle, so the cost is supposed to be significantly lower in a much more efficient system. Also, in order to have a useful product, it needs to be available in a broad enough ODD, or at least in a broad enough area to satisfy the needs of consumers. We believe that our product with Audi, which is progressing well, is going to satisfy these key requirements. As we progress with execution, we will be able to show this and expose this to the OEMs—that it is not an “if” question, it is a “when” question, and the “when” is imminent. I do not think that any OEM has question marks on the value proposition to consumers. It is a consensus that the ultimate value proposition to consumers is eyes off and mind off—giving back time to the driver. This remains a compelling case. OEMs may be more cautious in going all-in in developing this when it is not clear there is an available solution. We believe that we will be providing this available solution very quickly relative to others, and this can reignite the momentum with OEMs. Analyst: Thank you for that. Maybe a related question. Some OEMs with robotaxi offerings have been recently trumpeting the advantages of their data collection efforts. Can we get an update on where Mobileye Global Inc. is making strides in this regard in terms of extracting more data in REM and maybe some of the specific benefits of your test fleet, both for advanced products and robotaxi? Thank you. Amnon Shashua: We have no shortage of data. As we mentioned a year or two years ago, we have hundreds of petabytes of data that we can leverage for our development. Not only that, we added simulators that can run billions of hours of driving experience overnight—I talked about it at CES. It is not that we lack data. For the robotaxi, we just need to do the validation with the final hardware in terms of the vehicle platform, and this should be done in a few months from now. Thank you, Luke. Operator: Our next question comes from Gary Mobley with Loop Capital Markets. Please proceed with your question. Analyst: Hi, guys. Thanks for taking my question. I wanted to ask you about Surround ADAS. Perhaps you can give us an update there. More specifically, looking at your top 10 OEM customers, what percentage of those have committed to conversion to Surround ADAS? And maybe you can give us an update as to the timing or contribution for revenue from Surround ADAS and the ASP impact. Nimrod Nehushtan: Our first Surround ADAS design win announcement was roughly a year ago. It was with Volkswagen Group, which basically committed to upgrade their entry fleets to Surround ADAS starting 2028. As some reference numbers, the average ASP is around $100 to $150, with similar gross margins to our base ADAS volume, which is roughly 70%. Over the past two quarters, we managed to add two additional OEMs. So up to date, we have three. One is the major U.S. OEM that we announced back at CES, which, in a similar fashion to VW, decided to upgrade the entire electric fleet to Surround ADAS from base ADAS today—actually with a higher ASP than what VW has, with more content. Recently, we also announced Mahindra, the first Indian OEM to adopt Surround ADAS. So now we have three, and two of them are today our top 10 customers. We believe that Mahindra represents a significant growth opportunity given that the Indian market is just now starting to adopt ADAS. In India, less than 10% of vehicles have ADAS at all, and regulation coming up in 2027 is expected to accelerate this to the higher 90s in just a couple of years, which is a huge organic opportunity for us. Through this product with Mahindra, we can benefit and be a market leader in India. Zooming out on Surround ADAS, thinking in just a year to have three design wins, two out of the top 10 OEMs with significant volumes—this in and of itself, without new design wins, can represent, when these will be launched, more than a 10% increase in revenue on a yearly basis. As this gains momentum and as we make progress in execution, which we are, and we show this to more and more OEMs, we expect this to generate more interest, and these growth numbers can be even improved in the future. Analyst: Thanks. I appreciate that color. And for Moran, I had more of a housekeeping question. Can you give us some context around the goodwill impairment charge in the quarter? Moran Shemesh: In Q1, versus our previous evaluation from December, market cap went down about 35%. So we had to do an impairment assessment in the quarter. I have to say this goodwill is kind of unique in its nature, since it is goodwill pushed down to Mobileye Global Inc. from Intel on the acquisition of Mobileye in 2017. So even initially, it was a very significant portion of our net assets, which is not something reasonable for our company to have—goodwill on its own assets. On the valuation itself, we recognized a goodwill impairment of $3.8 billion. On the business aspect, we kept the same projections but reflected a higher risk premium because of the macroeconomic environment and geopolitical environment. That impacted the valuation and we recognized this impairment in Q1. Operator: Our next question comes from Aaron Rakers with Wells Fargo. Please proceed with your question. Analyst: Yes, thanks for taking the question. I wanted to ask first on SuperVision. I apologize if I missed it. Can you help us appreciate the volumes that were shipped this last quarter in SuperVision, and any updated views on the volumes as we start to think about the Porsche ramp going forward as we move through 2026 and into 2027? Moran Shemesh: We delivered in Q1 20,000 units. We are seeing stability in demand. 2025 was high in SuperVision. For Q2, we estimate 15,000 units—roughly the same number. We are still pretty conservative for the second half, and for the full year we are still estimating about 150,000 units or a bit more, kind of consistent with or a bit lower than 2025. In case that demand changes or there is any further impact—it is not something that we are seeing—orders keep coming, and this business has had stability for the last few quarters. As for Porsche, we are not anticipating volume in 2026. Amnon Shashua: The ramp-up will start in 2027, towards the second half of the year. Daniel V. Galves: Just to recap, we did not change our SuperVision volume assumptions for the year. Analyst: Perfect. And as a quick follow-up, I want to go back to the memory question. I know that you talked about your partners handling the pricing dynamics. But at a higher level in the current situation, are you seeing any risk from just actual supply of memory impacting any of your OEM customers or your partners from a procurement perspective? Is that a headwind that we should think about, or have you not seen any of that? Thank you. Nimrod Nehushtan: We did not see direct reporting or direct planning from our customers to accommodate for this. Our revised guidance reflects the recent discussions we had with our customers, and of course they baked in all of these risks into their current estimates. Of course, we need to keep a close cap on the situation and monitor it, but we are not seeing any direct imminent change. Operator: Maria, this next question will be our last question today. Operator: Our last question will be from Steven Fox with Fox Advisors. Please proceed with your question. Analyst: Hi. Good morning. I will try to make it a good one. I was wondering if you can go back and maybe expand on the initial comments you made in the prepared remarks about India. It sounded like you were saying you are more bullish about it. How much, and if you could talk about why, and whether there is any influence potentially down the road from your position with Chinese exports? Thanks very much. Amnon Shashua: Thank you. Nimrod Nehushtan: The Indian market has been lagging in terms of ADAS adoption rates compared to Europe, U.S., China, Japan, and Korea. Recent numbers suggest roughly 8% ADAS take rates in the Indian market, which refers to vehicles sold in India by both Indian OEMs and foreign OEMs. Just for reference, the Indian automotive market is roughly 5 million units per year. So in the pure size, it is a very significant opportunity. There is regulation coming up in 2027 which is expected to incentivize and mandate OEMs to adopt ADAS solutions starting 2027, and we expect this to increase the ADAS penetration rate from the 8% it is today to 70%, 80%, 90% in two or three years. We are today very strong with Indian OEMs—the two major Indian OEMs. The recent announcement on Surround ADAS with Mahindra reflects the strength and leadership position we have, and also that the Indian market is not necessarily just for entry solutions but also for more advanced higher-ASP products as there is more demand by Indian consumers for advanced functionalities. In Mahindra’s case, for example, ADAS has been ranked as one of the key reasons for Mahindra's increased sales year on year. They have been growing very fast and their customers vote for ADAS as one of the reasons for it. We believe that there is strong demand by consumers, there is going to be a regulatory push, and just the sheer size of the population suggests that it can be an organic growth opportunity, and we are very well positioned—not just with Mahindra, also others that are selling into the Indian market. Operator: We have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Galves for closing comments. Daniel V. Galves: Thanks a lot, Maria, and to the Mobileye Global Inc. management team, and thanks, everyone, for joining the call. We will talk to you next quarter. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to Iridium Communications First Quarter 2026 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Kenneth Levy, Vice President of Investor Relations. Please go ahead. Kenneth Levy: Thanks, Dave. Good morning, and welcome to Iridium's First Quarter 2026 Earnings Call. Joining me on the call this morning are our CEO, Matthew Desch; and our CFO, Vincent O'Neill. Today's call will begin with a discussion of our first quarter results followed by Q&A. I trust you've had the opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform act of 1995. Forward-looking statements are statements that are not historical fact and could include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent reviews only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures, including operational EBITDA pro forma free cash flow. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release and the Investor Relations section of our website for further explanation of these non-GAAP financial measures in a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt. Matthew Desch: Thanks, Ken. Good morning, everyone. We've had a good start to the year, and our results are right where we expected them to be. Total revenue grew 2% as in service revenue. We're reiterating our guidance for the year, and Vince will give you the details in a minute. We continue to have some important new products under development for introduction this year, and they're driving a lot of activity with our partner base. In the IoT area, our new tri-mode module, which we call the Iridium 9604 is on track for commercial availability in June, and our beta partners are now testing and preparing their first products using our next-gen platform. The 9604 combines our First Data IoT service, cellular IoT and GPS all in a very small and top-effective package and is generating a lot of excitement across our partner ecosystem. We believe the module also has the horsepower consolidated a number of our other legacy services over time, and that can be helpful to our sustaining cost and to simplify our portfolio. In the P&C area, the announcement of our new ASIC rolling out in July is also generating a lot of inbound activity and attracting a number of new partners who are looking to integrate this technology into their products. NSS disruptions around the world are highlighting the need for new assured PNT solutions for drones and autonomous vehicles, shipping companies and their insurance providers, critical infrastructure in the U.S. and abroad, commercial allocation, the opportunities are expanding tests. Over 100 new companies have expressed interest in the ASIC and we expect the commercial loss to drive deployments once it's in the market. Of course, our new Iridium NTN Direct standards-based service has generated a lot of activity as well as it progresses closer to commercial loss later this year. We've been demonstrating live over-the-air to mobile network operators and partners and its performance has been impressing everyone, even as we make enhancements and further tune the service. We've been expanding agreements with more MNOs, having signed 7 to date with a number of others in the pipeline, there's clear demand from MNOs to roam on to Iridium's network when their customers find themselves out of coverage. We're also in discussions with additional chip and module manufacturers to have their 3GPP Release 19 chips with Iridium capability available in 2027 and have gained support from the test up community as well. It's been a big job for Iridium to reprogram our satellites and build cloud-based processing and standards capabilities into our gateway and I'm very proud of my team for accomplishing so much so quickly. Indirect is positioned as complementary to the big B2B services that are emerging from StarLink, AST and now Amazon Leo. As these companies focus on connecting smartphones from the space, we will continue to focus on scalable specialty applications that support low-cost to IoT, particularly for industrial and government markets where reliability and coverage are critical. While, I talked about some of the new products we have underway this year to drive growth, our partners are also making progress on products and certifications that will resonate with their target markets. They include launching some new term loans in the maritime GMDSS area and conducting flood trials for certification of our new Iridium service aviation safety service. More broadly, I want to remind you of the 4 growth factors I talked about on our fourth quarter call in February. These are areas where we're prioritizing investments and it is a significant opportunity to expand our revenues even as more competition eventually comes to the satellite sector. First, in IoT, we are, by far, the leader in satellite IoT in terms of subscribers, revenues and technology partners. And we believe that as we reduce costs by adopting standard 3GPP protocols, we will see continued success and growth. We are already pursuing cost-sensitive use cases that were more difficult to address with proprietary services like automotive, smart meters, agriculture and expanded asset tracking. Our network reliability, global coverage partner ecosystem and strong brand position will allow us to continue to expand our revenues particularly when we add our second growth vector, PNT, into the mix. I've already talked about how our new PNT ASIC is expanding our pipeline of opportunities. But it's also attracting major chip makers earlier than we expected as these manufacturers eventually incorporate our PNT IP into their standard GNSS chips says, we think our business could really explore. We provided guidance on the revenue potential expected in this area over the next 4 years, and I'm as bullish about meeting those targets as I've ever been. Some early customers are starting slowly, but they are committed to the big rollout that we've been expecting. We also believe that our engineering and development work on new identity management and trusted location products could open up some very big new markets. We remain in the early phases of business development for these important services, but the opportunities are exciting. Our third growth area is national security missions with the U.S. government and is building off our success with the EMSS contract with the Space Force and the competency we've demonstrated in developing and operating the FDA satellite operation centers. We see a growing need for commercial satcom providers to complement Starlink and other broadband networks that are becoming part of the government-based data network or SDN. We have a growing pipeline of work in this area. Some of it will generate service revenue but also fast-growing engineering and support work. Requirements for Golden Dome are just now taking shape and we think Iridium is well positioned there. Finally, aviation safety is an area of distinction for us and of course factor for growth. We have a great position in this industry with our equity interest and strong relationship with Aireon as well as for our ability to be certified to connect pilots and aircraft controllers by satellite. Our efforts to develop some differentiated products that could bring more value to airlines is still in the early stages, but we are increasingly confident about our potential to disrupt the status quo in the market. I want to acknowledge all the attention that mobile satellite services has been getting of late, especially in light of Amazon's plans to purchase Globalstar. People have realized the importance and signifies of LSB spectrum as it relates to connecting consumer devices on a global basis from space when out of coverage from cell towers, which happens over 45 -- excuse me, over more than 85% of the planned surface. We share this view of the value of this spectrum. Regardless, our priority today is to focus on expanding into these 4 growth areas while maintaining our revenue base and legacy services. We believe that this is the right direction for Iridium, and we'll continue to stay focused on execution across the business. So we're off to a good start in 2026. Partner activity remains strong, and we continue to generate a lot of cash that we plan to invest in our growth factors. I look forward to providing more updates on our progress in the coming quarters. Now let me turn the call over to Vince for details on the quarter. Vince? Vincent O'Neill: Thanks, Matt, and good morning, everyone. I'll start my remarks today by reviewing Iridium's financial results for the first quarter and some trends we're seeing within our major business lines. I'll also provide an update on Iridium's leverage and capital position and discuss our outlook for the balance of the year. OEBITDA was $116.3 million in the first quarter, down 5% from the prior year period. The change largely reflected the impact of the shift to pay annual incentive compensation and cash which I previewed on our fourth quarter call. This resulted in a $4.2 million hit to OEBITDA and will have a full year impact of $17 million in 2026. This quarter's OEBITDA also reflects the benefit of a 2% increase in service revenue and ongoing growth in engineering and support. On the commercial side of our business, service revenues up 2% to $130.4 million. This was in line with our forecast and reflected growth in commercial IoT and voice and data during the quarter. Voice and data revenue rose 3% from a year earlier to $57.4 million, driven by the price actions we implemented last summer. This drove a 7% increase in ARPU from the year earlier. Net subscriber trends had improved from the year ago period when headwinds primarily associated with the [indiscernible] level of seasonal deactivations. Commercial IoT revenue was $46 million in the first quarter, up 5% from a year earlier. Net subscriber numbers this quarter have largely stabilized following last year's volatility related to a modification to retail pricing plants by one of our large consumer-oriented partners. As Matt noted, we are now in bigger trials of the new hybrid modem, the Iridium 9604, which combines cellular, satellite and GPS in one engineered solution. Early feedback has been great and we expect that the lower overall integration cost of incorporating this chip will help to accelerate subscriber growth. Commercial broadband was down 5% from the year ago period, and continues to reflect the ongoing impact from customer conversions to backup companion services, a trend we've discussed previously. Hosting and other data services revenue was $14.8 million this quarter, down about 1% from last year's comparable quarter. The decline mostly reflects the timing of expected payments related to activities with an existing non-PNT customer. We continue to be encouraged by the ever-increasing interest we are seeing for Iridium's assured PNT solution to address the vulnerabilities inherent to GPS and GNSS based systems. The introduction of our TNC ASIC this July is expected to accelerate growth and expedite the pace of deployment of Iridium PNT solutions. We continue to have conviction that PNT will drive at least $100 million in annual revenue for Iridium by 2030. Government Service revenue was up modestly in the first quarter to $27.6 million reflecting the final step-up in our EMSS contract last September. Turning to subscriber equipment. Sales were $20.2 million in the first quarter, largely in line with our expectations. Engineering and support revenue was $40.8 million in Q1 as compared to $37.5 million in the prior year period. This rise in revenue continues to reflect Iridium's growing scope of work with the Space Development Agency and supports our strategic focus on revenue growth tied to national security missions. As noted in this morning's earnings release, we are affirming our full year guidance for both and OEBITDA. I'd like to take a minute to review some of the drivers underlying this year's forecast. Starting with our commercial business in voice and data, we expect revenue to grow in the first half of the year, benefiting from the price actions implemented last summer. As a result of these actions, we would expect our to remain about $48 for the remainder of the year, consistent with our first quarter ARPU. IFC revenue is expected to grow in the mid-single digits. As Matt noted, we are deep in testing of next generation IoT modem and our targeting new markets and use cases that are highly sensitive to cost, full factor design and integration time lines. Based upon the positive feedback we were getting on the Iridium 9604, we believe it fills the gap in the satellite IoT market for utility at a value price. In our broadband business, we expect Maritime customers to continue to move to lower-cost backup plants. However, the introduction of new partner terminals combining Iridium service and GMDSS safety services will act as a tailwind for new subscriber growth. And over time, we believe, helped to offset current ARPU pressures. We continue to believe that really will remain an important player in the maritime sector. With regards to our government business, we have started discussions on our success contracts with the U.S. government and continue to expect they will exercise their option to extend the EMSS contracts for a period of 6 months at current rates. Accordingly, we expect the EMSS revenue of $110.5 million this year, even as we expand our relationship with the U.S. government with incremental engineering work. As Matt discussed, we get a lot of inbound traffic on our PNT solution. We continue to believe that this strong interest, along with the availability of our PNT this summer may provide upside to our full year hosted payload and other data of revenue forecast. We also expect that the strong trend we saw in engineering and support in the first quarter to continue. This momentum is tied to our work with the FDA and should support another year of record engineering growth. As I noted earlier, a Iridium will introduce a number of new terminals and modems this year. Our focus on lower cost hardware should broaden our sales funnel and allow Iridium to extend its satellite solutions to customers that have not historically considered nonterrestrial services. We can continue to expect full year recruitment sales will be in line with historical levels between $80 million to $90 million in 2026. SG&A growth in Q1 was more pronounced than more we expect for the balance of the year, largely due to timing benefit of program expenses in Q1 '25, the nonrecurring nature of some expenses incurred this quarter and the increase in sales costs tied to stock price appreciation this year. Going forward, we expect the SG1 run rate to moderate to low double digits in 2026 though stock appreciation could result in additional sales expense. Taken together, this outlook post our forecast for flat to 2% growth in service revenue in '26 and for operational EBITDA between $480 million and $490 million this year. I would again remind you that started in 2026, Iridium will pay annual incentive compensation entirely in cash rather than a mix of equity and cash as has been company's prior practice. This change is projected to have a $17 million impact to OEBITDA in '26. Without this change, OEBITDA have been projected to be in the range of $497 million to $507 million in 2026. I hope this color is helpful as you chart our progress and update the financial models for our first quarter results. Moving to our capital position. As of March 31, Iridium had cash and cash equivalents balance of $111.6 million and ended the quarter with a net leverage of 3.4x OEBITDA. Our strong free cash flow provides significant flexibility to reduce net leverage quickly. We also have flexibility to utilize our strong liquidity position to invest in business growth opportunities through product investments or even the tackle acquisition. On March 31, Iridium made a quarterly dividend payment of $0.15 per share to shareholders. We remain committed to an active and growing dividend program and expect the Board will continue to grow Iridium's dividend, consistent with prior years. Capital expenditures in the first quarter were $30 million. As we've noted previously, we anticipate CapEx this year to be consistent with 25 to support our work on Iridium NTN Direct. Turning to our pro forma free cash flow. We present a detailed description of our cash flow metrics, along with the reconciliation to GAAP measures in a supplemental presentation under the Events tab on our Investor Relations website. In those materials, we project pro forma free cash flow of about $318 million for 2026. Based upon our expectations for Iridium's growth, we expect to have the capacity to generate at least $1.5 billion to $1.8 billion of free cash flow over the balance of the decade. Iridium occupies a unique position in satellite market, and we remain very excited about our prospects for incremental top line growth and shareholder value creation. With that, I'll turn things back to the operator and look forward to your questions. Operator: [Operator Instructions] Our first question comes from Brent Penter with Raymond James. Brent Penter: Matt, you touched on the Amazon acquisition of Globalstar. I'd like to hit on that a little bit more. First, could you expand on what you think that deal signals about the value of Iridium and the MSS spectrum that you own? And then second, how do you expect Amazon owning Globalstar may or may not change the competitive landscape of the markets you operate in? Matthew Desch: Well, I think in general, it speaks to the value of the L&S spend that we occupied. More so, it speaks to the opportunity that I think the industry, certainly Amazon feels about the potential for global direct-to-advice services in the coming years. And I think it's healthy for the industry to get another big competitor. I think it will create more opportunities and expand the potential for that market more greatly. I'm not sure what was the second part of your question, Brian? Brent Penter: Yes, you started to hit on it. Matthew Desch: I don't think it changes really anything for us competitively that dramatically. I mean, as I said, we're really positioned to be complementary. We started pivoting well over a year ago towards those areas that are -- we believe we can create a differentiated advantage really whether it be aviation or national security missions or PNT, IoT, et cetera. And those areas, we feel really good about regardless of how many large operators there are in sort of the more straight to D2D space. So I don't think the change that dramatically. Brent Penter: Okay. Got it. And then last quarter, you all talked about the possibility of strategic alliances related to your spectrum. Can you update us on any early learnings in those discussions? And given the recent spectrum activity and valuations, has that moved up the stack to become higher priority? Matthew Desch: I don't know that I can really speak to that question. I mean, I think it's probably, at this point, an area of a lot of interest and activity in the industry. And I just think we just need to not comment on that at this point. Operator: And the next question comes from Chris Quilty with Quilty Space. Christopher Quilty: Matt, maybe a little bit of a follow-up on that. Does Amazon's acquisition of Globalstar in any way will effectively kill the potential for a big LEO processing round in your opinion? Matthew Desch: Describe what a big LEO processing round would be. Christopher Quilty: Well, Spacex had been looking to reopen up the big LEO band and now you've got Amazon that's just committed to $11.5 billion to take a position there. Presumably, you wouldn't get a new round to review that spectrum at a time when there's an ongoing acquisition associated with it, [indiscernible] right? Matthew Desch: So that's kind of a fine detail overall there. I mean, look, our position is more spectrum for mobile satellite services and D2D would be a good thing. We continue to kind of lobby for looking for more spectrum for the industry in general, whether it be for directed device or for any of the other applications, which are kind of consumer-friendly, device friendly, the kinds of things that Iridium has been focused on. So I don't know if it makes it more likely or not likely as I said, I think this is -- I think in general is a good thing. It does create more competition in this area of what's happening, a more better funded sort of competitor in the D2D area, but I don't know what that will mean these days for the FCC or for spectrum at this point. Christopher Quilty: Got you. And Vince affirm the $100 million for the PNT business in 2030, but you've gotten off to a slow start with customers. To hit that target, do you expect that as customers roll on, are there going to be sort of chunky step function pickups in revenue? Or does this grow on like a per subscriber basis where it starts slowly and then ramps up? Matthew Desch: I think it's going to be both. I think it's going to be both chunky. I think you can see some large movements in sort of that area as some major kind of customers come on and take sort of global business opportunities. And I think you'll also see sort of a broad-based subscriber by subscriber growth. I mean, that's what we're seeing. The number of companies that are integrating solutions right now are pretty -- business at pretty extraordinary in my experience in Iridium, all the activity around the discussions we're having around it. It just takes time for these devices to proliferate the market and to create the kind of growth we're expecting. And I think a lot of that will be accelerated by the ASIC. That wasn't completely required, but it is definitely an accelerator. Christopher Quilty: Got you. And final question. You mentioned lower cost for the 9604 in terms of your partners implementation costs. Can you give us a sense of this that 10% cheaper or 50% cheaper. And can you also touch on basically supply constraints that you've historically had or not in ramping that up versus something that's standards-based mean how fast do you think the product can be adopted and delivered? Matthew Desch: Okay. Well, in terms of pricing, it all depends on volume and really high volumes, it could be significantly less expensive than our legacy portfolio, the 9602 and 9603, 9604 being built on a more global platform that's utilized for many other applications means that the cost overall is quite a bit lower. And then, of course, the fact that it integrates multiple technologies into the same platform. So it's not a one-for-one kind of thing. It includes both those who want cellular and GNSS had to put those technologies separately into it. So it's really a fraction of the overall cost of the 3 solutions together. I don't know whether that's 20% or 10% or 30%, but it's a significant reduction, especially for those customers and volume we're utilizing all the power of the new product. And the terms of standard -- sorry, go ahead, Chris Christopher Quilty: No, I was going to say, so it's lower cost hardware going into lower-cost applications. Typically, we'd expect the ARPU to go down. But if you're bundling in additional capabilities like the old PNT, where does the ARPU go? Does it hold steady? Does it go up or down? Matthew Desch: Well, I think, first of all, it can support low and high ARPU applications. As I've often said, ARPU is kind of irrelevant. It's all incremental earnings to us is more a matter of what kind of resources of our network it utilizes and typically low ARPU applications, use almost no resources of our network and higher applications to use that more. So the more important part here is just how it sort of expands the use case of applications. So I mean we're really talking about a lot more things that we hadn't seen before. And when you add that together with our NTN Direct Service, which is a standard space, which would use standard ships, which are also low cost. In those cases, there's almost no integration costs that people have to go through A lot of times, they already have applications, they're just upgrading the chipsets and they can roll on to our network with almost no additional costs. So that opens up not only lower cost applications, but it opens up applications with large industrial companies who are uncomfortable using proprietary standards. For example, I'm really surprised that all the discussions we're having in the automotive industry right now. It does take a while to create revenue, but they're high volume and could be really efficient users of a standards-based solution. So it's really not a matter of kind of but ARPU will go down or up, maybe incremental ARPU in some of these applications will be lower, but the overall revenues that is what will grow versus what's most important. Christopher Quilty: Okay. I had to ask a lot of questions [indiscernible] since he wasn't on the call. Matthew Desch: Well, thanks for that . Operator: The next question comes from Edison Yu with Deutsche Bank. Xin Yu: I wanted to sort of come back to the Amazon Globalstar from a slightly different perspective. Is there any sort of, what you say, industrial logic to having that full L-band block that you currently share the 0.95 with Globalstar. Does that make any sense to kind of combine it? Would there be any sort of synergies that you could derive from just kind of technically speaking? Matthew Desch: Yes. As that question or that thesis that you're describing has been described very fully by both analysts and others in the industry. And I think I really need to leave it to that right now. Otherwise, it will sound like I'm promoting or trying to highlight something that I'm really not comfortable doing right now sort of in the current environment. Xin Yu: Understood. Second topic, there was some news about a drone outage. I'm sure you've probably done and obviously you guys are doing work there. Have there been any updates on the regulatory front or any sort of recent discussions since the last quarter on drones? Matthew Desch: You mentioned drone outage. Is that to some another company's technology. Are you talking about and how is it -- you're not talking about Iridium outage, right? Xin Yu: No. It was -- I think it was reported in the media. It was not related to you, obviously, but I think it sort of highlighted potentially some opportunities for you. Matthew Desch: I will say the drone environment for us is really hot. I mean, both in terms of integrating our communication technologies into drones as if not a primary or backup source, but also our PNT technologies makes a lot of sense as one of the technologies to maintain a location. And obviously, a lot of focus is on Middle East and other areas right now where drones are being operated. I'm equally excited about the commercial side of drones, which needs all those technologies as well with the new FAA Part 1 rules that are expected to come out later this year and finally, open up beyond visual line of sight commercial drones, where Iridium technology makes a lot of sense there. And there is a lot of activity around that. both in terms of our -- whether it's 9604 or 9704, which is the higher-speed IoT product or our Iridium NTN direct. And of course, a lot of discussion around PNT just to protect the integrity of the location. Operator: And the next question comes from Hamed Khorsand with BWS. Hamed Khorsand: Just want to understand what you're seeing on the subscriber end on the commercial IoT? Is any of that coming from the consumer side? Or is this purely coming from industrial customers? Matthew Desch: It's actually coming from both. And it looks a lot more. I think this year, like it did much more so than last year when we got the commercial side of it was kind of going through a pricing change from a big customer that sort of I thought distorted sort of the supravenumbers, but we're seeing a healthy subscriber growth is we did back in '22, '23, '24 and more normal growth. But we're getting growth from really across the board, industrial and consumer. Hamed Khorsand: Okay. And then could you just talk about this EMSS contract that you're saying that would require a 6-month extension. Is that just the same aspect that happened a few years ago when you were going through the renegotiation process? Matthew Desch: Yes. I mean our current EMSS contract, which has been a 7-year contract is approaching it's final seventh year, but there's an automatic -- there's a opportunity really for the customer during negotiations if it isn't completed on time to just extend it at the current year 7 price for an extra 6 months. That has happened in the last 3 contract renewals that I've been a part of. And so I'm expecting it to happen again this time as well, particularly if you could imagine if customer didn't see sort of the value in getting the new contract right away, they might extend the current one a little bit further. Operator: And the next question comes from Tim Horan with Oppenheimer. Timothy Horan: It seems like if you can get your PNT better than every GPS chip out there, the market is orders of magnitude bigger, I would say the same thing for IoT team. Can you just describe a little bit more detail where you are in getting it adopted in the standards? And I guess related to that, I mean, could you become a standard GPS replacement globally? And how do you think about pricing in that environment? I mean, because the lower you price it, the more likely you are to become the standard replacement? I know this is a complex question, but any thoughts would be helpful. Matthew Desch: Well, be careful about using the word standards, it does apply. But when I was referring in my comments to getting this to GNSS chipsets, I would say there's a number of suppliers who supply the majority of chipsets that go into all our consumer products. And handheld units and golf carts and all those sort of things. And I was referring to the fact that we always we also wanted to get into those chips, but they probably didn't see didn't understand really the value of our PNT service. When the ASIC came out and has become very public and all being interested generated, we're now seeing some of those companies who are now seeing exactly what's involved and what the physical attributes and sort of technical attributes in our -- and we're in discussions with some about integrating that more powerful alternate PNT service directly into their chips. You're right, that would expand the market really dramatically. But now in addition, when you said the word standard, 6G is includes the idea of PNT, and we're working to get our PNT technology embedded into the sixth generation standards that would -- that are really talking about enhancements to PNT. I wouldn't use the term we replace GPS. Our goal is always to be an alternative augmentation to GPS. Currently, we're not as accurate as GPS, but we're being so powerful, we're really difficult to jam or spoof being encrypted, et cetera. I will say we have plans to make our system much more accurate. I'll talk about that maybe more in the future that would require some additional payloads in space, and we're kind of in the early stages of kind of working through that book. We think we can do that pretty quickly and cost effectively. As far as what the value of that would be, yes, it would be extremely large and dramatic in terms of the potential for number of units and the impact that we could make across a wide variety of industries. It's a little early stage to talk about that. That's a 2030 kind of thing. I think we'll reiterate, I'm happy both reiterating our guidance on PNT to 2030 as well as the upside we see from like identity management, trusted location products to that. But yes, we're working right now on a much bigger strategy that could be a lot larger . Timothy Horan: And can you give us some color of the same concept for your IoT communications here. Matthew Desch: The same color on IOT in terms of... Timothy Horan: I'm sorry, you're becoming better in other chips like you described, like what would it need to take for that to get the really strong growth where they're not just using your customized ASICs, but it's something[indiscernible] . Matthew Desch: Yes. Well, obviously, Iridium PNT direct is completely about being embedded into standard chipsets. And right now, several of them are already in process of developing including some of the largest and most prolific terrestrial IoT chip manufacturers. And as they include our technology into those chips and any time those chips get into products, those customers could basically roll them on to a satellite network. I mean it -- it does expand the market tremendously for sort of IoT applications for us. Again, we're expecting growth in this area. I can just sort of say general, we're not giving exact guidance yet. There is some cannibalization of our sort of legacy services sort of embedded in that, but we believe that the overall market expansion greatly or significantly sort of goes beyond that so that our IoT services can continue to expand across that. And by the way, it doesn't replace all the sort of existing technology we have, like the 9604 because they provide tremendous value as well. Timothy Horan: But lastly, on the spectrum, just some concern that maybe your spectrum has already been utilized and couldn't be ported over to other constellations are used for other purposes. Can you kind of give any thoughts on that? Matthew Desch: Well, I mean, yes, our spectrum is being utilized and it's generating a lot of cash and revenue. I don't apologize for that. But yes, we have a very efficient network architecture. Our satellites are regenerative, they can utilize spectrum on literally a message by message basis and can be highly configured and controlled and automated in a way that is extremely efficient, and we've only improved that over time. So I know the questions some of you are asking is could we make some of our spectrum available for lease or for obviously, sale or for could somebody else as they controlled us, take advantage of our spectrum, particularly for like 5G new radio. And the answer is yes, we believe it could. We believe we can whether we were doing it ourselves or we're doing it with in conjunction with someone else that we could allocate some amount of spectrum to those other applications and continue to generate the revenues and cash flows and growth that we're expecting by very effectively moving around within our spectrum band on literally a call-by-call basis to serve the traffic that we expect to see in the future. So I know on some of the questions some of you asked, would we lease the spectrum to do that for someone else. I mean, theoretically, it's possible or technically as possible to do that. I'm not really -- I don't think that's the best way to add value from a rating perspective to our shareholders, et cetera. So I'm really not looking for those kind of opportunities right now. It would be some other kind of arrangement that would seem to make the most sense. Operator: And the next question comes from James Ratzer with New Street Research. Unknown Analyst: My question was really a direct follow-on from that last one to understand a bit more about the capacity utilization on your network. I mean, Matt, you are able to kind of quantify any further at the kind of peak hour of your network usage or in certain kind of global hotspots, what percentage of your capacity is currently being used? And in particular, going out towards the end of the decade as you roll out the new services you're talking about, how do you see the capacity utilization on your network evolving over the next 4 to 5 years? Matthew Desch: Yes, James. So it's a complicated question to answer and to do it simply. Our network really reassigns itself every 90 milliseconds. And then you can imagine, its ability to kind of handle traffic varies moment by moment, literally position by position on the air surface. We don't have any brownouts today, if you will, or peak. I'm always sensitive to talk about this because we -- one of the most efficient users of spectrum on the planet. We would like more spectrum. We would -- we believe we have enough spectrum to handle our growth plans going out into our next-generation system. And we have plans to sort of create capacity through capital expenditure and the next-generation constellation. That being said, we have areas where we're much more fully utilized in certain places and places less utilized. One thing I've talked about on previous earnings calls is one of the most inefficient users of our spectrum was our broadband service, which 5 to 10 years ago when we implemented or 7 to 8 years ago, I guess, when we promoted there was no Starlink or Amazon's LEO services or other broadband traffic, and we were just competing really with Inmarsat sort of L-band broadband services. That service is in decline. And the good news is it's kind of creating capacity for us because the most efficient user of our network is IoT and PNT services and things like safety services, whether it be aviation or maritime. So with that, we really believe we have to utilize a portion of our spectrum. We kind of repack our spectrum in a very effective way, create the ability to create new services within our existing band [indiscernible] Unknown Analyst: I get it, I get it. Can you say just last one for me, as you upgrade your satellite constellation. What kind of multiplex do you think you can get on capacity increase? Is that a kind of 2x increase, 10x increase? What are you planning on that front? Matthew Desch: Well, I challenged the team with a 10x increase. And the designs that we're talking about with kind of smaller, but many more satellites. We currently have a design that really maybe requires maybe 4x more satellites than we're currently operating, but it really does expand the capacity greatly with other antenna technologies and smaller beams on the ground, et cetera. So a lot of a lot of thinking about that. We're not having to really develop that system even start to develop that system for a number of years from now. But we're excited about some of the technologies we seek available and available to us that will kind of lower all the cost of that to provide whether it be launch or satellite bus capacity at a cost that certainly isn't greater than the network costs we experienced last time and probably a bit lower. So yes, I mean, I think we can get quite a bit of capacity in the future. Operator: Our final questions come from Justin Lang with Morgan Stanley. Justin Lang: Matt, just staying on the topic of spectrum and any potential arrangement with a third party. Just curious how we should think about the fact that you have government users relying on the network? I'm not sure we've seen that dynamic, at least not to the same extent with other spectrum that's recently transacted. So just curious how that factors into the considerations, if at all? Unknown Executive: Factors great consideration and nothing I would do or anything I'd say it would hurt the ability for us to operate our network out in the future for one of our most important customers or will for any customers for that Matt. Matthew Desch: I mean one of the reasons I would in terms of partnering in some way to sign additional services using our spectrum. One of the reasons why I want to be intimately involved in that is to be able to evolve services seamlessly and our customers and partner base, which is the most extensive in the industry after the future quite seamlessly for those customers. So there will be a lot of demand by our partners, whether they're government or industrial to future standards-based services. And we think we could be extremely valuable in terms of managing that transition over the next 10 years. So it's not an issue. We don't think it's an issue. We don't think there should be any concern by anybody in terms of doing anything in the future in terms of anything we do with our network in any way particularly if we can help manage that transition into the future. . Unknown Analyst: Great. That's perfect color. And then maybe just maybe one for Vince actually. The larger PNT order you've anticipated that sort of moved around quarter-to-quarter. Any update on that front you can share in new timing expectations? Vincent O'Neill: No. I think that's pretty much the same. Justin, as we talked on our February call. As I highlighted in my scripted remarks, we do think that there's the potential for upside there in terms of our '26 guide. But we just feel it would be premature to include that in the outlook at this point. . Unknown Analyst: Got it. So that order is not in the guide factored into the outlook today, right? . Vincent O'Neill: That's right. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Matthew Desch: Well, there's certainly a lot of interest in our spectrum. We certainly agree it does have a lot of value . [indiscernible] has been are demonstrating that. But I want to reiterate, we're really heads down and focused on organic growth, the kind of things we're doing as well as the investments we're making in our 4 growth pillars and new products we have coming out. So I'm really looking forward to continue talking about that in coming quarters with you as well as we demonstrate our continued ability to grow here. So thank you for being on the call and look forward to talking to all of you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to West's First Quarter Earnings Conference Call. [Operator Instructions] Please note, today's call is being recorded. I would now like to turn the call over to John Sweeney, Vice President of Investor Relations. Please go ahead. John Sweeney: Good morning, and welcome to West's First Quarter 2026 Earnings Conference Call, which has been webcast live. With me today on the call are West's President, CEO and Chairman; Eric Green, and West's Senior Vice President and CFO Bob McMahon. Earlier today, we issued our first quarter financial results. A copy of the press release, along with today's slide presentation containing supplemental information for your reference has been posted in the Investors section of the company's website at investor.westpharma.com. Later today, a replay of the webcast will also be available in the Investors section of our website. Before we begin, we'd like to remind you that statements made by management during this call and the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. Please refer to the accompanying safe harbor statements in today's press release and in addition to other disclosures made by the company such as our 10-K and 10-Q regarding the risks to which the company is subject. During the call, management will also report on certain non-GAAP financial measures including organic net sales, adjusted operating profit, adjusted operating profit margin, free cash flow and adjusted diluted earnings per share. The accompanying disclosure statement as well as reconciliations of these non-GAAP financial measures to the most comparable financial results prepared in conformity with U.S. GAAP are provided in this morning's press release, and in today's presentation materials. I will now turn the call over to our CEO, Eric Green. Eric? Eric Green: Thank you, John, and good morning, everyone. Thanks for joining us today. I am pleased to report the year is off to a strong start with outstanding performance in the first quarter revenues and adjusted EPS, with both metrics coming in well above our expectations. It is clear our growth strategy is delivering. First quarter revenues of $845 million were up 21% on a reported basis and 15% on an organic basis. Adjusted operating margins in the quarter were 21.4%, expanding 350 basis points as compared to prior year, and adjusted EPS came in at $2.13, up 47% compared to prior year. As announced in the press release today, due to our strong first quarter performance and the expected ongoing momentum in our business, we are increasing our revenue and adjusted EPS guidance for full year 2026. We now anticipate full year organic revenue growth back to our long-term construct of 7% to 9%, up from our previous guide of 5% to 7%, and adjusted EPS increased to the range of $8.40 to $8.75. Bob will go into more detail shortly. Now let's take a closer review of each of the businesses. Starting with HVP components in our proprietary Products segment, which represents 48% of our company's total net sales and continues to be the key growth driver for West. HVP components grew 23% on an organic basis in the first quarter. This growth was led by strong performance in both GLP-1 and non-GP-1 revenues. HVP components GLP-1 revenues grew significantly and contributed 10% of total company sales consistent with the previous quarter. While it is still early days in the adoption of orals, the trend is playing out as we expected and have previously communicated. That is orals are expanding the market. Our view remains unchanged for long-term growth in both injectable and oral GLP-1 markets as overall adoption of these products continues to increase. We continue to believe there are a number of factors that leave us optimistic about the prospects for our GLP-1 elastomers in the future. These include the expansion of insurance coverage, FDA regulatory decisions on compounded GLP-1s, reduced drug prices and the introduction of GLP-1s for new indications, as well as next-generation products. In addition, the launch of generics in several countries outside the U.S. should drive additional demand in the coming years. Non-GLP 1 HVP components revenues increased in the high teens in the quarter. This growth was driven by durable growth drivers, including biologics, HVP upgrades, including Annex 1, and underlying core customer demand growth. The better-than-expected HVP components performance in the quarter can be attributed to market growth and tremendous execution of our operating unit strategy, and scaling up production, particularly in Europe. Recently, I met with our team [indiscernible], Germany to see firsthand the operational improvements that we are leveraging across our HVP components manufacturing sites. There are 3 key aspects to this operational excellence initiative. First, we accelerated the process of onboarding new employees in the second half of 2025, which benefited production this quarter, and further increased output by temporarily redeploying our team members from other European sites. Second, we continue to optimize our global network. This includes working with our customers to qualify second sites, enabling us to increase production output. And third, a significant benefit of this initiative is the transfer of knowledge and implementation of best practices, which will result in ongoing enhancements throughout our global manufacturing network. Turning to our largest market, biologics. This business continues to be a strong growth driver for our HVP components business and delivered 26% organic growth. We continue to have strong win rates for biologics entering the market with solid growth at NovaPure, which is increasingly being selected for its attributes and quality by customers who are bringing new biologics to market. We're also benefiting from many biosimilar launches. Growth in this market is being increased by easing regulations and reduced testing requirements. When a biosimilar is introduced, [ it is usually ] results in expansion of therapy use. This generally allows us to maintain or even increase overall volume demand after biosimilars are commercialized. And we see a continued ramp in HVP conversion in Annex 1. We are experiencing strong conversion of standard products into HVP components, and this mix shift is improving revenue and margin performance. We continue to have strong growth in Annex 1 related projects, which increased sequentially and is up 66% as compared to this time last year. Annex 1 is anticipated to be a multiyear tailwind to our business with an expected revenue growth contribution of 200 basis points in 2026 from Annex 1 and HVP conversion. Moving on to our HVP delivery devices, which comprises 15% of company revenues. We delivered strong organic growth in the quarter, up 28% compared to prior year. This was driven by increase of SmartDose 3.5 revenues, which were requested in advance of the transaction, which we continue to expect to close midyear. The non SmartDose parts of the business represent more than half of the revenues and were up double digits in the quarter, led by SelfDose and Crystal Zenith. Standard Products, which represents 19% of our business, were up 0.5% on an organic basis during the first quarter. Standard products are an important funnel as they convert to HVP components over time, which provides value to our customers and generates incremental revenue for us. Turning now to West Vantage, the new brand name for our Contract Manufacturing segment, which represents 18% of our business. Revenues increased 6% organically in the first quarter. I was in Ireland a couple of weeks ago to participate in the official opening of our new Dublin West Vantage site, which is now fully operational and producing commercial product. This milestone marks a significant step forward in strengthening our global capabilities. This site incorporates our drug handling business, which is more profitable and less capital-intensive than our legacy contract manufacturing. While we are in the early stages in building our drug handling business, 2 days [indiscernible] business is meeting our expectations. The site also supports growing customer demand for high-volume injectable therapies, including treatments for diabetes and obesity. These aspects reinforce West's role as a critical partner in helping to secure patient accents to these essential medicines. Now I'd like to turn the call over to Bob to discuss the financials and guidance in more detail. Bob? Robert McMahon: Thanks, Eric, and good morning, everyone. This morning, I'll provide some additional details on Q1 revenue and take you through the income statement and some other key financial metrics. I'll then cover our updated full year and second quarter guidance. As Eric mentioned, we had a great start to the year as revenues of $845 million increased 21% on a reported basis and grew 15.3% organically, exceeding our expectations. And the performance was broad-based as all segments were better than expected and price contributed 3.5 percentage points of growth in the quarter. Our HVP components business was a standout, delivering $409 million in revenue and growing 22.6% organically. This was driven by robust growth in GLP-1s, HVP upgrades, including Annex 1 and overall continued improving performance in biologic revenues. As Eric mentioned, our team is executing at a high level and ramping capacity faster than planned while demand continues to be strong. Our GLP-1 HVP components business had another very good quarter of growth, and we expect continued growth throughout the rest of the year for all the reasons that we've previously talked about. And the HVP components business outside of GLP-1s accelerated nicely, growing in the high teens in the quarter and contributed over 2/3 of the HVP outperformance in the quarter. In HVP delivery devices, revenues were $124 million in the quarter and up 27.5% year-on-year organically. This was driven by growth in SmartDose 3.5 as revenues increased in anticipation of the expected midyear closing of the transaction, as well as good performance in [indiscernible] and SelfDose. In Standard Products, revenues of $161 million were up 0.5% on an organic basis, partially driven by [ NX-1 ] related inversion to HVP components. And our West Vantage segment delivered $151 million in revenue, growing 6.2% on an organic basis. Segment performance in the quarter was driven by an increase in sales of self-injected devices for obesity and diabetes. Now let's take a closer look at the rest of the P&L. Total company gross margin was 35.1% in the quarter, up 190 basis points year-over-year. The year-on-year increase is primarily driven by the positive mix shift of HVP components and price contribution. We did not see commodity costs have a material impact on our Q1 results. I also wanted to highlight that our West Vantage gross margin, while down slightly year-over-year as we ramp our Dublin facility, recovered sequentially as expected. Adjusted operating margins of 21.4% were 350 basis points up compared to the prior year, driven by the gross margin expansion and leveraging our SG&A and R&D across a higher revenue base. And below the line, net interest income was in line with our expectations, while our tax rate was a better-than-expected 18.3% for the quarter, and we had 72.4 million diluted shares outstanding. Now adding it all up, Q1 adjusted earnings per share were $2.13, up 47% versus last year, and up 45% above the midpoint of the guidance we gave on the last earnings call. Now before moving into our updated 2026 guidance, I did want to highlight a few other additional financial metrics. In the quarter, we delivered operating cash flow of $90 million. While down year-on-year due to the increase in AR related to our strong sales performance and the 2025 bonus payout, it was ahead of our expectations. Capital expenditures were $43 million, down from $71 million in the prior year as we continue to drive a focus on increased capital spending efficiency. And we remain on track with our expectations of $250 million to $275 million for the year, even as we increase our revenue guidance, which I'll talk about shortly. In addition, during the quarter, the Board of Directors authorized a new $1 billion share repurchase program given our strong financial position. In Q1, we repurchased 1.2 million shares for $298 million, paid out $16 million in dividends as an additional means of returning capital to shareholders. Our cash flow and strong balance sheet position well as we look to deploy capital for growth and deliver value to shareholders. And we ended the first quarter with $521 million in cash on our balance sheet. In summary, we had a very good first quarter that exceeded our expectations, and the momentum we saw coming into the year is continuing. And now let me turn to our updated guidance. And before getting into the numbers, I want to highlight a few important factors driving our outlook. The macro environment continues to be dynamic, and so we will remain prudent with our forecasting, given we have 3 quarters to go in the year. Most importantly, we've increased our growth expectations for the injectable market driven by the underlying trends Eric talked about earlier. HVP components, both GLP-1 and non-GLP-1s are the primary driver for our increased outlook. Our assumptions around the GLP-1 market continue to hold and the non-GLP-1 market continues to improve. We've also incorporated rising oil and commodity prices into our updated thinking and are working to offset these costs through various means as we have with tariffs and other inflationary costs. We expect to have a net impact of single-digit millions after the mitigation efforts. Importantly, our operations and supply chain have not been affected. We continue to expect to close the SmartDose transaction midyear. As a reminder, we generated $55 million in SmartDose sales in the second half of 2025 and have adjusted our full year 2026 expected organic growth rate to account for these revenues. For the year, we now anticipate revenue to be in the range of $3.295 billion to $3.35 billion, up $78 million at the midpoint. This reflects an increased organic revenue growth range of 7% to 9% for the year. Reported growth is 7.2% to 9.0%, with our assumptions around FX and the SmartDose divestiture unchanged and roughly offsetting. The increase reflects strong Q1 performance and an improving demand environment for the remainder of the year. In the Proprietary segment, we expect HVP components to continue to be the primary driver of revenue growth. We now anticipate this business to grow low to mid-teens organically for the year, accounting for about 7 points of the total company growth at the midpoint of guidance. This is up from our previous expectation of roughly 5 points of total company with at the midpoint. Importantly, both GLP-1 and non-GLP-1s are contributing. Non-GLP-1 HVP components are expected to grow low double digits and make up just over 5 points of total company growth, while GLP-1 HVP components is expected to be in the mid- to high teens. We also expect better performance in our HVP delivery devices, while our expectations for standard products in West Vantage are consistent with our previous guidance. The positive revenue mix is helping us to further expand our margins even as we see increased costs, and we have incorporated some below-the-line contributions in the updated guidance. To help with your models, we are now projecting $7 million in net interest income, a 19% tax rate for the full year and roughly 71.5 million diluted shares outstanding for the full year. This results in an adjusted earnings per share to be between $8.40 to $8.75 for the year, up 15% to 20% year-on-year. Now for the second quarter, we expect revenue to be in the range of $830 million to $850 million. This is a reported increase of 8.3% to 10.9%, and an organic increase of 7.0% to 9.6%. And we expect second quarter adjusted diluted earnings per share in the range of $2.05 to $2.12, up 11.4% to 15.2% year-on-year. In summary, we're very pleased with how our business is performing, driven by our key growth drivers and are optimistic about the future. Now I'd like to turn the call back over to Eric for some closing comments. Eric? Eric Green: Thank you, Bob. To summarize, the broad-based nature of the results we reported today continues to reaffirm that our growth strategy is working as expected. We have a strong, resilient business which delivers unique value to our customers. We remain focused on our critical growth drivers of biologics, GLP-1s, Annex 1 and other HVP conversion and leveraging our global infrastructure. The long term, many durable macro trends underpin West's growth trajectory as the global market leader in the injectable medicine space. Finally, I want to thank our team members for their commitment and reluctance focus to serving our customers, which allowed us to achieve these strong results. Operator, we're ready to take questions. Thank you. Operator: [Operator Instructions] Our first question comes from Patrick Donnelly with Citi. Patrick Donnelly: Maybe one on the non-GLP, nice results there in particular. Can you talk about the acceleration you saw there? It sounds like, Bob, I think you were talking about low double digits for the rest of the year on [indiscernible] Can you just talk about what you're seeing? Is it [indiscernible]? Is it biosimilars, biologics? Would love if you just break that down a bit more because the growth there was pretty notable. Eric Green: Yes, Patrick, thank you for the question. I think as we look at the HVP non-GLP-1 area of our business [indiscernible] the components, we're really pleased in how the market is starting to -- market demands continue to increase, particularly in biologics and biosimilars. We mentioned that we grew 26%. We believe -- for the balance of the year, we'll have very strong double digits in that area. And this is mostly on already commercialized drugs in the marketplace. While we do continue to have a very high win rate on new launches and new molecules being approved, most of the growth is coming from the commercialized drugs. Annex 1, as you asked about that particular area that continues to meet our expectations. We have -- we've seen a sequential improvement over the prior quarter, and it's up 66% over the first quarter of last year of a number of projects that we have taken on. And this is actually -- as you think about volume doesn't change, but the ASC and the margins do improve, it will continue to focus on that area. That is actually expanding as we think about -- it's not just [ E-regulations ]. We're starting to hear more about the expectations outside of Europe, particularly in the United States and also in Asia. I think the last area I want to just comment on, and that's why we have confidence in our guidance is really unleashing some of our operational excellence in our HVP manufacturing sites. The work that we're doing in Europe is fungible, transferable to other sites, which will give us the ability to leverage the existing capacity, higher throughput, higher output, [indiscernible] need a rise in demand of our customers. Bob, would you like to add? Robert McMahon: Yes, I would just say, Patrick, and thank you for the question. As you see, this is a continuation of what we saw in the second half of the year of this real continued momentum in the HVP non-GLP-1 components business. And to Eric's point, what we've seen is a real combination of not only demand, the benefit of the positive mix associated with upgrading to [indiscernible], and we expect both of those things to continue as well as the continued market development of the biologics business. And so feel very, very good about where that direction is going. If you recall, in Q4, we talked about demand outstripping supply. We're continuing to ramp and feel good about the team's ability to continue to meet that demand for the rest of the year. Patrick Donnelly: Okay. That's helpful. And then, Bob, maybe on the margin side, obviously, when AUPs are growing 23%, it helps on the mix side. Can you just talk about how we should think about the margins for the rest of the year between the mix shift piece? You mentioned the manufacturing excellence there. I know the footprint is an area for help. It doesn't sound like the commodity side is going to be much of a negative offset. So maybe just talk about the moving pieces there. And then obviously, the mix shift is helping quite a bit here. Robert McMahon: Yes. What I would say is mix shift certainly does help, but we're also being benefited from the great operational execution by the team, which helps absorb the plant costs and so forth. And so if we think about where we were in Q1 at 21.4% margin, that was a significant improvement over last year. Q2 will probably be roughly in that line and then second half will [indiscernible] despite increased cost, our expectation is that we... [Technical Difficulty] Operator: Ladies and gentlemen, please standby. Your conference call will resume momentarily. Again please standby. Your conference call will resume momentarily. Robert McMahon: Patrick this is Bob. Sorry, we got disconnected. Let me finish my thought. As I was saying... Eric Green: I think [indiscernible] when you drop there. Robert McMahon: Yes, yes, exactly. That wasn't a dramatic pause. So I apologize to the folks on the call. What we're expecting actually in the second half of the year is an extension, or an expansion of our margins despite the incremental costs associated with higher fuel and logistics costs. And so if we look at the full -- some of that's a benefit of continued margin mix and strong performance on the revenue side. If we look at our full year from last guide to this guide, probably another 50 basis points improvement year-on-year. So a very nice expansion. Operator: Our next question comes from Michael Ryskin with Bank of America. Michael Ryskin: Great I'm just -- and obviously, congrats on the quarter on the guide, I'm just curious, did you notice anything unusual in terms of ordering patterns, or acceptance from customers? We are just wondering maybe as a result of the Middle East crisis and the spike in oil, if any of your customers did any prebuying or stocking ahead of time. Just [indiscernible] of price increase or maybe supply [indiscernible] in the second half. Just wondering if you saw any weird dynamics in March once the conflict broke out? Robert McMahon: Yes, Mike, this is Bob. Thanks for that question. I'm glad you brought that up because we've actually done a lot of analysis on our results, and we did not see any pull-forward associated with the conflict in the Middle East. As we mentioned in the call, we did have greater-than-expected revenue associated with SmartDose 3.5, but that's a result of in anticipation of the transaction. But there was no pull forward associated with the conflict. Michael Ryskin: All right. That's very straightforward. And I guess kind of just staying on the same topic. You mentioned some of the offsets and some of the mitigation you're putting in as a result of that. I was wondering if you could talk through that, like whether it's price increases? I know you guys have a hedge on oil. You called that out in the Q. Could you talk about that? Could you talk about -- I think that's only a couple of months' worth, but anticipation of price increases in the second half, maybe some supplies [indiscernible] moving around sort of like how you're adjusting to that and how that's going to play out? And related to that you can... Robert McMahon: Yes. Thanks, Mike. Yes, what I would say, we have multiple tools at our disposal. Certainly, we do hedge a portion of our costs associated with that, but that certainly is not going to be the only way that we have the ability to mitigate. And similar to what we have done with tariffs and so forth, we'll look at multiple tools. Probably it's premature to kind of explain all the details there, but we feel good about our ability to recover a portion of those costs. Operator: Our next question comes from Paul Knight with KeyBanc. Paul Knight: Eric, a lot of this quarter sounds like capacity coming on line for West. So my question is around are there any bottlenecks that you see right now? And second, how easy is it for customers to move from one site, or use another site's capacity does it take a month, a year to get that qualification done? Eric Green: Yes. Paul, it's a multistep process. So first of all, on the capacity expansion, the teams have done a great job on additional capacity utilization of the existing facilities. And this initiative we launched in the second half of last year, but we're seeing -- we saw the benefits in Q1 and we'll continue to see that throughout the year. So higher throughput on existing capacity. We will always continue to layer in new capital equipment to be able to continue to expand basically around HVP finishing processing, which really is being fueled by the Annex 1 transition. You're absolutely correct. The second lever that we're working with certain customers is qualifying multi-sites. That process does take time. So it could be anywhere between 6 to 12 months for a transfer to occur effectively and another site to be validated. But that's on ongoing, and we'll continue to leverage that across our network, so we can level load more effectively. And I would say that that's additional benefit we will see throughout 2026, going into 2027. Robert McMahon: Paul, this is Bob. Just the other thing that Eric mentioned that I want to reiterate is around taking the learnings and the application of what we're doing in Europe and applying it to other plants, particularly our HVP plant, to be able to get ahead of some of that continued demand. And so not only are we doing the things, Eric was just talking about, which will help us not only in the mid and -- in the far term. In the near term, we're being able to leverage the existing assets that we have. So really nice work by the team. Operator: Our next question comes from Matt Larew William Blair. [Operator Instructions] Okay. We'll go to our next question, which comes from Kallum Titchmarsh with Morgan Stanley. Kallum Titchmarsh: Maybe just following up a bit more on Annex 1, just checking in on the flow of new customer conversations and conversions there. Any refreshed view on the duration of this tailwind? Whether customers are maybe facing issues not upgrading their components? And just how to think about what can be relatively captured from the TAM you framed up before? Eric Green: Yes, Kallum, it's -- this area of opportunity for us is actually very attractive, and we're gaining momentum. What we're seeing right now is the number of projects our customers we're engaged with, has increased and continues to increase. We're able to convert from a project status to commercialize product going into the market. I'm very pleased on the progress that we're making on [indiscernible] fronts. The conversations are actually more -- I would say, it's increasing because the regulations and our customers are looking beyond just Europe. And so therefore, there's more of a pull effect and having us participate on upgrading certain products in market today and commercialize drugs really run our HVP finishing processes. Which, again, going back to what Bob mentioned earlier about unlocking or unleashing the opportunities to expand our capacity capabilities in our HVP plants. That's going to enable us to continue to grow nicely. The growth that we believe that we will continue to deliver on 200 basis points per annum for multiple years. So we're early innings, I would say, we've identified at least 6 billion units that are targeted to be converted, and we're early in that stage. So we do think this is a very long-term growth opportunity. Robert McMahon: Kallum, just to add to what Eric is saying and to emphasize a couple of points. The regulatory environment does continue to increase across the globe, particularly focused on contamination. And I think we are uniquely positioned to be able to take advantage of this given our market position on existing products. So we're very optimistic about this. Kallum Titchmarsh: Appreciate it. And then I realize it's kind of less than 10% of the group. I would love to hear a bit more about the underlying demand environment in APAC. Pretty strong 29% growth in Q1. So just wondering if that's being underpinned by anything notably different than your U.S. and European growth drivers? And how we should think about investment into that region in the future? Eric Green: Yes. No, we continue to look at Asia Pacific as an attractive market for us. Geographically, we support that region in twofold. One, local for local consumption, but also export that is going to the global markets. So we rely heavily in other locations, [indiscernible] feed finished products into that region. I would say that we are seeing an increase, particularly in the biologics of the biosimilar space, which we have a very -- we continue to have a very attractive participation rate. And that's actually very attractive for us as you think about leveraging our higher end over HVP portfolio. So more to come, but we're pleased with the team's execution in region to support customers. But we are seeing an increase of CDMOs, small biotech firms looking to build a branch out into the Western markets. Operator: Our next question comes from Justin Bowers with Deutsche Bank. Justin Bowers: Eric, can you provide us with an update on the demand profile for some of the manufacturing space that you now have available in Dublin and in the West Coast? And then two, just also an update on the GLP-1 market. What are you seeing in terms of other indications outside of diabetes and obesity? Is there -- are there programs growing in that part of the market as well? Eric Green: Yes. Justin, you're right. At least for the first question you asked about the CGM business in Dublin that will be finishing up at the end of second quarter of this year. We're pleased with the progress we're making with new customers and contracts, to be able to backfill once the equipment processing lines are extracted from that facility. We are going to be installing new equipment from our customers to support them on their own new commercial launches, particularly around drug handling in the non-GLP 1 area. That's an area being attracted by our customers with the less Vantage strategy and the value proposition we're bringing. So I'm very pleased on the progress, more to come, but we do need to close out and finish on the current customer by the end of the second quarter, and then we'll do the transition in the second half with new customers. With regards to the GLP-1s, other indications other than [indiscernible] and diabetes, those are full projects in the pipeline that we're supporting. Actually, if you think about not just other indications, but other types of molecules that are being targeted for that market. We are obviously a very strong player -- and in the pipeline, it's very attractive. As you know, they're looking in combination molecules, or looking at other types of biologics. So we're very well positioned, and we do think that will be an extension of growth in that particular area for a number of years to come. Justin Bowers: Got it. I appreciate that. And then just a quick follow-up. On the drug delivery device strength that you saw and the transition there. Was that mostly volume driven? Or was there any incentive payments there? What were, sort of, the contributors to the strength there? Robert McMahon: Justin, this is Bob. Yes, the good news is it was all volume. There weren't any incentive payments associated with that [indiscernible] if you look at it, was roughly split evenly between SmartDose and the non SmartDose business. And so we feel really good about kind of the performance going forward. Operator: Our next question comes from Matt Larew with William Blair. [Operator Instructions] Robert McMahon: Yes. Let's move on to the next caller, please. Thank you, operator. Operator: Our next question comes from Daniel Markowitz with Evercore ISI. Daniel Markowitz: The first thing I wanted to ask on the [indiscernible] called out NovaPure as a positive for the first time in a while. And backing up, I think mix shift is such an awesome part of the story and NovaPure sort of stands out as being at the high end of the high-value components segment. So really nice to see that. I just wanted to ask what sort of drove the strength there specifically? Eric Green: Yes, Daniel, that's driven by market demand of commercialized molecules in market already. While we are continuing to see a number of new approvals in the pipeline we're feeding it with NovaPure. But that particular growth that you're seeing, and we expect biologics continue to grow quite nicely throughout 2026 is being fueled by NovaPure. Robert McMahon: Yes. It was one of the several highlights in the quarter, Daniel, and I feel good about the ongoing momentum there going forward. And so we had very nice growth in NovaPure year-on-year. Daniel Markowitz: Great. And then just a follow-up. As I look at the full year guide after a really strong quarter and a nice 2Q guide, the full year now looks more first half weighted versus what's typical. Is there anything to call out that's causing a decel in the back half? Or is this more conservatism? Robert McMahon: Yes. I'm glad you brought that up, Daniel. A couple of things. One is we are at the beginning of the year. So we are prudent. We're kind of taking it 1 quarter at a time. But we do have the roll-off of the CGM contract in the back half of the year. That is, as a reminder, is about a $40 million headwind in the second half of the year. That's no change from the original guidance that we had provided. And that also comes into play. But what I would say is we're prudent with our guidance and feel good about the ongoing momentum of the business. Operator: Our next question comes from David Windley with Jefferies. David Windley: I wanted to ask Eric about, or maybe Bob too, about incremental margin as good as margin expansion is year-over-year, I guess I would come at it from the standpoint of it still seems like there's quite a bit of opportunity there. Looking back in the model, revenue look to be at a record level, you're rebalancing capacity to open some new capacity, the NovaPure call out by Daniel. There's a number of factors that being positive margin was better year-over-year but down sequentially. I'm wondering if there were issues like labor ramp-up that you mentioned burden from commodity costs or perhaps the way of the SmartDose volume that came through in the quarter that might have shaded what would have otherwise been even better margin. Can you flesh that out for us? Eric Green: Yes, David, that's a good question. Let me start, and then I'm going to turn it over to Bob. But I think you've hit on the key points. We believe the HVP components business will continue to drive margin expansion. As we think about the biologics business continue to grow, you're absolutely correct by pointing out NovaPure and its strength of that particular business, which drives very attractive margin expansion. We also have the continuation of the Annex 1, and that's a multiyear journey. And as you know, we're basically moving an existing product in the market from a standard core level to a HVP, which brings very attractive margin expansion. And then I don't want to underestimate the impact of the leveraging our HVP sites more effectively with operational excellence. We've learned a lot in the first quarter. There's more to be done and also spread to our other sites, which we've actually seen as we went to those sites a few weeks ago. And we're very optimistic that we will be able to get more out of the existing capital that's in place today to produce HVP. So I do agree that there is opportunity for further margin expansion based on the HVP components Bob, do you want to add? Robert McMahon: Yes. And David, just a couple of other pieces of data. You're right. If we think about Q1, we were ramping throughout the course of the year. So that March had a much better performance than January, and that will continue to expand as we go through the rest of the year as those individuals were ramping up from a capacity standpoint. We did have a very good incremental, but I think it can be better. SmartDose did have some impact on that. And obviously, if -- to the earlier question around quarterly cadence. That's one of the reasons the second half of the year, we, in fact, on an operating margin basis to be pretty heavily above where we are in the first half of the year. And so a number of, I would say, positive opportunities for us to continue to expand margin not only this year but going into next year as well. David Windley: Great. And if I could just quickly follow up, Eric, I'd like to believe, based on my own age that you're still a pretty young chicken. You've made the decision to retire. Could you talk to us about that, please? Eric Green: Thanks for that. I'm pleased that you recognize that I'm still young. I feel it. No, I -- look, I think this is an outstanding organization. A lot of legacy, but a great future ahead of us, and I'm very proud of how the team is operating. I'm extremely proud of the executive team that we put in place, one of [indiscernible] next to me right now. And I do think this team is performing at a very high level, and will continue to do so. The business is operating very well. The strategy is very clear. the global leadership team is aligned and executing. And I think as I think about the successor coming in, when appointed, we'll be in a very good position to continue to take this business forward. So I'm excited about where we are at West, but I'm more excited about the future. And I couldn't be more proud about the team across the globe on how they are executing today, but more important in the future of this business. Operator: Our next question comes from Larry Solow with CJS Securities. Lawrence Solow: Congrats on the quarter as well. And just a follow-up on Dave's question there. Eric, we're going to miss you. It sounds like nothing imminent, but just curious how the search is going? Any kind of high-level time lines you can share with us or any thoughts there? Eric Green: Yes, Larry, thank you. So we are active in the market as we speak, and we anticipate that my successor will be appointed in the second half of this year. So [indiscernible] be informed as we make progress. But again, as I mentioned earlier, to David's question, this is an [ unbelievable ] company. And I think it's going to be -- once we have somebody appointed, we'll be in a very good position. Lawrence Solow: Yes, absolutely. You've done a great job enhancing the company's outlook. Just a couple of follow-up questions. You mentioned NovaPure. Most of the growth there has been driven by [ current products ] in the market. Just curious on the Annex 1 what folks are kind of shifting towards? Is it more towards the lower end of the curve there, like the [indiscernible] and then maybe [indiscernible] could go up a little more on the [indiscernible] side? Or do you see some of those -- of the $6 billion potential components, some of them eventually even inverting to some of the higher level -- high value services there? Eric Green: Larry, it's going to be a mixed answer for you. It really depends on the customer and the molecule itself. We have -- you're right, I would say, if you look at a weighted average more around the [ Westar ] and then leveraging [ Envision ], pharmaceutical washing, sterilization. We do have a few cases where they're going all the up to the high end of the spectrum of HVP. But it is more about the midpoint of that portfolio. And as a reminder, we're starting up -- many of them are starting off at the standard legacy products. So again, either case is very positive. We do also have some shift from the lower end of HVP going to the higher end. So it's a combination of both. So I gave you, kind of, a widespread of answer there, but it's -- that's why it's exciting. It's -- it's leveraging our global HVP finishing processes. Lawrence Solow: Got you. And then just quickly, I may just one last one. Just on the West Vantage. I guess you're calling that now. So I guess the cadence, should we expect for the rest of the year, do we expect a little bit of a dip? You had obviously a really nice strong quarter towards the [ middle back ] half of the year as the rest of the continuous [indiscernible] next piece comes out. And then sort of a rebuild in '27. And along those lines, does the more -- how should we view the margin profile of this segment as we go out the next couple of years? Robert McMahon: Yes, Larry, I'll take that question. And you're right. There is a kind of front half weighting associated with that just given what we were talking about before with the CGM contract exiting. So we -- our forecast for the year remains unchanged at roughly flat. It will be up in the first half and then maybe slightly down. Q3, I would expect to be the trough because if you remember, the drug handling is kind [indiscernible] up throughout the course of the -- throughout the year, as Eric mentioned, is on track. That's $20 million of incremental revenue. Most of that will be in the back half of the year. And as we've talked about the benefit of that drug handling is that's a higher-margin business than what it's replacing. And so from a margin profile, I would expect margin profile to be roughly consistent across the year. Lawrence Solow: Got it. Okay. And then eventually, does the drug handling have higher margin as you build that out? Robert McMahon: Yes. The drug handle margin -- and it's important, two other things. The drug handling business, while it has $20 million this year, that is certainly not at ramp at peak. It's probably 3x that much, which we'll continue to see ramp throughout 2027. And from a margin perspective, it's well at least twice as much on a gross margin basis as our current business. Operator: Our next question comes from Brendan Smith with TD Cowen. Brendan Smith: In terms of the 200 basis point contribution related to [indiscernible] is most of that baking in Europe-based upgrades? Are you seeing any customers upgrade, you mentioned the U.S. and Asia as next logical geographies? But are you seeing customers upgrade in parallel? And could that present any upside to that current expectation? [Technical Difficulty] Operator: Please stand by. Eric Green: [indiscernible] can you hear us? Operator: Yes. Brendan Smith: Yes, in terms of the 200 basis point growth contribution related to [ NX1 ], you mentioned the U.S. and Asia as next, sort of, subsequent geography seeing upgrades. Is the current expectation baking in pretty much just Europe? Or are you seeing any customers upgrade in parallel across geographies? And could that represent some upside opportunity there? Eric Green: Yes. There's two factors that have happened, Brendan. I mean, good question. And one is, our customers that are looking to upgrade for the European market are also looking at their portfolio and making more global decisions and being consistent. So we are -- we are seeing that as one factor. Another factor we are seeing, we're being brought into conversations with our customers even in the United States with the FDA making observations around sterility and the strategy around of their manufacturing processes. And therefore, there's opportunity to upgrade even in the U.S. market. So we're seeing a factor of both. And we'll see how this plays out in the near term, and that might be a potential opportunity. Robert McMahon: Brendan, I think the other thing to think about is a potential accelerant here is, as we think about all the work that's happening from the [indiscernible] standpoint. That's actually -- a lot of that is actually coming from Europe into the U.S. and what our pharma customers are wanting to do is standardize on a consistent product and process. And so that hasn't been fully baked in because a lot of that work is still ongoing. But that has the potential to kind of accelerate and expand our Annex 1 opportunities well beyond Europe. Brendan Smith: That's great. And in terms of the operational excellence plan. Can you speak to maybe like a cadence of executing that across sites or some time lines? And are those improvements baked into the [ raised ] guidance? Eric Green: Yes, the cadence is -- we're live right now. We're actually transferring some of the [ learnings and knowledge ] into other sites and particularly in [ Kinston ] and Jersey Shore, outside of our [indiscernible] and Waterford plant. So that is in process, and that will continue to occur throughout the year. As Bob alluded that, we were -- we saw a nice margin expansion within the quarter because of these efforts. So we are still in the buildup mode. We should see the expectations of additional benefits throughout the next several quarters. Robert McMahon: Yes, and we have baked some of that operational improvement in the forecast. Operator: Our next question comes from Tom DeBourcy with Nephron Research. Tom DeBourcy: I was just wondering on the HVP delivery devices and I guess you host the divestiture of SmartDose [indiscernible]. Just how you think about that business? I know you have the secrete platform and how you think about, I guess, adding to that portfolio and whether that's still, obviously, I guess, a core part of your offering to customers? Eric Green: Yes. No, absolutely. So within that portfolio, we have administrative systems, which is a very attractive market that continues to expand and grow, particularly in the hospital market. We have the Crystal Zenith, which is container alternative to glass that is really targeted to the highest end of biologics in cell and gene therapy. And then also you have the other alternative delivery devices like SelfDose that the demand and volumes are continuing to increase. And we have other versions and volume doses that we're able to offer our market. So we believe delivery devices is natural in this area as primary container as a natural extension from our elastomer business. We'll continue to invest around new product development and manufacturing capacity expansion because it's a very attractive growth profile and a margin opportunity. Operator: I'm showing no further questions at this time. I'd like to turn the call back over to John Sweeney for closing remarks. John Sweeney: Thank you very much for joining us today on our First Quarter 2026 Earnings Conference Call, and we look forward to updating you as we move through the year. Thanks very much, and have a good day. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to Molina Healthcare's First Quarter 2026 earnings call. [Operator Instructions] Please note this event is being recorded. [Operator Instructions]. I would now like to turn the conference over to Jeffrey Geyer, Vice President, Investor Relations at Molina Healthcare. Please go ahead. Jeffrey Geyer: Good morning, and welcome to Molina Healthcare's First Quarter 2026 Earnings Call. Joining me today are Molina's President and CEO, Joseph Zubretsky; and our CFO, Mark Keim. A press release announcing our first quarter 2026 earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, April 23, 2026, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in the earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance, the medical cost and utilization trend during the year, the political, legislative and regulatory landscape, the impact of Medicaid work requirements and redeterminations, our expected growth and margin expansion, the estimated amount of our embedded earnings power and future earnings realization, Medicaid rate adjustments and updates, our RFP awards and our acquisitions and M&A activity. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe? Joseph Zubretsky: Thank you, Jeff, and good morning. Today, I will discuss several topics. Our reported financial results for the first quarter, our full year 2026 guidance, which we reaffirm at approximately $42 billion of premium revenue and at least $5 in adjusted earnings per share, the political and regulatory landscape and a brief glimpse of our Investor Day agenda and growth outlook. Let me start with our first quarter performance. Last night, we reported adjusted earnings per share of $2.35 on $10.2 billion of premium revenue. We would characterize the results as solid under the circumstances but that characterization is against the backdrop of current modest expectations. Our 91.1% consolidated MCR reflects strong operating performance as we continue to navigate a challenging medical cost environment. We produced a 1.6% adjusted pretax margin in the quarter. In Medicaid in the first quarter, the business produced an MCR of 92%. While the January 1 rate updates came in as expected, our medical cost trend was modestly favorable to our expectations. We continue to work to enhance our medical cost management protocols to address the areas of high cost trend we observed in 2025. Last year, we observed a 7.5% medical cost trend that included 250 basis points of acuity shift related to the post-pandemic redetermination process. However, the acuity shift in core utilization impacts diminished as the year progressed. Our expectation that the acuity shift trend that we had experienced in 2025 was behind us and would not recur is holding up. We feel confident in our 5% medical cost trend assumption for 2026. In Medicare, we reported a first quarter MCR of 89.8%. At the beginning of the year, we successfully completed the transition of MMP members to the new integrated products. Our Duals business is the strategic focus for us in Medicare. As previously mentioned, we will exit the MAPD product for 2027. In Marketplace, the first quarter MCR was 84%. Membership stands at 305,000 and is slightly higher than our prior guidance, but the profile of our membership is as expected, following our decision to reduce our exposure in this highly volatile segment. The majority of our members are renewal members, and we remain concentrated in the silver tier, which leads to greater stability and predictability in our membership base. Turning now to our 2026 guidance. Although the quarter was strong when compared to internal and external expectations, we are merely reaffirming our full year 2026 adjusted earnings per share guidance of at least $5. Our full year 2026 premium revenue guidance remains at approximately $42 billion. We note that our forecast for Medicaid membership attrition increased slightly, but the associated revenue loss is projected to be offset by higher revenue in marketplace. We remain optimistic that states may provide off-cycle and retro rate updates throughout the year as they did last year. We are keenly aware that medical cost trend and earnings came in modestly favorable to expectations in the quarter. That being said, merely reaffirming our prior full year guidance is a prudent approach at this early point in the year and in this current environment. When we report second quarter results, we will update our full year 2026 guidance to reflect the first and second quarter results, which will provide a time-tested base off of which to project the second half of the year. Turning now to the political and legislative landscape. In Medicaid, States continue to evaluate their processes and how to implement work requirements and biannual redeterminations. The guidance from CMS affords States some flexibility on how to proceed with these requirements, particularly as it relates to the timing of these reviews. We are working closely with our state partners on the administrative requirements needed to implement these new policies. We continue to believe that membership impact will be minor and emerge gradually through 2027 and 2028 and therefore, any impact due to changes in the risk pool will be small. In Medicare, we are pleased with the improvement in the CMS final rate notice compared to the preliminary notice. In addition, the continued progress of States promoting the integration of Medicaid and Medicare supports the long-term competitive position of our duals products. In Marketplace, as we approach the 2027 pricing cycle, we will likely remain cautious as it is still possible for disruptive regulatory changes to occur. We look forward to updating you on our 3-year outlook at our Investor Day event on Friday, May 8. We see a clear path to margin expansion to the correction of the rate and trended balance that exists today and the revenue growth opportunities continue to be attractive in our businesses. We will provide a detailed financial outlook for premium revenue and earnings per share through 2029 and demonstrate how we will again realize the intrinsic value of the franchise we have built over the past 8 years. We will do so with the same level of detail and specificity that has been our hallmark. In summary, we are pleased with our solid first quarter results and continued disciplined approach to medical cost management. Our reaffirmed full year 2026 guidance reflects a prudent view of full year results at this early point in the year. With that, I will turn the call over to Mark for some additional color on the financials. Mark? Mark Keim: Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on our first quarter performance, the balance sheet and our 2026 guidance. Beginning with our first quarter results. For the quarter, we reported approximately $10.2 billion of premium revenue with adjusted EPS of $2.35. Our first quarter consolidated MCR was 91.1% and reflects continued disciplined medical cost medicine. In Medicaid, our first quarter reported MCR was 92%. The January 1 rate update came in as expected, while medical cost trend was modestly favorable to our expectations. In Medicare, our first quarter reported MCR was 89.8%, in line with our expectations. We remain confident in the pricing and benefit adjustments we implemented for 2026. In particular, our duals products, which now include last year's MMP members are off to a good start. In Marketplace, our first quarter reported MCR was 84%. Adjusted for prior year risk adjustment and program integrity impacts reduces that metric to approximately 79.5%. Given the pricing actions we took in our Marketplace segment this year, we have reduced our exposure and prioritized margin improvement. Our adjusted G&A ratio for the quarter was 6.9% and reflects the timing of certain operating expenses with no change to our full year outlook. Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested approximately $35 million of subsidiary dividends and our parent company cash balance was approximately $213 million at the end of the quarter. Our operating cash flow for the quarter was $1.1 billion and driven by the timing of government payments in Medicaid and Marketplace. Debt at the end of the quarter was 6.1x trailing 12-month EBITDA, and our debt-to-cap ratio was about 48 we continue to have ample cash and access to capital to fuel our growth initiatives. Days in claims payable at the end of the quarter was 44, modestly lower than is typical due to the timing of payments at quarter end. We remain confident in the strength and consistency of our actuarial process and our reserve position. Next, a few comments on our 2026 guidance. As Joe mentioned, we continue to expect full year premium revenue to be approximately $42 billion. Within that number are a few moving pieces. We now expect same-store membership in Medicaid to decline 6% this year, up from previous guidance of a 2% decline. We expect to end the year with approximately 4.5 million members. Meanwhile, Marketplace sold moderately higher paid renewals, ending the first quarter at 305,000. With normal market attrition, we expect membership in our Marketplace segment to end the year at approximately 250,000. Renewing members now represent 70% of our book. Lower membership in Medicaid and higher membership in marketplace results in our premium guidance remaining at approximately $42 billion. With low and no utilizers now at the lowest level we have seen, we do not expect any acuity shift from additional Medicaid membership declines. Our full year consolidated MCR and each of our segment MCRs are unchanged. In Medicaid, the full year MCR of 92.9% includes rate increases of 4% and medical cost trend at 5%. States continue to update their actuarial data to reflect higher observed trends. We remain optimistic States may provide off-cycle and retro rate updates throughout the year as they did last year. Several of our States have already provided off-cycle rate increases, and these would represent upside to our guidance. Full year medical cost trend guidance remains in line with our previous expectations. States continue to evaluate program design and benefit changes to address medical cost categories with the highest observed trends. Our MCR guidance on Medicare is 94%. We remain confident in the performance of our Medicare duals and integrated product business. In Marketplace, our full year MCR guidance is 85.5% and includes the normal expected seasonality. We continue to expect the full year G&A ratio to be approximately 6.4% as we drive efficiencies in our operations. The higher ratio reported in the first quarter with simply timing of a few items within the year. We reaffirm our full year EPS guidance of at least $5. We continue to expect earnings seasonality to be front-end loaded this year, reflecting the January 1 Medicaid rate cycle in the first half of the year and implementation of the Florida CMS contract in the second half. Turning to embedded earnings. Recall that our definition of embedded earnings is the future incremental contribution of our new contract wins and acquisitions. Recall that $2.50 a share of embedded earnings is the combination of 2026 MAPD losses and Florida CMS first year implementation costs. Both are certain to be positive impacts to our 2027 performance. Embedded earnings will remain a driver of value in the future. We look forward to providing you with an updated view of this important measure at our Investor Day. This concludes our prepared remarks. Operator, we are now ready to take questions. Operator: [Operator Instructions] The first question comes from Andrew Mok with Barclays. Andrew Mok: I appreciate the updated comments around lower Medicaid membership. Can you help us understand which states are driving that incremental pressure and how that impacts the MLR outlook and cadence for the balance of the year? Joseph Zubretsky: Sure, Andrew. I'll frame it and I'll kick it to Mark. We are pretty spot on with our membership forecast in Medicaid for about 15 or 17 of our states at about 2%. We underestimated the impact in California, Illinois and New York and somewhat in Texas. And in California, it was certainly influenced by the undocumented immigrant population. I'll kick it to Mark to talk about why we don't expect a continued acuity shift here. And it has to do with what we call low and no utilizers and the fact that, that's a much smaller component of our population today than it was in the past. Mark? Mark Keim: Yes. Absolutely. Andrew. Yes, so the States that Joe mentioned are driving why we're looking for a little bit higher attrition this year, California, Illinois, New York, Texas, Joe mentioned in California, it's the UIS, the undocumented immigration status members that are probably very disproportionately driving that State. Now our guidance has -- membership attrition was 2% for the year. In our new guidance, it's now 6%. So certainly on volume, that's down. In our prepared remarks, we said the revenue would be offset by marketplace. But to Joe's point, the acuity impact, potential acuity impact on a higher attrition assumption for Medicaid, we're really not seeing it. When we look at the low and no users, most of them came out over the last 1.5 years or 2 years since the start of redetermination after the pandemic. Right now, we're seeing a lower percentage of low users and no users in our Medicaid population than we ever have, at least since we've been recording it. The other point I'd mention is when we look at our stairs, levers analysis, on Medicaid, the people that are staying with us versus the people that are leaving us, the levers at this point are leaving very close to portfolio averages, which is just one more data point that suggests to us that any of this pent-up acuity shift is largely behind us. So yes, lower on Medicaid membership, but we don't really see an acuity impact here. Operator: The next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: Just to kind of follow up on that. I hear your point that low and no utilizers are at the lowest point you've seen. But I guess enrollment is also being more tightly managed, I think, probably at any time in the recent history of the Medicaid program. So I guess, can you talk a little bit about your confidence level that, that actually is kind of the reasonable baseline for looking at this. And then I hear you on the kind of the acuity narrowing and the lever stayer narrowing as you got through the second half of the year. But do you think you're actually at the point now where it is truly 0, and there is no difference. I hope you'd just be able to expand a little bit more on this assumption. Joseph Zubretsky: A couple of data points. I'll [indiscernible] it and hand it to Mark again. Our definition of low and no utilizes, we don't actually talk about exactly what it is, but it's a good metric to figure out whether there's large SKUs of MCRs in your population. That right now is very tight. In fact, in our definition, the percentage of total membership that are low and no users is 7.5 percentage points higher -- lower, sorry, than it was at the peak of the pandemic, and it's actually below pre-pandemic levels. So we're really confident that the post-pandemic redetermination process eliminated a lot of people who weren't using the system and eliminated them from the Medicaid roles. Now with respect to membership, yes, the whole eligibility verification process has gotten tighter in States. Right now, we're comfortable with our 6% membership attrition assumption for 2026. And when we talk to you at Investor Day on May 8, we'll give you a longer-term view of what that might look like for our Medicaid business over a 3-year period. Operator: The next question comes from Ann Hynes with Mizuho Securities. Ann Hynes: Can we talk about free cash flow. Your free cash flow was strong in the quarter. after a couple of years that weren't great. What are you expecting for 2026? And then on your debt to cap, I know it's right now 48%. What is the goal? What's the ultimate goal to get that to and maybe the timing? Mark Keim: Ann, it's Mark. Thanks a lot for that. I get questions on operating cash flow all the time. And as you know, in a regulated business like Molina, what's more important than total company operating cash flow is cash flow at the parent, right? Operating cash flow swings a lot as we do accruals for risk adjustment for corridors, we hold those accruals. Maybe we don't pay them down for a year or two. Then if we're not accruing new liabilities, you see those operating cash flows, but they aren't meaningful for the company because, again, the cash flow stays in the subs. . What is meaningful is the cash flow at the parent. We continue to have a lot of success with dividends moving from our subsidiaries to the parent. We moved cash to the parent once again in the first quarter and our outlook for the rest of the year is pretty good. My cash at the parent is a little over $200 million in the first quarter. It will be more than $600 million at the end of the year based on the dividends I expect to take throughout the rest of the year. So very good cash flow to the parent, and that's where we can actually use it to redeploy. That's what's really important. So on debt to cap, we are a little higher than we've been, but still at a very comfortable level, 47%, 48% depending on how you measure it. Typically, we target something in the low 40s as the more sustaining and enduring level. But with normal net income and the outlook we have for the business, I'm very comfortable with where we are in debt to cap. Operator: The next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. I understand the desire to kind of reaffirm this early in the year. I think we usually expect a lot more clarity for companies with Q2 results, so that makes sense. But just trying to understand a little bit whether this is that type of normal assumption around always kind of wait for Q2 to kind of raise guidance or whether you believe that there is still meaningful unknowns that aren't quantifiable at this point? And if there are, where you think that those things that could push the numbers in either direction that are still unknown? Joseph Zubretsky: Our prudent move to not increase guidance at the first quarter, even though the indicators are all positive for all 3 businesses are for vastly different reasons. In Medicaid, the volatility of the network cost inflection we experienced in late 2025, we had a very good trend result. In fact, the annualized trend result in the first quarter would indicate we might even come in less than 5% for the year, but we're not yet calling that. In Marketplace, we want to wait to see the June [indiscernible] before truing up our estimate for the full year. And we had a very, very good start in our new integrated products, our FIDE and HIDE in Medicare, but it's 1 quarter. It's a brand-new product, existing members, but a brand-new product. We want to see that develop for another quarter. We use the term time tested because I think it is prudent to see 6 months of results before updating our guidance, particularly coming off a highly volatile medical cost inflection environment in 2025, bearing in mind in Medicaid with a 92% result in the first quarter a 92.9% indication in our guidance for the full year, we can actually produce loss ratios north of 93% and still hit our guidance for the rest of the year. So cautious perhaps, but in this environment, we think it's entirely prudent to do so. Operator: The next question comes from Justin Lake with Wolfe Research. Justin Lake: Medicaid cost trend last year, you said 7.5%, this year, you're saying around 5%, appreciate the company's transparency and giving quarterly Medicaid trend? I think you said 1.2% in the first quarter last year and 1.6% in the second. Can you give us the Q3 and Q4 trends that you saw quarterly coming out, what are you seeing in the first quarter? And can you give us the split between trend and acuity each quarter? And maybe also tell us what's driving the lower trend, what cost categories driving lower trend this year? Joseph Zubretsky: Sure, Justin. I'll frame it and hand it to Mark. The framing remarks that I'll make is that in 2025 on a reported basis, the trend appeared to be accelerating. But as normalized and viewed on a pure period basis, it was actually declining throughout the year. Now the real key point is all of that 2025 information is trying to be used by observers to predict what's going to happen in 2026. In 2026 for 1 quarter only, the 2.5% acuity shift component of trend for 2025 did not recur. And the trend observed in the first quarter annualized, would put us at better than 5% for the full year. . So despite what it was doing in 2025, it looks like, at least for 1 quarter, our trend pick for 2026 is holding. Mark, do you want to discuss the quarter? Mark Keim: Sure. Justin, I appreciate your question. And the 1.2% to 1.6% you cited, I certainly recall. The way we look at our medical cost expenses is at the time what we report is what we know at the time. The other way we look at medical cost is on a pure period basis. we go back and we look at the full development of medical costs, and we put them in the periods of their dates of service. Those dates of service on a pure period basis in retrospect, can look different than what we reported at the time. So the 7.5% that we looked at for last year is certainly the number we saw. The evolution of it is a little bit different than we reported at the time. So what we saw is higher trends in the first and second quarters, declining when we put the cost into their appropriate time periods, which we call a pure period basis. Within that declining overall medical cost PMPM, the component of the acuity shift that we've talked about declined very meaningfully, such that by the end of the year, it was de minimis, almost gone. And as what Joe said, what gives us great confidence is here in the first quarter, we're seeing exactly that bear out. We're seeing the run rate of the 5% we saw last year of the core, but we're not seeing the acuity shift. In fact, as Joe said, we're seeing just a little bit better than that run rate of 5%. But at this point, it's too early to really lay that out. I always am reluctant to talk about trends on a quarterly basis because there's seasonality and there's noise. It's a much better annual concept, but I certainly appreciate the question. Operator: The next question comes from Sarah James with Cantor Fitzgerald.. Sarah James: Days came in at 44, which is below the 46 to 47 range in the prior 3 quarters. I know you're attributing that to timing, but is there any way that you can give us look at normalized DCP ex the timing items and then help us understand how you're thinking about reserve funding for Florida Kids, given the scale of the contract and typical pressure in the beginning of new contracts? And then second, in your assumption that the sub dividend bring parent cash up to $600 million by the end of the year. Would that be possible while your company-wide RBC still remain similar to the 305% that you exited '25 with? Joseph Zubretsky: I'll take the floor to -- I think your second question is about Florida Kids. Let me frame that. And we'll be talking about this on May 8 as a proof point of the significant amount of new business wins we've had over the last 5 or 6 years. The Florida Kids program, Florida CMS, the official name. We believe that total run rate is a $6 billion revenue program. We are in full implementation mode currently. We are experts at managing high-acuity lives, which is what this is. And we also have an unparalleled platform in our opinion, of managing behavioral costs, both from a clinical and cost perspective, which is a very large component of this program. We're really proud of the RFP proposal that we put forward in one. We have good visibility into the economics of the program now that we're in implementation mode. We have all the cost and claim data from our customer, our state regulator, and we have visibility on the '25, '26 program rates. So all that being said, we believe and we've seen that the financial profile of this program is attractive, and we believe will provide for a meaningful -- it already has provided for a meaningful addition to our embedded earnings to be harvested over a 2-year period. Mark, do you want to address the reserve stat? Mark Keim: Absolutely. Sarah, there was a lot in that question. Let me start with DCP. We were at 44 in the first quarter. Now that was down 1.5 days from our recent average. And what we said on the prepared remarks, it was entirely the timing of payments. Now if you wanted to poke on that, you would look at what we call the roll forward of our reserves that was in the earnings release, you'll see it again in the [ queue ]. But if you look at it on a kind of per member per month basis, what you would see is that our medical expenses were tracking like average incurred. But on a paid basis, we just paid faster, and that will stick out in the PMPMs, if you do the math. Now the other thing you guys do a lot of times to test our reserves is you look at the growth of premium versus the growth of claims payable. And our premium revenue was actually slightly negative year-over-year and our claims payable was actually meaningfully positive year-over-year, which would certainly give you comfort. Now on top of this, these are just testing balance sheet liabilities, underlying this are true actuarial [ tics ], which remain standard like they always are. I think the last part of your question was, can the dividends that I talked about still be possible in the presence of the RBC ratio? Absolutely. We only take dividends when they are above the RBC target of $300 million. So we would never dividend to get below 300. If that was the point of your question, we'll finish the year well above $300 million RBC even with those forecasted dividends. Operator: The next question comes from A.J. Rice with UBS. Albert Rice: Maybe just to clarify something on the quarterly trend and then ask about the marketplace. You were nicely ahead on MCR relative to consensus. I wonder how that compared to your internal expectation? And is any of your hesitancy on rolling that forward and updating guidance related to unusual items that might have impacted the quarter? I know some of the other companies have called out weather and flu being favorable. I don't know whether that had any impact on the trend you saw. And then my question on the exchanges, you're probably the only one that's saying you're seeing silver level continue to be the predominant one. Others are talking about move to bronze, someone even said they had some backup into gold. Is that pretty much benefit design that's driving that? Or are you seeing something different in the market than perhaps others are seeing? And then finally, just to comment your 305,000 current membership down to 250,000. Is that just evenly spread over the back half of the year? Do you sort of expect a more material drop at some point? Joseph Zubretsky: Let me take in the reverse order. So I can remember the about 305,000, think of it as going down to 250,000. Think of it as 40,000 terminations per quarter and 20,000 SAP adds. So 20,000 decline per quarter to 3 quarters. That's the easy one. On HICS product mix, we are still predominantly silver at 50%. But yes, we are in bronze where States allow a pricing regime that bronze can be profitable. And yes, there was a slight shift to gold during the year and I'll let Mark take that and put some color on that in a minute. And on your question about the Medicaid MCR. We use the word time tested for a very specific reason. There was nothing unusual about the first quarter. Yes, the flu season, what we call ILI is coming in slightly better than last year but within expectations. The weather had an effect here and there in various states, but for a few days here and there. No impact. The quarter was clean. Coming off of the unprecedented inflection of 2025, we want to see 2 quarters of information before we declare that the 5% trend is coming down and the 4% rates are going up, it's as simple as that. Mark, anything to add on HICS. Mark Keim: Yes, absolutely. On the point of the metallic mixes, the market is certainly up on bronze, a lot of what people call buy-downs as the subsidies declined. And certainly, we have a little bit more. We reported about 20% of our mix was bronze this year, which is up a little bit since last year. We're at silver, 50% and gold, almost 30%. What's interesting about gold is a lot of states have shifted their metallics such that gold becomes just as attractive as silver. As a result, we have a lot of gold and silver. Now why maybe do we have less buydowns than the market? Remember, our renewal rate is 70%. So we're keeping a lot of the same people. And very often, they're staying in the same metallic. Operator: [Operator Instructions] Next question comes from Scott Fidel with Goldman Sachs. . Scott Fidel: I was hoping you could maybe just on the Medicare MLR, just because you have the dynamic of exiting, MAPD plan for next year. Would you be able to parse out what the sort of continuing operations in Medicare, which I guess, would be more of the duals versus the MAPD MLR was in the quarter? And maybe any thoughts around maybe sort of giving us at those metrics, each of this quarter just as we try to think about sort of the run rate on Medicare MLR heading into next year? Joseph Zubretsky: You're right to point out that the Medicare story is a little more complicated than most Medicare story because it's a combination of our D-SNP product, which has been in force for many, many years. Our MMP members who are now converted to commercial-based HIDE and FIDE and then our MAPD product, which is going to be -- we're going to eliminate that product for 2027. We cited a drag on this year's earnings due to the MAPD product. I think we cited as producing $1 earnings per share drag that won't repeat next year. And it is tracking to plan. D-SNPs have always produced a modest profit, and they continue to the surprise, if there was one, a positive surprise was that we took a very cautious approach to converting 80,000 members and over $2 billion of revenue to HIDE and FIDE that are highly competitive new product, new rating regime. It performed a lot better out of the gate than we had anticipated. But it's 1 quarter, and we're going to be cautious in terms of updating guidance for the full year on that product. So in 2027 and beyond, we'll only be talking about duals. We'll be talking about D-SNP and we'll be talking about HIDE and FIDE, which will become a dual segment, and it will be a lot easier to follow. Those are the 3 pieces, and they will have different dynamics for different reasons. Mark, anything to add? Mark Keim: Yes. I'll just put some numbers around that. For our guidance for Medicare, we have about $6.6 billion in revenue, $6.6 billion, and a loss of $1.25. As Joe mentioned, the MAPD component of that is $1 loss on $1.2 billion of revenue. That goes away next year. So with next year just being the duals, the D-SNPs, the FIDEs, the HIDEs. The current run rate is about $5.5 billion, about a 94% MLR and we see that only getting better over time. In fact, our Stars profile for payment year 2027 has improved. So the outlook for 2027, but that should give you the jumping off point. Joseph Zubretsky: We'll give you a good 3-year outlook for our duals business in a couple of weeks at our Investor Day. We're pretty excited about it. As you know, the regulatory regime is favoring the integration of Medicaid and Medicare. And since we have a very deep and wide footprint in Medicaid and a Medicare business is quite robust. We're quite enthusiastic about the prospects for our duals business. . Operator: The next question comes from John Stansel with JPMorgan. John Stansel: Over the last few quarters, usually in the prepared remarks, you spent time talking about an actionable M&A pipeline. A little bit last commentary on that today. I just want to understand, we've seen some Medicaid plans announced that they're exiting either in '26 or '27. How are you seeing the pipeline? Has anything changed or anything that's kind of making that more or less actionable right now? Joseph Zubretsky: John, really, the only reason, very practical reason why we didn't talk about growth this quarter was because we have an Investor Day coming up in 2 weeks. What we'll talk about on this. And you're right to cite that as you plumb the depths of what goes on around the country in various states, there are plans that are reportedly in trouble, distressed. We know where they are. We know who they are. We've probably talked to them. And the pipeline, the M&A pipeline is quite replete with actionable opportunities -. We are going to remain disciplined, stick to our knitting on properties that fit into our core strategy. And I'll tell you, Mark and I have this debate with ourselves all the time. While we only paid 22%, 23% of revenue in the past, book value seems to be the best benchmark that one can look at now. And if you're putting -- if you're only paying for regulatory capital, an M&A opportunity is as good, if not better, than a new contract win. So we'll talk more about that in 2 weeks' time. The only reason we didn't talk about here is not because it's less important. We're not actionable. We'll be talking about it in great detail in 2 weeks' time. Operator: The next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: So you mentioned several of those moving pieces a lot throughout the call in terms of the various different books of business where you want better clarity -- you mentioned, for instance, June Wakely data, but what are the latest weekly data. How did that inform you? And then as we think about all those variables, can you kind of rank them on the level of clarity or how comfortable or vulnerable you are across those segments? And then just as we think about you give long-term growth aspirations or targets on May 8, how do we get comfortable with the baseline if -- could you give us any incremental clarity on the near term on May 8 at all? Joseph Zubretsky: Erin, we are encouraged by the start to the new year. The data points we laid out are real, as someone suggested before, is there anything in the first quarter of an unusual nature that is creating the caution that you're exhibiting. And the answer is no. We use the board time tested because in this environment, we think it is entirely reasonable, if not prudent, to have 2 full quarters of information, let the first quarter develop and become fully seasoned. [ Look ] in the second quarter, particularly on businesses where you have new membership, in order to update our forecast. So no, there is nothing in the first quarter result that is causing this caution. It is the test of time coming off this unprecedented inflection we experienced last year. Now when we get to Investor Day in 2 weeks' time, all you're going to have at the baseline is our current guidance for 2026 at $5, but we're going to give you a really good view of what this looks like in 2029. We'll show you the building blocks of growth. We'll show you how we expect margins to recover and to what extent. Obviously, we'll give you the numbers then. But you will see block by block, brick by brick, how we're building a story for 2029 in all 3 of our businesses. And the 2026 baseline of $42 billion of revenue and $5 is going to be the baseline. We're not updating it at Investor Day. Operator: The next question comes from Ryan Langston with TD Cowen. Ryan Langston: Sorry if I missed this, but can you elaborate a little bit more on the commentary of timing for operating expenses and G&A. Is that for incentive comp or something else? And then on the MAPD business, exit. You said in the past that you might have an opportunity to monetize that. Can you give us an update where you're at in that process? Joseph Zubretsky: Sure. I'll comment on the second question, Ryan, first and tag it to Mark on the timing of operating expenses. Yes, on the MAPD business, which is mostly in -- here in the Northeast and in California, we are still working with potential counterparties to transfer that business. We'd rather transfer to a strategic partner. We're still working with various counterparties to that end. . If we feel we won't be successful doing that, we will terminate the business and terminate the product for next year. So either way, we will be out of the -- the traditional MAPD product for 2027. We prefer the one transfer to a strategic partner. But if we're not able to do that, and we're still in the process of exploring that, we will wind it down. Mark, timing of expenses? Mark Keim: Yes. Ryan, full year guidance unchanged, as I said in my prepared remarks, 6.4%. We booked a 6.9% in the first quarter, which is entirely timing. There's some IT projects. And separately, as you know, we're gearing up for that very large contract in Florida, the Florida CMS Kids contract, which is $6 billion of run rate. You can imagine that's a big lift as we think about that. So it's just some lumpy expenses quarter-to-quarter. The emphasis here is that full year is unchanged at 6.4%. It's just the lumpiness of how we recognize expense. . Operator: Next question comes from Michael Ha with Baird. . Hua Ha: Just wanted to follow up on Steve's question about low and no utilizers. I understand you have a lot at you've seen. You don't expect additional acuity shifts Medicaid declines and that your low utilizes, I think you said 7.5% below peak. And I know, Joe, you mentioned you won't provide a definition on that, but is there any way you could provide a bit more color around perhaps what buckets of MLR you consider low utilized? Or is that 0 to 20%, 20% to 40% MLR higher, for example, would a 70% MLR number be considered that because the 70% MLR number dropping off is still like a 20% delta basically where your book is running at today. So curious if you had more color there, what percent of your members fit in those buckets, how those cohorts change over the past couple of years? Also, how do they compare versus your expansion book? Joseph Zubretsky: I'm not sure we actually -- I'll respect your question and try to answer as best as I can without. I think we're going to stop short of giving detailed numbers. So let me frame it this way. First of all, over what time period, if somebody doesn't use a service in a 90-day period is that no utilizer. Many people don't get a service for 3 months at a time. So the way I'll frame it is we didn't lock in on the definition, we tested all definitions. We tested time periods. We tested 0 utilizers very clear, no claims. What's a low utilizer? Is it a PMPM number? Is it a medical loss ratio number. . We tested definitions and centered in on one. And to be honest, the fact that low and no utilizers are down substantially, even below pre-pandemic levels. It almost matters not -- it doesn't matter what definition you use, it's down. So we're not giving absolute numbers, and we're not giving the model that we're using. But I absolutely assure you that making up a definition to make yourself feel good about is not what we do here. We tested the definition across a wide range of time frames and PMPM medical costs for that time frame to test whether it matters or not. And I will tell you it doesn't matter all that much. It is markedly down and therefore, we're not anticipating an acuity shift. Mark, you the architect of all this, do you have anything to add? Mark Keim: Yes. What's important is this is a directional statistic. As Joe mentioned, we've taken a lot of different approaches. And directionally, the number of low users and no users by all approaches is much lower. The specific numbers, in this case, are less relevant. The other statistic that I use, which just gives us great comfort in what we're seeing is the stayers, levers analysis. A year or two ago, levers would have left at much lower PMPM or MLRs, whereas now they're leaving at those ratios being much closer to the average, which again, is one more data point supporting our view on this. . Operator: The next question comes from Lance Wilkes with Bernstein. . Lance Wilkes: Can you talk a little bit about the state behaviors you're observing as we're going through this. And what I'm interested in, obviously, you commented a little bit on off-cycle rate increases. And maybe if you can talk about maybe what are the characteristics that help to drive that. But interested in kind of comments on pipeline, how states are approaching implementation, new processes, what types of products, if any, they're looking at kind of given the backdrop? And then just as a cleanup, if you could make any comments on the trend favorability in the first quarter. If there is any aspects of trend beyond acuity shift you're seeing some positive favorability in 1Q, that would be helpful. Joseph Zubretsky: Sure, Lance. On State behaviors, it's hard to -- you can draw some themes across the various states, but they're all different. But generally speaking, we're seeing states step up to the reality that a cost inflection has occurred and they are catching up to it. What do they need to catch up to? If you look at the trends we've experienced over the past 3 years, 4.5, 6.5 and 7.5 the cost baseline is 20% higher than it was 3 years ago. That's what they need to catch up to. Now we believe we're operating 300 basis points -- 300 to 400 basis points better than the average market. So as they catch up, we should be going back into a much more positive territory than we already are. Bearing in mind, our guidance in Medicaid is for a 1.5% pretax margin this year, eliminating the impact of Florida Kids. So we're in good shape there. So states are stepping up on rates. They are also, obviously, due to the indirect impacts of OB3, they're looking at eligibility. They're looking at carbons and carve-outs. They're wrestling with provider and MCO taxes. They're dealing with all the effects of that. They're looking at helping MCOs reintroduce UM on behavioral, for instance, during the pandemic, a lot of that was relaxed because people weren't using services. So you can go state by state, but those are the general themes focusing on eligibility a lot, focusing on program features, supplemental benefits that maybe don't need to be funded and trying to deal with the residual impacts of OB3, that's what we're seeing. On first quarter trend, I think your question was, is there any more color to put around it? From a medical cost perspective, we're seeing good controls over inpatient in Medicaid. The inpatient trend is flattening in Medicaid. That's pretty obvious. Pharmacy is actually behaving favorably. High-cost drugs are still a pressure point. But number of script volume per 1,000 and unit cost is actually leveling as well. And BH, which has been a trend inflection over the past 2 or 3 years, is more favorable this year, at least in the early stages than it was in the past due to state controls, client controls and company controls. So those are a few but it's certainly good news and encouraging news in the first quarter that the first quarter trend in Medicaid annualized would have us slightly better than the 5% trend assumption for the year. Mark, did I miss anything? Mark Keim: No, Joe, I think that's well summarized. The only thing I'd add on [indiscernible] is comments that Joe made, obviously, very appropriate. There's always questions about ILI or flu, whatever you want to call it, pretty much a normal season for us, and we're now coming out of that. So I think that's behind us. Thanks, Lance. . Operator: The next question comes from George Hill with Deutsche Bank. . George Hill: Two quick ones. Mark, I think you talked about -- I want to follow up on Michael's question. You talked about the decline in 0 or low utilizers down to the lowest level. It seems like it moves a lot sequentially from Q4 to Q1. I would love to have you talk a little bit about what drove that? And Joe, as we talked to state administrators on the Medicaid side, we're hearing a lot of worry about the community engagement requirements as we go into 2027. I would love to hear any early thoughts that you guys have had. We know work requirements are an issue, but a lot of states are worried about how to administer the community engagement requirements. Would love to hear what you think about that. Joseph Zubretsky: I'll take the second one first, and then we'll go back to low and no mark. Acuity engagement. Every state is different. We're actually fortunate in a way where we have a business in Nebraska, which is a state that has declared it's going early on work requirements. So we have some insights. And I'll tell you, they're going to move and they're going to move for the middle of this year. But it is very clear that the rules around what information you need to terminate Comex Part procedurally, how does it work? What's the definition of medical frailty that's going to be used. So we are working with each of our states in different ways. Various states allow different levels of intervention with MCOs in terms of whether you can help people find work, whether you control it performs, every state is different. But our community engagement teams nationally, property-by-property are extremely engaged with each of our state clients on working through these requirements. But I will tell you that it is still a bit unclear given the very general guidance CMS has given, what information is going to be required to terminate someone or allow them on ex parte and what the -- what are the exceptions, particularly with medical frailty. Mark, do you want to take the lower now user question? Mark Keim: Absolutely. So George, the market is down. Medicaid membership market is down about 20% since its peak in 2023 when redetermination began. As those 20% of the people came out, a lot of them were 0 and low utilizers. That is what drove the acuity shift, right? As they come out, the remaining population is on a weighted average, slightly higher cost per member. So what we saw in '24 and '25 was a component of our trend attributed to that mix shift, which we call acuity shift across '24 into '25. Across '25 we saw the percentage of low utilizers and utilizers fall to the lowest level with a little higher at the beginning of '25 and by the end of '25, it was at its very low level. which gave us confidence that, that acuity shift is largely behind us. So again, the component of low and no utilizers falling '24 and '25, that's what contributes to the acuity shift. And our data shows us that's largely behind us, if not totally behind us. Operator: Our last question comes from Jason Cassorla with Guggenheim. . Jason Cassorla: Most of my questions have been asked. Maybe just a quick 1 on earnings seasonality. You talked about the majority of earnings in the first half -- you've got an updated Medicaid enrollment expectation, higher exchange enrollment at the start of the year. I know this prudence in your outlook, given the unknowns and some timing nuances with the G&A and the ramp-up of the Florida CMS, maybe just you could step back, is there anything more or anything else on the seasonality side are you willing to give for us as we sit here today ahead of your Investor Day would be helpful. . Joseph Zubretsky: Mark, do you want to take what we expect for seasonality this year. Mark Keim: Absolutely. .What we had said previously was about 2/3 in the first half, 1/3 in the second half. I'm not going to update that now because if I did, I'd effectively be giving you second quarter earnings. But proportionately, we're in the same place. We had a nice first quarter, but I think proportionately, we would be in the same front half, second half. What drives that while the Medicaid rate cycle, remember, we get -- we're a little bit front-end loaded on the Medicaid rate cycle. Remember, seasonality on marketplace means always the first half of the year is a little better than second half. That's baked into our full year guidance. And then lastly, fourth quarter, Florida Kids, as Joe mentioned earlier on this Q&A session, Florida Kids will come in pretty high MOR in its first quarter, which is typical for new business. That will be some weight on the fourth quarter, no doubt. But those are the major components and proportionately higher in the first half, lower in the second half, as we said. Operator: This concludes our question-and-answer session and Molina Healthcare's First Quarter 2026 Earnings Call. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, good day. Thank you for standing by. Welcome to TAL Education Group's fourth quarter and fiscal year 2026 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please be informed today's conference is being recorded. I would like to hand the conference over to Ms. Fang Liu, Investor Relations Director. Thank you. Please go ahead. Fang Liu: Thank you all for joining us today for TAL Education Group's fourth quarter and fiscal year 2026 earnings conference call. The earnings release was distributed earlier today and you may find a copy on the company's IR website or through the newswires. During this call, we will hear from Mr. Alex Peng, President and Chief Financial Officer, and Mr. Jackson Ding, Deputy Chief Financial Officer. Following the prepared remarks, Mr. Peng and Mr. Ding will be available to answer your questions. Before we continue, please note that today's discussions will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release and this call include the discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would like to turn the call over to Mr. Alex Peng. Alex, please go ahead. Alex Peng: Thank you, Fang, and thanks to all of you for joining today's conference call. As we reflect on fiscal year 2026, it is worth stepping back to consider the progress we have made over the past several years. That progress has been built on more than two decades of experience in education along with continued investment in our capabilities and innovation. Together, these efforts have enabled us to continuously refine our offerings and better serve the evolving needs of students and society. So with that context in mind, let me now turn to our learning services business. Learning services remains our largest revenue contributor. We are committed to delivering quality learning service experiences to our user base. We are also building our content solutions business, including learning devices. These products significantly expand the accessibility and customer reach of our proprietary and third-party content. They work alongside our learning services to create a more integrated learning experience, driving longer, deeper, and stronger user engagement. Beyond our domestic operations, we also expanded into select international markets, leveraging our R&D capabilities and operational know-how to serve educational needs globally. While our businesses are at different stages of maturity, we are beginning to see meaningful improvement in company-level profitability. This underscores our ability to optimize core operations and build a more efficient operating model, further strengthening our foundation for sustainable growth and long-term value creation. So with that overview, let me walk you through our business progress for the fourth fiscal quarter and full year 2026. Our offline Peiyou enrichment programs demonstrated continued year-over-year growth in both the fourth quarter and the full fiscal year. Throughout the past year, we maintained a disciplined and consistent approach to expanding our offline learning center network, with a strong focus on service quality, operational health, and sustainable growth. Our expansion decisions are guided by a holistic assessment of factors including local market demand, receptivity to our offerings, our operational capabilities, and our commitment to maintaining high service quality. This approach supported solid growth and healthy operating performance throughout fiscal year 2026. In our online enrichment learning business, we continue to enhance user experience and service quality through technology. During the fourth quarter and throughout fiscal year 2026, we upgraded key products with richer content and technology-enabled features, creating a more engaging learning experience. Together, these efforts strengthen the value proposition of our online enrichment offerings and supported sustained user growth and engagement over time. Our learning device business achieved year-over-year revenue growth this quarter. In the last couple of quarters, this business has transitioned from its rapid expansion phase toward more moderate growth. We believe product quality and go-to-market capabilities will be critical to this business' long-term success. In March 2026, we introduced the X5 Ultra Classic, a device incorporating enriched content and upgraded AI capabilities. With the X5 Ultra now integrated into our learning devices portfolio, we are positioned to address a broader spectrum of at-home, self-directed learning needs. As we expand our installed base, our key user engagement metrics remain strong, with around 80% weekly active users and an average daily active usage time of about one hour per device. This allows us to serve customers beyond our physical presence and enhance at-home engagement. Next, let me turn to our financial performance for the quarter. In the fourth quarter, our net revenues were $802.4 million, or RMB 5.59 billion, representing a year-over-year increase of 31.5% and 25.8% in U.S. dollar and RMB terms, respectively. Our non-GAAP income from operations was $82.2 million and non-GAAP net income attributable to TAL reached $254.5 million for the quarter. I will now hand the call over to Jackson, who will provide an update on the operational developments across our four business lines and a review of our financial results for the fiscal fourth quarter. Jackson, over to you. Jackson Ding: Thank you, Alex. I am pleased to update you on our progress during the fourth fiscal quarter and full year across all core business lines. For Peiyou small class enrichment programs, we continued our operational momentum during this quarter. As we grow, we continue to uphold our service quality and operational efficiency. In terms of physical footprint, we expanded our learning center network at a measured pace. Our operational discipline is reflected in our key performance indicators, with Peiyou small class maintaining a generally stable retention rate of around 80% across fiscal year 2026, with certain quarters exceeding that level. Turning to our online enrichment learning business, we focus on student engagement to drive meaningful learning outcomes. To that end, we have driven engagement through interactive formats such as immersive online classrooms and role-playing activities. By offering both offline and online enrichment programs, we aim to address the evolving needs of students and support their holistic development. Next, our learning devices business delivered year-over-year growth in the fourth quarter as well as the full fiscal year. This reflects our progress in product development and go-to-market execution. Over the past year, we have also broadened our content library and incorporated AI-driven features to support a more engaging and effective self-directed learning experience. As Alex mentioned, last month we launched the X5 Ultra. This device expands our pricing points while offering more content, a unified learning interface, and improved AI tools, among them the upgraded AI ThinkE 101 tooling feature. To complement these upgrades, we have also improved the hardware. The X5 Ultra includes a faster processor and a 13.2-inch eye-comfort display, ensuring solid performance across different learning activities. While technology itself is important, we believe the true value lies in how it integrates curriculum-aligned content, scenario-based AI, and seamless hardware into a cohesive learning system—one that is intended to be more intuitive and practical for students. By organizing fragmented learning materials and tools into a clear, structured progression, it helps students monitor their progress and identify next steps. With these efforts, we aim to gradually evolve our learning device into a personalized learning companion designed to foster independent learning over time. I would now like to walk you through our financial results for the fourth fiscal quarter. Our net revenues were $802.4 million, or RMB 5.59 billion, an increase of 31.5% and 25.8% year over year, respectively. Cost of revenues increased by 28.2% to $375.2 million from $292.6 million for the same period last year. Non-GAAP cost of revenues, which excludes share-based compensation expenses, increased by 28.5% to $374.8 million from $291.7 million for the same period last year. Gross profit increased by 34.5% to $427.2 million from $317.6 million in 2025. The gross margin for the fourth quarter of fiscal year 2026 was 53.2% compared to 52.0% in the same period of the prior year. Turning to operating expenses, selling and marketing expenses for the quarter were $220.9 million, representing an increase of 1.4% from $218.0 million for the same period last year. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 2.0% to $218.5 million from $214.3 million for the same period last year. Non-GAAP selling and marketing expenses as a percentage of total net revenues decreased from 35.1% to 27.2% year over year. General and administrative expenses increased by 15.7% to $133.8 million, from $115.6 million in 2025. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, increased by 19.7% to [inaudible] from $106.0 million in 2025. Non-GAAP general and administrative expenses as a percentage of total net revenues decreased from 17.4% to 15.8% year over year. Total share-based compensation expenses allocated to related operating costs and expenses decreased by 31.9% to [inaudible] in 2026 from $14.3 million in the same period of fiscal 2025. Income from operations was $72.5 million in 2026, compared to [inaudible] in 2025. Non-GAAP income from operations, which excluded share-based compensation expenses, was [inaudible] compared to non-GAAP loss from operations of $1.7 million in the same period of the prior year. Other income was [inaudible] for 2026, compared to other income of $13.0 million in 2025. The change in other income for the fourth quarter was mainly driven by fluctuations in the fair value of certain investments. Net income attributable to TAL was $244.8 million in 2026, compared to net loss attributable to TAL of $7.3 million in 2025. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, was $254.5 million compared to non-GAAP net income attributable to TAL of $7.0 million in 2025. Moving on to our balance sheet, as of 02/28/2026, the company had $523.0 million of cash and cash equivalents, $1.0 billion of short-term investments, and $260.0 million in current and non-current restricted cash. Our deferred revenue balance was $882.2 million as of the end of the fourth fiscal quarter. Now turning to our cash flows, net cash used in operating activities for the fourth quarter in fiscal year 2026 was $215.0 million. Finally, I would like to briefly address our share repurchase program. On 07/28/2025, the company's Board of Directors authorized a share repurchase program under which the company may purchase up to $600 million of the company's common shares over the next twelve months. Between 01/29/2026 and 04/22/2026, the company has repurchased 101 thousand 371 common shares for an aggregate consideration of approximately $3.3 million. That concludes the financial section. I will now hand the call back to Alex to briefly update you on our business outlook. Alex, please go ahead. Alex Peng: Thanks, Jackson. Before turning to fiscal 2027, I want to take a moment to speak to the responsibility and mission we carry in serving students and families, particularly in the K–12 sector. At TAL Education Group, this is not a peripheral consideration. It is at the heart of how we think about our products, our services, and the standards to which we hold ourselves. It shapes not only what we build, but also how we grow. As we move into fiscal 2027, our strategy is centered on three priorities. First, we aim to drive quality growth across our businesses. We expect learning services to remain our largest revenue contributor, and we will continue emphasizing quality across both digital and in-person offerings so that we can serve more users effectively while preserving a strong user experience. In content solutions, we will focus on expanding through stronger product capabilities, richer content offerings, and more effective go-to-market execution. Second, AI remains key to our long-term strategy, and we are approaching it with a clear sense of focus and discipline. Our approach is application-first. Rather than pursuing foundation models ourselves, we are focused on deploying AI in ways that meaningfully enhance the user experience, improve operational efficiency, and strengthen our products and services. In learning, that means helping students find the right content more effectively, stay engaged more deeply, and learn more efficiently. Across the company, it also means applying AI to improve how we operate—from customer service and content production to software development—enabling us to grow with greater leverage over time. Finally, we remain focused on disciplined execution as we scale. By continuing to strengthen execution across content, product, operations, and go-to-market, we can further improve efficiency and enhance profitability over time. So that concludes my prepared remarks. Operator, we are ready to open the call for questions. Operator: We will now open the call for questions. If at any time your question has been addressed and you would like to withdraw your question, please follow the prompts from your phone system. Alex Peng: Before we take the first question, we would like to make one correction. We just mentioned we have repurchased at an aggregate consideration of approximately $3.3 million. This occurred between 01/29/2026 and 04/22/2026. That is the correction we would like to make. Now, please open the line to analysts. Thank you. Operator: The first question comes from the line of Jenny Wong with UBS. Please go ahead. Analyst: Thank you for taking my question, and first of all, congrats on another solid quarter. My question is related to other income. We noticed a significant increase in other income in the fourth quarter. Could you please provide more color on what drove this? Thank you. Jackson Ding: Jenny, thank you for the question. This is Jackson. Let me take this one. From time to time, we make financial strategic investments to either generate capital returns for shareholders or to accelerate business growth. These investment targets vary from classic wealth management products to minority equity investments to, sometimes, outright full-on mergers and acquisitions, all of which we have seen over the last few years. Specifically, what happened in this quarter is that a couple of our investments in our portfolio experienced an increase in valuation, and this resulted in an investment gain on our financial statements, which is booked under other income. I would also like to mention that this is a one-time event. Therefore, we do not recommend using this quarter's other income as a baseline for future performance projections. Jenny, I hope that answers your question. Analyst: Thank you, Jackson. Sounds good. Thank you. Operator: The next question comes from the line of Timothy Zhao with Goldman Sachs. Please go ahead. Analyst: Great. Good evening. Thank you for taking my question, and congratulations on the solid quarter. My question is related to the offline Peiyou small class business. Could management share some color on the most recent developments of this business in the fourth quarter of last year? What did the growth rate look like on the revenue side? And looking forward into fiscal year 2027, what is your strategic approach to expanding the learning center network, and what kind of capacity growth can we expect? Thank you. Alex Peng: Thanks, Timothy. This is Alex. I will first talk about our fourth-quarter performance and then share our approach to expanding the learning center network in the new fiscal year. In the fourth quarter, the Peiyou small class enrichment business, as we mentioned earlier on the call, delivered steady growth. Revenue increased year over year, primarily driven by higher enrollment, which reflects both our learning center network expansion and continued efforts to enhance the learning experience for our students. We talked earlier about key operational metrics; they remain healthy in the fourth quarter. For example, retention was over 80%, which underscores the trust our students and families place in our programs and the consistent high quality we maintain in our service delivery. From our day-to-day offline operations, we continue to see steady demand for enrichment learning, driven by the evolving parental and educational priorities of a new generation of parents. To align with these changing needs, we are increasing capacity and refining our offerings, both of which we believe will support the business's long-term growth trajectory. Regarding network expansion, in the fourth quarter we stuck to the disciplined approach that we have followed throughout the year and the past several years. For the full year, we entered five new cities, which brings our total coverage to over 40 cities across China. Looking ahead to the new fiscal year, we will continue to prioritize the business’s long-term health and sustainability. Our expansion strategy will remain disciplined, focusing primarily on consolidating our presence in existing cities rather than pursuing aggressive geographical coverage expansion. Operating from a higher baseline, we need to prioritize sustainable development over expansion in 2026. We expect revenue growth for this business to gradually taper in fiscal 2027 relative to its rate of growth in fiscal 2026. Timothy, I hope that answered your question. Operator: The next question comes from the line of Eddie Huang with Morgan Stanley. Please go ahead. Analyst: Hi, Alex and Jackson. Thank you for taking my questions and congratulations on a very strong quarter. My question is regarding the learning devices. Could you give some color on the performance of the learning device business in this quarter, and how did you mitigate the memory cost upcycle? Also, how do you view the current competitive landscape in the learning device sector, and what is your strategy to navigate and strengthen your position? Thank you. Alex Peng: Thanks, Eddie. This is Alex. Let me first share some color on our learning device performance in the fourth quarter and then our views on the competitive landscape. Our learning device business achieved year-over-year revenue growth in the fourth quarter. This reflects the consistent execution of our strategy, which has always prioritized improving product capabilities and refining our go-to-market approach. Sales volume also increased compared to the same period last year, supported by an expanded and more diversified product portfolio that meets a broader range of customer segments and needs. We also saw that the blended average selling price was [inaudible], which is consistent with our current product mix. Regarding memory cost pressures, this is an industry-wide challenge that many consumer electronics companies are facing. The sector has extensive experience managing these kinds of cycles through operational adjustments, and we are applying those lessons alongside strategies tailored to our business model. Our key initiatives include optimizing inventory turnover and stock management for greater efficiency, as well as refining our product portfolio by streamlining SKUs and adjusting our product mix where appropriate. These steps are helping us mitigate the impact of the rising cost cycle while maintaining our focus on long-term competitiveness. On competition, the learning devices sector remains highly dynamic, with competitors advancing in hardware, content offerings, and AI-driven features. In this environment, our strategy is to focus on continued innovation across our own product and user experience while staying responsive to shifting market conditions. Over the past year, we have expanded our lineup to serve different user segments. We talked about the recent launch of the X5 Ultra. We continue to enrich our content offering to enhance the learning experience. We have also maintained a solid cadence of software updates; we delivered approximately 19 major operating system upgrades and introduced nearly 300 new features over the last fiscal year. Together, these efforts help us reinforce our integrated approach, combining hardware, software, and distribution to create a cohesive at-home learning solution. We believe building innovation and product capability is the key to navigating the competitive landscape. Our progress to date in market share aligns with our expectations and the approach we have adopted. Beyond devices, we also see solutions as a strategic initiative that extends learning beyond the classroom and deepens and lengthens engagement for our users at home. We believe this can build together as an integrated learning experience for our students across learning services and content solutions. Our long-term goal is to make quality learning resources more accessible while supporting students’ holistic development along their learning journey. I hope that answers your question. Operator: The next question comes from the line of Jean Wang with CICC. Please go ahead. Analyst: Good evening, Alex and Jackson. Thanks for taking my question and congratulations on the strong quarter. My question is about the bottom-line profitability. Could you walk us through the primary drivers behind this quarter's bottom-line growth, and what were the key factors contributing to the improved profitability? Thanks. Jackson Ding: Thank you for the question. This is Jackson. Profitability is a priority for us, and we continue to take measures to drive profitability improvement. We see profitability as a manifestation of the value we create for customers and society as a whole, combined with our operating efficiency. Therefore, our measures focus both on value creation and on operating efficiency. Breaking down the drivers, there are several contributing factors to profitability momentum this past quarter. First, as Peiyou small class continued to grow, its margin profile remained steady and it generated more absolute profit dollars. Other business lines, including online enrichment learning programs and learning devices, showed varying degrees of profitability improvement as well. In addition to business-unit-level profitability improvement, the overall company also benefited from operating leverage, which has been a contributing factor to overall profitability improvement. On the overall trend, if we look at non-GAAP operating income margin for the last few quarters, in every single quarter this past fiscal year our non-GAAP operating margin improved compared to the same period last year. We see this as a result of the profitability improvement measures discussed above. I hope that answers your question. Operator: The next question comes from the line of Candace Chan with Daiwa. Please go ahead. Analyst: Hi, Jackson and Alex and Fang, thanks for taking my question and congrats on a very strong set of results. Can you provide us a breakdown of the top-line growth performance across the major business lines this quarter? Additionally, what is the outlook for growth for these business lines in the coming fiscal year? And one more question, if I may: we observed a very solid margin expansion for three consecutive quarters at about 10%. What is the potential for further margin improvement going forward? Thank you. Alex Peng: Thanks, Candace. This is Alex. Let me unpack that. First, on the breakdown of top-line growth across our major business lines this quarter. Starting with the Peiyou offline enrichment business, which remains our largest revenue driver, it continued its solid growth this quarter. This was supported by ongoing expansion of our learning center network and consistent improvements to service quality. Moving into fiscal year 2027, the expansion strategy remains disciplined. We are going to focus on increasing center density within existing cities to ensure we maintain high operational standards. We anticipate this business will continue to grow at a healthy rate. As operations grow larger and the baseline becomes larger, we have seen the year-over-year revenue growth rate moderate naturally, which is a trend we expect to continue into the next fiscal year. Second, in the online enrichment learning business, we remain committed to delivering high-quality, interactive learning experiences. We continue to enhance the user experience by introducing more interactive features and leveraging AI in both content production and our internal workflows. This product- and user-centric approach supports user engagement over time. In terms of channel strategies for the online enrichment learning business, we balance between growth objectives and return on investment to build long-term operational capabilities. Next, the learning device business delivered year-over-year revenue growth this quarter, driven by increased sales volume and a higher contribution from deferred revenue recognition. The market is evolving toward a more sustainable growth path, and we are focused on strengthening our long-term competitiveness through investment in product innovation and channel development. Our product strategy focuses on creating integrated learning solutions that combine hardware, proprietary software, content, and AI-enhanced experiences. In channel development, the plan is to further diversify distribution by balancing investment across both online and offline channels to effectively reach and serve our users. Putting it all together, when we look at the company holistically, as our operations scale within an increasingly larger baseline, we anticipate that our year-over-year growth rate will gradually moderate. With growing maturity, we also expect operational efficiency to improve, and we will remain focused on driving profitability. We may see some quarterly fluctuations, but improving overall profitability remains a top priority for fiscal year 2027. Looking ahead, we will continue advancing our strategic initiatives and strengthening core capabilities to support sustainable margin improvement over time. Candace, I hope that answered your question. Operator: This concludes our question and answer session. I would like to turn the call back over to management for any closing remarks. Alex Peng: Thanks again for joining us today. We look forward to speaking with all of you next quarter. Thank you. Bye-bye. 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 Independent Bank Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Kessel, President and CEO. Sir, please go ahead. William Kessel: Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's results for the first quarter of 2026. I am Brad Kessel, President and Chief Executive Officer, and joining me this morning is Gavin Mohr, Executive Vice President and our Chief Financial Officer; as well as Joel Rahn, Executive Vice President and Head of Commercial Banking for Independent. Before we begin today's call, I would like to direct you to important information on Page 2 of our presentation, specifically the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at our website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. Independent Bank Corporation reported first quarter 2026 net income of $16.9 million or $0.81 per diluted share versus net income of $15.6 million or $0.74 per diluted share in the prior year period. Highlights for our first quarter include a net interest margin of 3.65%, which is a 3 basis point increase on a linked-quarter basis; an increase in net interest income of $500,000 or 1.1% over the fourth quarter of 2025; an increase in tangible common equity per share of common stock at $0.33 or 5.9% annualized from December 31, 2025; a return on average assets and return on average equity of 1.24% and 13.43%, respectively; net growth in total deposits was brokered time deposits of $80.4 million or 6.9% annualized from December 31, 2025; net growth in loans of $31.8 million or 3% annualized from December 31, 2025; an increase in tangible common equity ratio to 8.7%; and finally, the payment of a $0.28 per share quarterly dividend on our common stock on February 13, 2026. Our first quarter results reflect the strength of our core fundamentals, including growth in net interest income, expansion in net interest margin, continued growth in both loans and core deposits. Our balance sheet growth remained disciplined with $80.4 million in core deposit growth and just under $32 million in total loan growth, including $53.8 million or 9.9% annualized in commercial loans, reflecting continued execution of our strategic plan. Credit quality remains sound, while geopolitical uncertainty has increased, we have not seen a direct impact on our customers yet, and we continue to monitor conditions closely. Profitability remains strong, again, with a return on average assets of 1.24% and return on average equity of 13.43%. We remain encouraged by our momentum and are optimistic about our opportunities and confident in the benefits of our recently announced merger with HCB Financial Corp., which will provide enhanced shareholder value. Moving to Page 5 of our presentation. Deposits totaled $4.9 billion at March 31, 2026, an increase of $80.4 million from year-end. This growth occurred in noninterest-bearing, savings and interest-bearing checking and reciprocal, offset by a small decline in time deposits. On a linked-quarter basis, business deposits increased by $94 million, retail deposits increased by $28 million. These were offset by a $42 million decrease in municipal deposits, primarily due to seasonality. The deposit base is comprised of 47% retail; 38% commercial; and 15% municipal. On Page 6, we've included in our presentation a historical view of cost of funds as compared to the Fed fund spot rate and Fed effective rate. For the first quarter, our total cost of funds decreased by 13 basis points to 1.54%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having in growing our loan portfolios as well as a brief update on our credit metrics. Joel Rahn: Yes. Well, thank you, Brad, and good morning, everyone. On Page 7, we share an update on loan activity for the quarter. We started the year with loan growth of $32 million or 3% on an annualized basis. Commercial loan generation was solid with approximately $54 million of quarterly growth or 9.9% annualized. During the quarter, our residential mortgage and consumer installment loan portfolios declined by $4.5 million and $17.5 million, respectively. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the first quarter, we added 2 experienced commercial bankers in West Michigan, bringing our total to 50 bankers comprising 8 commercial loan teams across our statewide footprint. Compared to a year ago, we have added a net of 5 experienced commercial bankers to our team. Looking ahead, based on a strong pipeline, we believe we will continue low double-digit growth of our commercial loan portfolio in 2026. We continue to see market share opportunities from regional banks in both talent and customer acquisition and are seeing steady organic growth from existing customers. Looking at the commercial loan production activity for the quarter, the mix of C&I lending versus investment real estate was 57% and 43%, respectively. And for our commercial portfolio, our mix is 68% C&I and 32% investment real estate. Page 8 provides detail on our commercial loan portfolio concentrations. There's not been any shift -- significant shift in our portfolio over the past year with the portfolio remaining very well diversified. Our largest segment of the C&I category is manufacturing at $191 million or 8.4% of the total portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $212 million or 8.8%. We outlined key credit quality metrics and trends on Page 9. We continue to demonstrate strong credit quality. Total nonperforming loans were $27.5 million or 64 basis points of total loans at quarter end, up slightly from 54 basis points at 12/31. It's worth noting that $20 million of this total is one commercial development exposure that we discussed in previous quarters. We continue to work through the challenges of this particular project and are appropriately reserved for any loss exposure. Past due loans totaled $8.2 million or 19 basis points, basically unchanged from 12/31/25. It's worth noting that $4 million of total delinquency was 1 commercial loan that was in process of renewal and was completed after quarter end. It's not reflected on this slide, but also worth noting that we realized net charge-offs of $266,000 or 2 basis points of average loans for the quarter. This compares to $68,000 or 1 basis point in Q1 of 2025. At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of 2026. Gavin Mohr: Thanks, Joel, and good morning, everyone. I'm starting at Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Turning to Page 11. Net interest income increased $3.2 million from the year ago period. Our tax equivalent net interest margin was 3.65% during the first quarter of 2026 compared to 3.49% in the first quarter of 2025 and up 3 basis points from the fourth quarter of 2025. Average interest-earning assets were $5.21 billion in the first quarter of 2026 compared to $5.09 billion in the year ago quarter and $5.16 billion in the fourth quarter of 2025. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income in the net interest margin. On a linked quarter basis, our first quarter 2026 net interest margin was positively impacted by 2 factors: The change in interest-bearing liability mix added 1 basis point and a decrease in funding costs added 10 basis points. These were offset by a change in earning asset mix and yield of 6 basis points and interest charged off on a commercial loan of 2 basis points. On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for first quarter 2026 and fourth quarter 2025 calculates the change in net interest income over the next 12 months under 5 rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date. The shock scenarios consider immediate, permanent and parallel rate changes. The base case modeled NII is slightly higher during the quarter due to $70 million of earning asset growth and 1 basis point of modeled margin expansion. Earning asset expansion was centered in commercial loans of $54 million and overnight liquidity up $40 million. Runoff and lower-yielding investments in consumer loans helped fund earning asset growth. Asset and liability yields were stable during the quarter with asset yields up 2 basis points and liability costs 1 basis point higher. The NII sensitivity to lower rates declined modestly, while the benefit to higher rates remained largely unchanged. Reduced exposure to lower rates is due to $75 million of notional for purchases and the termination of $87 million of short-term pay fixed swaps and a slight shortening in the maturity structure of time deposits. The overall position is closely matched for smaller rate changes of plus or minus 100 basis points. The bank has modest exposure to large rate declines and benefits from larger rate increases. Currently, 38.2% of assets repriced in 1 month and 49.3% reprice in the next 12 months. Moving on to Page 14. Noninterest income totaled $12 million in the first quarter of 2026 compared to $10.4 million in the year ago quarter and $12 million in the fourth quarter of 2025. First quarter 2026 net gains on mortgage loans totaled $1.3 million compared to $2.3 million in the first quarter of 2025. The decrease is due to lower profit margins. It was partially offset by a higher volume of loan sales. Mortgage loan servicing net was a gain of $1.6 million in the first quarter of 2026 compared to a loss of $0.6 million in the prior year quarter. The change due to price was a gain of $0.9 million or $0.04 per diluted share after tax in the first quarter of 2026 compared to a loss of $1.5 million or $0.06 per diluted share after tax in the prior year quarter. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $930 million of mortgage servicing rights on January 31, 2025. As detailed on Page 15, our noninterest expense totaled $38.3 million in the first quarter of 2026 as compared to $34.3 million in the year ago quarter and $36.1 million in the fourth quarter of 2025. Compensation expense increased $1.4 million, primarily due to salary increases that were predominantly effective on January 1, 2026. Litigation expense was $1.5 million in the quarter attributed to an accrual established for losses we consider probable as a result of all of our outstanding litigation matters in aggregate. Advertising expense increased $0.3 million in the first quarter of 2026 compared to prior year quarter, primarily due to a retroactive new deposit account opening incentives attributed to accounts opened in prior periods. We recorded merger expense -- merger-related expenses of $0.3 million in the first quarter of 2026. Nonrecurring noninterest expense items totaled approximately $1.9 million in the first quarter of 2026. Turning to Page 16 is our update for our 2026 outlook to see how our actual performance during the first quarter compared to the original outlook that we provided in January of this year. Our outlook estimated full year loan growth of 4.5% to 5.5%. Loans increased $31.8 million in the first quarter of 2026 or 3% annualized, which is below our forecasted range. Commercial loans increased $53.8 million in the first quarter, while mortgage and installment loans decreased. First quarter 2026 net interest income increased 7.3% over 2025, which is within our forecasted range of 7% to 8%. The net interest margin was 3.65% for the quarter and 3.49% for the prior year quarter and up 3 basis points from a linked-quarter basis. The first quarter 2026 provision for credit losses was an expense of $0.4 million, which was below our forecasted range. Moving on to Page 17. Noninterest income totaled $12 million in the first quarter of 2026, which was within our forecasted range of $11.3 million to $12.3 million in the first quarter. First quarter '26 mortgage loan originations, sales and gains totaled $130.6 million, $84.1 million and $1.3 million, respectively. Mortgage loan servicing net generated a gain of $1.6 million in the first quarter of '26, which is above our forecasted range. Noninterest expense was $38.3 million in the first quarter, above our forecasted range of $36 million to $37 million. Nonrecurring expense items included $1.5 million accrual and litigation expense and $0.4 million in retroactive new to deposit account opening incentives attributed to accounts opened in prior periods. Our effective income tax rate was 16.6% for the first quarter of 2026. Lastly, there were no shares of common stock repurchased in the first quarter of 2026. That concludes my prepared remarks. I would now like to turn the call back over to Brad. William Kessel: Thanks, Gavin. We've built a strong community bank franchise, which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent results for our shareholders. As we move through 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology while striving to be Michigan's most people-focused bank. At this point, we'd now like to open up the call for questions. Operator: [Operator Instructions] Our first question is going to come from the line of Brendan Nosal with Hovde Group. Brendan Nosal: Maybe just starting off here on the net interest margin. I think when you offered your initial margin outlook for '26 a couple of months back, you embedded 2 rate cuts in that outlook. Just kind of curious if we don't get any rate cuts over the course of this year, does that change the margin calculus versus your initial outlook one way or the other? Gavin Mohr: Not measurably, Brendan. That forecast holds. Brendan Nosal: Okay. Great. Maybe digging deeper on the deposit cost side of things. Just kind of curious like what the competitive environment for core funding is like across your markets. And I'm asking because I'm getting very different answers to this question based on market to market across the Midwest. So I would love to hear what you're seeing across Michigan. William Kessel: Brendan, I think it continues to be very competitive. In the Michigan markets, we've got a heavy field of credit unions. So I think oftentimes, they can lead the pack. But I think it oftentimes depends if you look at the competitor and sort of their balance sheet profile, you can sort of see who's maybe fighting a little bit higher -- harder with higher pricing than others. Our focus continues to be led by that commercial effort. And our goal is to have the operating accounts for our business clients and then also for our municipal clients. And we continue to hold, retain but add to that portfolio. And so I'm really pleased with that. But it is competitive, no doubt. Brendan Nosal: Okay. Okay. Good. I'm going to try and sneak one more in here. The world has changed geopolitically quite a lot over the past 3 months and there could be knock-on impacts to the domestic economy. So I guess when you look at the outlook you provided for 2026, are there any areas where you're feeling either better or worse today versus when we last spoke 3 months ago? William Kessel: I think -- and I'll let Joel jump in here, too. But I think we continue to be very optimistic about how we expect 2026 to unfold. One of the things that we do at Independent is rescore the entire retail portfolio for their credit scores twice a year. And we recently got the results from that rescore. And I continue to be very pleased in seeing very solid scores for the portfolio, not a lot of change in the various bands. Of course, we lend predominantly up in that 750-plus FICO area, at least north of 700, and those bands continue to be strong. So I'll let Joel maybe comment a little bit on the commercial side. Joel Rahn: Yes. It just -- it so much is dependent on how long the conflict lasts and what it does to prolong high energy prices. And it's probably the same thing I said maybe a quarter ago. It's just -- the duration of this, the high energy prices could be a drag on the economy and to state the obvious. And if that happens, you could see loan growth muted, I suppose, but we've not seen that yet. And business owner confidence is still unchanged, relatively high. So we have businesses that are making the decision to expand and construct new facilities, et cetera, despite the news headlines of the day. So only time will tell if that's a smart move on their part or not, but it's just -- it's such a fluid environment, Brendan. So we're just watching it carefully, and we'll react accordingly. Operator: Our next question is going to come from the line of Adam Kroll with Piper Sandler. Adam Kroll: I'm on for Nate Race. So maybe a question on expenses. I know there were some onetime items that kind of drove them higher in the first quarter. But if I strip those out, I get to a core number around $36.4 million. So I guess, do you still feel comfortable with the $36 million to $37 million run rate guide excluding the deal? Or do you expect those to trend higher? Gavin Mohr: No, we feel good about that, excluding the deal and the nonrecurring. Adam Kroll: Got it. And then how should we think about the cadence of cost saves associated with the deal? Gavin Mohr: Yes. So it was announced 50% phased in, in year 1 and fully phased in, in year 2. And just to point out, that's 50% half a year. Adam Kroll: Got it. And maybe a last one for me is just, Gavin, I was wondering if you could provide us with some updated thoughts on how you're thinking about deploying some of the excess liquidity brought over from the HCB deal? Gavin Mohr: Yes, we're not going to -- we're not ready to give direction specifically on that, Adam. I would say that -- as we think about how the banks come together, clearly, our first choice would be to deploy it through the commercial bank. And then from there, we would just move down asset classes in terms of yield. We're going to have opportunity to address maybe wholesale funding if we don't have a pipeline to absorb it as well as potential securities purchases. But that's still all very much in the analysis phase. Operator: [Operator Instructions] I'm showing no further questions at this time. And I would like to turn the conference back over to Brad Kessel for any further remarks. William Kessel: In closing, I'd like to thank our Board of Directors and our senior management for their support and leadership. I also want to thank all of our associates. I continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part towards our common goal of guiding customers to be Independent. Finally, I'd like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to the First Quarter Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company's website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. [Operator Instructions] During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute for looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the company's 2025 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at www.graco.com, and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knutson, Vice President, Controller and Chief Accounting Officer. Christopher Knutson: Good morning, everyone, and thank you for joining the call. I'm here today with Mark Sheahan, David Lowe and Sanjiv Gupta. I'll begin with a brief overview of our first quarter results and then turn the call over to Mark for additional commentary. Yesterday, Graco reported first quarter sales of $540 million, up 2% from the same quarter last year. Acquisitions contributed 5% growth and currency translation added 3% growth, partially offset by a 6% decline in organic sales. Reported net earnings were $119 million down 5% or $0.70 per diluted share. Excluding excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $0.66 per diluted share, down 6%. Gross margin decreased 60 basis points versus the first quarter last year. The benefit from our pricing actions helped offset higher product costs from lower factory volume, lower margin rates from acquired operations and incremental tariffs. Tariffs increased product costs by $7 million in the quarter. Operating expenses increased $9 million or 7% in the quarter. Excluding $5 million in incremental expenses from acquired operations and the effects of currency translation expenses were flat. In the quarter, the operating margin rate in both our contractor and expansion market segments was 24%, consistent with the same period last year. Industrial segment operating margin was 32%, down from 34% in the prior year quarter. The decline is due primarily to unfavorable volume and tariffs that were not offset by price realization. Total company knee operating earnings decreased $6 million or 4% in the quarter. Operating earnings as a percentage of sales were 26% compared to 27% in the same period last year. The adjusted effective tax rate was 20%, in line with our expected full year adjusted tax rate of 20% to 21%. Cash provided by operations totaled $120 million for the year, down $5 million or 4%. Cash provided by operations as a percentage of adjusted net earnings was 107% for the quarter. Year-to-date, uses of cash include share repurchases of 189,000 shares totaling $16 million, dividends of $49 million and capital expenditures of $12 million. These uses were partially offset by share issuances of $40 million. A few comments as we look forward to the rest of the year. Based on current exchange rates and assuming similar volume, product mix and business mix as in 2025, currency is expected to have a 1% favorable impact on net sales and a 2% favorable impact on net earnings for the full year 2026. For the full year, we continue to expect unallocated corporate expenses of $40 million to $43 million and capital expenditures of $90 million to $100 million, including approximately $50 million for facility expansion projects. 2027 will be a 53-week year with an extra week occurring in the fourth quarter. And finally, in the attached materials, we updated our outlook slide to highlight performance by segment and region, with the size of each color dot indicating its relative size versus the others. With that, I'll turn the call over to Mark for more details on our segment and regional performance. Mark Sheahan: Thank you, Chris. Good morning, everybody. Overall sales increased 2% in the quarter with acquisitions contributing 5% and foreign currency adding another 3%. That growth was partially offset by a 6% decline in organic revenue. Organic revenue started the year slower than expected, particularly in January. The business activity improved steadily as the quarter progressed, with bookings up 3% at actual currency rates, driving nearly a $26 million increase in backlog, primarily in our Industrial segment. If those orders have been converted to revenue at the end of the quarter, organic revenue at actual currency rates, would have increased 2% and total sales, including acquisitions, would have been up 7%. The Middle East region represents about $35 million of sales on a full year basis for Graco. To date, we've not seen any significant impact on demand or operations, though the environment remains uncertain. We are staying close to our customers and channel partners and are monitoring order patterns and logistics carefully. From an exposure standpoint, the Contractor segment will be the most impacted primarily related to our protective coating product application. Let me provide some additional color on our segments and regions. In the Contractor segment, sales increased 2% in the quarter, with acquisitions and currency translation each contributing 3%, partially offsetting a 4% decline in organic revenue. Within the segment, our form polyurea and protective coatings businesses continued to be bright spots, supported by strong global demand tied to infrastructure, border wall and data center projects. That said, construction demand remains softer than we would like, particularly in the Americas. Housing starts are expected to be relatively flat year-over-year with fewer new home sales and only modest improvement in existing home sales. Overall, the market has shown limited growth over the past 4 years, and we expect those conditions to persist this year. Turning to the Industrial segment. Sales increased 4% in the quarter, with acquisitions contributing 8% and currency translation adding another 4%. This growth was partially offset by an 8% decline in organic revenue. Despite the organic decline, bookings were up 5% at actual currency rates, driving a $23 million increase in backlog. If those orders have been converted to revenue within the quarter, organic revenue at actual currency rates would have increased 6%. Industrial Americas performed well delivering revenue growth despite lower project-based activity in our Powder group. Bookings in the region were up double digits, supported by broad-based strength across multiple end markets. EMEA and Asia Pacific were more heavily impacted by the timing of completion and acceptance of project-based activity, which drove the decline in the quarter. That said, both regions saw activity improve as the quarter progressed, with quoting levels moving higher. In our Expansion Markets segment, organic revenue declined 5% in the quarter, driven primarily by our semiconductor business, which was coming off an exceptionally strong prior year comparison. Semiconductor delivered its largest quarter of the year in 2025, growing 51%. Despite the tough comparison, semiconductor demand remained solid with first quarter bookings up at least 20% in each region. We're also seeing improvement in our environmental business. While the year started slowly, activity has picked up meaningfully with a strong start to the second quarter and bookings are trending positive year-to-date. Moving on to the outlook. Despite the slow start to the year, we're encouraged by demand trends across our broader end markets. We saw a meaningful pickup in both ordering and porting activity in our industrial and semiconductor businesses throughout the quarter. And based on current order rates, Strength in these areas should help offset continued softness in the Contractor segment. As a result, we're maintaining our 2026 revenue guidance of low single-digit organic growth on a constant currency basis and mid-single-digit growth, including contributions from acquisitions. Looking ahead, second half comparisons are more favorable, reflecting an easier contractor comparison in the third quarter and the expected timing of project activity in the industrial businesses towards the end of the year. Finally, I'd like to take a moment to welcome Sanjiv Gupta at Graco. Sanjiv comes from General Motors, where he spent more than 20 years in finance and operating roles across the globe, most recently as CFO of GM International. He brings deep experience across corporate finance, operations, manufacturing and supply chain and a strong track record of leading global teams. In addition, I want to recognize and thank David Lowe for his more than 30 years of dedicated service as he prepares for retirement. David's leadership deep financial expertise and steady guidance have played an important role in shaping our company and supporting our long-term success. On behalf of the entire organization, I want to thank David for his many contributions and wish him the best in his next chapter. In closing, I want to take a moment to recognize an important milestone for our company. On April 26, we will celebrate our centennial. This milestone reflects the strength of our people, the durability of our business model and the deep relationships we've built with customers and partners around the world. While we're proud of our history, this anniversary is really about the future, continuing to invest in innovation, supporting our customers and building on the foundation that has sustained the company for a century. That concludes the prepared remarks. Operator, we'll open it up for questions. Operator: [Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets. Deane Dray: Thank you. Good morning, everyone. Can I add my welcome to Sanjiv and to wish David all the best. Since we're in kind of an uncertain macro here, Mark, maybe you can just kind of take us through the major verticals and kind of what surprised you versus expectations? I know housing remains tough, but semiconductor looks like that's a positive side. And then just same thing on the geographies. And if you could elaborate a bit more on the Middle East exposure for contractor. Mark Sheahan: Yes. I guess I'd start at a high level and just say that our industrial bookings in the quarter were actually up mid-single digits, which was good. And unfortunately, we weren't able to convert that into revenue that you all saw. But in terms of how that mid-single-digit booking growth took place. It was really across multiple product categories, look at finishing process, our lubrication businesses, both ALE, automatic lubrication as well as our vehicle service business and a little bit of pressure in our sealant and adhesive business offset some of that. But overall, I was pretty happy with the growth in industrial in the quarter. . The powder business, again, was influenced mostly by some project activity on the bookings front that booked right at the end of the quarter that we just couldn't convert. Now those projects usually take time between booking and billing. And then the overall game of powder business, again, in aggregate was in line with our long-term expectation for the full year of kind of the low single-digit organic growth, constant currency. Obviously, the home center and the paint channel continue to be a little bit of a headwind for us. I wouldn't characterize them as down significantly, but they were down in the quarter. We did see nice growth in the areas that I mentioned in my script on the high-performance coatings and foam business that wasn't quite enough to offset all of the headwinds that we had in the traditional paint and home center channels. But overall, booking for the quarter was only down 1%, which is okay in an environment where we're still experiencing some pain. When it came to the environmental business, yes, the bookings and semiconductor were fantastic. We're starting to see a little bit of a pickup on our environmental business. And I would say that the HIP high-pressure business that's in there as well is also experiencing kind of growth within line of what we're expecting for the full year. Geographically, you've seen the numbers, but Europe is doing okay. Asia is somewhat influenced by the adhesive business that I referenced Previously, on the industrial side, we're off to a bit of a slower start, but the team is pretty optimistic that we'll be able to make that up as we finish out the next 3 quarters of the year. And North America has been okay here so far this year, where booking rates are up kind of in our low single digit -- low to mid-single-digit guide. So all in all, I wish we would have been able to convert more of the bookings into billings. It's only 13 weeks, and we do feel like we've got -- given the order momentum that we've got a good chance to be able to get to our low single-digit guide for the full year. Deane Dray: Great. And then just if you could follow up with any specifics around the Middle East exposure, you called out contractor. And then I'll give you my follow-up question. Just you said tariffs were a $7 million bad guy for the quarter. Can you talk about pricing? How much price action have you taken? And is this a potential year of a second price increase what's your crystal ball say? Mark Sheahan: Yes. So I'll handle the Middle East and give just a quick thing on the tariffs, but I welcome my colleagues here to chime in on those as well. Middle East has not been a problem for us so far. As I said, we're kind of monitoring the situation. We don't have any hung up orders or anything like that, that we're really that concerned about. Maybe the bigger concern would be with respect to if this blockade extends for a longer period of time, it will create some pressure with respect to the materials that we move. So you think about paints, adhesives, those are materials that require quite a bit of petroleum-based products. And to the extent that there is pressure there and those products increase in cost to consumers, et cetera, that may eventually make its way into our business right now, we're not that worried about it. My personal belief is that things will get cleaned up and we'll be able to move forward. But that's probably the bigger unknown risk for Graco and every other company that's out there moving those kinds of materials, at least here in the short term. On the tariff front, I would say, overall, we're doing a good job. I think we've really offset the cost pressures that we've seen in the P&L from input costs so far year-to-date. And really, the pressure that we saw in the gross margin line in the quarter was really in a couple of areas. One, obviously, volume, running a little bit below what we were planning for, really due to the cadence of the orders coming in at a softer pace at the beginning of the quarter versus what we saw sort of at the end of the quarter. Our pricing actions are really offsetting a lot of that activity that we've had. I also point out that the mix in the quarter, the mix of the products that came in was a little bit unfavorable for us as well. So I really have no concerns on the gross margin line for the rest of the year. I think the teams are doing a great job managing operating expenses, which are actually flat to down slightly in the quarter. So we're managing the P&L appropriately given the level of business that we had in Q1. Any other comments from you guys? David Lowe: Well, on the pricing side, I think that we have -- the way that we are looking at it, we have covered tariff costs, and there have been some volume-related some volume-related things that made that a little less effective. But we have for the -- in most of our businesses beginning last year we were -- we have been pursuing around the world our annual pricing adjustment drumbeat. In fact, we started a little earlier in the regions than we would ordinarily -- the -- here in North America, we have a handful of key channel partners that we have agreed to pricing adjustments that are going to begin to become call it, live early or sometime in Q2. So we're feeling really good about the implications of what those can also help us with as we get through the balance of the year. Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. . Mitchell Moore: This is Mitch Moore on for Jeff. Just on the low single-digit organic guide, just maybe with the start -- with the slower start of the year, I think it implies mid-single digit-ish growth through the remainder of the year. Could you just help us frame the segment level building blocks to get you there? And what's giving you confidence in that outlook? Mark Sheahan: Yes. If I had to point to one thing, I'd say we're up low single digit on our bookings for the first quarter. So I think our bookings rate lines up with what the guide was -- and so that gives us the confidence that we're going to be able to get within that guided range when we look out through the whole year. I don't know if you guys have any other comments you want to make. Christopher Knutson: I'll also say that, as Mark mentioned, the backlog build in the quarter, but -- also subsequent to the end of the quarter into April here, we've also seen another $21 million build in the backlog. So the order rates are there to support it. It might be a little bit lumpier on a quarter-by-quarter basis, but we have confidence we'll get there by the end of the year. Mitchell Moore: Okay. Great. And then just for my follow-up. I know we touched on tariffs a bit, but just -- is there any update you guys can provide with the updates to the Section 232 tariffs and if that changes your expectations for price costs for the year? Christopher Knutson: I will say that the change with the 232, where they're moving from a direct aluminum and steel to the full component. We're still working on assessing how much that's going to impact us. We do have some highly manufactured equipment. So when you switch to a full value of the imported goods, it would imply a higher tariff. But for us, a lot of our stuff is already manufactured here. So a lot of the import of the aluminum and steel is typically in its raw form. Operator: Our next question comes from Bryan Blair of Oppenheimer. Bryan Blair: Thank you. Good morning, everyone. Welcome, Sanjiv. And congratulations, David, I think you ended up a little short of Dale's tenure, but a great run nonetheless. . David Lowe: Hey, I can stay at -- maybe, consider staying another 18 years. Bryan Blair: All right. I would like to follow up on the backlog expansion in Q1 and then Q2 to date. -- just to level set, how much of the total build has been your Game business? Have there been project argument deferrals? Or is this strictly a matter of order timing -- and is this type of backlog build or the magnitude of it significantly out of the ordinary for the early part of the year? Mark Sheahan: Yes. I think that they're pretty similar. I think if I look across the legacy Graco Industrial businesses and the backlog that we've built there as well as the backlog that we built in the game business, including projects, et cetera, I didn't see anything jump off the page at me that says that they're heavily weighted toward the powder business. I think it's generally pretty consistent across both those segments. David Lowe: And I would add, especially the orders that we've seen since the close of the quarter, it's been quite balanced in the -- to use our internal terminology, the Industrial division, which is the legacy Graco the original legacy Graco plus the game of business. As part of this exercise, we ran some stress tests -- and being an old sales guy, I kicked the tires pretty hard on not just the industrial side but also on the contractor side. And I kept -- I kept coming to the same place that given the level of activity we're seeing in industrial and not really relying on a meaningful uptick in contractor low single digit is achievable. . Bryan Blair: Okay. I appreciate the color. And following up on the revised tariff framework again, just to level set, is there a meaningful assumed change in net cost impact for your operations? And perhaps more importantly, as a largely domestic manufacturer, do you see any incremental competitive advantages or opportunities under the new structure? Mark Sheahan: Yes, I don't think there's any obvious competitive advantages. And the way I'm thinking about the tariffs here short term and long term. The big question is, I think, at a stick. Are we going to have -- the tariffs that are in place today, obviously, the Supreme Court ruled the way they did, but they put in new tariffs. So -- when you look at -- if they stick incrementally, it's not going to have a big impact to Graco in terms of the absolute level that we're paying. I will note, and we did talk about this, we will be applying for our tariff refunds like every other company. And as those come in, we -- our intention would be to highlight those in results so that you know what they are as they come in. At this point, until we actually see the refunds, we're not really going to talk about the levels or the amounts or anything like that. So I think from a modeling perspective, it would probably make some sense just to leave them out. And when they come in, we'll break them out and then you can now they are. But to answer your question again, to reiterate, when you just think about the absolute level of tariff that this company is incurring, when the new structure that's in place, it's pretty similar to what we experienced before the new structure was put in place. Operator: Our next question comes from Matt Summerville of D.A. Davidson. Matt Summerville: Maybe just a minute on contractor. Can you talk about what kind of sell-in, sell-through trends you're seeing in both the home center and propane channel? And then can you also talk about how we should be thinking about the new product load-in this year maybe relative to last? And then I have a follow-up. Mark Sheahan: Yes. In terms of sell-in, sell-through, there's not a big difference. I think most of the channel partners that we do business with have been pretty careful with their inventory. And I think that they're continuing to be careful with their inventory. So I would characterize our sales and our bookings to be really pretty similar to what they're experiencing out the door. -- basis, which I think makes sense given the environment that they're playing in. We do have, as every year, products that we're launching and we're planning to launch products here in Q2. I would not be baking in any large incremental increase compared to last year. I think it's a fairly stable, fairly similar new product launch here for the contractor business, what we've experienced in the past. We've got a couple of things that we're excited about for sure that we can talk about after they're actually launched. But again, I think it will be kind of a similar year to what we saw in '25. David, if you got any... David Lowe: Yes. I -- just a coincidence, I had a conversation with commercial management earlier this morning. And just to underline 2 of Mark's points. On the home center side, the positive side of the story is the foot traffic has not deteriorated year-over-year. And the -- although it still remains off the record levels that we saw in '20 and '21 and such. So there's an opportunity for recovery there. Those channel partners do, I would say, a very good job managing their working capital, and we feel pretty good the inventory level there is satisfactory. On the paint store side, always of interest to us. I think the key point there is we feel -- on the -- I'd say at the ground level of the business, our commercial team indicates that the sell-through has been satisfactory. And so that in that really important space for us, call it, the retail demand is pretty -- is also pretty close to the wholesale, which is important, especially as we get some of these new products launched to that channel. And so I think that the -- where we are at vis-a-vis our partners is they're ready to go and ready to order when they see retail demand out the door demand increase . Matt Summerville: Got it. And then as a follow-up, maybe can you guys comment on how you're thinking about the M&A outlook, funnel actionability to the funnel depth, if you will, and where you may be seeing most activity? Mark Sheahan: Yes, I'd characterize the market is still pretty favorable. I think that there's properties out there that we're interested in. Our pipelines are well populated. We're having discussions with a lot of different companies. I do think there's been over the last year or so, a renewed appetite on the part of sellers to take a look at opportunities to realize value and they're looking at strategic buyers in a lot of cases. And -- we're going to remain active. We like businesses that -- where we can add value. I see a fair amount of opportunities within the Industrial segment, in particular. -- contractor also has a couple of things, but there's probably more lively stuff in the industrial side right now. Interestingly, I did go back and I looked at some information back from 2012 until the end of last year and 2012 was the year that we acquired Gema. About 30% of Graco's revenue that we finished the year with in 2025 is acquired businesses. So we have had a pretty good track record of acquiring businesses, integrating them, maintaining and improving our profitability over that time horizon. And that's really what we're trying to do with our M&A growth going forward. We have a target long term, 10% top line growth, 1/3 coming from M&A. And if you look back historically, we've been able to do that. So we're proud. The teams are doing a good job and hopefully, we get some more opportunities here as we finish out the year. Operator: Our next question comes from Brad Hewitt of Wolfe Research. Bradley Hewitt: So at the gross margin line, it looks like incrementals were about 25% in the quarter. Should we think about that year-over-year margin pressure is largely driven by a pension price cost? Or are there any other factors you would highlight there? Mark Sheahan: I think it's mostly mix and a little bit on the volume side. But Chris, if you could probably give more color on that. Christopher Knutson: It was mixed volume and acquired businesses that really impacted for the quarter Price cost was not a headwind outside of having lower factory volume to absorb the overhead. . Bradley Hewitt: Okay. Great. And then maybe switching over to the backlog side of things. Just curious if you can elaborate a little bit more on visibility of kind of expected backlog conversion as it relates to the rest of the year? And do you see any risk of project cancellations or maybe slippage of backlog conversion into next year? Mark Sheahan: Yes, I don't think we see any risk at this point. It's always there, but it couldn't happen, but nothing that we're concerned about on stuff that we've already booked and they're in our backlog. And I think that we said in Chris' comments that we expect most of that will convert in the second half of the year. It's hard sometimes to know the exact timing, but this is not something that we're going to keep on the books for more than that period of time. David Lowe: Yes. The risk of -- Mark is right. The risk cancellation, be it in our legacy business or in even our game business. with their direct system sales activity in my experience is quite low. In the legacy business, typically, -- our stuff is among -- I'm thinking of an industrial implication for sealant equipment or for something in the paint shop. Our stuff is some of the last that is actually ordered in a project. And -- so for example, the expansion of a paint line. I mean, we're literally being dropped in a month or 2 before it's going to be commissioned and come on stream. So things that we have in our pipeline in that business is quite tangible and rarely is it canceled altogether. On the -- in the -- on the Gema powder equipment side, I'd say that program -- that organization is even 1 step more sophisticated in direct sale activity for systems is to accept an order requires a down payment, a very meaningful down payment approaching half the project cost. And so the buyers are very committed if an order receives gets developed to that point and shows up in our backlog. In my experience, I was involved with the team at Gema for a few years. I think in the 8 or 9 years, I was involved over all that time, one project was canceled. Operator: Our next question comes from the line of Joe Ritchie of Goldman Sachs. Joseph Ritchie: David, thank you for all the help throughout the years. Wish you the best in retirement and Sanjiv, welcome. So Yes. So maybe my first question. I just want to make sure that I fully understand the -- like the backlog conversion on the powder finishing systems. So was this simply that just the orders that you were expecting to come through in the first quarter came through later than you expected them to come through? Or was there anything else related to either supply chain or manufacturing that also impacted the conversion? Mark Sheahan: Yes, I don't think there was any crazy stuff. We did get a couple of nice orders right at the end of the -- right at the end of the quarter, but we were also converting on to the backlog that we had built in the month of February out at that same time. So they kind of offset one another. But no, we're not constrained in our operations. We're not constrained with the supply chain. -- is really just kind of the cadence of these orders coming in, and we will get them out the door. We just didn't get them off the door by the end of March. Joseph Ritchie: Okay. All right, helpful. And I know you touched on the margin headwind, I think, in the first quarter being largely driven by lower volumes. I'm just curious, like with the acquisitions also coming through the industrial segment, how much of an impact did the acquisitions have to the margin degradation in 1Q? Christopher Knutson: On a total company basis, it's about 50 basis points related to the acquired revenue on a total company basis. So the stuff going through industrial was by far the majority. Joseph Ritchie: Okay. All right. Cool. And then one last one. So last quarter, I think we talked a little bit about these like upfront licensing revenues that you were seeing from some of your OEM customers. I didn't hear it get called out today. Just any progress on that specifically would be helpful. Mark Sheahan: Yes. We've got a couple of other ones that we're working on, but we didn't really book anything here in Q1. So that's why we were silent on it. We still like the prospects for potential to get future license agreements with a lot of the technology. We've got it running through Graco products. Every time we meet with customer or an OEM. They're excited about the compact size of these motors, the fact that they take less material that they're high torque. So we're hopeful that we're able to do more in that area, but nothing in Q1. David Lowe: Yes. I know we've talked about this before, Joe. It's sort of strategic -- it's a master class in strategic selling. Frequently, we are cultivating very large companies with large decision-making bodies and organizations and keeping their processes moving 1 large organization can be relatively responsive, quick and enthusiastic -- another organization can be equally enthusiastic, but the decision-making process moves at a different pace. So I think the nature of this is while we're excited and Mark is right about the technology, the visible results that you're going to see over time are not going to have the same degree of predictability as our standard products business. Operator: Our next question comes from Andrew Buscaglia of BNP Paribas. Andrew Buscaglia: Good morning, everyone. So yes, so it seems sort of starting out a little beat with 2 years ago, same scenario, all end markets are down. And that year, you kind of struggled to overcome things. So my question is, we're kind of 2 years later, kind of in the same setup. And the question does arise amongst investors. Like is there something -- this seems to be cyclical, but is there something more structural? And maybe does Graco needs to think about -- I don't know if it's a change of tack in terms of how you get volume, whether it's to touch your pricing or what. But I think at this point, you're 3 years in, and it just seems like the top line can't grow. So are there other discussions you guys have around anything around if there is anything under the hood structurally that's changed in the last 3 years? Mark Sheahan: I will just say that we have grown the top line. And I will say that, of course, every day, we come in here, and we're doing everything we can to grow the business. when you're reporting every 13 weeks, sometimes the quarters can look better than maybe the overall business might look and sometimes they don't look as good. We have been fighting some pretty substantial headwinds with respect to half of the revenue of the company that's tied to contractor and construction. And if you look at the macro data on anything, any metric that you look at over the last 4 to 5 years, that has been a really tough market to be in. And I'm proud that our teams have actually been able to drive the results that we have driven given the environment that we're in, we get up every day. We're working hard. We're pushing our teams. We're launching products. Our teams are incentivized around growth. So there's absolutely no reason why they shouldn't be driving for better results. There's nothing structurally wrong with the company. It's still extremely profitable. It still generates a tremendous amount of cash. And we have been also very active on redeploying that cash, both through the form of share buybacks as well as M&A. So No, there's nothing here that I think we need to do that's different. I think that we're doing everything that we can as we always have done. Andrew Buscaglia: Well, on that note, I think there's a little bit of there's some enthusiasm with this recent reorganization that there's something outside of what the market is giving you that you can find some incremental growth. And I guess where are we seeing that or to date, like -- where is that evident in your numbers? And will we see more a more pronounced impact going forward from that change you guys made a year ago? . Mark Sheahan: Well, again, we did guide to low single-digit growth, organic constant currency for the full year. For the quarter, our industrial business was up mid-single digit. -- growth, which was nice to see. Our expansion markets group is up high single digits growth. And those were offset by the fact that our contractor business was down 1%. So again, going back to the earlier comments, we're happy with what we're seeing. We'd like it to be better, obviously, we're pushing the team hard. We still feel confident that we're going to get to the guide that we talked about a couple of months ago. Operator: [Operator Instructions] Our next question comes from Walter Liptak of Seaport Research. Walter Liptak: I wanted to ask, just get a better understanding of kind of the monthly trends. You talked about January being weak. I wonder if you could attribute that to anything. And then February, we have the war kind of heating up, but it doesn't seem like from what you said about orders that, that has been impacting the trend for orders too much. But -- so I guess I'm asking like what are you hearing from customers, both in North America and other parts of the world. And as we got more of this behind us, are you getting more confidence that the customers can just kind of work through these macro uncertainties? David Lowe: Well in our businesses, there's different kinds of decision makers. On the contractor side of the business, maybe the decision making you typically can be quicker. -- or a little more reactive because generally, the buyers represent -- they're smaller organizations or entrepreneurs and such. There, I would say not -- despite all the challenges of the world and our contractor business, which, again, Mark reminds -- is reminding us that it's 50% of our overall construction broadly defined. The largest market there is here in North America and specifically the U.S. And really, we haven't seen a change in the, I call it, the momentum of that business for a while and certainly not in the last couple of months despite all the global noise because the fundamental issues are -- remain the ones that you're familiar with about affordability and even mortgage rates. I would say that as focusing on the micro and not the macro, I was really excited when for a few days, the 30-year mortgage rate got below 6% in late February. And now of course, it's, I want to say, about 630 or 635 currently. I think it gets more the world and decision-making when you look at industrial companies and how they make their decisions. And while I've got a list here I'll spare everybody in the interest of time, -- for example, we would say, "Oh, the auto industry market was slow for us. The auto OEM market was slow for us. We had some tough comps, and we didn't see too much activity in the first quarter. But actually, we feel pretty good about our pipeline in the automotive industry, even in some markets like China where think of combustion conversion to and requiring additional investments in the body and the pink shop. We're seeing greater inquiries and expanded pipeline from before the end of the quarter, even through the current period. And it suggests to me that big picture, big manufacturers, they know the world is a noisy place. But if they're committed to moving in certain directions, they're going to make those investments. So it's a long-winded way of saying I don't see a lot of demand implications on the things -- on the new things that we have been absorbing here in the first 4 months of the year. Walter Liptak: Okay. Great. And then I guess thinking about the second quarter and maybe the delays of the timing of shipments, especially for some of those powder orders, do we get like a normal seasonal bump up in the second quarter plus some of the orders that should have shipped in the first? Is that how we should think about it? Mark Sheahan: Yes. I think for the contractor business, our history has always been that Q2 is the top quarter. So I don't see any changes to that cadence. And I think on the orders that we just got in and recently, I mean, those are probably going to go off more in the back half with respect to the powder business. But for the legacy industrial business, we should be able to move those a little bit quicker. Walter Liptak: Okay. Great. And then maybe a last 1 for me is on buybacks. You guys weren't too aggressive in the first quarter. How are you thinking about buybacks versus M&A deals can you do both? Sanjiv Gupta: This is Sanjiv Gupta. So I -- maybe I'll take a shot at it. So again, I think very consistent with how we've always done it. We be very disciplined with our capital allocation framework. And obviously, the goal here is to drive shareholder return while having our financial flexibility. So a strong balance sheet we'll continue to preserve that. And then whatever operating cash flow we generate, which we have been generating very positively, we'll be using that cash to fund our growth. We've talked about internal growth that will be invested in projects which meet our return thresholds. And second priority would be the growth, which is external growth through disciplined M&A. Mark talked about it. And that really needs to meet our share needs to create the shareholder value and meet the return and integration threshold for us. And you've seen that recently with our current acquisitions, COROB, Color Service and Radia. And then in terms of shareholder return, obviously, we'll continue with the dividend. And any excess cash will be returned to the shareholders, and we'll be doing it very opportunistically as we've always done. So in summary, very consistent with our capital allocation framework, which we have deployed in the market that will continue. Operator: Thank you. If there are no further questions, I will now turn the conference over to Mark Sheahan. Mark Sheahan: Okay. Thank you very much for participating today. I look forward to seeing you some time down the road here, and thanks again for your interest in Graco. Operator: This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.