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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.
Operator: Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] A replay of the call and the accompanying slides are available on our Investor Relations website. Please review the forward-looking statements and non-GAAP disclosures on Slide 2. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir. Jason Darby: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer. Additionally, Sam Brown, our Chief Banking Officer, is here for the Q&A portion of today's call. We'll look forward to your questions and try to limit repeating details you've already reviewed in the earnings materials. I'll now turn the call over to Priscilla. Priscilla Sims Brown: Good morning, everyone, and thank you for joining us. I want to begin by thanking our colleagues across the bank as always for their continued focus and execution and our customers and shareholders for their trust and partnership. Overall, we delivered a very strong first quarter that underscores the strength of our balance sheet and purpose-driven model. We grew net revenue by 9.7% to $93.4 million. We expanded net interest margin 9 basis points to 3.75%, increased on-balance sheet deposits, $229 million to $8.2 billion and maintain strong Tier 1 capital at above 9.3%. Before commenting on the additional reserves we took this quarter, I'd like to dive into our results just a bit deeper. Our deposit franchise continued to perform exceptionally well with broad-based strength across our core segments. Political deposits increased $133 million to $1.9 billion as the midterm elections approach. The labor franchise generated $106 million of growth, and not-for-profit deposits grew $115 million. Deposit mix was also improved with average noninterest-bearing deposits increasing to 41% of total deposits. Finally, super core deposits are approaching 60% of total on-balance sheet deposits, demonstrating the stable, durable funding that is unique to Amalgamated. We chose to keep more deposits on balance sheet this quarter to drive core net interest income as the portfolio repositioning from selling lower-yielding securities is largely behind us. We plan to manage through the midterm election cycle with sufficient off-balance sheet deposits to absorb expected political deposit outflows after the elections which should result in no borrowings post election. Loan growth was solid with net loans up approximately $66 million or 1.3% led by strong commercial real estate lending production. Loans in our growth mode categories, C&I, commercial real estate and multifamily grew $109 million or 3.3%, reflecting solid originations, healthy mission in demand and continued credit discipline. Our PACE portfolio also expanded with total assessments of $15.8 million of 1.2% and bringing our PACE portfolio to approximately $1.3 billion. Now let me briefly address the additional reserves we took in the quarter, and Jason will have some further details as well. Included in our results was an incremental $9.2 million provision tied to a single borrower multifamily relationship that moved to nonaccrual during the quarter. The underlying collateral supports our position, and we are aggressively pursuing resolution options to preserve and optimize value. We view this as an isolated event with one borrower, which does not change our performance outlook. The reserve bill impacted earnings per share by $0.23 and yet we delivered solid core earnings of $0.80 per share. With the momentum we saw in the quarter, we are focused on executing and delivering on our revenue and earnings targets over the balance of the year, and you will see our optimism when Jason discusses our guidance increase in just a few minutes. Looking ahead, our strategy builds on who we are and why customers choose amalgamate it mission-focused organizations and individuals who see confidence that their capital is responsibly aligned with a partner who shares their purpose. That focus resonates nationally with customers in every state enabling relationship-based banking and efficient growth within our model. We see real opportunity to expand thoughtfully and consolidate market share in our core segments as we continue investing in people infrastructure and technology to support disciplined profitable growth, including progressing past $10 billion in assets. Now I'll turn the call over to Jason. Jason Darby: Thank you, Priscilla. I'll keep things moving so we can get to Q&A. On Slide 3, net income was $25.2 million or $0.84 per diluted share while core net income, a non-GAAP measure, was $24.1 million or $0.80 per diluted share. The GAAP to core difference was driven primarily by strong off-balance sheet income as ICS fee income increased $1 million versus the linked quarter. And we anticipate ICS fee income will be strong throughout 2026, and we also plan to keep more deposits on balance sheet to build the bank's core earnings power. Net interest income increased 3% to $80.2 million, in line with our quarterly guidance. Additionally, our net interest margin expanded to 3.75% driven by higher-yielding commercial loan originations and modest reductions in overall funding costs, though we expect our net interest margin to moderately decline in the second quarter related to balance sheet growth. On Slide 4, core noninterest income increased $1.1 million to $11.2 million, primarily from higher commercial banking fees and also $0.7 million of discrete billing income. Noninterest income has continued to deliver solid growth over the past year, reflecting meaningful progress towards our 85/15 diversification objective. Expenses decreased $0.5 million, while core expenses increased $0.3 million to $45.3 million. The rise in core expenses was mainly due to branch renovation and relocation costs and professional fees partially offset by a decrease in advertising expenses. Core expenses are tracking to our $188 million full year target. Our core efficiency ratio improved to 49.55% and demonstrating profitable scale and keeping us on track to deliver our 2026 goals. Now despite the reserve increase headwind, I'll address shortly, the quarter showed continued momentum and resilience across key metrics. Tier 1 leverage remained strong at 9.33% and revenue per share exceeded $3 for the first time in the bank's history. Illustratively, excluding the reserve build, return on average assets would have been 1.41% and return on tangible common equity, 15.76%. And while the setback is clear, we remain encouraged by our trajectory and the strength of the franchise value we've built. Now let's go to Slide 10 and spend some time on credit quality. Last quarter, we discussed one borrower in our D.C. market that showed stress related to their use of the Section 8 rapid rehousing program resulting in increased reserves of $1.9 million across 3 loans and a related $10.3 million increase in nonaccrual multifamily loans. There were also another 3 loans totaling $26.2 million with this borrower and a minority sponsor that were moved to criticized status. At that time, we were working with this bar and the minority sponsor to restructure this portion of their portfolio. Before we close the first quarter, the borrower indicated an expected default resulting in the classification of all 10 loans within the $78 million relationship, which included the 4 remaining performing loans of $41.5 million. Additional specific reserves, $9.2 million were established across the relationship at varying levels based on loan level assessments, including consideration of collateral values reflected in third-party appraisals, occupancy and in-place cash flows. Reserves on this borrower relationship now total $11.1 million. We are evaluating resolution alternatives, which may include foreclosure, note sales or other exit strategies, and while the bank has not historically taken title to foreclosed properties, it is prepared to do so if necessary, and we'll engage an experienced third-party property manager to preserve and maximize value prior to disposition. As a result, nonperforming assets rose to $99.3 million or 1.08% of total assets, while criticized and classified loans increased $51.6 million primarily related to downgrades on the single borrower, I just discussed. The allowance for credit losses increased to $68.2 million, representing 1.35% of total loans, providing appropriate reserve coverage. Excluding the provision increase discussed above, the provision expense would have been $4.2 million, primarily driven by expected consumer charge-offs and adding a specific reserve on a multifamily loan that moved to nonaccrual status during the quarter, offset by credit losses releases due to lower required reserves on C&I and consumer loans. In keeping with our practice of helpful disclosure, we have added a slide on Page 12 illustrating our D.C. Metro area real estate exposure. We believe this situation to be borrower specific and we'll be happy to answer follow-up questions. I'll wrap up by turning to guidance on Slide 13, where we are raising our targets. Net interest income target is raised to $333 million, and core pretax preprovision earnings target is raised to $183 million. This guidance raise is connected to our new annual balance sheet growth target of approximately 8% for 2026 as we derive more core earnings power from deposit gathering. We anticipate this to have a powerful and sustained positive impact on NII growth, and we estimate net interest income to increase to between $81 million to $83 million in the second quarter. I do want to close on a positive note because we've accomplished a great deal. And even as we work through the specific challenge, our fundamentals are strong. we've delivered consistent revenue growth, exceptional deposit gathering, continued loan growth, disciplined cost management and solid capital, all of which keep us confident in our ability to deliver on our targets for the balance of the year and into the future. We're now ready for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of David Konrad with KBW. David Konrad: I've got a few questions here. One on the credit, obviously. Just talk a little bit about -- I mean 2 questions here, a little bit about your comfort with loan-to-value of about 85% on this relationship and maybe closer to 60% on the rest of your D.C. exposure. So as you work through this, a, do you think you have enough margin here with that loan to value? And then, b, this is probably a more difficult question, but any idea on any thoughts on the strategy like timing of resolution, what we should expect over the coming quarters? Jason Darby: Sure. David, it's Jason. I'll answer the second question first and then talk a little bit more about the LTVs. From a resolution perspective, it's difficult to say the news is fairly new to us, and there were ongoing negotiations with the borrower that have since been changed. So where this just will end up from a resolution perspective, I don't have the best answer for you in terms of predictability. But what I can say is the reserving that we took for the current quarter was really designed to limit any volatility that you might see going through the P&L into future quarters. And if I think about broadly how timing might play out, we talked last quarter about this borrower relationship and where it was heading and there were 3 loans that were classified as nonaccrual at that point in time, totaling about $10.3 million. those would probably be the most likely to resolve sooner. The other ones where there is better collateral value and the bank is considering pursuing foreclosure amongst other options, there may be a longer tail on that, but I am confident that the volatility through the P&L will be well contained with the amount of reserves that we put up in the current quarter. And maybe that leads into an answer now on the valuation. And we think of this borrower relationship and we are best to carve it out of that, DC profile that we provided for investors in the earnings deck. So we think of this as a separate situation from a value perspective. If I look broadly across the relationship, it's 10 different loans that total $78 million, four them or $41 million weren't performing status before we received notification of the intent not to pay. So the reserve that we put in place that now totals $11 million effectively get us to that 85% valuation. And we think that we took a very conservative approach with that valuation at this point in time, for the purpose of making sure that we accounted for cost to sell or other types of embedded expense that might be recognized in relation to the situation that we're going to have to deal with here for the next few quarters. But the reality of it is we think that, that reserve is pretty well contained at the moment. I wouldn't say that it's evenly distributed across all the loans. I think it's more weighted towards some of the loans that we previously disclosed and what I also hope is that, that allows for us to have staged exits to the property situation as time unfolds. David Konrad: Okay. That makes sense. Maybe moving to better news, the outlook, the improved outlook. Net interest income for the full year, the net $331 million to $333 million range, just wondered, Jason, if you could break down a little bit on the guide in terms of how you think both NIM will progress through the year, but also the balance sheet side as well? I mean you talked a little bit about that going into next quarter. Jason Darby: Certainly. Yes, I think the balance sheet size, let's start there because that will be a key driver of how the margin will ultimately start to play out. But the balance sheet ought to end up on a spot basis at around $9.6 billion. It's potentially moving around a little bit, but that's moving up about $400 million from our original target. So we had originally targeted 5% growth going to $9.2 billion. We're now targeting $9.6 billion by the end of the year or around 8% growth. Now we've gotten through a fair amount of that in the first quarter or the first quarter alone, the balance sheet grew to about $9.2 billion, and that was about $400 million of growth right there -- I'm sorry, $300 million of growth right there. So we're going to start to see the benefit of that asset expansion rolling through NII. We've projected $81 million to $83 million of NII for the second quarter, and we expect that to ramp upward as we continue to go throughout the year. And so as I think about the margin, we will see a little bit of compression when we get into the second quarter. There'll be a little bit of nonaccrual impact from the loans that we've just discussed that we'll have to bake into the margin. But as we continue to move throughout the year, we're expecting to see it expand and expand modestly from where we are today. I wouldn't expect it to be materially different, but I do expect it to expand to be modestly above where we are today after accounting for a slight reduction or compression in margin in the second quarter. I don't know if I got everything there, was there a follow-on you wanted to ask you on the guidance? David Konrad: No, no. That was perfect. And maybe the last one for me is just the fee income outlook as well with some of the changes there. Jason Darby: Yes, fee income. We're actually quite happy about that. It's been gradually but noticeably growing. I think where we are throughout the rest of the year is going to be ratable to what we saw in the first quarter on a core basis with modest improvement, the GAAP number was a little bit higher because of the fact that we had nice ICS income, and we had a little bit of BOLI that was discrete benefit that we received. But overall, I think we're looking at just about $9.8 million to $10 million per quarter in fee interest income, and that will be evenly distributed across nice growth in Commercial Banking and continued acceleration of trust-related revenue as well. Operator: Our next question comes from the line of Justin Crowley with Piper Sandler. Justin Crowley: Just wanted to go back to the multifamily relationship that migrated in the quarter. Can you give a little more detail on what was so unique or isolated about the situation and with this borrower, and just what gets you to a point where you're feeling good about risk in the rest of the portfolio? Priscilla Sims Brown: Justin, we're going to be somewhat limited, obviously, as we are in the midst of negotiations with this borrower on talking about it in too much detail, though, I'm sure you'd love to know more, you can understand where we are on that. I guess I'll just start by reiterating some of the points we've made, which is this reserve build and nonaccrual increase is driven by this one single borrower event primarily. And what happened was pretty clear. It was a notice of intent to default which occurred after the quarter, but before we closed the books. There was no broad portfolio weakness. The notice triggered an accounting requirement that moved additional previously performing loans into nonaccrual. And then the borrower does have ties to DC Rapid Rehousing and Section 8 programs as well, but management really wants you to clearly understand that this was the borrower's behavior and financial condition is the driver, not the subsidy program itself. We review the exposure across Rapid Rehousing more broadly. We looked at exposure across the broader D.C. metro profile. And when I say that, I mean not just DC directly, but the states surrounding it. So we really, really looked carefully at that whole kind of metro area to see whether there were any other sort of similar characteristics. We also, as you know, have provided quite a lot of detail on our New York portfolio in the past. That's still there. We looked at that real carefully. We looked at California, be it a smaller portfolio. We found very little, and we certainly see no -- we see limited migration just outside of this relationship in any of these other areas besides what we've disclosed. I would also just say that the reserves were established conservatively upfront to limit future P&L volatility. But we also want to retain flexibility to pursue an exit, an accelerated resolution, if that proves to be the right thing for preserving value for shareholders. Sam and Jason, I don't know if there's anything you want to add to that? Justin Crowley: Okay, this was -- I mean -- yes. I mean -- so this -- it wasn't specific to the Section 8 housing program. This was more borrower specific in terms of what has driven the weakness in the situation. Priscilla Sims Brown: Rapid Rehousing and Section 8 are different. Section 8 is a federal program. Rapid Rehousing is a city program which is established to take people generally off the street and give them housing temporarily under a year. And that's what we looked at really carefully. We looked again at all of the Rapid Rehousing relationships we have. This borrower certainly had an overdependence on the program. But the issues here were specific to the borrower himself, his own behaviors and his own financial condition. Justin Crowley: Okay. Got it. And then I guess, shifting gears a little. On political deposits, you saw the increase for the quarter, a little bit of a slowdown from last quarter, but still moving higher. Just wondering if you could provide some color on what you're seeing there and how you think that trends as we head into the midterms later this year? Priscilla Sims Brown: Yes, Sam, I'll ask you to address that, but what I will say is, Justin, as you've observed and you've seen it in our deck, there's a general trend that continues to follow on each cycle, which is it builds over time, each trough is bigger than the trough before it. So they keep climbing the low points bigger than the low before and the high point is bigger than the high point before. And we don't see any indication that this will be different. And Sam, I don't know if you have any other... Sam Brown: Yes. Justin, it's Sam. I would just add a couple of quick points. I think you're exactly right that we see these political deposits very much on track with prior trend. We're very pleased with our ability to have demonstrated all the way back to 2018, the predictability and the repeatable nature of how those deposits come in and out. And at $133 million, certainly excellent growth, that would also just point you to the really strong diversified growth across all of our segments that contributed to this. Certainly, same political labor, nonprofit, all contributing over $100 million to our base, really smooths those ins and outs out and have contributed to quarter after quarter, how our great team has been able to continue to grow the book. Priscilla Sims Brown: That's a great point, Sam, because it's been the trend for quite a while now. We really are seeing strength not only in additional deposits to existing clients, but also new clients across segments. Justin Crowley: Okay. Got it. I appreciate that. And then just on loan growth. A lot of that once again coming from the multifamily side, is that like -- is that an area that you think continues to drive loan growth from here? What's the right way to think about that complexion as we get through the year? Sam Brown: Yes. Great question, Justin. We're really pleased with the pipeline we've got ahead of us. Certainly, at 250% RBC, we still have a lot of availability under a concentration limit. The pipeline has a lot of -- there's plenty of exposure for market rate from strong mission-aligned subsidy programs like those benefit from 421a in New York, all with really tightly underwritten financial metrics, ratios and also, we've got a lot of addition of enhanced structural protections that reflect our elevated standards as we continue to grow the company. So I think you'll see strong growth, strong risk metrics, and we're going to continue to keep going and all the ways you would want to see us perform. Jason Darby: Yes. So I'll just quickly add. I think the targets that we set out about 1.5% to 2% sequential loan growth in the net book, we're prepared to stay with those targets. We think they're very appropriate. Obviously, we're balancing between our grow more portfolios and those that are running off. So we'll expect to see a little bit higher growth rate just in the portfolios of C&I, multifamily and [indiscernible] versus the net book. And then we still have our PACE portfolio targets as well, Justin. So you should think of those as complementary from a growth perspective on the asset side, and the opportunity for the bank to continue to have balance in loan generation is something that we are very focused on. So we did have a nice quarter with multifamily. We expect to see a little bit more balance between our C&I and multifamily portfolios as we move throughout the balance of the year to help meet those targets. Justin Crowley: Okay. Great. And you mentioned on the PACE side as you continue to add to that portfolio. And I think in the past, you talked a lot about a lot of potential, specifically in the CPACE area. So -- and I think you have talked at length about the partnership that you're in. So just curious how you're thinking about growing that book as that business ramps higher? Sam Brown: Yes. Justin, it's Sam again. CPACE has been really tremendous for us. You obviously saw a really nice number in the last quarter. You saw more growth this quarter. We really like the pace at which those assets are coming on, no pun intended. That announcement of that partnership with Electrify in October has been very strong. We're seeing a lot of contribution to the pipeline for that. And I think you're going to see this continue to be a strong component of how we're going to grow the asset base, and we're picking up some nice yield growth over the quarter as well. Operator: We have no further questions at this time. Ms. Sims Brown, I'd like to turn the floor back over to you for closing comments. Priscilla Sims Brown: Thank you, operator, and thank you all for listening in. As we step back and think about the quarter, we feel that it was a very strong quarter. We delivered solid execution across the franchise, which allowed us to favorably revise our guidance. We're building on a consistent pattern of quarterly outperformance. Our financial and capital position remains strong. Our balance sheet is built to withstand adverse scenarios and at the same time, we're well positioned for accelerated disciplined growth. And just as importantly, this quarter reinforces our risk discipline. When we identified an issue, we acted early, we acted conservatively. We expanded the disclosure to you and we confirm that the impact is contained without losing momentum anywhere else in the business. That combination of performance, discipline and capital strength is exactly how we are positioning the bank for the long term. We thank you for your support, and we look forward to answering your questions after this call. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good day, everyone, and welcome to Enterprise Financial Services Corp First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions]. I'd now like to hand the call over to Jim Lally, President and CEO. Please go ahead. James Lally: Thank you all very much for joining us this morning, and welcome to our 2026 first quarter earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer, and Doug Bauche, Chief Banking Officer of Enterprise Bank & Trust. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K for reasons why actual results may vary from any forward-looking statements that we make today. Our financial scorecard begins on Slide 3. The solid financial performance that we've generated over the past several years continued into the first quarter of 2026. For the quarter, we earned $1.30 per diluted share compared to a seasonally strong $1.45 in the linked quarter and $1.31 in the first quarter of 2025. This level of performance produced a return on assets of 1.16% and a pre-provision ROAA of 1.65%. I would characterize our performance in the quarter as solid and on plan. Net interest income was relatively stable when compared to the linked quarter at $166 million while net interest margin expanded 2 basis points to 4.28%. This reflects both better seasonal performance in our deposit balances and net interest margin expansion resulting from our relationship-oriented business model where our clients receive value-added service from our teams and returned for a few extra basis points when it comes to loan and deposit pricing. Our well-positioned balance sheet continues to be the strength of our company, as it provides great flexibility with respect to capital planning. Capital levels at quarter end remained stable and strong, with total stockholders' equity at $2 billion and the tangible common equity tangible assets ratio of 9%. At this level of TCE, we were able to produce a return on tangible common equity of 12.53%. Our strong return profile allowed our tangible book value per share to remain level at $41.38 despite the fact that we utilized approximately $27 million of capital to repurchase 483,000 shares at an average price of $56.13. In addition to this, given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share for the second quarter of 2026 to $0.34 per share. Turning to Slide 4, you will see that loans dipped slightly in the quarter. Three things led to the slight decrease, the first is that several significant closings that we expected to see in Q1 have slid into the second quarter and have closed or will close in the coming weeks. The second reason for this decline was a $100 million pay down in our low-income housing tax credit portfolio. These paydowns happen annually and are the proceeds from successful sales that occurred in the fourth quarter of 2025. Another positive from these payoffs is the fact that the majority of these loans were made in 2021 and 2022 and the fixed rates earned on these loans are lower than what we can earn on this cash in our investment portfolio today. The final contributor was the sale of $25 million of SBA loans in the quarter, which produced a gain of $1.4 million. Doug will provide much more color on the performance of our markets and businesses in his comments. Our diversified deposit base continues to be a differentiator for us. We did experience a typical first quarter deposit outflows due to our heavy concentration of commercial-oriented accounts. We've worked extremely hard to blunt this trend through growth of our national deposit verticals as well as through market and business diversification within both the Commercial Bank and our more granular business banking and consumer relationships. The composition of deposits also remained stable as our percentage of [indiscernible] to total deposits remained at 33%. These trends were aided by a continued reduction in the overall cost of deposits to 1.52%, a 12 basis point drop in the quarter and 31 basis points when compared to the first quarter of 2025. It was on our 2025 first quarter earnings call that we first spoke with the 7 Southern California loans that ultimately landed in OREO. Our contention a year ago was that we would favorably work through these loans without a loss. Today, I'm pleased to report that we continue to make progress on this and currently have 4 of these properties under contract, representing total OREO balances of $46 million, with great progress on the other 3 properties being made. I would expect to report positive further progress in the remaining quarters of 2026. Additionally, the remainder of the portfolio continues to perform as expected. Ken will make additional comments about asset quality and provision expense in his comments. Turning to Slide 5. You will see our priorities for 2026. We made significant strides in asset quality improvement during the quarter and I'm confident that this will continue throughout 2026 highlighted by the expected sale of the 7 Southern California properties that are currently in OREO. I'm still bullish on overall mid-single-digit balance sheet growth for the year. Our ability to produce well-priced diversified deposits has been proven over the last several years, and I have a great degree of confidence that this will continue throughout 2026. However, the longer that uncertainty is the byproduct of the conflict in Iran, borrower sentiments may be cautious, which could impact future loan growth. Over the last few weeks, I have had the opportunity to visit with many clients representing the first array of businesses and industries. They continue to perform well, but their confidence to make large investments in capital expenditures or to think about any type of strategic hires or M&A is truly day-to-day. Like I stated on previous calls, entrepreneurs need to be able to see 90 to 120 days into the future to confidently make these strategic decisions and the recent volatility in the current environment could have an impact. Obviously, a quick resolution or stabilization of the current state changes this immediately. Finally, like many of our clients, we too are focused on efficiency gains through automation and expansion of our existing technology framework. This is a daily opportunity for our company, and we are excited about the progress we are making. Overall, I'm very pleased with our results for the first quarter of 2026. We are positioned extremely well for just about any environment. We have wonderful markets of growing diversified deposit base and an extremely strong balance sheet. We have used these tools to grow tangible book value per share over 10% annually for the last 14 years, and are in great shape to accomplish this again in 2026. With that, I would like to turn the call over to Doug Bauche. Doug? Douglas Bauche: Thank you, Jim, and good morning, everyone. Turning to Slide 6, you'll see the breakdown of our loan portfolio by asset class. Successful attraction and on-boarding of new clients across our footprint drove $97 million in Q1 loan growth and our core C&I and owner occupied real estate portfolios and $21 million in loan growth from our Life Insurance Premium Finance division. Those advancements, however, were largely offset by the anticipated $101 million reduction in our low-income housing tax credit portfolio via the successful completion of affordable housing projects and sale of state tax credits. The weighted average fixed coupon on the $101 million in tax credit loans paid off in the quarter was 3.29%, providing us the opportunity for redeployment of that capital at higher earning yields in the current environment. Furthermore, as Jim mentioned, we executed on the sale of $25 million of SBA guaranteed loans in the quarter. The Sponsor Finance portfolio declined $33 million in the quarter as payoffs from the sale of sponsor-owned portfolio companies exceeded new originations. Overall, I am pleased with the mix and breadth of our loan funding pipeline, and I remain cautiously optimistic about our ability to achieve our loan growth objectives for the year. The elevated geopolitical risks Iran conflict and market complexities may, however, result in our organic growth being more uneven over the next couple of quarters. Slide 7 demonstrates the continued strong diversity of our loan portfolio across our geographic markets and specialty business lines. The Specialty Lending portfolio at just over $4 billion inclusive of tax credit lending, sponsor finance, SBA and life insurance premium finance has remained relatively flat year-over-year. However, our core geographic markets in the Midwest and Southwest have delivered 6% and 25% year-over-year growth rates, respectively, which includes loans acquired in the branch acquisition that closed in the fourth quarter. In the West region, our investments in new talent in 2025 in Southern California are showing positive momentum. Leveraging market disruption, we are experiencing a growing pipeline of quality CRE and C&I holistic relationship opportunities that will translate to solid organic growth during the year. Turning to deposits on Slides 8 and 9. Reductions in the quarter within the core geographic portfolio reflect anticipated seasonal outflows and client balances of $272 million mainly associated with distributions, bonuses and tax payments. A material portion of this reduction was offset by continued growth within the national deposit verticals which grew by $187 million or roughly 20% annualized in Q1. On a year-over-year basis, total client deposits, excluding brokered funds, are up 10%. The national deposit verticals profiled on Slide 10 continue to provide differentiated and attractive sources of funding, while also diversifying our overall deposit base and somewhat softening the seasonality of our other channels with over $4 billion in deposits across our property management, community association and legal and escrow businesses, the average earnings credit is an attractive 2.59%, considering no incremental expenses in branches or branch personnel. Lastly, Slide 11 profiles the mix of our core deposit base which continues to be well diversified and highly relationship-oriented with just over 33% of these accounts being noninterest-bearing and 80% of them using some form of treasury management [indiscernible] online banking they offer operational stability and a solid base from which to expand other fee-generating revenue streams, including card and merchant services. Now I'll turn the call over to Keene Turner for his comments. Keene Turner: Thanks, Doug, and good morning, everyone. Turning to Slide 12. We reported earnings per share of $1.30 in the first quarter on net income of $49 million. Excluding certain nonrecurring items, earnings per share on an adjusted basis was $1.31 compared to adjusted earnings per share of $1.36 in the linked quarter. Pre-provision earnings were $70 million, a decline of $4 million from the linked quarter. The $0.05 decrease in adjusted earnings per share and the $4 million decrease in pre-provision earnings was primarily due to lower tax credit income and the impact of 2 fewer days on net interest income. The decline in tax credit income was expected as it is typically highest in the fourth quarter of the year. The provision for credit losses decreased from the linked quarter due to the decline in both net charge-offs and total loans. The primary driver of the provision this quarter was a qualitative factor that was added to recognize the potential impact on credit losses from the conflict in Iran. The increase in noninterest expense in the period was mainly due to typical seasonal increase in compensation and benefits and to a lesser extent, the first full quarter of run rate expenses from the branch acquisition that closed last October. These increases were partially offset by a decline in onetime acquisition costs related to the acquisition. Turning to Slide 13 and with more details to follow on Slide 14. Net interest income for the first quarter was $166 million, a decrease of $2 million from the fourth quarter, which was largely attributable to fewer days in the first quarter. Interest income declined $7 million from the prior period. The largest contributor was an $8 million decrease in loan interest as our yields fell 13 basis points on variable rate resets amidst Fed easing, along with a $17 million decline in average loan balances. This was partially offset by $1.9 million of additional earnings in the investment portfolio with average balances higher by $159 million and an 11 basis point improvement in the securities yield. The rate on loans booked in the quarter was 6.58%, and the average tax equivalent purchase yield on investment was 4.51%, both of which are additive to their respective portfolio. Interest expense declined $5 million compared to the linked quarter as a result of lower funding costs. Interest expense on deposits decreased by $5.5 million as average interest-bearing balances declined $89 million, and the rate on interest-bearing deposits moved 15 basis points lower. This was partially offset by higher interest expense on customer repo accounts due to seasonally higher balances. Our net interest margin for the first quarter was 4.28% and an increase of 2 basis points in the quarter. Our cost of interest-bearing liabilities declined 15 basis points led by lower rates on non-maturity deposits and borrowings, which more than offset the 9 basis point reduction in yield on earning assets. Net interest income remained slightly asset sensitive, primarily in parallel interest rate simulation with each 0.25 point cut in rates, reducing net interest income $1 million to $2 million per quarter or a couple of basis points of net interest margin. Including deposit-related noninterest expense in this analysis, we modeled that we are effectively neutral to modestly liability sensitive as we continue to have success growing the related deposit balances. We anticipate the recent steepening of the yield curve will favorably impact pricing on fixed rate loans and the reinvestment of cash flows in the investment portfolio. With the Fed seemingly on hold, we expect our net interest margin to remain in the low to mid 4.2%. As we execute on our growth plans for 2026 and remain committed to disciplined pricing on both loans and deposits, we look for net interest margin to be stable in this range with consistent growth in net interest income over the next few quarters. Slide 15 reflects our credit trends. Net charge-offs totaled $4.4 million in the first quarter compared to $20.7 million in the linked quarter. We made progress in the quarter reducing nonperforming assets with the full repayment of 2 loans and total principal repayments of $21 million on nonaccrual loans. We also foreclosed on the last property related to our largest nonperforming relationship and are actively working out these properties. As Jim noted, 4 of the 7 properties in this relationship are under contract, and we expect contracts for the other 3 properties in the near future. Net charge-offs totaled 15 basis points of average loans compared to 21 basis points for 2025. The provision for credit losses was $7.2 million in the period compared to $9.2 million in the linked quarter. The provision in the quarter was mainly due to net charge-offs and a qualitative adjustment to the allowance for potential impact of the Iran conflict. While we have not seen a direct impact on credit quality from the conflict that started at the end of February, we have recognized the impact that oil prices and market uncertainty can have on economic factors used to forecast losses in the loan portfolio. Slide 16 shows the allowance for credit losses. The ratio of allowance to total loans increased to 1.21% compared to 1.19% at the end of 2025. When adjusting for government guaranteed loans, the ratio increases to 1.32% of total loans, which shows the strength of our reserve coverage. On Slide 17, first quarter noninterest income was $19.1 million. This was a $6.3 million reduction compared to the linked quarter. The decrease was primarily due to other real estate owned gains and seasonally strong tax credit income during the fourth quarter of 2025. The first quarter included two mitigants from higher income from private equity fund distributions and a gain on the sale of guaranteed SBA loans. Turning to Slide 18. First quarter noninterest expense of $115 million was relatively comparable to the linked quarter as it included a full quarter of operating expenses related to the branch acquisition that closed in the fourth quarter. Noninterest expense in the fourth quarter included $2.5 million of onetime branch acquisition costs and a reversal of accrued FDIC special assessments. Excluding the impact of these nonrecurring items, noninterest expenses were $2.5 million higher than the linked quarter, which includes the first full quarter run rate of expenses from the acquisition. First quarter noninterest expense included seasonal impacts in compensation and benefits. Deposit costs were lower than the linked quarter by $1.5 million, which was largely driven by the expiration of certain allowances that were not utilized. Other expenses decreased from the linked quarter, primarily due to a recovery of a credit card loss event that was incurred in the fourth quarter. The core efficiency ratio was 60.2% for the quarter compared to 58.3% in the linked quarter. Our capital metrics are shown on Slide 19. The tangible book value per share of $41.38 was relatively stable with the linked quarter. Strong first quarter earnings effectively offset the fair value reduction from the impact of higher interest rates on our available for sale securities portfolio. We continue to proactively manage excess capital, repurchasing 483,000 shares of common stock for approximately $27 million. At an average price of $56.13 per share, this was an attractive multiple of tangible book value. Our tangible common equity ratio was 9%, stable with the linked quarter. The quarterly dividend was increased by $0.01 to $0.34 per share for the second quarter of 2026 continuing our record of increasing the dividend 9 consecutive quarters. This was a strong start to the year to 1.2% return on average assets and a 13% return on average tangible common equity. We're well positioned with a strong earnings profile, balance sheet and capital position to support further organic growth across our markets. I appreciate your attention today, and we'll now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Rulis of D.A. Davidson. Jeff Rulis: I'll tread lightly on the credit side. I know it's been exercising patients, but just to kind of go along the 4 properties that are under contract. I guess if you could touch on potential timing for sale. And then as we recall, I think those were pretty attractive. The real estate was really never a question on the valuation. It's just a fight to get to them. And I guess, so the question that second piece is any anticipated gains with those sales? James Lally: Yes, I'll take that one, Jim. Jeff. So 3 of the 4 should transact yet here in the second quarter and the fourth one later this year. And as it relates to the contracts we have in hand, they support how we've identified them in our financial statements. Jeff Rulis: Okay. And gains or losses, a little early to kind of... James Lally: It is early, but we feel confident about how we recognize things in the fourth quarter of last year, and how the things should settle out. Jeff Rulis: And on the other 3 properties you sounded optimistic on those as well. Any sort of differences in those? Or it's just sort of, again, its timing of the contracts and potential sales there's nothing, I guess, different from 4 versus the 3 still to may be dealt with? James Lally: It's timing. You're right. It's timing. You remember, one, we had a little while to get our hands on, which we have now. I've identified several different potential buyers. So now it's a bit of a -- let them fight that out to get the best outcome we can. Jeff Rulis: Got it. And then hopping over to the margin, Keene, I think our prior conversations were more of a margin to step down to 4.20%, I think as the rate environment has altered and it sounds like you've got some pretty good earning asset repricing opportunities within the book, but you pointed to the yield curve as well. Just want to check on the low to mid-4.20%. What's kind of the time line of that? Is that just through the end of the year? And I don't know if you've talked about your positioning thereafter -- any additional color on the margin? Keene Turner: Yes. Jeff, margin in March was a little bit of a step down from the -- what we reported here in the first quarter. So our guide is I would say today's run rate, and I think we see it holding stable through the end of the year. I think we had a little bit of balance sheet contraction here in the first quarter. And then with the shorter days, you get a little bit of a false positive in terms of margin popping. But we feel good about day count in our favor now. Really how the shape of the curve and where intermediate term rates are for reinvestment, both on the loan and securities portfolio and I think any amount of growth from a loan perspective that we can get an overall balance sheet growth, which we anticipate will happen here starting in the second quarter. I think we feel really, really good and optimistic. And I think we see margins being reasonably stable for that time frame. So we're positioned to defend it if necessary. We've been able to reprice deposits extremely well when the short end of the curve has come down. I think we continue to feel good about that if that's the case. But right now, it's status quo. And what I would say is historically status quo is good for us because it allows us to just go play offense bring clients on, expand the balance sheet and not to worry about doing as much repricing activity when that arises. So it's business as usual from a growth perspective. Jeff Rulis: Got it. Yes, I heard your message of a stable margin, but consistent NII growth is probably more important. Operator: Your next question comes from the line of Damon DelMonte of KBW. Damon Del Monte: I hope everybody is doing well. Keene, just looking for a little commentary around the outlook for expenses over the coming quarters here in '26. Do you expect much growth off of first quarter's level? And any insight in there would be great. Keene Turner: Yes. I think the first quarter is always seasonally heavy on compensation. We do expect that to alleviate slightly, albeit we will have a full run rate in the second quarter of merit that occurred in March and day count also moves against us there a little bit. So I think there's a little relief there sequentially, on the comp piece. And then we did have a benefit on the deposit expense line item. So that we expect to step up back to more of that $27 million level. So the way I'm thinking about it is that from a pre-pre perspective with day count and that reversal, we're sort of on the same run rate here to start the second quarter. And then whatever growth and other items we can get will accrue to our benefit. But I think the sequential change in expenses will be paid for in net interest income, and then maybe some other items. So that's sort of how I'm thinking about the expenses here moving into the 2Q and beyond. Damon Del Monte: Got it. Okay. So a step up from this quarter's $115.1 million, but then that's kind of offset by NII growth, is that... Keene Turner: Yes. That's essentially how I think about it. I think this is like a very base kind of earnings quarter where we can have mostly positive progress here for second, third, fourth quarter as we get more days, more growth, maybe some more contribution from some of the episodic fee items, things like that. Damon Del Monte: Got it. Okay. Great. And then could you help us think a little bit about the provision going forward. Nice to see the NPLs come down this quarter. I'm assuming you're still making progress on the remaining ones and you're going to have some loan growth. So is the provision kind of going to be driven by a similar level of net charge-offs over this quarter and kind of maintaining the loan loss reserve in that north of 120 basis points? Keene Turner: Yes. I think charge-off wise, charge-offs are sort of on from a basis point perspective, what we'd think about on a recurring basis. And then we just -- we took the opportunity with some of the uncertainty that's around the economic forecast, but really wasn't in the base yet to provide some additional reserves for that uncertainty. So I think, again, back to my comments, I think that positions us well, both with some of the progress we're making on credit as well as just having some of the economic data, whether it was in the underlying forecast or whether we put it on top, just absorbed into what we're thinking here. And then to the extent that we have growth and charge-offs, that will drive provisioning, but I think it can abate a little bit just given we took some of the bad news here in the first quarter and put it in a spot where it's there for reserves if we have businesses that are stressed by oil prices or whatever other items are caused by what's going on. Damon Del Monte: Okay. Great. And then I guess just one more quick one on capital and your view on capital management. Things are going well. strong capital levels bought back some stock this quarter. Can we assume that you guys will remain active in the market given the current levels of stock price? James Lally: David, this is Jim. Absolutely. We'll continue evaluating the merit of further repurchases and our other levers with respect to dividends, we'll continue to evaluate, but really, it's about growth. And as it relates to M&A, it still remains a low priority for us. So you're looking at repurchases and growth is the priorities for capital. Operator: Your next question comes from the line of Nathan Race at Piper Sandler. Nathan Race: Maybe for Jim or, Doug, curious if you can just comment on what you're seeing from a pricing perspective on new loan production -- on a blended basis and if you've seen kind of new loan production kind of incremental deposit growth being margin accretive and relative to the overall loan portfolio yield as well. Douglas Bauche: Yes, Nathan, it's Doug here. Thanks for the question. We are clearly seeing competitive pressures, kind of squeezing spreads and credit across all of the footprint today. we look at loan yields, I think at the end of Q1, yields were 6.2%, 6.3%, somewhere in that range. And given the current environment, right, we think we can continue to originate credit and that low to mid-6% range. And as we talked about, just some redeployment of capital from payoffs in the [indiscernible] portfolio that provides us some real advantage there of really 200 to 300 basis points of additional margin on that $100 million portfolio that paid off. So it's tough out there, right? But our team does a good job to price both to win and yet to work to protect our margin with every basis point that we can. Nathan Race: Okay. Got it. That's helpful. And then just the expectation that loan growth in the mid-single-digit range for this year is going to be funded by a deposit gathering or maybe can you just comment on kind of excess liquidity that you have come off the bond portfolio and just kind of other sources of funds to loan growth? Keene Turner: Yes, I think we expect to keep the the securities portfolio at a similar proportion. So I think our expectation is that will continue to grow it over the course of the year. That means that we're going to out fund loan growth with deposit growth, both in the commercial bank and the specialty and consumer bank. So that's our plan. I think that's the thing we're probably most confident about is our ability to grow deposits. We like the environment for deployment, whether that's in the securities or loans. And I think you heard from Doug, we'll continue to be disciplined on loan side, both on credit and pricing. And I think we think that sets up for a good performance in 2026 and beyond. So that's the playbook we've been running for the last few years, and I think that's the playbook for '26. Nathan Race: Okay. Great. Maybe one last one for Jim. Just curious if you can comment on any M&A appetite these days. Obviously, you guys have a nice organic trajectory in front of you and some nice earnings tailwinds over the balance of this year. But just curious if there's any opportunities on the M&A front that are interesting for you guys these days? Or is just kind of the focus on organic growth, buying back the stock, just given where the current is today? James Lally: Yes, Nate, we're focused on is executing the plan. We've got some work to do relative to growth and certainly, we have to execute the plans relative to sales of these assets that we have and what have you. But it's a low priority, and we just got to keep focused on making sure that the plan we put forth is executed perfectly. And that's where our fourth tender associates are focused on today and tomorrow and into the future. Operator: [Operator Instructions] We don't have any further questions in the conference line I would now like to hand the call back to Jim Lally, President and CEO, for closing remarks. James Lally: Thank you, Ellie, and thank you all for joining us this morning and for your continued interest in our company. We look forward to talking to you at the end of the second quarter, if not sooner. Have a great day. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Greetings, and welcome to the First American Financial Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] A copy of today's press release is available on First American's website at www.firstam.com/investor. Please note that the call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 877 660-6853 or 201-612-7415 and by entering the conference ID 37-5-9993. We will now turn the call over to Craig Barberio, Vice President, Investor Relations, to make an introductory statement. Craig J. Barberio: Good morning, everyone, and again, welcome to First American's earnings conference call for the first quarter of 2026. Joining us today on the call will be our Chief Executive Officer, Mark Seaton, and Matt Weisner, Chief Financial Officer. Some of the statements made today may contain forward-looking statements that do not relate strictly to historical or current fact. These forward-looking statements speak only as of the date they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on these risks and uncertainties, please refer to yesterday's earnings release and the risk factors discussed in our Form 10-K and subsequent SEC filings. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors. For more details on these non-GAAP financial measures, including presentation with and reconciliation to the most directly comparable GAAP financials, please refer to yesterday's earnings release which is available on our website at www.firstam.com. I'll now turn the call over to Mark Seaton. Mark Seaton: Thank you, Craig. We are pleased to report continued momentum in the first quarter, generating adjusted earnings per share of $1.33, a 58% increase from the prior year. In commercial, revenue grew 48%, achieving a record for a first quarter. Notably, we closed 20 orders, generating more than $1 million in premium, double the amount from last year. In our National Commercial Services division, we are seeing broad-based strength with 9 of our 11 asset classes up year-over-year. Data centers remain a meaningful tailwind with revenue tied to this sector increasing 76% relative to last year. We are also seeing strong activity in our Energy Group, which grew 250% and was a top 5 asset class during the quarter. Residential purchase revenue continues to lag. We have been more bearish on the purchase market this year than most public forecasts, and that view is proving accurate as purchase revenue declined 4% year-over-year. On the refinance side, we saw a modest benefit during the quarter when mortgage rates dipped into the low 6% range. While this provided some lift in the first quarter, volumes have since softened as rates moved higher again. Another key earnings drivers are bank, First American Trust, which continues to provide a steady stream of investment income. During Q1, average deposits totaled $6.8 billion, up 19% from last year. Growth has been driven by both commercial deposits and deposits from our -- outside of our captive title business. During the quarter, 29% of deposits came from sources beyond our captive title business, including $1.4 billion from ServiceMac and an additional $300 million from 1031 exchange deposits. Our agent banking strategy is also gaining traction with 284 agents currently banking with First American Trust, up 26% from last year. These balances are expected to grow as the market recovers. The bank continues to serve as a countercyclical earnings driver with meaningful long-term growth potential as we expand servicing 1031 exchange and agent banking deposits. Our primary strategic focus is to leverage AI across our business to amplify the talents of our team, better serve our customers and strengthen our operational capabilities. Over the past year, we launched an enterprise AI platform that helps product teams develop, govern and deploy secure compliant AI systems. This platform is an internal system that will allow us to deploy products faster and at scale. While we regularly discuss our 2 major enterprise initiatives, Endpoint and Sakura, we are also seeing incremental gains across the company. One example is in our Agency division, where we are deploying AI-driven tools that expand our quality control capacity by more than sixfold. We have also introduced AI-assisted examination capabilities that reduced order processing time by roughly 30 minutes per file. Importantly, these examination capabilities are not confined to our internal operations. This quarter, we are extending these same AI-driven tools into agent net, our title agent-facing platform, leveraging our proprietary data, domain expertise and proven production performance to deliver value to our customers. AI-driven efficiency improvements like these not only enhance our operating leverage, allowing us to scale efficiently as volumes recover, but also provide revenue opportunities by enabling us to deliver new solutions to our clients. We are also redefining how we build software. Today, 25% of our engineers are trained in Agentic AI development and are moving from concept to production in weeks rather than months. Productivity will continue to improve as the rest of our product engineering teams complete training this quarter. The impact goes beyond speed. Our teams are spending more time solving customer challenges ensuring every investment drives real value. We are embracing this transformation and believe we are in the leading edge of our industry in adopting these capabilities. Turning to Endpoint. We have outlined a plan to scale the platform across First American Title local branch network by the end of 2027, and we remain on track. Endpoint is live in Seattle, where we have opened around 310 orders and closed 150 orders on the new system with each transaction, we continue to learn and improve. In this pilot, we have automated approximately 30% of the tasks required to close the transaction allowing our people to focus more on customer-facing activities and complex issues. These automation rates will only increase over time. We are expanding the endpoint pilot this quarter to First American titles escrow officers across the state of Washington, an important milestone. We expect approximately 80% to 85% of our local branch network to be on endpoint by the end of next year. This represents a significant transformation, not just a technology rollout but a standardization of workflows that shift the nature of work from executing tasks to verifying them. The real value of AI lies not only in the tools themselves, but in how workflows evolved to fully leverage them. While substantial work remains, we are confident and energized by the opportunities ahead. With SEQUOIA, we also continue to make strong progress. As a reminder, SEQUOIA is our AI-powered title decisioning platform. We are currently live with refinanced transactions in 8 counties across California and Arizona in our direct division, where we have fully automated title decisioning 35% of the time. The more complex challenge has been purchased transactions. And last month, we reached a key milestone by launching SEQUOIA for purchase transactions. Today, in 3 counties, we are automating title decisioning for 13% of purchase transactions instantly determining insurability at order open. Over time, our automation rates will improve, and ultimately, we believe we can deliver instant title decisioning for 70% of purchase and 80% of refinance orders in markets that we have title plants. This is made possible by our industry-leading title plant data, underwriting expertise and innovative technology. By the end of this year, we plan to expand SEQUOIA across California and Florida with a national rollout planned for 2027. Looking ahead, we are optimistic about our earnings trajectory. Our commercial business remains strong. For the first 3 weeks in April, our opened commercial orders are down 4% relative to last year. But as we experienced this quarter, the fee profile matters more in commercial than the number of orders. And given our strong pipeline of sizable commercial transactions, we still believe 2026 will be a record year in our commercial business. On the purchase market, we remain more cautious than the consensus view. So far in April, open purchase orders are down 3% as the sluggish home sale trend continues. While the residential market remains at trough levels, we are focused on rolling out our new AI-powered title and escrow platforms, which will provide greater operating leverage when the market recovers. From a capital management perspective, we continue to deploy earnings into opportunities with the most attractive risk-adjusted returns. We are taking a disciplined approach to acquisitions, focusing on the right partners rather than growth for its own sake. As our stock has pulled back while our earnings and outlook have strengthened, we have taken the opportunity to repurchase shares. Matt will discuss our financial results and capital management in more detail. And with that, I'll turn the call over to him. Matthew Wajner: Thank you, Mark. This quarter, we generated GAAP earnings of $1.21 per diluted share. Our adjusted earnings, which exclude the impact of net investment losses and purchase-related intangible amortization were $1.33 per diluted share. Focusing on the Title segment, adjusted revenue was $1.7 billion, up 17% compared with the same quarter of 2025. Looking at the components of title revenue, we saw strong growth in commercial and refinance partially offset by weakness in purchase. Commercial revenue was $271 million, a 48% increase over last year, reflecting both increased transaction volumes and significantly higher average revenue per order. Our closed orders increased 9% from the prior year and our average revenue per order was up 36%. Purchase revenue was down 4% during the quarter, driven by a 6% decline in closed orders partially offset by a 3% improvement in the average revenue per order. This reflects continued weakness in home sale activity. Refinance revenue was up 76% compared with last year, driven by a 57% increase in closed orders and a 13% increase in the average revenue per order. This growth was supported by a temporary decline in mortgage rates during the quarter, though activity has since softened as rates have moved higher. Refinance accounted for just 8% of our direct revenue this quarter and highlights how challenged this market continues to be compared to historic levels. In the Agency business, revenue was $759 million, up 16% from last year. Given the reporting lag in agent revenues of approximately 1 quarter, these results primarily reflect remittances related to fourth quarter economic activity. Information and other revenues were $269 million during the quarter, up 14% compared with last year. The increase was driven by revenue growth at the company's subservicing business higher demand for noninsured information products and services and refinance activity in the company's Canadian operations. Investment income was $154 million in the first quarter up 12% compared with the same quarter last year despite the Fed cutting rates 3x. The increase in investment income was primarily due to higher average balances driven by commercial, 1031 exchange, subservicing and warehouse lending activity. Investment income did from our bank subsidiary shifting its asset mix to fixed income securities, which earn a higher yield and are less sensitive to changes in short-term interest rates. Personnel costs were $546 million in the first quarter, up 13% compared with the same quarter of 2025. The increase was mainly due to incentive compensation expense resulting from improved financial performance and higher salary expense. Other operating expenses were $277 million in the quarter, up 13% compared with last year, primarily attributable to higher production expense driven by higher volumes and increased software expense. Our success ratio for the quarter was 58%, which is in line with our target of 60%. The provision for policy losses and other claims was $40 million in the first quarter or 3.0% of title premiums and escrow fees, unchanged from the prior year. The first quarter rate reflects an ultimate loss rate of 3.75% and for the current policy year and a net decrease of $10 million in the loss reserve estimate for prior policy years. Interest expense was $27 million in the current quarter up 34% compared with last year due to higher interest expense in the warehouse lending business and on deposit balances at the company's bank subsidiary. Pretax margin in the title segment was 9.6% and or 10.4% on an adjusted basis. Moving to the Home Warranty segment. Total revenue was $110 million this quarter, up 2% compared with last year. The loss ratio was 36%, down from 37% in the first quarter of 2025. The improvement in the loss ratio was due to small reductions in the number and severity of claims. Pretax margin in the Home Warranty segment was 23.5% or 23.8% on an adjusted basis. The effective tax rate in the quarter was 22.9%, which is slightly below the company's normalized tax rate of 24%. Our debt-to-capital ratio was 32.2%, excluding secured financings payable, our debt-to-capital ratio was 21.9%. As Mark mentioned, our stock has pulled back while our earnings and outlook have strengthened, so we took the opportunity during the quarter to repurchase 556,000 shares for a total of $33 million at an average price of $6.21. So far in April, we repurchased 296,000 shares for a total of $18 million at an average price of $61.61. We will continue to take an opportunistic approach to buybacks based on valuation, available capital and our outlook. Now I would like to turn the call over to the operator to take your questions. Operator: [Operator Instructions] Our first questions come from the line of Mark DeVries with Deutsche Bank. . Mark DeVries: Thanks. As I know you're aware, there have been a lot of talk about new entrants leveraging AI to potentially disrupt the title insurance industry. Mark, could you just talk about the ways in which you're evolving, whether it's endpoint, Sequoia, other things to try to fend off the competition. And also, any kind of just inherent advantages you have moats that really should help you, again, hold up well against this competitive threat? Mark Seaton: Yes. Thanks, Mark. Just in terms of AI just in general, I mean these are new tools available to us that weren't available a year ago. And so we've seen what they can do. We do think they're going to change our industry for the better, not just on the operating efficiency side, but it's going to allow us to reach new customers and service routers better. And so we're really leaning into it. And we're just all in on AI, and we feel like we need to win in our industry with -- we talked a lot about SECOIA and endpoint on this call and prior calls, and we feel really great about those capabilities. In terms of the competition, I mean, there's a lot of talk about what AI can do, but we really have significant advantages. The first thing is -- and this is really for all type of companies, distribution is hard to get. And we've got thousands and thousands and thousands of local relationships all over the country. We've got 800 offices and big counties and small accounts all over the country. It's hard to replicate that. It's hard to get that. And it's hard to change how real estate is transacted in the U.S. A lot of people try something very slow to change. So distribution is very it's hard to get. Second thing is our title plans are a big advantage. It's a big advantage. We could not automate title like we are without our title plants. And not only are we automating it, but we're putting our balance sheet behind it. We're ensuring it, right? And so we're not -- when we automate things, we're not changing our underwriting standards. We're not creating new alternative products that shift risk on to consumers. We're putting our balance sheet behind it. And so our balance sheet is an advantage. Our data is an advantage. And I think I couldn't say this 3 years ago, but I think I believe this now, I think our technology is an advantage. I think when you look at our our industry, we don't really compete on the basis of technology at all. It's really -- it's a people business, it's a service business. But I think over time, data and technology become more and more important. And by those measures, I think we've got a big advantage. Mark DeVries: Okay. Got it. I know in the recent past, you've been able to kind of significantly expand your title plant footprint through kind of leveraging technology to make that process more efficient. Are you still generating efficiency gains there that could potentially have you with like kind of full coverage over the next several years? Or are there markets where that's just never going to make sense? Mark Seaton: I think there are realistically the submarkets where it probably doesn't make sense. We're in 1,850 counties now. That represents 82% roughly of all real estate transactions that's national coverage. We are always looking to build new plants, but it's more of 1 or 2 us here or there. I mean there's there are certain very, very rural markets where we're just -- there's just not enough business in those markets to scale. So we have a national footprint now. I don't -- I think when looking back 5 years ago, there were definitely some markets, I can think of Chicago in some places in Texas where we wish we had tied-up plans. Well, now we have them. So we've got a national footprint -- we've been -- the ability for us to post our plants has just gotten better and better and better over time. And we're clearly the industry leader here. And we sell this data to our competitors, we sell it to the industry on kind of a one-off basis, but we use it to really power our tools, and that's a big advantage. So I think for the most part, we're really in the markets we want to be with the title plans. I don't see another big wave of expansion geographically right now. Mark DeVries: Got it. Makes sense. And just one quick follow-up on endpoint. I think you -- I know it's really early stage in the role. I think you alluded to being up to kind of 30% automation so far. But my recollection is you've talked about automating a much higher percentage of the process there. Can you just remind us where you think that number ultimately goes? Mark Seaton: Yes. So first of all, we're really pleased with the progress with endpoint, and we're really focusing on continually improving the product and also getting ready here for our first conversion where we're going to convert first market and title escrow authors onto the new endpoint platform. . Our Washington team is very excited about this transition and it's going to happen at the end of this quarter. So we're excited about that. We're at 30% automation rates right now. It's going to take a few years, but ultimately, we think we can be 80% to 90%, something like that. And really what this gives us is it gives our people the ability to spend more time going out and getting business, dealing with customers in an escrow transaction, there's always things that go wrong. There's complex things that go wrong. And we can spend more time doing those things and less on the administrative part of it. I think the work-life balance of our escrow officers is going to get a lot better and it will allow us to have a lot more operating leverage when the market comes back. And there's not a system -- there's nothing like it out there. Again, everything is done manually today. And we are gradually getting to this automation rate. But I think 80% to 90% of scale, once it's mature, I think, is a good goal, but we've got a lot of work to do before we get there. Operator: [indiscernible] of Maxwell Richard with Truist. Maxwell Fritscher: I'm calling in for Mark Hughes. -- commercial ARPO has obviously been on a huge run. What are your expectations there for the balance of 2016? Do you see that being sustained? And I guess, looking looking at your current pipeline? Mark Seaton: Thanks, Max. Well, we have a lot of momentum in commercial right now. I think the whole industry is benefiting from this. I mean our revenue was up 4%. And we're very confident that Q2 is going to be another similarly strong quarter in commercial, and 2026 is going to be a good year. I mean, it's going to be a record year for us. And I think the commercial market has legs I think internally, we're always a little bit hesitant like how long is this going to last. But we think that there's going to be a couple more years here of at least strength in commercial market. There's a lot of tailwinds that we have right now. Like back in 2022 when interest rates spiked the bid-ask spread between buyers and sellers really widened, which caused the market to fall. But since then, like we're in a very different environment now, we've got price stability which gives investors confidence to invest. Sales growth has been persistent and it really helps with confidence because there's more recent and reliable comps in the market. Commercial lending has been on the rise. There's a lot of equity capital in the business -- on the sidelines. -- refinance volumes, there's a refinance ball we're going through right now. And so there's a lot of tailwinds, and we're just seeing it all across our business. And on top of that, we've got really a new asset -- new material asset class, which is data centers. We're working on data center projects in 25 states right now. And energy projects for us are really starting to pick up too. And we -- and it takes time, like energy, like we closed the deal this quarter. We started it 10 years ago. It's a very long-tailed business, maybe not all that's probably an extreme example. But there's just a lot of momentum, and we see it in 2016 and beyond. So we're very pleased with the team and what we're doing there. Geoffrey Dunn: Got it. And then you had mentioned refinance activity in Canada. Can you elaborate on the dynamics there? Is that activity expected to be sustained as well? And also, what's sort of the difference in the market there versus in the U.S. Mark Hughes: This is Matt. I'll take that one. So in Canada, they don't have the concept of a 30-year fixed rate mortgage. So their mortgages tend to be 3- to 5-year in duration and then they need to refinance. So we're really just coming to a refi wave or a refi wall that's coming. We saw it last year. We believe it's going to persist through this year and into next year. So -- we expect the refi tailwind to continue throughout the year here and into next year for Canada. Unknown Analyst: And then if I may sneak 1 last 1 in here. Are there any updates you can share on the regulatory environment? Mark Seaton: The regulatory environment, I mean, there's different components to that. I think on the state level, it's fairly benign at the moment. There's always some things happening here or there. But I would say it's fairly benign. I think at the national level, there's been a lot of talk about this title waiver pilot over time. It's we've talked about on these calls, it's immaterial. They've extended it until November of 2027. That's not new news. That's been around for a little while. So there's not there's always things going on. There's nothing I would point to specifically. Thank you. Operator: Our next questions come from the line of Terry Ma with Barclays. Terry Ma: So I think you called out 20 deals this quarter within Commercial with over $1 million in premium. Kind of any color on kind of what sectors those deals are kind of focused on? And then as you kind of look forward, like, is the breakup of like your deal pipeline kind of similar? And do you expect a similar number of deals with higher premium? Mark Seaton: When we look at the big deals, the biggest asset class was energy deals. We closed a lot of big energy deals. The second biggest asset class was industrial and data centers, we kind of split data centers, some of are industrial and then some of them are development sites. But industrial was our second biggest like megadeal asset class. And we did a couple of multifamily retail deals, but most of it is energy and industrial and data centers. And it's going to continue. Like I said, I mean we're working on data center deals. We've been working on energy deals and we're just seeing huge transactions, some of them already closed here in the second quarter, and we feel like the pipeline this year is looking very good. Terry Ma: Got it. That's helpful. I think last quarter, you said a bigger driver of the commercial growth or at least the revenue growth would be from volume rather than pricing. Is that still the thought? Or do you think there's a little bit more benefit from just the ARPU growth this year? Mark Seaton: Well, we've been surprised. I think that heading into the year, we thought it was going to be a record year in commercial than it is, but it's even better than what we thought it was going to be, and it's really driven by our own boat. So I think we've been a little bit you can say that the order counts have been below our expectations, but the fee per file has more than exceeded that. So that's the trend that we're seeing this year so far. Geoffrey Dunn: Got it. Okay. And then just 1 more question. A follow-up on your comment about title plants being a competitive advantage. Can you maybe just talk about how hard it would be for an entrant with AI or otherwise to kind of replicate that? Maybe just talk about what the barriers are to kind of reconstruct that advantage. Mark Seaton: Yes, sure. So first of all, if you want to build a title plan, you have to go out and buy the images. I mean you have to go out and buy the deeds and all the -- you have to go to 1,850 counties and you have to purchase, acquire the source documents that you need to build the title plan, very expensive just to buy the source documents. Once you get the source documents, you have to have the title skill, I would say, to understand what documents are relevant, what documents are not, how to post the plant every county is different. The syntax is different on what's the deed versus the warranty. There's a lot of nuances county by county and building a plan -- now I will say that it is cheaper to build a plant today than it was 2 years ago. There's no question about that. I mean, AI is really helping with that, and we've seen the benefit. I mean, we used to do it all manually today -- and today, about 85% of the time we posted digitally. And 15 or so percent of the time, we're not really sure there's some of these documents are hand written in some cases, and we have to have people look at it. So we've gotten cheaper to build a plant. But the big thing is you have to buy the source documents and every county or state have different rules about how far you have to go to search, like in places like Oregon, you've got to go all the way back to patent. You got to get the source documents all the way back to the beginning of the patent. Texas is 15-year search. So it is very, very difficult. And I know there's been like some talk of -- well, our title plan is useful or not. I'll just tell you this. People are still buying our title plants at a higher clip today than they were before. And a lot of the participants that are saying, oh, title plants are maybe not going to be around. They're coming to us and wanting to buy title plant data from us. So I think there's a lot of noise out there. But the reality is we think it's really valuable and time will tell. But we like -- we think it's a big strategic advantage to have our plans. There's no question about that. Operator: [Operator Instructions] Our next questions come from the line of Bose George with KBW. . Bose George: On the home warranty business, can you remind us what the good run rate margin for that is and also just the seasonality? Craig J. Barberio: Bose, thanks for the question. This is Matt. Yes. So typically, we look to have margins in the mid-teens for home warranty throughout the year. The seasonality is Q1 and Q4 typically are stronger quarters and then Q2 and Q3 typically have higher rates of claims, and it's really just driven by the weather and HVAC claims typically. Bose George: Okay. So this quarter, from a seasonal standpoint, is probably kind of roughly in line . Ryan Gilbert: Yes. I mean this quarter was definitely a good quarter. And I know last year, we talked about how last year, we had maybe higher margins than typical, and we didn't expect that to persist. I'd say Q1 was largely in line. Our expectation right now is that Q2 and Q3, we'll see more of a typical weather pattern. So you'll see claims pressures maybe in Q2 and Q3 compared to last year. Bose George: Okay. Great. And then actually, switching to investment income. In terms of the escrow deposits being able to utilize them more, is there more room to do that at the bank? . Matthew Wajner: So yes, so I'll answer what I think you asked, and then you can ask me if there's anything else there. So yes, I mean, we can put more deposits at our bank. We can grow our deposits at the bank. We definitely have more room. We have capital available there right now to grow deposits. And if we need to, we can contribute more. As a strategy, we keep some of our escrow deposits at our bank, some escrow deposits at a third-party bank. But as Mark mentioned, our strategic initiative has really been to grow deposits to the bank outside of our captive title business. For example, subservicing 1031 in agent banking. And that's really been kind of the driver of the growth that we've seen at the bank. And Bose, just 1 thing I'll add to that, too. One thing I'll add just real quick, Boss we -- at times, we've talked about how -- like when the Fed cuts 25 basis points, we lose roughly $15 million of investment income as a general rule of thumb. Well, we've been able to buck that trend. Like in the last year, the Fed's cut 3x, and yet our investment income is up 12% year-over-year. And so we're really proud of the fact that we've been able to grow our investment income despite Fed cuts for the reasons that Matt has mentioned. Operator: Our next questions come from the line of Oscar Neves with Stephens. Oscar Nieves Santana: So I have 1 on tech. Mark, you mentioned earlier that as you continue deploying endpoint in Sequoia, you also continue to learn and improve the product. And I was just wondering if you could share some color on those learnings. Mark Seaton: Well, the way the technology is built now, I mean, it's just moving at rapid fire pace. And like, for example, in endpoint, every time we do something manually, right, we can go back and very quickly now change the software, so the next time it doesn't have to be manually. We call it human in a loop, right? So the AI, we assume the AI can do the work, but there's times when it can because the machines haven't learned. And so every time human goes and makes an adjustment, then we go back and fix the software and make an upgrade, so that you don't have to make that adjustment next time. It's the same thing for SEQUOIA, right? And so the way the technology is built now, we've got the human loop process, where every time the human intervenes, we try to make it better the next time around. And we can iterate very, very quickly. And so that's why when we roll something out, 30% of automation rates for being this young of a product is fantastic, and it's just going to get better and better and better over time as the machines learn. -- and there's a big advantage for sort of getting their first to market, and we feel like we're doing that. Oscar Nieves Santana: That's very helpful. And sort of related to that, you highlighted that the title segment. Well, you mentioned the title segment margins were very strong, and they were driven by commercial and also some expense management. Can you break down the relative contributions between mix, pricing expense management? And how much more margin improvement you could -- you think is possible as those technology -- legacy technology platforms roll off? Mark Seaton: Well, I'll -- there's a lot there. I'll just say that when we look at the margin growth this quarter relative to last year, I mean, we grew margins 250 basis points in the title segment. . And really, the driver was the fact that question is has sort of exceeded our expectations. And so when we look at our success ratio this quarter, it's 58%, and we try to target 60% or less. If we get 60% or less, we say that's successful. And so we thought we did a good job of managing our expenses while revenue has been rising. I think when we look forward, we're going to see incremental gains because of technology over time. It's not going to happen in 1 quarter, we're not going to wake up and just be a 20% margin business. But I think these incremental gains will just start to compound over time. As we roll out our platforms nationally next year, and it's not just about those 2. I mentioned in my prepared remarks, we've got incremental gains happening and our team is excited about it. We're giving our team new tools to win. I hear stories every single day about AI is helping our employees. And these things will start to add up over time. And so I think whatever our normalized margins have been in the last 10 years, I think the next 10 years, they're going to rise, and we we'll see how far. But we've got new tools available to us that we didn't have that will make our business more efficient than it's been. Oscar Nieves Santana: Yes, that helps. And 1 last 1 around capital allocation. Maybe for Matt, you talked about your opportunistic approach around buybacks. So on that topic, first, if you can remind us how much is still available under the current repurchase program. And then what's the company's current thinking around capital allocation priorities for the remainder of the year, including M&A and buybacks? Craig J. Barberio: Yes. Thanks for the question. So under the current program, if you take into account what we've already purchased through today in April, we have a $248 million remaining on the program. So that's where we are. And then when it comes to capital allocation, like nothing's really changed from what we've discussed in the past, right? So our priority when we think about what we want to do with our capital is our priority is to reinvest in our business. We've been doing that. Mark has talked a lot about where that reinvestment is going. And then we also look to do acquisitions, right? And that's to the extent we haven't done a material 1 for a while now but we're open to it, but it needs to make sense for us, right? So the valuation needs to be right and the fit needs to be right. And there are things that are in the pipeline, but we'll see how that turns out. And then with our excess capital, we look to give that back to shareholders. We do that through dividends and share buybacks. I know the last couple of quarters, we haven't been buying back shares. In Q1, we decided that the circumstances had changed, right? Like we've talked about before, we're opportunistic when it comes to buying back our shares. And in Q1, we saw that our stock was under pressure while our earnings and our outlook has strengthened from where we thought we were going to be at the beginning of the year. So we took that opportunity to buy back shares. And we'll continue to take an opportunistic approach to buybacks based on valuation, available capital and our outlook. Operator: Thank you so much. There are no additional questions at this time. That does conclude this morning's call. We'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 77 660-6853 or (201) 612-7415 and by entering the conference ID 137-59-993. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.
Operator: Good morning, and thank you for joining us today for QCR Holdings, Inc.'s First Quarter 2026 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the first quarter. If anyone joining us today has not yet received a copy, it is available on the company's website www.qcrh.com. With us today from management are Todd Gipple, President and CEO; and Nick Anderson, CFO. Management will provide a summary of the financial results, and then we will open the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through April 30, 2026, starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I will now turn the call over to Mr. Todd Gipple at QCR Holdings. Please go ahead. Todd Gipple: Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our first quarter performance, and then Nick will walk us through the financial results in more detail. We are pleased to deliver the most profitable first quarter in our company's history. This performance was driven by healthy loan and deposit growth, significantly lower noninterest expense and modest margin expansion. We maintained excellent asset quality and generated meaningful growth in tangible book value per share while returning capital to our shareholders through opportunistic share repurchases. We also continue to make further investments in our digital transformation as we build a more modern, scalable bank for our clients and employees. Strong performance in our traditional banking and wealth management businesses partially offset the linked quarter reduction in our capital markets revenue. Capital Markets results were in line with our expectations given typical first quarter seasonality and were equal to our 5-year average for Q1 production. As a result, we delivered a very strong return on average assets of 1.40% and earnings per share growth of 31% compared to the same period last year, highlighting the strong earnings potential of our diverse business model. Our traditional banking business continues to deliver solid organic growth supported by healthy commercial and industrial activity across our markets. Our multi-charter model enables us to consistently gain market share with locally led community banks to build deep relationships with high-value clients and communities where they live and work. Our digital transformation remains on track with the successful completion of the second of 4 core system conversions in early April. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience and driving operating leverage. Our Wealth Management business also delivered very strong results with annualized revenue growth of 14%. Our success in this business continues to be driven by the experience of our team and the power of our relationship-driven model, which connects our traditional banking clients and key professionals in each of our communities with our dedicated wealth advisers across our markets. We are deepening client engagement and reinforcing wealth management as a key driver of our sustained top-tier financial performance. Our LIHTC lending business also continues to perform as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. We view LIHTC lending as a highly profitable, annually consistent and differentiated line of business for QCRH, anchored by our deep network of developer relationships, and historically high-quality assets our platform delivers. Our LIHTC business has consistently delivered strong results, demonstrating our success in navigating various interest rate cycles and dynamic market conditions. Our strong relationships with industry-leading LIHTC developers, combined with market demand position us well to grow this business and further strengthen our financial performance. Given the strength of our pipeline in our traditional and LIHTC lending platforms, we are reaffirming our guidance for gross annualized loan growth of 10% to 15% over the final 3 quarters of 2026. We are also increasing the lower end of our capital markets revenue guidance by $5 million, now targeting a range of $60 million to $70 million for the next 4 quarters. In combination with our LIHTC permanent loan securitizations launched in 2023, we have also begun partnering with private investors and LIHTC Construction loan sale transactions. These transactions enable us to expand our permanent LIHTC lending capacity, which will drive increased capital markets revenue. The ability to sell off these LIHTC construction loans allows our team to say, yes, when our developer clients would like us to provide the construction financing for their projects, in addition to the permanent financing that generates our capital markets revenue. This is allowing us to grow our market share in the affordable housing space. During the quarter, we identified a total of $523 million in LIHTC loans, both construction and permanent for securitization and sale. The transactions are planned to close during the second quarter and will mark our fifth permanent loan securitization and our second construction loan sale. This is our LIHTC flywheel in action. Strong demand for affordable housing, reinforced by the federal government's commitment to increase LIHTC tax credits, combined with our deep developer relationships and our exceptional client service, positions us to capture market share from the larger competitors in this space. LIHTC Industries proven long-term performance drives investor demand for these assets, enabling us to execute LIHTC loan securitizations and sales. These transactions allow us to proactively manage concentration risk, balance sheet growth, liquidity and capital levels while generating increased capital markets revenue. We are building an asset-light, capital-efficient and revenue-heavy business in affordable housing. While securitizations and LIHTC construction loan sales temper near-term on balance sheet growth, they enhance long-term profitability by creating more capacity. The balance sheet capacity created by these transactions is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue to more than offset the foregone interest income over time. These loan sales and securitizations are also allowing us to strategically manage our total assets under the $10 billion asset threshold this year. We anticipate growing beyond $10 billion sometime in 2027, and we plan to be fully prepared for the associated organizational impacts by mid-2028. Building on the planning efforts we began in 2023. Our company is executing at a high level across all 3 of our core lines of business. Our team has driven a 5-year earnings per share CAGR of 14% and a 5-year tangible book value per share CAGR of 12.5%. Our continued investments in talent, technology and strategic growth, combined with disciplined expense management, position us to sustain this top-tier financial performance. I am grateful for our 1,000 teammates that take exceptional care of our clients, our communities and each other as they deliver long-term value for our shareholders. I will now turn the call over to Nick to provide further details regarding our first quarter results. Nick Anderson: Thank you, Todd, and good morning, everyone. We delivered net income of $33 million or $1.99 per diluted share for the quarter. Net interest income was $67 million and increased slightly on a linked quarter basis when adjusted for fewer days in the first quarter. Our NIM TEY increased 1 basis point from the fourth quarter of 2025, which was below the low end of our guidance range. Our robust deposit growth came early in the quarter from our correspondent business, which carries higher pricing. And when combined with loan growth occurring very late in the quarter, margin expansion was muted. The increase in our margin was driven by significant improvements in the cost of funds, partially offset by a reduction in our earning asset yields. We continue to have a disciplined approach to deposit pricing. And combined with the liability-sensitive balance sheet, our cost of funds betas are more than 1.5x those of our earning assets during the current rate-cutting cycle. Since the Fed began cutting rates in 2024, our cost of funds have declined by 79 basis points compared to only a 47 basis point decline in earning asset yields. While we continue to benefit from repricing lower-yielding loans into higher market rates, the opportunity is naturally moderating as the rate cutting cycle matures. During the quarter, new loan origination yields exceeded those on loan payoffs by 22 basis points. However, loan growth arrived very late in the quarter and average loan balances were down $109 million contributing to the decline in the loan yield compared to the prior quarter. While our balance sheet has moved closer to neutral since the rate cutting cycle began, we remain positioned to benefit from future rate reductions with rate-sensitive liabilities exceeding rate-sensitive assets by approximately $900 million, providing upside to margin in a declining rate environment. For future cuts in the Fed funds rate, we estimate 1 to 2 basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect NIM expansion at the top end of that range. And if the yield curve remains relatively flat, we would expect NIM expansion at the lower end of the range. Supported by our late first quarter loan growth, we are guiding second quarter NIM TEY ranging from static to an increase of 3 basis points, assuming no further Fed funds rate changes. Upside in our second quarter NIM is supported by repricing opportunities on approximately $163 million and fixed rate loans currently yielding 6.2%, which we would project to reset nearly 25 to 30 basis points higher. We also anticipate continued CD repricing during the second quarter, with approximately $400 million of maturities, currently costing 3.7%, which we expect to retain and reprice nearly 25 to 30 basis points lower. We project investment yields to expand, supported by a solid pipeline of new municipal bonds priced well above 7% on a tax equivalent basis. Additionally, we are planning to offtake approximately $523 million of LIHTC loans through the securitization and loan sale in the second quarter, which should be moderately NIM accretive and is reflected in our NIM guidance. Noninterest income totaled $23 million in the first quarter, including $11 million from Capital Markets revenue and $5 million from Wealth Management. Our LIHTC lending team closed 13 projects during the quarter, including three with new developers as we continue to expand our LIHTC platform. Our wealth management team delivered strong results this quarter, adding 80 new client relationships and $177 million in new assets under management. While market volatility pressured AUM levels, new client growth largely offset that impact. Wealth Management revenue was up 3% from the prior quarter. This business continues to provide stability, recurring fee income and meaningful diversification to our overall revenue mix. Now turning to our expenses. Noninterest expense for the first quarter was $52 million compared to $63 million for the fourth quarter. The $11 million decrease was primarily driven by a $5.5 million reduction in salaries and benefits expenses associated with variable compensation related to earnings performance. In addition, we experienced lower professional and data processing costs due to the timing of digital transformation activities and the impact of the debt extinguishment loss in the prior quarter. Our flexible cost structure, particularly variable compensation tied to performance is designed to support operating leverage while preserving flexibility through various revenue cycles. As a result, expenses were well below our guided range, highlighting our expense flexibility. This structure closely aligns our underlying cost base with performance, supporting a pay-for-performance culture and value creation for shareholders. Our significantly lower noninterest expenses resulted in an adjusted core efficiency ratio of 57.7% for the first quarter. For the second quarter, we are guiding noninterest expenses to be in the range of $55 million to $58 million, which assumes capital markets revenue and loan growth are within our guided ranges, while also continuing to invest in our digital transformation initiatives. This outlook reflects our disciplined approach to expense management aligned with our 965 strategic model, which targets noninterest expense growth of less than 5% annually while enhancing operating leverage and profitability. Moving to our balance sheet. Total loans grew $145 million for the quarter for 8% annualized, excluding the planned runoff of the M2 equipment finance portfolio. There are $523 million of LIHTC loans identified for securitization and sale included in the held-for-sale category. These loans consist of a $207 million pool of LIHTC construction loans identified for sale to a new private investor and a $316 million Freddie Mac LIHTC tax-exempt permanent loan pool securitization. Continued execution of our LIHTC offtake strategies has increased our confidence to supporting larger transactions and a broader range of developer opportunities. Complementing our loan growth, core deposit growth accelerated during the quarter, increasing $409 million or 23% on an annualized basis. Average deposit balances only rose by $31 million or 2% annualized compared to the fourth quarter as we actively managed our excess liquidity off balance sheet to optimize balance sheet efficiency. We remain highly focused on expanding core deposits and improving the deposit mix across our markets. Our deposit mix improved this quarter, driven by higher noninterest-bearing balances and a reduction in higher cost CD and broker deposits, further strengthening our funding profile. Asset quality remained excellent during the quarter. Nonperforming assets totaled $43 million, a decrease of $439,000 from the prior quarter, which resulted in the NPA to total asset ratio remaining static at 0.45%. The ratio of criticized loans to total loans and leases was 2.01%, remaining well below the company's long-term historical average and near the 5-year low of 1.94% established in the prior quarter. The marginal increase in criticized loans was primarily driven by one large credit, which is expected to be resolved favorably later this year. The company recorded total provision for credit losses of $2.5 million during the quarter. down from $5.5 million in the prior quarter, primarily due to the reclassification of Light Tech construction loans to the held-for-sale category as these loans are expected to be sold at par. Net charge-offs were $4 million during the first quarter of 2026, a decline of $300,000 from the prior quarter. Between the start of the first quarter and April 20, we returned almost $25 million of capital to shareholders with about 288,000 common shares repurchased at opportunistic valuations. Since we began repurchasing shares in August of last year, we have repurchased 566,000 common shares, returning a total of $46 million to our shareholders. These repurchases demonstrate our capital allocation flexibility, enabling opportunistic repurchases when they create value and align with our strategic and financial priorities. We delivered another quarter of strong growth in tangible book value per share, which rose $1.33 to over $59, reflecting 9% annualized growth. Over the past 5 years, tangible book value has grown at a compound annual rate of 12.5%, highlighting our continued strong financial performance and long-term focus on creating shareholder value. Our tangible common equity to tangible assets ratio decreased 2 basis points to 10.31%. The common equity Tier 1 ratio increased 2 basis points to 10.54%, and our total risk-based capital ratio decreased 19 basis points to 14%. These quarterly changes reflect the combined impact of strong earnings and share repurchases during the quarter. The total risk-based capital ratio was also impacted by a reduction in subordinated debt capital treatment on our 2019 issuance and lower ACL balances. Finally, our effective tax rate for the quarter was 7%, down from 8% in the prior quarter, reflecting lower pretax income and an increase in the mix of our tax-exempt income relative to our taxable income. Our tax-exempt loan and bond portfolios have continued to support a low effective tax rate. Assuming a revenue mix in line with our guidance ranges, we estimate our effective tax rate to be in the range of 8% to 10% for the second quarter of 2026. With that added context on our first quarter results, let's open the call for your questions. Operator, we are ready for our first question. Operator: [Operator Instructions]. Today's first question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Thank you. Good morning, guys. Yes. Maybe first on the capital front. You've got the two securitizations planned for the second quarter. I apologize if I missed it, but do you have a sense for how much capital that will add to the stack. And then the follow-up is on the buyback side. Just do you plan to use that in buybacks? Or you're at, I think, 10.5% CET1. Is that a good bogey for you guys to settle near going forward? Or do you want to keep growing? Todd Gipple: Yes. Thanks, Danny. Appreciate the question. Actually, through the term loan securitization, we don't really free up regulatory capital because we're retaining B pieces historically. And that's okay, but it does free up GAAP capital. As you noted, we're getting into the mid-10s in terms of total risk base and CET1. And so 25 basis points gets freed up from the construction loan participation and that will allow us to continue to be fairly opportunistic with respect to buybacks. So we're getting up to really above our long-term target in terms of capital ratios. And so we would continue to be opportunistic. As you know, there's really 4 things to do with capital, retain it for organic growth, and that's a little less demand for us as we're going more asset-light and capital efficient in the LIHTC business. M&A is not a current priority for us. So then you get to returning capital. We did raise our dividend modestly and it remains a modest dividend because we believe at current valuations, the stock repurchases, buybacks are really the best use of capital. And so we're very pleased to have accomplished what we have already -- and really the answer is we would continue to be opportunistic when it comes to buybacks at current valuation levels that makes sense. And we tend to not just look at where we're at on a current price to tangible book or price to earnings, we really look at where earnings in TBV are headed. And considering we're growing those that are more than 10% CAGR. And gives us even more confidence to be buying shares. So kind of a long answer to your short question, but frees up about 25 bps, and we would continue to be opportunistic in share buybacks. Daniel Tamayo: That's great, Todd. I appreciate all the color there. And then maybe one on the margin. So we've got the guidance for the second quarter. Feels like maybe we're approaching stability. Curious for your thoughts on that. And then longer term, do the securitizations continue to be kind of modestly accretive every time you do them? Or is there a point where they are breakeven or don't impact the margin as much as we look forward for future securitizations. Nick Anderson: Thanks, Danny. I'll answer several data points here, maybe for that question. And when you think about our Q1 average earning assets, we were about $8.6 billion, considering the Q1 loan growth being back-end loaded. And then assuming we hit the midpoint of our loan growth, call it, 12.5% here for the rest of the year. I assume roughly middle of the quarter for offtakes. We expect average earning assets would be down about $200 million. So I'm going to translate that then into NII and NIM. Our core margin, we continue to expect to grind higher by a couple of basis points with loan and CD repricing plus. And then to your other question, the offtakes here in Q2, they are expected to be slightly accretive, and I'm going to call that about a basis point here for Q2. In addition, when it comes back to full circle to NII, we've got an extra day in Q2, and all of that leads us. I think we're going to feel pretty confident about holding Q2 NII static. When you think on the go-forward picture on future offtakes, I don't think we're going to anchor every transaction to being perfectly neutral quarter-to-quarter. Future LIHTC rotations likely to be less dilutive than it was in Q4. Q4 was -- we had a fair amount of well-priced assets that were part of that package transaction. Some of the transactions here in at lower yields. And so we also are combining that with our securitization. So we get a little bit of upside between the two transactions. So I think any time we're taking decent assets off the books. If we can hold neutral grade, I think our expectations might be a little dilutive, but certainly not to what we experienced during Q1 with the impact from the Q4 transaction. Operator: And our next question comes from Damon DelMonte at KBW. Unknown Analyst: This is [ Matt Rank ] filling in for Damon. Hope everybody is doing well today. My first question, thanks for the comments on the digital transformation. But just curious if any of that modernization includes anything with artificial intelligence. And maybe if you guys have identified any use cases, like could that technology speed up the LIHTC flywheel, so to speak, or help with wealth management, anything like that? Todd Gipple: Sure. Matt, thanks for joining. Give our best to Damon. We are really excited about the digital transformation that we're undergoing here, and I'll give you a little background to get to your AI answer, but we're halfway done. The first or conversion was candidly our most simple, and that was last October when we went from a Jack Henry product to another Jack Henry product, where we've landed at Jack Henry Silver Lake. The one we accomplished just after the end of the quarter, first weekend in April is candidly our most rigorous one. It was the first one going from Pfizer signature, the Jack Henry Silver Lake. It went really, really well. and we really wanted to accomplish that first one and have it go well, of course, we've got another one coming up in October and April. So in April 27, we expect to be all done. And the answer to your AI automation question is really about the decision we made a couple of years ago to partner with Jack Henry for our new core. We believe them to be the furthest along with respect to AI with respect to automation opportunities, the open architecture that they have has allowed us to integrate it with roughly 30 other -- a little over 30 other products that link to our core. That's gone really well. It's been a lot of hard work. But they are, we believe, furthest along in terms of giving us and their other bank clients a lot of capabilities when it comes to AI. That will come from our large third-party vendors. We're not going to be standing that up ourselves, but they are well down the path. With respect to how that impacts us in the future. I think it's going to be more about our retail and commercial banking. I do think there will be some artificial intelligence, certainly, that will help us in the wealth management space. When it comes to LIHTC assets, there are some conversations more around blockchain with respect to tracking those assets and the securitization and sale of those assets being more efficient with blockchain. So it's more about blockchain when it comes to LIHTC. So thanks for the great question. We are really excited about our digital future and we're about halfway down -- a little over halfway done with the core conversions. Unknown Analyst: Okay. Great. And then just one more question for me. The loan loss reserve came down this quarter. So just wanted to get your thoughts on how we should think about that level going forward. Nick Anderson: Sure. So Matt, while provision was down, that was really due to the reclassification of the LIHTC loans to held for sale. So we used some of the provision in -- or the ACL in that regard. But we did, and we believed it was important, we did hold our coverage ratio static at 1.26%. So while our provision was down we maintain the same level of reserves that we had previously. So just -- I appreciate the question because it will help be clear that we didn't soften reserves. We didn't light and reserve levels. We kept those static. The reduction in provision was about reclassifying a fair amount of loans to held for sale. Operator: [Operator Instructions]. Our next question today comes from Nathan Race at Piper Sandler. Hello, Nathan, is your line on mute perhaps? All right. It appears that we're not receiving any audio from Mr. Race's line here. So we're going to move on to our next questioner, which is Brian Martin at Janney Montgomery. Brian Martin: Guys, good morning. Can you just -- maybe I missed what you were saying there in terms of just -- I think I got the big picture on the being kind of neutral, but just kind of with the earning assets land in the next couple of quarters as you kind of roll through the growth and the offtake in terms of -- it sounded like it might be down 20 or so next quarter in the second quarter, given what happens? And then thereafter, it's stable to growing with the balance of the portfolio? Or just second and third quarter, just as you -- if it happens mid-quarter, just kind of how to think about those next 2 quarters from an average earning ascent standpoint. Nick Anderson: Yes. Thanks, Brian. Certainly, a lot of noise, here in Q2 as you think about the transaction and trying to model some of that out. But yes, you are correct. When you think about Q2 average earning assets, we're thinking about that being down about $200 million. But that assumes we're hitting a pretty strong loan growth for the quarter. And then we also then have the offtake kind of pegged up for mid-quarter of Q2. Now when you get to Q3, when we think about some of the noise, that temporary noise associated with the transaction, you'd start to see that to stabilize and to see some growth from there. Brian Martin: Got you. Okay. And just the margin, obviously, you gave some comments about next quarter's margin. But just the longer term, I think the -- maybe the question earlier just about it before in a period of stability here. The bias would be trending upward. I mean, you had some nice improvement on the funding side this quarter with the deposits. I don't know that -- just the timing of the loan growth coming on and I guess, any additional improvement on that funding side, but it feels like the margins kind of flat to up rather than down. Is that -- as you kind of look in the out quarters without putting words in your mouth, does that seem like how we should be thinking about it? Nick Anderson: Yes, Brian, that is how we're thinking about it, and we continue to grind out every basis point from our core margin. And as you mentioned, a lot of that is coming from our loan and deposit repricing. We continue to DRIP loans -- or sorry, DRIP deposit pricing on our nonindex deposits DRIP lower here as we can. But yes, our expectation is that we can continue to grind out every basis point here. even into Q2 with all the activity going on, but beyond that into Q3. I think something else that will contribute to that is our expectation on the stronger loan growth as well. Brian Martin: Got you. And the loan-to-deposit ratio, I guess, as you kind of move through all the noise here, I guess, where do you expect that to kind of settle out over the next couple of quarters given the dynamics here. There's a lot of moving parts in there. Nick Anderson: Yes. So we did drop quite a bit to 87% this quarter. Certainly, that's below our historical. When you think about Q2, we're expecting that to fall more into a range between 90% and 95%. I'd probably land at 92.5% longer term here. Brian Martin: Got you. Okay. And then last two, just -- I know you talked about the buybacks being the most opportune based opportunity short term. But as you kind of roll through the modernization of the technology and you're more asset-light or, I guess, does M&A become a bit more important or more interesting, I guess, are more likely as you kind of look out into 2017? And you managed below $10 billion this year, but going over, I know it doesn't have a big cost negative to you guys, given the planning you've done, but just in terms of going over with more size. Is that something you would think about as you go into '27? Todd Gipple: Yes, Brian, that's a fair question. I appreciate you asking. Our interest in M&A will grow a bit after we get all the way through this digital transformation. I've been careful to say in the past, we're not necessarily in blackout with respect to that because of the conversions we're doing, we would certainly have the ability to do something if it made a lot of sense. I would tell you our interest in M&A would be less about the gyrations of going over $10 billion. I continue to feel very good about that. But as you know, a lot of conversations are starting these days, and there certainly is more chatter around M&A. We think we are a really great partner for the right potential partner. But I would just say activity around that is ramping up in terms of conversations, but our strike zone remains very, very small. There's a whole host of metrics with respect to a potential partner that we would have to hit. Probably the main one would be at the pace we are accreting TBV and earnings per share it's going to have to be a very good strategic and financial transaction because we do not want to go backward. And so that means it would have to be an excellent partner, and there are some out there. it'd have to be a really well-done financial transaction because we have great momentum organically, and we really don't want to take a step backward in M&A. So probably the punchline there is open to it, but very tight strikes out. Brian Martin: Yes. And then nothing near term, more -- a little bit more in the out years -- or out quarters. Todd Gipple: Sure. Operator: [Operator Instructions]. Our next question comes from Nathan Race from Piper Sandler. Nathan Race: Sorry about the technical difficulties earlier. Todd Gipple: No worries. Nathan Race: I apologize, I hopped on late, but just in terms of kind of the cadence of capital markets revenue and just kind of some of the impacts you saw from a revenue perspective this quarter, I mean, how much did count the volatility in rates versus maybe some seasonality impact, what you saw in terms of capital markets transactions closing. And then do you also expect as you look out over the next 12 months to has some seasonally kind of lighter volumes as well in the first quarter. I guess I'm just trying to understand is the updated guidance is going to be kind of more loaded over the next 3 quarters. Todd Gipple: Sure. No, Nate. I appreciate the ability to clarify some of that. So in Q1, we saw very typical seasonality for Light tech, and it really didn't have anything to do with rates or any macroeconomic headwinds or candidly, even the war, just the affordable industry tends to work really hard to close a lot of deals at year-end. And then we have a pretty slow start to the new year. And actually, we did 13 projects right on top of historical Q1 average of $11 million. So landed about where we expected. We'll tell you that over the last couple of quarters, we've raised our guidance range, and that's because of all that we're able to do with some of these transactions on perm securitizations and construction loan participations. So back in Q3, we raised our guide from $50 to $60 million up to $55 million to $65 million in the Q4 call in January, we raised the top end of the range to $70 and left the bottom. Now this quarter, we're moving that floor up as we've become more confident about future pipelines I would just say I wouldn't get too focused on the precision of those guidance ranges. It's more about the direction that they're going up, you know us really well. We have a very strong say-do ratio, and we want to keep it that way. But again, the gist of this is our pipeline is shaping up as strong as it's ever been as we get further into the year. So Q1 seasonality was really just about the industry seasonality. We're very optimistic about the pipeline we have. We're good at closing deals these 13 projects we did in Q1, even though it was a slower quarter, three of those projects were with first-time new developers. So we continue to expand our roster too. So we're very excited about the future of LIHTC, having construction offtake allows us to say yes more often to clients. and to consider candidly slightly bigger deals. So we are very excited about the future of that. That's why we've gotten to the $60 million to $70 million guidance range. Nathan Race: Understood. That's really helpful. And just going back to the margin outlook and just with the expectations for some additional construction LIHTC securitizations or sales. Curious what pricing is on that product. I imagine it's higher than what you see on a perm basis or maybe even across some other commercial segments. So just trying to get a sense of what these additional securitizations, how that's going to impact loan yields, not only in the second quarter, but as you perhaps do additional construction sales or securitizations in the future. Nick Anderson: Yes. When we look at the impact on margin for future loan sales, I mean, we continue to expect to overcome any dilution that might come from additional loan sales certainly, pricing on some of the loans that we sell are going to vary depending on tax or tax exempt. Yes, it's probably more deal dependent, if you will. And also when you think about the timing of some of these transactions, these are both of the light tech construction transactions were with our first -- with first-time partners. And so we are focused on getting deals done and not that we took the ball off the economics, but we -- some of the deals that we are doing the offtake for have been in the portfolio for a minute. So those come with prices that were higher as they were originated in a higher rate environment. Now our speed to execution in the future is likely to be much shorter. And so I would expect the disconnect between the portfolio that we are offtaking to current rates would be smaller. Todd Gipple: And Nate, I guess I'd just tag on here and say the upshot of both transactions that we'll close here in Q2 is just a slightly improved margin, maybe a basis point. And that will fluctuate from time to time. There will be times where depending again on the mix of the other side of the balance sheet, we could see a little bit of margin accretion. We could see a little bit of margin contraction but it's all going to be really tight to static. We do not anticipate having to take significant margin pressure when we're taking these off the balance sheet. So yes, I really appreciate the question, just to be able to be clear about that, that we don't expect significant impact on margin when we're doing this. Nathan Race: Got it. That makes sense. And just as these securitizations play out and just given the loan growth outlook, curious if we can expect some additional reserve releases going forward going forward, similar to what we saw this quarter. or kind of how you guys are thinking about kind of just the reserve trajectory, maybe on a dollar basis, just as some of these loans are offloaded? Todd Gipple: Sure. So I guess what I would say is there may be another construction loan participation at the end of the year. that's really going to be based on where we land on gross loan growth. If we're more in the lower end of our guide at 10%, we probably don't need it. If loan growth is more robust, and we're closer to the 15% in the guide, we're likely to do another construction offtake later in the year. And if we did that, there would be another bit of lightening of provision when we have that happen. Absent that, provision would really come down to something a lot more consistent with what we've done over the last 6, 8 quarters. were in that $4 million or $5 million range. And I would tell you, my expectation on provision would be what would vary there would just be the pace of loan growth. We really aren't seeing any challenges in terms of the portfolio. So any modification in that kind of steady rate of provisioning would really be more about the level of loan growth. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to Todd Gipple for any closing remarks. Todd Gipple: Thank you all for joining us today. We really appreciate your interest in our company, and we look forward to connecting with you sometime soon. Have a great rest of your day. Operator: Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Hello. Welcome to Oceaneering's First Quarter 2026 Earnings Conference Call. My name is Sarah, and I will be your conference operator. [Operator Instructions] With that, I will now turn the call over to Hilary Frisbie, Oceaneering's Senior Director of Investor Relations. Please go ahead. Hilary Frisbie: Thanks, Sarah. Good morning, and welcome to Oceaneering's First Quarter 2026 Results Conference Call. Today's call is being webcast, and a replay will be available on our website. With me today are Rod Larson, President and Chief Executive Officer; and Mike Sumruld, Senior Vice President and Chief Financial Officer. Rod and Mike will provide our prepared remarks, and then we'll take your questions. Before we begin, please note that statements made on this call about our future financial performance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our remarks also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our first quarter press release, which is available on our website. I'll now turn the call over to Rod. Roderick Larson: Good morning, and thanks for joining the call today. I'm pleased with our first quarter results, which reinforce our confidence in the year ahead. We generated consolidated revenue and adjusted EBITDA consistent with our guidance and drove strong commercial momentum, capturing new awards and extensions across the portfolio. At the segment level, Aerospace and Defense Technologies or ad tech posted significant year-over-year revenue growth as expected, indicating steady demand across our defense portfolio. Despite softer energy center activity, subsea robotics or SSR and manufactured products, both delivered year-over-year increases in revenue, demonstrating the resilience of our portfolio. Overall, this positions us well to deliver on our full year guidance. Importantly, we further solidified our outlook with a strong first quarter order intake of approximately $1 billion, 1 of the healthiest intake since 2020, which resulted in a constructive first quarter book-to-bill ratio. SSR awards totaled approximately $300 million, including projects extending to 2031, which improves our visibility into utilization levels across the next several years. In addition, we secured multiple survey contracts for the Ocean Intervention 2 that will keep the vessel highly utilized for the next 3 quarters and showcase its range of capabilities, including simultaneous operations. Ad Tech added approximately $175 million in new contract awards, exercised options and increases to existing contract values. We also progressed on the technology front. As we shared on our last earnings call, we formally introduced Momentum, our next-generation electric work-class ROV, which delivers improvements in supervised autonomy, endurance and reliability. We expect to mobilize it on one of our U.S. Gulf vessels during the second quarter. We continue to develop our autonomous systems portfolio, including our Freedom platform. One commercial unit is currently operating in West Africa and we are moving towards testing and customer demonstration of a specialized Freedom vehicle for the Defense Innovation Unit or DIU, which reinforces our position as a provider of dual-use technology in the energy and growing defense markets. In ad tech, we delivered the U.S. Navy submarine rescue diving and recompression system following a multiyear complex rebuild and recertification of this globally deployable mission-critical capabilities. Beyond our subsea markets, I am very proud of the support we provided to NASA's Artemis program and the safety of its astronauts, applying decades of deep sea harsh environment experience to the unique demands of space. The successful launch and return of ARTEMIS I showcased this work, incorporating our advanced products and technologies. We value NASA's trust in us. Alongside these milestones, we are always navigating an evolving geopolitical environment. Let me address the impact of Middle East conflict on ocean nearing before Mike gets into our detailed financial results. First and foremost, the safety of Oceaneering is our top priority and all in the region are accounted for and safe. We have enacted established protocols are in frequent contact with our teams in the region and are taking necessary precautions to safeguard our people and property. Operationally, we've experienced intermittent disruption during this period, though the consolidated financial impact has thus far been modest. Integrity Management and Digital Solutions, or IMDS, has the greatest exposure in the region and has therefore been the most effective. We are coordinating closely with our customers and partners to manage these impacts and are monitoring conditions closely. So with that context, I'll turn the call over to Mike to summarize our first quarter results, and then I'll be back to provide our outlook for the second quarter and full year of 2026. Mike? Michael Sumruld: Thanks, Rod, and good morning. Let me share our first quarter 2026 consolidated financial results. Overall, results were in line with the guidance we provided last quarter. As expected, we saw lower activity in our energy portfolio and significant improvement for AdTech. Compared to the first quarter of 2025, revenue was $692 million, representing a 3% improvement with year-over-year revenue increases in SSR, manufactured products and ad tech. Operating income was $57.8 million, down 21% and Net income was $36 million or $0.36 per share, down 28% and adjusted EBITDA was $83.7 million, down 13%. The consolidated year-over-year comparisons are materially impacted by the record first quarter that our offshore project Group, or OPG delivered last year. Turning to our cash flow and liquidity. We utilized $59.1 million of cash for operating activities, largely for payment of performance-based incentive compensation and increased customer receivables. We invested $17.4 million in organic capital expenditures with approximately 54% allocated to growth and 46% allocated to maintenance. This resulted in negative free cash flow of $76.5 million, an improvement of $30 million compared to the first quarter of 2025. We ended the quarter with a cash balance of $607 million and $215 million available under our secured revolving credit facility, resulting in total liquidity of $822 million. Since we're discussing liquidity, let me address our share repurchase activity. We remain committed to an opportunistic and disciplined approach. Given the heightened market volatility tied to the Middle East conflict and the resulting swing in our share price, we chose not to repurchase shares in the first quarter. We will evaluate share repurchases as the year progresses as returning capital to our shareholders continues to be an important component of our capital deployment strategy. Now let's look at our business operations by segment for the first quarter of 2026 as compared to the first quarter of 2025. The SSR operating income of $55.5 million was down 7% on higher revenue. Average ROV revenue per day utilized increased from $10,788 and to $12,401 driven by improved pricing and discrete first quarter items that boosted ROV revenue are not expected to repeat. Specifically, we mobilized ROV systems for upcoming projects, which contributed revenue without associated ROV days utilized. We also completed a discrete cost reimbursement scope of work that contributed revenue with minimal margin. Looking ahead, we expect full year 2026 average ROV revenue per day utilized to exceed 2025, but we do not expect to maintain the first quarter rate. SSR EBITDA margin declined to 32%, driven primarily by lower ROV utilization, which decreased to 61% and as activity softened in both drill support and vessel services. We also saw our geographic mix shift somewhat to lower profitability regions as expected. We incurred cost to prepare the Oceaneering Intervention 2 for operations and continue to invest in the Freedom vehicle ahead of upcoming defense customer trials. We expect SSR margins to rebound in the second quarter as utilization increases in ROV and survey. For the quarter, the revenue split between ROV business and our combined tooling and survey businesses, as a percentage of our total SSR revenue was unchanged from the first quarter of 2025 at 79% and 21%, respectively. Our OV days utilized in favor of drill support was 67%, while vessel-based services were 33% compared to 62% and 38%, respectively, in the first quarter of 2025. As of March 31, 2026, we had ROV contracts on 83 of the 143 floating rigs under contract or 58% market share. We maintained our fleet count of 250 ROV systems. Turning to manufactured products. Revenue increased 6%. Operating income was $26.1 million or 18% of revenue, which is up 37%, excluding the $10.4 million theme park ride inventory reserve taken in the first quarter of 2025. Revenue results benefited from the receipt of steel tubes, but at no margin, while operating income improved on continued execution of higher-margin backlog and strong performance from our rotator valves business. Our backlog was $492 million on March 31, 2026, down $51 million from the first quarter of 2025. Our book-to-bill ratio of 0.91 was similar to the same period last year. We've seen backlog decline over the past 2 quarters, largely due to the timing of awards. While this segment is a lumpy project-based business, where backlog can change meaningfully from quarter-to-quarter, we have not seen a change in underlying demand. Our sales pipeline is healthy with a robust level of tendering activity and substantial opportunity value, and we expect to rebuild backlog in the coming quarters as projects move to award. OPG's results decreased as activity returned to more typical seasonal levels compared to a record first quarter last year, which included higher vessel utilization and a better service mix in the U.S. Gulf and international locations. Revenue was $135 million and operating income was $18 million resulting in a 14% margin. Favorable project mix partially offset the lower activity supported by installation work and continued execution on an international intervention project. [ IMDS' ] revenue, operating income and margin decreased due to lower activity in West Africa and Australia, the latter of which was the result of our decision to exit a low-margin contract. We entered 2026 expecting growth in the Middle East based on several recent contract awards and initially realized some of these benefits as the year started. However, the Middle East conflict and associated activity declined led to regional results that were essentially flat compared to the first quarter last year. Ad Tech revenue increased to $131 million, reflecting higher volumes in our Oceaneering Technologies, or OTC and Marine Services division, or MSD, business lines. In OTECH, growth was primarily tied to the large contract awarded in 2025, which is progressing on schedule. MSD results improved due to increased volume in submarine, maintenance and repair work and an increase in dry deck shelter overhauls. Operating income and margin decreased primarily due to a net $5.5 million accrual related to the expected resolution of a previously disclosed contract dispute. While the agreement remains subject to final approval, we expect that it will resolve the matter, reduce uncertainty and enable the team to focus on program execution and continued customer support. We anticipate settling our obligation over the life of the associated multiyear contract. Our unallocated expenses of $49.3 million were consistent with our expectations for the quarter and increased year-over-year due to a combination of wage inflation, foreign exchange impacts and increased IT costs. Let me turn the call back to Rod to discuss our outlook for the second quarter of 2026. Roderick Larson: Thanks, Mike. We expect to build on our first quarter results with sequential improvement. The quarter is shaping up as planned to support our guidance, even though we expected our consolidated results to be down year-over-year. On a consolidated basis, we expect our revenue to increase and EBITDA to be in the range of $100 million to $110 million. Comparing our second quarter 2026 to 2025 by segment, for SSR, we expect increased revenue and flat operating income due to changes in geographic mix and increased survey activity. As previously communicated, we anticipate an improving geographic mix and higher utilization in the second half of 2026. For manufactured products, we expect revenue and operating income to both increase by a mid-single-digit percentage. For OPG, we expect flat revenue and decreased operating income with modestly lower vessel utilization in the U.S. and West Africa and a project mix shift to lower-margin inspection, maintenance and repair, or IMR work. For MDS, we expect revenue and operating income to decrease due to lower activity in West Africa and Australia. Middle East activity remains uncertain and will depend on how regional conditions evolve. For Ad Tech, we expect significantly higher revenue and higher operating income. We project unallocated expenses to be approximately $50 million as wage inflation, foreign exchange impacts and increased IT costs are expected to persist. Returning to our 2026 outlook. Our full year plan is progressing as expected despite the uncertainty in the Middle East. We anticipate an acceleration in energy market activity in the second half of the year, with the potential to add incremental work in our OpEx-oriented work streams earlier. Against that backdrop, we are reaffirming our consolidated guidance ranges of low to mid-single-digit revenue growth and EBITDA of $390 million to $440 million. Comparing our full year 2026 to 2025 by operating segment. For SSR, we continue to forecast low to mid-single-digit percentage revenue growth. Average ROV revenue per day utilized is expected to increase slightly compared to our 2025 average. We anticipate that our ROE fleet utilization will be in the mid-60% range with higher activity levels during the second and third quarters that we will maintain our drill support market share in the 55% to 60% range. Tooling and survey results are expected to increase with improved utilization of the Ocean Intervention II based on recent contract wins. For the year, SSR EBITDA margins are forecasted to be in the mid-30% range. For manufactured products, we expect higher operating income on slightly lower revenue with operating income margins to range in the mid-teens. We expect high absorption in our umbilicals plants and a strong year from rotator products, which recently won its largest ever contract. Based on our current sales funnel, which indicates that backlog will build in the second and third quarters, We forecast the book-to-bill ratio will be in the range of 0.9 to 1.0 for the full year. For LPG, we expect lower revenue and significantly lower operating income with margins to range in the mid-teens. This reflects our forecast for lower margin IMR work in the U.S. Gulf and lower activity in West Africa, which we expect will be partially offset by ongoing intervention work in the Caspian and an upcoming installation project in North Africa. For MDS, despite the recent drop in Middle East activity, we continue to forecast revenue growth, supported by demand for our digital and engineering services. Operating income is still expected to increase, but by less than we previously anticipated, with margins in the mid-single-digit range. For AdTech, operating income is expected to increase on significantly higher revenue with margins in the low teens. Demand for our OTEC and MSD services should increase and recent government actions have provided funding consistency across our larger programs, giving us increased confidence in our outlook for 2026 and beyond. In summary, while conditions remain fluid, our expectations for the second quarter and full year of 2026 are unchanged. We are confident in our ability to deliver, supported by our first quarter order intake and our sales funnel for the rest of the year. The visibility provided by our consolidated backlog, the breadth of the geographies and end markets we serve, the flexibility provided by our healthy balance sheet and the commitment of Oceaneers worldwide. We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take your questions. Operator: [Operator Instructions] Your first question comes from Eddie Kim with Barclays. Edward Kim: The SSR awards of $300 million you booked in the quarter was a big number. Just curious how much of it was secured before or after the Iran conflict. And just broadly, as the Iran conflict and the resulting increase in oil prices we've seen, has that sort of increased customer inbounds for more ROVs and other parts of your business? Roderick Larson: I'd characterize it this way, I think you'd be hard-pressed to try to see an inflection point or anything in the orders. I think everything was kind of underway anyway. So not a big thing. I will call out this, but 1 of the things that's interesting about the order is that when you think about it is just a near-term or long-term effect on oil prices, we had an increase in longer-term contracts. So we averaged above 1 year for the contracts that were awarded, and we had some out to 5 years. So I think the longer term says that there's more than just a blip going on here. . Edward Kim: Got it. Got it. And just sticking on SSR, your ROVs full year utilization you maintained at sort of the mid-60s even though first quarter was a little bit low. -- at 61%. Obviously, you expect utilization to increase the remainder of the year. What gives you that confidence? Is it just more rigs -- offshore rigs going to work in the back part of the year or something else? Roderick Larson: Yes. Yes, and definitely, the back half helps, but also just -- I mean, the biggest part is the seasonality, right? We do get busier on vessels, especially in the second and third quarter. So we've got that going on plus some of these contracts that I just talked about will pick up in the fourth quarter. So we'll have some mobilizations in there as well. Edward Kim: Understood. And if I could just squeeze 1 more in, if I could. The ad tech contract dispute impact in the first quarter, it seems like on EBITDA, maybe it was a couple of million dollars and then how much -- what do you say is the be Iran war impact. Is that another couple of million? And is that going to linger into second quarter, which I assume is embedded in your second quarter guide, but just curious on both fronts... Roderick Larson: I don't think Iran affected the results on that. What I would say is I think it did help us clear up the funding. We mentioned that we got the funding came through and people back and made sure that the programs continue. It was more about just making sure the funding was in place than it was about any activity directly related to Iran. . Michael Sumruld: Yes. And the overall impact on our EBITDA was a net $5.5 million just when you're building out your model versus 2. Operator: Your next question comes from Keith Bachman with Pickering Energy Partners. . Keith Beckmann: I just kind of -- I wanted to dig into the ROV pricing discussion a little bit more. Obviously, it looks -- it was up in 1Q pretty significantly. You guys talked about some items that may not be repeatable. Is the -- is the 4Q 25% exit rate on revenue, kind of the right way to think about things going forward given some of the earlier impacts that you guys have mentioned or just anything on pricing on that front? Roderick Larson: I think revenue per day, yes, it is. I mean, we're still expecting to average higher year-over-year. So I think it's still a good starting point. We -- like we said, there were some one-offs that topped up revenue but didn't have much of an effect on EBITDA. Some of those things fall back and then we kind of go back to a more normal continuous improvement of the day rate. Keith Beckmann: Awesome. That's really helpful. And then the second question I wanted to ask was just around -- you guys have brought up this, I think, a few times before, but I just wanted to get a sense of kind of talk about lower profitability depending on working in certain regions. Could you kind of outline maybe higher profitability versus lower profitability regions a little bit for me? Roderick Larson: Yes, sure, sure. What we've referenced before in the Q4 call and here is the geographic mix for SSR. And typically, what we see, although not bad, and we've seen improvement over the last year, The margins in the North Sea and Brazil tend to trail the Gulf of America or Gulf of Mexico, your choice and West Africa. And we just see that mix shift towards those lower-margin locations in the first part of this year. I think we're seeing that come to fruition. But do based on line of sight, I think that, that shift is going to move back towards really, Gulf of America as we move into the latter part of the year. . Michael Sumruld: And then the second thing to watch is just the mix of work because the IMR work tends to be less differentiated, which means it's not as high margin as, say, the well remediation type work, the light well intervention or construction. So those are the things. As we get more of that work, we start to see the margins go up. Roderick Larson: Yes, which you could potentially see with everything going on to hope, but I think it's a possibility that you might see more of that intervention work. Keith Beckmann: Awesome. That's really helpful. I appreciate it. If I could slide 1 more and if you guys all fine. I wanted to ask around the -- you guys have brought up no share repurchase activity this quarter. Is there a chance that there could be a change of how you guys are thinking about deploying capital given maybe energy security risks create opportunities that could be there, maybe not in the immediate term. But I'm just trying to get thoughts on capital deployment, maybe if CapEx and returns there could be a better way to utilize capital. Just your thoughts on that right now, given we're in a much different situation than we were to start the year. Roderick Larson: You're thinking about it the right way. I mean, we definitely -- we've always said organic growth, potential inorganic growth that we think is really good and then return to shareholders. And so -- as those things become more attractive, you see -- 1 of the things I would tell you, as we work -- do this work with ad tech, we're prime on projects now. We're starting to see people that we work with that we think we look really good as potentially being part of Oceaneering those things -- the more work we do, the more we see those opportunities. So yes, if we have an opportunity to deploy capital that way, we would definitely redirect. Michael Sumruld: Yes. And I think it's fair to say that we feel like we've got the capital necessary to return some to the shareholders. We just need to be cautious about when we're choosing to do so and find those opportunistic moments. And it was just such a challenge in the first quarter, Keith, to do that. It was just swinging too much either direction, in our opinion. Operator: Your next question comes from Josh Jane with Daniel Energy Partners. Joshua Jayne: First question from me. It sounds like you're anticipating some incremental spending on OpEx items later in '26 and into '27. Maybe just some incremental color would be great and just maybe weave in some of the sense of urgency from customers just given what's happened over the last 8 weeks. Roderick Larson: Yes. I mean 2 really kind of -- it's 2 different stories. So if I start with -- we talked a little bit earlier about the increased oil price puts more money in the customers' pockets also improves the economics on well intervention and workovers and well remediation. And we've already seen customers starting to ask about, hey, is there going to be vessel availability during the season, right, so Q2, Q3. So I think some of that could come in. I mean, those things are pretty quick to turn around, so we could pull some of that into Q2, but definitely could fall into this year. . The other side is we see some resolution of the conflict in the Middle East. All those facilities that are close to the action are going to have to be looked at before they start up. So we think that there could actually be a little bit of a way of coming here on the Middle East IMBS activity because that would definitely have a scramble to put resources there to check these things out so they can start up the plants and the refineries there. So I think those are the 2 fronts we're watching carefully. Michael Sumruld: Yes. And on the latter, the couple of contracts that we won earlier this year, at the end of last year that started up before the activity declined due to what happened I think that just bodes well for us moving into the latter part of this year as well if that additional activity shows up. Roderick Larson: Exactly. It was a great time for us to improve our footprint there. Joshua Jayne: Understood. And then just my second one. You mentioned the Ocean Intervention too. I think that was the vessel that I board last summer. And from the commentary, it sounds like the opportunities are accelerating for simultaneous operations. Could you just talk a bit more in detail on the scope of work and how eager customers are to book an asset like this today versus where you were maybe 6 to 9 months ago? Roderick Larson: Yes, absolutely. I think for us, the exciting part is it's given us a chance to flex a little bit on the autonomous side or the remote operations that when we talk about SIMOPs, we're talking about operating the the ASP, the autonomous surface vessel that we bought. So that we're doing surveys with that along with doing the towed sonars and things off of the OI and some of the other things that we deploy from the Ocean Intervention too. . So it's this ability to almost do the work at 2 boats at once using lower cost, more efficient technology and the customers are really getting excited about it. Especially when we go into remote areas where there's not as many assets available I think that tends to be pretty exciting. So we did some trial work here in the Gulf and then we hope to get outside the Gulf and user as well. Operator: This concludes the question-and-answer session. I'll turn the call to Rod Larson for closing remarks. Roderick Larson: Well, since there are no more questions, I'll just wrap up by thanking everybody for joining the call. This concludes our first quarter 2026 conference call. Have a great day. . Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the PG&E Corporation First Quarter 2026 Earnings Release. [Operator Instructions] I would now like to turn the call over to Jonathan Arnold, Vice President of Investor Relations. You may begin. Jonathan Arnold: Good morning, everyone, and thank you for joining us for PG&E's First Quarter 2026 Earnings Call. With us today are Patti Poppe, Chief Executive Officer; and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's earnings presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides along with other relevant information can be found online at investor.pgecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended March 31, 2026. And with that, it's my pleasure to hand the call over to our CEO, Patti Poppe. Patricia Poppe: Thank you, Jonathan. Good morning, everyone. I'm pleased to be with you this morning to report another quarter of strong progress on multiple fronts. Today, we announced core earnings per share for the first quarter of $0.43. This strong start puts us solidly on track to deliver again and reaffirm our full year 2026 core EPS guidance of $1.64 to $1.66. At the midpoint, our guidance implies 10% growth over 2025 and would mark our fifth consecutive year of double-digit core earnings growth. Looking forward, we're reaffirming our EPS growth guidance for 2027 through 2030, which is unchanged at 9% plus annually. We're also reaffirming our 5-year capital and financing plans, including 0 new equity issuance needs through 2030. We continue to deliver for our customers on affordability. On March 1, we lowered electric rates for the fifth time since January 2024. For our most vulnerable residential customers, bundled rates are now down 23%. For other residential customers, rates are down 13% over that same period. In February, our Diablo Canyon nuclear power plant received the final state permit approvals needed to support extended operations through 2030. And in early April, the Nuclear Regulatory Commission granted Diablo Canyon, a 20-year license extension. These actions underscore Diablo Canyon's critical role in supporting California's reliability and clean energy goals, although further action by the state is required in order to operate beyond 2030. Turning to Slide 4. We remain focused on helping California build a durable, long-term wildfire solution. The CEA's report and recommendations provide a strong foundation as the legislature begins the next phase of this important work. We were encouraged to see the CEA emphasize the cost of inaction, noting that, and I quote, "Inaction perpetuates unaffordability for consumers and hinders the ability to attract the capital required to maintain safe, clean and reliable infrastructure." This is a strong call to act for California policymakers. As we said last quarter, the CEA report marks the beginning of the legislative phase. With the session running through August, policymakers now have the opportunity to evaluate a menu of options across multiple pathways. We remain encouraged by the progress toward meeting the commitment made by the legislature last year, to find and implement a long-term [ pole of society ] solutions. That commitment began with last year's SB 254, followed by the Governor's executive order, the CPUC submission to the CEA and now the CEA's report. As I said last quarter, the status quo is neither sustainable nor affordable, and California needs a model that works for all stakeholders, whether they are those affected by wildfires utility and insurance customers, communities, the state and the capital providers needed to support a safe, reliable and clean energy system. Turning to Slide 5. Our focus on wildfire mitigation remains clear and unwavering. We know this work is never finished, which is why we continuously look for better and more effective ways to strengthen our mitigation. Our operational mitigations, including PSPS, EPSS and continuous monitoring, are making us safer every day and position us to respond effectively whatever the weather conditions. Looking forward, our long-term infrastructure hardening plans will combine safety and improved reliability and lower maintenance costs. Undergrounding is an important driver of customer affordability too, reducing the need for and expense of annual inspections and vegetation management. As you heard on our last call, the CPUC has now provided a clear path for us to request additional undergrounding through a 10-year plan. We're still on track to make this filing with the OEIS in the third quarter, including our next approximately 5,000 miles and covering years 2028 through 2037. Combined with the 1,900 miles of undergrounding we expect to have completed by the end of 2027, plus an additional 4,000 miles of overhead hardening, this would result in nearly 11,000 miles of planned system hardening through 2037 or more than 3/4 of the high-fire threat miles we plan to harden based on our current risk modeling. We'll provide more detail in our 10-year filing. But in the meantime, we calculate that our undergrounding to date, over 1,200 miles has already allowed us to avoid more than $100 million of maintenance spend, which otherwise would have been paid by customers. That is exactly the kind of durable affordability we're working hard every day to deliver for our customers. Looking at Slide 6, you'll see our simple affordable model as amplified last quarter, giving us line of sight to customer bill growth of 0% to 3%. We call that our [ path to flat ], a destination our customers would love. As noted earlier, in March, we implemented our fifth reduction in electric rates in 2 years. That's real progress on affordability, and this progress matters most for customers who need it most. Since January 2024, electric rates for our most vulnerable customers are down 23%. For our other residential customers, rates are now down 13%, about $300 less per year. That is real money. Turning to Slide 7. You can see the progress we're making in enabling rate reducing load growth. Projects are moving through our development pipeline with our final engineering stage increasing to 4.6 gigawatts since our year-end update. This progression from application to preliminary engineering and on to final engineering is a natural and expected part of the project cycle and reflects healthy forward momentum. We also recently initiated our third cluster study, and the results reinforce that there's strong interest across our service area. In total, customer interest exceeded an additional 10 gigawatts, spanning multiple regions, including Silicon Valley and the Central Valley. Importantly, this demand remains diversified. There's no single project driving these totals. We're committed to only adding load that is definitively rate reducing. We simply need to get the pricing right. Projects from this latest cluster study, which meet the rate-reducing threshold will move through preliminary engineering over the next 6 months, refilling the pipeline funnel from the top as earlier projects mature. Importantly, this growth is occurring alongside significant resource additions across California. Since 2020, CAISO load-serving entities have added more than 33 gigawatts of new resources to the grid, including over 7 gigawatts in 2025 alone. In addition, the CPUC is continuing their practice of issuing [ new build ] procurement orders, which have resulted in 22 gigawatts under contract through 2029. This kind of growth is good for customers and good for California's economy. Every gigawatt of new data center load can contribute to affordability by reducing electric bills by 1% or more, while also supporting thousands of construction jobs and generating hundreds of millions of dollars in additional tax revenue. Before I hand it over to Carolyn, I'd like to tie all of this together with my story of the month. This quarter, that story is about continuous monitoring and how we are shifting from reactive maintenance to proactive, data-driven risk management. Continuous monitoring uses sensors, our smart meters, analytics and machine learning models to identify emerging issues on the system before they turn into outages, ignitions or safety events. It's allowing us to see developing conditions in real time and intervene earlier, often before there's any customer impact. We're seeing tangible operational benefits from this approach. Continuous monitoring helped us avoid approximately 12 million unplanned customer outage minutes in 2025 and another 4 million minutes in the first quarter of 2026. In many cases, these interventions occurred before customers were even aware there was a problem. Since the beginning of last year, we've had 1,484 good catches where sensor data flagged developing weaknesses or active events on the grid. 23 of these could have become ignitions but didn't. Identifying stressed equipment early also allows us to fix issues at a lower cost and avoid more expensive emergency repairs down the road. In fact, over that same 5-quarter period, early detection of stressed equipment helped us save an estimated $8 million of capital spend through lower cost repairs and over $1 million in expense by reducing time spent responding to emergency asset failures. Continuous monitoring is also improving how our teams work in the field. More precise diagnostics mean our troubleshooter spend less time searching for problems and more time fixing them, improving both productivity and safety. Taken together, our continuous monitoring program is an important step forward and an example of how we manage risk, control costs and deliver reliable service. With that, I'll turn it over to Caroline. Carolyn Burke: Thank you, Patty, and good morning, everyone. Turning to Slide 9. You can see our first quarter 2026 earnings walk. Core earnings for the quarter were $0.43, up $0.10 from the first quarter last year, putting us in position to once again deliver on our plan. Customer capital investments contributed $0.06, -- of that, $0.02 reflects ongoing execution of our capital plan and the associated return on rate base, including CPUC ROE. We also have a $0.04 benefit related to February's final commission decision in our 2023 [indiscernible] application. Nonfuel O&M savings contributed an additional $0.02, partially offset by our decision to redeploy $0.01 back into business. Timing and other was a $0.03 tailwind in the quarter compared to the prior year. As we look forward to the balance of 2026, you can count on us to remain focused on disciplined execution and delivering our guidance while taking a thoughtful approach to redeploying savings in ways that benefit customers and help to derisk 2027 and beyond. On Slide 10, there is no change to our 5-year $73 billion capital plan through 2030. We continue to see strong demand for customer beneficial investment across the transmission and distribution systems, and we still see at least $5 billion of incremental customer investment opportunity outside the current plan. We have flexibility in how and when we may pursue these additional opportunities to ensure we're making the right decisions for customers and investors. Our preference today remains making the plans better by prioritizing bringing in investments, which enable new beneficial load and help lower rates for our core customers over time, or we could make the plan longer by extending the duration of our top-tier rate base growth. A third option, though not one we're considering right now is to make the plan bigger by adding to our current $73 billion plan envelope. Taken together, these options give us confidence that we have flexibility in the plan and that we can continue to deploy growth capital in a disciplined way while at the same time, supporting affordability, growth and long-term value creation for owners. Turning to Slide 11. Our Five-Year Financing Plan is also unchanged from our prior call. The plan continues to be built on conservative assumptions, which align with the guideposts I've previously shared. First, our plan is built to require no new common equity through 2030. Second, we remain focused on achieving investment-grade ratings, including sustaining FFO to debt in the mid-teens. And third, we continue to target ramping up to a 20% dividend payout ratio by 2028, then maintaining that level through 2030. In February, we took advantage of favorable market conditions to execute 2 financings. We issued $1 billion of parent-level junior subordinated notes opportunistically starting to address 2027 parent funding needs. There is no change to our guidance for a net $2 billion of financing from parent debt and other through 2030. At the utility, we issued $2.2 billion of first mortgage bonds covering roughly half of our 2026 utility debt needs, which remain unchanged. From a capital allocation perspective, and in light of encouraging indications that the state is serious about pursuing additional wildfire reform, we continue to see our current plan as the right one for both customers and investors. However, I'll reiterate that if we stop seeing progress towards reforming the wildfire risk model, you can be sure that we will actively reevaluate all aspects of our capital allocation plan. On Slide 12, we continue to make steady progress toward investment-grade credit ratings, and I'm encouraged by the momentum we're seeing. Following our fourth quarter call, Moody's revised their outlook to positive, reflecting continued improvement in our credit trajectory. Our focus on strong financial ratios, discipline to hold the company leverage and continued progress on wildfire mitigation directly supports the criteria for potential upgrades. As I've noted before, achieving investment grade is a key milestone for us. It will lower our borrowing costs and translate into hundreds of millions of dollars in customer savings over the life of the debt we issue, creating a durable affordability driver for customers, not currently assumed in our plan. On Slide 13, we're reinforcing that we continue to see a path to deliver 2% to 4% long-term reductions in nonfuel O&M even after absorbing inflation and other cost pressures. Executing against our simple, affordable model is how we keep our capital program affordable for customers and sustained reductions in nonfuel O&M are a key element allowing us to grow our plan and fund the investments our system needs while also protecting customer bills. In addition to the great example of continuous monitoring Patti mentioned, we continue to innovate and drive efficiencies in our field operations by applying technology. By leveraging satellite and LiDAR, we're improving the quality and consistency of inspections while reducing the volume of patrols, lowering contractor reliance and enhancing safety in the field. Taken together, these changes are expected to deliver $24 million in annual O&M savings this year alone. This is another tangible example of how targeted technology investments support our long-term nonfuel O&M trajectory. Slide 14 highlights major regulatory and legislative milestones we're monitoring this year. On the regulatory front, following our fourth quarter call, we received our 2025 safety certificate from the CPUC, which is valid for 12 months through early March 2027. Additionally, as Patti mentioned, we're on track to file our 10-year undergrounding plan with the OEIS in the third quarter. I'll end here on Slide 15 by pointing out our differentiated story. We're proud of what we've accomplished, and we know there's still plenty of opportunity in front of us to continue delivering for our customers and our investors. We're focused on doing just that day in and day out. With that, I'll hand it back to Patti. Patricia Poppe: Thank you, Carolyn. Before we take your questions, I'd like to recap where we stand as we are building California's energy future. We delivered a strong first quarter, putting us firmly on track for another year of double-digit earnings growth. Safety remains our highest priority. We continue to strengthen our wildfire layers of protection. We continue to make real progress on affordability with a 23% reduction for our most vulnerable customers since January 2024. At the same time, we're seeing good progression of our rate-reducing large load pipeline, and we're encouraged by California's focus on constructive wildfire reform. . With that, operator, please open the lines for questions. Operator: [Operator Instructions] Your first question comes from the line of Shar Purreza with Wells Fargo Securities. Shahriar Pourreza: Patti, you've been vocal about not wanting to see the can kick down the road on legislation. I mean, obviously, that would be a bad outcome in your view. I guess, how should we think about capital allocation, like the buybacks in case some aspects of the CEA report get passed, but we don't get something that is all encompassing. So step in the right direction, but not the Goldilocks scenario. Is some progress about outcome [indiscernible] key aspects get pushed into '27, it's obviously a tight window and California is dealing with a lot. Just get a sense there. Patricia Poppe: Yes. Thanks, Shar. First and foremost, I would just reiterate that we're encouraged by the progress to date. We do think the right conversations are happening with the right folks, and we feel good and encouraged about that. I'll just offer that there's obviously minimum outcome to prevent additional costs being born by shareholders and this tail risk being able to be measured and understood. We know that that's a very important floor for an outcome here. And as we've been very clear, we've been reiterating wide and far the value of the investor-owned utility model. We've been advocating for the importance of the capital that we are able to attain from the capital markets from our investors and how important that is to making our infrastructure investments affordable for California that as we spread out the cost of infrastructure over time because of the great capital that is deployed by our important owners, that is good for customers. And so an important outcome of SB 254 is that we can attract low-cost capital to invest in that infrastructure to help California grow and make our energy cost more affordable for customers here. So I'll say all that backdrop to say that we feel like our capital allocation and our model is working. We're lowering rates while we're deploying our capital today. We think right now is not the time to change that plan, we know that the simple affordable model is the best plan for customers and investors. And so we're very bullish on that. Now to the ultimate heart of your question, if that doesn't occur, if we don't get a minimum outcome that's essential, then obviously, we'll have to look at and we will not avoid looking at our entire capital allocation plan, the whole financial plan. I'm not going to rack and stack how we would think about that here on this call, but I will just say that all aspects of the plan will have to be on the table, and we'll take a look at doing what's best in totality. But for now, we are encouraged by the progress that's being made and the level of attention to the issue. Shahriar Pourreza: Got it. Perfect. I appreciate that. And good luck there. Patti, just lastly, I mean, I know obviously, you keep highlighting the data center opportunity in the context of savings and kind of bill reductions, probably that's the right messaging in this environment. But is there kind of a point you can convert that into sort of like an earnings impact like some of your peers. I mean 4.6 gig in final engineering is somewhat material. I guess at what point does large load growth drive significant new transmission investments. Patricia Poppe: Well, I would say that it is. We are and we shared at the -- on our Q4 call that we've added more CapEx for transmission into our $73 billion capital plan. Given all of our circumstances, we think our $73 billion plan is the right plan. The idea that we would make that bigger would take some other changes, I would say, over time. And so right now, as Carolyn has been very consistent in sharing that we want to make the plan better. And when we say better, what we mean by that is by pulling in that transmission and data center load growth, if it makes it more affordable for customers, that's better. And so we've been very disciplined about our cluster study work. And when we talk about final engineering, we're sharing real costs with our potential large load customers and they're signing on for them that are absolutely not just from a a sound bite or a marketing perspective but an absolute rate reducing new CapEx investment. And so that makes our capital plan even better. There will come a time, I think, particularly after SB 254 Phase II resolution at the end of the legislative session that we should look at if the conditions are such that we could make the plan bigger, but that's just not now. Operator: Your next question comes from the line of Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask a follow-up on just the legislation and just there was a lot put forward by the CEA, like 3 separate phases. It's a big menu of things. And I guess just -- where are you kind of drawing the line? And what is sufficient? Is it more about having some type of permanent cap if I'm reading your response correctly? And then I just in the last legislative session, shareholders did have to kind of participate in some instances there. So how are you kind of thinking about that for Phase 2? Patricia Poppe: Yes. Nick, the most important thing, we think, is the whole of society approach. We think the governor was clear and the CEA report reflects that there are multiple aspects of wildfire liability reform that would be important for all California because remember, all fires in California are not caused by utilities. Insurance access in California is a real challenge to homeownership. We have a housing crisis in California, making sure that we have an insurable housing market is very essential for the state. So well beyond utility concerns the CEA report reflects a whole of society approach. We think that's smart because we're Californians too. And we care about what happens here and what happens to all Californians, not just those impacted by a utility wildfire. Now that being said, I am the CEO of the utility. So I do have a point of view that we need to make sure that the tail risk of wildfire liability is one that shareholders and investors can model can predict and know how great the risk is so that you can feel comfortable investing your clients' pension funds and retirement funds into our infrastructure here in California. So our minimum is very important that we have an ability to see and model and quantify what that tail risk is. Now on shareholder contributions, as were required in the 254 Phase I, that is a question that's part of a total look of the value of the fix, the totality of the legislative action will determine whether there's any reason to make additional contributions. And so the package would have to be looked at as a package. And if it doesn't improve the status quo then contributions would be unacceptable. But if there's a dramatic improvement to the status quo, we obviously would be in dialogue with policymakers. Nicholas Campanella: That's very clear. I appreciate that. And then I just had another question because it's kind of come up to the foray recently. Just the governor election in the state for various reasons has been more of a focus for folks. And I know that there's been some calls from various candidates on returns and affordability and maybe even notably a rate freeze. But I do recognize on slides and in the simple affordable model, you're showing that you're pretty well positioned against that. So just what's the strategy here to kind of make that resonate with new policymakers? And then, I guess, just how high grade is the plan if we were to kind of go that way with some of the more draconian things that are being piched right now? Patricia Poppe: Yes. Look, the good news is this. Number one, whomever is elected governor of the state of California, we're going to want what they want, and that's affordable utility rates. The even better news is performance is power, and we are performing. As I mentioned, we've reduced rates 5x in the last 2 years. Our most vulnerable customers' bills and rates are down 23%. That is meaningful progress that we can point to. And so politicians have to say what they have to say, I guess, to get elected. But when it comes down to brass tacks, and we actually have to do what's promised, I think our performance is a key enabler to our ability to work with whomever is elected to do exactly what these politicians want. We want the same thing. We want a healthy, vibrant California powered by PG&E and the IOU model is essential to the growth and prosperity of California. Operator: [Operator Instructions] Your next question comes from the line of Steve Fleishman with Wolfe Research. Steven Fleishman: Just I think your comments are pretty clear on what you kind of want out of a law. Just when you look at the different proposals or structures that were in the wildfire report, are there any of the ones that best met what you want and you think other parties stakeholders as well. Patricia Poppe: Yes. I think Steve -- I think this whole of society look is super important. So the 3 pillars, the looking at hardening our communities from spread is so important. It's 1 thing to prevent an ignition. But when the 100-mile per hour winds are here, we need to make sure that our communities are ready and that they are built purpose, just like in hurricane zones, making sure that we get those building codes and implementation of those codes, that would be very important to derisking our communities. . So obviously, that's a good thing. The liability limits and liability reform is something that we feel strongly should be looked at, particularly when a utility can demonstrate prudence and can demonstrate that through their wildfire mitigation plan, they are prudent. And then finally, any kind of state, backstop obviously helps to manage that tail risk. But what I'll tell you is there's lots of paths to odds here. There are all sorts of vehicles and methods and mechanisms. And so the report, I thought did a good job of outlining multiple paths, not -- we don't need everything in that. In fact, some of them were intentionally this or that. And so I think now is the heavy lifting for the legislature to really consider what's the totality package. What is the state's ambition to truly create a wildfire liability construct that works for everyone and works best. And we're, as I've said, encouraged by the conversations that have ensued so far. Steven Fleishman: And then I guess 1 related question. Just somebody brought up the governor election and obviously, we had this shake up occur. Is there any way to interpret whether that actually adds more impetus to address this wildfire law this year or the other way around? Is it disruptive to it? Just any thoughts there? Patricia Poppe: I would say the Governor Newsom has done incredible work over his time as Governor to address these major fundamental issues with wildfire risk in the state. I think he's probably the leading governor in the nation who has taken and led his legislative bodies through major reform in this area on his watch. . So as he indicated, and we're just -- from the reports and the executive order that he issued, I think he expressed interest in having a real fix but he can't act alone. He's got to have the legislature with him. And so it's been good to see legislative leadership describing a desire to really get into this issue. And so I look forward to them being able to do their job. And I think unrelated as much to the governor's election, but for the fact that it's Governor Newsom's last year in office here in California, I think he's made it clear that he'd really like to see action on this. Operator: Your next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering on the data center side of things. When might you expect to refill that bucket of application and preliminary engineering within a pipeline? And maybe more broadly, just what has been the pace of data center demand and conversations that you've been seeing? Patricia Poppe: Yes. I would say, first of all, the cluster study that we've initiated, we call it Cluster '26, our third cluster study has initiated -- has shown significant demand as we look at how we do the engineering, we do that over the next 6 to 8 months. We do parallel engineering of all the projects. This has been a real enabler to minimizing costs for any 1 project maximizing shared infrastructure investment and really getting a clear eye of where the capacity needs to be either added or leveraged where we have existing capacity. And so one of the, I would say, the big developments we're seeing lately is more interest outside of just the Bay Area. And so that's exciting. I'll just tell you, I was at a conference in EEI Key Accounts Conference with all our large customers, and I was on a panel with, I'll just call a Class A data center developer. And as he and I were talking before we went on stage, he -- and this is a major data center developer was unaware, we had additional capacity here in California. And so I think we still have a job to get the word out that California is open for business. We've added 33 gigawatts of capacity to the California grid, and we've got 22 gigawatts more under contract for the next 4 years. That is significant capacity being added on a grid that is underutilized because of our low air conditioning demand. So we really have an opportunity to serve these large load customers and I think word's getting out. And our third cluster, cluster 26 really has demonstrated that. So I would say, as you can see, as we indicated, 10-plus gigawatts showing interest. That's in the early phases of that cluster study. And as we do the engineering, obviously, some of that will fall out. We don't -- we've seen that over time. But as you can see, we continue to move closer and closer to actual construction and being online. We still expect to have about 1.8 gigawatts online by 2030. And again, these are multiple projects, no one silver shovel, as I like to say. So this is, I'd just say all good for California, for California's tech industries, for the customers who leverage technology and for all of the people who use the grid in California, this is a big win-win. David Arcaro: Great. Yes, that's helpful. And I guess, I think you kind of alluded to this also in that response. But I was just curious, I mean, you've got significant electric bill reduction coming as you start to bring this online. So could you just help with a sense of when those data centers are coming online and when customers would end up seeing some of that bill reduction to kind of add on top of what you've been highlighting and achieving on the affordability side of things. Patricia Poppe: Yes. So the 1.8 gigawatts will be online by 2030. We forecast that to be about a 1% to 2% rate reduction for that time period. And so when you add that into our simple affordable model, remember, this is the way that we've been reducing rates already. There's very limited large load that's contributed to the 23% rate reduction for our most vulnerable customers and 13% rate reduction to date. That's been delivered through a simple, affordable model. Converting our capital O&M ratio to a more capital less O&M, reducing our maintenance costs through more efficient operations. And as Carolyn mentioned, $26 million of savings by transforming how we do inspections. Those inspections are all O&M. So one of the secret sauces here at PG&E is our O&M reduction capacity and that is the most beneficial, quickest way to lower rates for customers. Of course, investment-grade credit metrics would also help lower bills for customers and large load as we transition forward is in the future years, our pathway, as we like to say, our path to flat. That is being driven by all of those factors. O&M reductions, more efficient financing and large load and the large load in the latter half of the plan. Operator: Your next question comes from the line of Anthony Crowdell with Mizuho. Anthony Crowdell: Follow-up to David's question on the -- I'm curious on the conversion from final engineering to construction, just your confidence in obviously, you've had an increase there, up to 140, just as that 4,600 now is in final engineering. Confidence of converting it to the construction mode. And then I have a follow-up. Patricia Poppe: Yes. So first of all, one thing to remember about how this large load gets approved and financed here in California. Our generation capacity is driven through the California Energy Commission, CAISO and the CPUC. And that's why we've added 33 gigawatts that process is working really well. I know that some of the ISOs across the country are struggling to get new large load built. We're getting capacity added to the grid. So in order to get one of these large load customers, they can leverage that capacity that's been added to the grid without having to do one-on-one contracts per se. So when we talk about final engineering, we're predominantly talking about transmission and the transmission engineering that's required because in a lot of cases, we're able to just do a direct connect, dual feed with a backup online on-site in order to deliver the reliability that these large data centers require. So to answer your question specifically, Anthony, we think there's a high conversion, but we've not been at this stage with this volume before. And so we're buttoning up all the final details with our counterparties. But the fact that they're moving forward, they're putting money on the table, these aren't final agreements, but they're awfully close, and they're putting real forecasted expectations for bringing load online that -- and so we'd say that process is working, but these will be important tests here, these final -- these 4 gigawatts to see how much of that actually goes to construction, but we're pretty optimistic than a lot of it will. And so that's why we forecasted 1.8 gigawatts by 2030. Right now, that's -- you can use that as simple math, but those numbers could change here in the coming months. Anthony Crowdell: Great. And then a follow-up on the $5 billion of incremental investment opportunities. And I know I think third quarter, you're going to file an undergrounding plan, and the miles are kind of subject to approval, how much of the $5 billion of incremental opportunities is dependent on the approval for the undergrounding plan or the undergrounding plan would be incremental to this $5 billion? Patricia Poppe: Unrelated. We built in a level of undergrounding and around $1 billion a year in our $73 billion plan, and that's what's built into our assumptions. So when we talk about the $5 billion, we talk more about accelerating reliability improvements, accelerating new business connections, accelerating these large loads, including more and more transmission infrastructure investment in our plan because right now, we're making trades between where best to deploy capital. We have plenty of capital to deploy, and we're really working from an affordability and our balance sheet are key drivers to how much capital we deploy, which is why we love our plan. We think it's the best. It really threads the needle for customers and investors. And so anything we add to the plan at this juncture means something else is coming out. And so that's why we would say that the $73 billion incorporates all of those things. Operator: Your next question comes from the line of Gregg Orrill with UBS. Gregg Orrill: I Was wondering about settlement discussions in the rate case, if you've had any and just your general thoughts on how that's going and settlement is at all likely> Patricia Poppe: Yes. I would say, first of all, evidentiary hearings will be here throughout May, and I think that's an important step in the process. That may create an opportunity for settlement. And so we would never rule out settlement. Obviously, we've settled cases in the past. But we've also gotten pretty strong indications from the CPUC that they like to do a fully adjudicated GRC. So we're open to both. We think we filed a great case. We think given our commitment to affordability and our follow-through on what we promised the commission, we would be doing with rates, and they're watching it happen. I think we enter those discussions as a real, trusted counterparty, and we look forward to the hearings throughout May. . Operator: Your next question comes from the line of Ryan Levine with Citi. Ryan Levine: Two questions. One, just in general, how does the summer look for weather into wildfire season? And then secondly, as you continue to look to optimize capital allocation into potential scenarios around CapEx, whether it's growth or something else. How do you look at what credit metrics to maintain on your holding company leverage? Patricia Poppe: Well, I'll take a weather question, and then I'll pass off to Carolyn on the credit metrics. On the forecast for weather, look, one thing I've learned, we have incredible scientists here at PG&E who are extraordinary weather predictors. But our strategy is not to count on weather prediction, we count on being ready every day. And so regardless of the conditions, we are in a position and a posture to respond and to be prepared and to prevent. As I shared in my prepared remarks, this continuous monitoring application to our grid is extraordinary. I cannot overstate how exciting it is to us here at the company to look at the potential of being able to move from a reactive grid operations to proactive grid operations with visibility, knowledge and forethought before conditions materialize. And before a branch grows into a tree, before a line has any kind of degradation, we can see it. Before a transformer might have early signals of failure, we are moving into a fully predictive grid posture. We're not there yet, but boy o boy, are we making progress and this continuous monitoring gives us a lot of confidence heading into this wildfire season that we have the posture required to prevent catastrophic wildfires. And so we're just -- we're working hard to make sure that we deploy those sensors and leverage that technology as quickly and as affordably as possible because it is so beneficial. I'll go ahead and kick it over to Carolyn for the credit metrics question. Carolyn Burke: Yes. Just on -- so just -- as a reminder, stepping back, like our current plan is certainly built around 3 things, as we've said. No equity, particularly at today's low valuation. We want maintain the common dividend, which provides us with flexibility. And then we do have some modest debt levels at parent level, sorry, debt financing in the plan at the end, but we are maintaining that 10%, and that's all built around maintaining our IG-level credit metrics today. post SB 254, I think that what you're getting at and looking at a different capital allocation if we said everything is on the table at that point in time. And so all elements of that plan that I just went through, will be on the table to be considered at that point in time. And what I will say is that you can just really count on us to look at market conditions. We're going to be looking at what's going on with our stock price, what's going on with interest rates, what is the overall environment, and we'll come to that conclusion at that time. Ryan Levine: Okay. And I appreciate the maybe sensitivity, but is there any color you could share around whether special dividends or ratable dividends or buybacks that we should consider in those type of scenarios? Patricia Poppe: Ryan, it's Patty. Yes, as I've said, we're just not going to rack and stack the alternatives here today. We're going to make sure that we do first things first, and that's to get a solid SB 254 outcome. Operator: Your next question comes from the line of Richard Sunderland with Truist Securities. Unknown Analyst: Just 1 for me. Given the transparency in the SB 254 Phase 2 process, recent CEA report, do you expect any new look to the legislative process this summer, like in earlier bill introduction or more debate on public text or I guess anything else that offers more external insight into where the process stands. Patricia Poppe: Well, we don't know exactly what -- how the legislature is going to approach this, but we do know that the Assembly Energy Committee Chair, Cottie Petrie-Norris had indicated that she had hoped to hold hearing sometime in May, which would be -- she said that in public statements. And so we're hoping that, that gets followed through on. We do think hearings will be important because it's a complex subject, and we think the more are legislators and these important committees both the insurance and the energy committees and the Senate and the assembly understand the alternatives. They'll see what the CEA report really was conveying that in action is not a good path forward. In action would be really just not an option. It's unaffordable. It's too expensive and too regressive. And we know our policymakers when they understand that we'll want to take the appropriate actions. And the good news is the CEA report provides multiple alternatives for consideration that would dramatically improve the status quo. So we look forward to those hearings and look forward to the discussion how it transpires here over the legislative session between now and the end of August. Operator: Your next question comes from the line of Carly Davenport with Goldman Sachs. Unknown Analyst: This is [indiscernible] on for Carly. I had a question on the CAISO transmission project. Could you give us a sense of where things stand in terms of getting to a final approved status? Are there any projects that you're more optimistic could clear the final iteration this year? And then how should we think about the financing strategy for these projects? Patricia Poppe: Yes. Thanks. Great questions. We're excited to report the transmission planning process from CAISO is has completed, and they've awarded 25 projects for '25 '26 planning, totaling $4.16 billion of projects for PG&E. This is a big improvement for PG&E. I think there was a period of time where the CISO was not sure that PG&E could follow through and do these transmission projects at this scale. And their determination certainly has shown that they have confidence that of 26 projects, 25 were awarded to PG&E. And we're proud of that. And all of those projects are currently built into our $73 billion capital plan. So no change to the capital plan there, just our ability to go ahead and execute those. Unknown Analyst: That's great. And then a quick follow-up on Diablo Canyon. Now that you got the license renewal, how are you thinking about appetite from the state to keep the plant on longer term? Patricia Poppe: Yes. Well, thank you for asking this question. I always love to talk about Diablo Canyon. Look, we're very happy with the NRC's 20-year license renewal, and that was a big milestone for the team. I think they've earned that with their performance, their continued delivery of clean energy for the state of California, one of the best operated nuclear plants in the country, proud of their performance, and we think that performance was essential in that license renewal. Now it is up to the legislature on whether the plant would be extended beyond 2030. I think the CPUC has been very clear that there's a real cost benefit and the billions of dollars of savings for customers by having Diablo remain online. And there's a recent study by MIT that confirmed and validated CPUC's understanding -- or CPUC's forecast. So I think with affordability top of mind, I leave it in the hands of the legislature to take the necessary actions to extend the life beyond 2030. But the economics certainly work. Operator: This concludes the question-and-answer session. I will now turn the call back over to Patti Poppe for closing remarks. Patricia Poppe: Thank you, Jeannie. Well, Thanks, everyone, for tuning in today. We know a lot of eyes, including ours, are on Sacramento and wildfire liability reform, and you can rest assured that our eyes are also on running a great utility. The PG&E transformation is on track. We have never been stronger or better positioned to serve, and it is our honor to do so. Thank you for joining us today. Stay safe out there. Operator: Ladies and gentlemen, that concludes today's call. Thank you again for all joining. You may now disconnect.
Operator: Greetings, and welcome to the Reliance Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with Investor Relations. Please go ahead. Kimberly Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's First Quarter 2026 Financial Results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance. Karla Lewis: Good morning, everyone, and thank you for joining us to discuss our first quarter 2026 results. Reliance is off to a strong start to 2026, capitalizing on favorable market fundamentals with first quarter volumes, pricing and earnings exceeding our expectations. Strong pricing and demand momentum continued to build throughout the quarter across our diversified product and end market portfolio. Our first quarter tons sold were a record and were up both sequentially and year-over-year. A result that's especially notable given the unusually strong tariff-driven demand pull forward in the prior year period. For the 13th consecutive quarter, we significantly outperformed broader industry shipments. Average selling price per ton sold also rose over the prior quarter, surpassing our expectations. Strong execution converted a 15% increase in sales, driven by higher shipments and prices into significant operating leverage driving over 30% year-over-year growth in our non-GAAP pretax income and nearly 37% year-over-year growth in non-GAAP earnings per share to $5.16. As previously announced, we also secured 2 significant government contracts in the first quarter to supply the Department of Homeland Security border wall and Joint Strike Fighter projects through our AMI Metals wholly owned subsidiary. We were excited to win these contracts which collectively represent up to approximately $3 billion in revenue and further reinforce Reliance's role as a trusted partner on critical U.S. infrastructure and defense programs. These wins illustrate our ability to support large and complex projects by leveraging the scale, logistics capabilities, processing expertise, deep supply chain relationships and existing operating infrastructure of the Reliance family of companies. Our diversified platform allows us to concurrently meet the needs of large program partners as well as small order quick-turn customers. As a reminder, our first quarter results did not include any contributions from the border wall contract. Our disciplined capital deployment and strong cash profile give us the flexibility to execute on both our growth and stockholder return activities concurrently. In the first quarter, we generated strong operating cash flow even with a typical seasonal build in working capital. Our full year 2026 outlook for capital expenditures is approximately $300 million with a little less than half directed towards strategic growth investments that enhance our processing capabilities, strengthen our ability to serve customers, expand our footprint and grow volumes in attractive markets. In the first quarter, we increased our dividend rate by 4% to an annualized $5 per share and repurchased $234 million of our shares. Our strong balance sheet and liquidity position remain key competitive advantages, affording us the ability to invest in our business, pursue strategic acquisitions and return capital to our stockholders while maintaining our disciplined approach to capital deployment. In summary, we are encouraged by rising customer optimism and activity across our broad end markets with continued momentum in the infrastructure, data center, energy and defense sectors. As we enter the second quarter, extending lead times at our mill suppliers also bode well for a continued strong pricing environment or access to metal becomes a strategic advantage. Reliance's unique scale and capabilities, along with our domestic mill relationships and exceptional teams position us well to further capitalize on the opportunities ahead in 2026. I'll now turn the call over to our COO, Steve Koch. Stephen Koch: Thanks, Karla, and good morning, everyone. Our first quarter performance reflects strong execution across our operations and a continued commitment to safety and customer service. I want to thank our teams for their hard work and discipline, which continue to differentiate Reliance in the marketplace. Turning to our demand and pricing trends. Record tons sold increased 9.4% from the fourth quarter of 2025, exceeding our expectations of up 5% to 7%. Year-over-year, tons sold increased 2.7%, significantly outperforming the service center industry, which reported a decline of 5.1% over the same period. Our nearly 8 percentage point outperformance in the first quarter and sustained outperformance over 13 consecutive quarters reflects the advantages of our operational scale, commercial diversification and unmatched processing capabilities. Carbon volumes remained our primary growth driver with particular strength in nonresidential construction and manufacturing applications. Aluminum and stainless product volumes also contributed to year-over-year volume growth at higher per ton profitability levels. Our first quarter average selling price increased 5.3% from the fourth quarter of 2025, exceeding our expectation of up 3% to 5%. Carbon steel, aluminum and stainless steel product pricing all trended upward amid tight supply, extending lead times and improving demand conditions. As Arthur will discuss in our outlook, we believe that these market dynamics will continue to support strong pricing in the second quarter of 2026, elevating a strategic advantage we hold in accessing metal from our domestic mill partners. Turning to our end markets. Nonresidential construction represented roughly 1/3 of our first quarter sales, primarily from carbon steel tubing, plate and structural products. First quarter shipments remained strong supported by Data Center and related energy infrastructure projects continuing at record levels, along with overall strong demand in heavy civil and public infrastructure work. Our strong position in these markets outweighed lower activity in certain private nonresidential construction markets. Our nonresidential construction market participation is further strengthened by our involvement in the Department of Homeland Security border wall project with activity commencing this month. General manufacturing also represented about 1/3 of our first quarter sales. Our participation in this market is highly diversified across products, industries and geographies. Shipments grew year-over-year driven by strength in industrial machinery, including data center equipment, shipbuilding programs, military programs, consumer products and construction machinery. We are also capturing rising nuclear-related demand driven by emerging small modular reactor programs and data center energy requirements. Aerospace products accounted for approximately 10% of our first quarter sales. Commercial aerospace demand remains subdued as elevated inventories persisted across the supply chain though we expect conditions to gradually improve in 2026 as OEMs work through record backlogs and increased build rates. Defense and space-related aerospace programs remained robust during the quarter. Automotive, which we primarily serve through our toll processing operations, represented 4% of our first quarter sales. As a reminder, our toll processing volumes are excluded from our tons sold. Underlying demand has remained stable supported by our recent capacity investments and our ability to quickly adapt to the variable demand of the automotive market. Lastly, we are seeing encouraging improvement in demand in the semiconductor market with momentum building in 2026. In summary, Reliance continues to be defined by our people, our strong domestic mill relationships and our focus on delivering unmatched customer service. The strategic investments we've made across our footprint are generating tangible returns and our disciplined commercial and operational approach continue to drive the profitability that differentiates us. I will now turn the call over to our CFO, Arthur, to review our financial results and outlook. Arthur Ajemyan: Thanks, Steve, and thanks, everyone, for joining today's call. We delivered a strong first quarter with sales up 15% year-over-year on stronger-than-anticipated shipments and pricing. Our gross profit of $1.2 billion was up 23% compared to the fourth quarter of 2025 and up 13% compared to the first quarter of 2025. On a FIFO basis, which is how we evaluate our ongoing performance, non-GAAP FIFO gross profit margin expanded to 30.1% compared to 28.5% in the fourth quarter of 2025, and was only slightly below 30.4% in the prior year quarter. Our pricing discipline enabled us to pass through higher mill pricing on most products in the first quarter and expand margins. Higher-than-anticipated material costs resulted in the first quarter LIFO expense of $37.5 million, above our $25 million estimate prompting us to raise our full year LIFO outlook to $150 million from the prior $100 million annual estimate. Accordingly, we expect LIFO expense of $37.5 million in the second quarter of 2026. I'd like to also briefly address the impact of incremental Section 232 tariffs on our gross profit margins and profitability. The 50% Section 232 tariffs have had the most impact on aluminum gross profit margin as pricing for many common alloy aluminum products increased significantly without a corresponding significant increase in demand. Despite the moderate negative impact on the gross profit margin, our aluminum gross profit dollars are up about 18% compared to the first quarter of 2025. Overall, the current pricing environment is resulting in higher gross profit dollars across our product portfolio and contributing to improved profitability despite variation in margin performance for certain products. Non-GAAP SG&A expense increased 6% compared to the first quarter of 2025, driven by higher incentive compensation from improved profitability, inflationary impacts on compensation and related benefits and higher variable warehousing and delivery costs associated with our increased tons sold. On a per ton basis, non-GAAP SG&A expense increased 3% due primarily to higher incentive compensation. Our growth in shipments from continued market share gains and improved gross profit dollars drove improved operating leverage and resulted in a 33% year-over-year increase in non-GAAP pretax income to $354 million with an 8.8% pretax income margin, which was up 120 basis points. Our non-GAAP first quarter earnings per diluted share grew nearly 37% year-over-year to $5.16. For reference purposes, LIFO expense per share amounted to $0.54 for the quarter compared to the $0.36 assumption in our guidance and $0.35 in the prior year quarter, stemming from higher-than-anticipated carbon steel and aluminum product cost increases. Moving on to our balance sheet and cash flow. Cash flow from operations in the first quarter was approximately $151 million, reflecting typical seasonal working capital build from increased shipment activity as well as the impact of higher metals pricing. Our inventory turn rate based on tons improved to approximately 5x compared to 4.9x a year ago, while accounts receivable DSO of 42 days was consistent with the prior year. During the quarter, we funded $64 million of capital expenditures, paid $67 million in dividends and repurchased $234 million of our common stock at an average price of $299 per share. We have approximately $529 million remaining available under our current share repurchase program. As of March 31, our total debt was $1.7 billion. Our leverage position remains very strong with a net debt-to-EBITDA ratio of 1, giving us substantial liquidity and flexibility to continue executing on our capital allocation priorities. Looking ahead, we expect both demand and pricing to remain healthy in the second quarter of 2026, generally in line with Q1, subject to ongoing risks from domestic international trade policy and the conflict in the Middle East. We anticipate second quarter 2026 non-GAAP earnings per diluted share in the range of $5.15 to $5.35, up 16% to 21% year-over-year, including an estimated $37.5 million of LIFO expense or about $0.54 per diluted share. Please refer to our first quarter earnings release for further details on our Q2 outlook as well as anticipated contributions from the border wall contract. In closing, we're very pleased with our first quarter performance, our solid volume growth, continued market share gains and disciplined pricing supported improved operating leverage and stronger earnings. This concludes our prepared remarks. Thank you again for your time and participation. We'll now open the call for your questions. Operator: [Operator Instructions] And our first question will come from Martin Englert with Seaport Research Partners. Martin Englert: Questions on the guidance here. And just looking at the current quarter FIFO gross profit margins improved to about 30% from the 28.5% last quarter. Even accounting for the new DHS contract in the mix for 2Q, given the improving broader price backdrop as well as volumes, do you think you're being conservative with the implicit 2Q FIFO gross margins in guidance? Or are there other factors to be considering here like a lagging catch-up in margins and the inflationary price factors with aluminum here? Karla Lewis: Martin, so on the guide for Q2 around gross profit margin, which we don't explicitly provide guidance on. Q1 was a good strong pricing environment with a lot of products having price increases, which gives us an opportunity to drive our margins up a bit for a temporary period. We expect some continued price improvement in Q2, but not to the level of Q1. So we will start to see the higher cost metal hit the inventory and kind of normalize a bit towards -- we believe, towards the end of the quarter. So probably not stronger, we have less upside than in Q1 from a price increase dynamic. And then on the border wall, the margins -- the gross profit margins will bring our consolidated number down a bit just based on the product mix what we're selling and the services we're providing. But as we mentioned, extremely low operating cost on the volume there, which will help us leverage our expense line and give us very strong earnings from the border wall project. Martin Englert: I guess looking another step ahead here and coming back to your comment on maybe by the end of the quarter, so not as much of a price increase or momentum quarter-on-quarter, but maybe things begin to normalize relative to the inventory costs coming through. So looking further ahead, then does that offer some opportunity for some partial normalization in FIFO gross margins understanding that you'll have this contract in the mix, and that will be something that's dilutive, but not added it to the bottom line? Karla Lewis: Yes, I think that's right, Martin. It's -- that's the way the dynamics typically work pricing drives a lot of the margin upside and then to the extent it normalizes or comes down, but you also need to underlying demand there as well to support that, which we, at this time, feel really good about 2026 across demand across most of the products and end markets we're selling into, which provides a good backdrop from a pricing standpoint. So it was good strong price increases in Q1. We expect prices to remain at good levels. Just again, maybe not increasing at the same pace. Martin Englert: Okay. So some transitory issues and I shouldn't say issues, but trends and items sort of normalizing some of the pricing moving through the distribution channel as it relates to the cost pushing through, not too different than what we saw in recent quarters here, given the inflationary impact of 232 tariffs, yes. Karla Lewis: Correct. Yes. Martin Englert: Okay. If I could one more. I was just curious on your thoughts for -- it seems like areas of the defense are strong semiconductor improving, which I think it's been a while since we've seen any positive news on that front. And I think I've also heard like within oil and gas, maybe if you can just touch on the margin profile of these product lines that serve these end markets and potential mix implications as we're moving through 2026. Karla Lewis: Yes. We don't really talk about how they affect gross profit margin by product, Martin. And it does vary, but it also depends how much value-add processing we're doing. So -- you're right, Defense continues to remain strong across a lot of the different products we sell. Semi, it's a small part of the business, but it has been lagging. We -- not at a gross profit margin line, but we have talked about some of our niche semiconductor business being very high-value types of products, and that has been down, but we're happy to see some improvement beginning. But as far as at a consolidated level, nothing really to comment on as far as change in product mix or financial guidance. Arthur Ajemyan: And Martin, I would add that from an end market perspective, we saw the ISM manufacturing index for 3 consecutive months, stay above 50%, and we saw that translate into some increased activity in the first quarter. So -- and we noted that in our release that the manufacturing end market, we saw increased year-over-year tons. So -- we're looking at that as a good tailwind, and we have a lot of different products with value-added processing that go into that end market, which, as we all know, hasn't been doing really all that great for the past 3 years. So there's some potential tailwinds there. Martin Englert: Yes. It's nice to see some nascent signs of recovery with activity amongst the end users there. Congratulations on the results and the contract wins there. Operator: And our next question comes from Bennett Moore with JPMorgan. Bennett Moore: Karla, Steve, Arthur, congrats on the strong quarter. I guess I wanted to get a better idea of how we should think about the cadence of these DHS volumes ramping throughout the year? And is the pricing structured such that if broader market pricing were to fall that you could actually offer down protection to gross margins in such a scenario? Karla Lewis: Bennett, as far as the cadence on the border wall project, as we mentioned, we began shipping this month in April. And so we're still in a bit of start-up ramp-up phase. So we included in our Q2 guide. Our current estimate of volume activity in the quarter. We do expect that to increase as we move into Q3 and beyond as the program really gets up and running. But there's not a committed shipment schedule. So it could vary from quarter-to-quarter, but we do anticipate higher activity as we move into Q3 than what we projected for Q2. And as far as the pricing, we can't get into the specifics on the pricing, but we do have the contract volume up to certain dollar amounts over the period through 2027. Bennett Moore: Understood. Coming to aluminum, I mean, we've certainly seen another spike in pricing. I guess I'm just wondering if you're still able to cover your costs at this stage is 50 bps still the right way to think about the margin impact and if possible, could you share what the -- what share of aluminum was in relation to the LIFO expense past quarter? Karla Lewis: Yes. So Bennett, you're correct. I think the dynamics in aluminum, in particular, continue where -- we -- unlike this time last year, our companies now have been able to push through the 50% tariff to our customers, but we're not necessarily getting a full margin on that 50% tariff cost, which puts a little pressure on the overall gross profit margin from our aluminum products compared to periods where we did not have a 50% tariff that we had to cover and try to push to our customers. And then you're right, it also gives us kind of a double hit on LIFO because LIFO in our view, was not intended for periods with 50% tariffs, and so we have to take a LIFO charge on top of the tariff costs that we need to push through, so that does -- right now, while these 50% tariffs are in place and with the market where it is, it is a bit of a drag. We think that's transitory and while we have these tariffs in place. However, the aluminum prices are significantly higher. So even though we're not getting the percentage margin on that, we are getting significantly higher gross profit dollars on our sales of aluminum that we then have to help cover our SG&A and other costs and contribute at a higher level to earnings dollars. Arthur Ajemyan: Yes, I was just going to say that we're on that moment, I'm despite the margin distortion that Karla mentioned, gross profit dollars are up year-over-year to the tune of almost 17%, 18%. So it shows that profitability has improved significantly on those sales is just to Karla's point, when you introduce a 50% tariff that creates some noise. And the LIFO noise is also substantial from aluminum last year, nearly half of our LIFO expense was related to aluminum this year. It's tracking at a little less than half, maybe over 1/3. So -- I mean, let's just say, prices level off and say where they are. Come next year, you're not going to have that headwind from LIFO on aluminum that's contributing to this temporary margin compression dynamics. So net-net, these tariffs have contributed to higher profitability across our product portfolio including aluminum. Karla Lewis: And on the LIFO side, just as a reminder, when we book expense, it increases our LIFO reserve that is then available to come back into income in future periods when prices come down. Operator: [Operator Instructions] We'll go next to Samuel McKinney with KeyBanc Capital Markets. Samuel McKinney: And we talked about the rapid rise in aluminum pricing being a drag on gross margin, just given it's been tough to get ahead of that and I know tariffs are still impacting that market. But am I wrong in my thinking that the first quarter sequential gross margin expansion does seem to reflect a better job of navigating that market versus the back half of last year? Karla Lewis: Yes. I think that's fair. And again, we want to be clear it's a drag on the gross profit margin percent but not on the gross profit dollars. But yes, you're thinking about that correctly that I think incrementally, each quarter coming out of Q2 last year when the tariffs hit, we've made progress against that. As we talked about, overall demand improving a bit, too, including for some of the aluminum products. So that helps us on passing through cost if demand is stronger. So yes, so we would agree with the way you're thinking about that, Sam. Samuel McKinney: Okay. And then on the border wall contract, you're expecting it to be a solid earnings contributor despite the relatively lower selling price versus the rest of your business. But when you talk about the operating network, if you could just discuss with us some of the operating levers you think you can pull as these tons grow over the course of this year and probably into next? Karla Lewis: Yes. So price is lower on those products. But with the services that we're providing, which a lot of that on these -- on the tons for the border wall, it's a lot of storage handling. We are doing some value-added processing, but our operating costs are pretty low based on the volume that the kind of SG&A percent is lower than it is in the rest of our business. So at these volumes, low cost structure, it's a good driver to earnings plus one of the reasons we believe that Reliance was awarded this contract. And by the way, back in 2008, our AMI business secured smaller than this, but a pretty decent-sized border wall. They called us the Sense contract, and they performed very well under that. This is much larger in scale with the tonnage and a short time period to be able to provide these services. And we need multiple locations to store and provide the logistics under the contract to really meet their requirements. And with the Reliance network of companies, our AMI company is working with other Reliance companies utilizing some of their property, which also keeps our costs lower. We didn't have to go out and secure some of the new equipment or property to be able to service the project. Stephen Koch: Yes. And I'd like to add to that, a majority of the products being shipped into our Apollo structural sections, but there's also a lot of sheet that we're utilizing one of our processing plants in Texas -- So like Karla mentioned, we have planned to set up all along the border. So we're going to be shipping products out of Texas and out of California. We really appreciate all of the support we've received from our domestic mill suppliers because as everybody knows, that supply is a little bit tight right now. Hot-rolled coil is on limited availability, and we're able to get as much as we need to meet our customers' demands. Operator: We'll go next to Nick Cash with Goldman Sachs. Nicklaus Cash: Just a quick one on the current inorganic growth pipeline. Again, you have been a little bit since you guys have done pretty much meaningful acquisition, just wondering how the pipeline currently looks and how you're thinking of capital allocation between organic and inorganic growth going forward? Karla Lewis: Nick, from a kind of acquisition pipeline, I'd say it remains pretty consistent with what we've talked about the last few quarters. There are opportunities out there. And we see a kind of steady stream as we have for the last year or so. Some companies we like. So we're always looking at what's out there and evaluating how they might fit into Reliance, then, of course, we have to see if we can agree upon valuation with the sellers. And where we've had a consistent appetite to acquire good companies. We just -- it's somewhat dependent on who's ready to sell their companies because a lot of the companies in our space are privately owned family companies. And so we wait for them to be ready to sell. Like I said, then there's valuation. So we've no change in our appetite for that, but we've also been in a strong financial position for the last few years where we haven't had to, to choose between our capital allocation priorities. We've been able to execute on the acquisitions we like while at the same time, continuing to grow organically and providing strong returns to our shareholders through our consistently increasing dividend as well as, I think, a reasonable level of activity on our share repurchases, and there's no change to that. Nicklaus Cash: Appreciate that. And if I could just one more. Going out data center and energy infrastructure. Just real quick, what percentage of non-resi tonnage is data center-related how has that mix shifted year-over-year? And then within energy infrastructure, I guess, how much solar exposure do you guys have? Karla Lewis: Yes. So Nick, unfortunately, I mean, we wish we could give you that number, but with the customers that we sell to because we're not typically selling direct into the OEM or the project. We're selling to fabricators and contractors with multiple projects. Well, certainly, we often know what project is going into. We don't have a good way to quantify. But I think we've been seeing increasing activity for data center. And Steve, I don't know if you have anything to add on that or on solar? Stephen Koch: Yes. So Nick, unfortunately, we don't have a lot of direct exposure to the solar market, but our suppliers, our mill suppliers have a lot of the -- they're getting it no direct, which is consuming a lot of tube and hot-rolled coil, which is keeping the mill is already busy and keeping prices at a really good level for the market. Operator: We take a follow-up question from Bennett Moore with JPMorgan. Bennett Moore: I wanted to come back to the semiconductor markets real quick. And I'm wondering -- what sort of opportunities do you see to gain share, I guess, from foreign ship makers? And if you could remind us what that qualification process looks like and the timing to do so? Karla Lewis: Yes. So -- we -- I think we've talked different times before on the call, Bennett. So from our semiconductor exposure for the most part, while there are a lot of ancillary things around it that we're selling into the equipment, semiconductor chip equipment manufacturers. And that's where we've seen some positive activity. The last quarter or two, we've seen that improving. And there have been some shifts by those customers to foreign locations. We do have a location in Singapore that helps support some of our customers over there in that market as they've shifted a little more there. And then our other kind of specialty semiconductor company. They do sell to the chip makers, equipment makers, they have locations in the U.S., South Korea and China. And -- but they also -- a big portion of their business also sells into the building kind of the interior plumbing of the chip facilities as they're being built. And that's where we have seen pullbacks by a lot of those customers or just delays in building the chip plans, especially here in the U.S. But that's a good market for us. And that company of ours has had -- there's a lot of interest. They've been working on some capabilities to sell more into the data center market. And we're expecting to start to see some increased activity for that company around the data center market in the near term. Stephen Koch: And as far as qualifications go, a lot of our customers who had moved over to Asia and they're moving back because of the onshoring coming back. We're already certified within and already picking up some business. Bennett Moore: And I guess I'll squeeze one more, if I can. I wanted to ask about the second contract, the defense contract, I think, for Lockheed programs, upsized renewal here, but are you able to help contextualize what the margin profile looks like for this contract relative to the overall business given the H1 is a little bit below? Karla Lewis: So the -- we already have those programs -- those existing programs under contract with Lockheed Martin. And -- so there's no significant change in impact of the new contract when it begins in 2027. We do expect about 10% higher volumes -- it's a larger contract with multiple programs, including the Joint Strike Fighter. So it will add but should not be a noticeable shift on any margin profile. Operator: And we have a follow-up from Martin Englert with Seaport Research Partners. Martin Englert: For the DHS contract, any more you can share with the volumes associated with Phase 1 and the incremental volumes -- the rest of the contract, I guess, completes? Karla Lewis: Yes. So Martin, we have not disclosed tonnage under that. We did disclose dollar amounts, which were Phase 1 and Phase 2, the total is $2.2 billion. Phase 1 is $1.4 billion, which runs through... Arthur Ajemyan: Mid-2027. Karla Lewis: Yes, I think at the end of Q2, 2027. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Karla Lewis for closing comments. Karla Lewis: Thank you, and thanks, everyone, for joining us today and for your continued support of Reliance. In summary, just a reminder of Reliance's unique scale, diverse portfolio, financial strength, domestic mill relationships and expanding service capabilities that enable us to support our customers reliably and to capitalize on the significant opportunities ahead in 2026. And I'd really like to thank our Reliance family for all that they did for a very strong first quarter we look forward to them doing throughout the rest of 2026 and doing it safely. So again, appreciate all of our employees throughout Reliance. And before we wrap up, I also want to note that we'll be in Boston next month for KeyBanks, Industrials and Basic Materials Conference. And in June, we'll be at the Wells Fargo Industrials Conference in Chicago, and we look forward to connecting with many of you there. Thanks again, everyone. Goodbye. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to the Getty Realty Corp. first quarter 2026 earnings call. This call is being recorded. After the presentation, there will be an opportunity to ask questions. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel, and Secretary of the company, will read a safe harbor statement and provide information about non-GAAP financial measures. Please go ahead, sir. Joshua Dicker: Thank you, operator. I would like to thank you all for joining us for Getty Realty Corp.'s first quarter earnings conference call. Yesterday afternoon, the company released its financial and operating results for the quarter ended 03/31/2026. The Form 8-Ks and earnings release are available in the Investor Relations section of our site at gettyrealty.com. Certain statements made during this call are not based on historical information and may be forward-looking statements. These statements reflect management's current expectations and beliefs and are subject to trends, events, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Examples of forward-looking statements include our 2026 guidance and may include statements made by management including those regarding the company's future financial performance, future operations, or investment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. I refer you to the company's Annual Report on Form 10-K for the year ended 12/31/2025 as well as any subsequent filings with the SEC for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. You should not place undue reliance on forward-looking statements, which reflect our view only as of today. The company undertakes no duty to update any forward-looking statement that may be made during this call. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures including our definition of adjusted funds from operations, or AFFO, and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive. Christopher Constant: Thank you, Joshua Dicker. Good morning, everyone, and welcome to our earnings call for 2026. Joining us on the call today are Brian Dickman, our Chief Financial Officer, and RJ Ryan, our Chief Investment Officer. I will lead off today's call by providing highlights of Getty Realty Corp.'s first quarter financial performance and investment activity, RJ Ryan will then discuss our portfolio and investments in greater detail, and Brian Dickman will provide additional information regarding our earnings, balance sheet, and 2026 AFFO per share guidance. I am pleased to report that Getty Realty Corp. is off to a strong start in 2026, highlighted by a 13.1% year-over-year increase in our annualized base rent, a 6.8% increase in our AFFO per share, and an increase to our full-year 2026 earnings guidance. The foundation for this growth is our in-place portfolio, which is essentially fully occupied, achieved 100% rent collections, and continues to demonstrate stable rent coverage. Despite volatility driven by current geopolitical events, our tenants and their businesses have once again proved their resilience and ability to perform during rapidly changing operating conditions. Building on that foundation is the impact of the capital we deployed in 2025 and year to date. We are seeing the benefits of investments we have made in our platform to accelerate growth, including a larger investment team, new technologies, and improved processes. And we expect to capitalize on constructive transaction markets for convenience and automotive retail properties throughout the year. Year to date, we have invested more than $34 million at an initial cash yield of 8%. Beyond what we have closed, we have approximately $125 million of investments under contract, as well as a pipeline of transactions under signed nonbinding letters of intent that is in excess of the pipeline which was disclosed at the time of our recent equity offering. This pipeline is supported by a robust capital position as our recent capital markets activities have provided us with significant liquidity and attractive cost of capital to fund our 2026 business plans. We currently have more than $170 million of unsettled forward equity, and our $450 million revolver is completely undrawn. When we look at the spectrum of opportunities under contract and in our pipeline, we are confident that we can deploy this capital accretively as we move through the year. As we think about the rest of 2026 and beyond, I take great comfort in the quality of our portfolio, including its proven durability and ongoing diversification. I have no doubt that the platform we have built can drive disciplined growth as we continue to lean into our expertise in sourcing, underwriting, and closing investments in our core convenience and automotive retail sectors. We remain committed to our disciplined underwriting approach, which prioritizes owning real estate in high-density or growing metro areas with excellent access and visibility in retail markets and which is leased to creditworthy operators under a long-term triple-net lease. The sectors we invest in are large and fragmented and benefit from prevailing consumer trends for demand, convenience, speed, and service. As these industries continue to consolidate and become more institutional, we believe our direct sale-leaseback approach and deeper relationships in our target segments uniquely position Getty Realty Corp. to grow with both established and emerging retailers. With that, I will let RJ Ryan discuss our portfolio and investment activities. RJ Ryan: Thank you, Christopher Constant. At quarter end, our lease portfolio included 1,186 net lease properties and two active redevelopment sites. Excluding the active redevelopment, occupancy was 99.7% and our weighted average lease term was 10.1 years. Our net lease portfolio spans 45 states plus Washington, D.C., with 61% of our annualized base rent coming from top-50 MSAs, and 77% coming from top-100 MSAs. Our rents continue to be well covered with a trailing 12-month tenant rent coverage ratio of 2.5x. Turning to our investment activities, for the quarter, we invested $30.3 million across 29 properties at an initial cash yield of 8%. The weighted average lease term on acquired assets for the quarter was 8.8 years. Highlights for this quarter's investments include the acquisition of 22 properties for $27.3 million, including 16 auto service centers and six drive-thru quick service restaurants, and $3 million of incremental development funding for the construction of multiple new auto service centers and drive-thru quick service restaurants. Subsequent to quarter end, we invested an additional $4.1 million, bringing our year-to-date total investments to $34.4 million at an 8% initial cash yield. Our year-to-date activity included the acquisition of several net leases that we view as a complement to our core sale-leaseback business. This drove a shorter weighted average lease term than our typical investment activity but also led to us adding 11 new tenants to the portfolio and executing granular acquisitions with an average $1.2 million purchase price. Looking ahead, as Christopher Constant mentioned, we currently have approximately $125 million of investments under contract and a significant pipeline of investments under signed letters of intent. These transactions are spread across our four convenience and automotive retail sectors and are predominantly relationship sale-leasebacks and development funding opportunities with new 15- to 20-year lease terms. The initial cash yields for these investment opportunities are in the mid- to high-7% area. Moving to our asset management activities, as previously announced, we extended five unitary leases totaling $11.3 million of ABR, or 5% of total ABR, during the first quarter. The net benefit of these lease extensions was an increase to our weighted average lease term and a significant reduction in ABR expiring in 2027. In addition, we sold two properties during the quarter for gross proceeds of $3.7 million. With that, I will turn the call over to Brian Dickman to discuss our financial results. Brian Dickman: Thanks, RJ Ryan. Good morning, everyone. For 2026 Q1, we reported AFFO per share of $0.63, a 6.8% increase over Q1 2025. FFO and net income for the quarter were $0.69 and $0.43 per share, respectively. A more detailed description of our quarterly results can be found in our earnings release, and our corporate presentation contains additional information regarding our earnings and dividend per share growth over the last several years. Starting with some color on G&A expenses, management focuses on the ratio of G&A, excluding stock-based compensation and nonrecurring retirement costs, to cash rental and interest income. That ratio was 9.2% for the quarter ended 03/31/2026, a 130-basis-point improvement over the same period in 2025. As we mentioned on our last call, we expect G&A growth to be less than 2% in 2026 and for our G&A ratio to fall below 9% as we focus on controlling expenses and continuing to scale the company. Moving to the balance sheet and liquidity, as of 03/31/2026, net debt to EBITDA was 5.1x, or 4.2x including the impact of unsettled forward equity, both of which compared favorably to our target leverage of 4.5x to 5.5x. Fixed charge coverage for the quarter was 4x. During the first quarter, we received $250 million from our previously announced unsecured notes issuance and used the proceeds to repay the borrowings under our revolving credit facility. We ended the quarter with $1 billion of total unsecured notes outstanding, with a weighted average interest rate of 4.5% and a weighted average maturity of six years. We have full borrowing capacity under our $450 million revolving credit facility and no debt maturities until June 2028. In February, driven by our growing investment pipeline and the strong performance of our stock to start the year, we raised $130 million of new common equity in an overnight offering. Those shares were sold on a forward basis, and we currently have a total of 5.5 million shares subject to outstanding forward sales agreements which, upon settlement, are anticipated to raise gross proceeds of approximately $171.5 million. As Christopher Constant mentioned, we are in a very strong capital position with more than $625 million of total liquidity and have more than sufficient capital to fund our under-contract pipeline and additional investments as we continue to source new opportunities. With respect to our earnings outlook, as a result of our year-to-date activities, we are increasing our full-year 2026 AFFO per share guidance to a range of $2.50 to $2.52 from the prior range of $2.48 to $2.50. As a reminder, our guidance reflects the current run rate from our in-place portfolio with certain expense and credit loss variability and does not include any prospective investments or capital markets activities. We think this approach remains appropriate for our business and look forward to updating everyone on the positive impact that our investment program has on our earnings as we move through the year. With that, I will ask the operator to open the call for questions. Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. You may press star then 2 if you would like to remove yourself from the question queue. Please press star then 1. The first question we have comes from Mitch Germain of Citizens Bank. Please go ahead. Mitch Germain: Thank you, and congrats on the quarter. Christopher Constant, what do you think is driving the increased momentum in the investment pipeline? You know, obviously, I know you have made some investments in people. Is it more, you know, sellers kind of rationalizing what their pricing expectations are? Is there anything you can point to? Christopher Constant: I think it is a little bit all of the above. Right? Obviously, with more dealmakers at Getty Realty Corp., there is more business development activity. As the portfolio has grown, we obviously have more relationships that we can tap into. But I do think there is an element of businesses are growing. The theme around consolidation certainly continues in all the sectors we invest in. And as folks are looking at their capital needs, I do think the sale-leaseback market is becoming more attractive, and it is a complement in certain cases to their other capital sources like debt or even equity. So I think it is a mix. What I would say is that most of our conversations are around growth, and folks are constructive in terms of what the current price dynamic looks like across the sectors. We certainly feel that in our portfolio and in our pipeline, and I think that is why you hear some of the positive tone in our language in the script and in the quarter. Mitch Germain: Are you becoming any more selective with regards to what sectors you are allocating capital to? Or are you open for business across everything that you are investing in? Christopher Constant: We are focused investors. So I think by nature, that makes us somewhat selective. But within the four sectors that we invest in, we are equally excited about all four of them. The broader pipeline under contract, and what is behind that, includes numerous opportunities across all of those verticals. Mitch Germain: Great. Last one for me. Brian Dickman, you talked about scalability of the platform. Can you highlight maybe some of the things that you have accomplished to get a little more efficient? Brian Dickman: Yeah. I think you have heard both Christopher Constant and RJ Ryan, and even past calls, Mark Olear, talk about the things we have been doing around technology and process improvement. So certainly, I think those things are having an impact. But also, I think we all understand that net lease platforms are inherently very scalable. We have been investing in the platform for a number of years, and combined with some of the market dynamics Christopher Constant went through, we are just, I think, really starting to bear the fruit of those efforts. Mitch Germain: Congrats. Operator: The next question we have comes from Upal Rana of KeyBanc Capital Markets. Upal Rana: Great. Thank you. Christopher Constant, with the pipeline growing, I am just curious what you are seeing out there in terms of larger portfolio deals? Christopher Constant: Yes. I mean, I think obviously what we closed this quarter was more granular in terms of maybe some more individual asset acquisitions. But the broader pipeline and the opportunities that we are underwriting has a mix of what I would call midsize to larger portfolios. And again, I just go back to what I said on the earlier question, which is our operators are looking to continue to grow and consolidate. And that kind of mid-market M&A transaction or a larger portfolio certainly feels like there is a component for sale-leaseback financing to help get those deals done. Upal Rana: Okay. Great. And then, Brian Dickman, your cost of capital has not materially improved this year, and you have nearly $170 million in the forward equity and also the revolver. So I want to get your thoughts on your strategy on use of capital as we go through 2026 and maybe any additional appetite to raise even more capital? Brian Dickman: Yeah. Thanks, Upal Rana. Fair observations and not lost on us on cost of capital, but I would say that our strategy, as it were, around capital raising and capital allocation really has not changed. We are going to maintain leverage in that 4.5x to 5.5x range. We are going to look to keep the pipeline at least partially funded so that we know we have some certainty around that cost of capital. So I think those fundamental components have not changed. As you look to this year, I think you will see us draw on the revolver for the debt piece and settle that equity again to maintain leverage. And then as far as additional equity beyond that, I think as always, it is going to be a combination of the pipeline, the magnitude of that pipeline, where those deals are being priced, and then where the stock is trading, where our cost of capital is. But I do not see any change in strategy. I think if you look over the last several years, that is how we have executed, and I would anticipate us doing the same thing throughout this year and beyond. Upal Rana: Okay. Great. Thank you. Operator: The next question we have comes from Michael Goldsmith of UBS. Please go ahead. Michael Goldsmith: Good morning. Thanks for taking my question. Can you just talk a little bit about bad debt? Are you seeing any challenges within the portfolio? And then also, can you update us on how bad debt is baked into your 2026 guidance and if that has changed since the start of the year? Thanks. Brian Dickman: Michael Goldsmith, I will touch on that. Working backwards, we use about a 25-basis-point assumption for credit loss. We did not experience any of that in the first quarter. I would say that is also conservative relative to looking back over longer periods of time. So that continues to be what is baked into the guidance on a go-forward basis. And then the portfolio itself is quite healthy. There is nothing that rises to the level of a watch list for us, and there is nothing that we are anticipating in the near to medium term that gives us any significant concerns around credit loss in the portfolio. As we know, these are nondiscretionary, defensive, essential-type businesses. Obviously, there is a lot of geopolitical and macro noise, but as we sit here today, the tenants continue to perform. The businesses continue to perform. And while we do think it is prudent to have an assumption in our guidance for credit loss, there is nothing imminent that gives us any concern, as I said. Michael Goldsmith: Thanks for that, Brian Dickman. And I think this was touched on on some of the other net lease earnings calls, but 7-Eleven closing some stores — more of the smaller locations — just wanted to get a sense of how that, if any way, influences your portfolio or how you are thinking about your portfolio and how to be positioned in the c-store space going forward? Thanks. Christopher Constant: Sure. I will start, and maybe RJ Ryan wants to add a few comments here. 7-Eleven is a tenant of ours, but they are not in our top 20. On a broader scale, this is a trend that we have been talking about with investors for years. The c-store is getting larger. It is getting more complex. The importance of food, beverage, and brand to drive customer visits inside the store — this is not a new trend. With a portfolio the size of 7-Eleven’s, of course they have stores that are smaller, and they are focused on the larger store to compete with other brands that may be even slightly ahead of where they are. From our standpoint, given that we have been around the store business for a very long time, this is very consistent with what our tenants are doing. If you look at the acquisition activity that we closed in c-store last year — I think our big transaction in the fourth quarter — the average store size was either 7,000 or 8,000 square feet. That is what the modern c-store looks like: heavy food, importance of brand, loyalty programs, and, of course, they do still sell fuel and traditional merchandise, but it is far more than just the old-line c-store. The other thing I would say is we do have some of the older assets that were part of the legacy business. Those are the leases that got renewed this quarter. They are still profitable. When you have a really well-located, maybe slightly smaller store, those still make money for our tenants. We were really pleased to get those leases extended, and our tenants wanted to stay there. RJ Ryan: I echo what Christopher Constant says. 7-Eleven did announce those closures. Again, I would highlight they also announced about a third of those closures, numerically, as planned reopenings or new stores in that larger format. I think it is a reflection not only of the industry, but frankly, of what Getty Realty Corp.'s investment strategy is and what we have executed on certainly over the last several years, if not beyond, and how our portfolio has evolved. It just shows the evolution of the C&G space and where we and others are focused. Michael Goldsmith: Thank you very much. Good luck in the second quarter. Thanks, Brian Dickman. Operator: Thank you. The next question we have comes from Brad Heffern of RBC Capital Markets. Brad Heffern: Yes. Hey, good morning, everyone. Question about the war and gas prices. I know most of the c-store margin is inside the store, but sometimes they do struggle to pass on higher gas prices right away, or maybe customers have less money to spend inside the store. There can be a working capital draw too. I am just curious: Do you think there will be any net impact on your tenants from this? Or do you think they will be able to withstand it? Christopher Constant: It is a great question and one that we have gotten in a lot of our meetings recently. Going into the year, the nice part about our business on the fuel side is that we were starting at retail fuel prices that were less than $3 a gallon nationally. We also entered the year at fuel margins on average that were north of $0.40 to maybe $0.45. That is not a historical record high, but that is a very healthy number. And you are right, typically our tenants have struggled to pass on 100% of the increase where there has been a rapid movement up in oil. What I would tell you is that if you look at some of the national data, almost all of that increase has been passed on. So if margins were in the high $0.40s, they are still nationally above $0.40. And then what does happen on the backside is when the price of oil does come down, typically our tenants are able to maybe widen out their margin a little bit or hold retail pricing. So to date, tenants continue to see the fuel margin — the fuel side of the business — remain healthy. Conversations we have had with tenants are more about the duration of this, the health of the consumer, and continuing to drive traffic in the store. We are having conversations on a regular basis with tenants, and again, what you see in our portfolio is the c-store business is still highly profitable. The gas piece is still highly profitable. And tenants are just trying to drive traffic in the store for the higher-margin side of their business. Brad Heffern: Okay. Got it. Thank you for that. And then, Brian Dickman, on the guidance, you obviously closed acquisitions in the first quarter. It does not seem like enough to make the guide go up by 1%. So can you walk through what drove that? I am assuming part of it was the equity raise, but anything else you would call out? Brian Dickman: Yes. There are really two components. The equity in and of itself would not have impacted the first quarter. You do have the impact of the investment activity. You also have the actualization of whatever was assumed around the credit loss and expense variability that we speak to as driving the variability in the range. Again, we had no credit loss in the first quarter. Expenses generally came in at or below budget. So it is really the combination of those two things — the actual performance against what was forecasted plus the investment activity. And then also, candidly, sometimes when you are dealing in hundreds here and dealing in pennies, the rounding also will get you. So it may not have been a full two pennies, but on the round, that is where it came out for us. Brad Heffern: Okay. Got it. Thank you. Operator: Thank you. The next question we have comes from Wes Golladay of Baird. Please go ahead. Wes Golladay: When you look at the cap rates, I think you are guiding to mid to high 7s. It is a little bit lower versus what you have done in the last few quarters. Is that primarily just due to a mix where there are fewer developments or just different categories in the pipeline? Christopher Constant: I think it is all of the above. Obviously, with the equity that we raised, there are a lot more transactions, broadly speaking, in the market that are maybe in and around that 7.5%. This allows us to grab some of those deals, maintain that healthy spread that we are looking for, and blend those with the deals that are in high 7s approaching 8%. I think that is why you saw our pipeline go up and why we still talk about some of the activity behind that. Do you want to add to that, RJ Ryan? RJ Ryan: Yeah. That is the range we have been operating in and around for quite some time. To Christopher Constant’s point, I expect us to still be quite active in that mid to high 7% range. But we do have an opportunity to expand our activity on the lower end and still blend in that mid to high 7% range. We feel pretty confident in our ability to do so. Wes Golladay: Okay. Thanks for that. And just one housekeeping question. What are you looking at for G&A for the full year? Brian Dickman: It should be right around $20 million, Wes Golladay. Plus or minus. Wes Golladay: Okay. Thank you very much. Brian Dickman: And that is on the cash G&A number. Just to be clear, I think we are at 5.2% for the quarter. First and second quarter tend to be a little elevated. It moderates over the second half of the year. So that $20 million range would be the cash G&A number. Wes Golladay: Okay. Thank you very much. Operator: The next question we have comes from Jenna Gallen of Bank of America. Please go ahead. Thank you. Good morning, and congrats on the first quarter. Jenna Gallen: Can you broadly break down how much of the $125 million pipeline is acquisitions and how much is development funding? If you can remind us, developments — is that typically a three-, four-, five-quarter construction timeline? RJ Ryan: Hi, Jenna Gallen. It is RJ Ryan. The $125 million pipeline is — and it echoes what we said on our last call about 60 days ago — tilted towards the development funding, which is generally that three- to 12-month time horizon. Christopher Constant: We have added additional more traditional sale-leaseback, acquisition-leaseback type transactions, but the pipeline itself, as it sits, is skewed more towards that development funding. Operator: Thank you. Jenna Gallen: Thank you. Operator: The final question we have comes from Michael Gorman of BTIG. Please go ahead. Michael Gorman: Yeah. Thanks. Good morning. Just a quick one from me. Obviously, rent coverage remained pretty strong in the quarter versus the fourth quarter of last year, but there were some noticeable moves within the different buckets you break out in the presentation. Anything specific to point out there in terms of tenant trends moving between those different categories? Or anything in particular that you are seeing on the consumer side that may be driving some of those moves between the different buckets that you break out? Thanks. Brian Dickman: Hey, Michael Gorman. The short answer is no. One thing I would just highlight: we are on a three-month lag. So the data we are looking at is through 12/31/2025. It would not have captured the first quarter performance, although Christopher Constant referenced some of the conversations and anecdotal information we are getting from tenants such that we are not expecting significant changes in Q1 either. Back to the data you were referencing, when we look at it at a slightly more granular level — by lease, by property type — we see very, very consistent results versus the prior quarter. Sometimes, a tenant or a lease will just split on one side or the other of where the breakpoints are, and we actually see that quite a bit. A tenant that is around 2.5x might be 2.4x one period and 2.6x the next, and you do see that more than you might expect around some of those breakpoints. But from the high-level perspective, it is very similar, very consistent, very stable quarter over quarter across all four property types. Michael Gorman: Great. Thank you very much. Thank you. Operator: At this stage, there are no further questions. I would like to turn the floor back over to Christopher Constant for closing comments. Please go ahead, sir. Christopher Constant: Thank you, operator, and thanks to everybody for participating on our call this morning. We are really pleased with the start of the year. We look forward to getting back on the phone with everybody when we report our second quarter in July. Unknown Speaker: Thank you. Operator: Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the First Quarter of 2026 Earnings Conference Call for CVB Financial Corporation and its subsidiary, Citizens Business Bank. My name is Sherry, and I'm your operator for today. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2026. Joining me this morning is our Chief Executive Officer, Dave Brager; and our President, Clay Jones. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com, and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2025, and in particular, the information set forth in Item 1A risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Dave? David Brager: Thank you, Allen. Good morning, everyone. For the first quarter of 2026, we reported net earnings of $51 million or $0.38 per share, representing our 196th consecutive quarter of profitability, which is every quarter for 49 years. We previously declared a $0.20 per share dividend for the first quarter of 2026, representing our 146th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 13.4% and a return on average assets of 1.33% for the first quarter of 2026. Our net earnings of $51 million or $0.38 per share compared with $55 million for the fourth quarter of 2025 or $0.40 per share and $51.1 million or $0.36 per share for the prior year quarter. Results of the first quarter of 2026 reflects solid growth year-over-year across several financial metrics, including pretax pre-provision income growth, net interest margin expansion, loan growth and growth in deposits and customer repurchase agreements. Pretax pre-provision income grew by $4 million or 6% over the first quarter of 2025. Our net interest margin expanded by 13 basis points over the prior year quarter to 3.44% as our earning asset yields increased by 7 basis points, while our cost of funds decreased by 7 basis points. Average loans grew by $157 million or approximately 2% from the first quarter of 2025. We also increased our average total deposits and customer repurchase agreements by $288 million or 2.4% from the first quarter of 2025. Now let's discuss loans further. Total loans at March 31, 2026, were $8.64 billion, a $280 million or 3.3% increase from the end of the first quarter of 2025. This increase was driven primarily by growth in commercial real estate loans of $141 million, a $62 million increase in dairy and livestock and agribusiness loans and a $43 million increase in construction loans. We also had $34 million of growth in SBA 504 loans and C&I loan outstandings increased by $10 million over the prior year. Total loans declined by $56 million from the end of 2025 as dairy and livestock and agribusiness loans declined by $117 million due to the seasonal peak and line usage that occurs every calendar year-end. The seasonal decline is evident by the decrease in line utilization rate from 78% at the end of 2025 to 69% at March 31, 2026. C&I loans decreased quarter-over-quarter by $21 million as line utilization decreased from 32% at the end of 2025 to 30% at the end of the first quarter of 2026. Partially offsetting the decline in line usage from the end of 2025 was commercial real estate loan growth of $57 million, SBA 504 loan growth of $13 million and construction loans increasing by $22 million. Loan originations have started off the year at a strong pace as originations for the first quarter of 2026 were approximately 90% higher than the first quarter of 2025 and 15% higher than the fourth quarter of 2025. Our loan pipelines remain relatively strong, although rate competition for high-quality loans continues to be intense. C&I loan originations have stayed relatively consistent over the past 5 quarters, but commercial real estate loan originations have been strengthening. Loan originations in the first quarter had average yields of approximately 6%, which was roughly 25 basis points lower than the prior quarter. Our average loan yield was 5.32% for the first quarter of 2026, compared to 5.47% for the fourth quarter of 2025 and 5.22% for the first quarter of 2025. During the fourth quarter of 2025, we collected $3.2 million of interest on a nonperforming loans. Excluding this additional interest income, our loan yield would have been 5.32% for the fourth quarter of 2025. We experienced $9,000 of net recoveries during the first quarter of 2026 compared to $325,000 of net recoveries for the fourth quarter of 2025. Total nonperforming loans increased by $1.5 million to $6.1 million at March 31, 2026, which represents 0.07% of total loans. The increase is primarily due to the downgrade of a $2.9 million C&I loan for which we established a specific reserve in our allowance for credit losses. Classified loans were $83.1 million at March 31, 2026, compared to $52.7 million at December 31, 2025, and $94.2 million at March 31, 2025. Classified loans as a percentage of total loans were less than 1% at March 31, 2026. Now on to deposits. Our average total deposits and customer repurchase agreements for the first quarter of 2026 were $12.5 billion, which compares to $12.2 billion for the first quarter of 2025, and $12.6 billion during the fourth quarter of 2025. Our noninterest-bearing deposits declined on average by $112 million compared to the first quarter of 2025 and by $107 million compared to the fourth quarter of 2025. On average, noninterest-bearing deposits were 58% of total deposits for both the first quarter of 2026 and the fourth quarter of 2025, compared to 59% for the first quarter of 2025. Interest-bearing nonmaturity deposits and customer repurchase agreements grew on average by $400 million from the first quarter of 2025. Our cost of deposits and repos was 82 basis points for the first quarter of 2026, compared to 86 basis points for the fourth quarter of 2025 and 87 basis points for the year ago quarter. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and income. E. Nicholson: Thanks, Dave. Pretax pre-provision income was $71.6 million in the first quarter of 2026, compared to $71.9 million in the fourth quarter of 2025 and $67.5 million in the first quarter of last year. After adjusting for acquisition expense and gains on OREO, our operating income grew from the first quarter of 2025 by $8 million, reflecting positive operating leverage of 6%. The growth in operating income was driven by growth in net interest income of $7.4 million by 7% rate of growth. Net interest income was $117.8 million in the first quarter of 2026, compared to $122.7 million in the fourth quarter of '25 and $110.4 million in the first quarter of 2025. Interest income decreased from the fourth quarter of 2025 by $6.9 million due primarily to 2 fewer calendar days in the first quarter, a $134 million decrease in earning assets and the $3.2 million of non-accrued interest paid during the fourth quarter. Interest income increased from the first quarter of 2025 by $6.1 million as our earning asset yield increased by 7 basis points from 4.28% to 4.35%, and our average earning assets increased by $336 million. Interest expense declined from both the prior quarter and the prior year quarter. Interest expense was $31.3 million in the first quarter of 2026, compared to $33.3 million in the fourth quarter of 2025 and $32.6 million in the first quarter of 2025. Our cost of funds decreased from 1.01% in the fourth quarter of 2025 to 97 basis points in the first quarter of 2026. Our cost of funds was 7 basis points lower than the first quarter of 2025, even though the average balance of interest-bearing deposits and repos increased by $400 million. Noninterest expense -- noninterest income was $14.3 million in the first quarter of 2026, compared to $11.2 million in the fourth quarter of 2025 and $16.2 million in the first quarter of 2025. The fourth quarter of 2025 included a $2.8 million loss on the sale of securities, while the first quarter of 2025 included a gain on sale of [indiscernible] of $2.2 million. The quarter-over-quarter increase in noninterest income also included a $1.1 million increase in the cash render value of bank-owned life insurance. Trust and investment services income grew by $313,000 or 9% from the first quarter of 2025, but decreased by $307,000 over the fourth quarter of 2025 due to lower brokerage fee income. Our allowance for credit loss was $80.2 million at March 31, 2026. In comparison, our allowance for credit losses was $77 million at December 31, 2025. The $3 million increase in the allowance was primarily due to the establishment of a specific reserves totaling $3.2 million. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at March 31, 2025, was modestly different from our forecast at the end of 2025. I'm sorry, the resulting economic forecast at March 31, 2026, with modestly different than the forecast at the end of 2025. Real GDP is forecasted to be below 1% in the second half of 2026 and stay below 2% through 2027. The unemployment rate is forecasted to reach 5% by the middle of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue their decline through the end of 2026 before experiencing growth in the back half of 2027. So switching to our investment portfolio. Investment securities totaled $4.8 billion at March 31, 2026, a $116 million decrease from the end of 2025. Available for sale or AFS investment securities were $2.59 billion and their held-to-maturity investments totaled $2.25 billion. The unrealized loss on AFS securities increased by $2 million from $308 million on December 31, 2025 to $310 million. Our $700 million in fair value hedges generated negative carry in the first quarter of 2026, resulting in a $1.1 million and $750,000 decrease in interest income compared to the first and fourth quarters of 2025, respectively. Now turning to our capital position. At March 31, 2026, our shareholders' equity was $2.3 billion, a [ $93 million ] increase from the first quarter of 2025, including the $52 million increase in other comprehensive income. The company's tangible common equity ratio was 10.5% at March 31, 2026, while our common equity Tier 1 capital ratio was 16.3%. Our tangible book value per share increased over the last 12 months by 9% from $10.45 at March 31, 2025, to $11.42. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the first quarter of 2026 was $60.6 million, which includes $1.1 million in onetime merger [indiscernible] acquisition of Heritage Bank of Commerce and $500,000 in provision for off-balance sheet reserves. Regulatory assessment expense decreased by $1.6 million as a result of the unwinding, the remaining accrual for the special FDIC assessment. Excluding acquisition expense and the provision for off balance sheet reserves, the level of core operating expense was essentially flat to both the prior quarter and the first quarter of 2025. Our efficiency ratio was 45.8% in the first quarter of 2026, compared to 46.3% in the fourth quarter of 2025 and 46.7% in the first quarter of 2025. Noninterest expense, excluding acquisition expense as a percentage of average assets totaled 1.55% for the first quarter of 2026, compared to 1.53% in the fourth quarter of 2025 and 1.58% for the first quarter of 2025. This concludes today's presentation. Now Allen and I and Clay will be happy to take any questions that you might have. Operator: [Operator Instructions] And our first question will come from the line of David Feaster with Raymond James. David Feaster: I wanted to start on the deal and welcome to the call, Clay. So I know we're only a week into this, but I just wanted to get a sense of how to [indiscernible] quarter. How has it gone thus far? Like what are your top priorities just in these first few weeks after the deal is closed from an operational perspective. And Dave, I know like the goal is always to CVB, the bank. Like where are you focused initially and you see the most opportunity to add value? David Brager: Yes. So I think initially, David, obviously, we're just trying to acclimate all the new associates that have joined us through the merger. So Clay has been -- Clay and his team, the former Heritage folks have been drinking through a firehose. There's a lot of training, a lot of information that's going on. We're looking at how we set up accounts, how we structure relationships. All of those things are part of that initial time frame. Clay and Julie, who joined our Board were in our first Board meeting yesterday. So they're getting acclimated. Clay is going to be spending a lot of time down here. We'll be spending a lot of time together. We sort of restructured the organization to involve the new senior leaders that are joining us, Clay and his former senior leadership team that are remaining. So there's just a lot of education about the culture of our bank. The way we do things. And that's not an event, it's a process. So it's going to take some time to do that. But all in all, things went very well and closed weekend and it will continue to get easier and better as we go forward. But I'd love to [indiscernible] give his perspective as well. Unknown Executive: Yes, David, I think, Dave, the integration is going just fine. As Dave said, the team is just getting acclimated to do reporting lines and new systems and reporting lines. So it's all going just fine. I think the primary focus we have is one thing close to our customers and clients and making sure that they hear from us often and also just keeping a close eye on our associates to make sure that they're keeping pace with the integration and the training. David Feaster: Okay. That's great. And I know we didn't include much in the way of optimization. Look, the deal gives you a ton of financial flexibility, right? Didn't really include any optimization in guidance outside of maybe some of the purchase mortgages that we talked about with the deal closed, and all this financial flexibility, has your thoughts changed at all about opportunities to optimize things or deploy excess liquidity just given the fully marked balance sheet? E. Nicholson: David, you're right, we do have some ability to restructure the balance sheet a little bit. We have announced and do have a sale in place for the single-family mortgage pools of Heritage. Beyond that, we're still evaluating it. I think we'll come out of the quarter with a balance sheet and a plan that you'll be able to see on the next quarterly earnings, but a lot of moving parts right now and it does give us a fair amount of optionality. David Feaster: Okay. And then just last one for me. The commentary on the origination activity is extremely encouraging. I wanted to dig into that a bit. How much of the improvement that you're seeing is you gaining share at this point and your bankers being more productive versus improving demand. And just kind of curious, how do you think about the growth outlook, just in light of the competitive landscape that you alluded to, which it sounds like it's primarily on the pricing side. And then just again, the expansion in the Bay Area? David Brager: Yes. Well, obviously, we're not going to compete on the credit quality side. We're going to maintain that pristine credit quality. And when you're fighting for those types of deals, you have to price them in a way that you can win them, assuming that you're monetizing the rest of the relationship as well. But I think, initially, I would say, to answer your question more specifically, I would say, initially, it was just there was more opportunity out there. I think what's happened over the last couple of quarters, for example, and with the increase in the opportunities that we're seeing, I think that we're in a very good position from a liquidity perspective, from a market perspective, obviously, from the Heritage -- the former Heritage perspective, there's some significant opportunity there just with the capacity of the combined organization relative to pull them at house lending limits, those types of things. So we view it as very positively. We need to get them integrated and understand how we look at it. But from a credit perspective, very similar; from a pricing perspective on the lending side, very similar. On the deposit pricing side, that's probably a little more work that we're going to have to do ultimately. But at the end of the day, we're going after the same types of relationships we were going after the same types of relationships. So I think it's our people recognizing that, hey, we're ready. But a lot of it is just there's a lot going on out there, but there's a lot of competition. So that's primarily why even though in some ways, the treasury rates have gone up a little bit. And our loan origination yields have gone down slightly just because we're having to compete if we want to win. David Feaster: Is our pipelines still holding up pretty solid? And do you think you can kind of hold new origination yields in the 6% realm? David Brager: Yes. I mean, I would say that it's going to be around that 6% range. Going forward, obviously, it depends on the mix of real estate versus C&I and then the utilization of that because we're actually getting better rates on the C&I stuff than on the real estate stuff. And that was part of the reason the net interest margin -- well, there's a lot of -- the Fed lowered rates in December, there was a number of things that happened and our yields stay the same, essentially the same if you exclude the [indiscernible]. And so I think that was a big victory for us. And if this loan demand remains and we're continuing to book what we've been booking, I think that's a big tailwind for us as we keep going through the year. But yes, pipelines are holding up and there's plenty of opportunities for us out there for the right relationships. Operator: One moment for our next question. And that will come from the line of Kelly Motta with KBW. Kelly Motta: Maybe building upon David's question, I do appreciate the color on pipelines, and it's all quite encouraging. I'm wondering in your markets if you're seeing any increased competitive dynamics, notably, I think, growth at Wells was a lot stronger with the asset cap coming off. I'm just wondering if there's been any notable shifts or change in dynamics in your markets? David Brager: Yes. I don't know if I would say there's been any noticeable shift. I mean it's always extremely competitive, especially for the types of relationships that we're looking for. There are some banks. You mentioned Wells Fargo. I would -- there's other banks. Pat Premier was not as active for the last few years, Colombia is going to be much more active. I mean there's a number of organizations. The Fifth Third, the regional banks, BMO. There's a number of banks that are coming into our market. And plus, you always have the big guys. And so I think there is maybe some increase at the higher end of sort of our typical type relationship we go after. But it's not significantly different than before. I don't know, Clay, do you want to. Unknown Executive: No. I echo Dave's comments here. The market continues to be very competitive. I don't think there's been any recent shifts in competitive nature of the clients that we go after in the Bay Area, it continues to be just as competitive as it is here. David Brager: Yes. And Kelly, I would just say this, we're -- our bankers are most successful in their new customer origination, new relationship origination business, it's with the biggest banks. We provide a super high level of service that allows us to compete. We have the product array, and I think that's another sort of tailwind from the Heritage merger as far as both combined organizations being able to provide that wide array of products and services to our relationships and prospects. So there are some very positive things that are occurring. And as we get everybody integrated and acclimated, it should improve. Kelly Motta: Got it. That's really helpful color. Turning to capital, your level levels should still be quite robust pro forma for the merger just closed. You had been a bit active in the buyback prior to announcing the deal, which put that on hold, wondering any updated thoughts on capital management, buybacks, future deals, the work things? David Brager: Yes. So I'll sort of start with the tail end of your question first. Look, we want to make sure we integrate Heritage appropriately. That is our #1 focus. So unless there's something that's really unique or an opportunity that's really unique and something we've been looking at, I would say we're more focused on the integration of Heritage than additional M&A. We do recognize that we have an enormous amount of capital and prior to us getting in conversations with Clay and Heritage, that was something that we were very active in, and we repurchased 4.2 million shares last year, and we'll continue to evaluate that. Obviously, the combined company's earnings, we'll be looking at the dividend, ultimately, this quarter is really where we're going to get all the -- Allen can opine on this as well, but we're going to get the balance sheet set up the way that we want it set up and then we'll be working on those capital management things and definitely, buybacks are going to be part of that strategy going forward. So I don't know, Allen, do you have anything you want to add? E. Nicholson: Kelly, as Dave said, it will be noisy in Q2, a little bit more noise in Q3. But as we get into Q3, I think we'll have a lot more visibility into our capital. And of course, as you pointed out, our pro forma is already very strong. And historically, we've been able to generate a lot of organic capital. And we'll definitely have to evaluate all those things that Dave mentioned. Kelly Motta: Got it. If I could just slip it in as a follow-up. You mentioned the resi mortgage, it's held for sale right now. Do you anticipate that off the balance sheet by quarter end? Or is there a possibility that could stick around a bit longer than perhaps we expected an announcement? E. Nicholson: No, we do expect it to be off the balance sheet by the end of the quarter. Operator: One moment for our next question. And that will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: I want to start on the C&I credit that you assigned some specific reserves to. And then the other classified credits that migrated. I know classified overall still sub 1%, but just wanted to get some color on what happened there and plans for resolution and timing possible? David Brager: Yes. So I'll start with the nonperformer. So that C&I loan was impacted by one of their customers who declared bankruptcy. So we have shored up our collateral position. We did put a specific reserve because at the time we had not shored up the collateral position in the way that we wanted to. So I don't really anticipate, there could be some challenges there, but we're very proactive when we create things and when we look at things and how we classify them. So just being very transparent, it's -- for lack of a better term, they're a marketing company for a larger organization and they sell agricultural products. So it's something that we've been involved with since one of these customers, but we just wanted to make sure that we elevated it to that level. As far as the classified loans, it's really centered in two relationships. They both happen to be C&I. We're in very good collateral positions in both of those deals. That makes up the majority of the increase in the classified loans. One of the companies is in the midst of a sale and that could happen. I mean we're obviously prepared if it doesn't. But they're both within their collateral guidelines and we think one of them is just a situation with the operations, and they're working hard on that. So again, just being very proactive and it's something that happens now and again. And -- but nothing systematic or endemic of the rest of the portfolio. These are just 2 separate situations. Matthew Clark: Okay. Great. And then just a few housekeeping items. Do you plan to do the CECL double count here in 2Q, resulting in an outsized provision? Or are you not [indiscernible] ? E. Nicholson: Matthew, we elected the new accounting, so there won't be a double count. Matthew Clark: Okay. Great. And then accretion expectations? I know the marks can still move around a little bit, but I assume you have preliminary marks at this stage. Any guesstimate, I mean we have our own, but I just wanted to check in to see what you thought may be quarterly -- normal accretion -- normal accretion might be per quarter? E. Nicholson: Too early, Matt. Too early, sorry. We'll have -- we'll be able to give you better answers next quarter. Matthew Clark: Okay. And then just -- I think there was a special FHLB dividend. Can you just quantify that this quarter? E. Nicholson: I think it was about $400,000. Operator: One moment for our next question. And that will come from the line of Andrew Terrell with Stephens. Unknown Analyst: Maybe just wanted to start off. I know you guys don't generally guide, but with the merger closed in the second quarter, the kind of range of forecast for the margin for 2Q or pretty widespread. I was hoping you could maybe just help us out. I don't know if you have kind of day 1 pro forma margin, what the general kind of impact is to your reported margin when you layer in heritage. Just any kind of guardrails you could put kind of around margin expectations for us? E. Nicholson: Andrew, once again, sorry, it's a little bit too early. Dave said we closed 4 days ago. We did include on Page 31 of the investor presentation, the pro forma loans and deposits for the combined organization, excluding the mortgages we're selling. So at least, I mean, you can look at that from a starting point, but we are still evaluating the balance sheet in terms of what we're going to do with repositioning the bond portfolio, repositioning some of our wholesale funds. So unfortunately, it's too preliminary for me to give you much more information. Unknown Analyst: Okay. Does the yield on Page 31 of the deck for HTPK loans, the 560, does that include the single-family yield? And I'm assuming the 560 is pretty out of mark? E. Nicholson: Yes. There's no mark. And if you look at the pro forma yield of 547, that's excluding the single-family. And that's on a combined basis, of course. Unknown Analyst: Got it. Okay. When we talked some in the past just about maybe some of the opportunity to upsize some of the legacy Heritage relationships and maybe that some of that was already occurring pre deal close. Just can you remind us general kind of opportunity set there? How that influences kind of how you're thinking about loan growth throughout the year? Unknown Executive: Yes, Andrew, no question about it at deal announcement, we gave a mantra to the team to make sure that we captured all of those clients that we're growing and that we're reaching our upper limits at Heritage. We now have greatly expanded that capacity and those clients obviously have extended their runway with Heritage significantly. So there's great opportunities in terms of our largest clients that on a going forward basis. I would add to that, too, as Dave said, there's some additional synergies amongst the 2 firms as combined in terms of ag, dairy, lending, mortgage origination, trust, wealth services, international services. So there's just a wide variety of opportunities that our relationship management teams and calling officers are engaged in. So going forward looks good. David Brager: Yes. And I would just say, I want to Clay to answer that first just from the perspective of the former Heritage offices. But from the overall perspective, Andrew, just to your question, a lot of this is 4 days in, they're drinking through the firehose, trying to figure out everything. And so we're working on it. But just overall, pipelines have remained strong. The relationships, we haven't had a lot of turnover in relationships. We're seeing opportunities for us to do maybe a little bit better than we did last year as far as loan growth. But I do think that as we get through the second quarter, we'll have a much better idea. And you're right. I mean I've always said sort of low single-digit growth. I mean that could be mid-single-digit growth. But we just need to make sure that we understand the relationships as we look out on the opportunities that are out there. But for now, we're sort of sticking with what we've been doing and what's been done in the past. So I don't know if that gives you a better answer, but we're still kind of in -- we want quality stuff, and we're having to price it aggressively. And so I think that is going to be somewhat of a limiting factor as well. But on the positive side are definitely the things Clay said, not just on the loan side, but on the overall relationship side. Operator: [Operator Instructions] One moment for our next question. And that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: One follow-up on the initial loan growth commentary. In terms of the strengthening of the commercial real estate segment from a demand and production perspective, how much -- could you kind of parse that a little bit in terms of more -- is it more customer activity? Is it borrower is getting more comfortable with the rate environment we're in and moving forward on projects? Is it CBB getting more competitive on pricing? Just kind of parse out kind of the moving parts that's attributed to that strength? David Brager: Yes. Well, I definitely think it starts with potential borrowers out there. It's, I mean, our existing customers, it's -- our bankers' ability to go and attract new relationships to the bank. So I think that's driving some of it. I think also, Gary, I'd say our average size of new loan origination has creeped up a little bit as well. There are a number of things that are sort of assisting us in reaching that low single-digit growth that we had last year. So I think that's part of it. I don't know that we're getting more aggressive on pricing than we have been in the past. We were always aggressive for the right relationships. Obviously, the loan pricing is just one component of the overall relationship. We have to look at the deposit side, we look at the fee income side. We look at how we monetize the entire relationship. And so that -- I don't know that we're getting more aggressive, but I definitely think customers are more used to the rate environment and money can't sit on the sidelines for that long. So there are people that are doing things, and we're seeing some of that activity and capturing a good part of it. But yes, I think it's all of those things that are sort of contributing to those opportunities. And we just 90% of the new loan originations in the first quarter over the first quarter of last year, it's basically double what we did last year, and that's -- I think that speaks to just the opportunities that we're seeing and the opportunities that we're winning. Gary Tenner: Appreciate that. And actually, as a follow-up there, any particular asset class within [indiscernible] that you're seeing more activity in or maybe is driving more of the [indiscernible]? David Brager: Yes. I don't know that there's a specific asset class. It's pretty well balanced between all asset classes. I will say even it's probably easier to parse it out by owner or non-owner. We were doing a lot of owner-occupied in the past. The thing that was really missing was investor commercial real estate really across all classes, multifamily, industrial, retail, I mean, we are seeing much more investor commercial real estate than we have in the past. I mean, going back the last year has been pretty steady in that area. But before that, we weren't really seeing any investor commercial real estate. Nobody was doing anything. So I think it's just more investor real estate across all asset classes and those opportunities, we've been doing pretty well with. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Great. Thank you, Sherry. First, I would like to welcome Heritage Bank of Commerce customers, associates and shareholders to Citizens Business Bank. The merger with Heritage Bank Commerce marks the most strategic and largest acquisition by asset size in our history, bringing together 2 premier relationship-focused business banks and advancing our long-standing objective of expanding citizens throughout California by entering the Bay Area. Our team is eager to build on the strong customer and community relationships that Heritage has established, and our performance in the first quarter demonstrates our continued financial strength and focus on our vision of serving the comprehensive financial needs of small to medium-sized businesses and their owners. Our consistent financial performance is highlighted by our 196th consecutive quarters of profitability and our 146th consecutive quarters of paying cash dividends. I would like to thank our customers and associates for their continuing commitment and loyalty. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in July for our second quarter 2026 earnings call. Please let Allen or I know if you have any questions. Have a great day. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Valley National Bancorp First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Gianetti, Investor Relations. Please go ahead. Andrew Gianetti: Good morning, and welcome to Valley National Bancorp's First Quarter 2026 Earnings Conference Call. I am joined today by CEO, Ira D. Robbins and CFO, Travis P. Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release and presentation. Please also note slide two of our earnings presentation and remember that comments made today may include forward-looking statements about Valley National Bancorp and the banking industry. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q, and 10-K. With that, I will turn the call over to Ira D. Robbins. Ira D. Robbins: Thank you, Andrew. Valley National Bancorp delivered another strong quarter. With net income of approximately $164 million, or $0.28 per diluted share. Excluding certain noncore items, adjusted net income was $169 million, or $0.29 per diluted share. Despite traditional first quarter headwinds, including elevated payroll taxes and a lower day count, adjusted pre-provision net revenue increased to $253 million during the quarter, providing a strong jumping-off point for the rest of the year. While Travis will provide additional detail on the financial performance, I wanted to spend my time discussing strategic execution and long-term value creation. We have spent the past few years deliberately reshaping this organization. We have strengthened our balance sheet and upgraded our operating model while supporting incremental investments in talent, technologies, and capabilities that we believe will be impactful over the long run. The cumulative impact of those efforts has become increasingly evident in our recent financial results. Just as importantly, these enhancements have positively impacted our daily operations and ways of working. Strategically, our focus is consistent and clear. First, we are building a higher-quality and increasingly resilient funding franchise. Our emphasis on core deposit generation is not just about short-term pricing advantages. We are focused on winning primary operating relationships, deepening engagement across our client base, and creating a stable funding engine that can support growth aspirations across cycles. The combination of scalable specialty deposit verticals, enhanced treasury management capabilities, and an improving client experience has enabled us to better compete across markets and channels. Secondly, we are pursuing diverse, relationship-focused loan growth. We are intentionally allocating capital towards businesses, geographies, and industry verticals where we see durable demand and strong risk-adjusted returns. This includes business banking and middle market opportunities in our high-quality markets, as well as specific niches like health care, where we have a differentiated value proposition. To fund the strategic growth, we have remained disciplined, selectively exiting lower-return transactional clients that do not align with our future strategic focus. This is not about maximizing short-term growth. We are building a relationship-focused portfolio that we believe will perform consistently across economic environments. Thirdly, we continue to focus on operating leverage and scalability. Many of the investments that we have undertaken over the last few years, including our core conversion, data infrastructure enhancement, and organizational redesign, were made with a long-term lens. As a result, we are increasingly able to grow deposits, loans, and revenue faster than our fixed cost investments and without adding unnecessary complexity. We view this as a critical advantage for a regional bank that operates in an underserved size range but still competes regularly with upmarket institutions. That brings me to Valley National Bancorp’s positioning around artificial intelligence, which we believe represents a meaningful inflection point for the banking industry. Valley National Bancorp’s approach to AI reflects a balance between our pragmatic relationship-led culture and the acknowledgment that these technologies can enable us to reimagine how work gets done across our company. We believe these rapidly accelerating capabilities can augment productivity of our associates, enhance decision-making, improve operational efficiency, and most importantly, position Valley National Bancorp to better serve our diverse client base. Our dedication to improving the granularity, consistency, and infrastructure around our data over the last few years has been a key underpinning in our ability to effectively utilize AI tools today. We invested early in AI talent and advanced analytics, and have embedded certain capabilities into our operating model in the wake of our core conversion. Already, AI is helping our bankers prioritize opportunities and better understand client needs. We have already utilized AI to improve access to our internal knowledge base, to rethink legacy back-office processes, including card service requests, certain elements of underwriting, and risk monitoring, and to accelerate data analytics and software development. Specific use cases implemented to date include a customer-facing voice AI agent that proactively contacts past-due auto loan customers to motivate payment; fraud tools to verify transaction legitimacy and to prioritize suspicious activity alerts; and AI enhancements to our sales process to optimize the next best product offer. These are small examples of a much broader effort to unlock our associates to spend more time doing what they do best: building relationships and delivering high-value advice. We expect these capabilities will continue to translate into higher productivity, better risk outcomes, and a more consistent client experience with less friction, all while preserving the human element that defines our brand. Looking forward, our priorities remain consistent. We plan to continue to selectively invest in growth, maintain our balance sheet discipline, and deploy capital thoughtfully. We are confident that the foundation we have built positions Valley National Bancorp to navigate uncertainty, capitalize on opportunities around us, and deliver sustainable returns over time. With that, I will turn the call over to Travis P. Lan to walk through the financial results in more detail. Travis P. Lan: I wanted to start by giving a brief update on our 2026 financial expectations. As a result of continued strong core deposit growth, solid loan demand in our markets, and a favorable yield curve backdrop, we believe that annual net interest income growth will trend towards the higher end of our previously provided range. We expect more meaningful acceleration in the second half of the year, with no significant change to our expectations for noninterest income, noninterest expenses, or credit costs. We believe there is modest upside to our previous guidance range and existing consensus estimates. From a balance sheet perspective, we continue to believe that our CET1 ratio will remain towards the higher end of our target range. Slide 12 illustrates the execution of our capital strategy during the quarter. We generated over 30 basis points of regulatory capital in the period. Over half of this supported well-funded organic loan growth, and we used roughly a third of our capital generation to buy back stock. Relative to last quarter, slightly more capital was used for the buyback. Slide 13 illustrates the strong momentum in our deposit gathering efforts. During the quarter, we increased direct customer deposits by over $900 million, which enabled us to pay off nearly $300 million of maturing higher-cost brokered deposits and $350 million of higher-cost FHLB advances. As a result of the strong direct deposit growth, loans to non-brokered deposits improved to 106% from 107% last quarter and 112% a year ago. Total deposit costs declined 18 basis points during the quarter, reflecting proactive reductions in core customer deposit costs and the funding rotation I just mentioned. We remain laser-focused on improving our funding profile to further de-risk our balance sheet and drive continued profitability improvement. We anticipate that total deposit growth will be towards the high end of our 5% to 7% guidance range for the year. Turning to slide 16. Total loans grew nearly $700 million, or 5.5% annualized during the quarter. Owner-occupied CRE, particularly within our health care specialty vertical, continues to contribute to our growth as regulatory CRE declined modestly. C&I loans grew nearly $150 million during the quarter, reflecting strength across existing geographies and business lines, as well as contributions from newly onboarded talent. We anticipate that loan growth for the year will be between the midpoint and high end of our previous 4% to 6% range. Slide 19 illustrates the fourth consecutive quarter of net interest income expansion, which occurred despite day count headwinds associated with the first quarter. This increase was the result of solid loan growth, core deposit generation, and repricing dynamics on both sides of the balance sheet. Net interest margin was flat from the fourth quarter, which, combined with our continued repricing tailwinds, positions us well to achieve the year-end margin guidance that we laid out previously. Despite the expected normalization of noninterest income from the fourth quarter, we posted strong first quarter results as compared to one year ago. On a year-over-year basis, noninterest income was up 18%, driven primarily by capital markets and deposit service charge revenues. These results are in line with our expectations and we believe set the stage for further improvement throughout the year. Turning to slide 22. Reported noninterest expenses increased to $310 million in the first quarter, from $299 million in the fourth quarter. On an adjusted basis, however, noninterest expenses were effectively flat as seasonal payroll tax headwinds were largely mitigated by modest reductions in other compensation costs, professional and legal fees, and adjusted FDIC insurance expense. As a result of our cultural focus on expense control, Valley National Bancorp’s efficiency ratio declined to 53.1% in the first quarter, from 53.5% in the fourth quarter and 55.9% a year ago. We continue to believe that positive operating leverage will accelerate throughout the year, which is expected to result in an efficiency ratio trending towards 50% by 2026. Slide 23 illustrates our asset quality and reserve trends. Nonaccrual and accruing past due loans each declined modestly during the quarter, primarily as a result of positive migration of CRE out of each bucket. Net charge-offs as a percentage of total loans declined to 14 basis points from 18 basis points last quarter, and the modest uptick in provision expense reflected the quarter's strong loan growth. Allowance coverage remained generally consistent around 1.2%. We do not anticipate material changes to this level throughout the year. Turning to slide 24. Tangible book value increased approximately 1% during the quarter, as solid retained earnings growth was partially offset by an OCI headwind associated with our available-for-sale securities portfolio. Regulatory capital ratios declined modestly as a result of strong loan growth and our stock buyback activity. Based on our preliminary analysis, we estimate that regulatory capital ratios would increase between 80 and 100 basis points under the proposed Basel III standardized approach. Until those rules are formalized, we continue to anticipate that our CET1 ratio will remain towards the higher end of our targeted guidance range. With that, I will turn the call back to the operator to begin Q&A. Thank you. Operator: Thank you. For your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Manan Gosalia with Morgan Stanley. Your line is now open. Manan Gosalia: Hi, good morning. My first question is on the NII side. You are pointing to the higher end of the NII guide. Strong deposit growth already, strong loan growth. Can you talk about some of the inputs around the NII outlook today versus your outlook in January, and the ways in which you can drive funding costs lower even if we do not get more rate cuts? And then, Ira, you spoke about investing in AI early and the benefits that that should drive going forward. Are there any areas where you think you need to accelerate the spend there, or is a lot of the investment spend going to be self-funded from here? If you can just help us with how to think about the expense outlook this year and next year and how we should think about the operating leverage going forward? Travis P. Lan: Yeah. Thanks, Manan. This is Travis. Relative to where we were coming into the year, we had assumed two Fed cuts as of 12/31. Obviously, those are out of the forecast. But as we have said pretty consistently, we are neutral to the front end of the curve. So the elimination of those cuts in the model is not overly impactful to our NII outlook. We are more exposed to the belly and longer end of the curve, and there has been some migration higher there, which has been incrementally helpful. From a deposit cost perspective, even if we are unable to materially reduce core customer deposit costs in a vacuum, we still have what we view to be pretty significant tailwinds from the structural rotation of higher-cost wholesale funding into lower-cost core. And that is what I think has given us so much confidence about the margin trajectory you have seen play out over the last year or two, and why we continue to have confidence through the end of year and into 2027. Ira D. Robbins: Thank you. I think it is a significant opportunity for us and really for the entire industry as to how we think about how we service clients from an operating expense perspective, and then also how we enhance the revenue side of it as well. I think for us, when we think about the expense that would go into it, we have always been very mindful of what the efficiency ratio is within the organization and how we self-fund a lot of what we have done here. We have spent about $450 million on CapEx in the last seven to eight years versus a $50 million number in the seven- to eight-year cumulative period before, while still maintaining a very efficient organization. When I became CEO, I think we were 3,350 employees and $20 billion in size. Today, we are 3,607 employees and $64 billion in size. So having a more efficient organization, the more we can press that, provides an opportunity to really enhance the AI spend as well as other opportunities within the organization. Just over the last year, we declined about 100 employees within the organization, and as we think about the reduction in some of those roles, we are definitely enhancing the opportunities and reinvesting some of that back into AI that we think is going to be a lot more productive moving forward. Manan Gosalia: Great. Appreciate the color. Thank you. Operator: Thank you. Our next question comes from the line of Freddie Strickland with Hovde Group. Your line is now open. Freddie Strickland: Hey, good morning. I was just wondering if you could talk about competitive landscape on the retail deposit side, maybe how that has changed and whether that has really shifted as broad expectations and more cuts seem to fizzle out? Travis P. Lan: Yes. Thanks, Betty. This is Travis. Look, it does remain competitive out there for, I would say, consumer deposits. I mean, rates have kind of backed up; you see it in the offered rates that are posted in branches and online. I would just say for us, the consumer element is a component of our anticipated deposit growth. The majority does come from the commercial side, and that would include small business and business banking in that as well. There, we are competing with the relationship, the service model that we have, the treasury platform that we can provide. So, obviously, rate will always be an element of how you compete for deposits, but it is not the only one. I think that is what has enabled us to differentiate ourselves from a deposit growth perspective while also driving down costs. Freddie Strickland: Great. Thanks, Travis. And just on the common equity Tier 1 guide, you mentioned it in your opening remarks, but can you just refresh us on capital priorities and does that CET1 direction mean fewer buybacks or simply more generation? Or are you taking into account the Fed moves there? Just wondering if you can talk a little bit more about buybacks relative to the CET1 ratio. Travis P. Lan: Yes. Thanks. So we have been pretty consistent that we have this range or target range of 10.5% to 11% on CET1. But throughout 2026, we anticipate staying at the higher end of that range. I think one key element, for us, the number one priority for capital utilization is to support high-quality, well-funded loan growth. And as we have seen good activity in the first quarter and the pipeline is building as well, and we anticipate, as we said, that loan growth will trend towards the higher end of our range, we want to be able to support that. So we bought back 4 million shares this quarter. In aggregate, it was about $52 million of capital we utilized for the buyback. I would anticipate that pulls back a little bit because as we look at the loan growth opportunities for the next couple of quarters, we want to make sure that we are preserving the capital to support that. So we anticipate remaining active to some degree, but it would not surprise me if it is a little bit less than what the first quarter was on the buyback. Freddie Strickland: Alright. Great. Thanks for taking my questions. Operator: Thank you. Our next question comes from the line of David Chiaverini with Jefferies. Your line is now open. Brooks Dutton: Hey, guys. Brooks Dutton on for Dave this morning. You know, with your CRE concentration ratio trending lower, 329%, what is the long-term target for this metric? How does that influence you guys' 4% to 6% loan growth guide for the remainder of 2026? And then just on fee income, there is lower capital markets activity quarter. Can you guys talk about your run-rate expectations for 2026 as we progress through the year? Ira D. Robbins: I think we were very diligent within the last two-ish years in identifying a certain runoff portfolio that really was transactional for us. So they did not really bring the deposit relationships that we were looking for. So those tier three clients continue to run off, which creates capacity for a lot of other loan growth within the organization. I think when we think about absolutes, getting under 300% as an absolute number is a longer-term priority for us, and we think that we are trending there. But there is really very little pressure from an external perspective that we feel that we need to accelerate that. These are good quality loans, but I think maybe it is just not hitting the return hurdle that we are looking for. So for us, it really becomes how do we rotate the profitability of clients from certain under-ROI clients into higher-ROI clients. And that is really what is driving how we think about the runoff of the CRE portfolio. Travis P. Lan: Yes. Thanks. We did indicate on the fourth quarter call that fee income in general was about $7 million elevated in a variety of ways. One of that was $4 million or $5 million of elevation from a swap perspective in the fourth quarter. So that normalized as expected. The $10 million in Capital Markets in general is a good starting point. I would anticipate that we see growth throughout the rest of the year. Operator: Thank you. Our next question comes from the line of Janet Lee with TD Cowen. Your line is now open. Janet Lee: Good morning. For loan growth, is the more growth coming from nontransactional CRE and then still, you know, pretty robust growth in C&I there, should we expect the mix—should we expect more of growth to also come from CRE in the future quarters versus what you expected in the prior quarter? Or how should we think about mix of loan growth as we head into the rest of 2026? Travis P. Lan: Yeah, Janet. Maybe I will start, and Gino can add some commentary in terms of what we are seeing in the pipeline. But coming into the year, we had guided to about $2.5 billion of loan growth, of which $1 billion was C&I, $1 billion was CRE, and $500 million was consumer and resi. Within that $1 billion of CRE, we anticipated a couple hundred million would be regulatory CRE—so investor and multifamily. As you saw in the first quarter, that was a slight decline. I would anticipate maybe seeing a little bit of regulatory CRE growth throughout the year, but the majority will remain in kind of owner-occupied and C&I, with support from the consumer areas as well. So maybe, Gino, just about what you are seeing across the markets. Gino Martocci: I will just add we continue to invest in new talent primarily for C&I. Talent, upmarket C&I and business bankers as well, are focused on C&I and deposit-rich businesses. Our C&I pipeline is up $1 billion since the end of the year, so we expect to see continued C&I growth throughout 2026. Travis P. Lan: Both because of the investments we made and because our clients continue to invest. We have relatively robust economies. We are in affluent markets, whether that is Coral Gables, Tampa, Morristown, Manhattan, or Garden City. All of those markets remain strong and robust, and our clients, despite the noise out there and some of the headwinds from input costs, continue to remain confident and continue to invest. We are supporting. Janet Lee: That is helpful. And your credit was very stable this quarter, but your criticized and classified loans were up a little bit, driven by C&I special mention loans. Could you provide some color on the trend you are seeing? And do you still expect the trajectory of criticized and classified to decline from here, or should it stabilize over the near term? Mark Sager: Hi, Janet. The stabilization of criticized in first quarter is just a normal phenomenon of year-end financial collection and some migration. We do anticipate that we will still see a decline in the criticized throughout the year, noting we had the big decline in Q3 and Q4. And we still have an expectation for the year to be down. Janet Lee: Got it. Thank you. Thank you. Operator: Our next question comes from the line of David Smith with Truist Securities. Your line is now open. David Smith: Hey. Good morning. Ira D. Robbins: Morning, David. David Smith: Can you give us a sense of where new loans are coming on the books today and how spreads have trended over the quarter given everything that is going on? And did you have the spot deposit rate for March 31? Travis P. Lan: Yes. This is Travis. New loan yields declined modestly by—I think it was about 6.75% last quarter. It was maybe 6.55%, 6.60% this quarter. We are seeing modest spread compression in certain asset classes on the commercial real estate side. I think that led to a little bit more runoff in the regulatory CRE book than maybe we had anticipated coming into the year. But spreads have remained generally stable in most of our target portfolios. It obviously remains competitive for high-quality customers that we are banking, but I do think we have reached an air pocket from a size perspective. We are one of very few banks remaining in this size category that can offer all the products and services of a large bank with the high-touch service and quick response and credit underwriting of a more community-oriented bank. I think that is playing well for us to be able to grow without necessarily seeing spreads collapse. Yeah. I do. Interest-bearing spot deposit cost was 2.95% versus 3.02% at December. All-in was 2.26% spot deposit cost versus 2.32% at December thirty-first. So down six basis points from the December to the March. David Smith: Got it. Thanks very much. Operator: Thank you. Our next question comes from the line of Anthony Elian with JPMorgan. Your line is now open. Mike Petrini: Good morning. This is Mike Petrini on for Tony. So I will start on NIM. How are you guys thinking about NIM trending for the rest of the year? You mentioned coming into the year that the three-thirty mark was sort of what you expected. How do you guys see that trending? And on loan growth, now that you are sort of at the mid to high end of that 4% to 6% range, what categories do you feel more encouraged on now than you did before? Any color on the expected growth trajectory of the different categories over the rest of the year would be great. Travis P. Lan: Yes. So coming into the year, we had anticipated a slight decline in margin in the first quarter and then building up to that $330 million level by the fourth quarter. And the reality is we posted a better starting point. And so I would anticipate that there is some upside to that $330 million fourth quarter 26 target that we have laid out. Again, I think the funding profile is better than we had maybe anticipated. The interest rate backdrop remains supportive of the margin expansion. And we saw the structural tailwinds that we outlined on the net interest income side of the deck, showing the fixed-rate asset repricing and then the fixed-rate liability repricing as well. When you add it all up, I think we feel better about the margin guide than maybe we felt coming into the year, even though coming into the year was strong as well. Gino Martocci: Our pipeline remains very robust. It is basically double what it was a year ago. It is primarily concentrated in C&I and health care. We have got a very terrific health care franchise with very experienced people, and that business continues to grow. We do have a reasonable amount of CRE demand that is offset by the runoff of the nonregulatory book. And it is robust growth across all of our geographies, whether it is Florida, New York, New Jersey, and even in our growth markets. We are seeing good growth in Illinois, LA, etc. So we expect a very robust origination year. Operator: Thank you. Our next question comes from the line of Matthew M. Breese with Stephens Inc. Your line is now open. Matthew M. Breese: Hey. Good morning. Ira D. Robbins: Morning, Matt. Matthew M. Breese: Maybe just a quick one on expenses first. Just given some of the moving pieces, severance, etc. What is a good starting place for the second quarter on salary expenses? Is $150 million the right place to be? Any other moving parts there? And then one thing I have not heard a lot about, but I have heard a lot of your peers talk about is just the extent they are seeing payoffs and prepayments. First, maybe just your thoughts on that—are you seeing that as well but able to offset it? And then secondly, is there prepayment penalty income going in the NIM? I would love to get some sense for how that has trended and if it is extensive. Are we modeling too much of it right now? Travis P. Lan: Matt, I think that is right. And I would just say the first quarter payroll tax impact was about a $7 million headwind. That declines by about $4 million in the second quarter. At the same time, our merit bonuses only went into place mid-March, so there is no real impact from that in the first quarter. Those two things effectively balance out. So if you take the severance away from the compensation line, I think that is a good starting point. The only element, and this moves around quarter to quarter, is we did see some higher insurance costs in that line in the first quarter. So it is possible that we could outperform from that perspective, but I do not think that would be overly material. Yeah. I do not think—first of all, it does go through our NII, although it is not an overly material number. Prepayments this quarter declined to about $1.2 billion. They have been running at around $1.4 billion for the last couple of quarters. So we saw a slight decline in prepayment activity. But it has been fairly consistent when you look back over, you know, five or eight quarters or so. So I do not think it has been a material moving piece in terms of balances or the NII. Matthew M. Breese: Okay. And could you remind us of what the accretable yield that is flowing through the margin is? And that was what it was last quarter too? And then last one for me, just on asset quality. The big areas of concern for the industry—I would love your thoughts on NDFI—not that you have a ton of it—and then office commercial real estate. Any sort of green shoots there or anything that is keeping you up at night? Travis P. Lan: Yeah. It is, like, $10 million this quarter, which has been consistent. It is about $4 million on the security side and $6 million on the loan side. This quarter—excuse me—was $9.5 million this quarter. It was $10.9 million last quarter, so a slight decline. Mark Sager: Hey, Matt. NDFI has never been a big portion of our portfolio. We have about 2.6% of the portfolio in NDFI, compared to 7% for our peers. That number for us also—we have mentioned in the past we have had a focus on capital call facilities out of our fund finance group. Those are exceptionally well structured to entities with a strong history and a very strong LP base. So we view that as safe lending. But yes, as you have mentioned, it is a small part of our portfolio. As it relates to the office portfolio, we have that breakout in our deck. We continue to be very granular in that space, diversified by geography, more suburban than urban. And we definitely are seeing more rational transactions happen in the office space. If it has not hit bottom in all markets, it is close to bottom, and we are seeing new lease-up activity, a reduction in subleasing in the majority of our markets. So not actively growing that portfolio, but our concerns on that portfolio have definitely abated. Gino Martocci: Hey. It is Gino too. I will only add that in the last two quarters, there has been record leasing in New York City, and record rents—especially your Class A properties. You can see upwards of over $200 a square foot in rent. So some of the concerns about loan demand and other things that are happening just are not materializing with corporations in their leasing strategies at least. Matthew M. Breese: Thank you. Operator: Thank you. As a reminder, to ask a question at this time, please press—Our next question comes from the line of Christopher Edward McGratty with KBW. Your line is now open. Christopher Edward McGratty: Oh, great. Good morning. Travis P. Lan: Good morning. Christopher Edward McGratty: Travis, going back to the capital, just to push a little bit on the buyback. I mean, your ROE is going in the right direction, generating more capital. Can you not do both—high end of growth and buybacks—or maybe it is more of a back-half year as you kind of talk about the near-term loan growth? But I guess, what is the hesitation, especially with the Basel III proposal? Travis P. Lan: I do not think that there is any hesitation. I just think we have a very robust pipeline, and we want to make sure that we are well positioned to support that loan growth, Chris. So again, we bought back $50 million of stock in the first quarter. Something in that $40 million-ish—$40 million to $50 million—range still feels reasonable. The average price we bought it back was below where the market is today. So that is another element that plays into it, but we will remain active in the buyback. I just indicated that I think it will be a little bit lighter than the first quarter. Christopher Edward McGratty: Okay. That is better color. Thank you. And then, Ira, I did not hear M&A or strategic mention at all. I am getting an updated view there if there is a change. Thanks. Ira D. Robbins: Yeah. I mean, from an M&A perspective, I do not think anything has really changed. I think, from a historical perspective, it has been important for us to remain shareholder friendly and do what is in the best interest of the shareholders, and I do not think that is ever going to change here. Christopher Edward McGratty: Thank you. Operator: Thank you. And I am currently showing no further questions at this time. I would now like to hand the conference back over to Ira D. Robbins for closing remarks. Ira D. Robbins: I just want to thank everyone for their interest and look forward to speaking to you next quarter. Thank you. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Pool Corp. First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Senior Vice President and Chief Financial Officer. Please go ahead. Melanie M. Hart: Welcome to our first quarter 2026 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements, including management's outlook for 2026 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of any non-GAAP financial measures included in our press release will be posted to our corporate website in the Investor Relations section. Additionally, we have provided a presentation summarizing key points from our press release and today's call, which can also be found on our Investor Relations website. We will begin today's call with comments from Peter Arvan, our President and CEO. Pete? Peter Arvan: Good morning, everyone, and thank you for joining us. As we begin the 2026 season, the industry continues to work through a period of stabilization. Consumer discretionary demand remains measured while the installed base continues to drive steady maintenance activity. Q1 is our smallest and most weather-sensitive quarter and our focus entering it was on executing cleanly through the shoulder period to position us for the core season ahead. Our team delivered a solid start with sales growth of 6%, operating income growth of 7% and a 10 basis point of operating margin expansion exceeding our expectations for the quarter. Execution was steady across our geographic footprint with strong maintenance volumes and improving trends in several discretionary categories. A solid start like this reinforces rather than changes our full year view, we are confirming our full year diluted earnings per share range of $10.87 to $10.17, which includes the $0.02 of ASU benefit realized in the first quarter. Reviewing sales by geography, California grew 10% and Texas 7%, supported by constructive weather and strong maintenance demand. Arizona grew 1% and Florida declined 1%, reflecting steady maintenance activities, offset by weather and some softness on the irrigation side in Florida. Across the markets, our teams adapt quickly to local conditions and our differentiated product portfolio, proprietary brands, technology platforms and supplier partnerships built and refined over many years, continued to widen the structural advantage that define our position in this industry. These are not advantages that can simply be replicated by adding locations. In our other key businesses, Horizon net sales declined 2%, consistent with the broader discretionary environment we've seen persist. In Europe, sales grew 5% in local currency, building on the improved trends which we exited in 2025. By product category, we saw broad-based growth. Chemicals grew 8% on strong volume with standout contributions from our proprietary and private label lines, which carry structurally higher margins and are gaining traction across the enterprise. Building Materials grew 5%, continuing to build on our national pool trend offering. This, we believe, builds upon our growing share in this category given the backdrop of muted new construction market. Equipment grew 7% on price and solid volume and commercial was flat for the quarter, largely due to project timing, but exited the quarter with slight growth. Turning to our 2 strategic aftermarket channels, independent retail and the Pinch A Penny franchise network. Sales to independent retail customers grew 3%, a solid setup as they prepare for the core season. And Pinch A Penny franchisee sales to their end customers grew 4% and our franchisees opened 7 new independently owned franchise locations in the quarter. On the digital side, POOL360 increased to 13% of net sales in the first quarter, up from 12.5% a year ago. Our teams continue to make steady progress engaging customers through enhanced offerings and most recently -- or most recently POOL360 unlocked. Between our digital investments, and our distribution network, we are well positioned to continue deepening customer engagement across both professional and DIY end markets. Consistent with what we have discussed last quarter, we remain disciplined on our sales center expansion -- capacity expansion and are focusing on driving more value from our existing footprint. We consolidated one sales center into its existing market in the quarter, bringing our total to 455 sales centers. We still expect to open 5 new sales centers for the full year. This is a measured productivity first posture, the right stance given the current environment. We have made several investments in our network, our technology and our people over the past several years, and our focus now is on leveraging those investments rather than adding to them. You should expect our expense growth rate to moderate as we grow into the capacity that we have already built. As we look at the rest of the year, the macro backdrop has not changed materially from what we described entering 2026. New pool units for 2025 came in at 58,000. While we expect 2026 will be close to that level, it is important to remember that the center of gravity of our business is the 5.5 million in-ground pools already installed. We serve that installed base with a combination of product innovation, customer experience and go-to-market capabilities that no 1 else in the industry can match. Our growth thesis does not require a recovery in new pool units. It is anchored in maintenance, remodel and share capture across product categories for the existing installed base. Our teams remain focused on executing the plan we have set out entering the year, maximizing share across product categories and investing deliberately in technology, private label and partnerships that extend our reach. Over nearly 4 decades, we've built something that goes well beyond distribution, an integrated platform of supplier relationships, proprietary products, technology, franchise networks and field expertise that no one can replicate. We have deliberately invested in that platform so that we perform in the environment we are in today. And so that we are in a fundamentally stronger position whenever the cycle turns. The depth, the reach and the relationships that we have built are unmatched, and we are getting stronger and not standing still. We look forward to sharing more about our strategic priorities and capital allocation discipline at our Investor Day on May 12. I want to thank our team, our vendor partners and our customers for the work and the trust that underpins what we do. Our people are the reason we start each season ready to win and their efforts in Q1 set us up for the season ahead. I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer for her commentary. Melanie? Melanie M. Hart: Thank you, Pete, and good morning, everyone. We are happy to share a solid first quarter with net sales increasing 6% compared to the prior year period. The 6% increase reflects approximately 3% from pricing, 3% from volume in our maintenance and discretionary categories and 1% from customer early buys and foreign currency translation. Pricing contributed approximately 3% to sales growth in the first quarter. This reflects an estimated 1% to 2% full year price realization from current year increases supplemented by an approximately 1% incremental benefit from mid-season pricing actions that were implemented at the end of April of the prior year. We expect this pricing contribution to normalize in subsequent quarters when fully reflected in our year-over-year comparison. Within our chemical product lines, we have observed some moderation in pricing from levels seen at the beginning of the quarter. But at this time, we are not realizing a significant impact on consolidated net sales. We will continue to monitor market conditions. Volume growth was a meaningful contributor to our top line performance with our maintenance and discretionary product categories, delivering a combined 2% increase driven by improved demand across equipment, parts and chemical volumes. The positive momentum we experienced in building materials during the back half of 2025 carried into the first quarter, providing support to overall sales growth. Build and material sales for the quarter increased 5%, and we are encouraged that our results continue to track ahead of permit data. Permit data remains lower than prior year levels through the end of the first quarter. Finally, the benefits we saw from early buys and foreign currency translation provided an approximately 1% tailwind to reported sales in the first quarter. We do not anticipate currency to be a material contributor to full year results as the favorable translation impact is expected to diminish in the seasonally stronger second and third quarters as the sales base increases. Gross margin for the quarter was 29%, a decrease of approximately 20 basis points compared to the prior year period. Primary drivers of the year-over-year change during the quarter were product mix, inbound freight associated with stocking levels through the season and increased early buy activity. Product mix was the most significant driver of the year-over-year variance. Equipment sales grew 7% in the quarter and given the lower relative margins of this category, the strong volume performance diluted consolidated gross margin. We view this growth as strategically positive. Customer early buy activity also increased in the quarter. As is typical with early buy programs, these sales reflect modest discounts from regular season pricing and therefore, carry somewhat lower margins than our in-season business. The increase in early buy volume is consistent with our go-to-market strategy and positions us well for the selling season ahead. Customer mix and chemical margins were also modestly below prior year levels, though neither represented a material individual driver of the variance. Partially offsetting these headwinds, we continue to realize benefits from our pricing initiatives and ongoing supply chain actions. First quarter gross margins are in line with our historical seasonal patterns and should not be viewed as sequential from fourth quarter levels. Operating expenses for the first quarter were $247 million or a 5% increase over the same quarter in prior year. The increase was driven by the addition of 6 greenfields opened after March of last year, technology cost and overall inflationary increases. As discussed on our year-end call, our 2026 operating plan is focused on unlocking efficiency across the 50-plus greenfield locations opened over the past 5 years, combined with process improvements resulting from our ongoing investments in POOL360 and its expanded capabilities. First quarter results are tracking in line with that plan. Operating income of $83 million increased $5 million or 7% compared to the prior year. We realized a 10 basis point operating margin improvement. Interest expense of $12 million reflects the incremental borrowings associated with share repurchase activity during the quarter. Diluted earnings per share of $1.45 increased $0.03 compared to the prior year. Prior year included a $0.10 ASU benefit versus $0.02 in the current quarter. Excluding the impact of ASU in both periods, diluted EPS increased $0.11 or 8% for the first quarter, reflecting our ability to generate earnings growth with top line expansion. Moving to our balance sheet and capital allocation. Consistent with our normal seasonal pattern, we executed our vendor early buy programs to ensure appropriate inventory coverage heading into the season. Inventory at March quarter end was $1.7 billion, 14% higher than first quarter last year and an increase of approximately $200 million from year-end as product was received and positioned across our network. Our current inventory includes stocking for new locations and acquisitions added to the network, new product introductions resulting in a broader product range and cost inflation relative to the same period last year, with some opportunistic purchases made ahead of currencies season price increases. Inventory investment is concentrated in our fastest-moving product lines, and we would expect a normal seasonal reduction in inventory levels as we move through the peak selling season. We ended the first quarter with total debt of approximately $1.2 billion and a leverage ratio of 1.7x, which is within our stated range. As is typical, debt levels will increase through the first half of the year as seasonal inventory builds and early buy payments come due before declining in the back half of the year as receivables are collected. Net cash provided by operations was $25.7 million for the first quarter compared to $27.2 million in the prior year period, with the year-over-year change primarily driven by higher inventory purchases in support of the upcoming selling season. During the quarter, we repurchased approximately $64 million in shares, an increase of $8 million over the prior year period, with $271 million remaining under our current repurchase authorization. We will continue to execute share repurchases in an opportunistic and disciplined manner, consistent with our capital allocation framework. Even with our first quarter trends tracking ahead of our expectations, full year guidance remains unchanged. We continue to expect a 1% to 2% pricing benefit for the full year of 2026 from vendor cost increases and related price pass-throughs. Combined with growth from the installed base of pools and the absence of any meaningful recovery in discretionary spending, we expect top line performance to be a low single-digit growth on a same selling day basis. Gross margin for 2026 is expected to remain consistent with 2025, supported by continued supply chain efficiencies, pricing strategies and higher private label sales offsetting the prior year margin benefit from mid-season price increases. As indicated at year-end, first quarter reflected the highest year-over-year expense comparisons. We expect expense growth to moderate on a quarter-over-quarter basis throughout 2026 as we focus on capacity absorption and a prior year new sales center opening. Incremental incentive-based compensation, if earned, will be recorded in proportion to estimated operating income growth and the costs associated with new sales center openings in 2026 are expected to be weighted towards the back half of the year. With the share repurchases during the quarter, our projected interest expense is now a range of $49 million to $51 million. We would expect second quarter to have the highest interest expense of the year following the payment of early buys. Our estimated full year tax rate remains approximately 25% with the second quarter rate to be approximately 25.5%. Our guidance does not include ASU benefits beyond the $0.02 recognized year-to-date as we continue to expect the full year impact to be less than prior year. We are expecting approximately 36.6 million weighted average shares outstanding for the rest of the quarter and the full year, updated for our first quarter share repurchase activity. Guidance remains unchanged with a diluted EPS range of $10.87 to $11.17 including the $0.02 ASU tax benefit recognized in the first quarter. The midpoint reflects a 2% to 3% growth over prior year. Pool Corp's first quarter results demonstrate the earnings power of our model. even in a market that has not yet seen a full recovery in discretionary activity. Pricing discipline, supply chain execution and the growing contributions of POOL360 are working as intended and our network continues to expand in a way that strengthens our competitive position for the long term. We entered the peak season with confidence in our team, our inventory position and our ability to deliver. I will now turn the call over to the operator to begin our question-and-answer session. Operator: [Operator Instructions] The first question comes from Susan Maklari with Goldman Sachs. . Susan Maklari: My first question is on your ability to realize the return on investments that you talked about coming into this year. As the pool season start come together. Can you talk about your competitive positioning? What you're hearing from the sales centers and your customers in there? And just how you're thinking about that overall positioning as we move into the spring summer? Peter Arvan: Sure. When we think about getting ready for the season, we think about making sure that we have all of the sales centers ready for the surge of business that happens during the second and third quarter. That means that having the right inventory in the right location, having a staff that is fully trained and frankly, excited about the season having all of our new products ready to be introduced to customers working really hard on early buys to make sure that we have the product out in the field at our customers' locations ready to sell, making sure that we have explained all of the new product offerings that are available to our customers so that they can help grow their business and that our marketing programs are finally tuned to kick off the demand creation efforts that we do, they are very unique in the industry. And then it's a matter of making sure that in the sales centers that our teams are ready for the surge of business and that we've taken advantage of the investments that we've made in capacity creation so that we get better every year. We have a performance-based culture and every year, there is a drive to make sure that whatever we did last year, that we do better this year, whether it is our productivity levels in the sales centers. whether it is our efficiency in serving customers and how quickly we get them in and out the door. All of those things are part of the overall customer experience that we focus on. And especially with the newer locations that we opened up in the last couple of years, the newer ones are the ones that we pay the most attention to, to make sure that they're ready to start without missing a beat. Susan Maklari: Okay. That's helpful. And then, I guess, given the geopolitical environment and the moves that we're hearing in consumer sentiment. What are you hearing from your customers on the ground? Has there been any change in how they're thinking about their backlogs or consumers' willingness? And what are you seeing on those discretionary side of the business? Peter Arvan: I think that we continue to watch the health of the consumer. We watch housing turnover, frankly, the age of the installed base all matter. What -- it's early in the year to look at permit data and try and draw any conclusion for where we will end up because the first quarter is just so small relative to that. So there's a lot of -- first quarter is really kind of selling season and now the builders are trying to lock down contracts. So I can tell you that I've heard everything from very optimistic, and I'm sold out to other areas where they're still trying to pursue contracts to make sure that they can lock up the season. So on balance, I would say, relatively unchanged with some green shoots, I would say. Susan Maklari: Okay. All right. That's encouraging. Good luck with the quarter. Operator: The next question comes from David Manthey with Baird. David Manthey: Pete, as you mentioned, I realized the first quarter is seasonally volatile, but we saw a couple of decent-sized changes in some of the supplementary information you provided. So chemicals staged quite a turnaround here. Florida, I guess it had been growing a little bit. Now it's down 1% and California and Texas are booming. I'm just wondering if you can talk about those to the extent there's any signal there versus noise in the first quarter. Peter Arvan: Yes. I'd be careful about drawing huge conclusions on first quarter, but I'll give you just a couple of things to think through. In terms of Chemicals, first quarter is actually one of the quarters that -- so when you're trying to sell a program to a dealer, dealers typically don't convert during the season, they convert after the season and then they would load their inventory into the stores for the upcoming season. So as you know, with our private label chemicals, our legal and easy floor lines, which we believe are best-in-class, especially when paired with the technology tools and the water testing apps that we have and water testing strips, everything for the integrated systems, I think we saw good traction from the dealers and specifically on the retail side, that has helped our traction that we're seeing on the chemical side. And frankly, the teams are out hunting that business because I think we've got a great value proposition. When I look at California and Texas, California, I think, benefited a little bit from weather. California was pretty hot in -- earlier in the first quarter, which is atypical. So that weather pattern helped. And I think the same was true for a bit of Texas. But again, it's so small and relative to the grand scheme of things that I don't know that I would draw a whole lot of conclusions from that. But I can tell you, the team did a very good job of explaining the value proposition and winning share at the dealers in the first quarter. And I think that's just a result of conveying a very strong message or the best value proposition in the industry. David Manthey: Yes. And second, you've talked about growth in OpEx expected to slow through the remainder of the year. And Melanie mentioned that. Could you tell us, does that still kind of anticipate that full year OpEx will be in that 60% to 80% range relative to gross margin or sales dollar growth. Is that -- I know that's a target. But based on your guidance ranges and how you're looking at the business, is that still the target for 2026? Melanie M. Hart: That is the long-term target, but you should remember for 2026, we do also have that incentive comp reload, so -- where we do expect to get some leverage for the year, some of that natural leverage will be offset by that rebuild on the compensation side. So it will be a little bit lower than our normal long-term algorithm. David Manthey: And that comp reset was -- I think you talked about $15 million. Is that still the case? Melanie M. Hart: Yes, at the low single-digit growth. David Manthey: Got it. Peter Arvan: What we're counting on, Dave, though, is the absorption as the new sales centers that we've opened last year and the year before, as they continue to gain traction and the absorption rate on that cost improves. And when you couple that with slowing of adding new investments to the business, because I think we're adequately invested in most areas right now. I think the results for the back half of the year are encouraging. Operator: The next question comes from Ryan Merkel with William Blair. Ryan Merkel: I wanted to start with gross margin. Peter, Melanie, can you quantify the impact to gross margin from the customer prebuy and then also the higher equipment mix -- and the reason I asked is I think last quarter, you guided gross margin slightly up year-over-year in the first quarter. So curious what was different versus what you thought? Melanie M. Hart: Yes. So we're not going to provide a kind of detailed quantification of that. But if you think about what we have talked in kind of relative margins, so we generally will talk about kind of building materials, having the best margin and then after that would be chemicals and then after that would be equipment. So with the equipment being the higher portion of the first quarter sales and really kind of outgrowing our expectation that's really where we saw some dilution of the consolidated margins. Ryan Merkel: Got it. So in my own words, it sounds like the equipment growth surprised you in 1Q versus what you thought? Melanie M. Hart: It was a very pleasant surprise. Ryan Merkel: Okay. Got it. All right. That's good to hear. And then second question is, can you just comment on what you're seeing so far in April? And how does that compare to March. And I'm just curious if March had a weather boost and trying to figure out if that's continuing into the second quarter. Peter Arvan: Yes. I think we're -- I don't know, most of the way through April, and I would -- I guess I would characterize April as expected. So it's -- for what we have contemplated within our guidance and with the plan, I mean, April is going as expected. Operator: The next question comes from David MacGregor with Longbow Research. David S. MacGregor: I guess I wanted to just ask about pricing and inflation and demand elasticity. And I guess in the past, where within the mix have you seen this sort of first appear? And do you feel your private label offering is sufficient breadth to maybe offset by capturing the down market shift? And would that downshift be margin accretive? Peter Arvan: Yes, I'll take that, David. Just the way, I wouldn't want anybody to position our private label as a down price offering. We look at our private label and have intentionally focused on making sure that it is a very high-quality product. So we're not actually selling it saying, "Hey, we're trying to make -- we're trying to have a cheaper offering, we're trying to have an offering that has tremendous value and is very high quality. I think when it comes to the inflation, where we have seen it, and I've commented on this before, obviously, inflation drives the -- it's most prevalent in discretionary when you get into the cost of a new pool. And then when you get into on the maintenance side, there are some parts of maintenance that are -- that we would call semi-discretionary. A pump and a filter nondiscretionary, if those need to be replaced or repaired, they have to be replaced or repaired. But you get into heaters and/or lights, something like that. If somebody doesn't want to fix that, if there is one that is -- that needs to be replaced, you don't actually have to have that to continue to safely operate the pool. So in some areas, that's where we have seen some decline in demand. But I would tell you that that's already in and baked in. So we're not seeing that either change materially from what we've seen over the last couple of years. David S. MacGregor: Okay. Got it. And thanks for the clarification on the private label. I guess second question is just on equipment sales, which obviously look encouraging, I guess, at this point, which you saw this quarter. Any sense of how much deferred investments may be in the market there? And just, I guess, given the rate of catch-up following prior downturns, what could that contribute to growth over the next year or 2? Peter Arvan: Can you clarify your question. I just want to make sure I answer the right question. On your comment on deferred. David S. MacGregor: Well, I'm just -- I'm getting the sense of the equipment sales, there's been some deferral with the downturn. And so now it looks like we're starting to see people spending money on equipment again. And so I'm just trying to get a deferred pending may have occurred there. Peter Arvan: Yes. I think there is -- as a couple of pieces of equipment transition to longer life items. So like when the industry moved from single speed pumps to variable speed pumps, by their very nature, variable speed pumps last longer -- sometimes up to 2x longer than a single-speed pump. So if you go back to 2018 when that regulation went into effect, then you just do the -- you extend out the life of a variable speed versus single speed, those variable speed pumps that were installed very early on in the transition that would have gone well past the normal life of a single-speed pump. Those will now start coming into the replacement cycle, we believe that. And the same thing as it relates to like incandescent lights, which were much shorter life than the LEDs that we replace them. And those 2 -- as we work through that cycle, you'll start to see more replacement for that. So that's all encouraging for us for the future. Operator: The next question comes from Scott Schneeberger with Oppenheimer. Scott Schneeberger: I'm going to focus a bit on pricing. I guess, Melanie, for you, you discussed that we're going to be lapping the tariff pricing that started in April last year. I'm just curious how we should think about that. Did that ramp much in the second quarter? Will we see that as a comp in the second quarter not really until we get to the back half. Just curious how we should think about the cadence and the impact of that since it's a full point in the guidance calculation. Melanie M. Hart: Yes. So when you look at full year pricing, we are at the 1% to 2%, which is based on the current year increases. And so in the first quarter, we had that incremental 1% that was really the tariff price increases that we saw last year. In second quarter of last year, we did have some benefit from those price increases, so we will be lapping that. So at this point, for the remainder of the year, we would expect pricing to be more in that 1% to 2%, just reflecting the current year cost increases. . Scott Schneeberger: And then with this really solid move in the first quarter in Chemical, and I think 1 of you mentioned that there was some good private label, which is higher margin activity there. Could we see upside this year just a little bit behind the strength there and the possibility for persistence in it and also the margin element of the private label with the chemical impact? Peter Arvan: Yes. We're very encouraged by chemicals in the first quarter because that's the nondiscretionary part of the business. and it really goes in 2 channels, right? It goes to the pro channel, which is -- that's your day in, day out, foot traffic into the branches, which is very encouraging. And that's driven by the value proposition that we have. That's the 40-year relationships, that's the expertise in the branch, that's the footprint. That's the customer experience they get there, the tech platform and frankly, the quality of the private label product that we're selling. And then the other side of that is going to be the independent retail taking that product on and putting it on their shelves and that being their go-to brand for the season. So we're encouraged by the results in the first quarter. And we think that as the season progresses, that will be just a good tailwind for us. Operator: The next question comes from Garik Shmois with Loop Capital. Garik Shmois: Just on the expectation that you have for operating expense growth to moderate -- you mentioned improved operating leverage on recent greenfields. I'm wondering if there's anything else besides that in the calculation? Are you expecting certain cost actions in addition to better operating leverage? Melanie M. Hart: Yes. So we are focused on ensuring that the greenfields that we put into place that we're continuing to get those up to fleet average. So there's our concentrated effort on that, which does drive operating leverage at those locations. And then along with that, we are constantly kind of evaluating from both a seasonal standpoint and a market standpoint, ensuring that we're operating effectively within our capacity creation efforts. So we've talked about utilizing the benefits of POOL360. So looking at -- as we continue to increase our sales through POOL360 at each location, that gives us the opportunity to evaluate our operating model in those locations. Garik Shmois: Okay. A follow-up question is just on chemical prices. There's a comment I think in the prepared remarks, they moderated in the quarter, but you're not seeing an impact to sales. Just wondering if you can assess if there's going to be a risk that it becomes a bigger headwind in future quarters at all? Peter Arvan: Yes. I don't know. From where we sit right now, our view is that prices are fairly stable. So I don't -- I mean, that could change, but from where we sit right now, I don't see it in any meaningful way. I mean, it could happen market to market. Somebody, a competitor could do something in a market, but I don't see anything structural that -- where there's a setup for that to change. Operator: The next question comes from Sam Reid with Wells Fargo. Richard Reid: Just wanted to quickly dive into the inventory comment around new product introductions. Specific examples, but also, are you doing any more, say, around like white label China import product? I just want to better understand some of the nuances there on the inventory line. Peter Arvan: Yes. Our job as the distributors to make sure that we have the best product offering for our customers, no matter where it comes from. So I wouldn't say that there is a -- if you look at our private label products, the -- much of that product is domestically produced, and there is some of it that comes in from import and that's frankly always been the case. But our view on new products is not new products, lower cost for the sake of lower cost what we look for is new products that have new technology that help us expand the market. So we look for highest quality features and benefits that our customers and their customers would want would want to drive demand. So I mean in no way, shape or form, do we go out and look for, hey, I just want to find the cheapest pump, the cheapest filter if that was our goal, our product mix would be very different than it is today. We focus on having the best product, highest quality professional grade products that will help our customers grow their business. Richard Reid: All helpful, Pete. And maybe just a quick one on the prebuy activity during the quarter. I mean, you did break out the prebuy contribution in your bridge. I'm just curious though roughly what is the gross margin for a customer that prebuys a product versus, say, a non prebought product. Would just love maybe that split on your gross margin line, just so we could better understand the impact to gross margins in that first quarter from prebuys. Peter Arvan: Yes. We typically don't break that out. I mean because there is no one answer, it varies, right? It varies by customer, it varies by the products that varies by the products that they buy, and so the overall mix. So unfortunately, I can't give you an answer that says, "Hey, it's, this many bps for that type of customer versus a customer that buys normally because it depends on when they buy, how much they buy and what they buy and how large of a customer they are for us. Operator: The next question comes from Collin Verron with Deutsche Bank. Collin Verron: I just wanted to follow up on the equipment and the replacement cycle. Can you just put some numbers around what the useful life of the equipment is now -- and just given that useful life, do you see a replacement cycle in the next couple of years just because we're coming up to 5 or 6 years post COVID when there was a lot of demand. Peter Arvan: Yes. Let me characterize it like this. The life of -- expected life of equipment varies tremendously, based on what the product is and the operating conditions that it's used, whether it's in a seasonal market or whether it's in a year-round market and whether the product is properly maintained or not and with weather events. In general, part of the value proposition of a variable speed pump is that it runs instead of that full rate under full load all the time. It runs at a lower load which extends the life. It could extend the life by 30%, 40%, 50%, it really depends on many, many other factors. But in general, it has extended the life span of pumps, doesn't really have much of an impact on filters or anything like that. Heaters, it's really a function of water quality, more than anything else. If you maintain great water chemistry that can extend the life. You could have a brand-new product with lousy water chemistry and destroy it very quickly. So -- but in general, we look at 2 categories for life expectancy changes that were a bit design, if you will. One is the variable speed pump certainly last longer than the single-speed pump in the range of what I just discussed. And then if you look at LED light bulbs for the pool, those certainly on an apples-to-apples basis are going to outlast an incondici. So since the time that both of those products were introduced we see that there should be opportunity for that replacement market coming up. Operator: The next question comes from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Just want to come back on inventories, 14% growth. I think you mentioned that the broader product range and service levels, but just maybe how would you characterize inventories where you want them to be? And then just back on that broadening the product range. Can you talk -- give us some examples about the new tech or expanding the market type products that you mentioned in the prior comments? Peter Arvan: Yes. So in terms of the inventory, if I look at the -- certainly, the level of inventory is up. If I look at the profile, the profile is what I would characterize as extremely healthy. actually very astute buyers when it comes to buying inventory. So if I look at the dollars and where those are, if they're not sitting in a significant amount and a bunch of new products that don't have any sales history. They're sitting in very high moving very high moving items. So I really -- from an inventory perspective, I spend very little time worrying about the inventory levels because I think the team has -- does an amazing job controlling inventory, and we generally do what we say every time. When I think about new products, I'll give you an example. So on our private label line, we have a regular chlorine tablet, which has been around forever in the pool industry. And now we also have a proprietary product, which is an extreme tab. The Extreme tab has additives in the tablet that distinguish it from a standard tablet. It has more additives in it that produce a better quality pool that has inhibitors that has as algecides and then it has clarifiers and other products that distinctly differentiate that product. And our customers and their customers see a big benefit from that. So that tab -- or that product is growing nicely. Another example would be our -- something in our filter cartridges. So we have a proprietary [indiscernible] antimicrobial cartridge filter, which is much faster to service and has a very low micron filtration rate, which again helps produce a clearer pool, and that's especially important when you think about LED lights, which are getting brighter and brighter. So anytime somebody upgrades their lights, if the water quality isn't really good, you'll start to see those suspended particles. So great filtration to complement lights matters a lot, and we're right there for the customers to provide those products. Jeffrey Hammond: Okay. Those are great examples. Just on pricing, I think you mentioned you expect it to moderate. I'm just wondering if you're hearing of any potential follow-on price increases, whether it's freight inflation from higher gas or oil-based products. I think we heard about some pricing actions in [indiscernible] coordinators, Section 232 kind of tariff update. Any chatter of any follow-ons coming? Melanie M. Hart: Yes, there has been some chatter. I would tell you when we look across our product category from where we kind of stood this time last year. Last year, when we talked about the impact from the tariffs, we did have an incremental 1% that we added to pricing for the forecast for the year. At this point, some of it's noise. We've gotten some notices from vendors, but I would say it's not as widespread as we were at about 30% of our cost of product this time last year where we had announced price increases per se, and we're just not at that level at this point. So we don't have as much of an impact expected. So we're still kind of waiting to hear from if other vendors have reactions to what's going on in the market. Operator: The next question comes from Steve Forbes with Guggenheim. Unknown Analyst: This is Jake Nivasch on for Steve. Just 1 for me. I wanted to dig into POOL360 a little bit. So it's nice to see that penetration levels continue to increase as seen from this quarter from the prior year period. And just curious what the expectation is for the year for this platform, I guess, from a penetration standpoint. And I guess, as a follow-up, curious about what the customer retention looks like utilizing this platform. Where are you seeing when perhaps some of the newer branches, perhaps they're utilizing that a little bit more than some of the older vintages? Or is it the dynamic not really related to that? Just any sort of update there would be great. Peter Arvan: Yes. We're actually very encouraged by POOL360. We think it is a structural differentiator for POOLCORP, both in customer experience and certainly from a cost-to-serve perspective, which is why we've had so much focus on it. What's interesting is, is that there are some regional differences in the adoption rate. There are some -- we have some [indiscernible] very high utilization, some well over 30% in the tool, and we have some that are lower. So some of that is just some -- which seem to be regional differences and some of it is just opportunity on our part. So we continue to focus on improving the quality of the tool every day people wake up and say, "How do we make it better, how do we make it better, how do we make it better, what new features that we have to add, how do we communicate those, how do we train the customers and our branch teams on those features. So there's a range. So I don't think we're anywhere near as a company near entitlement of our penetration. As last year, we ended for the total year at 17%. And as I mentioned, we have some branches that are well over 30. So for me, I don't see any reason why the company couldn't ultimately exceed 25% target and maybe higher in the future, it all depends. So it's important that we remain flexible with our customers though, would not try and force them into using it. We do business with our customers the way they want to do business with us. Some of them embrace the digital tools, some people like the face-to-face. Operator: The next question comes from Shaun Calnan with Bank of America. Shaun Calnan: Just first, can you talk about what you think growth be better early by this year? Do you think customers are more worried about potential price increases? Or do you think this is like a view that they're more optimistic on 2026? Peter Arvan: Yes. I don't know that it was a fear of price increase. I think it's a couple of things. I think that early on in the year, there is always a fair amount of optimism because customers don't know what they don't know. And by nature, our customers tend to be fairly optimistic. So that's a portion of it. I think to scale it, when you look at some of these early buys, I don't know that there's any risk for any of the customers with an early buy. It's not like they're buying a year's worth of inventory. So they're buying some inventory to start the season. So I don't know that anybody is betting the farm on what they buy. So I would say it's a function of our sales efforts, the quality of our products and how well we serve the customer more than anything. Shaun Calnan: Okay. Got it. And just as a follow-up, you had mentioned being able to get some discounted equipment last quarter, did you pass that discount along to your customers? And was there any change in the structure of your early buy discounts? Peter Arvan: I assume you're referring to early buys. And early buys are just as part of the normal course of business. And I think we had a question earlier about pricing on early buys. And again, the answer is it just depends on the customer or the product mix they're buying, how much they're buying, and things like that, there is no formula that says, this means that as it relates to the price increases. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Arvan, President and CEO, for closing remarks. Peter Arvan: Yes. Thank you all for attending today's call. We look forward to you joining us -- joining our Investor Day webcast on May 12, when our executive leadership team covers strategic initiatives and our long-term financial outlook in more detail and on July 23, when we announce our second quarter 2026 results. Have a wonderful day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to Hexcel Corporation's First Quarter 2026 Earnings Call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Kurt Goddard, Vice President of Investor Relations. Thank you. Please go ahead, sir. Kurt Goddard: Hello, everyone, and welcome to Hexcel Corporation's First Quarter 2026 Earnings Conference Call. Before beginning, let me cover the formalities. I would like to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgment, and uncertainties, caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and earnings release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today are Thomas C. Gentile, our Chairman, CEO, and President, and Michael Lenz, Interim Chief Financial Officer. The purpose of the call is to review our first quarter 2026 results detailed in our news release issued yesterday. Now let me turn the call over to Thomas. Thomas? Thomas C. Gentile: Hello, everyone, and thank you for joining us today for Hexcel Corporation's first quarter 2026 earnings call. Our first quarter results were in line with our expectations in terms of an improving commercial market, higher production levels, and channel inventory levels normalizing following the destocking we experienced in 2025. The quarter reflects strong execution across the business in a very dynamic environment, which is creating the operating leverage we predicted as production rates continue to increase. Also, results for the first quarter further demonstrate the long-term value Hexcel brings to our customers as a global leader in the development and manufacturing of advanced lightweight material solutions. Our market position benefits from our deep technical expertise, vertical integration at scale, and long-standing customer relationships. With a uniquely broad portfolio of lightweight composite solutions, Hexcel is well positioned for returning to growth as commercial aerospace production recovers back to pre-pandemic levels and higher. Before turning to our first quarter results in more detail, I want to briefly address the environment with the current situation in the Middle East. We are monitoring developments closely and remain in regular contact with our customers and suppliers as the situation evolves. Hexcel constantly maintains a focus on taking actions to protect our business from near-term cost volatility. While some of the inputs to our products are petroleum-based, most of what we buy is under long-term contracts. We also hedge propylene, a petroleum derivative, for eight quarters. These mechanisms mitigate much of the near-term impact from higher oil prices for feedstock, energy, and logistics costs as much as possible. Our focus is on managing near-term impact and maintaining flexibility in our operations along with a disciplined approach to managing the business. Jet fuel is one of the largest operating costs for airlines, which reinforces the importance of efficiency and lightweighting. Recent Consumer Price Index data shows that prices for airfare have risen almost 15% year-over-year as airlines grapple with higher fuel costs. Newer aircraft deliver improved fuel efficiency, which in a higher-price fuel environment makes lightweighting even more critical. This renewed emphasis on fuel efficiency directly benefits Hexcel. Turning to our first quarter results, Hexcel achieved sales of $502 million, a 10% increase compared to the same period last year. Adjusted earnings per share were $0.59. Rising commercial aerospace demand drove earnings, which enhanced our operating leverage as we grow back into our existing capacity. Gross margins also improved compared to last year. These results reflect improved capacity utilization and strong operating performance across our operations. In our Commercial Aerospace segment, sales were $334 million in the first quarter, an 18.8% increase over the same period in 2025. Sales increased across all four major programs, the Airbus A350 and A320, and the Boeing 787 and 737 MAX. Other commercial aerospace sales increased 15.6% over the same quarter in 2025 on the strength of regional and business jets. As we have discussed from prior quarters, the commercial aerospace recovery has taken longer than initially expected. In our previous call, we highlighted our growing confidence that a sustained increase for commercial production rates at the OEMs was taking hold. We continue to see that production rate ramp materialize. Our first quarter results aligned with our expected outlook for growing commercial aerospace volumes entering 2026 and continuing over the next few years. Remember that as a materials provider, the various supply chain partners keep different levels of inventory and there is also scrap and waste, so production rates we provide are approximate. Also, Hexcel is typically four to six months ahead of the OE aircraft assembly, so our assumptions are based on production, not OE deliveries. Here is how we see the outlook for the major commercial programs. First, the A320. Based on recent public announcements regarding A320 engine availability, we now expect our volumes on the A320 to be at the lower end of our guidance of low-700s for the year rather than low- to mid-700s. We remain confident in the overall catalyst for increased OEM production rates on the A320 to continue going forward. On the A350 program, we are seeing increasing alignment between our production rates and the Airbus build rates, with channel destocking largely behind us. We remain confident in our outlook for 80 units in 2026, perhaps even with a bit of upside. On Boeing programs, we see tangible evidence of progress in the ramp-up of both the 737 and the 787, which includes investments to expand manufacturing capacity in Charleston for the 787 and in Everett for the MAX. While we continue to lag Boeing's production rate for the MAX, the year-over-year first quarter sales growth was particularly noteworthy. Q1 was our best quarter on the MAX in years, with production at around 40 aircraft per month. Our forecast on the MAX for 2026 was mid-400s, and it looks like Boeing will exceed that. On the 787, our forecast was 90 to 100 units, and that continues to be our expectation. As commercial production rates at the OEMs recover, we expect to see ongoing benefits to our operations from increased operating leverage. At the same time, we are taking a measured approach to bringing capacity online to ensure incremental costs are aligned with sustained demand and that the benefits of higher production rates are not diluted. Throughout this process, our priority remains on meeting increasing production requirements while maintaining the highest standards of safety and quality. On balance, we see the puts and takes for this year canceling each other out and we are maintaining our full-year guidance. Turning to the Defense, Space, and Other segment, our first quarter sales of $169 million were impacted by the divestment of our Austrian facility, which led to a decrease in sales volume overall in the segment compared to the same quarter last year. Looking at just Defense and Space, our sales increased low single digits compared to the same period last year. We saw an increase in our volume for our European fighter programs and for both U.S. and European military rotorcraft programs. This was offset by lower volumes for launchers and rocket motors in Space. First quarter volumes for this segment also reflect the inherently uneven nature of defense program funding and spending which can vary from quarter to quarter. We expect to see the impact of increased defense spending in areas such as missiles begin to impact us favorably later this year. As we have discussed in previous calls, organic growth in the Defense and Space market is a strategic priority for Hexcel, and we remain confident in the long-term opportunity. Defense spending trends for procurement of new platforms by the U.S. and Western-aligned countries continue to indicate increased multiyear defense spending, underscoring the durability and scale of the current rearmament cycle. This increased Defense and Space spending highlights opportunity for Hexcel, as our advanced composite materials enable greater range, increased payloads, and enhanced performance characteristics such as low observability for military and space platforms. All these are areas that differentiate Hexcel. In terms of our balance sheet, at the end of Q1, we refinanced our $750 million revolver, extending its maturity to 2031. This refinancing terminated our previous revolver that was set to mature in 2028. This action further reinforces our strong liquidity position. As part of our ongoing work to streamline Hexcel's portfolio toward markets that value our high-performance aerospace carbon fiber, we remain on track with the transition of our Leicester, UK business from industrial applications to aerospace development. The restructuring cost from our transformation at Leicester impacted our results this quarter. To recap, our first quarter results reflected the forecasted rise in commercial volumes we anticipated and our expectations that operating leverage will be beneficial. Our operations typically use cash in the first quarter of the year, and this quarter cash usage was low and noticeably favorable compared to past history. This gives us confidence in the 2026 full-year guidance that we provided on our previous earnings call. Despite the macroeconomic challenges, while uncertainty in the global environment remains elevated, the market fundamentals support sustained demand for Hexcel's lightweight composite material across commercial, defense, and space markets. With our broad product portfolio, market-leading position, and continued operational discipline, we are well positioned to navigate near-term uncertainty and deliver long-term value for our shareholders and other stakeholders. With that, I will turn the call over to Mike to walk through the first quarter financial results in more detail. Mike? Michael Lenz: Thank you, Thomas. Sales growth was strong in 2026 as commercial aerospace platforms ramped and the higher volume drove margin expansion from operating leverage. Total first quarter 2026 sales of $502 million increased 8.8% in constant currency, reflecting strong growth in the commercial aerospace market. This commercial aerospace growth was partially offset by lower Defense, Space, and Other sales following the divestment of the Austrian industrial business in September 2025. By market, Commercial Aerospace first quarter 2026 sales were $333 million, increasing 19% compared to 2025. Commercial Aerospace comprised approximately 66% of total quarterly sales. Sales increased for all four of the major platforms, including the Airbus A350 and A320, and the Boeing 787 and 737. Sales growth for the two Boeing platforms was particularly strong, which was admittedly an easier year-over-year comparison as our first quarter 2025 sales to Boeing were light. Sales for Other Commercial Aerospace in the first quarter increased 15.6% year-over-year with strength in both business jets and regional jets. Defense, Space, and Other first quarter sales at $169 million represented approximately 34% of total sales. First quarter sales decreased 6.9% on lower industrial sales following the divestment of the Austrian industrial business last year. Year-over-year comparisons will be influenced through the third quarter of this year due to this previous divestment. Further, as we proceed with ceasing industrial operations at our Leicester, UK site, as disclosed last quarter, that will add an additional decrement to year-over-year comparisons as the site's annual sales have been around $15 million annually. In terms of the Defense and Space business, international military sales were strong in the quarter, including the Rafale and Typhoon fighter aircraft, as well as European military helicopter programs. Domestically, the CH-53K and Black Hawk sales were strong in the quarter. Space sales were softer year-over-year for launchers and rocket motors. Gross margin of 26.9% for 2026 increased from 22.4% in 2025 on volume, mix, and price realization. Rising carbon fiber sales improved asset utilization, which drives margin expansion from improved cost absorption. In addition, we had a nonrecurring favorable effect from the timing of inventory utilized. As a percentage of sales, operating expenses, including selling, general, and administrative expenses and R&D expenses, were 13.4% in 2026 compared to 12.5% in the comparable prior-year period, with the increase primarily reflecting R&D expenses. A portion of this was the timing of R&D activities as we continue to invest in innovation to secure a position on the next generation aircraft. Adjusted operating income in the first quarter was $68 million or 13.5% of sales, compared to $45 million or 9.9% of sales in the comparable prior-year period. Foreign exchange has become a headwind, as the impact of a weaker dollar is now being felt following a lag resulting from our hedging program. First quarter 2026 operating margin was negatively impacted by approximately 80 basis points from foreign exchange. In contrast, 2025 had a favorable impact of approximately 60 basis points from foreign exchange. Now turning to our two segments. The Composite Materials segment represented 80% of total first quarter sales and generated an adjusted operating margin of 17.6%. This compares to an adjusted operating margin of 14.2% in the prior-year period. The remaining 20% of total sales generated an adjusted operating margin of 14.6%. This compares to an adjusted operating margin of 6.8% in the prior-year period. Net cash provided by operating activities in the first quarter 2026 was $19 million compared to a use of $29 million last year. Working capital was a cash use of $63 million compared to a cash use of $98 million last year. Capital expenditures on an accrual basis were $18 million in 2026 compared to $17 million in the comparable prior-year period. Free cash flow in 2026 was a use of $6 million compared to a use of $55 million in 2025. Q1 is historically a cash-use quarter, but this year was less than typical as the timing considerations we highlighted regarding fourth quarter 2025 cash flow normalized in Q1, in addition to the improved EBITDA result. Adjusted EBITDA totaled $107 million in the three months of 2026 compared to $85 million in the first three months of 2025, an increase of 26%. We refinanced our $750 million syndicated revolver in March, extending maturity to 2031 from 2028, with a slight improvement to pricing. There were no substantive changes to covenants, and this maturity extension enhances our medium-term liquidity and improves our debt maturity profile. Leverage, defined as net debt to last twelve months adjusted EBITDA, was 2.6x at 03/31/2026, and our leverage remains elevated following our revolver borrowing in October 2025 to finance an accelerated share repurchase. We remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5x to 2.0x during 2026. The accelerated share repurchase concluded in early March with approximately 4.5 million shares repurchased, or almost 6% of our outstanding float. Since the beginning of 2024, we have returned over $800 million to stockholders through dividends and share repurchases. The company did not repurchase any shares of common stock in the first quarter 2026, and the remaining authorization under the share repurchase program at quarter end was $381 million. The board of directors declared a $0.18 quarterly dividend yesterday, payable to stockholders of record as of May 4, with a payment date of May 11. In closing, we had a solid first quarter, and as Thomas mentioned, we have reaffirmed our 2026 guidance including adjusted EPS of $2.10 to $2.30. Our expectation remains for a roughly even split between the first half and the second half of 2026, consistent with normalized historical seasonality. There remain a number of potential puts and takes, with uncertainty from the Middle East conflict and higher oil prices a potential headwind, whereas the possibility of a faster customer rate ramp could become a tailwind as the year progresses. I also want to state how much I have valued my time as CFO and the privilege of working with an exceptional team producing such differentiated products for our customers. Thomas C. Gentile: Thank you, Mike. Before we open the call for questions, I want to thank Mike for his leadership and contributions as our Interim Chief Financial Officer. Mike stepped into this role at an important time for Hexcel, providing steady leadership while we conducted a search for Hexcel's next CFO. Mike worked with us to close out 2025, assisted with executing the accelerated share repurchase, built a plan for 2026, participated and led the finance sections in two board meetings, refinanced our revolver, and participated in two earnings calls. Quite a set of accomplishments for an interim CFO. With the hiring of Jamie Kugen, who starts May 1 as Hexcel's next CFO, Mike will finish out his tenure and support Jamie in his transition into the new role. Mike came into this role and was not just a caretaker. He brought new perspectives and helped us get better in a variety of financial areas. On behalf of the Hexcel board and the entire management team, I want to thank Mike for his commitment and the impact he made during his time with Hexcel. To close out, our first quarter performance reinforces our confidence in the direction of the business and Hexcel's value proposition. As commercial aerospace production continues to recover, we will benefit from improving operating leverage supported by our disciplined approach to bring capacity back online, control cost, and focus on safety and quality. Long-term fundamentals across Commercial, Defense, and Space remain strong, and Hexcel's differentiated portfolio, technical capabilities, and customer relationships position us well to deliver growth and value over the long term. We will now open the call for questions. Julian, we will take some questions. Operator: As a reminder, to ask a question, please press the appropriate key. Thank you. Our first question will come from David Strauss from Wells Fargo. Please go ahead. Your line is open. David Strauss: Thanks. Good morning. Tom, is there any change in your outlook? I think you had forecast Commercial up low- to mid-double digits for the year. Is there any change there given the potential upside you are talking about on rates? And then second question on the Composite Materials margin. It looks like the incrementals there were north of 40%. I think you are absorbing a decent kind of FX headwind. Kind of how did you get there this quarter, and how are you thinking about incrementals from here? Thanks. Thomas C. Gentile: Great. So in terms of the outlook on Commercial, we are basically saying that we are going to hold to our guidance and our overall plan, with some puts and takes. We do see a little bit of upside on the A350 from the 80. Based on the Airbus master schedule, based on our bottoms-up forecasting, and based on the firm POs that we already have, we see upside on the 737, as I mentioned, and 787 is about flat. But we do see some pressure on the A320. As I said, our original forecast was 700 to 750, so low-700s to mid-700s, and now we are saying it is going to be at the low end of that range because Airbus has highlighted that with the engine situation, they are expecting to deliver fewer A320s this year. So net-net, we see basically a flat outcome for the year in terms of our plan, but substantially up from last year. So again, higher on A350 and 737, flat on 787, and a little down on A320. In terms of the margins, this quarter really benefited from a few things. One, we had strong volume performance. Secondly, we did get some price on a couple of contracts with customers that came due in the normal course of events, and we were able to capture that. We also benefited, as Mike mentioned in his remarks, from inventory that was built last year and was on the books at a lower cost. When we sold it, we got the benefit from that. And then it was just a lot of operational discipline, holding the line on cost, driving productivity in the factories, and that helped improve our margins. Overall, we were very pleased with that outcome. Thank you. Operator: Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead. Your line is open. Sheila Kahyaoglu: Tom, thanks for all the color. Just given the volume incrementals are dropping through really nicely, maybe on the A350 where the mix can be particularly favorable, it sounds like you are feeling better about the destocking trend there, and it is only the A320 that is an issue. You mentioned favorable inventory sales timing in Q1. How does the A350 ultimately flow through to the top line and margin profile as we move through the year? And then just the volume on Defense, when do you expect that to really accelerate given some of your programs in your portfolio and how we see the budget come through? Thomas C. Gentile: Right. What we see typically, Sheila, is when our volume goes up, we get better operating leverage because we are using more of our capacity, and so that drives the operating leverage for improved margins. And when I say capacity, we have 14 carbon fiber lines in Salt Lake City. We had four of those mothballed during most of the pandemic. We brought one on at the end of last year. We will bring on another one this year. As we go through the year and rates increase, particularly on the A350, using that additional capacity will create more operating leverage for us. And as we bring the next line on, that will create even further operating leverage. That is really the way it translates: increased volume allows us to utilize more of the capacity that absorbs more fixed cost and increases the operating leverage, which drives margin. And as I mentioned, on the A350 we expect to see the rates continue to increase. As Airbus has said, they are at seven, they are planning to go to eight, and we may see nine before the end of the year. That is why we feel comfortable right now with our outlook of 80, maybe a little bit of upside, as we go through the year. On Defense, it is sometimes lumpy—space launchers and satellites. We do see lumpiness on that. We saw that this quarter. For example, there was one program that we supplied, the Vulcan, which has been paused, and so that was a pretty good number last year and in the first quarter it was fairly negligible. That is an example of the lumpiness. We saw the same in Europe with some launch systems. But on missiles, for example, we are at a very good rate right now, but that gets better and we start to see it really jump in the third and fourth quarter of this year because there have been a lot of new orders for missiles, and that is starting to flow through. It has not flowed through yet. It will flow through later in the year. Then on some of the other programs that we are on, I would say they are still in the EMD phase—in terms of Engineering, Manufacturing, Development—going into LRIP, low-rate initial production. Over time, as those rates start to ramp up from low-rate initial production into full rate, we will start to see the benefit of that. So it is a slow build, but we are starting to see it, and it will become more material in the third and fourth quarter this year. Operator: Next question comes from Scott Stephen Mikus from Melius Research. Please go ahead. Your line is open. Scott Stephen Mikus: Morning, Tom and Mike. Very nice numbers. Tom, if the numbers in my model are correct, I think the $281 million of commercial aero sales in Composite Materials is the highest for any quarter since 2020, which was not really impacted by COVID. Wide-body production rates are still below pre-COVID levels, so I am just curious, was there a restocking benefit? And then on the pricing comments, was there any specific end market or program that was particularly strong from a pricing perspective? Also, you sounded upbeat on the A350 outlook for this year. Airbus has been in Kinston now for over five months. Based on your conversations with Airbus, is that facility no longer an issue when it comes to A350 production, and does the ramp mainly come down to business-class seats and, to a lesser extent, engines? Thomas C. Gentile: Right. On the first one, commercial aero sales were high, and even though wide-body production is still below where it was in 2019 and we expect it to be below for a couple of years, we are seeing the benefits of that increased production. We did not see the restocking that we saw last year. We saw that our deliveries were more in line with the OEM production rates, and so that suggests to us that that is normalizing, and we are not seeing the destocking. That is a positive. In terms of pricing, it was not in any particular area. It was just several contracts that came up for renewal in the normal course of events, and as I have said before, whenever that happens, we do try to align current market conditions with pricing on those contracts, and we got the benefit of that in Q1. We will continue to see that on a regular basis as we go forward. Our contracts tend to be five to seven years, so every year between 15% to 20% of our contracts come up for renewal and we renegotiate them, and we have been getting better prices to align with some of the inflation—the higher cost of labor, material, utilities, and logistics—that we have seen in recent years. On Kinston, I will let Airbus speak to the specifics of it, but certainly they now have full control of it and they are able to control their own destiny. They have been fairly optimistic in terms of their schedules. What we look at is our bottoms-up demand estimate, where we talk to every plant, including Kinston, and that has been very strong. Then we look at the firm POs—our POs are generally firm five months out into the future—so we are starting to see the POs already for September, which is post the August shutdown, and those are very strong as well. It is on the basis of that that we are optimistic on the outlook for the year. Operator: Our next question comes from Myles Alexander Walton from Wolfe Research. Please go ahead. Your line is open. Myles Alexander Walton: Thanks. Mike, you mentioned guidance split roughly in half, first half versus second half. Were you referring to sales, EPS, or both? And that $0.10 or so decline that you are pointing to at the midpoint, is that mostly based on margins being lower within Composite Materials because of the lack of benefit from the inventory you had in the first quarter? And then, Tom, anything you want to comment on in the M&A pipeline or outlook for inorganic growth? Michael Lenz: I was referring to EPS. A couple of things as you think about margins and trajectory going forward. Certainly, that nonrecurring benefit was relatively significant, or I would not have mentioned it. There are other considerations as we move through the year. Thomas mentioned about lines coming back on, which is great because we are carrying the depreciation and get the leverage for that, but you also have some start-up costs when you open up a new line and the phasing of hiring. There is always an ebb and flow along the way. As we looked at the balance of everything—like Thomas said, being pretty good through September—we will see what Q4 comes in. We saw that as the right balance of conservatism as well as looking at the potential opportunity later in the year. Thomas C. Gentile: Right. On M&A, Myles, our focus is really 100% on executing on the production ramp, then also making sure we are driving our R&D and innovation to get on the next generation aircraft, and then focusing on organic growth in our core businesses and in Defense in particular. As you know, we did the ASR last year in October, and we took $350 million out of our revolving credit facility, and we committed that we would pay that back and get our leverage down below 2x. As Mike said, we are at 2.6x to 2.7x right now. Our goal is to get back under 2x by the end of this year, and so we are not really planning on any M&A until we get to that point. In the future, the focus for M&A will be looking at things that are advanced material science and have an ROIC of 15% or greater. In the absence of that, we will continue to repurchase shares in the future, but not until we get back below 2x net debt to EBITDA leverage. Operator: Next question comes from Kenneth George Herbert from RBC Capital Markets. Please go ahead. Your line is open. Kenneth George Herbert: Hey, Tom. Good morning. Nice results. I wanted to see if you can provide a little more detail as to how you are managing risk on specifically your European manufacturing footprint. We have had a number of questions on this over the last month as we have seen greater volatility in input costs. Can you help frame the risk and provide confidence that you will not see any sort of uptick or related risk as a result of what is happening with energy prices or other input costs globally, but in particular with your European footprint? And if I could, you have mentioned a few times increased spending to support next generation aircraft. Do you have any updated thinking on timing as to when we could hear about announcements from your customers? Is the timing accelerating, or has your timing changed at all as you think about next-generation clean-sheet aircraft? Thomas C. Gentile: A couple of things. First of all, most of what we buy for production in the U.S. and Europe comes from the U.S. and Europe—over 90%—so we have that sort of natural hedge. In Europe in particular, we do have a forward buying program on things like natural gas that gives us a little bit more stability in the energy outlook. Of course, if things persist for a very long period of time, we will see the impact of that in out years, but for the next couple of years we feel very confident with our hedging program and our forward buying program. That will help mitigate some of those costs, and the fact that most of what we buy for European production comes from Europe and not from regions that are more impacted by the current events. And in fairness, most of our production of carbon fiber is in the U.S. We have 14 lines in the U.S., two in Europe—one PAN line in Europe—and the rest in the U.S. Prepreg is mostly in Europe, which is near the Airbus plant, but carbon fiber production is tilted toward the U.S. On next-generation aircraft timing, nothing has changed. We are still consistent with what the OEMs have declared publicly, which is that they would not make a decision for another couple of years, maybe launch a program by the 2030 time frame with an entry to service in the late 2030s. There are a lot of discussions going on right now for all different parts of the aircraft, looking at not only what type of carbon fiber and resin system, but also what type of production process. We are deeply engaged in those discussions with both airframe OEMs, Airbus and Boeing, but also with the engine OEMs. I expect that they will stick to the time frame they have announced publicly. Michael Lenz: And, Ken, as Thomas said, we layer in sequentially over several quarters both the hedging of propylene as well as the pre-buy. In the near term you are the most covered, and then that fades as you go out into later periods. None of us have a precise crystal ball as to how events will unfold over the next few months, so this approach provides balance. Operator: Our next question comes from Gautam J. Khanna from TD Cowen. Please go ahead. Your line is open. Gautam J. Khanna: Hey, thanks. Good morning, guys. I wanted to ask if you could quantify what you think your A350 shipment rate was in the first quarter, and maybe if you could give it for some of the other programs as well. Thomas C. Gentile: Just roughly, I would say A350 was at about seven, a little bit underneath seven. 787 was a little bit above seven. Both of them are talking about going to eight later this year. Boeing is talking about going above that, and Airbus is the same for the A350. As I said, we think we could see nine before the end of the year. On the A320, we were just under 60 per month, so kind of in line with where Airbus is. As I said, we are usually ahead of the OEMs. Our production is more of an estimate because we are looking at the quantity of material, and we are also about six months ahead of them. It is not deliveries that we are looking at so much as production. On the MAX, we are in the 40 range, which is consistent with where Boeing has said they are. They have been tracking very nicely and they are expecting to go to 47 later in the year, so we will be prepared for that. On the 787, as I said, we are a little bit ahead of seven per month, and they are tracking nicely to the 90 to 100 that they indicated last year; that still seems to be a good number. That is how we look at each of the rates. Operator: Our next question comes from Analyst from Bank of America. Please go ahead. Your line is open. Analyst: Last quarter you talked about selective hiring for the A350 ramp-up. Could you give us a sense of where you are in the hiring, and how you are thinking about hiring for everything else that is also ramping up? Thomas C. Gentile: Because our production is fungible across all of the programs, our hiring is aggregate, so I will give you the overall. As we said, we were a little bit heavy last year in terms of staffing because we had expected higher rates. We hired people and the rates did not come, so we ended up higher. There was no point in laying them off because we knew we had to hire them back this year and train them. We held on to that, and that impacted some of our margins last year. This year, we expect to hire around 400 people in direct labor to help support the production. Through March, we have hired about 200, about half of that. We were expecting to not start hiring in bulk until the middle of the year, but with the higher rates, we started a little bit earlier. So we had about 200 in the first quarter and expect 400 for the year to support the plan we have in front of us. Operator: Our last question will come from Scott Deuschle from Deutsche Bank. Please go ahead. Your line is open. Scott Deuschle: Good morning. Mike or Tom, is this step-up in R&D likely to continue over the rest of the year, or should it normalize back down from these levels? And the high end of guidance implies the average EPS over the next three quarters is about in line or slightly lower than the $0.59 you printed this quarter. I understand you had the inventory benefit, but unless that was really big, it would seem there would be pressure to grow EPS off this first quarter base given the build rate increases. Could you clarify the puts and takes as you go into 2Q? Michael Lenz: Hey, Scott. A couple considerations at play here. Broadly, our overall R&D headcount is actually down year-over-year, but remember, R&D spending involves other activities as well. We had a degree of an increase in Q1 just with the timing of certain activities related to that. Also, as you start any fiscal year, you revisit where your costs are flowing, and there were a couple of items that were in the factory cost centers that are really dedicated and related to R&D. So there was a little bit of a bucket shift there—nothing drastic or radical. On EPS cadence, we are very well mitigating the various cost increases here in the near term, but not completely 100%. We are being thoughtful about that. While everybody focuses on oil per se and those inputs, a prolonged elevation of that type of situation impacts other things such as shipping costs. There is also the phasing of the start-up of lines with start-up costs and the need to bring the hiring on before you realize the business and the flow-through. Taking all those into consideration, we felt this was the balanced outlook. Hopefully, we see further acceleration that could lead to potential upside. Thomas C. Gentile: And that is exactly right. When we are doing testing of new carbon fibers—to increase tensile strength, modulus, and compression—we have to produce batches of test material. Historically those batches just stayed within the plant, but now that they are picking up and there is a little bit more material, we are allocating them more properly to R&D. You will see some of that, and that is the bucket shift that Mike mentioned. In general, we are stepping up R&D to make sure that we have the right products in front of our customers as they make their decisions on the next generation product. You will see slightly elevated R&D as we go forward—some of it being the bucket shift and some of it being that we are stepping up to be aligned with where the OEMs are, both the airframers and the engine makers, for the next generation aircraft. As for EPS phasing, we are going to be about half and half on EPS for the course of the year—first half and second half. This was a strong start to the year. We will continue to drive production rate efficiencies, hold the line on cost, and drive productivity in the factory. We feel comfortable with the outlook. With all the uncertainty regarding production rates and oil, we feel it is prudent right now to hold the line and maintain guidance. We will certainly try to drive productivity and improve on it, but right now it is about balance. Operator: We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Senstar Technologies Ltd. Fourth Quarter and Full Year 2025 Results Conference Call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. I would now like to hand the call over to Corbin Woodhull of Hayden IR. Corbin, would you like to begin? Corbin Woodhull: Thank you, Latanya. I would like to welcome everyone to the conference call and thank Senstar Technologies Ltd. management for hosting today's call. With us on the call today are Mr. Fabien Haubert, CEO of Senstar Technologies Ltd., and Ms. Alicia Kelly, the CFO. Fabien will summarize key financial and business highlights, followed by Alicia, who will review financial results for the fourth quarter and full year of 2025. We will then open the call for a question-and-answer session. I would like to remind participants that all financial figures discussed today are in U.S. dollars, and all comparisons are on a year-over-year basis unless otherwise indicated. Before we start, I would like to point out this conference call may contain projections or other forward-looking statements regarding future events or the company's future performance. These statements are only predictions, and Senstar Technologies Ltd. cannot guarantee that they will, in fact, occur. Senstar Technologies Ltd. does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand, the competitive nature of the security systems industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures which should be considered in addition to, and not in lieu of, comparable GAAP financial measures. Please note that in our press release, we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to the company's website at senstar.com for the most directly comparable financial measures and related reconciliations. And with that, I would now hand the call over to Fabien. Fabien, please go ahead. Fabien Haubert: Thank you, Corbin, and thank you to those joining us today to review Senstar Technologies Ltd.’s fourth quarter and full year 2025 financial results. We continue to deliver solid full year performance with growth in revenue, margin expansion, and continued profitability. In 2025, revenue was $36.4 million, gross margin expanded to 65.5%, and we delivered net income of $3.2 million while maintaining a strong balance sheet with $22.5 million in cash and no debt. Those results reflect steady demand across our business and the strength of our operating model. Importantly, revenue from our core verticals grew 5% for the year, supported primarily by continued strength in corrections and energy, particularly in North America and EMEA. The performance reinforces the resilience of our business and the relevance of our solutions across critical infrastructure markets. Moving to the fourth quarter, we encountered more challenging conditions than anticipated. Revenue declined 14% year over year to $8.8 million, which also impacted margins in the quarter. The fourth quarter was impacted by several nonrecurring and timing-related factors, not a change in the underlying demand. Those factors include delays of government projects, mainly in the U.S. corrections vertical following the U.S. federal government shutdown, and a nonrecurring European telecom utility project, which will convert to further revenue generation in 2026. Most of these projects have shifted into 2026 and later periods. This gives us confidence in the strength of our pipeline, which continues to grow, and the overall demand environment, as reflected in our full year results where our core verticals grew by 5% despite the fourth quarter timing impact. Looking more closely at our verticals, we continue to see meaningful opportunities across data centers, energy, utilities, corrections, airports, and solar farms. These key verticals are increasingly focused on security and operational intelligence, which aligns well with our technology and capabilities. Our strategy remains focused on repeatable deployment and scalable account expansion, where we can leverage our installed base and deepen relationships with key customers over time to cross-sell our advanced technology solutions dedicated to demanding verticals. On the technology front, 2025 marked a breakout year for LiDAR adoption and customer engagement across multiple verticals, with LiDAR increasingly deployed alongside our perimeter intrusion detection solutions, with no cannibalization effect. This has translated into strong LiDAR sales growth, mainly in the fourth quarter. This is an important distinction, as LiDAR is expanding our target market, creating new use cases across virtually all our verticals and enabling Senstar Technologies Ltd. to address a broader range of customer applications. We saw strong growth in LiDAR-related sales and activity with continued momentum and solid pipeline creation. Customer acceptance of LiDAR for both security and operational applications has accelerated dramatically, driving robust pipeline expansion within this strategic initiative, complementing and enhancing our unrivaled PIDS and software reach. Our 3D LiDAR technology in security applications does not compete directly with our core fence and buried detection solutions, but with alternative technologies such as thermal cameras, video and analytics, radar, 2D LiDAR, and others. It also addresses further surveillance needs for several other critical points within our vertical markets, expanding considerably our addressable market and customer use cases. Our acquisition of Blickfield, completed in 2026, represented a transformative step to enhance our competitive position and capture share of this rapid growth market. Our expectation for accelerated growth globally, without requiring significant investment, is supported by maximizing our unrivaled global sales and technical footprint across our current vertical markets to disseminate this groundbreaking technology. On top of that, Blickfield offers high growth perspectives in volume monitoring and traffic applications, where Blickfield has already developed a footprint. Turning to our geographic performance, the U.S. and LATAM remained our strongest markets for the full year of 2025, with solid contribution from corrections and energy. Throughout 2025, we secured important new wins across healthcare, utilities, oil and gas, and energy, while data centers, airports, and increasingly LiDAR continue to generate meaningful pipeline creation. Revenue from the U.S. and LATAM region increased 5% for the year but declined by 20% in the fourth quarter due to government funding delays following the government shutdown. Encouragingly, most of those projects are still alive, and we have seen some positive activity in support of our view that this was largely a timing issue. Canada was a standout performer, returning to growth, with over a 110% revenue increase in the fourth quarter and 22% for the full year, driven by strong wins in corrections and utilities. Our methodical investment in the EMEA region over the last several years is positioning Senstar Technologies Ltd. to capture new opportunities with key accounts in targeted verticals. The region delivered low single-digit revenue growth for the year, reflecting underlying resilience and continued customer demand, though the fourth quarter was impacted by difficult comparisons related to a large-scale nonrecurring utility telecom project in the prior year, which is expected to deliver revenue in 2026. We secured major wins in solar farms, energy, data centers, corrections, and airports, and together with strong pipeline creation, we have renewed conviction behind the region's growth prospects in the coming quarters. We are encouraged by the steady demand we see in the region, supporting a robust pipeline and favorable growth outlook. The EMEA region is experiencing a significant increase in requests for LiDAR applications as well. In Asia Pacific, performance improved in the fourth quarter with 21% growth. On an annual basis, Asia Pacific declined 9%, reflecting the impact of a material nonrecurring project in Q2 2024. We are optimistic about recent wins and continued pipeline development for the key verticals, including solid wins in data centers and corrections, serving as a great source of momentum for quarters and years to come. Across all regions, our business development strategy is gaining traction. We are expanding our presence at key accounts, increasing cross-selling opportunities, and building a more diversified and resilient revenue base. Together with Blickfield, we also secured several promising projects across military and government, airports, corrections, and data centers. Looking ahead to 2026, we are enthusiastic about the opportunities in front of us. We are seeing continued activity across data centers, utilities, energy, and LiDAR, supported by a growing pipeline. Our business development strategy is centered on high-growth verticals, an appetite for complexity, opportunities for scalability worldwide, and leveraging our preexisting footprint. Senstar Technologies Ltd. is making inroads with new key accounts and deepening existing customer relationships. Our pipeline is growing, further supporting improved market penetration and enhanced revenue diversification. The addition of Blickfield to our current portfolio will further assist us in expanding our range of solutions and addressing more security and non-security applications in our current targeted vertical markets. We are also substantially broadening our current addressable market and strengthening our ability to successfully approach verticals in which we were not historically present. Importantly, Senstar Technologies Ltd. will actively support and further develop Blickfield's efforts to expand their position in volume and traffic monitoring applications, which are extremely attractive markets combining vertical excellence, high growth, margins, and worldwide scalability. We will work together with Blickfield to develop positive synergies with the whole group to accelerate its growth. We entered 2026 with an expanding pipeline and are focused on converting that activity into revenue. At the same time, we remain disciplined with cost, ensuring we balance investment in growth with continued operational efficiency. In summary, we enter the new year with a strong balance sheet, steady demand across our core markets, an exciting pipeline, and an enhanced technology portfolio. Our focus is on execution: converting our pipeline into revenue, expanding within key verticals, and driving sustained growth over time. Before turning the call over to Alicia, I would like to thank our employees for their continued dedication, our customers for their trust, and our shareholders for their ongoing support. I will now turn the call over to Alicia for a review of the financial results in more detail. Alicia Kelly: Thank you, Fabien. Our revenue for the fourth quarter of 2025 was $8.8 million, which compared to $10.2 million in the year-ago quarter. This year-over-year reduction is related to nonrecurring project timing and delays in government projects following the federal government shutdown in the U.S., positively offset by stronger performance from the energy vertical. The Asia Pacific region was the strongest performing geographic region in the quarter, with revenue increasing 21% year over year. Growth in the region was fueled by steady demand in data centers, utilities, and healthcare. Revenue from the U.S. and LATAM declined by 20% in the quarter. As Fabien commented, the performance in the U.S. was impacted by challenging market dynamics, including the delays in government projects following the federal government shutdown. Canada delivered a positive offset to performance in North America in the quarter, with revenue increasing by 110% versus the fourth quarter of last year. The EMEA region declined by 24% in the quarter due to a challenging year-ago comparison, which included a large telecom project in 2024 that did not reoccur. The quarter included contributions from the government, airports, corrections, and data center verticals. The geographical breakdown as a percentage of revenue for the fourth quarter of 2025 compared to the prior year quarter is as follows: North America, 44% versus 42%; EMEA, 41% versus 46%; APAC, 15% versus 11%; and all other regions were immaterial for both periods. Fourth quarter gross margin of 61.5% compares to 64.5% in the year-ago quarter. The variation in gross margin is primarily the result of less favorable product mix, in addition to tariff impacts associated with a U.S.-based project, lower revenue, and overhead expense cadence. Our operating expenses were $5.6 million compared to $5.1 million in the prior-year fourth quarter and represented 63.3% of revenue versus 50.2% in the year-ago period. The increase was primarily driven by G&A expense growth of 30% due to the transaction costs associated with the Blickfield acquisition. As a positive offset to the research and development investments, we were awarded a one-time government subsidy for our AI development initiative, validating our innovative technology solutions. Operating loss for the quarter was $159,000 compared to operating income of $1.5 million for the fourth quarter of last year. Operating loss for the quarter was primarily driven by revenue declines and higher G&A costs. The company's EBITDA for the fourth quarter was $35,000 compared to $1.6 million in the fourth quarter of last year. Financial loss was $150,000 in the fourth quarter of this year compared to financial income of $463,000 in the fourth quarter of last year. This is mainly a non-cash accounting effect we regularly report due to adjustments in the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operating entities in the group, in accordance with GAAP. Net loss attributable to Senstar Technologies Ltd. shareholders in the fourth quarter was $33,000, or $0.00 per share, compared to net income of $1.6 million, or $0.07 per share, in the fourth quarter of last year. Added to Senstar Technologies Ltd.'s operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses for the fourth quarter were approximately $925,000 compared to roughly $680,000 in the year-ago period. Turning now to the full year results, revenue for the full year of 2025 was $36.4 million, an increase of 2% compared to $35.8 million in 2024. Growth in the year was driven by the North American region, with strength in the corrections and energy verticals. The U.S. led the revenue growth at 9%, followed by stable single-digit growth in EMEA, offset by a 9% decline in Asia Pacific. The geographical breakdown as a percentage of revenue for 2025 compared to 2024 is as follows: North America, 49% versus 45%; EMEA, 36% versus 36%; APAC, 14% versus 15%; and Latin America, 1% versus 3%. Full year 2025 gross margin was 65.5% compared to 64.1% in 2024. The roughly 150-basis-point improvement in gross margin was largely attributable to a balanced product mix, product redesigns, and efficiency gains in our material purchase process. Our operating expenses were $20.8 million compared to 2024, reflecting the result of investments made in business development, as well as transactional costs associated with the Blickfield acquisition which was announced in December 2025, as well as closing-related costs for a foreign entity. Operating income for 2025 was $3.0 million compared to $3.9 million in 2024. The decline in operating income was related to slower revenue growth and increases in general and administrative costs associated with the Brookfield transaction and the closing of the foreign entity. Financial income was $71,000 in 2025 compared to $731,000 in 2024. Net income attributable to Senstar Technologies Ltd. shareholders in 2025 was $3.2 million, or $0.14 per share, compared to $2.6 million, or $0.11 per share, in 2024. The company's EBITDA for 2025 was $3.7 million compared to $4.6 million in 2024. Added to Senstar Technologies Ltd.'s operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions, and corporate expenses for 2025 were $3.2 million compared to $2.2 million in 2024. Turning now to our balance sheet, cash and cash equivalents and short-term bank deposits as of 12/31/2025 were $22.5 million, or $0.96 per share. This compares to $20.6 million, or $0.88 per share, as of 12/31/2024. The company had zero debt as of 12/31/2025. That concludes my remarks. Operator, we would like to open the call now to questions. Operator: 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 key. Once again, that is star-1 to ask a question at this time. One moment while we poll for questions. The first question comes from an Analyst with Oppenheimer. Please proceed. Analyst: Hi. With regards to the Blickfield acquisition, is there a specific vertical or opportunity you see for their technology? Fabien Haubert: Yes, thanks. Indeed, we are seeing three main paths to growth. First, LiDAR within our current verticals increases the addressable market tremendously. In a lot of cases, when end users do not choose fence sensors or buried solutions, they privilege cable-less or wireless solutions such as thermal cameras, radar, video, and analytics. With 3D LiDAR, we are able to address part of that market where we were not able to compete in the past if the decision from an end user was not to secure the fence mechanically. That is the first addressable market, which we see rising strongly for us because the technology provides unique strengths that can outperform alternative technologies. Second, within our current verticals, LiDAR gives us the possibility to address parts which we did not address before—typically, when you have storage yards, roofs, corridors, or outside zones without a fence. That increases our opportunity set significantly, and we are already developing a pipeline there. Third, in volume monitoring applications—basically on-the-spot monitoring of bulk for petrochemicals, fertilizers, salt, and other materials—LiDAR gives the possibility to perform live measurement on the spot. It is a vertical where Blickfield is already very active, and we are committed to supporting further development of this vertical. Last but not least, traffic applications such as road, crosswalk monitoring, and tunnels—where Blickfield already has a footprint—are very close to our markets and represent a strong path for growth. Those are the three main directions we want to leverage with Blickfield and the LiDAR technology. I hope I have answered your question. Analyst: Yes, you have. And as far as Brookfield is concerned, the charges we saw in the fourth quarter—are you expecting more in the first quarter, or is that mostly behind you? What can we expect? Fabien Haubert: So, I cannot comment on the first quarter. What I can tell you is that the LiDAR sales in the fourth quarter are only Senstar Technologies Ltd. sales because we used to have a technology partnership with Blickfield, and therefore the sales of Blickfield are not part of the Q4 results. We will present later on in Q1 the sales from Senstar Technologies Ltd. of our LiDAR and, of course, all the big velocity. Alicia Kelly: And just to clarify your question there, we incurred costs through 2025 for Blickfield, and we expect that there will be some costs still in future periods, but not substantial. Analyst: Okay, good. And one other question with regards to the projects that were delayed in the United States: have any of those projects broken ground, or are you moving forward, or is that still pending? Fabien Haubert: All of them are moving forward. The ones we identified are still alive and working, and we have good hopes to convert some of them in the quarters to come. I want to be careful because you can never predict against another shutdown or other macro events, but those projects are still active. We are still working on them with the operational entities of the customers, so we did not encounter major losses or cancellations. We still have good hope they will materialize in the quarters to come. Analyst: And I think it was a telecom project in the EMEA area—you are expecting that to hit again in 2026? Fabien Haubert: Absolutely. We expect some portion of it in 2026. It was a multiphase project. The first large phase occurred last year. The further phases were delayed for reasons outside our control, but yes, some of it should recur in the coming quarters. Analyst: And I saw there were some charges with regards to closing of a foreign office. Where was that located? Fabien Haubert: That is related to the relocation of the company which occurred early 2025 in Canada, and we closed the previous entity, which was the legacy of the Magal office. Analyst: Understood. And what is your employee count? How much has that gone up with the Brookfield acquisition? Alicia Kelly: Headcount went up by 28 people with the acquisition, so we are around 160 people with Blickfield. Analyst: Okay. Great. Thank you. Operator: There are no further questions at this time. I would like to turn the call back to Mr. Haubert. Would you like to make your concluding statement? Fabien Haubert: On behalf of Senstar Technologies Ltd. management, I would like to thank our investors for their interest and long-term support of our business. Have a great day. Operator: Thank you, ladies and gentlemen, for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Freeport-McMoRan First Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. David Joint, Vice President, Investor Relations. Please go ahead, sir. David Joint: Good morning, everyone, and welcome to the Freeport conference call. Earlier this morning, FCX reported its first quarter operating and financial results. A copy of today's press release with supplemental schedules and slides are available on our website, fcx.com. Today's conference call is being broadcast live on the internet. Anyone may listen to the call by accessing our website home page and clicking on the webcast link. In addition to analysts and investors, the financial press has been invited to listen to today's call. A replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include non-GAAP measures and forward-looking statements, and actual results may differ materially. Please refer to the cautionary language included in our press release and slides and to the risk factors described in our SEC filings, all of which are available on our website. Also on the call with me today are Richard Adkerson, Chairman of the Board; Kathleen Quirk, President and Chief Executive Officer; Maree Robertson, Executive Vice President and Chief Financial Officer; and other senior members of our management team. Richard will make some opening remarks. Kathleen will review our slide materials as well as Maree then we'll open up the call for questions. Richard? Richard Adkerson: Thank you, David, and welcome, everyone. We are now in the 20th year since Freeport combined with Phelps Dodge to create the modern Freeport by forming a global leader in copper. Our strategy was set after I became CEO in 2003, just as China merges the dominant source of copper demand. Our decision to build our company around copper was a good decision then and has only gotten better over time. We were in Chile last week for the Annual Global Copper Conference, which I first attended in 2004 and learned that the then expected supply response to China's demand would be more muted than expected. This year, there was a strong positive consensus by attendees by copper's future. We are now in a new area of growth about copper, which is broad-based and driven by the growing demand for electricity. Simply, electricity equals copper. Our assets at Freeport are long-lived and have embedded major growth options, which we are advancing for the future. We have exciting growth ahead in the Americas with significant opportunities to improve profitability using modern technology. Grasberg will continue as a major long-term contributor to our growth and profitability with high grades of copper and gold. The extension of our rights to operate beyond 2041, pursuant to our recently signed MOU with the Government of Indonesia is positive for continuity of these benefits from this remarkable world-class history. We just celebrated our 59th year of successfully operating in Indonesia. I personally been engaged since 1988. Our team there is best-in-class in large-scale Block Cave mining. Kathleen will review with you our operating results and outlook, including our plan to restore full production at Grasberg. I personally have complete confidence in our teams addressing the current challenges. I'm personally proud of Freeport's global team, and how our company is so well positioned for the future. Kathleen? Kathleen Quirk: Great. Thank you, Richard, and thank you all for participating on our call today. We will review our first quarter performance and update you all on our initiatives, projects and outlook for the future. It's an active time for our teams across our global business as we work to restore large-scale production at Grasberg safely and sustainably, drive value through operational excellence and new technology initiatives in the U.S. and prepare for a new and exciting phase of organic growth. Starting on Slide 3, we provide the highlights of our first quarter. Our sales of copper, gold and unit costs were better than our forecast and the favorable metal price backdrop allowed us to generate growth in revenues, EBITDA and cash flow compared with last year's first quarter despite our Indonesia operations operating at reduced capacity. The strength and diversity of our portfolio comes through in the results with our U.S. mining operations contributing 2.5x more operating income in the first quarter of this year compared with last year's first quarter, with strong conversion to the bottom line. We were successful in completing the required remediation at Grasberg to commence our phased ramp-up initially in production blocks 2 and 3 in the Grasberg Block Cave. This was an important milestone and involved impressive execution by our team. I'll cover in more detail the challenges encountered with material handling bottlenecks and the initial ramp-up, how are we addressing the issues and the impacts on our ramp-up forecast. As Richard mentioned, a notable highlight of the quarter was the memorandum of understanding reached in February with the Government of Indonesia to extend their operating rights for the life of the resource. This is an important long-term value driver for Freeport, the government and the many stakeholders who benefit from our long-standing operations in Indonesia. We are advancing our future growth plans and submitted an environmental impact statement in March for a major expansion project in Chile. We're progressing several initiatives to scale our innovative leach project and completing our work to be in a position to potentially greenlight our brownfield expansion project at our Bagdad mine in Arizona later this year. We returned approximately $300 million to shareholders in the first quarter including common stock dividends and the purchase of 1.7 million shares of our common stock. Our balance sheet is solid, and we're in a strong position to invest in our future growth while returning cash to shareholders. Moving to Slide 4. We summarize our priorities for 2026. These are the same priorities we set at the start of the year, and each of these represent areas of meaningful value creation. Strong execution of our plans, including achievement of a successful ramp-up at Grasberg, crystallizing the value of our leach opportunity, adopting new technologies to improve performance and investing in profitable growth will enable us to build significant value in our business. We know we will face challenges along the way, as evidenced by the current situation at Grasberg, but I'm confident our highly experienced team will address and successfully overcome any challenge with urgency and determination. Turning to the markets on Slide 5. As a leading global supplier of copper, Freeport benefits from copper's increasingly important and critical role in the global economy. As we look forward, we see rising copper demand associated with massive requirements for the power grid to support new technologies. Copper superior conductivity makes it the metal when it comes to electrification and the world is becoming much more electrified. Copper price have averaged over $5.80 per pound year-to-date and reached an all-time high, exceeding $6 per pound in the first quarter. Demand signals remain strong. Our customers in the U.S. continue to report rising demand associated with AI data centers and related energy infrastructure, which has more than offset weakness in private construction and in the auto sector. Recent reports from China reflect a significant resurgence of demand with significant power grid spending and significant draws on Chinese exchange inventories in recent weeks. As we step back and assess the fundamentals, we expect the market will require additional copper supplies to meet growing demand. At Freeport, we have a valuable geographically diverse portfolio of copper assets and are strategically well situated for the long term with large-scale production facilities, long-life reserves and resources and a portfolio of low-risk brownfield expansion opportunities to serve a growing market. Turning to operations on Slide 6. We summarize the operating highlights by geographic region. Looking at the U.S., production was above the year ago quarter, but a bit lower sequentially compared with the fourth quarter of 2025 and our expectations. Our operating teams continue to focus on our operating disciplines, improving unplanned downtime and achieving sustained maximum output from our existing assets. We're really encouraged by the recent improvement in our mining rate, particularly at Morenci, where we achieved a 19% increase in rates compared with last year's first quarter. Sustaining the higher mining rates will translate into improved copper production over time, and we expect copper production to grow over the course of the year. Our innovative leach initiative continues to show real promise. We are deploying our first internally developed additive and have a line of sight to a new additive which shows significant promise in lab test. We have commenced the pilot test at Morenci to increase the temperature of our stockpiles by applying a heated leaching solution to the stockpiles. We know that higher temperatures will enhance recoveries and our work is focused on finding the most effective engineering and cost solution to achieve this. We remain encouraged with the ability to scale to 300 million to 400 million pounds per annum in the 2026, 2027 time frame, which will unlock our path to 800 million pounds per annum from this initiative. We're continuing to lean heavily into incorporating innovation into our basic mining practices and see great potential for the tools that AI and other tools will offer to enhance operating performance. In South America, the Cerro Verde team did an excellent job navigating the first quarter with severe flooding in the Arequipa region and with challenges with mill efficiencies. We continue to expect stable production levels at Cerro Verde and some growth at El Abra, a project in Chile in partnership with CODELCO over the next couple of years. There's a lot of activity going on at El Abra currently with a leach pad extension and plans to conduct testing in late '26 of heated stockpile injections to enhance leach recoveries. As I mentioned, we filed our environmental impact statement for a major expansion at El Abra in March. This project will transform El Abra from a relatively small producer to a large-scale contributor within the Freeport portfolio. We summarized the highlights on the Grasberg restart, and I'll provide more detail on our progress in the slides ahead. We reached agreement with our insurance providers during the quarter for a $700 million insurance recovery, which was the maximum limit under the policy. We expect to collect the proceeds during the second quarter. In Indonesia, we continue to operate one of our two smelters with available concentrate and the new smelter remains on standby status, with an expected restart later this year. Next several slides, we're going to take you through the Grasberg update, what we've accomplished to date, and where we're moving forward as we go through 2026. There's a summary on Slide 7 of the current status of the Grasberg Block Cave. Over the last several months, we were successful in completing the activities required to restart mining and production blocks 2 and 3, and we commenced mining on a limited basis in March. As a refresher, production blocks 2 and 3 were not directly associated with the external mud rush, which occurred in production block 1C, which is located closer to the surface and beneath the low spot in the former open pit. The location and characteristics of production blocks 2 and 3 do not have the same exposure to an external mud rush as we had in production Block 1C. However, production in production blocks 2 and 3 was temporarily suspended in September 2025 to install concrete plugs to isolate production block 1C panels and ensure no connection to the surface, complete cleanup of material on the extraction and service levels, restore infrastructure on the service level and strengthen our case management plans. This was a huge undertaking and the team did a great job executing this plan. After we completed the projects and regained access to the area, we conducted inspections and sampling of the more than 600 draw points in production blocks 2 and 3 and was able to determine that the material characteristics within the cave changed significantly over the period of inactivity with a larger proportion of wet ore within the cave compared to when we suspended operations in September 2025. This increase in what material was associated with surface water, which percolates through the pave rock within the mine and is removed from the mine through gravity drainage. Under normal conditions, active mining, assist and managing the accumulated water within the cave. We have significant experience in mining wet material, our systems to extract the ore from the draw points rise fully autonomous remote loaders that are capable of safely handling that material. The challenge we are currently addressing is downstream of the extraction level and relates to the material handling systems for loading ore onto our automated trains. Historically, we had a higher ratio of dry material, which allowed us to manage the wet material by blending to a consistency suitable for loading through chutes onto the trains. With the current conditions, we will need to install specialized equipment on the shots to regulate the flow of ore for train loading. We've been testing this equipment over the past few years in connection with our long-range planning in anticipation of potential changes in ore conditions over time. We understand the engineered solution to this issue, but it will take time to make the modifications which limits production in PB 2 and PB 3 to what our existing chute designs can handle. We expect that the majority of these bottlenecks can be addressed by mid-2027. In parallel with addressing the shot infrastructure in PB 2 and 3, we're also continuing to work to prepare for a future start-up of production block 1 south and advancing a series of derisking initiatives on surface drainage and other risk mitigation strategies, including the recent installation of new imaging technology to enhance cave monitoring. Our current forecast reflects our best estimate of the time frame to address the current bottleneck. Still very early in our initial ramp-up and a number of factors could affect rates positively or negatively as we go through the coming months. This is a timing issue with a designed engineer solution, not a significant cost issue and not a change in the ultimate recovery of the resource. We're confident in the ability to restore large sale production safely and efficiently as we go forward. On Slide 8, just for some background, we provide a summary of what we presented in January and an update of our current status. As indicated, the initial restart commenced slightly ahead of our schedule. We were previously targeting production rates in PB 2 and PB 3 to ramp up to 100,000 tonnes per day in the second half of this year. With the current material handling constraints, we now expect to be limited to approximately 60,000 tonnes per day from production blocks 2 and 3 in the second half of 2026, increasing to the 90,000 tonne per day range by mid-2027 as modifications, the ore loading infrastructure are completed over the next several months. As additional information in the reference materials on Page 39 that provides details on the ramp-up. On Slide 9, this is an illustration of the draw point comparison of the current draw points compared to September of 2025. This is a planned view of the GBC extraction level withdraw points in PB 2 and 3 color-coded to show the number of wet and dry draw points prior to suspending mining in September 2025 compared to what we're currently seeing today. As shown in September 2025, 30% of the total 635 active draw points were wet compared with 45% currently, a 50% increase in the wet draw points. For blending purposes, we require a minimum of 1:1 ratio of dry to wet material measured within each panel to meet the requirements of our existing shot design. Currently, there are 10 panels out of a total of 23 compared to only 1 in September, which do not meet the 1:1 dry-to-wet ratio criteria, resulting in a derating of production until the chute modifications are in service. We're continuing to monitor the draw points to determine potential changes and the possibility that conditions could become drier as mining rates continue. However, we believe proceeding with these modifications will provide more robust material handling systems and enhanced flexibility as we go forward over the long term. On Slide 10, we show a diagram to illustrate the mine layout and the planned modifications downstream of the extraction level. As illustrated, mining occurs on the extraction level, and that's not where the issue is. The issue is with the ore sent to the haulage level through ore and chute passes. The bottleneck we are addressing relates to the shots that are used to load the automated trains at the haulage level, and we show photos of the current shot design and the replacement equipment to regulate the flow of what material into the railcars. This is a robust solution. There's additional information on Slide 37 in the reference materials to show you the design of these regulators. Summing this up, we provide on Slide 11 on reports of PTFI's revised 5-year production forecast. We've incorporated adjustments to our ramp-up schedule. And over the 5 years, the revision for the Grasberg district reflects an approximate 9% in reduction for copper and 7% for gold with the largest impacts in 2026 and 2027. Again, this material is not lost and is expected to be recovered over time. As I mentioned, we're in the early stages of the ramp up. There are a number of factors would provide upside to these estimates as well as a number of risks. Again, this is not a resource recovery issue or a significant cost issue to resolve. It's a timing issue, and we will work to optimize the plans as we go forward. Our team is highly experienced, and we're confident in our ability to successfully address the current bottlenecks and restore large-scale production safely and efficiently. Moving to our growth, which is a very exciting feature of report. As I mentioned, we're looking at the fundamental outlook for copper. It's very clear additional copper supplies are required to support energy infrastructure, new technologies and more advanced societies. At Freeport, we benefit from a portfolio of organic growth opportunities, which can be developed from our known resources in jurisdictions where we have established history and experience. Our projects in Indonesia also have the benefit of high gold content that come with copper. Because our projects are brownfield in nature, we benefit from leveraging existing infrastructure, economies of scale, experienced workforces and relationships with key stakeholders to move more quickly with less risk than a greenfield project. We're entering a period of growth in our Americas business with near- and medium-term opportunities to scale our leach initiative and double production at our Bagdad mine in Arizona. We have longer-term growth in the Safford/Lone Star District and an exciting project at El Abra in Chile. We're using innovative approaches with our projects to improve efficiencies, reduce costs and reduce capital intensity and shorten the lead times for our projects. The high potential low-cost innovative leach initiative is a great example of this, and it's likely one of the highest NPV opportunities across the industry. We have projects in the 2026 pipeline to test injection of heated solutions into our stockpiles, which together with additives have potential for significant recovery gains. This year, particularly in the second half, will be an important year as we get results from our heat trials, advance our additive deployment and work to scale next year to 400 million pounds per annum from this initiative and to define our path to 800 million pounds by as soon as 2030. The expansion opportunity at Bagdad is moving toward an investment decision. We're advancing engineering, retesting our capital cost estimates and economic evaluations and working with our vendors to secure pricing on major components. We're continuing to advance our work on tailings infrastructure there to further enhance optionality on the timing of the project. As a reminder, there are no permitting hurdles, and we've done a significant amount of work, planning and early works so that we can complete the project within a 3- to 4-year time frame. Studies are continuing in the Safford/Lone Star District to evaluate the optimal expansion and development options, and we continue to work to capitalize on the large undeveloped resource we have at Safford/Lone Star in an established U.S. mining district. At El Abra, we have a great opportunity with our partner, CODELCO, to develop a large-scale expansion. This is a significant resource with total copper reserves at El Abra approaching the size of the large position we have at Cerro Verde. As Richard mentioned, we were in Chile last week, and the project is being received very positively by our stakeholders. The Chilean government is enthusiastic about the project and is working with us to achieve a timely review of the application. We're also continuing to progress the Kucing Liar project in Indonesia, to sustain a low-cost, long-term production profile in this prolific district. On Slide 13, to wrap up my comments and then Maree will cover the financials, a significant portion of our reserves, resources and future growth are in the United States. Freeport is an important copper -- American copper producer and is by far the largest contributor to the U.S. copper market with an established and successful franchise dating back to the late 1800. We call ourselves America's Copper Champion, and we are aggressively pursuing a series of initiatives to enhance our U.S. business through innovation, automation and investment in expanded facilities. These initiatives are designed to add production at a low incremental cost and improve profitability and resiliency of our valuable U.S. business. In an industry where development lead times can span more than a decade, our U.S. business is strongly positioned with the potential for a 60% increase in copper production over the next several years. Our team is excited about these opportunities, and they represent a significant value driver for all of Freeport. As I mentioned, they were working to improve our cost position in the U.S., and we've got our sights on targeted reductions as we go into 2027 and beyond. While we're currently facing some new challenges with rising energy costs and other consumables, the work we are doing within our control will make our U.S. business more resilient, more profitable and meaningfully more valuable. I'll turn the call over to Maree, who will review our outlook, and then we'll take our questions -- your questions. Thanks. Maree Robertson: Thanks, Kathleen. On Slide 14, we show our 3-year outlook for sales volumes of copper, gold and molybdenum. The outlook incorporates the adjusted ramp-up schedule for Grasberg that Kathleen reviewed earlier, which is the primary change from our prior estimates. As discussed earlier, these changes are timing in nature and will be recovered in the future. We expect growing volumes in 2027 and 2028 as we reach full recovery at Grasberg. We provide quarterly estimates on Page 27 of the reference materials. As ramp-up progresses, our second half volumes are expected to be approximately 30% higher for copper and approximately 50% higher for gold compared with the first half, driving earnings and cash flow in the balance of the year. On Slide 15, we highlight renewed cost pressures we are experiencing since the onset of the conflict with Iran in late February. The price of diesel fuel, which we use to support our whole trucks in the Americas and for a portion of our power plant in Indonesia has been totaled with the most significant impact in Indonesia. To date, it has been more of a cost issue than a sourcing issue, but we continue to monitor the separation carefully. For reference, a sharp rise in diesel prices in March equates to an approximate $500 million cost increase on an annualized basis. We are also monitoring the sulfuric acid situation where prices where prices more than doubled on the spot market. We do not have significant exposure to the spot market, and we are further insulated to the sulfuric acid market volatility through our natural hedge from our smelters. We have incorporated recent diesel prices in our updated forecast and have also incorporated updated assumptions for higher gold and molybdenum prices. With these updates, and the revised production profile, our current outlook for net unit costs is expected to average $1.95 per pound of copper for the year compared with the prior estimate of $1.75 per pound. The primary driver of the change reflects the lower contribution of Grasberg volumes. Putting together our projected volumes and cost estimates, which show modeled results on Slide 16 for EBITDA and cash flow at various copper prices ranging from $5 to $7 copper. Whilst we do not project prices, we modified the range to show sensitivities with upside and downside to the current prices. These are modeled results using the average of 2027 and 2028 with current volume and cost estimates and holding gold flat at $4,500 per ounce and molybdenum flat at $25 per pound. Annual EBITDA would range from approximately $14 billion per annum at $5 copper to $21 billion at $7 copper. With operating cash flows ranging from approximately $10 billion per year at $5 to $16 billion at $7 copper. We saw sensitivities to various commodities on the right. You will note we're highly leveraged to copper prices with each $0.10 per pound change equating to approximately $400 million in annual EBITDA in the 2027, '28 period. We will also benefit from improving gold prices with each $100 per ounce change in price approximating $110 million in annual EBITDA. With our long lead reserves and large-scale production, we are well positioned to generate substantial cash flow to fund future organic growth and cash returns under our performance-based payout framework. Slide 17 shows our current forecast for capital expenditures in 2026 and 2027. Capital expenditures are similar to our prior estimates and are expected to approximate $4.3 billion in 2026 and $4.5 billion in 2027. The discretionary projects are expected to approximate $1.6 billion to $1.7 billion per year in 2026 and 2027. With roughly 50% related to the Kucing Liar development and the LNG project at Grasberg. The balance includes acceleration of tailings and other infrastructure to support Bagdad expansion the Atlantic Copper Circular Project, which is expected to be completed during 2026 and capitalized interest. The discretionary category reflects the capital investments we are making in new projects that under our financial policy, a fund with the 50% of available cash that is not distributed. These projects are value-enhancing initiatives and are detailed on Slide 37 in our reference materials. We continue to carefully manage capital expenditure, and we'll continue to deploy capital strategically to projects with the best return and risk reward profiles. Finally, on Slide 18, we reiterate the financial policy priorities centered on a strong balance sheet, cash returns to shareholders and investments in value-enhancing growth projects. Our balance sheet is solid with investment-grade ratings, strong credit metrics and flexibility within our debt targets to execute on our projects. We have no significant debt maturities through 2026 and have substantial flexibility for funding the 2027 maturities. Since adopting our financial policy in 2021, we have distributed $6 billion to shareholders through dividends and share purchases and have an attractive future long-term portfolio that will enable us to continue to build long-term value shareholders. Our global team is focused on driving value in our business, committed to strong execution of our plans, providing cash to invest in profitable growth and return cash to shareholders. Thank you for your attention. We'll now take your questions. Operator: [Operator Instructions] Our first question will come from the line of Carlos De Alba with Morgan Stanley. Carlos de Alba: So maybe I wanted to explore a little bit on the level of confidence that you have on the new guidance for Grasberg. Obviously, a surprise on the reservations. But as you see -- as you move forward, are there any specific points or areas where you think there might be a higher risk for the potential reductions to production or ramp up that maybe we should be aware of that might realize or not, but you could maybe Kathleen highlight for us what those will be, that will be great. Kathleen Quirk: Yes. Thank you, Carlos. The main thing that we are doing to resolve the issue is to install these regulators into the shoe calories. Right now, we have the capacity to mine the material, but we're limited because of the need to have a certain type of consistency to go through the chutes. And so when we think about what the risk to the ramp-up are at this point, it is a really a construction schedule a delivery schedule from our vendor, who we were already working with. We've got the -- some of the equipment is already on site. It will be installed on a phased basis. and we have over the coming months, additional equipment that will be coming to us so that we can install these -- we call them spilmenators into the -- onto the shots. So really, it's a situation where the bottlenecks will be addressed by the installation of this equipment. And we have equipment on site now. We've got equipment on order, and it's a matter of meeting that execution timetable. I want to go back to this team and what this team accomplishes in terms of the ability to construct things at Grasberg. This is not a lot different than a lot of the things that the team has done in the past. The work that they did to prepare for restart was a really busy schedule, a lot of moving pieces, and the team did an excellent job with the support from our centralized team to execute the plan, and we'll approach this in the very same way. It's got one of the highest net present values in the business right now to get this up and running. And our team is all over it. We have confidence in the ability to meet the plan. Now the risks are that there could be delays in getting the materials. There could be construction delays, but that has been -- we've managed that through this plan that we put forward, and we'll stay on top of it until it's done. Mark Johnson is on the call as well. And Mark, if you want to add any color to what we're doing there, please go ahead. Mark Johnson: Yes, Kathleen. We've had one of these silminators what we -- it was a prototype about a year ago that we call Version 1. What we're installing now is a reengineered version of that, Version 1.5. We've got the first one installed last week, independent of some of this recent realization on the shift in material types. So we're testing that starting this weekend. As you mentioned, we've got a number more at side. Our fabrication is taking place in Indonesia. And the group that's doing it has been very responsive to our needs. We're looking at wrapping up the capacity of that plant in Indonesia. And then also the team is looking at other ways to shorten the construction cycle on the chutes. So I -- what we've taken and what we put into the plan is what we know we can do from the past. And then like you mentioned, we'll be continuing to look for things to do that we could optimize and make that installation just that much more simple and quick. Kathleen Quirk: Carlos, one other thing, and Mark can add to this, but we want to reiterate that this is -- we're in the very early stages of the ramp up. And so the sampling that we did of all of the the draw points is, as of the present time, we have a process where we sample and inspect the draw points on a regular basis. As we continue to mine, it could be that some of this bottleneck gets resolved and our traditional blending systems can accommodate the material. We have not counted on that in this forecast. We've counted on using this more robust system of regulating the flow in the chute, but we could have a situation where the material becomes dryer as material is mined. And Mark, you can add to that if you'd like. Mark Johnson: Yes. It was kind of the unfortunate timing of ramping up just as we were doing the forecast process, really at the beginning of March, I think our forecast based on the knowledge at that time, would have been very similar to the previous estimate. So what we've done, as Kathleen has mentioned, as we started mucking, we had a higher incident of spills occurring. Some of the material that we began mucking shifted to a weather material. So what we've done is implemented what we know today and use that as our basis. What we do know is, as we mark the porosity of the material above will improve. And that's the sort of upside we might have is that as we get a broader footprint, as we begin mining more draw points, more panels that some of these could convert back to where they were. It's a process where we -- as we're mucking, we do a very frequent assessment. So it's a very dynamic process. We already mined each panel, as Kathleen mentioned, remotely. It only takes 1 draw point within a panel to be wet that we do the remote mining. So we were set up to do that from the onset. And now it's just a matter of that ratio within each panel. There's also implications from panels adjacent to a wet panel. The team has also been very innovative on being able to remotely manage other aspects within the panel like rock breakage and hung up panels. And so it's more than just the remote mucking. There's a number of other initiatives that we're pursuing that will increase the availability of the draw points. Carlos de Alba: Maybe a very, very quick follow-up. Can the regulators handle a dryer material if the ratio improves over time? Mark Johnson: Yes. Yes. It's really about being able to shut off the flow if it gets very sloppy, and it's a very innovative design, where the gate and the hydraulic grams, actually, as the material starts to flow it assists in us being able to shut off the flow if we need to. So it's a matter of preventing spills from the -- from happening on our haulage level onto the trains. But it will also handle the dry material. Kathleen Quirk: It's a very flexible, robust system. And as we mentioned, we had planned over the long term to install it, and now we're accelerating that to make the system more flexible and robust to handle any type of material. Operator: Our next question will come from the line of Alex Hacking with Citi. Alexander Hacking: Not to Monday morning quarterback, but you've got a very experienced team there at Grasberg. How is this issue missed in the initial assessment that water would start to build up as mining was halted. And then maybe in layman's terms, like why not add more drainage to the mine? Kathleen Quirk: Mark, why don't you take the last part of that and what we're doing. In terms of the first part of that, Alex, we have monitoring of the water coming in and out of the cave. And so there was nothing that was detected of any significance or any significant concern. It's just a matter of getting access to each of these draw points and to be able to inspect them, and we couldn't do that until we got access in this March time frame. The -- it doesn't take a lot to -- for something to move from dry to wet, and it's just a small amount of moisture. So this isn't like a lot of water or some big overwhelming situation, it's just the nature of what's led or moist versus what's completely dry. But we do have a number of initiatives, and that's what I wanted Mark to cover a number of initiatives that we started after the incident last September to address a more robust drainage system. But the one we have now within the Block Cave in terms of the gravity drainage is very good. The one that we are pursuing is additional drainage from the surface. But Mark, why don't we cover through that, and we've got some information in the supplemental thoughts on it as well. Mark Johnson: Right. Yes. The slide that you're referring to is 41%. But Alex, what we have right now and what we've had in place for years is that we have a pretty comprehensive drainage plan from the surface in the open pit where the pit has not been impacted. You're aware that as we Block Cave, there's a subsiding zone where the rock breaks. And where we have the wet muck coming from is the rainfall that falls onto that broken material. Our drainage system, both for groundwater and for the surface area that's been unimpacted is very robust. It's been in place functioning. But what the wet muck generation comes from the daily rainfall, it falls on to that rock. It works its way down through the cave. And as it gets to a draw point, that draw point turns into somewhat of a funnel where it concentrates some of that flow that's within that broken rock. And as Kathleen mentioned, it's only a couple of percent difference in moisture content that can convert material from a dry material that we can handle easily to a weather material that we need to manage much more significantly. So it's not a matter really of drainage, but what we are doing as a result of the external mud rush, the other incident, obviously, that's put us into the situation in the PB 1 area is that we're looking to be able to drain the water away that collects within the cave, essentially in that shape of the old pit. And so we're drilling into some of that broken rock above PB 1. And we're seeing some initial indications even with the smaller diameter drill holes that we've been able to access some of that water, that's encouraging. We're getting some other drills that will drill those sort of holes much quicker and a bigger diameter. Those are on schedule. They're coming in should be drilling by the end of June. And then we got some other initiatives that are more focused on the PB 1, reopening of taking away that surface water that ponds or pools and any mud like material, any liquefiable material that might gather in the pit bottom. Operator: Our next question will come from the line of Chris LaFemina with Jefferies. Christopher LaFemina: Just a couple of follow-up questions on Grasberg and kind of following up on what Alex just asked. So if we look at the portion of wet draw points before the mud rush ancient, I think you said it was 30% and it's 45% now. So my first question is, what sort of variability is there around that number? In other words, was at 30%, but sometimes 35%, sometimes 25%. What level of confidence do you have in the ratio of dry to wet today. And that's the first question. Second question is on the -- like when did you identify that the -- there were too many wet draw points. I think there was a media report a couple of weeks ago that indicated that Freeport was actually ahead of schedule on the blockade ramp. And that's -- maybe that was an incorrect media report, but I'm wondering if this is something that you just learned very recently and was not an obvious problem just a few weeks ago. Kathleen Quirk: Chris, on the diagram, we show on Slide 9, the number of draw points dry-tow comparison, the important thing to look at here is also the panel. So in September, we had only 1 panel within PB 2 and 3 that didn't meet the ratio. And so we were dealing with that with lending and so that was only one that we were addressing. On now, you've got 10 out of the 23 that don't meet the one-to-one. So the -- that -- what it ends up doing is derating the production of the whole panel because you can only produce the -- at the level of the 1:1 until we get these enhanced material handling systems installed. So that's an important factor in what's going on within each panel. In terms of the variability, Mark can comment further on this. But we wouldn't have had significant variability in the past, but we do have ongoing monitoring that looks to see for our processes to monitor these draw points for planning and management systems. But since we started mining, we have had some draw points that were wet initially in March go to dry and vice versa. So it is a little bit of a dynamic situation right now in the very early days of the ramp-up. As Mark talked about earlier, the timing of all this is we had just really commenced the ramp-up, and so there was new information that we were getting along the way in April as we were going through the forecasting process. Freeport, we did not modify any of our guidance, the actual progress we were making on the ramp-up in terms of -- or the products we're making on the restart was very good. As I mentioned, we got that done ahead of schedule. Some of the media reports that you may be referencing relate to some of the discussions in Indonesia, where there could be government people that are asking questions about the plan or media asking about the plan. And those would have been based on our original plan because we had not formalized our forecast until recently. Again, the recovery and the preparedness to get to the ramp-up was going very, very well, and it's only this new information that has been unfolding in recent weeks at where we had to address the forecast. Again, it's very early days and things can move from here, but we do have a solution. We're going to execute against that solution, and it's a positive long-term solution to giving us flexibility to deal with these sorts of things as we go forward over the long term. Mark Johnson: I might just add, since the start of the Grasberg, we've also had a model that predicts the future of that wet to dry ratio. And all the way through the life of PB 2 and 3, that ratio is generally 2:1 that we have 2 draw points of drive to 1 wet. There'd be some panels that are -- that vary -- the variability is more across the footprint. But broadly, we had a much better ratio that we've been forecasting and using that as part of our mine plans, that's a big part of the reason that we built GBC to be able to be remotely mined from the onset. So we've been working on this for quite some time. It's a bit of a complex model. It's both material characteristics from size and then managing how the water makes its way through the broken rock mass. So our indications were that were much different over the longer term. It didn't indicate the need for the stilminators at this point of the mine. As Kathleen mentioned, we were working on that and saw certain panels that would require that. But what we've looked at now is a much more taking what we have today and just applying that, making sure that the chutes themselves are not the bottleneck. So the current plan is that that will replace all the chutes that will have that additional flexibility. Operator: Our next question will come from the line of Nick Cash with Goldman Sachs. Nicklaus Cash: Just wanted to switch gears a little bit here. You mentioned deploying the first initially developed additive and working on a second additive in North America. How established are the supply chains for each of these? And how quickly can you scale those additives, and how much of the $800 million guide incremental for leaching is a result from these new additives? And then lastly, given the increased deal cost and global supply chain pressures, is there any risk for the $2.50 unit cost targets for North America in '27? Kathleen Quirk: Thank you, Nick. The -- in terms of the additive, the one that we're deploying now, and we started with one stockpile of Morenci and are now deploying it more broadly across the stockpiles at Morenci is readily available. And that is -- we've got a supply chain for it, and it's being applied and the results will continue to evolve as we go through the year, and that's the data that we want to see. In the lab, the additive that we're referring to, we've got two additional additives that we're focused on and maybe more after that. But we call them our next-generation additives. We've seen with these additional additives, performance in the lab that is a multiplier effect of benefit above the one we're using now. So we have been working with potential suppliers on those. It's not as easy to find, and we may have to have it made as the ones that we're using now. But we've been conducting some meetings in recent months with anticipation that we will commercialize one or more of those additives, and that's really showing potential. And to answer your question about the scaling, it's the combination of additives and heat that is going to get us to the 800 million pounds. So we can -- at the current levels, all of the initiatives we're doing on precision leaching, all those things, all the things we're doing on leach everywhere, we've got helicopters that are adding irrigation lines to places that we couldn't access before. All those things are sort of operational work that we're doing, and that will allow us to be in this 250 million pound, 300 million pound range. The rest of it really comes from the additives and heat. And it's not just one by itself because the combination of using an additive on side of heat could give you a 1 plus 1 equals 2.5 or 3. And so that's why this heat work is very important as well to get to our ramp-up rates. We've just started at Morenci. We've got a pilot where we're heating the rafinite that will go is we just really just literally just started this to heat the rafinite to try to raise temperatures within the stockpile. We're doing that on a test basis. We have our idea to put in some modular units of heat that could be applied to all of our stockpiles. Initially, we're using natural gas to heat, but we're very excited about potential to have geothermal heat at Morenci, and we've got promise there. We're actually doing some drilling to define a geothermal resource that would be a low-cost way to heat the stockpiles. So we know that heat works, raising the temperature of the stockpile will add volumes of significance. And that, combined with the additive, we have a path to getting to 800. We've got to solve what's the right additive for different material types. And we've got to solve the engineering of how to best get the temperatures raised in the stockpile. Cory Stevens is on. He and his team are leading this effort, and I'll ask Cory to make any -- and I'll come back to your 250 question, Nick. But Cory, if you want to add any color to what I just said, that would be helpful. Cory Stevens: Yes. Thanks, Kathleen. Yes, so Kathleen said it, we've got a pilot going. We're using that to calibrate or heat models and what we would expect to see at Morenci. And in parallel, we've got a bigger project going where we're going to be tripling the size of that for our El Abra operation that's going to add some volumes there. And additionally, we have a number of other targets where we're looking at a modularized version that can be deployed more readily across the portfolio, particularly in North America. We're pretty excited about where we're headed on that front. Additionally, there's options with chemical heat using pyrite and air. Here in the second quarter, we're going to be starting our -- what we call our perfect pile in New Mexico, and that will have a next-generation design on being able to leverage heat from the natural pyrite that comes with the process there? Kathleen Quirk: Nick, on the 250 question with the changes in consumable costs and energy costs, we're reviewing what all that means, and it's been a volatile situation. But in terms of where we were on that, if you looked at the energy cost, asset costs, all the various consumables in place in recent quarters, together with the addition of these low-cost incremental pounds of getting to our 400 target sometime next year. That would bring us -- so we had a path to get to 250. We now need to look at what the right environment is for things that we don't control like the cost of diesel or other inputs. And so that will cause us to relook at the 250, but the point is, is that with the input costs that we've had in place over the last several quarters and the addition of these very low-cost incremental pounds, we see being able to get our U.S. cost down significantly closer to where we are in South America. So that is still intact. We just need to continue to monitor what impact these commodity input costs will have on our cost structure. But the things that we can control, we're working very hard and have confidence that our unit cost will trend lower, all other things being equal. The sulfuric acid situation, while Maree said, we don't have a lot of spot exposure this year, we'll have to see how that unfolds as we get into next year. And while we're hedged naturally because we have the smelters, the cost of the assets that we buy will be shown in the operating cost for the U.S., and we'll have an offset elsewhere with the smelters that we have where we actually produce and sell assets. So I hope that helps you give you some color around that. Operator: Our next question comes from the line of Bob Brackett with Bernstein Research. Bob Brackett: Staying on the leaching theme. You all have been on a tear in terms of getting patents. I think you've had more patents in the last 3 years, a couple of dozen that you've had in the previous 10, many related to leaching. What's the philosophy of those patents? Are they sort of defensive to make sure you can execute on your inventory on your resource, or could they be potentially offensive where you could be partner and get access to additional resources with your technology? Kathleen Quirk: I'll let Cory add to this, but it's really both. Our focus -- we've got 40 billion pounds-plus of copper in these stockpiles, which have been treated as waste in the past. And so there is a huge value opportunity for us and that's our immediate priority to recover some of that copper that's sitting there in stockpiles, which needs a catalyst to produce it. So that is our first priority. The second is, yes, we could leverage technologies that we develop to potentially partner with others, potentially having synergies in an M&A transaction, et cetera. But it's -- our first priority is to maximize the value of our own work here. The team we have working on this, we have a technology center in Tucson, and the team we have working on it is really, really strong. We've added to the team, recently added some chemists and some other disciplines to the team. So we have a multi-disciplined team, working not only on what's the best additive, but also what's the best way to commercialize and our corporate development team has been actively involved in that as well. So it's -- like I said, it's a very high net present value project and would transform our U.S. business and something that we're making a lot of advances to, and we're going to crack the code as we go forward. Cory Stevens: Yes, Kathleen, you nailed it, really, we're moving forward with this powerful group of innovators and fill in the pipeline. The 42 billion pounds that are within our existing stockpiles don't count the other options that we have within our company for below cut-off grade material that we're currently considering ways today that could be extremely valuable for us in the future as these options materialize, it's a very competitive market. And so we're being very careful to protect our interests as we come up with these innovations. Operator: Our next question comes from the line of Lawson Winder with Bank of America Securities. Lawson Winder: If I could, I'd like to follow up on the theme of industry cost pressures and just get a sense for what you provided on the slides, and maybe this is best addressed by [indiscernible], just in terms of the sensitivity of diesel. So it's interesting. So versus the Q4 slides, it looks like diesel sensitivity has actually increased. Can you maybe just walk through why that would happen, why there'd be a large impact on EBITDA now than there was 3 months ago? Kathleen Quirk: PAll right that Maree reviewed has our sensitivities to copper and all of our input costs, et cetera. And so what we do to calculate the sensitivities is use what's in that forecast for diesel price assumptions and then measure a 10 -- plus or minus 10% change to that. So we have now incorporated a higher cost of diesel in our assumptions than what we had previously, and that's why a 10% change is more than what it was before. Is that the question you were asking? Lawson Winder: Yes, Yes. No, that's exactly right. It just seems like it was a bit nonlinear. So that's it. I guess you're just assuming much higher diesel is a base case at this point? Kathleen Quirk: Right, yes. So we'll have to monitor that. We'll have to monitor it as we go. But in our forecasting process, we typically use the prices in effect around the business been volatile, but the price is in effect at the time of the forecast. So those '27, '28 have higher diesel costs than we would have had 3 months ago. Lawson Winder: Okay. That makes perfect sense. And then just thinking about industry cost pressures. I mean there's -- we heard of explosive costs being higher, grinding media, you mentioned some insulation from sulfuric acid. When you think of some of the other key cost items for your business, are there other places where you feel there's some level of insulation? And then where are some of the other items where there might not be and there could be more exposure there? Kathleen Quirk: It's been very regional, Lawson. So as Maree mentioned, we have we've had a significant rise in diesel costs, but the most significant impact has been in Indonesia and other Asian regions have experienced that inflation more significantly. We haven't seen a lot of things in terms of what we buy, being adjusted at this point. But that will be something that lags, and we'll have to see how long the situation continues and whether it will start to flow through other components of our costs. But some of the things that trade on the spot market, you can see have reacted. But a lot of our consumables are contractually negotiated. So we'll have to just continue to to monitor those. Operator: Our next question comes from the line of Katja Jancic with BMO Capital Markets. Katja Jancic: Recently, we saw there was a change to Section 232 tariffs impacting derivative products. Do you see any impact from that, or do you expect any impact from that? Kathleen Quirk: Not associated with what we sell. So that we have changed a lot of the codes for what gets tariffed. It did not change anything with respect to the refined copper cathodes at this point. And as you know, actually this is -- that is something that the government said they were going to be reviewing potentially by middle of this year. Katja Jancic: And then maybe just quickly, I know you mentioned the support acid, you're hedged, but can you let us know how much of it you actually do purchase in U.S. for your U.S. operations? Kathleen Quirk: It varies, but we do purchase some assets in the U.S. We also have -- of course, we have the smelter, which provides a base load of asset to our U.S. operations. We have actually a sulfur burner where we buy sulfur and convert that to acid at our Safford operation. And so it varies what we buy in terms of the amount of assets [indiscernible]. We internally generate a big portion of what's needed in the U.S. And then, of course, in Spain, where we have a smelter, that's all sold externally. And then in Indonesia, we sell acid, and we'll be selling that Grasberg ramps up, we'll be selling more acid because we'll start to operate both smelters in Indonesia. So we're net long. And we do have -- in South America, we do buy acid. And as we said, we don't have a lot of exposure to the spot market at this point in time. But if this continues, we'll have to look at what it means for 2027. Operator: Our next question comes from the line of Timna Tanners with Wells Fargo. Timna Tanners: Two questions from me. I wanted to follow up on the Grasberg forecast. I know you talked about it being a timing issue, but I just noticed an it's small, but it does look like some of the revisions extend out to 2029. So I just wanted some color there. And then pivoting to Peru, if I could, just would be interested in your thoughts on the upcoming political election given your presence at Cerro Verde. Kathleen Quirk: On the Grasberg, the real impact, the real significant impacts were in '26 and '27. We do have a small impact in '28 and '29, but those are really on the margin, there really wasn't any. We don't -- we're not projecting any sort of issue related to this material handling issue as we get into those periods. That is just the normal forecasting updates and the founding it's pretty close to where it was. Timna Tanners: Got it. Okay. And then your thoughts on Peru, if I could. Kathleen Quirk: Politically, we work with any administration. There's been -- as you know, there have been many presidents in Peru in recent years. And so we're prepared to work with any administration that comes in. And we have a really good relationship with -- which is really important in Peru with the local communities. We know we have to earn that every day, but that's really important at the local levels as well in Peru as we manage our risk there, having that relationship and having the partnership that we have on water that we supply to Arakuipa has been been really positive for Cerro Verde. But in terms of changes in administrations will just continue to work, do the right thing, good corporate citizen in Peru with great benefits to the community. So that's been a real positive for Cerro Verde for many years, and we expect that in the future as well. Richard Adkerson: Yes, let me just add that what Kathleen mentioned about our relationship with Arakuipa is really special and our team down there, deserves a lot of credit for the way that they've built relationships with the community when so many other mining operations down there, face a lot of challenges from the community. So that's -- and we've dealt with a whole wide range of presidents, politics are very complicated, but you can look at our operating record and see how we've operated at Cerro Verde throughout all of that terminal, and I'm confident we'll continue to do so. Operator: Our next question will come from the line of Orest Wowkodaw with Scotiabank. Orest Wowkodaw: A couple for me, please. I noticed the idle cost recovery costs at Grasberg went up to $1.3 billion from $900 million previously, in terms of costs that are being excluded from your reported cash costs. Is that -- I'm just wondering, is that incremental dollars going out, or is that you're just shielding more of that from being included in cash costs? Kathleen Quirk: That's basically the -- because we're not at full capacity in the second half a portion, and it will be -- start being just a declining portion, but a portion of our cost are expensed and don't go through the inventory and cost of sales. So it's really -- it's not an increase in cost. It's really characterization of whether it's included in our unit costs, or how it's treated for accounting purposes. So we're just following the accounting guidance and as we modified the ramp-up schedule since we're not at capacity yet, a portion of our costs are treated as idle and those are expensed right away. So that's really what that is. It's really no change in absolute absolute costs other than the input cost that we have with [indiscernible], et cetera. But in terms of the idle cost methodology, that's consistent. Orest Wowkodaw: Okay. Perfect. And then just coming back to the operating recovery at Grasberg. You've identified the chutes as being a bottleneck here for the more substantial level of wet ore. Are there any other potential bottlenecks ahead as this will get solved that could play into the recovery rates? Kathleen Quirk: This is the big one. As Mark was saying, we -- our plan in terms of mining has been to have the mining capacity and the loading capacity at the distraction level to handle what material. So this is really just a logistical of how to get it loaded onto the trains. So this is really the -- solving this issue will get us where we need to be in terms of the large-scale ramp-up. Orest Wowkodaw: Okay. But the wet versus dry doesn't impact the capacity of the trains. Is that correct? Kathleen Quirk: Right. Operator: Our final question comes from the line of Daniel Major with UBS. Daniel Major: Two quick follow-up questions. Firstly, just looking at Slide 9 of the presentation again. It doesn't look like there's been any significant change in the ratio of wet to dry in PB 1S or in the other sections. Is that the right read, so no change there? Kathleen Quirk: Well, this really was the -- this really was the comparison in PB 2 and PB 3 of wet to dry. So PB 1, we're still doing our work on PB 1 to be in a position to restart PB 1 South by middle of next year. So this chart really just deals with the wet to dry in PB 2 and 3. In terms of the overall the overall contribution of PB 1 and then ultimately, PB 1C, it's relatively small that we have in these forecasts. So our focus -- our initial focus is to get scale from PB 2 and PB 3 and then optimize the situation at PB 1S. And then as Mark said, as we get more of our derisking done with the work we're doing with the drainage at the surface consider reopening PB 1C. But this plan largely particularly in '26, '27, '28 time frame is largely from the PB 2, PB 3 ramp-up. Mark Johnson: I'm sorry, go ahead. . Daniel Major: No, maybe you were answering that. I mean I was just going to say, are you also then installing the similar modifications to the systems in PB 1S to ensure that you can achieve nameplate capacity even if the ratio is higher in that zone as well. Kathleen Quirk: Yes. So that was already planned, that was already part of our plan, is to have these devices in the panels and the chutes and PB 1, 2 calories in PB 1. But go ahead, Mark. Mark Johnson: That was what I was going to add. I was just going to let them know that Daniel know that the chutes in PB 1 were damaged with the external mud rush. So the plan was to replace them with the newer technology. Daniel Major: Okay. And then just a final one. What is the CapEx associated with these modifications? And there's been no change to group CapEx guidance? And if you've deferred CapEx, is there any implications on the mine plan beyond 2030. Kathleen Quirk: These are not terribly expensive equipment that we're installing. We've added something on the order of $60 million to $70 million in CapEx associated with this and had some timing variances within the plan that offset that. So it's not a major cost driver, particularly considering how much copper and gold production you get from having this. So it wasn't a big cost didn't show up as a big cost bearing capital cost payers. Operator: And I will now turn the call over to management for any closing comments. Kathleen Quirk: Well, thank you, everyone, and thanks for taking so much time with us, and we'll continue to report our progress as we go forward and we're available if anybody has any follow-ups. Thank you very much. Richard Adkerson: Thanks a lot, everyone. I can assure you we're going to be transparent and all things that go on with this ramp up. Thanks a lot. Operator: And that concludes our call for today. Thank you all for joining. You may now disconnect.
Operator: Hello, everyone, and welcome to the Southwest Airlines First Quarter 2026 Conference Call. I'm Nick and I will be monitoring today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions] Now Danielle Collins, Managing Director of Investment Relations will begin the discussion. Please go ahead, Danielle. Danielle Collins: Hello, everyone, and welcome to Southwest Airlines First Quarter 2026 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; and Tom Doxey, our Chief Financial Officer. Before we begin, A quick reminder that in today's session, we will be making forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. With that, I'll turn the call over to Bob. Robert Jordan: Thank you, Danielle, and good morning, everyone. We appreciate you joining us today. First quarter 2026 represents an important milestone for Southwest as all our previously announced initiatives are now in place and contributing to our results and what a difference a year makes. That broad set of commercial, operational and cost and efficiency actions represent a fundamental transformation of our business model, and is translating into strong customer demand for our new product, strong financial results and strong margin expansion. The financial tailwind provided by these initiatives is meaningful, as indicated by our results. Our first quarter EPS of $0.45 was in line with our guidance in January and represents a significant year-over-year improvement from a loss of $0.26 per share, or an adjusted loss per share of $0.13, and these results were delivered [indiscernible] backdrop of significantly higher fuel costs, which represented a $0.22 EPS headwind in the quarter further illustrating the underlying momentum that we're seeing across the business. First quarter operating margin of 4.6% was an 8.1 point improvement year-over-year, or 6.6 points on an adjusted basis, a powerful change in how the company generates earnings. We also generated $1.4 billion in operating cash flow in the quarter, an increase of 65% from the first quarter of 2025. Now that the contributions from our initiatives have kicked in, I want to reflect on two potential narratives that have been brought up occasionally regarding Southwest Airlines. The first being, because we don't serve long-haul international markets, and like material exposure to premium segments, we would be unable to generate margins that are in line with carriers that do have those attributes. And second, that our customer base is somehow different and would therefore be unwilling to respond to our product changes, and pay more for segmented products and seat ancillaries. As evidenced by our first quarter results, we are proving those arguments wrong. Southwest has significant fundamental and enduring [indiscernible] the largest domestic network, the most nonstop flights, and a #1 position in nearly half of the 50 largest U.S. airports. Operational excellence that resulted in Southwest being named the Wall Street Journal's Best U.S. Airline of 2025, cost discipline and operational efficiency, and importantly, legendary service and hospitality provided by our incredible people. Those core strengths, coupled with our new product offering, are fundamentally changing the financial margins that we produce. Our transform business model is being stress tested and this unique environment of geopolitical upheaval and much higher fuel prices. Against this challenging backdrop, our first quarter operating margin of 4.6% and our year-over-year unit revenue growth of 11.2% demonstrate the strength of our new model. Moreover, in the second quarter, we expect unit revenue growth between 16.5% and 18.5%, which I expect to be industry-leading by a wide margin. That's all proof that our existing customer base, and the new customers we are attracting, want and are willing to pay for our new products and our product attributes. In other words, they love the Southwest product. While the external environment remains uncertain, we are confident about how we are positioned, a wholesale change to the business model and product offering that is being battle-tested by higher fuel prices and geopolitical tensions, yet is producing top-tier industry financial results. Looking deeper at the results, demand remained strong across geographies, customer segments and both business and leisure. And the customer take rate for our enhanced product offering and seating ancillaries is strong as well. Passenger revenue growth, operating revenue and unit revenue each set first quarter records with March marking our largest operating revenue month in our history. Going forward, we remain squarely focused on continued margin expansion and are taking actions to further improve financial results, including aggressively optimizing our product and revenue initiatives such as the recent increase in bag fees, taking targeted actions to further reduce nonfuel costs, and drive efficiency across the business. And you saw a portion of that come through in our first quarter CASM-X increase of 2.3%, well below our guide of 3.5%. Continuing enhancements to our product offering, such as our new partnership with Starlink. By the end of the year, Starlink will be available on at least 300 aircraft, and roughly 2/3 of our fleet will be equipped with in-seat power, and larger overhead [indiscernible]. We expect these changes, combined with recent product enhancements to continue to drive growth in corporate business travel. We are aggressively managing our network, reducing lower return flying and redeploying that capacity to higher margin opportunities, such as the recently announced suspension of operations at [ Chicago Air and Washington Dulos ], and we had a handful of flights at both airports, which were underperforming. And we entered 2026 with a disciplined capacity plan, and now expect full year capacity growth of approximately 2% at the low end of our prior 2% to 3% range, driven by ongoing schedule optimization and network refinement. Turning to the outlook. There is significant economic and geopolitical uncertainty, and it's not possible to know with confidence all the ways the industry could be inactive. That said, we do know two things. Fuel prices are much higher. And if that is sustained, it will require higher ticket prices to offset that increase in fuel. Given the ongoing macroeconomic uncertainty, updating our full year adjusted EPS guide of $4 would not be productive at this time. Achieving this outcome would require lower fuel prices, and/or stronger revenue performance to offset higher fuel expense. We will continue to monitor conditions closely and provide updates to our guidance as appropriate. For the second quarter, we expect EPS in the range of $0.35 to $0.65 using an average fuel price range of $4.10 to $4.15 based on the forward curve as of April 16. The EPS guide represents significant [ expected ] earnings and margin expansion year-over-year. In closing, while fuel is an external factor, and we were operating in a volatile macro environment, our first quarter results are proof there is strong customer demand for our new products. Our initiatives are working. Our significant core strengths remain and that combination is producing top of industry margins. I want to say how proud I am of our people. The progress we are seeing across the business is the direct result of the work they do every day, delivering for each other, our customers and our shareholders. We are just 18 months removed from announcing our initial transformational initiatives, and I could not be prouder of our teams for the discipline and excellence, which they continue to deliver. And with that, I will turn it over to Andrew to cover revenues and operational performance. Andrew Watterson: Thanks, Bob. The first quarter was an important one for our operations as our teams delivered industry-leading reliability while executing a significant amount of change across the airline. This included the successful implementation of assigned seating and extra legroom on January 27. The with the operation ranking first among our peers, an on-time performance and completion factor on launch day. Q1 RASM was up 11.2% year-over-year, well above our guidance of at least 9.5%, reflecting the contribution from our new product offering, as well as broad [indiscernible] across the network. Operating revenue of $7.2 billion was an all-time record for first quarter. We also announced adjustments to our network. As Bob mentioned, we announced the suspension of operations at [ O'Hare and Dulles ], where we'll be consolidating our operation in Chicago Midway, [ Rigan National ] and Baltimore, and [indiscernible] capacity to high-performing opportunities. At the same time, we are seeing strong performance in markets where we've added capacity, including San Diego, Orlando and Nashville. We will continue to evaluate future network and capacity adjustments that we feel will be accretive to our performance. Separately, we are seeing our initiatives resonate with customers, as demonstrated by several examples. We have seen a meaningful shift in customer purchasing behavior. The mix of customers buying up from our base product increased from approximately 20% at 2025, to roughly 60% in the first quarter of 2026, with ancillary upsell performance also meet expectations. We're also seeing clear traction with business travelers. Managed corporate revenue increased 16% in the first quarter and 25% in March, marking the largest quarter and month in our history. And reinforcing that our enhanced product is resonating with higher yield customers. At the same time, engagement across our [indiscernible] program continues to strengthen. Enrollments increased 37% year-over-year. And the number of customers earning tier status rose 62%, demonstrating both strong acquisition of new customers and deeper loyalty from existing base. We continue to deliver a safe and reliable operation, improve efficiency across the system and support the continued evolution of our product offering. Our people have done an outstanding job navigating a period of significant change. I want to thank them for their continued dedication. With that, I'll turn it over to Tom. Tom Doxey: Thanks, Andrew. We continue to demonstrate strong cost discipline to start the year with first quarter CASM-X up 2.3% year-over-year on a capacity increase of 1.5%, and in spite of a 1.2 point headwind from the removal of 6 seats on our 737-700 fleet to accommodate new extra [indiscernible] seating. Fuel prices increased meaningfully during the quarter. We have forecasted a first quarter price per gallon of $2.40 and ended up at $2.73 per gallon, increasing fuel expense by approximately $164 million. In spite of the dramatic increase in fuel cost and other operational headwinds experienced during the quarter, we hit our EPS guide. We also delivered the highest adjusted net margin of the large U.S. airlines during the first quarter. With our cost discipline, initiative contribution revenue strength and operational excellence, allowing us to deliver the margin expansion that Bob outlined earlier. We ended the quarter with $4.8 billion in liquidity and a leverage ratio of 2.2x. Having a strong investment-grade balance sheet, and high relative margins within the industry is a key strategic advantage for Southwest, especially during times of industry stress, where our strength creates the opportunity for further separation between Southwest and other airlines. During the quarter, we entered into a $500 million secured term loan facility backed by a small portion of previously unencumbered aircraft, which we used to pay down the final portion of our payroll support program loans [indiscernible] would have otherwise moved to a higher interest rate in the second quarter. We also returned capital to shareholders through share repurchases of $1.25 billion and $93 million in dividends. We have $450 million remaining in our current share repurchase authorization. Looking ahead, our focus remains on managing what we can control. Driving efficiency, maintaining disciplined cost management and investing smartly in our product and operations. We expect second quarter CASM-X to increase 3.5% to 4% year-over-year on a capacity increase of 0.5% at the midpoint. Consistent with Bob's comments, based on what we see today, we continue to expect margin expansion and earnings growth in 2026, and will continue to be nimble and opportunistic in the way that we manage the business. And with that, I'll turn it back to Danielle for Q&A. Danielle Collins: Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. To help us manage time efficiently, we ask that you please ask you 1 or 2 questions back to back at the onset. Operator: [Operator Instructions] And the first question will come from Mike Linenberg with Deutsche Bank. Michael Linenberg: My two questions here. Just, Andrew, the upsell out of the bottom bucket from 20% to 60%, do you have a sense of what that average increase in fare is going from that 20% to 60%? And then just my second question to Bob. Just thoughts about potentially competing against the government controlled or a government-owned carrier. I mean, whether it's sound industrial policy or not? So I'll let you roll that one over. Andrew Watterson: Yes. Thanks. It's Andrew. So I'll start with the first one. I'm not going to break down it [indiscernible] product by fair product, but I will say that, obviously, we had an 11.6% yield increase year-over-year. And at least half of that came from people voluntarily decided to pay more by buying up. So we have, kind of, secular yield trends going on, and then we have people voluntarily buying up, which creates the extra yield boost. And so net-net, we're super pleased with it. Robert Jordan: Mike it's Bob, and on the second -- with [ Spirit ]. I mean, it's a tough situation. We've got a lot of people that are affected, but it's a tough industry. I mean, things come around. I've been here 38 years, you have you have wars. You have fuel spikes. You have economic issues, recessions. And you got to be prepared for the long term as a business because the shocks are going to happen. And that's why we've created a very resilient business here at Southwest Airlines to prepare for those things. On competition, we're focused on improving ourselves and competing with the top of the industry. And it's showing in the results. If you look at the first quarter, you got an 8-point margin expansion year-over-year. Our net margin is going to be the best amongst the large U.S. carriers. If you look at the second quarter guide and the spread between our unit revenues and our unit cost is a 14-point expansion. So we're focused on building a resilient business continuing to optimize from the transformation. Our customers love the products, and that is where all of our focus is. Operator: The next question will come from Jamie Baker with JPMorgan. Jamie Baker: A couple for Tom. So the first question has to do with the second quarter RASM guide. I realize you hadn't previously given us the synced guide, nor had your competitors. But there was enough info out there that we all kind of backed in how the second quarter was looking before the start of the war. And that's my question. Since the war start, we've seen several points in second quarter RASM improvement on your competitors, but your second quarter guide seems, kind of, in line with what we were thinking before the war. Maybe we just got lucky, but for the sake of investors on the call, can you tell us how many points of RASM improvement went into this second quarter outlook as fares began to rise? And then second, still considerable consternation [ around your ] traffic liability. It's flat year-on-year. I know there was some language in last night's 10-Q. Maybe the way to clear this up would be -- and I don't know if you have your finger tips, but under the old methodology, what would the ATL have been at the end of the first quarter? I'm asking because squaring a flat ATL out with such strong revenue growth is -- well, it's difficult for me, and we continue to take a lot of questions on it. Andrew Watterson: Jamie, it's Andrew. Tom -- give me the first one, he'll take the second one. The RASM guide is us looking at our current trends, which have accelerated and projecting that forward. I know many airlines were talking about fuel recapture and making assumptions about fuel recapture. I think we're -- that's sort of a dangerous game. We are taking our current trends, which are very strong. We have even stronger yield traction than we did in Q1, once again, with stable volumes. We're taking that and pushing it forward. If there were an acceleration in the environment from today, then there would be upside to that. But [ we'd ] rather just take the current trends and project that forward to get a good [ center cut ] RASM guide. Tom Doxey: Yes. Jamie, on the ATLs, talking about old versus new methodology, we're not going to get into the detail of exactly what the different percentages are and how they allocate between the different buckets. So we've talked about is that what we've moved toward, as we have this new agreement with Chase, is very much industry standard. It's very much where a lot of our peers are in the way that we either bank into ATL loyalty revenue or recognize it in one of the revenue categories. And I think as you look at ATLs just generally, there's nothing unusual to note. You look at the sequential trends, you look how it compares to other carriers. There's nothing unusual to note in what those trends are. Operator: The next question will come from Conor Cunningham with Melius Research. Conor Cunningham: Maybe following up on that response to Jamie's first question. Just -- why is it a dangerous game to assume some sort of fuel recapture throughout the remainder of the year? Is it that you're fearful of demand [indiscernible]? Just -- I think there's a big debate on just how straightforward like recapture is in general. So if you could just talk about that. And then, Tom, the capital allocation [indiscernible] clearly things are changing a fair bit. Your free cash flow profile probably took a step back with the rise in fuel. So just trying to understand the buyback going forward from here, you bought back a lot in the first quarter. Your leverage has gone up a little bit. You've talked about that. But if you could just frame up the changes in how you think about capital allocation? Robert Jordan: Conor, thanks. It's Bob. I'll take the first, and then Tom will take the second. Just on the fair environment generally. Certainly, we've seen a willingness to move fares along. There's been constructive pricing behavior. But at the end of the day, this "percent of fuel recovery", which is really what you would put on top of your trend, it's going to be dictated by market conditions, not by some academic formula, or target of calculated recovery. So based on that, we believe what is most fair is to put current trends in because you cannot predict at what point consumers and demand is going to be -- you're going to begin to see demand destruction based on the pricing environment. So we've run current trends through. If we see upside to that, then that's upside to our guide. And bottom line, we're focused on what we can control. We're taking actions against pricing like [indiscernible] increase. We're taking actions, obviously, along the broader pricing front. We have made some close-in demand shaping reductions to capacity. We already had low capacity in place for the year. So we're taking actions against the things that we can control, aggressive cost discipline, and the fare environment will ultimately play out based on market conditions. Tom Doxey: And Conor on capital allocation, as we mentioned in the prepared remarks, having a strong and efficient investment-grade balance sheet is a key [indiscernible]. You hear others talk about their desire to get there. The fact that we're there gives us the ability, of course, to borrow lower rates. And as we think about how we move forward, and just how we navigate, it's all about staying within guardrails that keep us there. And we've been very consistent about what those guardrails are about liquidity, see where we are relative to that this quarter. And then we've actually floated down on the debt ratio despite of being in, I think, a more challenging environment as the business and the EBITDA generation that has occurred in business has improved, we've actually floated down on that debt ratio. And maybe just as a side note, that ratio is a gross debt-to-EBITDA ratio. And so it's, I think even compared to some of the others out there, a very conservative way to look at it. So as it relates to share buybacks, it's always going to come back to staying within those guardrails. And we don't know exactly what's ahead, but we've seen incremental cash generation from the business, versus where we were before in spite of today's environment, and we'll just follow that and stay within our guardrails. Operator: The next question will come from Catherine O'Brien with Goldman Sachs. Catherine O'Brien: So my first question, really, it's hard to tease apart of the macro from the initiatives, hence the move to EPS guidance. But there were a couple of things you thought could drive upside to your EPS outlook in January, including a step-up in close in extra legroom purchases from corporate travelers and potential market share gains. Can you update us on those efforts specifically, how they've been going versus your initial plan? And then second, a related question and a bit of a follow-up to Mike's. Great to see the big step-up in buy-up in 1Q puts the launch of your new seating products. Can you just break down how much of that is cash sales, loyalty points being redeemed in credit card perks? Andrew Watterson: The [indiscernible] we gave in our prepared remarks, the corporate numbers have responded. You saw that they were back weighted to March. So once the assigned seating and [indiscernible] went in place, we saw an uptick both from current customers, but also new customers. So we're seeing an acceleration of new unique customers in our corporate channels which indicates a kind of desire now to fly Southwest Airlines. And well also within the same existing network of accounts we've seen buy up to the higher fares as corporate policy allows them to buy up. So those numbers we quoted are indicative of the consumers behaving like we anticipated. And as far as the redemptions, I think cash has accelerated more than redemptions on the fare products, which is consistent with what we wanted to do. We went to more variable burn in our earning -- excuse me, on our rep awards last year. And so that tends to do on the best flight to put your redemption mix down, the cash mix up. Operator: The next question will come from Ravi Shanker with Morgan Stanley. Ravi Shanker: So maybe just kind of similar but different on the theme of RASM. To the extent possible, if you looked at your earnings for the year, ex fuel on both cost and revenue. So let's say, you were to use Feb 28 assumptions. Do you think you're still on track for at least [ $4 ] of EPS for the full year. And I think you have pointed to upside to that? And maybe as a follow-up, what innings do you think you're with -- you're in when it comes to monetizing some of these internal initiatives and kind of how much do you have left in the [ tank ]? Robert Jordan: Yes, Ravi, thanks so much. The -- I think the short story is, but for fuel, everything is on track and performing, sort of, at or maybe slightly better than we expected. It's really just a story of fuel. I mean it's a $0.22 headwind in the first quarter. It's a $1 billion headwind in the second quarter or 10 points of margin. So it's very material. But no, yes, the only change to how we were thinking about the full year right now is fuel. And I just did want to address the guide as well. There's been some reporting that we pulled our guide. We did not pull our full year guide. There are scenarios where absolutely we could still hit the $4. It depends on fuel and revenue trends from here. We just felt like it was not productive to introduce a new guide, or a range, given how volatile fuel is day to day to day. On your second question of what inning are you in, in terms of optimizing the current initiatives? I do believe we have a ways to run. Our original forecast, or the plan, would be to get to full run rate because these bake in over time based on the booking curve, to get to run rate here in the third quarter. And then, of course, we have opportunities to optimize fair product buy up, optimize the way we think about seat ancillaries. And then on top of that, we're going to continue to continue to enhance the product. You saw the Starlink announcement, continue to make a push into business who loves the new product. I mean the fact that March revenues on the business side were up 25% is a huge indicator of that. But yes, we're -- our run rate was expected in the third quarter on the initiative performance, and then we have room from there. Operator: The next question will come from Scott Group with Wolfe Research. Scott Group: So I just wanted to follow up on that sort of last answer, Bob. Like your comment that the only change really is fuel and everything else is sort of in line, maybe slightly better. I mean, I guess it feels like everyone else is saying, yes, fuel is a lot higher, but now our revenue assumptions are a lot higher, too, as where the whole industry is sort of working to pass through fuel. Would you not agree with that sort of comment? And then maybe just along those lines with fuel, like there's certainly a sense of, hey, the industry -- this is the first sort of like big fuel spike where you guys aren't hedged and that's, sort of, helping the industry pass through fuel quicker? Like are you approaching fuel pass-through differently than maybe you have in the past? Or maybe do you think you're approaching it differently than the industry? Robert Jordan: Yes. The first question, where would we be but [indiscernible] is all again hypothetical. You're trying to compare what would the industry have done with pricing and fares as compared to what is happening today. With the rise of fuel, no doubt, there is -- it's a more constructive backdrop, I believe, in terms of pricing. So yes, I think it's fair to say that the pricing environment is stronger, and we didn't give you a range. We gave you at least $4. So we did not give you what that upper range would be. But it's a more instructive fair environment, certainly than I would have expected. And then you just look at Southwest performance. We are demonstrating incredible cost discipline. In the first quarter, you had cost come in -- unit costs come in at [ 2.3 ]. And then you had a [ 1.2 ] headwind in that from seat removal. So the cost discipline, which is [indiscernible] It's not timing. It's not odd transactions. It's structural improvements in cost is certainly helping here at Southwest as well. Which is the whole point about the fact that looking at revenue trends, it's going to take -- revenues is going to take fuel, but our $4 is absolutely not off the table. And then on hedging, we've talked about this many times. Hedging had become very expensive. The cost of hedging, because of volatility we were spending about $150 million a year in hedging. So just -- if you look back over a period of time, we just made no sense to hedge. And of course, I mean, you can't predict an extraordinary circumstance like a war. If we all could, you'd hedge and then you wouldn't, and that's -- it's unreasonable to think you could do something like that. I do think the fact that we are all basically unhedged puts the industry in a position where you're going to take -- and we're all going to take actions to deal with the fact that fuel is rising at an extraordinary rate, which again is why you're seeing a constructive pricing environment right now. Operator: The next question will come from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: This might be tricky to -- this might be tricky to announce sequentially here. But just the first was on fleet requirements. How has your plan for retirements or used aircraft sales changed, if at all? And if you could walk us through any cash flow or cash flow 1 and 2 P&L impacts from aircraft sales? And then Bob, my follow-up. Organizationally, Southwest has been very focused on rolling out these initiatives, executing on these initiatives. Are you now in a better place, or more prepared to consider potential consolidation scenarios? Tom Doxey: Duane, I'll take your first one on the fleet side. You've seen the numbers that we've talked about for this year and the [ 60s ] for aircraft coming in new from Boeing. No change there. We're feeling confident about what we're seeing out of Boeing every month. Things seem to just be getting better and better there about their ability to deliver on time. And so the retirements that we have are very much tied to the aircraft that are coming in. You've seen what we've guided around -- both for this year and kind of high-level commentary that we've given for the next several years around capacity. No major changes there. And so the quantity of retirements really will just depend on the timing with which those new aircraft deliver, which again are becoming more and more predictable by the week. Robert Jordan: Duane on your second. The -- organizationally, I think the -- there's been a lot of organizational efficiency that's been put into place here at Southwest at both on the front line and then especially here in sort of the corporate side of the business in the last year. The business is moving at an incredibly agile pace in terms of change. You're seeing that come through in the execution of the transformation and then continuing to add focus on our customer, add attributes at our customer [indiscernible]. So we're moving at a pace that I've just not seen here at Southwest. So our ability to deal with any issue, I think, is better than it was a year or 2 ago, period. We don't comment on what consolidation and what could happen in the industry. There's lots of rumors out there. We're focused on what we can control. There's no value in focusing on rumors. There's no value focusing on fuel because you don't have one thing that you can do about it. But things change and if the -- if some of that were to become real, then obviously, we would take a look and decide what our response to that would be. But we don't comment on those things. Operator: The next question will come from Atul Maheswari with UBS. Atul Maheswari: Based on the full year guide on capacity, it implies that the back half capacity growth, it's going to be closer to 3%. So you're accelerating capacity in the back half at a time when others are cutting. So just some rationale for the implied capacity growth acceleration in the back half in this fuel backdrop [indiscernible] And then as my second question on the cost out performance. I know you mentioned those are structural. But if you could provide some key buckets of the cost outperformance, or the improvement that you're seeing currently, that would be helpful along those lines. If I can add just one quick one is, what's [indiscernible] what should we think about the CASM-X in the back half on the 3% [indiscernible] growth? Robert Jordan: Yes. Atul, it's Bob. I'll take the first, and then Tom will take the second on cost. Our -- we entered the year 2026 with a very disciplined cost plan. Capacity up 2 to 3. We've been modestly trimming that as we move throughout the year. I would call that sort of normal demand shaping where you take a look in their flights that just don't make sense anymore, and you either cut that capacity, or you cut that capacity and then you redeploy. We've also had aggressive with moves like you saw with [indiscernible] and [ Dallas ] to take underperforming markets and deal with those and then move capacity to markets that are performing, the San Diego and Nashville, et cetera, of the network. We've taken our second quarter capacity down, as you saw. We're now expected to grow roughly 0.5 point. And I just would point to the fact that we'll continue that close in demand shaping and capacity activity in the third quarter. We'll do that in the fourth quarter. So I understand your point, but I would not read through -- I wouldn't read that through as the final number. But again, you've heard others talking about cutting capacity. We started there. We started with a well thought out conservative, constructive capacity plan for the year at 2 to 3 points, and that's now become 2. So you're seeing others come back to us, not others go below our capacity plans. Tom Doxey: And Atul, on the cost question. The cost performance that you're seeing, and Bob referenced this a bit earlier. But this is structural, this is representing great work that's happening across a lot of the teams, not relating to timing or transactions or other things. And as you think about some of the bigger buckets that are there, for us, the people expense represents just shy of half of our cost structure. And so we need to make sure that as we're operating that we're doing that in an efficient way. You've heard us talk a lot about how important it is that we continue to run a really high-quality operation. It is a cost-efficient thing to be running as good an operation as we are now. And so we look to be as efficient as we can be out there. Some of the other big buckets that we have, technology for one, we have come a long way. Lauren and her team are just phenomenal in the tool that they built. But we did have a bit of catch-up that we were doing, and that gives us the ability to kind of back up a bit, while still maintaining the strong trajectory in technology transformation. So you're seeing some savings there. And then maybe the third and final bucket I'll raise is just on the, kind of, maintenance and fleet side of things. As you're going through a replacement of older, less efficient aircraft and replacing those with brand new, more efficient 737 MAXs, you just want to make sure that you're doing that as far as component maintenance and other things. You're doing that in the most efficient way that you can. I think we are one of the best in the world at doing that type of optimization work. And you're seeing that showing up in the number quarter after quarter after quarter as we do that. Operator: The next question will come from Savi Syth with Raymond James. Savanthi Syth: Maybe, I think Duane, just to follow up on Duane's question there. Just curious what the aircraft sales benefits were in 1Q and expected in 2Q in the P&L, in terms of understanding what the core cost is? And maybe for the second question, just to follow up on that. Just how are you thinking about aircraft sales going forward? Because it feels like as you catch up to this kind of delayed MAX delivery that we will see this kind of continue for a few years yet. So just kind of curious your thoughts there. Tom Doxey: Yes. Thanks, Savi. We had 5 aircraft sales that we did. There were three 737-700s. There were two 737-800s that we sold. So those 5 aircraft. And about a $30 million or $40 million book impact there. So not super material to the cost numbers that you saw. So everything you're seeing in the cost numbers is around the structural changes that we're making in the business. Operator: The next question will come from John Godyn with the Citigroup. John Godyn: Bob, I wanted to follow up on the topic of consolidation. And it's not about rumors, news or anything like that. I mean you were pivotal and central to the [indiscernible] deal many years ago. I feel like there must be learnings from that. There must be kind of a philosophy on when consolidation, or being involved in it matters? And adds value, when it doesn't? I think [indiscernible] just more historical context and plugging into the company's philosophy today rather than any commentary on what's going out there right now? Robert Jordan: Yes, John, thanks for the question. And it's pretty basic to my mind. Again, as you sort of go back and reflect on [ AirTran ], it -- and yes, it was involved in that deal heavily. It's, number one, [indiscernible]. In other words, you have the pieces they get put together have to result in synergies. They have to result in goodness in terms of geographies served. You have to be compatible enough thinking about things like aircraft holders. So at the end of the day, if it doesn't paper out financially and other -- it doesn't make sense to pursue. Second, you've got to have a chance to pass [indiscernible] and get it approved. If it's -- no matter how good it might look if you have too much overlap as an example and your odds of approval it's too risky. And no matter what you think, it's not something that you can pursue. And we've always been pro competition, pro-consumer here at Southwest. So the combo has to be something that's good for your customers. It's got to -- in particular, add geographies, add to the network, potentially add products, but serve them in a better way. And that's how we thought about [ AirTran ]. It met all of those. The geographic combination made sense. The synergies were there, the cultures were similar. And at the end of the day, that was a great thing for Southwest Airlines. It can't be simply because, hey, it's good time to do something, or the rest of the industry is doing something. It has to make sense fundamentally. Operator: The next question will come from Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: Just curious on -- just within the outlook for 2Q RASM, or just even kind of broadly over the balance of the year, do you anticipate load factors getting back up into the 80% range? And it's just one concern we hear a lot from investors, like is longer than the 70% range. There's like that risk that there's maybe -- or a concern that there's share loss in some of the more competitive markets? Andrew Watterson: Yes, I'll take that. So if you look at our Q1 RASM and you kind of put back to Q1 of 2019, you see our RASM on a [indiscernible] basis has outperformed the carriers to report so far, the big 3 in particular. And so obviously, that's the metric that matters. But the year-over-year, year over 6 years, you drive RASM. Bob mentioned we [indiscernible], and I got employee questions about, hey, Andrew, the flights are always full. Well full flight does not mean a profitable fight. And so one of the most [indiscernible] things you can do in the airline business is chase market share or chase volume. You have to go after RASM and our RASM is performing with us on a year-over-year basis, [indiscernible] year-over-year basis, [indiscernible] 7-year basis. It is working for us. And so we'll continue to focus on that. And that [indiscernible] going up, so be it. And in our calculations, we look at the incremental cost to carry as well as [indiscernible] we get as we price and we accept them reject demand every day. So for us, it's working, we'll continue to push RASM as hard as we can, and we're seeing extraordinary good yield protraction right now, and that's that drives -- that's a vehicle for high RASM, we will pursue it. Operator: The next question will come from Brandon Oglenski with Barclays. Brandon Oglenski: I mean, maybe if I can just follow up on that because there seems to be like this fickle market view that a high-teens RASM guide is somehow indicative that Southwest is incrementally losing share. And I know we've kind of beat around the bush on this, but I don't know, Bob or Andrew, do you want to comment on that? And then maybe incrementally for the second part of my question, how dynamic have you gotten to pricing these incremental products that you just haven't had before? Is there more upside to come on figuring out what people's value they put on these products is? Andrew Watterson: Sure, I'll start. I mean you're growing slower, as Bob mentioned. So therefore, your share will drop, and that should be fine. You look at the number of people on board your aircraft, once again, footing back to preendemic, the number of the people in the aircraft is flat to up. The aircraft have gotten bigger. So our aircraft size is 160. The big 3, I think, is about 120, 130. So it's a much bigger aircraft size. Other airlines with big aircraft also see this challenge. So I don't think it's anything to do about inherently [indiscernible] to Southwest Airlines. You see all the metrics we talk about is we have always been attractive. We got incrementally attractive with these new products. And we were monetizing that mostly on the back of yield in a high-fuel environment, that is the path to prosperity is giving it on the back of yield. Robert Jordan: And I just want to add a little perspective here because now the narrative is, yes, [ 17.5% ] guided RASM is not enough. And then even though load factor is up somehow, we must be losing share, and there's -- our customers love these new products, and there's incredible demand. But if you just go back a bit here over the last 18 months, the narratives about Southwest from the naysayers, I think they're becoming increasingly desperate a bit here. First, it was Southwest won't change. And then it became, well, Southwest can't execute the changes that they've talked about. And then it was, well, they got them done but their customers aren't going to want to buy the new products. Now there's some wonky argument about accounting and ATL and then we're losing share. And if you just step back, ignore all that junk and look at the results, terrific product demand. Best net margin of the large U.S. carriers, a 17.5% unit revenue growth in the second quarter, which is off the charts. Business revenue up 25% in March. The transformation is working. Customers love the product, and it is transforming our financial results. And I just would say, too, you've got to always examine the motives of those that are pushing [indiscernible], especially one that's increasingly irrational. Operator: The next question will come from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe just related to all the fuel comments and capacity comments, Bob. I could see why you're frustrated at the same time [ to ]. I guess at what fuel price do you make further changes to capacity? And as a follow-up to that. How do we think about when fuel prices and how fuel prices impact your aircraft sales or deliveries? And how you think about changing them for how long they stay at these elevated levels? Robert Jordan: Yes. I'll -- maybe Tom on the second one. The -- I'll take the first one. It's really hypothetical because fuel has been around -- I mean really day-to-day, you're seeing 8%, 10% moves day-to-day. We are -- again, and you're not in control of exactly how fast and how much you can raise fares. There's market dynamics at play. But there is a lot of constructive fair movement. We're seeing that. And as clearly revenues and therefore, fares are underneath the increase in fuel. So we've not caught the increase in fuel by any stretch of imagination, which is why you're continuing to see fares move in the industry. So I can't predict exactly where fuel is going. And so therefore, I can't predict exactly where [indiscernible] and fares are going. Which is why I indicate we're just using the forward curve. We'll continue to be dynamic. We'll continue to react. We came in again to the year with a very disciplined capacity plan and we'll continue to be aggressive in redeploying capacity to better performing markets. And then, yes, it really -- if fuel really moves up from here, obviously, we would take further actions. But I think trying to -- trying to indicate what those might be is just speculation at this point. Just so that we'll be aggressive though. Tom Doxey: And then the follow-on question on aircraft, having such a large fleet of mostly unencumbered owned airplanes gives us tons of flexibility. So that will really just be an output of how and where we're looking to grow, and to what levels and the flexibility is there to retire or retain to adjust to whatever the environment might be. Operator: The next question will come from Dan McKenzie with Seaport Global. Daniel McKenzie: So my question is similar to a prior one trying to get at M&A philosophically. And I guess my question really is, how [indiscernible] is the investment-grade rating? And is that something you'd ever be willing to put at risk temporarily if it de-checked all the boxes that you talked about, Bob? And then Secondly, I guess, Andrew, Southwest is doing so much on merchandising. And just going back to that question about how much room is left in the tank. The revenue upsell at the time of sale seems pretty compelling, pretty -- communicated pretty well. But I'm curious how big the upsell opportunity is after the sale, what you're doing here? And what percent of revenue that could ultimately be? Tom Doxey: So Dan, I'll take the first one, and this goes to comments I made earlier. The investment-grade rating for us is a differentiator. There are only 3 airlines in the world that have an investment-grade rating. And so as we look at the activities that we do, just know that, along with the guardrails that I referenced earlier are a filter that we use to evaluate different opportunities or different decisions that we make within the business. Andrew Watterson: And on your second question, I think when we originally gave some of our values before for initiatives that you kind [indiscernible] extra legroom. We talked about how we expected the kind of that to improve as we kind of bake it in from this year into next year. So obviously, there is still upside to come from it. The time of sale, we are seeing very good traction as we indicated by our in our prepared remarks. But we're also still continuing to optimize that. We're happy with it. The stand-alone seats. Some of that comes at sale, but there is a very kind of sharp inside the week before departure booking curve there, and we have dynamic pricing tools that we have deployed to help us that, and we expect a benefit there, all those in the same vein that we expect to improve from this year into next. And there's also other opportunities that Bob talked about that we're looking at to make taking into the next level, including getting some more share shift on this. So overall, as Bob said, it's working better than we expected. There is implied room to come in our business case, and we think there's room on top of that for upside. Operator: The next question will come from Chris Wetherbee with Wells Fargo. Christian Wetherbee: I just want to try to make sure I understand this. I [indiscernible] ask this question that's been asked a bunch of time, but I'm just curious. Since March 1, how many fare increases have you put through? Just putting initiatives aside, I guess, how many have you participated in the industry just to give a sense of kind of how that's played out? Andrew Watterson: I count 5 broad industry-wide fare moves and another one underway today. Christian Wetherbee: Have you participated in all of them? Andrew Watterson: Those all stuck and which means all care has participated. Operator: The next question will come from David Vernon with Bernstein. David Vernon: So I guess I should say, yes. So if you look about the Rapid Rewards information that's in the earnings release, they were talking about enrollments up 37% [indiscernible] Is there any -- is there any color you can give us around how the card program is performing as far as total spend or sign-ups for the card? Just trying to figure out like how the card program is performing during this period? Andrew Watterson: I would say that we saw improvement with the rollout in the mid last year of the new card. Our remuneration was up 8% approximately year-over-year, which is, I think, just shy of the other airlines, and we don't yet have a high fee credit card which is a source of much of the gains across the card industry. And so we're really encouraged that without that key aspect, we're at 8%, and we expect that to accelerate if we can offer that kind of card. Operator: The next question will come from Chris Stathoulopoulos with SIG. Christopher Stathoulopoulos: Okay. I'll keep it to one call. So -- one question. On demand elasticity destruction, although I prefer the former, I guess, term there. If you could contextualize the part of your network that is perhaps more resilient than others. So whether it's some inherent pricing power due to network architecture or otherwise, as we consider what is likely going to be, I guess, some weakening in certain parts of this K-shape recovery, however you want to describe it. But parts of your network that you believe for whatever reason, are more resilient, or have some inherent pricing power around them? Andrew Watterson: This is Andrew. We are seeing extraordinarily strong fares and strong demand across the entire network across all customer segments across different travel types. The only place seen weakness are the mix in [indiscernible] and Hawaii because of weather and political activities. And even those have seen a sequential improvement in the last couple of weeks. So it is -- when we say broad-based, we very much mean broad-based. Robert Jordan: And the other thing I would add, just with the fundamental change in the financial performance of the business and the fundamental change in our margins, whatever is happening in the customer response. So at some point, you do begin to see some pushback on fare increases, which, again, as Andrew said, there's absolutely no sign of that obviously, with higher margins now, top of the industry margins and that performance allows us to look at the business and markets in a different way because they're performing. So markets flipping from a performer to an underperformer is very different when you're near breakeven than when you're producing top of the industry margins. Danielle Collins: Thank you for that, Bob. We'll have time for one last question. Operator: And the next question will come from Michael Goldie with BMO Capital Markets. Michael Goldie: Going back to costs for maintenance expense, is the performance that we're seeing driven by delivery of new aircraft and then divesting of older equipment, or is anything else changing that's driving that maintenance performance? And then just a follow-up on headcount. We've seen head count per ASM climb quite a bit since 2019. I get that part of that is investing in network resiliency. Are we at the right levels? Or are you going to grow into these resources over time? Tom Doxey: Thanks, Michael. So on the maintenance side, there's several buckets that are there. What you referenced, which is the ability to be efficient in the way that you are retiring a fleet type, that's certainly part of it. And I think we've consistently quarter-to-quarter-to-quarter, got more and more efficient in the way that we're doing that, especially as it relates to the 737-700, the smaller, less fuel-efficient aircraft as we're bringing the new MAXs into the fleet. So that is definitely a contributor. And we have many, many years ahead of that continuing to occur for us as we continue that transition with hundreds of airplanes, new airplanes on order. Apart from that, though, there is efficiency around the way that we're managing our supply chain and other elements of the program that are also contributing to that maintenance expense being as efficient as it has been. And then to your second question on headcount. So much of the head count expense that we have is variable. And so yes, we do look at head count in and of itself as it relates to the front line, but it's really more about having the right number of people so that you have the right folks in the right places so that you're not having to have more premium pay and other things that would result from not having kind of an efficient set up across our operations. And then on the indirect side for headcount, you've heard us talk about the fact that we, year-to-year, are keeping head count [indiscernible] flat, which as we go through attrition and other things, you'd probably see the head count come down just a bit to be able to enable the dollars to stay flat year-to-year-to-year. Danielle Collins: That wraps up today's call. We appreciate everyone for joining us. Operator: The conference has concluded. Thank you all for attending. We'll meet again here next quarter.
Operator: Good day, and welcome to the Snap-on Incorporated 2026 First Quarter Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on the touch-tone phone. Please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sara Verbsky, Vice President, Investor Relations. Please go ahead. Sara Verbsky: Thank you, Betsy, and good morning, everyone. We appreciate you joining us today as we review Snap-on Incorporated’s first quarter results, which are detailed in our press release issued earlier this morning. We have on the call Nick Pinchuk, Snap-on Incorporated’s Chief Executive Officer, and Aldo Pagliari, Snap-on Incorporated’s Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance; Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we will take your questions. As usual, we provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the web viewer as well as on our website snapon.com under the Investors section. The slides will be archived on our website along with the transcript of today's call. Any statements made during this call relative to management's expectations, estimates, or beliefs, or that otherwise discuss management's or the company's outlook, plans, or projections are forward-looking statements and may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in our forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I would now like to turn the call over to Nick Pinchuk. Nick? Nick Pinchuk: Thanks, Sara. Good morning, everybody. Wow. What a quarter. You know, there are a number of different storylines threaded through our last three months. But I believe if you step back and you look at the whole, you can see several important facts. First is that this has been a period of considerable uncertainty, but the resilience of our markets and the strength of our operations have restarted a momentum, registering strong sales. It is also quite clear that our team continued to invest in expanding and preserving our strength, in our line of new products, in our continuing brand position, and in new technologies for more powerfully wielding our proprietary databases. We believe, and many people believe, that the combination of technology and proprietary databases are among the great powers in business today. And through the blizzard, with uncertainty and tariffs, opposing currencies, rising material costs—all the elements of a storm—our gross margins have resisted the impacts and overall have remained at a strong level. So today, I will review with you the highlights of our quarter. I will give you my perspective on our results, on the markets, and our progress. And after that, as usual, Aldo will give you a more detailed review of the financials. For us, when you look at the quarter and what it means, we proceed with confidence. Confidence in our markets, in our products, in our brands, and of course, confidence in the knowledge and energy of our experienced and capable team. And as such, we are encouraged by our first quarter results. We believe they reaffirm that this confidence is well placed even in the most difficult of times. And you can see it in the numbers. Overall sales in the quarter were $1.2072 billion, up 5.8% from last year as reported, including a 3.4% organic increase, a new first quarter record, and our second-highest quarterly sales ever. OpCo operating income, or OI, for the quarter of $250.8 million was up compared to the $243.1 million recorded in 2025. And the OpCo operating margin was 20.8%, 50 basis points below last year, but still strong, despite the 40 basis points of unfavorable foreign currency and the impacts of higher investment. For Financial Services, operating earnings of $68 million in the quarter were lower by $2.3 million, or 3.3%. Our overall EPS was $4.69. This was up $0.18 from 2025, and the results show broad gain, overcoming the uncertainty and demonstrating our resilience. Now let us turn to the market. We continue to believe that the vehicle repair environment remains robust—extremely favorable—requiring a continued stream of new tools and information systems for confronting the rising complexities of the modern vehicle. It is clearly an unmistakable trend. Repair shops—dealerships and independents—they see it every day. They will tell you repairs are tougher and more complicated. And we love it. The ongoing strength of the market is confirmed by its key metrics. Car park continues to age—the average age now at 12.8 years—naturally requiring more extensive maintenance and overhauls. And that is seen clearly if you look at household spending on vehicle repairs; it is up high single digits in the quarter. But it is more than vehicles. It is also seen in the world of the shops and the techs. The hours worked are up, and the tech wages are rising. Garages are on and the need for more skilled techs continues to increase. We believe all these data points say that vehicle repair is stronger than ever, and the prospects just keep getting better. That said, the uncertainty is still high across the American grassroots. Tech confidence remains tepid—reticence toward long-term purchases—but they are bullish on shorter payback solutions that make work easier, faster, safer, and help them beat the clock and move on to the next vehicle. Now, Snap-on Incorporated speaks with its franchisees and techs all the time. And my recent conversations with individuals in our van network coast to coast say that green shoots are popping up. Even with our tool storage units—they were up this quarter. I will say that again: tool storage was up. And as I spoke to the franchisees, they expressed their excitement about where they are positioned, and they are enthusiastic about their future. As I said, they see great opportunity. Having said that, it still seems that with each day, there is more bad news for breakfast. I mean, the hits just keep on coming—risking and otherwise—uncertainty. Having said that, though, we like where we are standing: rooted in the resilient vehicle repair market, continuously connected with the tech, observing the work, launching great new products, and having the capacity to manufacture them right here in America. And in this environment, we are seeing what we think might be an early thaw. Now let us shift to the other half of the automotive segment. This is where Repair Systems & Information, or RS&I, resides, servicing shop owners and managers. The activity in the sector remains consistent, although it does at times reflect variations based on new product timing or OEM campaigns. Our shop owners and manufacturers see the trends. They know vehicle complexity is rising, and that it drives the need for more sophisticated systems, equipment, and tech assists to manage those changes. As I just said, the drumbeat can be influenced by the lumpy nature of the OEM project sector. But the owners and managers keep saying they need more techs, the garages are busy, the repair difficulty is increasing, and they need more help in keeping pace. I can tell you Snap-on Incorporated is up to that. That is why RS&I continues investing in modern equipment and diagnostics that navigate procedures on vehicles new and old with precision and with speed. Now, we do have a strong lineup in undercar and collision equipment in RS&I. But particularly powerful are our diagnostics and information systems and proprietary databases. We continue investing in that advantage, fortifying our positions by applying new technologies like large language models and natural language translators—capabilities that enable us to expand our datasets more quickly and wield the resulting systems more powerfully. The progress of our systems that search billions of data points, matching the unique vehicle profile and current systems to just the right fits—and it all happens in seconds. A great example is our newly launched StreamLab feature that streamlines the process for confronting job estimates—part of Mitchell 1. Estimates are a particularly thorny and time-consuming challenge for any shop. But our new system for Mitchell 1 makes it much easier. We are going to hear a lot about that later as we go forward. So that is vehicle repair—robust for both individual techs and for garage owners and managers. And we believe we have a decisive advantage in both arenas. We expedite repairs, we improve productivity, we keep vehicles moving, and we help techs and the shop make much more money. We believe it is a great place to be. Now let us go to the critical industries. This is where our Commercial & Industrial Group, or C&I, operates, rolling the Snap-on Incorporated brand out of the garage, into harsh environments where the penalty for failure is high, the workers demanding, and the need for precision, repeatability, and reliability are high—all conditions that warrant a Snap-on Incorporated-level product. C&I covers a wide range of applications, from the latest space missions to expanding the power grid to extracting natural resources to helping build data centers. This is where we excel with customer connection and innovation—observing the work and turning those insights into individual products or custom kits, matching the tools to the specific task. It is a business rooted in the essential, both domestically and internationally. And with that, critical industries offer an ongoing and robust opportunity. And as such, we continue to invest in those possibilities—capacity and building our understanding of the work—and it is paying off. The industrial business—our critical industries operation—showed considerable strength in the quarter, growing high single digits with particularly great and broad strides in aviation, heavy duty, and natural resources. That is our market—vehicle repair—performant not just in this interval, but driven by continuing secular trends of aging and complexity. And despite the uncertain environment, those secular trends keep it moving. The metrics say being a tech is a great place to be. And Snap-on Incorporated is keeping up, pivoting to match the current tech preferences with great products. The shop owners and managers recognize that upgrading is table stakes to cash in on the robust vehicle repair demand that they are seeing. And Snap-on Incorporated has the equipment, the data, the systems to put them right on target. And we are reaching beyond the garage, taking full advantage. The industrialist quarter says it so. The critical industries are a bellwether. The essential is expanding, bringing with it more demand for precision and customization. It is all music to our ears. And one fast overall perspective on our results: how are we? Fast overall perspective is that our results demonstrated once again the power of the Snap-on Incorporated Value Creation Processes—Safety, Quality, Customer Connection, Innovation, and Rapid Continuous Improvement—developing innovation solutions born out of insight and observations from standing right in the workplace. And those insights this quarter, combined with our dedication to RCI, enabled us to resist the turbulence of the day. You can see it in the numbers. It is an important and ongoing strength. Well, that is a macro overview. Now let us turn to the segments. In the C&I Group, sales were $381.6 million, representing an increase of $37.1 million, or 10.8%. That includes $11.9 million in favorable foreign currency and an organic gain of 7.1%—gains across all the business units, but led by the Industrial Division with custom toolkits for critical industries and the constant demand for precision torque product. As I said, Industrial had a great quarter—high single-digit growth—that was without a significant rise in the military. Gains in almost every other sector, with aviation up strong double digits. Boom shackalacka. It was a great quarter. From an earnings perspective, C&I operating income of $54.9 million was up 3.2%, and the operating margin was 14.4%, down 110 basis points. The quarter included 50 basis points of headwind from currency and the impacts from tariffs and rising material costs, which are particularly focused in C&I. Again, the quarter for the Power Tools divisions improved year over year, driven by new products and first-to-market innovation. Our Murphy, North Carolina, plant released two new 14.4-volt 3/8-inch cordless ratchets that extend what I think everybody says is our already powerful ratchet lineup. The additions focus on making tasks faster: break it loose, press the trigger, and zip the fastener off. Spinning at 550 RPM, which doubles the output of our standard unit. Our new ratchets make quick work of applications with numerous bolts—great for dealing with timing covers, oil pans, engine rebuild—and many more applications. Garages use them all the time now. We launched two new versions: first, the CTR887 long neck for reaching deep into the engine compartment, and then the compact CTR881 designed specifically for navigating tight spaces, enabling access to the workpiece without removing adjacent components, expediting the repair and saving a lot of time. Remember, the techs feel the need for speed, and our two new ratchets bring just that. We also expanded on the sensational launch last quarter of our own nano access portfolio. Again, we wielded customer connection, observing that there was trouble navigating crowded engine bays and penetrating the vast webs of sensors and wires hidden behind the dash on modern cars. So we designed the quarter-inch-drive CTNN22040 straight power driver with a narrow 90-degree head. I mean, this baby is small, and it goes everywhere, and makes the difficult easy. And it is loaded with features unique to the nano—a variable-speed trigger, easy forward and reverse selectors, and 600 fasteners on a single charge, all while operating at a lightning-for-small-power-tools 300 RPM. The techs love the fast payback solution, and it was another record-setting piece. C&I—a quarter with strong momentum in domestic markets. Sales up 10.8%, 7.1% organically, led by critical industries, extending the Snap-on Incorporated brand out of the garage, propelled with strength in cordless power tools and precision torque. Let us go on to the Tools. Tools first-quarter sales were $406 million, up organically 3.4%—higher sales in both the U.S. and international networks. The operating income of $105 million was up 13.6%, and the operating margin in the quarter was 21.6%, up 160 basis points. Notably, the gross margin in the period also rose 140 basis points, reaching 47.7%, overcoming the impact of tariffs and rising material costs, prospering in a day in which cost is a question. During the quarter, we maintained our pivot, wielding our customer connection, observing the work and using the insights to develop new products that align with the customers’ preference for short-payback items—items that also make the tedious and the complex easy. I think we have done that. That was demonstrated by two new products forged in our Milwaukee plant. First, the glow plug socket. Diesel glow plugs are essential for preheating cylinders to the optimal temperature that supports ignition, but replacing these common components is not simple. For example, on the 2006 to 2016 models of the popular GM Duramax engine, accessing these components is really cumbersome. And quite frequently, glow plugs are seized from exposure to harsh environments. It takes considerable power to break them loose, especially in tight quarters. Standard tools will not reach without removing blocking parts. And both of those conditions—the seizing and the tightness of the compartments—make a routine job complicated. So our team went to work developing the new IPSTML12, a quarter-inch-drive, 12-millimeter swivel socket. It is 52% longer than our regular, and its swivel joint goes to 30 degrees—features that combine to reach the workpiece with general ease. And the new unit is also designed with our Flank Drive geometry—that feature directs the force to the flats of the fastener and away from the corners, maximizing the torque, bringing the needed power while preventing rounding, efficiently completing the repair without damaging the components because of the power you had to apply. Another example of customer connection released in the back half of the year is a new socket configuration that matches up with our great nano access cordless products. Developing a power tool small enough to fit in your pocket was a great idea; we took it a little further. We designed an entirely new set of sockets to make the overall combination even smaller. It is called the 119NTMLE. It is a 19-piece, quarter-inch tool set, consisting of 10 metric and 7 imperial-sized sockets that are 22% shorter and 8% narrower than the standard offering. And each item is secured in a foam pallet for good storage of these products. The techs value the accessibility and love the new sets—really amplifying the success of our nano product. Now, tool storage in the quarter generated some momentum, backed by the ongoing development of fast payback storage alternatives, new items like our KRSC46—that is a roll cart unveiled last summer. Built in our Algona, Iowa, plant, it is a one-piece, fully welded body setup, which includes six drawers, each with a 120-pound load capacity—pretty high—and with an 11-inch-deep flip-top compartment ideal for storing power tools. And an important thing for a cart—because technicians want to match them up with the boxes they have already purchased—it is available in multiple paint and trim colors, and it is capable of matching any full-size box. So the unit provides ample space for techs looking to expand, but it has been designed to enable functionality without taking the leap into long-term payments. And that combination worked. And in the quarter, also hot were accessories such as lockers, side cabinets, and work centers—options that increase storage space for existing boxes, all at a lower entry point than a new roll cab. Speaking of full-size roll cabs, we did release in the quarter a commemorative box celebrating our nation’s 250th anniversary entitled “A Tribute to America.” The 84-inch EPIQ is a beauty. It is gloss black case with white drawers and red trim, and the 12-inch power drawer. And at the top left corner, it has a blue panel overlay with 50 laser-cut stars. The red, white, and blue setup conjures the view of the American flag when you step back from it. And the work center door displays symbolic images synonymous with U.S. history: the Statue of Liberty, Mount Rushmore, the iconic image of the Marines raising a flag on Iwo Jima, and the first moon landing. Each model has a serialized medallion, numbered 1 to 1776. It overcame the big-ticket reticence in the core, becoming a highly coveted box—epitomizing both the Snap-on Incorporated U.S. presence and the birth of our great nation. You know, some products are too exciting to pass up, even in the trough. That is the Tools pivoting to match the technicians’ current needs and preferences, linking manufacturing solutions right here in the U.S. that improve efficiency by making the tasks easier. Now on to RS&I. Sales in the quarter were $485.3 million, up 2%, including $9.1 million of favorable currency effects. Organic sales were up only slightly to last year, but it was still enough to be the highest-ever sales quarter for the group. The volume reflects increases in our diagnostics and repair information products to independent repair shop owners and managers, offset by lower sales to OEM dealerships. In short, the EQS product business hit a flat spot. Operating earnings for the quarter were $119.5 million, representing a decrease of $2.6 million, or 2.1%, versus 2025 levels. The operating income margin of 24.6% included 60 basis points of unfavorable currency and compared to the 25.7% recorded last year. The gross margins were 46%, up 30 basis points, despite the unfavorable currency effects and the impact of tariffs and higher material costs. So the lower OI margin reflected primarily the unfavorable currency and our investments fortifying our proprietary databases by enhancing them with large language activities—investments that we strongly believe will strengthen our advantages going forward. We know the complexity of today will only grow, and we will continue investing in software and equipment empowering shop owners and management with the resources required to confront that trend and to make more money. Case in point, air conditioning systems have evolved. Now they are not just for climate control, but they support overall vehicle performance and EV battery maintenance. As an example, our PolarTech A/C recyclers roll out of our facilities in Conway, Arkansas. During the quarter, RS&I released the new ProSeries PolarTech—one machine for both popular refrigerant types, R-134a and R-1234yf. The Pro models are also loaded with features for managing a wide variety of vehicles: a large filter allowing for extended runtime, nitrogen leak testing for faster diagnostics, a two-stage vacuum necessary for supporting systems on small Civics to large Suburbans, and a 12-inch touchscreen for easy navigation even with gloves. The units have automatic functionality—techs can tackle another job while the recycling goes on—and a bright status light or an audible signal notifies the user when intervention is required. It makes recycling particularly more efficient. The onboard database is terrific. It identifies the VIN and presets the unit with OEM vehicle specifications, preventing the time often wasted manually looking up the stats. Our new ProSeries is a great example for helping shop owners and managers navigate the complexity of new cars—hook it up, enter the VIN, the machine takes over—improving both productivity and error-proofing the process. You know, we are confident in the strength of RS&I. We keep investing to expand its position by making work easier with great products and with proprietary information. That is Snap-on Incorporated’s first quarter. Corporation’s overall sales $1.2072 billion—the highest first quarter ever. Organic sales up 3.4%. OpCo operating income up, and gross margins holding firm. The C&I Group’s organic sales up 7.1%, the critical industries recording a bountiful quarter. Tools Group organic sales up 3.4%, gross margins up 140 basis points, and operating margin up 160 basis points. RS&I organic sales up slightly—still the highest ever. Gross margins up 30 basis points. Investments across the group to fortify our advantages in product and brand and in people. And the corporate EPS, $4.69—up again over 2025. We had strong results that overcame the headwinds—C&I extending the brand out of the garage, Tools Group successfully pivoting to customer preferences, and RS&I leveraging our proprietary offering to solve the complex. It was an encouraging quarter. Now I will turn the call over to Aldo. Aldo Pagliari: Thanks, Nick. Our consolidated operating results for the first quarter are summarized on Slide 6. Net sales of $1.2072 billion in the quarter represented an increase of 5.8% from 2025 levels, reflecting a 3.4% organic sales gain and $26.9 million of favorable foreign currency translation. Sales in our Commercial & Industrial segment, or C&I Group, increased year over year, led by strong performances with critical industry customers and robust sales by our specialty torque operation. In our automotive repair markets, sales gains were achieved through our franchise van channel, while activity with repair shop owners and managers was essentially flat. From a geographic perspective, consolidated sales were up across all regions. Consolidated gross margin of 50.4% compared to 50.7% in the first quarter last year. The decline of 30 basis points primarily reflected 40 basis points of unfavorable foreign currency effects. In addition, the benefit of increased volume and savings from the company's RCI initiatives were largely offset by higher tariffs and other material costs. As you may recall, many of the incremental tariffs did not go into effect until 2025, and as such, first quarter last year did not include those additional costs. That being said, Snap-on Incorporated is relatively advantaged in the current tariff environment by principally manufacturing in the markets where it sells; however, our costs can be somewhat impacted by trade policies. Operating expenses as a percentage of net sales of 29.6% compared to 29.4% in 2025, primarily due to increased personnel costs and expanded technology investment, partially offset by the favorable effects of sales volume. Our technology investments include further strengthening of our core infrastructure, as well as broadening the use of large language models across key business functions to improve productivity. Operating earnings before Financial Services of $250.8 million in the quarter compared to $243.1 million last year. As a percentage of net sales, operating margin before Financial Services of 20.8%, including 40 basis points of unfavorable foreign currency effects, compared to 21.3% reported in 2025. Financial Services revenue of $101.1 million in the first quarter compared to $102.1 million last year, while operating earnings of $68 million compared to $70.3 million in 2025. Consolidated operating earnings of $318.8 million compared to $313.4 million last year. As a percentage of revenues, the operating earnings margin of 24.4% included 40 basis points of unfavorable foreign currency effects, compared to 25.2% in 2025. Our first-quarter effective income tax rate was 22% in 2026, and 22.2% last year. Net earnings of $247 million, or $4.69 per diluted share, compared to $240.5 million, or $4.51 per diluted share, in 2025. Now let us turn to our segment results for the quarter. Aldo Pagliari: Starting with the C&I Group on Slide 7, sales of $381.6 million rose $37.1 million compared to 2025 levels, reflecting a 7.1% organic sales gain and $11.9 million of favorable foreign currency translation. The organic increase includes gains in each of the segment's operations, including a high single-digit improvement with customers in critical industries, and a rise in the specialty torque business. The strong demand in critical industries includes higher sales in the quarter to customers in U.S. and international aviation, heavy duty, and natural resources. Shipments serving military applications, however, were essentially flat year over year, but reflected an improving trend from activity in 2025. Additionally, our European-based hand tools business also contributed to sales growth in the period. Gross margin of 40.3% compared to 42.6% in 2025. This decline is primarily due to higher tariffs and material costs, and 50 basis points of unfavorable foreign currency effects, partially offset by benefits from the increased sales volume. Operating expenses as a percentage of sales of 25.9% in the quarter improved 120 basis points from last year, primarily reflecting the higher sales volume. Operating earnings for the C&I Group of $54.9 million compared to $53.2 million in 2025, and the operating margin of 14.4%, including 50 basis points of unfavorable currency, compared to 15.5% last year. Aldo Pagliari: Turning now to Slide 8. Sales in the Snap-on Incorporated Tools Group of $480 million compared to $462.9 million last year, reflecting a 3.4% organic sales gain and $7.2 million of favorable foreign currency translation. The organic rise is due to low single-digit gains both in the U.S. and in the segment's international operations. During the quarter, while we had some success with featured tool storage products, we believe our ongoing pivot to shorter payback items continued to temper the persistent uncertainty of technician customers in the current environment. Having said that, we were pleased to see the positive uptake of tool storage products during the period. Gross margin improved 140 basis points to 47.7% in the quarter, from 46.3% last year, mostly due to increased sales and savings from the segment's RCI initiatives, partially offset by higher material and other costs. Operating expenses as a percentage of sales of 26.1% compared to 26.3% in 2025. Operating earnings for the Snap-on Incorporated Tools Group of $105 million compared to $92.4 million in 2025. The operating margin of 21.6% improved 160 basis points from last year. Aldo Pagliari: Turning to the RS&I Group shown on Slide 9. Sales of $485.3 million compared to $475.9 million a year ago, primarily reflecting $9.1 million of favorable foreign currency translation. On an organic basis, a low single-digit increase in sales of diagnostic and repair information products to independent repair shop owners was offset by decreased activity with OEM dealerships and managers. This decline primarily reflected lower sales associated with OEM programs in North America, which more than offset higher revenues with OEMs in Europe. In addition, sales of undercar equipment in the quarter were essentially the same as last year. Gross margin of 46% compared to 45.7% last year, primarily due to the favorable business mix and savings from RCI, partially offset by higher tariffs and material costs. Operating expenses as a percentage of sales of 21.4% compared to 20% in 2025. This increase is largely due to 60 basis points of unfavorable foreign currency effects, higher personnel costs, and expanded technology investment, including those in support of the segment's growing software-based businesses. Operating earnings of $119.5 million compared to $122.1 million last year. The operating margin of 24.6%, including 60 basis points of unfavorable currency effects, compared to 25.7% reported in 2025. Aldo Pagliari: Now turning to Slide 10. Revenue from Financial Services of $101.1 million decreased $1 million from last year, primarily due to lower interest income resulting from a year-over-year decrease in the size of the average portfolio in the period. Financial Services expenses of $33.1 million increased from $31.8 million in 2025. However, provisions for bad debts improved by $300 thousand from those recorded in the first quarter of last year. As a result, Financial Services operating earnings of $68 million decreased $2.3 million from last year's levels. In the first quarter, the average yield on finance receivables was 17.6% in both 2026 and 2025, while the average yield on contract receivables was 9.1% in each year. Loan originations of $264.6 million in the first quarter represented a decrease of $4.1 million, or 1%, from 2025 levels. Aldo Pagliari: Moving to Slide 11. Our quarter-end balance sheet includes approximately $2.5 billion of gross financing receivables, with $2.1 billion from our U.S. operation. For extended credit, or finance receivables, the U.S. 60-day-plus delinquency rate of 1.9% is down 10 basis points from 2025. Additionally, the rate is down 20 basis points from last quarter, reflecting the typical seasonal decrease between the fourth and first quarters. Trailing 12-month net losses for the overall extended credit portfolio of $72.9 million represented 3.75% of outstandings at quarter-end. We believe that these portfolio performance metrics remain relatively balanced, considering the current environment. Aldo Pagliari: Now turning to Slide 12. Cash provided by operating activities of $168.7 million in the quarter represented 145% of net earnings and compared to $298.5 million last year. An improvement of $70.2 million, or 23.5%, from comparable 2025 levels largely reflects decreases in working investment versus increases last year, and higher year-over-year net earnings. Net cash used by investing activities of $28.6 million mostly reflected capital expenditures of $21.2 million and $5.1 million for acquisition of a former independent Car-O-Liner collision distributor in Australia. Net cash used by financing activities of $211.1 million included cash dividends of $126.8 million and the repurchase of 267 thousand shares of common stock for $99.9 million under our existing share repurchase program. As of quarter-end, we had remaining availability to repurchase up to an additional $234.1 million of common stock under our existing authorizations. Aldo Pagliari: Turning to Slide 13. Trade and other accounts receivable of $890.7 million represented an increase of $9.3 million from 2025 year-end levels due to the higher sales volumes. Days sales outstanding were 67 days in both periods. Inventories decreased by $4.7 million from 2025 year-end, primarily due to $5.6 million of foreign currency translation. On a trailing 12-month basis, inventory turns of 2.4 were the same in both periods. Our quarter-end cash position of $1.7533 billion compared to $1.6245 billion at the end of 2025. In addition to our existing cash and expected cash flow from operations, we have more than $900 million available under our credit facility. There were no amounts borrowed or outstanding under the credit facilities during the quarter, nor was any commercial paper issued or outstanding in the period. With respect to our outstanding debt, notes payable and current maturities of long-term debt increased by $300 million, reflecting the reclassification of our March 2027 unsecured 3.25% notes to current status. That concludes my remarks on our first quarter performance. I will now review a few outlook items for the remainder of 2026. With respect to corporate costs, we currently believe that expenses will approximate $28 million each quarter. As a reminder, in 2025, earnings per share included a $0.31 nonrecurring one-time benefit from the RS&I Group legal settlement. We expect that capital expenditures for the year will approximate $100 million, and we currently anticipate that our full-year 2026 effective income tax rate will be in a range of 22% to 23%. I will now turn the call back to Nick for his closing thoughts. Nick? Nick Pinchuk: Well, thanks, Aldo. Our markets are resilient and strong. And it is a strength not dependent on the ups and downs of the economic cycle. They are rather driven by the solid secular trends of aging, rising complexity, expanding criticality. And these are, of course, turbulent times. The hits just keep on coming—continuing tech uncertainty, unfavorable currency diluting our margins, the impacts of inflation, and the fluctuation in government policies. They all serve to cloud the horizon and weigh on consumers. We see some green shoots—in our Tools Group and our overall sales gains, and in our nascent increases in tool storage. We do see encouraging signs, and we believe our future is quite positive. And as such, we continue to expand our investments in what we believe are for Snap-on Incorporated corridors of decisive advantage. You can see the numbers turn across the face of the quarter—progress along our runways for growth and for improvement. We are enhancing our franchise network, and we are extending further into critical industries—growing substantially even while military is flat. And we are wielding our Snap-on Incorporated Value Creation Processes with effect—launching great new products in customer connection and innovation. And we are effectively bringing RCI to bear on the major challenges of the day, keeping gross margins strong against the winds. And we love to say it all. C&I sales up 10.8% as reported, 7.1% organically, with the critical industries leading the way with high single-digit growth. The Tools Group, back to positivity with increases of 5% as reported, 3.4% organically. Gross margins strong at 47.7%, up 140 basis points. OI margins 21.6%, up 160 basis points. And RS&I volume up slightly in the quarter, but still enough to record the highest sales ever in the period. RS&I gross margin of 46%—up 30 basis points against 60 basis points of unfavorable currency effects. OI margins are still robust at 24.6%, but down 110 basis points from last year, reflecting currency and what we believe are powerful investments. In the overall corporation, sales up 5.8% as reported, 3.4% organically—making it the highest first quarter ever and the second highest of all our quarters. Gross margin is 50.4%—strong against the wind. OI margins, 20.8%—also strong, but down 50 basis points, with 40 basis points of unfavorable currency effects, and reflecting the decisive investments. And the EPS, $4.60—up again. This period was a demonstration of the resilience of our markets, the power of our model, and the skills of our team—making progress in the blizzard and still investing in our future. Looking forward, we proceed with confidence. And we are confident and convinced regarding a positive future. We are confident because we know the special nature of our markets—driven by powerful secular trends. We know the strength of our advantages in products—Snap-on Incorporated really does make critical work easier. And we know our advantages in brand—Snap-on Incorporated stands alone. The Snap-on Incorporated name really is the singular sign of the pride and dignity working men and women take in their professions. We are confident because we know our advantages in our people. Our team is committed, capable, battle-tested. Our team just does not aim to succeed. Snap-on Incorporated expects to succeed. As such, we believe that propelled by these advantages, Snap-on Incorporated will continue to move forward positively throughout 2026 and well beyond. Now, before I turn the call over to the operator, I will speak directly to our franchisees and associates. I know many of you are listening or will be hearing this later. Our progress in the period—strong sales and holding firm against the challenge of the day—has been a result of your efforts. Your performance in the quarter—you have my congratulations. For the energy and capability you bring to the enterprise every day—you have my admiration. And for enlisting your future, your dedication, and your confidence in our team—you have my thanks. Now I will turn the call over to the operator. Operator? Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble our roster. The first question today comes from Bret Jordan with Jefferies. Please go ahead. Bret Jordan: Hey, good morning, guys. In the prepared remarks on C&I, you talked about heavy duty specifically within the stronger categories. Do you think you are seeing a cyclical trend there—that after a long softness in the heavy-duty market, there is some improvement? Or is this a product or short-term factor? Nick Pinchuk: I would not say we saw so much softness in heavy duty, Bret. I cannot say there is not some macro trend, but we believe it is because we are understanding the work around heavy duty more every day, and this leads to more effective, complex, and customized solutions, which people are signing up for. We think when we do this, yes, we are following the markets, but we are also capturing some share in our business. Bret Jordan: And I guess also in the prepared remarks, you talked about restarted momentum, then you talked about green shoots a couple of times. Could you talk about maybe the cadence of the quarter? Obviously, the last month had some pretty significant geopolitical events going on. But for the underlying trend, are you seeing that the volumes in the garages are picking up—that that is driving this green shoot? Nick Pinchuk: I think a couple of things. It is hard for us—a month is not really significant progress. And so when we look at the quarter, we can make no conclusions about the effect of the war on where the world is going. But I will tell you this: the green shoots were associated principally with tool storage and the sales of those items. And I just had recent conversations with the franchisees. They sounded pretty optimistic to me. They were talking proudly about the Epic box with the red, white, and blue—“I was able to get two of them,” “I got one of them.” They seemed pretty positive. And I can tell you franchisees do not hold back when they talk to me. I get a lot of complaints, and these conversations were pretty positive. So I put that together with the nascent tool storage increase and our total sales and say that is a green shoot. But it is one quarter. We do not give guidance, and you never really know. But it is better than a poke in the eye with a sharp stick—what we got. Operator: The next question comes from Scott Stember with Roth. Please go ahead. Scott Stember: Good morning, and thanks for taking my questions. Nick, can you talk about how some of the other subcategories in Tools did—whether it is hand tools, power tools, diagnostics? Nick Pinchuk: Sure. Look, Tools was up. Power tools was up. Diagnostics was tepid. In fact, it was challenged this period, but had some difficult comparisons last year. So that is the way it went. Pretty much most things were up, except diagnostics was a little weak in this period. Scott Stember: And as far as sell-in to the van channel versus sell-off of the channel, any meaningful differences? Nick Pinchuk: No. I do not think one quarter is meaningful in this kind of thing, but it is in the same zip code as the growth—up 3.4%. For example, the 3.4% total was also what happened in the United States, and the sales off the van were in that same ballpark. It is never exactly the same, but over time it kind of rolls off. We felt pretty good about the sell-off the van this quarter. Scott Stember: Just last question on tariffs. I know that you guys have done a great job of being relatively insulated. But with some of the recent changes that we saw, is there going to be any change to that narrative? And to the extent that you have had some payments that you have made, are you looking to pursue some rebates with the exclusions going away? Nick Pinchuk: Tariffs these days are a blizzard. They changed the 232 rules, and they added 122—it is like numerical salad. We do not think tariffs are going to change very much actually going forward—not planning or expecting some changes. Now in terms of refund, Aldo has been rehearsing his answer for a while here. Aldo, go ahead. Aldo Pagliari: Well, actually, I have only been rehearsing since April 20. They opened a portal for people to apply for refunds. Our view is—first, I want to emphasize—tariffs are not as significant to Snap-on Incorporated as they might be to many other companies out there. But our strategy is to protect the fact that we do not want anything to expire. If you do not file for rebate through the portal, you run the risk that things go past what they call the liquidation date, and then you can never challenge it—even if one wanted to. So that is our strategy right now. We are not depending on it; we are protecting our rights so they do not expire unchallenged. Nick Pinchuk: I would just add—we are not depending on anything out of this. I am not sure what is going to happen. It is unsure what will happen with tariff refunds and when they will be paid, how it will all work. For us, we are just making sure we keep ourselves in the game and not depend on anything. Scott Stember: Got it. That is all I have. Thank you. Operator: The next question comes from Luke Junk with Baird. Please go ahead. Luke Junk: Good morning, Nick. Maybe to kick it off here—there has been a lot of chatter about the level of tax rebates this year in the U.S. Just curious if you saw any impact from that in the Tools Group or maybe the Finance company and, if so, any links to that? Nick Pinchuk: It is hard to say. On the finance company—you did point out—originations were kind of flattish, and the losses did creep up a little bit. But the 60-day delinquencies are better both sequentially and year over year—that is a pretty good thing. What the result of that is is not clear, but our guys were talking about improvement in that area before we thought tax returns were in play. When I go through the garages, unlike the standard story about people at the grassroots, most of these people do not let this money burn a hole in their pocket. They tend to say—I am putting it in a bank, or I am going to pay off some debt. So maybe that could have worked at paying off the debt; I am not so sure. None of the franchisees I talked to mentioned it. I did not prompt them, and maybe if I had, they would have said it is great for us. I do not think we are seeing it as a big factor, but that is hard to say. Luke Junk: Got it. Switching gears to C&I, could you remind us on the military exposure within critical industries specifically? I know you mentioned seeing a lot of growth there right now, but just in terms of past experience and the impact that tends to be a little lagged when military activity picks up. Nick Pinchuk: The C&I business is a pretty good business—it is well over $100 million in a quarter. The military is one of six different segments and towards the top of that list. Lately, the military has been down—last year, military was down double digits. We got a little bit back in the fourth quarter, and this year it stayed flat, so it has improved some. We expect the military to improve going forward. History says that when conflicts like this are over, refurbishment becomes important. They restock and reverse, so we usually get good business out of that. On top of which, I think the nation is saying, given the environment, we have to stock up a little bit more on military. So we expect that to expand. What I loved about the quarter was, the military did not help us and, boy, some of those other areas—like aviation—were gangbusters. And it is pretty profitable. Industrial had a terrific quarter. The industrial business seems pretty good to us. It keeps expanding, and it is mostly because we keep understanding the work better in each of those places. That is our principal value-creating mechanism—to understand the work and create products that are irresistible to customers, whether customized or not. As you understand the work better, you get a bigger product line. That is what we are doing. It seems to be working. Luke Junk: Got it. I will leave it there. Thank you. Operator: The next question comes from Christopher Glynn with Oppenheimer. Please go ahead. Christopher Glynn: Thanks. Hello, everyone. Just wanted to keep going on the C&I themes you just talked about, Nick, because the comments you just made kind of reinforce some of the stuff in your prepared remarks. The C&I growth historically has been pretty intermittent, rather than hitting a growth cycle and a consolidation cycle. So I am wondering if you are suggesting something culturally and in the bones has gotten better about the work—kind of like, you know, some companies really hit stride with new tools out of the pandemic. Nick Pinchuk: I think you are right about that. We have seen it happen a couple of times. We were turning along in critical industries, and then we expanded capacity here at Snap-on Incorporated. We added a whole building that allowed us to build more customized kits and expand on that, and it shot up. Then it hit a little bit of a pause when the military started sputtering, and then it is coming back. Behind all this is the idea that I really do believe we are gaining share because our products are getting better. It is hard to talk about any one product because most of them are kits, but in those kits, configuring them such that they meet the problem—if you have a particular jet aircraft you want to deal with in terms of maintenance or manufacturing—we will put you right on target. We have some of those. I am not saying we are immune to cycles, because it certainly has proven not to be, but what has elevated the game is capacity. Christopher Glynn: Have you instituted new organizational layers or structures or account realignments? Nick Pinchuk: Capacity. We are learning how to wield the capacity better. We have added people in the field; we have learned more about the work. Also, we have created a capacity situation where we can deliver quicker and more effectively. Those kinds of things have combined to give us some acceleration. What happens is you add something, then you learn how to do better and better with it. When you start something up, it helps you, and then you realize what you have and work on it. It is the essence of RCI. What you are seeing there is in the bones of Snap-on Incorporated Value Creation—figuring out more improvement—and secondly, having a better product. I believe that is the situation. Christopher Glynn: And then my other one, just on SOFCO originations. It sounds like storage might be turning a corner and you have a pretty good comparison backdrop for a while there. Diagnostics was off in the quarter a little bit, but not at the RS&I level. Even Tools had a couple of really nice diagnostic quarters in the middle of last year. Seems like maybe the ingredients are in place for originations to start to grow, and the commemorative unit in particular sounds really cool and is hitting some stride at a high price point. Do you feel like that is the direction? Nick Pinchuk: The originations were flat in the quarter, roughly. I use the word green shoots particularly because I am not sure what the increase in tool storage means. I do think it shows some thaw. We could not get arrested before with big boxes. Now you saw the Tribute to America, and I have the feeling that it sold well not only because it is a compelling offering, but also because maybe the hurdles were a little bit lower. We will see how that plays out. I think it is favorable—it shows tool storage is not completely dead. In fact, it was a nice strong quarter for tool storage. Operator: The next question comes from Gary Prestopino with Barrington Research. Please go ahead. Gary Prestopino: Good morning, all. Sorry if I missed this, but could you maybe just talk about how much tool storage was up year over year? Nick Pinchuk: I do not want to get nailed to a cross on exact numbers, but tool storage was up more than the average. It was one of the leading items. A quarter is not definitive, but I still feel pretty good about it. I am not here to declare victory, but I feel good about it. Gary Prestopino: So if I ask this another way—was a lot of that due to this new lower price point product that you put out there for the techs? Nick Pinchuk: Some of it was due to that. I talked about the new roll cart that came out. We made it available in all these colors. You might think that is trivial, but it is not—people want a roll cart to match their box. If they have a candy apple red box with carbon trim, they want the roll cart to look like that. If you make that available, it tends to sell more. The roll cart is pretty sturdy, so that was another contributor. Yes, the Tribute to America was a good contributor too, but it did not account for everything. Gary Prestopino: You said the franchisees are a little more optimistic than they had been. Do you attribute that to some of what you have done strategically with shorter payback products, or are they really starting to see a turn in the appetite for technician purchases of tools? Nick Pinchuk: Probably some of both. Franchisees usually talk to me about products they do not like or how easy or hard it is to sell. When I say they were positive, they were not saying it was hard to sell, and they have said that before. I did not talk to every franchisee—it was a windshield survey—but the guys I talked to seemed pretty positive. And I do think it makes it easier to sell if we have offerings that match the preference. So I guess the answer is both things are in play. Gary Prestopino: In the C&I segment, are you seeing increased demand from the data center market for specific tool kits? Nick Pinchuk: We are seeing increased demand for specific products for the data center market in terms of the construction of the data center. We are being asked to quote, and we are finding business in those areas. Gary Prestopino: What was the FX impact to EPS? Aldo Pagliari: We had $0.02 of good news when it came to operating income from translation. When you look at the unfavorable currency remarks throughout the deck, that has to do with transaction negative variances, largely associated with our factories emanating out of Sweden and the United Kingdom to some extent. Nick Pinchuk: So some good news there, Gary. The reason why we talked about the negative is, yes, it was positive on EPS but negative on the margins, because it added sales and did not add profits in proportion. It added a lot of sales and almost no profit. Gary Prestopino: Okay. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Sara Verbsky for any closing remarks. Sara Verbsky: Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on Incorporated. Good day. Unknown Speaker: Goodbye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to Dover's First Quarter 2026 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Chris Woenker, Senior Vice President and Chief Financial Officer; and Jack Dickens, Vice President of Investor Relations. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Mr. Jack Dickens. Please go ahead, sir. Jack Dickens: Thank you, Clay. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through May 14, and a replay link of the webcast will be archived for 90 days. Our comments today will include forward-looking statements based on current expectations. Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update are forward-looking statements. With that, I will turn the call over to Rich. . Richard Tobin: Thanks, Jack. Good morning, everyone. Let's get started on Slide 3. We're off to a good start in 2026. Revenue grew double digits in the quarter, driven by continued strength in our secular growth exposed end markets acquired company performance and constructive demand conditions across the portfolio. Bookings were a key highlight in the quarter. First quarter bookings totaled $2.5 billion, up 24% year-over-year. Book-to-bill was healthy at 1.2% in the quarter with each of the 5 segments well above 1, providing improved visibility and confidence in our forecast. Our balance sheet remains strong and continues to provide flexibility for long-term value creation. During the quarter, we continued to return capital to shareholders through opportunistic share repurchases while also investing behind high-return capacity expansions and productivity projects, our acquisition pipeline remains active as industrial M&A begins to pick up. As always, we will remain disciplined with a focus on maximizing value creation through strong financial returns and strategic fit. All in, adjusted EPS of $2.28 per share was up 11% year-over-year. While we are keeping a keen eye on the geopolitical machinations, and the possible impacts to the macro environment, we believe we are well positioned to drive value creation for our shareholders given the underlying strength of our order books, the flexibility of our business model and the operational execution of our teams and our opportunities for capital deployment. We remain committed to delivering double-digit adjusted EPS growth for the full year consistent with Dover's long-term performance trajectory. We have chosen to reaffirm full guidance for the year for the time being. But clearly, based on order rates, we are driving to the top end of the range. We will revisit guidance next quarter. Let's go to Slide 5. Engineered Products revenue increased modestly in the quarter supported by strong underlying demand and healthy bookings in aerospace and defense components and industrial winches, along with improving trends in the global vehicle aftermarket business. Clean Energy and fueling grew 11% organically led by strong shipments in new orders and clean energy components, fluid transport and retail fueling. We continue to see aggressive build-outs from national retailers in North America, which we believe is still in the early innings of a multiyear growth cycle and we are also seeing healthy improvement in Europe as well. Margin performance was driven by volume leverage and operational execution with recent pricing actions expected to further bolster margin performance over the balance of the year. Imaging & Identification delivered stable performance across core marking and coding equipment, consumables and in serialization software. Segment margins remained strong with some foreign currency translation headwinds in the quarter that should abate as the year progresses. Revenue in Pumps and Process Solutions declined modestly in the quarter as solid performance in artificial intelligence, energy infrastructure components and industrial pumps allowed us to lap a tough comp in biopharma, segment margins expanded on favorable mix and strong productivity execution. Climate and sustainability technologies was a standout during the quarter, delivering 15% organic growth. Heat exchanges performed especially well across all regions, particularly in North America on the growth in liquid cooling applications and data centers. Food retail also delivered solid top line performance supported by continued double-digit growth in CO2 refrigeration systems together with the recovery in refrigerated door cases and services as forecast. Demand remains strong and the order book supports our confidence in the full year outlook as we are already booking into the second half. Margins were up in the quarter on volume leverage and a higher mix of CO2 systems and heat exchangers. I'll pass it to Chris here. Christopher Woenker: Thanks, Rich. Good morning, everyone. Let's go to our cash flow statement on Slide 6. Our free cash flow in the quarter was $131 million or 6% of revenue. This was a $22 million increase when compared to the first quarter of last year as cash conversion on higher year-over-year earnings was partially offset by higher capital expenditures tied to growth and productivity investments. Our full year capital expenditure estimate remains at $190 million to $210 million. Consistent with prior quarters, we expect Q1 to be our lowest cash flow quarter of the year as our operating businesses make investments in inventory ahead of seasonally stronger volume quarters in Q2 and Q3. Our guidance for 2026 free cash flow remains on track at 14% to 16% of revenue. With that, let me turn it back to Rich. Richard Tobin: Thanks, Chris. I'm on Slide 7. Bookings momentum continued to build in the first quarter. Bookings are up 12% over the last 12 months, reflecting broad-based acceleration across most end markets. Importantly, Trailing 12-month book-to-bill is now above 1, providing further visibility and confidence in the growth outlook. The acceleration in bookings and demand is driving longer lead times in certain growth markets. We are seeing the most clearly in programs specific orders for aerospace and defense components and longer cycle components for steam and gas turbines and engines. And in retail refrigeration CO2 systems and in heat exchangers as customers work to secure supply of critical components for fast-growing applications such as liquid cooling applications. Turning to Slide 8. We highlight several key end markets that are material drivers of our revenue growth in 2026 and beyond. We expect to generate over $1 billion in revenue from applications tied to artificial intelligence and power generation infrastructure this year. In data centers, increasing density of thermal requirements are necessitating a shift towards liquid cooling, which directly benefits our connector and heat exchanger businesses. Our SIKORA acquisitions, which closed in June of 2025, expands our exposure to electricity infrastructure through measurement and inspection control solutions for high-voltage polymer-coated wires and cables a direct beneficiary of growing electrification trends and demand for customers for product quality assurance and improvement. SIKORA is performing well ahead of its acquisition underwriting case. We are actively working to expand its geographic offering through our global channels and relationships. Natural gas remains the most visible option for scalable, reliable energy to meet the growing demands for electricity. Our Precision Components business provides bearing seals and compressor components for gas and steam turbines, engines and midstream natural gas infrastructure. Demand for steam and gas turbine components remains robust, a reflection of OEM lead times that now extend multiple years. While we have not seen a corresponding acceleration in midstream investment necessary to transport the gas to those turbines, early customer indications suggest a pickup in shorter cycle orders for midstream compression beginning in the second half of this year into early next year. Our clean energy components business continues to build to see solid growth in valves and vacuum jacketed piping used in LNG liquefication, infrastructure, including export terminals. We are also seeing strong demand in space launch-related applications, which recently booked its single largest order ever for space launch infrastructure where growth rates remain firmly in double digits. And biopharma customers continue to invest behind new therapies and increasing production rates driving long-term growth for our single-use connector pump and flow meter solutions; and finally, in CO2 refrigeration, we maintain a clear market leadership position in the U.S. supported by fully platformed product portfolio from our retrofitted plants in Condas, Georgia that provides strong competitive moats and product performance lead times and scalability, the shift to natural refrigerants has transitioned from a regulatory mandated demand to performance and productivity driven adoption as early installs have proven that the technology delivers improved operating performance versus legacy technologies. Despite the strong growth we've experienced, North America remains in its early adoption of natural refrigerants with penetration still below 10%. Let's go to Slide 9. Our organic investments remain our highest priority for capital deployment. Here, we highlight several most meaningful high-return capital projects planned for 2026. We continue to invest where demand visibility and returns are strongest while maintaining discipline around productivity and cost optimization. We also outlined a number of ongoing fixed cost reduction and facility consolidation initiatives. In aggregate, these actions are expected to generate more than $40 million of rightsizing savings in 2026 with an incremental carryover benefits into 2027. The precise timing of these savings will depend on where able to finalize certain facility moves as we balance site consolidation with underlying demand trends in certain growth markets. Let's go to 10. In Engineered Products, we expect low single-digit organic growth for the year, driven primarily by aerospace and defense, which continues to experience significant demand strength tied to electronic warfare and signal intelligence solutions. We expect to see further stabilization of vehicle aftermarket businesses supported by recent booking trends. Clean Energy and Fueling is expected to deliver broad-based organic growth across clean energy components, fluid transport and retail fueling and retail fueling domestic demand from national customers remains strong. We believe that this is a multiyear cycle. Our greenfield facility expansion and below-ground retail fueling is expected to support this growth cycle, particularly in our fiber like composite solutions business which is seeing accelerating adoption globally, including increased specification and data center-related infrastructure applications from hyperscalers. We expect margin improvement in clean energy and fueling for the year on volume leverage, acquisition integration and productivity initiatives and positive price versus cost dynamics. Imaging and ID should deliver low single-digit growth driven by serialization software and marketing and coding hardware and consumables supported by strong order rates. Pumps and Process Solutions should benefit from growth in industrial pumps single-use biopharma components, precision measurement solutions for electrification infrastructure and critical components for steam and gas turbine engines and midstream compression. We also expect gradual improvement in our core polymer processing equipment is supported by improved quoting activity. Finally, we expect climate and sustainability technologies to deliver double-digit organic growth for 2026 driven by continued strength in CO2 reiteration systems and the anticipated recovery in refrigerated door cases and engineering services were national. Retailers are reengaging in maintenance and replacement activity following a period of tariff-related delays supporting a rebound from historically low volume levels in the previous year. We expect the robust demand across all geographies for brazed plate heat exchanges to continue over the balance of the year with particular strength in North America tied to liquid cooling of data centers and other HVAC applications. Lead times for large and extra large heat exchanges have extended materially with additional capacity coming online as the year progresses. We have a margin opportunity here from volume leverage and the fact that we are carrying redundant fixed cost in refrigeration as we complete our facility consolidation. Let's go to 11. Full year guidance is on the left. We expect 2026 seasonality to be consistent with recent years. The operating environment still has a share of macro noise, whether it's politics input costs or policy-related uncertainty. That said, the demand signals we're seeing across the portfolio remain constructive and provide a level of visibility that supports our outlook. We are staying disciplined in our operations in our response to demand conditions. We are investing behind the platforms where returns are most compelling and we have the balance sheet flexibility to opportunistically play offense with capital deployment to create long-term value for our shareholders. With that, I'll pass it to Q&A. Jack? Operator: [Operator Instructions] We'll move first to Nigel Coe with Wolfe Research. Nigel Coe: Thanks quite a -- I think you got through at an hour's worth of prepared remarks about 15 minutes of well done. I think just want to kind of clear up the kind of the obvious question. I mean obviously, the orders -- this is a record order quarter. So just anything unusual supply chain of your concern people are getting ahead of maybe potential concerns around Middle East, et cetera? And have you seen the strength continue into April? Richard Tobin: No, I don't -- we don't see any kind of prebuy. I mean, what we put in the comments about longer lead times is -- what you do see is customers ordering for later delivery periods than normal, just because demand is outstripping supply at the end of the day. So that's really what's driving up especially in brazed plate heat exchangers, CO2 systems and refrigeration cases. And you can see that in the portfolio. So overall, we don't say -- we don't see anything based on changes in tariffs or anything like that. It's just more the demand is there. And I think there's a recognition that you would need to get in line if you want deliveries because of capacity constraints. Nigel Coe: Okay. That's great. And my follow-up on the tariffs. You mentioned tariffs, which a lot of inflation coming through on some of the base metals and steel. Maybe just talk about some of the countermeasures to that? And just maybe just clarify how the different tariff landscape is impacting Dover. Richard Tobin: Yes. Well, with the diversification of the portfolio, we've been trying to run down literally tens of thousands of line items of input costs and the like, and I won't bore you with the details other than the fact that it kind of comes out relatively neutral at the end of the day. So everything that we are planning on based on the last round of tariffs. Now with these changes, we kind of go 360 degrees and come out in the same spot at the end of the day. So there will be pockets where it may be detrimental, and there will be pockets where potentially, it's a strategic advantage because of the fact that we're mostly a build in the region to ship into the region kind of company at the end of the day. So net-net, after thousands of man hours of work it's solved nothing here. Operator: We'll move next to Andrew Obin with Bank of America. . Andrew Obin: Maybe a different angle on S232. You are largely domestic manufacturer. Will the change to Section 232 tariffs provide you? Is any competitive advantage versus importers of finished goods? Richard Tobin: I hope so. Hard to tell, right? This is all new news. And like we saw the last time a year ago, it takes 4 to 6 months for these changes to work their way through because of the fact that you've got inventory changes and a variety of other things. I'm not going to talk about where we think we may have a strategic advantage, we'd just rather take advantage of it. But clearly, just like the last time we went through this, having relatively short supply chains has proven to be helpful. . Andrew Obin: And I can't resist. I will ask this question. Organic growth, 5%, bookings in the mid-20s and you're guiding 3% to 5% organic growth? The comps don't get tough until Q4. It seems a conservative guide. . Richard Tobin: I know. And if you remember, Andrew, we actually got questions about our guide when we initiated our guide. So this is -- and I think -- look, I think if you go back and read the transcript, I was pretty explicit they were driving clearly to the top end of the guide. We're 90 days into this. Well, what are we now 120 days into it or whatever. If bookings trends remain consistent through Q2, it's clear that we're going to have to revisit top line expectations. . Andrew Obin: And booking in April bookings are just for April booking seems to be fine. . Richard Tobin: Yes. Yes. So far so. Operator: Thank you. We'll move next to Joe O'Dea with Wells Fargo. . Joseph O'Dea: Rich, maybe just in terms of that comment on Nigel's question around the demand is there. trying to understand the triggers behind the demand being there because it's very broad-based when we look at the order strength. And so what what has shifted from sort of customer sentiment, what you're seeing out there around the confidence to order right now? And it sounds like that has persisted even through the geopolitical situation now. . Richard Tobin: Well, look, I mean, when we gave our guidance for the year, we basically targeted both the clean energy and climate segments as the two segments that were going to drive the growth going into 2026 and here we are in Q1. And they are driving the top line growth, and they are the ones that are -- got the best order rates in terms of bookings. So in a way we knew it was coming and there was a reason for it. I mean I don't want to rehash the whole issue of what we went through for a couple of years on underinvestment in both retail fueling and now we're seeing that during the corner and kind of the headwind that we had to overcome last year on refrigeration. So there's kind of the secular story of the CapEx cycle swinging in those particular markets. The balance of it is generally either acquisitions or the growth platforms, and that is kind of widespread across the portfolio with the exception of DII. So it's a combination of a lot of things, whether it's a secular growth driver and a lot of -- we've been investing pretty heavily in capacity expansions and new product introductions over the last couple of years and knockwood they are gaining some pretty good traction in the marketplace. . Joseph O'Dea: And then just shifting to M&A. Sound pretty constructive on the pipeline. Just I guess, confidence in getting something done this year. it doesn't look like multiples are moving any lower, and you've got a track record of discipline so how you're kind of navigating through that dynamic? . Richard Tobin: Yes. Multiples are frustratingly high for sure. But we got a variety of different balls in the air. I would just got to see if we can get them across the finish line or not. So look, the good news is there's more product available, right, because the fact that equity markets are performing well and multiples paid are pretty high. So that generally is a precursor to product becoming available. That's the good news. Can we find stuff that we like, hope so. We've got a couple of proprietary things going on. So we'll see. But better than it's been over the last couple of years, just in terms of the total environment. Operator: We'll take our next question from Mike Halloran with Baird. Michael Halloran: I'll ask both my questions in 1 shot, because my convention is a little poor. First, you saw the long-cycle orders roll through appropriately. Are you seeing any improvement sequentially as you work through the quarter into April on the short-cycle order side of the things? Did it mirror from a trajectory perspective, at least a long-cycle orders -- and then on the long-cycle orders, maybe just talk to how you think that plays out in terms of conversion to revenue, what it means for sequentials or first half, second half weighting, however you want to put it, as you work through the year? Richard Tobin: Okay. The pace of the orders remained relatively consistent from Q4 into Q1. And that's just a broader base comment. Let's not get confused between long-cycle orders and kind of longer-cycle capital goods demand. What we're seeing is a phenomenon that we're getting what would have been reasonably short cycle orders being booked to reserve capacity. . So it's -- that's why you see the order rates what they are. And if I showed you the expected delivery times, you would see that we're getting orders well into Q2, into Q3 in certain businesses that we wouldn't see that. And that's just because there's a demand supply constraint there. So over time, we would expect those orders to build, which is great. We have them, and then we kind of -- we'd see them probably normalize as we ramp up production to kind of -- to meet that demand. So the good news is we got the orders and the pace of that rate sustained itself throughout Q1 and has sustained itself through April. So -- but it's not as if in polymer processing and can-making equipment, the stuff that's got really long lead times, those are not what's driving the order rate in the backlog. Operator: We'll move next to Jeff Sprague with Vertical Research. . Jeffrey Sprague: Rich, maybe just kind of picking up on that then, the supply constraints that you're talking about are Dover internal, not kind of supply chain inputs. And I guess I sort of get that right? You've been waiting for growth. You probably kept your boot on the throat of some investment here when it wasn't growing. But maybe -- am I right on that? And maybe just a... Richard Tobin: It's -- Jeff, it's more of that -- it's not that we haven't had any constraints, right? At the end of the day, when you're booking the way we're booking and trying to ramp and it's cost us quite a few margin dollars in Q1 trying to like ramp up to do everything here. But it's more of like these data center projects. There's -- we operate in some markets with very few competitors, which is the beauty of the business model. So everybody understands that, so they're ordering advance to reserve the capacity. So it's -- and that's the same thing for a lot of the markets that we participate. And it's not a question of -- we would never ramp the capacity to meet what you see in terms of the orders as if we could get it out in Q1 anyway, right? All we're doing is -- the funnel is the funnel. We have ramped for sure. But the funnel is the funnel, and we're just working with the customers and saying, look, we're sold out in Q2, you got to start ordering for Q3. Jeffrey Sprague: That's what sound like you like you ramped down, and now we're doing a 180 and we're ramping back up. It's just... Richard Tobin: No, no, no, no, no. We've never -- look, I mean, we're good at cost management at the end of the day, but it's not like we've taken plants out or anything as part of our consolidation. Those are all efficiency. We've not real fully taken out production capacity in the markets that we wish to participate in over the long term. . Jeffrey Sprague: Got it. And then just on the climate-related stuff, then this -- the strength in orders there and on the top line, is that pretty level loaded between the CO2 and the heat exchange or heat pump-related pieces of the portfolio. Could you just elaborate on that a little bit more? Richard Tobin: Yes. I mean it's the law small numbers now, right? So you don't want to use percentages because the size of the business is different. But it is broad-based with the exception of Belvac, right? So the heat exchanger business is growing very well. We're actually back to your capacity question, adding more capacity and heat exchangers? And on the refrigeration side, CO2, we are adding capacity there, right? So we've just been selling a new production line in ones a plant that was empty is now getting close to being full now. And then on the refrigeration side, I mean, we beat that to debt last year. There was that delay that cost us 2 points of growth. That's all the orders coming through. That's where it's been quite the juggling act of taking leading customer demand almost in an inefficient way, because we're in the midst of a facility consolidation. We're actually delayed in getting that project done because we had so many orders. We had to keep the plant open and that's cost us margin dollars. We're on path to get that all done probably by midyear. So I would expect the incremental margin in that segment to be robust in H2. We're probably going to have to carry it a little bit through Q2, but then we should see a pretty material inflection in margin performance if we can get this right. Operator: We'll move next to Andy Kaplowitz with Citigroup. . Andrew Kaplowitz: Which just in DPS, you mentioned you overcame tough comps and pump some process in Q1 and you didn't own biopharma and you didn't change your forecast for the year, but -- are you seeing business gas compression picking up? And obviously, your business is guest turbines from, but what's the outlook for the overall business? I would imagine maybe slightly stronger versus last quarter, but you tell me? . Richard Tobin: Well, I mean, I think that we were pretty transparent even in Q1 last year that we had a great Q1 that we -- was going to set this up. We are very pleased actually with the performance of the segment despite that, particularly in terms of the margin performance, right? Because we not only had the tough comp, that's tough comp on the top line, but it's a tough comp in terms of a margin comparison, too. And so not only did we do a great job in MOG in terms of margin preservation despite tough top line conditions across the balance of the portfolio in biopharma and thermal connectors and industrial pumps and precision components, the margin performance has been exemplary. So I'm always trying to kind of manage expectations about margin performance. I think we actually did better than we would have expected in Q1. For the balance of the year, I think if you go back and look at the comments, yes, we've been doing really well on the turbine side for some time now, and that will continue to do well. What we're really looking for is the inflection on compression. Signs are there, but if there's any upside to the performance of that segment in the second half, it would be in compression, but we'll know when we get the orders, that that's coming. . Andrew Kaplowitz: That's helpful. And then maybe just on DII, you're still talking about low single digit organic growth and margin expansion for the year. But can you give us more color what happened in Q1, sort of any additional color on that business, I think, would be helpful. . Richard Tobin: I mean, I don't think we have a lot of angst about 30 basis points of margin compression. That's a rounding error. It's FX, Andy. I mean we -- you know it's our most global business. And because of that, it's got a ton of FX running through it. So we're not worried at all. It's not a negative at all, the performance in the quarter. It's going to do it. This business is going to do what it does every year, right? It's going to deliver single-digit top line growth, very healthy margins and a ton of cash. . Operator: We'll move next to Amit Mehrotra with UBS. . Amit Mehrotra: Rich, I wanted to ask about Engineered Products. It was nice to see that business return to growth and book-to-bill was obviously very strong. I think you guys have a pretty decent defense business inside of there that's I guess, fortunately or really unfortunately quite relevant in today's geopolitical environment. Can you just maybe talk about the growth you're seeing there. Is it really specific to that business? Or is it more broad-based? And then I guess with the book-to-bill, can we accelerate off of this and do you have enough capacity to kind of meet that opportunity? . Richard Tobin: It is driven by the defense business in the segment right now, but that's not to say that the industrial wind side is actually doing quite well. And as we talked about before, on the vehicle service side, the headwind that we saw last year in Europe is abated. So the management team is doing a good job there in terms of margin performance and the like. On the defense side, yes, I mean this goes back to this a long discussion about long lead times and everything else. We are working like mad to increase production capacity in aerospace and defense to get it done. It's just not something you can kind of throw money at, unfortunately. It in order to do it, it takes a lot of time to do it. So it's doing really well. And I would expect if we can get a little bit more production capacity online, we're probably going to be able to sell it in as we march through the balance of the year. Amit Mehrotra: Okay. And then just as a follow-up. You had mentioned earlier this net impact of tariffs and I guess, Section 232. But I wanted to just double click on something you mentioned a little bit because I think you do have some competitors in certain specific business lines that do disproportionately manufacture in Mexico. I think they've been historically quite stubborn in cutting prices, but are you seeing any competitive behavior that either gives you an umbrella or an opportunity for share in those markets? If you can just give a little bit of color on what you're seeing? I know April 6 just happened. So maybe it's too early, but anything you could offer would be helpful. . Richard Tobin: History would say that in that particular market that you're referring to is that they will not give up market share and just eat it. The success of our business is more predicated upon the significant investments that we've made in our own production processes that has enabled us to have best-in-class product lead times, meaning that we don't have to go grab market share on price. We can do it on lead times. That's the strategy. And knockwood what it seems to be working right now. . Operator: We'll take our next question from Joe Ritchie with Goldman Sachs. . Joseph Ritchie: So Rich, I'm wondering like how are you thinking about the TAM for both CO2 systems and liquid cooling? Obviously, CO2 systems still way underpenetrated relative to Europe and just got back from data center world and liquid cooling is growing like wildfire. So I'm just trying to think about like what the opportunity is for you guys. . Richard Tobin: Well, we -- I think we can give you a much more intelligent answer about CO2 systems that we're going to be able to give you about liquid cooling because I'll leave it to much larger market participants to try to figure out what that TAM is. But clearly, it's growing. On the CO2 systems side, as we put in the notes, North America is 10% penetrated. So that's basically -- the math there is the installed base has converted 10% of the footprint, which doesn't include kind of growth, but our estimates in retail refrigeration and commercial refrigeration, it's kind of 1 for one. For every greenfield, there's probably a shutdown. So -- but if we just look at the installed base, we're at 10% penetration. So that gives plenty of opportunity. The base couldn't if it wanted to convert in a short period of time. So the beauty of it is, if it's -- if we stay in front in terms of product line performance and we stay in front in terms of online capacity that we can kind of just run this run the table a little bit over a multiyear period. Well, at least that's what we're going to try to do. . Joseph Ritchie: Got it. That's helpful. And then just maybe on that point, on the capacity piece. So it seems like you're expecting incremental margins to really to inflect, I guess, maybe in the second half of the year, I guess, in DCST. I guess I don't know how do we think about that? Like how much capacity you have available? Is it like -- do you think you've got like is it a multiyear capacity? Is it -- do you have enough through the end of next year? I'm just trying to understand it, because obviously, it has implications for the margin trajectory of those businesses. . Richard Tobin: Yes. With the -- if you go to the slide in the deck where we're adding capacity is now is generally speaking for '27 demand at this point. So we're -- when any time we're adding capacity, it's not generally intra-year capacity. I mean sometimes you can do it. But generally speaking, it's kind of -- the CapEx that we spent 18 months ago is now productive capacity now. So where we're adding is based on an even forecast, 3-year forecast evolving over time. So I think that we've got it right, I guess, is the best way to put it. But back to your question about the TAM about data centers -- if we were to install the capacity of some of the estimates of the TAM, there is never going to be enough capacity in the marketplace. So we're just going to have to see from what -- our interactions with our customers, we think that we're on the front foot of kind of rolling the capacity rollout based on the demand curve. . Operator: We'll move next to Julian Mitchell with Barclays. . Julian Mitchell: Maybe, Rich, I know you've touched on this a couple of times, but I think it's sort of worth looking at just, because there's some various cross currents. So you said that the pace of bookings was sort of steady in the last several months, but you had very good bookings growth, which you said is a function not of pre-buy, but customers sort of placing orders with a longer lead time because of supply concerns later in the year. So maybe just to flesh that out a little bit I guess I'm most interested in the point around is that sort of view based on customer conversations that they're not placing the orders ahead of price increases? And also, your point on the bookings sort of pace being quite steady, you didn't see a spike around when Iran started. Just sort of help us put some of those things together . Richard Tobin: Sure. I think for the most part, as a general comment, all of our pricing was done at the beginning of the year. So it was all announced. I mean the argument would have been we drive orders in Q4 because they knew it was coming in Q1, and we've gone past that now. So there's some exceptions as the vast majority of the pricing is out there now. No, we did not see any kind of spike. Like I said, I mean it's different by business, but kind of the pacing that we saw into Q4 just rolled right through Q1. In particular, in the segments where we thought it was coming anyway, right? And so a lot of that is while that's coming, you're communicating with your customers about, okay, here's where we are in terms of product lead times. And they're beginning to stretch a little bit just because of the fact that we -- that capacity is being utilized. So I don't foresee. I don't -- it was more of a secular growth in the areas that we had kind of bet on we're going to come anyway just came. Not -- it wasn't like we were surprised at all by any individual business other than, I think, like I mentioned before, the margin performance in DPS despite that having to change a pretty tough headwind there from a mix point of view, I think it was probably the only thing that surprised us. And I think the other issue is, as I mentioned before, the demand in kind of retail refrigeration was a little bit stronger than we would have expected, and that's necessitated us to keep a plant open longer than we would have liked to. It's great. It drives the revenue, and we'll take it. But weirdly, it's a little bit dilutive in terms of margin conversion because we can't get that fixed cost out. We'll get it out, but it's probably going to take us a a quarter longer than we would have expected. And that was my comment of if you think about the Climate segment, you've got brave plate heat exchangers, which is very capital intensive. So at a certain point, incremental margin flips over on the depreciation of all the investment, and we see in that growth -- and then once we get those redundant costs out of refrigeration business, we can expect incremental margin there to inflect positively also. Julian Mitchell: Yes, that was very helpful. And that was sort of where I was going with the second point, which you had, I think, 10% revenue growth all in, in Q1. EBITDA margins company-wide were up basis points, though. You've gone through sort of in DCST maybe why the operating leverage picks up later in the year. I just wondered, across the other segments in aggregate, kind of anything you'd call out that helps the operating leverage improve later in the year? . Richard Tobin: I would think the retail fueling business will also inflect sequentially positive throughout the year on volume leverage and on product mix through the year also. We would expect this to be 1 of the lower margin quarters for us, right? Because if you think about the seasonality, if everything goes as planned, you've got volume leverage on that kind of bookings and growth, which we would expect would drive margins higher in that particular segment. I think DPPS if we can stay where we are, I think we'd be pleased. Operator: We'll move next to Patrick Baumann with JPMorgan. Patrick Baumann: Just -- just had a follow-up on the orders. So generally, looking historically, the first quarter orders convert at a similar level into second quarter sales. So I guess I'm just trying to get a sense on how to think about that $2.5 billion in orders versus the $2.2 billion in sales that consensus has for the second quarter. And it would be helpful if you could, in that vein, maybe quantify what was, I guess, unusually longer-dated orders in magnitude within that $2.5 billion number? Richard Tobin: Yes. You can do the math here and take the order rates and stuff it all into Q2 and get a pretty big revenue growth number. And I would advise you, that's why we had all these discussions around here about the machinations of describing longer-dated orders, right, to kind of prevent that at the end of the day. We'll -- seasonality, we will move up in Q2 for sure. But I don't think we get ahead of our skis here and trying to look at bookings of Q1 and say, well, wait a minute, if it's that much, let's go stuff that into Q2 because I think it's just not realistic from a capacity point of view. So -- we are booking in certain businesses into Q3 now. So that is great for us, but let's not get get overly excited about the revenue growth in Q2. We will get as much as we possibly can get out in Q2. . Patrick Baumann: Is it like $100 million, $200 million of longer-dated borrowers? Is that . Richard Tobin: Patrick, we're not going there. . Patrick Baumann: In, I would try. My follow-up on price expectations for the year now, based on what you're seeing from a commodities cost inflation perspective, do you still expect to be a kind of 1.5% to 2%? . Richard Tobin: Yes. Yes. Right now, I mean, it's a moving target. We'll see what happens with input costs and metals and everything else. But right now, even if we see it, we won't see it in the back half of next year anyway because we've got everything else in inventory. . Patrick Baumann: Okay. So that guidance is unchanged for price then? . Richard Tobin: If you want to give us price guidance, sure. . Operator: And our final question comes from Chris Snyder with Morgan Stanley . Christopher Snyder: I just kind of wanted to follow up on some of the price commentary. Rich, I thought earlier in the call, you were saying maybe there is more price coming into Q2 to combat the cost inflation. I don't know if that's just maybe the earlier action being realized in Q2. So just kind of I guess, did you guys put more price in place since the start of the year just in response to the cost inflation? . Richard Tobin: I'm sure we did anecdotally, but no. I mean, I think all the pricing that we put out started at the beginning of the quarter. . Christopher Snyder: I appreciate that. And then I guess just on Q2, I don't think anyone has asked it yet. I mean like is the expectation that Q2 is kind of still in this 10% EPS growth mid-single-digit organic growth range . Richard Tobin: Okay. I haven't done the math. I know that we're driving towards over 10% EPS growth for the full year. I guess, seasonality says that our profits are generally highest in Q2 and Q3, and I'll leave it to you to do the math. . Operator: That concludes our question-and-answer period and Dover's First Quarter 2026 Earnings Conference Call. You may now disconnect your line at this time, and have a wonderful day.
Operator: Thank you for standing by, and welcome to the WEX Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Steven Alan Elder, Senior Vice President of Investor Relations. You may begin. Steven Alan Elder: Thank you, operator, and good morning, everyone. With me today are Melissa D. Smith, our Chair and CEO, and Jagtar Narula, our CFO. The press release and supplemental materials issued yesterday, including a slide deck to walk through prepared remarks, have been posted to the Investor Relations section of the website at wexinc.com. A copy of the press release and supplemental materials has been included in an 8-K filed with the SEC yesterday afternoon. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, we sometimes refer to as ANI, adjusted net income per diluted share, adjusted operating income and related margin, as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis, due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in the press release, recently filed annual report, the supplemental materials, and the risk factors identified in the most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q and other subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I will turn the call over to Melissa. Melissa D. Smith: Thank you, Steven, and good morning, everyone. We appreciate you joining us. The first quarter marked a strong start to the year for WEX Inc. We exceeded the high end of our guidance range for both revenue and adjusted net income per diluted share, and we did that with strong execution across the organization. After record revenue and adjusted net income per diluted share in 2025, we continued to build on our momentum in 2026. Revenue for the quarter was $673.8 million, an increase of 5.8% year over year. Excluding fuel prices and foreign exchange, revenue grew 5.4%, which was above the midpoint of our prior guidance. Adjusted net income per diluted share was $4.15, up 18.2% year over year. Excluding fuel prices and foreign exchange, adjusted EPS grew 19.4%. Importantly, these results were not driven by just one segment. Benefits and Corporate Payments continued to perform well, and we delivered better-than-expected results in Mobility amid a still challenging market. We are seeing the benefits of our scale, our increasing productivity, and the strength of WEX Inc.’s operating model. At WEX Inc., we simplify the business of running a business. Every day, our customers manage payments and workflows that are complex, regulated, and mission critical. Too often, they still have to stitch together disconnected systems across spending, payments, reimbursement, reporting, and controls. That makes decisions slower, oversight harder, and risk more difficult to manage. That complexity is only increasing, and that is exactly why we believe WEX Inc. is well positioned to thrive. What makes our model powerful is that across Mobility, Benefits, and Corporate Payments, our businesses share common technology, data, compliance, and financial infrastructure, including WEX Bank. That allows us to uniquely solve customer problems in vertically specialized ways while also scaling capabilities across the enterprise. It is why our strategy is focused on the customer and driven by three priorities: amplifying our core, expanding our reach, and accelerating innovation. The work we have done over several years to strengthen that shared operating foundation is translating into tangible business results. In 2025, we increased product innovation by more than 50%. And in 2026, we are focused on converting that velocity into better experiences and outcomes for our customers and stronger productivity, growth, and operating leverage for WEX Inc. A large part of our accelerated product innovation is being driven by AI, which is helping us in two ways. First, it enables us to deliver better products and make smarter and faster decisions. We are able to use our data, workflows, and domain expertise to improve things like claims, spend visibility, service, credit, and payment outcomes. Second, it is helping us redesign how things get done inside WEX Inc. by both automating routine work and improving speed and accuracy, allowing our teams to focus on higher value decisions for customers. AI is not a separate initiative but something that is being integrated into our operations to improve customer outcomes and increase efficiency. In 2026, we plan to deliver $50 million in cost-saving actions, including savings from automation and modernization, with a portion of the proceeds to be reinvested in the business and the remainder to flow through to margins. Let me spend a few minutes on the momentum we are seeing across the business and how that momentum reflects the strategy we are executing, starting with Mobility. Within Mobility, which represents roughly half of our revenue, we are executing well and delivering improved results even as the market and macroeconomic environment remains challenging. While our outlook does not anticipate a macro recovery, we are making progress in the areas we can control: pricing, sales productivity, product expansion, and customer execution. That strong execution is reflected in our financial results in the first quarter. Mobility revenue increased 3.2% year over year. Higher U.S. fuel prices were a tailwind, but that benefit was offset by international fuel spreads. Payment processing transactions were down 3%, so this is not a story of the market suddenly snapping back. Rather, it is a story of improving execution. We are closely monitoring energy price volatility related to the Middle East conflict. At this point, we have not seen a meaningful impact on customer demand or volumes in Mobility. We are seeing a small impact to travel volume trends leading into the second quarter that we are reflecting in our guidance. We are confident in the progress of our growth levers. We are encouraged by the early traction in 10-4 by WEX Inc., where we are growing active users and have earned very high ratings in both the Apple and Google app stores. This product expands our reach into a large and underpenetrated part of the market while creating a path to deepen relationships over time. Lastly, on Mobility, I am proud of our team for completing the complex BP conversion, which will create a small benefit in the second quarter. Most importantly, it solidifies the BP contribution we expect in 2026 and into 2027. As a reminder, we won this important contract from the strength of our enhanced acceptance product. Let me now shift to Benefits, which represents 30% of our revenue. In Benefits, our momentum continued during the first quarter. We came through a strong open enrollment season, and that positioned us well for the remainder of the year. Benefits revenue increased 8.5% in the quarter. HSA accounts on our platform were up 8% year over year to 9.4 million HSA accounts in Q1. Here, WEX Bank continues to be an important differentiator, allowing us to earn attractive yields on HSA assets. Benefits is one of the clearest examples of how our technology investments are creating value for customers. We have talked before about our early results in reducing claims reimbursement times by more than 98%, and we continue to increase integration and automation across the platform. We are leveraging technology to create better customer and partner experiences and drive durable growth. Finally, let me turn to Corporate Payments, which represents approximately 20% of our revenue. Corporate Payments revenue increased 9.3% in the quarter. In Corporate Payments, we are strengthening the core while continuing to expand the reach of the business across industries, geographies, and workflows. We continue to bring new customers onto our platform and our pipeline is building momentum. We are excited to announce today that we entered into a long-term renewal with a large and strategically important travel customer. This renewal reinforces the value proposition of our platform: reliability, compliance, workflow integration, and the ability to handle complex payment flows at scale. Consistent with what we said on our fourth quarter call, the economics of the renewal are already contemplated in our guidance and are fully reflected in our Q1 results. At the same time, we continue to see progress outside of travel. Our direct accounts payable solution leverages our Corporate Payments platform and has focused on the underserved mid-market, enabling it to deliver outsized growth. Direct accounts payable purchase volume increased in line with last quarter, and this book of business represents approximately 20% of annual segment sales. Broadening our opportunity set outside of travel represents a practical long-term growth opportunity for the segment. We entered 2026 with momentum, and our first quarter results reinforce that our strategy is working. In the third quarter of last year, I mentioned we had reached an inflection point. Since then, we have seen both revenue and adjusted EPS grow, as we illustrate on Slide 5 of our earnings presentation. This momentum is driven by the strength of our pipeline, improving productivity, and the pace of product innovation. Our investments over the last several years are producing results, and we are now moving to a phase of scaling those investments to deliver increasing operating leverage and drive meaningful margin expansion over time. We are combining our increased efficiency and scale with a disciplined capital allocation framework. As we illustrate on Slide 14 of our earnings presentation today, our returns on invested capital have been increasing on a NOPAT basis as a result of our strong execution and thoughtful capital deployment. As the environment has changed, we have shifted our capital allocation priorities accordingly, pivoting from accretive M&A to share repurchases. Today, we are prioritizing debt reduction, until our leverage ratio is below three times, while continuing to invest in the business. I know some of you may have questions regarding the proxy. I will be discussing this in more detail with our lead independent director designee, Dave Voss, during a webcast fireside chat on Monday, April 27. I hope you will be able to join us for that discussion. In the meantime, you can read more about our strategy and progress and our thoughts on the proxy contest in the comprehensive investor presentation that we published on our Investor Relations website last week. With that, I will turn it over to Jagtar to walk through our financial performance and updated outlook in more detail. Jagtar? Jagtar Narula: Thank you, Melissa, and good morning, everyone. Before I begin, I want to remind you that unless otherwise noted, all comparisons are year over year. We delivered solid revenue growth and strong earnings performance in the first quarter, while continuing to build momentum and strengthen the operational foundation that positions us for accelerating growth and profitability in 2026. Total revenue in the quarter was $673.8 million, up 5.8%, and above the top end of the guidance range we provided last quarter. The impact of foreign exchange rates and fuel prices increased revenue growth by 0.4%. Excluding these macro impacts, revenue was slightly above the midpoint of the guidance range we provided last quarter. Adjusted earnings per share was $4.15, an increase of 18.2%, partially offset by a decrease of 1.2% related to the net negative impact from fuel prices and foreign exchange rates. Excluding these macro impacts, adjusted EPS was above the high end of the guidance range we provided in February. Let me walk you through the macro impacts in the quarter in more detail and how they may have deviated from your expectations given the sensitivities we provide. There are three key things to remember when we talk about sensitivities and fuel price guidance, especially in periods of high price volatility like we saw in Q1. First, the European market we operate in tends to move opposite of our U.S. fuel price exposure. Extreme price volatility in Q1 led to an unfavorable $7.6 million revenue impact from these spread movements that offset the favorable $5.5 million revenue impact from U.S. fuel prices. Second, the sensitivity we provide assumes that gasoline and diesel prices move in tandem. In Q1, diesel prices moved much higher than unleaded gasoline prices, so the sensitivity was not as accurate. Our OTR customers primarily buy diesel fuel, where our revenue stream is more tied to fixed fees per transaction. Our local customers are primarily buying unleaded gasoline, which is predominantly tied to percentage-based fees and is therefore more sensitive to changes in fuel prices. When there is a large disconnect in the price between diesel and unleaded gasoline, as we saw in Q1, the sensitivity is less accurate. Finally, there is a timing factor with late fees in our sensitivities, as we recognize late fee revenue based on balances in prior months at prior fuel prices. This means when prices rise rapidly, the benefit to late fees will trail by about a month. Overall, we did not see the fuel price impact that we would have normally expected in Q1 because of the very sudden increase and the timing at the end of the quarter. However, we are confident we will see this normalize as we anticipate fuel price volatility levels out for the remainder of the year. One last point on the macro is regarding FX. We also had a favorable $5.1 million revenue impact from FX gains in the quarter. Overall, this was a very noisy quarter in the macro. But the real story is a solid performance across the business that is positioning us well for the remainder of 2026. Before I move on to the segments, I want to update you on our sales and marketing efforts broadly, where we are seeing encouraging results. In the first quarter, new business added about 1% to our revenue growth rate versus last year. Our returns are coming in as planned, and we continue to expect new business growth to outpace last year. Turning now to the segments. Mobility revenue increased 3.2%, driven by our strategic initiatives taking hold and a small benefit of 0.2% related to fuel prices and changes in foreign exchange rates. This exceeded our expectations and demonstrates the momentum we are building through both new sales and pricing increases that you can see coming through our account servicing revenue. Our payment processing rate was 1.23%, a decrease of 10 basis points sequentially. The sequential decrease in the net interchange rate is due primarily to the impact of European market movements, which I mentioned earlier, and the higher fuel price in the U.S. As a reminder, last year gallons in OTR were pulled forward into Q1 due to territories, which created a tougher comp for Q1 this year that we were able to overcome. I would add that on the local fleet side of the business, we also saw a quarter-over-quarter improvement in same-store sales, which is another encouraging sign. In our Benefits segment, total revenue of $216.2 million rose 8.5%, reflecting the strong open enrollment season Melissa mentioned earlier. Overall, SaaS account growth was 3.8% in the quarter. While this was slightly lower than what we guided, it was due to shutting down a non-core product that was not delivering the returns we expected, which added a 2% drag to account growth in the quarter. The impact is immaterial to both revenue and income. Importantly, this deliberate action aligns with our strategic focus to amplify our core by investing in products that deliver appropriate returns for the business. The Benefits segment continues to capitalize on both the scale we have built and the value derived from our investment portfolio at WEX Bank, which allows us to deliver industry-leading returns on our HSA assets. Average HSA custodial cash assets grew 11.8% in the quarter and custodial investment revenue grew 14.2%. HSA accounts also grew 8%, as Melissa noted earlier. Overall, we are very pleased with the performance of the segment. Finally, in Corporate Payments, revenue of $113 million increased 9.3% at the high end of our expectations with our net interchange rate expanding three basis points year over year. Purchase volume also increased 3.6%, reflecting continued strength in our travel customers. Travel-related revenue grew approximately 12% in the quarter, supported by the strength of our partnerships. Revenue from non-travel customers grew in the mid-single digits. Within that, our direct AP business grew in line with Q4. We are still in early innings here, and while there is higher volatility in growth rates given the size of the portfolio, seasonal trends from customers, and impacts of legacy businesses included in the mix, we remain excited by the long-term opportunity. Moving to margins. Year over year, Q1 adjusted operating income margin declined 50 basis points, driven primarily by an increase in credit losses from 12 basis points to 19 basis points, within the range we guided you to last quarter. Normalizing for the unfavorable 200 basis point impact of higher credit loss and fuel price differences, our adjusted operating margin would have expanded 130 basis points as a result of efficiency gains through technology and AI, pricing actions, and the operating leverage we are seeing from higher organic growth by the investments we have made in innovation in 2025. For 2026, we are expecting margin expansion of 75 basis points on a macro-neutral basis, and that is embedded in the midpoint of our guide. With that, let me transition to the balance sheet. WEX Inc. is a business that generates strong recurring revenue, which in turn produces reliable free cash flow. On a trailing twelve-month basis, we have generated $671 million of adjusted free cash flow, a 14% increase over the same period last year. This is a strength in all periods, but especially in times of economic uncertainty. It gives us significant capital deployment optionality. We also benefit significantly from WEX Bank, which provides low-cost funding through deposits and Federal Home Loan Bank lines. It is important to note that the bank gives us a lower cost of funding versus alternatives such as securitizing our receivables. In addition, as we have mentioned before, WEX Bank also helps us drive higher yields in our HSA assets through its investment portfolio. Touching on leverage, we ended Q1 with a leverage ratio of 3.1 times, flat from the end of Q4 as expected and within our long-term range of 2.5 to 3.5 times. We remain on trajectory to reach the midpoint of our leverage range in the second half of the year. Let me shift to capital allocation, a focus of every investment decision we make at WEX Inc. Each step of our disciplined capital allocation process is grounded by a clear objective to maximize long-term shareholder value, and every investment decision we make is weighted against returning capital to our shareholders, including internal investments in our segments. As we think about deploying capital externally through M&A or share repurchases, we start by prioritizing a safe and strong balance sheet as measured by maintaining a leverage ratio below the midpoint of our target range at three times. Because of that, we expect to continue to reduce leverage through Q2. While M&A is not at the forefront today, we will assess opportunities that strengthen our strategic position. I also want to point you to our new disclosure on return on invested capital that Melissa mentioned earlier. We calculate this by looking at our equity and corporate debt excluding working capital funding at WEX Bank—that includes deposits and borrowings from the Federal Home Loan Bank—against our net operating income after tax. We exclude WEX Bank for ROIC because its funding sources are not comparable to operating capital. As Melissa mentioned, we are very pleased to see this important metric continue to improve. You can find more detail on the calculation in the earnings presentation we posted today. One final point on capital allocation: our strategy remains consistent, and you should expect any excess cash from higher fuel prices to drop through to reduce leverage near term. Now let us move to earnings guidance for the second quarter and the full year. In Q2, we expect to generate revenue in the range of $727 million to $747 million. We expect adjusted net income per diluted share to be between $4.93 and $5.13. For the full year, we now expect to report revenue in the range of $2.82 billion to $2.88 billion. We expect adjusted net income per diluted share to be between $18.95 and $19.55. Compared to the midpoints of the previous ranges, these represent increases of $120 million in revenue and $1.70 in EPS. You should think of these increases as largely driven by updating our fuel price assumption to $4.30 per gallon in Q2 and $3.70 per gallon for the full year. Lastly, on the interest rate side, we are no longer assuming any rate cuts for the rest of the year in guidance. This change had an immaterial impact to full-year guidance. In closing, our first quarter results underscore the strength of our diversified model and the discipline of our execution. We remain focused on executing our strategy to deliver results that drive sustainable, long-term shareholder value. With that, operator, please open the line for questions. Operator: We will now open the call for questions. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of David John Koning from Baird. Your line is open. David John Koning: Yeah, hey, guys. Good job. When I look at probably the most important metric, the Mobility acceleration was really good in the quarter. I mean, 3% growth on an organic, constant currency, constant macro basis, best in five quarters. But you called out tariff impacts were still a headwind, and some things are emerging. I guess I am wondering, between tariffs going away, BP coming on, late fees getting a lagged benefit, ISM getting better, are all those kind of emerging benefits that growth actually accelerates from Q1 after a good Q1? Melissa D. Smith: Well, first of all, thank you. We are really proud of the execution we had in the quarter. And you are right, you are putting a bunch of factors together. Last year, we had to pull forward, as you mentioned, that affected some of the growth rate comparisons in the over-the-road business. And we have rolled on BP. We have done a bunch of pricing work. We are feeling good about the trajectory that we are on. When we actually contemplated the guide, we ran through the benefit that we saw in the first quarter and we held the rest of the year to what we had previously guided. But I think that is really just more to reflect that there are a lot of factors that are happening in the world right now, and we just want to be cautious about it. But you are right to point out, we have a number of really positive things that are going our way right now, and we feel really good about the trajectory we have for the business. David John Koning: Thank you. And maybe just as a follow-up, Mobility EBIT was actually down year over year. I guess I am wondering, is that mostly just sales and marketing? And maybe, Jagtar, could you kind of put some numbers around it a little bit? Like, how much of that was simply sales and marketing going up, and maybe core EBIT actually grew? Maybe talk through that a little bit. Jagtar Narula: Yeah, Dave. So the two pieces year over year are sales and marketing and credit losses. Remember, credit losses have gone up year over year in this segment. We talked a little bit about that last quarter in the Q4 call. It was related to some new offers we had put in the market and tested. We pulled those offers away, but we saw higher credit losses coming through associated with them, which is why we pulled the offers away. We saw that roll through in the quarter. That actually added about two percentage points to, as Melissa mentioned in her prepared remarks, about 200 basis points to operating margin impact in the quarter. So, if you adjust for that piece, margins would have actually been up quarter to quarter for the company. For the Mobility segment, it was about 360 basis points in the segment. So if you adjusted for that, you would have been roughly flat year over year. David John Koning: Gotcha. Thank you, guys. Operator: Your next question comes from the line of Ramsey El-Assal from Cantor Fitzgerald. Your line is open. Ramsey El-Assal: Hi, thank you for taking my question this morning. I have two questions, I will ask you both at once. Both of them are about fuel prices. I guess the first one is, are you seeing any downstream impact on, or do you anticipate any downstream impact on, credit performance because of higher fuel prices? Are you seeing that pressuring your customers in any notable way? And then the second part of the question is, what are you seeing in terms of fuel spreads as we enter the second quarter here? I was a little surprised that spreads were as impactful as they were given that is a smaller part of your business. I am just curious, are spreads settling down, or is there still a risk that you could see some fuel price spread volatility that offsets some of the benefit of higher retail prices? Melissa D. Smith: Yeah, it does make sense. Let me start with the first part of your question. In 2022, fuel prices were just under $4.50, so we have seen spikes in fuel prices before. We are not seeing it impact credit quality, but we are paying attention to that. And we are not seeing it affect customer behavior patterns, with the exception of the fact that we see people more interested in ways to create efficiency. We think that is drawing them into our tools. We certainly see more demand for our 10-4 app, and we have seen really strong demand for that. So on the fringe, you would see more behavior patterns where they are looking for efficiency, but not really having much of an impact overall in the portfolio. And then the spread question: our business in Europe operates off spreads; it is the predominant model there. When you have rapid changes in prices is when you see these kind of meaningful changes in spreads. Because it was such a rapid movement and it happened so fast in the first quarter, it had a sizable impact in Q1. We expect the rest of the year, in the way that fuel prices are forecasting, that we are not going to have a similar type of thing. And just to note, when we snap fuel prices, as you might guess, they have been moving around quite a bit. We took kind of a mid view of the futures curve. Knowing that it has been moving up and down, we took kind of a midpoint. Ramsey El-Assal: Got it. Thank you so much. I appreciate it. Operator: Your next question comes from the line of Mihir Bhatia from Bank of America. Your line is open. Mihir Bhatia: Hi, good morning. Thanks for taking my questions. Maybe just wanted to start with adjusted operating margin and just understand exactly what is embedded in your guide for the year on adjusted operating margin relative to last year? Jagtar Narula: We are expecting, for the year, adjusted margins to increase about 130 basis points. A piece of that is the fuel price change that we made in the current quarter for the full year. So if you exclude the fuel price impact, you are getting about a 75 basis point improvement in operating income margin for the full year. Mihir Bhatia: Got it. That is helpful. Thank you. And then, sticking with Mobility, you have the organic growth, right? You have 3% organic growth year over year. Can you talk about some of the factors that are driving that? Transactions are still down. You obviously have the interchange effect this year. So what is driving the organic growth? And then, as we think about the next few quarters, should the interchange rate bounce back up? Are we through the fuel price impact and the European spreads impact? Will that reverse in Q2? I think that was six of the 10 basis points decline. What is a good interchange rate to think about for the rest of the year? Melissa D. Smith: When we think about managing the business, we think about new customers we are bringing on, retention rates, as well as pricing. In the Mobility business itself, Jagtar talked about the fact we saw a 1% increase in new sales coming through. New sales are better and are taking across the portfolio, including Mobility. They are driven by the work we did in our sales and marketing investments. You can actually see that coming through pretty rapidly. The second thing, retention looks similar to what it did last year. Pricing is up, and pricing has had a positive impact on revenue growth and is probably the primary driver. And then the last thing, Jagtar mentioned that same-store sales improved slightly. It is still negative, but it is getting a little bit better, which is a positive, we think, for the course of the year. Jagtar Narula: On the payment processing rate, you are right. We did see a roughly 10 basis point reduction quarter over quarter from the market move predominantly in Europe and then fuel price changes. As we go into next quarter, you will see the full-quarter impacts. Our interchange rate and fuel prices are inversely related because of the fixed-fee component of how we charge customers. So as you go into the second quarter, you will get the full-quarter impact of the higher fuel prices. You should expect to see interchange rates roughly remain flat to the first quarter. And then, as we go through the year, we are assuming that fuel prices decline in the third and fourth quarters. You will start to see interchange rates rise again as fuel prices decline. Mihir Bhatia: Alright. Thank you. Operator: Your next question comes from the line of Rayna Kumar from Oppenheimer. Your line is open. Rayna Kumar: Good morning. Thanks for taking my question. I want to go back to Mobility for a second. It obviously came in better than you were expecting. I want to understand exactly what came in better than you were anticipating, and how sustainable is that going forward? And then just on the Benefits segment operating margin, what exactly drove that increase, and how sustainable is that expansion for the remainder of 2026? Melissa D. Smith: It was a little bit of everything. If you go across, volume came in pretty much as we expected. Late fees were a little bit better and pricing was a little bit better. So it is a little bit good across the portfolio that was slightly better than we expected. On operating margins at a macro level, one of the things that Jagtar mentioned earlier is that if you look at our operating margins in the first quarter, reported they are down, and there was a really big impact on margins for the company because of credit losses, which is a bit of a timing issue that will play out more favorably as you go through the course of the year. But underneath that, there is 130 basis points of improvement in operating margin, which is really tied to the work we have been doing over the last few years around using AI to modernize the way that we are operating as a company. You can see that really coming through. Benefits is a piece of that. Overall, we actually have 8% fewer employees at the end of 2025 than we did at the end of 2023. We are really reimagining how work can get done. AI has been a huge tool that we are using associated with that. We have a disproportional number of employees dedicated in our Benefits business, and so part of why you see that benefit coming through and looking like it is quite scalable. Jagtar Narula: As we go through the year, the impacts to Benefits operating margin are really going to be related to rates. While we are no longer assuming any rate reductions, the year-over-year compares will get more difficult as you go through the year, somewhat related to maturities in the portfolio and reinvestment. You will start to see some moderation of operating margin as you go through the year related to that. But we still feel pretty good about where we are as a company. I think we have been executing well, as Melissa mentioned. Rayna Kumar: Super helpful. Thanks for the details. Operator: Your next question comes from the line of Christopher Nathaniel Svensson from Deutsche Bank. Your line is open. Christopher Nathaniel Svensson: Hoping you can discuss pricing opportunities within the Mobility business. Clearly, lots of ongoing discussion about this. Feels like we have seen hundreds of slides on that topic in the last couple of weeks. And, Melissa, I think you briefly alluded to pricing in your prepared remarks and a couple of the answers here in Q&A. Hoping you can just put a finer point around pricing, maybe both from a philosophical point of view—how you think about pricing generally—and then more tactically, if and how you plan to improve pricing in Mobility going forward? Melissa D. Smith: Pricing is actually one of the levers that we have been using over the last decade, and certainly over the last few years. We had about $70 million worth of pricing actions that we took in 2024 and 2025, with more that are coming through this year. The way that we think about it is, as we are looking at pricing, we are balancing the effect to customer attrition with pricing actions, and we look at both of those things. To the extent that we can increase on price because of the value that we are providing to our customers and not create a customer attrition issue, we are doing that. We have done it in different ways. We have looked at our merchant contracts and renegotiated those. We have increased late fees and customer fees across the portfolio. It is really just an embedded part of how we operate now, and we have had some pretty sizable increases over the last three years. Christopher Nathaniel Svensson: The other thing I wanted to ask: in your prepared remarks, Melissa, you talked about the impact of travel on the guide for the rest of the year. Hoping for some more color on that. I think you have a few million dollars in quarterly revenue in Corporate Payments from Middle Eastern travel specifically. One, is that correct? Two, anything beyond that direct exposure that you are calling out, either with regards to the impact for March numbers or for the outlook for the rest of the year and Q2 and beyond? Melissa D. Smith: You nailed it. It really is the Middle East that we are seeing soft. If you look at Q1, volume was very normal. If you look at our overall growth in Corporate Payments, we feel really good, and travel volume growth was really quite strong across the portfolio. What we saw starting in April is that the Middle East corridor was starting to look softer. It is on the order of about $3 million a quarter for us. We reflected that in our Q2 guide. We think it is a very narrow sliver of travel volume. But just to be thoughtful, it is a trend that we are seeing in the portfolio. The rest of the portfolio looks like it is operating as normal, and that is what we reflected in our guide. Christopher Nathaniel Svensson: Helpful. Thanks, Melissa. Operator: Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Your line is open. Tien-Tsin Huang: Just to follow up on that last point there, Melissa and team. On the segment outlooks, have they changed at all between Corporate Payments and Mobility, given what you saw in April and the comments there? Jagtar Narula: No. We continue to hold to the guidance that we have given earlier this year. We do not adjust segment-level guidance quarter by quarter. We continue to maintain where we started the year. Tien-Tsin Huang: Okay, perfect. Just want to make sure. And then I know the prior full-year outlook embedded the $50 million in cost savings, some of which you said would be reinvested. A quarter in now, have you started that process? Has that changed at all in terms of magnitude or timing? I am trying to get a sense if that is creating a little bit of flexibility for you on the margin front. Melissa D. Smith: The $50 million has not changed. It is still embedded in our guidance. We have seen really good progress in that. I will point back to the fact that we saw 130 basis points of margin expansion in Q1, excluding some of the noise we have in credit losses. All the work that we have done over the last few years, you are actually seeing that come through in terms of productivity across the organization, and it is reflecting in our numbers already. We talked about the fact we are reinvesting a portion of that, but we are dropping through 75 basis points at the midpoint of our guide on a macro-neutral basis into operating margin expansion. We talked about last year being this investment year, and this year being a scaling year. You can see the scale of the investments coming through in revenue, and the scale is coming through in our operating margin. Tien-Tsin Huang: Good. I know that was a focus for you, Melissa. Thanks for the update. Operator: Your next question comes from the line of Sanjay Harkishin Sakhrani from KBW. Your line is open. Sanjay Harkishin Sakhrani: Thank you. Good morning. First question is on Mobility. I think, Melissa, you said same-store sales are still slightly negative. Through the quarter and year to date, we have heard some cautious optimism on over-the-road and it is coming back. Is that what you see or hear? Is that not linking through your numbers, or is it just still quite volatile there? Then maybe tag along on that—David’s first question talked about improving trends over the year. Could you give us a little bit more on what is on the comp as we move through the year? Melissa D. Smith: On the over-the-road marketplace, we are hearing from our customers that the smaller customers are certainly getting pinched by fuel prices. On the positive side, they are seeing increases in spot rates, and so they are earning more as they are making deliveries. But that is getting eaten up in large part by the increase in fuel prices. The mid and large customers are able to tack on fuel price surcharges and so are less impacted by the overall fuel price environment. In general, there have been fewer operators in the marketplace—more people have left the market—creating an overall better environment in terms of profitability for those who are surviving and thriving. We are seeing changes in the over-the-road market. We are not seeing a big increase in demand yet, which is when we will start to see more of a benefit, but we are seeing dynamics that are hopeful and make the marketplace look like it is improving from a financial perspective. Jagtar Narula: On your question about growth trends in Mobility, we expect trends within what we have guided to. In the early part of the year, we expanded our factoring portfolio last year; we have gotten some growth benefit from that and will lap that as we go through the year. Other than that, as Melissa talked about, we are not assuming any change in the macroeconomic environment, so we are expecting current trends to continue. Sanjay Harkishin Sakhrani: Maybe just one follow-up on travel. You think that weakness in April you mentioned was isolated to the Middle East. American Express talked about seeing it more broadly, and refunds were up. If you have not seen it now, is some of that factored into your outlook? And then secondly, on the renewal of that large partner, I know it is in the guidance number. Is there any take-rate optics that we need to be thinking about? Is there a greater impact next year versus this year? I just want to make sure we are tied on the optics of it. Melissa D. Smith: Let me talk about that renewal first. I am super excited. It is a renewal with a partner that we have been co-innovating with for years on embedded payments. I think it is validation of the value prop that we have—the ability to do workflow integration, handle complicated payments at scale, and have that industry expertise. It is a multiyear agreement and fully reflected in the first quarter results. That should not have an incremental impact to next year. It is already baked into the first quarter results. In terms of broader travel trends, what we are seeing right now is very isolated in terms of the specific customers that we are working with that have exposure in the Middle East. We are not seeing something that is broad-based across our portfolio right now. We reflected some softness in the second quarter related to what we are seeing but not broad softness, because that is not what we are seeing right now. Jagtar Narula: On take rates, I would refer to what we talked about last quarter. We are expecting take rates for the year to be roughly flat to last year, with some slightly down in travel, slightly down in non-travel, more mix of travel. All the dynamics of that renewal are baked into the guide we gave previously. Operator: Your next question comes from the line of Analyst from Raymond James. Your line is open. Analyst: Hi, good morning, and thanks for taking the questions. I wanted to start on SMB strategy. Any color on SMB sales trends for the quarter? And, bigger picture, how do you think about scaling that business over the medium term to become a bigger part of Mobility? Melissa D. Smith: SMB is attractive because it is a relatively unpenetrated part of the marketplace. We have been on a multiyear journey to focus on it, first starting with our risk tools. We talked a couple of years ago about all the work we did adjusting the tools using AI, and then we went into marketing and really made changes to the way that we are marketing and adjusted the tools as well. We had to do a lot of foundational work before we started going after this phase, and we have seen really good results. The customers are coming in; our LTV-to-CAC calculations are holding to what we expected, and we are monitoring two key assumptions in this portfolio: the accounts, and what happens with credit and with lifetime value. So far, everything is coming in pretty much on the models. We continue to focus on how we can refine the motions that we are making, learn about how we are bringing those customers in to become more efficient, and I would say we are having success—each quarter, we get a little bit better, and then continue to scale the business. That is in the North American Mobility portfolio. We feel like we have a good pipeline. That pipeline will continue to build. We are learning from it and we are getting better. The second part for us in the small business arena is the 10-4 app that we rolled out last year. We rolled it out with the same idea: it is an underpenetrated part of the marketplace. These are owner-operators that we are not going to extend credit to, so they are not going to be capable of really buying into our core products, but we are exposing them to our discount network of fuel. They are downloading an app and using that application to buy fuel at a discount, which is really important to them, particularly right now. They are saving money, having a good user experience, and we are seeing those users come back month after month. We think of that as a community that we can continue to build and then sell more into over time. Small business is an area that we can continue to build and mature, and we are seeing success so far. Analyst: Okay, awesome. Then I want to switch gears to the direct AP business. You mentioned volumes in line with 4Q at about 15%. Hoping you could put a finer point on your expectations for volume growth there for the year and if double digits is still the right way to think about it. Thank you. Melissa D. Smith: On the AP Direct side, which is about 20% of the business, as you know, we are going after the mid-market. We continue to build out the sales team there. It has operated pretty much according to plan. Those salespeople are bringing new customers; they implement quite rapidly. We are expecting, through the course of the year, to stay in that 15% range on the AP Direct spend volume, about 20% of the segment. The other part of note, Jagtar mentioned that there are some parts of the business in Corporate Payments that are not growing as fast. Our FI business and our bill pay business are slower growers. We have also been focused on embedded payments outside of travel. We have had a number of customer signings. Those are longer implementations, so we expect that volume to be coming through more weighted to the second half of the year. The net of all of that is you should expect outside-of-travel volume growing throughout the course of the year and more back-end weighted as the embedded payments customers kick in. Operator: Your next question comes from the line of Analyst from Wolfe Research. Your line is open. Analyst: Hi, thanks. This is Daniel on for Darren. Just wanted to ask a quick one on the full-year EPS guide. It seems like you chose not to pass through the Q1 beat and are only raising based on fuel prices. Could you maybe walk through that decision and any potential sources of conservatism you have embedded there? Thank you. Jagtar Narula: Hey, Daniel. That is actually incorrect. We passed through the first quarter beat as well as changes in fuel prices, FX, and interest rates. Analyst: Got it. It just raised by $1.70 at the midpoint, and that was the fuel price adjustment as well. I will look into it. Thank you. Operator: Your next question comes from the line of Michael Infante from Morgan Stanley. Your line is open. Michael Infante: Hi, guys. Thanks for taking my question. Just on the Mobility same-store sales front, can you provide a little bit more color on why local fleet same-store sales have been structurally weaker than OTR? Given what I assume is an improving exit rate within Mobility, what is your expectation on gallons and volumes from here? And does that spot rate improvement in the freight market give you an opportunity to open up the credit box? Thank you. Melissa D. Smith: The same-store sales has rather converged for both OTR and North American Mobility over the last quarter. You are right—historically, over the last year, NAM same-store sales were a little bit worse than OTR. That has gotten a little bit better, and OTR had gotten a little bit worse, so those two things have come in line. As we build out through the course of the year, we will have a more positive comp next quarter in terms of volume because of the pull-forward activity that is negatively affecting us this quarter. We would expect to see volume naturally get better because of that. We are continuing to see strong sales, so that should help as well, and then BP coming on. All of those things should help build our transaction and gallon growth, going from negative in the first quarter to moving to positive as you go through the year. Michael Infante: That is helpful. Then just a quick follow-up on Benefits—some of the deposit economics. You obviously called out the deposit migration from third-party banks. Can you remind us on the differential in unit economics for $1 held at WEX Bank versus a third party, and how much runway there still is for that migration? Thanks again. Jagtar Narula: We will typically get about 50 to 100 basis points better if we move it from third-party banks to WEX Bank. We have moved a lot of the money that we expected to move over from third-party banks to WEX Bank. We still have roughly $400 million at third-party banks, but a lot of that is used for operational purposes. I would not expect continued movements of that to be a tailwind for us for the rest of the year. Operator: That concludes our question and answer session. I will now turn the call back over to Steven Alan Elder for closing remarks. Steven Alan Elder: Thank you, Rob. We appreciate everyone’s time today, and the company looks forward to chatting with you again at the end of the second quarter. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust, Inc. First Quarter 2026 Earnings Conference Call. This conference call is being recorded and a replay of the call will be available three hours after the completion of the call for the next two weeks. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties Realty Trust, Inc.’s website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Peter M. Mavoides, President and Chief Executive Officer; Robert W. Salisbury, Chief Financial Officer; R. Max Jenkins, Chief Operating Officer; A. Joseph Peil, Chief Investment Officer; and Sheryl Kaul, Director of Financial Planning and Data Analytics. It is now my pleasure to turn the call over to Sheryl Kaul. Sheryl Kaul: Thank you, operator. Good morning, everyone, and thank you all for joining us today for Essential Properties Realty Trust, Inc.’s First Quarter 2026 Earnings Conference Call. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not revise or update these forward-looking statements to reflect changes after the statements are made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release. In our earnings release last night, for the quarter, we reported GAAP net income of $60 million and AFFO of $105.8 million. With that, I will turn the call over to Peter M. Mavoides. Peter M. Mavoides: Thanks, Sheryl, and thank you to everyone joining us today for your interest in Essential Properties Realty Trust, Inc. We had a productive first quarter, deploying $389 million into 126 properties and raising $419 million of equity in support of our pipeline, while growing our AFFO per share by 11% year-over-year. Despite a macro backdrop characterized by heightened volatility, our team continued to source and execute attractive investment opportunities, as our ability to deliver capital is highly valued in this environment. Our focus on servicing relationships and providing sale-leaseback capital to growing middle market operators across our targeted industries continues to be a differentiator for our company. Investment cap rates were stable this quarter, with an initial cap rate of 7.7% and a GAAP yield of 8.8%. This meaningful spread to our cost of capital is a key driver of our earnings growth. With $1.5 billion of available liquidity and low leverage of 3.5x pro forma net debt to annualized adjusted EBITDAre, our balance sheet positions us well to continue to deliver compelling growth. Overall, investment activity and portfolio credit trends have started the year ahead of our budgeted expectations. Coupling this with our investment trajectory drives our ability to increase our 2026 AFFO per share guidance to a new range of $2.00 to $2.05. We commensurately increased our investment volume guidance range by $100 million to a new range of $1.1 billion to $1.5 billion, and our cash G&A guidance has improved by $1 million as a result of cost discipline as the platform continues to scale. Turning to the portfolio, we ended the quarter with investments in 2,417 properties that were leased to over 400 tenants. Our weighted average lease term increased to approximately 15 years, with just 2.8% of our annual base rent expiring over the next three years. With that, I will turn the call over to A. Joseph Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activity. AJ? A. Joseph Peil: Thanks, Pete. Overall, our portfolio credit trends remain healthy. With same-store rent growth in the first quarter of 1.4% and occupancy of 99.7%, we had just seven vacant properties. Portfolio rent coverage remains strong at 3.5x, and the percentage of ABR under 1.5x rent coverage declined by 140 basis points. Disposition volume moderated to $10.2 million at a cap rate of 6.9% following an elevated fourth quarter of car wash property sales. Looking ahead, we continue to expect modest disposition activity driven by proactive asset management, as well as overall portfolio construction shaping. Our focus on middle market operators continues to yield a highly diversified tenant base, with our top 10 tenants comprising only 15.8% of ABR and our top 20 representing only 26% of ABR at quarter end. We remain disciplined and are actively managing the portfolio toward long-term credit stability, and broad diversification is a pillar of our risk management framework. On the credit event side, during the quarter, one of our restaurant tenants filed for bankruptcy. We own seven properties that were leased to this tenant, which represented approximately 30 basis points of ABR. With identified backfill tenants on five sites and two locations under contract for sale, our expected recovery rate is consistent with our historical range of approximately 80%, which is better than our budgeted expectations. The relatively quick resolution timeline and a reasonable recapture cap rate demonstrate the inherent fungibility of our restaurant assets. As is typical, this situation was operator-specific in nature, and looking at our restaurant exposure overall, operator revenue and margin trends remain healthy and consistent with recent experience. With that, I will turn the call over to R. Max Jenkins, our Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics. R. Max Jenkins: Thanks, AJ. On the investment side, during the first quarter, we invested $389 million at a weighted average cash yield of 7.7%. Our capital deployment was broad-based across most of our top industries, with no notable departures from our investment strategy. During the first quarter, our investments had a weighted average initial lease term of 17.7 years and a weighted average annual rent escalation of 2.1%, generating a strong average GAAP yield of 8.8%. Our investments this quarter had a weighted average unit-level rent coverage of 3.1x, reflecting a conservative rent level and healthy unit profitability for our operators. We closed 22 transactions comprising 126 properties, of which 100% were sale-leasebacks. The average investment per property was $2.9 million this quarter, consistent with our historical range and reflecting our focus on investing in fungible assets. Though we do not normally comment on specific investments, this quarter we closed on a large portfolio that is noteworthy and was reported publicly by this tenant. In January, we acquired 74 properties in a $147 million sale-leaseback with Denny’s as part of their privatization transaction. With an average price of under $2 million per asset and strong unit-level coverage, the property profile exhibits the high level of fungibility that we seek in our restaurant investments. The transaction is a great example of how we add value to our relationships with a reliable and transparent closing process. It also shows how our deep industry expertise, especially in the restaurant sector, enables us to leverage proprietary data to drive an efficient underwriting process. Looking ahead, pricing in our pipeline remains constructive, with cap rates in the mid to high 7% range representing an attractive spread to our cost of capital, which is supportive of our long-term growth trajectory. After a great start to the year on the investment side, we increased our full-year investment guidance by $100 million to a new range of $1.1 billion to $1.5 billion. With that, I would like to turn the call over to Robert W. Salisbury, our Chief Financial Officer, who will take us through the financials for the first quarter. Robert W. Salisbury: Thanks, Max. Overall, we were pleased with our first quarter results. The company generated AFFO per share totaling $0.50, representing an increase of 11% versus the first quarter of last year. On a nominal basis, our AFFO totaled $105.8 million for the quarter. This AFFO performance was slightly above our expectations, driven by a combination of earlier deployment timing, lower cash G&A, and favorable portfolio credit trends. Total G&A in the quarter was $12.3 million and cash G&A was $8 million, representing just 5% of total revenue, down from 5.9% in the same period a year ago. As a result of continued cost discipline, we reduced our cash G&A guidance for the year by $1 million to a new range of $30 million to $34 million. We declared a cash dividend of $0.31 in the first quarter, which represents an AFFO payout ratio of 62%. Our retained free cash flow after dividends reached $40 million in the first quarter, equating to approximately $160 million per annum, and represents a substantial source of internally generated capital to support our future growth. Turning to our balance sheet, our income-producing gross assets increased to over $7.5 billion at quarter end. The increasing scale and diversity of our portfolio continues to enhance our credit profile. On the capital markets front, we completed an overnight equity offering in February, raising over $402 million. We also raised approximately $17 million of equity on our ATM. All of our equity issuance this quarter was completed on a forward basis. We settled $193 million of forward equity during the quarter, with a portion of the proceeds utilized to partially repay our revolving credit facility balance. Our balance of unsettled forward equity totaled $541 million at quarter end. The weighted average price of our unsettled forward equity was $30.55 at quarter end. During the quarter, our share price was modestly above this level. As a result, under the treasury stock method, the potential dilution from these forward shares is included in our diluted share count. For the first quarter, our diluted share count of 212 million shares included an adjustment for 671 thousand shares related to this treasury stock calculation, representing a minimal headwind to our AFFO per share for the quarter. Looking forward, our updated AFFO per share guidance range continues to include a conservative assumption for treasury stock method dilution of approximately $0.01 to $0.02 for the full year. Our pro forma net debt to annualized adjusted EBITDAre remained low at 3.5x at quarter end, which is well below our long-term average in the mid-4x, leaving us with ample dry powder to execute our 2026 business plan. We remain committed to maintaining a conservative balance sheet with low leverage and significant liquidity. As we have previously discussed, we continue to anticipate an unsecured debt issuance in the middle of the year to fund our growth pipeline and extend the weighted average maturity of our liabilities. Lastly, as we noted earlier, we have increased our 2026 AFFO per share guidance to a new range of $2.00 to $2.05, reflecting a growth rate of 7% at the midpoint and over 8% at the high end. With that, I will turn the call back over to Peter M. Mavoides. Peter M. Mavoides: Great. Thanks, Rob. In summary, we are happy with our first quarter results. Our high-quality portfolio is performing well, with a compelling 15-year weighted average lease term, sector-leading diversity, and a deliberate commitment to fungibility that allows us to effectively and efficiently manage the potential risks in the portfolio. On the investment side, our differentiated sourcing and underwriting discipline focused on delivering value to our longstanding relationships, and a well-capitalized balance sheet, position us well to continue to generate best-in-class total shareholder return. We will now open the call for questions. Operator: At this time, if you would like to ask a question, please press star-one. Once again, that is star-one to ask a question. We will take our first question from Caitlin Burrows with Goldman Sachs. Your line is open. Caitlin Burrows: Hi, good morning everyone. Maybe just looking at the acquisition volume and cap rates in the quarter, volume was high. You mentioned cap rates were stable. I think they were maybe a little lower than recent quarters. So on the cap rate side, could you just go through what drove that decline? Is it just the reality of business today, industry mix, the portfolio deal, something else? And would you expect that level to continue? Peter M. Mavoides: Hi, Caitlin, and thank you for the question. As we communicated on our last call, we expect cap rates in the mid to high 7% range, coming down from the 8% that we saw last quarter. Some of that is capital markets and competition. Some of that is industry mix. But certainly, the 7.7% is a healthy rate, and we feel pretty good about that. Caitlin Burrows: Got it. Okay. And then maybe just on the macro side, as you think of the macro volatility that is going on, can you go through how that impacted Essential Properties Realty Trust, Inc. in the quarter or not, and maybe how it impacts competition? Peter M. Mavoides: I think most of the volatility that we see today is going to impact us next quarter. The deals that are closing and pricing in Q1 were really baked in during Q4, which was much more stable. As we think about the current market—volatility, a higher 10-year—I think all, on balance, help us, as we are a consistent, reliable capital provider with a lot of liquidity and a long track record of reliably closing transactions, and counterparties value that in an uncertain and volatile market. On balance, I think it helps. Obviously, if volatility persists, it is going to put some strain on the consumer, and that puts strain at the margins on the portfolio, but certainly nothing that is outsized or gives us pause, which is one of the drivers of raising guidance here on this call. Caitlin Burrows: Got it. Thank you. Peter M. Mavoides: Thanks, Caitlin. Operator: Our next question comes from John James Massocca with B. Riley Securities. Your line is open. John James Massocca: Good morning. Peter M. Mavoides: Good morning, John. John James Massocca: Can you provide a little more detail on the Denny’s transaction? How is that sale-leaseback structured? Is everything kind of a uniform distribution in terms of lease maturity, or is there some variance there? And bigger picture, what made you comfortable with the tenant given some of the news that has been out there about location closures and the take-private transaction? Peter M. Mavoides: I will have Max tackle that question. I would start by saying, first and foremost, as a real estate investor, we take comfort in the properties that we are buying and the lease terms, and then the tenant comes into focus after that. Max? R. Max Jenkins: Thanks for the question, John. To start, these are small, bite-size, granular, fungible restaurant properties, which we have had tremendous success investing in over the years here. You have 74 properties at less than $2 million per asset. The key thing here was the average operating history was over 40 years across our portfolio, so you have durable, strong unit-level coverage, stable performance across the board, and an attractive yield. That is what we look for in restaurant investments. To your question about the structure, it was a combination of both corporate-owned and operated stores as well as multiple franchisees, which is good for us because we have geographic diversification and tenant credit diversification. We were very happy with the process. We have known the equity group for a few years, and it is a strong relationship. They relied on our certainty of close, and we are happy with how that transaction played out. John James Massocca: Okay. And then, relatively small numbers in terms of the overall ABR, but it seems like there was a bit of an increase in rent in some shorter lease maturity years, particularly 2026. Is there something driving that? Is it releasing, or is it something with one of the transactions that closed? R. Max Jenkins: Some of that was attributable to the Denny’s portfolio. We got creative with some of the franchisee stores, so it was not all a contiguous lease termination schedule, which is one of the reasons why we won the deal—we were able to get creative and underwrite every individual property, every franchisee, and the corporate credit as well. There is a little bit of noise, but I would not look too deeply into it. John James Massocca: The number of relationship transactions was a little bit lower this quarter. Was that primarily tied to Denny’s, or were there other transactions with new sale-leaseback partners? Peter M. Mavoides: I would say that decline is mostly related to Denny’s. John James Massocca: Okay. Alright. That is it for me. Peter M. Mavoides: Thank you very much. Thanks, John. Operator: Our next question comes from William John Kilichowski with Wells Fargo. Your line is open. Analyst: Hey, good morning. It is Jamie Feldman filling in for John here. A couple of questions for you. Denny’s was the result of a take-private of a public company. We are seeing a lot of activity in the capital markets—IPOs, take-privates, and a lot going on in the private credit world. What are your thoughts on larger-scale deals going forward versus one-offs? I know the one-offs have been more of a sweet spot. As you think about the pipeline and the conversations you are having with your seller-type clients, what do you think the world looks like over the next 12 to 18 months? Peter M. Mavoides: I do not think we are going to see a ton of ripple-down effect into the middle market tenants we are dealing with. Our larger transactions tend to be very episodic. Certainly, Denny’s is an outsized one. I would expect our portfolio going forward to still be predominantly small, granular deals and not the larger M&A-type transactions. It is rare that they happen in our industries at a size with real estate that really gives us an opportunity to get in there. I would imagine our pipeline going forward remains very granular. Analyst: Thanks for that. On cap rates, you mentioned more competition and they are coming in a little bit. How do you think about your investment spread to your cost of capital going forward, given your different capital sources and the ability to create the same level of accretion for the same dollar amount? Robert W. Salisbury: As we have talked about in quarters past, the investment spread is really more of an output than an input. We tend to price deals in the marketplace based on where the facts and circumstances shake out for each individual deal. On the capital side, our weighted average cost of capital has not moved materially relative to the last time we gave an update. If you look at where our unsecured debt trades today, it is probably in the mid to high 5s. If you look at our cost of equity, which we tend to use our AFFO yield as a proxy for, it is in the mid to high 6s. As you know, we retain nearly $160 million of annualized free cash flow after paying out dividends, which is a free source of capital for funding our investment pipeline. When you throw all those sources of capital into the blender, we are in the mid-5s on a WACC basis today. When you compare that to where we are deploying capital in the mid to high 7s, that is a healthy spread of 200 basis points plus and very supportive of our long-term growth algorithm. From where we sit today, we would love to see our share price at a higher level, but we are very much in business deploying capital for shareholders. Analyst: Thanks for that. One more—there are headlines about higher fuel costs, higher food costs, and now a lot of talk lately about fertilizer costs. As you digest the headlines and think about what could change over the next months and quarters, where do you think you will see the most impact across your tenant base? What are you watching the most as you think about your portfolio? Peter M. Mavoides: The casual dining and entertainment space has seen—and we expect to continue to see—the most weakness. That weakness manifests in flat to down 2% to 3% sales and some margin pressure, maybe 100 to 200 basis points, which can flow through to maybe 10 to 20 basis points on rent coverage. Thematically, we do not expect major shifts in our industries. We dig down to the idiosyncratic risk with specific operators that are either growing, over-levered, or grew too fast, and really understand how they are performing and how our sites within those credits are performing. The portfolio is performing well. Our credit performance is coming in better than anticipated early in the year, which supported our guidance raise. We do not expect material flow-throughs to our portfolio performance, but we are watching the consumer and specifically our casual dining and entertainment space. Operator: Our next question comes from Michael Goldsmith with UBS. Your line is open. Michael Goldsmith: Good morning. Thanks a lot for taking my question. First question is on the bad debt in the period. I think you mentioned a restaurant property group—presumably that is the Applebee’s franchisee. In addition, I think I saw that there was an impairment on the income statement. Can you talk a little bit about what you are seeing from your tenants and if the environment has gotten particularly challenging for any of them? Peter M. Mavoides: I will let AJ tackle the specific impairments. In general, much like my earlier comments, people are performing, and credit is coming in better than anticipated, which supported our guidance increase this quarter. It tends to be very idiosyncratic events that drive impairments and bad debt. On the impairment for the quarter, AJ? A. Joseph Peil: More broadly, on the health of the portfolio, we are paying a little bit closer attention to the entertainment and casual dining space, and you referenced in your question the casual diner we called out in the prepared remarks. That was significantly more episodic than it was a trend line. Broadly speaking, our restaurant portfolio is generating 2.5x-plus coverage across the board, so we feel good about the portfolio. On the impairment, I will have Rob comment on the balance sheet impact. Robert W. Salisbury: As AJ mentioned, many of these situations are idiosyncratic in nature. We have a robust quarterly impairment testing process that is well established and has been in place for a long time. For the impairment this quarter, it was driven primarily by one site at a former American Signature location. That tenant went bankrupt in the fourth quarter. It had been paying rent and the lease had not been rejected until a time during the first quarter, and that triggered the impairment testing process. In general, we have not been bullish on the home furnishing industry. That is an industry that we have not invested in for many years, and we are down to one location now, representing effectively a rounding error in terms of exposure to the portfolio broadly. Not a huge surprise in terms of where the exposure is, and it is not a material impact going forward. Michael Goldsmith: Thanks for that. As a follow-up, you have a term loan that is expiring in early February at a particularly low rate. How are you thinking about refinancing that? The refinancing would be a bit of a headwind for your 2027 earnings. Would you look to accelerate transaction activity to maintain the strong growth you have generated, or do you just proceed as normal? Peter M. Mavoides: We have talked a lot about terming out our debt and getting long term on the balance sheet to match-fund our assets. We are likely to look to the unsecured bond market at some point to take out that term loan, and there will be some incremental dilution as a result of that low rate rolling off. We think about our investment trajectory on a much longer-term basis and make investments in our team to be able to do more and source more and process more transactions—granular ones, which is where we think we add value. When we develop a business plan for 2027, we will look at that. Our ambition has been and continues to be to offer compelling total shareholder return in the net lease space. We will address that as it comes upon us. I would not say the automatic toggle is to buy more just to cover up a little bit of the earnings; we will look at a full business plan in 2027 to position ourselves as a best-in-class grower. Operator: Our next question comes from Haendel St. Juste with Mizuho. Your line is open. Haendel St. Juste: Hey, guys. A couple of quick ones left here for me. First, on the coverage for the investments in the quarter—down a bit versus last quarter when I think you had more industrial deals and below your overall portfolio average. I know this bounces around a bit, but how should we think about your coverage levels on deals going forward in this environment? Should this past quarter prove more of an anomaly? Peter M. Mavoides: I would not read too much into that subset of deals. It is highly influenced by the mix of industries and the individual transactions. We had 22 investments in the quarter across most of our industries, so there is always going to be a wide variation in that number. Restaurants tend to have some of the lower coverage, so the Denny’s properties in the mid to high 2s would certainly drag that down a little bit. Haendel St. Juste: Got it. Maybe some color on Chicken N Pickle—top 10 of yours. There have been some reports that some of their assets may be seeing pressure in terms of sales. Curious on your comfort level with that exposure and anything within the sales trends or credit overall that might be changing your view on that tenant. Peter M. Mavoides: They are a private company, so I do not know where there would be public commentary around their sales. As we said, the entertainment space has seen some challenges, and Chicken N Pickle sits within that bucket. We continue to believe we have good assets on the ground with that operator. We have seen some flat top line. Our coverage remains healthy, it is a good relationship, and we will continue to watch the trends in our entertainment bucket overall. Haendel St. Juste: And on car wash—your exposure there in the quarter was down a bit. Is that just by virtue of other investments in the quarter, or is there more of an effort to get that exposure down? Maybe remind us where you see the long-term exposure target for that segment. Peter M. Mavoides: We continue to think car wash is a very compelling industry with great cash flow dynamics and strong margins, and the real estate presents a compelling investment opportunity. As we have said in the past, we have a soft ceiling for any one industry at 15%. We have run car wash up to that level or above it, and we have comfort doing that given our deep experience and deep data within that space to underwrite incremental investments. As we disclosed, we sold a number of car washes in the fourth quarter where we saw an attractive bid from investors looking to take advantage of accelerated bonus depreciation. You are likely to see that bounce around. We are happy where it is, and we would be happy taking it up if we saw compelling investment opportunities. Operator: Our next question will come from Richard Allen Hightower with Barclays. Your line is open. Richard Allen Hightower: Good morning, guys. Back to the impairment charge booked in the first quarter—I did not catch this. Was it just the one furniture location that led to the entire $16-plus million? And help us with the mechanics—if you sell a vacant box or backfill with a cash rent-paying tenant, how does that affect any potential change to that number going forward? Peter M. Mavoides: A good chunk of that was the furniture store, but there were certainly others. We operate almost 2,500 properties, and there are multiple scenarios happening in any given quarter. You take an impairment when it becomes apparent the value has changed from what is on your balance sheet. You tend not to mark it up once something subsequent happens, but we will see what happens with that property, and our accountants will evaluate what to do accordingly. Richard Allen Hightower: Thanks. And you have a relatively muted official watch list—lower than some peers. Maybe walk us through how you define your watch list and where that stands today relative to a couple of quarters ago. Peter M. Mavoides: We define our watch list with a pretty clear methodology so investors can understand and track it. We define watch list as tenant credit risk of single-B and unit-level coverage risk of 1.5x. That has tended to hover around 1%. I think it is slightly up, maybe 20 basis points this quarter. A. Joseph Peil: It is 1.3% today. Peter M. Mavoides: 1.3%. Very helpful. Thanks. Operator: Our next question will come from Jay Kornreich with Cantor Fitzgerald. Your line is open. Jay Kornreich: Good morning. You mentioned that volatility could cause some strain on the consumer, yet you still feel confident in the investment pipeline as you increased guidance to $1.3 billion at the midpoint. How does the pipeline look, and what industry segments—beyond car washes—might you want to expand in as the year goes on? Peter M. Mavoides: We focus a large part of our investment activity on our relationships within our targeted industries. Our investment pipeline and opportunity set come from there. Generally, we anticipate growing our pie ratably across all our industries. Clearly, we had an outsized transaction in Q1 within the restaurant space, and you see that flowing through. Overall, I would expect it to grow ratably. We are pricing long-term investments—20-year deals—taking a long view of performance, coverage, and sales to develop that pricing. That does not change with short-term volatility. Jay Kornreich: Looking more into casual dining where you referenced some weakness—your exposure to casual dining actually declined 20 basis points this quarter even though you did the Denny’s acquisition. Were you getting out of some less favorable operators while moving into Denny’s? Peter M. Mavoides: Denny’s is in the family dining category given their focus on breakfast and lunch. We also had commentary around a casual diner in our prepared remarks—roughly 30 basis points of ABR—which we worked through, and that is probably what you saw flowing through the casual dining line. Jay Kornreich: Got it. Thanks. Operator: Our next question will come from Smedes Rose with Citi. Your line is open. Smedes Rose: Hi, thank you. As you are working with middle market operators—either existing or potentially new clients—do you get the sense their access to capital from other sources is more constrained now than it was a year ago, either from direct competitors to you or traditional financing like regional banks? Have you seen any changes there? Peter M. Mavoides: Hey, Smedes. Thanks for the question. At the margin, yes, though with 20 transactions during the quarter there are a lot of different scenarios. Overall, the capital markets environment is a little more constrained, but not materially so. Smedes Rose: And to clarify, you mentioned the seven properties in that bankruptcy—I think they were all Applebee’s. Five were backfilled. Are they now open, or are they just scheduled to have a new tenant come online? Peter M. Mavoides: They had a new Applebee’s tenant step right in to the lease. They are open, operating, selling hamburgers, and paying rent. Smedes Rose: Gotcha. Thank you. Operator: Our next question will come from Greg Michael McGinniss with Scotiabank. Your line is open. Greg Michael McGinniss: Good morning. Denny’s is now a top-five concept in the portfolio at around 1.6% of ABR. Are you able to disclose the split between corporate and franchise-owned exposure, and how many different Denny’s franchisees are now tenants? Peter M. Mavoides: We are not disclosing the exact split between corporate and franchisees, but it is pretty diverse. We have up to 15 franchisees. Greg Michael McGinniss: Thanks. For a company with your expected earnings growth, we were a bit surprised to see cash G&A guidance actually lowered. Could you talk about the drivers of that reduction? Robert W. Salisbury: As we looked at the guidance range this quarter, there were a number of moving parts on the cash G&A front. Our initial budget included a range of assumptions around hiring, technology spend, and other initiatives. In general, we are trying to be as efficient as we can as we move through the year. That drove the reduction on the cash G&A side, and you saw the other drivers in the press release. Peter M. Mavoides: Thank you. Operator: Our next question comes from Eric Martin Borden with BMO Capital Markets. Your line is open. Eric Martin Borden: Good morning. On the disposition front, are there any tenants or verticals where disposition yields in the market are tighter than your internal view, where you would be more inclined to recycle capital given the current market yields? Peter M. Mavoides: Pricing is very idiosyncratic. As Rob walked through earlier, our weighted average cost of capital is in the mid to high 5s. We do not see a lot of properties within our portfolio that would trade below that. Generally, our disposition activity is focused on de-risking sales and portfolio shaping, and those assets typically do not garner premium pricing. We are not using dispositions as an accretive source of capital. Eric Martin Borden: Great. Thank you. Operator: Our next question will come from Jana Galan with Bank of America. Your line is open. Jana Galan: Thank you. Good morning. Following up on dispositions, it is funny to see 2Q-to-date activity on dispositions higher than acquisitions. Do you think disposition activity will be elevated this year, or is this just a little more first-half heavy? Peter M. Mavoides: I would not read too much into that. It is really timing. The closing timeline on our dispositions tends to be unpredictable, and we do not control when the buyer is going to close. I would expect normalized disposition activity in the ~$20 million per quarter range. Jana Galan: Thanks, Pete. Operator: Our next question comes from Analyst with Capital One Securities. Your line is open. Analyst: Hi, everyone. Thank you for taking my question. On the previous call, you mentioned the 10-year yield in the mid to high 3s would be a spot where competition could increase. In true markets fashion, yields dove down toward 4% and then came up since. In that short period, were there any changes to the transaction marks that you saw, or was it too quick to glean anything there? Peter M. Mavoides: I would say it is too quick. With a roughly 90-day transaction cycle, we are constantly pricing and closing on deals, and two- to four-week volatility really does not come into play. Analyst: Thank you. Operator: We do have a follow-up question from Caitlin Burrows with Goldman Sachs. Your line is open. Caitlin Burrows: Hi again. Two more modeling questions. You increased full-year acquisition guidance, so it seems like you are pretty confident, but it also looks like the start to 2Q has been slow. Do you think 2Q will end up being a lower volume quarter? Peter M. Mavoides: I think it will likely be lower than the first quarter given the start to the quarter. Generally, the pipeline is full. Without putting too fine a point on it, something in the $275 million to $325 million range is reasonable, but it is too early to tell. Caitlin Burrows: And on the straight-line rent adjustment, it was $15.365 million in 1Q. That seems higher than it has been. Is that the new normal, or was there something one-time in that? Robert W. Salisbury: Appreciate you getting into the weeds on the straight-line rent adjustment. In the fourth quarter, we had a couple of one-time items that moved that around. If you look back to the trend line prior to Q4, the number in 1Q is more in line with that trend. In general, the 1Q number is a pretty good run rate absent any acquisition activity, which would obviously impact where straight-line goes from here given that we are booking GAAP cap rates in excess of our cash cap rates. Caitlin Burrows: Okay. Operator: Thank you. It appears we have no further questions at this time. I will turn the call over to Peter M. Mavoides for any additional or closing remarks. Peter M. Mavoides: Great. Thank you all for your participation in the call today and for your questions. We look forward to seeing you at upcoming conferences, and have a great day. Operator: This concludes today’s program. Thank you for your participation, and you may disconnect at any time.