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Operator: Hello, everyone. Thank you for joining us today for the Texas Capital Bancshares, Inc. First Quarter 2026 Earnings Conference Call. My name is Sammy, and I will be coordinating your call today. I will now hand over to your host, Jocelyn Kukulka, Head of Investor Relations, to begin. Please go ahead, Jocelyn. Jocelyn Kukulka: Good morning, and thank you for joining us for Texas Capital Bancshares, Inc.’s First Quarter 2026 Earnings Conference Call. I am Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today’s presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share, and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today’s earnings release, our most recent Annual Report on Form 10-K, and subsequent filings with the SEC. We will refer to slides during today’s presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open the call for Q&A. I will now turn the call over to Rob for opening remarks. Rob Holmes: Good morning, and thank you, Jocelyn. We enter this quarter with clear conviction in our strategy and the disciplined execution required to continue unlocking substantial value for our shareholders and clients. First quarter outcomes reflect our shift in strategic focus to consistent execution and realizing the full potential of our investments. This quarter, we took decisive steps to align our organizational structure with that imperative. I am pleased to announce strategic executive leadership appointments that further enhance our positioning for growth. Jay Klingman will transition to Head of Private Bank and Family Office following five successful years building and scaling our middle market and business banking franchises. Dustin Cosper assumes the role of Head of Commercial Banking overseeing Real Estate Banking, Middle Market Banking, and Business Banking. This shift positions the firm to drive enhanced client outcomes across private banking and commercial banking through more comprehensive and integrated solutions. John Cummings has been named Chief Operating Officer, charged with driving sustained operational excellence and further positioning our platform for scale. Matt Scurlock, Texas Capital Bancshares, Inc.’s Chief Financial Officer, will assume the role of President of Texas Capital Bank, further aligning financial, operational, and business leadership across the organization. We have also appointed Jeff Hood as Chief Human Resources Officer to ensure our talent strategy and culture align with our operational and commercial ambitions. He will be joining the firm in early May. Turning to the quarterly results, contributions across the firm enabled another quarter of strong financial progress, as adjusted quarterly earnings per share increased 72% versus the prior year period to $1.58 per share as total revenue increased 16% year over year to $324 million, driven by 8% growth in net interest income and 56% growth in noninterest revenue. Fee income from our areas of focus increased 59% year over year, reaching $58.8 million in the quarter, a record for the firm. Notably, all three focus areas delivered record quarterly fee income, demonstrating the platform’s continued maturity and enhanced cross-functional strength. This is not a single-driver story; it reflects embedded momentum across advisory, capital markets, wealth, and treasury services, all facilitated by excellent client banking coverage across the platform. New client acquisition remains a fundamental driver to platform value. Each quarter, the firm onboards clients that generate revenue across multiple service lines, a structural advantage that compounds over time. Investment banking fees of $42.3 million grew 89% year over year with broad contributions across syndications, capital markets, and sales and trading, reflecting our unique ability to deliver high-quality client outcomes across a range of product solutions. Treasury product fees of $12.1 million increased 14% as existing clients continue to leverage our differentiated payment capabilities and new clients onboard at an accelerated pace. Wealth management fees also increased for the third straight quarter, reflecting building momentum that we expect to continue through the year. In total, fee income comprised 21% of total revenue versus 16% a year ago, demonstrating the success of our multiyear shift toward a more diversified, capital-efficient, and resilient revenue base. This trajectory directly reflects disciplined client selection and our ability to deepen relationships over time. Our first quarter capital position highlights both the strength of our platform and the efficacy of our capital management approach. Tangible book value per share of $75.67 increased 11% year over year, marking an eighth consecutive quarterly record for this important metric. During the quarter, we repurchased approximately $75 million of common shares at a weighted average price of $96.82 per share, demonstrating our confidence in the franchise and our conviction that earnings momentum will continue. Tangible common equity to tangible assets of 9.87% exceeds peer levels, and CET1 of 11.99% remains well above our stated target of 11% and internally assessed risk profile. As previously discussed, we do not manage the firm to an expected economic scenario. We instead regularly evaluate potential macroeconomic impacts on both credit quality and earnings capacity. Detailed reviews over the past few quarters include topics such as private credit, disruption from artificial intelligence, and exposure to data center supply chains, all of which confirm our adherence to disciplined client selection and diligent concentration management. Leading up to the recent conflict in the Middle East, we assessed the impact of rising commodities pricing on a series of client segments, including commercial clients that rely on commodity inputs such as helium, urea, and aluminum, as well as clients whose customers are potentially impacted by rising prices. While our assessment across these topical areas suggests impacts on specific clients are, at this point, tangential, we nonetheless continue to assume a credit posture in the reserve calculation that is increasingly reliant on a downside scenario weighting. We maintain a balance sheet that is intentionally positioned, carry capital and reserves that provide meaningful flexibility, and deliver a breadth of products and services that keep the firm relevant to our clients in any environment. That posture is a choice—one we have made consistently—and is the reason we approach periods of uncertainty from a position of strength and are front-footed in the market. Our earnings trajectory is sustainable. Our balance sheet is strong. And our platform is positioned for durable growth. Today, we are pleased to announce the initiation of a quarterly common stock cash dividend, a tangible expression of our confidence in earnings momentum and our commitment to returning capital to shareholders while funding continued organic growth. This dividend reflects a mature platform, the strength of our capital position, and management’s conviction in the long-term trajectory of the firm. Thank you for your continued interest in and support of Texas Capital Bancshares, Inc. I will now turn the call over to Matt for details on the financial results for the quarter. Matt Scurlock: Thanks, Rob, and good morning. Starting on Slide 4, first quarter total revenue increased $43.5 million, or 16%, year over year, driven by 8% growth in net interest income and a 56% increase in noninterest revenue. Net interest income increased $18.7 million year over year to $254.7 million, in line with our January guidance of $250 million to $255 million, which anticipated a modest linked-quarter decline of $12.7 million consistent with typical first quarter seasonality. Net interest margin expanded 24 basis points year over year to 3.43%, the sixth consecutive quarter of year-over-year expansion, and improved 5 basis points to the prior quarter. Noninterest expense increased 5% year over year to $213.6 million. On an adjusted basis, noninterest expense was $212.2 million, an increase of $9.1 million relative to the first quarter of last year, as expense-based productivity continues to deliver anticipated revenue growth and incremental new investments align directly with defined areas of capability build. Taken together, pre-provision net revenue increased $33 million, or 43%, year over year to $110.4 million. Adjusted PPNR reached $111.8 million, up $34.4 million, or 44%, marking the fifth consecutive quarter of year-over-year expansion. Provision for credit losses of $16 million was stable year over year, reflective of anticipated quarterly credit trends and management’s continued assumption of economic scenarios materially more severe than consensus estimates. Net income to common was $69.5 million, up $26.7 million, or 63% year over year, and adjusted net income increased 65% to $70.5 million. Strong financial performance, coupled with a disciplined multiyear share repurchase program, is consistently driving meaningful EPS growth for our shareholders. First quarter earnings per share reached $1.56, up 70% year over year, with adjusted earnings per share of $1.58, up 72% year over year. Book value per share of $75.71 and tangible book value per share of $75.67 both increased 11% year over year, representing the eighth consecutive quarter and record high for the firm. The allowance for credit losses held relatively steady at $331 million, or 1.32% of total LHI and 1.81% of total LHI excluding mortgage finance. Total LHI of $25.2 billion increased 13% year over year and 5% linked quarter, with contributions across both the commercial and mortgage finance portfolios. Period-end commercial loans of $12.5 billion increased $1.2 billion, or 10%, year over year, driven by now consistent contributions across industries and geographies and sustained quarterly increases in target client acquisition. Linked-quarter commercial loans increased $336 million, or 3%, representing the ninth consecutive quarter of commercial loan growth and continuing the trajectory of risk-appropriate and return-accretive portfolio expansion facilitated by our bankers across Business Banking, Middle Market, and Corporate Banking. Commercial real estate loans of $5.3 billion decreased 9% year over year and 2% linked quarter, as payoff rates continue to outpace client appetite for capital deployment, with expectations previously provided for full year average CRE balances to decline approximately 10% remaining intact. Despite the expected seasonal linked-quarter pullback, average mortgage finance loans increased 32% year over year to $5.2 billion, with period-end balances increasing to $7 billion, 33% above average for the quarter and consistent with the annual pattern of origination volumes building at the end of Q1 heading into the spring and summer home-buying season. Enhanced credit structures now represent 67% of period-end mortgage finance balances, up from 59% at Q4 2025, further improving the blended risk weighting of the portfolio to 53%. We anticipate that an incremental 5% could migrate to the enhanced structures over the next several quarters, at which point we should reach the maximum near-term potential for the portfolio. Total deposits of $28.5 billion at quarter end increased 9% year over year and 8% linked quarter, with reductions in interest-bearing deposits associated with seasonal tax payments supplemented by modest levels of brokered deposits to support the temporary and predictable late Q1 growth in mortgage finance volumes. Ending-period commercial managed Experian deposits increased $76 million, or 2%, and are now up $309 million since Q3 2025, with average commercial noninterest-bearing deposits remaining at 13% of total deposits for the quarter. Average noninterest-bearing mortgage finance deposits of $4.2 billion decreased $288 million year over year, bringing the self-funding ratio down to 80% for the quarter, as eight quarters of focused reduction clearly improved both the balance sheet resilience and earnings generation. We have now established a more balanced deposit base with a complete treasury offer increasingly embedded across our clients’ platforms and would expect the mortgage finance self-funding ratio to settle between 70% to 80% in the near to medium term. The majority of mortgage finance noninterest-bearing deposits are compensated through relationship pricing, resulting in application of an interest credit to either the client’s mortgage finance or commercial loan yield. The compensation attribution is evaluated on a periodic basis, and we determined that the 60% mortgage finance and 40% commercial split be updated to reflect the evolution of the mortgage finance business, resulting in a 70% mortgage finance and 30% commercial distribution beginning on the first of this year. Average cost of interest-bearing deposits declined 15 basis points linked quarter and 65 basis points year over year to 3.32%, as we continue to add value to banking relationships beyond simply price. This is in part evidenced by the 75% cumulative interest-bearing deposit beta realized since the beginning of the cycle. During the quarter, we completed a $400 million fixed-to-floating senior notes offering due in 2032 priced at a coupon of 5.301%. Proceeds from the issuance will be used in part to redeem the holding company’s $375 million fixed-to-floating rate subordinated notes in May, leveraging improved risk-weighted asset positioning associated with the enhanced credit structures to fulfill holding company cash objectives with a lower-cost instrument. Current and prospective balance sheet positioning continues to reflect the balance sheet and business model that is intentionally more resilient to changes in market rates. Our modeled earnings-at-risk improved as expected this quarter as market rates moved consistent with our previously communicated preferences for adding duration to the swap book. During Q1, $350 million in swaps matured with a 3.31% receive rate. These were replaced with $500 million in receive-fixed OIS swaps executed at 3.45%, with $100 million becoming effective March 1 and the remainder becoming effective on April 1. Looking ahead, we will continue to exercise discipline in appropriately augmenting rate-fall earnings generation embedded in our business model. At this point, we are comfortable with our near-term positioning across a range of forward interest rate paths. Net interest income of $254.7 million declined $12.7 million in the quarter, primarily related to seasonal mortgage finance dynamics and fewer days in the quarter, which were partially offset by quarter-over-quarter improvements in deposit costs. LHI excluding mortgage finance yields compressed modestly, consistent with expected SOFR-linked loan repricing. Adjusted noninterest expense of $212 million increased 5% from Q1 2025, reflecting continued investment in frontline talent across fee income areas of focus and increasing tech-enabled capabilities meant to both improve the client experience while positioning the firm for continued scale. Q1 adjusted salaries and benefits increased $29 million to $130.9 million due to $17 million of seasonal compensation, annual incentive reset, new frontline talent, and annual merit-based salary increases. For the remainder of 2026, we continue to anticipate approximately $125 million of salaries and benefits and $75 million of all other noninterest expense, both on a quarterly basis. As Rob described, noninterest income increased 56% year over year and 15% linked quarter, setting several records for the firm. Noninterest income as a percentage of total revenue reached 21% in the quarter, up from 16% in Q1 2025, consistent with our strategic priority to increase noninterest income through expanded products and services delivered across our platform. Investment banking and trading income of $42.3 million increased 89% year over year, supported by broad-based contributions across the platform. Wealth management and trust fee income of $4.4 million also represented a record high, increasing 11% year over year, supported by assets under management of $4.4 billion, which increased 16% year over year from organic net inflows and favorable market conditions. Treasury product fees at $12.1 million—a record high as well—increased 14% year over year, driven by continued client adoption and the expansion of payment and cash management capabilities that have driven north of 10% growth in gross payment volume in four of the last five years. Total noninterest income is expected to be $65 million to $70 million for Q2, with revenue attributed to investment banking and sales and trading contributing approximately $40 million to $45 million. The total allowance for credit loss, including off-balance sheet reserves, of $331 million remains near our all-time high. When excluding the impact of mortgage finance allowance or related loan balance, the allowance was relatively flat linked quarter at 1.81% of total LHI, which is in the top decile among the peer group. Net charge-offs for the quarter were $17.4 million, or 30 basis points of LHI, tied to previously identified credits in the commercial portfolio. During the quarter, previously discussed commercial real estate multifamily credits were further downgraded as projects in lease-up continue to require ongoing rental concessions to gain or maintain occupancy. Despite these net operating income-influenced grade adjustments, material project-specific equity and sponsor support give us confidence in the fundamental portfolio quality moving through the year. Capital ratios remain strong and well in excess of our internally assessed profile. Tangible common equity to tangible assets of 9.87% and a CET1 ratio of 11.99%. During the quarter, the firm repurchased approximately 770,000 shares for $74.6 million at a weighted average price of $96.82 per share, representing 127% of prior month’s tangible book value per share. We remain committed to prudent capital deployment that balances organic growth and tangible book value accretion through share repurchases at levels that we view as attractive relative to the firm’s intrinsic value. Additionally, against the backdrop of more durable and structurally higher levels of earnings generation across the platform, the Board of Directors has approved the initiation of a quarterly common stock dividend of $0.20 per share, providing another tool to effectively manage capital on behalf of our shareholders. For full year 2026, our overall outlook remains unchanged from guidance given in January as we continue to realize scale from multiyear platform investments. Guidance accounts for one additional rate cut in December with a Fed funds rate of 3.5% at year end. We anticipate total revenue growth in the mid- to high-single-digit range driven by industry-leading client adoption and continued growth in our fee income areas of focus, with full year noninterest revenue expected to reach $265 million to $290 million. Anticipated noninterest expense growth in mid-single digits reflects increased year-over-year compensation expenses tied to improved performance, targeted expansion in defined client coverage areas, and sustained platform investments. Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we reiterate the full year provision outlook of 35 to 40 basis points of average LHI excluding mortgage finance. This outlook reflects another year of positive operating leverage and sustainable earnings generation. Operator, we would now like to open the call for questions. Thank you. Operator: We will now open the call for questions. Our first question comes from Woody Lay from Keefe, Bruyette & Woods. Your line is open, Woody. Please go ahead. Woody Lay: Hey, good morning, guys. The momentum is really great to see. You mentioned some of the uncertainty in the Middle East and feel good about your clients. As it pertains to the investment banking pipeline, I know last year with some of the tariff noise, we saw some timing pushed out to the back half of the year. Do you expect a similar dynamic to happen here if the uncertainty lasts longer in the quarter? Matt Scurlock: I would start by saying that we are really pleased with our track record of finding the right solutions for our clients, which continued this quarter, whether that is bank debt or non-bank debt. We were the number one arranger of middle market syndicated credit in the country this quarter, along with arranging over $11 billion of debt outside the bank markets for our clients, and we raised over $1 billion on our still-new equities platform. When you think about how we use the investment bank as a differentiator in the market, the coverage bankers are doing a great job of leveraging the product partners to win new relationships, particularly with our target prospects, evidenced in part by over half of the investment banking fees outside of sales and trading we generated in the last six months coming alongside new client acquisition in banking. These record fee quarters continue to be underpinned by much more granular deal volumes. These are not a couple of large transactions; they are a durable, consistent approach to delivering service in the market. We still feel really good about the $40 million to $45 million for the quarter and $160 million to $175 million for the full year. Rob Holmes: I would just add one thing, Woody. Matt clearly articulated what I think are very good statistics. Remember, we are not doing investment banking with a different set of clients. We are delivering the best products to our middle market and corporate clients through the great relationships our middle market and corporate bankers have with those clients, which gives credibility to the investment bank and bankers when they come into the room. I think that is a differentiated part of this platform. Woody Lay: Got it. That is helpful color. Maybe shifting over to the mortgage finance business, the period-end loan balances were well above where they have been historically. I know that can be volatile with timing, but any expectation for average balances as we head into the second quarter? Matt Scurlock: There was quite a bit of volatility in Q1 on 30-year fixed-rate mortgages. We got as low as about 5.98% in February and then hit the high point in March at about 6.64%. If you will recall, the full-year guide of about 15% is predicated on a $2.3 trillion origination market and an average 30-year fixed-rate mortgage near that context, which—while there could be some volatility along the way—we still think is the right number for the full year. That gets you to about a $6 billion full-year average warehouse balance. We think that is actually the number for Q2 as well, Woody—about $6 billion of average mortgage finance volumes. You should end around $7.2 billion, and that comes with about $4.5 billion of average mortgage finance deposits. So that self-funding ratio should push down to around 75%, which should help the yield move from around 3.99% this quarter to somewhere around 4.05% in Q2. We have clearly completely restructured that business, with now 67% of those balances residing in the enhanced credit structure, which is generating significant capital. For the loans that are in the structure, it is a weighted average risk weighting at 30%, 53% for the entire portfolio, and 78% of those clients do things with us beyond the dealer, and 100% of them are on our treasury platform. Incremental volume in the mortgage finance business is significantly more profitable for us now than it has ever been. Rob Holmes: I would just suggest that the new credit-enhanced structure fundamentally changed the firm. It took a business that by definition was a subpar loan-only business and moved it—in concert with a new product and service platform—into one where we are doing many things with those clients, and we are lending to them through a dramatically less risky structure that allows for higher returns and releases capital. It fundamentally changed the way we look at that business, and it is more of an industry vertical than a mortgage warehouse. Matt Scurlock: And just to put a couple more numbers around that, Woody, over the last twelve months, we have grown loans by $2.8 billion, or 13%, and we have also bought back 6% of the company—$228 million—for inside of $87 a share, while actually growing CET1 by 36 basis points. This has been a critical factor not just in structurally enhancing profitability, but in allowing us to deploy capital in a variety of different ways. Woody Lay: Alright. That is all for me. Thanks for taking my questions. Rob Holmes: Thanks, Woody. Operator: Next question comes from Casey Haire from Autonomous Research. Your line is open, Casey. Please go ahead. Jackson Singleton: Hi, good morning. This is Jackson Singleton on for Casey Haire. Matt, just wanted to start on NIM. Any color you can give us on the drivers heading into Q2? Matt Scurlock: Happy to walk through that. We are pleased with the ability to generate NII improvement across a range of interest rate environments, and as we have talked about in previous calls, that is predicated on improved deposit repricing—which for us is a result of being more relevant for clients—and a deliberate move away from historically higher-cost funding sources. That said, we have been pretty vocal on previous calls: we think the cost of funding for the industry is going to go higher over time, and our strategy and resource allocation contemplate the mix of businesses and services we will need to earn an acceptable return against that reality. We have no additional reduction in deposit cost incorporated in the full-year guide. For Q2, we do anticipate slightly higher interest-bearing deposit costs to support volumes necessary to fund the seasonal, predictable, and temporary increase in mortgage finance, which we just walked through. As you see mortgage finance grow in the second quarter, that is a lower-yielding asset. The yield is moving from 3.99% to 4.05%, whereas the yield on all other loans outside the mortgage finance business stays around 6.65%. That blends the overall loan yields down from 6.04% to the mid-to-high 5.90%s, which should push the margin down to 3.35%–3.40%, while seeing NII actually increase on the larger balance sheet to $260 million–$265 million. Jackson Singleton: Got it. Super helpful. And then just one follow-up. How should we think about buybacks going forward, given CET1 well above 11%, but TCE is now around 10% which is around the soft target, and you just announced the dividend? Any color on how management is thinking about buybacks for the rest of the year? Matt Scurlock: We have $125 million of remaining authorization. We have shown a propensity to buy back inside of 1.3 times tangible (which is essentially two- to three-year out tangible book value per share). I would look for us to be constructive around those prices. The decisions around the buyback or the recently announced dividend—which Rob can talk to—were not influenced by potential changes in the regulatory capital treatment. But for you, that is roughly a 100-basis-point potential pickup in rent cap should you see these changes go through. We are confident in our current levels of earnings generation, our capital position, our reserve levels, and liquidity, and we are pleased to have another tool at our disposal to effectively allocate capital. Rob Holmes: I would just say that we have proved to be good stewards of capital allocation. Distribution policy is important to shareholders and to us, and the dividend shows great confidence in the platform, our bankers, our earnings, and prospects going forward, as well as our capital and our risk posture. We are excited about having another quiver and the ability to add to the distribution policy as we go forward. Jackson Singleton: Great. Thanks for all the help. I will step back. Operator: Our next question comes from JPMorgan. Please go ahead. Analyst: Good morning. This is Mike Petrini on for Tony. I am curious if you could provide any color on what drove the quarter-over-quarter increase in NPAs. Any industry in particular that stood out? Matt Scurlock: Those are a few previously identified credits that we have been reserving for now for multiple quarters. They are continuing to go through workout in a way that we think is going to be maximally beneficial for the firm. No industry concentration—there is one multifamily and a couple of corporate credits—consistent with our guide of 35–40 basis points provision for the year. Analyst: Great. And then just one on expense. How are you thinking about the split between comp expense and non-comp expense? Matt Scurlock: When you strip out all the seasonal comp and benefit expense for Q1—about $17 million—and add back in annual incentive comp accruals, the impact of new hires primarily in fee income areas of focus, and then just a few weeks of merit increases that were processed late in the quarter, that moves salaries and benefits to about $125 million in Q2. All other noninterest expense remains around $75 million. As a reminder, that is heavily focused on expenses associated with putting new capabilities in the market—growth in occupancy, marketing, and technology expense—which is expense in support of revenue. Think roughly $200 million of total noninterest expense in Q2, and that is probably a good number for Q3 and Q4 as well. As a reminder, that is enough to cover the high end of the revenue guide; if you see revenue, particularly fees, come in at the high end, you would have some offsets in noninterest expense. Analyst: Great. Thank you. Matt Scurlock: You bet. Operator: Our next question comes from Jared Shaw from Barclays. Your line is open, Jared. Please go ahead. Jared Shaw: Hi, sorry about that. Good morning. With the self-funding ratio guiding lower now, what does that mean for total end-of-period and average DDA balances as we look at next quarter? Matt Scurlock: We like, in aggregate, $4.5 billion of average balances for mortgage finance for next quarter, and then you will see that drift a little bit higher toward the end of the quarter. But we think we have essentially right-sized our deposits in that particular segment, with almost all of those clients having appropriate treasury relationships. I would not anticipate the self-funding ratio really moving much lower. I think somewhere between 70%–80% is the right way to think about it over the rest of this year. Jared Shaw: Alright, thanks. And I think you went through the NII outlook for second quarter. Was that $260 million to $265 million? Did I catch that right? Matt Scurlock: You got it right—$260 million to $265 million. Margin is 3.35%–3.40%. Jared Shaw: Thank you. Matt Scurlock: You bet. Operator: Our next question comes from Jefferies. Your line is open. Please go ahead. Analyst: Hey, guys. Max on for David. Just a quick question around C&I and the pipelines. I know you attributed a lot of the growth to actual new client growth rather than just high utilization. Could you talk about new client growth versus higher utilization for fiscal year 2026? Matt Scurlock: Utilization is up 1% linked quarter and down 2% year over year. We continue to sit around that 45% level. The majority of the growth continues to come from new client acquisition. Commitments are up $2.8 billion—almost 15%—year over year. An important thing to remember is that when we are acquiring these clients through the banking verticals, we are doing other things with them. They are generating investment banking fees quite often at the outset of the relationship. Over 90% of them are doing treasury business with us, which is why you are seeing the pickup in year-over-year treasury product fees. The incremental profitability associated with new client acquisition in C&I is significant. Rob Holmes: And to Matt’s point earlier, when you arrange $11 billion of debt for clients that is not bank debt—Term Loan B, high yield, and private credit—and close to $1 billion of equity, the new clients are not only showing up through loan growth. They are showing up in other ways across the firm. Analyst: Got it. Thank you very much for that color. I appreciate it. Just a quick follow-up. Going to CRE loans, paydowns decreased again this quarter. Any color you can add to that? Any specifics you expect for CRE declines for the rest of the year? Matt Scurlock: I would still think average balances are down at least 10%. Average was $5.7 billion last year; we think it is down at least 10%. You could see about $100 million come off in each of the next three quarters. Credit availability in that space dramatically outstrips demand. We are fairly focused on multifamily and industrial, have a great set of clients, and the starts in those spaces are at the lowest levels in ten years. The reduction of those balances is simply a reflection of our clients transacting less, and we have plenty of opportunities to deploy capital elsewhere, so we will not chase lower yields on the marginal client. Analyst: Great. Thank you very much. Operator: Our next question comes from Matt Olney from Stephens. Your line is open, Matt. Please go ahead. Matt Olney: Yes, thanks. Good morning. Most of my questions have been addressed. I want to go back to capital. I appreciate the commentary around the common dividend and the buyback. Where does M&A rank as far as the capital priority list this year? Rob Holmes: Nothing has changed there. It is part of the menu on the strategy continuum. We continue to look at opportunistic alternatives in M&A, whether it is whole bank or otherwise, and we will continue to do that. The great news—and you are going to get tired of hearing me say it—is we do not have to do anything. Our M&A transaction was a transformation, and we still have a ton of synergies, both cost and revenue, that we can exploit and that will benefit shareholders for a long period to come. We are excited about being in the position we are in and not having to do something strategically to achieve our goals. Matt Olney: Okay. Thanks. That is all for me. Operator: Our next question comes from Jon Arfstrom from RBC. Your line is open, Jon. Please go ahead. Jon Arfstrom: Thanks. Good morning, everyone. A few follow-ups. Matt, you mentioned technology spending as one of the drivers you are focused on. Can you talk a little bit about where you are spending in terms of tech and what some of the projects are? Matt Scurlock: We hope at this point we have a track record of effectively investing in a technology platform that yields either new products that generate revenue with target clients or drives real structural efficiencies. The mandate here is no different. We continue to look aggressively at ways to automate, digitize, and eliminate processes that can improve the client experience, improve the employee experience, and decrease operating risk. Some of the year-over-year increase in tech spend is capitalized project portfolio that should reduce expense or show increased revenue elsewhere on the platform. We are also quite focused on figuring out ways internally to leverage AI, so you see some of that come through in tech expenses as well. Rob Holmes: Jon, I grew a little frustrated a short period back about our progress with AI, and we realized to do AI really well, you need a great data platform. We have been building that for the past five years. It is called Big Sky. We are in the cloud with a modern tech infrastructure. We have over 250 internal APIs that you need for AI. We have all the things that we need, and in the past short period of time, we have made up a lot of ground. We have our own secure multi-LLM AI platform called Ranger. It is available to most of our employees and was built by our tech team. About 80% of employees have accessed it in the last four weeks, so it is widely used and widely adopted. We have a three-pronged strategy on AI. Number one, we have firm-wide agents—right now in production for loan ops and fraud. We will have credit agents to do portfolio reviews, etc., in the next quarter, with great adoption by the credit team. We have over 170 processes that we are mapping for firm-wide agents as well. Every company has process mapping, but they are often done vertically—not horizontally. We are mapping processes as a continuum—loan origination, approval, onboarding, monitoring, etc.—and will digitize, improve, or apply AI on top of that process mapping. We also have an agent builder with about 64 employees who have created 280 agents they want to use. We are tracking those agents; if multiple employees created the same agent, we will create a better one, retire the others, and drive firm-wide adoption. Lastly, we are selectively deploying third-party AI solutions for certain use cases. We think that is the right way to move forward, and we are excited about it. We have embedded governance and risk management into every stage of development and deployment, which is important. Jon Arfstrom: That is very helpful. One question on the promotions—and congrats, Matt, on that. The Private Banking and Family Office title reads wealth capabilities as well. Is that the first time we have seen Private Banking and Family Office named in your documents? What is the plan there, and does that include wealth management? Where are you in terms of the timeline for growing that business? Rob Holmes: That business was a legacy business here; however, like most things we found, the infrastructure was poor. We had to move to a new custodian, improve the digital client journey, restructure service, and make a lot of changes. Now that is in really good shape. We have one of the highest-rated high-yield savings digital accounts in America, so we know how to digitally improve client journeys. Now our client journey on our private bank platform is as good as a money center bank. I suggest you try it—we can onboard you, Jon, if you want. Our custody works right now. Our portfolios have always performed competitively, often better than peers for like-risk portfolios. With the right infrastructure and client journey, we can put real weight behind that business and grow it. Our bankers are already calling on these clients—the managers of these companies—and the brand has won their trust and confidence. Just like a middle market banker is the point of the spear for investment banking, they can do the same for wealth, but with much more confidence. Jay has run a wealth business before here in Texas. He knows our clients and can partner really well with Dustin—who used to report to Jay—running Commercial Real Estate. They can partner on growing that business across the platform. The Family Office is new as of about six months ago. We hired someone from a money center bank who ran that business on the West Coast to come here. There are more family offices in Texas than any other state, and more in Dallas than any other city in Texas. We think that is a key component in differentiating both for the private bank as well as investment banking and treasury. Jon Arfstrom: And then just one last one for me—on the dividend. I like that decision, but I am curious: how heavily debated was that at the board level, or was it a relatively easy decision and rational in terms of the life cycle of the company? Rob Holmes: The good news is the Board has complete confidence in this management team and the people who work here. We have created a lot of credibility at the Board level, just like I hope we have at the investor level, and certainly with the regulators, by doing exactly what we said we would do over a long period of time—both in the short and long run. Our employees—bankers, middle and back office—have delivered exactly what we said. When you have these conversations, it is on the backdrop of a lot of confidence and proven performance that gives them the confidence to fully support the dividend. It was an important decision, but it was not labored. Operator: We currently have no further questions. I would like to hand back to Chairman and CEO, Rob Holmes, for some closing remarks. Rob Holmes: Just want to say thank you to everybody for dialing in, and we look forward to next quarter. Operator: This concludes today’s call. We thank everyone for joining. You may now disconnect your lines.
Operator: Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. First Quarter 2026 Earnings Call. On the call today are James L. Eccher, the company's Chairman, President and CEO; Bradley S. Adams, the company's COO and CFO; Darin Campbell, the company's Head of National Specialty Lending; and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second Bancorp, Inc.'s comments today will contain forward-looking statements about the company's business, strategies, and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. The company does not undertake any duty to update such forward-looking statements. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the home page under the Investor Relations tab. Now I will turn it over to James L. Eccher. James L. Eccher: Hey. Good morning, and thank you for joining us. I have several prepared opening remarks. I will give you my overview of the quarter and then turn it over to Brad for additional color. We will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A. From a GAAP perspective, net income was 25.6 million dollars, or $0.48 per diluted share in the first quarter, and return on assets was 1.51%. First quarter 2026 return on average tangible common equity was 14.2%, and the tax-equivalent efficiency ratio was 52.4%. Excluding all adjustments, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and its wholly owned subsidiary Evergreen Bank Group, net income for the first quarter was 26 million dollars, or $0.49 per diluted share. First quarter 2026 earnings were impacted by 9.8 million dollars of net loan charge-offs, which primarily included a commercial real estate investor charge-off of 3.9 million dollars for an office property located in Downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property now cash flows adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of 1.3 million dollars in the warehousing and distribution space has seen its cash flow position deteriorate over the last year. And lastly, net charge-offs related to the powersport business totaled 3.9 million dollars, a relatively higher-than-normal level due to some seasonality and continuing consumer lending softness consistent with what is being seen in the broader economy. Tangible book value per share increased to $14.35 as of 03/31/2026 from $14.12 as of 12/31/2025. The tangible equity ratio increased 5 basis points from last quarter, from 11.02% to 11.07%, and is 73 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.13% in the first quarter, increasing from 12.99% last quarter, but decreasing 34 basis points from a year ago. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for the first quarter. That is a 5 basis point improvement from last quarter and a 26 basis point increase over the prior like quarter on a tax-equivalent basis. Pre-provision net revenues decreased in the first quarter from the prior quarter primarily due to day count, lower loan balances, and a decline in rates overall. Cost of deposits was 105 basis points for the first quarter compared to 115 basis points for the prior linked quarter and 83 basis points for 2025. For 2026 compared to last quarter, tax-equivalent income on average earning assets decreased 4 million dollars, while interest expense on average interest-bearing liabilities decreased 2.1 million dollars. The loan-to-deposit ratio was 93.2% as of 03/31/2026, compared to about 94% last quarter and 81.2% as of 03/31/2025. The first quarter of 2026 experienced a decrease in total loans of 66.9 million dollars from last quarter. Tax-equivalent loan yields declined 5 basis points during 2026 compared to the linked quarter but reflected a 48 basis point increase from the quarter year-over-year. The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter. Nonperforming loans increased to 22.7 million dollars, but classified assets declined by 2.8 million dollars. In general, our collateral position is very good on quarter one downgraded credits. We recorded 9.8 million dollars in net loan charge-offs in the first quarter, with the majority stemming from the powersports portfolio and one relationship each in commercial real estate investor and commercial. The allowance for credit losses on loans was 72.1 million dollars as of March 31, or 1.39% of total loans, compared to 72.3 million dollars at year-end, which was 1.38% of total loans. Unemployment and GDP forecast views and future loss rate assumptions remain fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections. The impact of global tariff volatility and the war in Iran continues to be considered within our modeling. Provision levels quarter-over-linked quarter increased by 6.5 million dollars to 9.5 million dollars and were largely driven by the powersports portfolio net loan charge-offs as well as the two larger credits that we mentioned earlier. Noninterest income reflected a 476 thousand dollar increase in the first quarter compared to the prior linked quarter and a 2.4 million dollar increase from the prior year linked quarter. Mortgage banking income increased 225 thousand dollars compared to the linked quarter and increased 574 thousand dollars compared to the like prior year period, primarily due to volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income decreased 51 thousand dollars over the prior linked quarter but increased 156 thousand dollars from the prior year like period. Other income increased 358 thousand dollars in the first quarter compared to the prior linked quarter and 714 thousand dollars compared to the prior year linked quarter, driven largely by powersport loan service fees and dealer chargebacks. Total noninterest expense for 2026 declined 2.7 million dollars from the prior linked quarter as the first quarter experienced 349 thousand dollars in acquisition costs compared to 2.3 million dollars in the fourth quarter last year. Our efficiency ratio continues to be excellent, as the tax-equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, OREO costs, and the adjustments to net income as noted earlier, was 51.7% for the first quarter compared to 51.28% for 2025. On the credit front, we are obviously disappointed in the level of charge-offs in the quarter, but otherwise trends at Old Second Bancorp, Inc. remain excellent. Commercial real estate office continues to be under pressure broadly, with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is that we do not have very much of it on a relative basis and do not see circumstances in other credits similar to this credit that declined in value this quarter. I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece of with the Evergreen transaction. I would like to call your attention to page six of our loan portfolio disclosures for more color on our office portfolio. With respect to the aforementioned C&I relationship, we are working through that one. There is underlying cash flow and value in that business. More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of current and future interest rates, as well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher-cost deposits in the falling interest rate environment. With that, I will turn it over to Brad for more color. Bradley S. Adams: Thank you, Jim. As Jim mentioned, revenue trends were generally excellent with only a modest decline in net interest income relative to last quarter. That is pretty unusual. To the prior year quarter, net interest income increased by 18 million dollars, or 29%. Tax-equivalent loan yields decreased by only 5 basis points, but securities yields increased 4 basis points in the first quarter relative to last quarter. Overall, total yield on interest-earning assets declined 3 basis points, and cost of interest-bearing deposits decreased 15 basis points. Total interest-bearing liabilities decreased by 12 basis points. The end result was a 5 basis point increase in the tax-equivalent NIM to 5.14%, relative to 5.09% last quarter. Obviously, we believe this continues to be exceptional margin performance. Tax-equivalent NIM for 2026 increased 26 basis points compared to 4.88% last year. Average loans decreased by 70 million dollars, or 1.3% quarter-over-linked quarter, and average deposits decreased by 162 million dollars. Deposit runoff is largely concentrated in high-beta, effectively wholesale, deposit captions as planned. Loan origination activity in the first quarter was seasonally slower, but the pipeline remained strong. Certainly, the market environment, including ongoing pricing challenges due to tariffs and the uncertainty with war, results in reluctance on borrowers to invest in capital projects. Our lending teams are working with their customers to ensure we can meet their needs and offer loans at a good price when the demand is there. From a stock repurchase perspective, we acquired 1.2 million shares at an average price of $19.63, resulting in a reduction in equity and a growth in treasury stock of 23.1 million dollars for 2026. That enhanced EPS by about $0.01 for the quarter. We are a little more than halfway through the existing buyback authorization. We expect to continue to remain active. Obviously, capital still managed to grow in the quarter despite the size of this capital return, and that is due to the exceptional earnings power that is inherent in this balance sheet right now. It is pretty remarkable that we can have a couple of stumbles in credit and still produce this level of earnings, with an ROTCE still in the mid-teens. Margin trends still feel very good and stable in the near term. I do think later in the year we will start to trend back towards 5%. Loan growth for the remainder of the year is still being targeted in the mid-single-digit level. Expense growth will continue to be modest in the quarters ahead. As you can see, as I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow. That is it from my end. So with that, I will turn the call back over to Jim. James L. Eccher: Okay. Thanks, Brad. In closing, obviously, a mixed quarter, especially as it relates to the two aforementioned credits. But the rest of the bank is performing exceptionally well, far ahead of expectation, and the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well. Operator: That concludes our prepared comments this morning. James L. Eccher: I will now turn the call over to the moderator and open it up to Q&A. Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Jeffrey Allen Rulis with D.A. Davidson. We will now open the call for questions. Analyst: Thanks. Good morning. Just a question on the net charge-off expectations to realign where we are for the balance of the year. You had been bouncing around 40 basis points, and you have talked about that with the powersports book. Given this quarter's elevated level, is there any pull-forward on some of those losses, or should we revert back to that prior guide on net charge-offs? James L. Eccher: Yes, good question, Jeff. I mean, I think the first thing is, as it relates to powersports, the absolute level of charge-offs is going to be a little bit higher. I would call your attention to page nine of our loan disclosure deck. You can see—and Darin can speak to this, certainly—but the absolute losses were higher this quarter, and the contribution margins were at an all-time high. So that is the trade-off here. We had an 8.3% net contribution margin after charge-offs. We think loss content will probably trend lower in the coming quarters due to normal seasonality. As it relates to commercial office—page six I mentioned before—we have a little over 3.5% of the loan book in office today, 68% loan-to-value based on updated appraisals. Only 3 million dollars is classified. There is one other credit that is not classified that we are keeping a close eye on, and we may see some pull-forward losses, but it is too early to tell at this point. So, roundabout way of saying, we think losses will trend lower in coming quarters, but just keep in mind that powersport losses will be a little more elevated than what we normally report. Analyst: Appreciate it, Jim. I would take the positive side to the next question on the margin. I heard your comments, Brad, on expectations for the margin, but is there any residual, maybe positive impact on the sub debt payoff? Is that inclusive of your expectations? And the second piece of that is, are you assuming a kind of static rate environment? Bradley S. Adams: What I would tell you at this point—and obviously notice is required to pay it off further—but what we have done for the go-forward is we paid down a portion of the sub debt that resulted in the gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further, or we could refinance depending on what we view our capital needs as. Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet. But I do not think the name of the game is any different than what we have said for the last two years, Jeff. We have got lots of flexibility. The balance sheet is ridiculously strong. To be able to see the kind of delta that we have seen in rates along the curve and deliver this kind of margin stability has been something I am very proud of. I do not see a lot of volatility going in. I think we will see more consumer loan yields as it relates to powersports. In the near term, I think we will see some of that mitigated by the movement back up in rates with some of the macro uncertainty—what that has done to overnight index swap rates and so on and so forth. But all in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring, but it is about as upbeat as I can be. Analyst: Appreciate it. Thanks. Bradley S. Adams: Yep. Operator: Your next question is from Brandon Rudd with Stephens Inc. Analyst: Hi. Morning, guys. I think—thanks for the color on the charge-offs. Can we drill into the increase in the nonperforming loans? I think the press release mentions a few larger relationships. If you could provide a bit more color there. James L. Eccher: Yes. Classifieds were lower. We did have an uptick in some substandard accruing loans. The largest was that aforementioned C&I credit that is cash-flow dependent. They have been hit pretty hard with supply chain disruption and tariff issues. That is really the largest one. We did have a little bit of an uptick in special mention—two or three credits—one of which we talked about was that office. One of them we repositioned. But, again, classifieds in total were down about 3 million dollars. Analyst: Okay. Thank you. And then maybe if I put some pieces together here, the provision was a bit higher than expected. I am assuming that is to cover the charge-offs in this quarter, but the reserve ratio kind of held flat. Looking ahead, should we assume the reserve level—sorry, the ACL ratio—kind of holds flat at this level going forward? James L. Eccher: Plus or minus, that is a reasonable expectation, Brandon, as these classifieds work through and they come down. Analyst: Okay. Thank you. And then one last one, taking a step back, I think there is a new exhibit on slide four at the bottom showing the decline in participation and syndication exposure over time. Is there a level that you would like to get that down to over time? James L. Eccher: Yes, that is a good point. I mean, that portfolio largely came over with the West Suburban acquisition. It peaked at right around 500 million dollars. We have done a real good job of reducing that portfolio. We have essentially more than halved it over the last couple of years. Yes, there is probably some room here; we would like to continue to wind that down. But it has created a headwind to growth the last few quarters. That is not a main line of business for us. We do not view that as franchise-enhancing type of business. So I think you can expect us to continue to wind that down. There is a certain level we will keep, but we would like to continue to wind this down even further. Analyst: Got it. Okay. Thank you. Maybe just one last one on loan yields. Broadly, we have heard that spreads were a bit compressed last quarter. Where are new origination yields relative to roll-off yields, and what is that incremental pickup? James L. Eccher: If I look at it quarter-over-quarter, the weighted average yield that we put on as far as new business has averaged between 6.6% and 6.75% over the last couple of quarters. That is actually down, obviously, 50 to 75 basis points from prior quarters. Analyst: Okay. Sure. Thank you very much. Thanks, Brad. Operator: Your next question for today is from Nathan James Race with Piper Sandler. Analyst: Hey, guys. Good morning. Thanks for taking the question. Bigger-picture question: the earnings power and the high-quality and top-quartile earnings that you guys have been putting up over the last several quarters seem to be masked by the ongoing credit inconsistencies and noise there. Jim, is there anything else you can offer to assure investors that you are getting toward the tail end of some of that credit noise in the legacy portfolio? James L. Eccher: Yes. I guess all I would say is nonperformers overall—if you look at two years ago to the end of last year—we are almost half, right? Obviously, this is a little bit of a disappointing print, having them go up again this quarter. I would just say credit progress and improvement is not always linear. This office credit has been hanging out there for some time. We think we are through most of that book. And then the C&I relationship kind of came to a head over the last six months. All I can say is we understand our NPAs are higher than we would like, and we are working very hard to reduce those. Analyst: Okay, that is helpful. And maybe, Brad, just given the buyback pace this quarter, is there appetite near term—given you are expecting some moderation in charge-offs going forward, and the margin is pretty well positioned for the current rate environment with the Fed on hold—to keep up the pace of buybacks and limit excess capital inflows going forward? Bradley S. Adams: I do not see any reason why buybacks cannot continue at these levels, subject to the remaining amount on the authorization. If you would ask me today what my intentions are, it would be to refile another authorization in short order once this is filled. We have more than enough capital to do anything strategic that I could envision coming our way and still continue to return capital to shareholders. Analyst: Got it. And I apologize—I jumped on late—but, Jim, any thoughts on what you are seeing from a pipeline perspective and how you are thinking about loan growth over the balance of this year? James L. Eccher: Yes, the first quarter is obviously soft in commercial, and it is soft with powersport. Pipelines are building. We still are anticipating low-to-mid single-digit growth through the balance of the year. Nothing has changed on that front. Analyst: And from a pricing competition perspective, are you seeing anything irrational out there on the commercial lending side of things in Chicagoland these days, or how are new spreads holding up on the commercial portfolio? James L. Eccher: I would say commercial real estate is fiercely competitive right now. We are still getting acceptable spreads in our C&I group and leasing. Brad mentioned we think powersport yields will come down a little bit due to competition. But we are still bullish our margin is going to be hanging in there around 5%. Analyst: Okay. Great. I appreciate all the color. Thanks, guys. James L. Eccher: Thank you. Operator: Once again, if you would like to ask a question, please press 1. Your next question is from David Conrad with KBW. Analyst: Hey, good morning. Just a follow-up question on loan growth from here. I was hoping you can break that down a little bit between commercial and powersports. I imagine powersports is just kind of the trough seasonal level for the year. So maybe those two asset classes—give a little bit of expectations for the year. James L. Eccher: Yes. Maybe I will let Darin talk about powersports. As it relates to commercial, we think it will be pretty broad-based. I think we will see growth in commercial real estate, C&I, sponsored, leasing. We are not seeing any one sector with higher expectations than the other. As it relates to powersport, maybe, Darin, you can comment on that. Darin Campbell: Yes. I think I am the same as where I was at end of the year. In the overall group—and with that, I include the collector car lending that we do as well nationally—we will have single-digit growth. I am self-projecting for the remainder of the year. And then charge-offs in powersports were a little bit over 2% this quarter. Analyst: But to your point, the excess spread, the contribution margin, was actually one of the highest you have had in recent quarters. Just wondering if you are doing anything to tweak the credit on that aspect as you are looking at originations going forward in terms of underwriting. Darin Campbell: We have tightened a little bit on the underwriting, but not a material change, because we focus on the net contribution margin, which is the overall profitability of the business. A lot of it is driven by product mix. We have a good mix of originations—endorsed OEM products and non-endorsed products—and we charge higher on the non-endorsed products than we do for our endorsed products. For example, endorsed would be Indian, Triumph, KTM. If you are not endorsed—maybe it is Harley, BMW, Yamaha, Suzuki—those types of products, we charge a point higher for those products. So part of the little higher charge-off rate is related to the product mix coming in over the last couple of years, which is driving the overall profitability. It does not charge off at a point higher, but we charge a point higher. So it is driving a little bit higher charge-off rate, but it is also driving a better profitable portfolio. I see it staying around this level, maybe slightly less. A couple of changes that we made: our overall mix of paper that we did in the first quarter—if you include everything that we did nationally in the business—2025 compared to 2026, our FICO score went from 735 up to 743 on the full mix of business that we did, comparing quarter over quarter. All of that will start playing into the mix as this portfolio continues to turn over. That number should start coming down a little bit, but I would not say materially going down because we like the mix of business that is going into the portfolio from a profitability standpoint. Analyst: Got it. Perfect. And then last one for me, Brad. Expenses were much lower than at least what I expected this quarter. Maybe a little more color on core expenses—where we go from here for the year. Bradley S. Adams: Fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out. Acquisition costs were also in there. I would point you broadly to the overall expense guide, which is we are trying to grow in that 3% to 4% range for the year. That feels right. So I would just expect it to follow that range from here. I would say, given how well the businesses are performing, I would expect to see an overall bonus level as a component of salary and benefits to be relatively consistent with what we saw last year, minus the one-time stuff, of course. Again, I feel like we have done a good job controlling it, and 3% to 4% in this kind of inflationary world, given the type of double-digit increases that we have in employee benefits, is pretty good performance for us. I am pleased with that. Analyst: Got it. Okay. Thank you. Appreciate it. Operator: We have reached the end of the question and answer session, and I will now turn the call over to James L. Eccher for closing remarks. James L. Eccher: Okay. Thank you, everyone, for joining us this morning. We appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy, 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. If you would like to withdraw your question, press 1 again. I would now like to turn the conference over to Michael Sabella, Vice President of Investor Relations. You may begin. Michael Sabella: Thank you, operator. Good morning, and welcome to Patterson-UTI Energy, Inc.'s earnings conference call to discuss our first quarter 2026 results. With me today are William Andrew Hendricks, President and Chief Executive Officer, and C. Andrew Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations, or predictions for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company takes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, patenergy.com, and in the company's press release issued prior to this conference call. I will now turn the call over to William Andrew Hendricks, Patterson-UTI Energy, Inc.'s Chief Executive Officer. William Andrew Hendricks: Thank you, Mike. Welcome to our first quarter earnings conference call. I am going to begin by saying we are hiring. Now let us get started. The 2026 built on our momentum from 2025 with strong field execution supported by our technology and digital offerings across our diversified drilling and completions businesses. Our team stayed focused on the same priorities that drove last year's results—staying close to customers, delivering high-quality services and products that help them operate efficiently, and aligning CapEx and operating costs with the opportunities ahead. We are proud of our performance and believe our position across all our businesses will allow us to continue delivering strong cash returns across a range of market conditions. The commodity outlook has shifted materially since the start of the year due to heightened geopolitical risk and oil supply disruptions in the Middle East, which will likely reshape global oil supply and demand balances for several years. These developments underscore the strategic importance of U.S. oil and natural gas production and reinforce the need for a diversified global energy supply base, with U.S. shale production more critical than ever. Over the past several years, even as expectations for U.S. shale activity have fluctuated, we have remained focused on operational excellence in our core businesses. We have consistently believed that excelling in our core operating businesses is critical to enhancing shareholder value regardless of the macro environment. Today, we are pleased with the efficiency of our operations, and as U.S. shale activity inflects higher, we believe the decisions we have made position us to capture outsized value from a higher U.S. rig count. As a predominantly shale services company, we will always evaluate opportunities to deploy capital and expand our exposure to other geographies and product lines. However, we will remain disciplined and focused on returns for any potential growth investment. Momentum appears to be shifting back toward U.S. land activity over the coming quarters, but our corporate priorities remain unchanged. We will continue investing in technology and equipment that differentiates our services and supports long-term free cash flow per share while maintaining capital discipline, balance sheet strength, and consistent returns of capital to shareholders. We are well positioned to execute on these priorities. From a macro perspective, the outlook is improving, though the pace of recovery remains somewhat difficult to predict. We believe the industry will need to increase drilling and completion activity just to maintain oil production. With oil prices now running significantly above the mid-December levels assumed in many customers' 2026 budgets, we are encouraged by the setup for higher U.S. drilling and completion demand. Some customers have already started to make plans for higher activity levels later this quarter, and we increasingly hear that the strip is likely to incentivize additional incremental oil-directed drilling and completion activity in 2026 at approximately $70 and, if those prices hold, higher activity into 2027 becomes more likely. As is typical, private customers are moving faster than the publics. Natural gas activity also appears likely to improve as newly commissioned LNG facilities drive higher export volumes. While some of the incremental demand may be met by additional pipeline capacity from the Permian Basin later in 2026, we believe additional drilling and completion activity in gas-focused basins will be needed to fully supply that growth. As a result, we believe natural gas-directed drilling and completion activity is likely to increase in 2027. In our Drilling Services segment, we are very pleased with how the first quarter unfolded. Pricing remained steady, reflecting the value customers place on performance and reliability. In addition, the cost control programs we implemented towards the end of last year continued to gain traction and provided meaningful support to results. Because customer programs typically adjust with a lag to changes in commodity prices, activity for some customers in the first half of the year continues to reflect prior budget assumptions. We are seeing conditions improve, and we expect momentum to build through the quarter. We expect our rig count will exit the second quarter above the quarterly average and near the high point so far for the year, around 92 to 95 rigs depending on the timing, positioning us well as we move into the second half. As E&Ps continue to drill deeper zones and extend lateral lengths, the importance of rig capability and contractor performance continues to grow. The number of the most capable rigs—those with the load-bearing capacity and pipe handling systems required for today's deeper and longer, more complex wells—remains limited and driven by investments from the best performing drilling contractors. With our in-house engineering expertise and disciplined approach to upgrades, we believe we are well positioned to gain share in this growing market in a capital-efficient manner. As rigs become larger and more technical, we expect this to strengthen our competitive position and support higher returns over time. Our Completion Services segment delivered solid results for the quarter despite disruption from a January winter storm that effectively paused the completions business for five days. Excluding that impact, our frac operations ran near capacity with our natural gas-powered assets near fully utilized. Demand for completion services is improving, particularly in 2026, and we are in discussions with customers on higher pricing to more appropriately reflect rising demand and the high industry utilization. Available frac capacity across the industry is limited, and the few fleets that could be reactivated are among the industry's oldest and least efficient. At current pricing, reactivation does not seem economical, and pricing would need to rise meaningfully to incentivize incremental supply as demand increases. While our completions business has nearly 250 thousand cold-stacked horsepower that could technically be reactivated, we have been clear that our priority is to invest in newer technologies that will drive long-term returns. Our cold-stacked equipment represents the oldest diesel equipment in our fleet, and reactivating a single fleet would require more than $10 million investment. While the equipment could likely find work in the current market, the long-term return potential remains uncertain, and we are not prioritizing investment in these older assets. Over the past several years, we have high-graded our fleet by investing in newer natural gas-powered technologies that we believe will remain in demand and generate strong returns for years to come. We continue to expect our nameplate horsepower to decline this year as we execute this high-grading strategy. Over the past several years, the frac industry has seen consolidation and bifurcation of equipment quality and efficiency. Lower-tier pricing has constrained cash generation for smaller peers, limiting their access to capital and slowing investment in new technology. This dynamic continues to widen the gap between industry leaders and the broader peer group, supporting a more rational and stable market with structurally higher returns over time. We expect our nameplate horsepower to continue to decline as we direct capital toward expanding our Emerald fleet of 100% natural gas-powered assets. By year-end, we expect more than 15% of our active horsepower to be powered entirely by natural gas, with approximately 90% powered at least partially by natural gas. We believe we have one of the highest quality fleets in the industry, and this transition reflects our ongoing focus on improving operational performance. In our Drilling Products segment, the team delivered solid performance despite several industry headwinds. The conflict in the Middle East has increased risk in one of our key regions, which contributes roughly 10% to 15% of segment revenue, primarily from Saudi Arabia. Land activity in Saudi Arabia largely tracked expectations during the quarter, although activity in certain regions was impacted. On the cost side, we have experienced meaningful inflation in several key inputs, particularly the material tungsten, where prices are significantly higher than a year ago. In addition, our Middle East operations have seen higher logistics and personnel costs due to the ongoing conflict in the region. Even with these challenges, our drilling products business delivered only a modest decline in adjusted gross profit versus the fourth quarter, and we are actively pursuing additional actions to further mitigate these risks. From a competitive standpoint, we are encouraged by our position. We are pleased with the team's performance, and we believe we have grown to record market share in several key markets, including Saudi Arabia. In the U.S., we also believe there is additional upside with several large customers. Overall, our teams executed at a high level in the first quarter, maintaining a disciplined focus on service differentiation, capital allocation, and cost control as we navigated a demand environment shaped by customer budgets built on a crude oil price deck well below the current strip. We believe the indicators increasingly point to a period of higher commodity prices. Based on our customer conversations, we expect this to drive an increase in U.S. shale activity starting later in the second quarter and continuing into the second half of the year. Even if oil prices moderate somewhat from current levels, we would still expect upside versus today's activity. As we approach an inflection in U.S. activity, it is worth briefly reflecting on the strategy we have followed the past few years. While we continue to evaluate opportunities to expand beyond our core markets, our priority will always be return-on-capital driven, and we have yet to find compelling opportunities that have cleared our investment threshold. We remain focused on strengthening our competitive position in our core businesses and improving efficiency, operationally and financially. As we have always said, we believe disciplined capital allocation and continuous improvement in our existing businesses are important ways to enhance shareholder value. With activity now inflecting higher, the decisions we have made the past several years position us to deliver improved performance going forward. We are pleased with where the company stands today and are confident in our ability to continue delivering strong cash returns to shareholders. I will now turn it over to C. Andrew Smith, who will review the financial results for the quarter. C. Andrew Smith: Thanks, Andy. Total reported revenue for the quarter was $1.117 billion. We reported a net loss attributable to common shareholders of $25 million, or $0.06 per share. Adjusted EBITDA for the quarter totaled $205 million, which included $3 million in early contract termination revenue in the Drilling Services segment. Our weighted average share count was 380 million shares during Q1. As expected, seasonal working capital headwinds impacted free cash flow in the first quarter. Given the timing and variability of these items throughout the year, we view full-year free cash flow as the most meaningful measure of performance, with working capital turning into a tailwind in the second half. In our Drilling Services segment, first quarter revenue was $352 million and adjusted gross profit was $134 million. Revenue and adjusted gross profit included the previously mentioned $3 million of early contract termination payments. In U.S. contract drilling, we totaled 8,301 operating days in the quarter, with an average operating rig count of 92 rigs. Excluding early termination revenue, pricing was relatively steady versus the fourth quarter, and we continue to see benefits from the cost reduction actions implemented late last year. For the second quarter in Drilling Services, we expect our rig count to average around 90 rigs, and we expect to exit the quarter above the average as we reactivate rigs in the back half of the quarter. We expect adjusted gross profit in the Drilling Services segment to be approximately $130 million. Our guidance includes $5 million of rig reactivation and mobilization costs and assumes minimal second quarter revenue contribution from those reactivations. In our Completion Services segment, first quarter revenue was $680 million, and adjusted gross profit was $98 million. Results reflected the impact of roughly five days of winter storm disruption in January. Excluding that disruption, our frac calendars were essentially full with limited spare capacity to increase activity and an extremely efficient calendar. For the second quarter, we expect Completion Services adjusted gross profit to be approximately $105 million with near full utilization of our active assets. First quarter Drilling Products revenue was $80 million and adjusted gross profit was $33 million. Results reflected disruption in the Middle East related to the ongoing conflict and some cost inflation. For the second quarter, we expect Drilling Products adjusted gross profit to decline slightly, driven by lower profitability in our international business, particularly in the Middle East, and the normal impact of spring breakup in Canada. Other revenue was $6 million for the quarter, with adjusted gross profit of $3 million. For the second quarter, we expect Other adjusted gross profit to be approximately $5 million. General and administrative expenses in the first quarter were $69 million. For the second quarter, we expect G&A to be approximately $67 million. On a consolidated basis in the first quarter, depreciation, depletion, amortization and impairment expense totaled $218 million. For the second quarter, we expect it to be approximately $220 million. During the first quarter, total CapEx was $117 million, including $54 million in Drilling Services, $45 million in Completion Services, $16 million in Drilling Products, and $1 million in Other and Corporate. We ended the first quarter with $337 million of cash on hand and nothing drawn on our $500 million revolving credit facility. We have no senior note maturities until 2028. Our board has approved a quarterly dividend of $0.10 per share, payable June 15 to shareholders of record as of June 1. I will now turn it back to William Andrew Hendricks for closing remarks. William Andrew Hendricks: Thanks, Andy. I want to close the prepared remarks with some additional comments on our company and the industry. The commodity outlook has shifted meaningfully since the start of the year, with both current and future oil prices now well above the assumptions embedded in our customers' initial 2026 budgets. While many customers remain cautious in the near term, we are seeing a clear change in market tone, including more discussions around rig reactivations, stronger completion demand, and improving pricing across our businesses. Taken together, we have much more clarity on the market direction, and these dynamics point to a more constructive environment for activity and profitability for Patterson-UTI Energy, Inc. Even as we expect industry drilling and completion activity to inflect higher, we will continue to invest in our strategic initiatives to improve returns. In completions, we will continue to favor technology investments over overinvesting in our older cold-stacked equipment, and we will invest at a measured pace into new assets that should generate stronger returns over multiple years. In drilling, we are executing a disciplined cadence of structural upgrades to support deeper wells and longer laterals, consistent with where customer demand is trending. Digital and AI investments remain central to our strategy and are embedded across all of our operations. With the changing market sentiment, we believe that technology upgrades will be well supported through favorable contractual structures to support accretive returns. Finally, while the macro environment has changed, our corporate priorities have not. We remain focused on generating durable returns and sustainable free cash flow through the cycle while returning capital to shareholders. Our balance sheet remains strong, and we expect to deliver another solid year of free cash flow in 2026. As we evaluate opportunities to deploy capital, we will remain disciplined and prioritize investments that offer the highest return potential. With that, I would like to thank the men and women of Patterson-UTI Energy, Inc., who work hard every day to help provide energy to the world. Abby, could you please open the lines for questions? Operator: We will now open the call for questions. If you have dialed in and would like to ask a question, please press star then 1 on your telephone keypad. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Saurabh Pant with Bank of America. Your line is open. Saurabh Pant: Hi. Good morning, Andy and Andy. Andy, I think your inbox is going to be full of résumés by the end of the day after listening to your opening statement. It sounds like the initial leg of the upside is being driven by the private completion side, which makes sense. Already, we are talking about Patterson-UTI Energy, Inc. saying you are pretty much sold out on the high-end fleet, and several peers have said the same. How are the publics thinking about when and how much they want to add activity, if they want to add activity? At that stage, what would the supply side of the equation look like? How much capacity would we have or not have on the sidelines ready to come back, maybe both on the rig and the frac side? William Andrew Hendricks: Okay. Let me see where I can start. To begin with, we are really excited about the opportunity to put drilling rigs back to work, and like I mentioned earlier, we think we will be somewhere between 92 to 95 rigs as we exit the quarter based on timing. That is going to lead to higher completions demand over time. The interesting challenge that we have in the industry is we are sold out of our top-tier equipment. We are essentially sold out of everything that can burn natural gas, and we certainly will see a demand for more capacity as we move through the year. Before we start adding more capacity, we are going to be very focused on returns, trying to improve pricing where we can. We will continue the discussions that we are already having with a number of our customers on what that pricing should look like given the tightness in the market and given the demand. You will see instances over time of trading of customers within the market. We are going to work on improving pricing and improving returns before we start adding capacity. I think that is critically important, especially given how pricing in completions has been pushed down over the last couple of years. It is important for us and for our shareholders to improve returns where we can before we start bringing more capacity onto the market on the completion side. Saurabh Pant: That makes a ton of sense, Andy. On the way pricing would work—on the rig side, there is a contract book. How would contract duration look? How quickly can we expect higher pricing to show up in your numbers based on your contract book? And on the frac side, how should we think about pricing reopeners—three months, six months—or are there still a sufficient number of annual contracts where pricing would take time to reset? William Andrew Hendricks: I think the best way I can describe the pricing situation on the rig side is that when we did the last quarterly conference call, we said leading edge was in the low $30 thousands per day, down from the mid- to low-$30 thousands. What we are seeing today is pricing that is starting to move up from the low $30 thousands. I am not ready to call mid- to low-$30 thousands, but it is definitely moving up from the low $30 thousands at the leading edge with everything fully loaded on the drilling rig, and we are excited about that. As we get requests for technology upgrades on the drilling rigs—structural or digital—that leads to an investment and is going to require a term contract, and we are hearing favorable commentary from our customers that they are willing to do that as well. That will lock in those returns for the investments that we have to make. On the frac side, we are in discussions with customers today. We have anecdotal evidence where some customers have already given us 10% pricing increases. That is relatively small compared to how completions pricing has been pushed down over the last couple of years, but given the tightness in the market—from our side and what we hear from competitors—pricing will move up steadily over the next months through the end of the year. Saurabh Pant: Just to clarify, are the majority of your frac contracts on three- to six-month pricing reopeners? William Andrew Hendricks: It is a mix. We have some spot work in the second quarter. We have some longer-term contracts where pricing only resets every six months for some very large customers. We also have some customers where you revisit it as frequently as every month. So we have a mix. Derek John Podhaizer: Hey, good morning. Maybe a first question on the rig supply. I think on the website you are at 88 rigs today. You are talking about adding up to seven rigs by the end of the quarter. How material are the expenses to get those rigs back to work? And how many more rigs would you have behind that that will require real capital investments and the upgrades you are talking about for deeper wells and longer laterals? I am thinking through putting upward pressure on that low-$30 thousands dayrate toward the mid-$30 thousands or even into the mid- to high-$30 thousands like we saw last cycle. On a rig-by-rig basis, what would the required capital cost be to bring certain rigs back after these seven or ten? William Andrew Hendricks: For the rigs that are going back to work, it has not been too long since they were working, but there are some costs incurred to put them back to work. From an accounting standpoint, we also have to capitalize some of the mobilizations, and we have some rigs that are moving in different parts of the country. That puts us at around $5 million in OpEx to get everything back to work and put a number of rigs out through the end of the second quarter and into the third. We also get revenue back from that—we get paid for mobilizations—but it flows through operating expense, not CapEx. As we move forward through the year for some of the structural upgrades, we think we have a relatively low cost for a number of our customers. It could be in the range of just a few million dollars, and we can see paybacks in a year to a year and a half on some of that, depending on the dayrates, and we will lock that into term contracts. That will start to push dayrates higher. When we get into the large structural upgrades, the CapEx costs are significantly higher. For the Apex XC+ rig we have working in the field today—which went through a large upgrade process—those dayrates are pushing $40 thousand a day, and in the market we are in, we expect to be exceeding $40 thousand a day toward the end of this year and early next year with those types of large structural upgrades. Derek John Podhaizer: Thanks. On the frac side, you are effectively sold out. It is going to take a lot to bring equipment off the fence given it is legacy diesel. Can you talk to the white space in the calendar in Q2? Has that been fully soaked up? How is the second half firming up for your current frac equipment? What needs to happen on the current active fleet as far as white space being soaked up for the remainder of the calendar year before you would consider adding incremental new builds, likely next-gen 100% natural gas type of equipment? William Andrew Hendricks: This has been a very dynamic situation. As of last week, there was some white space in the calendar that a lot of people might not have expected given commodity prices. As of two days ago, we have basically filled the majority of that white space. Hats off to the team in completions for working with customers to fill that up. For completions, the second quarter is really a transitory quarter—not quite the inflection we are seeing in drilling—but that inflection in completions comes right after that. We feel that as of today we are fully loaded in the third quarter. I am really pleased with what the team is doing, how they are working with customers, and how they have loaded up the calendar, especially considering how the overall U.S. rig count had continued to come down earlier in the year. James Rollyson: Good morning. Andy, as you look at this inflection, you have talked about how tight the underlying frac market is. How do you think about getting all your pricing back to where you were two to three years ago? Given what you have been doing on the cost side over the last couple of years, how does that translate into margins relative to, say, the low-20s EBITDA margins in Completion Services right after the Nextier close? Just trying to connect the dots on where margins might trend over the next couple of years. William Andrew Hendricks: What is important for us right now is to constructively work with our customer base to get pricing back in line with where we are in the market. We have been pushed down in completions pricing for the last couple of years, and for shareholders, we need to get returns back to a reasonable level. While we are still generating good cash flow, there is an opportunity to get returns higher, and we want to do that before we start adding capacity. At the same time, throughout this year, we have been adding the new Emerald pumps that are 100% natural gas-burning. We are really excited about the uptake in the market. These pumps are essentially spoken for with various customers even before they show up in our inventory. It has been a measured pace to bring those out, and when we do, it improves our pricing and returns as we introduce those into various fleets. We do not want to add significant capacity to the market until we can structurally move pricing back to where we think it needs to be to get our returns. Positively, a number of our competitors are near sold out too. With consolidation in the completions market over the last five years, it is structurally in a better place. While we are all still competitive, there is a measured level of discipline to improve returns for shareholders before adding capacity. C. Andrew Smith: On CapEx, we set a budget at the beginning of the year implying a down year as we were all expecting. Conditions today look remarkably different than during our budget cycle. We are looking at places where there could be opportunity to lean into what we think is going to be a pretty strong price environment, but we do not have an updated figure to provide today. Scott Andrew Gruber: Good morning. Staying on frac pricing, the fleet is much more stratified today. To set an upside scenario, how much incremental pricing would you need to see on direct drive and e-frac to support new builds that reflect fleet expansion and not just replacement? William Andrew Hendricks: When we look at how we are deploying the new Emerald direct drive—100% natural gas—into our existing fleet, the economics are very good, and the way we are pricing those is very good. The bigger need is to lift the average across the equipment that has been under contract over the last year or so. We need to get our overall average up. It is not really about what we are getting for the new technology; that is working well and generating the returns we want. I am more concerned about lifting overall averages. We are entering a very tight market for completions. We have been sold out of everything that can burn natural gas for a few quarters, and overall the industry is about to enter a very tight market for completions. That bodes well for all of us trying to get returns up to acceptable levels, and then we can look at capacity increases of new technology. C. Andrew Smith: Given where we are in the market and the premium gas-burning equipment gets today, we are seeing pricing improvement across the fleet—more so on the gas-burning equipment. With increasing visibility over the next couple of years, you do not have to see a huge amount of pricing to justify some new builds into this type of market, but you probably still need 5% to 10% additional. Scott Andrew Gruber: On the gap between Emerald kit and dual fuel—there is likely a gap between Emerald and Tier 4 dual, and a gap between Tier 4 and Tier 2 dual. As pricing improves, do those gaps compress or does everything move up while spreads sustain or widen due to diesel displacement economics? William Andrew Hendricks: You are correct—there are various levels of technology and pricing differentials between them. The market we are about to go into over the next six months is a rising tide that lifts all boats. The differentiation and pricing differentials will remain, but overall pricing for all levels of technology should move up. C. Andrew Smith: With the diesel-gas spread, while all pricing will move up, you may see the spread between different levels of equipment widen in terms of cost differentials. Stephen David Gengaro: Thank you, and good morning. On pricing contracts, given your positive commentary, would you expect a strong inflection point in margins in the third quarter for completions, or more of a smoother increase over a couple of quarters? How should we think about when we see it on the income statement? William Andrew Hendricks: I think it will be more of a smoother increase in pricing not just over the next two quarters, but into 2027 as well. This will be based on constructive negotiations with our customers. We are going to have customers who want to increase their capacity, and E&Ps we are not working for today may call, creating opportunities and negotiations across the base. We need to do the right thing for shareholders and improve returns, and it is a steady process over multiple quarters. Stephen David Gengaro: On the drilling side and performance-based packaging of products between completions and drilling, how does that play out in a tighter market? Does it give you more opportunity? William Andrew Hendricks: We have seen challenges since we introduced our P10 Advantage offering as the market was getting softer. Recently, I have been in discussions with some mid-tier operators who may kick off a program and want to discuss what we can do for them. For a mid-tier operator expanding their program, they may not have all the internal resources. If we can help them on efficiencies across drilling and completions, that is positive. A tighter market should be positive for expanding that offering, and we are well positioned to help. Arun Jayaram: Good morning, Andy and team. Your prepared comments suggest the rig count is trending up five to seven rigs in Q2. Which U.S. shale basins are you seeing the incremental demand on the rig side? William Andrew Hendricks: We are seeing it across multiple basins, not concentrated in any one. We have customers in multiple basins looking at their economics—both oil and gas—so it is broad. That is encouraging and suggests further opportunities over the next few quarters to expand the rig count. Arun Jayaram: You closed your prepared remarks talking about evaluating opportunities to deploy capital. You talked about Emerald technology—100% natural gas. What are you looking for to add incremental capacity? Your nameplate is going down this year, but what market signals are you looking for to deploy growth capital? William Andrew Hendricks: We have been holding back some cash looking for opportunities to deploy—through increasing the dividend, buying back shares, and looking at M&A. As the market improves, we now have further options because with increasing activity and demand for technology—whether on the completion side with Emerald or on the drilling side with the Apex XC+ rig—we have to evaluate returns and what is the right answer for shareholders as we deploy more capital. Keith MacKey: Good morning. It is rare to be talking about termination revenue and reactivation in the same call. Can you walk us through those factors? Is it a timing issue on the termination? And with the rig reactivations, what type of CapEx or OpEx do these rigs need to come back? Is it a matter of increasing specification requests by operators? William Andrew Hendricks: This quarter has had a lot of moving parts. We have had E&P customers that started the year with budgets based on certain commodity prices and pressure from investors to keep CapEx in line. We did have rigs come down and termination payments, in the same quarter we are now discussing putting rigs back to work. That creates challenges as the rig count comes down and then goes back up, with rigs moving between basins. In terms of costs to put rigs back to work after they have come down, if they have been working in the last year, we are probably in the range of $2 million in CapEx if upgrades are required. There are no upgrades that are less than $1 million for technology—structural or digital—depending on the customer, location, and objectives. That potentially drives more capital spend. As we spend those dollars on upgrades, we certainly want a term contract to cover that. C. Andrew Smith: To clarify, the rigs we are talking about in the second quarter include $5 million of operating expenses to reactivate those rigs. That is OpEx, not CapEx. The CapEx would be on rigs further out that have not worked as recently and may need structural upgrades. Keith MacKey: Understood. On inflation, what are you watching and how much can you mitigate? William Andrew Hendricks: Diesel prices are moving up. On sand, there is plenty in the Permian Basin; we are not seeing challenges there. In smaller basins, things may be starting to tighten, but we expect that to change over time. On the Drilling Products side, tungsten prices are moving up significantly, but we have ways to mitigate that—using more steel body bits versus matrix to reduce tungsten use. If there are costs moving up that we need to pass through, this is the right market to do that, and we will be looking at that as well. Douglas Lee Becker: Thank you. How many rigs will be reactivated with the $5 million in costs? Is there line of sight to term work, or is the spot market picking up enough to deploy that capital? William Andrew Hendricks: I would say right now, nothing at that level yet in terms of new long-term awards, but we are looking ahead to the second half of this year and into early 2027 and having those discussions with customers. The $5 million also includes mobilization costs, not just work on the rigs. The market is moving in the right direction to allow potentially significant technology upgrades and possibly taking share. We are excited about the discussions and the changing conditions. C. Andrew Smith: To clarify, that $5 million ties to the 92 to 95 rig exit rate we were talking about earlier. Douglas Lee Becker: Understood. Housekeeping: you mentioned the winter storm cost about five days on Completion Services. Any EBITDA impact from that? C. Andrew Smith: Yes, it was about $9 million. We had that included in our guidance when we gave it last quarter. We were not as precise then—we said $5 million to $10 million—but it ended up at the high end of that range. Edward Kim: Hi, good morning. I am surprised the overall U.S. land rig count is still roughly flat since the beginning of the Iran conflict about two months ago, even as oil prices have increased substantially. Does that reflect customers being in wait-and-see mode before increasing activity, or is it the lag between making that decision and actually standing up a rig? It does seem based on your outlook that the industry-wide rig count should start picking up within weeks. C. Andrew Smith: Our customers—just like we did—went through a budget cycle, and a lot of this came on right after plans for the year were made. Changing those plans quickly without surety on where it would end up or how long it would last would be difficult. I am not surprised by the pace at which rigs are starting to come back. William Andrew Hendricks: In the public data, some of the biggest E&P operators have not changed their programs—they are sticking to budgets this year. I think that will probably stay that way for many of them. You will see other publics and privates move quicker, and that is what you are seeing in our rig count projections. The large E&Ps will relook at budgets for 2027, which is encouraging for next year. Edward Kim: Based on your commentary, 2026 could almost look like a mirror image of 2025. At the beginning of last year, you were running about 105 active rigs. Is 105 achievable by the fourth quarter of this year, or would that be too much of a stretch? William Andrew Hendricks: It is too early to project exactly what our rig count number will be at the end of this year, but we are encouraged that we will put more rigs out in the second half after the second quarter. We are happy to be working in this type of market versus what we dealt with last year. Daniel Robert Kutz: Hey, thanks. Good morning. On the international businesses—looking past the near-term disruptions related to the conflict—have you had any customer conversations outside the Middle East, or even with customers there, that indicate potential activity upside for Patterson-UTI Energy, Inc.'s services and equipment? Any inbound across global Drilling Products, the LatAm drilling footprint, or the Turnwell JV in the UAE? William Andrew Hendricks: In the Middle East—from Kuwait down to Oman—we have a solid Drilling Products business. Onshore activity was relatively steady, especially in Saudi Arabia and the UAE, but offshore activity shut down midway through the conflict, which had an effect. In Saudi Arabia, our customer was working through inventory in their warehouses, which slowed product sales for everyone. At some point that will end, and product sales should move up. We are seeing higher logistics costs to get products and materials into the Middle East and a slowdown in Kuwait as well. In South America, we shipped two drilling rigs to Argentina. Over the next one to two years, we expect rig count in Argentina to continue moving up; we may get to participate more—too early to call that yet, but we are in a number of conversations. In Venezuela, there are a number of interested parties looking to increase production, especially in the Orinoco Belt with heavy oil. Those discussions will take time and likely go very slow, but interest is there. Daniel Robert Kutz: Back to the U.S., some indicate DUC inventories are materially low, which can influence the relative pace of drilling versus completions. Do you track this, and how might it influence the pace between drilling and completions? William Andrew Hendricks: DUC inventory has come down, directly related to the rig count coming down and the number of wells between drilling and completions. Some smaller customers started the year drilling wells and planned to complete them later; based on current economics, some have called us to frac sooner, and where we could, we accommodated them, which led to better returns on some of that work. It is not widespread yet. Now we are entering a period where the drilling rig count is going to start to move up, and we are going to see DUC inventory start to move up until completion activity moves up. With the tightness in the completion market, there could be a period where DUCs increase more than normal until more completion capacity is available. That should be very positive for completions in the second half of this year. Donald Crist: Good morning, guys. Thanks for fitting me in. A macro question: we are hearing that worldwide supplies are dwindling and there is a significant dichotomy between the physical and financial markets for oil. We are hearing the strip could increase materially, and maybe we do not go back to $65 to $70 oil. What is your macro view on oil over the coming years? William Andrew Hendricks: I am not a commodities trader, but there are interesting things happening. On refined products like jet fuel, kerosene, and distillates, those commodities have been ramping up at a faster rate than crude. Commodity traders on the crude side are watching how products trade to determine what the real cost per barrel should be, given a disconnect between traders’ opinions of where oil should trade versus where you can physically get oil today and where you can move it. We still have a bottleneck of crude in terms of global production that is missing, and that will have to get filled or start moving again, which will take months to work out. Where the strip trades today looking forward seems more like a best guess versus the material price of a barrel of oil. It will be interesting to see how that shakes out over the next year. I am encouraged by how our customer base is reacting and discussing the forward strip, and by the fact that we can tell you today that we are putting drilling rigs out. John Matthew Daniel: Thanks for including me. I completely flubbed and thought your call started at ten. Apologies. Three questions—first, from a supply chain perspective for drilling capital equipment, where are the longest lead times today, and could that delay rig reactivations over the next several quarters? William Andrew Hendricks: There are some long lead items—some close to a year—for specialty items for very large upgrades. We have already been placing orders for some long lead items to keep things moving within the existing budget. Our capital budget includes technology upgrades, not just maintenance, so we try to stay in front of long lead items. Lead times are what they are, and we keep items on order where it makes sense. There are shorter lead items as well—structural steel, for example—that we can get in a reasonable timeframe. I have not heard anything from the teams that gives me concern about getting the items we need at the pace we think we will need them. John Matthew Daniel: You touched on international—Argentina and Venezuela. How do the rig specs differ between those markets and what you are doing in the U.S.? Any operational color? William Andrew Hendricks: For Argentina (Vaca Muerta), you can take a U.S. rig and move it down there to drill the horizontals—almost identical rig specs. In Venezuela, it depends on the basin. In the Orinoco heavy oil, we were drilling those wells twenty years ago with 1 thousand horsepower rigs. A 1.5 thousand horsepower U.S. rig can work very well there today. There are deeper onshore plays where you would need 2 thousand to 3 thousand horsepower, but I suspect the focus in Venezuela will be on heavy oil, given Gulf Coast refineries, and U.S. rigs can work there. John Matthew Daniel: For your employees in the Middle East, what percent left when the conflict started and what percent have returned? How do you think about sending more people back? William Andrew Hendricks: Hats off to our enterprise response team. They ran a 24-hour operation to check on everyone from Kuwait to Oman, ensure people were okay, and assist moves where needed. A bigger concern was rotators working in the field in the UAE—we moved them over land to Oman and then flew them out once flights were operating. At this point, we have everybody back to where they are, and it is relatively business as usual. We still have concerns, but our people there are comfortable working there. If they are not, we certainly have work for them here—we are hiring. Operator: That concludes our question and answer session. I will now turn the conference back over to William Andrew Hendricks for closing remarks. William Andrew Hendricks: Thanks, Abby. I just want to thank everybody that dialed in today for our conference call. It is an exciting time in the industry where we are seeing this inflection. We are very happy to report a quarter where we are putting drilling rigs back to work and have a good line of sight on completions for the rest of the year to be relatively fully loaded out. Thank you. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Fulton Financial First Quarter 2026 Results Conference Call. At this time, all 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 that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Patrick Lafferty, Investor Relations Officer. Please go ahead. Patrick Lafferty: Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter ending March 31, 2026. Your host for today's conference call is Curtis Myers, Chairman, Chief Executive Officer and President. Joining Curtis is Richard Kraemer, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations, and then on News. The slides can also be found on the Events and Presentations page under Investor Relations on our website. On this call, representatives of Fulton Financial Corporation may make forward-looking statements with respect to Fulton Financial Corporation’s financial condition, results of operations, and business. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the Safe Harbor statement on forward-looking statements in our earnings release and on Slide 2 of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton Financial Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements. In discussing Fulton Financial Corporation’s performance, representatives of Fulton Financial Corporation may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton Financial Corporation’s earnings announcement released yesterday and Slides 27 through 34 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now I would like to turn the call over to your host, Curtis Myers. Curtis Myers: Well, thanks, Patrick, and good morning, everyone. For today's call, I will provide a few high-level observations and some operating highlights for 2026. Then Richard Kraemer will review our financial results in more detail and discuss our outlook for the remainder of the year. After our prepared remarks, we will be happy to take any questions you may have. We are pleased with our start to the year. The first quarter reflects the strength of our foundation and the consistent execution of our strategy. We made continued progress against our strategic priorities by growing the company, delivering effectively, and operating with excellence. As a result, we are effectively serving all of our stakeholders. We have maintained a clear focus on long-term value creation and the benefits of our community banking model are evident in our performance. Our teams across the organization remain focused on serving customers and operating efficiently in a dynamic environment. From a performance standpoint, first quarter operating earnings were $0.55 per diluted share. Profitability remained strong with an operating return on average assets of 1.3% and an operating return on tangible common equity of 14.76%. These results reflect solid execution across the business, disciplined balance sheet management, and effective capital deployment as we repurchased shares while growing tangible book value. During the quarter, strong revenue generation and prudent expense management drove positive operating leverage, demonstrating the underlying earnings power of our business model. This execution resulted in an improvement in our efficiency ratio to 56.7% and supported strong pre-provision net revenue performance, increasing $9.2 million linked quarter to $141 million. Our balance sheet and liquidity position give us the flexibility to meet customer demand and proactively invest in growth opportunities. Our continued investment in talent and capabilities remains central to our strategy. Targeted hiring and selective team lifts continue to enhance our growth efforts as these new team members become productive and help expand pipelines. These investments are translating into stronger activity, higher productivity, and deeper client engagement. Building our overall team is aligned with our long-term growth objectives. Loan activity during the quarter was solid, led primarily by growth in commercial mortgage, including an opportunistic purchase of an in-market commercial loan portfolio. That growth was partially offset by a decline in construction balances as well as the continued planned runoff of the indirect auto portfolio. Most importantly, origination activity remains healthy. Pipelines continue to build, and overall demand fundamentals remain constructive. Commercial loan origination increased meaningfully in 2025, and early 2026 origination is running above prior-year levels. Relationship manager productivity has further improved year over year, resulting in increased customer engagement and enhanced sales results. Given these trends, we believe we are well positioned to continue generating disciplined, smart growth. On the funding side, deposit trends were also positive, reflecting strong engagement in each segment of our customer base supported by effective sales execution and disciplined pricing. Our teams continue to focus on building deeper, meaningful relationships, which is driving results and further improving engagement. This momentum reflects the strength of our relationship banking approach and the continued impact of our customer experience initiatives. We remain focused on maintaining a balanced funding profile while carefully managing deposit costs in a highly competitive environment. Noninterest income was steady during the quarter and again represented more than 20% of total revenue, highlighting the benefits of our diversified business model. Revenue growth in Wealth Management was partially offset by normal seasonal declines in other fee categories. On a year-over-year basis, fee income grew more than 9% across all businesses compared to 2025. This was led by a 12% increase in Wealth Management. From an expense standpoint, we remain focused on cost discipline. Expense levels and underlying trends were consistent with our operating plans, as we continue to balance targeted investments with improved efficiency across the organization. Credit performance remained stable and was relatively in line with last quarter. Nonperforming assets improved to 55 basis points of total assets, from 58 basis points in the fourth quarter. We are mindful of the broader landscape, including ongoing geopolitical developments and their potential impact on economic conditions, customer sentiment, and market volatility. These dynamics reinforce the importance of disciplined, balanced, and prudent credit decision-making as we move throughout the year. We are also pleased to close the acquisition of BlueFoundry Bancorp on April 1. This marks an exciting milestone as we bring together two organizations. Our focus is on thoughtful integration, supporting customers, aligning teams, and building on the shared strength of our combined franchise. Integration planning is progressing well, and we look forward to completing these efforts later this summer. As we look ahead, our priorities remain unchanged. We will continue to focus on profitable growth, prudent risk management, and disciplined capital allocation while delivering value for our customers, our team members, and our shareholders. With that, I will turn the call over to Richard Kraemer to review our first quarter financial results in a little more detail. Richard Kraemer: Thanks, Curtis, and good morning, everyone. Unless I note otherwise, the quarterly comparisons I discuss are with 2025. For the first quarter, operating net income available to common shareholders was $99.7 million, or $0.55 per diluted share, consistent with last quarter and reflective of solid execution across the business. On a GAAP basis, earnings were $0.51 per diluted share. The difference between GAAP and operating results was primarily driven by acquisition-related expenses, core deposit intangible amortization, and other nonoperating items detailed in our reconciliation tables. Net interest income totaled $262 million, declining approximately $4 million, driven largely by day count. Within that, interest income declined due to slightly lower loan and security yields, while interest expense also declined, reflecting continued progress in managing deposit pricing and improved funding mix. The net interest margin was 3.58%, down just 1 basis point from the fourth quarter. Importantly, margin performance continues to reflect underlying structural stability rather than short-term tactical actions. Deposit pricing discipline continues to mostly offset asset yield pressure, and funding mix improved as brokered balances declined further during the quarter. Our interest rate risk profile remains relatively neutral, providing stability throughout a volatile and less predictable rate environment. Deposit average balances were stable, while ending balances increased $179 million during the quarter. This was driven by softer earlier-quarter seasonal trends, which rebounded as the quarter progressed. Growth was driven by higher savings balances and an increase in noninterest-bearing demand deposits. Total cost of funds decreased 9 basis points, reflecting both pricing actions and favorable mix. Loan balances increased $121 million during the quarter, with average loans also up modestly. Yield trends reflected ongoing repricing dynamics, while credit spreads on originated loans remained stable. As always, we continue to emphasize disciplined pricing and return thresholds. Moving to the investment portfolio, securities increased by $28 million as investments as a percentage of total assets remained at 15%, a level that continues to provide balance sheet flexibility. Liquidity remains strong, supported by a well-diversified funding base. AOCI increased by $23 million during the quarter given the late March rise in interest rates. Noninterest income totaled $69.8 million, effectively flat with the prior quarter. Wealth Management revenue increased during the quarter and was partially offset by modest declines in commercial and consumer banking fees, largely due to seasonality and two fewer days in the quarter. Fee income again represented just over 20% of total revenue and continues to enhance earnings stability. On the expense side, total noninterest expense was $200.3 million, down $12.7 million from the fourth quarter. The decline was driven primarily by lower incentive compensation and continued discipline across nonpersonnel costs, partially offset by $2.6 million of acquisition-related expenses. On an operating basis, expenses totaled $190.7 million and the efficiency ratio improved to 56.7%. We believe this level of efficiency is sustainable as we continue to invest selectively in people, systems, and strategic priorities. Credit performance remained stable during the quarter. The provision for credit losses was $14.4 million, resulting in an allowance for credit losses of $367.5 million, or 1.51% of total loans. Nonperforming assets improved to 55 basis points of total assets and net charge-offs were 25 basis points of average loans annualized. Our reserve levels continue to reflect a balanced, prudent assessment of portfolio performance, forward-looking economic assumptions, and borrower- and sector-level analysis. Turning to capital, our CET1 ratio increased to approximately 11.9% and the tangible common equity ratio improved to 8.6%. During the quarter, we repurchased approximately $24.5 million of common stock under our 2026 authorization. From a capital allocation standpoint, our priorities remain funding organic growth first, maintaining discipline around share repurchases, and preserving flexibility for future opportunities. We closed the acquisition of BlueFoundry Bancorp on April 1, and the transaction will be reflected in our second quarter results. From a financial standpoint, the deal is expected to be immediately earnings and tangible book accretive in line with previous expectations. Revenue enhancements are expected to be driven primarily by relationship expansion. We remain confident in both the strategic rationale and the financial benefits of the transaction. Looking ahead to the remainder of 2026, our expectations remain consistent. We are affirming our full-year 2026 operating guidance, with the only change being an update to our interest rate assumptions to reflect a 25 basis point cut in July rather than March. We continue to expect annualized mid-single-digit loan growth, controlled expense growth, and strong capital generation. Overall, our first quarter performance reflects high-quality, repeatable earnings supported by prudent risk management and disciplined execution. We will now open the call for questions. Operator: Certainly. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please limit yourself to one question and one follow-up in the interest of time. Our first question will be coming from the line of Daniel Tamayo of Raymond James. Daniel, your line is open. Daniel Tamayo: Thank you. Good morning, everybody. Maybe one for you, Richard Kraemer, on the expenses to start things off, just because it was, I think, a better quarter than expected in the first quarter from a core perspective, but then the guidance was reiterated. Help us think about the pace of expense add and then cost savings as we go through the year, and if you are, as we think about where we may shake out towards the end of the year from a run-rate basis post everything with the deal, if there is a number or a way to frame that, that would be helpful. Thanks. Richard Kraemer: Yeah, thanks, Daniel. So, look, overall I would still point to the annual guidance. I think there is a lot of comfort around that kind of middle of the range. That would imply, obviously, progression higher from that $191 million operating base today on a stand-alone basis to something closer to $200 million by the end of the year. And then you have to factor in what we called out last time — we still feel very comfortable with that $27 million for the second, third, and fourth quarter combined for BlueFoundry. That will obviously be a little bit heavier in, call it, July, but we think by the end of the fourth quarter we will be at our 50% cost save run rate. So hopefully that helps. Daniel Tamayo: Yeah. I mean, maybe I can try and put a little bit of—well, I have to work through the model a little bit, but I think the number I am looking at for the consensus—I had a number around the $2.15 range, I believe, in the fourth quarter. Is that in the ballpark? Is it possible to get that specific? Richard Kraemer: My gut reaction is that is a little high based on where we should be on a run-rate basis and hitting that 50% cost save. Daniel Tamayo: Okay. Helpful. Thank you. Do you have—just give us some help on the classified and criticized in the quarter directionally from where they ended in the year? Richard Kraemer: Yeah, Daniel, classified and criticized continues to trend down. Nonperforming is trending down. So those credit metrics continue to either be stable or move in a positive direction. Daniel Tamayo: Okay. Thanks for that. And then, lastly, the deposits—it was a nice strong quarter of core deposit growth in the first quarter. Just give us your thoughts on your ability to hold those levels. Obviously, not expecting the same kind of growth going forward, but from a perspective of noninterest-bearing and overall core deposit growth, how you are thinking about the trajectory from here? Richard Kraemer: Yeah, we do not see long-term trends changing. We did have a good first quarter. Core was up. There is seasonality. There are account flows in commercial and municipal. So those things will bounce around quarter to quarter, but those trend lines we see being pretty consistent as we move forward. The only thing I would add is just keep in mind the composition of BlueFoundry deposits in the very near term. We bring that on in the second quarter. They had a very low concentration of noninterest-bearing. On a percentage basis, that is going to change our pro forma a little bit. But on the balances, that commentary stands. Operator: And as a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. Our next question comes from the line of David Bishop of Hovde Group. Your line is open. David Bishop: Hey, good morning, gentlemen. Curtis Myers and Richard Kraemer, just curious, you guys definitely bucked the trend in terms of core and Mid-Atlantic, able to show loan growth here. What geographies drove the growth? And what did prepayments and payoffs look like this quarter relative to the last few? Curtis Myers: Just a couple of points on loan demand and growth overall that might be helpful. We continue to expand the teams throughout the footprint, so we have been ramping that up as we talked about over the last couple quarters. Pipelines are meaningfully higher year over year, and up even linked quarter, so fourth-quarter to first-quarter pipeline up. That is a good metric. You get to the end of the year—that typically tails off and then you rebuild in the new year—but we are up linked quarter. We think we are generating the originations we need to get the guidance. We reaffirmed the guidance. There certainly are headwinds: runoff in construction for us; the perm market is very competitive, so we are being prudent and selective in what goes to permanent; so you have seen over the last four or five quarters some headwind from that. And borrower sentiment—they were a little apprehensive in the first quarter. I think that is why you see a little softer first quarter overall. We are feeling that as well. But we definitely have some good momentum. And just to be clear, I think we have the team in place, and we are winning business at the pace that we can get our guidance. As a data point on construction, the maturity schedule that we have seen—the actual maturities we saw over the past year versus what we see over the next four quarters—was double. We are looking at 50% or less of that maturity wall for construction to perm over the next four quarters, so that helps alleviate a lot of that future pressure as well. David Bishop: Got it. That is good color. And a follow-up on capital planning: are there any target levels you are managing to in terms of CET1 or TCE that, over and above, you would consider excess for share repurchases? Richard Kraemer: We do not manage to specific levels. We feel capital is pretty robust right now. We were pretty active in the buyback in the first quarter. We feel well positioned to deploy capital—and, again, that is organic growth, any corporate activities, whether it is a portfolio purchase or a bank, something like that—and then we will use a buyback opportunistically. We feel good about our capital levels, and I think that gives us a lot of opportunity and flexibility as we move forward. Operator: Our next question will be coming from the line of Casey Haire of Autonomous Research. Your line is open, Casey. Analyst: Hi, good morning. This is Jackson Singleton on for Casey Haire. Richard Kraemer, I just wanted to touch on NIM into the second quarter given the close of BlueFoundry. Any help you can give here on what we can expect directionally? Richard Kraemer: Yeah, directionally higher. We reaffirmed our NII guidance, but feel good about the purchase accounting marks that we announced initially. You will start to see that purchase accounting accretion come through in February. I would say on the core margin, if you think about deposit repricing, I think that is starting to trough. So I would turn attention more towards, I think it is actually Slide 21 of our deck, on some of that fixed asset repricing and the back book—lots of maturities. On the $4.4 billion of loans we have repricing within the next twelve months, you will see, at current market rates and spreads, anywhere from 50 to 60 basis points benefit on that back book. So you really start to focus more on the asset repricing going forward. But we feel good about the original estimates we had out there for BlueFoundry, so that will all start kicking in soon. Analyst: Got it. Okay. And then for my follow-up, have you done any work on the Basel III proposal and the impact it could have on capital ratios? Richard Kraemer: Loosely. I think there is some benefit to us because of the relative size of our residential portfolio. I do not have specific numbers to cite, but it is modestly beneficial. Operator: Our next question will come from the line of Matthew Breese of Stephens Inc. Your line is open, Matthew. Matthew Breese: Good morning. I had a few questions; I will keep it tight. First, Curtis Myers, I think you mentioned a portfolio purchase. What was the size of it? In market, out of market? And are you considering additional portfolio purchases to get the guidance? Curtis Myers: Yes, Matthew. It was a unique opportunity—commercial portfolio right in the heart of our franchise. It was a really good opportunity. We purchased it from a high-quality institution that does business the way we do—granular, about a $1.2 million average loan size in there. Overall portfolio was around $200 million. It is a pretty similar customer base to ours, again, right in the heart of our market. We have referenced this a couple times over the last couple years—we want to be in a position opportunistically, whether it is a portfolio purchase or bank M&A. We are always looking for these opportunities. This was unique, we were positioned well, and we feel really good about it. Matthew Breese: Okay. And then with BlueFoundry, you get, geography-wise, deeper exposure to Northern New Jersey, which are economically more vibrant areas. How does that change the loan growth outlook for you? Does it change commercial real estate growth dynamics? Is that a 2026 or 2027 event? And, oppositely, is there anything on their books now that you have it that we should anticipate being in runoff mode? Curtis Myers: We feel really good about that market. It is a good market. We were in the market with a handful of financial centers and had teams covering it from further away, so this really gets us in that market in a bigger way. We got legal day one quickly. Integration is going well. Their team is energized; our team is energized. We feel good overall about it. The market is not going to move the overall dynamics for us—we are going to do business similarly there as we do throughout our footprint. Their book is very much a community banking book—small business and small real estate. We have a lot of opportunity to go up market in real estate, which they could not, but do things that we typically do throughout the footprint. We are not looking to do anything different than we do—our mortgage business, our wealth business. The synergy we got on the Republic transaction for our Wealth business was pretty meaningful, and we think we are going to have those kinds of opportunities there. So we see up-market commercial, we see Wealth, and then just a really good market overall driving all of our businesses. We definitely see it as a net opportunity. From a runoff standpoint, there is nothing on there that we are saying, “We do not do that business; we are going to run it off.” Through transitions you get a little bit of runoff risk that we will work really hard on, but there is nothing specific and purposeful that will run off that is meaningful to the overall organization. Richard Kraemer: I might just add: a significant portion of the originations have been either brokered or third party. On the residential side, we have a pretty significant capability in origination, so we will be able to replace—not necessarily run off, but replace—that with Fulton-originated paper, which is going to help spreads and absolute yields in those portfolios as well. It is a nuance, but I do not think it is runoff; it is more of us using our capabilities to replicate what they were doing. Matthew Breese: Last one for me. Share repurchases—you have been at it consistently for five or six straight quarters. It feels like we have ended up in a range of $20 million to $30 million per quarter in buybacks. Is that something we should model at least the next couple of quarters, if not through the end of the year? Richard Kraemer: We are always looking at that, and I think it really depends on a couple things. It depends on organic growth—that is where we want to deploy capital the most—then other opportunities where we might want to hold on to capital, and certainly market dynamics and pricing. We look at buybacks like we look at M&A or any other corporate activity. We have hurdles and metrics that we look at to be active in the market. Typically, there are opportunities within each quarter that we have been able to do some buybacks, and we would look for those opportunities as we move forward. We have $125 million remaining, so we have plenty of room, and we definitely are looking for those opportunities. Operator: I would now like to turn the conference back to Curtis Myers for closing remarks. Curtis Myers: Well, great. Thank you all again for joining us today. We hope you will be able to be with us when we discuss second quarter results in July. Thank you, everyone. Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Operator: Welcome to Strategic Education, Inc.'s first quarter 2026 results conference call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education, Inc. Terese Wilke, please go ahead. Terese Wilke: Thank you. Hello, everyone, and welcome to Strategic Education, Inc.'s conference call in which we will discuss first quarter 2026 results. With us today are Karl McDonnell, President and Chief Executive Officer, and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following today's remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties, and risks that Strategic Education, Inc. has identified in today's press release that could cause actual results to differ materially. Further information about these and other relevant uncertainties may be found in Strategic Education, Inc.'s most recent annual report on Form 10-Ks, the 10-Q to be filed, and other filings with the Securities and Exchange Commission, as well as Strategic Education, Inc.'s future 8-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on our website at strategiceducation.com. And now I would like to turn the call over to Karl. Karl, please go ahead. Karl McDonnell: Thank you, Terese, and good morning, everyone. Our first quarter results reflect meaningful progress across three of our primary strategic objectives: the continued investment and growth of our Education Technology Services division, growing our employer-focused strategy, and further implementing our AI and other productivity-enabling systems. For the first quarter, Strategic Education, Inc. revenue declined 1% year-over-year driven by a slight decrease in consolidated enrollment. Based on our current enrollment trends, we expect that the first quarter will be the low point of the year in both absolute revenue and revenue growth. Our productivity initiatives drove a 2% reduction in adjusted operating expenses, resulting in 3% operating income growth and slight margin expansion to 14.3%. Adjusted earnings per share came in at $1.41. Turning now to our segments. Education Technology Services grew revenue 21% to $42 million driven by Sophia Learning subscriptions, higher employer-affiliated enrollment, and new Workforce Edge partnerships. Even with a 7% increase in expenses as we continue to invest in the ETS business, ETS operating income grew 42% to $20 million and a 47% margin. ETS now represents 46% of consolidated operating income. Within ETS, Sophia Learning grew average total subscribers by 40% and revenue by 32% with strong growth in both consumer and employer-affiliated subscribers. Workforce Edge ended the quarter with 82 corporate agreements covering 4 million employees, and enrollments from Workforce Edge into either Strayer or Capella grew 70% reaching nearly 4 thousand students. As you know, expanding this network of corporate partners continues to be among our most important strategic focus areas. Moving to U.S. Higher Education, employer-affiliated enrollment grew 10% and reached a new all-time high of 34.5% of total U.S. Higher Education enrollment, an increase of more than 300 basis points from the prior year. Healthcare, which is a key component of our employer strategy, also grew 10%, and healthcare enrollment now represents more than half of all U.S. Higher Education enrollment. U.S. Higher Education revenue declined 4% in the quarter, reflecting a slight decline in unaffiliated enrollment along with somewhat higher discounts and scholarships, which together lowered revenue per student. Our productivity initiatives continue to enable effective cost control with operating expenses down 2%. The segment delivered $26 million of operating income and a 12% margin. U.S. Higher Education also set a new record for average student retention at 89%. Turning now to Australia and New Zealand. Total enrollment declined 3% in the quarter. Regulatory constraints on international enrollment continue to be a headwind and are only partially offset by continued domestic new student growth. We remain focused on maximizing international enrollment within the current caps and on our continued investment in the domestic market. On a constant currency basis, ANZ revenue was down 4% reflecting the enrollment decline and a slight decrease in revenue per student. Here too, our productivity initiatives drove a 3% reduction in operating expenses. We reported an operating loss of $2.4 million for the quarter, which, as we have noted before, reflects the normal seasonality of that business. On capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 493 thousand shares during the quarter for a total of $40 million. As of the end of the first quarter, we have approximately $200 million remaining on our share repurchase authorization through the end of the year. And finally, as always, I would like to thank all of my colleagues here at Strategic Education, Inc. for their ongoing commitment to our students and our employer partners. We will now open the call for questions. Operator: If you have a question or a comment at this time, please press 11 on your telephone. If your question has been answered or you would like to remove yourself from the queue, please press 11 again. Our first question comes from Jeffrey Silber with BMO Capital Markets. Your line is open. Jeffrey Silber: Thanks so much. Karl, I appreciate the comments about saying that the first quarter is hopefully the low point from a revenue and a growth perspective. I know you have always talked about getting back to your notional plan. Any idea in terms of the timing of that, when we might see that? Karl McDonnell: We have partial visibility into the next quarter, obviously, and I would say that enrollment trends in U.S. Higher Education have been improving. We expect that they will continue to improve, which is why we had the comment on Q1 being the low point on revenue growth for the year. As for the notional plan or model, I should clarify, Jeff, that when I am talking about our performance against the notional plan, I am predominantly referring to EBIT and EPS. And from that lens, I have very high confidence that we are going to be on our notional plan this year. Could we get there with better expense management and maybe a little less revenue just given how the first quarter played out? I think that is possible. But as I say, I am very confident that we are going to be there from an EBIT and EPS standpoint. Jeffrey Silber: Okay, that is great to hear. If I could just move on to a regulatory issue. Effective July 1, we have some new rules coming from the One Big Beautiful Bill Act, specifically the caps on graduate and professional loans. I know you do not have as much exposure there, especially on the professional side, but I am just curious if you have seen any impact. Are students maybe a little bit reluctant because they are unsure about the funding environment? Any color you can provide would be great. Karl McDonnell: I have not heard of any demand-related issues or pressures as a result of grad loan limits changing. We are still waiting on final language to see exactly how that is going to be shaped, but I do not expect that we are going to have a major impact from changes to the grad loan limits. Jeffrey Silber: Alright, great to hear. I will get back in the queue. Thanks. Karl McDonnell: Thanks, Jeff. Operator: Again, ladies and gentlemen, if you have a question or a comment at this time, please press 11 on your telephone. One moment for our next question. Our next question comes from Alexander Paris with Barrington Research. Your line is open. Alexander Paris: Hi, guys. Thanks for taking my question. I just had a follow-up on that last one. The notional plan, Karl, you said you had high confidence in EBIT and EPS. From the notional plan, can you just refresh my memory? It calls for 46% revenue growth and 200 basis points of adjusted operating margin improvement. You said it could be a little less revenue, a little bit more cost reduction. But what are you referring to? You are referring to the 200 basis points of adjusted operating income improvement? Karl McDonnell: Yes, specifically. And the reason I say that is, obviously, we control our expense. I would say that the AI and other technological enablement to productivity are being implemented a little faster than even I expected, so I think it is going to have a slightly bigger impact this year than I otherwise would have expected. And I do not know where revenue is going to be ultimately, but if you just assume that our current enrollment trends are going to continue through the balance of the year and you layer on accelerated productivity, that gives me high confidence that we are going to get to the 200 basis points of margin expansion, and that will translate into whatever growth rate it is on EPS. Alexander Paris: Gotcha. And then, regarding enrollment in U.S. Higher Education, obviously, big growth continues in employer-affiliated enrollment that accelerated sequentially from the fourth quarter. Unaffiliated was down 5.5% by my calculation. That too represents a sequential improvement when it was down 8.5% in the fourth quarter. So what explains the sequential improvement? Are new students up in that channel? Karl McDonnell: Specifically, we have had, I would say, a little better than what we expected in new student growth at Capella. In fact, I would describe Capella's new student enrollment as quite strong. We have seen ongoing weakness in predominantly Strayer's undergraduate unaffiliated enrollment, which frankly is not part of our strategy. We are not trying to grow unaffiliated enrollment, but it has been improving. So I would say, Alex, it is a mix of Capella doing better than what we expected and Strayer beginning to improve from lower levels that we had last year. Alexander Paris: Gotcha. And then is there anything different you are doing in terms of marketing to the unaffiliated? Obviously, your focus is on employer-affiliated, but, you know, social media marketing, things like that, trying to drive enrollment in undergraduate unaffiliated at Strayer. Karl McDonnell: Yes. Well, it is a combination of a couple of things that have been really playing out over the last couple of years. The first is we have told our U.S. Higher Education management team that we want them to solve for the overall highest growth we can get across U.S. Higher Education and to not necessarily solve for any particular growth at either Strayer or Capella, but to try to maximize the sum of both of those. And what has happened as a result of that is Capella has just been a much stronger grower. And as such, we have been supporting Capella's growth with increased investments in marketing. And because we have not necessarily increased the aggregate amount in U.S. Higher Education, that means that we have been marketing a lot less at Strayer, which is predominantly the channel for unaffiliated enrollment. And in fact, Daniel could give you maybe a more precise number, but if you go back two years ago and compare it to where we are today from a marketing investment standpoint, Strayer is probably down by 50% or more, and Capella is up by 50% or more. And that is feeding the strategy that we are trying to execute, which is employer-focused, healthcare-focused. In some quarters, Capella's mix of employer-affiliated enrollments is over 50%. So it is a direct enablement of our strategy. We are happy to have unaffiliated enrollments. We are not trying to exclude them. It is just not where we are investing our growth capital. We are investing our growth capital in the employer channel, healthcare, and ETS in the States. And that is how it is playing out, and that is how we plan for it to be executed for the rest of this year and moving forward in 2027. Alexander Paris: Gotcha. And given the improving trends in U.S. Higher Education enrollment, you know, the sequential improvement, the slowing rate or the declining rate of decline, do you think we will get to growth by the end of the year in U.S. Higher Education enrollment? Karl McDonnell: I think it will be very close. I think we have a good chance to do that. I cannot predict, obviously, but I think that is entirely possible. Alexander Paris: Great. And then the last question, and kind of similarly, ANZ segment. Given the 3% increase in the international cap expected in 2026 and the strength that you are seeing on the domestic side of new student enrollment, do you still expect that segment to get to overall enrollment growth by the end of the year? Karl McDonnell: It is going to be close. I am hopeful, I should say, that we are going to have full-year new student growth, which will be the first in the post-cap era. Whether or not we get to total enrollment growth, it will depend. I have to say that one of the things that we saw in the first quarter that we did not foresee is that the Australian government has begun to slow down visa approvals even when you are below your cap. That is not something we saw last year. The Australian government was very good about approving visas as long as you were under your international cap. This year, there has been more friction, and we suspect it may have something to do with just greater immigration scrutiny following the Bondi Beach incident that happened in Sydney last year. But that was something that did not happen last year. It happened in the first quarter. I do not know if it is going to happen in the second quarter moving on, but that was more friction than what we were expecting, and that may impact our ability to generate total enrollment growth this year. Alexander Paris: But you feel good about new student enrollment growth this year in ANZ? Karl McDonnell: Yes. And we continue to have pretty strong domestic enrollment growth, and I have to go back and look, but I think three out of the four quarters last year, we had it, the last three. And we also saw that in the first quarter. Alexander Paris: Great. That is helpful. I appreciate the additional color. I will get back in the queue. Karl McDonnell: Okay. Thanks, Alex. Operator: One moment for our next question. Our next question comes from Jasper Bibb with Truist. Your line is open. Jasper Bibb: Hey, good morning, everyone. Underneath the U.S. Higher Education margin performance this quarter, can you compare where the operating margins for Capella and Strayer stood at this point? Is there a big difference there? And with the shifting growth investments from Strayer to Capella that you talked about, do you think you have kind of fully right-sized your fixed costs for what has become a smaller business on the Strayer side versus where you were pre-COVID, or is there more to do there potentially? Daniel Jackson: Hey, Jasper. It is Dan. The Capella margin, probably not surprisingly, is much higher than Strayer and is driving most of the operating income for U.S. Higher Education. Strayer has a positive margin. It is just a fraction right now of Capella. And for expenses at Strayer, though we are pretty close to right-sizing them, there are still opportunities when it comes to some of the productivity work that Karl referenced and continued real estate rationalization. So I think the Strayer margin will improve, but it is unlikely to get to where Capella is. Jasper Bibb: Got it. And then, there was a slight decline in revenue per student in the U.S. in the first quarter. In the context of revenue bottoming in the first quarter, or the expectation there, how are you thinking about revenue per student in the U.S. over the balance of the year? Daniel Jackson: Yes. So first off, we are expecting relatively stable revenue per student for the full year. The first quarter was lower due to higher scholarships and discounts and lower classes per student, both year-over-year and sequentially from the fourth quarter. And that variability is driven by program and degree mix, the mix of corporate students, and the mix of some of our unaffiliated student groups that are eligible for scholarships. Again, it is hard to predict those, but with pricing that takes effect starting in the second quarter, we think the full-year revenue per student is still likely to be flat, so it will offset some of these other trends. And one other note on that because the sequential issue was also exacerbated by our fourth quarter 2025 revenue per student being significantly higher due to a significant decline in scholarships and discounts that quarter compared to the fourth quarter 2024. So that was a little bit of an anomaly. Jasper Bibb: Makes sense. Thank you. And then for Education Technology, it seems like your growth rate for Sophia stayed pretty high, but the Workforce Edge growth rate has slowed a bit. I know you are starting to lap your large retail partner that you were ramping last year. Anything else we should consider for how each of those two businesses are going to perform in 2026 and the relative growth rates there? Karl McDonnell: Well, you have to remember, Sophia is pretty big now, so it would not surprise me if the growth rate moderates some, although our expectation is that we should be able to continue to support 20% plus growth at Sophia. You are right, we are anniversarying a big retail client in Workforce Edge, so there could be slightly less growth there, but remember, one of the big benefits of Workforce Edge is enrollments into Strayer and Capella. And as I said in my prepared remarks, we had over 4 thousand of those students in the first quarter. We expect that number will continue to grow. We have a very robust pipeline of new clients coming into Workforce Edge. We continue to get unsolicited inbound RFPs every quarter. So the way that we think about ETS is that we basically have two market-leading businesses there. Sophia is the market leader on alternative credit pathways. Workforce Edge is knocking on the door—Sophia the market leader on education benefit management. They are both great businesses. We continue to invest heavily in them, and we expect that they will continue to grow significantly both in the near term and the long term. Jasper Bibb: Got it. Thank you for taking the questions. Karl McDonnell: Sure. Thank you. Operator: I am not showing any further questions at this time. I will now turn the call back to Karl for any further remarks. Karl McDonnell: Thank you, ladies and gentlemen, and we look forward to discussing our second quarter results next quarter. Operator: Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect, and have a wonderful day.
Craig Allen Mailman: Only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com enter code GPC 26 to submit questions. So, Marshall, I am going to turn it over to you to introduce your company and team, provide any opening remarks, and tell the audience the top reasons that investors should buy your stock today. Then we can jump into Q&A. Hit the red button. It is new. Okay, I was trying to kill time, but thank you, Craig. Marshall A. Loeb: Good morning, and thanks everyone for your time and interest in EastGroup Properties, Inc. this morning. I will start kind of right to left introducing our team: John Coleman, EVP, runs our Eastern Region from the Carolinas down to Miami; R. Dunbar, who is our president as of January, and runs our Central Region, which is really Texas and Nashville; then Casey Edgecombe, who handles, as many of you know, our investor relations. EastGroup Properties, Inc., if you are not familiar, we call it Shallow Bay industrial REIT, which is really shallow bay, a euphemism for smaller, infill buildings. One of our peers described this years ago and made the comment, EastGroup Properties, Inc. has always been last mile; you all just were not smart enough to coin the phrase. We try to build a campus setting near businesses, near higher-end residential—ideally, that is where the disposable income is. We are typically in smile states, which is where people are moving, where there is population growth. In terms of reasons why to invest in EastGroup Properties, Inc., two or three facts come to mind. We talk internally a good bit about how to lower our risk without reducing our return. We have now had 51 consecutive quarters of FFO growth versus the same quarter prior year. Same thing for our same-store NOI. If we hang in there one more month, we will make it to 13 years of positive FFO and positive same-store NOI—just this push for industrial REIT and the growth we have been able to enjoy. We are one of the older REITs here; we have been industrial since the mid-1990s. So a proven management team. I was looking at the screen earlier at all the red on it, and we have been through everything: COVID, the GFC. We have been an industrial REIT and a public company throughout. Thankfully, our team has been through all those cycles. Our strategy evolves, but we were not housing or office; we have always been a shallow bay industrial REIT during that timeframe. Maybe going through all those economic cycles, one of the other things we have learned is you never know what the next black swan event is, so have a safe balance sheet. We have the lowest debt to EBITDA in our sector, right around 3x. Our debt within our total market cap, as of the close of Friday, was around 14%. That is all laddered, fixed-rate debt in terms of maturity schedule. We also have the lowest top 10 tenant concentration—our top 10 tenants are a little below 7% of our revenue—so we like the geographic as well as tenant diversity. You never know when you are going to pick up the news of an accounting scandal or some issue at one of our tenants. Thankfully, there are not that many, but we try to be geographically diversified, tenant diversified, and have the lowest G&A as a percentage of revenue in our sector. Hopefully, we can run our company with low overhead for you. On top of all that, we are still trading below our long-term multiple of FFO. A lot of that is interest rates—I am trying not to blame it on the spokesperson for the company—but you can get all those things: 13 years of better FFO growth, safer balance sheet, we have cut our debt by about half of where it was a handful of years ago, and we are below our historic multiple. Those are the main reasons why we think it is a compelling opportunity. Craig Allen Mailman: We will now open the call for questions. Perfect. Thanks for the initial comments. You were nice enough to put an operating update out ahead of the conference, and the development leasing, which started to pick up in the fourth quarter, looks like it is continuing. Maybe talk about some of the gestation periods on the 166 thousand square feet that you signed and how the leasing pipeline for development and operating assets looks today. As we focus on that inflection of leasing that investors have been waiting for in industrial that looks like it is here, talk about that trend. Marshall A. Loeb: I will confess, I love our setup in that supply is at its lowest level since 2018, and in the smaller or shallow bay buildings, vacancy is about half the vacancy rate of the industrial market because so many big-box buildings on the edge of town got built, which we do not compete with either by location and mainly building design. Our average tenancy is about 35 thousand square feet. Our average building size is just under 100 thousand square feet. We will have a small campus for that last-mile service or delivery. Thankfully, our development leasing—R. Dunbar, I will let you add some color—we signed a little more than half of our development leasing that we signed in 2024 and 2025 in the fourth quarter. It has been an interesting last 18 months where we have had solid activity. You mentioned gestation period—just getting people to the cash register. We had people in the store; it is getting them to the cash register, and that seemed to happen more in the fourth quarter. The 166 thousand square feet you mentioned were since our earnings report—so early February, a little under a month. We got a development lease signed, and then one that is a long-term tenant expanding their building. It is manufacturing-related, kind of cross border, which we think is another tailwind. Their business is good, and they want to expand the building—we are going to expand their building by about 100 thousand square feet, renew their existing lease, and add 100 thousand square feet. I am pleased with the activity we have. You always breathe a sigh of relief when the lease gets signed, but there is still a fair amount of activity throughout our portfolio that—hopefully, the next time you hear us report, which will be first quarter—I am hopeful we will have a decent chance to build on those 166 thousand square feet. R. Dunbar? R. Dunbar: As everybody is aware, with Liberation Day last year, April 1, it caused a lot of users to pause and wait to see what would happen. We saw the biggest impact on that through our development leasing. The operating portfolio performed quite well last year as users decided to stay in place and renew. Craig Allen Mailman: Did you guys look at the tenant pool for your size range? You are a little bit differentiated having, I think, your average tenant size around 35 thousand square feet, which seems to be a stronger part of the market. How deep is the tenant pool for that segment of the market? I know you out-punch the market in some areas in terms of occupancy versus market occupancy. Talk about the resurgence there—markets that might be thinner where if you do not make a deal it may be a couple months until the next tenant comes, versus others where you could hold the line a little bit more on pricing and maybe even push on the margin. Marshall A. Loeb: Good question. I remember a broker saying to me, every 10 thousand square feet, the number of prospects you have goes up as you come down in size—the smaller the tenant, the more prospects—and the TIs are lower. We focus on tenants that distribute within the metropolitan area. We want growth in Orlando, Dallas, Austin, Phoenix, Las Vegas—that is how we pick markets. In some fast-growing markets, we will have the same tenancy in different parts of the market because when it is a fast-growing city, your traffic is terrible; you have outgrown the freeway system. That helps us. In Dallas, for example, you can compete on your service level. If you are a hotel and your AC is out, you want the repair person quickly, and if they are coming from cheaper space on the edge of town, they are going to get stuck in traffic. We are not the lowest-cost competitor, but we want to compete on location and our own service level. In smaller markets—Tucson, Greenville, South Carolina—there is less competition; it is a smaller portion of our portfolio. We may be one of the fewer games in town versus a Dallas or Atlanta. There are fewer tenants, but that has not held us back on rents. In some areas, there is always activity in Houston, always activity in Phoenix. We are in real estate; we do this every day. When you think big buildings, no one was building 800 thousand-square-foot buildings years ago; the vacancy rates—call it 8% to 9%—are in much newer buildings than you think for a 100 thousand-square-foot building. There is obsolescence or the local owner that may not have the CapEx—maybe a partnership that just is not real estate people. So we should, in my mind, always be able to out-punch the market over the long term. There are a couple of markets we watch—for example, Austin, Texas. The vacancy rate because of oversupply in Austin—and that market has gotten really long north to south—is around 20%, but we are 99% leased in Austin. Phoenix has a pretty high vacancy rate, maybe 14% to 15%, but we are 99% leased in Phoenix. It is a lot of big-box on the edge of town, and there has been a flight to quality in this slowdown too. We see markets like Atlanta that have negative absorption in the Class B and C product in older buildings and pretty strong positive absorption in what we try to own or build, which are the newer buildings. Craig Allen Mailman: We have a couple questions coming in. First one, on tariffs. What are you hearing from tenants following the SCOTUS IEPA ruling? Does the ruling reduce uncertainty for tenants, or do pivots to alternative tariff statutes keep uncertainty elevated? Marshall A. Loeb: It is early to get tenant feedback. Starting last year—and I agree with R. Dunbar—first quarter last year was one of our strongest quarters, and then when we had Liberation Day, it put capital decision-making into a bit of paralysis. Our portfolio stayed full; it was development leasing that slowed. We ended the year 97% leased. We are 96.6%, per our update as of Friday. We are still full. About a third of our development leasing is, as you think about it, one of the things we like about a park setting: a tenant in Building 3 has outgrown their space, so we will build Building 8 for them in the park. It will hurt our same-store numbers, but we usually tell tenants we can accommodate your growth needs. The way the market has worked the last several years, rents have been rising and still are. We can backfill your space in Building 3 at a higher rate. It will take us nine or 10 months to deliver the new building, but we move people around. I think tenants are a little more immune—maybe all of us are. We have said it is going to be a noisy year with a lot of headlines. I am hopeful. I do not think we are done with tariffs. Do not listen to my political advice, but I do not think the Supreme Court ruling means this is not a topic anymore. At some point, you have to run your business. Usually the local team says we need more space; corporate says, the headlines are messy, sit tight, make do. At some point, people get to where they just need more space. That is what we saw later in the year, and we are seeing it to a degree in first quarter. I am hopeful people are getting a little more used to the shocks to the system. Craig Allen Mailman: The other question that came in: could you talk about where cap rates are, on a stabilized or market-rent basis, for assets in your markets today? R. Dunbar: It varies from market to market. Some of the lower cap rate markets, we are seeing low-5s, sometimes upper-4s. Some of the stronger markets—like Nashville, where supply and demand have probably stayed more in check than anywhere else in the country—are there. Dallas cap rates, with the growth rates and strong demand there, are kind of in the low-5s. Depending on the market, you may see a little bit higher, mid-5s. Austin may be a little bit weaker because of the amount of supply. Southern California is more challenged because market rents are more in flux—harder to ascertain today—but still seems to be fairly healthy, mid-5s to upper-5s from what we are hearing and seeing. Craig Allen Mailman: And on development yield, it feels like you have been sticky in that plus-or-minus 7% range. Despite cap rates moving around—and maybe being lower than people would have thought on a market basis—what is your comfort level? Your start guidance was pretty healthy this year. Your view on incremental starts, build-to-suit versus spec. And in the operating update, you issued some equity—the view of equity versus incremental debt. Marshall A. Loeb: Thankfully, our development yields have hung in there—7%, low-7s. We typically say, as a rule of thumb, about 150 basis points above the market cap rate, depending on the size of the portfolio and things like that. We have healthy profit margins on our development. I will brag on our team a little. Last year at this time, we had come out with $300 million in starts, and with Liberation Day and things like that, we build parks in phases—one or two buildings at a time. It is a pull system. Most of our peers say, we are going to build a building and hope three people are not doing that. I will get a call from one of these guys saying, Phase 2 is 50% leased, I have an LOI out or a lease out, or more activity; I need to build the next phase. We only started $175 million a year ago versus the $300 million we had told the Street. It is hard to predict, but we will go as fast or as slow as the market is telling us, and I like that we were disciplined, even though we would rather have done $300 million. This year, at $250 million, which is what we penciled out, the starts will come from the teams in the field. Usually, we will pull that ticket—we were talking earlier today about a few of the development leases we are working on: if we can get this lease in, that will pull the ticket to put more blue shirts on the shelf. It is like a retail store, or like building out a residential subdivision: as one or two homes sell, we start the next one. We think that is lower risk, and we like the returns we are getting. One interesting and maybe not surprising thing—you saw it with the expansion we announced—because supply is back to pre-COVID 2020 levels, and many of the people that build shallow bay are local/regional developers with an institutional partner, in this slowdown their balance sheets were not structured to carry land or a construction team. We bought land from people that were not able to close sites where they had done all the work but did not want to carry it for two years until the market normalizes. We think we will have a really good runway in terms of fewer people—it will take them a while to get back in business and up and running. They will, and we will oversupply again—that is the nature of our business—but there will be a pretty long runway, measured in a couple of years. With that, we have had more prelease opportunities where people have not been able to find space: would you build us a building, or like the one in Arizona we announced, would you expand the building? We have a good relationship with them, but the availability just is not there. We are probably working on more situations now where tenants would take an entire building—or maybe a couple of buildings in a park if we would build it—than in the last three or four years that I can think of. R. Dunbar: To add to Marshall’s comments on the prelease or build-to-suit activity, we really saw in the last year an uptick in conversations with our existing tenant base and customers that needed to either expand or consolidate operations. That has accelerated into this year. The expansion we signed in Arizona was a good sign, and we continue to have other conversations. That speaks to the power of our platform and portfolio—we have over 70 million square feet of existing product and over 1,400 customers. When they need to expand, we are usually the first call. That is why we like to do things in phases and to have some land inventory. With over 1 thousand acres of land, we are in a prime position to service these tenants that now need to expand or reconfigure some of their distribution networks. We feel like we are in a good spot. We will not land all the conversations we are having, but we have shown we landed one earlier this year, and hopefully we will pull another one or two in the boat as we continue throughout 2026. I agree with Marshall—hopefully it would give us some upside to the $250 million in starts. Marshall A. Loeb: It is hard—these are $50 million, $100 million decisions—but if we could land a few of those and the economy can hang in there, I am an optimist. I hope we can hang in there and maybe have some upside to the number of starts. I always say I do not worry about the buildings starting as much as I worry about them finishing. We can start whatever we want to start; we just want to make sure we get it leased. We usually underwrite a year after completion to get the building stabilized and leased. Either way, that is when it rolls into the portfolio. Last year, we saw where our vacancy dropped; it was more buildings that are achieving our yields, but it was taking 16 to 17 months past completion to lease up rather than, at the peak, six or seven months. That was when we peaked on development as a company, probably just under $400 million. I am glad we have the team and the balance sheet and the land. We want to usually have permit in hand for that next phase, which has gotten much harder within the cities—pulling those permits in fast-growing cities. People want the delivery quickly; they want the service person, but no one wants all the trucks on their road. Getting industrial permitted has gotten materially harder than it was five or six years ago, which is great for the 65 million square feet we own; it is a challenge for the next incremental 5 million we will build. John Coleman: I was going to add, if you take a snapshot of where we are in the Eastern Region with new development starts, we are at about a 60% reduction from the peak. That dynamic has worked in our favor. A couple of things: construction costs—although there have been some tariff impacts—are actually lower for new development because of the lack of new demand for construction. As we look forward into 2026, supply will be greatly down, to Marshall’s point, so we think there could actually be some upward pressure on rental rates when that happens. On land, just having the land entitlements in place—to be permit-ready to start—that is key. We have a very deep land inventory that is fully entitled. When that site is ready for the next phase, we are ready to start construction. On development, we had a question come in on whether you have seen water rights extend entitlement timelines or change site coverage for new development. Nothing, at least in our market shed on water, that I have seen or heard of. The entitlement period is taking longer. Power is more of a constraint than typical. For our users, most of them are not heavy power requirements, so we have not seen a hindrance on our activity regarding power, but it is something we are monitoring. That is being driven by data center demand—power and water. It is shocking how much is consumed. In Atlanta, for example, there are public hearings now where residents are showing up in opposition to future data center zonings and permitting. It is on the table; I am not sure where it will go. We put our toe in the water and looked at some data center opportunities—probably not a great fit for us. I think you will continue to see pushback on those two utilities moving forward. Craig Allen Mailman: In the markets you operate in, how much does data center development crimp industrial development? You are not sharing land sites, but you are targeting similar land sites. Where do you see that impact being the greatest on future new supply of industrial? Marshall A. Loeb: Certainly, they can pay a lot more, and usually with industrial we can only go one story, historically. We are about the first guys to get priced out of land when we chase it. It is one more source of competition, tied into power. We said we are not actively looking at data centers, but we want to understand it. If we do have land that has the power and the water for data centers—we joke that we want to know if there is oil under our land. If it is there, we should capitalize on it. It is another set of competition, but they seem much more limited than what we can do for industrial. Ours is hard to come by, but theirs is even harder—zoning, permitting, and especially power. They have approached us on some sites at different times. The power requirements they need, and the lead time to get that power, are so long. If we can capitalize and there is an opportunity to do it without us pretending to be a data center developer—which is not why I would buy EastGroup Properties, Inc. stock—there are better opportunities in other rooms here than this one. Craig Allen Mailman: Shifting to development leasing cadence: how should we think about development leasing cadence throughout the year and, subsequently, development starts? Marshall A. Loeb: It is hard to predict the cadence. It was odd last year—we do not normally have 52% in one quarter; it is usually not that lumped together. You never know when that tenant finally decides. Rents have risen, and what used to be a director of real estate decision is now often a CFO decision. That takes the gestation period out a little bit. We have local/regional tenants and Fortune 100 tenants. Usually, the bigger the company, the bigger the legal department, the longer the gestation period—even if we have three leases with them in other markets. As those leases get signed, we will move quickly to build the next building, with permits in hand. Our prospects all have tenant-rep brokers, and if I am a tenant-rep broker, I want to see construction underway because if I promise your space is going to be ready in June, I want that developer building. If you are moving in, you are going to be calling me every day asking where your space is. That is why it is important for us to have a little bit of inventory in the market. You hate to lose a good tenant because you cannot accommodate their growth, but if we do not, somebody will. That is where, if we land some of these prelease opportunities, I could see upside to the $250 million—or, if the market hangs in there, I hope there is upside. Using last year as an example, you are better served if we are a disciplined allocator of capital. Last year was our lowest new investment year in a while. We did not see the development opportunities, and cap rates were sticky. What we bought was strategic more than opportunistic, whereas a couple years ago we saw things not close because of the capital markets, and we were getting a second look. We had a very active year buying existing, leased but new product. Then that window closed. We will try to find where the market opportunity is. We have said we are going to end up with well-located, state-of-the-art shallow bay industrial buildings in fast-growing markets. Most of the time, we are better off building it. If everybody wants it, we would rather create it than outbid people for it. Sometimes the market gives you that window to buy it vacant or buy it when it is leased. Usually, the inbound calls tell you where the window is. Craig Allen Mailman: Pivoting to AI: as it relates to EastGroup Properties, Inc., what initiatives are you looking at? How much time or money have you spent on identifying opportunities for productivity enhancement or revenue enhancement? How have you looked at it internally? Marshall A. Loeb: Good question. I will compliment our IT team on where we can use it—training and trying to stay safe within a cybersecurity world. We think about making sure we do not get hacked. On AI, we have spent time training all of our team. If you asked where we have seen the reduction to date—we are not a design or creative team, or legal—it has been our accounting. Our quarter-end closing has gotten more automated—our property accounting team has done a really nice job. We would rather reduce the closing time and offset that with analysis time if we can use technology to do that. They may argue with me on the percentages; it has mostly been what is available out there with us tweaking it to use it. Within our tenant base, you are still delivering goods and service to local tenants. The bigger the space, the more we see tenants’ ability to put in CapEx and equipment. At 35 thousand square feet, it is usually not state-of-the-art where a 1 million-square-foot building would be. We will watch to see how they can use it to be more efficient with their space. We keep seeing more opportunities—onshoring/nearshoring is the latest tailwind, kind of like e-commerce. Our old tenants did not go away; then e-commerce started diving into the pie. Now it has been suppliers to the Intel plant in Phoenix, to the TI plant outside of Dallas, to Tesla when they come to Austin. We have tenants that supply anything from food to paper products to boxes—people that need to be near that new source of demand in the market. Craig Allen Mailman: Rapid fire. Same-store NOI growth for the industrial group in 2027? Marshall A. Loeb: For the group, 5.5%? Craig Allen Mailman: From an M&A perspective in your property type, more, same, or fewer companies this time next year? Marshall A. Loeb: Same in the REIT industry? Fewer. So go with the flow. Craig Allen Mailman: Thank you so much. Everyone, enjoy the conference. Marshall A. Loeb: Thanks, Craig. Thanks, team.
Henrik Høye: Hello, and welcome to the presentation of the first quarter 2026 results for Protector. We always start with all the employees. And just before we started now, there was a moment of silence, and that was the same when we started with the employees. And then I had a conversation with some people on the first row about -- and I said that I'm quite good at awkward silence. And the reason why I'm good at awkward silence is because I'm bad at small talk. So I'm not uncomfortable when it's quiet for a couple of minutes right before we start. But what we did focus on in that session is about our vision for 2030. In March, we met, it was about 550 out of 700 people in Oslo to discuss, have workshops on 3 elements that are part of our vision for 2030. And the first one is about people. The second one is about data and third one is about innovation. And it's about thinking differently. Back in 2021, we came out of a situation of poor profitability and that we needed more discipline in our underwriting and our profitability focus. And then we decided that growth was something that had to come second. It still is. Profitability is first. But we can now with a stronger basis, stronger profitability basis, have been more bold and have higher ambitions also when it comes to growth going forward. So a lot about -- a lot of it is about being the challenger and redefining what the challenger is in 2030. It is something else than what it was before and what it is today. The sector is developing. We're growing and the world around us is developing. And in that technology and AI is very important. And we have 2 targets, and they are the same as they were in 2025 for 2026. One is profitable growth. That will always be there. The other one is data. Last year, we focused on measuring data points and following up. So we have targets on data points. This year, we're shifting the focus to the value of that data. So we need to get something out of the data. An example can be that we want more recourse on the claims handling side, then we need better data in order to get more recourse or on the underwriting side, we want more relevant and bigger inbox from the brokers, and we want to quote more of that volume. The market history shows that's more about the market. So let's not target that, but we want to see more relevant business. Then we need more data to provide to the brokers, and we need to be the best one at providing data to the brokers in order to get to that place. So -- and then obviously, using AI will not be any value if we don't have good data. So that's a prerequisite for getting value out of all the projects we have. And we have solutions and functionality with AI technology in Protector today. There are examples in claims handling and in underwriting and all employees use it on a daily basis to become more efficient, but we're yet to find the way of really changing the way we work. And one focus area we've had is that if you're good at something, when you've done a process many, many, many times and you are to improve that process, you do it with incremental improvements because you know how it's done. But what's important when you have a technology that can support you in creating higher value is to think about where you want to go. And that's actually quite difficult if you're good at doing the process. So I think that we are very good at -- we have good processes, and we are good at following those processes. But that makes us -- it's a big change to say this is where I want to go. And that's where we need to be in order to make change. So we're focusing on the outcome and the target. And then we start seeing some change, some different approaches to how we do things. But it's a big focus. We're still investing and it hurts and it costs to increase data quality, quantity, structure and availability. And it costs resources and money to test and fail with AI solutions many times. But it's very interesting, and it is a great opportunity to understand our culture in a new way and a better way. Okay. That was this morning and some insight into the cultural part, which is extremely important in Protector. The first quarter is -- the growth has been basically announced previously after the quarter 4 when we talked about 1st of January. And what you can see is that the number is lower, meaning that February and March are lower than the January figure was, and that's true for basically all countries, except for the U.K. Combined ratio is very strong. I'll get back to that because you need to normalize it. There are very few large losses there. And maybe the most important figure here is the one that comes from the U.K., and I'll get back to that when I talk about the volume and the growth later on. One information here, we always really -- since we only work with insurance brokers, we have defined quality together with the brokers, and we do broker satisfaction surveys. And in new markets, we have always done it 18 months after the first policy in sets. And in France, we have now -- we're not 18 months in, but close to 18 months in. We've conducted our first survey, and we have very good results from that survey, both on the general sales underwriting service and on claims handling, the brokers we work with because we only send it to the ones we work with. So the others don't really have a lot of feedback to us. So that's 40-something brokers that have responded to this survey. So fairly small. It's very early. So the first survey, you don't -- we haven't had the opportunities to make many mistakes. But it is an indication that what we have delivered during those first 13, 14, 15 months is something that the brokers appreciate more than what the competitors have delivered. So it's a good start, but let's see when we do the next one, and it's even more important further down the line. So to the volume. And I'll spend the time on 1st of April U.K. because I think that's quite important here. 1st of April 2023, we won a lot of business in public sector and housing in the U.K. The market was hard, meaning that the rates were higher. And some of that business has been out to tender, 1st of April 2026, but not a lot of it. So we've kept a lot of that volume in our books. And what has been out to tender, we have rewon approximately 80%. So that means that the portfolio that we have that has delivered and delivers very strong profitability is very stable in public sector and housing. And that could have been different. I've previously said that we don't know when our business, when our portfolio goes to market, if the rates are too low, we won't win it back or then we will lose it. And what is for sure is that the rates will go down when it goes out to market because the rates have fallen in the market in general. So we have a renewal rate in those sectors above 100%. That is that we're retaining most of the clients, and we have inflation and there is some exposure growth for those clients, and we even have some rate increases. So the rate is above 0. The rate, if you adjust for inflation, is above 0 in public sector and housing in total for 1st of April 2026, which is a very strong result, and it could have been very different. The new sales is another story. So the rates have been falling, and we have seen approximately half of the volume as we saw last year, which was similar to the year before. And we have quoted slightly less. So there have been some clients that we don't like, that we don't have risk appetite for. The hit ratio is slightly lower, very similar for local authorities, public sector and quite a lot lower on housing associations. So that's due to pricing. Competition coming back into the market and pricing being lower. So the result on public sector and housing is -- it's a very strong result, and it's driven by that not a lot of volume has been out in the market and that we have had discipline in the underwriting. And it's strong discipline to end up with this result. And then that's only the limited segment, public sector and housing. Commercial sector is much bigger. We have a much smaller market share. And so that's where the potential is large, and that's what's driving the growth. So that's where we have the new sales in 2026. It's still a softening market in the U.K., especially on property, but it's flattening out somewhat. So we are able to convert some of our quotes to wins more than what we have done before, and we're also quoting -- seeing more and quoting more. And then we have the real estate segment, which I have talked about before. We have opened that segment. But I've also said that I don't expect us to quote a lot of business before the fourth quarter of 2026. We are quoting some business both some in the smaller segment of the real estate segment and also some of the larger clients. What we see is that rates are low as in commercial sector for now, but we are converting some. So we have some hit ratio on what we are quoting. But don't expect a lot to come from that segment before -- or we don't expect to quote a lot before fourth quarter inceptions. And then the market will be what it is. So we may not win a lot in fourth quarter, but we are more confident today with more data and more knowledge about the real estate sector that this is a segment for us. So it's very similar to the housing sector where we have had very good success. So low deductibles and cost advantage is very important. I forgot to say before I started that -- I see that they're speaking in the front here. So I forgot to say that questions during the presentation are welcome and better during the presentation than keeping them all for after. So if you have any questions, the volume side. Unknown Analyst: [indiscernible] Just on the sort of lower-than-expected tenders out there, and I appreciate that being on the public sector and housing side. But do you have any reflections of why that is? Because just intuitively, given the -- all of the comments on price pressure and a softening market, if I were to sort of renew my insurance, it feels like this is the time to do it. But now instead, customers are sort of exercising their options to automatically renew on what seems to be a bit old terms. Why aren't more sort of using this opportunity? Is that a negative read to sort of expectations for the even better prices going forward? Or what are sort of your reflections on that? Henrik Høye: I mean we don't really know. But there are several reasons that drive it. And one is that some of the capacity -- the public sector housing is in a way, a bit of a strange market because it's mostly when new capacity comes in, it comes in through the existing incumbent insurers, Zurich Municipal is one very large player or it comes through MGAs. And these MGAs are not really -- they don't really necessarily have the credibility and the trust from the brokers to be place business with. So then they are waiting with bringing it out to market. the local authorities, they are looking to have a reform in the U.K. to merge some of the local authorities and become more efficient or at least that's the ambition. So they are -- there is some uncertainty there, which makes them honor the long-term agreements or an optional year in the long-term agreements. And then obviously, the insurers are doing a lot to keep the clients. So they're doing something on the renewal side in order to avoid competitions. And that's -- we do that and our competitors do that. So I think there are several reasons why you see that type of lower tender volume in the market. But at the same time, your last comment or assumption, that's an interesting one because we do have a -- we have higher uncertainty on inflation now, and it's a dangerous combo with softening rates and higher uncertainty, and it only goes one way, then on inflation. So to expect that the softening will continue in that type of an environment with post-COVID learnings not too far away, then at least I think that that's a way of discrediting the market and our competitors because the right thing to do would be to now change. Unknown Analyst: And just a quick follow-up on that. Let's just assume that those volumes are sort of rolled over to potentially coming out in 2027, both in terms of the market, but also your -- you mentioned sort of like the portfolio composition of a lot of volumes being won in '23 and '24. And given the sort of dynamics with 3- to 5-year contracts, will then '27 be sort of like a very important year with a lot of volumes, both from volumes being basically postponed into '27, but also on your portfolio with a lot of tenders and a lot of sort of contracts having to be renewed then in '27? Henrik Høye: So both '27, '28 and even '29 are important renewals of that portfolio. So it's -- in a way, we've talked about this before, and we have some estimates of how that volume will be tendered, but we don't know exactly. So -- but let's say that we expose 20% in '27 and maybe a bit more in '28. And then the rest -- we've had some exposed now, obviously, than the rest in '29. And then it depends on the market how that is. But -- but the rates we have from there, and this is also something I've said before, they are not something that we expect to be in the portfolio over time. So that will normalize. And in a way, that market -- those market conditions are better if you have a cost advantage when there is a bit tighter margin than when the margin is very high because then everyone earns money. We go to the claims side, and we like to focus on the risks and the opportunities for improvements. That's on motor this quarter. Obviously, one quarter is short, we write and say that you need to understand that quarterly volatility must be expected both ways when it comes to growth and profitability in Protector to see it over time. But it is a fact that the underlying realities, if you correct or if you adjust the claims ratio for first quarter '26 and compare it to an adjusted figure for first quarter 2025, it is a worsening. So that's a fact. The reason for it is motor. Motor is poor profitability. Property has a very strong and stable profitability, and that's our largest product. And there are not any other problem areas on the product side. So it's motor. So good news is that motor is very short tailed, so you see it very quickly. And it's also easy to understand that if you have many claims, more claims than you had last year as a client and the broker understands this and it's unprofitable, you can adjust prices. But what surprised us is that the claims inflation, which is not only prices, but also frequency increases was higher than what we have seen previously. So there is something that could be volatility. But the way we see it is that we don't think of it as volatility and bad luck in the first place. We first try to find out if there is a reason, if we can find the reason and if there is a systematic problem. So that's how we started. Parts of it, it's in particular from Norway and Denmark. That's where the worsening is the worst or the biggest. And we also grew -- we had a strong growth. 1st of January in Norway, in particular. And parts of that portfolio, the new portfolio is not performing well. So we need to understand if we've done mistakes there or if that also is some kind of coincident or volatility. So we're obviously already looking into it. And so there is something there that we need to understand. And there are actions we need to make. And in addition, you have more uncertainty on inflation going forward. So that's a focus area. But as I said, the good thing is that this is something that we see, we can quickly understand it, and we know it's possible to do something about it. And we also know that we have very good processes of doing something about it on a client level, which gives good results on renewal pricing and adjustments. But we're not very concerned about it. No change in risk appetite. We still believe that motor is an area where we should continue growing. Any questions on claims development? When you look at the time lines here, you see on the large loss side that it's -- we're not at the 8% that we now have as a normalized level, but we still believe that, that's a sensible normalized level. And on the runoff side, I have mentioned previously that best estimate is important for us, both on the case reserving and on the actuarial reserving. But coming from a period with more uncertainty, you can expect that, that uncertainty ends up on the conservative side. It could obviously go both ways, but that's some of what you're seeing now. On the cost side, which we haven't talked about, we talked about the growth and the claims development. On the cost side, there is a reduction. You'll see that broker commission is higher. That's because we grow in France where broker commission is higher. But if you adjust for that, it's a slightly bigger decrease from last year, but most of it is due to the share price reduction and the long-term bonus plan that we have talked about before that has gone the opposite way. So there's no real reduction in cost quarter-over-quarter. And again, that's investing in data and in AI. But obviously, at some point, we need to see that in the cost ratio. And I think there are good -- we have good solutions and good process improvements that have -- that will drive a reduction and scalability in -- on the cost ratio going forward. Investments, that's volatile, as you all know. And on the equity side, we had a big loss in the quarter. Most important thing -- or the 2 most important things to mention is the increased yield. So the yield has gone up due to the interest rate increase. And the other thing is that in the equity portfolio, there was a mistake in the presentation that we sent out on estimated intrinsic value discounts, not that, that necessarily is something everyone believe in, but that said 30%, it is -- the correct figure is 37%, which makes more sense when the equity portfolio has had a loss. So -- but the point is on the equity side is that the underlying performance of the companies has been good. So it's been okay for some time. We've had some poorer performing companies. Now it is -- has turned around. So that's on a good trend. And so that's positive. And just as an example of the volatility, if you look at the equity portfolio today or a couple of days ago, year-to-date, we're plus, and you could figure that out because we have the list of equities. And so the loss is gone and there is a positive return. As of today, but tomorrow could be different. Any questions on the investment side? Yes. Profit and loss, the only thing that you see is that the tax rate is high. That's obviously due to the profit coming from insurance side and there's tax on that and that the reduction of the profit comes from equities where there's no tax. Capital position. So in the quarter, the largest reduction in the requirement on the capital side that comes from a reduced equity portfolio. So that has some effect. There is also some reducing effects on the requirement from the exchange rates, the Norwegian kroner strengthening in the quarter. And then when it comes to the dividend here, the most important factors for that dividend is obviously that we have a faster stress strong capital position. But we also have the U.K. portfolio, we have a high earnings capacity going forward. There's an increased yield in the bond portfolio, but the insurance portfolio is stable. So we know the earnings capacity from that portfolio and more transparency in that following 1st of January and 1st of April in the U.K. And then the French market now has 5 quarters, and we don't see any signs of that being mispriced or that we've had wrong clients coming in. So we're more confident in the French portfolio, even though it will be volatile, but we see some good development in the French portfolio. And we -- even though we see lots of opportunities for the future, we don't have in the short term, i.e., a year, we won't have many new markets started within 1 year. And during that time, we have a high earnings capacity. So that's -- those are the reasons for the dividend. Obviously, we would have liked to have opportunities to use that capital for -- at any time, but this is more a time element. And in the meantime, we will earn some more capital. So that's it on the summary. Any more questions? Unknown Analyst: Just a bit more big picture, the developments in the different markets, and I appreciate maybe U.K. being sort of like the main focus more than concern maybe. But just in terms of your competition, I appreciate that more in general, the underlying claims ratio is up, but some of it is due to frequency, but in some way, I guess, pricing also has an impact on that. Where do you see your competition in terms of their profitability amid a market softening. Is this sort of like a timing issue that the industry will, on a relative basis, bleed out for a few years and then we'll back -- we're back to the '22, '23 situation in the U.K. where you had pretty much the market for yourself? Or is it a change in your competition as -- are there more efficient players out there now versus before? Just any comments to sort of ease our nerves that this is not, in fact, a structural issue. It's more of an irrational behavior type of thing? Henrik Høye: I think it's interesting. But first, predicting where the market will go is very -- we don't spend a lot of energy on that because that's difficult. But we don't see any competition that is different, rather on the opposite where we see MGAs with high cost structures. So there, you know that one element is their commission level. And that commission level is in many cases, almost all cases, double of our cost ratio. And then there is a carrier behind and there's other cost elements to it. So that's -- and those are the ones that drives price in the U.K. market, if we focused on that. In the Scandinavian market, we don't see any large changes or the Nordic market. The French market is a bit early to say, but we don't see -- so if there is a difference between the French market and the U.K. market because there are large markets, there are many players, many of the same players. So if there is a difference, it is that the brokers have a larger part of the value chain in France, which gives the relevant part of the cost ratio that where we have an advantage, a smaller part to play. But at the same time, we see a change in that, that there will be -- it's not sustainable that the brokers have that large part of the value chain over time. So we don't see any signs of that. But obviously, we're paranoid about our cost position in the areas where -- that we need to improve that. because someone could come or competitors can improve. So we need to continue that journey of improvement, and we are focusing on that. So that's important. But we don't see any signs of it. And how the market cycle goes. The historical facts are that the market cycles are long in the Nordics. They're shorter in the U.K. U.K. motor, the market cycles are -- they can be almost quarterly. And that's driven by the consumer sector, but it is contagious to the sectors we are in. So -- and in a way that it's it must be a good place to be if you have a consistent approach and a disciplined approach to underwriting. And there are quick market cycles. You don't need to be part of the cycle that is unprofitable. So if you stop there and then you can be part of something that goes up, that must be a good thing. And it is, in many ways, irrational. And some of the segments we're in, we see irrational behavior now. So there is no way we would -- and maybe we're wrong, but some of those segments where you know that they're not excluding escape of water claims from their cover, our competitors because then they wouldn't be able to win clients. Those escape of water claims, they won't change a lot. They cost GBP 3,500 per claim and the frequency of them, in general, you can predict fairly easily. And when insurance is priced on the level of those claims, then you don't have anything for cost margin and large losses. So then at some point, it will stop. So in some of those segments, we think -- Thank you. Unknown Analyst: Could you please elaborate on what are the main opportunities and what are the main trends you see, when are they coming? Henrik Høye: So it's elaboration on AI and main opportunities, main threats. And I think I said some words previously. But what we -- so one example of a threat is that we have one distribution channel and thinking about whether that distribution channel is present sometime in the future and how that broker part of the value chain will be when you can use agents for parts of that work as a client. That is an interesting exercise, not because we necessarily -- we could argue against or for that scenario that brokers have a smaller role and that we lose that distribution. So it's not necessarily believing or not believing in the scenario, but it's a very interesting exercise to do both together with the brokers, but also for ourselves. And I think the outcome of that is that we will deliver -- as we go, we would deliver better to the brokers. And if that scenario ends up being, then we're prepared for them not being there. So that -- and that's agentic wording, marketing and pricing that can be done. But for the type of clients we have, remember that the average size of our clients is probably something like EUR 150,000. So -- and U.K. has very large clients. That -- to use an agent to quote that is a bit more complex because the data is it's not available like it is in the consumer sector where you have exactly the same cover and exactly the same exposure. So here, there are very many tailor-made solutions. So that -- but what we believe is that we can obviously get efficiency gains from AI solutions, we already do. So we can do more quotes, we can do more claims per person. And in parts of the processes, we have HQ wise, we can do a lot more on HR and compliance and all the requirements that come from the outside, much more efficient. But that's kind of obvious that you can get efficiency gains from large language models. What we focus on is to increase the decision-making ability for Protector that we are more precise in our decisions. And that's more dependent on data than technology because the technology is there. So that's -- and I don't know if it's answered your question exactly, but some words on that. No more questions? Thank you.
Operator: Welcome to the Enea Q1 Presentation 2026 during [Operator Instructions]. Now I will hand the conference over to the CEO, Teemu Salmi; and CFO, Ulf Stigberg. Please go ahead. Teemu Salmi: Thank you, and good morning to everyone, and welcome to this Investor Call for Quarter 1, 2026 Enea. This is Teemu Salmi speaking, CEO of Enea. I'm very happy to be with you here today. During the next 20 minutes, we'll take you through the results and some comments about quarter 1. And at the end, as usual, we leave some time for questions and answers. Let's dive straight into it. First of all, we are very happy and pleased to report that we have solid 12% net sales growth in the quarter when counting in constant currencies from -- in fixed currencies from quarter 1 last year. That equals 5% growth in reported numbers. So a good solid start of the year. And with that, we're also reporting a very strong improvement in our profitability, adding up at an adjusted EBITDA level of SEK 75 million or 34% which is the highest in many years when it comes to the first quarter. And also, EPS jumps up quite significantly since quarter 1 last year, ending up at SEK 0.98. On top of that, we also have a very good momentum for our strategy execution at the moment, and I will come back to that in just 1 second. As said, the growth here in the beginning of the year was quite a lot fueled by our business development mainly in our firewall business that had a great successful start of the year, where we signed many deals, many significant deals predominantly in Europe and North America. So that has been fueling our development in the quarter. And we also have a strong momentum in our growth portfolio. And you'll see now, I'll come back to that a little bit later on in the presentation that starting quarter 1 this year, we will also start reporting our sales a bit differently than last year. I have been getting a lot of questions and feedback about the transparency of our product portfolio and how it is developing. So actually starting this year, we will report our sales development in 5 product groups instead of the 2 areas we were reporting last year, Networks and Security. Now we will have 5 product groups where we will report our sales against. And I will come back to the structure in just a bit, so hang with us. But basically, these 5 product areas, we have one growth part of it, and we have one as we call classic part of it, but we've had a very good momentum in our growth portfolio and with our products that are part of that portfolio. Enea more relevant than ever. I mean we see that the need of secure solution and increased security in general is pushing our business in the right direction. We -- the government sector for us is showing good progress, and we have a very healthy pipeline that keeps on growing. So there's a lot of opportunities for us to close in that. So we are staying strong and growing in the telco sector and also in the CPaaS sector, now complementing that with the government sector, giving us another leg to stand on when it comes to our future business development. So that is good to see. And also during the first quarter, we have participated in Mobile World Congress in Barcelona, which is one of the biggest telco or telecom communication fairs in the world. Even though we had the breakout of the war in Iran, which meant that no Middle Eastern customers were able to travel to Barcelona. We still had a very good result out of that, and we are pleased with our participation there. Saying that, the war in the Middle East has also, of course, had an impact on our business slightly. I mean, some deals we were anticipating to close in quarter has now been postponed into the future due to our customers having other priorities in quarter 1. So not losing any business, but we see a slight shift of business into the future. Momentum is picking up again in Middle East, and we're looking forward to catch up on that in the quarters to come. We also made during the quarter press release about one customer of ours, Liberty in Costa Rica where we have deployed our messaging firewall in that in combination with the threat intelligence service that we are providing, we are combating cybercrime. And the results for our customer in Costa Rica were really outstanding. And in just 3 weeks, we were able to together with them to decrease 99% of the spam and the scam that was going through their network. And on top of that, our customer could block over 30,000 scam domains that were used for scam bursts. So not only do we have the good and right products, but they also have a short time to value with our customers once we are deploying them. On top of that, also in the quarter, we have -- not only do we have good traction on the market with our customers, but we're also winning awards when it comes to our products and offerings. We have won 5 awards -- global awards in the quarter. 3 in the firewall space, 1 for traffic management solution and 1 also for our embedded security Qosmos product in the quarter. And then when it comes to the strategy execution, it is moving on according to plan. I'm super happy to announce that we, in the quarter, also have now recruited our new Chief Commercial Officer, Mathias Johansson. He has started 1 month ago and he's now going to take charge of accelerating 1 of our 3 pillars in our strategy, which is the market acceleration. And speaking of the market acceleration, we have also hired new sales capabilities in the security domain to push our security and government business in the right direction. And we are continuing to execute on our market acceleration activities as part of the strategy by also together with Business Sweden, being part of one joint event in Taiwan later on in the quarter because that is also one of our focus markets in Asia Pacific. And we are continuing to execute on the other activities just as we have commented since we launched the strategy in November. So good start of the year. We are more relevant than ever, and our strategy execution is going as planned and also started to show some good payoffs and pay back already now. All in all, if we look at the numbers for the quarter, our net sales ended up in reported numbers, SEK 222 million, which is 12% growth in fixed currency, 4% in reported currency. Our EBITDA margin, 34% or SEK 75 million in absolute numbers. Our net debt has increased slightly, and you can also see that our operating cash flow is slightly going down. We see the operating cash flow decrease here in the quarter. The short-term part of that, where we anticipate that the capital that we are tying up now in quarter 1, a lot of that capital we -- well a big part of that capital will actually transfer into cash flow already in Q2. so there's very short-term spikes in the working capital. There is, however, the investments we made in Middle East and Africa is tying up a bit of capital that we expect to be starting decreasing over the year of 2026. Earnings per share ended up at SEK 0.98 per share. And our R&D investments, they continue to be on stable levels as we have presented in previous quarters as well, around 24%, 25%. Yes. I've already covered most of the things on the slide here. I think the thing that I want to stress is that we had a tough year in our firewall business last year, and our business can be a bit spiky over quarters because we sell the business models we have. We sell quite a lot of perpetual licenses, which means that 1 quarter can have a lot of sales other quarters can have a little bit of less sales. But we have a very strong start of the year for our firewalls where we actually have signed 3 major deals in the quarter with one of the largest network operators in the world and also with some -- 1 of the big CPaaS players globally as well, which we are happy for because it's just showing the relevance and importance of our portfolio. And before I now hand over to Ulf for more details about the financials of the quarter. I want to come back to what I said earlier about how we will now report our sales going away from the Networks and Security split that we have had in our sales in the previous year. This year, we will report our sales in these 5 product groups, as we call it. If we start to the right, there is an old traditional known segment or group -- product group, Operating Systems, which we have said for many years, is a structural decline. We will continue to report Operating Systems, Sales and Development separately. And then the former Network and Security portfolio, we have divided in 4 product groups: Network Performance and Intelligence, Signaling and Messaging Security, Embedded Network Insights and Security and Network Access Control. So if we start in the top left corner with the network performance and intelligence, basically, we have our traffic management and our real-time database Stratum there as the products, main products in that product category. In the Signaling and Messaging Security, we have our firewalls. That's our firewall business that we reported separately in one product group. We have our Embedded Network and of course, sorry, with the Signaling and Messaging Security, we also, of course, have our threat intelligence service that we are selling included and reported as part of sales in that product group. In the Embedded Networks and Insights and Security, we have our Qosmos product, basically our Embedded Security business that we are selling. And then Network Access Control is the more classical CSP-related products that we're selling, like the AAA and the ENUM DNS et cetera, in that product category. And as you can see, there's a color coding behind all these product groups as well. There are the ones, Network Performance Intelligence, Signaling messaging, Embedded Network Insights, they are part of the growth portfolio. And we have the Classic portfolio, which is then containing Operating Systems and Network Access Control. And the reason we are doing this is the products in these product groups have a bit of a different dynamic where, obviously, the growth portfolio is the portfolio that's going to fuel the growth of Enea for the future, where the Classic portfolio have the dynamics of being focusing on profitability and generating bigger profits than the growth portfolio in the short term. And in quarter 1, I can say that the net sales split between growth portfolio and Classic portfolio was 80-20. So 80% of our top line is coming from the growth portfolio and 20% of our top line is coming from the Classic portfolio. And this is the way you can expect to see Enea reporting our sales moving ahead. With that, I would like to hand over to Ulf Stigberg for more details about the financials in quarter 1. Ulf, please? Ulf Stigberg: Thank you, Teemu. So a little bit more in detail. We see a 12% growth in net sales in fixed currency and what we're very proud of this quarter is that we can see also a change in growth over the rolling 12 months measurement going from last year 12 months plus 1% and adjusted for currency, plus 4%. We report a 34% adjusted EBITDA margin amounted to SEK 75 million for the quarter compared to SEK 52.6 million previous year. This takes us to a level of 34% compared to 25% previous year. Reported EBITDA margin is 23% for the quarter. We have a development of cost that's almost in line with the previous year. The operating expenses spend is about SEK 175.9 million compared to SEK 189.7 million, and the variation can mostly be explained by SEK 13.4 million lower cost in relation to currency adjustments. Going over to the EBIT. We report an EBIT of 9%, corresponding to SEK 2.2 million compared to 1% previous year and SEK 1.6 million. This also drills down to earnings per share by to SEK 0.98 compared to minus SEK 0.94 in previous year, and this is a great, I mean, development from last year. So going into the reporting structure, we now have presented a net sales split by product group. And also, we have the split by revenue category in the bars, you can see 3 different tones of colors. This corresponds to service, support and maintenance and software license. And over the quarters, you can see that the net sales in each of the group varies and the variation depends mostly to software license revenues in the quarter. And we have different development and sales efforts, of course, in different portfolios here that creates a little bit of different performance in the different groups. You can see that we have a high share of software license revenue in our growth portfolio to the left. And we have also a high share of service revenues in the Signaling and Messaging Security product group and the second group from the left. And the two classic product groups to the right, as Teemu mentioned here, represent 20% shows some variations over the quarters. And with the development of stable and a little bit of a decline in the operating system product group. Going into the details for the quarter, we can see we had a good development within the Signaling and Messaging Security group. Growing by 48% and by 56%, if we adjust for the currency. So a very good growth within that group, of course. The growth within the Network Performance and Intelligence product group was 6% and 25%, if adjusted for currency the Embedded Network Insights and Security grew by 5% adjusted for currency and reported figures even on compared to the previous year. The same measurement that over 12 months makes a little bit more sense maybe if you look at the Growth. The Growth portfolio growing by 4% or 12% in FX-adjusted measurements. And the Classic portfolio actually had a decline in reported figures by 7% and adjusted for currency by minus 5%. One area that we have been working with during the last 12 months is our exposure to financial variations and this shows that we have less exposure in financial net for this quarter. The total financial net for quarter 1 2026 was SEK 2.6 million compared to SEK 21.7 million previous year. And finally, we see the cash flow analysis here with the improved profit on the first line going from SEK 1.6 million to SEK 20 million, we have improved the financial net from minus SEK 21 million to minus SEK 2.6 million. We have the items of noncash and taxes increasing in this quarter mainly related to a provision that was made in the quarter by SEK 25.7 million. And also, we see the change in working capital related to mainly deals that we have closed in the quarter 1. And the main part of this increase in the quarter will translate to cash within quarter 2 this year. We have some investments on the SEK 29 million, and we have the result of financing by SEK 4.1 million. This takes us to a net cash flow of total SEK 10.6 million negative. We can see the debt -- net debt have increased over 12 months. And the main explanation of this change is that we have more exposure to the business in Middle East and Africa region, which have a little bit longer project lead times compared to previous. And finally, we have a healthy levels of equity ratio and net debt to EBITDA. And for the buyback program, we have bought 243,000 shares in the quarter for a total consideration of SEK 15.6 million and all activities are related to the AGM mandate that AGM gave the Board a year ago in May. And the Board have now almost used the SEK 50 million frame that we decided to utilize in that mandate. All right. Over to you, Teemu. Teemu Salmi: Very good, Ulf. Thank you so much. We will start wrapping up this and leave some minutes for questions and answers at the end. Coming back to key takeaways from the quarter, once again, a great start of the year with a solid growth of 12% in constant currencies. Great improvement in our profitability and EPS, and we have good momentum for our strategy execution. So we feel that we have a good start of the year, and we're also well positioned for the execution of the rest of the year. And that gives us a short-term outlook that we say that, I mean, our market remains stable to moderately positive. That is exactly what we have said before. And we see that it is in that vicinity still. We are super relevant still for the market and the government sector is growing well. And I hope and I think looking at how the development now has been in quarter 2 that this quarter 1 will be the last quarter with these heavy headwinds we have had predominantly from the U.S. dollar in 2025. Quarter 2 should give us a bit of leeway when it comes to the pressure of the FX headwind that we have been experiencing throughout, I would say, the full 2025. That given for the 2026 guidance, we leave it unchanged we believe we will have a single-digit organic growth. We will end up north of 30% in adjusted EBITDA margin, and our investments will accelerate the growth. And then also the reason why we're saying that we will also increase our cost a bit in the year is that we are investing in our strategy. And that's also why we're saying that our EBITDA margin will be above 30%. We report 34% right now, which is good, and we have a good buffer now to 30%. And we will continue to invest in the quarter -- or sorry, in the year for the strategy execution, which will have a slight impact on our cost as well. Long-term ambition stays as we communicated as part of our strategy launch last year. We have the ambition that over the next 3 years, '26, '27, '28 that we will grow in average 10% each year in that period. And that our profitability will end at the end of 2028 above 35% measured in EBITDA. So we leave this also unchanged. So both long-term and short-term guidance remains as before. With that, I think we are done with our presentation, and we go over to questions and answers. Operator: [Operator Instructions]. Teemu Salmi: Right, just waiting if there is a verbal question coming through. I don't think so. Well, please feel free. As the operator said, Meanwhile, we will jump over also to the written questions here. Starting with the first one around a white paper on the utility of our software in drone application. And the question, are you recognizing revenue today from this end market, how many such projects are you involved in. Good question. We are not recognizing any revenue from these applications yet. We have many ongoing projects, engagement discussions. And actually, we are submitting today or tomorrow an RFP with content of drone applications as well. So it's still a very early market. It's a developing market. We are on the ball. We have relevant solutions for it. And let's see now this first RFP that we're submitting might give us, if all goes well, also the first revenues with that application. Next question, Rasmus, Redeye. How should we think about the quarterly variations between the business segments? How should we think of growth in the longer term between growth in Classic? And is there anything that sticks out in the business segments including the CPaaS deal that drives the solid organic growth in the quarter. Ulf, do you want to take these? Ulf Stigberg: Right. I think the quarterly variations between the business groups or the product groups are expected and this is a result of more transparency now basically, you can say that the 4 groups have in previous years also compensated a little bit if a group is lower, doesn't close a large deal in one quarter one other group will. So it's some kind of even out the exposure. But what we see in the longer term, of course, we expect the growth product groups, the 3 groups growing more than the classic. And of course, our long-term strategy targets 10% over 3 years. So that will be north of 10% if we're going to meet that target, of course. If anything sticks out I'm not sure about that. Do you want to comment on that. Teemu Salmi: No. No, I think it's been a solid development in the quarter. Of course, in the firewall business, we had an exceptionally good quarter. and we communicated the CPaaS deal, but there are many other deals that builds up the quarter, not only for the firewall business, but for the other segments as well. And as you could see, Ulf showed that if we look at the growth segment, it has had a very good development year-over-year. And I think it's incremental development of the business that we are doing and also of course, the relevance of our products and our footprint that is growing on the market. So I would say that there's nothing else. It's just organic growth, I would say that we are working with and developing, Rasmus, we can talk more later, of course, as well regarding this. Next question regarding AI. Can you elaborate on what solutions you're developing or selling that specifically protects against AI hacker attacks. Well, let's -- yes, we have several. I mean, let's start with messaging, for instance. I mean in our messaging portfolio, we have been awarded this quarter as well for our AI-based restricted image detection solution. So basically messaging -- I mean our customers, they handle millions of messages every hour, right? And you cannot parse messages manually. But you need to have a mechanism that scans the message before you approve and read them through and it becomes an SMS or MMS or whatnot in your phone when you receive it, right? Obviously, AI solutions there. We've had those in place. We have different -- many different AI solutions in place already. But one of the latest now released this is AI-based restricted image detection, where it's easy to, in a message to go through text and find a bad language or you can find words that would make our customers block that message from being sent, but pictures have been harder, of course, to evaluate. Now we have a solution where with the help of AI, for instance, also can look at pictures and determine is this picture according to what is according to the policy that can be sent through or is it something that has a criminal intent or other malicious intent, so to say. So that's one of our latest solutions. And we actually got several awards for that solution in the quarter 1 this year. And we have many AI capabilities already live in many of our product offerings. Next, congratulations on nice progress. Thank you, Matthias, lots of EU grants for critical infrastructure are you relevant of any of these. Ulf, do you want to comment on that? Ulf Stigberg: I mean this is an area that we are working into gradually. And definitely, we will look into the EU grants, and we will be able to take benefit of such grants if available, but we cannot share any specific at this stage. Teemu Salmi: Thank you, Ulf. And I think now, at least what I see the final question here from David. Q1 '26 effective tax rate was 5.6%. What tax rate should we expect for the longer term of Enea. Ulf Stigberg: Good question. And tax area, we are a business group in many different legal entities and is a challenge for us, but we are working on this. I don't have a figure to share as of now, but it varies a little bit between the quarters. So we have to come back to that. Teemu Salmi: All right. It's actually on the hour I don't see any more questions in the question space. Thank you for listening, and I and Ulf, we wish you a great day ahead. Thank you, and bye-bye.
Operator: [Interpreted] Good morning and good evening. Thank you all for joining the conference call for the LG Display earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on LG Display's First Quarter of Fiscal Year 2026 earnings results. Dong Joo Kim: [Interpreted] Good afternoon. This is Kim Joo Dong, Vice President, in charge of Finance and Risk Management Division at LG Display. Thank you for joining our first quarter 2026 earnings conference call. Joining us today are CFO, Kim Sung-Hyun; Vice President, [ Cho Seung Hyun ] in charge of Business Control and Management; Vice President, [ Kyong Jeong Deuk ], in charge of Large Display Planning and Management; [ Hong-jae Shin ] and Ahn Yu-Shin, in charge of Medium Display Planning and Management; Vice President, [ Paek Seung-yong ], in charge of Small Display Planning and Management, Vice President, [ Sang Keuk Kwon ] in charge of Auto Marketing and [ Kim Kyu-dong ], Leader of the Business Intelligence team. Today's conference call will be conducted in both Korean and English. For detailed performance-related materials, please refer to our disclosure or the Investor Relations section in the company website. Please refer to the disclaimer before we begin the presentation. Please be informed that the financial figures presented in today's earnings release are consolidated figures prepared in accordance with International Financial Reporting Standards. These figures have not yet been audited by an external auditor and are provided for the convenience of our investors. I will now report on the company's business performance in Q1 2026. Revenue in Q1 was KRW 5.534 trillion, down 9% year-over-year and 23% quarter-on-quarter on the back of stable OLED product shipment and favorable exchange rate and despite such external factors as the seasonality and the base effect coming from the discontinuation of the LCD TV business in Q1 last year. Operating profit was KRW 146.7 billion, rising Y-o-Y, driven by strengthened business structure and sustained OLED performance. Operating profit margin was 3%, and EBITDA margin was 21%. Net income recorded a loss of KRW 575.7 billion due to the impact of FX translation loss on foreign currency debt as the high exchange rate persisted. Next is area shipment and ASP trends. Area shipment in Q1 was 3.2 million square meters, down 21% Q-o-Q. On top of the seasonality, there was continued push by the company to streamline low-margin models, primarily in the midsized product line. As for ASP per square meter, it fell 4% Q-o-Q due to the seasonal decline in small panel products with relatively high price per square meter. But at $1,244 it was up 55% Y-o-Y, thanks to the rising share of OLED as a result from the company's business structure upgrade efforts. Next, I will discuss the revenue breakdown by product category. TV was 16% and IT 37%. Mobile and Others segment accounted for 37%, down 3 percentage points Q-o-Q as the market entered into seasonality. Auto, which is relatively less season sensitive, took up 10%, up 3 percentage points Q-o-Q. The OLED product group accounted for 60% of total revenue, up 5 percentage points Y-o-Y. We believe that through our persistent internal push to enhance our business structure and shift to an OLED-centric company, we have established a structure that can generate meaningful performance despite unfavorable externality. Next is financial position and key metrics. Cash and cash equivalents in Q1 was KRW 1.525 trillion, largely unchanged Q-o-Q. Of the main financial ratios, current ratio was 74%, almost flat Q-o-Q with debt-to-equity ratio at 251% and the net debt-to-equity ratio at 157%. While there have been temporary fluctuations quarter-on-quarter due to adjustment in our borrowing portfolio and the impact of exchange rates, we plan to further strengthen our financial soundness in the long term. Next is guidance for Q2. Total area is expected to grow by low 10% level Q-o-Q, driven by shipment increase, mainly in large-sized panels. As for the price per square meter, it is expected to fall by low to mid-10% due to lower shipments resulting from mobile products seasonality, which typically command higher price per square meter. I will now turn the call over to our CFO, Senior Vice President, Kim Sung-Hyun. Sung-Hyun Kim: [Interpreted] Good morning and afternoon. This is the CFO, Kim Sung-Hyun. Thank you for joining us at this conference call. Despite the seasonality in Q1, we were able to remain profitable for 3 months in a row, thanks to our years-long internal efforts such as initiatives to transition to a business structure based on OLED and high-end strategic customers as well as the innovation of cost and improvement of operational efficiency. Furthermore, we have significantly enhanced business stability and competitiveness by increasing the share of OLED out of total revenue to 60%, a 5 percentage point increase Y-o-Y. The clearly improved business fundamentals will serve as the solid foothold for a sustainable profit-generating structure that the company aspires for and will be the driving force behind our continued improvement in business performance. We will keep working to ensure stable OLED-centered product shipments and the expansion of business performance. But looking at the external environment, uncertainties today are higher than ever before. The scope and scale of these uncertainties continue to grow, including not only rising semiconductor prices, but also declining global demand, rising energy costs and supply chain disruptions, making it difficult to estimate their full impact at this point. Accordingly, we believe that close monitoring of the external volatility and uncertainties, along with the ability to respond swiftly are essential capabilities that the company must possess and that the situation requires more cautious approach. Meanwhile, even as external uncertainties persist, it is highly positive that our competitiveness in high-spec products, which is our strength, is increasing and that technological barriers are rising along with it. Even as we seek optimal response to external uncertainties, we will strive to secure financial soundness and achieve sustainable results that meet the expectations of the market and our customers based on a company-wide effort to strengthen our technological differentiation. Next, allow me to briefly outline our plans and strategies by business segment. In the small-sized mobile business, we will flexibly respond to our customers' diverse technical needs based on our technological leadership and reliable supply capabilities. We will also efficiently utilize our existing production infrastructure to ensure seamless preparation for the future. In the midsized business, we plan to continue improving profitability by focusing on high value-added products, actively responding to customer demand with our differentiated competitiveness in tandem OLED and high-end LCD technology. We also intend to keep improving our product portfolio with a focus on profitability to further enhance production efficiency. In large panel business, we plan to strengthen our premium product lineup based on our white OLED technology while also expanding our range of price competitive products. And in monitor business, where the shift to OLED is accelerating rapidly, we intend to grow our OLED business and focus on acquiring customers by expanding our gaming product lineup, which incorporates our proprietary technology. And in auto, where competition is increasingly fierce, we will keep solidifying our market position based on our differentiated product and technology portfolio. Finally, a few words on our investment. We maintain the principle of allocating CapEx primarily towards essential current investment and future-proof technology investment. The investment disclosed last afternoon in new OLED technology infrastructure was also decided in this context. We plan to strengthen our technological competitiveness and growth foundation by continuing to upgrade our OLED technology as a way to respond to future market trends and customers' demand. At the same time, our work to optimize investment efficiency will continue unchanged. CapEx in 2026 is expected at around KRW 2 trillion. We will continue to build up a decision-making framework that enables a prudent yet flexible response by finding the right balance between preparing for future growth and ensuring financial soundness. This concludes our presentation of business highlights for Q1 2026. We will now take your questions. Operator, please commence the Q&A session. Operator: [Operator Instructions] [Interpreted] The first question will be provided by Gang Ho Park from Daishin Securities. Gang Ho Park: [Interpreted] Thank you for taking my question, which is on the disclosure of new investment that was made yesterday. So the disclosure was for about KRW 1.1 trillion in OLED. And so my question is, can the company provide more details about this disclosure? And recent media reports have mentioned that another company is exclusively supplying into foldable products. Is the disclosed investment for new -- is it for new form factors to counter this? And if that is the case, then what is LGD's business strategy regarding foldable smartphones and its market entry? Sung-Hyun Kim: [Interpreted] This is the CFO. Allow me to respond to your first question. Now as everyone would know, in the industry, we see that the technological development is really accelerating at a remarkable pace. And the importance of technology is also translating into the competitiveness of companies. So all the companies are now struggling and really competing against each other to secure the competitiveness. Now as has been reiterated several times, the company is focused on the OLED business. Accordingly, the more ready we are with new OLED technologies and the more technologically competitive we are, then there will be more business opportunities coming our way, and we will be able to maintain our competitiveness across the industry. And yes, the company has disclosed -- made disclosure about new facility investment within this context. And as for the specifics, I would love to share more of them, but then given the fact that our new technology directly translates into new technologies for our customers, please understand that I am not in the position to discuss them further. Unknown Executive: [Interpreted] This is [ Paek Seung-yong ] in charge of Small Display Planning and Management and allow me to respond to the question about the foldables. Our position and perspective on foldable devices remain unchanged. Foldables offer consumers differentiated value through a new form factor, and there are growing market expectations that they will be the new growth driver. But until we gain visibility into market size, pace of growth and our own opportunities, our strategy will be to grow performance by maximizing production and sales of existing products. If clear opportunities are identified in the smartphone sector, we will prepare a supply system after carefully reviewing such factors as market acceptance of differentiated products and growth rate, and we will then try to build on our mass production experience in midsized foldable devices to expand new business opportunities in the smartphone sector. Operator: [Interpreted] The following question will be presented by Jimmy Yoon from UBS Securities. Jimmy Yoon: [Interpreted] My question is regarding the overall panel business. Today, we see that the memory shortage is driving up memory prices and oil price is also surging following the Middle East conflict. Such mounting uncertainties may trigger more concerns regarding potential production disruptions in the tech value chain, shifts in demand, rising cost and price pressure from customers. What is the expected impact on demand? And what will be the company's response? Unknown Executive: [Interpreted] This is [ Cho Seung Hyun ] in charge of business control and management. Now it is true that the market today is facing growing uncertainties stemming from the memory shortage and the impact of the geopolitical conflict. But I believe that we have to look at the first half and the second half of the year separately. Now in the first half, we are seeing some pull in demand due to concerns over memory supply. And with the scheduled major sporting events coming around, there is expected to be some positive impact. Now going into the second half of the year, considering factors such as component price hikes, set price changes and macro uncertainties coming from the Middle Eastern situation, we will have to be more cautious in our approach to market changes. While external uncertainties are increasing across the market, the impact varies slightly by company depending on their customer and product structure. The impact of rising chip prices is more pronounced in the mid- to low-end product segments, meaning that the impact on global customers with relatively strong SCM competitiveness is likely to be quite limited. It might even be an opportunity for them. So against the risk of growing volatility, we will closely monitor changes in demand and trends in component supply and demand. We will collaborate with customers and focus more on cost innovation drawing from our global customer portfolio and established high-end product lineup and successfully navigate these challenging market conditions. Operator: [Interpreted] The following question will be presented by Jung Hoon Chang from Samsung Securities. Jung Hoon Chang: [Interpreted] My question is similar with some of the previous questions. There has been some uncertainties in the business, as the CFO has mentioned, with the pronounced effect of the U.S. and Iran conflict, especially on the rise on the commodity prices. So, so far, there was some discussion about the midsized and small-sized businesses. But then for the large panel business as well, then what will be the company's operational strategy as well as the growth strategy for the future? If you could provide us with an update, what's helpful. Unknown Executive: [Interpreted] This is [ Kyong Jeong Deuk ] in charge of large display planning and management. For our large panel business, amid industry volatility this year such as rising prices of commodity as well as the components like semiconductors, we plan to establish a stable revenue structure and strengthen our fundamentals by enhancing our high-end OLED TV lineup with leading global set makers and also by expanding our mid- to low-end OLED TV lineup. And for the OLED monitor segment, the high-end gaming monitor market is very rapidly shifting from LCD to OLED. And we -- and the share out of our total shipment is likely to grow very significantly from low teen percent last year to around 20% this year. So our product and customer strategy will be about maximizing our business performance and opportunities through an optimized production share between TVs and monitors and to keep solidifying our market leadership. Operator: [Interpreted] The following question will be presented by Won Suk Chung from iM Securities. Won Suk Chung: [Interpreted] Now I also have 2 brief questions. Now we have been discussing uncertainties a number of times so far. But now yes, as the uncertainties continue, I believe that perhaps cutting losses from the IT business has made a significant contribution to the company improving profitability Y-o-Y and also for the year. Then as the uncertainties continue, then when does the company believe that you will be able to turn around to profitability? And also looking at the OLED new investment disclosure yesterday, it seems as if the company is also increasing OLED investment into new technologies. Now given the fact that the other companies are also looking into the investment for the 8-gen IT OLED and so forth. So what is the company's plan for investment down the road? Yu-Shin Ahn: [Interpreted] This is Ahn Yu-Shin, in charge of Medium Display Planning and Management. Now the ongoing uncertainties in the external environment, including the U.S.-Iran conflict makes it difficult to expect a recovery in the IT sector this year. To prepare for increased demand volatility in the second half due to rising commodity prices and prices of components like semiconductors, we are securing supply flexibility and closely monitoring the situation. Although sales and shipment volumes decreased Y-o-Y in the first quarter, profitability improved thanks to internal initiatives like strengthening our product mix. For the year, we will focus on high-end differentiated products based on long-established customer trust, technological competency and responsiveness and further upgrade our high-end focused customer structure and maximize opportunities with a select and focused approach tailored to customer demand, which will keep up our trend of improving profitability. And regarding IT OLED, as the transition from LCD to OLED accelerates, starting with tablets and extending to monitors, we are aware of the growing interest in the market as well. IT products have a diverse customer base and product specifications and having sufficient demand to keep the fab running is crucial. To do that, we need to meet consumer needs for technological capabilities and price competitiveness as well. As the period of uncertainty and high volatility in demand continues, we intend to proceed cautiously until there is clearer demand visibility for OLED in the downstream. Until we have enough visibility to make investment decisions, we plan to utilize our existing infrastructure as efficiently as possible. We are actively exploring various strategies to prepare for future opportunities, and we will be ready to respond in a timely manner when the market begins to fully take off. We will take one last question. Operator: [Interpreted] The last question will be presented by HyeonWoo Park from Shinhan Investment & Securities. HyeonWoo Park: [Interpreted] The company is reportedly implementing voluntary retirement this year again following last year. So what is the expected scale of this adjustment? And when will this be reflected? Will there be more of this type of workforce adjustment and onetime cost in the future? Unknown Executive: [Interpreted] Yes. So as have been reported in the media, there is going to be another round of workforce adjustment this year. And this is part of the company's effort and transition to an OLED-centric company. So along with this, we have been upgrading our business structure and improving our product portfolio and strengthening our cost structure and also undertaking cost innovation. Now we are aware of the sense of fatigue that the shareholders might be feeling as the similar event continues to repeat itself. And for the short term, yes, this will be something that will incur cost to the company, and this is the kind of decision that requires very cautious approach as well. But we also see this as a necessary process for the company to remain sustainable, and we have made this decision from a long-term perspective. And as this is an internal company process, the specific terms cannot be disclosed for which I ask for understanding. But then there have been some fairly detailed reporting by the media as well. But again, the program is still ongoing. It's not been concluded yet. So as for the specific overall cost or the scale, it is too early to tell. Now yes, it is true that having the repeated implementation of the voluntary retirement by no means is desirable for the company either. But if it does have to happen, then it better happen within a short period of time so that the sense of stability will be restored among our members. And that is why we have -- we are offering a much strengthened package this time around. And this is part of the company's plan to make sure that this does not have to happen again in the near future. Now the second quarter for the company historically has been a period of poor financial performance. Now of course, we have undertaken some business restructuring, business realignment and also cost innovation efforts. And as a result of the series of efforts, we were planning and expecting profitability in the second quarter of this year. And that is how the business was managed as well for at least 1 month. So we were expecting to see profit in the second quarter. And despite that, of course, we continue to try to become a better company, a more sustainable company for the longer term. So on that note, I would also like to ask for a more positive view from the shareholders and investors as well. Operator: [Interpreted] This concludes LG Display's Q1 2026 Earnings Conference Call. We thank everyone for joining us today. Should you have any additional questions, please contact the IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Leszek Iwaszko: Good morning. Thank you for standing by, and let me welcome you to Orange Polska conference call in which we will summarize our results in the first quarter of 2026. My name is Leszek Iwaszko, and I'm in charge of Investor Relations. The format of the call will be a presentation by the management team followed by a Q&A session. Speakers for today will be our CEO, Liudmila Climoc; and CFO, Jacek Kunicki. Let me now pass the floor to Liudmila to begin the presentation. Liudmila Climoc: Thank you, Leszek. Good morning, and welcome to our conference summarizing first quarter of 2026. I will start with Slide 4. I'm very happy to report that we have started the year very well, both commercially and financially. Our commercial performance was solid as we achieved healthy growth of customer bases and ARPO across all subscription services. I'm particularly pleased that in the third quarter, Orange was a leader in mobile number portability. This is a big advantage [ to ] our competitors. Moreover, in line with our balanced volume value approach, we uplifted prices for all our services in first quarter, which will fuel our growth for future. It was also another good quarter for our wholesale operations. We generated a very solid 6% revenue growth despite the multiyear national roaming contract, which is now over as from beginning of 2026. And we also see a very good pipeline for Q2. It confirms that wholesale is our strategic growth engine complementing our retail operations and improving our risk profile. Our financial results were outstanding as we closed the quarter with close to 10% EBITDA -- EBITDAaL growth and significant improvement in cash generation. And I propose to zoom on highlights of our commercial activity on the next slide. So our commercial performance, commenting on it for first quarter, reflected very strong customer demand and our focus on value as well as intensive market competition, especially in fiber. In convergence, both customer volumes and ARPO grew at a good pace, with 4% growth of customer base, which is in line with a run rate that we projected in Lead the Future strategy. This ARPO increasing by more than 4%, benefiting from our value approach and pricing, with good demand for content and popularity of higher-speed packages -- fiber packages. Fiber customer base increased 10% year-on-year. It is a very good dynamic considering intensive and diverse competitive landscape. Fixed broadband ARPO is up with 3.7% year-on-year, which reflects a solid growth, which is normalized after an exceptional performance in 2025. Mobile had another strong quarter, with net customer additions of above 70,000. As I already mentioned, for the first time in a few years, we were the winner of number portability by a big advantage. The win was driven by our main Orange brand on the consumer market in postpaid and prepaid. But also Nju, our B brand Nju and Flex were strongly contributing. We achieved this, thanks to a combination of both local marketing actions with our superior connectivity and comprehensive service. Mobile ARPO continues to reflect 5% growth of the main brand and the change in the mix of customer base towards lower ARPO in B brands. These are very solid results achieved despite challenging competitive environment. Successful commercial activity is our main priority, is an anchor of our Lead the Future strategy and value creation. And we are -- we have quite a busy commercial agenda for second quarter. So you need to stay tuned. Thank you. As for now, and I hand over the floor to Jacek. Jacek Kunicki: Thank you, Liudmila. Good morning, everyone. Let's start the financial review on Slide 7 with the highlights of our performance. Our financial results in the first quarter were excellent across the board. Revenues increased almost 3%, driven by solid core telco and wholesale dynamics. The EBITDA grew by 9.5% year-over-year. Its outstanding dynamics reflect a strong underlying growth as well as a onetime gain from VAT relief for prior year's bad debt. The net income reached almost PLN 300 million in Q1, growing by over 50% year-on-year. It was driven up by strong EBITDA and by high gain on real estate disposal. Next, PLN 300 million eCapEx figure for Q1 reflects a slow start of investments due to harsh weather conditions in winter as well as the already mentioned proceeds from high property disposals. Finally, the organic cash flow improved by PLN 175 million year-on-year due to the strong EBITDA growth combined with lower CapEx. Q1 naturally reflects a seasonally high working capital requirement. So it is the year-on-year comparison that really matters. And this quarter, it is very strong. Let's now review our Q1 results in more detail, starting with the top line. Q1 revenues grew 3% year-over-year, fueled by progress in all key business lines. Revenues from core telecom services increased by nearly 5% year-on-year, and this is in line with our expectations. I will break this item down into 2 elements so that we have a proper understanding of the trend. Firstly, all postpaid services, so convergence, fixed broadband and mobile postpaid, their combined revenues grew nearly 6% year-on-year, so exactly as much as in the prior period. We're keeping a very solid trend. This was fueled by a consistent growth of their customer bases and their respective ARPOs. Secondly, prepaid, where we record just over PLN 200 million of quarterly revenues. The dynamics have naturally slowed down versus the elevated trends that we recorded in 2025. And just to bring this into the perspective, prepaid revenue dynamics were usually flat to negative as customers progressively migrate to postpaid. However, in 2025, we lifted prepaid revenue to a double-digit percentage year-over-year growth, with price hikes for almost the entire customer base that were done in Q1 of 2025. This is highly value accretive as most of these additional revenues are now recurrent. However, we are now measuring the year-on-year progress versus a much higher comparable base, and prepaid is back to its flattish growth status, however, on the increased level. Then revenues from wholesale posted a solid 6% year-over-year growth despite the end of the national roaming contract. Here, we benefited from the fiber backhaul deal signed in H2 of 2025, although its contribution was much lower than in Q4 of last year. We benefited from infrastructure rental services as well as from a consistent 40% year-on-year growth in the number of fiber accesses that we sell through our wholesale customers. Finally, revenues from IT&IS have increased by 7% due to higher value of integration and networking projects realized by the B2B. To sum up on the revenues, we are satisfied with the pace of revenue growth in Q1. Secondly, we see good prospects for Q2 in the key lines of business, with strong trends in the B2C and solid project pipelines, both in the B2B and wholesale areas. Let's now take a look at profitability on Slide 9. Our Q1 EBITDA increased by an outstanding 9.5% year-on-year. It is driven by a 6% underlying growth, reflecting strong business trends. Our direct margin grew by 4.5% year-over-year, benefiting from a strong growth of core telecom services, wholesale and IT&IS. We're pleased with a very solid dynamics in the B2C and with the improving trends of margin in B2B, where margin recovery is amongst our top priorities for 2026. We've also built up an encouraging pipeline of projects for the second quarter, both in the B2B area and in wholesale. These are strong assets in face of an unstable macro and supply environment, so we are optimistic ahead of Q2. Our indirect costs were flat year-over-year, preserving our high operating leverage. We benefited from efficiency gains in network operations, in the employment optimization and lower cost of property maintenance. Our transformation program is accelerating, and so we should enjoy its further benefits in the future. Apart of the strong underlying performance, the EBITDA has also benefited from a PLN 28 million onetime gain related to the VAT relief on prior year's bad debts. Let me briefly explain this last item as well as its consequences. So we sell overdue receivables through factoring. So far, we were paying the nominal amount of VAT on these despite selling them below face price value. We have obtained a favorable court ruling, and we can now pay VAT in proportion to what we recovered through factoring. As a result, we have recovered the overpaid VAT for 2019 and 2020. There is an additional PLN 45 million more to be recovered over the course of the next 2 to 3 years. As a consequence, we've also modified our VAT settlements for current bad debts and adjusted our balance sheet accordingly. Finally, from Q1 onwards, we're also recognizing slightly lower bad debt costs in the current P&L. As a takeaway, we are pleased with the Q1 EBITDA. What is particularly encouraging are strong underlying trends and the commercial pipeline that we have developed for Q2. We are now clearly aiming at the upper end of the 2026 EBITDA guidance. Thank you, and I hand the floor back to Liudmila. Liudmila Climoc: Thank you, Jacek. Let me summarize and present you our focus for next month. So as you see, we've started the year very well. We are happy with our commercial and financial performance in first quarter. It provides us with strong momentum towards the achievement of our annual ambitions and further growth of shareholder value. We remain committed to disciplined execution of Lead the Future strategy. In the coming months, we focus on busy commercial agenda to prepare further value creation actions in B2C, for consumer line of business, and we have valuable projects to be delivered in enterprise, in B2B and in wholesale. In B2B, we are implementing a new operating model that is grouping all our IT&IS competencies under one roof in order to unlock more potential. On cost transformation as well, we are progressing well. Every quarter is fueled by new initiatives, and we are also shifting our focus to identify new projects that will give it another boost in 2027. So with good prospects ahead, we have high confidence to deliver full year guidance in the second year of our 4-year strategy, even if a market environment is demanding and volatile. So that's all from us. And now we are ready to take your questions. Leszek Iwaszko: Thank you. So we are switching to Q&A session. [Operator Instructions] We have a first question coming -- voice question coming from Dawid Gorzynski from PKO. Dawid Gorzynski: Congratulations on this excellent results. I have 3 questions actually. So maybe just read all of them. Firstly, I'm curious how much you are advanced right now? Maybe in like percentage terms in your cost transformation process, how much is still left for next quarters? Second question on other operating income. It was at a bit elevated level compared to previous quarters. And I wonder if that included maybe higher margin from FiberCo contract or maybe higher copper sales? And last question on CapEx. If you may quantify what was the impact of poor weather? Like to what extent the CapEx was lower because of that reason in the first quarter? Jacek Kunicki: Thank you for those. Dawid, on CapEx, I would assume that the weather impact is roughly about, let's say, PLN 70 million. That would be my best guess as to the impact on the postponement of certain projects due to weather because it's mostly connected -- well, it mostly affected January and February. So around PLN 70 million. On the other operating income net, what you will see is you will see other operating income at PLN 111 million in Q1 2026, which actually is very close to what we have recorded for Q1 of 2025, where it was PLN 106 million. It is indeed higher than the Q4 2025, where we had PLN 95 million of other operating income net. When I analyze the reasons for this, we have broadly the same impact between the 3 different quarters of the relationship with the FiberCo, so no real change here. Then there is an impact of a greater sale of copper in Q1 because this is the quarter where we usually sell more of copper. So no impact year-over-year. It is the same figure. However, this could be something around PLN 30 million impact if you compare Q1 to Q4. And then this is offset by about, I would say, up to PLN 20 million negative impact of the difference in ForEx and derivatives valuation, which were positive in Q4 2025 and slightly negative in Q1 2026. So it's most -- if you compare Q-on-Q, it's mostly the sale of copper, offset by a different timing of -- different impact of derivatives. And then for the cost transformation, it's difficult to be quantified in percentage terms, because I would need to -- I mean the impact of the transfer, at least in some categories, it is happening rather similarly in each of the years. What we are doing is we are attempting to be at least PLN 100 million greater impact of transfer for 2026, I would say, net-net, versus 2025. And here, this is, I would say, well advanced. But the impact of transformation needs to be viewed, I think, as the -- in the context of all other items that are basically affecting the cost base. So what we are aiming ultimately is to try and keep indirect costs flattish or flat year-over-year. This is the -- I would say, strategic ambition, and the transformation plan is definitely helping towards this goal. And so you will -- I think the best way to judge our progress with this regard is to look at the level of indirect costs year-over-year, quarter after quarter, and each time that we can be relatively flat or flattish a part of the different one-offs that we have, then this means we are rather achieving the objectives. I think that would be my way of trying to quantify because any other way, it just involves the gross value of initiatives while you have also some other factors, some cost indexation, you have, obviously, the pay rises that are happening. You have the holiday pay provision, which is different between the different quarters. You have the share-based payments, which are depending on the share price. And so ultimately, what we're trying to do, let's keep cost base -- indirect cost base flattish a part of the -- those major one-offs. Leszek Iwaszko: The next question is coming from Pawel Puchalski from, I guess, it's still Santander. Pawel Puchalski: Hello. Can you hear me? Jacek Kunicki: Yes. Yes, go ahead. Pawel Puchalski: Okay. Hello, everyone. I've got a couple of questions. Let's start with VAT relief. Specifically, you mentioned its tax relief for year 2019, '20. My question would be, shall we expect the same scale of VAT relief awaiting for us -- for you to be presented as positive one-offs for years 2021, '25? And could you potentially deliver those in year 2026 or maybe it's scheduled for a later period? And later onwards, I would like to know where are you aiming at growth of your core telco by year-end? Now we see that plus 4.8% year-on-year. My question, what is your best guess for Orange Polska core telco growth year-on-year in quarter 4? I would like to know the dynamics. And well, just a different -- very different question. Well, if there was any major telco for sale in Poland, would you be interested? And would you acquire one just like it is the case in France presently? Jacek Kunicki: Thank you very much for your questions, Pawel. Always a pleasure. So starting with the VAT relief. I think there are few consequences of this. So a part of the one-off that we have clearly mentioned, we have, first of all, around PLN 45 million of bad debt relief for prior years still to be recovered, okay? We expect this to be recovered over the course of the next 2 to 3 years. And it is -- some of it may actually still happen this year. We never know. It really depends on the stance of the tax authorities towards the specific cohorts because each year is a cohort, so towards specific years and the declarations that we have filed. And also on the court proceedings, which are still ongoing regarding part of these amounts. So while we are rather confident that we should be able to recover this PLN 45 million, it is not virtually certain today, so I would not be able to recognize it as an asset today. And it could take up to 3 years, I think, for most of these amounts to be recovered, knowing that our legislative system is less than predictable. But this is the amount and the timing. I think on top of that, we will have a small impact, something like PLN 2 million to PLN 3 million per quarter where our bad debts, our ongoing recurring bad debts should be lower than recognized historically. And then -- so I think that is regarding VAT, unless something is still not clear. In which case, please do probe. For the core telco services, I would say the following: the 4.8% would be my assumption of our current run rate. So if you ask me today what would be my best guess for Q2, not Q4, but for Q2, it would be roughly 4.8%. However, as Liudmila mentioned, we have a few items on our commercial agenda, on the details of which, obviously, I will not elaborate on. And it just shows you that we continuously work to initiate new actions that would exert upward pressure on this trend. Now of course, the success of this depends on the execution, depends on customer response and depends on the competition. Hence, I am not as precise as to say if this is what exactly this will be by year-end. But Q2, I would expect 4.8% because prepaid is more or less at its new norm. And then regarding telco for sale, I would assume -- no, we will not comment on M&As right now, and it's not something that you will have us commenting on a hypothetical situation. Leszek Iwaszko: Thanks. Next question is coming from the line of Ali Naqvi from HSBC. Ali Naqvi: It seems like the ICT or B2B sales had a bit of an inflection point in the quarter. Can you give us an outlook for the remainder of the year? And just in terms of the legacy business, the decline in there, is that first quarter of proxy as well for the balance of the year? And similarly, could you just explain what's going on with equipment sales, please? That would be great. Jacek Kunicki: So it's ICT, it's equipment and legacy. I guess, legacy, it's more or less in a stable trend of a decline. It's honestly nothing major for us that I would see today in terms of a change of trend in any way. Regarding equipment, because this was your second question. So here, what we have is we actually have less equipment revenues in the B2B line of business. And it's mostly got to do with the choice of both the customers but also availability of handsets. We had less high-end handsets being sold in Q1 in comparison to the Q1 of the previous year. And so the volumes were, I would say, not out of the ordinary. The pricing, at least on the B2C side was exactly the same as -- well, it was close to the average unit price of the previous year. It was mostly the mix of handsets for the B2B sector. And then regarding the IT&IS, I think what is -- I mean this is highly volatile revenue stream, obviously, because it is project based. Today, it is obviously, on the one hand, benefiting from a continued underlying strong demand in Poland for the digitalization and also from our own actions. It is, I would say, even less easy to be predicted as we know that the environment around both pricing and availability of the memory chips is very volatile. So in some cases, we're actually figuring out how to address the demand knowing that the supply side is extremely volatile. So it is less easy to be predicted, I would say, on the quarter-per-quarter basis. What we do expect in terms of IT&IS is 5% to 7% compound annual growth rate of those revenues between now and 2028. And I think we will need to -- and we strive to keep within this range of revenue growth, keeping an eye on the profitability as well. So making sure that this is not entirely achieved through very low margin activity, such as license resale, but that we have a solid mix of networking, integration, IT projects, but IT development projects, some cyber attack and cloud-based solutions to drive the margin as well as the revenue growth. So I think we need to keep an eye on this 5% to 7% CAGR. Ali Naqvi: Maybe just expanding on that then. Is there any risk that -- is the situation with memory chips and the inflation on the supply side, does that sort of derail your longer-term guidance in any way? Or is there any way that you can manage that? Jacek Kunicki: I think, honestly, the -- our colleagues on the ICT side have proven again and again extremely resilient and being able to adapt. And as this is project based and it will concern the whole industry, I'm very confident that even if we have a slowdown in this part of the activity, we will be able to exploit some other demand area and continue with the growth of both top line and the bottom line over the long-term horizon. And anyway, I think even with the memory chip crisis, while this may be an extremely volatile situation this year, it's -- and -- I mean it's hard to imagine this kind of volatility persisting for the 3 or 4 years. We might have the chips being less available or available at higher prices. But it's a different situation versus the -- what we have today, where the prices of the chips are highly fluctuating between one day and another. And I would say pricing might be elevated, in which case, it will affect the entire market. But still, it will not, I don't think it will affect the demand. But the price stability, if you think 3 years down the line, it is something that will not stay as volatile as we see it today. Liudmila Climoc: Normally, it should correct during next quarters. Leszek Iwaszko: We have no more voice questions. We have 2 questions from us -- that came to us as a text. And first from [indiscernible] pension fund. A question that we've already answered, but I will read it. In France, we are observing consolidation process on telecom market when Orange is taking part. Do you see such a possibility on Polish market? So I guess we do not comment on that. One, and there is a type of questions on -- from Piotr Raciborski from Wood & Company. The first one is referring to what we said is you're asking the guided 4% to 8% underlying growth rate in Q2 2026, do you mean sales or EBITDA? That's the first question. And the second question is on ICT. Does Orange see stronger demand on ICT from public segment in face of national recovery and resilience plan fund inflow in 2026. Liudmila Climoc: So maybe we'll start with a second question on linked with IT&IS opportunities and funds coming from different EU projects, EU funds. Obviously, we are -- there is an ongoing pipe of projects in which we are taking an active part. So we are quite optimistic, but at the same time, we are moderate linked with what has been just said with current memory chip crisis. So yes, projects are coming, prospects are there. We are participating actively, and we have very strong legitimacy to winning these projects as we are very strong in our IT&IS capabilities, cloud, cybersecurity, integration services. But main questions for short-term, very short-term, is how the tenders will go, whether we will be able -- or market will be able to respond in the required terms knowing that sometimes pricing for equipment is valid for days or for 1 week or 2 weeks, while public acquisition process usually has taken much more time as we're going through mandatory stages. So in short-term, this can be the main -- is current main disturbance to the process, which we expect it will be somehow settled during next coming months because the market will learn how to respond to this price volatility, what offers validities will be coming. So yes, now volatility is high, which is impacting also like projects, but normally, it should be settling down. Jacek Kunicki: And on the 4% to 8%, I think you have misheard. It was 4.8% that we were speaking about in terms of the expected growth rate for core telco revenues in Q2, not EBITDA. Obviously, we expect EBITDA growth in Q2. Obviously, for the full year, the guidance is 3% to 5% growth. I think we can clearly say we've had a great start. We're aiming at the high end of this guidance. And I think it's fair to say, we will monitor how successful will be in Q2. So what level of growth of EBITDA we get in Q2. And we will monitor the prospects that we will have for H2. So when we meet the next time in July, I do believe we will be in a much better situation to make any judgment on how we see H2 and the full year. I think that is -- but the question was 4.8% core telco revenue growth year-on-year expected in Q2. Leszek Iwaszko: Thank you. We have no more questions. Thanks for the call. And if you -- I repeat it every time, but if you would like to meet us, talk to us, just give us a note. Otherwise, see you in July. Thank you. Have a good day. Bye. Jacek Kunicki: Thank you very much. Liudmila Climoc: Thank you.
Operator: This time, we are gathering additional participants and should be on the way shortly. We appreciate your patience and ask that you continue to hold. Good day, and welcome to the Blackstone Inc. first quarter 2026 investor call. Today’s conference is being recorded. At this time, participants are in a listen-only mode. If you would like to ask a question, please signal by pressing star one. If you are using a speakerphone, please make sure your mute function is turned off. At this time, I would like to turn the call over to Weston Tucker, Head of Shareholder Relations. Please go ahead. Weston M. Tucker: Great. Thank you, Katie, and good morning, and welcome to Blackstone Inc.’s first quarter conference call. Joining today are Stephen Allen Schwarzman, Chairman and CEO; Jonathan D. Gray, President and Chief Operating Officer; and Michael S. Chae, Vice Chairman and Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation, which are available on our website. We expect to file our 10-Q report in a few weeks. I would like to remind you that today’s call may include forward-looking statements which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the factors that could affect results, please see the Risk Factors section of our 10-Ks. We will also refer to non-GAAP measures, and you will find reconciliations in the press release on the Shareholders page of our website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone Inc. fund. This audiocast is copyrighted material of Blackstone Inc. and may not be duplicated without consent. Quickly on results, we reported GAAP net income for the quarter of $13 billion. Distributable earnings were $1.8 billion, or $1.36 per common share, and we declared a dividend of $1.16 per share which will be paid to holders of record as of May 4, 2026. With that, I will turn the call over to Steve. Stephen Allen Schwarzman: Good morning, and thank you for joining our call. Blackstone Inc. reported outstanding results in the first quarter. Distributable earnings increased 25% year over year to $1.8 billion, as Weston mentioned, underpinned by 23% growth in fee-related earnings and a 26% increase in net realizations. Inflows reached $69 billion in the first quarter and nearly $250 billion over the last twelve months, reflecting broad-based strength across our fundraising channels. Total assets under management grew 12% year over year to a new record level of more than $1.3 trillion. Most importantly, nearly all of our flagship strategies reported positive appreciation in the quarter compared to declines in major equity and credit indices, led by exceptional strength in infrastructure. We achieved these results amid a volatile market backdrop which was impacted by geopolitical turbulence including the war in Iran, and AI disruption fears. We have also been navigating an intensely negative campaign against the private credit sector despite the strong long-term returns generated in this area, resilient fund structures, and continued healthy demand from institutional investors and insurance companies. First, with respect to the market backdrop, since 2020 alone, we have experienced five market-moving events around this same time of year: the COVID shutdown in 2020; the Ukraine invasion in 2022; the regional banking crisis in 2023; the tariff announcements in 2025; and now the conflict in the Middle East, which triggered the largest quarterly increase in oil prices in over thirty-five years. In each of these prior events, having patience was the key. When the world ultimately normalized, risk appetite returned and investors refocused on fundamentals. To that end, what we see through the lens of our extensive global portfolio is an economy that has been highly resilient through the macro shocks of the past several years. The AI revolution—an extraordinary level of investment taking place in data centers, equipment, chips, energy infrastructure, and other related areas—continues to power economic growth, and we see no signs of that engine slowing down. At Blackstone Inc., we began thinking about the transformative potential of AI many years ago. I personally became active in the field in 2015, spending time with key industry figures that would define the AI revolution. Today, we believe Blackstone Inc. has become the largest investor in AI-related infrastructure in the world, and we have a front-row seat to the remarkable advancements underway in this ecosystem. In 2021, well before ChatGPT arrived, we privatized QTS, which would become the cornerstone of our data center strategy. Our total portfolio now consists of over $150 billion of data centers globally, including facilities under construction, and it continues to grow rapidly, with an additional $160 billion in prospective pipeline development. In addition to developing data centers, two weeks ago, we filed to launch a new public company that will acquire stabilized, newly constructed data centers leveraging our deep expertise in this area. We have also become one of the largest investors in the modernization and growth of the U.S. electric grid, given the rising demand for energy, including to power data centers. Specifically, we are the most active private investor in the utility sector over the past several years. Our portfolio also includes the longest cross-country network of natural gas pipelines in the U.S., with this resource expected to account for approximately half of data center power generation within the next five years. Additionally, we are major providers of private credit to energy companies. Alongside our expansive platforms in digital and energy infrastructure, we have also invested in several of the leading innovators driving the AI revolution itself, such as Anthropic and OpenAI, primarily through our wealth platform. In addition to these winning areas, we expect AI to catalyze new opportunities across other Blackstone Inc. business lines such as life sciences, where we believe AI will accelerate advancements in biomedical research. At the same time, the firm has significant exposure to physical assets which we believe are well insulated from disruption and benefit from their own positive tailwinds, including logistics, residential real estate, transportation and communications infrastructure, and many forms of asset-based credit. We also own fast-growing franchise businesses that are effectively royalty streams on physical assets, alongside a significant portfolio in the health care and industrial sectors. Overall, we believe Blackstone Inc. is extraordinarily well positioned for an AI-enabled future. Of course, some sectors and companies will see disruption. Software in particular has come into focus as an at-risk area and we expect the range of outcomes here. The sector will have to adapt to AI, and there will be winners and losers, with mission-critical platforms likely to be more resilient. As technology moats narrow, advantages will increasingly come from proprietary data, deep workflow knowledge, customer trust, being embedded in systems of record, and the speed and strength of execution. At Blackstone Inc., we will continue to drive preparations in our own portfolio to help our companies address and incorporate these innovations. Turning to private credit, where it is worthwhile to separate fact from fiction. External assertions have ranged from the sector posing systemic risk to the prospect of significant losses of investor capital. These assertions and their dissemination have negatively impacted capital flows in the wealth channel to private credit strategies including to our flagship vehicle in the space, BCRED. Despite the external noise, our institutional and insurance clients—representing 75% of our credit platform AUM—have continued to commit large-scale capital to the asset class. Of note, BDCs and credit interval funds with redemption features represent less than 10% of the U.S. non-investment-grade credit markets. Meanwhile, the Treasury Secretary, leaders of the Federal Reserve and the SEC, and the heads of numerous financial institutions have now acknowledged they do not see systemic risk from private credit. The key question is whether private credit is a good product for investors and can it continue to deliver premium to liquid credit over time. At Blackstone Inc., we have generated 9.4% net returns annually in our non-investment-grade private credit strategies since inception nearly twenty years ago—roughly double the return of the leveraged loan market. This track record crosses market and economic cycles, periods of high and low interest rates, and multiple credit default cycles. We believe we are moving toward a period of lower base rates once we work through the impact of the Iran war. And we also expect defaults to move higher from historic lows, as we have stated previously. But we have designed our funds with these cycles in mind, with low fund leverage, high current income generation, and the equivalent of meaningful reserves for future potential losses. We remain highly confident in our ability to continue to achieve a premium return to liquid markets over time. Meanwhile, our overall credit platform is expanding significantly, including to the investment-grade private credit area which Jonathan will discuss further. Performance and innovation have been the foundation of the outstanding results we have achieved in credit. As with every business at Blackstone Inc., we believe they will continue to drive our growth in credit going forward. In closing, the firm remains laser focused on delivering for our investors in these dynamic markets. We have established leading businesses across virtually every part of the alternatives industry, with over 90 distinct investment strategies providing a unique platform for future growth and profitability. Our people are more innovative than ever, and we are relentlessly pursuing new markets and asset classes. We remain steadfast in our mission to be the best in the world at whatever we do, and we have no intention of slowing down. I will now turn the call over to Jonathan. Jonathan D. Gray: Thank you, Steve, and good morning, everyone. The outstanding results we achieved in difficult markets are a testament to the breadth of our platform and the power of our brand. Blackstone Inc. is an all-weather firm. Meanwhile, multiple pillars of strength are driving us forward. Our institutional business is thriving, our credit platform is expanding despite the market noise, and our private wealth business continues to shine. Starting with our institutional business, which remains the bedrock of our firm, AUM in this channel is now approximately $715 billion, up more than 50% in the last five years, and we are seeing powerful momentum today across numerous areas. Our dedicated infrastructure platform grew 41% year over year to $84 billion, underpinned by exceptional investment performance. The commingled BIP strategy has generated 19% net returns annually since inception seven years ago versus our original target of 10% to 12%. Data centers and energy infrastructure continue to be the largest drivers of gains in this area, as well as for the firm overall. As the AI revolution accelerates, we see a profound shift underway toward hard assets, and having one of the largest infrastructure platforms alongside the largest real estate business in the world should be quite favorable for our investors. Sticking with our open-ended strategies, our multi-asset investing segment, BXMA, crossed the $100 billion milestone in the first quarter, up 15% year over year—its fastest organic growth in nearly twelve years. BXMA delivered its twenty-fourth consecutive quarter of positive returns in its largest strategy in Q1, despite the market downdraft. In our institutional drawdown area, we are raising a new cycle of funds across a number of highly successful and differentiated strategies, most of which we expect to be significantly larger than predecessor vintages. In life sciences, our new flagship, BXLS VI, hit its hard cap in the first quarter, raising $6.3 billion—an industry record and nearly 40% larger than the prior vintage—on the back of 18% net annual returns in the prior funds since inception. The diversity of the sources of capital was remarkable, including from pensions, sovereign wealth funds, foundations and endowments, family offices, insurance clients, and the wealth channel, and 50% of total capital came from outside the United States. This outcome exemplifies the breadth and power of the firm’s fundraising engine. In corporate private equity, we have raised nearly $12 billion to date for our new Asia flagship, including April closings, and we are approaching its $13 billion hard cap, compared to approximately $6 billion for the previous vintage. In secondaries, we raised an additional $6 billion in the first quarter for our latest private equity flagship, bringing it to $11 billion to date—halfway to our target of at least the size of its $22 billion predecessor. The secondaries platform, like BXMA, crossed over the $100 billion milestone in the first quarter. Post quarter-end, we closed an initial $1.7 billion for our fifth private equity energy transition flagship, which we expect to be substantially larger than the prior $5.6 billion vintage. Finally, in credit, we held a final close for our latest opportunistic fund, OSP V, in the first quarter, which hit its cap and was meaningfully oversubscribed, reaching over $10 billion of investable capital—one of the largest institutional credit fundraises in our history. This success in fundraising is in sharp contrast to what one reads regularly in the press about weak institutional demand for private market strategies. Again, what matters is performance. Our opportunistic credit strategy has achieved 13% net returns annually since inception nearly twenty years ago. Stepping back for a moment on our credit business, which continues to deliver strong results amid the noise, we now manage $536 billion of total assets across corporate and real estate credit, up 15% year over year, including $40 billion of inflows in the first quarter. The BXC&I segment specifically grew 18% year over year, and Q1 represented one of our best quarters of fundraising from institutions and insurance clients on record. The foundation of our growth in credit is innovation, which is powering our expansion beyond non-investment-grade strategies to many forms of investment-grade private credit. In Q1, our investment-grade private credit platform grew 23% year over year to approximately $130 billion. We are becoming a key capital provider for the real economy, including infrastructure, residential and consumer finance, commercial finance, and aircraft leasing. The opportunity here is enormous. The need for capital to build out AI infrastructure exceeds the capacity of public markets. For our investors, our direct-to-borrower model is designed to produce a durable premium to comparably rated liquid credits by eliminating distribution costs while delivering borrowers greater certainty. Our model generated nearly 180 basis points of excess spread on credits we placed or originated over the last twelve months for our private investment-grade-focused limited partners. In the insurance channel overall, our open-architecture, multi-client approach continues to resonate, with AUM growing 18% year over year to $280 billion—up fourfold in the past five years. In our non-investment-grade strategies, we continue to see strong demand, as I mentioned, underpinned by our institutional clients. That said, we have seen demand slow in the individual investor channel, as Steve noted, specifically for BCRED. In Q1, BCRED’s gross sales were $1.9 billion, a solid but decelerating number, while repurchases increased, resulting in net outflows for BCRED of $1.4 billion in the quarter. As we saw with BREIT, however, we believe what ultimately matters is long-term performance and delivering a premium to liquid markets. BCRED has generated 9.4% net returns annually since inception over five years ago in its largest share class—nearly 60% higher than the leveraged loan index—through periods of both high and low interest rates. On a year-to-date basis, BCRED protected investor capital against the backdrop of widening spreads and declines in the public credit indices. It did so despite taking significant loss reserves. The portfolio now carries a weighted average mark of 96.4, including the bottom 5% of loans at less than $0.70. Meanwhile, BCRED’s borrowers reported low double-digit EBITDA growth for the most recent twelve-month period, while interest coverage has improved by approximately 40% over the past two years to 2.2x as rates have declined and earnings have grown. Overall, our private wealth platform continued to shine in Q1. Our AUM in the channel increased 14% year over year to $310 billion and is up nearly threefold in the past five years, powered by our performance and brand. As one illustration of our differentiation in this channel, in a recent survey of financial advisers by Bank of America’s equity research team, Blackstone Inc. ranked number one in terms of brand quality for the fourth time in a row, with a score that was four times higher than our nearest competitor. Our total sales in private wealth were $10 billion in Q1, including $7 billion for the perpetual strategies. BXP led the way with $2.5 billion raised and has achieved a remarkable 18% annualized net return in its largest share class, lifting NAV to $21 billion in only nine quarters. Our infrastructure vehicle in private wealth, BX Infra, saw its best quarter of fundraising since launch at approximately $900 million, bringing NAV to nearly $5 billion in just five quarters. BREIT, our largest private wealth vehicle by NAV, raised $1.2 billion in the quarter, up 44% year over year to the highest level in three years. Meanwhile, repurchases fell 41% over the same period, leading to positive net inflows for each of the past two months. BREIT has generated a 9.3% net return for its largest share class since inception over nine years ago—60% above the public REIT index—including positive returns each of the past fifteen months. The vehicle’s portfolio positioning, including significant exposure to data centers—now at 23%—has enabled BREIT to navigate an extremely challenging period for real estate markets and deliver a highly differentiated experience for investors. Looking forward, we remain very optimistic about our prospects in the vast and underpenetrated private wealth channel. Our innovation is accelerating, and we have a multitude of products in the pipeline, including a new perpetual multi-strategy product targeting more liquid exposures called DXHF. This vehicle will leverage the capabilities of the BXMA business and is another important building block alongside our flagship private wealth vehicles in real estate, private equity, credit, and infrastructure, enabling us to offer the full spectrum of these asset classes to individual investors. We plan to bring a number of multi-asset strategies to market over time, including through our strategic alliance with Wellington and Vanguard. Meanwhile, we are seeing positive developments in the defined contribution channel, with the regulatory rulemaking process well underway. Overall, there is huge runway before us in private wealth. In closing, as we demonstrated again in Q1, this firm is built to deliver for investors through good times and challenging ones. We believe we remain tremendously well positioned to navigate the road ahead, whatever it may bring. And with that, I will turn things over to Michael. Michael S. Chae: Thanks, Jonathan, and good morning, everyone. In the first quarter, the firm delivered 20% plus year-over-year growth across fee revenues, fee-related earnings, net realizations, and distributable earnings, while at the same time, our funds reported resilient investment performance—all against a backdrop of significant turbulence in the external environment. This broad-based strength highlights the exceptional balance and durability of our business. Starting with results, fee-related earnings grew 23% year over year to $1.5 billion, or $1.26 per share, representing one of the three best quarters of FRE in our history and the best outside of a calendar Q4. Fee revenues increased 20% year over year to $2.6 billion driven by strong growth in both total management fees and fee-related performance revenues. Total management fees reached a record $2.1 billion, up 13% year over year, underpinned by double-digit growth in base management fees across three of our four segments, including 14% for private equity, 15% for credit & insurance, and 21% for BXMA. In real estate, base management fees declined moderately on a year-over-year basis in Q1, in line with the trajectory we previously outlined, due to harvesting activity in our opportunistic funds and headwinds in our institutional Core+ platform. At the same time, transaction and advisory fees for the firm nearly doubled year over year to $212 million, with a record quarter for our capital markets business. It is important to note that we generate these fees utilizing minimal capital. As our franchise continues to scale, including in infrastructure and investment-grade private credit, we expect continued strength in this revenue stream. Fee-related performance revenues were $488 million in Q1, up 66% year over year, powered by a fourfold increase in these revenues at BREIT and a nearly 2.5x increase at BXPE, alongside contributions from BCRED, BXMPRA, and other perpetual strategies. Distributable earnings increased 25% year over year to $1.8 billion in the first quarter, or $1.36 per share. In addition to robust FRE, net realizations totaled $448 million in the quarter, up 26% year over year. Gross performance revenues grew 70% year over year to $780 million, reflecting the highest level for a calendar Q1 in four years. Principal investment income was lower on a year-over-year basis, with the prior year including the sale of our internally developed Bistro software asset. Realization activity in the first quarter included numerous monetizations in the public portfolio, the sale to a strategic buyer of an aerospace and defense company, the recapitalization of a housing finance platform in India, and the sales of certain other energy positions. This disposition activity reflected a transaction environment that was strengthening in the latter part of 2025, entering 2026, allowing us to execute four IPOs last year. The significant recent market volatility and broader uncertainty has had the effect of pushing out exit pipelines and slowing realization activity in the near term. That said, if there is a durable resolution of the conflict in the Middle East, we would expect robust activity in the second half of the year. Turning to investment performance, our funds delivered resilient returns in the first quarter, powered by the large-scale portfolio we have been building across the AI and energy ecosystem. Infrastructure led the way again in Q1 with 7.8% appreciation in the quarter to 25% appreciation for the last twelve months. Gains in the quarter were broad-based, with particular strength in data centers and in the energy portfolio. The corporate private equity funds appreciated 3.2% in the first quarter and 16% for the last twelve months, with Q1 returns also powered by energy, both the private and public holdings, along with Medline’s strong post-IPO performance. These gains were partly offset by material declines in our software portfolio in the context of the significant contraction in software market multiples. Overall, our private equity operating companies have continued to report healthy underlying fundamentals, with revenue growth increasing sequentially in Q1 to 10% year over year. In credit, our non-investment-grade private credit strategy reported a gross return of 0.6% in the first quarter, and 9% for the last twelve months, reflecting solid underlying credit performance across the vast majority of our holdings. In Q1, certain markdowns in the portfolio were more than offset by continuing substantial current income. At the same time, in real estate credit, our business generated healthy performance again in the first quarter, with the non-investment-grade funds appreciating 2.3% and over 14% for the last twelve months. Meanwhile, BXMA reported a gross return for the Absolute Return Composite of 1.7% in the first quarter, and over 12% for the last twelve months. BXMA has achieved positive composite returns in each of the last twenty-four quarters, as Jonathan noted, notwithstanding multiple significant market drawdowns during this period. BXMA delivered this positive Q1 return in a quarter where public equities, liquid fixed income, and the HFRX hedge fund index were all negative. Indeed, since the start of 2021, BXMA has generated a 50% higher cumulative return than the 60/40 portfolio, equating to approximately 250 basis points on an annualized basis. This performance powered BXMA’s sixth consecutive quarter of double-digit year-over-year growth in AUM in Q1. Finally, in real estate, overall values were stable in the first quarter. Significant strength in data centers was offset by declines in life sciences office, along with our public holdings in India in the context of a 15% decline in the country’s stock market in Q1. The BREP opportunistic funds reported modest depreciation in the first quarter. Outside of the India public portfolio, BREP values were stable. The Core+ funds appreciated 0.8% in the quarter, driven by BREIT’s strong positive performance. I would highlight three important factors with respect to the positioning of our real estate business. First, funds across our global platform—including most recent vintages of our BREP Global and Asia strategies, our BPP U.S. institutional Core+ vehicle, and, of course, BREIT—have significant exposure to a rapidly growing data center platform portfolio. Second, in logistics, our largest exposure in real estate, as you have heard from us and other industry participants recently, we are seeing very positive momentum in leasing activity, including a record forward pipeline for our U.S. platform. Third, we expect the collapse of new supply will be very supportive of fundamentals over time across major sectors, including logistics and multifamily, where industry forecasts call for deliveries this year to be at their lowest levels in twelve years. Overall for the firm, strong investment performance lifted the net accrued performance revenue on the balance sheet—our store of value—up 9% year over year to $7 billion, the highest level in three and a half years, equating to $5.69 per share. Meanwhile, performance-revenue-eligible AUM “in the ground” expanded to a record $635 billion in the first quarter, also up 9% year over year. The firm’s significant embedded earnings power continues to build. In closing, it has certainly been a complex operating environment broadly and for the firm, but our balance provides resiliency in these dynamic markets and creates a strong foundation for future growth. We believe we remain the partner of choice in private markets for investors around the world. And we have greater investment firepower than ever before to capitalize on the many opportunities before us. Thank you for joining today’s call. We will now open the call for questions. Operator: Thank you. We ask you limit yourself to one question to allow as many callers to join the queue as possible. We will take our first question from Craig Siegenthaler with Bank of America. Craig William Siegenthaler: Thanks. Good morning, everyone. And Steve, John, hope everyone is doing well. Our question is on the IPO pipeline. You are sticking with your expectation for a record year of IPO activity despite the conflict in Iran. So what is driving the record IPO outlook? Because I think some of your peers are going to talk about a more muted 2026 in their upcoming calls. And do you expect that to translate into sizable realized performance fees in the second half of this year, or is that more of a 2027 event? Jonathan D. Gray: So, Craig, I think it reflects the diversity of our firm and really our strong presence in the physical world and, frankly, around AI infrastructure. So we saw in the back half of last year we took two companies public in the U.S., Allegion and Medline. Those stocks are up 160%. So if you bring good companies that have real earnings momentum, the market wants that. So I would say it breaks into different buckets. It is AI beneficiary companies—obviously digital infrastructure, some of the tech companies that are going to go public this year. Then I would say the AI-unaffected companies—Medline would fall into that bucket. Those areas, investors, I think, have a lot of interest. Where there will be less activity will be in professional services, information services, software—the white-collar world. But, again, given where we are exposed across our firm, we think we will be able to get a number of IPOs done. So I do think it is really a function of how people perceive this business. In terms of translating, I think you made the right point on timing: these things get public, then over time, you sell. Interestingly, in the case of Allegion and Medline, both have performed so well we have been able to do secondaries relatively quickly. But it is on the path towards liquidity. And we would say once this war resolves and the markets stabilize a bit here, I do think we will see an acceleration. But I think our mix of businesses is favorable—maybe a little more favorable than others in this IPO regard. Michael S. Chae: Hey, Craig. It is Michael. I would also just add that even today, partly based on the IPO activity that we have undertaken recently, if you look at our net accrued performance revenue receivable, within the corporate private equity portion of that, nearly a third is public. And so that puts us in position to more readily monetize these positions if we like the value and markets are right over time. And then on top of that, as Jonathan mentioned, subsequent new issue activity, assuming markets hold up. Operator: Thank you. We will take our next question from Michael Cyprys with Morgan Stanley. Michael J. Cyprys: Hey. Good morning. Thanks for taking the question. So with AI powering strong returns across Blackstone Inc.’s complex, curious where you see that showing up in growth and fundraising results. And as you look out across the business today, what do you see as the biggest drivers of growth over the next year versus the next three to five years, as you pursue new markets and asset classes? Jonathan D. Gray: So, Michael, I would say it is broad based in terms of the impact of AI. Certainly, our infrastructure business, both for institutional clients and individual investors, is benefiting. Because there you have two very big engines: the data centers as well as what is happening in energy. I think as it relates to our energy transition business, which we talked about in the prepared remarks, given the performance there and the need for energy for not only data centers but for robotics and autonomous vehicles and reindustrialization, there you will definitely see strength. In real estate, it is becoming a bigger and bigger part, and as you have seen in BREIT, it has clearly been a big beneficiary, and it allowed us to power through this difficult period of time. But even in our flagship U.S. Core+ fund, it has become a bigger share, and now beginning in some of our opportunistic vehicles. So there, I think it will start to have, over time, a very positive impact in terms of returns. And then on the credit front, asset-based finance is an area where credit investors are very focused. They have concerns about what is going to happen with various corporate credits. They are saying, I am interested in asset-based finance, and again, AI infrastructure ties into that as well. So I would just say that it is broad based. I would also point out, by the way, in our private equity vehicle for wealth, a similar story there where we own some of the big LLMs and tech companies—three big companies likely to go public—and we also have a bunch of AI infrastructure. So when you look across our firm, this strategic decision that we made to go long AI infrastructure, I think, is going to be the single most important thing for the performance of our clients and ultimately the growth of our business. It does not happen overnight, but you are beginning to see it move into our results. And I think it will really differentiate things, lead to inflows, and most importantly, lead to these positive returns for our customers. Michael S. Chae: And, Mike, I would just add broadly, if you step way back, being in a position where we think we are probably the leading large-scale private capital provider to these areas around the ecosystem that need capital so badly to transform the world—that puts us in a really great position. That is sort of the big picture overlay, I would say, in the coming years. Operator: Thank you. We will take our next question from Bart Jarski with RBC Capital Markets. Bart Jarski: Great. Thanks, and good morning, everyone. I wanted to ask around private wealth, and you have a business plan to expand FTE to 450 by the end of this year. In the current environment, are you accelerating that business plan? Are you dialing it back? How is that evolving as you go through the private wealth channel? Jonathan D. Gray: We continue to move in wealth, I would say, at a fairly rapid pace. Joan Solitar and her team have done a terrific job expanding who we are serving within the United States, but broadly around the globe. Canada for us is an exciting market. Japan, I think over time, will grow more in Europe, Middle East, Asia. There is a lot of opportunity. Wealth is so underpenetrated relative to what we see in the institutional world, which is, call it, a third or more allocated to alternatives; individual investors are low single digits, even very wealthy ones. So we see this as a big TAM. And then, as I referenced, we have a pretty unique asset in our brand, recognition of who Blackstone Inc. is, the fact that people trust us as a steward of capital. Then we have this range of offerings—so for investors who want private equity or credit or real estate or infrastructure, now hedge funds—and then these multi-asset areas where we can offer a holistic solution to investors we think are very special. So we continue to invest around the globe, expanding our team, more boots on the ground, and delivering this product. And as customers have good experiences, like we experienced with institutional investors, they start with one product and then start to expand. So this feels to us as an area that has a long runway. And interestingly, going through this moment in credit—we went through a moment, obviously, a few years ago in real estate—in showing that these products can deliver both in terms of their liquidity promises as well as their returns builds confidence with financial advisers and their underlying clients. So our confidence in this channel remains as strong as ever, and our positioning, we think, is quite unique. Operator: Thank you. We will take our next question from Alex Blostein with Goldman Sachs. Alexander Blostein: Good morning, everybody. Thank you. John, just to build on that last point, if you zoom out a bit, the wealth channel is clearly still growing, going through some growing pains. We see a quite significant reaction, not just for you guys, but for the whole space. So curious if you take a step back, what are the lessons learned from the recent experience, which obviously the industry is still going through, with respect to redemptions—in terms of how the products are sold, how they are packaged, how you are thinking about the minimums that will be appropriate for clients to have in order to come into some of these products—as you continue on this path of expanding the footprint there? Thanks. Jonathan D. Gray: Well, Alex, it is interesting. What has been more challenging is that some of the social media and press reporting is so different than the facts that we see. When you think about these products, they are sold not directly to individual investors; they are sold through financial advisers who are obviously sophisticated. There is incredible levels of disclosure when we are selling these products. If you look at BCRED, on the cover page, there are six bold highlighted lines talking about the liquidity limitations in the product. To me, it is not a surprise that we have more than 300,000 customers, and yet, we have not heard complaints from them that they do not understand that they are trading away some liquidity for higher returns. And I think you just have to look back at the BREIT experience. There was a lot of noise at the time. We said the products are working; they are protecting individual investors. And so when you look back in the fullness of time, you have a product that has been around almost nine and a half years. For one year, you had more limitations on liquidity. Instead of one month, it took you four months to get substantially all your money back. And in exchange for that, you produced a 60% premium annualized in returns. And that is the business. And so these caps on redemptions are not a bug; they are a feature of these products. If you are good in any of these products over a ten-year period, there will be a moment, a cycle. The key question is, are you offering a premium in exchange for giving up this liquidity? Have you properly disclosed this? So I feel very good about what we have done. I think, ultimately, the products will continue to produce this premium as they have in BREIT and BCRED. And I think these tests are helpful. I do not think it deters the long-term trend line, which is for individual investors to get the exposure, the higher returns, the diversification benefit, the opportunity to invest in some of the fastest-growing companies in the world, real estate and infrastructure. I think that all holds together. We are going to get through this like we have always gotten through these moments, and the products will continue to grow. Operator: Thank you. We will take our next question from Bill Katz with TD Cowen. William Raymond Katz: Okay. Thank you very much. I want to mix up my question a little bit, given the first set of questions. You seemed to spend a lot of time this quarter in particular talking about BXMA. I was wondering if you could maybe step back and talk a little bit about what you are seeing in terms of institutional allocations, and then within the wealth segment, how are financial advisers repositioning from BCRED? Where do you see the demand going, and would that also include the hedge fund complex at large? Thank you. Jonathan D. Gray: So, Bill, you have been a follower of us for a long time. You know we have not talked a lot about our absolute return business because it had been pretty flat for a long time. It had protected investor capital, but since we brought Joe Dowling on, the business has really inflected in terms of performance. We have delivered, I think, 250 basis points a year of premium here since Joe joined us more than five years ago. We have had twenty-four quarters in a row of positive performance, as we talked about, in our flagship strategy. And that, of course, attracts investors’ attention. If you can deliver a downside-protected vehicle that delivers a premium to 60/40 and you have liquidity, that is a powerful combination. And at the same time, I think investors are recognizing in a world with a lot of volatility, to be able to protect their capital in something that is more liquid is very valuable. And I do believe as base rates have come down, and I think over time will come down further, these products become more and more important. So I would say the receptivity in the institutional meetings I have has really picked up. I would guess, in the individual channel, we will see more and more receptivity. The multi-managers have done quite well. I think the product offerings we will bring will be attractive over time to individual investors as well. So this is an area of the firm that, as I noted, has been pretty flat but is now growing again—up 15% year on year—which is remarkable. And I think, again, performance drives everything for us. What they have done in BXMA bodes very well for the future of that business. Operator: Thank you. We will take our next question from Glenn Schorr with Evercore. Glenn Paul Schorr: No problem. So I wanted to ask on credit and the different moving ins and outs on fees. So maybe you could help separate the headwinds and tailwinds to help us talk about the future. We saw a drop in credit fee-paying AUM during the quarter and the resulting impact on management fees. Credit deployment was down in the quarter, but I am wondering how much of this is timing. You raised a boatload of institutional money between last quarter and this quarter on the institutional side in private credit. Maybe talk about the timing of deployment and how we should think about that translating to management fees. I appreciate it. Michael S. Chae: Certainly. Yes, there are a number of moving parts. Fee AUM was up 14% year over year in the quarter. We saw $37 billion of inflows. The platform is broadening in scale and diversity. There obviously is some near-term deceleration in the BDC area. But overall, I think the breadth of the platform is the story over time. As part of that, our asset-based finance area, which we call ABF/IGPC, was up 29% year over year in fee-earning AUM. We do have substantial dry powder not earning management fees—$74 billion of dry powder in the credit & insurance area. And the vast majority of that earns fees upon investment, so you will see that brought in over time. Those are some of the key drivers. Quarter over quarter, there was a sequential decline of 1%. Again, there are puts and takes, but it was mostly attributable to a one-time benefit in the fourth quarter related to some insurance partnerships and an annual adjustment there. So lots of moving parts. The direction of travel, we think, over the medium and long term is very good. You will see in the very near term some deceleration, but the breadth of the platform across strategies and, as you are pointing out, this building dry powder that will earn fees as invested make us continue to be very positive over time. Jonathan D. Gray: I would just add to that, Glenn, it is striking the difference in terms of what we have seen from the institutional and insurance clients relative to the wealth channel to all the noise about private credit. It is as sharp a contrast as I have seen, and I think it does bode very well for our credit platform. Glenn Paul Schorr: I wonder if I could ask just a very quick follow-up. If software helps—I should say AI helps more than it hurts—software spreads have widened a ton in credit. I am wondering how you think about balancing the opportunity versus too much concentration risk, while things are wide like this? Jonathan D. Gray: Look, I think when you have these moments where markets gap out—it could be on the non-investment-grade side, frankly it could be on the investment-grade side in the fund finance areas—people get nervous. That does create opportunity. Interestingly, the market has held up much better than the headlines. The leveraged loan market at this point has recovered quite a bit for everything really but the software names. I think there will probably be some in technology. I do think there is going to be a heterogeneous outcome for different software companies. So you have to be thoughtful in terms of where you focus. But overall, I think it is attractive. And the fact that we raised more than $10 billion of investable capital for our OSP fund, I think that will prove to be very well timed. So if we see big trade-offs or subsectors where we have differentiated insights, I do think we will be able to deploy capital into that. We have done a few things, but it has been interesting how resilient this market has been despite the headlines. Operator: Thank you. We will take our next question from Dan Fannon with Jefferies. Daniel Thomas Fannon: Thanks. Good morning. Last quarter, you talked about strong management fee growth for 2026. Based on the previous comments, it sounds like credit is slowing a bit here as we think about the near term. But maybe if you could talk more broadly about the other large segments as we think about the rest of the year in management fee growth. Michael S. Chae: Sure, Dan. Stepping back, if you look at the first quarter, three of our four business segments—outside real estate—grew combined management fees 15% year over year. So that is carrying forward the healthy momentum from 2025. In terms of some of the building blocks of that and the outlook: on the positive side, we talked about the new drawdown fundraising cycle that is underway. We will see an embedded upward ramp from these, mostly later in the year. SP X (our Strategic Partners fund) was activated in late Q1 and will continue to fundraise; our third Asia private equity fund and our energy transition fund we expect to activate in the near term. Now, those will all have fee holidays, so the impact will really be in the second half of the year, especially in the fourth quarter. You will continue to see the seasoning and expansion of our perpetual strategies overall—it is nearly half of our firm-wide PE AUM now. The power of BXP scaling—$21 billion in NAV in two years, more than doubling year over year. BX Infra has emerged—about $5 billion, up 3x year over year. And, of course, infrastructure overall—up 41% year over year—including BX Infra and related new products. As we discussed, BXMA obviously has terrific momentum. On the caveat side, we just talked about the deceleration in credit, notwithstanding many of the positives within that platform. And then, as we referenced last quarter, some slowing in our real estate segment, reflecting two things: harvest activity in our opportunistic funds and some headwinds in BPP, as I mentioned. Those are the key factors and sort of the architecture of the year. Operator: Thank you. We will take our next question from Ken Worthington with JPMorgan. Kenneth Brooks Worthington: Hi, good morning, and thanks for taking the question. As we think about the Middle East conflict and fundraising from that geographic customer segment, how big have Middle Eastern clients been historically to Blackstone Inc.? And do you see the conflict impacting fundraising from these clients in the near to intermediate term? And on the other side, does the conflict change where, what, and how big investing looks in the Middle East for Blackstone Inc.? Jonathan D. Gray: Thank you, Ken. I would say we have seen remarkable resilience from those clients so far in terms of continuing to make commitments to our vehicles. It is possible some of them may make some different choices in terms of reinvesting at home for a period of time, but right now, we have continued to see strong interest. I would say in terms of our platform, as you know, we are very diverse. There is no country outside the United States that represents more than low single digits to our overall firm. It is really the way Steve built the firm, and I think it provides real resilience to the overall firm as well. In terms of those countries, I think it is a mistake to bet against the Middle East—either the GCC countries or Israel. These countries are really embracing capitalism, investment, growth, and I think once this conflict is resolved, that pattern will be restored. We think these countries will continue to be quite strong. Reflecting that, we made two commitments during this war period—one in Abu Dhabi to help build a payments company, and one in Dubai in the aerospace area, aircraft leasing. So we continue to be believers in that part of the world, and we think this will prove to be temporal. Operator: Thank you. We will take our next question from Brian Bedell with Deutsche Bank. Brian Bedell: Great. Thanks. Thanks for taking my question. Within the retail wealth product space, just in terms of what you are hearing from financial advisers and the composition of the clients that are asking for redemption requests: I think for BREIT, it was a minority of customers, and I suspect that is the case for BCRED as well, as most people understand the long-term viability of the products. But if you could just characterize what you are hearing from that phase, and to what extent you think it is just the risk-off environment that might impact flows in the near term. And then, given your brand strength, do you expect to actually gain market share in this channel, given not just the brand and performance, but also the breadth of product? Jonathan D. Gray: Brian, I would start with your last question on market share. I do believe that when these shakeouts happen—we saw this in the real estate area—I think the number of competitors has diminished, and I think it positions BREIT very well as real estate starts to pick up in an upcycle. And the way we managed through that proved important. I think there is a likelihood as well here in credit that the combination of how people manage transparency, liquidity, valuations, returns can be beneficial also. So I do think we could see a changing of the guard or winnowing a little bit through this process, so yes to that. On the profile of the redeemers: you are exactly right. Contrary to this popular idea that it is small investors leading the charge, it is actually a smaller number of large investors who are double the size, on average, of the typical account in these vehicles. They are the ones—we saw this if you went back to BREIT, and it is the same story here with BCRED. The great mass, by number, of smaller investors tends to stick with the product over a long period of time. It is the bigger boulders, as opposed to the pebbles, where you get more movement in terms of redemptions. And that has proven to be similar again—different than the popular perception. Operator: Thank you. We will take our next question from Brian McKenna with Citizens. Brian McKenna: Okay, great. Thanks. We have seen time and time again that capital and liquidity become a lot more valuable during periods of volatility. I appreciate the benefits of this from a deployment standpoint. But from a business perspective, can you remind us why you operate a capital-light model? And what are some of the strategic and competitive advantages of having this kind of balance sheet during all parts of the cycle—from a business growth perspective and your ability to always be in a position to lean into longer growth opportunities across the business? Jonathan D. Gray: We appreciate that question because running capital light can be a harder business model—you have to raise money from third parties as opposed to borrowing large amounts of money and earning a spread on that. But we do believe that, given what can happen when the environment changes and what the regulatory climate can look like, being an investment manager gives us the greatest flexibility. Operating a business with virtually no net debt and no insurance liabilities means that if we need to use capital to do something at the firm level, it is available. There is no moment where we are facing any sort of liquidity crisis. As you know, we pay out basically 100% of our earnings between our dividends and our stock purchases. We like this capital-light model. We like being an open-architecture third-party manager for our investors. We think that is the right long-term approach. And particularly when you get to moments of volatility, you are not going to see redemption risk at a firm level. There is no credit risk at a firm level. We think this is an all-weather business model. It is why we have been through a lot of volatility, particularly in the last six years, and Blackstone Inc. keeps powering ahead. So we are going to continue to be a capital-light investment manager, focusing on delivering performance—that is what really matters—building our brand, building this reservoir of trust. And if we do that, you will continue to see very strong capital flows and strong financial performance. That remains the hallmark of our firm. Operator: Thank you. We will take our next question from Brennan Hawken with BMO Capital Markets. Brennan Hawken: Good morning, John. Good morning, Michael. A couple questions, a little more modeling oriented. Quarter-over-quarter base fee growth has slowed in recent quarters. We understand you have several large funds on fee holidays, but can you help us get an idea about what that might look like over time as we progress through the year and make our way closer to those big funds coming off the holiday? And then, also, a second component—stock-based comp ticked up a bit here. How should we think about stock-based comp over the course of the year and next couple of years? Thanks. Michael S. Chae: Sure. Thank you, Brennan. I will take the second one first. On stock-based comp, if you step back, as Jonathan just hit it, if you look over the long term at our capital return policy—nearly 100% of our cash earnings—and at the same time our approach around keeping our share count effectively flat, over the last eight years our share count has basically grown about 0.3% a year while our AUM has compounded about 14% per year. We like that relationship. There is seasonality to SBC growth over the course of the year. The rate of growth in the first quarter was below that of a year ago, which was sort of the preview that we gave. And I do think, for the full year, you will see that rate of growth end up being materially lower than the first quarter—materially lower. On base management fees for the course of the year, I gave some of the building blocks a couple questions ago. Sequentially, you are seeing—probably this quarter and next quarter—some more moderate growth across the firm. We expect that to accelerate in the latter part of the year in part based on those drawdown funds coming online and getting through their fee holidays, as well as continued momentum elsewhere, which I outlined. You do have these headwinds in the real estate area, and we think those will, in a sense, bottom out in the middle part of the year and also accelerate sequentially as we exit the year into the early part of next year. Brennan Hawken: Great. Thanks for taking my questions. Operator: Thank you. We will take our next question from Steven Chubak with Wolfe Research. Steven Joseph Chubak: I wanted to drill down into some of the comments on AI exposure. You spoke about sizable exposure to companies that are certainly well placed for AI transformation across utilities and data centers, and I know you cited a couple of other examples. At the same time, there are growing concerns around disintermediation risk. You cited the challenges facing the software sector, but the threat of AI admittedly extends beyond software. Was hoping you could speak to your process for how you are re-underwriting AI risk across your portfolios, and what are some of the actions you are taking to better position the book to navigate this looming threat? Jonathan D. Gray: I would start with acknowledging you are right. This does go beyond software. It includes, as I mentioned, information services, professional services—really a broader white-collar world. Our biggest exposure would be in software, and that is less than 7%, so pretty small as a percentage of the firm’s AUM. Nevertheless, we are quite focused on working with our companies to adapt to an AI-forward world. Many of these software companies have very valuable incumbency models that should enable them—if they become adroit with AI—to do quite well, and other companies are more exposed. Nevertheless, I think these management teams are capable, and many of them will shift to the new world. I think software will be very important sitting on top of these large language models, but the outcomes will be quite differentiated. So for us, working with our portfolio operations team and our AI experts with our portfolio companies is super important. As we think about deploying new capital, yes, you have to be thinking about what are the risks in this world and what are the multiples. If you look in the quarter, our biggest investments—and this really does not speak to a change, but just how deep we are in the physical world—the biggest investments we made in the quarter were a Spanish waste company, another data center company, a residential services business, and another business in the energy electrical equipment space. Our exposure in those areas is really going to pay off. And I think, by the way, interestingly, real estate—which has been the sleeping giant at Blackstone Inc. here—as investors pivot back to hard assets, as we get some calming after the war, and as the performance picks up along the lines Michael was talking about, particularly around logistics where we are seeing very favorable supply-demand fundamentals, I think that is an area where we could start to see an acceleration. But no question, today this is top of mind when we are investing capital, particularly in those white-collar affected areas. And with our existing portfolio companies, it gets a huge amount of focus. Steven Joseph Chubak: That is great. And, at the risk of breaching the one-question rule, I was hoping—at the risk of this not getting covered—if you could speak to the DOL and the provisional guidance that was offered on alts inclusion in 401(k)s. Jonathan D. Gray: Well, I think what is interesting in 401(k)s, which people do not fully realize, is that fiduciaries today can put private assets into 401(k) plans—defined contribution plans. What has really held it back, of course, is the long history of litigation. And so what you end up with is individuals who are not in a defined benefit plan end up getting no exposure to alternatives, and yet their colleagues who may have joined their company ten years earlier have a huge DB plan and a third of their assets in alternatives. We think it makes a ton of sense for there to be the benefits of diversification and returns—exposure to some of the fastest, most innovative companies in the world; exposure to real estate and infrastructure, which are mostly in the private market. What this DOL ruling—and it is still working its way through the system—does is start to establish a safe harbor, like annuities got a decade ago, so that a plan sponsor can put this in the mix. It will be a minority of assets but will give individual investors the opportunity to get this exposure. It is still a very regulated system between the sponsors, consultants, the ERISA standards. But I think this is a good development. It will take time, but we see interest here. This is an area that we think over time has a lot of potential. Operator: Thank you. We will take our next question from Arnaud Giblat with BNP Paribas. Arnaud Giblat: Yeah. Good morning. My question is regarding the CoreBridge–Equitable merger. I was wondering how this will affect your investment management partnership with CoreBridge. Are there risks to the assets, or is there perhaps a growth opportunity to grow the partnership through the merger? And also, what is your plan for your 12% stake in CoreBridge? Thank you. Jonathan D. Gray: We view this as an exciting opportunity for CoreBridge with their merger with Equitable. As it relates to our existing IMA with them, we have a contractual relationship where we are entitled to manage $92.5 billion of assets, so long as we meet certain performance thresholds. I think we are at around $80 billion today. We expect that will continue to grow. More importantly, we have delivered very strong performance for CoreBridge and its balance sheet. On average, across our insurance clients, as we mentioned, we have delivered a 180 basis point premium relative to comparably rated investment-grade credit. Our hope here is, as the joint balance sheet expands, that we can do similar things for Equitable. Obviously, we have not gotten into any of the details—it is early days and the merger has not been approved—but we would love to try to expand what we do for the combined company. Our base business remains, and we look at this as a potential opportunity to expand because we think we can continue to deliver these premiums for insurance policyholders on the Equitable side, but we will have to wait and see. On our stake, obviously now we are in a merger period. We are going to wait and see. We think CoreBridge represents very compelling value on the screen of where it trades today. This merger has to go through. We are long-term investors. We believe in the compounding in the combination of these companies. Ultimately, at some point—because we run a capital-light business—we will recycle that capital, but we do not expect that in the near term. Operator: Thank you. We will take our next question from Patrick Davitt with Autonomous Research. Michael Patrick Davitt: Hey, good morning, everyone. The market is still having a lot of trouble framing how to think about the refinance risk in the software loan portfolios. Given that it is still many years out and the loans are generally still performing really well, it feels like we are in a state of limbo. Could you better frame what options or levers your credit team has, if any, to proactively work with the backing sponsors well ahead of those maturities to help give some tangible outcomes that nip this concern in the bud preemptively? Michael S. Chae: Thank you. Jonathan D. Gray: It is interesting. If you look at our software exposure in BCRED, for instance, the average borrower put up $3 billion of equity. So they have a lot of incentives here to make these investments work. And as you said, Patrick, the performance of the companies has continued to be good. In fact, in our credit portfolio, our software businesses were the best-performing sector. I think when it comes to options, when you have years away, there are a lot of things that could happen. Right now, sentiment is quite negative. The market is going to see how these companies perform as AI continues to roll out. Given the low levels of leverage—using BCRED again as an example—these were 37% loan-to-value loans. In many cases, the EBITDA has grown quite substantially. So I think for those that are well performing, with this “wall of maturities,” people find a way, either through refinancing or extensions. These things tend to happen. I think the challenge is less around performing companies and more around if you have a business that is struggling—what do you do? That becomes harder, and those are the situations where we have taken meaningful marks in the portfolio. That, I think, is what happens. But generally, if performance continues, I think you will find a receptive market. It may take a bit of time. Right now, the uncertainty quotient is very high. Operator: Thank you. We will take our final question from Crispin Love with Piper Sandler. Crispin Love: Thank you. I appreciate you squeezing me in here. I just have a follow-up on the 401(k) question and the retail channel noise we have seen recently. How do you think that may impact the 401(k) opportunity longer term? 401(k)s definitely have less need for near-term liquidity, and private markets exposures may make sense here as you have articulated. But is it worth the risk and potential headaches for the alts, for the plan sponsors to get involved with a less sophisticated investor base compared to private wealth, given the pushback you would likely see from senators, headlines, etc.? Jonathan D. Gray: You made an important point, which is obviously near-term redemptions are not the focus in retirement savings. We think the rational argument—getting the benefit of long-term compounding from high-performing alternatives—is quite compelling. It may have, in some cases, raised some questions from some of the plan sponsors. But again, I think how this ultimately plays out: I do not believe you are going to see large losses of the kind that you read in the press coming from these private credit sponsors. If the products perform and we get through the redemption cycle again, I think people will see—like we did with BREIT—that these products are more resilient than the skeptics argue. As a result, that, combined with the nature of the long-term hold of the 401(k) vehicles, I think people will see these are quite beneficial. To me, the fact that we have this enormous institutional market—most of which is anchored by defined benefit plans for U.S. retirement workers—and then somehow that same worker who works for a different company today, or no longer works for a state that has a pension plan, is no longer entitled to a dollar of exposure—it just does not seem fair. It does not seem rational. So the key again will be showing people that these products are run in a responsible way and deliver premium performance. In the fullness of time, that is going to win the argument. Operator: Thank you. That will conclude our question and answer session. At this time, I would like to turn the call back over to Weston Tucker for any additional or closing remarks. Weston M. Tucker: Great. Thank you, everyone, for joining us today, and we look forward to following up after the call.
Henrik Høye: Hello, and welcome to the presentation of the first quarter 2026 results for Protector. We always start with all the employees. And just before we started now, there was a moment of silence, and that was the same when we started with the employees. And then I had a conversation with some people on the first row about -- and I said that I'm quite good at awkward silence. And the reason why I'm good at awkward silence is because I'm bad at small talk. So I'm not uncomfortable when it's quiet for a couple of minutes right before we start. But what we did focus on in that session is about our vision for 2030. In March, we met, it was about 550 out of 700 people in Oslo to discuss, have workshops on 3 elements that are part of our vision for 2030. And the first one is about people. The second one is about data and third one is about innovation. And it's about thinking differently. Back in 2021, we came out of a situation of poor profitability and that we needed more discipline in our underwriting and our profitability focus. And then we decided that growth was something that had to come second. It still is. Profitability is first. But we can now with a stronger basis, stronger profitability basis, have been more bold and have higher ambitions also when it comes to growth going forward. So a lot about -- a lot of it is about being the challenger and redefining what the challenger is in 2030. It is something else than what it was before and what it is today. The sector is developing. We're growing and the world around us is developing. And in that technology and AI is very important. And we have 2 targets, and they are the same as they were in 2025 for 2026. One is profitable growth. That will always be there. The other one is data. Last year, we focused on measuring data points and following up. So we have targets on data points. This year, we're shifting the focus to the value of that data. So we need to get something out of the data. An example can be that we want more recourse on the claims handling side, then we need better data in order to get more recourse or on the underwriting side, we want more relevant and bigger inbox from the brokers, and we want to quote more of that volume. The market history shows that's more about the market. So let's not target that, but we want to see more relevant business. Then we need more data to provide to the brokers, and we need to be the best one at providing data to the brokers in order to get to that place. So -- and then obviously, using AI will not be any value if we don't have good data. So that's a prerequisite for getting value out of all the projects we have. And we have solutions and functionality with AI technology in Protector today. There are examples in claims handling and in underwriting and all employees use it on a daily basis to become more efficient, but we're yet to find the way of really changing the way we work. And one focus area we've had is that if you're good at something, when you've done a process many, many, many times and you are to improve that process, you do it with incremental improvements because you know how it's done. But what's important when you have a technology that can support you in creating higher value is to think about where you want to go. And that's actually quite difficult if you're good at doing the process. So I think that we are very good at -- we have good processes, and we are good at following those processes. But that makes us -- it's a big change to say this is where I want to go. And that's where we need to be in order to make change. So we're focusing on the outcome and the target. And then we start seeing some change, some different approaches to how we do things. But it's a big focus. We're still investing and it hurts and it costs to increase data quality, quantity, structure and availability. And it costs resources and money to test and fail with AI solutions many times. But it's very interesting, and it is a great opportunity to understand our culture in a new way and a better way. Okay. That was this morning and some insight into the cultural part, which is extremely important in Protector. The first quarter is -- the growth has been basically announced previously after the quarter 4 when we talked about 1st of January. And what you can see is that the number is lower, meaning that February and March are lower than the January figure was, and that's true for basically all countries, except for the U.K. Combined ratio is very strong. I'll get back to that because you need to normalize it. There are very few large losses there. And maybe the most important figure here is the one that comes from the U.K., and I'll get back to that when I talk about the volume and the growth later on. One information here, we always really -- since we only work with insurance brokers, we have defined quality together with the brokers, and we do broker satisfaction surveys. And in new markets, we have always done it 18 months after the first policy in sets. And in France, we have now -- we're not 18 months in, but close to 18 months in. We've conducted our first survey, and we have very good results from that survey, both on the general sales underwriting service and on claims handling, the brokers we work with because we only send it to the ones we work with. So the others don't really have a lot of feedback to us. So that's 40-something brokers that have responded to this survey. So fairly small. It's very early. So the first survey, you don't -- we haven't had the opportunities to make many mistakes. But it is an indication that what we have delivered during those first 13, 14, 15 months is something that the brokers appreciate more than what the competitors have delivered. So it's a good start, but let's see when we do the next one, and it's even more important further down the line. So to the volume. And I'll spend the time on 1st of April U.K. because I think that's quite important here. 1st of April 2023, we won a lot of business in public sector and housing in the U.K. The market was hard, meaning that the rates were higher. And some of that business has been out to tender, 1st of April 2026, but not a lot of it. So we've kept a lot of that volume in our books. And what has been out to tender, we have rewon approximately 80%. So that means that the portfolio that we have that has delivered and delivers very strong profitability is very stable in public sector and housing. And that could have been different. I've previously said that we don't know when our business, when our portfolio goes to market, if the rates are too low, we won't win it back or then we will lose it. And what is for sure is that the rates will go down when it goes out to market because the rates have fallen in the market in general. So we have a renewal rate in those sectors above 100%. That is that we're retaining most of the clients, and we have inflation and there is some exposure growth for those clients, and we even have some rate increases. So the rate is above 0. The rate, if you adjust for inflation, is above 0 in public sector and housing in total for 1st of April 2026, which is a very strong result, and it could have been very different. The new sales is another story. So the rates have been falling, and we have seen approximately half of the volume as we saw last year, which was similar to the year before. And we have quoted slightly less. So there have been some clients that we don't like, that we don't have risk appetite for. The hit ratio is slightly lower, very similar for local authorities, public sector and quite a lot lower on housing associations. So that's due to pricing. Competition coming back into the market and pricing being lower. So the result on public sector and housing is -- it's a very strong result, and it's driven by that not a lot of volume has been out in the market and that we have had discipline in the underwriting. And it's strong discipline to end up with this result. And then that's only the limited segment, public sector and housing. Commercial sector is much bigger. We have a much smaller market share. And so that's where the potential is large, and that's what's driving the growth. So that's where we have the new sales in 2026. It's still a softening market in the U.K., especially on property, but it's flattening out somewhat. So we are able to convert some of our quotes to wins more than what we have done before, and we're also quoting -- seeing more and quoting more. And then we have the real estate segment, which I have talked about before. We have opened that segment. But I've also said that I don't expect us to quote a lot of business before the fourth quarter of 2026. We are quoting some business both some in the smaller segment of the real estate segment and also some of the larger clients. What we see is that rates are low as in commercial sector for now, but we are converting some. So we have some hit ratio on what we are quoting. But don't expect a lot to come from that segment before -- or we don't expect to quote a lot before fourth quarter inceptions. And then the market will be what it is. So we may not win a lot in fourth quarter, but we are more confident today with more data and more knowledge about the real estate sector that this is a segment for us. So it's very similar to the housing sector where we have had very good success. So low deductibles and cost advantage is very important. I forgot to say before I started that -- I see that they're speaking in the front here. So I forgot to say that questions during the presentation are welcome and better during the presentation than keeping them all for after. So if you have any questions, the volume side. Unknown Analyst: [indiscernible] Just on the sort of lower-than-expected tenders out there, and I appreciate that being on the public sector and housing side. But do you have any reflections of why that is? Because just intuitively, given the -- all of the comments on price pressure and a softening market, if I were to sort of renew my insurance, it feels like this is the time to do it. But now instead, customers are sort of exercising their options to automatically renew on what seems to be a bit old terms. Why aren't more sort of using this opportunity? Is that a negative read to sort of expectations for the even better prices going forward? Or what are sort of your reflections on that? Henrik Høye: I mean we don't really know. But there are several reasons that drive it. And one is that some of the capacity -- the public sector housing is in a way, a bit of a strange market because it's mostly when new capacity comes in, it comes in through the existing incumbent insurers, Zurich Municipal is one very large player or it comes through MGAs. And these MGAs are not really -- they don't really necessarily have the credibility and the trust from the brokers to be place business with. So then they are waiting with bringing it out to market. the local authorities, they are looking to have a reform in the U.K. to merge some of the local authorities and become more efficient or at least that's the ambition. So they are -- there is some uncertainty there, which makes them honor the long-term agreements or an optional year in the long-term agreements. And then obviously, the insurers are doing a lot to keep the clients. So they're doing something on the renewal side in order to avoid competitions. And that's -- we do that and our competitors do that. So I think there are several reasons why you see that type of lower tender volume in the market. But at the same time, your last comment or assumption, that's an interesting one because we do have a -- we have higher uncertainty on inflation now, and it's a dangerous combo with softening rates and higher uncertainty, and it only goes one way, then on inflation. So to expect that the softening will continue in that type of an environment with post-COVID learnings not too far away, then at least I think that that's a way of discrediting the market and our competitors because the right thing to do would be to now change. Unknown Analyst: And just a quick follow-up on that. Let's just assume that those volumes are sort of rolled over to potentially coming out in 2027, both in terms of the market, but also your -- you mentioned sort of like the portfolio composition of a lot of volumes being won in '23 and '24. And given the sort of dynamics with 3- to 5-year contracts, will then '27 be sort of like a very important year with a lot of volumes, both from volumes being basically postponed into '27, but also on your portfolio with a lot of tenders and a lot of sort of contracts having to be renewed then in '27? Henrik Høye: So both '27, '28 and even '29 are important renewals of that portfolio. So it's -- in a way, we've talked about this before, and we have some estimates of how that volume will be tendered, but we don't know exactly. So -- but let's say that we expose 20% in '27 and maybe a bit more in '28. And then the rest -- we've had some exposed now, obviously, than the rest in '29. And then it depends on the market how that is. But -- but the rates we have from there, and this is also something I've said before, they are not something that we expect to be in the portfolio over time. So that will normalize. And in a way, that market -- those market conditions are better if you have a cost advantage when there is a bit tighter margin than when the margin is very high because then everyone earns money. We go to the claims side, and we like to focus on the risks and the opportunities for improvements. That's on motor this quarter. Obviously, one quarter is short, we write and say that you need to understand that quarterly volatility must be expected both ways when it comes to growth and profitability in Protector to see it over time. But it is a fact that the underlying realities, if you correct or if you adjust the claims ratio for first quarter '26 and compare it to an adjusted figure for first quarter 2025, it is a worsening. So that's a fact. The reason for it is motor. Motor is poor profitability. Property has a very strong and stable profitability, and that's our largest product. And there are not any other problem areas on the product side. So it's motor. So good news is that motor is very short tailed, so you see it very quickly. And it's also easy to understand that if you have many claims, more claims than you had last year as a client and the broker understands this and it's unprofitable, you can adjust prices. But what surprised us is that the claims inflation, which is not only prices, but also frequency increases was higher than what we have seen previously. So there is something that could be volatility. But the way we see it is that we don't think of it as volatility and bad luck in the first place. We first try to find out if there is a reason, if we can find the reason and if there is a systematic problem. So that's how we started. Parts of it, it's in particular from Norway and Denmark. That's where the worsening is the worst or the biggest. And we also grew -- we had a strong growth. 1st of January in Norway, in particular. And parts of that portfolio, the new portfolio is not performing well. So we need to understand if we've done mistakes there or if that also is some kind of coincident or volatility. So we're obviously already looking into it. And so there is something there that we need to understand. And there are actions we need to make. And in addition, you have more uncertainty on inflation going forward. So that's a focus area. But as I said, the good thing is that this is something that we see, we can quickly understand it, and we know it's possible to do something about it. And we also know that we have very good processes of doing something about it on a client level, which gives good results on renewal pricing and adjustments. But we're not very concerned about it. No change in risk appetite. We still believe that motor is an area where we should continue growing. Any questions on claims development? When you look at the time lines here, you see on the large loss side that it's -- we're not at the 8% that we now have as a normalized level, but we still believe that, that's a sensible normalized level. And on the runoff side, I have mentioned previously that best estimate is important for us, both on the case reserving and on the actuarial reserving. But coming from a period with more uncertainty, you can expect that, that uncertainty ends up on the conservative side. It could obviously go both ways, but that's some of what you're seeing now. On the cost side, which we haven't talked about, we talked about the growth and the claims development. On the cost side, there is a reduction. You'll see that broker commission is higher. That's because we grow in France where broker commission is higher. But if you adjust for that, it's a slightly bigger decrease from last year, but most of it is due to the share price reduction and the long-term bonus plan that we have talked about before that has gone the opposite way. So there's no real reduction in cost quarter-over-quarter. And again, that's investing in data and in AI. But obviously, at some point, we need to see that in the cost ratio. And I think there are good -- we have good solutions and good process improvements that have -- that will drive a reduction and scalability in -- on the cost ratio going forward. Investments, that's volatile, as you all know. And on the equity side, we had a big loss in the quarter. Most important thing -- or the 2 most important things to mention is the increased yield. So the yield has gone up due to the interest rate increase. And the other thing is that in the equity portfolio, there was a mistake in the presentation that we sent out on estimated intrinsic value discounts, not that, that necessarily is something everyone believe in, but that said 30%, it is -- the correct figure is 37%, which makes more sense when the equity portfolio has had a loss. So -- but the point is on the equity side is that the underlying performance of the companies has been good. So it's been okay for some time. We've had some poorer performing companies. Now it is -- has turned around. So that's on a good trend. And so that's positive. And just as an example of the volatility, if you look at the equity portfolio today or a couple of days ago, year-to-date, we're plus, and you could figure that out because we have the list of equities. And so the loss is gone and there is a positive return. As of today, but tomorrow could be different. Any questions on the investment side? Yes. Profit and loss, the only thing that you see is that the tax rate is high. That's obviously due to the profit coming from insurance side and there's tax on that and that the reduction of the profit comes from equities where there's no tax. Capital position. So in the quarter, the largest reduction in the requirement on the capital side that comes from a reduced equity portfolio. So that has some effect. There is also some reducing effects on the requirement from the exchange rates, the Norwegian kroner strengthening in the quarter. And then when it comes to the dividend here, the most important factors for that dividend is obviously that we have a faster stress strong capital position. But we also have the U.K. portfolio, we have a high earnings capacity going forward. There's an increased yield in the bond portfolio, but the insurance portfolio is stable. So we know the earnings capacity from that portfolio and more transparency in that following 1st of January and 1st of April in the U.K. And then the French market now has 5 quarters, and we don't see any signs of that being mispriced or that we've had wrong clients coming in. So we're more confident in the French portfolio, even though it will be volatile, but we see some good development in the French portfolio. And we -- even though we see lots of opportunities for the future, we don't have in the short term, i.e., a year, we won't have many new markets started within 1 year. And during that time, we have a high earnings capacity. So that's -- those are the reasons for the dividend. Obviously, we would have liked to have opportunities to use that capital for -- at any time, but this is more a time element. And in the meantime, we will earn some more capital. So that's it on the summary. Any more questions? Unknown Analyst: Just a bit more big picture, the developments in the different markets, and I appreciate maybe U.K. being sort of like the main focus more than concern maybe. But just in terms of your competition, I appreciate that more in general, the underlying claims ratio is up, but some of it is due to frequency, but in some way, I guess, pricing also has an impact on that. Where do you see your competition in terms of their profitability amid a market softening. Is this sort of like a timing issue that the industry will, on a relative basis, bleed out for a few years and then we'll back -- we're back to the '22, '23 situation in the U.K. where you had pretty much the market for yourself? Or is it a change in your competition as -- are there more efficient players out there now versus before? Just any comments to sort of ease our nerves that this is not, in fact, a structural issue. It's more of an irrational behavior type of thing? Henrik Høye: I think it's interesting. But first, predicting where the market will go is very -- we don't spend a lot of energy on that because that's difficult. But we don't see any competition that is different, rather on the opposite where we see MGAs with high cost structures. So there, you know that one element is their commission level. And that commission level is in many cases, almost all cases, double of our cost ratio. And then there is a carrier behind and there's other cost elements to it. So that's -- and those are the ones that drives price in the U.K. market, if we focused on that. In the Scandinavian market, we don't see any large changes or the Nordic market. The French market is a bit early to say, but we don't see -- so if there is a difference between the French market and the U.K. market because there are large markets, there are many players, many of the same players. So if there is a difference, it is that the brokers have a larger part of the value chain in France, which gives the relevant part of the cost ratio that where we have an advantage, a smaller part to play. But at the same time, we see a change in that, that there will be -- it's not sustainable that the brokers have that large part of the value chain over time. So we don't see any signs of that. But obviously, we're paranoid about our cost position in the areas where -- that we need to improve that. because someone could come or competitors can improve. So we need to continue that journey of improvement, and we are focusing on that. So that's important. But we don't see any signs of it. And how the market cycle goes. The historical facts are that the market cycles are long in the Nordics. They're shorter in the U.K. U.K. motor, the market cycles are -- they can be almost quarterly. And that's driven by the consumer sector, but it is contagious to the sectors we are in. So -- and in a way that it's it must be a good place to be if you have a consistent approach and a disciplined approach to underwriting. And there are quick market cycles. You don't need to be part of the cycle that is unprofitable. So if you stop there and then you can be part of something that goes up, that must be a good thing. And it is, in many ways, irrational. And some of the segments we're in, we see irrational behavior now. So there is no way we would -- and maybe we're wrong, but some of those segments where you know that they're not excluding escape of water claims from their cover, our competitors because then they wouldn't be able to win clients. Those escape of water claims, they won't change a lot. They cost GBP 3,500 per claim and the frequency of them, in general, you can predict fairly easily. And when insurance is priced on the level of those claims, then you don't have anything for cost margin and large losses. So then at some point, it will stop. So in some of those segments, we think -- Thank you. Unknown Analyst: Could you please elaborate on what are the main opportunities and what are the main trends you see, when are they coming? Henrik Høye: So it's elaboration on AI and main opportunities, main threats. And I think I said some words previously. But what we -- so one example of a threat is that we have one distribution channel and thinking about whether that distribution channel is present sometime in the future and how that broker part of the value chain will be when you can use agents for parts of that work as a client. That is an interesting exercise, not because we necessarily -- we could argue against or for that scenario that brokers have a smaller role and that we lose that distribution. So it's not necessarily believing or not believing in the scenario, but it's a very interesting exercise to do both together with the brokers, but also for ourselves. And I think the outcome of that is that we will deliver -- as we go, we would deliver better to the brokers. And if that scenario ends up being, then we're prepared for them not being there. So that -- and that's agentic wording, marketing and pricing that can be done. But for the type of clients we have, remember that the average size of our clients is probably something like EUR 150,000. So -- and U.K. has very large clients. That -- to use an agent to quote that is a bit more complex because the data is it's not available like it is in the consumer sector where you have exactly the same cover and exactly the same exposure. So here, there are very many tailor-made solutions. So that -- but what we believe is that we can obviously get efficiency gains from AI solutions, we already do. So we can do more quotes, we can do more claims per person. And in parts of the processes, we have HQ wise, we can do a lot more on HR and compliance and all the requirements that come from the outside, much more efficient. But that's kind of obvious that you can get efficiency gains from large language models. What we focus on is to increase the decision-making ability for Protector that we are more precise in our decisions. And that's more dependent on data than technology because the technology is there. So that's -- and I don't know if it's answered your question exactly, but some words on that. No more questions? Thank you.
Operator: Good morning, and welcome to the LSEG First Quarter Results 2026 Investor and Analyst Call. [Operator Instructions]. I would like to remind all participants that this call is being recorded. I will now hand over to David Schwimmer, Chief Executive Officer, to open the presentation. Please go ahead. David Schwimmer: Good morning, and welcome to our first quarter results. I'm joined by our CFO, MAP; and our Head of IR, Peregrine Riviere. Q1 was a record quarter for the group and a perfect example of the value of our model. Our leading multi-asset class trading venues have been critical sources of liquidity, price discovery and risk management, while customer engagement with our trusted data to inform their decision-making has reached new highs. This is reflected in revenue growth of almost 10%, the highest since the acquisition of Refinitiv 5 years ago. This strong start puts us in an excellent position to deliver on our financial targets for the year. And as you will have seen from this morning's announcement, we expect revenue growth to be in the upper half of the 6.5% to 7.5% guidance range. We continue to take an agile approach to capital allocation. In the first quarter, we used the dislocation in our share price to buy back GBP 1.1 billion of shares. Including dividends, we expect to return more than GBP 3 billion over the next 12 months. Q1 was also a quarter of strong strategic progress. We're continuing to innovate and invest to capitalize on the opportunities that the ongoing technological change across our industry is creating. Our LSEG Everywhere strategy is embedding our AI-ready data across financial services, driving further growth in March and April in the number of customers accessing our data via MCP servers. We're also transforming our own products with very strong feedback on the Workspace AI tools we introduced in Q1 and an exciting pipeline of additional enhancements this quarter. The group's innovation goes far beyond AI. We executed the first transaction on our private securities market in Q1, expanding private market funding through our public markets infrastructure. We're making excellent progress on post-trade solutions in partnership with 11 global banks. We're building digital markets capabilities, including a Digital Settlement House and a Digital Securities Depository, and forging a new distribution channel for financial models through our Model-as-a-Service offering. I'll say more in a moment about our strong commercial and strategic progress. But first, I'll hand over to MAP to give color on the record financial performance. Michel-Alain Proch: Thanks, David. Overall, as David said, it was a very good quarter and further proof of our all-weather model. It was a strong quarter for our subscription businesses. All of them accelerated in Q1. Data & Analytics was up 5.1% as the strong growth sales at the end of last year flow through to higher revenues. We saw particular strength in Data & Feeds up 7.3%. The contribution from pricing and retention in D&A was unchanged compared to last year. FTSE Russell was up almost 9%. Subscription revenues accelerated as the rate of contract renewals normalized, as we said it would. Growth in asset-based revenue was also strong, reflecting product inflows and higher market levels. And Risk Intelligence grew double digits, 10.5%, reflecting strong demand for our business critical screening and identity verification services. Together, those businesses grew 6.3%, a strong acceleration from the 5.2% last quarter and on track for our expectation of around 6.5% growth for the full year. The quality of our market infrastructure really stands out in the kind of market environment we saw in Q1. David will give you more detail on this in just a moment, but you can see the financial impact on that on this slide. Markets revenue were up 15.5%, driven by strong performance across all the businesses. Cost of sales benefited from the action we took last year on the SwapClear revenue surplus. And as a result, gross profit was even stronger than total income, up 11.5% in Q1. Clearly, we have had a very strong start to the year. The outstanding performance from markets, combined with the great visibility we enjoy in our subscription businesses sets us up very well to deliver on all guidance for 2026. And in particular for revenue, we are confident in reaching the upper half of our guidance. In addition to our ongoing investments in the business, we are also returning surplus capital. We repurchased shares worth GBP 1.1 billion in the first quarter. Just over GBP 400 million of this was from buybacks announced last year and nearly GBP 700 million was from the latest buyback announcement in February. Combining the rest of this year's GBP 3 billion buyback and dividends, we will be returning nearly 10% of our market capitalization to shareholders over a 15-month period. As a reminder, even with our high level of investments and large shareholder distribution, we expect to end the year around the middle of our leverage range. This is all from me, and I will pass back to David. David Schwimmer: Thanks, MAP. Customers increasingly want to use our data in AI applications, opening up a new distribution channel. We are embracing that through our LSEG Everywhere strategy, delivering AI-ready data to our customers in their preferred environment, embedding our data in their AI-powered solutions and agents. We're continuing to see strong uptake on MCP distribution. In the roughly 4 months since launch, we now have 90 customers who have connected to our MCP server directly or via one of our AI partners. And we have a pipeline of over 60 more customers looking to connect. This is great progress given the onboarding process can take a few weeks. You can see from the pie charts that we are seeing a good global spread as well as broad-based interest across buy-side, sell-side and corporate customers. And we're seeing roughly half connect through Claude with the rest split between direct connections and other third parties. In terms of data sets, we are adding new ones to MCP all the time. Just this week, that included estimates, company fundamentals and corporate actions. And overall, we now have over half of our nonreal-time data available via MCP. So the platform is becoming more attractive every day. Over the coming weeks, we will add transcripts, Lipper funds, FTSE Russell indices and much more. While we are currently focused on driving adoption, we're refining our commercial policies, and we'll share the framework at our H1 results. So strong progress on our AI-ready data, and we are also making great strides embedding AI into Workspace. Our Workspace AI search product is in pilot with around 1,500 users today, and we expect to launch general availability in the next few months. Our Workspace AI deep research capability answers complex prompts with leading models from Anthropic, OpenAI and Google using our trusted data. We have around 1,600 customers in pilot and deep research is benchmarking very well against competitor products. We're adding much more data over the coming months and rolling it out more extensively throughout 2026. Today, over half of the take-up is coming from the investment management sector, where we have traditionally had lower penetration, so a positive sign. We're also seeing really deep engagement with our products. When global uncertainty and market volatility rise as they did in Q1, our customers turn to us, a testament to their trust in our solutions. We saw record use of Workspace in Q1. Our oil tools, which have long been popular with users, saw a 75% sustained uptick in usage. Our shipping data experienced a threefold increase in demand. In Data & Feeds, our real-time business data traffic grew 33% in Q1, and this has continued into Q2 with a new all-time high in early April. We're also really scaling up in some of the new channels we have added in recent years, making it easier for customers to access our data. Following the enhancements we made in 2023, we have accelerated growth in our cloud-based real-time offering, Real-Time Optimised, and use of that platform rose fourfold in Q1. I've spoken before about the power of the analytics API we built in partnership with Microsoft. In Q1, we drove 44% growth in data consumption through that channel. And making Tick History more easily available via cloud-based solutions continues to drive strong demand with 39% growth in the use of that data in Q1. Turning to our Markets businesses. As you know, we have intentionally positioned ourselves in areas of strong structural growth, driving the electronification of fixed income trading with Tradeweb, supporting cross-border flows in FX and helping customers manage risk and optimize their capital in our post-trade businesses. We achieved exceptional volumes in interest rate swaps on both our trading and clearing platforms as customers adjusted to shifting market expectations in Q1. Market conditions also drove strong volumes across the rest of the fixed income franchise as well as FX. That was on top of the strong double-digit growth we have consistently been delivering in FX clearing. In Equities, we also achieved strong trading volumes. Technology is accelerating the pace of change in our industry. We are investing and innovating to take advantage of that. Our index business, FTSE Russell, is expanding its presence in the digital asset space, attracting 8 digital asset ETFs to track its benchmarks in Q1. We're also seeing good demand for our private markets indices with StepStone. As markets digitize, we're on track to deliver 2 new digital markets capabilities, Digital Settlement House and Digital Securities Depository in Q2 and H2, respectively. I'll pick out just one more example from this slide, Model-as-a-Service. We made financial models from Societe Generale available through this channel in Q1, the first time we have expanded our analytics API to third-party models. We're adding models from our post-trade business later this quarter, taking further advantage of the powerful distribution capability of the analytics API we built with Microsoft. So to wrap up, this has been a record quarter of growth that puts us in a strong position to deliver on all our targets for the year. We're driving adoption of our AI-ready data across the industry through a range of AI partnerships. Our innovation is creating powerful new platforms for long-term growth. And we are returning significant surplus capital to shareholders, GBP 1.1 billion in Q1 and more than GBP 3 billion over the next 12 months. We're very excited about the opportunities ahead of us this year and beyond and are very well positioned for continued growth. And with that, I'll pass to Peregrine for Q&A. Peregrine Riviere: Thank you, David. [Operator Instructions]. Thanks, operator, over to you. Operator: [Operator Instructions] Your first question is from the line of Tom Mills at Jefferies. Thomas Mills: I think you've mentioned that you'll be looking to share more on the commercialization MCP as a distribution channel at 1H. I just wondered if you could give us a sense of your early conversations with larger customers, appreciating we're only about 4 months since launch. Is there a recognition on their part that this ultimately won't be included in existing agreement, will be [indiscernible] charges there? And just I noted that you said that you're seeing larger buy-side adoption in this channel versus the [indiscernible]. Why do you think that is? David Schwimmer: Tom, we are definitely seeing an understanding and recognition from our customers that this is incremental. This is a new product, a new service. So it has been specifically laid out in our -- for example, our data access agreements. A big part of those discussions, those negotiations are around the existing perimeter of what we provide. And I think it's very clear to them that MCP and the AI distribution channels are outside of that perimeter. So actually, a lot of the discussions that we are having with our customers are around their eagerness both to access the product and frankly, to understand what the commercial model will be. And so we are in early discussions with a half dozen or so about the commercial framework. And as we mentioned, we will be sharing that framework with the market in our half year results. So on the buy-side, I think it's just the utility. I think our customers are finding it very helpful, attractive product, easy to use. And so we're not particularly surprised that we're seeing that kind of traction. Operator: Your next question is from the line of Mike Werner of UBS. Michael Werner: I appreciate the presentation. A question on the MCP server. Apologies, I'm going to be focusing on this a little bit. I guess, can you give us a little bit more color as to the economics of the MCP server? If we think about you setting it up and the investment, how should we think about ultimately the variable costs? Is this something where there's a lot of operating leverage or there is a significant amount of consumption-based costs tied to the usage of the server? Michel-Alain Proch: Mike, it's MAP speaking. So in terms of economics, as far as MCP is concerned, a couple of points that I can make. As our clients are using LLM models to access MCP, so being OpenAI, Claude or Gemini. It's our clients who are paying the tokens to the LLMs. So this cost is with our clients. Then the cost we have for MCP is mostly coming from 2 things: First, the cloud cost and the cost of the data platform. Both of these costs are indeed variable. So that's something we want to take into consideration while we are establishing the commercial policy for this new product. Operator: And your next question comes from the line of Hubert Lam of Bank of America. Hubert Lam: I've got one question. On D&A growth, it was 5.1% in the quarter and only up marginally from the 4.9% in Q4. Can you talk about the different dynamics within the division where it seems like Data & Feeds had decent growth, but workflows slowed marginally? And also, I guess you touched upon it in terms of the enhancements in the Workspace, I guess would this be helpful in terms of driving up further growth within Workflows in terms of pricing or greater demand in the future? David Schwimmer: So I would not overinterpret any modest tick up or tick down in terms of workflows in particular. We continue to see really strong interest in the new functionality of Workspace and interest as well in terms of the new functionality that is Open Directory and how that will continue to be expanding over the course of this year and beyond. So we'll continue to add capabilities, add functionality, add product in there, new private markets data in there as well, which is also getting some good interest. So I wouldn't get -- as I said, I wouldn't overinterpret any kind of modest ticks up or ticks down in terms of where workflows are. And then Data & Feeds business is doing very well. We touched on this in the presentation, but very high demand for the content that we're providing in Data & Feeds as well as Workspace. And we will continue, as you know, to invest in that platform and look forward to continued growth there. Maybe just the last point -- sorry, Hubert, last point I should emphasize. I think everyone knows this, but just to be clear, no MCP revenue in here. Operator: You have a question from the line of Arnaud Giblat of BNP Paribas. Arnaud Giblat: Yes. Just continuing a bit on the MCP theme. I'm just wondering, out of the 150 clients that have signed up or signing up, how many are new clients to you? Are there any substantial new logo wins of size? Just wondering how this is driving incremental growth in the business? David Schwimmer: Arnaud, I cannot give you that answer off the top of my head. What I can tell you is that it's a broad range. We're seeing some large institutions like the big global banks. We're seeing smaller institutions like hedge funds. One dynamic that I can share with you is that the onboarding process can be much quicker with some of the smaller institutions. They're really eager just to get on. There's not a lot of focus or review on some of the compliance or regulatory aspects, whereas with the larger institutions, the onboarding process can take, I'll say, a few to several weeks. And there can be a couple of meetings where we explain the content, we explain how it works, go through a number of the security issues, then there can be some legal discussions and then there's the actual onboarding. So just in terms of timing, that's probably the area where at this point, I can give you the most insight that the bigger institutions tend to be slower than some of the smaller, more nimbler institutions. I hope that helps. Operator: And your next question is from the line of Enrico Bolzoni of JPMorgan. Enrico Bolzoni: I just wanted to follow up on your very latest comment, David, on the -- for example, on the fact that it's faster to onboard a smaller institution. So on one hand, I would think on top of my head that it would be easier to generally onboard clients via MCP relative to what has been historically. But AI is a very powerful technology, and I think that there might be some concerns and risk in terms of the perimeter of the usage of data, what AI actually might end up using. So my question is, do you expect that as this type of connectivity increases as a proportion of your, let's say, total clients and total revenues, the sales cycle will actually expand or will it actually shrink over time? David Schwimmer: I'm sorry, Enrico, when you say the same cycle, I just want to make sure sales cycle. Enrico Bolzoni: Yes. So basically, it's going to take -- you think over time, over the next, let's say, 3 years, is it going to take longer actually to onboard clients or actually it's going to be faster, so you'd be able to do it quickly. I'm just concerned about all the implication of AI for risk, for securities and making sure that the perimeter is well defined. I know there's a lot of legal implications when contracts are signed that involve AI technology. David Schwimmer: Yes, I would expect it -- well, first point I should make, it's already quicker relative to the historical onboarding in terms of what I'll call traditional or conventional products if we were setting someone up for a traditional API. So it's already quicker than that. And I would expect over time that it accelerates as our customers get more accustomed to the technology, as there is more and better understanding, particularly as we put our commercial framework out there later this year. This is all very new. Just to remind everyone, we turned this on, I think, December 23rd. And so we're just a few months into this, both in terms of having our own data sets available in this manner and in terms of our customers really figuring out how to use it. And so a number of them have been in what I'd describe as exploration mode here. But as the comfort level increases and I'm sure that on our end, we'll look to facilitate and accelerate our own processes as well, I would expect to see the sales cycle actually becoming a little bit shorter. Operator: Your next question is from the line of Julian Dobrovolschi of ABN AMRO-ODDO BHF. Julian Dobrovolschi: I have one on the subscription growth. Wondering about the sustainability of it. So you ended the quarter at 6.3%, which I think is quite healthy. But I think you also indicated that this is partly attributed to normalization in FTSE Russell mandates renewals. So I was just wondering how much is from onetime boost the performance that we have seen in Q1 versus a structural step-up in underlying run rate, please? Michel-Alain Proch: Yes. So just to reframe the conversation. So we posted indeed 6.3% for the subscription business in Q1. We reconfirm our guidance of 6.5% for the entire year, which would mean that in the next 3 quarters, we will be between 6.5% and 6.6%. In order to do so, we have a growth which is broad-based both in DNA, FTSE and Risk Intelligence. I have already indicated that we expect Risk Intelligence to carry on being double digit. As far as FTSE Russell is concerned, you're right on the fact that after 2025, which was a bit difficult, we see FTSE Russell going back on a growth trajectory to the high single digit that we used to have and an acceleration in -- progressive acceleration in D&A. So that's the 3 elements that is converging to 6.5% for the year. And as I was saying, we are very confident in it. Operator: Your next question is from the line of Ben Bathurst with RBC Capital Markets. Benjamin Bathurst: My question is also on MCP. Presumably, there are also some customers that have elected not to take it up at this stage. I just wondered what the typical pushbacks you're hearing when this is the case? Is it that customers aren't ready or that customers are using other MCP providers or any other reasons? And are there any actions you're planning to take to address any of these points to push connectivity up through the year? David Schwimmer: Thanks, Ben. So we're not seeing a lot of pushback. I think to the extent that we have had any questions, it's really been about the availability of certain data sets. So we've shared it with some customers, and they have been looking for particular specific data sets. And so sometimes if those data sets are not yet on, they're a little bit less interested. But as we mentioned this morning, we're adding more data sets all the time. We're now over 50% of all of our nonreal-time data sets available through MCP, and that continues, that just making it more and more attractive. Operator: Your next question is from the line of Oliver Carruthers of Goldman Sachs. Oliver Carruthers: Oliver Carruthers from Goldman Sachs. I've got another MCP question, which follows on a little bit to your answer to the last one, David. But it seems like some of your data and analytics competitors are also making their data sets available via [indiscernible] clients, via MCP servers, but they're only making their data sets partially available. So can you talk a little bit about your philosophy of how you're going to set the perimeter for what data sets you make available for your clients via MCP and then particularly in the context of your LSEG Everywhere strategy, which to me feels quite differentiated in this context? David Schwimmer: As I think you all are aware, we're very comfortable making our data available through MCP. And we are adding more and more of our data sets to it. We think it is a very helpful and valuable distribution tool. We think it works very well in terms of, I'll call it, cross-selling. It's a much stronger cross-selling machine than any human could be. We have about 1,500 data sets. And so if you are submitting a query through your model that goes into our MCP server, the way that works is that it is looking across the data sets that it has access to, to respond to that query. So it is a very powerful natural cross-selling machine. It's also a great lead generation machine because to the extent that we have data available in our MCP server and a customer does not have the license to that data set, then we can structure it so that, that becomes lead generation for us. And then we can interact with that customer and let them know that there is data available that would be responsive to their queries and expand their licensing. So I understand some of our competitors have more of a closed box mentality to this kind of opportunity set. That's not our approach. And from what we hear from a lot of our users and customers, they prefer our open model in this new era of very powerful AI distribution channels. Michel-Alain Proch: And if I may just add, David, we are adding data sets on a fortnight basis. Actually, we added yesterday, Reuters News and macroeconomic. So now we have Reuters News, we have fundamentals, estimate peers, and of the pricing corporate action, ESG ownership, company officers and directors, macroeconomics that we just put yesterday night. And in front of us in 2026, as mentioned in the slide, the major one that are awaited by our clients is deal and ownership data and transcript and filing. And then we will add commodities and Lipper fund data and finally, FTSE Russell. So you see it's a very busy pipeline of data set onboarding that we have in front of us. Operator: Your next question is from the line of Ian White of Autonomous Research. Ian White: I'm also on MCP, if that's okay. Maybe can you just elaborate a little bit more around the strategy with respect to MCP. I see that you kind of led with sort of real-time pricing data Tick History, while others have led with maybe more sort of company fundamentals, transcripts, kind of research content. Is there any strategic reason that you sort of see it differently to peers in terms of prioritization? Or is it a case of adding what is readily available more or less as quickly as possible? And can you just elaborate for us what's the end state here? And when will we reach that? Do you anticipate having more or less everything available via MCP in the medium term? And when is the medium term effectively? David Schwimmer: Thanks, Ian. So just, I guess, I'd say a slight correction. We do not make our real-time data available through MCP because of the latency requirements of real time, that is -- could you do it technically? Yes, you could do it. It's just given the current construct and the customer demand, that's not practical. So it's really just a function of making the data sets available in part relative to what we see in terms of customer demand and in part, making sure that the data sets are structured in a way so that they can be interoperable. And this is actually an important point that people often don't get. If you put a bunch of different data sets in an MCP server sort of willy-nilly, and they're not structured in a way to be interoperable, that can confuse the model in the same way that if you have a model accessing different data sets from different MCP servers that are not designed to be interoperable, that can confuse the model. So we are making sure that we're providing our data sets into our MCP server in a manner such that they are all designed, architected to be interoperable so that a model that is accessing data or content through our MCP server is going to get a very consistent experience with the interoperability amongst the different data sets, which just leads to better performance, higher accuracy in the model. So that's an important point that sometimes gets lost in terms of understanding how this works. In terms of end state, I expect that we'll have the vast majority of our DNA data available this half. And then as MAP mentioned, there's more coming in terms of FTSE Russell and other data from broader parts of LSEG over the second half. So we see really significant opportunity there in terms of creating an MCP channel to access the vast amount of data that we have across LSEG. Michel-Alain Proch: No, I would just add, it's really about what David said, it's -- the reason why we are able to put new data sets on the fortnight on MCP is because these data sets have been rearchitected by our team through our partnership with Microsoft. So it's all the work that we have been doing at rearchitecting the data with Microsoft, which is now coming to fruition and which is allowing us to be so fast at getting the data set ready for MCP. So as David said, by summer, we will be done for all nonreal-time data sets. Operator: [Operator Instructions] And your next question is from the line of Andrew Lowe of Citi. Andrew Lowe: I'll take one outside of MCP, if that's all right. There's been growing debate about your FXall business. So could you just talk us through the sort of planned investment within that business, where do you think you need to step up functionality? What's going to change over the next year or 2, and what the synergies are with the rest of your business? David Schwimmer: So FXall has had a very strong performance, as you would have seen in Q1. We have been continuing to invest in the capabilities in FXall really over the past couple of years and continuing to improve in its functionality, in its speed, in the interface. And I would say probably the area to touch on for this year is the fuller integration from FXall into Workspace and the opportunities that, that brings with this integrated front-end system. We've got FXall also plugged in as of a year or 2 ago into Tradeweb. We have straight-through FXall execution capabilities into ForexClear, so the kind of end-to-end processing. So again, strong performance this year, continued investment and continued improvement in its functionality, and we think it's a great business. Operator: You have a follow-up question from Arnaud Giblat of BNP Paribas. Arnaud Giblat: Yes. Just in your prepared remarks, you talked a bit broadly about the momentum you're having in post-trade services. I'm just wondering if there are any specific milestones you want to flag here in terms of activity pipeline? David Schwimmer: Arnaud, I just want to make sure I heard you right. The momentum in post-trade services, is that what you were asking about? Arnaud Giblat: Yes, yes. And specifically the partnership with the banks. David Schwimmer: Yes. Got it. Yes. It's going well. We're seeing -- we -- in Q1, we put trade agent out there, which is a very efficient, helpful platform in terms of OTC processing. We are seeing significant onboarding of new customers. And the real area of focus, now that we have the banks fully involved as of the announcement in Q3 of their investment, there's now active ongoing discussion across the business of really creating more integrated functionality. So when we talked about this business last year, you would have heard us talking about Quantile and Acadia and the different -- SwapAgent and different parts of it coming together. Now it's becoming much more of an integrated offering, and there's good engagement and dialogue with the banks as partners in terms of where we're taking this business. So good progress and good onboarding. It, at this point, has good growth. It's not a huge contributor to the business yet, but we expect -- as you have seen us deliver on in other parts of our business, we expect a nice long runway of growth. Operator: You have a follow-up question from Enrico Bolzoni from JPMorgan. Enrico Bolzoni: Sorry, just one follow-up to clarify as I think there's been a bit of confusion around it. Can you just please, to clarity, confirm that the derivative hedgings or the FX impact that you experienced in this quarter, that was about, I think, GBP 5 million positive, is not included in the reported constant currency growth rate, just for the detail to be clear? Michel-Alain Proch: Yes. Sure. No, I confirm that the embedded derivative impact of GBP 5 million is not recorded in the organic growth. Operator: And this concludes our questions via the conference line. I will now hand the presentation back to David Schwimmer, Chief Executive Officer, for closing remarks. David Schwimmer: Great. Well, thank you all. Thanks for your questions. To the extent you have any further questions, you certainly know where to find us. Peregrine and the team would be happy to hear from you and wish you all the best. Thanks a lot.
Tuukka Hirvonen: Good afternoon, and welcome to Orion's Q1 2026 Results Webcast and Conference Call. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. In a few moments, we will kick off with the presentation by our CEO, Liisa Hurme, after which you will have the possibility to ask questions either from Liisa or from our CFO, René Lindell. We will be first taking the questions through the conference call lines. And after that, we will turn on to the webcast chat function. So you may also type in your questions using the chat function of this webcast. And to our Finnish-speaking viewers, this event is held in English. But afterwards, later this afternoon, you will find a Finnish interview of Orion's CEO, Liisa Hurme on Orion's website. And just before letting Liisa to step in, just a reminder about this disclaimer regarding forward-looking statements. With these words, I'd like to hand over to Liisa. Liisa Hurme: Thank you, Tuukka, and good afternoon on my behalf as well, and welcome to listen Orion Q1 2026 results. Some highlights from this Q1. All our businesses performed solid in a solid way and very well, I would say so. And we also have good news regarding our clinical pipeline. We've been granted -- ODM-212 has been granted orphan drug designation in mesothelioma by FDA now in April. And we also started a new Phase Ib/II study called TEADCO which is a basket trial evaluating ODM-212 in combination with standard of care treatments in patients with selected advanced solid tumors. And I will talk more about that later on. Also, we have strengthened our executive team. We've appointed Berkeley Vincent as an Executive Vice President to lead Innovative Medicines division and as a member of my executive team, as of April 8. So let's look at the financials. Net sales, a healthy growth of almost 18% compared to the previous year's quarter 1. Also, operating profit growth 47%, which brought us to operating profit margin of 27.5%. And earnings per share increased 47%. Looking at net sales in more detail. Innovative Medicines drove net sales growth with royalties and tablet sales. But as I already mentioned, all the divisions are performing well, of course, in relation to the size of the division. So branded products growth was EUR 5.2 million, generics EUR 1.9 million; and Animal Health, EUR 1.1 million. And even Fermion external sales grew EUR 1.8 million, ending up to EUR 480 million of net sales during Q1. And the operating profit consists, of course, the royalties here in the Column 3, close to EUR 41 million and change in sales volume of EUR 21 million. We, of course, see some effect on decreasing prices, as we usually see the biggest products suffering of this are, of course, Simdax and Dexdor, but there are the generics as well. This comprises of EUR 9.3 million. That also includes FX and changes in cost of goods. No major milestones received in Q1, and then we also see increase in our fixed cost. And thus, our operating profit was close to EUR 150 million during Q1. Now to Innovative Medicines. The division growth was close to 54%. And here, we can see the Nubeqa royalties and tablet sales of EUR 145 million -- close to EUR 145 million, some other business of EUR 5.4 million, which is usually sales of services to our partners resulting EUR 150 million of net sales. And as we remember from the previous years, we start with the lower royalty rate from Bayer in the beginning of the year. So the royalties are tiered during the financial year. And we see in Q1 clearly lower income of Nubeqa compared to the last quarter of previous year, but clearly, a higher revenue, Nubeqa revenue compared to the previous year's quarter 1. And royalties were EUR 95 million and tablet sales to Bayer, EUR 50 million. Branded products, close to 7% growth compared to previous year with EUR 82.2 million. Easyhaler continues to drive growth in this division, especially budesonide-formoterol as the recent changes in treatment guidelines from last year favor the use of combination products over the mono products, and we've been able to really increase our sales according to this new guideline. And the good growth momentum in women's health therapy area continues with the HRT products. Generics and Consumer Health, 1.4% growth. It's according to market growth, maybe slightly below that, but this is only 1 quarter, and we all know that this is really a very wide portfolio in many different geographies. So this is a very good achievement for the first quarter. And Animal held 3.3% growth. Of course, again, a very wide portfolio, both for companion animals, and livestock and a global portfolio and the growth comes from all of the different geographies in both segments or both units. When we look at the top 10 products, of course, we see the Nubeqa as we discussed, driving the growth; Easyhaler, 7% growth; Entacapone slightly minus compared to the previous year's quarter 1. But this is mainly, again, timing issue of deliveries to different regions and different partners. Same goes with the Dexdomitor and the Animal Health DDA portfolio #4 here, which grows almost 11%, and that is, again, a result of deliveries leaving during Q1. And as I mentioned, women's health continues good growth trajectory with almost 15% growth. Burana slightly decreasing, almost 6%. And that's also a kind of more of a timing issue and depends on the season. But then we see 3 of our generics; Trexan, Quetiapine and Fareston which have a very, very healthy growth. This is partly due to the previously mentioned timing of deliveries to our partners but also showing that, for example, Trexan is a golden standard treatment, globally used both in cancer and autoimmune diseases and also solid position in our top 10 products. And Simdax, as I already mentioned, facing a heavy generic competition in Europe. Now Innovative Medicines during the quarter 1 comprised 36% of our net sales and generics, 32% and branded products, 20%. Animal Health and Fermion together were 11%, 12% of our net sales. Our clinical development pipeline has now -- the list is now a bit longer with the new combination study for ODM-212, but I'll go through the list to remind us what we have now going on. So the two 1st ones are studies on Nubeqa, the DASL-HiCaP for the neo-adjuvant use of darolutamide in prostate cancer; ARASTEP for the biochemically reoccurring prostate cancer; OMAHA-003 and 004 studies for metastatic castrate-resistant prostate cancer with opevesostat molecule that Orion has developed and then out-licensed to MSD. Then a bit of an odd product on this list, which is otherwise oncology products or molecules is levosimendan. It's a old classic from Orion's portfolio, the same molecule as we have in Simdax and that's developed for pulmonary hypertension, and there are two Phase III studies ongoing with that by our partner Tenax. Then two Phase II studies, again, with opevesostat for women's cancers like breast, endometrial and ovarian cancer -- MSD -- by MSD. And this is, of course, to test whether this mechanism of action would also work for hormonal cancers in women. CYPIDES is still ongoing. That was the Phase II study that was used when the Phase III studies with opevesostat started. So the results of that study were used for planning of that -- those Phase IIIs. TEADES is a monotherapy study, a Phase II study for ODM-212 for malignant pleural mesothelioma, and also for epithelioid hemangioendothelioma. These are 2 very rare cancers, solid tumors, and we think that this molecule, based on its mechanism of action, should have a direct antitumor activity to these cancer types. And the newest addition, TEADCO, co referring to combinations. The indications here, the cancers are mesothelioma, non-small cell lung cancer and pancreatic cancer. Here, we are combining ODM-212 with some known drugs that are used for these specific cancers. And we use the other kind of a mechanism of the inhibition, which would fight for the drug resistance or prevent the drug resistance, that patients usually throw to these currently used treatments. Sustainability is another topic. Some key figures of Orion sustainability programs. We've been able to decrease our greenhouse gas emissions by 13%, and this is scope 1 and 2, so doesn't include the Scope 3. Our injury rate is 4.9, and there is clearly room to improve there. For this year, we have very ambitious targets for LTIF. And then 2 things regarding more of a kind of code of conduct or how we operate within own company and with our suppliers, this has to do with the code of conduct. In Orion, 98% of our employees have carried out or done the training for code of conduct. Also, we do this code of conduct training and agreement with our suppliers, and 96% of our suppliers are also adhered to code of conduct, our third-party code of conduct practices. We have specified our outlook for this year. We gave our outlook in January. And now after Q1 when 1/4 of the year has already passed, we are a bit more wiser, and we are able to increase the lower limit of our range by EUR 50 million, both on net sales and operating profit. So the net sales range was EUR 1.9 billion to EUR 2.1 billion in the original outlook, and now it's from EUR 1.95 billion to EUR 2.1 billion. And same with the operating profit, which was previously EUR 550 million to EUR 750 million, and now it's from EUR 600 million to EUR 750 million. And here are some upcoming events for this year. And I think at this point, I thank you for your attention, and I think it's time for questions. Tuukka Hirvonen: Yes. Thank you, Liisa, for the presentation and set up for today. And now let's turn on to the question. We will first start with questions on the conference call line. So at this point, I would like to hand over to the operator. Operator: [Operator Instructions] The next question comes from Alex Moore from Bank of America. Alexander Moore: Two for me, both on Nubeqa. So you previously mentioned a quarterly royalty reporting can be impacted by last month estimates and some reconciliation effects. I was just wondering for Q1, is there any particular conservatism or phasing assumptions baked into your sales estimate for March? And then separately, can you give me high level color on whether the reconciliation for sales in December was meaningfully positive or negative in terms of impact on your reported royalty for the quarter? And then secondly, based on your current assumptions for full year sales run rate and tiered royalty rate, do you see consensus expectations of around 50% growth for Nubeqa sales this year as achievable? Rene Lindell: Yes. Maybe I can take that one. So I'll start first with basically December numbers. So we always try if possible to close the year with the actual reports and that we managed to do last year. So there was no reconciliation or overflow from '25 to '26. Naturally, as we said in the last month of the quarter, within the year are based on estimates that we then have and the latest data we have, and then we'll be updating in the second quarter, and then we will discuss that, of course, in Q2, but we are not giving details between -- in between months of how the Nubeqa accruals and actuals go. And then, yes, we are very happy, of course, that Bayer is also optimistic on the full year of Nubeqa and so are we. And of course, we do our own scenarios and try to make a balanced outlook for the year that includes various scenarios. But other than that, not commenting on Bayer's estimates. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 2 questions. Starting from the guidance upgrade, I think you mentioned that you were just wiser after Q1. Can you specify was the upgrade just based on Q1 performance? Or have you also upgraded assumptions related to the rest of the year? Rene Lindell: Yes. Maybe I can comment that. So as Liisa said, of course, we have 1 quarter behind us, and that was solid across the businesses. And also, I think Nubeqa performing very nicely in the numbers and in the market. So I think it's a general -- I think if we look at really the lower boundary, we also see that the probability for that old outlook, lower limit starts to be quite low and made sense to raise that lower limit to a bit higher. And when it comes to other aspects, some also effect from the fact that we have a little bit more information on the U.S.A. tariffs for pharma for this year that the impact would be earliest for October quarter. And that -- as that information came through that also reduces a little bit of the downside risk, although being said, it is still something of which is then end of the year, what the impact will be, if any, at that point of time. Sami Sarkamies: Okay. And then my second question would be related to Nubeqa product deliveries. These grew only 30% in Q1. I think they were also a bit small in Q4. So should we just assume that inventories at Bayer have become lower in the last couple of quarters, and these product deliveries will pick up at some point in time during the rest of the year? Liisa Hurme: Well, I think the tablet deliveries from Orion to Bayer is not a very good -- I would say, not a very good lead indicator how Nubeqa sales would develop or how the inventories that the supply chain is really, really long if you think the global supply chain. So it's -- I would advise not to look at that tablet number or tablet sales. We ship according to buyer's forecast. Of course, here for the shipments there is the same factor than for any other shipments that sometimes they leave on a certain -- last day of a certain month or then first day of the next month. So there might also be a big change or big differences depending on when the shipments leave Orion. So that's not a very good and reliable indicator for prognosing inventories or future sales. Rene Lindell: Perhaps I can continue here a little bit that we do expect for the full year that we will have higher tablet deliveries than what we had in Q1. So it wasn't yet I think, representative of the average level for the year. Liisa Hurme: No, no. This is exactly what I mean, and -- yes. Sami Sarkamies: Okay. And then, actually, I have one more question regarding the new combination study for ODM-212. Can you tell a bit more about the study, how many patients were recruited? When are you expecting readouts? And then it would be interesting to hear what is currently the market for the drugs that you will be combining ODM-212 with? Liisa Hurme: Well, I think I'll start with the studies. These are not huge studies. I don't have the exact number of patients unless my colleagues here have that. But let's remember that both of these indication, even though they are big ones. So we are now carrying out Phase Ib/2. So we are even first trying different dosing with some of the combined drugs. So -- and for the results and readouts, I would be on a safe side to say that we can expect those during '28. And the markets for the drugs that we are combining, I'm not going to share here the market details of those drugs, but those are listed -- the ones that we combine with, are listed in the press release currently. Sami Sarkamies: Okay. So assuming additional studies for these patients. . Liisa Hurme: Yes. . Sami Sarkamies: Are these blockbuster products? Liisa Hurme: Oh, yes. Indeed, some of them are. Tuukka Hirvonen: They are. But then again, 1 needs to remember that their indication may be wider than the one we are targeting with this combination. So we have listed the active ingredients in the press release we announced earlier this morning. So with that, you can definitely find out the brand names for these products. But again, please bear in mind that their indication may be wider than the one we are targeting with these trials. Sami Sarkamies: Okay. Thank you. I don't have any further questions . Operator: The next question comes from [ Matty Carola ] from OP Corporate Bank. Unknown Analyst: Firstly, about royalty rate. So what should we think about during this Q1? Is it comparable what we saw last year, first quarter? Or is it higher as now the sales, of course, grew from Bayer to Q1 last year? Tuukka Hirvonen: Apologies, Matty, the line was a bit bad right now. There's somewhat echo. Could you please repeat your question? Unknown Analyst: All right. Hopefully, it's better now. Yes, I was asking about the royalty rate during the Q1. So is it at the same level than last year? Or is it higher now as the Nubeqa sale has grew from last year? Rene Lindell: I don't think we comment on the royalty rates in that perspective as to where the tier breakpoints or so you'll have to probably wait for that calculation to be done a bit later during the year. Tuukka Hirvonen: Growing faster compared to previous year, we will be reaching the higher tiers earlier than last year. So in that sense, in Q1, also probably the average is somewhat higher than last year. Unknown Analyst: All right. Maybe then another question regarding the sales and marketing costs as they've been increasing. So could you roughly say how much there is like the actual costs? And how much are the end royalties? These are kind of causing the cost growth. Rene Lindell: Yes, of course, and he royalties are paying a role in their part, but also we have added sales force also to support, especially branded products in some European countries. So you will see both effects there visible that, of course, with Nubeqa growing quite a lot from last year's Q1, then, of course, those would be also visible in the sales and marketing. Unknown Analyst: Okay. And one more question regarding the R&D pipeline. So as you did have said that there is this one kind of the old study, which is not covering oncology. So I think it was last year exactly when you were putting this Tenax study in your pipeline. And could you remind us what was the reason to add that study back then to your pipeline? Why it was not there prior to year ago? You want to [indiscernible]? Liisa Hurme: Yes. That's a very good question, and thank you for asking so that we can remind -- I think that was the time when Tenax started the Phase III program for pulmonary hypertension. They had been working with levosimendan for a while, doing some confirmatory studies, but that was exactly the time when they were able to start the first study and then eventually later on last year, they started the next study or the second study for pulmonary hypertension. So there is no other reason for that. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: Ssian Ssirau from SEB. One question from me regarding Nubeqa. So when we think about this early-stage indication for Nubeqa, what would be a reasonable time line to expect that you would expense for you because I have understood that Bayer is fully responsible for the development for now. Liisa Hurme: Indeed. This relates to the DASL-HiCaP study and the readout for this study, if I remember correctly, it's '28. Tuukka Hirvonen: Estimated in '28. Liisa Hurme: Estimated in '28. I think that the latest point for us to jump in and use our opt-in would be when we see the results of the study. Operator: The next question comes from Iiris Theman from DNB. Carnegie. Iiris Theman: I have just 1 question. So what pipeline is do you expect in the next 12 to 18 months? Liisa Hurme: Well, I'll start with our ambition to start Phase I study, at least one Phase I study with our biologics during this year, by the end of '26. And then if you ask for the next 12 months, of course, then we move to enter in clinical stage. So I think those are the one -- the major initiations of new projects. And then regarding the results, no major results that we would be expecting this year. Tuukka Hirvonen: With the exception of the LEVEL trial -- Phase III trial by Tenax in Q3 this year. Liisa Hurme: Yes. Thank you, Tuukka. But then in '27, the... Tuukka Hirvonen: ARASTEP. Liisa Hurme: ARASTEP will -- there will be a readout for ARASTEP in '27. Then again,-- what else did we have in '27? Tuukka Hirvonen: Current estimate for the women's trials with opevesostat. Current estimate is in the end of '27. We'll see how that pans out. And also for our first ODM-212 Phase II, so with the mono trial, current estimate is also in the end of '27, but it may move either direction, depending on recruitment rates and so forth. Iiris Theman: Okay. And anything about opevesostat, ODM-208 for prostate cancer? Liisa Hurme: Readout for both of the studies is '28. Tuukka Hirvonen: Yes. The estimated final readout is in summer '28 for both of these trials. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Tuukka Hirvonen: Thank you, operator. Then we'll turn to the webcast questions. So again, you still have the opportunity to type in your questions by using the webcast chat, if you wish. We have here 1 question coming from Shan Hama from Jefferies. So Shan is interested to hear that could we please provide an update on opevesostat timing. And if we could still see interim data this year following Merck's comments in '25 ASCO, so last year. Liisa Hurme: Well, I think I can only repeat what we said a minute ago that the readout for both -- the readouts for both of the studies are estimated to happen in '28. And regarding any interim results or interim analysis, I don't have information on that. So that should be asked from MSD. Tuukka Hirvonen: Exactly. Thank you, Liisa. So we have no further questions either from the webcast, and I think that we don't either have any follow-ups on the conference call line. So I think it's time to wrap up and some closing words, if we wish, Liisa. Liisa Hurme: Yes. I thank you for your attention and very good questions. And of course, I hope that you will be attending our upcoming events this year and have a nice rest of the day. Thank you.
Operator: Hello, and welcome to Gecina Q1 2026 Activity Conference Call. [Operator Instructions] Today, we have Benat Ortega, CEO; and Nicolas Dutreuil, Deputy CEO in charge of Finance as our presenters. I will now hand you over to your host, Benat Ortega, to begin today's conference. Thank you. Benat Ortega: Good morning, everyone. It's a pleasure to share an update of the execution of our strategy today. One word to begin with on rental income. Our rental income increased in Q1 on a like-for-like basis, up 2.3% to EUR 176 million. This again shows our ability to outperform indexation, supported by rental uplift and a consistently high level of occupancy. As expected, indexation is decelerating, reflecting the slowdown in inflation and construction costs in France last year with the usual lag effect embedded in our leases. On a current basis, rental income reflects the impact of the significant disposals executed last year as we recycled mature capital from residential assets into higher-yielding opportunities in the office segment. Occupancy remains high and broadly stable year-on-year with more than solid activity in Paris and an acceleration of our residential occupancy. The temporary increase in vacancy in Boulogne reflects the time required to release surfaces vacated following lease maturities last year. But we have signed several leases in Boulogne during Q1 and public transport will improve significantly with the upcoming arrival of a new metro ring line next year after some delays. Turning now to leasing activity. We started 2026 with a solid leasing momentum. It's been 23,000 square meters signed between January and March, securing EUR 18 million of annual rents on an average lease maturity of around 7 years. Around 1/3 of this performance relates to renewals, illustrating our ability to anticipate lease maturities and secure occupancy ahead of time, while the remaining 2/3 comes from new clients, reflecting continued business development. The development of our fully managed offices is also progressing very well. These represent more than 16,000 square meters and EUR 16 million of annual rents, marking a 33% increase compared to the figures we shared at the end of 2025. We are convinced there is a strong demand for high-quality, well-designed spaces offering more services and greater visibility, and we will continue the rollout of our food service business in the next quarters. On the residential side, leasing dynamics are also positive with 335 leases signed, up 12% on a like-for-like basis. This confirms both the strength of our operating housing platform and the relevance of our diversified offering. Let me now spend the time on the pipeline. We continue to see a lengthy activity and interest across all our developments, and that includes also T1 Tower now named Shape. Discussions are active and well qualified, involving a diversified mix of large corporates as well as midsized or small tenants. On several assets, we are running parallel expression of interest and discussions, which is a positive sign for demand depth. 60% of Signature, the first asset to be delivered end of '26 is now secured, including a landmark deal with the global real estate expert, JLL on almost 7,000 square meters and ongoing negotiations are occurring on several other floors. As you would expect, discussions are at different stages of maturity. For assets with later delivery dates, conversations are naturally at early stage, while visibility and conversion tend to improve as construction progresses and projects become more tangible for tenants. Lastly, portfolio rotation continued in 2026. The EUR 200 million disposals at 3.5% yield all at the full year are now fully completed. And in addition, we have secured a further EUR 50 million of disposals at a 2.2% yield, reflecting the quality and maturity of the assets sold. These proceeds will fund the EUR 265 million of development CapEx currently being invested in the four large flagship projects we are -- you are familiar with, targeting double-digit yields on CapEx. It clearly illustrates the value creation embedded in our capital recycling strategy. The repositioning of T1 is also progressing as planned. The tenant has moved, allowing us to start works early May, around 15 months ahead of lease expiry while securing rental income until June 2027 and therefore, meaningfully reducing the expected void period during renovation. Overall, these actions are fully aligned with our core objective of improving returns for shareholders while preserving a resilient and future-proof leverage profile. We remain disciplined and pragmatic in our capital allocation, continuously assessing all options with no taboo. One last word before turning to your questions. Based on the performance we have seen so far and our current visibility, we confirm with confidence the guidance we have already shared with recurring net income expected in the range of EUR 6.7 to EUR 6.75 per share. Operator: [Operator Instructions] The next question comes from Florent Laroche-Joubert from ODDO BHF. Florent Laroche-Joubert: I would have maybe two questions. So the first one on the leasing side. We understand that you have discussion in progress and you are confident about the leasing of your development project and prime assets. But what about Boulogne? So we have seen that vacancy has increased this quarter. So do you think that now we have touched a low point? And when do you think that Boulogne can be positive in terms of leasing activity and in terms of occupancy for Gecina? Benat Ortega: Yes. On Boulogne, I think we are close to the low point, obviously. We are releasing progressively the square meters we have available. We have 3 buildings there. We have signed, as I said, several leases already in Q1. I think leasing is under progress. So we should improve progressively the situation. And as I mentioned, the metro line, we are expecting the metro line for now three years. The train station is finalized and it should open probably late this year or early next year, and I think it will improve significantly the attractivity of that area. Florent Laroche-Joubert: Okay. So now meaning that we can expect more positive to come from Boulogne or neutral... Benat Ortega: Yes, it will progressively ramp up. Yes. Florent Laroche-Joubert: Okay. That's good. And maybe a second question on share buyback. So we understand that maybe you are today more open for share buyback. So how do you -- would you like to include it in your allocation policy and maybe at what share price could be interesting for you to look at share buyback according to the current market condition from the recent data? Benat Ortega: I wouldn't say we are more open or less open. Like we mentioned in the earlier calls, we have a triangle approach on capital allocation. Obviously, it starts from disposals, it needs to be in line with the objectives we have for the balance sheet. And then once we have the cash, we need to assess which is the best option. Obviously, and the best options depend on opportunities on the market and the share price and therefore, always linked to the cost of capital and the best use of the capital. So that's why we said with no taboos, we will find the best options based on those 3 elements, which is balance sheet, disposals and then use of proceeds. Operator: The next question comes from Valerie Jacob from Bernstein. Valerie Jacob Guezi: I just have some follow-up questions from the question that was just asked. Maybe on the vacancy, how do you see your vacancy rate evolving during the year? Do you think that it will -- in the office market, do you think you will go back up to where it was? Or do you think you will stay here or deteriorate? If you could give us some guidance on how do you see this evolving, that would be helpful. Benat Ortega: Yes. Thank you, Valerie for your question. As I always said, vacancy can fluctuate from a quarter to another around the figures we post in average. So this quarter, it was slightly down on the office. At the same time, you might have seen that it was significantly up on the resi. So I will not read across one quarter figure to determine what should be for the full year. That's a bit the situation. Like you saw office CBD, which was a big question on the market following ImmoStat news. We grew a lot our rents in Paris. We grew occupancy. Reversionary was significantly higher than last year. So I think -- but again, 18% reversion or uplift in average for Q1. I will not draw a line saying that it's annual figure. So I think it was excellent in Paris, a bit tougher in Boulogne, but big picture, we grew more than 1% our like-for-like above inflation. So big picture, I think it was a positive quarter and on long-term vacancy, I think it will improve over time, fluctuating obviously, from quarter to another. Valerie Jacob Guezi: Okay. And maybe also a follow-up on the share buyback. So I mean, I understand that you said if you dispose of some assets, you have all options. But maybe do you have any sort of financial metrics to share with us on, you want to reinvest at sort of 7%. And if you don't, then below this level, you think that share buyback will be more accretive? Maybe just like if you can share some numbers on how you think about it? Benat Ortega: Sure. I think the metric which is important is keeping our LTV where it is. So that's really our DNA. I think we don't want to buy growth with debt these days. I think the market is uncertain. Rates are pretty high this time. So I think keeping our A- rating is clearly a clear line for us in terms of strategy. That being said, then we calculate our cost of capital based on the current share price. We look at potential acquisition and what they can deliver and assess which is the best option, like I said. So based on a stable LTV at EUR 70 or EUR 80 per share, the equilibrium is around 6.57% acquisition. So that's a bit -- basically the metrics with the same LTV. I have in mind that the equivalent to buy EUR 100 million of assets is EUR 70 million share buyback to keep the same LTV. So that makes a bit the metrics flying on both cases. Operator: The next question comes from Benjamin Legrand from Kepler. Benjamin Legrand: Can you hear me? Benat Ortega: Yes. Benjamin Legrand: I just had one more time, a question about Boulogne, more for 2027. If you do expect some big tenant to be leaving at that time or not? Benat Ortega: No, in 2027, no major expiring in Boulogne. Have in mind that, over the last 3 or 4 years, 4 of our 5 assets have been vacated, and we have been capable, in fact, to release almost full Horizons Tower to 70% of Sources and probably we have released or renewed half of the Citylights. So obviously, it's a challenging area, but we see a decent leasing activity on the ground in Boulogne. So that's why I was commenting about the ramp-up after those departures from '22 to '25.` Benjamin Legrand: Okay. And if I may ask a second question. You are mentioning 6.5% to 7% acquisition would be interesting for you instead of share buybacks. I was just wondering if you could add more colors about the investment market today, if you see that kind of potential acquisition coming on to your table at the moment or if the market is really muted or not? If you could add some colors. Benat Ortega: Yes, sure. It's -- the investment market is pretty complex to read, especially after the rate increase, after the Iran war. It plays two roles. Obviously, more complex to sell at tight yields, and at the same time, it gives more room for maneuver to buy assets. So I would say the -- as long as we can continue to dispose at decent prices, obviously, it gives more opportunities to buy on the right locations, the right assets to generate growth in the future. But the investment market is pretty quiet since now more than that. Benjamin Legrand: But are sellers willing to be selling at 6.5% at the moment? Or do they prefer to just keep... Benat Ortega: No. The best assets, well-restructured, trade at significant lower yields. Some deals were even occurring during Q1, below 4% yields. But this is not the type of assets we try to buy. We try to buy complex situations where our integrated platform can generate better growth than other players. So typically where there is development risk or leasing risk or the capacity to generate better rents through our fully serviced office business. So we tend to be an operator instead of just an investor, and that's where there might be a gap between what can generate a passive investor and what we can generate. And that's typically what we did on Signature, on the Rocher-Vienne acquisition. There was clearly a difference in the underwriting assumptions between what we did and what basically we are delivering, and we are delivering over budget, especially in terms of rents and what a passive investor can generate. So that's those fractions where we play our role. Operator: The next question comes from Veronique Meertens from Van Lanschot Kempen. Veronique Meertens: I wanted to focus a bit on the resi bit. Obviously, a very strong performance, plus 7.5%. Could you give some additional color on the exact drivers? Is that mainly coming from those transformations and the service product? Or do you see a strong performance in the resi segment in general? And also, again, some disposals in that market. How are those discussions going? Do you see more potential there? And who are the buyers there at the moment? Benat Ortega: Two questions in one. We commented on last year, on the fact that we were significantly transforming the way to operate our resi platform. Coming from really traditional resi where it was just flat by flat pre-leasing, no furniture, no service and so on, where we have transformed our business model towards different kind of offerings in the same building with services on top, so that each square meter has the best profitability. So each time a flat is vacated, we try to find the best way to maximize shareholder value. Therefore, sometimes it can be co-living. So we split into several rooms, we provide services to students and then we lease up the rent. Sometimes it's just furnishing the flat. Sometimes it's B2B deals with, I don't know, expats or embassies. So each time for one flat, we try to find the best solution. Obviously, it's more management intensive. So we have to change our processes, our teams, our concierge and so on to be capable to address this more premium and valuable clientele. But that's starting to pay off with an improved occupancy and also uplift -- more regular uplifts because those tenants tend to rotate faster and we can capture better growth. More generally speaking, in terms of resi, in terms of leasing, we are not really a fREIT proxy of the market. Our portfolio is 80% in Paris. Everything is next to Paris. So obviously, we have a high-end clientele, international clientele, with affluent people. And therefore, we -- the role we have is try to offer them services that they can't find elsewhere, fitnesses, co-working places, laundries, experience homes that they can't find in that super fragmented living space in Paris. Paris is mainly owned by individuals owning one flat, and we can provide something really different. And that's a different situation against other cities where you find more institutional investors, which are delivering those projects. So we make the difference with the fact that we own large buildings, and we can offer services that they can't find in the, let's say, general market. In terms of disposals, the disposal activity, a bit like in offices is pretty quiet, but we have found different type of investors willing to buy some residential assets last year and when we continue this year. It can be pension funds, it can be insurance companies, it can be state-owned entities which are willing to expand their living platform. So we see decent appetite on the living as a whole. So bed and shed looks attractive these days. And then we need to find the guys which are willing for the most prime location, willing to pay for the decent price. Veronique Meertens: Okay. That's helpful. And maybe one additional question on the resi. Looking at your credit rating, does S&P take into account that you have sort of like a diversified portfolio? In other words, could it have an impact on selling more resi towards your credit rating? Or is that not an issue at all? Benat Ortega: The credit rating is obviously a series of combining objectives between liquidity on the bond market, additional undrawn credit lines that we are providing future liquidity. It's also LTV. It's also ICR, which is excellent for us. It's also the quality of the portfolio we own, both resi, that plays a role, but also the primness of our office portfolio and the liquidity of the assets that shows that we have capacity, in fact, to manage those credit objectives. So it's really the combination of all that. Resi with its stability and growth that you can see obviously plays a role, but it's in a general equilibrium that we try to keep. So everybody has in mind the 40% LTV, but it's more than that. It's also liquidity on the debt side, liquidity on the asset side and asset quality. Veronique Meertens: Okay. So -- but you don't per se, foresee an issue if you were to sell more resi, that S&P could look at you differently? Benat Ortega: Not specifically if we do it well on all the other criteria. Operator: The next question comes from Ana Escalante from Morgan Stanley. Ana Taborga: I have a question regarding your target yields for acquisitions and marginal CapEx. I just wondered whether you are thinking about the headline rents or you are thinking about cash returns? Because as we have seen incentives in Paris are quite high, particularly in the peripheral areas but in Central Paris above 15%. So my question is how you look at these returns, right? And how do they look on a cash perspective right on headline rents? Benat Ortega: When you look at our Signature acquisition, the incentives are pretty low and rents are probably 20% higher than what we expected. So I think we have shown through that acquisition that we are careful in our underwriting, and we can generate decent returns on what we buy. Ana Taborga: But what's your guidance... Benat Ortega: Return on CapEx are higher than double digit. So they are significantly above 10% return on CapEx. Ana Taborga: But in terms of cash returns, both on acquisitions and CapEx, what are your hurdle rates, more or less? Benat Ortega: I will rephrase what I said earlier. I just said that because one of your colleagues asked me the question, at between EUR 70, EUR 80 per share, the equivalent to 6.57% return, cash flow return. So that's a bit what we try to achieve. Operator: The next question comes from Francesca Ferragina from ING. Francesca Ferragina: Still another little question on the investment. There is a pretty sizable portfolio coming to the market in Brussels, the one related from Aedifica Cofinimmo. What's your view on the merger market? And do you have a knowledge of this portfolio? Benat Ortega: You are referring from -- about the office portfolio of Cofinimmo. Francesca Ferragina: Yes. Benat Ortega: We are mainly a capital city -- large capital city operator. So what we like is diversified leasing base, strong and profound leasing market, which is probably not the pure definition of the Brussels market. So very happy to be in Paris, like you saw, that's the way for us to generate growth is, especially the diversity of the tenant base we have and the performance of our leasing market. Operator: There are no more questions at this time. So I hand the conference back to Benat Ortega for any closing comments. Benat Ortega: Thank you all for listening to the call, for your questions and see you during the next quarter. Bye-bye.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bankwell Financial Group, Inc. First Quarter 2026 Earnings 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. Press 1 again. It is now my pleasure to turn the call over to Courtney E. Sacchetti, Executive Vice President and Chief Financial Officer. You may begin. Thank you. Courtney E. Sacchetti: Good morning, everyone. Welcome to Bankwell Financial Group, Inc.'s First Quarter 2026 Earnings Conference Call. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the Events and Presentations tab for supporting materials. Our first quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q, and 10-Ks, for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. I will now turn the call over to Christopher R. Gruseke, our Chief Executive Officer. Christopher R. Gruseke: Thanks, Courtney. Welcome, and thank you to everyone for joining Bankwell Financial Group, Inc.'s quarterly earnings call. This morning, I am joined by Courtney E. Sacchetti, our Chief Financial Officer, and Matthew J. McNeill, our President and Chief Banking Officer. We appreciate your interest in our performance, and I am excited by this opportunity to discuss our results with you. We have delivered a solid start to 2026 with strong earnings, continued balance sheet improvement, and continued progress on our strategic priorities. For the first quarter, we reported GAAP net income of $11.3 million, or $1.41 per share. These results were supported by solid loan production, strong fee income from our SBA platform, lower funding costs, meaningful core deposit growth, and ongoing balance sheet optimization, including reduced reliance on wholesale funding and continued progress on building a more interest rate neutral balance sheet. Loan growth remained positive during the quarter with $190 million of originations, including $34 million of SBA production, resulting in net loan growth of $27 million. On an annualized basis, this level of growth is consistent with our previously communicated guidance of 4% to 5% for the full year, and our pipeline remains strong. Importantly, this growth is supported by strong core deposit inflows. Core deposits increased by $113 million sequentially, with $39 million coming from low-cost deposits. Included in that $39 million is $24 million of growth in analyzed checking balances, for an 8% increase on the quarter. In addition to funding our loan growth, we reduced brokered deposit balances and Federal Home Loan Bank borrowings by a combined $95 million, further improving our funding mix. Since our peak at the end of 2022, we have successfully reduced our brokered deposits by $513 million, a 50% decline. The net interest margin was 328 basis points, reflecting modest pressure from asset repricing, as floating-rate loans reset lower, and an unfavorable day-count impact relative to the prior quarter. These factors were partially offset by continued improvement in deposit costs, which declined 5 basis points sequentially to 310 basis points. Noninterest income remained a meaningful contributor to results, totaling $3.3 million, which includes $2.4 million of SBA gain-on-sale income. Our SBA division continues to be an important part of our diversified revenue strategy and a meaningful source of recurring fee income. Credit quality remains healthy with expectations of further improvement. While nonperforming assets increased modestly to 56 basis points of total assets, we have visibility into the resolution of several credits over the coming quarters. Overall asset quality metrics remain well within our internal expectations, and reserve coverage levels remain appropriate. Finally, we are excited to have opened our first full-service branch in New York during the quarter, located in Bay Ridge, Brooklyn. The branch is home to an experienced private banking team that joined Bankwell Financial Group, Inc. in 2025, and the addition of this location enables the team to deliver Bankwell Financial Group, Inc.'s full suite of commercial and private client banking services on the ground in New York. I will now turn the call back to Courtney E. Sacchetti to walk through the financial results in more detail. Courtney E. Sacchetti: Thanks, Christopher. Starting with the income statement, net interest income totaled $26.9 million for the first quarter and was largely unchanged compared to the prior quarter. Net interest margin declined modestly to 328 basis points, driven primarily by the repricing of floating-rate loans in a lower-rate environment and an unfavorable day-count impact. On a day-count normalized basis, the sequential NIM variance would have been approximately 5 basis points. These headwinds were partially offset by continued improvement in deposit costs. Total deposit costs declined to 310 basis points, down 5 basis points from the fourth quarter, and the bank exited March with a deposit cost exit rate of approximately 298 basis points. During the first quarter, we successfully repriced approximately $300 million of time deposits 44 basis points lower, generating an expected annualized benefit of $1.2 million. In addition, over the next 12 months, approximately $1.1 billion of time deposits are expected to reprice favorably with an average rate reduction of 14 basis points. This repricing is anticipated to deliver an incremental annualized benefit of roughly $1.6 million, or about 5 basis points of net interest margin. With respect to rate-sensitive assets, we have strategically increased the proportion of variable-rate loans from just over 20% at the start of 2025 to approximately 42% at quarter end. Additional detail on asset and liability repricing as well as rate sensitivity is provided on Page 8 of the investor presentation. Profitability remained solid in the quarter with return on average assets of 1.35% and return on average tangible common equity of 15%. As deposit repricing continues to flow through the balance sheet and interest rate sensitivity moderates, we expect incremental margin improvement over the balance of 2026, affirming our full-year net interest income guidance of $111 million to $112 million. Noninterest income totaled $3.3 million for the quarter, reflecting $2.4 million of gains on SBA loan sales and continued growth in service fee income driven by an expanding commercial client base. Based on our first quarter results, we are raising our full-year noninterest income guidance to $12 million to $13 million. Our pre-provision net revenue for the quarter was $13.3 million, or 1.6% of average assets, compared to 1.8% in the prior quarter. Our PPNR was impacted by approximately $1 million in annual noninterest expense typically incurred in the first quarter, elevating total noninterest expense to $16.9 million for the quarter. These annual costs are primarily related to employee compensation and certain services. Despite these seasonal expenses, our underlying noninterest expense run rate remains consistent with our prior guidance of $64 million to $65 million. The efficiency ratio for the quarter was 55.8%, which reflects the seasonality of first quarter expenses. Our provision for credit losses was a release of $1 million for the quarter, driven by the net impact of loan growth and economic factors embedded in our CECL model. The allowance for credit losses ended the quarter at 1.03% of total loans, with coverage of nonperforming loans at approximately 155%. From a capital and liquidity standpoint, the balance sheet remains strong. Total assets ended the quarter at $3.4 billion. Deposits totaled $2.9 billion, and both the bank and holding company remain well capitalized. Tangible common equity was 9.17%, and our consolidated common equity tier 1 ratio was approximately 10.5%. We repurchased 3,317 shares during the quarter at an average price of $45.32 per share. Now I will turn the call back to Christopher for closing remarks. Christopher R. Gruseke: Thanks, Courtney. In 2024, we laid out a plan to improve our funding mix, continue to grow our loan book in a disciplined manner, maintain strong credit quality, and build diversified sources of revenue. We have also committed to continue to invest in our tech-forward platform while managing expenses. We are truly gratified by the results achieved through the planning and hard work done by our team, and we thank them for their dedication. We will continue to execute on our strategic goals and look forward to sharing the results of our continuous growth and evolution with all of our stakeholders in the quarters ahead. We thank our longtime customers for their continued support and welcome the many new customers who have helped us to grow our business. We also appreciate the continued support and interest from our shareholders and the investment community. We will now open the call for questions. Operator: And from KBW, our first question comes from the line of Mark Shutley. Please go ahead. Analyst: Good morning. I appreciate the detail on the CDs and how much of that is coming due. I think you said that is a 5 basis point benefit to the margin. In this current rate environment, now that it is seemingly more flat, are you seeing more competition on the deposit side? I am trying to get a sense for how much the overall interest-bearing deposit costs can be worked down. Thanks. Christopher R. Gruseke: First of all, the numbers we put out on CDs expected to roll are based on market rates as of today. That implies no further cuts; as deposits roll to current market levels, that is what the impact would be. That addresses the first part of your question. Matthew J. McNeill: As far as deposit competition, it is very competitive out there. We are focused on bringing in low-cost deposits to bring down our funding cost, which is probably the most competitive area. However, we are finding success and have been able to substantially grow core deposits in the quarter. Christopher R. Gruseke: It is competitive. Net loan growth was approximately 2% quarter over quarter, but core loan growth was substantially higher. On deposits, core deposits grew by $113 million; roughly 25% to 30% of that was low-cost, including about $24 million of growth in analyzed checking. With the balance that did not result in loan growth, we paid down more expensive borrowings. We are happy with the deposit result despite the competitive environment, and the mix improved. In our deposit mix. Matthew J. McNeill: Yes. Analyst: Thanks, appreciate it. Switching gears, SBA was strong in the quarter, and it looks like originations are tracking higher. I think you previously talked about $100 million of originations for the year. Is there any change to that, and where does SBA fit into the overall fee guide? Thanks. Matthew J. McNeill: We are having success with SBA. We have a really strong team. We could definitely originate more SBA loans, but we are choosing to keep the volume generally where it is. We are not increasing the $100 million we put out as how we were thinking about fee income, although other fees are coming in higher as well. That is the reason for the increase in the fee guidance. Christopher R. Gruseke: If we wanted to do more, we could. We are about two years into this and have been measured in our approach. Analyst: Got it, appreciate it. That is it for me. Thanks for taking my questions. Christopher R. Gruseke: Thank you. Thanks, Mark. Matthew J. McNeill: Operator? Courtney E. Sacchetti: Operator, we are ready for the next question. Operator: Apologies. Our next question is from the line of—go ahead. Courtney E. Sacchetti: Feddie, are you there? Feddie Justin Strickland: Yes, sorry, I did not hear the name either. No worries. I wanted to start by asking about the Brooklyn office. Does that serve as a home base for some of the deposit-gathering teams in the city, and how much lending do you think you will do out of that office? Matthew J. McNeill: I think we will do a modest amount of lending out of the office, Feddie. It was not the primary reason to open the office. It was definitely a deposit play, which has already taken off and been robust. In the 10 months leading up to the branch opening, the team was very active, and we have had good success there. Lending is not a core part of the strategy there; however, we do think that some loans will come out of it. We have been lending in and around NYC since the bank’s inception, so it really should not change a whole lot in terms of the geography where we are lending. Christopher R. Gruseke: We do not have a plan to add branches just to enter markets or to make sure we have more branches. We hired the people first. This is a very experienced private client group that has been together for years and has already had material and significant impact on our organization. If what they needed was a branch to assist in their platform, then we could build a branch. We happen to love Brooklyn—I was born there—but we were not going out of our way to enter that market. We were following our deposit team and their needs. Feddie Justin Strickland: Got it, that is helpful. Switching gears to CRE concentration, given the current trend line, is it possible we could see that dip below 300% by year-end or maybe early next year? Based on what is currently in the pipeline and capital build, do you feel like you are in a range where you are pretty comfortable and not as worried about crossing that 300% threshold? Christopher R. Gruseke: We do not have 300% as a target. We are seeing a more diversified loan mix. It is conceivable, but it is not the plan. Over the last year, we have come down roughly 40 basis points from about 375%. Matthew J. McNeill: We are happy where it is. We can live with it, and I suspect over time we will get down there. Whether it is year-end or not, I do not know. It has been a trend for a while, and we are seeing a better flow of C&I deals. We have not done much office, etc. I think it will naturally get there, but it is not a particular goal. I would not be surprised to see it come down another 10 to 20 basis points over the course of the year. Feddie Justin Strickland: Got it. And then on the credit side, it looked like the modest increase in nonaccruals was CRE-driven. I apologize if I missed it in the opening remarks—can you speak a little more about what drove the increase there and what you might expect on resolution? Matthew J. McNeill: The increase was due to a tenant leaving a building; the sponsor was not able to make the payment. There is equity in the deal. We think we will be able to work with them to dispose of the real estate and be paid there. As you heard in Christopher’s comments, we have visibility into resolution of several of the credits that are on our NPAs, and we expect those to happen in the next couple of quarters, with meaningful resolution and a much lower NPA number. Feddie Justin Strickland: Perfect. Thanks for taking my question. Operator: From Raymond James, your next question comes from the line of Steve Moss. Analyst: It is Chase on for Steve. Hey, guys. On loan pricing, can you tell me where new origination yields are coming in these days? Courtney E. Sacchetti: For the first quarter, our average rate was 7.5%. Analyst: I appreciate that. And just one more for me. I saw you enabled the buyback this quarter. Can you tell us what would bring you more into that market? Christopher R. Gruseke: I am sorry, can you repeat that? I heard buybacks and then it cut out. Analyst: Yes, I saw you enabled the buybacks. Could you tell us what would bring you more into that market? Matthew J. McNeill: We look at the price daily when we are not in blackout. We have a plan in place. I expect the number to grow over the course of the year, but you would have to look at our consolidated CET1 ratio, and we are still trying to grow that. If levels hold, and given the amount of stock that we issued, I would not be surprised to see us, over the course of the year, nibble some back. But our goal is still to get to 11% on the consolidated CET1 ratio at Holdco, not necessarily by year-end. Analyst: Alright, I appreciate all the color. All my questions have been answered. Thank you. Matthew J. McNeill: Okay. Operator: With no further questions, this does conclude today’s conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. first quarter 2026 Earnings Conference Call. At this time, all 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 a message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference to Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc. Please proceed. Eric Newell: Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-Ks for the fiscal year 2025 and current reports on Form 8-K, including the earnings presentation slides, identify important factors that could cause the company's actual results to differ materially from any forward-looking statements made this morning, which speak only as of today. Eagle Bancorp, Inc. does not undertake to update any forward-looking statements as a result of new information, future events, or developments unless required by law. This morning's commentary will also include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website, or on the SEC's website. With me today is our President and CEO, Susan Riel, and our Chief Lending Officer for Commercial Real Estate, Ryan Riel. I will now turn it over to Susan. Thank you. Susan Riel: Good morning, and thank you for joining us today. We are pleased to begin 2026 on track with our near-term strategic priorities: generating capital through earnings, diversifying the balance sheet across both assets and funding, and executing on the repositioning work we have been discussing with you over the past several quarters. The first quarter reflected meaningful progress on several fronts. We returned to profitability, expanded net interest margin, and delivered strong C&I growth, a direct result of the deliberate investments we have made across the franchise and the disciplined execution of our commercial team. At the same time, we are realistic about where we are in this repositioning. The pace at which legacy exposures resolve and scheduled payoffs occur is faster than the pace at which we can prudently generate new earning assets. That asymmetry creates near-term pressure on net interest income and a smaller earning asset base as we work toward a higher-quality balance sheet. We are not shrinking the balance sheet because deposits are leaving us. In fact, core deposits have grown $240 million year over year. We are making strategic choices on both sides of the balance sheet that we believe position us for stronger, more sustainable, and more durable earnings. We continued to reduce reliance on higher-cost brokered deposits, refining the quality of our funding base. In parallel, our active resolution of problem credits is producing elevated charge-offs, a deliberate trade-off we are willing to make because we would rather absorb the near-term earnings impact and emerge with a cleaner balance sheet than carry these exposures for an extended time. The deliberate actions we took throughout 2025 are producing measurable improvement, a trajectory Eric will walk through in detail. We have a plan designed to deliver materially stronger pre-provision net revenue as the funding mix improves, as disciplined loan growth returns to CRE, and as the asset quality work I mentioned continues to reduce the impact from nonaccrual and resolution activity, and we are executing against it. With that, I will turn the call over to Eric to walk through the quarter in more detail. Eric Newell: Thank you, Susan. Before I walk through the specifics, I want to step back and acknowledge the tangible progress we have made on asset quality this quarter. This quarter, we reported net income of $14.7 million, or $0.48 per diluted share, a meaningful swing from the $2.4 million loss we reported last quarter, and that improvement reflects the hard work underway across the portfolio. Reducing criticized and classified loans, resolving nonperforming exposures, and strengthening the overall health of the portfolio remain the top operational priorities for this management team. Based upon investor feedback, and consistent with our commitment to transparency, we continued to expand our disclosures to give investors a better picture of portfolio dynamics—both the progress and the challenges. That transparency is something we take seriously, and it shapes how we will walk through this quarter's activity today. With that as context, let me walk you through what we saw in the first quarter. I will start with our concentration metrics. The first quarter saw continued reductions in our CRE and ADC concentrations, as expected payoffs, resolutions, and the completion of construction projects drove meaningful progress to reduce overall concentration risk to the bank. Our CRE concentration ratio, which measures CRE loans to total risk-based capital and reserves, declined to 295% at March 31, moving below the 300% threshold. Our ADC concentration ratio came in at 76%. Turning to criticized and classified assets, when combining substandard, special mention, and all held-for-sale loans, balances declined by $79.9 million in the quarter to $794.1 million at March 31, compared to $874 million at year-end. As a percentage of Tier 1 capital, that represents 67.3% at quarter-end, down from 74.6% at year-end and down meaningfully from the peak of 90% we saw at September 30 of last year. The directional trend is clear, and we are committed to continuing it. Slide 16 of the investor deck provides additional detail on the composition of that portfolio. On slide 17, we have added a portfolio walk to help illustrate the various inflows and outflows in the criticized and classified book during the quarter. I want to be direct about the inflow activity. $159.9 million of downgrades occurred in the first quarter, which is elevated relative to the $89.3 million we saw in 2025. However, this materially improved from the $445 million inflow we experienced in 2025. Let me briefly touch upon the primary drivers of the inflow. Three relationships accounted for the majority of the downgrade activity. The first is a multifamily project in Maryland experiencing pressured net operating income due to tenant credit issues and releasing costs. The property has been reappraised and is not considered collateral dependent. The second is a hotel relationship downgraded upon receipt of 2025 financials reflecting lower occupancy. We are updating the appraisal and working with the borrower on a remediation path. The third is a single secured C&I relationship moved to special mention. We currently do not expect any loss. Taken together, these are discrete situations, and we believe they are not indicative of broader portfolio weakness. What they do reflect is our portfolio management process working as intended. Loans migrating into criticized and classified are predominantly coming from our lowest pass risk rating category—relationships we have actively been monitoring through our criticized asset committee with upgrade and downgrade triggers and remediation strategies updated each quarter. Turning to the held-for-sale portfolio, we continue to make meaningful progress in the quarter. The portfolio ended at $55.7 million, down from $90.7 million at year-end. Slide 18 of the investor deck walks through the inflows and outflows during the quarter. We transferred three relationships from held for investment during the quarter to facilitate the sale of a fourth held-for-sale relationship, a deliberate action consistent with our strategy of resolving exposures in a manner that minimizes loss. Importantly, of the $55.7 million remaining in held for sale at quarter-end, $55.2 million is already under contract to be sold. While we made progress on total criticized and classified loans during the quarter, nonperforming loans increased to $128.8 million at March 31, up $21.9 million from the prior quarter, representing 1.86% of total loans. Slide 25 of our investor deck walks through the linked-quarter inflows and outflows. Loans on nonaccrual undergo specific reserve analysis, and those determined to be collateral dependent carry specific reserves in the ACL. The provision for loan losses in the quarter reflects the incremental reserves required for those exposures. Provision for credit losses totaled $13.4 million in the first quarter, a decline of $2.1 million from the prior quarter. Our allowance for credit losses ended the quarter at $147.2 million, or 2.12% of total loans. Within that total, we carry $60 million of reserves specifically against our income-producing office portfolio. Net charge-offs totaled $26 million in the quarter, an increase of $13.7 million. This was primarily driven by $11.6 million associated with loans moved to held for sale as part of our targeted resolution efforts. These actions reflect disciplined, relationship-by-relationship strategies to resolve legacy exposures where outcomes are assessed individually to optimize value. In many cases, we believe proactively resolving these credits positions us for stronger long-term results compared to extended workout scenarios. Early-stage delinquency is often the leading indicator of future credit migration, and the $31.9 million decline in 30- to 89-day past due balances is a constructive signal about the forward pipeline. We are encouraged by the trajectory. At the same time, the increase in nonperforming loans is a reminder that this work is not finished. We are not treating it as such. Resolving these exposures, maintaining our reserve discipline, and continuing to improve the overall health of the portfolio remain our highest priorities. Turning to earnings. The improvement in profitability this quarter is in many ways a direct function of the asset quality work I just walked through. The discipline around resolving exposures, managing expenses tied to loan dispositions, and repositioning our funding mix is showing up on the earnings line. With that as context, let me walk through the drivers. Net interest income declined $4.6 million to $63.7 million, primarily reflecting accelerated CRE loan payoffs and lower average cash balances, partially offset by reduced interest expense from the continued reduction of higher-cost brokered deposits. Two fewer days in the quarter also contributed. NIM expanded 9 basis points to 2.47%, driven by an improved funding mix as wholesale funding usage declined. We estimate approximately 3 basis points of NIM pressure from loans moving to nonaccrual and the associated interest reversals. Pre-provision net revenue was $27.7 million, an improvement of $7 million from the prior quarter. The improvement was driven by lower noninterest expense, which declined $21.1 million to $48.7 million, reflecting the absence of two notable items from the fourth quarter: $14.7 million of expenses related to loan dispositions and a $10 million legal provision tied to the probable and estimable resolution of a previously disclosed government investigation. Noninterest income increased modestly to $12.7 million, supported by $3.6 million of gains on loan sales compared to a $1.1 million loss in the prior quarter. Our capital position remains strong and industry-leading. Tangible common equity to tangible assets was 11.51%. Tier 1 leverage was 10.63%, and CET1 was 13.8%. Tangible book value per share increased $0.30 to $37.56 as earnings contributed to capital. On funding, period-end deposits declined $542 million from December 31, of which $413 million reflected the intentional reduction of brokered deposits. Year over year, we reduced brokered deposits by $921 million while growing core deposits by $240 million, reflecting coordinated execution across all our deposit teams. Available liquidity stands at $4.3 billion, and we maintain close to two times coverage of uninsured deposits. Turning briefly to the outlook. Our 2026 forecast is substantially unchanged from what we shared last quarter, and slide 11 of our investor deck provides the detail. We continue to expect full-year NIM in the 2.6% to 2.8% range, noninterest income growth of 15% to 25%, and noninterest expense flat to down 4% when adjusting for the notable items I mentioned. Average deposits, loans, and earning assets are still expected to decline year over year, reflecting intentional balance sheet repositioning rather than operating pressure. Altogether, these trends support our confidence in expanding pre-provision net revenue in 2026 despite a smaller average balance sheet. I will turn it over to Susan for final comments ahead of Q&A. Susan Riel: Thank you, Eric. Before we move to questions, I want to leave you with a few final thoughts. The first quarter demonstrated that our strategy is working. Asset quality is improving, our funding mix is strengthening, and the earnings profile is beginning to reflect the repositioning work of the past year and the true value of our franchise. We still have more to do, and we are not losing sight of that. But the direction is clear, and the discipline across this organization is real. What gives me the greatest confidence in the path ahead is the strength and depth of the team executing against it. Our priorities are well established: continuing to reduce criticized and classified balances, transforming our funding mix toward core deposit relationships, pursuing disciplined loan growth, and expanding pre-provision net revenue over the course of 2026. These priorities and the capabilities we have built across credit, finance, lines of business, and our risk and control functions are the foundation for the next chapter of Eagle Bancorp, Inc.'s story. This franchise has exceptional talent, a distinctive market position, and the institutional strength to continue delivering against these objectives through the leadership transition ahead and well beyond it. Before we conclude, I want to thank our employees for their continued dedication and professionalism. Their commitment has been instrumental in navigating a challenging period and positioning the company for the future. Thank you again for your time and for your continued interest in Eagle Bancorp, Inc. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. Our first question comes from the line of Justin Crowley with Piper Sandler. Please proceed. Justin Crowley: Good morning, everyone. I just wanted to start off on the level of criticized here. It is good to see that continue to fall with some help from the loan sales. Could you speak a little more to the new inflows into criticized? Is that a pace that you would expect slows from here, or how are you thinking about the trajectory as you move through the year? Ryan Riel: Hey, Justin. Forecasting what that is is tough to do. Our portfolio management practices touch on these loans each and every quarter. We should not see many surprises in that process because we touch it so frequently, but it is expected to continue to see some migration in there. Eric Newell: Ultimately, just to build off of that, Justin, our goal and commitment from my prepared commentary is that criticized and classified will continue to come down on an absolute level as well as relative to loans and Tier 1 capital. Based on what we see today and what we believe, we expect to make meaningful progress by year-end. Ryan Riel: And, Justin, to build on that, it is important to note that the regulatory definition of criticized and classified loans does not require loss content. The potential weakness or well-defined weakness that would define those ratings does not necessarily have loss content in them. That is part of the story we have been telling for several quarters. You have seen the composition of that list fall away from office. Justin Crowley: Okay. Got it. In terms of further loan sales, with what is remaining in held for sale and anything that could get added from here, are we at a point where future disposals are largely coming outside of the office portfolio? How would you set expectations there in terms of what you are looking to ring-fence? Ryan Riel: We are looking at each and every case on a one-off basis. We are evaluating it, management comes to a decision as to what the best path forward is, and we use the tools at our discretion. The anticipation is that tactic will continue to be used as we determine it is the best path to reach the best possible outcome and maximize shareholder value. Justin Crowley: Okay. That is fair. One last one on the office reserve, which you took down in the quarter. Can you talk through a little more on some of the factors that get you comfortable in that decision, in part considering the increase in nonaccruals, with a lot of that being office driven? Eric Newell: The biggest driver of the decline in ACL quarter over quarter related to office actually comes from the approximately $37 million reduction of substandard loans that are a big driver of that pool. That is the main driver of that decline. We assess the overall methodology that we apply qualitatively as well as quantitatively to the entire process, but particularly with office. We believe that the $60 million that is associated with the total office portfolio in the ACL is appropriate at March 31. Justin Crowley: Great. I will leave it there. Thanks for taking the question. Operator: Our next question comes from David Chiaverini with Jefferies. Please proceed. David Chiaverini: Hi, thanks for taking the questions. I wanted to follow up on the credit quality discussion. It is good to see that criticized and classified are down, and it sounds like you are expecting a continued decline through this year. Does this commentary also apply to the nonaccrual loans that we saw increase in the quarter? Eric Newell: I would say yes, generally. What you are seeing in nonaccrual loans is really the result of us working through some of the loans that have been identified as special mention and substandard. To me, the way I look at it, the barometer of what could come is really looking at the total portfolio of criticized and classified. As that portfolio continues to decline, which we expect will occur throughout the year, the incidence or the likelihood of some of those loans flowing into nonaccrual or charge-off will also fall. I think you are going to see some improvement in nonperforming as well, as that entire portfolio gets worked through. David Chiaverini: Great. Thanks for that. On the held-for-sale portfolio and the sales that you have under contract, it looks like on slide 18 there is a valuation of about $3 million. Are you selling loans in line with what you originally thought? And, at what percent of par on average are you selling loans? Eric Newell: I will answer the first part of that, and maybe Ryan can touch on the second part. When you look at the totality of what we put into held for sale through this cycle, which is really over the last three to four quarters, we have pretty much hit the mark. Yes, we had some losses that we recognized in the fourth quarter, but we had gains in the first quarter. When you net all that together, we feel comfortable with the process we have been undergoing to transfer those loans into held for sale. I would remind everyone that when it comes to office, we are generally using broker opinions of value because that is more forward-looking and reflective of the conversations we have been having with market participants with those notes. Ryan, if you want to touch on the second one—on the question of relative to par, where is the landing spot? Ryan Riel: It is a hard one to answer, and it has been a significant drop from par on the office side. If you go back and look through the last several quarters, you will see those numbers, and the second and third quarters of 2025 were where the majority of those challenges showed through the financial statements. We have not compiled the data of where we are relative to the original unpaid principal balance, but it is a substantial decrease because the office market has had a substantial valuation decrease. David Chiaverini: Just building off of that a little bit, when you look at the office portfolio and the cycle to date, what has the loss content been? Eric Newell: For the office portfolio, we have been probably between 45% and 50% when you think about loss content as a function of loss given default and probability of default. David Chiaverini: Got it. And then, as a percentage of carrying value with the reserves netting against that, it is significantly higher, is my assumption. Would you say that is fair? Ryan Riel: That is what Eric's comments address. The reduction to the carrying value netted us, for that portfolio, right about at a new par, if you will. David Chiaverini: Correct. Very helpful. Thank you. Operator: Thank you. Our next question comes from the line of Catherine Mealor with KBW. Please proceed. Catherine Mealor: Thanks. I had a question about the size of the balance sheet. It looks like in your outlook slide, deposits, loans, and average earning assets are coming in below your original range, in part as you clean up and push loans and high-cost deposits off the portfolio. But you have not changed the guidance. Do you feel like the full-year range will fall as we move through the year, or is there any reason to think that you will catch back up to where you originally thought the balance sheet would be? Eric Newell: There are a couple of things going on. Averages are informing NII. From a period-end perspective, our expectation is that CRE will continue to see some decline in the quarter, but when you compare year-end 2025 to year-end 2026 for the CRE portfolio, we expect it to be flat. That informs the forecast in terms of average balances for loans because you are seeing a material reduction in the first half for CRE, and we expect that to come back up in the back half of 2026. In terms of C&I, we saw approximately 5% linked-quarter growth on the loan side, so on an annualized basis that is about 20%. I would expect that to be a little bit lower when you compare year-end to year-end for C&I. That is one of the reasons why, when you look at the forecast, we are actually on the higher end of our loan growth target because of the contribution that C&I delivered relative to our initial expectations in the first quarter. One more thing on the forecast: we did not change the NIM range because the forward curve at March 31 has largely priced out the two rate reductions that were expected at year-end. Given our balance sheet and interest rate risk stance at the moment, that is beneficial to us. Also, we believe there will be growth in average cash in the second and third quarter. We have a third-party payment processor that does not really impact our quarter-ends but does impact our averages because the balances are here for seven to ten days, and the first quarter is a lower level of seasonal activity for them. Catherine Mealor: That makes sense. Thank you. Back to the credit piece—can we talk about the three new inflows into classified that you saw this quarter and mentioned in your prepared remarks? Why were those credits not originally identified when you did your full portfolio evaluation a couple quarters ago? Have you seen deterioration in those three since then, and could we be seeing more for the rest of the year? What are you looking for in your portfolio to ensure that you have captured everything that could be at risk within criticized/classified—any big appraisals coming up or maturities? Ryan Riel: Starting with maturities, if you look at our criticized/classified list, there are a number of loans on there that mature this year, some within close proximity to where we are today. We have been engaged with those customers for many months and figuring out the next step for that particular asset. The risk rating takes into account historical performance but is also forward-looking. On the inflow into criticized and classified, the new entrants are based on new information, not historic information. For the multifamily asset that Eric spoke to, a new appraisal came in and informed that performance continues to suffer from tenant credit issues, which, frankly, on a month-over-month basis continues to get better, and we are continuously engaged with that borrower. For the hospitality asset, recent trends, coupled with secondary and tertiary repayment sources and a decline in hospitality overall in our market, created a well-defined weakness by the regulatory definition. Again, loss content does not need to be present in criticized and classified assets. The point is that idiosyncratic factors in each individual relationship drove the risk rating downgrades, not something more systemic. Operator: Thank you. Our next question comes from the line of Analyst with Raymond James. Please proceed. Analyst: Good morning. Maybe following up on your comments there, Ryan, regarding the couple of new inflows—you have the hotel/motel in Arlington and the Prince George's County apartment building. Those matured in the last couple of weeks. Did you give them extensions, and what is the expectation there in terms of where you are going with those credits? Ryan Riel: We had hoped, before the maturity date, to have a longer-term plan in place. We did not arrive at that, so we put short-term extensions in place in both situations, which have already been booked. The data is as of 03/31, so the current maturity is actually out into the future a bit, and we continue to work with each of those clients for a longer-term solution. Analyst: Got it. In terms of the overall Washington, D.C. market—there are different submarkets with issues—but stepping back, what is your overall sense of activity, especially for multifamily, in terms of renting out properties and where things are going? Ryan Riel: The multifamily market as a whole in the region—across Maryland, D.C., and Virginia—from a rent growth and vacancy perspective is lessening. We are more equating with national averages where, historically, we had exceeded them as a region. That is not necessarily true in each individual submarket, but as a whole it has lessened. Absorption has slowed, and new supply has also slowed even more dramatically, which is a rebalancing mechanism for supply and demand. Additionally, valuations have maintained at higher-than-national averages. Cap rates are in the high 5s where national averages are in the low 6s. Overall, I would describe it as cautious optimism in the multifamily market—not without challenges and the need for owners and lenders to work through them—but overall, it is still a good and stable multifamily market in our nation's capital. Analyst: And a similar question on the office side—my sense is there has been better lease-up activity in some markets. What are you seeing for office activity now? Are the green shoots still there, or have they moderated from a few months ago? Ryan Riel: In the office market, trophy assets in our region continue to perform really well with record-setting rents announced regularly. Trophy and A are really working. On the B and C side, it is still a struggle. Tenant demand is not there. There is a lot of supply being pulled off the market through conversions and other tactics by owners, so it continues to be a challenge in the central business districts. More suburban, community-amenity properties—medical, neighborhood uses—have more demand and greater occupancy, and therefore better cash flow. There is more health in that space. In those more suburban spaces, often there are secondary and tertiary sources of repayment tied to those loans, so it is not just the office valuation as a payment source. Analyst: Going back to the criticized/classified funnel—you mentioned a fair amount was related to updated data, like annual financials. Was there a greater update this quarter than other quarters, or do you expect a similar pace for updated financials and a similar funnel in the second quarter? Ryan Riel: It is a point-in-time issue. The loans we are talking about are not high in quantity; it is the lumpiness of our portfolio that drives the dollars. If you track our top 25 loan list as CRE balances decline, a number of loans have reached full payoff, which has been the most significant portion of our decline in CRE balances—either refinances or sale of the underlying assets. We do not anticipate this level of inflow every quarter, but we will continue to monitor our portfolio and enhance our portfolio management practices. Eric Newell: Building off of that, it is important to reiterate the commitment that the team has to reduce the overall criticized and classified on an absolute basis by year-end. We are going to continue to show progress in future quarters as well. Analyst: Alright. I appreciate all the color here. Thank you very much. Operator: Our last question comes from the line of Christopher Marinac with Brean Capital LLC. Proceed. Christopher Marinac: Good morning. I wanted to ask about the granularity point that Ryan was just making. Is that going to work in your favor in terms of inflows possibly being less because of the smaller-sized loans as you continue to work through the book? And can that drive the reserve behavior from here? I know there is a scenario where reserves could go back up, but you have built this reserve over many quarters, so the decline was no surprise. Should provision continue to come in and be less than charge-offs for a while? Eric Newell: If you look at the first-quarter provision expense as well as charge-offs, that is a decent run-rate for our expectation for the remainder of the year for each quarter. When you add that together, it does show a reduction in the reserve coverage to loans by the end of the year. Are we going to get to a peer level on that metric by year-end? No. But I do expect that the coverage of ACL to loans will be lower at year-end 2026 than where we started the year. Christopher Marinac: Thank you for that. Going back to the C&I evolution—will we see C&I deposits grow year over year as we get further along? I know there was some seasonality in Q1 as the slides implied. How should we think about that a few quarters out? Ryan Riel: If you look back a year from now to March, C&I deposits have grown by a couple hundred million dollars. I do not think the first quarter is indicative of any trend. The C&I pipeline continues to be robust. We continue to mandate primary relationships with the transactions that we bring in. What you will see differently on the production and deposit side is the CRE pipeline, which is now building, will begin to be executed. To Eric's earlier point, we will stabilize balances through the first half and look to grow from our June 30 numbers toward the end of the year on both sides of the balance sheet. Eric Newell: On slide 29 of our deck, we have added disclosure about the C&I portfolio—both loans and deposits. You can see that we had 28% growth of deposits in the C&I line of business year over year. If you look at it from a dollars perspective, C&I more than funded itself dollar for dollar in 2025. I asked Evelyn if she could do it again in 2026, and we will see how she can deliver on that. Joking aside, our expectation is that you cannot fund that line of business dollar for dollar year in and year out, which informs some of the percentage growth that you see. It is evidence of execution of the strategic plan—remixing the loan side to have more balance between C&I and CRE, which lends itself to operating account growth, relationship growth, reduction of brokered deposits, better cost of funds, higher NIM, higher pre-provision net revenue, and better ROA. Christopher Marinac: Thank you, Eric. Last question on the FDIC expense. Is that going to be lumpy in terms of how it comes off in future quarters? Was this quarter any indication of where it could go in the near term? Eric Newell: There are two drivers to our FDIC insurance expense: our overall asset quality metrics and structural liquidity improvement. We are getting a lot of benefit—and have been over the last year—from the improvement of structural liquidity. Looking back over the last two years, our net noncore funding dependency ratio in 2023 was around 30%, and now we are well below 12% to 15%. That has meaningfully contributed to a reduction in the FDIC insurance expense. As we continue to reduce the criticized and classified, and as the FDIC insurance calculation (which looks at modifications under assets in the call report) lessens on our balance sheet going forward, that will have a very positive contribution to FDIC premium expense. I estimate, on a normalized AQ basis, we will probably be about half of where we are at right now on an annual run-rate basis. In terms of timing, there is always a lag because the premium is based off filings that are a quarter behind, but I would expect improvement in the back half of 2026 and definitely into 2027. Christopher Marinac: And half is still using the March case that we just saw? Eric Newell: I would take our full-year 2025 number and use that as the basis. Christopher Marinac: Great. Thanks for clarifying that, and thank you all for the information this morning. Operator: Thank you. Ladies and gentlemen, this will conclude the Q&A session. I will pass it back to the President and CEO, Susan Riel, for closing remarks. Susan Riel: I want to thank all of you for your participation and your questions today, and we look forward to talking to you again next quarter. Have a great day. Operator: Thank you. This concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by, and welcome to the First Merchants Corporation First Quarter 2026 Earnings Conference Call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involve risks and uncertainties. Further information is contained within the press release, which we encourage you to review. 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 financial and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I will now turn the conference over to Mark Hardwick. Mark, you may begin. Mark Hardwick: Thanks for the introduction and for covering the forward-looking statement on Page two. We released our earnings yesterday after markets closed and today's presentation materials are available via the link on Page three of the earnings release. Turning to Slide three, you will see today's presenters and members of our executive management team. Joining me on the call are Michael Stewart, our president; John Martin, our chief credit officer; and Michele Kawiecki, our chief financial officer. Slide four highlights our footprint and financial scale. We now operate 127 banking centers reflecting the addition of Southern Indiana following the First Savings acquisition. Total assets stand at $21.1 billion with $15.3 billion in loans and $16.5 billion in deposits. Adjusted performance metrics remain strong, including an adjusted ROA of 1.25% and an adjusted return on tangible common equity exceeding 14%, reflecting the underlying strength of our earnings engine. Turning to Slide five, first quarter reported net income was $27.7 million, or $0.45 per diluted share. Reported results included two notable non-core items. First, the legal close of the First Savings acquisition on February 1 resulted in $17 million of one-time acquisition-related expenses. Second, during the quarter, we strategically repositioned $357 million of mortgage loans from held for investment to held for sale and we expect to complete the sale of these loans by the end of the second quarter. These loans carry a weighted average coupon of 3.46%. The liquidity provided by their sale will be used to immediately pay down higher-cost deposits and, over time, will be deployed into commercial loans at a 6%+ yield. This repositioning resulted in a $29.8 million mark-to-market charge in the quarter, with a tangible book value earn-back of approximately four years. Excluding these items, adjusted earnings per share totaled $1.03, up from $0.94 a year ago, representing 9.6% growth, driven primarily by net interest margin expansion and solid fee income growth. Our tangible common equity ratio remains strong at 9% even after completing the acquisition and continuing disciplined share repurchases, including $24.9 million in the first quarter. Now Michael Stewart will discuss our line of business momentum. Michael Stewart: Thank you, Mark, and good morning to all. Our business strategy is summarized on Slide six. Building our Midwestern strength by growing organically remains our primary objective as a company. Our four primary business units work together in delivering financial solutions for businesses and consumers focused primarily on the maps you see on Slide seven. As Mark stated earlier, the first quarter was busy with the closing of First Savings Bank and the preparation for the May integration date. The legal close increased our overall loan portfolio size, with organic growth relatively flat during the first quarter. After the strong fourth quarter loan growth, declines in our sponsor and investment real estate portfolio outpaced our C&I growth within our region banking markets. The portfolio declines were normal-course payoffs that simply stacked in the quarter: sponsors selling their portfolio companies that we had financed, or real estate projects that achieved secondary market takeouts. I expect growth in both these portfolios to resume in the second quarter. Our regional banking teams, inclusive of the new team in Southern Indiana, continue to deliver solid loan growth. It is very pleasing to see our Midwest economy continuing to expand, our clients' businesses continuing to grow, and our bankers continuing to win new relationships. New loan production during the first quarter for our real estate and our asset-based teams was at record levels and demonstrates the value of our diversified loan origination teams. While this quarter's organic growth was flat, I remain confident in our expected mid-single-digit loan growth through the course of 2026. Let us turn to Slide eight, deposits. During the first quarter, our core relationship-focused deposit franchise continued to show growth through the commercial, consumer, and our Southern Indiana market. The bullet points below the table detail that the total deposit decline came from public funds, consumer CDs, and repayment of First Savings brokered deposits. Each of these deposit categories is a higher-cost source of funds as compared to the primary and operating accounts, which generated increases during the first quarter. Michele will be reviewing net interest margin improvement during the quarter, which was a direct result of disciplined deposit and loan pricing. Our continued deployment of new and enhanced products during the quarter on our digital platforms, wrapped with smart and effective marketing, continued to deliver quality growth within our markets. Our people are a strength in meeting the financial needs within our communities. During the quarter, we added new teammates within our sponsor, investment real estate, community banking, and private wealth teams to build on our brand and momentum. Before turning the call over to Michele, one last comment regarding First Savings Bank. Our integration efforts are on track. The engagement of their team continues to be strong. On-site training and preparation for the May integration are advancing as scheduled. Our model of community banking in Southern Indiana has its strength. Turnover of frontline personnel has been minimal, and, as the prior page has demonstrated via the growth in loans and core deposits, their clients continue to be patient during the transition. The specialty verticals have continued to show consistent production in new business during the quarter. This production will continue to contribute to the fee income of First Merchants Corporation, as a bulk of the originations are sold. I do want to highlight the SBA business model as a direct enhancement to the rest of First Merchants Corporation's franchise. Having the ability to offer SBA product solutions to our clients is a natural extension of being a community- and commercially-focused organization. The new SBA team will be the fulfillment team for all of our existing consumer, small business, and community bank teams. There are early successes that I expect to build post-integration. I am going to turn the call over now to Michele to review in more detail the composition of our balance sheet and the drivers on the income statement. Mark Hardwick: Michele? Michele Kawiecki: Thanks, Mike, and good morning, everyone. Slide nine covers our first quarter performance, including two months of operating results from First Savings following the February 1 closing of the acquisition. There was meaningful growth in total revenues in Q1. Net interest income grew $12.2 million and noninterest income grew $2.5 million linked quarter. This resulted in a $6.3 million increase in overall pre-tax pre-provision earnings to $78.7 million. Tangible book value per share declined 2.8% linked quarter but increased 7.3% over the same period in the prior year. The linked-quarter decrease was due to the impact of the acquisition and share buybacks. However, dilution from the First Savings acquisition at close was less than what we had estimated at announcement. Actual tangible book value dilution was only 2.4% versus 4.8% that we shared at announcement, and the tangible book value earn-back is now estimated to be 2.4 years. The difference was primarily driven by a lower interest rate mark, which totaled $53.1 million at closing. Slide 10 shows details of our investment portfolio. The bond portfolio declined from $3.4 billion to $3.3 billion due to changes in valuation and principal payments. First Savings had a $252 million bond portfolio that we sold at closing, creating liquidity for future loan growth. Expected cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2026 total $276.7 million, with a roll-off yield of approximately 3.24%. We plan to continue to use future cash flows generated from the bond portfolio to fund higher-yielding loan growth. Slide 11 covers our loan portfolio. The loan portfolio yield declined by 23 basis points from the prior quarter to 6.09%, which was impacted by the lower day count in the first quarter and repricing of assets due to the Fed rate cuts in late 2025. During the quarter, new and renewed loans were originated at an average yield of 6.18%. The allowance for credit losses is shown on Slide 12. This quarter, we had net charge-offs of $10.3 million and recorded a $4.9 million provision. The transfer of $357 million of loans to held for sale reduced the loan balances requiring reserve coverage and contributed to a lower provision than the prior quarter. At closing, we also recorded a $22.3 million increase to the allowance related to the credit discount on the First Savings loan portfolio. As a result, the allowance for credit losses totaled $212.5 million at the end of the quarter, representing a coverage ratio of 1.39%. Slide 13 shows details of our deposit portfolio. The rate paid on deposits declined meaningfully by 23 basis points to 2.09% this quarter. Our team strategically reduced deposit rates following the Fed's rate cuts late last year, resulting in a $4.6 million reduction in deposit interest expense in the first quarter even as deposits grew by $1.2 billion with the addition of First Savings. As noted on our slide, our noninterest-bearing deposits increased to 23% this quarter, up from 16% last quarter. This was driven by the redesign of our consumer checking account products. This change more accurately reflects the strength and quality of our deposit franchise. On Slide 14, net interest income on a fully tax-equivalent basis of $157.7 million increased $12.4 million linked quarter and was up $21.3 million from the same period in the prior year. Net interest income was positively impacted by a $1.2 million recovery from the successful resolution of a nonaccrual loan. As a reminder, we had a $3.3 million recovery last quarter. Our quarterly net interest margin of 3.35% increased 6 basis points from the prior quarter despite the lower day count in the quarter, which reduced margin by 5 basis points. Our strong core margin reflected our continued pricing discipline. Next, Slide 15 shows the details of noninterest income, which totaled $5.8 million on a reported basis and $35.6 million on a normalized basis. Customer-related fees were strong with quarter-over-quarter growth in wealth management fees and gains on sales of loans. Moving to Slide 16, noninterest expense for the quarter totaled $125.1 million and included $17 million in acquisition-related costs. The acquisition costs were primarily incurred in the salaries and benefits and the professional and other outside services categories. First quarter expenses also included $1.1 million of annual benefit plan expense as well as a one-time charge of $900 thousand for the write-down of a building. The cost synergies we expect to gain from the First Savings acquisition are on track, and legacy First Merchants Corporation expenses are in line with the guidance I provided last quarter. Slide 17 shows our capital ratios. The tangible common equity ratio declined to 9% due to the acquisition and share repurchases. Since the beginning of the year, we have repurchased more than 700 thousand shares, $27.6 million year-to-date. We remain well capitalized with the common equity tier 1 ratio at 11.22% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality. John Martin: Thanks, Michele, and good morning. My remarks begin on Slide 18. This quarter, we streamlined the credit slides and moved the detailed loan portfolio trend page to the appendix for reference. In today's remarks, I will focus on portfolio insights, asset quality, and the asset quality roll-forward, highlighting both the diversity and overall credit quality of the portfolio. On Slide 18, total loans ended the quarter at approximately $15.3 billion, with overall credit performance remaining solid. C&I line utilization increased modestly to 51%, which we view as healthy borrower activity rather than stress. Our shared national credit portfolio totals about $1 billion across 90 well-diversified borrowers with no outsized single-name exposure. In sponsor finance, outstandings are approximately $832 million supported by strong credit metrics, conservative leverage, and healthy coverage ratios. We remain disciplined on structure and intentionally underwrite with room for downside. Within CRE, retail is our largest exposure at $859 million and is largely credit-tenant and triple-net leased, performing as expected. Construction lending totals about $900 million across commercial and residential projects, with continued emphasis on borrower equity and prudent underwriting. From a concentration standpoint, we remain well within regulatory levels with CRE construction at 40% of capital and total CRE around 181%, providing the flexibility to selectively grow while maintaining a strong risk profile. Overall, we are pleased with portfolio performance and remain focused on balanced growth and disciplined credit risk management. On Slide 19, let me briefly touch on asset quality. Our overall asset quality remains stable, and our metrics are performing within expectations. As of quarter end, nonaccruals remained manageable with the largest relationships tied to income-producing real estate, including a $9.9 million multifamily construction credit and two office-related exposures totaling roughly $12 million. These credits are well known, closely monitored, and reflect areas of CRE we have been proactively managing. Importantly, we are not seeing broad-based deterioration across the portfolio. Credit issues remain idiosyncratic rather than systemic, with no meaningful migration beyond a small number of relationships. Charge-off activity and criticized asset trends remain in line with expectations, and reserve coverage continues to appropriately reflect the portfolio's risk profile. Overall, we are comfortable with asset quality trends and remain focused on early identification, active management, and disciplined resolution where necessary. On Slide 20, turning to nonperforming asset migration, during the quarter we added a $12 million nonaccrual office, which was largely offset by a payoff of a $12.9 million multifamily construction credit. So overall, NPA levels remain well controlled, with movement driven by a small number of individual credits rather than systemic deterioration. Resolution activity continues to progress as expected, and we remain focused on early engagement and disciplined management where stress arises. Taken together, asset quality and NPA trends reinforce our view that credit risk is contained and easily manageable. I will turn it back to Mark to discuss our capital position and outlook. Mark Hardwick: Thanks, John. Good report. Turning now to Slide 21, our long-term track record of shareholder value creation remains a key strength. Tangible book value per share has grown at a 7.5% compound annual growth rate over the last ten years. Given the earnings enhancements created by the First Savings acquisition and the modest balance sheet repositioning, I am particularly pleased with the limited tangible book value dilution from year-end 2025 through 03/31/2026, which Michele highlighted in her comments as well. It is just really pleasing to be at this point with what was a pretty modest tangible book value reduction and such strength in the earning stream. It is a good place for us to be. Slide 22 highlights our 11.7% total asset CAGR over the past decade, reflecting a consistent strategy of organic growth complemented by disciplined, value-accretive acquisitions that expand our demographic and geographic footprint. The First Savings acquisition is well aligned with this strategy and meaningfully strengthens our presence in a high-growth Indiana market. We look forward to building our Midwestern strength throughout the rest of 2026 by focusing on our people, our clients, our products, and technology, and I hope it is clear that organic growth is our top priority for the year. We are going to get through the integration on May 15, and we have great momentum with the First Savings team as Michael Stewart highlighted. Thank you for your continued support and investment in First Merchants Corporation, and we are happy to take questions at this time. Operator: We will now open the call for questions. As a reminder, to ask a question, you need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Daniel Tamayo of Raymond James. Your line is now open. Daniel Tamayo: Thank you. Good morning, everyone. Maybe first just starting on the loan growth side. Seasonally down in the first quarter, you had the loan sale in there. Mike, you sounded pretty bullish on loan growth prospects going forward. Maybe just give us a little bit more color if you can on what is driving that, thoughts on paydowns, the timing of the slowing going forward, and if you are still comfortable with, I think we talked about, 6% to 8% growth for the year last quarter, that number still holds. Thanks. Michael Stewart: Dan, so let us start with the end. Yes, I do feel confident with that mid-single-digit growth rate and reaffirm it. What demonstrates my confidence level is we really take a look at our commercial pipelines. They are as strong as they have been historically. What I have tried to talk about is in the first quarter, we just had some stacked normal-course payoffs that were above what we would look at in a normal run rate of reduction, but the payoffs were a little bit higher. Remember, we also had a really strong fourth quarter, and some of those anticipated fourth quarter payoffs did not happen until the first quarter. It was the investment real estate portfolio that was paying along with the sponsor book, and both of those production levels were really strong during the quarter. We will see the growth come back into those businesses. The community bank model, which is the core C&I that sits in our franchise, demonstrates a really good growth rate there, which is really fundamental for us. Another point of view I can share is that I know where we stand as of yesterday. That growth is coming through in a really strong manner. If you look at how we think about normal-course or known amortization, and what we think about known-course payoffs, it was just a little bit higher, but nothing unexpected out of the blue. The production level that we had, which is on pace for about $2 billion, we have got it in the first quarter; we were just stacked with some payoffs and feel really good about where pipelines are, where those two business units are already driving record production and bringing it onto our balance sheet, and then where I have seen our current April footing through, too. Mark Hardwick: I would love to just add. You made this in your actual comments earlier, but the paydowns really came exactly the way we would hope they would come, maybe not the timing. It was investment real estate moving into the secondary market, which is what we always expect and anticipate, which is great for credit quality, and then the sponsor book, exactly as you would anticipate, that over time those sponsors liquidate those companies, sell them to maybe another sponsor, etc. It was anticipated; it was just a little more first-quarter heavy than what we had expected. Some of it we thought might have happened in the fourth quarter slid over to this, and some that we might have had queued up in the second quarter happened early because the secondary markets are good with real estate. Daniel Tamayo: Great. Very helpful. Thanks, guys. And maybe for Michele on the margin, just curious where you see that moving going forward. You will have the loan sale happening in the second quarter. I am curious how you are thinking about the impact from that. I do not know if you gave more specific timing or are able to yet other than in the second quarter, but just curious how that impacts the margin overall and thoughts for the rest of the year? Michele Kawiecki: I will address the loan sale first. As Mark said in his comments, the loans that we are selling have a weighted average coupon of 3.46%. Immediately once we get that liquidity, we will pay down some of our higher-cost deposits, and I would say those are probably averaging about 3.80%. Over time, we will invest that liquidity in loans. Of course, that will happen over the course of the next 18 to 24 months, and so we will get some margin pickup over time, but it will not be immediate. It will be a little more neutral right out of the gate. For margin over the next few quarters, just because the day count in Q1 always depresses our margin by 5 basis points, once we get into Q2, Q3, Q4, we will see margin pick up a few basis points, if anything, just because of the day count and also because I think some of the repricing from rate cuts last year, we have already seen some of that. I think rates that we pay on deposits will be relatively steady, and so I would expect there to be a few basis points of pickup on margin through the year. Daniel Tamayo: Okay. So that is inclusive of the 5 basis points reversal from the first quarter? So just to call it a handful of basis points up from the first quarter level of margin? Michele Kawiecki: Yes, that is correct. Daniel Tamayo: Okay. Well, I appreciate that color. I will step back. Thank you. Mark Hardwick: Thanks, Danny. Operator: One moment for our next question. Our next question comes from the line of Russell Gunther of Stephens. Your line is now open. Russell Gunther: Good morning. I wanted to see if you could touch a bit more on the deposit migration and noninterest-bearing this quarter, perhaps how you are thinking about the sustainability of the remix, whether you assume any runoff from the consumer product redesign, and then as a follow-up, Michele, you touched on this a bit, but just overall cost of deposits going forward. Assuming a Fed on pause, do you think you have the ability to flex that lower from here, or is there kind of a slight upward bias to overall deposit cost going forward? Michele Kawiecki: I will start with the deposit checking account redesign. We have migrated those customers to our newly designed checking accounts, and we have been tracking whether there is any runoff, and it has been very stable. I think pretty well received. We are not anticipating any runoff. I would expect our noninterest-bearing to maintain that 22% to 23% level that we are seeing today. On the deposit rates, deposit markets are pretty competitive, and so I do not anticipate that we will be lowering deposit rates meaningfully through the year. I would expect it to be overall more steady. Michael Stewart: I will add a little bit more on that. We worked at the end of last year to redesign our consumer core checking account. Now we do not have any small interest-bearing checking; it all went to noninterest-bearing. That is where the big shift from the prior quarter is. Our core primary account activity, both in units and in dollars, continues to grow. The new product set that we call Prosper and Prosper Plus is being well received in the marketplace with new features and functionalities with some of our new platforms. It aligns with how we want to represent noninterest-bearing deposits. We are in year two of very strategically remixing the deposit base to be as core as possible with less dependence on CDs and public funds. It just takes time, but we are really pleased with the progress we are making. Russell Gunther: Maybe switching gears from a capital perspective, healthy levels of CET1 with the deal closed. Do you have a sense of the potential impact from the Basel III proposal on RWAs and CET1? And then from an overall capital return perspective, would you expect to remain active in the buyback here? Michele Kawiecki: We have evaluated the capital proposals, and I would say right now our estimate is that it will benefit us probably somewhere between 50 to 80 basis points. It is really driven mostly from some of the risk-weighted asset relief, particularly on the mortgage product. That is our estimate at this time, and we will keep an eye on where it gets finalized. From a capital management perspective, given where our valuation is, we will continue to be active in the buyback space in the coming quarters. Russell Gunther: Great. Very helpful. Thank you for taking my questions. Michael Stewart: Thank you. Operator: One moment for our next question. Our next question comes from the line of Brendan Nosal of Hovde Group. Your line is now open. Brendan Nosal: Hey, good morning, everybody. Hope you are doing well. Maybe just sticking with capital for a moment. As we all know, pro forma readings came in stronger than expected even with the repositioning of the mortgage portfolio. Totally get that you want to remain active in the buyback and loan growth is going to pick up here, but just kind of curious if you see any other need for additional sheet optimization over the course of the year? Mark Hardwick: If you mean additional loan or bond sales, we are not anticipating anything else. We think this is kind of perfect for 2026. It gives us liquidity so that we can continue a mid- to high-single-digit loan growth number that we talk about. It allows us to stay really diligent with deposit pricing and just remix the loan book at this point—we are cognizant of the loan-to-deposit ratio as well—from lower-yielding loans in our portfolio with a little longer duration to higher-yielding loans with shorter duration. At least in the coming months, I am not anticipating anything further. We evaluate all the time what our options are, but we are really pleased with the earn-back and especially the modeling of this, the way Michele talked about it. We assumed our mid- to high-single-digit loan growth would continue in a normal course the way we budgeted for a couple of years, and instead, if we redeploy this money out of mortgages into commercial over a 24-month window, what kind of pickup do we have, and that is how the four-year earn-back was calculated. I am pretty confident that we will be able to accelerate some of that. This year, we will be using that liquidity for current loan growth. You can model it a lot of different ways. We think the four-year earn-back is the most conservative, but just want to be sure everyone understands how we are thinking about it. Brendan Nosal: That is helpful color, Mark. Thank you. Maybe pivoting to a question on First Savings. Now with the deal closed and on the books, can you give us your latest thinking on how you view their three specialty businesses now that you have had time to see them in action? I heard your commentary on SBA, but I am more curious about first-lien HELOC and the triple-net lease product. Mark Hardwick: It might be a good point to just reiterate how well the integration process is going. The connectivity of our teams is the best it has ever been in an acquisition. I will let Mike jump into that answer because Mike has never been closer, on the ground, to every single action that we are taking, especially in those verticals. I am really pleased with where we stand today and excited about getting through the integration and then moving forward. Every day that we own the company, the more excited I am about the verticals. Michael Stewart: Let us start with the triple-net lease. Since the end of the year through the close through now, their production has remained very stable, which is a good thing in my opinion. They were originating triple-net lease on somewhat of a national basis, and they would sell that portfolio or put it on the balance sheet. It is an extension of investor real estate. It is an extension of what we understood but we really did not focus on. It feels natural for us to be able to continue to support how Tony and his team are continuing to generate triple-net lease business in an originate model. We give the option to put it on the balance sheet if we so choose or sell. The first-lien HELOC business is a unique business for us. They built a really nice model that also has continued to have similar production levels through this period of time. That has been for them a complete originate-and-sell. We have got secondary buyers on that and the secondary services. It is a fee generation business. There is some of that on our balance sheet today. It was on their balance sheet, so we have just modeled that we will keep our balance sheet flat for the first-lien HELOC, and as they continue to generate new business, it turns into fee income—much like our current mortgage business, our originate-and-sell model. And then like I referenced with SBA, they built a really nice infrastructure and ability to not only originate but underwrite and service and collect, which is just not a model that we had built. They were doing around $100 million of SBA transactions last year. First quarter production is actually higher than they were, again during this noise period of time with First Merchants Corporation. First Merchants Corporation’s SBA production last year was less than $10 million. Our infrastructure of small business banking and community banking looks to them as a new product set to continue to fulfill community banking and SBA products in our own backyard, which they really were not overlapping with us. It is just a natural extension of bringing them more volume and letting them be the fulfillment team. We are watching it through integration day, and then my team here is regularly working on what I call day two. We are going to continue to figure out where we want to go with growing the businesses or continue to incorporate into our core models. Mark Hardwick: Part of the reason we are so bullish about loan growth for the remainder of the year, the verticals are a really nice add. We have stayed in the credit profile and size that First Savings operated the business, but we do see opportunity mostly in the size of credits to start to make some adjustments, especially when you think about the triple-net lease business. It is a lever that we could use. So far, we have said, wait, let us just maintain the growth profile and the size of each credit exactly the way it is, and I would just say it leans on the small side. We are excited about how it can continue to help facilitate our growth in the future. Brendan Nosal: Thank you for taking my questions. Appreciate it. Operator: One moment for our next question. Our next question comes from the line of Damon Del Monte of KBW. Your line is now open. Damon Del Monte: Hey, good morning, everyone. Hope you are all doing well today. First question regarding the margin. Michele, hoping you could give a little color on the expectation for the fair value accretion marks that we could expect going forward? Michele Kawiecki: For the first two months of us having the First Savings acquisition, we recorded probably $1.5 million of fair value accretion. That is on a two-month basis. I would consider the run rate on a go-forward basis to be fairly similar on a full-quarter basis a little over $2 million. Damon Del Monte: Great. And then could you give us a little guidance on the outlook for the combined expense base here in the second quarter as you get a full impact from FSFG? Michele Kawiecki: I would reiterate the guide that I gave last quarter on legacy First Merchants Corporation. On the legacy base, I had given guidance that we expected a 3% to 5% increase year over year, and then you add in First Savings, but in the back half of the year recognize the cost synergies that we are on track to achieve. When you put all those pieces together, the quarterly expense total, on a quarterly run rate, will probably be somewhere between $111 million to $114 million. Damon Del Monte: And you think that level is once the savings hit, so kind of like an exit rate in the fourth quarter? Michele Kawiecki: Yes. Damon Del Monte: Lastly, when you think about market disruption, broadly speaking, and opportunity to maybe pick up commercial lending teams, are there any plans to add certain areas of the footprint, or do you feel that the efforts you have put forth in recent years are sufficient and you have a good team at the table right now? Michael Stewart: Yes, we look very opportunistically and very strategically right now in overlap markets where being able to add quality talent in our markets would just augment our brand and growth, so we are very active in that space—especially the Michigan market, in particular. I referenced that we have had continued strategic hires along the way. That is part of our business model of 2026. We added new bankers through asset-based lending, through investment real estate, through sponsor, but more importantly our core community bank, with several more joining soon in treasury management. This continues to build the infrastructure. That is not including what we have recently done in the private wealth group, which had really nice fee growth as we continue to win. Damon Del Monte: Great. Appreciate that, Mike. That is all that I had. Thanks a lot, everyone. Operator: One moment for our next question. Our next question comes from the line of Nathan Race of Piper Sandler. Your line is now open. Nathan Race: Hi, everyone. Good morning. Thanks for taking the questions. Michele, was wondering if you could frame up fee income expectations for the second quarter, and just if you are still thinking kind of mid- to high-single-digit growth for the full year. And what you are contemplating perhaps coming from First Savings—whether some of the verticals that you discussed earlier, whether it is single-tenant lease or first-lien HELOC—could be a driver for gain-on-sale revenue going forward, given that I imagine those relationships do not really come with deposits. Michele Kawiecki: When you look at our Q1 normalized level of total noninterest income, it was $35.6 million. Where I think about that going in the coming quarters, I would expect to get a full quarter of First Savings with the expectations that we have on gains on sales of loans coming from those verticals as well as our mortgage business. I would expect Q2 to see a lift of about 3% to 4% versus Q1, with a similar trajectory in the back half of the year. Nathan Race: Got it. And I jumped on late, so apologize. John, if you could touch on the drivers for the charge-offs in the quarter. Were there any First Savings loans that came through in some of those charge-offs? Just generally, how you are thinking about some resolutions of some of the NPA inflows from First Savings and the legacy resolutions as well going forward? John Martin: The charge-offs for first quarter were really legacy First Merchants Corporation. There were two main names I mentioned in my comments that came out of the portfolio—more idiosyncratic, normal-course charge-offs out of the regional bank and not sponsor finance. It was not really driven at all by charge-offs coming out of First Savings. The asset quality there thus far—and it is early—has been fine. We run processes every quarter and assess what is in that NPA bucket and just keep our eye on the level, actively working with borrowers to work out credits as well as any other strategic loan sale if we choose to go that direction. For the most part, it is just normal-course charge-offs that happened in the first quarter. It was higher because we had a couple of names that we have been working for some time that finally came to a head and we moved on. Nathan Race: And assuming charge-offs normalize to the levels that we saw during last year, do you see a need to provide for that high-single-digit loan growth guidance that you reiterated and just kind of grow into your unallocated excess reserves? Michele Kawiecki: Typically, we start with the goal of providing for our loan growth, and then it really just has to get adjusted based on the economic model. Right now, we are in a really good place when we look at the different economic scenarios that we run and within that range. Nathan Race: Got it. I appreciate all the color. Operator: One moment for our next question. Our next question comes from the line of Brian Martin of Bryn Mawr Capital. Your line is now open. Brian Martin: Thanks. Just one thought, Michele—you talked about the roll-off rate on securities. Just on loans, can you remind us now with FSFG what is repricing over the balance of the year and what type of pickup you get on what is coming due? Michele Kawiecki: One of the things that generally you are interested in, Brian, is on the fixed-rate loans. Our fixed-rate loan maturities are about $100 million that mature at a rate of about 4.5% each quarter, so there is definitely a tailwind there. As you know, two-thirds of our portfolio reprices pretty much immediately with any rate changes, and the rate changes that we had in the back half of the year—I feel like a lot of that asset repricing is already reflected in our overall portfolio yield. Brian Martin: Gotcha. Mike, you talked about the people you hired. It sounds like you hired five or six people recently. Just want to get a sense if they are already included in the loan pickup, or anything that is coming from them is not yet in the run rate? Michael Stewart: They are not in the run rate yet, but they were smart first-quarter additions. First quarter is typically a time when bonuses get paid and people that were actively looking to move take that determination, and we were in tune with that. Michele Kawiecki: I would add on top of that, Brian, in the guidance that I gave—if you recall my remarks when I gave the year-over-year increase on legacy First Merchants Corporation expense base of 3% to 5%—the reason why it is leaning a little bit higher than we normally operate is because we did anticipate hiring and adding to our commercial team and our private wealth team, which is what Mike is talking about. So that is built into the guidance that I provided. Mark Hardwick: I started to mention earlier, I think we added 15 FTEs in that space last year, and we have 10 in the plan this year. We are really pleased with the opportunity—the individuals that are available to us, that are interested in First Merchants Corporation—and their performance when they are on the team. But when Mike talks about the new 10 or so that we are hiring, we are not anticipating immediate performance. Brian Martin: And those you hired—were all those hired in the first quarter, or some of those hired last year? Michael Stewart: The 15 were throughout the year last year, a little more back-end. We have 10 planned this year that I referenced—six in commercial and two in private wealth—and a couple of them also replace. That was not this quarter. We are off and running like we wanted to so that production should start to see itself by the back half of this year. Brian Martin: Gotcha. Michele, just on the margin for a minute, given the day count change, is it a jumping off point maybe a little bit lower than where it ended, but you still maybe see a 3 to 5 basis point pickup just given the day count—something off of the current level—as we go into Q2? Michele Kawiecki: That is right. I do expect to see that kind of pickup. I know we have talked about a lot of the pieces on our earnings. Overall, I feel like consensus is in the right place. It reflects what we expect to deliver this year, and I wanted to reiterate that point. Brian Martin: Gotcha. Last two for me. Just the tax rate, and then there was some commentary recently about your commitment to the SBA by the government. Any thoughts if that changes your outlook on the SBA business? Mark Hardwick: Not on the SBA, not yet. Our chair, Jean Witowicz, is in the SBA business and has her own company that is what they do. We have had a really good understanding of SBA for a long time. We have now acquired a significant business in that space through First Savings. We feel like we have a good handle on it and we are excited about the future. Michele Kawiecki: And Brian, to respond to your tax rate question, a 13% effective tax rate is what we would expect on a normal quarterly basis. Brian Martin: And I think you said, Michele, the accretion is around $3 million? What is the quarterly accretion you are thinking about with a full quarter in there—is that kind of the range of $3 million to $4 million? Michele Kawiecki: It will not quite be that high. It was $1.5 million over the first two months that we had First Savings, and so I expect it to be a little over $2 million per quarter from their piece. The remaining pieces, aside from First Savings, have typically run about $1 million or so, sometimes a little less depending on what we see. Brian Martin: Perfect. Thank you for taking the questions, and congrats on the quarter and the transaction. Operator: I am showing no further questions at this time. I will now turn it back to Mark Hardwick for closing comments. Mark Hardwick: Thank you. My closing comments are to stay as high level as possible. We remain incredibly optimistic about the remainder of the year. Some of it there is no way that you can see; it is just what we see and what we feel. The speed of play keeps improving. I feel like the culture of our company is so strong. We have incredible teamwork and a sense of urgency that I have not maybe felt in the past. Throughout all the lines of business, people are getting after it and producing results. That includes our ability to handle something like First Savings—continuing to run the business and build great relationships and ensure an effective integration is an area where I am incredibly confident. The drivers of our performance continue to be really good. Our balance sheet growth—we remain optimistic even though the quarter was flat—feels great for the remainder of the year. Margin management is in probably the best place it has been in a while. It has been challenging since 2023, since Silicon Valley, and I feel like we are in as good a spot as we have been in a while. Fee income has been growing double-digits for an extended period of time, and the growth rates year over year were all in the double-digit range across the categories we disclose. Our expense control has been something we have been great at for years. We have adequate capital. It is allowing us to be active in the share repurchase space. If we are going to trade at these levels, then we are going to be active in buying back our own shares. I think it sets us up for a really strong 2026 and feeds into 2027. I appreciate your investment in the company and am happy to continue to have one-on-one discussions with any interested investors or current investors for that matter. Thanks for your time. We appreciate it, and we will talk to you next quarter. Operator: This concludes today's conference. Thank you for your participation, and have a great day. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated First Quarter 2026 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. We ask all question-and-answer participants to please limit themselves to one question. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sam Ullrich, Vice President, Investor Relations. Sam Ullrich: Thank you. Good morning, and welcome to our first quarter 2026 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2026 first quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News, located at churchilldownsincorporated.com, as well as in the website's investor section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent reports on Form 10-Q and Form 10-K. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday's earnings press release. The press release and Form 10-Q are available on our website at churchilldownsincorporated.com. And now I will turn the call over to our Chief Executive Officer, Mr. William C. Carstanjen. William C. Carstanjen: Thanks, Sam. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Ann Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. I will begin with a high-level overview of our first quarter performance and key strategic developments. Marcia will then walk through our financial results and capital management strategy in more detail. Then we will open the call for your questions. Let me start with a few key highlights from the quarter. First, we delivered a strong start to the year with record first quarter net revenues of $663 million and record adjusted EBITDA of $257 million. These results reflect strong execution across our portfolio and continued momentum with our growth strategy. Second, we successfully opened our Marshall Yards historical racing machine venue in Calvert City, Kentucky, on time and on budget. This marks our eighth HRM facility in the Commonwealth. Early performance has been encouraging, and the property is already contributing to job creation, increased purse funding for Kentucky's horse racing industry, and long-term shareholder value. Third, we continue to see strong progress in Virginia. We remain committed to supporting the renaissance of thoroughbred racing. We will host 48 race dates in 2026 and expect to generate significant purse funding from our HRM operations across the state that will be distributed during our race meet at Colonial Downs. We also ran a successful Virginia Derby in March, and we are excited that the winner, IncrediBolt, will have the opportunity to compete in this year's Kentucky Derby. We were very pleased with several positive developments in Virginia during the closing stages of the 2026 legislative session. The governor vetoed legislation related to skill games and a proposed new casino in Fairfax County. iGaming also did not receive approval. These outcomes support a more attractive operating environment, and we remain committed to continued investment and job creation in Virginia. Another example of our strategy around smart, transformative investments in the thoroughbred industry is reflected in our announcement earlier this week. We signed a definitive agreement to acquire the intellectual property rights to the Preakness Stakes and the Black-Eyed Susan Stakes from a subsidiary of The Stronach Group. This includes all trademarks and associated rights with respect to the Preakness Stakes, which is the second leg of the Triple Crown, and the Black-Eyed Susan Stakes, which is the second leg of the three related races for the fillies. We expect the second most wagered-on race in the country. The Kentucky Derby is, of course, first by a very wide margin, followed by the two other Triple Crown races, the Preakness and the Belmont Stakes, and then our own Kentucky Oaks race. Let me now turn to the Kentucky Derby and our vision for long-term growth. We continue to invest in enhancing the Derby experience, and for this year's event, we are unveiling several exciting upgrades. We have completed renovations of The Mansion, one of the most exclusive hospitality areas, offering exceptional views of the track and finish line. Our Finish Line Suites have also been significantly upgraded, creating a more integrated, high-energy hospitality experience with improved flow and premium amenities. These are our most exclusive suites, and we are very excited to show our customers a reimagined and unique setting. Following this year's Derby Week, we will accelerate the work on the Victory Run project. As I discussed on our call in February, we will finish this project in time for the 2028 Kentucky Derby. This new structure will offer spectacular premium suites on the first level. The guests in these suites will be able to walk to the rail to watch the races. Victory Run will also incorporate covered box seating and multiple high-end dining experiences on the second through fourth levels of the building. These projects are designed to deliver strong long-term returns while offering exceptional guest experiences. Looking ahead, we remain focused on expanding Derby Week into an even broader week-long national and international event. Last year, we welcomed more than 370 thousand guests across Derby Week, roughly the equivalent of five Super Bowls in one week. We see significant opportunities to continue growing with respect to attendance, wagering, viewership, sponsorship, and EBITDA. As part of that strategy, we are expanding Derby Week with the addition of racing on Sunday, April 26. And for the first time, the Kentucky Oaks will be broadcast in primetime on NBC and Peacock, giving us a powerful platform to expand the reach of this prestigious race and the broader Derby experience. At the same time, the continued growth of Derby Week is attracting innovative global partnerships. These partners are increasingly focused on premium, experience-driven engagement, and Derby Week offers a unique platform to deliver that at scale. Our partners recognize that activations at live sporting events have become more coveted given the significant growth in the experience economy. When coupled with premium hospitality offerings during Derby Week, our partners can provide once-in-a-lifetime experiences for their customers during one of the most marquee live sporting and entertainment weeks in the world. Over 152 years, the Kentucky Derby has become an iconic event in sports and entertainment. We are going to build on that legacy by continuing to expand its reach and relevance for future generations. Turning to our HRM portfolio, our venues in Kentucky and Virginia are performing well and play an important role in supporting the horse racing industry in their respective states. They generate purse funding, support the local agricultural industries, create jobs, and drive meaningful economic impact in the communities where we operate. We will continue to invest in HRM venues and product offerings. We introduced roulette electronic table games, or ETGs, based on historical horse races at six of our Kentucky HRM properties during the first quarter. Early indications are very encouraging, and the new ETGs are accretive to our GGR in Kentucky. We will be rolling out additional machines throughout 2026 and beyond. We are increasing our marketing of this new offering, and awareness is building at each of our properties. We are also working on developing additional HRM-based ETGs, including craps and then blackjack, to attract an even broader customer base. Looking ahead, our Rockingham Grand Casino project in Salem, New Hampshire, remains on track for a mid-2027 opening. This development represents another compelling opportunity to expand into an attractive market with a high-quality entertainment offering. In summary, this was a strong start to 2026. We delivered record results, executed on key strategic initiatives, and continue to invest in high-return growth opportunities across our portfolio. Churchill Downs Incorporated remains exceptionally well positioned with a strong core portfolio of businesses and a clear path for long-term growth. We are confident in our ability to deliver consistent and meaningful value for our shareholders. And before I turn it over to Marcia, a quick reminder: Derby Week begins this Saturday, April 25, with Opening Day and culminates on Saturday, May 2, the 152nd running of the Kentucky Derby. We have an exciting week of racing and events planned, and we look forward to hosting many of you in person. We are anticipating an exceptional Derby and Derby Week, significantly outpacing not only last year but also Derby 150 in 2024. If you have not secured your tickets yet, we encourage you to do so. We expect to be fully sold out. With that, I will turn this over to Marcia. Marcia? Marcia Ann Dall: Thanks, Bill, and good morning, everyone. I will begin with highlights of our financial results and then provide an update on capital management. First, regarding our financial results, as Bill noted, we delivered record first quarter revenue and adjusted EBITDA, with both our Live and Historical Racing segment and our Wagering Services and Solutions segment achieving record performance for the quarter. We are pleased with the continued momentum in our Live and Historical Racing segment. Adjusted EBITDA increased by more than $11 million, or 11%, compared to the prior-year quarter. Our Kentucky HRMs delivered outstanding results, with adjusted EBITDA increasing more than $9 million, or 17%, compared to the prior-year quarter, driven by strong growth across both Western and Northern Kentucky. Our Kentucky growth also reflects the opening of Marshall Yards in February. In Virginia, adjusted EBITDA increased by $3 million, or 6%, compared to the prior-year quarter. This growth was supported by continued momentum at The Rose, which delivered sequential increases in the GGR per machine per day for each month of the first quarter. Our team is making great progress in marketing the property to attract new guests and increase spend per visit. We are encouraged by the continued top-line growth and increase in the margins of The Rose. We believe the property remains in the early stages with a long runway for growth. At Colonial Downs Racetrack, we successfully held the Virginia Derby in March with sold-out attendance and a 19% increase in handle over last year, making it the third-highest wagering day in Colonial Downs’ history. Performance at our other Virginia properties was impacted by weather and increased competition. We are actively optimizing our marketing and operating strategies, and we remain confident in the long-term performance of these properties. Turning to our Wagering Services and Solutions segment, adjusted EBITDA increased 8%, driven by retail sports betting, contributions from our online sports betting market access agreements, and continued expansion of our XASSA platform. TwinSpires also delivered modest growth in adjusted EBITDA primarily due to lower legal expenses. Last, regarding our Gaming segment, our wholly owned regional gaming properties performed in line with our expectations, given the cessation of HRM operations in Louisiana in May and $2 million of weather-related disruption in January. Overall, first quarter same-store margins at our wholly owned casinos were relatively consistent with the first quarter of last year. Customer trends have improved versus the prior year and remain consistent with the prior quarter. We see continued strength among higher-value rated players and some softness outside of Kentucky and in lower-value unrated segments. We are actively refining our marketing strategies to capture opportunities across both segments. Turning to capital management, we generated $276 million, or $3.94 per share, of free cash flow in the first quarter, reflecting the strength and consistency of our operating model. Our strong free cash flow generation continues to support both reinvestment in high-return growth projects and meaningful capital returns to shareholders. Project capital expenditures were $40 million in the quarter, and we continue to expect full-year 2026 project capital spend of $180 million to $220 million. Maintenance capital expenditures were $19 million in the quarter, and we continue to expect full-year 2026 maintenance capital spend of $90 million to $110 million. We ended the quarter with bank covenant net leverage of 3.9 times, reflecting continued strong operating cash flow generation from our recent investments. With that, I will turn the call back over to Bill so that he can open the line for questions. William C. Carstanjen: Thank you, Marcia. Okay, everyone. I think we are ready to take your questions now. Operator: We will now open the call for questions. To ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. One moment, please. The first question comes from the line of Barry Jonas with Truist. Barry Jonathan Jonas: Hey, guys. Good morning. I may have missed this as the audio was a little off before, but can you detail a little more about the fee structure for the Preakness IP and also if you have any wider thoughts on the longer-term strategy there? William C. Carstanjen: Good morning, Barry. Thanks for the question, and sorry if there were any difficulties with the audio. Certainly happy to cover anything that slipped through the cracks. The fee structure in Maryland is a two-part structure. First, a base fee of $3 million that grows at 2.5% every year, starting in 2028. It does not apply for the 2027 Preakness, and we have not closed on the purchase of the intellectual property yet at this point either. But starting next year, it is a $3 million base fee, and from that point on, it grows at 2.5%. The second portion of the fee is 2% of handle for Black-Eyed Susan Day plus Preakness Day. You add those two amounts together, and you get the total. Last year, the Preakness and Black-Eyed Susan Day in combination did about $140 million of handle to give a rough perspective on where it is at this point. For us, it is a thrill to be a part of that. It is, in our view, an iconic asset. Having been in the game for a long time, I am familiar with the history of the Preakness and I know what it has been in the past and what it can be in the future. We are happy to participate and work with the state as they see fit to help build it back to its former glory. Operator: Thank you. Our next question comes from the line of Dan Politzer with JPMorgan. Daniel Brian Politzer: Hey, good morning, everyone. Thanks for the question. Just another one on Preakness. As we think about your capital allocation parameters, in the past you have talked about investing in the ecosystem, looking for things with local monopolies, and the ability to improve operations of an asset over time. How does this investment in Preakness fit into that, and how do you think about this potentially evolving over the medium to long term? William C. Carstanjen: Thanks for the question, Dan. First, some of those attributes come in connection with iconic, unique, and special assets that can have different attributes than everything else over time. We think the Preakness is one of those assets. We think it has tremendous potential and a tremendous history. As it unfolds, we certainly are available to the state and happy to work with the state to help them figure out how best to transition that property into something great like it has been in the past. For us, it is entirely consistent with how we look at things like the Derby. In my opinion, the Derby is always what is most special and most unique about our company, and it is an asset that cannot be duplicated. It is a very special, unique piece of Americana. We think Pimlico and the Preakness have elements of that themselves, and it is about developing and encouraging those things to happen over time. Operator: Thank you. Our next question comes from the line of Daniel Guglielmo with Capital One Securities. Daniel Edward Guglielmo: Hi, everyone. Thank you for taking my question. In the past, you have talked about growing the international customer base for the Kentucky Derby and U.S. horse racing in general. Outside of the dollars generated, how do you measure success there, and what are your goals over the medium term, so the next five or so years? William C. Carstanjen: Dan, thanks for that question. That touches on a theme that is personally really important and significant to me. I think we have this unique American event, and there is an irony to that because over the long 152-year history of the Derby, the international piece has not necessarily been the focus of our efforts. Despite that, we still have this global brand. Focusing on building that is critical going forward. It starts with attendance. It starts with encouraging more folks in overseas markets, starting with those that have an attachment or an interest in horse racing, to come experience the event. From that, it builds into sponsors and partnerships, and those are the more important elements. Certainly, some wagering can be possible; Japan is an example of that. But first and foremost, it is about driving high-end customer participation and encouraging sponsorships. Attendance and viewership can be a part of it. I do not have at my fingertips the information this year for all the markets that the Derby will be telecast. It is a very impressive and growing picture. Everything we see from an international perspective is positive, growing, and encouraging. You will see us focus more on that over the coming years because there is a big population out there in the rest of the world that is particularly interested in thoroughbred racing, as well as in the United States. Our job is to attract those people and bring them here in the higher echelons of our ticket offering. Operator: Thank you. Our next question comes from the line of Chad Beynon with Macquarie. Chad C. Beynon: Hi, good morning. Thanks for taking my question. Bill, one for you on the legislative win in Virginia. Obviously, you cannot predict future legislation, but anything you can highlight in terms of why this was vetoed, if the governor or other constituents are realizing the impact on the state? We are getting a lot of questions if this will become a recurring thing. Anything else you can help on there would be helpful. Thank you. William C. Carstanjen: Sure, Chad. Thanks for the question. Generally, state legislative processes are busy, messy processes. There is lots of activity and a divergence of views. It is part of democracy. The fact that legislation is introduced and discussed does not mean there is consensus in the state on what will happen that year or in the future. It is just part of the legislative process. Every year is different, and every legislature learns from past experiences, and that factors into what they want to do as a state going forward. Turning to Virginia, what happened there is part of a healthy democratic process. There were lots of discussions and divergence of views, and the state came to a conclusion on how they wanted to manage and think about gaming for the time being. I am encouraged by some of the dialogue and discussion that their progression on gaming issues is a positive one from our perspective. I am encouraged going forward that there is a forum for discussion and convergence of views, and that our views are respected, heard, and part of that process, and will be reflected in whatever outcomes in the future we might see. Generally, Virginia shows a lot of elements of a very stable environment for us. We believe in that jurisdiction and its potential, and we are really glad to be a part of that dynamic and environment. Operator: Thank you. Our next question comes from the line of David Katz with Jefferies. David Brian Katz: Hi. Good morning, everyone. I wanted to spend a second on Virginia if I may. Way back when we made this acquisition, there was clearly a lot of opportunity in what has evolved. Since then, there are more competing licenses and some traditional licenses, and forgetting about any discussion about iGaming, will it or will it not one day, Bill, I remember you telling me that every strategy should evolve as you go to be a good one. Has this turned out competitively the way you expected, and have you evolved your Virginia strategy for what appears to be increasing competition in that market? William C. Carstanjen: Great question, David. Already, you can see Virginia has been a really strong and encouraging investment for us. In terms of new competition, you face that discussion in all jurisdictions; it is part of the gaming dynamic in the country, and we have progressed through that pretty well. For us, there will be opportunities too as discussions around Virginia evolve over time. Always be flexible. I agree with what you said: always evolve your strategy. We have done that in Virginia. We do not control the noise and discussion that happen during any legislative session, but we participate vigorously in those discussions, and we constantly evaluate what is best for our company—where to focus, where to pivot, where to change. Through all this noise, Virginia has been a really strong investment. As we look forward, we see that continuing, and we will evolve that strategy and roll with the times as we see real pivots that need to be made. So far, so good. It has been a positive experience for us, and now it is about focusing on next year and how we want to evolve our business in that state. Operator: Thank you. Your next question comes from the line of Jordan Bender with Citizens. Jordan Maxwell Bender: Hi, everyone. Good morning. Thanks for the question. Kentucky continues to show some pretty nice growth. How do you think about the incremental 4 thousand machines you can put in the state, and more specifically, do you see any properties that are ripe for expansion? William C. Carstanjen: Thanks, Jordan. Kentucky has been a very positive experience for us. It has been a great investment for us in the short and long term. All these properties are still showing real signs of growing into their own skin. They have not reached maturity; they are still growing. HRMs as a product continue to get better. We continue to have more options and more variety of product. ETGs are something we feel positively about, and we look forward to expanding our offering of roulette and other products on our floors. Marshall Yards, which we opened in February, has gotten off to a really encouraging start. Without exception in the state of Kentucky, we do not view any of these properties as being at maturity yet. We will keep innovating the HRM product and growing into our marketplaces in each of these jurisdictions. More to come there. Operator: Thank you. Your next question comes from the line of Brandt Montour with Barclays. Brandt Antoine Montour: Good morning, everybody. Thanks for taking my question. I wanted to ask about the Derby. You sounded pretty upbeat about momentum there. To put a finer point on it, how would you compare the impact of geopolitical events to this spring’s ticket selling season to last spring’s geopolitical events? And, Marcia, is there any update to the $15 million to $20 million incremental EBITDA year over year that you called out last quarter? Thank you. William C. Carstanjen: I will start first, and Marcia, if you want to comment on the last part of the question, please feel free to jump in. Last year, the geopolitical events—which were really the introduction of Paris for the first time—impacted us. It impacted the sales process when it started. I am pleased to say that this year, we have not seen that. We are not experiencing geopolitical corrections to our sales process. It has been a smooth, predictable, and really encouraging sales cycle for us. Marcia Ann Dall: From a growth perspective, we are very confident in our $15 million to $20 million of Derby growth over last year’s number. As Bill said earlier on the call, that will be a very significant increase even over Derby 150. Operator: Thank you. Your next question comes from the line of Jeffrey Stantial with Stifel. Jeffrey Austin Stantial: Hey, good morning, everyone. Thanks for taking our question. Just one from us on the HRM business. We appreciate some of the commentary earlier on the rollout of electronic table games in Kentucky. I was hoping you might add a little more color in terms of what initial yields look like for these machines, how this is flowing through database growth and your ability to compete across the border with Class III casinos. Are you seeing some play shift over from slots to these tables? Any initial trends, keeping in mind it is still early, would be great. Thanks. William C. Carstanjen: Sure, Jeff. Happy to do that. Even introducing just one single ETG product—roulette—even with just a single product and lots of runway to add others, we have seen the addition of new customers. There have been changes to our database and a nice pickup in new customers. These are definitely accretive to the GGR on each of our floors. We really just started marketing this new product in April. We wanted time to make sure we worked out the kinks and understood how the products worked on our floor. We are really just in the first month of marketing it. I have only good news to report on what we are seeing. I wish we could push a fast-forward button and have more product, both in terms of the number of machines on the floor and the variety. Every metric we look at in terms of evaluating floor performance is a positive one with respect to introducing this product. Operator: Thank you. Our next question comes from the line of Trey Bowers with Wells Fargo. Trey Bowers: Hey, guys. Thanks for the question. Getting back to some of the more political questions we had earlier, as you said, this whole process can be messy and somewhat unpredictable. Is there a scenario by which, if you see digital expansion in states in which you operate that was not expected or you did not want, you could reverse course and lean into that? I would expect there will be more of this going forward. If ultimately iGaming does happen in Virginia, how might you benefit? Thanks a lot. William C. Carstanjen: Part of participating in the legislative process is always thinking through your fallback positions with respect to things that will help your business. Sometimes that can be going into different businesses. Sometimes that can be more product or other benefits to the business you have in the state. Part of managing through a legislative process is understanding your list of priorities and your series of fallback positions, and your willingness and flexibility to pursue new options based on what those options are. I do not want to comment on any particular line of business other than to say iGaming is a terrible public policy choice for states. It is not one that any state has figured out reliably to protect the consumers in that state. With that general caveat, we approach every state with a series of strategies based on what we see happening in that state. I think our track record reflects that we handle all kinds of issues fairly well, achieving positive improvements for our business environment in addition to battling things that can be threats to it. We make the best out of the circumstances we are faced with, and that is part of the skill set you need when you are in the businesses we are in. Operator: Thank you. Your next question comes from the line of Joe Stauff with Susquehanna. Joseph Robert Stauff: Thank you. Good morning, Bill, Marcia. On ETGs, I know the rollout is an iterative process. If we zoom out and think about the typical, say, 80/20 gaming positions, table versus slots, is that fair to assume you will likely get there at some point? Is that maybe a goal within 18 months, or does it take longer? Could you give us broader parameters on the rollout versus the near term? William C. Carstanjen: Thanks for the question, Joe. We are going to take it one step at a time. We will evaluate every change we make to our floor, whether it is adding more of a particular type of ETG like roulette or introducing new and different categories of ETGs. We will respond to the data and the information generated by our experiments with introducing new product. We do not set a target 80/20 or anything like that. We make smart decisions based on what the data tells us and what our customers tell us on the floor. We try as a management team to be a data-driven organization. We do not want to make up assumptions or stick to assumptions that do not turn out to be reflected in reality. We want to respond to what we see on the ground. That is true based on the experience of what we see on our floors, and that is true for the political environment. We will respond and plan around what the facts are. Operator: Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Shaun Clisby Kelley: Good morning, everyone. Marcia, wondering if you could comment a little bit on the proposal out there for Maryland historical horse racing machines. I think this may have existed in past iterations as well, but what is your broader take or support? Do you think there is any momentum behind it, and what might the process look like? Thanks. William C. Carstanjen: Sean, thanks for the question. I think you are referring to a bill that came through the legislative process last year. It passed but is not law. There has been a movement, particularly among the off-track betting parlors, or OTBs, in Maryland to get HRMs. I do not want to comment on that right now. We are getting our sea legs in the state. We are talking to the government and the executive branch. We are evaluating how we can be supportive and helpful to the state in achieving their goals of creating a world-class, best-in-class event that drives tourism and investment to the state in the Preakness. We are focused on that right now and becoming a more integrated part of that state-driven team. HRMs are a component of the discussion in the state, but I will not comment on it for now as we get our sea legs and become participants in all things racing in the state of Maryland. Operator: Thank you. Our next question comes from the line of Ben Chaiken with Mizuho. Benjamin Nicolas Chaiken: Hey, thanks for taking my question. Just one on Preakness. At risk of being repetitive, I think historically the property has had its own unique culture and following, which you referred to, Bill. Talk about your ambitions here, both qualitatively and quantitatively, if you can. Are you there to assist Maryland if they ask you to, or is this something that you can start to transform and redevelop near term? I am trying to get a better sense of the explicit goal for this property. Thanks. William C. Carstanjen: Thanks, Ben. Maryland is in control of the destiny of the Preakness. They have the land. They have authorized legislatively $400 million of bond proceeds to invest in the property. There is another $125 million of other government funds that are available to invest in Pimlico and Laurel Park, the training center they just approved buying earlier this week. They have a war chest of about $525 million of funds allocated to invest in racing, and they are in control of that investment. We, upon closing, will be the owners of the intellectual property and have already started a very strong dialogue with the state on how we may be able to help them achieve those goals. We have 300 people that work here in Louisville at the track or in our corporate offices supporting our racetrack—doing construction and design, ticketing, sponsorships, and wagering. We have a team of experts here that do this on an absolute world-class level, and certainly those resources and efforts are available to the state if they seek our help and would like our help in any way. Those discussions are just beginning, and it is important to let them play out at the state’s timing and direction. We really love the market. When we compare it to our own market here in Louisville and in the Midwest, we love that corridor from D.C. and Baltimore up through Philadelphia. There are lots of great customers and potential sponsors and business partners there. We think it is a market with a lot of opportunity, and we have a lot of ideas. But this is something that the state will have to ask for our help on, and we have begun that dialogue. We are excited for that to develop. Operator: I will now turn the call back over to CEO, William C. Carstanjen, for any closing remarks. William C. Carstanjen: Thank you, everybody. Really great series of questions today. It was fun to hear your questions and how you are thinking about our company, and we did our best to answer those. Thank you for your support. This is an exciting time for us. We are now going to focus on getting this thing called the Kentucky Derby underway. We hope to see many of you there, and we are going to work our rear end off to deliver a great Kentucky Derby. Thanks very much, and we will see you next time. Operator: Ladies and gentlemen, thank you for participating. This does conclude today’s program, and you may now disconnect.
Angus Bean: Good morning, everyone. Welcome to DroneShield's First Quarter of '26 4C results. It's a pleasure to be speaking with you this morning. So my name is Angus Bean. I'm the CEO and Managing Director for DroneShield. And I've got with me Josh Bolot, who is our Head of Investor Relations and Strategy and we're pleased to present our results to you this morning. Firstly, many of you have seen the news. DroneShield completed a leadership transition in the last couple of weeks of both our CEO, Oleg Vornik and our chair. We announced the market that our chair, after 10 years, Peter James, would not be standing for reelection, and we have had the appointment of -- sorry, for election our incoming Chair, Hamish McLennan. The news of this leadership transition has been received very well. And I'd like to thank, obviously, the whole 500 staff of DroneShield for their support during the last 2 weeks as well as our investors, various stakeholders and our partners around the world in the support of this transition. We'd also like to invite you to attend or join online, our AGM at the end of May, and we look forward to having another update of the business at that time. I'd like to also touch on what I've been up to in the first 2 weeks as CEO of DroneShield. Many of you have seen me in the past over the last 10 years in previous roles as Chief Technology Officer and Chief Product Officer. And it's a pleasure and an honor to step into the CEO role. In my first 2 weeks, it's a bit about listening. It's been about speaking with our team, understanding what they need, what their challenges are and making sure that we're all working together. DroneShield is now a sizable global entity and making sure that the team are moving together is a core part of my role. We've also been speaking to shareholders, understanding their views on the business, learning how we can improve and really listening to where they believe the business can be taken in the future. And we thank you for all the input from all our shareholders around the world. And lastly, we've been speaking with our partners who more and more we rely on to provide great commercial and technical opportunities for us around the world. So thank you for all of our partners. Let's move into the presentation. As many of you would have seen by now, we released our numbers yesterday, and these are outstanding results. This is the second highest quarter in terms of revenue on record for the business, and it demonstrates the continued momentum that -- and leadership that DroneShield has in the counter-drone market. Already, by this early stage in 2026, we have $155 million of committed revenue, which is an outstanding result for a business that only a few years ago was doing sub-$50 million on an annualized basis. So to be here in April with $155 million revenue committed for the year is an outstanding result. Interestingly enough, we are seeing, in our opinion, a better ratio between the larger military contracts that we at DroneShield have become known for, but also an increase in repeat and recurring smaller orders which is lending itself to allow the business to be much more predictable and allow us to make better decisions in the future. We are just as comfortable executing on these large military contracts as we are with the more sustained revenue streams from both military and the emerging nonmilitary market, which by dollar value individually are less, but certainly at a much significantly higher volume. And that's really good to see. It allows us to make better decisions as a business. You'll also note an increase in our Software-as-a-Service revenue stream for the quarter. One of our objectives, and we'll speak more about this later in the presentation, is to get to the point where we have above 30% recurring revenue as part of our business strategy. And so this is a great first step in moving in that right direction. In terms of financial discipline, you will also recognize this is our fourth consecutive quarter of positive net operating cash flow. Again, an important milestone for the business as we are proving operating leverage is increasing and our ability to operate the business is improving. In terms of momentum, I'd like to give a -- I'd like to give a bit more of a history analysis of the numbers. What you can see from the years of 2021 and 2022, is the early adopters, some small trial and test evaluations of our technology. Through 2023 and '24, we had a significant increase in those revenues, and that was primarily through first-time buyers and customers rolling out our products in a minor way. In 2025, we had an outstanding year. And this really represented the first time that militaries were buying as part of defense programs of record and part of much larger military programs that takes a number of years to come to fruition. 2025 really recognize that for us and as you can see in 2026, the results so far are very positive as both militaries are continuing to buy as part of much larger planned procurement activities. And this is where DroneShield really sees a lot of our business coming through in the future. We've spoken to some of the company highlights and the financials but it's important to understand what the future and also the company's position. Our sales pipeline remains strong at $2.2 billion. This is the same update we provided just over 2 weeks ago in March -- sorry, at the end of March. We have 312 deals in the pipeline, 15 of which have a value over $30 million. So the pipeline remains strong. We do have a number of deals that are outside of these 312 , but these are yet to be fully qualified. And so these are unweighted and not -- and at various stages of development in terms of the sales maturation cycle, but $2.2 billion pipeline remains a strong pipeline for the next couple of years. Operationally, we're in a great place. We have over 500 staff now in 7 different countries with a large portion of our capital being invested into research and development, which is becoming the norm in the defense and military industry where companies are being asked to self-fund programs and then the output of those programs is being procured at scale by militaries around the world. Our cash balance remains strong, again above $200 million cash balance, which really gives us the ability to be flexible and jump on opportunities when we see them. Globally, we are increasingly seeing a very turbulent and perhaps a chaotic environment where the world is moving to a multipolar order, and that is causing large tensions around the world. Our 2 primary markets remain the United States and Europe. The U.S., for example, we are seeing the confluence of 2 really significant trends. One is the regulatory environment and the second is the unlocking of significant revenue -- significant -- of significant budgets for defense and non-defense spending. In terms of the regulatory environment, we recently saw the Safer Skies Act, which unlocks 17,500 state and local law enforcement to actually start going through the process to procure counter-drone equipment, which was previously unavailable to them. The programs of records such as JIATF401 now are really taking -- starting to take place. We have the Department of Homeland Security also allocating significant budgets to Counter-UAS. A headline for us for this update is the recent receipt of a FIFA World Cup associated order, which is critically important, as DroneShield has done a number of headlines, both executive protection and sporting events around the world in the past. But the FIFA World Cup is an important one because it demonstrates, again, this idea that local law enforcement, who is the end customer are also starting to adopt counter-drone technologies, specifically those that DroneShield offer. This is a very positive sign. Europe and the U.K. remain a core part of DroneShield's strategy. Many of you are aware, we moved our Chief Commercial Officer, Louis Gamarra, and his family to Europe. And so our center of sales gravity is now in Amsterdam where we've recently opened our new headquarters. We've also opened up production in Europe as well, and we'll continue to expand that. And that allows us to be compliant with the Readiness 2030 or ReArm Europe Plan where we need to be at 65% European industry content to be part of that program. So we are now compliant and we have already started receiving orders through that umbrella. Outside of those 2 major markets, we still see strong growth in Asia, Latin America and the Middle East. And these are -- we are continuing to grow our sales and commercial operations in these areas. Australia remains our home, and we are really proud as an Australian business. We are part of the flagship LAND 156 program on both Line of Effort 2 and Line of Effort 3, and we anticipate to see additional orders from Australia in the months and years to come. In terms of our competitive differentiators, we have both technical and commercial differentiators. Our technical team, which I'm incredibly proud of, we have over 350 world-class engineers, developers and designers. We are able to take this technology from the ground up from the chip all the way through to the end product manufacturing. So we have full in-house capabilities to provide these world-leading technologies and we are in full control of that manufacturing cycle. Additionally, over the last 10 years, DroneShield has developed significant amounts of data on various types of drones, whether that be radio frequency recordings through to radar data, through to acoustic recordings. And so DroneShield holds one of the largest counter-UAS appropriate datasets in the world, which is a core tool and a core differentiator for us. This is something that is incredibly hard to replicate in a short space of time. Commercially, we are a truly global company now. You've seen that we've bolstered our -- both our U.S. and our European presence as well as our presence here in Australia. And fundamentally, our 70 distributors around -- 70 partners around the world remain a core part of the business and that the DroneShield's hub-and-spoke model continues to prove to be effective. In terms of the vision for 2030, this is something that Josh and I will be speaking more and more about over the next few months. It's exciting. We're seeing continued growth of our military market. In addition, we are seeing that now the green shoots of this commercial or nonmilitary market, which we have anticipated for almost a decade. DroneShield is incredibly well positioned as our technologies can be utilized in both military and nonmilitary markets, particularly with the regulatory change we discussed. DroneShield will remain a flexible organization in terms of how we approach the market. And so we have a multichannel market approach where we can either be the prime, the subprime, the partner or go through a regional distributor, or go direct to end users. So DroneShield, we take a multichannel approach there, and it really depends on the environment and the requirements of that location. In terms of the revenue target, we have a -- our big goal is to hit $1 billion annualized revenue with 30% of that is recurring revenue in the next few years. This is a substantial uplift on numbers that were already a 4x increase on previous years. But to fuel that, we are seeing strong diversification across our end users, geographies and our products, both hardware and software. And so we feel that the DroneShield business is in a very strong position in terms of its diversification across all those metrics. We also -- you'll also see, and you'll hear from us again in the next few months around DroneShield beginning to monetize our whole of lifecycle solutions. Today, we do some of the harder parts, which is new sales and new product development. DroneShield will be getting into additional services, both software and recurring services to continue to -- continue to strive towards that $1 billion annualized revenue and that 30% recurring revenue number. Our global presence, as I mentioned, remains strong with headquarters now in Australia, the United States and Europe, but you'll also see us continue to expand on our regional hubs in Asia, Middle East and Latin America. And finally, regional manufacturing in core markets will be a core part of the strategy over the next few years. I think this slide does a lot of work in terms of explaining how we see the counter-UAS ecosystem. DroneShield is very well positioned, providing layers 1 and 2 of the counter-UAS industry. In most cases, for most customers, the first technology they will look to employ is a radio frequency detection, and if they're able to, defeat solution. This, as many of you know, is DroneShield's bread and butter and has been a core technology that we continue to build on today. This is the most cost-effective and most reliable way to down the most amount of drones or deal with the most amount of drones that we see in the market today. So radio frequency continues to be a core technology being deployed by Tier 1 militaries and security operators around the world. Once the customer buys enough and they're starting to scale up their usage of those RF protection devices, often the next thing they need is a way to orchestrate them together. And that's where our DroneSentry-C2 comes in. DroneSentry-C2 allows an operator to have multiple devices deployed on a Google map style interface and they can then operate those devices fully remotely. We also released DroneSentry-C2 Enterprise at the end of -- excuse me, of last year that allows customers to also manage multiple sites themselves, so another layer above that DroneSentry-C2. From there, often, our customers ask us for additional layers of protection, and that's where we rely on our partner network of radar, optical and various other technologies where DroneShield provides layer 3, 4 and 5 solutions as part of that C2 solution. This is a constantly evolving technology field, where new technologies or various adaptations of existing technologies is constantly changing. And DroneShield can remain relevant in all of these areas by partnering, and through our extremely good test and evaluation team we can find the best sensors and effective technologies around world, integrate them into our C2 and offer them to our end users. You would have seen recently this included the recent signing of an MOU with Origin Robotics, an interceptor drone company out of Latvia. Over the last 10 years, DroneShield has developed a comprehensive suite of solutions across the 3 core operational scenarios that we see in counter-drone and these are dismounted, on the move and fixed site. DroneShield now offers solutions for all of these categories. And in addition, late last year -- sorry, in 2025, we offered our first SentryCiv product, a product that is specifically designed for the nonmilitary market. This is something that you'll continue to see from us in the future as we refine our approach to the emerging nonmilitary market. We've talked a little bit about the Software-as-a-Service, and we'd like to unpack exactly how that works. So we have 3 layers of software at DroneShield at the device layer, the site layer and at the enterprise layer. DroneShield now, again, over the last few years developed all their solutions from the ground up ourselves. And we can now successfully apply a Software-as-a-Service subscription to each of these layers, meaning that customers that are utilizing all 3 layers have a multi-software SaaS applied to their solution. And if you think of this as close to antivirus analogy, this is something that our customers are really fond of in terms of they need ways to keep their software updated to the latest software as similar again to antivirus. The longer you go without updating the software, the more likely that the drone technology may have changed and you may miss some significant change. So DroneShield has a strong pull to its Software-as-a-Service revenue streams through the need to keep those software up-to-date on each level of those devices. I'd like to acknowledge our senior leadership team. Again, over the last few years, we've strengthened our leadership team and we now feel very well positioned to continue to refine that and continue to build out the organization to achieve our significant revenue targets in the future. Lastly, as we mentioned at the top of this presentation, we have announced changes to our Board and our Chairman of 10 years, Peter James has decided to retire from the Board and he will not seek reelection at our next AGM. And Hamish McLennan has been -- will be appointed as the Chairman following our AGM in May. All right, and for last point on the Board. As we have previously announced, we will be -- we are reviewing and we have an ongoing process to seek additional Board members to continue to grow the experience and also the skill sets that our Board can offer the business to support that growth. Thank you for listening to the presentation this morning. I think one of the most important part of these presentations is to dive into some Q&A. And I'll hand over to Josh to start that process, and we'll also start taking some questions from the Q&A posted in the Zoom link. So Josh? Joshua Bolot: Thanks, Angus. And thank you for those investors and interested parties who have submitted questions in advance. That's been very useful. I will also combine those with some that we've received online and please continue to submit those. One question which has come through has been regarding the global conflict and escalation of global conflict and the widespread commitments in higher defense spending in the counter-drone space and how that's feeding into our revenue pipeline -- potential revenue pipeline. So maybe you want to talk a little bit about that and also the commercial fields that we're now moving towards. Angus Bean: Thanks, Josh. That's right. Well, firstly, the global situation, as we mentioned, does seem to continue to deteriorate and that puts DroneShield in a very important position as drone technology is one of the core disruptors and is essentially revolutionizing the military and security environment. DroneShield we find ourselves as an Australian business in a strong position to create these solutions and provide them to our end users, our Western allies around the world. Even in the last week, we've seen significant budget allocations from Australia, from the Philippines and from the United States specifically calling out counter-UAS as a core part of their expanded defense budgets. Our view is that this is driving the exceptional results that we've announced this morning with $155 million of committed revenue for 2026 at this very early stage. And so we'll continue to execute well, keeping our heads down and focus on both our product development strategies as well as our commercial strategies to take full advantage of these additional budgets being allocated at a rapid clip. Joshua Bolot: Thanks. The next question relates to revenue and profit guidance assessments. I'll address that one. DroneShield does not provide revenue or profit -- or earnings guidance. We share information about our progress, which includes, obviously, periodic financial reporting, the presentations to investor groups, including these and those which we lodge with the ASX and material contracts and that threshold for material contracts is over $20 million now and as well as other trading updates. And we feel this is the right approach given the nature of the industry we operate in. And as the company moves towards a more predictable style of revenue, for example, the recurring revenue, the SaaS lines over the next few years, that will help provide a greater granularity around that. In regards to the material contracts of $20 million, and this may cover off a few other questions. There was a question about the frequency with which we announced those. I think what's important right now is that 3 weeks ago -- just under 3 weeks ago, we announced the revenue pipeline. So the committed revenue for the year was at $140 million. Today, it's sitting at $155 million and we have not announced any material contracts over that period. So that provides an indication of a number of smaller sub-$20 million orders that are constantly being received from existing end users as well as new end users. And that's a very important sign of just the general maturity of the business as it's growing. So that kind of addresses that one. The other part, which we want to talk about is that the revenue and the trading update that was provided at the -- in the early days of April was prepared just as April was beginning. And there was a slight variation between the Q1 revenue change in -- on the 8th of April and what we've ultimately reported yesterday. That they should be taken in context that a comprehensive month end takes longer than a few days. An order delivery, which was made in the closing days of March was only notified to DroneShield during that month end process. And we recognize revenue when customers confirm the receipt of the day that they receive it. The suggestion that this might lead to bringing forward revenues is incorrect, and it still remains our second highest revenue quarter and the highest cash receipts quarter. Angus, the next one, which I might put to you is we're on government panels both in Australia and other jurisdictions. What's the commentary around the Australian panels? Angus Bean: That's right. So Australia's flagship defense counter-UAS program is called LAND 156, it's run by the Australian Army. And we are on 2 of the 3, and we hope to be on the third when the time is right, but we are in 2 of the 3 of those lines of effort. We've already received orders under the second line of effort, and we are on the panel, as you mentioned, Josh, for Line of Effort 3 and things are starting to move quickly where we're involved in a lot of good discussions with the Australian Department of Defense around LAND 156. Joshua Bolot: Great. The other discussion has been -- it's come through a few times. I'll address it because it will take a few questions off the register. The question is regarding dividends and the intention to pay off the dividend reinvestment scheme. DroneShield is a high-growth focused company and it has not paid dividends today. There is no current intention to do so as it is maintaining cash balances for reinvestment in product, potential acquisitions and other such opportunities. The Board does assess the situation from time to time, and will advise the market when there are updates to the dividend policy. A broader question here, Angus, is regarding the movement of technology towards other drone and robotic technologies seen in the market. There's been a question received online regarding non-aerial counter-drone defeat and maybe that expands the conversation towards our product development pipeline as well. Angus Bean: Thanks, Josh. So DroneShield, absolutely. We've updated our approach. And if you look at a lot of our documentation, we now refer to instead of just counter-UAS, which is counter uncrewed aerial vehicle. We often say UXS. And the X means multi-domain, okay? And so over the next few years, we are going to see an increase in ground UGVs, the surface of the water, USVs, and even underwater autonomous vehicles emerging. DroneShield and DroneShield's Technologies, we believe, are very applicable as these new types of threats emerge, and we have some of the core building blocks, whether it be the radio frequency, the radar and obviously, our C2 is the core orchestration layer to counter these emerging multi-domain assets. And so DroneShield, yes, we are opening our aperture as the technologies change and as we see essentially the super cycle and the trend go towards replacing human inventory and humans on the battlespace with a more robotic and autonomous vehicle selection. So DroneShield, we are one of a handful of companies around the world that has the proven expertise to execute the technology stack that will be utilized against these types of technologies in the future as well as the vision to counter these types of technologies in the future. Joshua Bolot: Thanks. The next question we've received is in relation to the staff costs and administration and corporate costs and that we've received this offline as well as online. So first I'll address that. The comment in -- this refers to a comment in 1.2F of the 4C, where there were some additional wordings regarding the salaries of the engineering team. This is an inadvertent error from a version control in the preparation of the 4C only. It has never appeared in prior 4C's and it does not impact the underlying numbers or methodology. The engineering team has always been in the staff costs of Line 1.2E and as they are in this 4C. So the commentary there is an inadvertent comment. On the matter of staff costs more generally, during the fourth quarter of 2025, there were some exceptional one-off items in the staff cost number. This led to it being higher in that quarter compared to those of the current Q1 2026. Without these one-off costs, Q4 staff costs, which were higher and would have set somewhere between those of this current quarter and those in Q3. So that addresses those matters. The next question regarding -- we've received online is regarding the transition changes. And I think it's fair to say we've addressed those quite thoroughly in the communications in early April. But importantly, there has been a considered plan with Angus joining and with Oleg's decision to step back. He still remains an adviser to the company and has -- and provides regular support where required, including in discussions with staff, with end users and with partners around the world. So we obviously understand that, that news would have been a surprise to some, particularly after so many years and developing the company from it's really embryonic stage. But after nearly over a decade after nearly 12 years, a decision for someone to step back and have personal reasons why they'd like to do that, I think, should be respected. The next question, which I'll bring to from the floor, let me just bring that up for a second. Perhaps you just want to talk a bit about the head count and where you see the main areas of our head count moving. Angus Bean: Sure. So as we've mentioned, we have about 500 staff across the world at the moment. We've -- over the last couple of years, many of you know, we've substantially increased our head count and we will continue to do so in a controlled way throughout '26 and '27, and you'll see a lot of that head count growth will be in our critical regional hubs of our new headquarters for Europe in Amsterdam and our headquarters for the U.S. outside of Washington, D.C. And so control growth will continue into the future in terms of the head count. And obviously, that is in response to the dramatically increasing demand that we're seeing for our products. Our demand on our commercial and sales teams, but also as we are rolling out larger and larger amounts of our multisite multi-center solutions, our field service engineering, training staff to provide those full programs into those end customers around the world. Joshua Bolot: There's been a question regarding the sales pipeline. I know we've addressed that. And a little bit about the frequency with which that's going to be reported. At the moment, it has been reported at the end of March and was there a decision to update it again now? Angus Bean: Thanks, Josh. So look, we felt that it wasn't appropriate to update the pipeline again so quickly after updating it only just 2 weeks ago. So the pipeline we've published for this update is the one that is relevant for this allocation of reporting and so we felt that was the appropriate way, and we'll continue to update the pipeline and obviously, our progress towards that pipeline throughout the year. Joshua Bolot: Great. A question regarding local and international competitors and how we differentiate ourselves in the global marketplace. Angus Bean: Thanks, Josh. DroneShield has a number of critical differentiators, both technical and commercial, as we mentioned. We are one of the most experienced, if not the most experienced counter-UAS company globally. And so although the DroneShield is a core part of this massive groundswell towards counter-UAS, there are competitors around the world. But very little have the scale of operations, the experience to roll out their solutions now at the quality level but also at the scale that many of our end users now demand. So DroneShield, we're in a very strong position. Additionally, being an Australian business and as we mentioned, around defense we are only regulated in most cases by our Australian Defense Export Controls office, which is a really good thing because we have no U.S. defense export controls on our -- most of our core product line items. We are bound by EAR out of the U.S. government for some of the radar technology that we integrate and we import from the U.S. but our core product lines are only controlled by the Australian Defense Export office, which we have a great relationship with. Joshua Bolot: Thanks. There's been a few questions online and also in advance regarding governance and remuneration. So I'll take those ones on. In terms of remuneration, the question is about the remuneration structure and incentives that align with shareholder value. I think there's been a clear move in making sure that their alignment and structures that work with both the shareholder expectations of value creation and growth and retention of staff. This includes the setting of performance metrics, which involve strong revenue growth targets of $300 million, $400 million and $500 million in 12-month periods over the next 3 years, also includes staggered vesting periods, 50% on achievements of that target and 50% after 12 months of continued service as well as minimum shareholding policies for key management personnel. The Remuneration Committee of the Board receives advice benchmarking and feedback from consultants as well as shareholder advisory groups. There will be further discussion of this in the Notice of Meeting for the Annual General Meeting, and we encourage everyone to read through that as well as attend and ask at the AGM. In terms of the remuneration and incentive structure of Angus, of the newly appointed CEO and Managing Director, these were shared in the leadership transition announcement. In relation to that, more generally, there have been questions regarding the governance steps, which have been initiated as a result of entering the S&P ASX 200. As indicated, we did -- we did initiate a search for additional non-exec director. And in that process, Hamish McLennan was identified. In speaking and identifying Hamish and his engagement with the company, we found a global leader who had worked across many industries, both in Australia and international markets, bringing a range of skills, both of a business nature and of the governance nature, which are highly useful in our business. So we look forward to welcoming him on the Board. The search for additional directors has not ended, and we will continue to do so and update the market along the way. We believe that the Board will evolve as the company matures, and that's consistent with any other company of this nature. The next question, which I'll address to you, Angus, is regarding the interplay of third-party products, the interoperability and how the -- how those conversations are sold to end users in the context and trends of our product versus the interoperable third-party products. Angus Bean: Sure. That's a great question. So DroneShield has those really core technology building blocks of radio frequency RF detection and defeat. We have our C2 and our sensor fusion layer. And as we mentioned, in layers 3, 4 and 5, which we offer to end users. That is a conversation mostly that happens with the end user. We have deep relationships now as we are on some really important programs around the world with what are they seeing in terms of the needs of the operators in the field. What are they seeing in terms of the need to secure low-altitude airspace, to secure air bases. And so we understand we have a very strong funnel of information in terms of the future needs and requirements of those operators. And so we take that into account and then we essentially do global searches around the world for best-of-breed types of sensor and effector technologies. And as we've announced of 3 almost consecutive partnerships over the last few months, Origin Robotics, OpenWorks and Robin Radar. We believe these are 3 absolutely exceptional organizations providing a great product and also opens up new markets and new regions for us. So you'll continue to see us do that. DroneShield, we are very focused on our C2 and our core technologies. But we acknowledge that we will need additional layers to be able to be that full turnkey counter-UAS provider but that doesn't mean that DroneShield needs to develop all of these technologies in-house ourselves, and specialization is really important. And so you'll see us continue to partner with the best of the best around the world. Joshua Bolot: There is a question regarding -- and we received this question outside of reporting periods as well regarding the large contract, which is a -- large possible contract, which is sitting in the pipeline. And I think we've previously talked about a number of $750 million, the status on that at the moment. Angus Bean: That's -- yes, that's right. That's a significant goal for us, and it's a contract that, as we've previously discussed, is a follow-on contract from some of the larger contracts that DroneShield received in previous financial years. So we are essentially the incumbent in terms of the technology provider for that contract. And so we feel in a strong position. And I myself have, recently in the last couple of months, met with the end user and decision-makers around that contract. We will continue to update the market on any -- with any confirmed information around that contract, but we won't be advising anything further at this stage outside of the contract remains in the pipeline, and we have great relationships with end user. Joshua Bolot: Thank you. There are a few questions regarding manufacturing. And I think those have largely been dealt with, but just to reiterate, at the moment, the majority -- the vast majority of our product is manufactured in Australia, and that's very important because that allows us to service the markets that we do and with relative ease. We have recently announced the manufacturing capability in Europe, and that is a very important facilitator for us to work towards the ReArm Defense Readiness Program in Europe, and we're very pleased to have that in effect now. The U.S. will come -- had a similar arrangement in place later in the year, and we'll update the market regarding that through a press release. I think more generally, a discussion regarding our approach to manufacturing might be worthwhile sharing. Angus Bean: Sure. So DroneShield, we generally take a light CapEx approach to manufacturing, where we are not involved in the fabrication of most of the parts, and we outsource that to a great supply chain of partners, as Josh mentioned, most of which are here in Australia. And so we don't need to be -- we can be very light on CapEx in terms of manufacturing. We don't require to essentially buy and maintain large mechanical equipment to do that. We utilize our supply chain for that. But what we do are the really important high IP and high-value add components of that manufacturing process. And so that often is the electronics subassembly process, the quality assurance and checking process and the final field testing of the solution prior to it being deployed into the field. So that's where -- that's how we do our manufacturing process. And as you've seen recently in Europe, we've successfully now transplanted our manufacturing setup to a completely external manufacturer -- contract manufacturing arrangement in Europe and that, again, shows that the way we design and develop our solutions. This model is very possible. While there is a lot of IP and know-how in terms of the manufacturing of these goods, the core really difficult part of what we do is actually the software and the encryption of that software that gets loaded onto the devices and so we successfully transplanted that production into Europe, which we're really happy with now. And as Josh mentioned, we are also looking at production options for the United States. But again, the core technology and the core software platform will be distributed from our team here in Australia. Joshua Bolot: One of the questions which has come through is regarding our views around profitability versus growth. I think the company has worked exceptionally hard to reach the pivot point that it has in the last 12 to 18 months, where particularly over the last 4 quarters, it is operational net cash flow positive. And in 2025, announced underlying EBITDA of close to $37 million, which is a 17% margin. I think what we've indicated to the market regarding our operating cost base provides an indication that we are looking at profitable growth within the business as we bring additional product lines and solutions online matched with the growth in the recurring revenue stream. In essence, we do look at -- when we are at opportunities we look at the payback period of new product investment. We do look at that from a number of angles both in terms of the return on investment that it will generate from delivering it into the market. The other thing that we've thought about is when we are looking at acquisitions, is the speed with which we may be able to do a similar thing or the same thing versus acquiring that. So to date, the company has not made any acquisitions, and it constantly is put different ideas and different opportunities. We balance that off with our internal investment and the payback period for those. I think that's quite a useful thing to think about because we do have a useful level of cash available for growth, be it organic or acquisition based. There's been a few questions, particularly around the commercial market. So one question is regarding the progress on SentryCiv to date and the types of customer scenarios that has been used and the growth that we expect there. I think we both know have some really good interesting case studies around that. And also how that will play out over time with things like Safer Skies and the split between commercial and military. So that's a broad question, but I think they go together. Angus Bean: Thanks, Josh. That's right. So the commercial market, as we mentioned, we believe, is now after almost a decade of talking about and monitoring the situation is coming online. Let's say, the nonmilitary market. And DroneShield, as I mentioned, we are in a strong position with already our first product. It's really specifically designed for that nonmilitary market, our SentryCiv product. The SentryCiv product is a high SaaS, almost entirely SaaS-based product, again, feeding another strategy that we developed to feed into that 30% recurring revenue base over the next few years. And it is -- we've made now a number of sales around the world of the SentryCiv product. But these sales, obviously, we don't publish as they are below the $20 million revenue number. But I'm really encouraged and excited to see the quality of the customers who are procuring this. We are talking about really major law enforcement and major, let's say, commercial operators around the world. And so our relationships are deepening with those commercial operators and those law enforcement markets that were previously unavailable to us, either through regulatory or through their lack of finances to actually go out and procure counter-drone equipment. So we are monitoring the commercial space very closely. We are starting to move the business more in that direction, bringing on our product teams specifically designed for that growing segment. But similarly to the way we have successfully penetrated the military market over the last decade, we will -- we don't want to go too early -- too hard too early. We want to mature that approach with the market and make sure every step along the way we take to capture that market is the correct one. And so we will -- you'll continue to see sort of a steady stream of movement in that direction as we continuing our core short-term revenue driver of the military market is self-sustained as well. So yes, we're really excited about the potential emergence of this commercial sector and the green shoots we saw in the first quarter of this year. Joshua Bolot: Thank you. There's a lot of -- a few questions regarding how we interact with the primes of the industry, both as customers, competitors and partnership arrangements with them. I think that's a broader question, particularly some of the companies that people have talked about in the U.S. and Europe. Angus Bean: Sure. So I think one of the most common misconceptions about DroneShield, and we get the question a lot, which is are you concerned about these really significant defense primes who have traditionally been very dominant players in the defense space for many years? And do you see them as a threat to the business? Our honest answer is in almost all cases, these defense primes are our customers much more than they are our competitors. And so whether it be in the U.S. or even now across Europe, we are actively selling to defense primes who are taking our technologies and our products and integrating them into their existing defense programs or into their larger defense rollouts as they capture them. So often, the defense primes are a partner of DroneShield. And as I mentioned previously, DroneShield, we remain very flexible with our approach to market where we can go direct, we can be the prime, subprime, contractor or even engage the market through an authorized distributor in country. So we're really flexible with that, and it will really depend on the region and on how we approach each of those markets. Joshua Bolot: There's a couple of short ones, which I'll just quickly rattle off. Do we deal with the Ukraine? I think we previously identified that we have less than 5% of our revenues currently based on sales to the Ukraine market. To market, obviously, that we've been very supportive of in the earlier stages of the conflict there. And the -- it is still a presence in our revenue, but it is not more than 5% at the moment. A question regarding our security and processes to ensure that we, I guess, commercially and militarily cautious in our approach, both in terms of making sure that our intellectual property is protected and our employees are appropriately vetted. So I don't know if you want to talk about that. Angus Bean: Yes, sure. No, that's a great question. So DroneShield, we are a DISP-certified organization, DISP, defense industry security program. And that is the major defense and security program that's rolled out here in Australia. And we are then -- we essentially govern the business via the rules of DISP. And that sets out very clearly what we need to do from an employee vetting perspective through to a cybersecurity and physical security controls perspective as well as provides a lot of insight in terms of the governance, policies and procedures that we need to have as part of an organization. So it's great actually to work with the DISP team as they provide for you the frameworks that you need to implement and then our significant security team then essentially rolls that out across the business. We are continuing to uplift that DISP certification, but also our general security posture across the organization and globally as DroneShield becomes a supplier of main stage, as we mentioned, larger programs of record. Our security needs to mature and continue to mature to make sure we meet the market where it is and make sure we protect the business. Joshua Bolot: Interesting question, actually. And it's inventory related. I think I'll start off with the answer and then we'll work towards the forward-looking part of the answer. So it's regarding inventory obsolescence. And what's happened in the past, I mean, we announced a one-off inventory impairment, the significant item of $8.5 million in the FY '25 results. That product is still in our warehouses and available for sale, it is still an effective product, and there are still sales of those, albeit at a slower rate. I think more generally, though, the question which comes through, which is how we deal with inventory obsolescence with the release of new hardware as we move into that expanded product set. Angus Bean: That's a great question, Josh. So yes, certainly, that is something that we are considering deeply. And one of the things we're going to talk about, particularly in the second half of this year as we bring on our next-generation platforms which I am dying to speak about, but we will hold off for now, is obsolescence. The good news here is the products that initially we'll bring on to the market do not directly replace any product lines that we see today. And so the product lines that you see on the website currently, we will continue to provide to end users for the next few years to come. And so this is not an immediate impact and much of the next-generation platforms will be slight variation in terms of product positioning or a completely different technology itself. And so we will -- there won't be any necessary disruption in terms of obsolescence but it's certainly something we need to manage. And as we grow our product lines, we are trying to be very strategic about the use of our core components. And for example, using the same chipset, if we can across multiple product lines, allowing us to then order at much higher volumes of an individual item, therefore, getting a better price per item. But then that product -- that chipset that is being used -- utilized in multiple different DroneShield product lines. So we've already started to roll this out in a lot of the core technology platforms that you'll see from us over the next 2 years. Essentially, we'll use a lot of the same family of chips and same core componentry. So again, reducing the chance of either component obsolescence or product obsolescence. Joshua Bolot: There are actually a number of questions, which are very interesting in relation to different trends and different things which people see in social media and whether they're kamikaze drones, whether they're fiber optic, whether they're real, whether they're AI. Maybe you just want to talk about how we assess each one of those developments and where it leads into our product road map. Angus Bean: Thanks, Josh. It's a broad question, but I will do my best. Look, essentially, counter-drone, this is, as we've discussed, one of the most -- drone technology itself is one of the most disruptive elements to the defense and security apparatus around the world as we speak, and DroneShield is one of a handful of companies that are incredibly well positioned with the experience, but also the operations and funds to execute on that emerging trend. There is a lot of noise. There is a lot of diverging technologies being developed. And there's no question, we need to make really good decisions around the technologies we invest in the future, whether that be technologies we choose to develop ourselves. The potential use of an M&A activity to acquire technology new to the business, or as you've seen from us recently, just choose to partner and create really good agreements that are beneficial to DroneShield with Tier 1 technology providers around the world. So we're going to take a balanced approach to that, and we'll assess each of those technologies based on its own merit as to which one of those 3 avenues we want to go down to attain that technology for our end users. The great hedge, I guess, we have from a technology perspective is our DroneSentry-C2 platform that essentially allows us to roll with the technology and integrate various different types of technologies, sensor or effector and provide that as a fully consolidated solution, full turnkey for our operators or if technologies evolve and our customers more increasingly so already have our technology in country in operation, we can augment their existing solutions with this new technology over time. So -- and it is one of the reasons I believe that when Oleg decided to step down as CEO and the Board ran their process that they did end up selecting the Chief -- previous Chief Technology Officer to essentially run the business as I believe that my personal -- personally one of the best positioned people in the organization to make some of those hard calls. Joshua Bolot: I think we'll use this as the last closing question, and it might tie nicely to some closing remarks as well. In relation, I think we've answered the vast majority of questions. And there are some questions, which, unfortunately, we're just not able to answer in a public forum or generally because of operational security reasons or for other reasons, it's just not appropriate for us to provide commentary on those matters. But I think the one which might encourage towards a broader answer and a closing statement is regarding the things that you see happening in the next 2 to 5 years in the business, which will help to get us towards that 2030 vision. Angus Bean: Sure. Thanks, Josh. So look, in terms of what do we need to do? The position that the DroneShield company finds itself in is very strong. And that is, again, to highlighted and demonstrated by this first quarter of '26 update. And so both financially, operationally and technically, we are in a good position. Many of you have mentioned in the comments, these are lofty ambitions, the $1 billion annualized revenue and 30% of that being recurring revenue. These are significant uplifts on where we are today. But we do believe these are achievable. And certainly, we are redesigning and reshaping the organization, gearing up to really go after these ambitious goals. And I certainly wouldn't have stepped into the role and wouldn't have the excitement that I do have if I didn't feel these were achievable. In terms of what we need to do, it's a continuation of our current existing R&D strategy. We currently hold a 2-year product and technology road map that we believe will set the business up really well for the growth that's required to hit those numbers from a product and technology perspective. You will see us, as I mentioned, continue to grow our regional hubs in both the U.S. and Europe. Both of these footprints now are generating good revenue for the business. You've seen a number of those larger deals, most recently out of Europe, but I think there were some comments before about not announcing any U.S. contracts, and I'd like to highlight what Josh was mentioning is that we have received a number of U.S. contracts, but many of them, if not all of them, have fallen under the $20 million, but the volume of those contracts has increased. And that's perfectly fine for us as a business as well. And if anything, it allows us more predictability and more certainty in the organization. So outside of growing the regional hubs, we'll continue to grow our partner base both commercially and technical in the future. And this is something that DroneShield as an Australian business, one that is highly trusted and respected in the sector, we are in a great position to utilize that goodwill and utilize the trust that we do have to partner with some of these great organizations and either enter new markets or augment existing solutions around the world. Joshua Bolot: Thank you. Thank you very much, Angus. I think we're just on 10:00. So we appreciate the time that many hundreds of people -- hundreds of people have used to listen to this update. And as Angus mentioned, we have our Annual General Meeting with the Notice of Meeting coming out in the -- by the end of the month. The Annual General Meeting is on the 29th of May, and we encourage everybody to either attend in person or online. Thank you. Angus Bean: Thank you, everyone.