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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.
Unknown Executive: [Interpreted] Distinguished leaders, investors and analysts, good afternoon. Thank you for joining us today for the China Oilfield Services Limited, COSL First Quarter Earnings Conference Call. COSL is one of the world's largest integrated oilfield-service providers. Our services span every stage of oil and gas exploration, development, and production. Our operations are categorized into 4 segments: geophysical and engineering exploration, drilling services, well services and marine support services. By leveraging our integrated capabilities, we provide clients with full life-cycle oilfield solutions. We remain highly responsive to evolving trends in the international oil and gas market while steadfastly prioritizing technological innovation as our leading strategic driver. We continue to refine our lean cost-control measures and actively promote the synergy between domestic and international markets, the so-called dual circulation strategy. We are committed to translating our premium equipment and technical prowess into a leading market position, striving to deliver robust performance to reward our shareholders and society at large. Please allow me to introduce the members of our management today joining us, Mr. Qie Ji, our Chief Financial Officer. Today's conference will consist of 2 parts. First, our CFO, Mr. Qie Ji, will provide an overview of the company's performance for the first quarter of 2026, and then this will be followed by a Q&A session. I will now turn the floor over to our CFO, Mr. Qie. Ji Qie: [Foreign Language] Unknown Executive: [Interpreted] Thank you, Mr. Qie, for the presentation. We will now proceed to the Q&A session. To allow more investors the opportunity to participate, please limit yourselves to no more than two questions. Before asking your question, please state your name and the company's relation. Please note that [indiscernible] interpretation will be provided throughout the Q&A session. We kindly ask you to [indiscernible] after each question to allow time for interpreter. [Operator Instructions] Unknown Analyst: [Interpreted] So I am [indiscernible] Everbright Securities. I have 2 questions, starting by the first question. As we can observe that with China's national strategy of ensuring national energy security, COSL has seen increased production output as well as reserves, in particular, with remarkable achievements in the deepwater area and South China Sea. We have also seen that you have increased the utilization of your semi-sub platform in deepwater area in Q1. So the first question concerns, can you give us a guide on the day rate forecast and operational volume of your deepwater platform throughout the year? So that's the first part of the first question. And the second part is, how do you see your competitiveness against international oil service giants? And the second question is we have observed that oil prices have been skyrocketing since beginning of March and have remained at high level, in particular, given the high oil prices and given the current geopolitical conflict, China's national energy security becomes all the more important. Me and a lot of other investors all agree that Chinese government will do more in safeguarding its national energy security. So the question is, how do you see the status quo of your operational volume? And do you have any forecast for your operational volume down the road as well as CapEx forecast? Do you feel the same as I have just introduced, in particular, how is your order reflecting such a new situation? Unknown Executive: [Interpreted] So you have touched upon 2 questions. One more concerning the macro side and other more about our forecast. I'll try to answer both of the questions briefly. So firstly, on the whole, our deepwater semi-sub platforms have been doing quite well for the first quarter of this year, mostly benefiting from our overseas operations, especially operations in Brazil, south part of Brazil, which have seen obvious -- clearly improved operational days because that platform was not became operational until September last year. As for the Chinese business, our semi-sub platform's operational days or operational volume have maintained relatively stable as new prices become executed. While to be honest, some of the semi-sub platforms, the price have increased slightly. This offset the slight decrease of the actual operational days of our semi-sub, which maintained the overall increase of our drilling platform services. As for the full year cost because we are waiting for the whole year cost, from our clients, we maintain dynamic conversations with them, hoping to satisfy their requirements of resources in either against the geopolitical situation in the Middle East or in the new era of the 15th Five-year plan period. As for the second question, I think that we still need to investigate and analyze how things change regarding the oil prices and regarding the Middle East situation because we were seeing spot prices as high as more than $110 or $120 and even higher. And at one time, WTI was even higher than Brent. However, over the past couple of days, we do see spot went down to about $80 plus. So such volatility has already become something that we can barely make any forecast about. I still believe that oil and gas suppliers will make sustainable and rational judgment on their part. As for domestic China situation, CNOOC is working to become a leading supplier contributing to oil and gas production increase in China domestic. And we have also seen that their crude output for Q1 increased and they contributed a large part of the output increase of crude oil coming from China. So again, to align with the first question, we will keep observing CapEx adjustment and whole year forecast adjustment made by CNOOC, and we will provide resources to provide guarantee to their request. Lawrence Lau: [Interpreted] Lawrence from BOCI, Bank of China International. I also have 2 questions. The first question is that I've seen that in the first quarter of your finance expenses, there was a large part of exchange losses. So can you walk us through to what extent or how large such losses and why there was such a loss? And secondly, I would like you to walk us through the income and profit performance of the first quarter. Unknown Executive: [Interpreted] Okay. Thank you very much for asking the questions. Regarding your first question about our finance costs, indeed, in Q1 2026, we have seen exchange losses to the amount of around CNY 300 million, CNY 303 million to be more specific, which is CNY 208 million higher than the same period last year, mainly because of the accounting denomination currency that we use, and we have business dealings with overseas subsidiaries and the balance contributing to such number that you have seen. It's not necessarily a result of our increased business scale overseas. However, as we keep dealing with our overseas intermediaries, the balance and the number will always be there. To elaborate further on this question, we are very much aware of either exchange profits or losses as a result of the situation that I just introduced and how it affects or even disturbance the operating performance of the company, we are even bothered by that. So we are currently examining and looking at some possible solutions to take measures at the right time, we choose the timing to take measures for the purpose of closing any influence on the normal operation of the company as a result of such FX exposure arising from accounting treatment. Measures include, but not limited to, adjusting the functional currency that we use in bookkeeping. And then when it comes to a specific breakdown of our revenue and profitability, on the whole, things are better than expectation in terms of segment breakdown. For our drilling service, domestic and overseas revenue, operating margin, and operating profit, all 3 are better compared with the same period last year. In terms of the well services, domestic and overseas, with especially overseas revenue performed better than expectation. Operating profit margin reached around 18%, 1-8-percent and both domestic and overseas well service revenue and profit have increased year-on-year. As for geophysical and vessel service, both performed stable. And to add one more thing about the operating profit. So for the first quarter of this year, operating profit of COSL reached CNY 1.53 billion, an increase of 22% year-on-year. Both domestic and overseas have increased 20% year-on-year, which means that the company's normal operations have been rather good, excluding or aside from whatever impact that we suffer from the exchange losses. Beina Yan: [Interpreted] Yan Bei Na From CICC. I have 2 questions. The first question is about your jackup because I've noticed that your jackup platforms utilization days in Q1 of this year went down a little bit because of some scheduled repair and maintenance scheme. So the question is, after the maintenance and repair complete, do you see their utilization days increase in Q2 compared with this quarter? And my second question is about your business in the Middle East because we do see some pause in the operation of some contractors in the Middle East in March. However, starting from mid-April, a lot of contractors have recovered their operations. So I wonder how that will impact your Middle East operation. Unknown Executive: [Interpreted] So to firstly answer your first question. Indeed, in Q1, our jackups repair days have increased significantly compared with the same period last year. Such repair has already been planned for by the company. And you will find that throughout the year of this year, there will be more repair days -- scheduled repair days of our platforms compared with previous years. And for Q1, mostly such repairs are concentrated in our jackup platforms domestic, and our semi-subs repair have maintained stable. But you will also find that whatever impact the increased repair days of our platforms has on our company's revenue has already been offset by the high day rate of China domestic jackups and semi-subs and the execution of the high day rate in Norway and increased part contribution by Brazil. There is one more thing I want to add for the first question because there is a part about our repair plan for Q2. Such plan will be very much aligned with the operational plan of our clients. So that's about the first question. As for the second question, the situation in the Middle East, the war occurred or took place in the Middle East on the 20th of February. So in Q1, the situation didn't impact us in a major way. However, we do gradually start to feel such impact starting from mid or late March. Specifically, our jackup and semi-subs in Saudi Arabia and Kuwait maintain operational and keep charging. However, the land rigs in Iraq have been affected by the decreased output in Iraq and such impact is already being felt. Then regarding your question about the Middle East changing situation, we basically will take 2 measures in response. One is to try to scale up our businesses in the Middle East. Let me give you some examples. We have recently secured a long-term large value contract for our well service in that region. And also, we have secured a turnkey or EPC contract for our drilling service in Iraq. In addition to that, given our global landscape, leveraging such advantage as a global player, we try to have opportunities in ASEAN as well as in America as an EPC contractor. We already see progress in both fronts. The increased business, we hope, can hopefully offset the impact as a result of Middle East. And on the other hand, we keep a close eye on the Middle East situation and make plans so that we are always ready when our clients are ready to resume their operations in that region. In another -- thirdly, we will seek opportunities as maximum as we can try to replace some of the players. Unknown Analyst: [Interpreted] From Guosen Securities. My question is, I noticed that a couple of days ago, COSL announced a cooperation framework agreement with a player in Kazakhstan because when it comes to the Middle Asia, COSL is a new player. Middle East -- Middle Asia features new in your global landscape. So can you walk us through the overall market of oilfield services in the Middle Asia or specific in Kazakhstan? And I would appreciate it very much if you can give us more details on how -- when do you expect the cooperation become more of a substantiality. Unknown Executive: [Interpreted] Thank you for the question. Due to the limitation of my professional knowledge, I can only share with you to the best of my knowledge for COSL and for CNOOC, Middle Asia or Central Asia has been an area that we have left for a long time and the reentry into this place is something of significance. So not long ago, the Chair of the Board, Mr. Zhao, went personally to Kazakhstan to sign the cooperation framework agreement that you have just mentioned, which will add a very promising point to the global landscape of COSL. So we did have conducted some preliminary investigation into the basic oil reserve situation of that country, and we find that mostly the reserves are in the mudflat area and very much prone to extremely cold weather. So the plan will mostly request efforts by our colleagues from the cementing business area, directional drilling, LWD and the colleagues specializing in other areas to work together. We are currently having discussions on doing some -- on creating operational plans for some test wells. As more of the details of such plans are coming out, we will be happy to share with all of you more details. Unknown Analyst: [Interpreted] From Bank of America. I have 2 questions. So for the first question, I would like to pursue further on the exchange losses because we know that exchange profits or losses, only transactional differences are recorded in your profit. As for translational differences, such differences are recorded in your OCI. So I wonder whether the appreciation of RMB has affected your dollar-denominated contracts already signed. And also, I would like to ask because you mentioned that your semi-sub platform day rates have increased. So may I ask whether such increase is observed in domestic China? Or is it because you have made adjustment of your day rate because of the RMB appreciation trend that you expect will continue down the road? And one more part of the question is if RMB keeps appreciating, whether exchange losses will keep being recorded in your profit in the future? And my second question is regarding your well service; can you walk us through it more? Unknown Executive: [Interpreted] So to answer the question, let me give you a very simple example using specific numbers so that you understand it more easily. Let's assume that the parent company, transmits USD 100,000 to its overseas subsidiary, so the USD 100,000 is reflected on the balance sheet of the parent company at RMB 700,000 if the exchange rate is RMB 7. In an extreme situation, if the exchange rate goes to RMB 6, which means on the balance sheet of the parent company, the RMB 700,000 becomes RMB 600,000 and the RMB 100,000 is naturally recorded as the exchange loss. For the overseas subsidiary because the RMB 100,000 is not -- USD 100,000 does not change because everything is priced in U.S. dollars. In doing balance sheet consolidation, USD 100,000 can be balanced out, but the RMB 100,000 as a result of exchange loss is recorded as finance expense. So if, say, RMB keeps appreciating against the U.S. dollar, the exchange loss that you will find on our balance sheet will expand as a result of the example that I just mentioned. So we are working on taking different measures, trying to narrow the USD 100,000 exposure, taking different means, for example, including narrowing it from USD 100,000 to USD 10,000 in order to minimize the impact. But if you take a look at a longer timeframe, throughout the 14th Five-year plan period in between the 2 years of '21, '22, there was 1 year a major exchange profit and the next year, a major exchange loss. But the overall impact on the company's balance sheet throughout the 14th Five-year plan period was CNY 40 million, 4-0-million. As for the second part of your first question, you have actually raised 3 questions. So the second part of your first question regarding the semi-subs, on the whole day rate of our semi-subs for this year did not change in any major way. However, there was indeed one semi-sub in domestic China, the day rate has increased significantly in Q1, and its utilization rate reached almost 100%, which greatly contributing to the revenue increase of our semi-sub. As for overseas semi-sub platforms, because we have signed long-term fixed rate contracts with the clients, therefore, didn't -- there wasn't any major change. As for the well-service business segment, in Q1, the revenue was CNY 6.07 billion, an increase of 5% year-on-year, mainly benefiting from the integration trend of our overseas business, which is growing very fast. In Q1, net margin was CNY 1.11 billion, an increase of 18% year-on-year. Both domestic and overseas have increased, especially overseas net margin has increased. As for the well service margin rate, in Q1, the margin rate was 18.2%, an increase of 2 percentage points year-on-year. Domestic margin rate exceeded 20%, becoming a main contributor of our profit margin increase in Q1, mainly because last year, there were certain one-off factors reducing our margin and such factors becoming absent this year contributed to the margin increase. Going forward, we will continue to work harder in securing new contracts for our well-services. As mentioned, despite the worst in the Middle East, we still managed to secure one high-value long-term contract for cementing service. I believe that the impact -- for all the impact, there will be such impact is only short term. As you can see, we still have 4 well-leader drill lock systems operating simultaneously in Iraq, which will help us to gain increasing market recognition and help us accelerate our business scale up in Middle East. Operator: [Interpreted] In the interest of time, this will be the last investor. Unknown Analyst: [Interpreted] From Changjiang Securities, the question is about your shareholder return plan for the 15th Five-year plan period. Do you have any plan to increase your dividend payout to the shareholders? Unknown Executive: [Interpreted] Thank you very much for the question. Giving back to investors or investor return, it is fair to say it's a purpose and the center of focus of all the business and operational activities of the company. As you can see, the increased EPS is a reflection of the 20% net margin increase of the net profit attributable to the shareholders, which is a testament to the fact that we respect and give back to shareholders. So for the -- throughout the 14th Five-year plan period, you noticed that our revenue or our turnover increased from CNY 30 billion to CNY 40 billion and to CNY 50 billion, exceeding CNY 50 billion. We are still making plans and adjusting plans for the 15th Five-year plan period. But the hope is in the next 5 years, our revenue can achieve another milestone increase as we have seen before. As for the dividend payout, we, of course, hope to fully share our growth with shareholders. This is very much dependent on the business growth of the company and strong cash flow situation of the company. And on the whole, the payout ratio, we hope the payout ratio shall be stable with the increase. Operator: [Interpreted] Thank you for the questions, and thanks to Mr. Qie and the management team for their detailed insights. We would also like to express our sincere gratitude to everyone for your ongoing interest in and support for COSL. Due to time constraints, this earnings conference call is now drawing to a close. If you have any further questions, please feel free to reach out to our IR department any time. This concludes our conference call for today. Thank you all and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Greetings, and welcome to the Kaiser Aluminum Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Orlando, Investor Relations. Thank you. You may begin. Kimberly Orlando: Thank you. Hello, everyone, and welcome to Kaiser Aluminum Corporation’s First Quarter 2026 Earnings Conference Call. If you have not seen a copy of our earnings release, please visit the Investor Relations page at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are Chairman, President, and Chief Executive Officer, Keith A. Harvey, and Executive Vice President and Chief Financial Officer, Neal E. West. Before we begin, I would like to refer you to the first four slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management’s current expectations. For a summary of specific risk factors that could cause results to differ materially from the forward-looking statements, please refer to the company’s earnings release and reports filed with the Securities and Exchange Commission, including the company’s Annual Report on Form 10-K for the full year ended 12/31/2025. The company undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company’s expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and cannot be reasonably predicted or provided without unreasonable effort. Any reference to EBITDA in our discussion today means Adjusted EBITDA, which excludes non-run-rate items for which we have provided reconciliations in the appendix. Further, slide five contains definitions of terms and measures that will be commonly used throughout today’s presentation. At the conclusion of the company’s presentation, we will open the call for questions. I would now like to turn the call over to Keith A. Harvey. Keith? Keith A. Harvey: Thanks, Kim. Good morning, everyone, and thank you for joining us. I will begin on slide seven. We are very pleased with our first quarter performance. The momentum we carried out of 2025 not only continued, but in several areas accelerated. As you saw in our earnings release last night, we are raising our full-year outlook, reflecting how quickly the improvement we are seeing is coming together as we execute our strategy and move toward our long-term conversion revenue and EBITDA goals. We believe 2026 represents the opportunity to deliver a true step change in performance, and our first quarter results reinforce that view. This quarter delivered another record for EBITDA and EBITDA margins. New capacity installed over the last several years is ramping well, customer demand has been stronger than we anticipated coming into the year, lead times across the industry are beginning to stretch, and pricing continues to firm across many of our products. While metal remains at elevated levels, these higher costs, which we pass through, have not led to any signs of meaningful substitution in our markets, and our supply lines for metal remain secure through the balance of the year, which allows us to stay focused on execution rather than availability. There were four key drivers behind the strength of the results we delivered in the quarter. First, customer activity across all of our end markets exceeded expectations. As lead times extended and pricing firmed, the environment has increasingly rewarded reliability and service. These are exactly the conditions where Kaiser Aluminum Corporation differentiates itself and where our operating discipline creates opportunities to win incremental business. Second, we continue to see meaningful mix improvement at our rolling mill Warrick. The mix shift toward higher value-added coated volume is fundamental to Warrick’s long-term success and underpins our confidence in the margin and EBITDA trajectory of the business. Performance has been encouraging and demand for coated products remains strong. Based on what we are seeing today, we expect this mix improvement to continue through the balance of the year. Third, operational performance significantly improved across our operations. With significant start-up costs and related disruptions to the operations now behind us as we completed our new investments, strong operational and financial performance is returning to more historical levels. Excluding metal lag gains in the year-over-year quarterly results, we saw an approximate 850 basis points margin improvement due to operational performance gains alone. And finally, aluminum prices moved up meaningfully during the quarter, creating a metal tailwind. While beneficial to our financial results, it is modest relative to the structural improvements underway across the business. As always, we operate on a metal-neutral basis, passing through what we cannot control while focusing on conversion, productivity, and disciplined capital deployment. I also would like to point out Kaiser Aluminum Corporation’s strong competitive position with the growing use of recycled material across our portfolio, which not only supports our sustainability initiatives, but also creates the environment for strong tailwinds under current conditions. I will continue to remind everyone that these conditions can also reverse and become headwinds should metal prices decline in a volatile market. Neal will cover these points in more detail as he walks through financial details related to the quarter. Neal? Neal E. West: Thank you, Keith, and good morning, everyone. I will now turn to slide nine for an overview of our shipments and conversion revenue. Conversion revenue for the first quarter was $404 million, an increase of approximately $41 million, or 11%, compared to the prior-year period. Looking at each of our end markets in detail, aerospace and high strength conversion revenue totaled $131 million, up $10 million, or approximately 8%, primarily reflecting a 9% increase in shipments over last year. Commercial aircraft production continued to recover, supported by higher build rates at our OEM partners. We are seeing signs of destocking now ending on several of our products, albeit certain plate products continue to destock within our commercial aerospace customers. Demand across our other aerospace and high strength applications, including business jet, defense, and space, remains strong with improving booking rates. Packaging conversion revenue totaled $157 million, up $30 million, or approximately 24% year over year, reflecting a 13% increase in shipments over last year. The shift to coated products is generating higher conversion revenue per pound and this is supported by strong underlying market demand. In addition, the improvement in shipments also reflects the ramp-up of the fourth coating line. As Keith mentioned on our last call, although profitability is expected to strengthen meaningfully in 2026, we plan to operate the line at around 80% utilization while we further optimize quality and consistency. General engineering conversion revenue for the first quarter was $87 million, up $4 million, or approximately 5% year over year, primarily driven by favorable pricing, partially offset by a 2% decline in shipments. Inventory levels across the channel remain at multi-year lows, positioning us well as these markets improve. Tariff-related reshoring and the differentiation of our customer-focused quality and services along with our Kaiser Select offerings are reinforcing a favorable market setup for increasing volumes with improved pricing. And finally, automotive conversion revenue of $29 million decreased by 8% year over year on an 8% decrease in shipments. Sustained high consumer borrowing costs and tariff-related uncertainties are dampening conditions across the automotive industry as a whole. However, demand for larger vehicles such as light trucks and SUVs, where our products are primarily targeted in this end market, remains strong among certain buyers. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to slide 10. Reported and adjusted operating income for the first quarter was $98 million, up approximately $55 million year over year. Reported net income for the first quarter was $63 million, or income of $3.71 per diluted share, compared to net income of $22 million, or income of $1.31 per diluted share, in the prior-year period. After adjusting for pre-tax, non-run-rate charges of $0.6 million, adjusted net income for the first quarter 2026 was $63 million, or adjusted income of $3.74 per diluted share, compared to adjusted net income of $24 million, or adjusted income of $1.44 per diluted share, in the prior-year period. Our effective tax rate for the first quarter was 24%, compared to 25% in the first quarter 2025. For the full year 2026, we continue to expect our effective tax rate before discrete items to be in the mid-20% range. Additionally, we anticipate the 2026 cash tax payments for federal, state, and foreign taxes will be in the $10 to $13 million range. Now turning to slide 11. Adjusted EBITDA for the first quarter was $129 million, up $55 million from the prior-year period. Adjusted EBITDA as a percentage of conversion revenue improved by 1,200 basis points from 2025 to 31.8%. The year-over-year improvement was primarily driven by $25 million from higher shipment volumes and pricing, and a net $34 million improvement in operating costs. This reflects improved scrap utilization and spreads, which was partially offset by higher operating costs. Of the $34 million operating cost improvement, $15 million was attributed to metal lag gain. In addition to our strong underlying operational performance, the first quarter metal lag gain was approximately $36 million. The increase in year-over-year scrap spreads and the metal lag gain reflect higher aluminum prices influenced by the upward pressure in global markets from the conflict in the Middle East, as well as elevated Midwest premium driven by U.S. tariff policy and tight domestic supply. As the year progresses, we remain focused on operational improvements by optimizing efficiencies and further leveraging our recent capital investment to support continued margin expansion. Now turning to slide 12 for a discussion of our balance sheet and cash flow. We generated solid free cash flow, which we calculate as operating cash flow less CapEx, of $69 million in the first quarter, despite higher working capital demands and elevated aluminum pricing, resulting in total cash of approximately $30 million and $566 million of borrowing availability on our revolving credit facility. Our resultant liquidity position of approximately $596 million remained strong as of 03/31/2026. As a reminder, our senior notes interest costs are fixed at $54 million annually, and we have no debt maturing until 2030. Given our strong last-twelve-month EBITDA performance and cash position, at the end of the first quarter 2026 our net debt leverage ratio improved to 2.8x from 3.4x at year-end, moving us closer to our targeted range of 2.0x to 2.5x. We now expect full-year free cash flow to be in a range of $140 million to $150 million, subject to metal price movements and their impact on working capital. Turning to capital allocation. Our framework remains focused on driving long-term growth. Our priorities are clear: disciplined organic investment, selective inorganic opportunities, and consistent return to stockholders. Our capital expenditures totaled $19 million for the first quarter 2026, and for the full year 2026, we continue to expect our capital expenditures to be in a range of $120 to $130 million. Finally, on April 13, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reaffirming their support for our strategy and focus on delivering sustainable value to our stockholders. 2025 capped our nineteenth consecutive year of dividend payments, a unique distinction that sets Kaiser Aluminum Corporation apart in the industry. In summary, as we celebrate Kaiser Aluminum Corporation’s eightieth anniversary, we enter 2026 with strong momentum, solid visibility across our end markets, and the benefit of having completed major growth investments. With this foundation in place, we are focused on harvesting returns, expanding margins through disciplined execution, and generating meaningful free cash flow. I will now turn the call back over to Keith to discuss our 2026 outlook. Keith? Keith A. Harvey: Thanks, Neal. Let me walk through our end markets and how we are thinking about the remainder of the year as part of that discussion, turning to slide 14. Starting with aerospace and high strength, demand continues to improve. We saw solid bookings and shipments across the portfolio in first quarter, and that strength is expected to continue. Destocking headwinds that affected parts of the market last year continued to ease, and improving demand is now the primary driver. A lack of imports is supporting market share gains, and increasing defense and space spending is adding incremental demand across several programs. In fact, demand for our defense and space applications appears to be taking an additional step higher, building on already high levels in 2025. Utilization across the facilities remains high, including the recently completed Phase 7 capacity expansion at our Trentwood rolling facility, driving longer lead times and upward pressure on pricing for non-contractual bookings. Based on this backdrop, we now expect aerospace and high strength shipments to grow in the range of 15% to 20% this year, with conversion revenue growth of 10% to 15%. In packaging, performance during the quarter was strong, with robust shipments and continued healthy demand in a supply-constrained environment. The fourth coating line advanced further toward full production, with eight monthly output records attained since 2025. This improvement was achieved despite persistent challenges with certain converters we use, particularly related to on-time delivery shortfalls and overall broader performance concerns. Our own execution improved during the quarter and momentum remains positive. With solid multi-year demand visibility, we will continue to position conversion revenue ahead of shipment growth as coated products become a larger portion of our mix. This is reflected largely in higher conversion revenue per pound. As you can see in the appendix of this presentation, conversion prices through first quarter have risen by nearly 50% since we acquired the business in 2021 and continue to improve. Given current market conditions, we now expect packaging shipments to grow between 10% and 15% for the year, with conversion revenue growth in the range of 20% to 25%. General engineering is off to a strong start in 2026 as well. Shipments and booking activity were solid across the portfolio. Pricing and lead times are moving out across most products, signaling a healthier demand environment. Generally speaking, low customer inventories and extending lead times create a favorable market backdrop. Specifically, on semiconductor plate products, order activity has been encouraging, whereas the destocking overhang that weighed on demand last year has largely transitioned into ensuring capacity is available to keep up with requirements. Based on trends we are seeing today, we expect general engineering shipments and conversion revenue both to increase between 5% and 10% for the year. In automotive, results were in line with expectations. Demand for light truck and SUV, where aluminum pairs well in light-weighting, remains healthy. Our shipments were lower as we prepare for two major outages later this year focused on equipment repairs, upgrades, and reviewing plans to significantly expand capacity to support aluminum driveshaft demand. As always, these investments are contractually supported by customer commitments and position the business well for future growth. Based on these factors, we now expect shipments and conversion revenue to be flat to down 5% for the year. Now turning to slide 15 and taking all of this together. We now expect conversion revenue to rise 10% to 15% and EBITDA to increase between 20% and 30% year over year. This improvement reflects stronger demand, firmer pricing, improved mix at Warrick, and continued strong execution across the portfolio. Overall, we are off to an excellent start in 2026. The fundamentals across our markets are aligning well with the expectations we set heading into the year and, in several cases, are exceeding them. The strategy is working, execution remains strong, and the opportunities ahead are even more encouraging. With that, we are happy to take your questions. Thank you. Operator: We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question queue. You may press star 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 star keys. One moment while we poll for questions. Our first question comes from William Peterson with JPMorgan. Please proceed with your question. William Peterson: Yes. Hi. Good morning. Thanks for taking the questions. Nice job on the quarterly execution and the revised guidance. I have a few questions. Starting off, trying to unpack the first quarter print: better-than-expected metal price lag benefits—can you unpack that versus the improving demand story and also versus the value-added pricing power? More importantly, looking ahead on the revised guidance, can you help us understand how much scrap spreads play a role versus mix and volume impacts that you had called out? Keith A. Harvey: Sure. Good morning, Bill, and I appreciate your comments. Let me speak to some of that. If I miss something, just hit me with the specific question again. The way I look at where we currently are, I have been trying to pull out the metal lag gains just to understand how we are doing operationally. If I do that in the comparative between the first quarter of last year and the first quarter of this year: last year, if I pulled out the gain and looked at what the EBITDA margin was without the gain, we were around the mid-teens, around a 14% to 15% type margin on just the operational side. If I do the same thing with the first quarter of this year and pull out the $36 million gain that we called out, that margin has moved up to about 24%. So we are driving the business operationally, which includes not only the mix, volume, and pricing we expected in the business, but also underlying better performance at the facilities. That also captures in the traditional business that we are taking advantage of spreads—these are beyond the metal lag that we call out. All in all, we have all the pieces performing much better and as expected. What was key, and I think sometimes gets lost: last year, we called out for the full year about $47 million of one-time start-up costs and related items. We have those pretty much behind us now. So we are getting some of that cost back into the system, the markets are improving, and we are executing better with all the chaos behind us. With regard to metal lags going forward, what we have stated—like in February—we said we are taking what the current quarter outlook does for us, and then we are looking at the forward metal curves. The forward metal curves, especially as we looked at in our last call, seemed to drop off proportionally for the market coming back into alignment. What I will say is that those forward curves are remaining fairly elevated. I am sure that is representative of the volatility in the market. So we could have some continued metal lag gains that will aid us. But, again, we are differentiating between that and operational performance. When I look at the margin growth based on how well we are doing versus just these tailwinds that have taken place, we have almost a 75% improvement year over year in Q1. That is what I am most pleased about and focused on, and I believe it is going to long term drive our business. William Peterson: Thanks for that color. There have been some changes to the Section 232 aluminum tariffs that have been refined somewhat. Are you able to comment on what impacts this change may have on your business, including supporting pricing or other customer feedback that you are hearing thus far? Keith A. Harvey: I have looked at it and tried to understand where that can come to play. I think it enhances the domestic supply position. A lot of those semi-finished type products coming in where a 25% would apply are really going to impact the imports for the most part. The 232s are hanging in quite well. I think we are on the verge of continuing to see reshoring elevate here. We are seeing more factory demand. We are seeing growth in semiconductors start to come off the floor we saw last year. I think it is going to double year over year this year and has potential to double year over year next year. So I think that strong demand and a greater hindrance for imports only leads us to a better market condition with regard to demand and a pricing environment. William Peterson: Maybe one more and I can get back in the queue. On the assumptions baked into the updated aero and high strength guidance, it sounds like you are increasingly more confident in commercial aero demand. Are destocking dynamics done or nearly finished? And how does that compare with the import environment being less pronounced? On the other side, defense sounds like you are feeling incrementally better as well. Keith A. Harvey: That is really it. We are seeing defense, in some programs where we expected perhaps a doubling, actually quadrupling of expected demand coming our way. On commercial aero, I happened to be watching CNBC yesterday morning, and Kelly Ortberg was on from Boeing, and he publicly called out the rise in build rates on the single-aisle from 42 to 47, as well as expected continued progress on other variants that are being up for approval. So we are seeing the commercial definitely get a little stronger. We are also seeing space—it is a cliché, but we are seeing space take off. All these things are hitting around the same time. We got into that same environment in 2019 when we saw not only aerospace start to take off, but also GE begin to rise, and that created a pretty pleasant environment for us. I can foresee the same thing beginning to occur here. William Peterson: Okay. Thanks for the color. Good to hear things turning positive for you. I appreciate the chance to ask some questions. Keith A. Harvey: Thank you, Bill. Appreciate it. Operator: Our next question comes from Samuel McKinney with KeyBanc Capital Markets. Please proceed with your question. Samuel McKinney: Hey, good morning, and congrats on the strong quarter. I am going to follow up on the last question on the aero and high strength market. You had enough confidence in the end market trends to raise the shipment outlook there for the year. You touched on the production ramp at the major OEMs, but can you talk about where you think we are in the destocking/restocking cycle within that end market right now? Keith A. Harvey: If I had to use a baseball analogy, I would say we are coming up in the seventh inning with regard to demand for plate-type products, and I believe we are in the ninth and heading into extra innings on the other products and markets that we participate in, including defense, business jet, space, and the other products. If I look back, we claimed a new record in 2024 for aero and high strength and then we got into some of that destocking last year. If I compare our first quarter results to the first quarter 2024, they are very similar, which is a strong start, stronger than last year. Our outlook, with the activity we are seeing currently and expectations, is that we are going to be growing quarter over quarter through the remainder of the year. I am expecting the quarterly results to continue to improve, and the outlook we are seeing right now supports that. Lead times have more than doubled in the last few months. We are seeing that with record-low inventories outside of the commercial players, which bodes well for long-term demand. We are going to see similar strength on the GE products as well. Samuel McKinney: Thanks. That is helpful. On a per-pound basis, you saw nice sequential expansion in packaging conversion revenue this quarter. Talk to us about the progress you have made and expect to make over the balance of this year on shifting to more coated capacity at Warrick, as well as the reception from your customers on the product coming off that new roll coat line. Keith A. Harvey: We have a target of 80% utilization of that line this year. Naturally, the first question is, with such strong demand, why not ramp it to 100%? Part of the mantra for Kaiser Aluminum Corporation is on-time delivery, and over the last couple of years, we have not been meeting our expectations—much less our customers’ expectations—in that regard. So we are going to ramp up and make sure that our service levels improve in a similar cadence. If we can get those earlier in the year, I am confident that demand will be there to support additional shipments. With regard to customer reception, we have had excellent reception to the quality of the product coming off that line. We have been progressing qualifications well through a number of customers, and as we ramp, we still have a way to go and more upside from that potential. Again, 80% is the target; there remains another 20% beyond that, and we intend to continue to focus on that move to coated. Our customers are receptive; they appreciate it. Demand is as strong as we have ever seen it, and we should continue to see growth throughout the quarter and through the balance of the year in that category. Operator: We have reached the end of our question and answer session. I would now like to turn the floor back over to Keith A. Harvey for closing comments. Keith A. Harvey: Thanks, Maria. We thank you for your continued interest in the company. I would also like to thank all the Kaiser Aluminum Corporation team members for their contributions in helping develop and execute what has long been a very successful strategy. I look forward to updating you all on our progress in July. Have a great day. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Emelie Alm: Good morning, everyone, and welcome to the presentation of the first quarter results 2026 for Husqvarna Group. My name is Emelie Alm, and I'm joined here today by our CEO, Glen Instone; and our CFO, Terry Burke. So Glen and Terry will walk you through the presentation, and then we will have a Q&A session. [Operator Instructions] So with that, I would like to hand over to you, Glen. Glen Instone: Thank you, Emelie, and a warm welcome from my side. So let's jump straight into the presentation. Q1, to summarize, off to a very solid start despite, of course, the continued uncertain market sentiment that we see out there, particularly around geopolitical tensions. We've seen a strong growth in our core portfolio, our key strategic growth areas. We're very pleased that our EBIT has expanded with some 10% given the strong product mix, but also a very good start to our savings program. From a strategic execution perspective, we've got a very good 2026 ahead of us in terms of product launches, and Q1 has started very well when it comes to our product launches ahead of the season. We made a very good start around the strategic portfolio management that we launched back in December, and we'll come back to that later in the presentation. So all in all, 2% organic sales growth, EBIT expansion to just over SEK 1.7 billion and a 12.3% operating margin. So to highlight some of the strategic areas during the quarter. Innovation. We're very, very proud, and I'm really happy to really talk about our innovation that we're bringing to the market in season '26. All 3 divisions are contributing here. Very happy to see the strong range of residential robotic lawnmowers that are coming for the small and midsized gardens, our 300 Series range, really moving the needle towards boundary wire-free AI vision technology. We also have an enhanced range of 400 Series product under the NERA brand, NERA range that also continues to expand and enhance our vision offering. Likewise, in the Gardena division, a strong range of watering products that really enhanced the first quarter result with the simply classic range of nozzles and sprayers as well as a strong range of watering controls. In Construction, we've actually brought a good new range of floor saw blades to the market that really enhances our sawing and drilling business portfolio unit. So that's just a flavor of what we brought during the first quarter. So a strong innovation pipeline already coming through in the first quarter. From a portfolio management perspective, when we launched this in December, we continue to enhance our operating model. This is where we will look much more strategically at our portfolio, grow in certain areas and, where we are not performing as well as we should be, we clearly need to turn it around or, in some cases, exit that portfolio. What I am pleased to see is we already see early signs of this coming through, and we see that in the results. We've enhanced a lot of our leaders. We've changed some leaders during the first quarter of this year to really drive those business portfolio units. So the operating model starts to get traction. Operational excellence. I'm really pleased that we got off to a good start when it comes to our savings program. We launched a SEK 4 billion cost-out program, and we've made a good start with some SEK 245 million in the first quarter, really coming through from some savings we found in sourcing and actually simplifying design, really, really supported by a strong complexity reduction already during the first quarter. So all in all, off to a good start. If we look at the sales development. Then as reported, our sales was minus 5%. That is actually including a currency headwind of minus 7%. So organically, we grew with 2%. We've seen organic growth in the Husqvarna Forest & Garden division with 3%, growth in the Construction division with 1% and a 1% organic sales decline in Gardena. As mentioned, very strong growth in our key portfolio areas, particularly around robotics, watering and handheld products. What I am pleased to say is actually we've seen a growth in all of our regions so far in quarter 1. So we're very pleased to see that. It's been some time since we've reported a strong growth or growth across all of the regions. Just to remind you what we launched back in December around the business portfolio units. We'll come back to this time and time again. We have clear segments that we're operating in what we call profitable growth. You see there are 5 key business portfolio units. Really pleased to actually say 4 of the 5 have shown growth actually during the first quarter of 2026. In the middle of the page, we have 3 which we are in increased profitability, where we really expect to grow in line with the market. In the profitable growth segment, we expect we can grow actually beyond the market. On the left-hand side is the turnaround segments where actually we've seen a continued challenge during the first quarter in all 3 of those areas. We'll come back -- and I'm very pleased actually with the plans we have in place around all of the areas, but particularly around the turnaround business portfolio units. And we'll come back to you in due course and report on them. From an earnings perspective, Terry will take us through the bridge later in the presentation. But as mentioned, we managed to expand the operating income to just over SEK 1.7 billion from SEK 1.56 billion in the prior year, resulting in a 12.3% operating margin corresponding to 10.6% last year. And really, this is a volume increase, a price increase, improved product mix, but also the result of strong cost savings. We did, however, have a currency headwind as well as a tariff headwind that culminated to some SEK 115 million and, again, Terry will take us through more of the details later in the presentation. Going into the divisional performance. If we look at Husqvarna Forest & Garden first. We saw a 3% organic sales growth, growth in all regions, which we're very pleased to see and growth in our key segments: key segments of robotic lawnmowers and key segments of handhelds. Both residential robotic lawnmowers grew as well as the professional robotic lawnmowers. So very pleased to see. So from an earnings perspective, of course, we got an improvement from the volume and improvement from the mix, but also, of course, a contribution from the cost-out program. There was a slight positive tailwind from FX impacting the Forest & Garden division, which, of course, also improved the margin. From a Gardena perspective, the top line organically declined with 1%. However, I would say it is fairly polarized. And by that, I mean we saw a strong growth in the strategically important watering business portfolio unit and a continued decline in the Powered Garden area. So strong, strong growth in watering, as I said, and we're very pleased to see that. However, the challenge remains around the Powered Garden business portfolio unit, and we'll continue to define and refine that turnaround plan, and we'll come back in due course. But I'm very pleased with the plans that the team have in place to turn around this BPU. So despite the tough top line, actually, the division managed to improve the earnings, which we're very pleased to see. So we actually saw a 10% expansion in the EBIT, really driven by strong product mix because of the watering growth and a continued strong development around the savings program, negative impact from lower volumes, negative impact from tariffs and also a slight negative impact from FX of some SEK 13 million. Moving over to Husqvarna Construction division. We actually saw a growth of 1% organically. Actually, we saw a growth in the North America region and a softer European situation. However, strong growth when it comes to sawing and drilling, one of the profitable growth areas within the portfolio, and also growth when it comes to surface preparation as well as a strong aftermarket development in the quarter. However, a continued negative when it comes to the Compaction Placement and Demolition part of the portfolio, again, in the left-hand side of that previous page I showed you. Construction is actually more exposed to FX, and we saw a negative headwind of some SEK 43 million because of the heavy presence in North America but also actually a negative headwind by way of tariffs and raw materials. So despite those headwinds, we still managed SEK 110 million in operating income in the quarter for Construction. So all in all, we're very pleased with the divisional performance. At that, Terry, I pass over to you. Terry Burke: Thank you, Glen, and good morning from my side to everybody. The Q1 EBIT bridge: 2% organic sales growth and a 10% EBIT growth moving to a 12.3% margin. If I walk you through the bridge, starting from the left going over to the right. We had a positive volume impact in the quarter. As we talked about, we had organic sales growth and we also had favorable mix. The favorable mix was really coming from robotics growth, handheld growth and watering growth. Those were the main drivers for the positive mix. However, this was partly offset by inflationary cost pressures that we've incurred during the first quarter. Moving on to the next bucket, cost savings. We've delivered SEK 245 million of cost savings during Q1, and we feel very pleased about that. We have guided roughly SEK 800 million for the year. We still hold to that SEK 800 million. We were able to take, let's call it, perhaps some of the lower-hanging fruit early in the year. So that feels good that we're able to address that, and we continue to drive our cost saving program. As Glen mentioned earlier, cost savings predominantly coming through from sourcing and design to value. Moving on to price. We had a small positive price. This is a net price improvement in the quarter. We did have price decline in the robotics. And of course, the other categories had a positive price development, ending up with a small net positive in price. Transformational initiatives is something, of course, we want to continue to invest in. These are our strategic areas. And we invested some SEK 50 million during quarter 1. Currency, we had quite a significant currency headwind last year. This has now slowed down. We only have a negative SEK 30 million in quarter 1. So that was good to see that, that's starting to play out. Just to give you some feel for how we see currency for the rest of the year, we expect another negative quarter in quarter 2 and then a slightly positive in the second half of the year. So for the full year, we expect a negative currency of some SEK 60 million to SEK 100 million negative, depending, of course, how it plays out. Tariffs in quarter 1 was a gross negative SEK 85 million. Our previous predictions, previous tariff rates, we talked about some SEK 200 million to SEK 250 million gross headwind for this year. We now see that being around a negative SEK 150 million, so a slightly improved situation from the tariffs. So negative SEK 85 million, and the rest of that SEK 150 million negative direction will come during Q2. So with that, we landed just above SEK 1.7 billion of EBIT, 12.3% margin. Cash flow. Maybe the first thing to point out is we have changed the way we report cash flow, just to make people aware that now, going forward, we will talk about free operating cash flow. Previously, we reported on direct operating cash flow. What you can see in the quarter was a negative SEK 1.1 billion. And really, this is impacted by timing, and the real movement was the change in net working capital. There's two elements to that. One is we currently stand with higher accounts receivable at the end of Q1, and that was really driven by a stronger sales development in the second half of Q1, which meant we ended the quarter with higher accounts receivable. The second one was we had lower trade payables. And I would say we are more normalized on our trade payables levels now. Last year was slightly inflated. So a more normalized situation there. But there are timing issues for both of them, and worth pointing out, quarter 1 is traditionally a negative cash flow quarter. Return on capital employed, one of our new financial targets and metrics that we launched in the Capital Markets Day in December. We've improved our return on capital employed to 7.6% from a 6.5% same time last year. So it's good to see how we've started to see an improved situation here. That's really driven by a couple of factors. First of all, we have an improved operating income. And secondly, we are seeing lower capital employed, which you can see on the chart in front of you, around SEK 3.5 billion on average lower capital employed over the last 12 months. And that's really driven by we've lowered our borrowings. We've had a couple of good years of cash flow, we've been able to lower our borrowings, and that has had a positive effect. So good development on the return on capital employed. Balance sheet. We continue with a solid balance sheet and a good financial position. Maybe a couple of things to call out here. Inventory, we are some SEK 900 million higher. If you adjust for currency, it's actually just above SEK 1 billion higher inventory. And we would say we are ready for the season to start. Quarter 1 is a sell-in season. Quarter 2 is really, we talk about, where the music plays and the sellout when the season starts. So we have good season readiness. We have good inventory around us. So we're ready to go for the season. Trade payables, I did already cover that in the cash flow part. But just again to highlight, we have higher trade receivables. It's a timing effect due to the stronger sales development in the second half of Q1. Borrowings, we've lowered by some SEK 1.5 billion compared to March '25, as you can see. And trade payables, as I mentioned earlier, some SEK 1 billion lower, and that's really again a normalized situation this year compared to slightly above normal last year timing effects. So moving on to our debt position. Our net debt/EBITDA ratio is now at 2.0 compared to 2.5 this time last year. So again, we're driving this in the right way. We lower our borrowings. Our net debt position is SEK 13.8 billion, which is pretty flat to previous year, which was around SEK 13.7 billion at that time. So a good progress on our net debt/EBITDA. Our debt maturity profile, I would say, is healthy, as you can see in the bottom chart here. And we also successfully refinanced a new 5-year bond of some SEK 1.1 billion during February 2026. We remain investment grade, BBB- with a stable outlook. With that, Glen, I pass back to you. Glen Instone: Thank you, Terry. And just to wrap up the quarter 1 presentation. So as said, a solid start to the season despite the uncertainty we see in the world. Organic sales growth of some 2%, growth in 2 divisions and a slight decline in one. A good expansion of our operating income, some 10% expansion driven from volume improvement, a stronger mix and a good start to the savings program. From a strategic perspective, just zooming out, good product launches, a great innovation pipeline. We're making good progress with the strategic portfolio management. So I'm very, very pleased with the start of the year. Good savings, good innovation and operating model starts to get momentum. So with that, Emelie, I think I'll pass back to you. Emelie Alm: Super. Thank you, Glen, and thank you, Terry. So with that, we would like to open up the Q&A session. And I will actually start with one question from the webcast, and it's from Adela Dashian from Jefferies. And I mean, we updated the tariff guidance already so you have this scenario in there already. But how do you see the April change to the Section 232 impacting our tariffs? Terry Burke: Yes. And that is all included in the communication that I gave you. We think we see a roughly exposure of SEK 150 million gross tariff impact for the year. As I said, SEK 85 million is already taken in Q1. So there's a little bit more to come. But I think the important thing is, of course, mostly mitigated through price increases. Emelie Alm: Thank you. And operator, do we have any questions on the conference call? Operator: [Operator Instructions] We have a question from Fredrik Ivarsson, ABB. Fredrik Ivarsson: Maybe first question on demand. We've seen consumer confidence coming down quite significantly, at least in some countries. Can you say anything about how consumers have reacted initially? I know it's early in the season, but any signs from that in terms of consumer behavior? Glen Instone: Fredrik, I think it's fairly early to say. Of course, as we mentioned, Q1 is our sell-in quarter, really preparing for the season. And now we're hoping that Q2 is, we often say, where the music plays, where the demand really happens. So I think it's a little bit early to say, but we're very, very happy with our sell-in and very, very happy with our strong product launches. But too early to say around the consumer demand at this point. Fredrik Ivarsson: Okay. Fair enough. And then a follow-up on the amendment of the 232 tariff. So you lowered the tariff guidance a little bit. Is that due to the amendment of Section 232? Terry Burke: It's all factors considered. Of course, there's been quite some changes. So I think it's a lot of moving parts. But ultimately, it's everything that we know of today and, of course, it can change. But everything that we know of today is all baked into those numbers that we communicate now. Fredrik Ivarsson: Okay. But should we assess that under this new sort of tariff structure, you actually expect lower tariffs? Terry Burke: Yes, yes. Fredrik Ivarsson: Okay. Okay. Good. And then on the current raw material cost inflation, can you say anything about what you're expecting in terms of input cost inflation and where you potentially could expect that to hit your P&L in terms of timing? Glen Instone: Yes. If we look at this, of course, what's going on in the world right now, particularly the Strait of Hormuz impact, we're seeing that would impact us across two areas, raw materials and logistics. We think full year impact this year would be around SEK 300 million as we know today, if it continues through the remainder of the year. That will be SEK 100 million secreting to logistics and SEK 200 million relating to raw materials. And really, the main raw materials that are impacted are plastics, aluminum and steel. And they take account of about 60% of our raw materials, and they are three main raw materials that are exposed. But we would see again around SEK 200 million from raw materials in the remainder of the year given what we know today. But just to highlight though, of course, mitigated by price. We will pass that price on. Yes, that's the gross impact. Fredrik Ivarsson: Very clear. And last one maybe. And potentially I missed this, the line broke up a little bit, but did you say anything about the growth in robotics? Glen Instone: We did. So we had a strong growth in robotics actually, particularly if I look at this in the three areas, we should say. Strong growth in professional robotics under the Husqvarna brand, strong growth in residential Husqvarna robotics as well. And we actually saw a decline in the Gardena-branded robotics, but overall, a growth in robotic lawnmowers. Operator: The next question is from Bjorn Enarson, Danske Bank. Björn Enarson: Talking a little bit about the good development in Q1 and what that is telling you. I mean, are we basically saying that the expectation are kind of downbeat and this is kind of a normalization? Or do you believe that retailers and dealers are turning more positive on the season, betting on the staycation kind of environment, if you understand that? Glen Instone: Yes. There's probably a part of that in there, Bjorn. I think the big thing is during your Q1, it's very much preparing for the season. Strong portfolio, strong innovation, so a strong sell-in in preparation for the season. That's how we're seeing this. Anything to add, Terry? Terry Burke: I think we can only control, of course, what we can control and we feel in a good position going into the season. Of course, it's highly uncertain how things are playing out. But there is an argument for a positive staycation effect, but there is also a counterargument of weak consumer sentiment, holding their money given the highly uncertain times and cost of living increases. So it's very, very difficult for us to judge and have an opinion. But we're ready for the season to start. Björn Enarson: But given that Q1 developed well, I mean, that must say something about sentiment among dealers, although they're coming from low level, if you understand what I mean. Glen Instone: Yes. That's absolutely valid, Bjorn. We do see maybe a positivity from our channel partners that are willing to take in the inventory. And of course, they've selected Husqvarna Group as their supplier. So that is a positivity. And again, well prepared for the season with what we have in the channels. Björn Enarson: Yes. And second question, I mean, you're talking a bit about the inventory situation that you are well prepared but, also again, that it's very uncertain given where the world is here and now. How should we think about that, I mean, if it's not developing along the lines of your expectation? Are we in a difficult situation? Or how should we look upon this level of inventories? Glen Instone: So I think you look at inventory in sort of two lenses here. One, of course, is our inventory that we hold in preparation for the season. And as Terry mentioned, this is slightly higher in preparation for Q2, and we feel well prepared. And then, of course, is the inventory with our trade partners as well that we monitor. And again, we seem to be on a somewhat normalized level overall with our trade partners, 1 or 2 high levels on some segments. But we're keeping a very, very close eye on the inventory levels both, of course, with our trade partners and also making sure we address our own internal inventory levels. Björn Enarson: Okay. And then maybe a quick one on the Gardena robotics. You talked about it was a decline. Was this a little bit of an intentional decline? Or I mean, are you losing share due to that you don't want to participate full out? Or is it a mix within the mix situation, where low end of the low-end robotics are perhaps growing better, et cetera? Glen Instone: No, we did expect a decline this year. It's a double-digit decline for robotics. We knew that from the listing situation. We knew that from the competitive landscape. So it was very much in line with what we thought going into the year. At the same time, the new product launches we've had under the Gardena brand in robotics, particularly the Gardena SILENO sense, that's been well received. So we've got some positivity within the general decline for Gardena robotic lawnmowers, but in line with our expectations for Q1. Operator: Next question is from Alexander Siljestrom, Pareto Securities. Alexander Siljeström: A couple of questions from me. Starting off with the cost savings program that came through there in Q1. Obviously, very impressive. Do you expect sort of the same rate here in Q2? And also if you could talk about the sort of full year guide on the run rate. Terry Burke: Yes. First of all, I absolutely agree. We feel pleased with quarter 1, how that has developed, and SEK 245 million is a good number for quarter 1. As I did say, perhaps we picked up on a little bit of the low-hanging fruit during that first quarter. So that was also important. We are working hard. We are driving cost out of this organization. We were very clear on that at the Capital Markets Day. We have a big target and we are working hard towards that target. We hold at the SEK 800 million for now. Again, we are working hard towards it. So we'll have to see how that plays out. But for now, we still stay with the SEK 800 million as the guidance for the year. Alexander Siljeström: Okay. Cool. And anything for Q2? Should we expect sort of SEK 200 million then there given the target or SEK 250 million? Or is it too early to say? Terry Burke: It's too early to say. But I mean, directionally, I'm thinking it's going to be around the same, SEK 200 million, SEK 250 million. Alexander Siljeström: Yes. Cool. And then maybe just on the growth in the robotics segment. You mentioned that Gardena was down double digits. Could you talk about the growth for sort of the non-Gardena robotics, so residential Husqvarna and professional? Was that in the sort of double digits or high single digits? Or any color there? Glen Instone: So if we look at the Husqvarna robotics, we did have a double-digit growth very much across two different segments, professional and residential, and very much in line with the guidance we provided at Capital Markets Day. So we're pleased with the start for Husqvarna. Very strong innovation pipeline, great product launches in Q1, and we feel we're very well prepared and we're really taking the shift as we move over to boundary wire-free and different vision technology. Alexander Siljeström: Cool. And maybe just a final one on North America. Impressive that you're back to growth there as well. Could you talk about sort of the main product segment drivers that you saw there and also maybe the impact from the storms? Glen Instone: Yes. So I think it's a valid point you raised on storms. We actually saw a good growth in handheld products in North America, which is good to see. Actually, a decline with wheeled. We saw a growth in the whole construction assortment in the quarter as well in North America, and we also saw a growth in watering under the Orbit brand in the Gardena division in the quarter. So growth in construction, growth in handheld products and growth in watering products in the U.S. Operator: Next question is from Johan Eliason, SB1. Johan Eliason: Yes. I guess this was me. It's Johan Eliason from SB1. Can you hear me? Emelie Alm: Yes, Johan. Johan Eliason: So I was just wondering a little bit about the robotics, coming back to that. You mentioned strong growth for the professional and the Husqvarna-branded residential. How would you say the margins for you are developing on those products and categories in a year-over-year perspective? Are you holding up the margins on that part of the robotics business, improving or declining? And any indications there would be helpful. Glen Instone: By and large, Johan, we are holding up margins with the Husqvarna-branded robotics, very much in line with our business plans. So holding up the margins, to answer, yes. Johan Eliason: Good. And on the Gardena where you see the decline, is there a mix? So you said that the new introductions are at least doing well there. Is that allowing you for a sort of a positive margin mix so you can hold it there as well? Or how should we think about the margin year-over-year on those products? I remember you did have some price cuts a year ago maybe and then still some sellout. So maybe that is also helping that part of your robotics offering more. Glen Instone: Yes. We mentioned price in the presentation. And the negative price on robotics, it really came from the Gardena assortment, particularly the older technology. Whereas the newer technology, the new launch I mentioned, that held up. So we see more positive margin from the new products and a negative margin from the older products. But all in all, margin has moved down for the Gardena robotics assortment. Terry Burke: And maybe just to be clear. The Gardena robotic is margin decretive both to the division and to the group. Johan Eliason: Okay. Okay. Good to know. Then if we look at the consumer segment now when you are transitioning to the wire-free solution. The total cost for the consumer, including with the old solution, wires and then maybe having some external help to install it vis-a-vis buying the wire-free solution today, is that a bigger total ticket for the consumer on the Husqvarna-branded side? Or is it lower? Or it's basically the same? Glen Instone: It's basically the same. Actually, Johan, we see very comparable prices year-on-year in the marketplace if we -- say, for 1,000 square meter machine, we see very comparable prices. Of course, it's higher technology and, hence, we need to take cost out of the system to maintain those margins. And that's exactly what we're doing. Emelie Alm: Thank you. Before we go on with the conference call, we can maybe have a follow-up. It's from Stefan Stjernholm regarding the inventory level at resellers. So if you can elaborate a bit on the regions and so on. Glen Instone: Yes. Stefan, so if we look at the inventory in the trade, which I understand your question is, we actually we see it normalized in Gardena, per se, with the exception of watering, and it's slightly higher given we've had a strong Q1 sell-in. So that's where it actually stands out as being slightly higher. I say that's applicable globally. If we go to Husqvarna Forest & Garden division, handheld is normalized globally. We have wheeled normal in Europe, normal to slightly higher in North America. And robotics is normal to slightly higher globally as well, again, with a very, very strong sell-in in Q1 in preparation for the Q2 season. And Construction, I would say across the board is normalized. There is still a reluctance to take on too much inventory from our construction partners. That has been the case for the past couple of years given the uncertain times we're living in. So I would say a normalized situation within Construction. Operator: We have a follow-up question from Fredrik Ivarsson, ABG. Fredrik Ivarsson: A short follow-up on the cash flow and the timing impact. Should we expect that to sort of fully reverse in Q2? Terry Burke: Yes, Fredrik. As I said during that slide, it's really a timing issue. And of course, having a stronger second half to quarter 1 from a sales perspective meant that the accounts receivable landed higher at the end of the quarter. It's purely a timing impact, and that will flush through during Q2. So yes, I would say it will all get corrected just as the timing flows through. Glen Instone: We're happy to have higher accounts receivable, Fredrik. Good indication of strong sales. Emelie Alm: Thank you. And with that, operator, I don't think we have any further questions. Or do we? Operator: There are no more questions from the phone. Emelie Alm: Okay. And we've been through all the questions on my iPad here. So with that, would you like to wrap up a little bit? Glen Instone: Absolutely. So again, thank you for joining our quarter 1 report. Off to a solid start. This is a journey we're on and it's a long transformation journey, but again, good to get a strong Q1 behind us. We are executing on our strategic areas, very strong portfolio management, good cost savings and a very strong innovation pipeline. So at that, we wrap up. Thank you. Emelie Alm: Yes. Thank you. Thank you for listening. Terry Burke: Thank you.
Operator: Greetings, and welcome to the Helen of Troy Limited Fourth Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference call over to Ann Racunis, Director of External Communications. Thank you. You may begin. Ann Racunis: Thank you, operator. Good morning, everyone. Welcome to Helen of Troy Limited’s Fourth Quarter Fiscal 2026 Earnings Conference Call. The agenda for the call this morning is as follows: I will begin with a brief discussion of forward-looking statements. Scott Azel, our CEO, will then share his thoughts and areas of focus, and Brian Grass, our CFO, will provide an overview of our financial performance in the fourth quarter and fiscal year, and outline our expectations for the full year Fiscal 2027. Following our prepared remarks, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are management’s current expectations with respect to future events or financial performance. Generally, the words “anticipates,” “believes,” “expects,” and other similar expressions are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from anticipated results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. A copy of today’s earnings release can be found on the Investor Relations section of our website by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. We have also posted an investor presentation to our website which contains additional information and perspective on our results and outlook. With that, I will now turn the conference call over to Scott. Scott Azel: Thank you, Ann. Good morning, everyone. It is great to be with you as we close FY ’26 and begin to outline a look to our future. We finished Q4 with a sharp focus on execution. We are determined to be a better company on the road to being a bigger company. We will do this through ruthless focus and disciplined execution. Focus, discipline, and execution best characterize our exit out of FY 2026 and Q4. Net sales exceeded expectations and adjusted EPS was in line. Margins reflect our strategic investment as we make deliberate choices to invest in our brands and our people to position our organization for the future. This progress caps a dynamic year—one in which we took action to address both internal and external challenges by implementing organizational changes necessary to move closer to the consumer, prioritize brand health, and win in the marketplace. Internal ownership is driving our reset. We are committed to operating Helen of Troy Limited more effectively by removing complexity, editing our priorities, and amplifying our actions for impact. Operating rigor in supply chain and demand planning resulted in year-over-year inventory levels that were essentially flat, even as we absorbed significantly higher tariffs in our inventory. Tariff mitigation was paramount, utilizing supplier diversification, SKU streamlining, and pricing actions to protect our margins. Debt reduction continues to be a priority, driven by strong free cash flow and a successful post-quarter divestment of our Southaven, Mississippi distribution facility. We drove operational clarity by moving decisions closer to the consumer, empowering brand-level ownership, and enabling our teams to move with the speed of the consumer. As I have stated, our current situation was not created overnight, and our recovery will not be instantaneous. However, we are taking a measured approach to building our future. Before I discuss our Fiscal 2027 plans, I want to be clear about the market we are navigating. We have made progress, but we are in tune with the macro environment. Overall sales trends reflect a volatile market. While our Home & Outdoor business held steady, our Beauty & Wellness business felt the pressure. The flu season did not really happen. Respiratory and fever rates stayed well below average, which meant that fewer shoppers needed to restock our wellness products. Retail inventory is finally stabilizing. Most retailers are back to healthy stock levels and are working through any residual pockets of excess. We cannot control the macro challenges, but we will be intentional in our actions in service of brand and consumer. We are winning where it counts. Consumers are being selective on where they spend, but brands that deliver innovative products that make consumers’ lives better through style, utility, and personalization will continue to win in the marketplace. Our innovation is landing. We see sales trends improving as we launch new products and offer real solutions. And we are taking market share. Even in this environment, brands like Fix Braun, OXO, Osprey, and Olive & June are standing out as leaders. The challenges we navigated in Fiscal 2026 were a catalyst for change, providing the necessary clarity of where we must invest and where we must simplify. To achieve this, we are executing a multiyear roadmap, a three-phase evolution from stabilization to a portfolio of powerhouse brands. Fiscal 2027 begins with phase one. This is about restoring brand momentum, driving our growing brands faster, and rebuilding top-line momentum for our declining scale brands. We will take the abstract concept of focusing on the consumer to action, making the consumer-centered offense real in FY 2027. We will do that through the following critical actions. One, powering our portfolio—this is about editing and amplifying our brand-building efforts by using a framework to identify the highest return brand investment opportunities. Two, futures capabilities—we have to skate to where the puck will be by investing in capabilities to leverage our consumer insights to inform a trend-forward innovation roadmap. Three, strategic investment—remains a priority as we put capital behind innovation, brands, and people. Four, operationalize consumer-centered decision making by placing talent and decisions closer to the consumer and marketplace for speed and execution. Five, modernizing operations is a parallel priority—strengthening our digital foundation, building a baseline in AI, elevating our eCommerce presence, and upgrading our advanced planning systems to drive greater supply chain visibility and responsiveness. Six, platform-level improvements to our operating engine will continue as we stabilize the enterprise for long-term growth. Three pillars will fortify our plan. Our first pillar, consumer-first innovation, is centered on accelerating product development and modernizing our global reach through high-impact social and digital storytelling that resonates across our global footprint. In Home & Outdoor, we are expanding brand reach by entering product lines where our brands are resonating with consumers and have a clear right to win. At Hydro Flask, in response to strong consumer demand for a wider variety of use cases, we extended our successful Micro Hydro franchise with two additional sizes. We also recently launched new carryout soft coolers and totes redesigned for improved comfort, performance, and longevity. Hydro Flask’s legacy continues to be recognized by the industry, with the Wide Mouth awarded Gear Junkies’ overall pick for Best Insulated Water Bottle of 2026. OXO is expanding into adjacent categories in food storage and feeding in the second half of the year, bringing OXO’s award-winning performance and ease of use to high-growth areas where we see significant opportunity. OXO’s successful Rapid Brewer continues to achieve accolades, winning Best New Product Release in 2025 during its seventeenth annual Sprudgie Awards, which is considered the Oscars of coffee, among other recognition we have received. And Osprey continues to augment its technical pack offerings, providing outdoor enthusiasts with new pack solutions that excel in hiking, backpacking, and travel environments. In Beauty & Wellness, innovation remains a primary driver for brand building and consumer relevance. Our new Revlon Versa Styler launched exclusively in Walmart in the first quarter with early consumer demand exceeding expectations. Priced below $100, this is an all-in-one tool that delivers meaningful time-saving innovation by taking hair from wet to damp to dry and refreshed without the need for multiple attachments. Curlsmith expanded its portfolio with the new Curl Fit Reviving Mist, a unique alternative to a traditional dry shampoo, while Olive & June introduced new press-ons with hand-painted charms and fresh frame colors. I am proud to share that Beauty brands continue to receive top industry recognition, including multiple Glamour 2026 Best of Beauty awards for Olive & June, Revlon, and Drybar. Bakes and Pure have several new introductions planned in the coming months, as we continue to leverage these trusted brands to deepen our consumer relevance. In International, strategic global expansion is a critical priority. We are accelerating our global reach as a key investment in our operating model, laying the groundwork for durable and long-term growth. For online engagement, we are sharpening our execution. Social commerce is an increasingly important connection point for our consumer. We will advance our work across platforms like TikTok Shop and Meta Shop to meet our consumers where they are. And digital experience is receiving significantly more rigor to ensure our online presence matches the premium nature of our brands. Our second pillar, commercial operational excellence, prioritizes critical capabilities to grow with strategic retail partners. We are strengthening digital marketplace capabilities, including catalog and product page management and third-party seller mitigation. Our U.S. club business development efforts are focused on building long-term, multi-brand partnerships. We are modernizing our technology and systems by prioritizing core platform upgrades, data and analytics, automation, and AI-enabled solutions. We are investing in advanced planning capabilities to improve forecast accuracy and optimize inventory performance. And we are continuing to make targeted investments in Southeast Asia to strengthen our dual-sourcing capabilities. Our final pillar, people and culture, is reenergizing our organization and ensuring we have the right capabilities to win. Culture relaunch is establishing a brand-led model, reengaging our current teams as we transition toward a new era of ownership mindset and impactful execution. Talent infusion is a parallel priority. We are thoughtfully investing in high-potential talent internally and attracting new talent externally to provide fresh ideas and modern brand-building skills to drive our future. AI workflow evolution is augmenting our team’s ingenuity. We are investing in hands-on training to automate routine tasks, allowing our people to focus on creative storytelling and innovation that wins with the consumer. Fiscal 2027 will be a pivotal year of restoration as we align our organizational architecture and pivot back toward growth. Our outlook reflects our focus on restoring top-line performance while operating with excellence across our enterprise. Our net sales outlook reflects growth in Outdoor, as we work to stabilize Beauty & Wellness. Adjusted EPS and profitability targets are grounded in a disciplined investment framework, allocating capital to high-ROI initiatives that strengthen long-term brand health. Free cash flow generation remains a priority, supported by ongoing work to drive working capital efficiencies and continued debt reduction. Phase two is about concentrating and catalyzing during years two and three. We are prioritizing high-velocity, scale-potential brands, ensuring capital and resources behind the categories and regions where we have the biggest right to win. Active portfolio management is designed to ensure capital is deployed where it generates the highest return. To that end, portfolio optimization is an ongoing process as we prioritize capital and resources toward high-growth categories where we have the greatest right to be successful. A fortified shared services platform empowers our brand teams to spend 100% of their time on what is visible—product, storytelling, and consumer experience. Phase three is about building and scaling during years four and five. We plan to shift our full weight onto a concentrated portfolio of leadership brands that demonstrate a clear positioning and shared capabilities, expanding on sourcing, governance, and international reach to create a durable growth, sustainable value-creation model. We plan to pursue strategic portfolio expansion through high-impact acquisitions of both brands and specialized capabilities that leverage our enterprise scale. We plan to prioritize expansion into high-growth adjacencies as we utilize our platform to become a global leader in consumer-first innovation. We plan to support billion-dollar-plan category leadership goals by deeper organizational alignment, with internal engagement sessions scheduled for later this spring. More detailed long-term initiatives in our specific multiyear roadmap will be shared later this calendar year. To bring it all together, we believe Fiscal 2027 marks a turning point for Helen of Troy Limited as we enter our first-year goal of restoring our competitive edge. We want to be a better company on the road to being a bigger company. We are methodically deploying digital and data-driven capabilities that bring us closer to the consumer and accelerate our speed to market. Grounded in our “do fewer things better” mantra, I am confident our teams are aligned to deliver the high-velocity execution required to restore long-term growth, and we will win. Now I want to pass it over to Brian to walk you through our results and outlook in more detail. Brian Grass: Thank you, Scott, and good morning, everyone. Our fourth quarter results were a step in the right direction, with net sales, adjusted EPS, and cash flow at the better end of our expectations, demonstrating the focus and resilience of our associates. Their stewardship is rebuilding the necessary momentum as we transition to a growth-first mindset in Fiscal 2027. Looking more broadly at the year, our performance reflects continued progress on a number of commercial and operational initiatives. While these actions did not fully offset external pressures in Fiscal 2026, they have built the foundation for product-driven growth that we are prioritizing in the year ahead. During the year, we made tangible progress on several fronts. One, portfolio focus—we leaned into innovation-led growth with multiple new launches, as Scott mentioned, and more to come in Fiscal 2027. Two, tariff management and dual sourcing—we have strengthened our supply chain, which is helping to mitigate the impact of continued geopolitical uncertainty. For the full fiscal year, gross unmitigated tariffs had a $51 million impact on gross profit. Through a disciplined combination of SKU prioritization, cost reductions, price increases, and supplier diversification, we successfully reduced the net operating income impact to less than $30 million for the fiscal year and diversified cost of goods sold subject to China tariffs to approximately 30% by year-end. We currently have the capacity to dual-source approximately 45% of our annual product volume. We expect this figure to reach approximately 55% by Fiscal 2027, further mitigating our supply chain risk. Three, operational fundamentals and go-to-market—beyond supply footprint diversification, we focused on strengthening the fundamentals of our execution. This included improving our go-to-market effectiveness, sharpening our focus on our brands, and putting them at the center of our commercial execution and strategy. By leaning into innovation for more product-driven growth, we are ensuring our supply chain and sales teams are aligned to support our strongest, highest-margin brands. Four, pricing integrity—last quarter, we chose to temporarily stop shipments in Beauty & Wellness to support consistent pricing adoption. I am pleased to report we have resumed shipments in almost all of these instances. I am grateful for the collaborative partnerships we have with our retail customers. Turning to the financial highlights for the fourth quarter, consolidated sales decreased 3.3%, favorable to our outlook. The impact of our pricing actions and the contribution of Olive & June partially offset the year-over-year decline from tariff-related revenue disruption and lower core business volume. Home & Outdoor segment sales declined 1.5%, ahead of our expectations. OXO and Hydro Flask were ahead of plan, and Osprey contributed solid year-over-year growth. OXO benefited from good point-of-sale at value customers and replenishment at mass. Hydro Flask benefited from the success of recent product launches and also saw strength in the closeout channel as we improved our inventory composition. Osprey’s growth was primarily driven by the eCommerce channel, their continuing stream of new products and expansion into adjacencies, and the clearance of end-of-season goods through the outdoor channel. Beauty & Wellness sales decreased 4.7%, with approximately 2.8 percentage points driven by tariff-related disruption. Revlon, Olive & June, and Braun were the standouts in the quarter. Revlon outperformed our expectations, driven by continued strong point-of-sale at Walmart and Target and a solid contribution from International. Olive & June saw organic growth in its business of 18% and contributed 4.9 percentage points of growth to total segment sales, driven by effective digital grassroots marketing, new product introductions, and strong brand loyalty and consumer engagement. Olive & June has been a great addition to the Helen of Troy Limited portfolio, strengthening our profitability and outperforming valuation metrics. Braun saw solid performance in EMEA and APAC, driven by early flu incidence in those regions, order timing shifts, and strong replenishment. International sales grew 5.4%, surpassing our expectations with strong point-of-sale, expanded distribution, and new product innovation. Gross profit margin decreased 400 basis points to 44.6%, primarily due to the impact of higher tariffs, less favorable inventory obsolescence than in the prior year, higher retail trade and promotional expense, and a less favorable channel mix within Home & Outdoor. These factors were partially offset by the favorable impact of the acquisition of Olive & June and lower commodity and product costs exclusive of tariffs. SG&A ratio increased 270 basis points, primarily due to unfavorable operating leverage, higher annual incentive compensation expense year over year, EPA compliance costs, and the acquisition of Olive & June. Adjusted operating margin decreased 710 basis points to 8.3%, primarily due to the net impact of tariffs, an increase in incentive compensation year over year, unfavorable operating leverage, and the preservation of trade and brand spending to support future revenue growth. Moving on to balance sheet highlights, we continue to emphasize working capital efficiency and balance sheet productivity as an engine to fund our strategic investments, improve our operating flexibility, and position the company for long-term growth. Regarding our year-end position, inventory ended at $456 million, largely flat to the prior year despite $34 million of incremental tariff costs in inventory at the end of Fiscal 2026. We accelerated the turns of our more productive inventory while also clearing out slower-moving inventory, which resulted in a net reduction of almost $50 million in the fourth quarter alone. Debt closed at $781 million. Our net leverage ratio was 3.87x, compared to 3.77x at the end of the third quarter. The increase was primarily driven by lower trailing twelve-month EBITDA reflecting lower revenue and higher average tariff costs. This was partially offset by favorable free cash flow driven by the inventory reduction and the conversion of prior-quarter peak season receivables, enabling $112 million of debt paydown in the quarter. Free cash flow for the fiscal year was $132 million despite $72 million of incremental cash outflows specifically for tariff payments and transitory costs associated with diversifying our supplier base to regions outside of China. Subsequent to the end of the fourth quarter, we further improved productivity of our balance sheet with the sale of our distribution facility in Southaven, Mississippi. The sale generated proceeds of approximately $78 million, which we used to pay down our debt. We expect to continue to consider balance sheet productivity opportunities to further strengthen our financial flexibility and focus our resources on the core business as we pivot to growth. Turning now to our full-year Fiscal 2027 outlook, we expect net sales in the range of $1.751 billion to $1.822 billion, with Home & Outdoor net sales of $854 million to $882 million and Beauty & Wellness net sales of $897 million to $940 million. Adjusted EBITDA of $190 million to $197 million, which implies year-over-year growth of 2.1% to 6.3%. Adjusted EPS of $3.25 to $3.75, and free cash flow in the range of $85 million to $100 million. We expect our quarterly sales cadence to be uneven, driven by lapping of prior-year revenue dynamics. At the midpoint of our range, we expect first-half year-over-year sales growth to be slightly positive, with the second half of the year slightly negative. Due to the cadence of people and brand investments, and higher average tariff costs cycling out of inventory and into cost of goods sold in Fiscal 2027, we expect roughly 15% of our total annual adjusted EPS outlook in the first half of the year, with roughly breakeven adjusted EPS in the first quarter. Help with modeling our Fiscal 2027 outlook includes tariffs in place as of April 2026, assumed to remain in effect for the balance of the year, not including the benefit from any potential tariff refunds; no significant fluctuation in commodity costs, freight, or disruption in supply availability; interest expense of $47 million to $49 million, with cash flow prioritized for debt reduction and an expected net leverage ratio of approximately 3.2x or lower by the end of the year; a full-year adjusted effective tax rate of 25% to 27%; continued working capital efficiency during Fiscal 2027 with an emphasis on further inventory reduction; capital expenditures of $28 million to $32 million, with an emphasis on product innovation and supply chain diversification; and April 2026 foreign currency exchange rates assumed to remain constant for the remainder of Fiscal 2027. In terms of our expectations regarding the operating environment, we continue to expect inflationary pressures, softness in discretionary categories, conservative retailer inventory management, and an increasingly competitive and promotional landscape. Our outlook does not assume a significant or prolonged impact from the conflict in Iran or other similar macro disruption on the supply chain, as it cannot be reasonably estimated. We expect continued diversification of our global manufacturing footprint, reducing the cost of goods sold exposed to China tariffs to less than 20% by the end of Fiscal 2027 and limiting the net operating income impact to less than $10 million for the full fiscal year. Our outlook reflects a deliberate choice to preserve investments in our brands and people and includes an increase in growth investments of approximately 40 basis points, prioritizing high-return marketing and innovation initiatives. As we transition back to growth mode, we have a clear bias toward revenue improvement over aggressive cost reduction. By focusing on revenue recovery now, we expect to recapture operating leverage and build long-term sustainable momentum. Finally, while we are not yet where we want to be in terms of financial performance, the midpoint of our outlook implies a forward free cash flow yield of 20% using Tuesday’s market capitalization. We believe this is a compelling value metric that compares favorably with our peer set and the market overall. With that, I will turn it back to the operator for Q&A. Operator: Thank you. We will now open the call for questions. We will now 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 while we poll for questions. Our first question comes from the line of Peter Grom with UBS. Peter Grom: Scott, the commentary on the different phases and the path forward was incredibly helpful. But can you frame or help us understand what success looks like on the other side of this? I am not trying to get guidance on 2028 or 2029 today, but for a business that several years ago had significantly greater earnings power versus what is outlined in guidance today, I am curious how you would frame the opportunity and whether you think the business can get back to levels we saw several years ago, particularly as it sounds like you may be setting up investment levels across a greater number of brands moving forward. Scott Azel: Peter, good morning. Thank you for your question. Let me give you a bit of backdrop on myself and the leadership team, put a pin in Q4, and then get more into your question. When we think about Q4, there were four things we were really focused on. One is to get really sharp on our ambition so that the work we set up for FY 2027 can begin to show markers of progress. Two, how we begin to start that journey in Q4 through trying to build against the top line and put things in place in our organization to set us up for the future. Three, how we invest in our people and our culture not only for Q4 but to start the journey as we get back to where we want to get to. And four, balance sheet productivity and paying down debt. I would say that we quietly feel like we made progress in all four of those areas. As we look to the future, a healthy Helen of Troy Limited is really about first being a better company before, on our road to being a bigger company, and it is built on many pillars. First, putting the consumer at the center of everything we do, underpinned by brands that are healthy with the scoreboard around growth and market share, and then investing in critical capabilities—first making sure we get our organization, team, and talent closer to the marketplace and closer to where decisions are made so they can rapidly innovate, tell relevant stories, and commercially execute. Second, invest in commercial and brand-building capabilities that are going to enable our brands to have the right to win on the shelf or on the digital marketplace. Third, invest in make, move, and hold with our supply chain so we can be agile and responsive in a dynamic marketplace. And lastly, continue to be thoughtful on our global execution, because we know our global business needs to play a bigger role than it plays today. All of that should be underpinned by investing in our culture and people who are going to help us drive it, and continuing to focus on a healthy balance sheet. For FY ’27, it is really showing markers by doing the things I just talked about—becoming a better Helen of Troy Limited on the road to a faster-growing Helen of Troy Limited. Peter Grom: That is super helpful. And then, Brian, just a question on the guidance and the level of visibility or flexibility that you have today—more in the context of a pretty volatile external backdrop—and the guidance, I think you mentioned, is more than 80% weighted to the back half of the year. Can you walk through the level of confidence you have embedded in that inflection? Have you embedded more conservative underlying assumptions to account for something that might not go your way? Specifically, there was commentary in the release around commodity costs, freight, and supply availability. You mentioned no significant fluctuation. Is that related to where things stand today, or does guidance assume no major cost impacts related to these factors? Brian Grass: To cover the last part first, we called out the fact that things have changed as a result of the Iran conflict pretty quickly. It is only a few weeks old, but resin prices, commodity prices, and fuel prices have all reacted pretty significantly, and that does impact our raw material cost. We are calling it out, but I think almost anyone would say it is a little too new and too fresh to get your arms around and embed in an outlook, so we have not attempted to do that. We are proactively working to minimize any impacts. We have forward-bought some raw material to make sure we have what we need in the short term. There could be scarcity issues that come up, and we have attempted to lock in pricing. We also attempt to lock in our inbound freight pricing and are in the process of securing favorable rates as compared to current spot pricing, which has also spiked. So we have not adjusted our outlook up or down as a result of the conflict. We have taken actions to minimize the impact, and then we will have to see how that plays out. Hopefully, from a modeling perspective, you appreciate us not trying to model something that is really difficult in an early stage to model. With respect to the cadence, it is not about conservatism; it is about the comparison to the prior year and the lumpiness of the prior year, the cadence of our people and brand investment in the current year, and how tariffs layer into all that. Mixing that together results in lower EPS in the first half of the year and higher EPS in the second half. The biggest part is the higher average tariff costs cycling out of our inventory into our cost of goods sold in the first half of this year, whereas we almost did not have any tariff impact on COGS in the first half of last year. We did have a tariff revenue impact in the first half of last year, but not a COGS impact. Now we are getting the full brunt of that COGS impact in the first half of this year. Overlay that with the investments we are making in our people and our brands, and that compresses the first half and then releases in the second half of the year, where you get the benefit. Operator: Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question. Bob Labick: Good morning. Thanks for taking our questions. To start with revenue guidance, how much price is baked into the guidance for next year, and have retailers fully accepted that? Because we had the stop order. Where do you stand on that? How much price is in the revenue guidance, and where are you getting it? Then I have a follow-up. Brian Grass: If you bake it all together and you are looking for total revenue impact of price increases, it is about $50 million impacting our revenue through price increases. That sounds like a big number, but it does not come close to covering all of our tariff costs, as well as regulatory costs emerging related to packaging and things of that nature. So it makes a bit of a dent in terms of profit, but it does influence revenue. That impact is the year-over-year impact for Fiscal 2027 versus ’26. In ’26, we only got partial realization of that, and in some cases it was delayed. With respect to where we are, we have effectively 100% of our planned pricing increases in place, with a couple minor exceptions. It did take us a period of time in ’26 to get everything in place. Price was one of the levers that we pulled to try and offset tariffs, along with SKU evaluation and other actions, and that is the impact. Bob Labick: Great. And in the theme of invest-to-grow, you mentioned a 40 basis point increase in growth investment. What are the steps necessary internally before you increase it more? I imagine to get to where you want to be, it will be more than 40 basis points of investment spending to reignite growth. What are the next steps so you can lean harder into the growth engine? Brian Grass: You are right. We built the plan this year intentionally to lean into any overperformance with additional growth investment. We have framed up and planned a host of investments that we could not afford to make in the base plan provided today. The idea is that with any overperformance, we will continue to pursue those high-ROI investments and lean in. The hope is that by the end of the year, it is not 40 basis points—it is more—because we have better operating leverage and produce more profit as a result of growth, and then continue to feed the flywheel. We intentionally built a plan that allows us to do that. We are giving you the base plan, and when we have upside—which we are expecting and think we can drive—that overperformance will go into greater investment. Operator: Our next question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question. Susan Anderson: Hi. Good morning. Thanks for taking my question. Brian, maybe just to drill down on the segments in the quarter a little bit. Within Beauty & Wellness, can you talk about brand performance—was Beauty or Wellness the bigger driver of the decline, and how did Drybar and then Curlsmith perform? You mentioned the cold/flu season being weak—was that the biggest driver, or was it pretty equal? And then in Home & Outdoor, you talked about Osprey doing well online. How did it do in stores? Are you still seeing that category decline, and is Osprey still gaining share? Brian Grass: I might break it down a bit differently within Beauty & Wellness. Olive & June and Revlon had relative strength, and the remainder of Beauty was relatively weaker compared to them. In Wellness, overall performance was a little softer than we would like it to be, both in terms of the cough, cold, flu season and in some of the more competitive categories where Honeywell and some of the other brands play. For Home & Outdoor, we are seeing very positive trends almost across the board. We are excited about what we are beginning to see, with respect to Osprey in particular. The category is generally trending down, but Osprey is generally trending up, taking share, and performing well in that category, and we continue to expand into adjacent categories. Overall, as a company, while we are not yet where we want to be across all brands and categories with respect to POS, we are trending largely in the right direction across the majority of the brands in their respective categories, which we see as a sign of progress. Susan Anderson: Great, thanks for the color. Scott, can you talk about the new innovation that resonated with consumers in the quarter across the portfolio, and any color on newness coming out throughout this year? You also mentioned increased focus on eCom investment—will that be brand websites to drive DTC, or more tech investment and social selling? Scott Azel: We have had a number of innovations across the portfolio, but I will highlight a few. Osprey continues to expand its strength in technical packs into adjacent categories, and we saw continued strength there. Olive & June, not only in their core business, continues to bring new innovation and new reasons to bring consumers to the category. The Revlon Versa Styler is really bringing new news to the category and is off to a very promising start. Hydro Flask also has multiple innovations landing well. Over the last several months as I have traveled around the company, I have focused on pulling innovation forward—where we have the right consumer insights and business cases, we are putting more investment against it and, where it makes sense, pulling it into Q4/Q1 on a faster track. On digital capabilities, depending on the brand, we are clearly trying to drive some web traffic, but the bulk of my comments are around sensing and understanding where the consumer will be, ensuring we show up on partner sites with advantage versus competition, and driving more agility for our brands to interact with social commerce, whether it be Meta Shop, TikTok Shop, and other emerging ways of connecting with our consumers. Operator: As a reminder, if you would like to ask a question, press 1 on your telephone keypad. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question. Olivia Tong: I wanted to get a better sense of your expectation for category growth and your bedding for next year and what it was this year. As we think about your cadence of stabilization, I realize there is a big difference in year-over-year comps, but why do you not expect growth in the second half on sales? As Peter alluded to earlier, there has been a multiyear challenge, so as you think about your optimism around innovation and several other things, why should we not expect a bit more in the second half? And can you talk about retailer discussions that support your enthusiasm around innovation and then managing the tail of brands or the tail of exits that still need to be managed down? Scott Azel: Great question. When we talk about stabilization for FY ’27, first I think about what we control within the four walls of Helen of Troy Limited. It is about editing our agenda and amplifying the things with the biggest growth potential, moving with the speed of the marketplace. We have been doing that work, and it is embedded in our plan. Underneath that, we have sharp conviction on the critical capabilities necessary for each of our brands to have the best chance to compete—everything from the right operating model to drive decision making at the speed of the consumer, to making sure organizationally we are set up for success. We are doing that work. Consumer-led innovation—leveraging consumer insights to develop an innovation roadmap that answers today’s needs and gets ahead of the marketplace—we are doing that work now. Investing in omnichannel capabilities—sensing the consumer, engaging with social commerce, and partnering with our biggest strategic retail partners in the right way against the critical opportunities we have identified. And standing up work in our supply chain that helps us make, move, and hold product so it is the right product, right place, right time, more effectively. The combination of those will drive us toward stabilization. On category assumptions and how it plays out, I will turn it to Brian. Brian Grass: We have not really changed category assumptions overall. It is hard to boil all our categories into one measure, but broadly, categories are pressured by the same pressures on the consumer—price and related factors—so I would call category a bit of a headwind as we look to next year. On why you are not seeing more revenue growth, we have assumed that current POS trends continue where they are today. We have seen improvement; we have not assumed continued improvement. We have also assumed continued consumer pressure and that price elasticity has an impact—that is a pretty big headwind. We are offsetting that several ways. We are lapping prior-year tariff-related revenue headwinds, but of the $80 to $90 million we saw in Fiscal 2026, we are recovering about half at this point. Direct imports in China market are still a work in process, and we may recover more, but we have assumed about half. Then you have the other offsets, which are the exciting parts: product innovation and commercial building blocks, international growth, and price increases. When you put all those together, it results in flattish net sales year over year. Any upside would be continued improvement in POS trends, which we have not assumed. Olivia Tong: Understood. As a follow-up, oil is off its peak but above pre-Iran conflict. You mentioned paying below market—can you talk about the change relative to the prior year in discussions with providers? Brian Grass: The comment on being below spot price was specific to freight. Spot prices are increasing, but we feel we have contracted at rates below that and feel comfortable, assuming we can stay on contracted rates and there is no significant disruption that would push us outside of that. As it relates to the conflict overall and its potential impact on our suppliers, raw material prices are going up almost instantaneously, driven by fuel. We have had discussions with our suppliers on potential impacts. At this point, I cannot give you where that will end up. Typically, these discussions evolve over time—there is not an instantaneous adjustment. The same thing played out with tariffs—we absorbed a direct tariff impact, and how we managed that with suppliers evolved over time. It is an ongoing discussion, happening live. We are aware of the potential impact, but it is early days, and we will work with our suppliers to get to a good outcome in terms of ultimate pricing. Operator: We have no further questions at this time. I would like to turn the floor back over to management for closing comments. Scott Azel: Thank you for joining us today, and we look forward to speaking to many of you in the coming weeks. Have a wonderful day. Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Inc Third Quarter Fiscal Year 2026 Earnings Conference Call. Today’s call is being recorded. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need assistance during this call, please press 0 and someone will help you. At this time, I would like to turn the conference call over to George A. Price, Senior Vice President of Investor Relations for CACI International Inc. Please go ahead, sir. George A. Price: Thanks, Jeanne. Good morning, everyone. I am George A. Price, Senior Vice President of Investor Relations for CACI International Inc. Thank you for joining us this morning. We are providing presentation slides, so let us move to Slide 2. There will be statements in this call that do not address historical fact, and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night’s press release and are described in the company’s SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let us turn to Slide 3, please. To open our discussion this morning, here is John S. Mengucci, President and Chief Executive Officer of CACI International Inc. John. John S. Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal year 2026 results, as well as our updated fiscal 2026 guidance. With me this morning is Jeffrey D. MacLauchlan, our Chief Financial Officer. Let us move to Slide 4, please. Before turning to our results, I want to start by reminding everyone that CACI International Inc is a fundamentally different company than it was ten or even five years ago. This evolution is the result of a clear and consistent strategy, intentional leadership, and disciplined execution over many years. It did not happen by accident. The key elements of our strategy are, first, we operate in seven markets where we possess decades of deep mission knowledge. We know and understand what our customers need. Second, we focus on enduring priorities. We are a national security company that targets narrow, deep funding streams. Third, we are a software-defined technology leader. We differentiate ourselves by using software to address critical needs with the speed, agility, and efficiency our customers demand. Fourth, we invest ahead of customer need to show the art of the possible without waiting for requirements. And fifth, we deploy capital in a flexible and opportunistic manner to create value for our customers and our shareholders. Executing this strategy enabled us to expand our portfolio, increase free cash flow per share, and generate additional shareholder value. Slide 5, please. Turning to our third quarter results. We delivered another quarter of outstanding performance on our way to another exceptional year. Revenue for the quarter was $2.4 billion, up 8.5% year over year. We also generated a strong EBITDA margin of 12.3%, and robust free cash flow of $221 million. In addition, we won $2.2 billion of awards, which represents a book-to-bill of 0.9x for the quarter and 1.2x on a trailing twelve-month basis. These awards were driven by our exceptionally strong recompete performance, an important indicator of customer confidence and a key enabler of long-term growth. While award activity improved in the quarter, it is not yet fully recovered from the multiple government shutdowns and acquisition organization changes. As we said before, quarterly awards can be lumpy. But we continue to have excellent visibility, a strong pipeline, and see a very constructive macro environment. Our results continue to reinforce that CACI International Inc is differentiated and well positioned. With that said, we are raising our fiscal 2026 revenue and EBITDA margin guidance, driven by the addition of ARKA and the strength of our organic margin performance. Slide 6, please. On that note, let us discuss our recent acquisition in a bit more detail. During the third quarter, we closed the acquisition of ARKA, a leading technology company focused on national security missions in the space domain. ARKA brings exquisite space-based imaging sensor technology with high technical barriers to entry, agentic AI-based ground processing software, and deep customer relationships built over decades of strong performance. ARKA is a powerful addition to CACI International Inc. We now have sensors deployed across all domains. We can provide multi-source actionable intelligence and bring operationalized agentic AI capabilities to classified customers across the national security apparatus. In fact, we already have agentic AI efforts underway with our shared customer footprint and we see significant additional cross-selling opportunities. ARKA positions us for opportunities including Golden Dome, INDOPACOM support, future ground architecture, and space superiority missions. To fully leverage our combined capabilities, we have integrated ARKA and CACI International Inc’s existing space portfolio under the leadership of ARKA’s former CEO. ARKA exemplifies the type of acquisition that investors should want us to make: wide competitive moat, unique capabilities and technology, exceptional execution history, and strong financial performance, and all in one of the most strategically important domains in national security. It is our flexible and opportunistic capital deployment strategy in action, positioning CACI International Inc to drive long-term growth and free cash flow per share and additional shareholder value. Slide 7, please. CACI International Inc is a national security company. That focus continues to be a powerful differentiator in the marketplace. We have more than 1,400 people embedded in mission spaces across all combatant commands performing planning, intelligence analysis, cyber, and operational support. We are involved in every operational headline you read, as well as the many operations you will never read about. This proximity to mission gives us an advantage that is hard to replicate. We understand the mission and the threats because we see them every day. This creates a feedback loop that sharpens our business development, strengthens our reputation for execution, and informs our decision making, allowing us to confidently invest ahead of customer need. These are meaningful discriminators that create competitive advantage and help drive our financial performance. For example, CACI International Inc recently received multiyear extensions on several contracts in critical mission-focused areas as a direct result of our exceptional delivery. Slide 8, please. Our strategic investments, informed by the mission proximity I just described, have positioned CACI International Inc as a leader in software-defined technology and key warfighting domains that are receiving significant attention and funding from our customers. And these investments also demonstrate a repeatable strategy that will drive future growth and shareholder value. A great example is our SPECTRAL program, where we are developing the next generation of shipboard signals intelligence and electronic warfare capabilities for the Navy’s surface combatant ships. We initially invested ahead of customer need to show them the art of the possible and to demonstrate our differentiated solution during the bid phase. Now we are actively investing ahead of need during execution to accelerate delivery of capabilities to the field, a key ask of the current administration. During the quarter, the program continued to progress as we achieved Milestone C, marking the start of SPECTRAL’s low-rate initial production and deployment phase. This is a defining step towards ramping up the program and delivering this critical EW technology to the fleet. And because SPECTRAL is built using software-defined technology with open architectures, another key administration priority, we see significant additional opportunities across the Department of Defense and international. Another example is in countering UAS, where we are seeing accelerating demand, increasing orders, and a growing pipeline driven by Merlin, our commercially sold counter-UAS system. Merlin leverages nearly two decades of our counter-UAS investments and work across the Department of Defense to deliver a system that sees farther, detects more, provides more critical decision-making time, and delivers more effective low- to no-collateral-damage capabilities than any other available system. Merlin is a software-defined system that can be rapidly updated and provides a nearly unlimited magazine of economically sustainable nonkinetic effects, including unique cellular detection and defeat capabilities. From concept to deployment in under a year, we are not only providing the Department of Defense with the capabilities they are asking for, we are also delivering them at the speed demanded. We are proving this in real time with the Merlin system that our customers deployed on the southern border. A final example is our strong positioning for Golden Dome. CACI International Inc has been investing in, developing, and building many of the capabilities this mission requires across many critical layers. First, our counter-UAS systems. Defending the homeland is not just about ballistic or hypersonic threats. It is also increasingly about threats from unmanned aircraft systems. CACI International Inc’s technology is ideally suited for this mission, where extended detection range provides critical time for decision making and low- to no-collateral-damage effects are critically important for mission success. Second, our exquisite left-of-launch capabilities. These include sensitive cyber activities as well as our worldwide set of embedded sensors, which can detect and defeat threats before they are deployed. And third is our space-based sensing. ARKA significantly expands our capabilities in the space domain, including technologies such as hyperspectral imaging and missile detection. SPECTRAL, Merlin, and Golden Dome are three significant proof points of how CACI International Inc creates value for our customers and our shareholders. They demonstrate where we identified an enduring need early, invested well ahead of award, and established differentiated positions through years of disciplined execution and continued innovation. Slide 9, please. Turning to the macro environment. We continue to see constructive budgets and demand signals. While the government fiscal year 2027 budget is still evolving, the proposed spending looks very positive in many key areas for CACI International Inc, including electronic warfare, counter-UAS, space (especially classified space and counter-space programs), C5ISR, and IT modernization, including AI and the digital backbone. We are in the right markets that are aligned to enduring, well-funded priorities. We are providing the right capabilities to address our national security customers’ most pressing needs. And with that, I will turn the call over to Jeff. Thank you, John, and good morning, everyone. Please turn to Slide 10. As John mentioned, we are very pleased with our third quarter performance. Jeffrey D. MacLauchlan: Despite some modest disruption from the ongoing DHS shutdown, our revenue and awards reflect our strong market position in a recovering but still sluggish award environment, while our strong margins and cash flow demonstrate the high-value, differentiated characteristics of our offerings and our operational excellence. In the third quarter, we generated revenue of $2.4 billion, representing 8.5% year-over-year growth, of which 6.8% was organic. Despite the modest DHS impacts that I mentioned, we still saw the expected acceleration in organic growth moving into the second half of the year. EBITDA margin of 12.3% in the quarter represents a year-over-year increase of 60 basis points, even after absorbing $17 million of ARKA transaction costs. Adjusting for these expenses, our strong third quarter profitability was driven primarily by overall mix and strong program execution. Third quarter adjusted diluted earnings per share of $7.27 were 17% higher than a year ago. Greater operating income along with a lower share count more than offset higher interest expense, including $11 million related to ARKA, a higher income tax provision, and the transaction costs I mentioned earlier. Finally, we delivered healthy free cash flow of $221 million in the quarter, driven by strong profitability and good working capital management. Third quarter cash flow was reduced by approximately $20 million due to transaction costs and other acquisition-related financing fees. Days sales outstanding, or DSO, were 55 days, two days lower than the prior quarter. Slide 11, please. Turning to our balance sheet and capital structure. Our pro forma leverage at the end of Q3 was 4.2x net debt to trailing twelve-month EBITDA, slightly better than the expectation we provided when we announced the ARKA acquisition. We continue to expect leverage to return to the low threes within six quarters based on the strong cash flow characteristics of our business. I will remind you again that we have a strong track record of successfully and quickly deleveraging after major acquisitions. This underscores our consistent financial performance, disciplined capital deployment, and demonstrated access to capital. As we have previously indicated, ARKA is accretive to both growth and margins. The acquisition of ARKA is just the latest example of our flexible and opportunistic capital deployment strategy and the evolution of our portfolio, which positions CACI International Inc to deliver long-term growth and free cash flow per share and additional shareholder value. Slide 12, please. We are pleased to increase our fiscal 2026 revenue and EBITDA margin guidance driven by the addition of ARKA and the strength of our organic margin performance. You will notice on the right-hand side of the chart, we have provided a breakdown of costs associated with an acquisition for transparency and your modeling purposes. We now expect revenue to be between $9.5 billion and $9.6 billion. This represents total growth of 10.1% to 11.3%, which includes about 3.5 points of growth from acquisitions, including approximately $150 million from ARKA. We are increasing our fiscal 2026 EBITDA margin to the 11.8% to 11.9% range, underscoring our strong execution and evolving portfolio as well as contributions from ARKA. Our full-year margin outlook includes the impact of approximately $22 million of transaction costs related to the acquisition. Our updated FY 2026 adjusted net income guidance is between $615 million and $630 million. Adjusted net income reflects the after-tax impact of approximately $60 million of pre-tax transaction costs and higher interest expense, largely offset by stronger organic margin and ARKA’s earnings contribution. This yields full-year adjusted EPS guidance of between $27.70 and $28.38 per share, which represents growth of 5% to 7% even as we absorb these costs. And finally, we are reaffirming our free cash flow guide of at least $725 million, even after absorbing nearly $50 million of transaction costs, interest expense, and an increased investment in capital expenditures. As we consistently say, we see free cash flow per share as the ultimate value creation metric, and our FY 2026 guidance represents 65% growth in free cash flow per share over FY 2025. Slide 13, please. Turning to forward indicators. All metrics continue to provide good long-term visibility into the strength of our business. Our third quarter book-to-bill of 0.9x and our trailing twelve-month book-to-bill of 1.2x reflect good performance in the marketplace, even with the multiple shutdowns and slow rebound in award decisions. Trailing twelve-month weighted average duration of our awards in Q3 continues to be just over six years. Our total backlog of $33.4 billion increased 6% year over year, while our funded backlog increased 19% over the same period. Both metrics reflect healthy organic growth even when normalizing for ARKA’s contribution of $835 million to total backlog and $422 million to funded backlog. Additionally, ARKA has another $2 billion of noncompetitive franchise programs from which we expect to recognize revenue over time but that do not yet meet the regulatory criteria to be added to backlog. For fiscal year 2026, we now expect 98% of our revenue to come from existing programs, with 1% each from recompetes and new business. Progress on these metrics reflects our continued strong operational performance and yields increased confidence in our outlook as we close out the year. In terms of our pipeline, we have more than $4 billion of bids under evaluation, over 80% of which are for new business to CACI International Inc. We expect to submit another $22 billion in bids over the next two quarters, with over 75% of those being for new business. We continue to have excellent visibility, are well positioned in a very constructive macro environment, and remain very comfortable with our outlook, including our three-year targets. In summary, we delivered another quarter of strong results. Our performance continues to demonstrate our differentiated position in the marketplace, which is further enhanced by our acquisition of ARKA. Our ongoing investment ahead of customer need enables us to win and execute high-value, enduring work that drives long-term growth, increased free cash flow per share, and additional shareholder value. And with that, I will turn the call back over to John. John S. Mengucci: Thank you, Jeff. Let us go to Slide 14, please. In closing, I want to emphasize what truly differentiates CACI International Inc. While others talk about adjusting to the changing market, we are already delivering. We anticipated years ago that speed, software-defined solutions, and mission proximity would define success for the long term in national security. We positioned the company accordingly through deliberate investments and disciplined execution of our strategy. This is all about expanding the limits of national security. It is not about chasing trends. It is about understanding where threats are evolving, where our customers’ hardest problems will be, and building the capabilities to address them before they ask. That is what has allowed us to compete and win against a broader set of competitors. Our third quarter and fiscal 2026 results to date demonstrate this differentiation in action: strong organic growth, expanding margins, robust cash generation, and the strategic addition of ARKA to further strengthen our position in the space domain. We are executing our strategy, delivering for our customers, and driving long-term shareholder value. Before I turn the call over for questions, I want to congratulate NASA and the Artemis II crew on their historic achievement. I also want to recognize that both CACI International Inc and ARKA contributed critical technology that exemplifies the caliber and mission impact of our offerings. CACI International Inc’s optical communications technology enabled high-definition video and data transmission throughout the entire mission, while ARKA provided essential sensing technology on the SLS rocket to ensure a safe crew ascent. To both teams, thank you for your exceptional work on this landmark achievement for our nation’s space program. As is always the case, our success is driven by our now 27,000 employees who are ever vigilant, expanding the limits of national security. To everyone on the CACI International Inc team, I am proud of what you do every day for our company and for our nation. And to our shareholders, I thank you for your continued support of CACI International Inc. With that, Operator, let us open the call for questions. Operator: At this time, in order to ask a question, press star then the number 1 on your telephone keypad. Star 1 again. For today’s call, we do ask you that you limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Jonathan Siegmann with Stifel. Please go ahead. Jonathan Siegmann: Morning, John, Jeff, and George. Thanks for taking my question, and congratulations on closing the transaction. Just a real quick one. With ARKA, now that it is all integrated under one leadership, can you scale how big your space exposure is today? John S. Mengucci: Yeah, John, thanks. Well, it has definitely gotten larger, and not just in size, but frankly, in scale and just the absolute eye-watering capabilities that that national asset brings in. Look, we do not use that national asset term loosely. They are a 62-year-old company, have been at the forefront of technology developments since the Cold War, with an outstanding track record of execution. We talked to the majority of the satellite primes that utilize what ARKA provides in space, and we received outstanding feedback: a consistent partner consistently delivering on schedule and within cost. Jeffrey D. MacLauchlan: You know, what drives the growth of the space business further? Definitely Golden Dome. Some of the backlog numbers that I mentioned earlier—just to have an asset that has another $2 billion of noncompetitive sole-source franchise programs from which we are going to continue to expect revenue—really does drive future growth. John S. Mengucci: All in all, today, looking at space, you are looking at greater than $1 billion worth of total business, with future growth we see coming forward when we get to talking about fiscal year 2027. Jonathan Siegmann: Appreciate that. And maybe I will just ask one for Jeff on margins because that was pretty impressive for the quarter. Previously, you made statements quantifying the difference between tech and expertise, which was helpful for us. Now that you have added the super A’s—ARKA and Azure—is there any framework that we can think about for the relative margin differences between those two segments? And any lumpiness or seasonality to keep in mind? Jeffrey D. MacLauchlan: Yeah, thanks, John. Look, you hit at an item that we are probably not going to provide a lot more specificity around, at least at this point, but clearly, the addition of these significant technology franchises is important in the evolution of the portfolio we have been talking about for some time and the attendant margin expansion that comes with that. So you put your finger on something that we are not quite ready to quantify, but the condition that you observe is clearly the case. I would add relative to the second part of your question that that does come with a certain amount of lumpiness in terms of margin. You can see that a little bit when you do the algebra around the fourth quarter margin, where we have particularly strong margins this quarter and you will quickly figure out that increasing our margin performance for the year probably means some lumpiness in the fourth quarter that goes the other way, the way this quarter went the right way. So there is some variability around that that you have noted. Overall, however, we clearly have embarked on this strategy with the expectation that margin continues to go up and to the right, despite an occasional quarterly bounce. John S. Mengucci: And, John, let me also add on the revenue side. The expected financial contribution over the next twelve months that we shared with you all in December is still accretive to revenue growth and margin. But on the revenue side, revenue is not going to be linear. It is a technology business. You make deliveries; you book revenue. When you book, you book profit. So, you know, unfortunately or fortunately, program schedules are not congruent with quarter-end points. We cannot apologize for that. It is very much like the rest of our technology business. We will do our best to estimate quarter to quarter, but this is a full-year business. We have said that a lot. And ARKA is a fantastic growth addition for us as we move forward. Operator: Your next question comes from the line of John Godin with Citigroup. Please go ahead. John S. Mengucci: John? John, are you there? Operator, let us move on to the next question. Operator: Your next question comes from the line of Gavin Eric Parsons with UBS. Please go ahead. Gavin Eric Parsons: Thank you. Good morning. John, you talked about this a bit, but maybe it is a two-part question on the booking environment. It seems like the submits are building really nicely, but that is not converting to the pipeline. So what are you seeing there? And then second, on funding, if I exclude ARKA, your funded backlog was up high single digits. So is the funding environment still behaving better even if the award environment maybe is lagging? Thanks. John S. Mengucci: Yeah, Gavin, thanks. Let us unpack that. Look, we continue to see excellent visibility and a strong pipeline. We see a really constructive macro forecast as we look forward. Let me just start with we are in the right places. We are investing ahead of need in the right capabilities. We are able to deliver them faster and more efficiently. That is exactly what the administration wants. But it is safe to say we are not a short-term hand-to-mouth business. We have a large and growing backlog, as you mentioned—nearly $34 billion, which is up 7% year over year. Funded backlog is up 19% year over year, and a healthy trailing twelve-month book-to-bill of 1.2x. And then the last thing I would like to share is a statistic I enjoy: the weighted average duration of backlog on a rolling basis is greater than six years as we get through Q3. So funding trends, customer demand, a potential $1.5 trillion GFY 2027 budget (which includes reconciliation funding), all continue to support what we are looking at going forward. We have talked about the fact that there is a number of short-term factors behind the slow award decision-making, and we could spend the rest of the day being 50/50 on reasons why. There is a lot of money in the budget. That means there is an awful lot of planning. Reconciliation funds are multiyear money. But at the end of the day, awards are lumpy. I like our plan. I like the pipeline. I like the bids submitted. Over the next couple of quarters, I fully believe that the government will go back to the days of awarding most programs within 100 to 300 days of when they plan to, and we will continue to move forward. But at the end of the day, not a hand-to-mouth business. We are growing just fine. We will continue to grow, we will get through this awards trough, and we will continue to deliver. Jeff? Jeffrey D. MacLauchlan: Gavin, I would add to that. You noted the funded backlog increase. The organic piece of that is 10%. I would also note that the sluggishness that we have seen in the acquisition and award structure—and this is underscored by the backlog statistic that we just used—we have not experienced any administrative part of the contract administration. So the government is, by and large, funding programs. They are paying bills. They are processing invoices. Payment offices are working. The sluggishness in the awards mechanism has not translated into that side of the government. Gavin Eric Parsons: Okay, thanks, guys. And a long shot here, but guidance implies growth accelerates in April, and you have got some pretty easy comps this year. So any early thoughts on if the exit growth rate can continue into next year? Jeffrey D. MacLauchlan: Yeah. We do see growth accelerating in the fourth quarter, which has always been the plan. When I referred to the fact that we were seeing the growth acceleration we expected in the third, that was part of that. But I would also encourage you to keep John’s comments in mind relative to the fact that the business is managed to the year. We have customers that have rhythmic buying patterns at different times of year. They buy differently, and we typically have a strong fourth quarter—strong second half and particularly fourth quarter—which we see again this year. But I would encourage you to not think about that as an exit rate for the year. If you look over time at the distribution of our margin and revenue growth, you will see that back-end-weighted trend. Do not extend that into 2027 as we close out 2026. John S. Mengucci: If I added a comment about 2027, I would encourage you to look forward to us continuing to deliver—driving revenue, driving margins, driving free cash flow. Again, we would not say that if we were not very comfortable with our three-year targets. Jeffrey D. MacLauchlan: The momentum in the business that you see is real. Operator: Your next question comes from the line of Gautam Khanna with TD Cowen. Please go ahead. Gautam Khanna: Good morning, guys. How are you doing? John S. Mengucci: Morning. Jeffrey D. MacLauchlan: Morning. Gautam Khanna: Good. I wanted to follow up on that last question. I remember last quarter you kind of explained the Q4 sequential ramp that is expected—JTMS and some other programs. I am curious why those would not continue to be at a very high rate exiting June into September. Is there anything one-time with those specific contracts that are driving so much of the sequential growth that then tapers off? And then I just wanted to get your broad perspectives on the fiscal 2027 budget request and how that might benefit CACI International Inc—in what parts of the business? Jeffrey D. MacLauchlan: Why do I not take the first part of that, and let John take the broader budget question. I would refer you back to the discussions that we have had about the different ramp profiles, and there are a couple of things that are happening in the fourth quarter and the sequence from third to fourth. One is that we have a number of programs that ramp in sort of a bimodal growth rate. One of the patterns that I talked about is a lot of these large agile software programs have an initial phase that is planning the second phase. So there is acceleration and then a leveling off and then a reacceleration. We are working through those phases right now on ITAS and, to a lesser extent, NCAPS. We very much are in that mode for JTMS. The other thing I would point out is that we do have a number of the technology areas where customer communities are particularly heavier buyers at different times of year, often with increased activity in the fourth quarter of our fiscal year. And then the final variable is that we have a number of items where we are in the early stages of activities that are driving investment for future growth—that is another variable in that mix. So the real answer is it is a portfolio. While mix sometimes feels like a handy explanation, there really are three or four substantive conditions that are at play here, and they come together from time to time with outcomes that we try to suggest you expect. John S. Mengucci: On the 2027 budget, larger budgets never hurt. We would rather have larger budgets than shrinking ones. But as I have said many times, we are going to pay much more attention to where the funds are flowing under the surface. What we see in the President’s Budget request looks very positive. The J-books came out earlier this week, so we will be able to garner much more detail from those as we build our fiscal 2027, 2028, and 2029 plans. We are in a $300 billion TAM, and we are roughly a $10 billion company, so there is plenty of room for us to grow. We firmly believe that the electronic warfare and counter-UAS areas, both in the Department of Defense and in DHS, show great promise. We are having all the right meetings and planning sessions and making the right internal investments to meet those market needs. Space looks really good, both in the classified space programs where we are very strong in those future budgets—especially those in the FY 2027 plan—C5ISR, and then 2027 and beyond. Operator: Your next question comes from the line of Scott Stephen Mikus with Melius Research. Please go ahead. Matt Martolo: Good morning. This is Matt Martolo on for Scott Stephen Mikus. Good morning, and congrats on Milestone C on SPECTRAL. As that program moves into LRIP and eventually into full-rate production, are there any challenges that you foresee or investments that need to be made to support the production ramp? And then how should we benefit as it moves into production? Thank you. John S. Mengucci: Yeah, thanks. We are extremely proud of where the SPECTRAL program is. That was a long road for us to achieve victory there, and the team has done an outstanding job. We received Milestone C. We are just beginning the LRIP portion in the October–November timeframe—sort of Delivery Zero—where we will begin delivering some of the systems. On the investment side, as my prepared remarks stated, we invested long ahead of the award of that program to make certain that the brains of that system, which is looking at multiple antenna feeds and all of the known threats, provide a great AI baseline for naval combatant ships. We have performed those investments. We have also continued CapEx investments in our production facility in Melbourne, where we are rolling out both CAESAR/CAF and the SPECTRAL program. We have continued to invest in this program, driving, frankly, long-lead item purchases slightly ahead of Milestone C so that we could take that timeline between C and when we can deliver the first system down. It is an absolute proof point for us on our focus on excellent execution. It is a new large-type program for us, but a great partnership with the Navy coupled with the right funding timing allows us to deliver to the well over 100 ships that are in the U.S. Navy fleet today. Operator: Your next question comes from the line of Seth Michael Seifman with JPMorgan. Please go ahead. Rocco Barbero: Good morning, guys. This is Rocco on for Seth. How should we think about ARKA impacting margins moving forward? You mentioned that quarter-to-quarter margins can be lumpy from the technology side of the business. But is the 11.6% that is implied for next quarter the right way to think about the lower end of the new company margins post these deals? Jeffrey D. MacLauchlan: The ARKA contribution in the fourth quarter is pretty consistent with our expectations. John mentioned the fact that this is a delivery and mix business and very much not linear. We gave some indication of margin in the December 2022 call, but I would point out that within any particular quarter, around that average, we may see three- or four-point swings. I do not know if I am getting exactly to the question that you asked. The ARKA expectation for the fourth quarter is well aligned with our expectation when we made that announcement. The organic business mix will be a softer quarter when you do that math. Rocco Barbero: Right, that makes sense. And then what type of directed energy capability does ARKA bring to CACI International Inc? And have they been fielded at this point? John S. Mengucci: They bring a portion of directed energy—things we cannot talk about on the line. Yes, it is a new capability for us. We were not in the directed energy business prior, and I think we will be able to talk more on that in the quarters to come. I do want to touch back on your earlier question. Look, ARKA is a long-term play for us. It is probably one of the strongest acquisitions that we have done in terms of both doubling down on capabilities and customer relationships, and us owning and growing a price-based business in a market that is going to see valuations of those such a strong space portfolio grow in years to come. We have been able to do that all inside of a company that covered down on our transaction and our interest costs and is still delivering $725 million of free cash flow. We are in the very early innings. We just got to integration on April 1. We are still in the month of April, so in the first twenty or so days, we have gotten a lot done. And Andreas, who is running the combination of ARKA’s business and our space business, is already making a major impact as to how we can continue to grow in space. Operator: Your next question comes from the line of Tobey O’Brien Sommer with Truist Securities. Please go ahead. Tobey O’Brien Sommer: Thank you. If I think about the business from a really high level—mission tech, expertise, etc.—is it fair to think of mission tech as a mix shift of two to three points per year because of faster growth as well as, generally speaking, applying more capital on acquisitions in that direction? Jeffrey D. MacLauchlan: I think, Tobey, that is broadly right. It is a hard thing to generalize, but the condition you observe is certainly true, and you are on the right vector, to be sure. Tobey O’Brien Sommer: And with respect to counter-UAS, I was wondering if you could characterize what the experience in the war so far has meant to the opportunities that you see in front of you and maybe how that has impacted customer conversations and decision making. John S. Mengucci: Yeah, Tobey, thanks. Let us start with where we are in the counter-UAS market. We are already in government inventory. We have been doing this for a couple of decades. Merlin is our family of counter-UAS systems. It is part of our broader $2 billion EW portfolio. We continue to expect growth from counter-UAS. The foundational part of this is that we are able to sell it under two different vectors—under FAR Part 12 and FAR Part 15—so we can meet the administration’s priorities. We are in place for world events and the like. We are currently providing counter-UAS to all four of the armed services. We are in active discussions or negotiations with 16 other agencies and organizations across the federal government, and we already have, as I talked about in my prepared remarks, a system that has been fully deployed on the southern border. As you all know, it is our practice that for anything competitive, we are not going to provide details, but we will absolutely share those details on the next quarterly call and in incremental press releases as we go forward. On the international front, as an update since our last call, we are now very active working sales in theater through the U.S. Army Task Force 59, DIANA 401, and CENTCOM for mobile counter-UAS units. We are getting kits prepared to support testing against one-way attack drones—the ones that have been in the news over the recent quarter. We have established relationships with resellers to give us access into the Saudi, Kuwaiti, and Qatari markets through their Ministries of Defense. They are all in various stages of the process, but you should expect those folks to be on board within 45 days, and we have to work through the exportability issues. We are very strong in this market. We have talked about this for quite a long time. Current events are driving stronger demand, as well as with the seven countries to whom we have already delivered EW. So it is a strong market, well funded in the U.S. through both direct reconciliation bills, adding billions to our TAM, which is what moved us to a $300 billion level, and really strong interest in counter-UAS for Golden Dome, as well as other initiatives like the eastern flank drone wall. A lot of positive work here. We are putting the right dollars of investment to work, and you saw the CapEx is up slightly—half of that was to ARKA, and a portion goes through our EW portfolio—and we are full speed ahead in how we want to grow this. Operator: Your next question comes from the line of Sheila Karin Kahyaoglu with Jefferies. Please go ahead, Sheila. Sheila Karin Kahyaoglu: Hi. Good morning, guys. Just one question for me. Great stuff on the funded backlog growing despite the environment. Maybe just honing in on your Civil business—still solid growth there, up 7%. What are you seeing, and how do we think about major program drivers within Civil into fiscal 2027? Jeffrey D. MacLauchlan: There are a couple of things going on in Civil, Sheila. You can see the modest DHS headwinds, but you can also see the NASA NCAPS ramp. Those would be the principal drivers of the change that you see. Sheila Karin Kahyaoglu: Okay, great. Thank you. Jeffrey D. MacLauchlan: You are welcome. Sheila Karin Kahyaoglu: Operator? Operator: Your next question comes from the line of David Egon Strauss with Wells Fargo. Please go ahead. Joshua Korn: Hi, good morning. This is Joshua Korn on for David. I wanted to follow up on the broader defense budget question. It is noted in the slides that the reconciliation funding is starting to flow through. Is there any way you could quantify to what extent your programs benefit from the base budget versus the reconciliation benefit from last year? And then any thoughts on what that might look like for 2027? Thanks. Jeffrey D. MacLauchlan: The majority of what we do and what we have been able to grow is in the base budget, and it will continue to be in the base budget because we have selectively decided in our several markets to go after areas that are traditionally funded within the base. On the reconciliation funding, we have seen those start to flow. They are going to be very prevalent in Golden Dome, as well as border security. We have seen some additional funding show up there. We are doing a lot of AI-based object-tracking tech, as well as additional spend in our counter-UAS area. We are currently modernizing the Space Force’s critical infrastructure through reconciliation funding. Again, you can directly tie that to things in the Golden Dome area. In the intelligence world, we continue to enhance what we do in the left-of-launch area around situational awareness. And then in IT modernization, we have a lot of large enterprise systems that we are looking to try to make common across the Department of Defense. If the Army has a picture-perfect enterprise system to X, we are pushing to have that same solution be used through the rest of the Department of Defense. A lot of nice funding. Whether it is RDT&E or in procurement versus O&M, it does not quite matter to us. We are always doing modernization through sustainment, which is a large use of O&M funding. Clearly, as our business continues to evolve, we will see increasing amounts of RDT&E funding. So we are really well funded to close out 2026, and just as nicely funded as we go forward in fiscal year 2027. Joshua Korn: Great, thank you. Operator: Your next question comes from the line of Mariana Perez Mora with Bank of America. Please go ahead. Alex Preston: Hey, guys. This is Alex Preston on for Mariana this morning. I just wanted to go back to NASA and the Civil side real quick. Given the budget fluctuations there in FY 2027—right, the request calls for significant cuts year over year, but there is also this shift towards exploration away from pure science, so there is a bit of a dynamic there. I am curious if you had any broad puts and takes on that budget request and where you see CACI International Inc and ARKA playing within that context. Thanks. John S. Mengucci: Yeah, so I guess we are on both sides of that, Alex. Let us start with NASA NCAPS first. We continue to successfully ramp that program. We are receiving very high praise from our customer. We are deploying a commercial agile-scale delivery model to really standardize and centralize software development across NASA, very similar to what we have done with Customs and Border Patrol on BEAGLE. The way to think about that work in terms of budgets and administration priorities: we are reducing software development times, increasing efficiency, and bringing administrative systems across NASA into compliance with the plethora of federal reporting requirements. We have all key metrics, and we are supporting, I think, 800 to 900 different applications and platforms. So there is no impact to the work that we are doing. By driving commonality and moving NASA and their software development frameworks closer to the way that commercial companies and CACI International Inc do software development, it is going to generate cost savings across the organization. The nice thing for us, it supports the theme of NASA wanting to reduce their reliance on outside headcount and push those dollars more into mission, which is fantastic for us as we look at our space business. So it is the organization taking full advantage of what we are doing on one part of our business—driving agile software development practices and putting DevSecOps in place—that has been saving the organization money. And the even sweeter news is we are on the receiving end of that as we look at what we do in space. Very much aligned, and not a funding threat to where we are going on NCAPS, and it will continue to ramp to support 2027 growth rates. Alex Preston: Great. Thank you. Really appreciate the color. Operator: Your next question comes from the line of John Godin with Citigroup. Jeremy Jason: Hi. This is Jeremy Jason on for John Godin. Thank you for squeezing me in. As we think about these complex technical solutions transitioning from development to production—like SPECTRAL—I wanted your take on the outlook for the scalability of these technologies across different customers and upcoming budget cycles. And could that theory be affected by a potential blue wave? Thanks. John S. Mengucci: I will take your last comment first. The beautiful thing about being an investor in CACI International Inc is that a number of years back, when we set this company on its next course, we spent a lot of time looking strategically at the kind of markets we wanted to support and the parts of the federal government we were going to be very focused on. It is no accident that we are focused on national security—DoD, the Intelligence Community, and DHS—all of which have full bipartisan support. Blue waves, red waves, purple waves—it does not much matter to what we are doing. We are in very critical areas that the government will not decide to just turn off. So first and foremost, that is where we are at. On systems like counter-UAS, SPECTRAL, and our work in agentic AI—those all scale wonderfully as we move forward. Our optical communication terminals move beyond the 2- and 4-watt proliferated LEO systems to very exquisite systems. For SPECTRAL, its scalability is to deliver the baseline we have agreed upon to well over 100 combatant ships, and then move into the FMS side of where SPECTRAL goes. On top of the FMS work is all the topside and antenna work that we and the Navy believe should be the next phase of SPECTRAL so we can secure even more signals from those topside antennas and drive processing improvements that will protect ships not only from missiles, but also from drones. In the counter-UAS area, we have been scaling up production capabilities in Sterling and in Melbourne to be able to deliver Merlin. It is a tough supply chain right now—there are a lot of people buying flat panel radars. What differentiates us, and how we enhance it going forward, is the software capability of that system. It is not always about updating hardware. Whether this is fly-by-wire drones, one-way attack drones, cellular drones—you name it, we have seen them all over the planet. We are more than able to scale forward from that position as well. We can talk a lot about optical communication terminals and everything we have done in the tech area, but they all follow that common theme: you need to understand the mission so that you can deliver. We hear a lot about AI and how that is going to move different parts of our business forward. Frankly, AI without mission is like a car without gas—it is great to look at, but you cannot do much with it. We have been able to scale AI use throughout a lot of what we do, and we are looking forward to driving the growth further in fiscal year 2027. Operator: Your next question comes from the line of Jan-Frans Engelbrecht with Baird. Please go ahead. Jan-Frans Engelbrecht: Good morning, John, Jeff, and George. Congrats on another good quarter. I wanted to talk about the ARKA and legacy CACI International Inc space portfolio. Is there an ability to combine those capabilities into a solution for the customer? John S. Mengucci: Thanks, Jan-Frans. Probably the most prolific revenue synergy we have is going to be on the ground processing side, where ARKA already has authorizations to operate agentic AI solutions in a number of different mission models that allow them to process and find different things in the GEOINT stream. We are just as adept on the SIGINT side, but we have not moved to AI on that side. We are just beginning to have customer meetings, given that we just got everything integrated. So there are revenue synergies there that have not even begun, which will allow us to move the Intelligence Community further down the path toward higher-level, multi-INT solutions. The other area that we are already connecting is how do we go about building larger-scale optical communication terminals—larger ones, or ones of the same size that need to push a terabit of data through them versus 2 to 4 meg. ARKA is a 60-plus-year space company. We are a six-plus-year space company in the world of optics. There are a lot of synergies already taking place there. We are looking at different ways that we can get through production and different ways we can do engineering. There is so much more we can be doing for the folks who build satellites and the customers who absolutely need information from those missions. We are really excited about what the future brings for us. Jan-Frans Engelbrecht: Thanks, John. Very helpful. And then a quick follow-up, if I may. If we look at FY 2027, and you have great visibility in this business—close to four years of annual revenue in the backlog—any large multiyear contracts that you have bid on, sort of multibillion-dollar contracts, that you expect to be adjudicated in FY 2027? Or any notable recompetes that we should look out for in the next twelve months? John S. Mengucci: On the new business front, we always have a number of multibillion-dollar things that are rumbling around at different stages. Do we have some that are over a billion dollars that can be awarded in fiscal year 2027? Absolutely. Frankly, we were looking at some of those to be awarded toward the end of 2026, but we were not there. We will be able to report on how 2026 wraps up and how they go forward within 2027. On the recompete front, 2026 has been a really large year for us. As Jeff mentioned during his prepared remarks, we are already greater than 90% on the recompete front. What is just as exciting is that future recompetes that would have come up in 2027 have already been extended by 18 to 24 months, which is a great way to win a recompete—never having to bid on it. You only get there when customers recognize the importance of the areas we are in, the importance of national security, and the level of performance we have had. Operator: That concludes our Q&A session. I will now turn the conference back over to John S. Mengucci for closing remarks. John S. Mengucci: Thanks, Jeanne, and thank you for your help on today’s call. We really want to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you have follow-up questions, and Jeffrey D. MacLauchlan and George A. Price and Jim Sullivan are available after today’s call. Please stay healthy, and all my best to you and your families. This concludes our call. Thank you, and have a fantastic day. Operator: This concludes today’s conference call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the Pinnacle Financial Partners First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I will now turn the call over to Jennifer Demba, Senior Director, Investor Relations. Please go ahead. Unknown Attendee: Thank you, and good morning. During today's quarterly earnings call, we will reference the slides and press release that are available within the Investor Relations section of our website, pnfp.com. President and CEO, Kevin Blair will begin the call. He will be followed by our Chief Financial Officer, Jamie Gregory, and they will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation. And now Kevin Blair will provide an overview of the quarter. Kevin Blair: Thank you, Jennifer. Good morning, everyone, and thanks for joining us. January 1st marked the official close of our merger with Synovus. And rather than slow down, we hit the ground running. We're choosing to lead. In our first 90 days together, we focused on what has always mattered at Pinnacle, building the best team, delivering exceptional client experiences and translating that into sustainable, profitable growth. The early results speak for themselves. For the first quarter, Pinnacle delivered diluted earnings per share of $0.89 and adjusted diluted EPS of $2.39. On an organic basis, we generated over $2 billion in loan growth and almost $2 billion in core deposit growth, right in line with our 2026 expectations. The net interest margin expanded into the top half of our target range and adjusted noninterest revenue grew over 20% versus combined results in the first quarter of 2025. Moreover, credit remained stable, and we continue to see strength in key metrics and ratios such as adjusted return on tangible common equity and adjusted tangible efficiency. As expected, our results this quarter included $275 million of merger-related costs. At the same time, our recruiting engine continues to do what it does best, when. We added 50 experienced revenue producers during the quarter, up 22% on a combined basis from the fourth quarter of 2025 and up 11% on a combined basis from the prior year. This momentum has carried into April with another 37 new hires or accepted offers. That's not a coincidence. Great bankers are drawn to environments that are empowering, engaging and frictionless making it easier to deliver distinctive seamless client service. Integration is progressing ahead of plan, and importantly, without losing the soul of what makes Pinnacle work. Our operating model is in full motion. Leadership accountability is clear. Technology and system decisions are largely complete, and we remain firmly on track for operational and brand conversion by March 2027. Most importantly, our clients noticed positively. In the latest Coalition Greenwich survey, legacy Pinnacle ranked #1 nationally in Best Bank awards earned while Synovus ranked 6. According to Coalition Greenwich, outcomes like this are exceptionally rare in bank mergers and they don't happen by accident. We have never viewed this as a merger of 2 companies. It's a merger of relationships, and that has met one clear mandate from day 1, maintain what clients value and make it better. These results tell us we're doing both. Our team members felt it too. This month, Pinnacle was named #12 on the Fortune 100 Best Companies to Work For List, our tenth consecutive year earning that recognition. Through a period of real change, our culture didn't fade, it showed up. Finally, last month, Pinnacle joined the KBW NASDAQ Bank Index or BKX. This transition from the KRX places us amongst a select group of banks recognized globally for scale, consistency and strong returns, and reflects the outstanding reputation we have built with investors. As we look ahead, we remain firmly focused on executing the Pinnacle playbook. Our priorities are clear, consistent and unchanged. We remain focused on top quartile organic growth, disciplined hiring of experienced revenue producers and sustained earnings expansion. These priorities are supported by strong risk management and fundamentals built to perform through cycles and deliver superior results over time. Scale only matters if it makes you better, and this combination does exactly that. With that, I'll turn it over to Jamie to walk through the quarter and the key drivers in more detail. Jamie? Andrew Gregory: Thank you, Kevin. Our first quarter sequential and year-over-year comparisons are significantly impacted by the Synovus merger, which closed on January 1. As a result, we will make selected references to combined results for legacy Pinnacle and Synovus in prior quarters to give you a clear view of our organic growth in the first quarter. The primary driver between our reported EPS and adjusted EPS in the first quarter was $275 million of merger-related expenses. Net interest income was $933 million in the first quarter driven by excellent balance sheet growth. Period-end loans excluding the day 1 purchase accounting loan mark, increased $2.1 billion or 10% annualized from the combined firm's fourth quarter 2025. The majority of the organic loan growth was in C&I credits, with contributions from our geographic markets as well as in our specialty lending lines. Linked quarter organic core deposit growth was $1.9 billion or 8% annualized in the first quarter. This healthy growth in core deposits was driven by higher interest-bearing demand deposits and money market accounts and was broad-based across our geographic business units. Total deposit growth was impacted by a strategic reduction of broker deposits. The net interest margin expanded to 3.53%, which was in line with our previous guidance of 3.45% to 3.55% and driven by purchase accounting, balance sheet marks and fixed rate asset repricing. Recall that in January, we repositioned a portion of the legacy Synovus securities portfolio. These transactions reduced interest rate risk in the securities portfolio, support our Level 1 HQLA position and eliminated approximately all of the PAA associated with the securities portfolio. We also took other securities actions during the first quarter to enhance balance sheet liquidity and yield. On a combined basis, adjusted noninterest revenue increased over 20% year-over-year and was stable compared to the fourth quarter. Core banking, wealth management and capital markets fee growth was strong year-over-year. Income from our equity method investment in BHG was $31 million during the first quarter, in line with expectations. We remain disciplined with noninterest expense control while continuing to invest in revenue-producing talent and technology, partially offset by the realization of some of our merger-related cost synergies. Our adjusted tangible efficiency ratio was 51%, in line with expectations for this phase of the merger integration. We incurred $275 million of nonrecurring merger expense in the first quarter. On a combined basis, our nonmerger-related linked quarter growth was driven by higher employment expenses largely due to seasonally higher personnel costs. Also, on a combined basis, head count was down 2% sequentially. We realized the majority of our 2026 merger-related expense synergies in the first quarter. Credit trends remained very healthy in the first quarter. Net charge-offs were in line with expectations at $49 million or 23 basis points. This compares to 25 basis points for the combined firm in the fourth quarter and 19 basis points for the combined firm in 2025. The nonperforming asset ratio was 0.58%, which was largely impacted by 2 senior housing relationships that were previously rated, have a specific reserve and should be resolved this year. The allowance for credit losses ended the first quarter at 1.19% compared to 1.17% for legacy Pinnacle at the end of December. This increase in the reserve was driven by net loan growth, a deterioration in the economic forecast and an increase in individually analyzed loans. These factors were partially offset by a decline in qualitative reserves. For your reference, we have included slides in the appendix on our nondepository financial institution loan portfolio and the private credit exposure within this portfolio. As you can see, Pinnacle's NDFI loan exposure is approximately $7.3 billion. In the first quarter, approximately $700 million of legacy Pinnacle music catalog loans that were previously classified as general C&I credits were reclassified as NDFI. Our common equity Tier 1 ratio ended the quarter at 9.8%. Our intent remains to deploy capital generated through earnings to client growth as we proceed through 2026, while building CET1 to the low end of the range. I will now hand it back to Kevin to review our 2026 financial outlook. Kevin Blair: Thank you, Jamie. Pinnacle's differentiated revenue producer hiring model continues to be the engine of our growth, and it performs well through cycles. That's not a claim, it's a track record. The momentum we're building today through disciplined hiring and client consolidation is what drives our confidence in the path ahead. Our 2026 outlook is unchanged from what we shared in January, and our first quarter results reinforce it. We expect period-end loan growth of 9% to 11%, excluding the purchase accounting loan mark versus combined balances at year-end 2025. We're on track with 3% organic period-end loan growth, excluding the purchase accounting loan mark in the first quarter. Importantly, our assumptions are not dependent on changes in line utilization rates or moderation in current paydown and payoff activity. Same model, same results, our bankers win clients, and these clients consolidate to Pinnacle. Total deposits should grow 8% to 10% versus combined year-end 2025 balances. That growth will be driven by continued recruiting momentum, core commercial client deepening and the ongoing contribution from our specialty deposit verticals. Our adjusted revenue outlook remains $5 billion to $5.2 billion for the full year. The net interest margin is expected to be approximately 3.5% with the marginal benefits of near- to medium-term fixed rate asset repricing within the legacy Pinnacle portfolio generally offset by a methodical increase in our on-balance sheet liquidity position. Our net interest margin range assumes a forward rate path consistent with current market expectations. The balance sheet remains approximately 1% asset sensitive to the front end of the curve and 1.5% asset sensitive to long-term rates. And our goal continues to be towards managing a relatively neutral posture for the foreseeable horizon. We continue to expect approximately $1.1 billion in adjusted noninterest revenue this year, driven by sustained execution in treasury management, capital markets and wealth management. This guidance also includes a projection for BHG investment income of approximately $105 million to $115 million for 2026. The slight headwind relative to our prior estimate is not a reflection of BHG's core performance. Rather, this is part of a strategic effort to further optimize their funding and delivery platforms, a decision which presents a modest near-term revenue recognition headwind, but which we believe best positions BHG to enhance long-term profitability and enterprise value. We're managing for the right outcome, not just the next quarter. Our adjusted noninterest expense forecast remains in the range of $2.675 billion to $2.775 billion. We expect to realize approximately 40% or $100 million of our merger-related savings this year. Underlying tangible expense growth is driven by revenue producer hiring from the back half of 2025, continued 2026 recruiting, real estate build-out to support market expansion and normal inflationary items. We now estimate $400 million to $450 million of the $720 million in nonrecurring merger-related and LFI charges will be incurred this year, excluding merger-related equity acceleration cost. We continue to operate in a constructive credit environment. Net charge-offs are expected to be in the range of 20 to 25 basis points for the full year, consistent with combined company performance in 2025. The fundamentals underpinning that outlook are sound, and we see nothing on the horizon that changes our view. Our focus for capital management for the rest of 2026 remains on managing our CET1 ratio towards our target of 10.25% while continuing to prioritize deployment for core client growth. As it relates to the most recent capital NPR, we estimate the proposal could have a 60 basis point positive impact to our CET1 ratio. We continue to expect an adjusted effective tax rate of approximately 20% to 21% for the year. In summary, Pinnacle is navigating this year from a position of strength. While some question the pace, complexity or disruption inherent in a merger of this size, the first quarter delivered exactly what we said it would and in a meaningful way. Top quartile revenue growth, expanding merger synergies and disciplined execution across every geography and specialty banking unit reinforce our conviction and what lies ahead. Integration is progressing. The team is performing and the model built over the past 25 years is precisely what this environment rewards. We are only one quarter in ahead of pace and exceeding expectations, but make no mistake, this is just the opening act. The model works, the team is motivated and we're locked in on proving that this is built to last. With that, operator, let's transition to the Q&A portion of today's call. Operator: [Operator Instructions] Your first question is coming from John McDonald from Truth Securities. John McDonald: Just wondering if you guys could drill down a bit into the outlook for loan and deposit growth. The things that you've seen so far this quarter that give you confidence in both? And maybe just a reminder, how much is driven by the seasoning of hires that have already been done and how much is coming from other factors? Kevin Blair: John, it's a great question. As we've talked about the first quarter, I think, answered the question of whether the combined companies can continue to grow. And what gave me a great deal of confidence was the diversification across the geographies and the specialties and the momentum that we continue to see in our pipelines in all of those areas is what gives me a great deal of confidence in the trajectory that this is not just a 1 quarter or 2 quarter growth story. As you recall, the combined companies back in fourth quarter also grew double digits. . We had about $4.2 billion in funded production this past quarter. As you saw in the deck, it was largely across all of our geographies and our specialty units. And so that gives me a great deal of comfort that it's not coming from one asset class or one area. We know that the bankers that we've hired in previous years continue to generate a lot of that growth. Also, we know that some of the hires that we made this year, the 50 that we talked about are already hitting the ground running. So, for me, the pipelines are robust. The combination of the benefits from previous hiring as well as the cross-selling opportunities that we have from introducing each of the organization's capabilities to the other client base. That's what gives me confidence. And so you saw we maintain our guidance. Same thing on the deposit side. It's coming from the new hires. It's coming from some of our deposit specialties. And again, it's fairly broad-based. And that, again, gives us confidence that we reiterated the guidance for the year. John McDonald: Great. And maybe just a follow-up on the deposits for Jamie. The core deposit growth was plus 6% and -- the total was plus 6%, the core was plus 8%. You mentioned a little bit of strategic reduction of brokered. Can you give us a little color on that? And do you see the core deposit growth kind of accelerating up a bit as you go through the year? Andrew Gregory: Yes, John. As we look into 2026, we do expect to see deposit growth to be more back-end loaded as we look to the seasonals and the growth, as Kevin mentioned, from the hires. The first quarter was very strong. I mean growing core deposits at $1.9 billion, pretty much in line with loan growth gives us a lot of flexibility. And so what do we do with that flexibility? We reduced our broker deposits. Basically, it's just a cost optimization play and wanted to reduce costs where we could. Operator: Your next question is coming from Timur Braziler from UBS. . Timur Braziler: First question is just any change in the go-to-market strategy on either side of the bank and just wondering what the reception has been early on from any changes made. Kevin Blair: Yes, go-to-market strategy. As we've talked about, Timur, it's really moving to the Pinnacle model. And what that means is that we're adopting the rapid hiring of revenue producers. And I think what you can see this quarter is about 40% of the producers that were hired were hired in what I would consider the legacy Synovus footprint. And that is about a 50% increase over what we would have done in the same period last year. So the model of hiring has been rolled out and is actually being executed within that Synovus model, within the Synovus footprint. The model that we're executing on the Pinnacle side has to do with autonomy, a decentralized framework that allows specialty bankers to support the local geographies that's been rolled out. Our bankers on the legacy Synovus side love it. It quite frankly, is what they were used to years ago within Synovus, so it wasn't a great deal of change. I would tell you that the engagement level with our frontline team members is very high. And I think you can see that with the results. This could have been a quarter where people were focused on distractions and talking about the merger and changes, but reality is everyone continue to serve their clients and generate the growth that we thought they could generate. And so I would say the model changed a little bit from the Synovus side, but it was well received, and it's already in the process of being well executed. On the Pinnacle side, really no changes. We -- as I said, we've kept the incentive structure, we've kept the hiring model. We've kept the decentralized geographic framework. So there shouldn't be a lot of changes on that side. Timur Braziler: Okay. Great. And then one on expenses, as my follow-up. We got the guide for this year. I'm just wondering, as we go out into next year, and we get the majority of the cost saves starting to hit, just how do those flow through? Are you expecting there to be net reduction of expenses as you get the majority of the cost saves? Or are we in growth mode where investment into the franchise is going to maybe eat into some of those, and it's still going to drive increased expenses maybe at a decelerated growth rate. Kevin Blair: Yes, Timur, as we look at 2027, there are 2 components, and you hit them both. First is we will continue to operate in this model where we expect to be winning with recruiting, bringing bankers over. We expect that to continue. And so you should look at the historical kind of core NIE growth rate of legacy Pinnacle, and that's in line with how we're looking at longer term. And so for 2027, you could see that be in the high single digits. And then from there, you back out the synergies. And we said our target for 2027 is 75% of the overall synergies, so going from the 40% to the 75% will offset a portion of that core NIE spend, but just a portion of it. Operator: Your next question is coming from John Pancari from Evercore. John Pancari: On the -- on the loan front, I think your organic growth was pretty solid in the quarter against your 9% to 11% guide. Could you give us a little bit more detail in terms of what you're seeing in terms of credit spreads and new money loan yields? Are you seeing any competitive pressure there? And then also on the lending front, if you can give us a little bit more granularity what you're seeing in terms of loan demand and line utilization in the quarter, how that's faring? Kevin Blair: John, I'll start with the end. We actually didn't see a lot of change in line utilization this quarter. It was actually down a little bit. But we did put on about $8.2 billion of commitments versus just $4.2 billion of funded loans. So I think you could see some fund-ups happen over the next several quarters based on this quarter's production, but the growth this quarter was not driven from line utilization increases. . When we look at loan pricing this quarter, our yields came in right around $620 million on new loans. And I think that's within our expectations and essentially flat with kind of where the combined company's fourth quarter experience would have been. So I don't think there's any surprises. I've heard a lot on the deposit front as it relates to competition and hypercompetitive environment. We came in at $262 million roughly on production there. It was up about 6 basis points from last quarter when you combine the organization. That was really more just movement into the money market category. So I think in general, when we analyze the competitive landscape, not only on loans but also on deposits, I think it's pretty rational. I think what's different is that a lot of folks expected some of these promotional rates to come down. And they haven't come down. They've remained fairly stable. But it's a competitive world we're living in, but we're not seeing anything that's irrational or anything that we can't compete with. And so we feel pretty good about where we are on a pricing standpoint, and there's nothing in that competitive data that would make us change our outlook on NIM or on growth. John Pancari: Got it. All right. And then I appreciate the color on the competitive dynamics on both side to the balance sheet. Separately, on the broader growth strategy, and I certainly appreciate your commitment to the 9% to 11% loan growth and the 8% to 10% deposit growth and the whole growth strategy and the hiring behind it. In this backdrop, certainly some uncertainty out there, if the macro backdrop does weaken and you tighten standards on the credit front, what does that mean for your growth expectations? How do you expect that you could modify and adapt to the backdrop and still -- would you still be confident in these targets on the lending side? Andrew Gregory: John, that's the beauty of this model is that a lot of the growth that we're talking about is predicated on bankers bringing their books over. And so we put some slides out there in the past laying out the book of business that we expect to build just based on bankers that have already been hired. And that still exists. And you could say that on the Pinnacle side, there's $15 billion to $20 billion of growth embedded and people who are on the team today, and they will bring clients over, build their books to where they used to be, where we've seen all the rest of the bankers build their books. And that's not economic dependent. And so sure, a stronger economy is a positive, stronger growth is a positive, being in the Southeast as a positive. But our growth is more predicated on that hiring than anything else. And in that number, the $15 million to $20 million, that doesn't include the prior Synovus hires, and that may be another $5 billion on top of that. And so -- we see a lot of growth just from bankers, bringing over books of business, building their books. And it's more about that than it is the general volatility of the economy. Kevin Blair: And Jamie, just to add on to that, John, we do -- as you know, we look at all of our transaction activity, we analyze pipelines, but we also survey over 400 commercial clients every quarter. We also look at the actual cash inflows and outflows of 24 industry categories. And looking at that survey this quarter, as Jamie said, we don't rely on the underlying economic growth to drive it. But the bottom line is, I think we're operating in a great footprint. -- and our clients are remaining constructive even in this environment. Now not euphoric, but they're durable -- and I think they're adapting and finding efficiencies and they're leaning in a little bit. And so we saw that the overall sentiment of our client base hasn't really changed even with all these geopolitical risk and some of the uncertainty that's out there. So I think that gives us confidence that the economy at this point won't serve as a headwind. Operator: Your next question is coming from the line of Ebraham Poonawala from Bank of America. Ebrahim Poonawala: I just wanted to go back to sort of the net interest margin. When we think about the purchase accounting benefit and then the loan deposit growth dynamic, when you look at the first quarter growth that came on the balance sheet, is that around the same ballpark? I'm just trying to figure out what the resiliency of the 3.5%-ish margin is in a world where there's no big change in the interest rate backdrop. And maybe tied to that, Jamie, what's your sense of noninterest-bearing deposits as the mix of total changing from here? Do you see that going thing flat, going up or going down? Andrew Gregory: Yes, Ebrahim, it's a great question. As we look at growth, kind of circling back to the prior question, the growth in core deposits is a huge positive in the first quarter, tying that out with the with loan growth. As we look forward, we expect to see strong core deposit growth continuing relatively in line with loan growth a little bit behind. And that will help us out in the funding mix. But in the first quarter. Kevin mentioned loan production rate was 6.2%. On the deposit side, it was 2.62%. And so you think about that margin, it's about 3.6% and between loan yields and deposit costs of just the growth in the first quarter. Now you can't use that and just say, okay, well, that's actually not accretive for the rest of the year if you continue to do that because there are other things that go into that, and you will see us do some actions as we go through the year for liquidity management, there will be a little bit of a headwind to the margin. So I think the right way to look at it longer term kind of when we get beyond 2026, as you think about the legacy Pinnacle margin, which was approximately 3.3%, just below premerger, that's probably a decent margin for future incremental growth. And if you use that as a proxy for incremental margin of growth beyond 2026, then what you see is slight -- very slight headwind to the margin in the out years. And so that's generally how I'm thinking about it. For this year, we're saying a 350 margin for the full year 2026, coming off the 353 in the first quarter. I will just say that in the first quarter, there are a couple of positives that will not reoccur in the second quarter. And that's day count is a little positive and also our securities repositioning in the month of January was slightly positive to the margin. So a good baseline for Q1. Adjusted for those is in the 350 area. And basically, what we're saying is that's a good full year number as well. With regard to NIB, we do expect that to remain relatively stable at around 20% of deposits. Ebrahim Poonawala: Got it. That is good color. And just one quick follow-up. I believe when we did the deal -- so you talked about a lot of growth coming from banker hiring. Are there opportunities given the larger balance sheet size to bring on wallet of existing relationships, which are on the balance sheet and where you could see a bit more loan growth beyond what's coming from the hiring? Like is that something we should be thinking about? Is that a real opportunity? . Andrew Gregory: Well, Ebrahm, I will start with some successes we had in the first quarter. We had 6 capital markets deals that totaled $10 million in revenue that basically they are lead arranger fees, investment banking advisory, I mean these are some of the benefits when you have more balance sheet, more clients you get more of this type of business. So that's fee revenue, it's not exactly what you're asking, but that's the type of business that has a $120 billion bank that we're going to see more and more of. And so we're really pleased to see that in the first quarter post close to hit the ground running with that. And yes, obviously, we can have bigger whole limits, things like that on the balance sheet. But in all aspects, we're just more relevant to the larger clients here in the Southeast. Kevin Blair: And Ebrahim, you recall, we put $100 million to $130 million in revenue synergies, and one of the categories was relationship expansion. And a lot of that had to do with being able to offer the other client base, some of the services that the company would bring to the combined firm. This quarter, equipment finance, we were able to put up about $120 million guidance facilities in the legacy Synovus footprint coming from the Pinnacle Equipment Finance team. On the dealer finance side, we have about $650 million in the pipeline coming from the legacy Synovus footprint, asset-based lending. We have about $200 million of new market deals that are in process. And then in capital markets, we were able to do $110 million in multicurrency syndications which we wouldn't have been able to do in legacy Pinnacle. So you're already starting to see, as Jamie mentioned, on fee income and lending, the fruits of bringing the companies together, but we're in the early innings there. And I think it's going to continue to drive growth. But that would obviously be embedded in our expectations for this year. Operator: Your next question is coming from Casey Haire from Autonomous. Casey Haire: So I wanted to touch on the recruiting strategy. Very good momentum here at 87% or so year-to-date. I was wondering if there is upside to that 250 target for 2026. And then are you still getting the same economics on these hires, but just noticed the expense guide, while it's the same, it does imply a bit of a step up going forward versus flat. Kevin Blair: Previously. Well, Casey, I don't want to bet against ourselves and up our targets today. But as I said, I feel really great about what we've been able to accomplish in the first quarter not just because of the numbers. But I think, as you know, many people were questioning whether we could continue to hire with a merger weighing on some of these decisions where bankers may be waiting, watching and taking a pause. So I think first quarter shows that the model itself is the attraction point and the merger has not changed that. . Could we go over that number? Sure. I mean but we're still focused on where we are today. You saw the 50 that we've hired another 37 that have already accepted offers. I think 22 of those individuals are already in the bank and have started working here. And so I'm super excited about it. And as I mentioned in my earlier comment, the fact that when we look at some of our legacy Synovus leaders, they've already started to execute on the model, seeing a 50% increase there. So in terms of the economics, I think we go into this expecting similar economics. I can't tell you whether the 50 we hired to date are going to exceed or fall below that. But what we've been seeing in tracking gives me -- it gives me a great deal of confidence and no change into what those individuals will bring to the bank. And it goes back to what Jamie said earlier. The model isn't just about hiring. We're not bringing over people using headhunters. We're recruiting people that have worked with other Pinnacle team members so that there is a great deal, a higher probability of success because we know what their work was at their previous institution. And so I think that you'll continue to see that growth. Jamie mentioned earlier, $15 billion to $20 billion of embedded growth on the Pinnacle side, let's say, another $5 million from the legacy Synovus hires. I'm incredibly bullish on our ability to continue to add. And what's interesting to me when I look at it across the geography, it came from every geography, and it came from every specialty. 28 geographic hires, 22 specialty hires. And so I think there's a lot of additional hires that will happen this year. Casey Haire: Great. And just switching to capital. Is there any -- just some updated thoughts on potential BHG monetization or making use of the Greystar JV with credit risk transfers to speed up the CET1 rebuild. Kevin Blair: No update on the BHG side as far as a liquidity event. But I will say that we spend a lot of time with that team and -- we really do believe in their strategy going forward of remixing their distribution. We think that it will improve long-term profitability as well as improve enterprise value. So we appreciate that partnership. On capital ratios, starting here at 983 on CET1, our intention is to build capital as we go through the year to get to the low end of that target range, get to the 1,025 area. There is a chance that we would use some sort of a CRT or SRT strategy to help with capital, but it would have to be the right situation and the right cost of capital. Right now, we're not really contemplating anything in that regard, but that is definitely a tool in the toolkit should we find the right fit at the right cost. So we'll continue to evaluate those options as we go through the year. Operator: Your next question is coming from Michael Rose from Raymond James. Michael Rose: Maybe just to touch on the revenue synergy slide. Obviously, I understand that all the ranges provided were reiterated. But any sense on what could -- what areas we could see progress maybe a little bit sooner versus later in that 2- to 3-year dynamic? And then I guess just from the outside looking in, how do we get comfortable because it's always hard to see, I think, from the outside looking in that you're actually realizing those revenue synergies. So any sort of comfort there would be helpful. . Kevin Blair: Thanks, Michael. I'm glad I brought it up because I think the context does matter here because we are only 1 quarter in, and we're still operating on 2 separate systems, which create some barriers to be able to offer the other organizations products. I think where you'll see the early wins are more concentrated in the accelerated RM hiring, which was one of the areas that we thought we would see early wins. And then the specialty cross-sell pollination that I mentioned earlier, whether that's equipment finance, asset-based lending, dealer finance, family office, those sort of things we can offer without being on the same platform. So still feel very comfortable with the $100 million to $130 million. I think if you remember in one of the industry conferences we were at, we said we expected a modest, I think, $20 million in 2026, and what we're seeing in our pipelines and the opportunities there, I think we'll be able to achieve that within this year's numbers. And so we'll be very transparent as we get to those numbers, we'll share where they're coming from, and we'll go back and show you those relative to what our targets were so that you can see the pull-through, but I would just say one quarter in, we're still on 2 systems. The synergy story is coming to life. And I think when we put the combined toolkit in front of our bankers on one platform, these numbers will really begin to accelerate. Michael Rose: Okay. Very helpful. Appreciate that, Kevin. And then maybe just as my follow-up. Obviously, a really good start on the hiring front. It's been brought up a couple of times here. I think in these types of deals, though, we always worry about retention. And I think that was 1 of the key attributes of Pinnacle over a very long time period was just the high level of retention. Can you just talk to that there? Because obviously, it seems like the backdrop for hiring, everybody is hiring at this point and more so than they have in the past couple of years at least. So maybe you can just talk to some of the retention of lenders and associates and how that should trend moving forward? Kevin Blair: Yes, Michael. Like internally, to your point, not only do we set the goals for hiring, we also set a retention goal for voluntary turnover at 7%. And that was the combined retention number of both organizations. And you could argue that's a fairly aggressive target given that we're going through a merger. And through the first 90 days of the year, we're right on that target. And yes, we've had a couple of folks leave the organization. A lot of them retired. I think of our producers that have left, almost 20% were due to retirement. And so I think we're ahead of the game there. As you know, once you pay out bonuses, you generally see a higher level of turnover. And so that percentage that we have to this point that's been annualized. We would expect it to continue to decline from here. So I think others have said this merger would be a huge opportunity to poach Pinnacle team members that just hasn't happened. And I think, again, it has everything to do with the model and the fact that these team members are deeply engaged in our company, they are successful and they're not searching out another opportunity. And that's, I think, what's different from what you've seen from other mergers. Operator: Your next question is coming from Jared Shaw from Barclays. Jared David Shaw: I guess, just sticking on the hiring question. Are you, at this point, looking to expand into any new geographies? Or is most of the hiring just getting more concentration in markets you're already in? Kevin Blair: Jared, no new expansion markets at this point. If you recall, we recently expanded into the national capital region within the last 5 years. We continue to hire in that Maryland District of Columbia, Virginia market. It's continued to be a great growth engine for us that has expanded down into Richmond. We're making hires in Central Virginia, and that is a growth engine. I would tell you that this quarter, the state of Florida has been our best growth both in kind of the Northern, Central Florida as well as South Florida. I think that's a real opportunity because as we've shared in the past, even though we have a strong presence there, we believe we can add a lot of density in each of those markets. And then more recently, we added a new -- Pinnacle data, a new market in mobile Alabama, and that's been a real growth engine for us. And so I would tell you, we will continue to focus on the 9 states in the District of Columbia that we're in today, and there is lots of opportunity within those. And the pipelines that we have today are largely focused on those markets. Jared David Shaw: Okay. And then just as a follow-up, I know the systems conversion is still a little ways out, but how are you -- I guess how are you looking at AI and maybe seeing how that could change your ultimate either tech spend or tech opportunity as you're moving towards this broader tech integration? Kevin Blair: Well, look, number one, yes, we're still focused on March 2027. We know that, that conversion will be the first time that our clients will fill the impact of this merger. And so we're progressing on plan, and we're in a good place to be able to have all the systems conversion -- all the systems converted. We've decisioned over 250 technology platforms, and now we've gone through a built processes to be able to complement those technology decisions. So AI is something that we've been deploying for some time. I think we're kind of through the pilot phase. . If you may recall, we rolled something out at Synovus several, I guess, a year ago that was called ChatPFP, which is kind of an internal policy forms and procedures platform. I think we've answered now 18,000 banker questions. And I think we've saved over 3,000 hours from the work that we've done there. We also have 13 portfolio initiatives that are in flight. And I would tell you that our AI focus is around 3 things: banker and team member productivity, where we can use it to not replace team members, but to make them more effective at doing their job. Number two, credit intelligence, where we can use it to really reduce the time that it takes from client application to closing. And then third, leveraging the capabilities with our business partners so that we can use the technology, the AI technology that they're deploying. We will leverage some of the AI tools as we do conversion. We've used it on process reengineering. We'll use it on some of the coding that we have to do. And so it is fully embedded in our culture today. And we're rolling out lots of tools across the organization to help all of our bankers be more effective. Operator: Your next question is coming from Anthony Elian from JPMorgan. Anthony Elian: A follow-up on capital. I know you have the buyback authorization in place, but Jamie, the expectation to get to the low end of the 1,025 CET1 target before you begin or contemplate any amount of buybacks. Andrew Gregory: Tony, that's our plan. And so when you think about our capital accretion, it remains similar to what we discussed last quarter. The capital waterfall in today's earnings deck is a pretty good illustration of that. So we have 38 basis points of capital generated in the first quarter from earnings, and then we deployed 8 basis points of that to our common dividends. And when you look at the remaining 30 basis points, that is what gets either delivered to clients or is either used for -- to grow capital ratios or to be deployed to something like share repurchases. And in the first quarter, we deployed 24 basis points to clients. Now that was a little bit higher than what we said in January when we said that we would expect to deploy about 20 basis points, but truthfully, that resulted from the growth in commitments more than the growth in loans. And so as we look forward, I think that's a healthy way to look at capital accretion each quarter. We still think that there are many scenarios where capital -- where RWA growth consumes about 20 basis points, but you could see quarters like this quarter where it's a little bit higher than 20. Anthony Elian: Okay. And then on Slide 27 in the appendix, what drove the decline in the total loan mark to $675 million and the year 1 purchase accounting now expected at $90 million, which I think is at the low end of the previous range. . Andrew Gregory: Yes, Tony, that's largely driven by rates. There's a little bit of a shift in the valuation due to kind of where the marks came out by loan product. And so that was really just a rate story. But what I'll say on the PAA and amortization going forward, 70% of that is in residential mortgages. And so you look at those residential mortgages, the average rate is around 4.25%, the average underlying loan rate, and we're assuming about a 7% prepay rate on those mortgages. So the volatility around PAA amortization should be relatively light. And so -- unless rates decline significantly. And so that's generally how you should think about the PAA amortization from year-end evaluation. Operator: Your next question is coming from Stephen Scouten from Piper Sandler. Stephen Scouten: I wanted to go back to BHG really quickly. I think, Kevin, you mentioned some of the change in guide was relative to adapting funding mechanisms. I'm just curious, looking at the slide, it looks like originations were up year-over-year. Could that revenue be a little bit more episodic around securitizations? Or kind of how should we think about the cadence of BHG and kind of what that looks like longer term? . Andrew Gregory: The BHG outlook remains strong. As I mentioned earlier, it's a great partnership. I mean the team down there just continues to dominate in consumer lending. And we're pretty pleased with everything they're doing. When you look at the production in 2026, I mean, there's a strong increase from 2025. The real change is the distribution. And the way to think about that from our perspective is that the price received on the loans of bank partnerships is just simply a lot higher than the price received on securitization or whole loan sales. And so the reason you would choose the lower price, though, is because you don't have any ongoing costs to voluntary repurchases, things like that. And so we think the right strategy is to take the lower premium today by selling more into securitizations and loan sales to asset managers, and improve long-term profitability. But it also should improve enterprise value. And the reason for that is it gives people more certainty into that forward earnings profile when it's just based on the production and the price of production of the loan sales. And so we're really pleased with the strategy. We look forward to seeing it play out, but it will result in lower fee revenue for us in 2026, but it's the right long-term move. Stephen Scouten: Got it. Great color there. And then just one other piggyback on all the hiring questions. I know you said mobile a newer market. How long do you think today the existing footprint can kind of drive this level of growth? And if you had to expand markets, is it fair to think of you guys moving west slightly with all the dislocation that's occurred in those markets? . Kevin Blair: For me, Steve, for the foreseeable future, there's so much opportunity. When we look at the market share data and you look at the Greenwich data, I mean, look, we haven't talked about that today, but for legacy Pinnacle to be #1 in the country and the Net Promoter Score and legacy Synovus to be #6 in the country, it shows you we have 2 strong organizations coming together, creating a loyal client base. When we look at the data in the markets we serve today, the only thing that people are hired than Pinnacle on is market share. And the market share that some of these bigger banks have, they're also those same banks that have very low Net Promoter Scores. And so our opportunity to hire in the existing markets and to take share from those bigger institutions is right in front of us, and we're doing it every day. So that's going to fuel the growth. As it relates to expanding into new markets, what I think we've proven out is it's less about choosing a market and trying to then go and find talent. What we've done is we find the talent regardless of where the market is. If you get the right leader, that person will be able to bring over the right team, and we'll be able to grow by rolling out that Pinnacle model. Operator: Your next question is coming from Bernard Von Gizycki from Deutsche Bank. Bernard Von Gizycki: Just on credit, the allowance for credit losses during the quarter. Just I wanted to see if you could unpack a few of the things, the deterioration economic forecast, the increase in the individually analyzed loans and just the decline in the qualitative reserves that you show on Slide 34 of the deck. Could you just unpack the drivers a little bit here for us? Andrew Gregory: Yes, it's a great question. I mean when you look at the economic impact, a couple of things were happening there. One, we obviously use the updated forecast from Moody's. But as you can see in the appendix, we also adjusted the weightings of the scenarios. And the reason we did that was because of the economic uncertainty, everything that's going on in the world. We just wanted to put a little heavier weighting on slow growth and basically just acknowledge what's going on out there. And that drove the change in the economic outlook. And then what was the rest of your question? Kevin Blair: Qualitative. Andrew Gregory: The qualitative -- the qualitative reserves, obviously, we have those in there. each quarter, it's a fairly significant amount of the allowance. Those ebb and flow based on the differences or how we see the outlook of individual portfolios. That came down this quarter based on us just seeing a little bit reduced risk in some of those portfolios that we had allocated. We had it in multifamily and a few others. And our outlook has improved on those areas, and we reduced the qualitative accordingly. Bernard Von Gizycki: Great. And just my follow-up. In case I missed this, just there's no change in the full year guide of the 1.1 to 1.15 of the adjusted fee income, despite the reductions in BHG, like you mentioned, from optimizing their funding. Just what areas helped offset this? I mean, Jamie, you mentioned some of the capital markets deals. I'm thinking something from there. Just any thoughts on what the offsets were? Andrew Gregory: Yes. When you look at the rest of the year, first, I'll kind of get the starting point on the first quarter. You had core banking fees up 11%, wealth up 14%, capital Markets more than doubled when you look at year-over-year comparison. So we have great momentum to start the year. And as we look forward, we really expect to see that continue. So embedded in that guidance is mid- to upper single-digit growth in each of those categories. We expect that in core banking fees and wealth and in capital markets. And then that will be offset partially by that reduction in BHG revenue. Operator: Your next question is coming from Catherine Mealor from KBW. Catherine Mealor: It was nice to see the average earning assets ahead of expectations. Can you give any update to how you're thinking about the building cash and securities as we move through the year? . Kevin Blair: Yes, Catherine, in the first quarter, you saw us grow the securities portfolio by about $750 million. And you should expect to see us continue growing the securities portfolio as we go through the year. and we could end the year up $1.5 billion to $2 billion. Longer term, I would expect to see the securities portfolio grow to 19%, 20% of assets over time, and you'll just continue to see us build towards those levels. Catherine Mealor: Okay. Great. And then maybe one follow-up on just the reserve question. You gave your net charge-off guidance of 20 to 25 basis points. As we think about the reserve, do you view that as more stable bias upward or bias lower just as you kind of sit here at our -- at the current reserve and how you're thinking forward about the credit risk. Kevin Blair: A lot of that depends on the economic outlook. And as we just discussed, we increased the weighting to slower growth. And if the economic outlook improves, well, that would be a tailwind to reducing the allowance. But we believe outside of that, we expect it to be relatively stable. And you didn't ask the question, but as I think about it, in provision expense, you should continue to see what you saw this quarter outside of the change in the ratio, you should expect to see a provision about $20 million higher than charge-offs just due to strong loan growth and providing for that loan growth. Operator: Your next question is coming from David Chiaverini from Jefferies. David Chiaverini: So overall growth was stronger than expected in the first quarter. You previously mentioned earlier this year that the first half might be slower than the second half. Is it fair to say that growth could be more consistent through the year than originally expected? Kevin Blair: Well, there are seasonal in the second half of the year that we would expect to play out. And so we view the first quarter as being ahead of schedule. And so it's a strong quarter for us with regards to growth in both loans and core deposits. And so we're going to strive to maintain that momentum, but this is definitely being ahead of schedule. David Chiaverini: Great. And then back on to capital. Can you talk about the Basel III end game and the impact that could have on your capital ratios? And how you might deploy any incremental capital that may result that? Kevin Blair: Yes. That's the question of the day from my perspective, strategically, the proposed rules can really work to our advantage. The impact of AOCI inclusion is fairly immaterial to us at these rate levels, but the changes in risk weightings further enhance the attractiveness of our core client business, C&I lending and commercial real estate lending relationships. So we feel that we are very well positioned for this, both in our go-to-market strategy and our balance sheet management. Of the estimated 60 basis points benefit in the risk-weighting asset changes, about 35 to 40 basis points comes from commercial lending and about between 10 to 15 basis points comes from residential mortgages. So we await the finalization of these -- of the rules. We look forward to getting through the comment period and implementing in the new regime because we think it will just really only enhance what we do and how we serve our clients. But your question on the incremental capital, we're not going to make any decisions today based on this until we get to the final rules and the rules implemented, but it's definitely going to -- it definitely looks like it's going to be a positive to our capital ratios. Operator: Your next question is coming from Gary Tenner from D.A. Davidson. Gary Tenner: I had clarifying question about the NIM roll forward in the deck. It included securities mark benefit of 7 or 8 basis points. I'm just curious how that -- it was 9 basis points. But with the bond repositioning in the first quarter, I'm surprised that it was reflected quite that way. So could you talk about that item versus kind of ongoing securities yield and in the wake of the repositioning? Kevin Blair: Yes, that was going to come through one way or another. By doing the repositioning, it came through in NII instead of PAA. And so that's really basically at close, we marked that book to market, the securities portfolio. And so that's really just a placement on the income statement difference between the two. And I think that's a testament to the permanence of PAA when it's rate driven. I mean basically, with loans and securities, you can make that PAA go away and turn it in NII by executing a market trade. And so we feel really good about the future of NII from the marking of the Synovus balance sheet. And I think that, that just kind of shows the longevity of it. But really one way or another, that was going to be in the margin in the first quarter, but the trades just made it traditional NII. Gary Tenner: Okay. So that was just the margin benefit, not necessarily the accretion. Can you give us, Jamie, just what the kind of net accretion benefit was in the quarter overall? Andrew Gregory: Yes. The way to think about that is -- so securities accretion, PAA accretion would have been $25 million a quarter is kind of a good number. If you look at loan accretion, it's about $20 million a quarter. And that's, again, as I mentioned earlier, that 70% of that is coming from residential mortgages. And so that's the general accretion that's in the margin each quarter. Operator: Your next question is coming from Chris Marinac from Brean Capital Research. Unknown Analyst: Can you talk about the NDFI business line in terms of is there an upper bound to where you want that to go over time? And I appreciate the disclosure you gave on NDFI to? Kevin Blair: Chris, you saw it on Slide 37, it's 9% or $7 billion. And I think what's important, you see the headlines, only about $1.7 billion in private credit, less than 2%. And look, just think about the backdrop, I know the media investors are painting this picture of all NDFI exposure being the same. And I just don't believe that to be accurate. And it's not how we manage the book. Where we do have exposure there -- our protection is structural. We said on the very top of the capital structure, senior secured first lien loans. And we largely have effective advance rates when you factor in the liquidity and the eligibility buffers of around 50%. So we are well structured there. The biggest part of that book for us is our structured lending division, which is about $3.4 billion. And so we've been operating that for the last 7 years, and that group has not produced a single charge-off and hasn't had an NPA since 2019. So I think they execute with a great deal of credit and operational discipline. So I don't believe that there's an upper bounds. We believe that each loan that we're bringing on today is well structured, secured and performing well. like any asset class once you start getting a 10% or larger, I think you have to start thinking about whether you have concentration risk, and so we would look at that. But the great thing about this book, as you heard, Jamie, even the catalog music business, these loans, although they are contained in one bucket, they're very different, and they're very granular. And so I would hate to set a target for something based on an asset category that, quite frankly, has different underlying structural components that are not homogeneous in nature, and hence, likely are not likely to perform similarly through different economic scenarios. Unknown Analyst: No, that makes sense. And then the reserve assigned to these is just part of the general C&I bucket, correct? Kevin Blair: That's correct. . Operator: Your next question is coming from Robert Rutschow from Wells Fargo. Robert Rutschow: I guess, first, do you expect to have a Visa gain, and would there be any impact to capital from that? Kevin Blair: No. No, we do not. Robert Rutschow: Okay. And then second, if I could just follow up on the retention question. Do you think you'll provide that retention number going forward? And is there a period where you might expect sort of elevated churn in the legacy Synovus employee base over the next, say, 12 to 18 months? Kevin Blair: Look, we are a transparent organization. We'll be happy to provide that data. The real answer to that is this last quarter. If you have folks that don't want to be part of the new company, the first quarter is the period in which they would have self-selected based on the fact that bonuses are paid, and generally, that's when recruiting picks up. So I would tell you the kind of the worst is behind us and the fact that we're on track tells me that it should only get better from here, but we will be extremely transparent on that. . Operator: This concludes our question-and-answer session. I'd now like to turn the conference back over to Kevin Blair for any closing remarks. Kevin Blair: Thank you, Matthew, and thank you all for your thoughtful questions and for your continued investment in what we are building here. I think one quarter in as a combined company, the results speak for themselves. Loan growth, deposit growth, margin expansion, recruiting momentum and a culture that just didn't survive the merger, it's strengthening and scaling. That doesn't happen by accident. It happens because of the model, the people and the strong commitment from leadership to doing the right thing. . And doing things the right way matters. While some of our industry peers go through mergers and they've leaned in on things like elevated promotional deposit rates as a big client retention tool, that's not how we operate. Our retention strategy has one solid foundation, and that's talent. The best bankers attract the best clients, the best clients stay. It's that simple, and it works. People are what makes the difference. What the first quarter tells me is that we didn't merge into mediocrity. The Pinnacle model is fully intact. We're actively expanding. We're producing exactly the results it was built to produce. What particularly energizes me, as I said earlier, is the speed at which our Synovus leaders have embraced and applied the Pinnacle hiring model, up 50% year-over-year. As excited as I am about the progress we've made, we're not perfect. There have been moments in this integration where we've moved too fast. We've had to course correct or we didn't have the immediate answer. That will continue, and undertaking of this size doesn't come without its share of bumps, and I wouldn't suggest otherwise. But I'd tell you this, the wins have greatly and consistently outweighed the misses, and we learn from every one of them. One quarter will not define us, but it will set a standard that we intend to exceed, and we're not done proving it. Culture is what I think about every single day because results follow it, not the other way around. And the culture is holding. The recruiting momentum, the systems conversion ahead, the revenue synergies being locked in and the client relationships deepening across our 9 states, those are the chapters that are still to be written. We have shown that this model can do what it does and do it well. The best of what this firm has to offer is still in front of us. Before I close, I want to speak directly to our team members because no number in this presentation, no metric we reported today happens without you. Many of you didn't ask for this merger. Many of you had real concerns about your role, your market, your clients and your future. Those concerns are valid, and I never want to minimize them. Change of this magnitude is hard, and you faced it head on. You showed up, you served your clients without missing a beat. You welcome new team members you've never met, and you made them felt like they belong. That kind of character cannot be manufactured, it cannot be taken for granted. Your efforts, your passion, your dedication is exactly why I have no doubt about where this firm is headed. You're the reason it works, and I'm deeply grateful. I also want to recognize Jennifer Demba, our Director of Investor Relations, who will be retiring in June. Jennifer, over the past 3 years, you've been an extraordinary partner, elevating our investor relationships, and leading the function better than you found it. Your impact from this organization will be felt long after June. Thank you, and we wish you nothing but success in this well-deserved next chapter of your life. As we wrap up today's call, I'll end where we started. We entered 2026 with a promise to deliver for our shareholders, our clients and our communities and, most importantly, our team. One quarter end, we've delivered. We did exactly what we said we would do. And this is just the opening act. The model has proven, the team is unified, and we are locked in on executing every promise we have made. We look forward to seeing many of you at upcoming conferences. And with that, Matthew, we can conclude today's call. Operator: Certainly. Thank you for joining us today. That concludes the Pinnacle Financial Partners first quarter 2026 earnings call. Have a good day.
Operator: Thank you for your patience. Your conference will begin in approximately two minutes. Please continue to stand by. Greetings, and welcome to the PENN Entertainment, Inc. First Quarter 2026 Earnings Call. I would now like to turn the conference over to Joseph Jaffoni, Investor Relations. Please go ahead. Joseph Jaffoni: Thank you, Chelsea. Good morning, and thank you for joining PENN Entertainment, Inc.'s 2026 first quarter conference call and webcast. We will get to management's comments and presentation momentarily as well as your questions and answers. During Q&A, we ask that everyone please limit themselves to one question and one follow-up. I will now review the safe harbor disclosure. Today's discussion contains forward-looking statements. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please see our press release for details on specific risk factors. It is now my pleasure to turn the call over to PENN's CEO, Jay Snowden. Jay, please go ahead. Jay Snowden: Thanks, Joe. Good morning. I am pleased to report PENN's diversified retail portfolio delivered another solid quarter, as Retail segment adjusted EBITDAR grew year over year. Our property performance was encouraging across the portfolio with particular strength in the West segment, reflecting the ongoing ramp of M Resort's new hotel tower and impressive results from the team at Ameristar Blackhawk. In the Midwest segment, we delivered strong revenue and EBITDAR growth led by our properties in the St. Louis market as well as continued momentum at the new Hollywood Joliet in Illinois. Results thus far from our first two development projects provide us continued confidence in the anticipated success from the upcoming openings of the Hollywood Columbus hotel tower on June 12 and the new Hollywood Casino Aurora on June 24, in addition to our new Council Bluffs relocation scheduled to open in 2028, all of which are subject to final regulatory approvals. As we have said previously, we anticipate our four development projects will generate 15% plus cash-on-cash returns on our aggregate project cost of $800 million, which is net of the 50% contribution from the City of Aurora. Overall, increases in both visitation and spend per visit companywide supported year-over-year theoretical revenue growth across all of our rated worth segments, representing the largest quarterly increase in three years for the Retail segment. Looking ahead, we continue to see solid trends into April despite higher gas prices and ongoing geopolitical uncertainty. Importantly, we are also beginning to see improving trends in those regions where we are anniversarying new supply, particularly in Bossier City, Louisiana, and Council Bluffs, Iowa. Turning to the Interactive segment, we saw significant adjusted EBITDA improvement of approximately $78 million year over year in Q1 driven by nearly 15% year-over-year growth in iCasino revenue and approximately 5% year-over-year growth in online sports betting revenue, and a significant reduction in marketing spend coupled with continued cost management. This marks the first full quarter under our realigned digital strategy, which is focused primarily on our U.S. iCasino states and Canada, while operating under a more efficient cost structure overall. We are continuing to see positive trends in Ontario, including year-over-year growth in average monthly active users, online sports betting revenue, and iCasino revenue. These results reflect the ongoing strength of theScore Bet brand in Canada and our realigned digital strategy, which we think bodes well for the anticipated July 13 launch of regulated iCasino and online sports betting in the province of Alberta. theScore Bet has been approved as a registered iGaming operator by the AGLC and preregistration efforts have begun in the province. We expect our Alberta launch to result in a $20 million loss in 2026, within the range we previously provided on our quarterly earnings call in February. As Felicia will discuss in a moment, the resulting change to our prior breakeven guidance for 2026 Interactive adjusted EBITDA is entirely attributable to this $20 million investment in Alberta. Said differently, outside of Alberta, our breakeven Interactive guide for the year is unchanged. Slide five of our investor presentation underscores our continued focus on our major pillars of growth as our Retail and Interactive segments, along with our recently optimized corporate structure and maintenance CapEx spend, drive significant improvement in free cash flow generation in 2026, which in turn strengthens our balance sheet as leverage declines and sets us up for an even stronger free cash flow story in 2027. I will now turn it over to Felicia. Felicia Kantor Hendrix: Thanks, Jay. Our Retail segment generated revenues of $1.4 billion, adjusted EBITDAR of $471.4 million, and segment adjusted EBITDAR margins of 33.2%. Our adjusted EBITDAR results benefited from a one-time favorable adjustment related to a legal accrual, which nets out to a $5 million benefit primarily in the South region. As it relates to 2026 guidance, based on our better-than-expected first quarter Retail results, we are increasing the midpoint of our 2026 Retail revenue and adjusted EBITDAR guidance by $20 million and $12 million, respectively, to reflect the upside generated in the quarter. As a result, our revised guidance ranges are $5.73-$5.86 billion for revenue and $1.88-$1.98 billion for adjusted EBITDAR. As you think about the second quarter, as Jay mentioned, we continue to see stable trends carrying into April. While this is the case, as we noted on our February earnings call, we do expect some temporary disruption in the quarter, as the legacy Aurora riverboat will be closed for about two weeks due to regulatory requirements prior to opening the new Hollywood Casino Aurora on June 24. The 2026 Retail segment should benefit from the contribution of all four of our development projects, and we expect adjusted EBITDA to grow year over year in the mid-single digits. Our Interactive segment in the first quarter generated revenues of $358.3 million, including a tax gross-up of $185.8 million, and an adjusted EBITDA loss of $10.8 million. We now expect 2026 Interactive revenues of approximately $1.6 billion, inclusive of an estimated tax gross-up of about $820 million, and an adjusted EBITDA loss of $20 million, which, as Jay just mentioned, is entirely attributable to the Alberta launch. On the revenue side, our revised guidance now takes into account the online sports betting promotional spending associated with launching in a new market, particularly in the third quarter, as well as further fine-tuning our online sports betting expectations for the year. Importantly, we are also seeing better-than-expected performance in stand-alone iCasino in the U.S. and in Canada, which is somewhat offsetting the factors I just mentioned, and is consistent with our Interactive segment strategic priorities. We continue to expect small losses in the second and third quarter, but note that the loss in the third quarter will be the largest loss of the year due to the Alberta launch. We expect 2027 to be profitable in the Interactive segment. Overall, our first quarter 2026 Interactive segment performance and outlook reflect the benefits of our increased emphasis on U.S. iCasino states and Canada, as well as our more rationalized and nimble cost structure. We expect the “Other” category adjusted EBITDAR to be negative in 2026, unchanged from our original guidance back in late February. The table on page eight of our earnings release summarizes our cash expenditures in the quarter, including cash payments to our REIT landlords, cash taxes, cash interest on traditional debt, and total CapEx. Of our total $95 million CapEx in the quarter, $65 million was project CapEx, primarily related to our four development projects. As we remain focused on delevering and strengthening our balance sheet, in March we issued $600 million of unsecured notes due 2031 at an interest rate of 6.75% and used the proceeds to repay borrowings under our revolver. Accordingly, we ended the first quarter 2026 with total liquidity of $1.7 billion inclusive of $[inaudible] in cash and cash equivalents. Subsequent to quarter end, on April 16, we refinanced our $1 billion revolving credit facility and refinanced approximately $447 million of our Term Loan A. In June, we expect to receive approximately $225 million in funding from GLPI for the new Hollywood Casino Aurora, which opens on June 24, and the remaining $21 million from the City of Aurora by the end of the year. We have elected not to take GLPI capital in connection with the construction of our Hollywood Columbus hotel tower, which opens June 12. As we highlight on slide five of our earnings deck, we expect to delever by at least one full turn for lease-adjusted net leverage and by at least two full turns for traditional net leverage at year-end 2026, driven by strong free cash flow generation throughout the year and more optimized CapEx spend. Total 2026 CapEx is now expected to be $420 million, down from our prior guidance of $445 million, and that total includes $200 million of project CapEx, down from our prior guidance of $225 million, and $220 million of maintenance CapEx, which is unchanged. The reduction in project CapEx reflects a timing shift moving from 2026 to 2027 for the Council Bluffs relocation project, which is now expected to be completed in 2028. Importantly, this is only a change in our planned start date with no changes to scope or budget. We continue to expect total cash payments under our triple-net leases to be $1 billion in 2026, and for 2026 cash interest expense, net of interest income, we now project $150 million, reflecting our $600 million notes offering and current interest rates. For cash taxes, our outlook is unchanged. We do not expect to be a cash taxpayer in 2026 given the favorable tax deductions enabled by the one big beautiful bill in addition to our acquired NOLs and various tax credits. Our basic share count at the end of the first quarter was 1.334 billion shares. We also have 4.5 million potential dilutive shares from the remaining convertible notes stub and about 1 million dilutive shares from RSUs and stock options. I will now turn it back to Jay. Jay Snowden: Thanks, Felicia. I said during our last earnings call that 2026 would be a year of strong execution for PENN. While we have the rest of the year still to deliver, I am happy to report we are off to a great start. Looking ahead, we will remain laser focused on improving our free cash flow generation while optimizing our corporate overhead and remaining disciplined with our capital. With that, can we please open the line for our first question, Chelsea? Operator: As a reminder, that is star one to ask a question. We do ask that you please limit yourself to one question and one follow-up. Our first question will come from Barry Jonas with Truist Securities. Please go ahead. Barry Jonas: Hey, guys. Good morning. Jay, if we look outside of your development projects, what do you think is driving your strong retail trends? I think the consumer is benefiting from higher tax refunds, but as you mentioned, you do have higher gas prices and general macro uncertainty to deal with. Thanks. Jay Snowden: I think it is really what you laid out, Barry. It is hard for us to know exactly what the drivers are. There are definitely puts and takes. Gas prices are higher, although, as I have said in the past, as you look at regional gaming over the last several decades, the economic indicator that most closely correlates to behavior on regional gaming is employment, and employment continues to be a really good story in the U.S. Gas prices may be a little bit of noise and a headwind. The vast majority of our customers in the regional portfolio come within a 30-minute drive, so you are probably not making a decision on the price of gas as to whether you are visiting a casino once every week or two weeks or once a month, because it is not going to cost you much to get there. I would say we are seeing some benefit from tax refunds being higher year over year by what I read as 11%-12%, which is helpful, and I think we will probably continue to see and feel that. April feels very much through the first three weeks like a continuation of Q1, which is good. We are not seeing any cracks in the armor. We are feeling really good as we look out for the remainder of the year. As it relates specifically to PENN and our portfolio, we are now fully anniversaryed around the Bossier City new supply which opened in February. You probably feel an impact through maybe March, but now that we are here in April, we are starting to see some nice trends on a year-over-year basis out of Bossier City. In Council Bluffs, Iowa, we saw incremental supply hitting the Nebraska market across the state line probably through about now last year, so by the time you get to the second half of the year, we are feeling pretty good. You do not see any new supply really impacting us. There is a little bit of renovation competition in Baton Rouge, but that is not going to impact us by much given our asset quality there. We are going to have all four of our growth projects up and running — two of them fully ramping with M Resort hotel and Joliet, and two just opened. Learnings we have from the hotel expansion at M and the water-to-land conversion at Joliet are going to make the Columbus and Aurora ramps probably a bit stronger and faster. It still will take time, but there are learnings we are applying there. Overall, we are feeling good about the consumer generally, and we are feeling really good about the setup for PENN specifically as we move throughout the remainder of the year. Barry Jonas: Great. And then just for a follow-up, maybe for Felicia. I think your free cash flow targets look very strong this year. How confident are you in hitting them and maybe growing off these levels into 2027 and beyond? And then just sneaking in, should we think about potential uses? Thank you. Felicia Kantor Hendrix: We feel confident in our guidance. As Jay just said, we feel good about the consumer, generally and specifically, and we have talked about our pillars. One of those pillars of growth is increasing our free cash flow production going forward, especially given our right-sized CapEx and the resizing of our overall corporate structure. We are in a good place. We continue to improve in our Interactive segment, generating smaller losses throughout the year and, as we get into the fourth quarter, generating profitability. So again, we feel good about our free cash flow profile and growth looking forward. As we get into 2027 and think about our return of capital, we are obviously looking at share repurchases and continuing to delever. As you can see on slide five of our earnings slides this morning, we expect to generate lease-adjusted net leverage in the ranges of 5.3x to 5.7x this year — a significant decrease from 2025 — and our traditional net leverage over two turns lower in 2026. We expect that to continue to decrease into 2027. Then we are in a very good place as we look at our typical uses of capital inclusive of share repurchases, investing in our continued growth pipeline, and continued delevering. Jay Snowden: I would just take a step back. We are going to generate $3 plus of free cash flow per share this year. Our stock is trading just under $15 as of yesterday. So you have a 20% free cash flow yield. We have a tremendous amount of confidence in the ability to deliver on that this year. In every category, the story gets better in 2027. We are not going to guide yet for 2027, but you should assume everything looks better, which means that free cash flow story and the free cash flow yield are even more compelling as you look out to what is now not that far away given we are in April 2026. Operator: Our next question will come from Brandt Montour with Barclays. Please go ahead. Brandt Montour: Good morning, everybody. Thanks for taking my question. I just want to start off with digital. Was hoping you could talk, Jay, a little bit more about how that business progressed throughout the first quarter. Presumably, you continue to build iGaming stand-alone momentum and perhaps some further cost rationalizations. But we did see the industry iGaming growth slow in March. How would you characterize how your contribution margin exited the first quarter in terms of your trajectory toward breakeven? Jay Snowden: Happy to, Brandt. The backdrop for PENN is that we have really shifted our focus the last six months, and certainly throughout Q1, from the OSB-only states in the U.S. to much more of a focus — prioritization of OpEx and customer acquisition — on Canada as well as the states in the U.S. that offer both iGaming and OSB. From our perspective, the progression in the quarter looked quite good. February was the one softish month we had; January was solid; March was solid. We continue to see really good momentum on the stand-alone Hollywood Casino side of things. Overall, we are feeling comfortable. We are focused in the right areas. There is some pressure on customer acquisition costs as it relates to U.S. sports betting — that has been well covered — because of prediction markets and others in online sports betting stepping up to respond to that. That is not really a big focus of ours right now. Our focus is on Canada and getting ready for the Alberta launch. We feel really good about the setup there. We have done a lot of analysis on what worked for us with the Ontario launch and what maybe did not. We are doing more of the right things, and we expect to deliver market share results in Alberta that look very similar to what we have generated in Ontario, where we continue to have momentum. Our story may be a bit unique in that Canada is really driving a lot of our results, Hollywood stand-alone iCasino in the U.S. is driving results, and OSB is maybe less important overall to the Interactive story. We are feeling good about the momentum we have internally at PENN. Aaron LaBerge: Canada growth in March was very strong, and our stand-alone casino growth is very healthy. We are setting record revenues there. Growth and acquisition continue to be strong. As Jay said, we are seeing some softness on the OSB side, but we are offsetting that with disciplined spend and reinvestment in the areas that matter. Casinos — specifically stand-alone — and Canada both look really good going out of this quarter and into last quarter. Jay Snowden: Lastly, our retention in the U.S. post rebrand is exactly where we expected it to be. It has been very strong with our higher-worth customers, which has been the primary focus. We have lost some of the unprofitable and lower-worth customers — that was by design as we pulled back on reinvestment in some key strategic areas. We feel really good about having a handle on everything, which is important as we look out through the remainder of the year. When we put out the original guide for Interactive, we had some wiggle room on marketing spend, reinvestment, and cost structure, and we can make adjustments in real time, which is what we did in Q1 and will continue to do throughout the year. You will see really nice momentum in Canada and the U.S. as we close out the year with a profitable fourth quarter. Brandt Montour: That is great. Thanks for that. Just following on to that, in the deck, I think it says marketing spend was down over 65%. We were looking for 50%. Is that efficiencies you found in the quarter or timing? How should we think about the rest of the year in terms of that extra savings you outlined for the first quarter? Jay Snowden: Aaron, do you want to take the first stab? Aaron LaBerge: The decrease in marketing spend is also inclusive of what we are spending with ESPN. The rest is focused efficiency across the markets that are working, as we just talked about. We were spending a lot more in OSB-only states, which were not as profitable for us, so we have shifted that. We are focused in hybrid states that have both iCasino and sports betting. Stand-alone is showing a lot of great momentum, so we are spending there. Canada is starting to pick up as well, so we are spending there. We have a lot of levers to move around to make sure our marketing is working in the best way for us, and that is what we have been doing. Jay Snowden: There is nothing really one-time driving that decrease year over year, Brandt. It is us continuing to get better and smarter and be more judicious in terms of where we are allocating marketing dollars every week, every month, every quarter. That will continue. There will be a little bit of noise in Q3 with the Alberta launch, so I would not bake the Q1 decrease in for the rest of the year because of third-quarter noise. We feel really good about having a handle on cost structure, marketing, reinvestment, delivering the best returns, where to invest in customer acquisition, and where to pull back. The focus is on getting this to breakeven or better as we move throughout the remainder of the year and into 2027. Aaron LaBerge: We will continue to monitor results and invest where we see opportunity and where it is effective throughout the year. Operator: Our next question will come from Daniel Politzer with JPMorgan. Please go ahead. Daniel Politzer: Hey. Good morning, everyone. Thanks for the question. First, on the regional gaming landscape, there has been news flow on potential M&A. Where do you stand as you think about your balance sheet and leverage improving relative to potential opportunities if there were assets to come on the market or fall out of any large transaction? Jay Snowden: We are staying close to the headlines as you are, and we will see what does or does not develop. I feel better about our balance sheet today than I have in years, and that is great. As you look out to the end of the year, for us to have our lease-adjusted net leverage back into the mid-5s — the midpoint of what we have here is 5.5x, maybe a little better — and traditional net leverage in the low-2s, then look out to 2027, where if you were looking at doing something from an M&A perspective, it probably takes you out to 2027 given timelines in our highly regulated industry. We would be looking at leverage levels that would be lower — low-5s on a lease-adjusted basis and into the high-1s from a traditional net leverage perspective. We are going to have more capacity. The history of PENN M&A is very accretive given our overall operating structure. We have the industry's best tax-adjusted EBITDAR margins, a great asset portfolio, and a very valuable database that can help improve results of assets we acquire. We would definitely be interested in looking at the right asset in the right market at the right price. We are not placing proactive calls, but if assets on the market are attractive, we will take a look. Daniel Politzer: Thanks. Then turning to Interactive. In the quarter, your iCasino net revenue is up 15% and online sports book up 5%. Over the course of the year, it seems likely that iGaming will be up more. Can you put some parameters around how to think about growth through each of those segments for the full year? Jay Snowden: We obviously have assumptions built out in our model and our guide. You will definitely see higher growth from iCasino than OSB. It also depends on market growth. I would expect us to be at or above market growth in iCasino. For OSB, on a net basis, probably close to where market growth is — handle definitely lower — but on a net revenue basis, at the market is probably the right way to think about it. Operator: Our next question will come from Joseph Stauff with Susquehanna. Please go ahead. Joseph Stauff: Thanks. Good morning, Jay. I wanted to ask if you could give maybe an update on Joliet and the progress thus far in the months and the outlook in terms of the ramp. And then the second question is on Alberta. I know the launch date was moving around, but assuming early July, what are you allowed to do going into that launch to leverage your brand in Canada, especially around the NHL playoffs and with Edmonton being about a third of the population? Jay Snowden: I will take Joliet and then Aaron can respond to Alberta. We continue to feel really good about Joliet. Every month, we feel a little bit better. We are seeing strong results on the revenue side. You saw the slide where we are continuing to break records from a gaming revenue and non-gaming revenue perspective every quarter. The end of the quarter in March was our best month ever for Joliet, both in slots and tables. Same thing at M Resort. We feel really good about these investments and our ability to generate incremental revenue and incremental EBITDAR and EBITDA. Based on our learnings for Joliet, by the time we hit the 12-month mark in August, we are going to be feeling pretty good about the margin improvement as well from pre- versus post-, whereas the first six to nine months, revenues are much higher but you are figuring things out on the cost side and you have all of your restaurants and entertainment programs open most days of the week. Then you start to dial it back with your learnings. We are in that dial-back and optimization phase with Joliet while continuing to see database trends improve. We are very excited about what we are seeing month to date in April, in addition to what we saw in Q1. I think we are right where we expected to be, and it is a good template for what we expect with Aurora, applying those same learnings and a roughly 12-month time frame to ramp. At M Resort, there are a lot of learnings we can apply to our Columbus hotel that is going to open in June as well. Aaron LaBerge: In Alberta, we feel really good about our launch. TheScore brand in Canada is very strong — it is the number one media sports brand in market. We have as many people on theScore in Alberta as we do in Ontario, so it is very strong. We have a full-scale marketing plan that starts in July. The date is no longer moving around — it is July 13. We will have a full-scale launch then. We are already in market with preregistration. We will be active from a brand and performance marketing perspective. We launched in Ontario and enjoy a very nice market share there today — it is a big part of our gaming business — and we expect to see similar market share in Alberta based on the investments we are going to make. We have a great partnership with the Jays, which is a national team, and we will lean on that. If you are in Ontario today, you are seeing theScore brand all around the city, and the same will continue in Alberta. We will leverage all of our assets, and we are expecting a very successful launch. Operator: Our next question will come from Jordan Bender with Citizens. Please go ahead. Jordan Bender: Hi, everyone. Good morning. It looks like you exited the Washington, D.C. sports betting market. Following the rebrand and now what you see in the business with it settling, any change to philosophy operating in certain states, whether size or tax rates? Jay Snowden: It is a good question. That is something we are always evaluating. Generally speaking, staying in OSB-only markets — if we can get those to be close to breakeven from a contribution margin perspective — makes sense for us as you think about iGaming eventually passing legislatively in many of these states. Your number one feeder into iGaming is the cross-sell from online sports betting — 60% of our online gaming business in the states that offer both came from online sports betting initiation. That is compelling. If you are not losing money in a state and you have volume of customer activation and retention and you have cultivated relationships, it makes sense to stay in those markets. That is our view, but we will continue to look at each market individually. D.C., we did not have much volume, so it did not make sense for us there. Everywhere else, as of the last time we analyzed, it made sense to stay in the game. Aaron LaBerge: That is the beauty of having a scale platform. You can launch and operate at an efficiency level that is breakeven or better, and it does not really cost you anything to stay there. D.C. was the only obvious one for us to look at. Currently, there are no plans to change our footprint. Jordan Bender: Understood. Thanks. Felicia, I think your comments from last call point to sports betting gaming margins maybe being a little bit under what you expected for the quarter. Is it fair to assume there was a couple of million of bad hold in the EBITDA number in 1Q? Felicia Kantor Hendrix: I think that is fair. Jay Snowden: We came in at 8.4% versus a structural hold of 9%. That was some of the impact in Q1. Overall, we were pretty close to where we expected to be, so we did not call it out. Generally speaking, March Madness does not hold as well as other sports because you do not have the same same-game parlay volumes that you do with NBA, NFL, and MLB. We were not disappointed, but in Q2 it is more likely to be at that structural hold number of 9% or better depending on how things go for the NBA and NHL playoffs. Operator: Our next question will come from John DeCree with CBRE. Please go ahead. John DeCree: Hey. Good morning, everyone. Thanks for taking my questions. Jay, on the progress of an omnichannel strategy, can you talk a little bit about where your iGaming customers are coming from? Is that cross-selling from OSB? Is that activating the retail database? How is that strategy going and how are customers coming into the system? Jay Snowden: It has been and continues to be a big focus for us, given where the industry is and where it continues to head. Having a digital and a retail relationship with your consumer is absolutely critical — an imperative. We are happy today with our ability to execute on that. Specifically on iGaming, roughly 60% of that business comes directly from online sports betting. In the states where we have a retail footprint — less so New Jersey, more Pennsylvania and Michigan — most of the rest of our business comes from our retail database. Then you have some organic through the brands and performance marketing efforts and customer acquisition investment. Overall, we are continuing to get better. We are continuing to work on our systems to make it a lot more automated, which will be better for the customer experience from an omnichannel perspective. The ideal scenario — and I do not think we are that far away — is one platform, one app, and one wallet for everything, with full integration to your retail experience on premise. I feel really good about omnichannel execution. I think we do it very well relative to the market, and it is only going to get better as we continue to invest in resources and capital. Aaron LaBerge: We got a lot of early growth from our database in Pennsylvania and Michigan, as Jay mentioned, but the brand is really strong. As we continue brand and performance marketing, the growth you see in our numbers is building on itself. It is a nice one-two punch to leverage your database and then support that with marketing to pull in new users. We are not seeing signs of that stopping based on our marketing spend, and we expect to continue that success, especially in hybrid states. Operator: Our next question will come from Shaun Kelley with Bank of America. Please go ahead. Shaun Kelley: Hi. Good morning, everybody. Thanks for taking my question. Jay or Aaron, building on that last question, I think you mentioned 60% of iGaming coming from some form of sports betting cross-sell. More broadly, we have seen a slowdown in OSB trends — you can see it in the 5% growth rate number. What is the offset for PENN? Your data looks like it is outperforming what we are seeing in the broader market. We are seeing a correlation between OSB slowdown and iGaming slowdown for those that rely on cross-sell. What is working for you to stay above that trend? It sounds like Ontario is one point, but anything else? Jay Snowden: Overall, the way to think about it is Ontario is clearly an area of strength, and the launch of the Hollywood stand-alone casino is another. We are just now starting to anniversary those launches from late Q4 and early Q1 of 2024 into 2025. For us, being relatively new as a stand-alone with that brand lead is very compelling given that is the flag on our brick-and-mortar properties in Pennsylvania and Michigan. We are continuing to put some extra weight into Canada. In the areas where you would expect us to have brand equity — and we do — we are leaning in. That is why we are seeing performance a little bit better than the market. We would expect that to continue as we learn what is working and what is not. It is definitely Ontario and Hollywood stand-alone driving most of that. Aaron LaBerge: In Ontario, the strength of theScore brand really helps us. The sportsbook is growing, and that high cross-sell drives gaming revenue. We have also seen growth in our stand-alone theScore Casino as well, which we are investing in, so that is a nice one-two punch in Canada. In the U.S., cross-sell is important, but if you are getting lower OSB volume, it will affect casino revenue on that cross-sell. We have been offset somewhat by the success we have seen in Hollywood. We are moderating between the two. They are both still very important to a healthy business, but we are seeing more growth on the casino-only side. We are focused on continuing to drive OSB in hybrid states because the crossover is important. Shaun Kelley: Thanks. As a quick follow-up, could we get a legislative update? There are proposals in Michigan around potential iGaming/OSB tax increases, some in Ohio, discussions in Massachusetts and Arizona, and Maine as well. Jay Snowden: Generally speaking, on the states you mentioned, it is still relatively early in the process. We need to see how it plays out. Since prediction markets have gotten aggressive on spending, and it appears there is some impact on customer acquisition costs and potentially on OSB handle, legislators and state leaders we are speaking to understand that now would not be a good time to raise taxes on incumbent operators, especially on the brick-and-mortar side. Those conversations have been ongoing but productive. As it relates to Maine, there is litigation pending regarding the iGaming legislation that passed. We will see how that plays out. We are not happy with how that was put together in Maine as one of the two land-based operators who have paid hundreds of millions of dollars in taxes, invested a lot of money, and employ a lot of Mainers. If that ends up being implemented the way it was proposed, you should expect PENN to be investing next to zero in the state of Maine going forward. Operator: Our next question will come from Chad Beynon with Macquarie. Please go ahead. Chad Beynon: Hi. Good morning. Thanks for taking my question. Wanted to ask about the Chicago market. The VGT bill to permit restaurants in Cook County and Chicago was passed, and it looks like restaurants can start in the third and fourth quarter. Given your presence in the area — I know you are a little further out into the suburbs — do you think there will be any impact from this, and is anything factored into the guidance in the back half? Jay Snowden: I would say no in terms of impact, just given where our properties are located, as you noted, in the suburbs. For Aurora, our primary competitor is Grand Vic. We do not really compete with folks who would plan on spending the majority of their gaming budget in downtown Chicago given traffic and commuter dynamics in Chicagoland. Same thing with Joliet; our primary competitor is Harrah’s Joliet. That will not change. If anything, we are excited about being able to participate. We have Prairie State Gaming, our VGT route operation business in Illinois, that does quite well for us and continues to grow on the top and bottom line. We anticipate participating in the expansion of VGTs in the greater Chicago area, which overall should be net positive for us. Chad Beynon: Interesting. Thank you. With the increase that you have seen on the retail customer, what is the current status or update on cashless gaming? You were a leader with that. Do you think this will continue to progress and maybe with some of that retail business coming back, you could see more green shoots there? Jay Snowden: The dynamic on cashless for us is that customers who are engaged with cashless love it and use it almost every time they visit our retail properties. We see stronger retention and LTV with those customers. We are not planning to do anything wildly different. We are looking to continue to improve the experience overall, and that will not change. We continue to make the experience better, particularly as we think about new openings like Joliet and Aurora and what adoption looks like. It is probably more an education thing than anything else. Those who have engaged with our cashless product do like it, but the percentage of those who engage is still below where we want it to be. We are continuing to work on that. Overall, I would expect adoption to continue to improve over time. Operator: Our next question will come from Jeff Stanchel with Stifel. Please go ahead. Jeff Stanchel: Hey, good morning, everyone. Thanks for taking our question. One from us on the retail business. It seems there is a bit more pushback recently against unregulated skill games and other gray market distributed gaming. You saw the Virginia governor veto the bill. Missouri seems to be starting some legal enforcement. There is a court case making its way through Pennsylvania. Jay, do you agree the trend seems to be shifting against these machines, and how much of a tailwind could this be if machine counts go down materially in any of these key states? Jay Snowden: We are feeling better about where things sit in states like Pennsylvania and Missouri than we probably ever have. The skill game legal case is going to be in front of the Pennsylvania State Supreme Court in the next couple of months. We will see how that goes. We have a very strong opinion as to skill games and their illegality in most of these markets, if not all. In Missouri, you have an attorney general who we think is doing a fantastic job stepping up and shutting devices down. The argument is often that bar and tavern owners need the machines or else they may not have a profitable operation. The reality is these are illegal. I do not think we would make that argument in other areas of life. If you are operating illegal machines and the state attorney general says shut them down, they need to be shut down and probably should never have been in operation. We are encouraged by what we are seeing in Pennsylvania and Missouri. There is still time for things to play out, and we will stay close to it. If it moves in the direction we hope, it would create a tailwind for us on the retail side. It is hard to measure given variables, but I would imagine it would ultimately be a tailwind. Operator: Our next question will come from Ben Chaiken with Mizuho. Please go ahead. Ben Chaiken: Hey. Good morning. Thanks for taking my questions. A few on Aurora. How long will you be in transition? Presumably, there will be some downtime from your comments — I am guessing it is largely in May. Is there anything notable about this opening and project versus Joliet? My perception is that the surrounding area around Aurora is a little more developed versus Joliet. And then, what are some of the learnings you alluded to earlier — you described it as potentially stronger and faster? Jay Snowden: Happy to. For Aurora, you are correct: it will be roughly a two-week operational shutdown that will happen in June. It happens right before we open, so you should expect that to happen maybe a little bit in late May, but the rest will be in June. It will be entirely in the second quarter of 2026. Having done it once before closely with the Illinois regulators, we expect it to go smoothly, given that the Joliet transition also went smoothly. The biggest differences between Aurora and Joliet include the surrounding area, as you noted. The Rock Run development around Joliet is just now starting to come out of the ground. We have 250 residential units going up adjacent to Joliet that should be open by the end of this calendar year, and a 250-plus room hotel breaking ground soon and opening by 2027, within walking distance to Joliet. That is a really good long tail for Joliet — as good as the start has been, it should get better over time. For Aurora, we expect a ramp that continues to improve over time as most new openings do. It is a more mature area — we are adjacent to the Chicago Premium Outlets, which generates millions of visits a year. We are going to have a hotel with over 200 rooms with suites, a spa — Joliet does not have that — a larger casino floor, more F&B, entertainment space, and outdoor entertainment. Think about Aurora as bigger with a few more amenities versus Joliet, in a very mature area, right off the interstate. We are feeling bullish about the Aurora opening given what we have seen in Joliet so far. Ben Chaiken: That is helpful. One on Alberta. What were some of the considerations when thinking about customer acquisition and marketing? You talked about strategies that worked and did not work with Ontario. Any nuances you can share about expectations, whether that is player behavior or market size? Aaron LaBerge: When we launched in Ontario, it was a lot less competitive. There are a lot more applicants and people in market for Alberta, which is a factor we are looking at. Leaning on theScore brand will help us break through some of that noise. In terms of players, it is hard to tell because they are not playing today. Right now, we are modeling similar behaviors to what we see in Ontario, and we will adapt from that. Operator: Our next question will come from Trey Bowers with Wells Fargo. Please go ahead. Trey Bowers: Hey, guys. Thanks for the question. On digital, as we look through the balance of the year, any incremental detail you can give on the cadence? When you say a small loss, should we look to Q1 as a good idea of what Q2 and Q3 should look like and then get to a Q4 level of exit profits? Jay Snowden: Happy to, Trey. Q2 looks very similar to Q1 — maybe a touch better — but in that range of a small loss. Q3 would be a larger loss because you have the Alberta launch in Q3 for the first three months of that market. Q4 should be profitable and get us to a total loss for the year of $20 million. That is the cadence to think about. Trey Bowers: Perfect. As a follow-up, going back to your comments on M&A earlier, with the shares where they are, how do you think of a hurdle rate for M&A versus buying your own stock, especially given you referenced the 20% plus free cash flow yield? Jay Snowden: This is a topic we spend a lot of time on at the board level. We are constantly evaluating our capital allocation options. Something on the M&A side would have to look really free-cash-flow accretive to invest there. If you have a free cash flow yield at 20% plus, that is what you have to measure against, with different variables added to the equation. We think there could potentially be assets where, depending on the market and the value our database and operating cost structure could deliver, you could get a really nice return in that same neighborhood. There is no doubt that our stock is very attractive at these levels, especially as you look out to 2027. Operator: Our next question will come from Bernie McTernan with Needham & Co. Please go ahead. Bernie McTernan: Great. Good morning. Thanks for taking the question. On the retail guidance raise for this year, it was really only flowing through the 1Q beat. Was it just an earlier-than-expected impact from the growth projects, or any other color you could provide? Jay Snowden: It is still early in the year. We are feeling really good about what we see in April, but we do not want to get ahead of ourselves. There is a lot of geopolitical and macro noise, and markets are fluctuating. Based on where we are in the calendar year, that is more of a factor than anything. If the trends we saw in Q1 and are seeing in April continue, then we would have guided higher than what we ultimately did. We want some more time under our belt, and we want to get the two new properties opened — Columbus and Aurora — and then we will have more to share. The next time we are on this call in August, we will be in a position to be more clear about the rest of the year. Bernie McTernan: Makes sense. On OSB, revenue grew 5% this quarter. It seems like MAUs were down, so presumably handle was down. So the growth was driven by higher GGR hold and lower promotional intensity. Can you frame the runway if MAU and handle trends stayed this way — what is the runway to keep stable-to-slightly growing that OSB revenue base? Aaron LaBerge: You hit it. Hold is helping us as our volumes are down. We will focus on maintaining volumes and growing them slightly, although our plan anticipated volumes would go down as part of our new structure and focus. Casino volumes are important, Canada is important, and OSB in hybrid states is important. We did see that softness, as you noted, but we held well. We continue to make improvements in our risk and trading. We have confidence in how we are holding and the improvements we are making. We think hold will continue to help us as volumes are flat. Jay Snowden: On a year-over-year basis, MAU declines have been pretty consistent. It is not as though these are further accelerating in the wrong direction. It has been very stable post rebrand throughout Q1. The goal in 2026 is stability and then to start to see some growth in MAUs and continue to see growth in ARPMAU as you move throughout this year and next year. We are focused on our higher-worth sports betting customers. That is working for us; retention has been fantastic. We want to be above flat in OSB net revenue. We accomplished that in Q1 and want to continue to accomplish that as we move through the rest of the year and into 2027. Operator: Why do we not take one more question? Our last question will come from Stephen Grambling with Morgan Stanley. Please go ahead. Stephen Grambling: Hey. Thank you for sneaking me in. Sticking with overall digital, a clarification on turning profitable in the fourth quarter. Do you anticipate you could be profitable even if we strip out the licensing or skin revenue? And longer term, how do you think about how Canada versus the U.S., excluding skins, will contribute to EBITDA? Any puts and takes in each? Jay Snowden: We will have a lot more to share as we move throughout the year. Overall for Q4, based on what we are anticipating right now, we will be profitable inclusive of the skin revenue. Probably pretty close to breakeven without the skin revenue, if not a little positive. We just need more time under our belt post rebrand, but that sets up very nicely as we head into 2027. We want to get this business to profitability overall and then to profitability after skin revenue, and we are going to do that. Trends are moving in the right direction from an NGR, cost structure, and contribution profit perspective. That will continue to get stronger every quarter as we conclude the year and head into 2027. Stephen Grambling: Is there any reason to believe the margin structure long term would be different, excluding skin revenue, in Canada versus the U.S. on an apples-to-apples basis? Jay Snowden: Canada is going to be our strongest margin market in North America, driven by volume and market share and by tax rate, and the fact that you have iCasino and OSB. Canada for us is market number one from a margin and profitability perspective. In the U.S., in the states that have both OSB and iCasino, we are going to see much stronger margins than the OSB-only states. We are of the opinion it is probably a matter of time before many of the OSB-only states turn to some form of iGaming, and we want to stay in the business and be ready when that day comes. Operator: Thank you. We have now reached our allotted time for questions. I would like to turn the call back over to management for any additional or closing remarks. Jay Snowden: Thanks, everyone, for dialing in. I know it is a busy morning in the space. Thank you, Chelsea, and we look forward to speaking to all of you again in August. Operator: Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the First Quarter of 2026. This conference call is being recorded [Operator Instructions] I would now like to introduce Chethan Mallela, Vice President of Investor Relations at Keurig Dr Pepper. Please go ahead. Chethan Mallela: Thank you, and hello, everyone. Earlier this morning, we issued a press release detailing our first quarter 2026 results, which we will discuss on today's call. An accompanying slide presentation is available and can be viewed in real time on the webcast. Before we get started, I'd like to remind you that our remarks will include forward-looking statements, which reflects KDP's judgment, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting KDP's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to our earnings release and the risk factors discussed in our most recent Form 10-K and our latest 10-Q, which will be filed with the SEC later today. Consistent with previous quarters, we will be discussing our Q1 performance on a non-GAAP adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings materials. Here with us today to discuss our results are Keurig Dr Pepper's Chief Executive Officer, Tim Cofer; and Chief Financial Officer, Anthony DiSilvestro. I'll now turn it over to Tim. Timothy Cofer: Thanks, Chethan, and good morning, everyone. We are pleased with our start to the year. We closed the JDE Peet's acquisition and made steady progress on our transformation initiatives, while continuing to drive our base business, with first quarter results that tracked slightly ahead of our expectations. In a dynamic operating environment, our teams remain focused on balancing longer-term foundational work with near-term execution. Looking ahead, our top priorities for 2026 remain unchanged: delivering our low double-digit EPS growth guidance in a high-quality way, seamlessly integrating JDE Peet's and beginning to unlock combination benefits, and achieving key milestones to set up a successful separation. While there's plenty of work ahead, our well-constructed plans and year-to-date progress reinforce our confidence in delivering on these commitments. Before discussing our quarterly results, let me briefly touch on our transformation work. On April 1, we closed the acquisition of JDE Peet's, welcoming over 20,000 new colleagues to KDP and bringing our complementary portfolios and capabilities together, united by a shared passion for great brands and exceptional coffee experiences. With the transaction now closed, we have begun to operationalize our integration plans, led by a dedicated transformation management office and guided by clear work streams and accountability. At the same time, we're also advancing our work to separate into 2 advantaged pure-play public companies which will be well positioned to create value through increased focus and organizational clarity with fit-for-purpose strategies and capital allocation policies. Beverage Co. will be a growth-oriented challenger in the large and attractive $300 billion North American refreshment beverages market. With iconic brands, differentiated go-to-market capabilities and a proven track record of white space expansion, the stand-alone beverage business should deliver compelling financial results while also possessing strategic optionality over time. Global Coffee Co. will be a scaled leader in the $400 billion global coffee market with an enhanced set of capabilities to meet consumer needs across formats, channels and geographies. Supported by a portfolio of leading global and regional brands, deep expertise in sourcing, blending and appliances and strong synergy potential, the coffee business will also have a compelling value creation model. As we balance near-term performance with our transformation agenda, we have put in place an operating model designed to maintain enterprise focus while preparing each business unit to operate independently at separation. Under this structure, the centralized KDP leadership team is responsible for strategic oversight, total company commitments and transaction execution. While our dedicated beverage and coffee operating units are accountable for delivering their 2026 business plans and shaping the strategic direction for each business. As CEO of KDP and the future CEO of Beverage Co., I am overseeing both the KDP leadership team and the beverage operating unit. As we recently announced, JDE Peet's CEO, Rafa Oliveira, has been selected by the Board to lead the coffee operating unit and become the future CEO of Global Coffee Co. upon separation. Rafa has meaningful CPG experience, a track record of navigating complex global markets and is the architect of JDE Peet's brand-led strategy. He's the natural choice to lead our coffee business today and in the future, and I look forward to advancing our partnership as we prepare to stand up 2 winning companies. Overall, our transformation work is progressing well, and we continue to target operational readiness to separate by the end of 2026, with the official separation likely to occur in early 2027, subject to market conditions. Turning now to our first quarter results. Net sales grew 8%, with positive contributions from both net price, realization and volume mix. Top line performance was led by continued strong momentum in U.S. Refreshment Beverages and International, partly offset by previously discussed temporary pressures in U.S. Coffee. Our EPS of $0.39 declined from last year, reflecting the phasing of cost and tariff impacts and lapping a below-the-line gain in the year ago period. Importantly, as Anthony will discuss, we have visibility to healthy EPS growth beginning in the second quarter with further acceleration in the back half. Let me now discuss our Q1 segment performance. I'll start with U.S. Refreshment Beverages, which delivered another robust growth quarter. Net sales and operating income each grew at a double-digit rate, driven by favorable trends in our core carbonated soft drink business and continued momentum in our portfolio's emerging growth areas. Within CSDs, the category remained healthy, with Q1 retail sales dollars growing at a mid-single-digit rate and accelerating from Q4. While Dr Pepper faced a difficult innovation comparison versus the Blackberry launch last year, our underlying trends were strong, with the brand's 3 primary lines, regular, diet and zero sugar collectively gaining share during the quarter, supported by demand generation activity and point-of-sale execution. CSD Innovation will play an important role in our plans for the rest of the year. Canada Dry Fruit Splash strawberry launch nationally in February and has driven healthy consumer trial, strong on-shelf velocities and incrementality to the franchise. The launch contributed to Canada Dry's Q1 share gains and should provide a further tailwind in coming quarters. In addition, the fan favorite, Dr Pepper Creamy Coconut limited time offering relaunched earlier this month, and we're confident it will build on its successful initial run during 2024 as it taps into ongoing consumer interest in dirty sodas. Our performance in 2026 will also benefit from our continued focus on aligning our CSD portfolio with consumer needs around both value and wellness. With consumers seeking affordability in the current environment, we have refined our promotional strategies to offer compelling price points in key channels, while maintaining discipline to ensure net price realization continues to offset inflationary pressures. We're also leaning into the better few areas of our portfolio with Bloom Pop prebiotic CSDs expanding rapidly off a small base and our zero sugar CSD offerings growing at a double-digit rate in Q1. Beyond CSDs, we continue to build our presence in emerging growth areas. In energy, we once again expanded market share during the first quarter, led by Bloom and GHOST, which were 2 of the top 3 fastest-growing major trademarks in the category. Our performance reflected strong innovation, incremental distribution wins and high-quality DSD execution. We believe our portfolio approach to the category remains a clear advantage, and continue to see meaningful growth potential across C4, GHOST, Bloom and Black Rifle. Our sports hydration partnership with Electrolit is also delivering healthy results, with the brand gaining significant share in Q1 through distribution expansion and strong velocities. Overall, U.S. Refreshment Beverages continues to represent an outsized growth driver for KDP, and we expect this segment to remain a key contributor in 2026. Turning now to U.S. Coffee. While both net sales and operating income declined, the quarter largely played out as we expected, and we have conviction in both the category and our business. I'd highlight a few key points. First, the coffee category is healthy, with continued growth and manageable elasticities. The Keurig compatible subsegment grew retail sales at a nearly 4% rate, with our owned and licensed brands keeping pace. Our licensed Lavazza brand was a standout performer, growing K-Cup sales more than 50% in the quarter through brand strength, successful innovation and increased distribution breadth and quality. Second, as expected, our reported results were impacted by some meaningful but temporary headwinds. Peak year-over-year cost pressures constrained Q1 segment profitability, reflecting the timing of higher cost green coffee hedges and tariffs. And as previewed last quarter, trade inventory adjustments pressured pod shipments, which declined 7% and lagged point-of-sale trends, weighing on operating income. Importantly, these headwinds should ease slightly in Q2 and moderate more meaningfully in the back half, providing visibility to improve top and bottom line trends over the balance of the year. Third, despite the near-term profit pressure, we're thoughtfully investing in the long-term growth initiatives. Let me provide a few examples. We're enhancing our premium owned and licensed segment through the well-supported Keurig coffee collective innovation launch, which is off to an encouraging start with strong retailer enthusiasm and early consumer trial. We are continuing to execute our coffee partnership strategy as evidenced by the recent renewal and expansion of our K-Cup agreement with Nestlé USA. This agreement deepens and extends a highly successful relationship, and will enable us to expand distribution and innovation for the Starbucks brand in the Keurig ecosystem. And we continue to prepare the Keurig Alta system for its initial targeted direct-to-consumer launch planned for later this year. This disruptive next-generation coffee system will feature our Keurig brand, the newly acquired premium Peet's Coffee brand and over time, the likely participation of partner brands as well. Putting it all together, combining constructive category trends with our investments to support long-term growth initiatives, we remain confident in the prospects for our Coffee business. In International, Q1 net sales grew at a high single-digit rate, driven by net price realization. While volume/mix declined modestly due to some short-term impacts related to the Mexico beverage tax, we're encouraged by the resilience of underlying consumer demand and our share trends across key categories. Despite the top line strength, operating income declined, reflecting cost pressures and higher investment spending in a seasonally smaller profit quarter. Looking ahead, we expect profitability trends to improve as inflationary pressures ease, volume/mix strengthens and we execute our commercial plans for the year, including summertime activations to drive engagement and celebrate soccer fandom. Overall, we continue to expect our International segment will remain a meaningful growth contributor over time, given our strong local share positions in attractive categories as well as portfolio and distribution expansion opportunities in both Canada and Mexico. We will also be disciplined and opportunistic in targeting other geographies. For example, we recently evolved our Suntory partnership in Europe to a more collaborative concentrate supply model that will provide access to incremental consumers through a capital-light, low-risk model. To close, we're starting the year on solid footing. We completed the JDE Peet's acquisition. We're making steady progress advancing our transformation agenda, and we remain on track to achieve our full year outlook. As we look ahead to the rest of the year, we're focused on sustaining base business momentum, integrating JDE Peet's with excellence and laying the groundwork for 2 strong standalone companies. With that, I'll turn the call over to Anthony to discuss the financials in more detail. Anthony DiSilvestro: Thanks, Tim, and good morning, everyone. We delivered solid first quarter results that were modestly ahead of our expectations, reflecting strong momentum, particularly in cold beverages. Net sales increased 8.1% in the quarter, led by strong gains in U.S. Refreshment Beverages and International, partly offset by a decline in U.S. Coffee, as expected. Net price realization was the primary top line driver, contributing 5.5 percentage points to growth, while volume mix added 2.6 points. Gross margin contracted 220 basis points as elevated cost pressures were only partly offset by net price realization and productivity savings. We expect Q1 to represent the most significant year-over-year gross margin decline for our legacy KDP business, with trends improving as inflation and tariff impacts ease, particularly in the back half. SG&A was flat as a percent of sales, with transportation and warehousing efficiencies offsetting increased marketing spending across all 3 segments to support our key brand equities and compelling innovation slate. All in, Q1 operating income declined 1.9%. Including the below-the-line impact of lapping last year's $0.02 gain on the sale of our Vita Coco state, EPS decreased 7.1% to $0.39. Moving on to our segments. U.S. Refreshment Beverages net sales grew 11.9%, with volume/mix contributing 7.2 points. Net price realization added another 4.7 points, reflecting inflation-driven price increases taken early in the year. On the bottom line, segment operating income was strong, increasing 9.8%, with net sales growth and productivity savings more than offsetting inflation and a higher marketing spending. Overall, U.S. Refreshment Beverages has strong momentum, led by healthy trends in carbonated soft drinks, energy and sports hydration. We have robust innovation and commercial plans in place for the balance of 2026, and expect another strong year for this segment. In U.S. Coffee, our Q1 performance was largely as anticipated. Net sales declined 2.3%, with volume mix driving an 8.2 percentage point decline. Odd shipments declined 7%, reflecting trade inventory adjustments along with manageable price elasticities. Brewer shipments also declined at a high single-digit rate, primarily driven by elasticity. Net price realization added 5.9 points to net sales, driven primarily by carryover pricing in both pods and brewers. Turning to profit. Segment operating income declined 21.3%. This was primarily driven by meaningful cost pressures as higher green coffee costs and tariffs flow through our results in the quarter. Profitability was also impacted by the pod shipment decline and increased marketing spending. Collectively, these factors more than offset benefits from net price realization and productivity savings. Ultimately, our U.S. Coffee segment is tracking with our plans. While we continue to expect subdued profit for the full year, we have visibility to progressive improvement, particularly in the second half when our costs improve and short-term trade inventory dynamics normalize. In our International segment, constant currency net sales increased 8.5%. Net price realization contributed 9.2 percentage points, driven by pricing actions taken in response to cost pressures in both Mexico and Canada. Volume/mix provided a partial offset, declining 0.7 percentage points. International segment operating income declined 15.1% on a constant currency basis, primarily due to cost pressures, including the Mexico beverage tax and increased marketing spending. As we previewed last quarter, we planned for a softer start to the year in this segment, and we continue to expect profit trends to improve as 2026 progresses. Turning to the balance sheet and cash flow. During the first quarter, we closed the financing for the JDE Peet's acquisition with an optimized structure comprised of a $4.5 billion beverage company convertible preferred equity investment, a $4 billion coffee company pod manufacturing JV minority investment, approximately $6 billion in newly issued long-term senior debt and an additional term loan borrowings. Based on this financing mix, we continue to expect net leverage of approximately 4.5x at midyear. We remain committed to investment-grade ratings for KDP and our 2 future companies and will prioritize debt paydown in the near term. Our plan is for free cash flow generation to serve as the primary deleveraging source, though we will also continue to assess noncore asset divestitures. We generated $184 million of free cash flow in the first quarter and continue to expect legacy KDP will generate approximately $2 billion for the full year. Incorporating the net cash flow contribution from JDE Peet's this year, including the impact of incremental financing costs and onetime deal and transformation-related expenses, we expect approximately $2.5 billion of aggregate company free cash flow in 2026. Cash generation should increase beyond this year, enabling us to further optimize Beverage Co. and Global Coffee Co's. capital structures and over time, providing optionality for value-enhancing capital allocation. Let me now turn to guidance. We are reaffirming our 2026 outlook, which uses current FX rates and includes the anticipated contribution from JDE Peet's as of the April 1 deal close date. We plan to report JDE Peet's as a separate segment until separation. For the total company, we expect net sales in a range of $25.9 billion to $26.4 billion, reflecting 4% to 6% constant currency growth for legacy KDP and an $8.5 billion to $8.7 billion contribution from JDE Peet's. On the bottom line, we expect low double-digit EPS growth in constant currency, which includes an anticipated 6 to 7 percentage points contribution from the JDE Peet's acquisition and 4% to 6% growth for legacy KDP. Based on current rates, we anticipate that FX will represent an approximately 1 percentage point tailwind to total company net sales and EPS growth for the full year. Below the line, we are assuming the following: interest expense of approximately $1.13 billion to $1.16 billion; an effective tax rate of approximately 22%; and approximately 1.37 billion diluted weighted average shares outstanding. As a reminder, beginning with the second quarter, our P&L will also have 2 new impacts to reflect the pod manufacturing JV and the convertible preferred security. For the balance of 2026, we expect the following: approximately $190 million in pretax coffee JV costs, which will flow through the noncontrolling interest line, and convertible preferred costs that will flow through below net income to KDP and will be calculated each quarter as the greater of the roughly $53 million quarterly preferred dividend or the securities approximately 8% proportionate share of earnings. For 2026, we expect the calculation to default to the proportionate share of earnings. From a phasing perspective, we expect high single-digit EPS growth in Q2, with further acceleration in the back half as costs improve and synergies built. In closing, we delivered solid Q1 results. Our teams executed well in a highly dynamic environment and made important progress preparing the company for its next chapter. We remain on track to deliver our full year commitments, while also building the foundation for our 2 future stand-alone public companies. With that, I will turn the call back to Tim for closing remarks. Timothy Cofer: Thanks, Anthony. Overall, we're pleased with our start to the year. With clear priorities and well-crafted plans, we're striking a healthy balance between near-term fundamental delivery and our longer-term transformation initiatives. We will remain focused on disciplined execution to achieve our 2026 commitments and capitalize on the value creation opportunity we see ahead. With that, we're now happy to take your questions. Operator: [Operator Instructions] The first question today comes from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: So first, on U.S. Refreshment, clearly, strong sales growth on an underlying basis even adjusting for incremental gross distribution, et cetera. Can you just give us a bit more detail under the hood on what's driving the momentum in a segment and brand level and how sustainable you think those growth drivers are going forward? And any thoughts on the impact from SNAP changes so far? And then if I can just slip one in on Coffee. There's obviously a lot of dynamic factors impacting profitability at this point. You have the higher commodity pressure, particularly with the hedgings and the inventory timing. But at the same time, obviously, green coffee prices have come off, the tariff situations improve. So just -- can you give us an update, on a quarterly basis going forward, how you see profitability in that segment playing out given those factors? And also how pricing ties into the cost dynamics, both in terms of what you're seeing in the marketplace and your own potential actions? Timothy Cofer: Yes. I'll tackle the first 2, and I'll take it over to Anthony to talk about coffee profitability. Look, on U.S. Refreshment Beverage, we're very pleased with our start to the year. You saw the print, double-digit growth both on the top line and the bottom line. And in terms of your question on sustainability, we expect this segment will continue to deliver strong results in the balance of the year, both top and bottom. As you think about the top line, we've got a great innovation slate lined up. You've already seen the impact on our second largest CSD brand, Canada Dry, with the Fruit Splash innovation and news there, that drove share gains. Literally in the last days a week, we've launched Dr Pepper Creamy Coconut. We expect that to be a big hit this year, capitalizing on dirty sodas. Feel very good about our DSD route to market execution and the ability to continue to drive distribution gains for key brands, both owned brands that are showing strong growth continued momentum like our zero sugar lineup and a lot of partner brands, think energy, rapid hydration, prebiotic CSDs. Last thing I'd say on the top line driver is stepped up brand support. We are planning to increase marketing this year. We did it in the first quarter. You'll see it on a full year basis, and really dialing up our precision marketing capabilities and our digital agenda. Having said that, I will say net sales will likely moderate relative to the Q1 elevated levels. The quarter, as you mentioned, Dara, did benefit from some incremental GHOST distribution year-over-year on a comparison basis and some outsized growth in some partner brands. Having said that, top line growth will remain strong for the remainder of the year, healthy volume trends, positive net price realization and U.S. Ref Bev will be an outsized contributor relative to our MSD net sales growth guide for legacy KDP, and I expect this top line growth momentum will also translate into continued operating income as well. You then referenced SNAP. I would tell you this, we're seeing healthy trends across our categories. Even with the pricing actions to offset inflation, the volume we're seeing in CSCs at a category level and broader LRB have been positive this year. And I think this underscores the value that our categories provide to our consumers and what we're doing around affordable pack sizes and some of the work on price pack architecture and RGM. The innovation is still ringing true to consumers and providing continued appeal. So the SNAP impacts to date have been manageable and largely consistent with our expectations and our plans. We know and we monitor closely state-by-state, how these waivers roll out, and you'll expect us to continue to monitor that and adjust in our RGM capabilities to ensure that we deliver on our guide. Anthony DiSilvestro: On the Coffee phasing question, let me start by saying on a full year basis for 2026, we do expect a modest year-over-year profit decline for U.S. Coffee with the cost pressures continuing to exceed pricing and productivity, particularly in the first half, and you saw it in our first quarter. Our results will also reflect our decision to prioritize investment spending as we set up the business for separation despite the inflationary backdrop. From a phasing perspective, we would expect the Q1 decline will be the most significant for the year as the inflation cost pressures peaked on a year-over-year basis, and you're seeing the green coffee cost inflation come through the P&L. And as we've talked about in the past, it does lag market prices by about 6 to 9 months, given our hedging programs and our inventory cycle. I would also say in the first quarter, a little bit of extra drag, top and bottom line from some adjustments and reductions in trade inventory levels, particularly in pod. And also, as I said, our higher marketing spend behind initiatives like Keurig Coffee Collective and the Keurig Anthem campaign. This pressure should begin to moderate a bit in Q2, but the larger improvement will be in the back half. Cost inflation will meaningfully ease in the second half and our innovation and commercial [ programming ] will begin to kick in and we should see some top line improvement. And I would end by saying, look, based on current coffee prices, this could be a tailwind for us going into 2027. Operator: The next question comes from Chris Carey with Wells Fargo. Christopher Carey: So I wanted to follow up on this line of thinking. Just [ 2 ]. Number one, you stress test confidence a bit more. I look at consensus estimates for coffee margins specifically and see roughly 1,000 basis points of margin improvement into the back half of the year. Certainly, you're not talking about guiding to segment margins, but there's clearly some nice improvement in margins if you're going to see modest profit declines in the full year. There's also roughly high teens or 20% earnings growth in the back half if you're delivering high single digits in Q2. So I just wanted to maybe dig in a bit deeper on the cost front. How much visibility do you have in your coffee costs at this point of the year, I assume, high? And secondly, how much visibility do you have that your stronger consumption trends in coffee will be reflected in stronger shipment trends so as to avoid some of the volume mix deleverage into the back half of the year? And just one quick follow-up as well on U.S. Refreshment. From the Creamy Coconut launch, are you expecting any uplift into Q2? Because I would imagine that would offset some of the drop-off in GHOST. Timothy Cofer: Okay. Let me start broadly with -- talking about U.S. Coffee and how we're seeing the various puts and takes on the year. And then, Anthony, maybe you can talk more specifically on green coffee cost and how we're seeing that flow through the P&L on a quarterly basis. I think -- our focus in 2026 in U.S. Coffee is to navigate these near-term headwinds while really positioning our business for long-term success. So as we anticipated and as we shared at the guide at the beginning of the year, the first half of the year features headwinds from real peaking cost pressures and some trade inventory adjustments. And so you've seen that flow through, impacting both our top and our bottom line performance in the first quarter, but this is tracking right on to our expectations. Anthony mentioned this a minute ago, we're also deliberately stepping up our investment behind long-term growth initiatives even as we manage through these higher cost peak inflationary environment in Q1 from a P&L standpoint. So we've meaningfully increased our Q1 marketing. Anthony said it earlier, on both pods and brewers and against our fairly robust active innovation slate on both the pod and the brewer side, Keurig coffee collective new brewers and then preparing for Alta. All of this gives us good line of sight to an improving top and bottom line trend as the year progresses. Net sales will improve as our innovation, our marketing, our commercial investment will build through the quarters, and operating income will also benefit from the improving coffee cost envelope, particularly starting in the second half. Anthony, do you want to talk a little more on coffee cost, green... Anthony DiSilvestro: Sure. Let me step back a bit. We are guiding -- and we have a high degree of confidence to our low double-digit EPS guide. And as Tim mentioned, that's going to accelerate as we go through the year here for a number of reasons. The most significant one would be green coffee cost, and we have very good visibility to how this will flow through balance of the year, given our current hedging program as well as our inventory cycle. I would add to that, we are mostly hedged on other commodities, including those that have been impacted by the recent conflicts in the Middle East. We are also bringing on board, obviously, JDE Peet's. And JDE Peet's profile will follow a one that's similar to our U.S. Coffee segment, right? As coffee prices improve, their quarterly performance will improve as well. And also, again, we have good visibility to that. Now as they bring JDE Peet's into the fold, we will build synergies throughout the year, and that will obviously have a building impact on our performance as we go through the quarters. So sitting here today, good visibility to the rest of the quarters and -- which gives us a high level of confidence in our guide. Timothy Cofer: Yes. And then, Chris, your last question back on Dr Pepper and Creamy Coconut. As you think about Q1 on Dr Pepper, it did reflect a bit of innovation timing shift. So Blackberry a year ago launched early in the year, and we lapped that. So we saw a little bit of pressure there. But as I mentioned in my prepared remarks, our 3 core Dr Pepper lines, regular, zero, and diet Dr Pepper collectively grew share. So overall, I feel great about Pepper momentum, now layer in Creamy Coconut. And we've got a lot of confidence. Creamy Coconut is going to be a big success this year. Already in the first few weeks, we've seen a ton on social and in-store activity. There's a lot of excitement building as we roll into summer on Creamy Coconut, and I do think that will be an important contributor year to go for brand Dr Pepper. On top of that, I would tell you, we still have -- we're going after some unique occasions and consumers. There's still distribution gaps we can close. Dr Pepper Zero Sugar continues to grow at a double-digit rate and has upside. And we're layering on our enhanced precision and personalized marketing capabilities. So Dr Pepper will be a great growth standout. We expect another year of share growth and a meaningful contributor to outsized growth in U.S. Refreshment Beverage. Operator: The next question comes from Michael Lavery with Piper Sandler. Michael Lavery: You touched on each of the segments and just unpacked how some of the year unfolds. Helpful color. But could you walk us through the JDE Peet's piece of that and just considerations on what's left for the rest of the year and how to think about just moving parts and what's going on there? Timothy Cofer: Sure. Let me start by saying, overall, we closed the deal April 1. And I think, overall, I'd tell you, what we've learned in the last few weeks confirms everything we saw in our planning process and the deal close period. This is a business that has a healthy foundation, strong brands, strong capabilities and a talented team. I'm seeing already the energy and the opportunity behind both their, what they called reignite the amazing strategy, which is in its early stages but has lots of runway, and now the combination benefits of combining legacy Keurig Green Mountain with JDE Peet's. We've announced and we can confirm confidence in the $400 million in synergies as well as some incremental revenue opportunities, in particular here in North America between the Peet's brands and the Keurig brands. So feel very good broadly about what we've seen since the close. In terms of performance of the business, obviously, we just took ownership of the business, so I'll speak at a high level on what we've seen year-to-date. I would say the trends are consistent with our expectations. Even back to when we announced the deal, obviously, back in '25, they delivered a solid year, managing through the very unfavorable see price inflation. And we are on track for another good year here in 2026. I would say the phasing of the results will be influenced by commodity cost timing just like we're seeing in the KDP Coffee business. And the profit will be more constrained in this inflationary first half. We saw that in Q1. We expect that to continue into Q2. But at the same time, we have good visibility to accelerating trends in the second half as green coffee becomes more favorable. Operator: The next question comes from Andrea Teixeira with JPMorgan. Andrea Teixeira: I was hoping to see if you can talk about like as the green cost prices improve, are you planning to roll back some of the pricing you had for [ coffee ] parts to just reignite volumes and improve operating leverage? And just as a clarification, as we decompose U.S. Refreshment Beverages volume mix, in particular because of cost, can you comment on how it behaves on a more organic basis? Anthony DiSilvestro: Sure. I'll start on the coffee pricing question. So in coffee, our pricing in 2026 that you're seeing in the sales bridge is primarily the carryover from 2025 actions that we took to offset inflation. And as we talked about the inflation, it's persisting in the first and second quarter of this year as we see it come through the P&L. And as we move into the second half, that the current coffee price pullback should ease pressure on our P&L. So we should see a moderating impact of year-over-year pricing as that happens and that moderation come through in the second half, and we lapped some of those prior year increases. Beyond that, it's probably not appropriate for us to speculate on future pricing actions. We'll certainly continue to monitor the inflationary environment. We keep an eye on the elasticities. We are mindful of any price gaps and certainly prioritize providing value to our consumers as we consider these longer-term pricing actions. Timothy Cofer: Good. And then Andrea, you asked a question related to GHOST, and I think I mentioned that in response to Dara's question. Q1 did benefit from some incremental year-over-year GHOST distribution benefits. And if I had to dimensionalize that, that's worth a couple of points in terms of that onetime impact as we lap that a couple of points to the US RB growth performance. Now we've cycled that kind of onetime benefit. And now we're just in core KDP DSD growth, which we expect will continue to be outsized, right? There's still distribution growth opportunities feature and display, cold cooler presence as well as a robust innovation slate for GHOST. So GHOST will continue to be an outsized growth driver, but Q1, in particular, benefited from a couple of months of outsized performance. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Anthony, I wanted to go back to a comment that you made around kind of being hedged on input costs that may be tied to the Middle East, at least for the remainder of this year. I think maybe it would just be helpful to sensitize or help us sensitize some of the exposures to things like aluminum and PET, if we do get a prolonged kind of rally here in resins and aluminum costs that lasts into '27. So just any additional color you can help us with there as we start to contemplate maybe what the margin implication could be going forward? Anthony DiSilvestro: Sure, sure. Look, as with many CPG companies, we have both direct and indirect exposure to commodities that have been impacted by the Middle East conflict. And this includes a number of inputs tied to the packaging and energy areas such as aluminum, resins, diesel, that's in our DSD network, freight costs. And I would say that no single one of those inputs has an outsized impact on our cost structure, but they're all important. And as we've seen the recent inflationary moves, we have a very systematic and comprehensive hedging program, and those hedges and forward cover are in place to help insulate us in the near term from that volatility. For 2026, we are largely hedged and wouldn't expect to see the recent movement impact our P&L in 2026. But I would say, to the extent those higher prices sustain, we would develop mitigating action plans that we would execute longer term to protect our margins. Operator: The next question comes from Robert Moskow with TD Cowen. Robert Moskow: You may have mentioned it before, but you said in your prepared remarks that after the split, you'll have optionality for value-enhancing capital actions. I want to know if you could give any more color on what those actions might entail? And would they have anything to do with the convertible you have and the minority investments? Timothy Cofer: Yes. I'll take that. And I did make that comment as it relates BevCo. I think specifically, obviously, both companies on the other side of this separation will have the independent optionality to make the best choices for their business and their shareholders. As I think about BevCo, let me start by saying that I love this portfolio, the leadership positions we have across the LRB categories, the advantaged capabilities that we've built and really this very entrepreneurial challenger culture that runs through our company. And I'm confident that with these set of characteristics and advantages, we can deliver consistent top-tier results and we can create a lot of value. As an independent company, we -- I do believe we'll have some additional strategic optionality that perhaps was less actionable under a combined KDP umbrella. And what could those look like? I mean one is around route to market. I'm a big believer in the power of DSD. It's a source of competitive advantage. And I do think today, it is optimal for us to own DSD in most markets. We take a very local decision case by case and we let the scale and the economics and what's best for our brands dictate that ultimate route to market. But as a stand-alone, BevCo will be incentivized to continue to test the optimal model as it relates route to market. And I think as a stand-alone company, we've got that optionality. The other area is just around portfolio and continuing to future-proof this portfolio, ensure this portfolio is structurally advantaged, pursuing white space expansion has always been a priority for KDP. And I think BevCo will be even more agile and even more proactive in this area. We can consider earlier-stage partnerships, new geographies, more creative structures. So overall, we've got a lot of conviction in the future of BevCo and our ability to drive healthy top and bottom line growth in our current portfolio and with enhanced optionality. Operator: Next question comes from Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: I guess one quick just clarification on the guidance for Q2. Is that total company guidance? Or is it, I guess, legacy KDP? And then sort of drafting off of Robert's question on the portfolio. Maybe just to add to that, what Anthony had mentioned on the potential sale of noncore assets, what types of things would that be? And is the intention just to maybe have a tighter portfolio there? And -- or is it more in the spirit of bringing down leverage? Anthony DiSilvestro: Yes, in answer to your first question, the high single digit is total company outlook for the second quarter. In terms of your other question, just stepping back a little bit, we are very focused on committed to investment-grade ratings, not only for KDP, but for the 2 future companies. And our ability to deleverage is primarily driven by our ability to generate significant free cash flow. And you heard it in our prepared remarks, we are expecting $2.5 billion of free cash flow, which includes 9 months of JDE Peet's and all the related costs of the debt financing. We also said that free cash flow obviously will support our dividend and enable us to deleverage by about [ a half a turn ] per year. And that will get us to our stated leverage target that separation, which is 3.5 to 4x for BevCo, [ 3.75 to 4.25 ] for Global Coffee Co., but we also said we'll look for additional opportunities to accelerate deleveraging. Not appropriate to getting any specific details, but there are a number of things that we're looking at across non-core assets and minority investments to help us along. Operator: The last question today comes from Filippo Falorni with Citi. Filippo Falorni: I wanted to ask on your energy drink portfolio. We continue to see very solid growth for both GHOST and Bloom in track channel data. Can you comment a bit on the shelf space gains that you're realizing in the spring resets? Like how much room do you see in terms of further distribution for both brands? And then on the other side, C4 has been a little bit softer. Do you see any cannibalization from GHOST? Or what are the plans to reaccelerate that brand? Timothy Cofer: Sure. Thanks, Filippo. You've heard me say this many times, big believer in energy as a category. It's 29 billion. It's growing mid-teens. And there are structural growth drivers in place that suggests this is a category that continues to have a long runway for growth. I think there's distribution expansion, particularly when you think about channels outside of C-store. There's household penetration upside. There's occasions to go after. There's cohorts, obviously, female forward brands are experiencing tremendous growth right now, and we have one of those in our portfolio in Bloom. So it's a great category, strong growth, and we see continued runway. We like the approach we've taken. We've taken a portfolio approach. We have 4 brands of scale that we go to market with. GHOST, a great lifestyle brand; C4 in performance; Bloom, female forward; and Black Rifle in mainstream, and feel good about that position. And you saw continued market share growth here in the first quarter, and we expect that to continue on the year. Our portfolio is well over $1 billion now, and we see continued upside. As it relates to your other 2 kind of sub-questions on -- one on shelf space and one on C4. On shelf space, we had a successful sell-in cycle for our energy portfolio this year. And we are beginning to see and would expect on the year meaningful distribution gains, incremental PDPs or total distribution points, including in the critical convenience retail channel expanded space as well in kind of up and down the street. And you're seeing that particularly with GHOST and with Bloom. On C4, we feel great about our partnership with Nutrabolt, and what we're building together on C4, we've created a lot of value for both parties. Since we first took distribution back in 2023, C4 has more than doubled its retail sales, added more than 1 point of market share. And as it relates near in performance, it is fair to say we made some decisions together with our Nutrabolt partners to rationalize some elements of the portfolio. So there was a smart subline that we're no longer distributing through DSP, and the ultimate line has been repositioned for even stronger performance, and that's in the high stimulation 300 mg type of caffeine segment. So when you adjust for those factors, we feel good about the underlying trends and kind of the core yellow can performance line, excited about the innovation that we're bringing to market with our Nutrabolt partners and confident in C4's long runway ahead to drive brand momentum. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chethan Mallela for any closing remarks. Chethan Mallela: Thanks, Betsy, and thanks, everyone, for joining us today and for your interest in KDP. The IR team is available if you have any follow-ups. Thanks so much, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the First Quarter 2026 CBRE Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chandni Luthra. Thank you. You may begin. Chandni Luthra: Good morning, everyone, and welcome to CBRE's First Quarter 2026 Earnings Conference Call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an excel file that contains additional supplemental materials. Today's presentation contains forward-looking statements, including, without limitation, statements concerning our business outlook, business plans, seasonality and capital allocation strategy as well as our earnings and cash flow outlook. These statements involve risks and uncertainties that may cause actual results and trends to differ materially. For a full discussion of the risks and other factors that may impact these statements, please refer to this morning's earnings release and our SEC filing. We provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. Throughout our remarks, when we cite financial performance relative to our expectations, we are referring to actual results against the outlook we provided on our fourth quarter 2025 earnings call in February, unless otherwise noted. Also, as a reminder, our Resilient Businesses include facilities management, critical infrastructure services, property management, project management, loan servicing valuations, other portfolio services and recurring investment management fees. Our transactional businesses comprised property sales, leasing, mortgage origination, carried interest and incentive fee in the investment management business and development fees. Finally, beginning this quarter, our financial results reflect the financial reporting changes we discussed on our fourth quarter earnings call and in our March 24, 8-K. Prior period results have been recast accordingly. I'm joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 3 as I turn the call over to Bob. Robert Sulentic: Thank you, Chandni, and good morning, everyone. CBRE continued to generate strong financial results while making important strategic gains during the first quarter of 2026. Together, our 3 services segments, Advisory, Building Operations & Experience, and Project Management grew revenue by 20% and operating profit by nearly 30%. Additionally, profits from our data center land development program were delivered earlier in the year than anticipated. Our Resilient Businesses grew revenue by 18%. This reflects our strategy to grow businesses that are resistant to real estate cycles or benefit from secular tailwinds, which supports strong through-cycle growth. Simultaneously, our Transactional Businesses achieved their highest growth rate of the current cycle at 22%, reflecting our strategy to maintain and extend our market leadership position in sales, leasing, financing, and real estate development. These businesses generate excellent margins and cash flow while providing data and market insights that help us across CBRE. Our work related to infrastructure assets has become a source of significant profits and growth spanning all 4 business segments. This consists of the services we perform for data centers as well as power, telecom and transportation assets, among others. This is also central to our strategy. We generated more than $3 billion of total revenue from infrastructure activities in 2025 and nearly $950 million in the first quarter. Within the BOE segment specifically, we've created a dedicated critical infrastructure services business line. This business line includes work for data centers along with the telecom and power assets captured in the Pearce business we acquired last year. Revenue in this business line totaled $1.7 billion in 2025 and $580 million in the first quarter and is expected to grow in excess of 60% this year. The strong momentum we saw during the first quarter in Infrastructure Services and across other parts of our business has continued in the early weeks of the second quarter. Considering this, we are upgrading our EPS expectations to a range of $7.60 to $7.80 for the year, which would result in more than 20% growth at the midpoint of the range. This assumes that the economic environment remains supportive. Emma will describe our outlook in more detail after she reviews the quarter. Emma? Emma Giamartino: Thanks, Bob. Good morning, everyone. Our first quarter results exceeded expectations. Even without the pull forward of profits in our land development program, EPS beat our expectations by nearly 10%. In local currency, our Services segment delivered 27% operating profit growth. And as Bob mentioned, nearly 30% with the benefit of FX. Given this relatively large FX tailwind, I will reference growth rates in local currency, unless otherwise noted, to best reflect our operating performance. Advisory Services revenue saw continued strength in leasing and accelerated growth in sales. Leasing revenue grew 18% globally and 21% in the U.S. Industrial leasing grew 24% in the U.S., as occupiers continue to act ahead of tightening supply for first-generation big-box facilities. U.S. office leasing revenue increased by 15% with broad-based strength across gateway and non-gateway markets. Additionally, data center leasing revenue more than tripled from last year's first quarter. Outside the U.S., leasing revenue rose by double digits in Asia Pacific, led by Japan, while EMEA saw mid-single-digit growth. Global property sales revenue growth accelerated from Q4, rising 39%, led by the U.S. and Asia Pacific. U.S. property sales revenue increased 64% as all major property types delivered double-digit increases. Outside the U.S., growth was notably strong in Japan. Mortgage origination revenue increased 53%, fueled by strong volumes from debt funds and the GSEs. Our loan servicing portfolio grew 5% to more than $460 billion. Advisory SOP grew 35%, delivering strong operating leverage. Turning to the Building Operations & Experience segment. Revenue grew 16%. In addition to significant growth in our new critical infrastructure services line of business, which Bob described earlier, our local facilities management business continued to increase revenue at a mid-teens rate. In the Americas, revenue was up almost 30% as this region had 1 of its best start to a year. Enterprise Facilities Management revenue also grew by double digits, led by the technology, industrial and life sciences sectors. BOE's SOP increased 23%, with operating leverage driven by an amortization cost reclassification. Excluding this change, SOP growth was in line with revenue growth as expected. Turning to our Project Management segment. Revenue increased 11%, while pass-through costs rose 9%. Growth was underpinned by strong infrastructure activity. Among real estate projects, growth was driven by the technology sector and was broad-based, led by double-digit growth in Asia, the U.K. and the U.S. SOP grew 14%, reflecting operating leverage. In the Real Estate Investments segment, SOP exceeded our expectations, driven by earlier-than-anticipated data center land sale profits. We continue to have embedded gains of approximately $900 million that will be monetized over the coming years. In Investment Management, recurring asset management fees increased driven by higher net asset value. However, operating profit declined due to lower incentive fees and promote income. We raised $1.3 billion of new capital during the quarter and ended Q1 with more than $155 billion of AUM, in line with Q4's level. Now I'll discuss free cash flow and capital allocation. We produced $1.7 billion of free cash flow on a trailing 12-month basis, reflecting 78% conversion. As we've discussed previously, cash incentive compensation is paid out in the first quarter based on the prior year's performance. Due to the strong performance in 2025, free cash flow conversion was lower than the prior year's Q1. We expect to end in 2026 with free cash flow conversion around the high end of our 75% to 85% target range. We have repurchased nearly $540 million of shares year-to-date, reflecting our continued belief that our share price does not reflect the sustained long-term growth trajectory of our business. As Bob indicated, we now expect full year core EPS of $7.60 to $7.80, up from $7.30 to $7.60, previously. The increase is driven by our outperformance in the first quarter and early part of the second quarter, momentum in our infrastructure services-related businesses and strong pipelines across our company. We are increasing our outlook for advisory and BOE. Advisory is now expected to deliver high-teens SOP growth. We are expecting approximately 25% SOP growth for BOE, which includes high teens growth due to improved performance in the underlying business and the remainder due to the cost reclassification. There will be an offsetting increase to depreciation and amortization, resulting in a neutral impact to net income. Our SOP expectations for project management and REI remain unchanged. Our outlook assumes no material changes to the macroeconomic or interest rate environment. And in terms of seasonality, as a result of our first quarter outperformance, we expect to generate nearly 40% of EPS in the first half of the year, a higher percentage than we would typically achieve. With that, operator, we'll open the line for questions. Operator: [Operator Instructions] And our first question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: Great morning. Nice quarter. My first question relates to just how you're thinking about the second half of the year because the first quarter and first half looks quite strong. And so wondering if you can get into a little bit more of your thinking into how much of that maybe was pulling forward stuff you thought would happen later in the year versus just outright strength and trying to get a sense of your conservatism or how you're thinking about 2H. Emma Giamartino: Sure, Tony. So we increased the midpoint of our guidance from $7.45 to $7.70 of EPS, as you saw. As Bob talked about and I talked about, we pulled forward our development profits that we expected to generate later in the year to the first quarter. So there's no impact to our guidance for our REI segment. . In terms of the raise from $7.45 to $7.70, 1/3 of that is based on the outperformance in the first quarter in advisory and BOE and 2/3 of that raise is increasing our expectations for the remainder of the year. Within advisory, we're seeing strong pipelines going into Q2 and especially in the U.S. And so despite the fact that there's uncertainty in the macro, we are raising our outlook in advisory for the remainder of the year. But remember that, that growth will still decelerate going into the second half, given we're working against tough comparisons. And then within BOE, we're raising our guidance for the remainder of the year slightly given the strength in both critical infrastructure services and local. Anthony Paolone: Okay. Got it. And then my second question really is the roughly $30 billion in pipeline and projects in Trammell Crow right now. Can you talk about how much is, say, industrial data center office and so forth? And just the prospects of that -- you mentioned the $900 million, just the prospects of that potentially just being further accelerated and seeing that as the year progresses? Robert Sulentic: Yes, Tony, the biggest portion of the Trammell Crow in-process portfolio and pipeline portfolio is in 3 areas. So industrial, multifamily and data center land. The thing to know about Trammell Crow Company, forever that business has been really good at acquiring land, entitling land, improving land and positioning land to be more valuable than it was before we got involved with it. That is a core competency of that business. And as we've moved through various parts of the cycle, we've aimed at business in areas that we thought had secular tailwinds. So if you remember, coming out of COVID, CBRE was and continues to be a massive office building business. And COVID hammered everything about office buildings, but we moved aggressively into industrial land and multifamily land and multifamily development and industrial development. And within 2 years, we are back to record earnings. What you're seeing now is a considerable amount of investment in multifamily and industrial because we believe there is a dearth of new development that will be coming on over the next few years, and we're well positioned to do that. We've talked a lot about that. But we also, around the country, have secured dozens of land sites that have the potential to be data center land sites over time. And we're working with various data center users, especially the hyperscalers to get that land entitled, get that land powered, get water into the land. And we think we'll have a relatively steady stream of opportunities and data center land over the next few years. It will be lumpy. For sure, it will be lumpy and as evidenced by the first quarter, our harvest so far this year is kind of what we thought it would be for the first year, and Emma gave you some perspective on that. Operator: [Operator Instructions] Our next question comes from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: Maybe, Bob, if you could just maybe elaborate a little bit on maybe some of the conversations that you and the team have had with some other C-suite executives just more around kind of where their head is on the macro. And I realize that the problems in the Middle East kind of occurred fairly late in the first quarter. So not much time to impact that business. And maybe that's tempering your enthusiasm for the back half a little bit. But just how are you sort of thinking about leasing and sales? And I guess what would it maybe take to create more challenges in that business moving into the back half of the year? Robert Sulentic: A bunch of different things going on there, Steve. So 1 is what's going to happen specifically with regard to the Middle East and things that are directly impacted by the Middle East. One is what's going to happen to the economy more broadly. Big theme, obviously, is what's going on with artificial intelligence, big theme is what's going on with job creation and all the old jobs disappear. So I'll comment on each of those. . Starting with the economy. People feel generally good about the economy and less energy prices spike to the point where we end up in a situation where there could be a recession in parts of the world that are energy specific -- or energy sensitive, maybe global recession. I don't think people think that's going to happen, but they're worried about that. Most companies that we interface with are not particularly impacted by what's specifically going on in the Middle East. If you look at our company, none of our 4 business segments have as much as 5% of their profits in the Middle East. So it didn't impact us in the first quarter. It hasn't impacted us so far in the second quarter. Most of the companies that we're working with have not been massively impacted there or even all that materially impacted. And so they're watching like we are, but not that worried about that specifically. The whole AI job creation or job destruction thing that is unfolding and ping-ponging back and forth, lots of discussion around that, lots of headlines around all the jobs that are going to be eliminated by AI. And so we've tried to dig deep and get some kind of empirical underpinning based on the business we do with companies. And I will tell you that kind of the market-facing headlines don't sync up very well at all with what's going on in our direct conversations with these clients. So to give you a statistic, if really there was this view that all these jobs are going to be eliminated by AI, you would think that the users of space would be backing off on their leasing of space, not just currently, but you would think they'd be taking shorter-term leases for fear that they weren't going to need the space in the future. The average length of lease we're doing in office buildings today hasn't decreased by a day. It simply hasn't decreased. It's held steady for the last several years, and it's holding steady now. So to put your money where your mouth is, thing would suggest that the fears around job losses aren't quite as high as the headlines. I can tell you for our company when we look at what's going on, we anticipate some job loss in certain areas. So we have AI initiatives underway to create efficiencies in the company. And so for instance, we have lots of people in call centers around the world, thousands of them. We think some of that -- we think we can rationalize that by maybe as much as 25%. We're going to be able to cut back on research. We're going to be able to cut back on our human resources or people organization. But the most profound thing going on in our business today as we've moved into critical infrastructure in a 3 billion last year in our services business is already almost $1 billion in the first quarter, we can't hire enough people. Our biggest challenge is across that business, we're having trouble getting the various skilled people we need. And we're not alone in that regard. I'm sure that anybody that's following the market is seeing the same thing. So there's a myriad of things going on when we talk to others in our sector and others in the companies we serve. But net-net, I would not say there's a lot of fear about what's going on right now at least in the foreseeable future. Steve Sakwa: Great. Maybe just as a quick follow-up, Emma, I know you talked about the $540 million of buybacks. I think in the excel file, it showed $530 million of actual buybacks in the quarter. Could you either provide a share count or an average buyback price that's associated with that $500 million? I just want to make sure we have kind of our shares moving forward accurate for the model. Emma Giamartino: Yes, the price is in the high 140s. It's around $148. . Operator: Our next question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Really nice results here. First, I wanted to ask about training partnership with Meta around data center capabilities. And Bob, you're just talking a little bit about some of you can't hire enough people, I think, critical infrastructure. So I guess, do you see similar opportunities with other big tech and AI companies. And then as we think about something like that, is it more like a onetime revenue opportunity or there kind of recurring resilient revenue streams that as you kind of that could be built as you be supported by a partnership like this. I guess how we be thinking about these opportunities? Robert Sulentic: It's definitively not a onetime thing. We're building a capability there in multiple cities around the U.S. to recruit, train and place technical people to support Meta's data center initiative. And it is really, really hard to get those people and we're recruiting and training those people and sending them not only into CBRE's teams to support Meta, but into our competitors and others in the market. They viewed us as having a unique ability to hire and train people. We have a big operation in that regard. We hire something like 30,000 people a year, and so that we ended up in that position. The bottom line is, with these companies that we interface with to do critical infrastructure and data center work, there's a broad base of things that we can do to support them, and this is something that surface because of our brand and our scale and our breadth here in the U.S. and in other places around the world, that we were well positioned to help them with, and we expect this to be an enduring service that we provide. Stephen Sheldon: Very helpful. Maybe then as a follow-up, around the commentary on average office lease durations holding steady. Would be curious with industries, you guys have the flexible co-working business with industries. What have you seen there? Have you seen demand for more flexible space start to pick up? Is that something that could structure -- if, let's say, average lease duration start to pull back, would you even potentially see an uptick in demand for solutions like industrial that give companies more flexibility? I guess, how are you thinking about that? Robert Sulentic: Yes. The number of industrial units that we're adding is exceeding our expectation in underwriting when we bought the business. We're quite pleased with the pace at which we're adding those units, and we expect it to continue this year and into the foreseeable future. And the thing about that business is that I think anybody that's been following us knows we bought that business because we thought it was a premium offering that would be interesting to corporates in addition to small- and medium-sized businesses, and we're seeing that play out, just like we're seeing strength in every other part of the office market. We're also seeing that Industries' capability as an experienced company is becoming an increasing opportunity for us with our corporate clients on the facilities management side of things. So yes, we're seeing good momentum there, and we're quite excited about it. Operator: Our next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: Congrats on the quarter. Clearly, a very strong first quarter for both investment sales and leasing. I guess, just curious on -- I know you say the pipelines continue to look very strong. One of your peers last week was commenting on the fact that they are seeing sort of client decision-making slowing down given the lack of visibility. And when you have sort of this sort of instability, long-term investments just becomes slightly harder to make. I'm just interested, are you seeing any signs of that? And if you do see -- if we do end up seeing an impact, is your expectation more that we could see that in EMEA and APAC versus the U.S.? Robert Sulentic: I think there's more worry in APAC, in Asia over the impacts of higher -- and Continental Europe a little bit over the impacts of higher energy prices. We really aren't seeing decision-making slowing down as it relates to industrial leasing or office leasing. Where we're seeing some slower decision-making is corporate capital investment, except for data center investment. And we think part of what's going on there is that resources are moving from other types of real estate-related capital investment to data center investment. But there could also be a little uncertainty that is creeping into. Capital investment is 1 of those things that tends to slow down a little bit when there is some uncertainty. So we have seen some decision-making slowdown there. But really not on the leasing side. It hasn't surfaced yet for the -- it certainly hasn't surfaced in data centers. Obviously, Emma gave you those numbers, but it hasn't surfaced as it relates to kind of traditional warehouse leasing, traditional office leasing. Office leasing is strong all around the world, maybe a little less so in Europe. So we really aren't seeing yet that slowdown in decision-making. We'll see how things unfold, but we're not seeing it now. Julien Blouin: That's very helpful. And maybe going back to the AI topic. I was wondering how your thoughts on the risk from AI have maybe evolved since last quarter. Do you still believe that your BOE segment is where some risk of disintermediation lies and less so on the capital market side. And I guess, how do you think about some of these headlines that are out there around sort of smaller AI-based start-ups that are reported to be gaining traction in smaller commercial real estate transactions and sort of bypassing traditional brokers in the process? And do you think there's a risk that if they prove themselves at sort of the smaller sized transactions like 6 or 12 months from now, they could be used for $10 million or $20 million transactions. Robert Sulentic: Yes. Well, I'll kind of hit that at the end here. I'll walk you through how we think about AI. So we start by thinking about it like we do with everything. We are very driven by our strategy. And as you know, our strategy is to be diverse across asset types, service types, geography and client types. And we very definitely have pursued this strategy of pushing resources into areas of secular tailwinds. AI is creating a considerable secular tailwind for our company right now, and it's fairly broad-based. To the point where I think our move into critical infrastructure and data center services is going to be at least as profound as our move into outsourcing was in the '90s and early 2000s and much faster. Again, I want to reiterate some of the numbers we laid out, $3 billion. And this is independent of our land program in Trammell Crow Company. $3 billion of revenue last year, almost $1 billion of revenue in the first quarter, growing almost 50% this year, some very strong opportunities for us to do M&A in that area because of the track record we've established for M&A. This is a good home for targets. It's a good home for employees. And our brand and history positions us well with clients. So a lot of opportunity there. We think that's the overwhelming impact to our business. The second thing we look at is what we can do to enhance the products we have. So if you go across our 4 segments, Brokerage, Building Management, Project Management. We are developing AI-enabled tools in every 1 of those areas. We've been able to attract some very strong people. Again, I think our brand and our scale has helped us. There's a lot of interest in real estate. We've been able to attract some technology people and then some AI people that have helped us there. And we're very bullish about the product suite we've developed. I think it's going to help us do more business than we've done before. The next place is efficiency. This is where there's going to be some potential loss of employees. And I commented on this earlier. We're going to see some efficiency in our offshore service centers. We're going to see some efficiency in the research area and financial planning and analysis and human resources. There's a lot of those areas, and we think the gains will be fairly significant. It's going to take time to get those gains, because you have to develop the tools and then you have to implement the tools and then you have to reorganize yourself and limits. So there will be some eliminations there. Where we think we're most protected, and I commented on this last quarter, is in our transactional businesses. So our investing businesses, our brokerage businesses, our development business, where you lead with strategy and negotiations and creativity. And I know there's been commentary. We've read it, we've seen it, "Oh my gosh, in the brokerage business, there's all this data-related and financial analysis related work that goes on, that's going to be squeezed down by AI, which is going to cause revenues to be squeezed down". Well, if you really know how that business works, the vast majority of what we spend in that business goes to our brokers, the vast majority of what we spend. It doesn't go to financial grinding and analysis and data. We do a lot of work in data, we do a lot of work in financial analysis, but the majority of the expense is around brokers. And what the brokers provide is specifically the strategic help, this creative help, this negotiating help, the knowledge that goes beyond the data that's on the street. And that's why, over the years, when I've been asked, as you guys get bigger and stronger, you're going to use that leverage to squeeze down your brokers? The answer has always been no. The real value in that business comes from that creative strategic thinking. It's true in our investing businesses. It's true in Trammell Crow Company. That land development business is not going to be disintermediated by AI. It's going to be enabled by AI. So we're not sitting here today. I'm sure there's going to be ways AI does stuff that it hasn't done before, and we're all going to figure that out over time. But we think we're reasonably well protected there. And then when you hear these anecdotes about some proptech company that says they're disintermediating the brokerage business, I would ask them to show you their revenue stream and see what you get. Operator: Our next question comes from the line of Brendan Lynch with Barclays. . Brendan Lynch: Maybe a few follow-ups on the data centers. How is the Pearce acquisition trending versus the $90 million of EBITDA contribution you had originally anticipated for 2026. And maybe in terms of expanding the data center platform, what are some of the other verticals or some verticals you could potentially expand into? Robert Sulentic: Yes. I'm going to answer the back half of that question and Emma will [indiscernible]. Pearce, by the way, is not a big data center business. So it's telecom power, et cetera. But in the data center business, we're seeing big impact in our brokerage business. We're seeing big impact in our building operations and experience business where we formed this critical infrastructure line of business, and we're doing a lot of project work there, we're doing a lot of building management work. We do work on over 1,300 data centers around the world. And then, of course, we're continuing to see in turn towns in our big project business, a lot of work, and we have opportunity to expand all those things. Turner & Townsend has primarily over the years, before we combined with them, been European, Middle East, Asia Pacific business with some activity in the U.S. Now they're growing rapidly in the U.S., leveraging the network of professionals that CBRE has. On the contrary, our data center services, building management and small projects business in the white space has been primarily U.S., and now we're seeing a big opportunity to expand that in Europe and Asia. So those are some areas we're focused on. And I think Emma can talk about M&A. But I think if you look at the M&A strategy, we've had, you'd be confident that there's opportunity for us in those areas around the world. Emma, I don't know if you want to add to that? Emma Giamartino: Yes. Just to add on Pearce front and specifically to your question, it's performing well in line with our expectations. One important thing to note is if you take the $60 million of revenue that we forecasted for 2026, you can't ratably lay out across the quarters because there is a seasonal element business, given that they're maintaining cell towers and wind farms and solar. So the weather has an impact on the revenue here. So if you exclude Pearce in the first quarter, our BOE revenue growth was mid-teens. . Brendan Lynch: Okay. Great. That's helpful. And maybe just 1 follow-up. If I heard you correctly, it was about $900 million of embedded profit in the land bank. And you talked about dozens of other land opportunities that you could monetize in the future. How should we think about the steady state contribution, understanding it's going to be lumpy, but just your ability to acquire attractively priced land and add some value-add components to it and kind of keep that pipeline steady over the next couple of years? Robert Sulentic: Yes, the $900 million is not land profits captured in Trammell Crow Company. It's all profits captured in Trammell Crow Company, including the land. And the data center land opportunity, we have lots of sites that we have the opportunity -- the potential opportunity to monetize, but it's hard. It's really hard. You have to get approvals, you have to get power, you have to get water. And as a result, we have not been overly aggressive about forecasting what might happen there. . We're very excited about the potential. We like the portfolio of sites that we have control. We have very little capital of our own investment in those, by the way. We really like the ability we have to work with hyperscalers and other data center clients to help them get land positions. But we're knowing how hard that business is and the scarcity challenges around things you need and the public opposition and so on and so forth, we're being very measured about the outlook we're establishing for that. But the $900 million is all the profits we see captured in Trammell Crow Company today. And we are filling that back up at the same rate. We're emptying it out, I guess, is what I would say. Operator: Our next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: I wanted to ask about AI and how you've rolled it out to your teams. Could you quantify what percentage of your teams are using it? And if you're limiting who can use it? And what are you doing to maintain the closed-loop system in terms of your data, where data is the linchpin of value in that business? Robert Sulentic: Jade, we're like everybody else. We're working our way through that and trying to figure it out. And you didn't say it explicitly, but you kind of implied it. One of the things we're watching very closely is it can get really expensive really fast if you don't control who has the access to use it and what they can use it for. And our Chief Operating Officer, Vikram Kohli, who's also over our cost control program and specifically has reporting up to him the technology part of our business right now is watching very closely how we're using AI and where we're using it. how we're using it to improve our products and where we're using it randomly around the system. And as you can imagine, there's a lot of that. And I will just say broadly that we are controlling it controlling who has access to it, controlling what we use it for. And we're reasonably pleased like we have been historically that we're attacking new technology in a measured way where the benefit we're getting is in balance with the cost, we're expanding on it. But it's something you've got to watch really closely. Jade Rahmani: Just switching to transactions. Just wondering if you can give any comment as to whether the pipeline has slowed at all. driven by the increase in rates and also modest widening in CBRE borrowing spreads that we've seen. Emma Giamartino: So Jade, the pipeline hasn't slowed at all and going into Q2 the pipeline is actually stronger than we would have expected it to be at the beginning of the year. I think what's important to note about rates that we get asked about a lot. As long as the tenure has been around in the 4% to 4.5% range, we've seen sales activity and loan origination activity continue to grow and accelerate. So as long as there is a significant spike above that, we don't expect to see any slowing. . Operator: Our next question comes from the line of Seth Bergey with Citi. Seth Bergey: I guess, just wanting to go back a little bit to capital allocation. You did kind of the buybacks in the quarter. And has AI changed the way you kind of think about your capital allocation priorities as you think about buybacks or kind of resilient businesses that bolt-on? Or is there any sort of incremental investments or kind of AI companies that you would look to kind of add to the platform? Emma Giamartino: So our capital allocation priorities remain consistent and they have over time. We are always prioritizing M&A, and if anything, as Bob mentioned earlier, we see even greater opportunity for M&A at this point than we have historically, especially in the data center space. And so we will continue to prioritize M&A. But of course, as you've seen, as we're monitoring our pipeline and thinking about what we can convert in a year. We're going to fill that in the buybacks, especially when our price remains undervalued. In terms of investing in AI, as Bob said, it's similar to how we invest in technology. And we're constantly organically investing through our CapEx in technology and now AI to support our business, and that will remain unchanged. I don't expect us to be investing in specifically AI companies, like we didn't make large investments in technology companies historically. Seth Bergey: And then I guess you talked a bit about raising headcount where it makes sense and using AI to kind of increase productivity. It might be a little early, but do you have a sense of how that can kind of change the margin profile of certain segments kind of over time? Emma Giamartino: So it's very difficult to speculate how it will impact over time, but it will. I think it will take a number of years, and it will start in our functions. I mean, Bob mentioned our HR teams, our shared service teams, but even those head count reductions, we anticipate happening a few years from now versus immediately. So time will tell in terms of how that will explicitly impact our business. Operator: Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. Just a quick one. Going back to sort of the BOE. I think you mentioned earlier in the call that the sort of ex the acquisition, the revenue growth would have been, I think I heard mid-teens if that's correct. And I think the messaging has been that, that growth rate has been sustainable for quite some time. I guess my question is, is there a way to sort of double click and think about how much of that growth is driven by existing tenants expansion there versus sort of new businesses? And has that mix sort of shifted as the business has changed over the past couple of years? Emma Giamartino: So the way we think about that business is between our Enterprise Facilities Management, our local business and then now our Critical Infrastructure Services business. So Enterprise is a solid double-digit grower -- low double-digit grower over time. Local as it's been expanding into new markets, I mentioned earlier, we have still significant growth within the Americas. Our local business grew revenue in the Americas this quarter of 3%. So that's bringing that growth above that double-digit, low double-digit range. And then our Critical Infrastructure Services business, as you saw, has tremendous growth within it. So it is going to keep that growth rate within our BOE segment in that mid-teens range and potentially above over time. . Ronald Kamdem: Helpful. And I guess my second question is, as I'm sort of thinking about whether it's advisory services versus BOE versus project management, at sort of this point in the cycle is advisory -- is the greatest margin upside still in advisory services because of potential transaction upside? Or how do you guys think about sort of the potential margin uplift in some of those other segments? Emma Giamartino: So advisory is nearing -- has already gone back to the 2019 levels of margins, which we think is a relatively steady state margin for that business. There will be incremental margin uplift throughout this year. But where we think the opportunity is, is within BOE and within project management. Those margin gains, as you've seen, are steadier and more incremental over time, but we see opportunity for those to increase. . Operator: And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, Bob Sulentic, for closing remarks. Robert Sulentic: Thanks, everyone, for joining us today, and we'll talk to you again in 90 days when we report on our second quarter. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.
Operator: Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Investor Relations. Please go ahead. Maria Lee: Thank you, Sarah, and good morning. I'd like to welcome everyone to our first quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Jim. James Taiclet: Thanks, Mark. Good morning, and thank you to everyone on the line for joining us on our first quarter 2026 earnings call. First, I'd like to highlight this week's breaking news on a recent win for our Aeronautics business. Just this past Monday, Lockheed Martin signed a $1.5 billion contract with the Peruvian Air Force for 12 Block 70 F-16 fighters with an opportunity for a second squadron of an additional 12 aircraft. This is the first F-16 direct commercial sale contract in decades and broadens our footprint in the modernizing Latin American region. This was a collaborative partnership with the U.S. government, and we continue to work with the Peruvian government in executing on its sovereign acquisition process. Overall, we reported solid results for the quarter as demand for our premier Defense Technologies and space exploration capabilities remains high. This elevated demand is supported by the highly effective performance of our platforms and systems that has again been demonstrated during this first quarter. Artemis 2 crew and the dedicated teams at NASA completed their historical mission and a near flawless flight and recovery using our Orion spacecraft. Artemis launched on April 1, carrying 4 astronauts on a 10-day mission around the Moon. The first crude space flight beyond low earth orbit since 1972, and the farthest humans have ever traveled from earth. The Orion spacecraft served as the crew transport and habitation module throughout the entire mission, traveling thousands of miles beyond the moon before safely splashing down in the Pacific Ocean. Orion is the only vehicle capable of traveling into deep and back while safeguarding human life. It will enable future Artemis missions and ultimately, exploration of the moon, Mars and beyond. We are now assembling Orion for Artemis 3, 4 and 5, cementing Lockheed Martin's role in sustained deep space discovery. While Artemis 2 reflects what's possible at the edge of human space exploration, it also underscores that Lockheed Martin's portfolio is delivering extraordinary capabilities in the most demanding conditions both on earth and in space. Additionally, Lockheed Martin platforms have performed extremely well in very demanding missions during recent U.S. and allied operations and active conflict zones. The F-22 Raptor and the F-35 Lightning established air superiority when called upon. Our C2 BMC and [indiscernible] systems combined with FAD and PAC-3 interceptors, delivered layered air and missile defense in infrastructure and populations, military bases and ships at seed. Moreover, the Black Hawk combat rescue helicopter and C-130 aircraft supported successful combat search and rescue operations and extremely difficult conditions in hostile territory. The operational relevance of these systems has direct implications for our business. In the weeks following Prism's first use in active operations, we announced plans to quadruple production to meet accelerated demand. This is in addition to the commercially inspired long-term agreements we already entered into with the Pentagon to rapidly expand the production capacity for PAC-3 and THAAD interceptors by 3x and 4x, respectively. In light of these multiyear framework agreements, we are in the process of construction and/or modernization of more than 20 facilities across several states dedicated to achieving these great expanded reduction rates of production of these sophisticated munitions. These investments are expected to support thousands of skilled manufacturing jobs across our defense industrial base, provide accretive investment opportunities for our suppliers and enable the addition of second and third sources within our supply chain to enhance the resiliency of our production system. For its part, the F-35 also continues to execute critical missions, delivering fifth-generation air-to-air and air-to-ground capabilities unmatched by any other aircraft. The platform's combination of Stealth advanced sensors and AI-assisted targeting enables pilots to operate with decisive advantage. In the first quarter, we secured a new F-35 production contract for long lead items and the initial presidential budget request includes increased F-35 quantities. Rotary wing capability is proving equally valuable with a family of Black Hawk supporting critical search and rescue personnel insertion and resupply missions. We are also far down the road in converting the Black Hawk to both pilot optional and fully autonomous operations to capitalize on its range payload and survivability in contested environments. These examples are testaments to our strategic focus on mission execution and our commitment to disciplined investment to drive 21st century digital and physical technology into tried and true major platforms. This initiative is designed to provide our customers with the most capable integrated and reliable systems that can be quickly assimilated into existing force structures, training programs and logistical infrastructure. The urgency of the current operational environment, coupled with the strong performance of franchise Lockheed Martin Systems has also spurred the rapid progression of initiatives that were already underway with our customers on long-term production commitments. We recently announced a $4.8 billion contract to further accelerate production for PAC-3. A tangible example of how we partner with our customers and advance from novel framework to contract to continue increasing the scale and speed at which we can deliver. The long-term demand inherent in the munitions agreements allow us to confidently expand our investments, boost internal capabilities with robotics, and strengthen supply chain resilience, in turn, delivering long-term shareholder value to Lockheed Martin's shareholders. Chart 3 outlines our collaborative approach with the U.S. government to address these urgent requirements and illustrates how acquisition transformation is enabling us to accelerate and expand production. These munitions agreements provide risk mitigation for industry and efficiency and speed for government a combination that benefits customers and shareholders alike. We also remain committed to advancing emerging technologies. Since launching the Lockheed Martins Venture Fund, we have backed more than 120 companies with many now serving as Lockheed suppliers. In the past 2 years, we've added 25 new companies and are expanding the fund's capacity to $1 billion, more than double its formal size. Our expertise and innovation and scaling the production at scale enables us to serve as trusted partners for the next generation of solutions from startup and other new entrants to the industry. Building on this momentum, earlier this week, we announced a further strategic investment in [indiscernible] technologies to bring to market a fully integrated end-to-end turnkey counter UAS solution, which seamlessly uses detection, control, identification and mitigation capabilities into a single commercially available offering. This partnership will accelerate Fortum's ability to scale production. We'll also incorporate its products into our deployment-ready integration with Lockheed Martin's Sanctum counter UAS ecosystem. This is just the latest example of reinforcing our commitment to invest in innovative technologies that deliver rapid reliable solutions for new threats. Our commitment to developing advanced capabilities is consistent with the budget environment where there continues to be broad support for national defense initiatives. The administration's priorities, accelerating munitions production, strengthening integrated air and missile defense, advancing next-generation aircraft, expanding space capabilities and preserving long-range for [indiscernible] strike are reflected in this budget request. These priorities are all well aligned with our already long-standing initiatives and product sets. The Department Awards budget rollout that was released on Tuesday, reflects continued strong demand for our core franchise programs. At a broader level, the administration's prioritization of defense industrial base investment and modernization spending provides a constructive backdrop as we execute against our significant backlog. We are well positioned. Our strategy is taking hold. Our solutions are in high demand, and we remain confident in our full year guidance for 2026. Before turning it over to Evan, I'll cover our top focus areas for the year. With that significant backlog and demand continuing to grow, enhancing and accelerating execution is imperative for us. Factory production is already up more than 60% from just 2 years ago. and we remain focused on converting demand and long-term growth while executing with discipline in a dynamic environment. Next is innovation. A key feature of our 21st Century security vision encompassing AI solutions for enterprise efficiency, digital threat integration, model-based engineering to accelerate our program time lines and a commitment to open systems architectures that allow us and our partners to rapidly integrate new technology from us or others and continuously enhance capabilities, thereby strengthening deterrence. Third, our partnerships are in full alignment with the department's acquisition transformation strategy. This is enabling a government industry model that we have long advocated for and under which we were the first to sign a multiyear agreement. International demand also remains robust as budgets expand and allies and partners across the globe continue to seek out our superior systems and capabilities. Finally, our people are the foundation of everything we do. Tens of thousands of workers develop, build and sustain our systems, and we're deliberately growing this workforce by investing in training pipelines collaborating with community colleges and technical schools and creating long-term manufacturing careers. Our new munitions acceleration center that we're building in Camden, Arkansas exemplifies this effort serving both as a production facility and a development hub for the next generation of defense talent that will use the latest in AI and robotics to do their jobs. Now I'll turn the call over to Evan to walk us through the Q1 financial results and outlook. Evan Scott: Thank you, Jim. Good morning, everyone, and thank you for joining us. I'll now walk through our consolidated financials and touch on some additional highlights from the quarter include few words, a status update on the munitions agreements before handing it off to Mark, who will discuss the quarterly financials by business area, and then I'll come back to discuss the detail on our 2026 outlook. Starting on Chart 4. First quarter sales were $18 billion, in line with the first quarter of 2025. We saw strong growth on missile programs within MFC and and on strategic missiles within space, offset by lower volume at Aeronautics, primarily related to the life cycle on classified programs and an RMS on Sikorsky heavy lift programs due to timing of material receipts. First quarter 2026 sales were impacted due to the shortened fiscal period compared to the prior year, we expect sales to grow in the second quarter and throughout the remainder of the year, supporting our full year growth outlook. Next, segment operating profit amounted to $1.8 billion, a decline versus the first quarter of 2025, primarily due to nonrecurring events in the prior year related to program milestones and completions at Aeronautics, Space and RMS. First quarter 2026 results also reflect unfavorable performance adjustments at Aeronautics associated with F-16 and C-130. Design and development delays temporarily impacted F-16. On C-130, integration challenges and supplier constraints, which occurred early in 2025, persisted into the first quarter of 2026. The C-130 deliveries have resumed with 4 aircraft delivered as of today, keeping us on track for our full year targets. Earnings per share of $6.44 decreased 12% primarily driven by lower profit and mark-to-market losses due to changes in the fair value of investments and liabilities for deferred compensation plans. This was partially offset by benefits from a more favorable FAS/CAS pension adjustment. Shifting to new business, MFC was awarded $7 billion in orders for PAC-3 contracts. This includes 1 award for $2.2 billion from the first quarter of 2026 and a $4.8 billion fully funded undefinitized PAC-3 contract we signed earlier this month, advancing the first of the [indiscernible] ramp production agreements we announced earlier this year. These awards underscore the sustained and growing demand for our missile defense capabilities. Lockheed Martin's commitment to the mission and the government's dedication to partnering on the rapid scale-up of this capability. We are partnering with the Department of War to definitize all multiyear munition acceleration agreements, and we will continue to provide updates as we progress. At Aeronautics, we secured a $700 million contract to procure long-lead materials for F-35 lots 20 and 21 for our international program partners. A further signal that Allied nations are continuing their commitment to the F-35 program as the aircraft consistently proves itself in live combat. At space, we secured an $890 million contract for our Fleet Holistic Missile capabilities, a program that provides sea-based nuclear deterrents and one that Lockheed Martin has served as a prime contractor for more than 70 years. And at RMS, we were awarded a $365 million contract for Aegis Blistic Missile Defense. The Aegis weapon system is a proven command and control solution that links sensor and effector assets across all domains from undersea to space, showcasing how Lockheed Martin connects established and innovative technologies to enhance homeland defense capabilities. They're adaptable for missions like Golden Dome. Moving to free cash flow. We reported use of $291 million in the quarter. The negative cash was largely driven by working capital timing, including impacts from the implementation of a new ERP system in one of our business areas. The impact of this system upgrade was anticipated and we expect that the effect will be resolved by the second quarter. Our full year cash guidance remains, and as in past years, higher cash flow is projected to be weighted towards the latter half of the year. Additionally, earlier in the quarter, the IRS issued favorable guidance regarding the corporate alternative minimum tax. This strengthens our confidence in reaching the upper end of our cash flow range. In the quarter, we paid $816 million in dividends and retired $1 billion of long-term debt. We remain committed to our dynamic and disciplined capital allocation prioritizing a strong balance sheet while investing for the long term. In the first quarter, we invested $511 million in capital expenditures and $458 million for research and development. an approximately 15% increase over the prior year first quarter. I will now turn it over to Mark to walk through the business area results. Unknown Executive: Thanks, Evan. Starting with Aeronautics at [indiscernible] First quarter sales in Aero decreased 1% year-over-year, primarily driven by life cycle timing and classified programs, losses recognized on the F-16 program and lower production volume. This was partially offset by increased volume on F-35 sustainment. Segment operating profit decreased 14% compared to the prior year related to unfavorable profit adjustments on F-16 and C-130 programs and the absence of favorable profit adjustments on classified programs that occurred in the first quarter of 2025. These impacts were partially offset by favorable profit adjustments on the F-35 program. The image on the right depicts an F-35, refueling from a KC-130, underscoring Aeronautics role and delivering integrated air power to the U.S. and its allies. In the first quarter, we were awarded a $462 million contract to expand support of the Royal Canadian Air Force's fleet of C-130Js. Turning to Missiles and Fire Control on Chart 6. Sales at MFC in the quarter increased 8% from the prior year, driven by higher volume from production ramps on existing PAC-3 tactical strike missile programs, including JASSM, LRASM and PRISM. Segment operating profit increased 8% year-over-year, primarily from the higher sales volume. On the right, you can see a photo of a [indiscernible], equipped with Precision Strike Missile, or PRISM. In the first quarter, we successfully completed the first flight test of our PRISM increment to demonstrating its ability to engage moving targets. Shifting to Rotary and Mission Systems on Chart 7. Sales at RMS decreased 8% year-over-year in the quarter, primarily from lower production volume of both RADAR programs and at Sikorsky. Operating profit in the first quarter decreased 19% compared to the prior year. driven by unfavorable preadjustments at Sikorsky programs and on the absence of a cost recovery from an intellectual property license arrangement that occurred last year. In the first quarter, we delivered the very first UH-60 MX, Black Hawk helicopter to the U.S. Army. The UH-60MX includes a fully integrated Matrix autonomy suite, enabling optionally piloted flight and supporting the Army's pursuit of open architecture, mission supported autonomy. On Chart 8, we'll conclude the business area discussion with space. Sales increased 7% year-over-year in the first quarter, primarily driven by higher sales volume on strategic and missile defense programs, including the Fleet Ballistic Missile and next-generation interceptor. Operating profit decreased 26% compared to the prior year, primarily due to the absence of a benefit from completion of a commercial civil space program, partially offset by higher sale volume on the programs I previously described. Now I'll turn it back over to Evan. Evan Scott: Thanks, Mark. Shifting to Chart 9. Our 2026 financial outlook remains consistent with the expectations we shared in January including mid-single-digit sales growth, profit of $8.4 billion to $8.7 billion and free cash flow range of $6.5 billion to $6.8 billion. Our free cash flow guide continues to assume between $2.5 billion and $2.8 billion of capital expenditures in support of production ramps and key strategic growth opportunities. It is also important to note that we expect margins to improve over the course of the year, with gains anticipated in the second half of 2026 as production milestones are achieved and risks are retired. We remain focused on disciplined operational execution, scaling production and delivering at speed to meet the urgency of this moment. Now we'll open up the line for Q&A. Operator: [Operator Instructions] Your first question comes from Kristine Liwag of Morgan Stanley. Kristine Liwag: Maybe Jim and Evan and Mark, I want to focus on the F-35, the company's largest program. It was very encouraging to see the Pentagon request 855 in the fiscal year '27 budget up from 47% last year. And you've also called out the funding for sustainment. I was wondering, can you reorient us on where we are in the program, the F-35 role in Modern Warfare and your outlook for production and sustainment. James Taiclet: First off, I'll say that the performance of the F-35 and active operations over the last 6 months has been really definitive proof that the aircraft is standing alone around the world and its ability to do both really advanced air-to-air emissions and achieve our superiority alongside F-22s and also air-to-ground missions. And so in the midnight hammer operation, for example, when the nuclear capabilities of Iran were damaged significantly. That mission was enabled by the scoring of the bombers, V2 bombers by F-22 and F-35, it couldn't have happened, I don't think, without them safely. And part of that mission was to air the ground side of sort which enabled both U.S. and Israeli F-35s to essentially obviate the air defense system and very [indiscernible] defense system of Iran. So this is quite evident now with that and other missions that the F-35 is uniquely capable as a fifth generation platform. It's the only one in the free world in current production right now. And so therefore, the net from the U.S. government is solidified, as you said, and also the interest in the airplane from our allied customers is also heightened as well. So I think it's basically proven itself as the dominant modern fighter aircraft through its performance. The second piece of it, Kristine, is -- and I think both our allies and us have discovered this in the European and Middle East theater is that F-35 is basically a flying command post, where it can ingest sensor data from the aircraft, organize it, declassify it necessary and pass it off without any pilot intervention into the command and control system for multiple services and multiple allies, that information gets digested and then other platforms can actually act on in other crews and capabilities can be applied to these threats that the F-35Cs when it's in flight. And so there have been missions where an individual pilot or a for ship of airplanes does 3 or 4 missions over a couple of hours and those missions can include Combat Air Patrol, protecting other airplanes. It could include close air support protecting truths on the ground that are friendly. And it can also include the sort of surveillance and data fusion mission that I also described. And there have been some examples of missions that have gone on 3 or 4 hours with the aircraft, multiple are fuelings and again, the single pilot or the formation can execute all 3 of those missions even when all the munitions are expanded. So I do think that this aircraft has -- we always do it, but internally, but that it is superior to every other airplane in the world right now that we faced at least. So I think that's the position of the aircraft. Operator: Your next question comes from Rich Safran with Seaport Research Partners. Richard Safran: I thought you could give some additional color on Aeronautics and RMS results. Some of this was a difficult comp, but I wanted to know if you could maybe give some more color on your opening remarks and discuss what drove the adverse profit adjustments on the F-16 at Sikorsky and also on the F-35 that offset. James Taiclet: Yes, I'm happy to take that, Rich. Starting in F-16, we have a new configuration that's being delivered as part of the Taiwan and Morocco production run. So we ran into some issues during the flight test causing some rework, which delayed deliveries. So the combined cost of the rework and schedule extension ran through our program estimate. Unfortunately, we're back on track with a successful flight test and plan to deliver -- begin deliveries of the first aircraft as soon as this week. So we're right back on track on that program and, of course, celebrating the good news on Peru. But the team is very focused on the execution, and we're off to a good start this quarter. I think one of the positive points, as you pointed out here is the F-35 production margins. That's accretive to overall aero margins. We've seen some real strength in performance on our deliveries that you've seen as well as our cost performance. So I think that's looking good. RMS we had some cost growth on some of the programs there and a lot of material timing that we expect to be just sort of a quarterly anomaly as well as sort of a difficult compare to last year Q1 as we had several onetime profit events that make it a tough compare. If you look at just the quarter in context with comparing quarter-over-quarter, all those onetime charges across 3 BAs accounted for about $190 million of sales and about $240 million of profit. So when you sort of net that out, we see the Q1 is on track we expect to see successive sales and margin growth throughout the year with strength to get to our total year guidance. Thank you. Operator: Your next question comes from Seth Seifman with JPMorgan. Seth Seifman: I wonder if you could talk a little bit about the the multiyear contracts that you're looking to sign in Missiles and Fire Control, and obviously, a lot of important opportunity there for the company. But can you also help us think a little bit about the risk side? Are you signing up and committing to reach these significantly higher production rates in the out years? And how do we think about what the financial downside could be for the company if these rates aren't reached? James Taiclet: So as far as the tripling or quadrupling of production rates, that's going to have to be a team effort in the U.S. government and us and our major suppliers certainly have all locked arms on how to get that done. So for example, if you look at the PAC-3 system, we're the OEM and the integrator of course, for the missile itself, but we rely on L3Harris for solid rocket motors and we rely on Boeing for seekers. Both of those companies have publicly stepped up to meet the same level of commitment as we are to invest in that scaling within their companies. Those are just 2 examples. But I would say essentially what the government, we and our major suppliers have agreed to is to -- we'll go ahead and fund the NRE on the 7-year framework agreements. And as a result of that, we can focus on the small and medium suppliers and helping them scale up as well while our large teammates in the industry will handle their own nonrecurring costs. And that's all been agreed upon between the U.S. government, those companies and Lockheed Martin. With respect to our small and medium suppliers, we've got a lot of interest in getting financial help for them to do the scaling. Part of that's going to come from the open strategic capital inside the Department of War. They've got a pretty big balance sheet and they're going to use that to help equity with equity and debt instrument investments in the small and medium supply base to encourage and enable all of this. We are having the confidence now to add second and third sources in that small and medium supply base and even in some of the larger subsystems, if you will, because we have a 7-year agreement, so the nonrecurring costs to stand up those second and third sources now makes sense. So I think this is a very well risk-managed arrangement. And if you kind of go back to the slide very quickly, there was some real constructive engagement, I'll say, between the U.S. government, and I can only speak for Lockheed Martin here. But some of those engagement elements really enabled us to go to a more commercial-like business model for major weapon systems. It really hasn't been done before. And that's because the leadership of the department at this point is willing to engage in topics such as risk mitigation. And some of the ways that we've done that with the government is for our commitment to do nonrecurring cost, capital expense investment, et cetera, to reach these new levels of production. We have basically a 7-year commitment and if you will, a recovery element to these agreements that says if for whatever reason the government decides the production rate won't be as high in years 5, 6, whatever or there's a change in Congress that changes the nature of how this agreement can be actually appropriated, I'll say, then there are kind of reach back or clawback mechanisms for making the company holds. So I'm just again speaking for Lockheed Martin. There's clawback arrangements with the government then the agreements and will be in the contracts to make sure that we're whole. And if there's a change in government policy or a reduction in the production rate that they request down the road, we will not be harmed by that. Another element is, again, this notion of our major suppliers being asked and stepping up to their own NRE. So we don't have to make that investment with any risk whatsoever. And then the third thing is that we requested and made arrangements for two important elements, which are very similar to the way we build telecom networks in my last industry, which is inflation index base escalator. So fixed price to start with inflation-based escalator for the 7-year period that's based on an index for the industry. And then secondly, kind of cash flow neutral approach, which means if we were doing our contracting for Patriot the old way, our cash flow would be x, it wasn't going to be X minus anything. And so we were going to get and will get under these agreements, advanced payments from the government to make this program for -- and all of these long-term agreements, cash flow neutral for the OEM and for Lockheed Martin in our case. So -- that's what we've negotiated as far as risk management. I think it's quite really solid, frankly, that we protected the company and also enabled the company, we think, with our supply chain to actually make good on these ramp-ups. Unknown Executive: And just one additional context as well. In addition to the key contract provisions that were negotiated the highest levels of this company and at the Pentagon. If you look at the operational, it is true that we're going to have an aggressive ramp schedule. As Jim said, we're back to back with our suppliers. What's also notable is the support that we've gotten from the Department of War, which is to say they have pulled in some of the true industry experts from our industry and others, both at our facility and our suppliers to say, if there is a best practice out there, we're going to put it to use. It doesn't have to be invented here to make sure we scale these milestones. So it is all hands on deck in the best possible way. Operator: Your next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Jim, can you share an update on the classified program in Aeronautics, including how risk is trending on the program? And then are you seeing any willingness from the government to provide additional funding to support your efforts to keep that program on track? James Taiclet: Yes. Given the classified nature of the program you're referring to in aeronautics, what I can say is, and it was, I guess, evident from our release, there were no charges taken on the program of interest here in the first quarter. We have increased the scrutiny on that program. And actually, again, the higher levels of operating executives in this company is now overseeing that program. We do think we have a path through the flight test and other parts of this program. that have sufficient coverage, I'll call it, in our financials right now to hopefully not experience any additional write-downs of the program. But it is complex. It is cutting-edge literally, and there's still some risk there, but we think we've got it well managed. On the government side, there's really strong interest in this program at very high levels in the department. And they seem -- again, see, I can't speak for them, but very, very committed to carrying through with this program. and carrying through the success for it. And therefore, there's ongoing discussions with them on making sure that the contract is structured in a way that the company and the industry can be successful in delivering this. At the same time, the government will get what's asked for and what it's going to pay for. So I would say that from my perspective and what I can share on this call, I feel better about that program than I have probably since I got here 6 years ago. Operator: Your next question comes from Scott Mikus with Melius Research. Scott Mikus: We saw Northrop reached an agreement on B-21 production to accelerate, which gives them the opportunity to improve the economics on the program. Given the strong demand for missiles and munitions, is there an opportunity to reach an agreement with the customer to accelerate production of the classified missile program at MFC that could yield some better economics for Lockheed. James Taiclet: So given the unclassified nature of what you're referring to, I think I can put it in a similar context. The demand from the customer for that capability is heightened. It's something that will make a difference. I would suggest as any large classified program would and our abilities to accomplish emissions that it will be applicable for -- so that is increased. The interest in the customer of getting this field is increased, I would say, over the last year or 2. Secondly, the program, again, of interest is similar as to the last one you all asked about. There were no charges taken in the first quarter. Again, that's the only thing we could kind of say about that. And again, we have put risk mitigation on that program similar to the aeronautics program level. So I do think we have it covered with oversight of some of the best and highest level experts in our company on a recurring basis. Having said all that, there is interest and again, the product accelerating and expanding production potentially and there's conversations about that with government. There's nothing different about that system other than its level of classification vis-a-vis PRISM or Patriot, et cetera. It's an MFC volume missile program, which could be subject to a similar contracting approach if the government decides to do that. And so they all have to stop. Unknown Executive: And just one last piece of context to support that as well. We last took a charge there in 4Q of 2024, and there has been no change in estimate since then. So we've struck a baseline and continue to hold that while we look for additional opportunity. Operator: Your next question comes from Ken Herbert with RBC Capital Markets. Kenneth Herbert: I wanted to ask a question on free cash flow. Significant use in the first quarter, I think, as expected, step up in working capital. I wanted to just verify this was F-35 or if there's anything else to call out on that in the first quarter? And then second, as you think about the full year guide, how should we think about the cadence here in the second quarter and in the second half of the year to hit the full year guide on the free cash? Evan Scott: Yes. So I think in the first quarter, a few things going on there. One, as we disclosed, we've got an ERP or billing system transformation at 1 of our business areas that occurred to close the year last year. So we went through that process this quarter and expect to be back on track in the second quarter. It's notable, of course, that we drill very hard to surge and collections to close out the prior year knowing that this was in front of us. That's what positions us to make the additional contribution to our pension, which helped derisk our cash flow this year. F-35 continues to make progress as we progress on deliveries, we'll have more opportunities for cash liquidations. I think as you look throughout the year and the pace of our deliveries and program milestones, we're going to continue to see cash increase throughout the year, it's going to be back-end loaded, not unlike previous years, but I think we've demonstrated our ability to close the year strong and hit our cash flow guide. And then with the support that we've gotten from the tax policy, which helps enable and incentivize investment in American manufacturing, that gives us additional confidence to hit the top end of our range this year. Operator: Your next question comes from Gautam Khanna with TD Cowen. Gautam Khanna: Was wondering if you could comment on the pinch points in ramping MFC capacity. I know you guys have the JV you're building with GD on solid rocket motors and just wanted to see like how quickly can missile capacity actually be raised? And if you're throwing even more money at it, can it be pulled forward more substantially than maybe what people are thinking. James Taiclet: So the goal is to sort of have a ratable increase from our current levels of production, which is last year 650 Patriot missiles per year up to 2,000. And that's going to take 3 to 4 years depending on supply chain and other considerations, but we really do think we can get it done in 3 to 4 years. the supply chain improvements that we're pursuing, the General Dynamics slacked Martin teaming on solid rocket motors, also Northrop Grumman is looking at expanding a solid rocket motor business potentially into Patriot. And there's some commitments there that we think will bear some fruit. The other pinch point. So I think we've got solid rocket motors, I don't want to say covered, but we've got a lot of interest in it. You may have heard that L3Harris is spinning out its SRM business to -- and also have support from the U.S. government to finance and fund their expansion, which they've already announced where it's going to be and how it's going to happen. So that's a good sign. Secondly, Northrop's commitment is a good sign. Thirdly, General Dynamics partnership with us is another good sign as far as SRM, pinch point risk, I guess, I'd call it. The second area is the seeker for the Patriot. And Boeing is similarly made a public commitment and one to the government that says, hey, we're going to invest in that seeker business. We're going to get to the volumes that we're asking -- you're asking us for. And they've actually been improving as well over the last year or 2 [indiscernible] to deliver on this very complex component. So those are the 2 biggest I guess, risk areas, there'll be a handful of others in the mid to small business supply chain. We will have -- and the government -- as Evan just said, we'll have assistance provided to those companies. And we're looking for capital markets providers in addition to the government of strategic capital to to provide ready and efficient financing for these medium and small companies, given that they're going to have a 7-year subcontract to Lockheed Martin, who has a 7-year contract with the U.S. government, a pretty good credit line there. So I think that we're going to be able to manage those pinch points, but those are the main ones. Operator: Your next question comes from Ron Epstein with Bank of America. Ronald Epstein: Just circling back on some of your comments you brought up in your prepared remarks about how you're deploying AI in the enterprise and in some of the weapon systems. How are you broadly thinking about that? Are you developing pools herself as lucky trying to develop its own large language model or are you using outside stuff? Just kind of broadly thinking about your AI strategy and what you're doing there? James Taiclet: Yes. Thanks, Ron. So there's only 2 dimensions to artificial intelligence adoption in Lockheed Martin. One is the in-house business systems, production system, ERP supply chain management, all those kind of in-house critical activities. We're applying artificial intelligence there, everything to the closing process, right, to contract and bid provisions to respond to our customers. Every place that you can imagine, AI could be helpful, defect management and discovery, those kinds of things in the factory supply chain breakdowns. Those kinds of things, we are using -- utilizing AI to make all those business processes better for us. The second thing that we're doing and alluded to earlier is we are introducing AI into our products and services where it makes sense to do that. But under a rubric of of an ethical standard that is adopted from the Department of Defense's rubric. So we're introducing AI into target recognition into battle management, command and control, [indiscernible] as it's called things like that, places where you've got a lot of data. If you can fuse it, bring intelligence to it quickly and provide commanders and pilots options. That's basically the way we're driving AI into our mission solutions, if you will. All of this is within what we call the Lockheed Martin Artificial Intelligence Center. So we made a decision with our then really a chief engine here. We have another [indiscernible] today, but her predecessor when I first joined the company 5, 6 years ago, said, hey, I want to stand up a single AI center for all of Lockheed Martin instead of having each business do it or something like that and consolidate the GPUs, consolidate the infrastructure make sure that we have a totally wold system that can operate at the classified level and has no connection to the external Internet so that we don't have cyber and other risks in that regard. And also, we have our own data sets. We don't use any data from outside the company or outside the customer that's provided to us. So we have this internalized AI center, but we utilize external models for it. So there's a range of AI models. Many of them are incredibly well known, and we have access to those on a token basis or otherwise that we run in our AI center on our own GPUs on our own infrastructure that's cyber secure and hacking secure. So that's how we do it. There's been a pretty significant investment over these last 5 or 6 years into that. And I actually think that we may have a best-in-breed AI center, at least in our industry. So we're not building basic artificial intelligence models. We're using others, but we're applying them to our internal business operations and to our product set. I think, in pretty aggressive and useful impactful ways. Operator: Your next question comes from John Godin with Citigroup. John Godyn: Jim, I wanted to just ask about the evolving landscape a tremendous amount of new issues, new entrants. What is that impacting the competition for talent? How is that impacting contracting and maybe offensively, you had some comments in your prepared remarks about how it might be impacting the opportunity to make investments or strategic partnerships. I'd love to just kind of get your take broadly. James Taiclet: So we welcome competition. We welcome what we like to call other people's money and other people's talent into this endeavor with us or in competition with us for that matter. So this traditional defense industrial base needs to be expanded. And we've been working for years to expand it with some of the major tech companies and telecom companies out there like when we publicly stated these before, Verizon IBM, Microsoft, NVIDIA, et cetera. At the same time, it may be less visible. We've been investing in this sort of startup and new entrant space ourselves. We've done some acquisitions of relatively early-stage companies internally into Lockheed Martin. But in many cases, I'd say in most, we can be an investor through our venture group, have a [indiscernible] get access to the technology and figure out how to incorporate it again into our products and systems in ways that will benefit our investment that we have, the company we invest in and will accelerate our capability and again, using other people's money and other people's talent with these businesses, things maybe that we don't have the bandwidth or the personnel to do. So I think it's a positive development both for the National Defense Enterprise of the government and our industry together and for our company, and we're embracing this. We have another entity called Lockheed Martin [indiscernible], where we can do medium-sized joint ventures or co-investments. We're doing that in the wildfire fighting space that we've announced before, for example, through kind of an all entity, if you will. So we are eager to get access to and collaborate with small, medium, new entrant companies, et cetera. We have -- we're a subcontractor [indiscernible] some cases, frankly. So we view these companies across the board as just other suppliers in the term of this industry's [indiscernible], right? So Same thing with Northrop, Same thing with Boeing Defense. We partner with them sometimes. We compete against them sometimes. This industry is used to that and is comfortable with that, and so are we. Our goal is to get the best technology and get access to it through whatever vehicle we need to deliver on a mission technology road map for our customer, right? So if our goal is how do we have the best air-to-hair compact capability in the U.S. Air Force, for example, we want to take the platforms we have we want to introduce AI from the best available source. We've actually are working with the Air Force now at Edwards Air Force Base, which is a test pilot school. There within autonomous F-16 that's working tactics that will be more survivable where even a piloted aircraft when it's in a dogfight or has to do a really hard turn on a missile can take over and optimize that response in the fight, so to speak. So we want to advance these mission capabilities with our platforms or networking with others, frankly. And we want to get these these resources into those mission sets. And we're not very proprietary about where they come from, frankly. So how does that affect our talent management I would say that we have excellent retention rates. It's about half of general industry as far as losing folks on a voluntary basis. We're at like 4-ish percent broad industries like 8% to 10% turnover. So we have pretty solid retention, but there are some places like AI data scientists and others where it's competitive, and we have compensation plans that we think can meet the moment on that and keep the key people we need to. And the third thing I'll say on talent is people that come to Lockheed Martin want to come here for a reason, and that reason often has to do with either their prior military service, their families, where they grew up or whatever it is, that gives them some connection with these missions. Like this air defense mission we're talking about is so important. And the situation in the Middle East would be far, far different if the Patriot and the FAD and the Aegis systems weren't employed and others from other of our competitors and partners, but people will get drawn to that mission and they tend to stick around if that's why they came here. The contracting side, we had a meeting with about 30 of our key people yesterday in Arlington in our office there. And I said the same thing to them. This is a golden opportunity right now based on who's in government, their experience, their willingness to change the demand that they have for what we do and our partners in our industry do. We can move the contracting system from this far cost -- federal acquisition regulation based, cost-based Truth negotiation act burden that we've all had and move it more towards a commercial contracting system, which is exactly the agreement we have in these frameworks with the Department of War right now. This is the time to do that. I would say the new entrants and the venture-backed companies are constructive on this. They're helping us and the government get out of our traditions and into a more agile contracting scenario. We will -- we embrace that. And then as far as investments, if you get the contracting right, you can keep the talent, we'll have better ROI on our investments going forward, and we'll have better risk management, too. So -- and again, we can partner and offload certain kinds of technologies or certain kind of physical investments that someone else is better off making than we are. So I'm encouraged by all of this in the evolving landscape as you asked. And I think we're positioned to take a good advantage for our company and for the the U.S. government and our allies based on this more available resource out there for us. Unknown Executive: It's Mark. We're coming up on time. We'll take 1 more question. Operator: Your next question comes from David Strauss with Wells Fargo. David Strauss: One quick clarification question and then a question around cash flow and working [indiscernible] CapEx. Clarification question would be around what your growth rate would have been ex the work week comparison if you had the same number of work weeks this quarter. And then on the cash flow side, Evan, wondering what what exactly you baked in for working capital this year to kind of recover your higher CapEx investment in the cash burn profile on the aero and MFC classified programs, what we're looking at this year and then maybe looking out beyond that? Evan Scott: Sure. So I think of the shorter week or shorter time period of this quarter being kind of in the few hundreds of millions of dollars of revenue thereabouts. So we'll get that extra time back in 4Q, just so we're all tracking to the same calendar there. With respect to the cash burn on our classified programs, I'd still think of that as kind of the $500 million to $700-ish million a year for this year and next year, and then we expect to see a pretty sizable drawdown on that cash draw depending on how that goes. And the last question was CapEx. Yes. So from a CapEx perspective, a key part of the tenant, as Jim mentioned, is sort of cash flow protection as we make sizable investments ahead of scaling. So if you think about the $1 billion increase year-over-year on CapEx we've had. I think about half of that tied to these agreements that have this kind of cash flow protection. So that's what we have assumed in our guidance now to have the offset there as we invest in capital scale rapidly for the future. James Taiclet: Okay. Thanks again, everybody, for joining us. So in the first quarter of 2026, Lockheed Martin, our products and systems proved themselves again and again, in conflict situations and outer space literally. Our backlog is resilient, our investments in capacity, digital transformation and people are going to position us to deliver on the commitments we've made to you and to our customers. Lastly, and this is really important. We want to thank the service members who have put themselves out there and executing these missions with skill, dedication and courage and that's why many of us work at this company is to help them get their missions done and come back safely. So thanks to all of you for joining us, and we'll be back in touch with you next quarter. Thanks. Operator: This concludes today's conference call. Thank you for joining. 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Operator: Greetings, and welcome to the Dow Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If you would like to ask a question at that time, please press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I will now turn the call over to Dow Inc. Investor Relations Vice President Andrew Riker. Mr. Riker, you may begin. Andrew Riker: Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I am Andrew Riker, Dow Inc.’s Investor Relations Vice President. Leading today’s call are James R. Fitterling, chair and chief executive officer; Karen S. Carter, chief operating officer; and Jeffrey L. Tate, chief financial officer. Please note our comments contain forward-looking statements and are subject to the related cautionary statement contained in the earnings news release and slides. Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items. We will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release that is posted on our website. On slide two is our agenda for today’s call. James R. Fitterling and Karen S. Carter will start with a summary of our first quarter performance, including details on each of our three operating segments. Karen S. Carter will then provide an update on current industry dynamics, including how global supply disruptions are influencing market conditions. She will also discuss Dow Inc.’s competitive advantages, particularly our purpose-built asset footprint and advantaged feedstock positions. We will then outline several actions underway to deliver a step-change improvement in earnings across the cycle, including progress on Transform to Outperform and our other self-help initiatives. Jeffrey L. Tate will close with our outlook for the second quarter and an overview of our capital allocation priorities and focus areas for disciplined financial management, both in 2026 and across the cycle. Following the prepared remarks, we will open the call for Q&A. I will now turn the call over to James R. Fitterling. James R. Fitterling: I would like to first take a moment to recognize our colleagues, neighbors, customers, and partners in the Middle East who are facing significant turmoil and uncertainty. Our thoughts are with everyone affected by this conflict, and we wish for their safety and well-being during these difficult times. On slide three, I will cover additional details from the first quarter. The solid results we delivered reflect our commitment to controlling what we can control. While January and February order books were solid, we experienced a sharp positive inflection in March with the beginning of the conflict in the Middle East. We expect the supply disruption will persist throughout 2026. During this quarter, we focused on Dow Inc.’s strengths of prioritizing our customers, managing costs aggressively, and operating with safety, reliability, and long-term value creation. We delivered 3% sequential volume growth, net sales of $9.8 billion, and operating EBITDA of $873 million. And with our self-help actions well underway, we delivered approximately $193 million in period cost savings. As we look ahead to the second quarter and beyond, we are taking actions to enhance Dow Inc.’s agility and resilience. We are also entering a seasonally high-demand period, providing additional tailwinds as we move through the next couple of quarters. In addition, an increasingly positive margin backdrop continues to unfold, and we expect the pricing momentum that began in March to continue across every business and every region in Dow Inc.’s portfolio. On the supply side, the conflict in the Middle East has created constraints that are clearly evident in the near term. This includes supply chain disruption for an extended period of time. We also anticipate impact to future investments, including potential delays or cancellations of planned industry capacity additions, as well as increased pressure for capacity rationalization. And lastly, we expect that the higher global oil and naphtha prices will steepen the global cost curve. Against this backdrop, our in-flight actions serve to further strengthen Dow Inc.’s competitiveness and position us to drive margin improvement and capture earnings upside. First, our incremental growth investments are delivering returns, like our new world-scale polyethylene train in Freeport, Texas. And we are making progress on our Alberta project where the overarching merits of this investment and the cost-advantaged Americas are further reinforced by the current global dynamics. In addition, the benefits from our previously announced European asset shutdowns begin this year. And lastly, we are building a Dow Inc. that is more agile and resilient through any cycle. A company that delivers through periods of volatility, and one that focuses on capturing upside, improving margins, and outperforming our peers to effectively reset the competitive benchmark. We will share more details on all of this later in the call, and Karen S. Carter is going to cover our first quarter operating segment performance. But before that, I would like to briefly address our recent leadership announcement. Effective July 1, Karen will assume the role of chief executive officer and I will move to the role of executive chair. This announcement follows a deliberate multiyear succession process in partnership with our board and ensures continuity as we execute our strategy. Serving as CEO of Dow Inc. has been the privilege of a lifetime, and I am incredibly proud of what our team has accomplished together. This transition comes at the right time as we transform our company for its next phase of growth. I have full confidence in Karen’s leadership, her deep operational experience, and her ability to drive performance and value creation. As CEO, she will continue our efforts to transform Dow Inc., positioning us for greater agility and resiliency through any phase of the cycle. She is exactly the right leader to guide our company and deliver on our strategic priorities with discipline and rigor. Thank you. Karen S. Carter: Good morning to everyone joining today. I am honored to step into the role of CEO of Dow Inc. Having spent my entire career with the company, I have a deep appreciation for our people, our innovation capabilities, and the critical role we play in enabling our customers’ growth. As we look ahead, our priorities remain consistent. We will continue to drive operational excellence, maintain disciplined capital allocation, and advance high-value growth in our core markets. Dow Inc. is well positioned with our advantaged global portfolio, a strong balance sheet, and a talented global team. My focus will be on driving execution, delivering value for our customers, and ensuring consistent long-term value for our shareholders. I am excited about the opportunities ahead and confident in our ability to continue to deliver for all stakeholders. Turning now to our first quarter results by segment. As James R. Fitterling mentioned, Team Dow Inc. remains focused on disciplined execution in every business throughout the first quarter. As the situation in the Middle East unfolded in March, we continued to manage costs and cash tightly while also prioritizing our customers. We delivered solid results in January and February, and then dynamics in the Middle East quickly impacted industry supply-demand conditions. In fact, our operations outside the region experienced the largest percent sales gain from February to March that we have seen in our company’s history. Our teams remain focused on balancing near-term dynamics with discipline while also progressing our long-term objectives, and this agility continues to be a key differentiator for Dow Inc. In Packaging & Specialty Plastics on slide four, first quarter net sales were $4.9 billion, reflecting price decline versus the same period last year. Polyethylene volumes increased in all regions both versus the prior year and last quarter, supported by continued global growth in flexible food and specialty packaging applications. Polyethylene volume gains were offset by lower merchant olefins sales following a turnaround in the U.S. Gulf Coast and lower licensing revenue. With safety and reliability at the forefront of our priorities, this turnaround is now complete. The unit is fully operational, and our team is shifting their focus to completing our second cracker turnaround for the year, which is planned for the second quarter. Operating EBIT was $[inaudible] million driven by lower integrated margins and higher planned maintenance activity. This was partly offset by higher polyethylene volumes, as well as tailwinds from the company’s cost-reduction efforts. Looking ahead, our significant Americas footprint, including our new Poly7 asset, will enable our teams to capture improved margins. Next, turning to our Industrial Intermediates & Infrastructure segment on slide five. Net sales were $2.6 billion, down 8% year over year. This was largely due to lower prices in both businesses as well as lower volumes in polyurethanes as a result of impacts from the Middle East conflict. Our proactive cost-savings actions in both businesses provided tailwinds that offset some of the decline. Volume declined in the quarter as well, primarily due to our actions to reset our competitiveness by shutting down our higher-cost upstream propylene oxide asset late last year. As a reminder, this action rationalized approximately 20% of North American PO industry capacity. And while we are experiencing a prolonged weak demand landscape across building and construction, our new alkoxylation assets are driving growth in Industrial Solutions, which serves attractive end markets such as home care, pharma, and energy. Moving to the Performance Materials & Coatings segment on slide six. Net sales were $2.1 billion, which is flat compared to the same period last year, with higher volumes in both businesses. Volume increased 2% year over year, largely in downstream silicones, particularly in electronic and home and personal care end markets. Notably, downstream silicones continue to be a growth engine for the business, delivering high single-digit volume improvement versus last quarter. The business remains focused on advancing our multiyear asset and market strategy which will help us grow with key customers. The strategy includes shifting our mix towards higher-value products in markets like electronics and mobility, while rightsizing higher-cost upstream capacity. And this work is further advanced by our previously announced European asset actions, including the shutdown of our basic siloxanes plant in Barry, UK by the middle of this year. This capacity represents approximately 25% of European siloxane industry capacity. Next, on slide seven, I will frame further details on the current macroeconomic environment. The headline is this: demand across many markets is steady. At the same time, supply is short, and arbitrage is increasing. On the demand side, for our core polyethylene packaging markets, conditions remain resilient. But we are seeing mixed signals in other key markets that Dow Inc. serves. For example, in the U.S., inflationary pressures and higher interest rates are still weighing on existing home sales. This continues to be reflected in our Industrial Intermediates & Infrastructure and Performance Materials & Coatings segments, both of which serve the building and construction market. Consumer spending has shown some modest improvement but the landscape and behaviors are likely to remain cautious until we see a significant inflection in macroeconomic conditions. Moving to supply dynamics. We anticipate that shutdowns, feedstock limitations, and logistical constraints will continue to reshape polyethylene product availability across regions. These conditions are creating ripple effects well beyond the Middle East, including significant impacts to logistics costs and transit times. Supply and feedstock into Asia and Europe are constrained, which is triggering price increases globally. It is also leading to increased production in the Americas and is providing Dow Inc. the opportunity to capture new business in Europe. The duration and severity of these constraints increase the likelihood of lasting industry impacts, including the potential for accelerated capacity rationalization in this context, as well as delays or cancellations of planned capacity additions. Expectations for higher U.S. supply are helping to ease some of the pressure and provide stability. North American LNG markets remain well supplied and regionally insulated from these disruptions. In addition, U.S. Gulf Coast NGLs, including ethane, continue to be largely unimpacted. All of these factors underscore the benefits of Dow Inc.’s cost-advantaged footprint in the Americas. Next on slide eight, we will unpack some of the current regional and industry impacts in more detail. In the two months since the conflict began, the scale of disruption we have seen is unprecedented. Roughly 20% of global oil capacity is currently offline and approximately half of global ethylene and polyethylene supply is either offline, constrained, or directly impacted. These are unparalleled numbers reflecting a combination of physical infrastructure damage, feedstock limitations, and severe logistics disruptions. Transit through the region remains significantly impaired, largely driven by the ongoing disruption in the Strait of Hormuz. And the disruption has been amplified across Asia and Europe, tightening feedstock availability and pushing producers to reduce production or increase prices to cover the rapidly escalating costs occurring from the conflict. Looking across regions, a large portion of Middle East capacity remains offline with increasing risk of lasting infrastructure damage. In Asia Pacific, feedstock constraints are limiting operating rates and reducing export availability, challenging producers who are operating at uncompetitive levels. And in Europe, high costs will require continued price increases to justify additional production. In contrast, the Americas continue to operate at high rates, highlighting the importance of Dow Inc.’s cost and feedstock advantages in the region. Currently, it is estimated that roughly three quarters of announced global capacity additions would be either directly impacted by the conflict or dependent on supply chains that remain highly constrained. The longer these conditions persist, the greater the potential for further industry changes. And lastly, it is not likely that the pricing impact of these events will be temporary. We expect rising global production costs and a steepening global cost curve to continue influencing pricing and spreads. Next, on slide nine, we will discuss how Dow Inc.’s specific advantages drive near-term value. At the beginning of the Middle East conflict, petrochemical prices, especially polyethylene, were at multiyear unsustainable lows. Despite broader near-term market volatility, we anticipate packaging demand will remain resilient, providing meaningful pricing potential as evidenced by recent March settlements. That brings me to our advantaged global asset footprint. Dow Inc. operates a large portion of our light cracking capacity in the cost-advantaged Americas, with assets in the U.S., Canada, and Argentina, all of which continue to operate at high rates. Our consistent focus on investing in the Americas gives us reliability, feedstock security, and cost stability at a time when global supply chains are strained. In Europe, our feedstock flexibility remains a critical differentiator. With naphtha supplies impaired and pro-nap spreads increasing, Dow Inc.’s ability to optimize across feedstocks provides a clear cost and availability advantage versus peers. This allows us to protect and expand margins through running our assets competitively, even in a volatile energy and feedstock environment. And specific to our Packaging & Specialty Plastics segment, Dow Inc. has higher North American capacity than our closest peer, further supported by the 2025 startup of our Poly7 polyethylene train in Freeport, Texas. Additionally, approximately 80% of our P&SP product sales go into higher-value, resilient applications including packaging, consumer, and health and hygiene. These end markets have historically demonstrated lower risk of demand destruction. The structural advantages we have deliberately built over time give us confidence in Dow Inc.’s ability to manage through volatility while capturing value at any point in the cycle. In addition to these portfolio advantages, slide 10 outlines the key areas where we remain committed to self-help actions that will strengthen Dow Inc.’s earnings power. First, we are on track to deliver the remaining cost savings from our previously announced $1 billion program by the end of this year. We are also executing a series of strategic moves that will uniquely position Dow Inc. to win. This includes earnings upside following the completion of our remaining incremental growth investments in cost-advantaged regions, as well as benefits this year from the beginning of our European asset shutdowns. Additionally, Transform to Outperform is expected to deliver at least $2 billion in near-term EBITDA improvement. As a reminder, we expect approximately two-thirds of that to come from productivity gains, and the remaining one-third from growth. Next, I will share a few examples of early opportunities that we have identified and are taking action on. First, we have begun transformation assessments at approximately 25% of our large sites with a goal to deliver sustained improvements in returns from all of them over the next two years. We are evaluating and driving improvements in production yields, asset utilization, maintenance productivity, energy efficiency, and third-party spending, and we expect this work will result in more than $400 million of the $1.3 billion in productivity improvements that we committed to. The first site transformation identified approximately $80 million in run-rate EBITDA improvement, well exceeding our initial projection. We are also seeing early growth gains from expanded use of digital commercial capabilities and more disciplined opportunity management. Pilot efforts in these areas have meaningfully improved the quality, size, and value capture from new opportunities. Learnings are quickly being scaled to support and accelerate targeted growth across the portfolio. And since completing comprehensive evaluation, our dedicated end-to-end process owners have shifted from assessment to execution. For example, in our plan-to-fulfill work process, we defined a clear end state from demand planning to manufacturing operations all the way through to customer delivery. We are now redesigning work and leveraging technology to simplify workflows. This enables increased efficiency for Dow Inc. and service reliability to our customers. Additionally, in the first quarter, we announced a series of senior leadership changes that delivered an approximately 20% reduction in both headcount and cost at that level. We remain confident that our collective efforts in Transform to Outperform will ramp sharply to $400 million in the second half of the year, creating a Dow Inc. that is more resilient across the cycle while consistently delivering growth, customer success, and improved shareholder value. And as an important reminder, all of our self-help actions and the upside they provide are additive to the potential upside we anticipate going into the second quarter. Next, I will turn the call over to Jeffrey L. Tate, who will cover our second quarter modeling guidance and Dow Inc.’s key financial strength. Thank you. Jeffrey L. Tate: As we look ahead, I would like to provide some context around our earnings expectations for the second quarter and for the remainder of the year. As we have noted throughout today’s prepared remarks, the situation in the Middle East has introduced volatility and uncertainty into the broader market environment, including how customers secure product. We remain committed to taking actions to position Dow Inc. for success amidst this ongoing turmoil. Karen S. Carter shared the ways in which we are quickly pivoting to several of the areas that are directly within our control. This includes leveraging our advantaged manufacturing footprint and activating pricing levers across all businesses and all geographies, including our largest operating segment, Packaging & Specialty Plastics. These levers give Dow Inc. significant near-term advantages. Our expectation for second quarter is approximately $12 billion of revenue and EBITDA of $2 billion. This sequential improvement is driven by pricing gains, expanding margins, increased asset utilization, typical seasonal demand improvement, and our continued focus on reducing cost—all of which are expected to more than offset rising feedstock and energy costs, planned maintenance activity, and expected sequential decreases in licensing revenue. In Packaging & Specialty Plastics, our global pricing strategies—especially for polyethylene—are designed to capture value in key markets, helping to mitigate external pressures. We expect this to drive significant sequential improvement versus the first quarter. For Industrial Intermediates & Infrastructure, we expect normal seasonality and improved margins to provide sequential gains. With that, higher plant maintenance and lower licensing activity in the second quarter are expected to mute these tailwinds. And in the Performance Materials & Coatings segment, we anticipate a modest impact from the Middle East conflict. However, rising propylene costs are likely to delay seasonal demand uplift that we would normally see across building and construction end markets. On equity earnings, several factors will impact Dow Inc.’s sequential earnings expectations. First, we anticipate a headwind from the safe proactive shutdown of our facilities in Kuwait as a result of the Middle East conflict. Lower feedstock availability at our Thailand joint ventures will also be a headwind. Additionally, beginning this quarter, we suspended Sadara equity loss recognition in accordance with U.S. GAAP. The carrying value of all liabilities on the balance sheet reached a total of Dow Inc.’s existing relevant obligations and commitments. This is also reflected in our updated full-year equity earnings expectation which can be found in the appendix of today’s presentation. In summary, predicting global macroeconomic and end market dynamics in this period will continue to be difficult. But we expect more potential upside to these projections than downside. All of this represents our best assessment during a period of rapid change. We will provide updates later in the quarter if there are any significant developments compared to our current expectations. Next, on slide 12, I will spend a few minutes on our consistent approach to disciplined financial management, which remains another core differentiator for Dow Inc., especially in environments like we faced over the past few years. First and foremost, our capital allocation framework remains consistent. Everything starts with safe and reliable operations. In addition, we continue to maintain a solid balance sheet as well as our longstanding commitment to an investment-grade credit profile. On capital deployment, we remain focused on high-quality organic investments, with capital expenditures expected to be at or below depreciation and amortization across the cycle. This includes prioritizing advantaged assets, regions, high-return projects, and investments that strengthen our cost position and earnings durability. With our near-term growth investments behind us, Path2Zero remains our only planned major project. Returning cash to shareholders through dividends and share repurchases also remains a clear priority across the cycle. Looking ahead to the balance of the year, our cash priorities are clear. In March, we received a cash payment from the Nova litigation, and we expect to receive the remaining tax withholdings of approximately $300 million later this year. At the same time, we remain focused on delivering the full benefits of our self-help actions, which we expect to total approximately $1.1 billion this year. This includes the remaining $600 million from our 2025 program, as well as $500 million in growth and productivity improvements from Transform to Outperform. As we mobilize the teams and complete several assessments in the immediate term, we expect to demonstrate a significant portion of the in-year value in the second half of this year. We will also continue to take a disciplined approach to working capital, making prudent trade-offs to support customers and operations while protecting our cash position as earnings improve. This was evident in the first quarter as we saw a year-over-year improvement in working capital of greater than $300 million. Importantly, all of this is underpinned by our strong liquidity position and well-laddered debt profile, with no substantive maturities until 2029. We have approximately $14 billion of total liquidity, inclusive of cash on hand and committed bilateral credit lines. Our revolving credit facility was recently renewed through 2030, and our committed accounts receivable securitization includes the recent renewal of our European facility through 2029. We also ended first quarter with over $4 billion of cash on hand. This liquidity positions us well to manage through macro or industry volatility without compromising our near-term priorities or Dow Inc.’s long-term strategy. Our intentional actions give us confidence that Dow Inc. can continue to navigate the current environment, invest in the right opportunities, and deliver sustained value to shareholders across the cycle. Next, I will turn the call back to James R. Fitterling to provide closing remarks on slide 13. James R. Fitterling: Thank you, Jeffrey L. Tate. As I look at slide 13, it really captures how we position Dow Inc., not just for this quarter or this year, but for long-term value creation through the cycle. First, even in a disrupted industry environment, we are well positioned to navigate market dynamics, which was apparent in our first quarter results. Our order books were solid in January and February, and we saw a sharp positive inflection in March, and we expect that to continue throughout 2026. As a result, the positive momentum from announced pricing actions across every business and every region is taking hold and building. At the same time, our mix continues to shift toward higher-value sales, including functional polymers where Dow Inc.’s differentiation clearly shows up in our “pound for polyolefins” benchmarking. We published this peer benchmarking today on our investor relations website. This annual process provides important insights into our performance and that of the broader industry, and it is what ultimately led to Dow Inc.’s actions to effectively reset a competitive benchmark through Transform to Outperform, which is underway. This year’s results demonstrate that Dow Inc. is delivering consistent outperformance in many areas. This includes superior performance in our advantaged polyolefins portfolio, as well as outperforming the peer median on EBITDA growth for downstream silicones across all markets. That is not accidental. It is the result of disciplined execution and a focus on value. Our teams understand Dow Inc.’s strengths and have aligned our R&D and innovation to the areas of our portfolio where Dow Inc. wins and our customers value it the most. Second, we have focused relentlessly on building long-term agility and resilience. We are acting thoughtfully but decisively to improve the quality of our portfolio and improve our long-term earnings. And we are not backing off. Transform to Outperform is already driving new value that is additive to near-term market upside. We are leveraging our strengths to enable faster, more efficient operations, improve innovation, and modernize how we serve our customers in high-value markets. At the same time, we are seeing tangible benefits from decisive portfolio actions, including the completion of our incremental investments in high-growth areas of our portfolio, as well as the shutdown of higher-cost upstream assets in Europe that will begin later this year. And with a revised timeline, our Alberta project will enable growth and resilience in high-value applications like pressure pipe, wire and cable, and food packaging. We remain confident that Dow Inc. can capture outsized growth in these markets for years to come, which will create additional value for shareholders. And lastly, foundational to everything we do is the financial discipline and flexibility that we have built. That discipline matters. It is what allows us to be steady when others are reactive and to keep investing when it counts. So when we say Dow Inc. remains a compelling investment opportunity, we say it with confidence, grounded in actions. We entered 2026 in a strong position and we remain on solid footing. Our long-term vision, our strategic priorities, and the steps we have taken to navigate a challenging down cycle inflected in a way that positions our company for stronger, more resilient growth for years to come. I am incredibly proud of how Team Dow Inc. has navigated all the challenges that we have encountered over the years. They have adapted quickly to changing market signals while staying focused on cash generation and improving margins. Thank you for your continued interest and support of Dow Inc. I will now turn the call back to Andrew Riker to get us started with the Q&A. Andrew Riker: Thank you. We will now open the call for questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Operator: Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. We kindly ask that everyone limit themselves to one question. Your first question comes from the line of Hassan Ahmed from Alembic Global. Your line is live. Hassan Ahmed: Morning, James and Karen, and congratulations to both of you on your new roles. A question around the timelines associated with the normalization of supply chains in a post–peace declaration sort of environment, and also the sustainability of some of these pricing initiatives, particularly for polyethylene, that you have announced. It seems that, in a no–facility damage environment, it would take at least probably three quarters for supply chains to normalize. Then there are questions around how much damage to facilities has actually been done, what impact that may have on the availability of supply, and the availability of feedstocks as well. And in a higher oil, higher naphtha pricing environment, would rationalization be accelerated? Would love to hear your views about the sustainability of pricing and timelines associated with normalization, particularly as consensus estimates seem to be factoring in a V-shaped normalization of these supply chains. James R. Fitterling: I will take a shot, and then I will ask Karen to talk about the pricing. When I was at CERAWeek at the very beginning of the conflict in early March, I mentioned that we did some modeling at that time that it would be 275 days or longer for the supply chain disruption to unwind. And a lot has changed since then. There have been more attacks in the Middle East. More assets have had to be shut down. This week, the last cargoes of crude to go to refiners landed at refiners. So the way I look at that is the first ripple effects of the shutdown of the straits hit the shores this month—two months later. And we do not have any sign that the straits are going to reopen. In fact, any ships that have attempted have been turned back. The straits moved over 130, probably close to 150 cargoes a day—very different cargoes: very large crude carriers, LNG cargoes, marine-packed cargo for moving plastics, bulk chemical shipments, refined fuel shipments. All that stopped, and all that tankage is full and sitting in the Arabian Gulf. And so we have to clear that, and I just gave you a pretty good estimate of what it takes to clear it and get it out to market, and then you have to get vessels back in and get them offloaded. You are going to have to get a lot of empty vessels back in the Gulf before you can restart plants because the plants are at tank tops. When we looked at it, we said shipments that go out of the straits are going to be prioritized. I do not think it is very likely that petrochemical and plastic shipments will be prioritized first. I think it is more likely that crude oil, fuel, fertilizers would be prioritized first because those affect national security and food security for a lot of countries. You have got repairs that have to be made. In some cases, the repairs may be made because of the duration of this before the straits reopen, so if there is anything good here, you have got some time to get repairs made before the straits reopen. But you have to have human capital, and you have to be able to get the equipment in that you need to repair some things. The 275 days I mentioned was the logistics unwind from talking to our logistics providers. We were going into this in March, at the end of February, with low inventories, pricing momentum, and good order books. We had 3% volume growth sequentially in the first quarter, and now we are seeing a tick up. So I think everything is poised for strong demand and really tight supply, and I think that bodes well for price and outlook. Karen S. Carter: Exactly, and on the pricing—thanks for the question—I think we should go back to January and remember that you had $0.05 in January. Then in March, in relation to the Middle East crisis, there was another $0.10 settlement. If you look at ACC data for the month of March, the way I would calculate it, it was a record month. Demand has remained steady, but both exports and domestic sales set second-highest month ever records. Then, if you look at overall total sales, it was also a record as well. Industry operating rates surged to 97% while DTI declined. So all of that sets us up for strong price momentum. If you look at the announcements, for the month of April we have $0.30 per pound on the table, and then we have another price increase out there for the month of May of $0.20. So when you look at the $2 billion guide that we have for second quarter, there is $0.26 per pound of margin improvement globally that is baked into that, and that is also aligned with our view of the duration. Based on James’s comments around the duration, we believe that there is more room for prices to move up, and as we do that, that will present upside to the $2 billion guide. Operator: Your next question comes from the line of Michael Joseph Sison from Wells Fargo. Your line is live. Michael Joseph Sison: Good morning, and congrats as well to Karen and James. When you think about the $1.75 billion for P&SP in 2Q, can you frame whether that is kind of a mid-cycle EBITDA or a peak EBITDA? And then when you think about the sustainability of these integrated margins into 2027 as supply chains come back, where do you think we could end up post all this? James R. Fitterling: Karen, do you want to take it? Karen S. Carter: Sure. I will go back to the $0.26 per pound integrated margin improvement that we expect to get here in the second quarter. That is mid-cycle, perhaps a bit above mid-cycle. It is important to go back to the impact of this, which is really 3x what we saw in 2021 from Winter Storm Uri. There, you really did see us move over about a six-month period to mid-cycle and above prices. So my response is that if it is mid-cycle, we are moving to peak levels. But with the supply shock overnight, that is why you are seeing the ramp and price increases go faster than even what we saw in 2021. And again, as I indicated in my last answer, we expect that this environment is going to continue in alignment with the duration of the recovery, which we believe is going to take six months to 18 months to resolve. Operator: Your next question comes from the line of Vincent Stephen Andrews from Morgan Stanley. Your line is live. Vincent Stephen Andrews: Thank you. Good morning, and I echo the sentiment on the leadership transition. Could I ask, James, if you think when we get to the other side of the conflict, there could be any changes in the cost curve on a sustainable basis, and in particular, whether you think Europe’s position can improve at all on the other side? And then, in the nearer term, how are you thinking about the profitability of your own European assets over the course of the next couple of quarters? Do you think prices will improve enough to reset profitability there, or how are you thinking about it? James R. Fitterling: Good morning, Vince. On Europe, a couple of things are having an impact right now. The tightness in the marketplace from the shutdown of the straits is not just the inability to move product, but the magnitude of the impact. About 20% of Middle East oil production was shut in with the straits, and about 40% of Asian naphtha production was shut in through the straits. You saw the effect of that being force majeures in Asia of the high-cost producers because they could not get feedstock. On top of that, we are seeing in China restrictions on the refiners. They are being forced to produce fuel and jet fuel at the expense of something like naphtha, and that is going to continue to keep pressure on the availability of naphtha there. That has helped in Europe. Europe has a little bit closer access to some naphtha and they have some refining capacity. I would say the biggest help on margins right now has been the tightness in byproducts. You are starting to see positive byproduct credits in the crackers. As you know, a naphtha cracker makes one-third ethylene and two-thirds byproducts, so byproduct credits can be a big contribution to improved margins there. I think it will hold, obviously, through second quarter and third quarter. Longer term, a lot is going to depend on decisions that countries and people make. I talked about 40% of Asian naphtha and 90% of Japan’s LNG coming through the straits. I think it is logical to expect that countries are going to step in and make some changes like we saw after Russia–Ukraine when the Germans worked hard to diversify and get five LNG facilities going to diversify their natural gas supplies. You are going to see some things like that. Those will obviously take time to shake out. You cannot get any of that in place in a one- to two-year period, but there will be decisions that will be made that will have a longer-lasting impact. On Europe, we will return to profitability. Karen, maybe a little bit on margins and demand there. Karen S. Carter: Demand for our assets definitely has moved up. The pro-nap spread has widened. We have more flexibility from a cracking perspective than any of our peers in the region. So we have increased our operating rate, and we are helping to fill the gap from a supply perspective that you just referenced, James. We anticipate that margins in the second quarter are also going to go up in Europe for us. James R. Fitterling: I think Europe will be under pressure when Middle East supply comes back because with that being shut in now, it has to be supplied from domestic Europe. When that comes back, the cost position in Europe will move back. So I do not think it changes our long-term outlook on Europe. I think it gives us a little breathing room in the short term and some time to do things wisely and get it shut down in a really smooth fashion. Thanks, Vince. Operator: Your next question comes from the line of Jeffrey John Zekauskas from JPMorgan. Your line is live. Jeffrey John Zekauskas: Thanks very much. A two-part question. The export price of polyethylene from Houston today is about $1,775 a ton FOB, but the delivered price to Asia for polyethylene is less than $1,300 a ton. Can you describe what is going on in terms of why our general export price is so high but Asia seems to be a weaker region for pricing in the scheme of things? And for Jeff, could you let us know what the relationship that you expect between operating cash flow and EBITDA is in 2026, and what the real cash commitments are to Sadara? James R. Fitterling: Karen, do you want to touch on what is going on with Asian prices of polyethylene? Karen S. Carter: Yes, thanks for the question. What I can say is that our prices around the world are going up. The export price is the indication of real demand, not local price, and as James just indicated, in China in particular they are starting to restrict the feedstock that is going to petchem production. So we continue to expect prices there to go up as well. Jeffrey L. Tate: On the cash side of things in terms of operating cash flow and EBITDA, we entered and exited first quarter with a very strong cash position at slightly over $4 billion. As we look at our outlook for not only second quarter but for the full year, we continue to see not only the self-help actions but also all of the activities related to our pricing momentum building as we work our way through the year and through the quarter. With that, we would expect our cash conversion rate to steadily improve as we go from one quarter to the next. We are in a really good position to see that operating cash flow and free cash flow increase from a cash conversion perspective. In terms of your question around the Sadara cash commitments, I would like to make a couple of comments. You will notice that in first quarter, Dow Inc.’s cumulative equity losses for Sadara reached $1.4 billion. This matches our existing relevant obligations and commitments. Accordingly, under U.S. GAAP, we are in a position to suspend further recognition of the Sadara equity losses. The $1.4 billion of commitment that we have from a relevant obligation perspective is comprised of $1.2 billion of debt, approximately $100 million related to our revolving credit facility, and approximately another $100 million related to our letter of credit. Specific to your question around the cash commitments for 2026 through 2038, that would be approximately $100 million per year. Operator: Your next question comes from the line of Kevin William McCarthy from Vertical Partners. Your line is live. Kevin William McCarthy: Thank you, and good morning. James, one of the most common questions that we field from investors is along the lines of assessing the durable supply-side impacts from the conflict. Would love your thoughts on that subject in terms of physical damage to assets in the Middle East, new plants that we thought might be starting up that are in fact unable to do so, and you also made a comment that you would expect increased rationalization of assets because of the conflict. How would you frame out the lasting impact as opposed to the impacts related to feedstock and traffic through the strait? James R. Fitterling: Yes, Kevin. I do not have all of the insight to what has happened there, but I can go based on the incidents that I am aware of and things that have been shared that are public. I think most of the attacks were relatively limited. We saw information about, for example, the East–West pipeline in Saudi where a pump station was attacked. We saw some situations in Kuwait where some upstream assets were attacked. In most of those cases, they have the capabilities, the people, and the wherewithal to get that repaired and back up. So if you look at what I said about 275 days plus to reopen the straits and get things back to normal, I think a lot of that is going to be able to be repaired within that time frame. You had the situation in Qatar with the LNG plant. What got hit there was a very critical piece of equipment that takes two and a half to three years to rebuild, and then, of course, it has to get installed. That is the most significant attack that I have heard of, and there is not a lot that I think they are going to be able to do to fix that quickly, but that does not have as much impact on the petrochemical side of things. Talking with our partners, I think they are actively working on repairs, and I do not hear anything from them that leads me to believe it is going to extend longer than the duration of this logistics constraint. Operator: Your next question comes from the line of Patrick David Cunningham from Citi. Your line is live. Patrick David Cunningham: Hi, good morning. Thanks for taking my question. Could you perhaps walk through any impacts of the conflict on maybe the 10% to 15% of non-polyolefin derivatives that are exposed to some of these tightening market dynamics, and where you might see the biggest potential for additional export opportunities or advantaged footprint taking advantage of some of the higher margins? James R. Fitterling: Ethylene glycol has probably been the biggest impact of all of it. You see that already showing up in the response and what is happening, and those should be able to repair quickly. It is also one of the things you see in the results with Kuwait’s earnings in the first quarter—remember Equate has operations in Canada and Texas, so they have a global footprint on MEG. They are able to supply their customers and also take advantage of the price increases, and that more than offsets the situation that they have to deal with locally. They will be able to get that back out and moving once the roadblock clears. On propylene derivatives, there are some—obviously, we have some in the polyurethanes business that will be impacted. There is some polypropylene that will be impacted. In polypropylene, you had different downstream demand dynamics—autos being slow, appliances slow—which takes a little demand pressure off polypropylene. So we have not seen the same kind of dynamics there. Karen S. Carter: On the EO side and MDI, we are working to get those prices up above the cost increases. MEG prices are moving up as well. On the silicones and siloxanes side, there is less impact from the conflict. There, I would just highlight that prices are moving up as an early indication of what we are seeing on anti-involution in China, which we believe is a positive sign. We are working to move prices up across the board. Most of it is because of the Middle East crisis; within silicones and siloxanes, it is a bit of a different story, but prices are moving up as well. Operator: Your next question comes from the line of Frank Joseph Mitsch from Fermium Research. Your line is live. Frank Joseph Mitsch: Thank you, and let me offer my congratulations to James and Karen. Coming back to Sadara, could you speak to the future of what your expectations are for Sadara over the next couple of years? Can you speak to whatever damage may have been sustained so far to that facility? And also, Jeff, when you were speaking to the changes on a GAAP basis for Sadara—that unit had been running at a negative $120 million or so per quarter in equity earnings to Dow Inc.—I would imagine that might have been higher had you not made the adjustment to GAAP. Can you comment on that? Thank you. James R. Fitterling: I will take the first part. One of the things I will continue to do as Karen takes over the CEO role is finish up these negotiations with Saudi Aramco on the restructuring of Sadara and trying to address some of the challenges that we have faced there. I think the asset itself has sustained a little bit of damage. Most of it is pretty straightforward, and we are able to manage it. A lot of what was fired at that coast was intercepted and protected very well. A few stray things got through, but we have a good team on the ground, and they have gone through all the damage assessments, and they will be able to get things back up and running. Our focus is going to be on getting the restructuring right, getting the participation of Sadara right. It is not really an operating problem; it is more of a leverage issue and a balance sheet issue that we have to get right, and that is what we are working through with Aramco. As I promised, I will have more of an update for you midyear when we come back for earnings then. Jeff, do you want to comment on that last part? Jeffrey L. Tate: Yes, Frank. In terms of looking at first quarter specifically, you are spot on—the equity loss impact was $115 million. On a full-year basis, we would estimate that to be in the approximately $400 million range from a Sadara impact perspective for Dow Inc. Operator: Your next question comes from the line of David L. Begleiter from Deutsche Bank. Your line is live. David L. Begleiter: Thank you. Good morning, and again to James and Karen, congrats on the new roles. Karen, back to 2Q guidance: what does that $0.26 of global margin expansion imply for the $0.30 you have announced for April and the $0.20 for May? Does that include a portion of those or all of those? Karen S. Carter: It includes our April price increase that is on the table, but it does not include May. So May would present upside to the guide that we have in second quarter. Operator: This concludes our question-and-answer session. I will now turn the conference back over to Andrew Riker for closing remarks. Andrew Riker: Thank you, everyone, for joining our call, and we appreciate your interest in Dow Inc. For your reference, a copy of our transcript will be posted on Dow Inc.’s website within 48 hours. This concludes our call. Operator: You may now disconnect.
Operator: Thank you for standing by, and welcome to the Honeywell First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's call is being recorded. I would now like to hand the call over to Mark Macaluso Senior Vice President of Investor Relations. Please go ahead, sir. Mark Macaluso: Thank you. Good morning, and welcome to Honeywell's First Quarter 2026 Earnings and Outlook Conference Call. On the call with me today are Honeywell Chairman and Chief Executive Officer, Vimal Kapur; Honeywell Aerospace Technologies President and Chief Executive Officer, Jim Currier, and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information on this website that may be of interest or material to our investors. Our discussion today includes forward-looking statements that are based on our best view of the world, and of our businesses as we see them today and are subject to certain risks and uncertainties, including those described in our recent SEC filings. This morning, we will review our financial results for the first quarter of 2026, provide guidance for the second quarter and discuss our full year outlook. As always, we'll leave time for your questions at the end with Vimal, Mike and Jim. With that, it's my pleasure to turn the call over to Vimal, who will begin on Slide 3. Vimal Kapur: Thank you, Mark, and good morning, everyone. Honeywell delivered strong results in the first quarter, building on the momentum from 2025, despite a complex geopolitical backdrop and temporary mechanical supply chain constraints in Aerospace. Orders grew 7% organically on the strength of our Building and Industrial Automation segment as well as in petrochemical and refining verticals in Process segment. Including the orders growth in Aerospace, we drove backlog to over $38 billion with book-to-bill above 1.1. Sales growth was robust across Electronic Solutions and Aerospace, [indiscernible] aftermarket services in Building Automation and gas and LNG in Process Automation and Technology bolstered by our innovation and new product engine. We expanded margin 90 basis points to over 23%, driven by pricing discipline, productivity and accelerated stranded cost removal ahead of the Aerospace spin. All of this drove 11% adjusted earnings growth in the quarter, demonstrating the strength and agility of the Honeywell operating system. We also made tremendous progress on the portfolio transformation that began in 2023. We announced the sale of our Productivity Solutions and Services and Warehouse and Workflow Solutions businesses, respectively, which we expect to close in the second half of 2026. We are also excited to announce that now we expect to complete the Honeywell Aerospace spinoff in the third quarter on June 29, marking the final step in our transformation. All of the acquisitions, divestitures, spin-off and simplification effort over the past 3 years have positioned both Aerospace and Automation for right future as independent leading industrial companies. Despite the strong start to the year, we are taking a prudent approach to our guidance given the uncertainties surrounding the conflict in Middle East. We remain confident in our ability to drive accelerating growth in the second half as our backlog supports a pickup in growth in Process Automation and Technology. We will continue to closely monitor the situation and provide any further updates if the situation changes materially. Before we get into the details, I want to thank all our employees for their focus, commitment and dedication throughout our multiyear transformation. The future is bright as we set both businesses and gear to thrive with the right strategic focus, and capital allocation priorities that will drive value for our customers, employees and shareholders. Let me turn to Slide 3 to discuss the progress on our portfolio transformation. As I mentioned, we are progressing on the final separation milestone with the Aerospace spinoff now expected to complete on June 29, just over 2-months away. The leadership team for both Honeywell and Honeywell Aerospace are in place and already executing for our customers today. In March, we successfully raised $20 billion of Aerospace spin financing while delivering strong investment-grade credit rating of A3, A- and BBB+ with a positive outlook from Moody's, Fitch and S&P, respectively. Proceeds from the financing will be used primarily to redeem Honeywell debt, the majority of which has been completed as of quarter end and to fund a cash to the Aero balance sheet. Aerospace also announced a groundbreaking supplier framework agreement with the U.S. Department of War to rapidly increase the production of critical dense technology through a $500 million commitment. Honeywell was among the first tier 1 supplier to sign an agreement of its kind, and we are honored to support the U.S. and allied forces with these increased production capabilities. This agreement demonstrates the criticality of Honeywell Aerospace to national security interest and supports a multibillion-dollar revenue opportunity. Turning to Automation. We amended an agreement to acquire Johnson Matthey'’s Catalyst Technologies business, which [ adjusts ] the total consideration and extends the date to close the deal to the end of July. We continue to believe the combination of the business with our capability in Process Technology will unlock future growth by broadening our portfolio, growing our installed base and creating a more integrated offering for our customers. As I mentioned, we announced -- we signed an agreement to sell Productivity Solutions and Services to Brady Corporation and Warehouse and Workflow business to American Industrial Partners, in two, all cash transactions. These businesses are well positioned to grow profitably under highly capable new leadership with deep industry experience. And for Honeywell, the sale allow us to further simplify our portfolio alongside the planned separation from Aerospace. Following these sales and spin, we will have a more cohesive portfolio focused on three principal end markets. [indiscernible] to share much more about our business with the investment community at our upcoming Investor Day for both Honeywell Aerospace and Automation business in June, both companies have exciting future ahead. Before we get into the details, I want to discuss our outlook for Process Automation and Technology in light of the current Middle East conflict, let's turn to Slide 4. In quarter 1, the Middle East conflict drove a roughly 0.5% impact to revenue for all of Honeywell, most notably in Process Automation and Technology given the energy exposure and presence in the region. Clearly the situation in the Middle East is evolving rapidly, and we hope for fast resolution to the conflict. However, our guidance assumes the conflict persists through the end of the quarter and the resulting logistics and shipment delays cost a roughly 1% impact to revenue. We continue to effectively manage through this with the safety and well-being of our employee being the top priority. Despite the conflict, demand continues to be strong for differentiated Process Technology on a global scale. We have secured over $2 billion in project wins over the past 3 quarters, including for LNG, refining and petrochemicals and sustainable aviation fuel across U.S., Brazil, Africa and Middle East. These wins include both rebuilding of the impacted facility with the key customers, including Qatar Energy LNG and new expansion projects helping further reinforce the growth outlook for PA&T, securing a long tail of high margin services and software opportunities. Notably, in November last year, Dangote Petroleum Refinery and Petrochemicals selected Honeywell to supply advanced technology services, proprietary catalyst and equipment to help double production capacity at Africa's largest refinery in Nigeria. In addition, Dangote will license Honeywell's Oleflex Technology, which converts propane to propylene and Honeywell's Petrochemical Technology to produce linear alkylbenzene or LAB, a key ingredient in detergents for household needs. With this agreement, the customer will nearly double its production of polypropylene which supports the manufacturing of packaging materials, consumer goods and industrial products and once at full production will operate once of the world's largest LAB plants. As a follow-up of this award earlier in April, we announced that Dangote also selected Honeywell to provide Connected Services, Advanced Digital Performance Monitoring and Operator Training at the same refinery. This will help customers like Dangote improve operational performance, increase asset reliability and enhance their workforce ultimately unlocking greater value for their facility. On LNG, we recently signed agreement to provide integrated liquified natural gas pretreatment and liquification solution for Commonwealth LNG planned export facility in Louisiana and next decade's Rio Grande LNG project in Texas through an agreement with Bechtel. We expect strength in our LNG vertical to continue given the additional projects we expect to be awarded in quarter 2. Longer term, we expect the favorable crack spreads in petrochemical and refining will generate incremental catalysts and services demand to maximize performance of our customers' plant in addition to needed repairs and modification related to rebuild. Once the conflict stabilizes, we expect the industry will benefit from pent-up demand and more stable feedstock supply, enabling better plant utilization rates. Despite the near-term disruption Process Technology orders increased double digit, driving a 22% increase in PA&T backlog. We remain on track on expected second half ramp as LNG and large modular equipment deals convert to sales in the back half of the year, which will be followed by new catalyst demand in 2027. So while we acknowledge the challenges the business faced over the last few quarters, we are encouraged by the resiliency of orders growth and backlog, which will generate a strong runway as we progress through 2026 and into 2027. I look forward to sharing more with you during the June Investor Day. Let me now turn to Slide 5 to talk more about Aerospace growth trajectory in 2026. We continue to see strong Aerospace demand across commercial OE, commercial aftermarket and defense space, which is driving sustained orders growth of 28% over the last 12-months, which drove roughly $19 billion Aerospace backlog, a 20% increase from the prior year and 1.1 book-to-bill in the first quarter. Against this backdrop, our mechanical supply chain over-delivered in the fourth quarter of 2025 enabling double-digit organic sales growth. However, certain critical suppliers experienced temporary constraints to start the year, which led to slowdown in January and February and lower output and sales growth. Output improved considerably in March, our highest revenue month for the quarter, making us confident that our supply chain efforts will produce better results moving forward. Given the significant amount of demand we see in Aerospace portfolio, Honeywell has invested more than $1 billion over the past 3-years into expanding the capacity and resiliency of our supply chain. Our 2026 guidance incorporates the continuation of this elevated level of spending focused on [ on-boarding ] new suppliers, developing internal capabilities and assisting our supply partner with engineering and operation. The strategy drove double-digit output growth for 14 straight quarters prior to quarter 1, and we are confident on getting back to the trajectory in the near term. Given the progress exiting Q1, our history of recovering from supply chain constraints and continued positive demand trends, we are maintaining our Aerospace guidance of high single-digit organic sales growth for the year. As you can see on this page, the outlook is consistent with historical linearity in the business, as we typically experience a sequential ramp throughout the year. To further support this ramp, Electronic Solution deliveries are meeting accelerating defense requirements, and we are investing in a new capacity necessary to ensure we can continue to do so. In the first quarter, Electronic Solutions sales grew double digit. With that, I will now turn the call to Mike to go through Honeywell's first quarter results and 2026 outlook in more detail on Slide 6. Mike Stepniak: Thank you, Vimal, and good morning. In the first quarter, we successfully navigated the difficult geopolitical and macroeconomic environment while exceeding expectations for both segment margin and adjusted EPS. Sales grew 2% organically, led by growth in Building Automation and Aerospace Technologies, and pricing and execution remains strong across the portfolio, fueled by new product introductions. On a segment basis, Building Automation surpassed our expectation once again in the first quarter with sales up 8% organically across both solutions and products. Sales growth was led by strong demand for new products and momentum across the high-growth data center and healthcare verticals. On a regional basis, sales in the Middle East and India were both up double digits. Building Automation also delivered strong orders growth, up 9% with double-digit growth in projects, services and fire products. Aerospace sales grew 3% organically, with commercial demand and increasing global defense needs, supporting growth in commercial OE, commercial aftermarket and defense and space. Underlying demand remains robust. But as we discussed on the previous slide, 1Q results were adversely impacted by temporary supply chain headwinds in mechanical products. On profitability, Aerospace segment margin expanded 20 basis points from the prior year to 26.5% aided by pricing, productivity and favorable mix. In Industrial Automation, sales were up 1% organically in the quarter. Solutions grew 7% led by robust Services demand in measurement and strong performance in Warehouse and Workload Solutions. Products declined slightly primarily in Productivity Solutions and Services, but was partially offset by continued strength in Sensing. Notably, Industrial Automation orders were up 10%, highlighted by strength in China and recovery in Europe. Finally, Process Automation and Technology sales were down 6% organically in the first quarter. This was driven principally by timing delays in refining catalyst reloads and automation service upgrades, including impacts related to the conflict in the Middle East. Project sales were flat as elevated demand in LNG was offset by delays in process automation. However, the orders momentum continued in Process Automation and Technology with double-digit growth in Process Technology in the first quarter, following very strong order growth in the fourth quarter of 2025. In total, Honeywell orders grew 7% organically with broad-based demand, resulting in book-to-bill above 1.1 and 15% increased backlog. On profitability, segment profit increased 6%, while segment margin expanded 90 basis points to 23.3% with margin expansion in all 4 segments. This was principally led by Industrial Automation, which expanded 260 basis points and Process Automation Technology, which expanded 200 basis points from pricing and productivity actions, a strong result in Process Automation and Technology despite the top line volatility. Adjusted earnings per share of $2.45 was up 11%, driven primarily by higher segment profit and lower share count. Foreign currency provided a modest benefit and below-the-line items were favorable primarily due to higher pension income. You'll find additional information on the first quarter adjusted EPS bridge in the appendix of our presentation. Running out the results, we ended the quarter with nearly $100 million of free cash flow, down from $200 million last year. The benefit of higher operational income was offset by timing of collections in the Middle East and inventory headwinds in Aerospace, given the mechanical supply chain dynamics. Collections have improved meaningfully in April, and we remain confident in our full year outlook. On capital deployment, we returned $1.8 billion to shareholders through roughly $1 billion of share repurchases and $800 million of dividends while funding over $220 million in CapEx to drive future growth. Let's now turn to Slide 7 to discuss our second quarter guidance. We anticipate second quarter organic sales growth of 2% to 4%. Aerospace should improve sequentially from first quarter, driven by ramping OE production rates and higher defense spend, supported by incremental improvements in the supply chain, while Process Automation Technology will be slightly weaker than first quarter due to incremental pressure stemming from the Middle East conflict. Both Building Automation and Industrial expect to be roughly in line with their full year outlook for these businesses. We expect segment margin to be in the range of 22.2% to 22.5%, down 10 to up 20 basis points, led by pricing and productivity actions that we expect will largely offset rising inflation and unfavorable mix in Process Automation and Technology due to timing of high-margin catalyst shipments and the impact from the Middle East. We are also seeing an acceleration in the stranded cost takeout ahead of the Aerospace spin. On the segment level, we expect strongest margin expansion in Building Automation, while Aerospace margin will be roughly flat. Adjusted EPS is expected to be $2.40 at the midpoint, reflecting a higher effective tax rate in the quarter, amounting to about $0.16 headwind. On a normalized tax basis, EPS in the second quarter would be roughly $2.55 at the midpoint of our guidance, driven by higher segment profit and higher expected pension income. Slide 8 provides a look at the second quarter dynamics, I just described. We expect growth from roughly $0.06 of higher segment profit, while lower below-the-line expenses will drive a similar benefit of $0.04 to $0.07 due to higher pension income, partially offset by increased repositioning costs. But the main item to note is the $0.16 headwind from a higher tax rate of approximately 21% versus 16% in the second quarter of 2025. Nevertheless, we still expect our full year tax rate to be approximately 19%. The impact from the share count reduction and foreign exchange translation will be roughly $0.01 each. Additional below-the-line details are available in the appendix of the presentation. With that as the backdrop for the second quarter, let's turn to Slide 9 to discuss our full year outlook. We're maintaining our organic growth outlook of 3% to 6% despite the temporary headwinds we encountered in the first quarter. We expect strength to continue in Building Automation, while Industrial Automation will continue to recover in Europe and China. Process Automation Technology should be roughly flat for the year as order visibility and robust backlog levels delivered a strong second half. Finally, in Aerospace, as I mentioned earlier, our full year guide of high single-digit growth remains intact, driven by improvement in our supply chain observed in March. We expect to continue to deliver strong operational execution driven by pricing discipline, productivity actions and earlier-than-expected stranded cost takeout. In the first quarter, this allowed us to deliver strong margin performance while navigating near-term volatility related to material cost inflation, mechanical supply chain headwinds in Aerospace and impact from the Middle East conflict. While we outperformed our expectations in the first quarter, the ongoing geopolitical situation warrants prudence. And we are, therefore, maintaining our full year segment margin guidance of 22.7% to 23.1%. Our guidance continues to include the results of PSS and WWS until the transaction close. It also assumes a continued ramp in Quantinuum investments. And while we expect to de-consolidate the results of Quantinuum in the second quarter, we are not adjusting our segment margin or adjusted EPS guidance at this time to reflect this. There is also no change to our free cash flow guidance for the year. Let me now turn the call back over to Vimal to wrap up before Q&A. Vimal Kapur: Thanks, Mike. We are pleased with our first quarter results with segment margin and adjusted earnings per share exceeding expectations. Looking ahead, we are successfully navigating an uncertain geopolitical backdrop with the strength of our resilient business model approach and rigor of our Honeywell accelerator operating system. We are tracking ahead of schedule on our separation milestone with the Aerospace spin-off now expected to be completed on June 29. I'm very excited to be on the [indiscernible] of this formation of 2 leading pure-play public companies and witnessed a long runway of value creation both businesses will deliver. We look forward to hosting investors at our upcoming Honeywell Aerospace Investor Day on June 2 and 3 in Phoenix and our Honeywell Investor Day on June 11 in New York City. These events will provide an excellent opportunity to share our strategy and long-term growth expectation. With that, Mark, let's take the questions. Mark Macaluso: Vimal, Mike and Jim are now available to answer your questions. [Operator Instructions]. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: [indiscernible], this is the last quarter of Honeywell as is. But I just wanted to just maybe just try and get a bit more information on the supply chain challenges, especially in such a low volume quarter. So just -- it's obviously a very popular inbound question we're getting from investors. So any more details on that? And kind of measures in place to try and solve this problem? James Currier: Nigel, this is Jim Courier. Just to give you a little bit of color and commentary around the supply chain challenges. Typical historical patterns are such that we normally have a slower start at the first of the year, particularly as we exited a very strong fourth quarter at 13% output growth for Aerospace. What I would tell you is that the start of the quarter, however, was more acute in terms of the decline versus what we had anticipated. And we recognize that this issue at the end of January and early February, and it was a very acute transitory issue specifically with some key suppliers in the mechanical space that adversely affected both our engines business and our Control Systems business. And when I say acute, we can actually identify down to specific outlines within the portfolio that were impacted. The point being, however, is that we started to see the recovery as we deploy the resources accordingly and we started to see that recovery in the March time frame, and we're seeing that momentum carry itself over into April, which gives us the confidence in terms of our forecast that we have of mid- to high single-digit growth for the second quarter. Nigel Coe: Okay. That's great. And then just on the 2Q margins, you're forecasting quite a step down Q-over-Q. And you talked about some of the productivity and obviously getting ahead on the stranded costs. Just wondering any more details on how to think about margins by quarter, why they'd be coming down Q-over-Q? And I think you called out Aerospace flat year-over-year. I just want to make sure that was the case. Mike Stepniak: Yes. Nigel, this is Mike. So our margin expansion framework for the year remains the same. So we talk about [ 20% to 60% ] for the year. 50 bps to 90 bps expansion operationally. We have 30 bps drag from Quantinuum. What's happening sequentially versus the first quarter, first, operationally, nothing is changing. We're doing extremely well on stranded cost takeout, that's ahead of plan. Pricing will be above 3% again. So feel good about what we're doing on pricing and the teams are progressing well. What's happening in the second quarter sequentially, we have, I would say, a mix pressure from catalyst sales or lack of catalyst cells in the second quarter. And it also gives us a little bit of pressure year-over-year. But as you remember, last year, second quarter was our strongest quarter on catalyst sales in the year. So on total year, I don't see any pressure to what we guided. In fact, I feel more confident that we'll deliver that 20 bps to 60 bps. We just have to get through the second quarter. In Aerospace, we talked about roughly being for the year at 26%, and that's kind of where it's going to be for the year. Vimal Kapur: I'll also add that the loss of revenue we're having in Middle East is also high-margin revenue. So that just has associated margin pressure because of services software, which has impacted the most due to disruptions there. So that becomes the additional driver because it's kind of high dis-synergies associated with that. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start off maybe with the PA&T organic sales ramp through the year. Help us understand kind of how we should be thinking about that? It sounds like you're still thinking sort of flattish for the year as a whole on organic sales, which is consistent with your prior guidance, but obviously a much tougher first half. So maybe sort of flesh out for us some of the main moving pieces and how that organic sales growth trends from here in the year? . Vimal Kapur: So essentially, I think the only change since we provided the guide has been the Middle East situation and we lost revenue, as we indicated, about 0.5% of Honeywell total revenue in Q1 and about 1% in Q2. What we feel very strongly about is our backlog in the business continues to grow. Not only we had a strong booking in Q3, Q4 of second half of last year, but also printed a very strong orders number in Q1 of this year, and trends remain very, very robust for Q2, which gives us a very high confidence of second half ramp of the revenue of high-single or PA&T segment. Therefore, it's just going to be first half is, as you've seen the actual results of Q1 and then forecast for Q2, they get offset by strong performance in the second half. So net-net, the overall year being flattish, we remain very confident on that. The backlog supports it, the historic linearity supports it. So there's not much out of the way assumptions we have made in this forecast. Mike Stepniak: And Julian, there is also just continues to be more pent-up demand for the second half. We're seeing a lot of requests from customers in the Middle East. So I'm confident this demand is coming and like Vimal said, from a backlog standpoint, we still have a lot of conversion happening sequentially that's going to happen in the second half. So quite excited about that opportunity. Julian Mitchell: And then just secondly, back to Aerospace. I just wondered if you could give us some update on what you're seeing kind of real time in the commercial aero aftermarket side of things and whether you have moderated your outlook at all for the second half or Q2 on things like flight hours or departures that type of thing? That would be helpful. And on the supply chain issue, just lastly on that, is there any help you can give us on kind of specific product types that were most affected by the supply chain issue? James Currier: Yes. So specifically, Julian, to the product type, I'm not going to provide specificity around the actual outlines themselves other than say that it was very acute and we could attribute it to a couple of outlines specifically within the Engines and Power Systems business. As it pertains to the commercial aftermarket and any implications on a full year basis, right now, we saw no impact in Q1 as a result of the conflicts, and we see negligible potential impact in Q2 that's going to be overcome-able. I think the point that I would highlight, however, is that the demand is exceptionally strong, and our growth is constrained by supply and not demand across the board, and any impacts that we see in terms of flight hours in the Commercial segment tend to have a trailing impact in the Aerospace business, as flight hours go down, we start to see as it works its way through the ecosystem, it's anywhere between a 3- to 6-month delay before we would see something within the Aerospace business. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe just a follow-up on the last question. On the commercial aftermarket. Jim, any way you could delve into that a little bit more, talking about your Middle East commercial aftermarket exposure? How do we think about it on engine mix within business aviation, APUs on commercial, powered by the hour on that 3- to 6-month lag comment, where would you see the most volatility? And as a follow-up, on Aerospace margins, as we look at Q1 solid start, 26.5%. How much of an impact was the supply chain? And do we see any puts and takes from asset sales or mix in that Q1 figure? James Currier: Sheila, a couple of things I'll talk to you on the commercial side of the aftermarket, particularly out of the Middle East. Again, as I mentioned, our growth is limited by supply, and not about the demand. Now having said that, we are watching very closely fuel prices, the increase in fuel prices and how much longer they will persist across the board. But we're not seeing any related demand impacts. And power by the hour programs for us, there's a smaller revenue stream within the overall aftermarket portfolio, as compared to time and material and repair and overhaul portions of our business overall. The one point I wanted to highlight, and you mentioned it about business aviation we've actually seen very strong resilient growth in business aviation flight activity, even in light of the higher fuel prices, and it actually grew much better than what we saw in the commercial air transport. And as you know, that is a part substantial part of our portfolio in terms of business aviation within the aftermarket and part of the overall revenue of our Honeywell Aerospace. The one thing I would also add is just on defense. So as we see the conflicts that are occurring, the two key words to remember are going to be around replenishment and sustainment, replenishment around the aspects of missiles and munitions, furthering increasing the magazine capacity that exists not only for the U.S. but for our allies abroad. And then with the usage of aircraft in theater and how we are positioned, we're continuing to see very strong demand in terms of sustainment and support of those operations. Sheila Kahyaoglu: Great. Can I just add the margin question. Can we just -- can you talk about the solid Q1 margins. How much of an impact was supply chain? Was it negative? And any positive onetime items in there? James Currier: As you know, our mechanical business, we actually -- our mix was much more favorable Electrical versus Mechanical and that produced a tailwind for us in Q1, even despite of our lower volume leverage in the quarter. Now as our output will increase throughout Q2 and be more of a mix around mechanical due to the recovery that we anticipate will occur, you'll start to see that fluctuate, and you'll start to see it being a little bit more normalized. But the focus area I would apply is full year. You do see fluctuations quarter-to-quarter, very mix dependent. But on a full year, we expect modest expansion for Honeywell Aerospace. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: Good morning, everyone. I just want to say at the outside here, I don't recall any other time in Honeywell's history where you've had more portfolio moves at one time that you've been orchestrating as well as navigating all the geopolitical issues. So the fact that you can reaffirm guidance here is impressive. I did want to understand -- I know it's early, and I appreciate that you've -- you're assuming the conflict last through the second quarter. Can you size for us what the Middle East rebuild opportunity is at this point? Maybe not just give us some dimensions and qualitative what areas you'd be active in? Vimal Kapur: Yes. First of all, Deane, thanks for your comments on portfolio transformation. I would say that with the announcement of the firm date of the Aero spin on 29th of June and completion of transactions for both businesses, which were held for sale, puts us in a position now, Honeywell will be a pure-play automation company, well positioned for its future. So I really feel good about what we have accomplished over the last 2 years. To your question on Middle East, I would say that I see that coming up in three different phases. The first phase is obvious that the services required to get the plants up and running. That work has not yet started. The situation has normalized to a point that we are being requested for that. So there are a few facilities which got hit during this conflict. So they are still -- there's no real activity in those sites. Now after that phase is over, it probably will take -- typical plant start-ups can take 8 to 12 weeks then we really expect the refurbishment of some of the facilities, which have been impacted. The one where Honeywell equipment is there, specifically in Process Technology, we have some known issues. We are already working with the customer, and that can show us an incremental demand in second half of the year as the things become more normalized. And finally, as the oil price remain elevated to now $100 or above, the forecast generally suggests that the supply side disruptions won't end so soon because the normalization is going to take likely much longer, which then bodes well for the overall spreads for the product for our customers, which will -- which should support the more demand for services and catalyst in the times ahead. So all in, I would say the best way to put it forward is that near-term headwinds are already reflected in our numbers. And long term, the trend suggests that it's going to be a favorable outcome for Honeywell and more broader for the process industry. Deane Dray: That's really helpful. And just as a follow-up on that last point on the impact of $100 oil to UOP, in particular, there's -- were pushouts of catalyst reloads. But you also said that the spreads remain favorable. So just what's the impact on UOP near term? And then as we see some normalization? Vimal Kapur: Yes. So as you saw, I just mentioned in our earlier conversation that we remain very, very convicted on the fact that we'll have PA&T Process Automation Technology, second half at high single digits. That's driven by the two facts. One is our backlog is very strong due to the 3 successive quarters of order booking and then [ Q2 ] was also looking very, very robust at this point. And then we do expect the catalyst demand favored by the favorable spreads. So all things being equal, we remain very confident of the second half performance for Process Automation Technology business due to a combination of backlog and catalyst demand coming ahead. Mike Stepniak: The only to just add that the margins will improve as well in the second half for the business, given better mix, more volume leverage and strong pricing. Operator: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I'm sorry to beat a dead horse on this Aerospace issue, but I just have one more follow-up on this. Like when we look across the 3 subsegments of commercial aftermarket, commercial OE and defense and space, which were impacted by the issue in the first quarter? And how should we think about the path to improvement within those 3 pieces into 2Q? James Currier: Nicole, this is Jim. It actually impacted all of 3 end market segments. When I talk about specific outlines within our Engines and Power Systems business, it was both commercial and again, very acute. It impacted both Commercial and it also impacted Defense Engine outlines. And then some of that, obviously, being that the supply base is the same for commercial and defense and that same supply base is supporting aftermarket and R&O repairs as well. Those same outlines then were affected from an R&O standpoint in terms of being able to deliver into the aftermarket, both from a defense standpoint as well as on a commercial. And again, it was highly acute and highly specific in the engines and Power Systems business. But again, the mechanicals also affected us slightly as well on our control systems business. Nicole DeBlase: Got it. Okay. So the improvement into 2Q should be kind of broad-based across those 3 pieces? James Currier: That is precisely correct. Nicole DeBlase: Okay. Understood. And then just on the order trends, Curious what you guys saw in the 7% organic growth if you were to kind of parse that out across your shorter cycle and longer cycle businesses? And any interesting trends throughout the quarter? Vimal Kapur: Yes. So order -- the overall orders reported are 7% growth. Orders growth was led by Industrial Automation, up 10%, which is a combination of both long and short cycle. Building Automation also had a strong quarter, 9% orders growth. Process and Automation Technology was up 3% and Aerospace was up 6%. So I would say across the board, it's broad-based strength in the orders. On the short cycle, Nicole, I would say that specifically for Automation side, Building Automation performance remains exceptionally well. As you have seen that this is fifth or sixth successive quarter, we are printing high single-digit growth. Not only the demand remains robust. So it continues to perform well through our new product introduction and perform better than market. Industrial Automation also the demand is shaping up well. Initially, when the start of the year, we had expressed concern on demand of short cycle in China and Europe, that certainly is recovering, which is very positive for us. We'd also see short-cycle demand in U.S. I think that's where Industrial Automation business have some pockets where we have to do more recovery, but we are trending in a very right direction. And as we have observed the Industry Automation results, I do expect that business to start performing more like low single-digit growth. Once we take out the 2 businesses which were held for sale out of our revenue forecast, I'm just saying the RemainCo business it's trending very nicely towards low single-digit [indiscernible] second half of the year. So short cycle, I would say, overall strength is favorable. On the Process market, I would say it's being clouded by the war and the disruptions, and it's just hard to separate the reality of the demand versus the disruption caused by oil prices, supply shortages, ability to do shipment. It's hard to kind of separate the facts versus reality and provide an absolute comment there. Mike Stepniak: Yes. I would just add that we're expecting short cycle to accelerate in the second quarter. It will be mid- to high single-digit growth. So we feel good about short-cycle right now. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: Just a question on Building Automation. Clearly, it has been one of the best businesses for you for a while. At the same time, some of your competitors, I think, seem to be sort of waking up a little bit. How do you view a competitive environment in this market in areas like fire? And how sustainable is your leader -- clearly at AHR. I mean your software presentation was fantastic. Sort of -- I understand why you feel confident that maybe just expand what is we're seeing on Building Automation? How is competitive environment developing, as I said, given that some of your competitors are waking up. Vimal Kapur: Thank you, Andrew. I mean, I would say that, look, we remain in our guide more conservative because we always [ cite ] Building Automation at mid-single-digit plus and we are performing high-single. And as I had mentioned during our Q1 earning call -- in earnings calls in earlier in the year, that we don't want to always assume we will keep taking share. but we have been constantly doing that, which is good news for Honeywell. I would say the competition by our business model is sell product through channels. We actually compete with large multinationals on a very limited basis because projects business in Building Automation is just about 15% of the overall segment. So what the headline base is, some of the peers, which are publicly reported companies, our overlap with them from a portfolio perspective is not very large. Our competition is midsized companies, which vary by each region. We have set up companies we compete in fire and BMS and security in U.S. We have different set of people we compete in Europe, different set of people we compete in China, and that's the benefit in this business that we are benefiting from fragmentation of the market. We are going on the strength of our new products, and our common supply chain. And we believe that our organic growth engine, new product and innovation [indiscernible], including Forge is working extremely well. And the quarters are shaping quite well ahead. The near-term demand remains strong. So we do expect that the trend what you have observed over the last 4 to 5 quarters should remain intact in the times ahead. Andrew Obin: And with the divestiture of the Warehouse Automation and Handheld Devices I mean, clearly, the Sensors business is becoming much more core and front and center. Could you just sort of parse out what you're seeing there? And what are the trends in key verticals there? Vimal Kapur: Yes, Andrew. So clearly, now Industrial Automation is positioned as a Sensing and Measurement business. I'm really pleased on finally, we found a very clear strategy in the business. I would say that our position there in three broad end market sensing, in aerospace, medical devices, industrial equipment, that's position 1. Position 2 is our metering business in utilities and position 3 is gas detection on all environments, be it oil and gas, be it semiconductor and more broader in industrial. The end markets are strong in each one of these areas I mentioned. And our job is to benefit from these fragmented industrial automation market in Sensing and Measurement and build a better position as we did in Building Automation over the last 3 to 5 years. That's a task ahead of us. Our strategy is working. Our performance is improving every quarter progressively. And as I mentioned, that I do expect that second half gets slightly better, and we remain very optimistic on the performance for 2027. Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Yes. Vimal, can you give a little more color into the improvement you saw particularly in IA margin in Q1. The margin improvement was impressive. I know you've talked about a bigger focus on productivity and [indiscernible] ahead of separation in that segment, and in PA&T. But a bigger fixed cost take out in IA. So maybe you can update us on what you've been doing and or how much improved pricing versus cost is helping as well? Mike Stepniak: Sure, Mike, I'll start and I'll ask Vimal to add some color to it. I think IA is going to be a margin expansion driver for us for the next year or so. With the separation of the [indiscernible] businesses. We saw a lot of opportunities structurally just to simplify the business from a cost standpoint. And the team got after that cuase quite early. So you'll continue to see the benefit as we go through the year. Also pricing for us has improved. I think the team has done a really outstanding job in terms of understanding the inflation, working with the customers to manage it and improving pricing. So that's the second piece. And then finally, I would say NPI, the team has been on NPI for the last 18 months, and we're starting to see those NPI hitting the market, and that's helping us recover share where we lost share. So all around, a really good story on Industrial Automation and will continue to be a source of strength for us this year and next year. Vimal Kapur: Yes. I mean, I think the only thing I'll add would be the pricing story is very strong in Industrial Automation, but also more broad-based and across Honeywell. We signaled the pricing between 3% to 4%, and it's more trending towards upper end, more towards 4% versus 3% and how inflation is shaping up I expect that trend to persist, which is going to help us continue to expand margin expansion as we have guided. But I overall performance, I think I have nothing more to add to what Mike said. Andrew Kaplowitz: And then, Vimal, maybe it's a little early for this question, but just focusing on some of your customer conversations as the Middle East conflict has played out here. And given your relatively big exposure now to LNG, do you sense a need for more energy security now or maybe more local-for-local investments. So maybe you have a more robust LNG cycle? Like what are your conversations like around that? Vimal Kapur: Very, very bullish on LNG cycle, I would say, Andy, the 2 businesses we acquired in the last 18 months Liquefaction business from [indiscernible] and Sundyne business, they're performing extremely well. The demand continues to remain strong by the fact we very correctly mentioned not only in U.S. there's more capacity being built to serve the known demand. There's additional capacity being asked now for diversification. [indiscernible] think about those demand being in places like Africa, which was not on the map of LNG business, but they have a lot of gas. So people are considering projects there. We have a lot of inbound requests from that part of the world. And clearly, the refurbishment will be required in Middle East to the damaged infrastructure, which will be the -- which was not a planned demand because this was not something we planned for. So all in, the LNG Liquefaction business and our overall Honeywell LNG story in terms of automation story, our software capabilities is there, with the Sundyne having very specialized equipment for compressors and pumps for LNG, we have a very neat proposition, and it is going to remain a highlight of RemainCo Honeywell. It will remain for next few years a high-growth vertical based upon the demand I have seen over the last few months. Operator: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: So I really like Slide 4. Obviously, it shows like how geographically diversified your project wins have been over the past year. I'm curious, as you kind of think about that high single-digit ramp in the Process side of the business. How do you -- how are you guys underwriting the potential risk to that second half implied guide? Vimal Kapur: Joe, these are very firm projects. There are -- sometimes the demand of these projects can get shifted due to FIDs happening and not happening. But in this case, the LNG backlog is very strong, in particular and some of the new demand, which have come from Africa for refining capacity, there's a natural case there to build more fuel infrastructure in Africa because it never had one, and there's a big refinery by Dangote, which is one of the largest refineries. So those are very, very firm demand, which makes us confident on a very, very limited uncertainty in our backlog. And that's why if you see our confidence factor on high single-digit growth for the overall Process segment is very high. We are not making any assumptions of unknown demand the linearity and supported by our backlog conversion is the basic fact on which we are forecasting this. Mike Stepniak: And Joe, we've been talking about it for almost a year now. We always had that backlog. The backlog improved. Those are all projects which went to FID, meaning they're invested, there is cash behind them and they're ready to go. So like Vimal said, this is a very solid backlog that's going to start converting in the third quarter. Joseph Ritchie: Yes, that's great to hear. And then -- and then maybe just touching on the Building Automation business. I just came back from being a data center [indiscernible] the last couple of days. And clearly, that's a part of the business that I'm sure is growing significantly. I'm sure we're going to hear more about this in June, but maybe just help kind of highlight like how you're thinking about the potential opportunity for your business specifically as it sells into data centers? Vimal Kapur: Yes. So we continue to improve our share of demand in data centers every quarter progressively. And where we have done a great job is really moving into Tier 2 data center providers. I think there's always a lot of conversation of hyperscalers, but increasingly, Tier 2 providers are becoming very, very relevant, not only in U.S., but I'm also talking about Europe and Asia, and that's where our segment performance is very strong. So I expect that we continue to ramp up our volumes in building automation and data center, but interesting development is not Joe, that we are actively working on liquid cooling for our Sensors business because if liquid cooling trend is true, it requires more sophisticated controls compared to the traditional HVAC air-based control. And that's where Honeywell technology is going to be very, very relevant. So our Sensing business is actively working with other liquid cooling providers, which names are well known. And we are also actively working for power generation for some of the data center, which are behind the meters. We have seen a trend where behind the meter power capacity is being set up and our traditional control and automation capability is very unique in that space, because think about it, we always did power plant within a refinery within a paper mill. That's not new for us. And now power plant happens to be in the data center, which is our natural capability. So I would say Honeywell penetration in data center now continues to improve, and we remain bullish on our revenue growth coming from the segment, not only in Building Automation, in the years ahead, it's going to help also Industrial Automation. And depending on some of the projects in the U.S., it may also help Process Automation business. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Unknown Analyst: I wanted to ask a question on on Aero. Just the cadence of growth intra-quarter. I think you mentioned it being acute in terms of challenges in January, February. But obviously, the full quarter closed out at, I think, 3%, 4% organic growth. It implies maybe the exit rate in March is back to where you expected in the second quarter. I just want to get a sense of that. If you can just give us a little bit of that intra-quarter cadence. James Currier: Yes. This is Jim. A couple of comments around that. The cadence within the quarter, I think it's important to note that 50% of the quarter is actually delivered in the third month. And therefore, the momentum that we saw and which you saw in March and carrying that momentum going forward into April, the point being is that our starting point in terms of the first month is substantially better than what we saw in the first month of the first quarter, i.e., January. So as that momentum continues and has laid itself over into April, we expect to see that continued progression throughout the quarter. And even though it's early in the quarter, and as I mentioned, 50% of the quarter is delivered in the third month, what we're seeing in terms of recovery gives us the confidence in terms of what we expect in year-over-year growth for the second quarter. Unknown Analyst: Okay. And then just on the Process Automation side, we noticed, obviously, the aftermarket was down 10% in the quarter. Projects have been relatively stable. Just wondering if you could just talk about Process Automation aftermarket trends. I assume -- I think you said that Middle East conflict, nothing really embedded in the back half. Correct me if I'm wrong, but if you could talk about how that impacts the aftermarket of the Process Automation? Vimal Kapur: Yes. So most of our lost revenue was as a practical matter was aftermarket because this is where our ability to ship the product related to service migration project, lot of on-site services we provide, which are contractual, you can't just simply go there. So it got impacted incrementally by about $50 million round numbers in quarter 1, and we have forecasted about a 1% impact there. Overall, when we started the year, we had indicated the demand being very muted for services and catalyst in process thing got disrupted with a conflict, but the elevated oil price now supports strong demand on the other side of it. So we'll see how the business performs. But we think that the quarter 1 and quarter 2 were the bottom, and we should see more sequential improvement in the second half of the year in the business. Operator: Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: Just one question on the portfolio, but I guess, multi-part. Something wonky in your calendar you're calling June 29, Q3. I'm wondering on the PSS sale, if you could give us a little bit of color on whether or not there's tax leakage, on warehouse. I'm wondering if you could tell us what the 2025 EBITDA was? And then finally, I think you said Quantinuum would be consolidated in Q3. I guess that implies your selling a stake or there's a round that you won't participate in that will take you below 50%? Maybe you could give us a little color on that also. Vimal Kapur: There were four questions there. I'll try to see wrap up here. So I think on the tax leakage part, PSS, I'd like to let Mike talk about it. Mike Stepniak: Sure. So there won't be any tax leakage related to these two transactions. And obviously, we'll have more more to share on that as we progress and complete the transactions. But probably, you'll see it in the third quarter. Vimal Kapur: Both these transactions, Jeff, I want to look ahead and not look back. These are behind us. These businesses are in safe hand with the rightful owners, and I think we have gone through a public auction process and found the best buyers for both of them. I think that's what I can share. On Quantinuum, I'll let Mark... Mark Macaluso: Yes. I think, Jeff, not a great answer for you, but we're subject to rules restricting our ability to share really any further details beyond what you've seen in the release from Wednesday. Jeffrey Sprague: Okay. Understood. And then on the date, so 29 was technically the third quarter for us? Vimal Kapur: So the first day of the quarter 3, happens to be on June 29. I know I was equally surprised by [indiscernible]. Yes, I was confused for a couple of days, but now I've settled. Operator: Our final question this morning comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: Is the supply chain disruption that weighed on Aero growth in January and February, primarily a function of inability to ship because maybe some of your suppliers are struggling to keep up with the pace of demand? Or is it because your Aero customers overbuilt inventory towards the end of last year and they were effectively de-stocking early in the year? James Currier: Chris, this is Jim. It was absolutely not any de-stocking that is happening with our customer supply base. It was purely supplier-centric the lack of certain critical piece parts from high critical suppliers that did not achieve the volume outputs necessary to allow us to deliver the specific outlines within Engines and Power Systems and Control Systems portions of the business. Christopher Snyder: And then just a quick follow-up on Aero. Is there any color you could provide on back half margin expectation, just all the moving parts between the mix shift, obviously, some of the commercial OE price negotiations that you've talked about? And then maybe lastly, any sort of integration tailwinds from case just just kind of -- what do we expect there in the back half? James Currier: Yes. I mean, what I would say is, on an annualized basis, you will see us being modestly up on margin expansion. -- quarter-to-quarter, you do see variability largely driven by mix across the board and mix within the mix of what we are delivering. But on a full year basis, we'll be modestly up for Aero margins. Vimal Kapur: Okay. As always, I would like to thank all our shareholders, our customers and all the Honeywell future shapers around the world for the strong first quarter results you delivered. We remain confident in our path ahead, and we look forward to sharing more with everyone in the months to come. Thank you for joining us today, and we hope that you have a great rest of your day. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup, Inc. Q1 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, please press 1 again. Thank you. I would now like to turn the call over to James Zeumer, Vice President of Investor Relations. Please go ahead. James Zeumer: Thank you, Kelvin, and good morning. I want to welcome everyone to today's call to review PulteGroup, Inc.'s operating and financial results for our first quarter ended 03/31/2026. Joining me on today's call are Ryan Marshall, President and CEO; Jim Ossowski, Executive Vice President and CFO; and David Carrier, Senior Vice President, Finance. In advance of this call, a copy of our Q1 earnings release and this morning's webcast presentation have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today. I would highlight that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan. Ryan? Ryan Marshall: I made the following statement to the senior leaders of PulteGroup, Inc.'s homebuilding and financial services operations. In a quarter that grew increasingly more complicated, you delivered exceptional results both operationally and financially. I offer the same thoughts to open this call. In a period that saw every aspect of our consumers' lives impacted by domestic and global events, our discipline, focus, and proven business platform allowed us to deliver another quarter of strong business performance. Financially, our $3.3 billion in home sale revenues, 24.4% gross margins, and lower share count all contributed to driving earnings of $1.79 per share. Supported by the ongoing strength of our operations, we positioned the company for future growth by investing $1.3 billion in land acquisition and development, while returning $360 million to shareholders through share repurchases and dividends. After having allocated $1.7 billion to these activities, we ended the quarter with $1.8 billion of cash and a net debt to capital ratio of effectively zero. Operationally, we were successful in growing our community count, which was an important driver of our 3% increase in net new orders. And as shown in this morning's release, our results benefited from 18% order growth in Florida, as our diversified business platform and exceptional land positions continue to deliver strong results. As pleased as I am with the growth in orders, I am even more encouraged with the fact that many of these homes are build-to-order homes. In the first quarter, build-to-order homes accounted for 43% of net new orders, up from 40% in Q1 of last year. On our last earnings call, we outlined our plans to shift our business back toward our historic mix of 60% build-to-order and 40% spec. This quarter was just the first step in a process that will take several quarters to complete, but I am encouraged by such early success. And finally, I would highlight the progress we continue to make on lowering our spec inventory, particularly our finished inventory. Reflecting actions taken by our field teams, we ended the quarter with an average of 1.4 finished specs per community, which is inside our target range of one to 1.5 finished specs per community. This level of spec inventory allows us to effectively serve those homebuyers needing quick move-in homes, while supporting our strategic shift back to selling more build-to-order homes. Overall, I would say that the first quarter developed as a typical spring selling season, with orders increasing sequentially as we moved through the months. It is difficult to determine what impact global events may have had, but we appreciate consumers were facing higher rates and costs in March. Through the first few weeks of April, demand conditions have remained on track with typical seasonal trends. Still, in the quarter, we experienced strong buyer traffic to our communities, and sold more than 8,000 homes, which says consumers remain actively engaged in home buying. And once again, our diversified business platform allowed us to capture the strongest segments of the business, namely the move-up and active adult buyers. Economic reports talk to the K-shaped economy and how lower- and middle-income families are struggling much more than those in upper incomes. Housing demand over the past two years has been consistent with these dynamics. We saw this play out again in our first quarter results, with both relative demand strength in our move-up and active adult businesses, and option and lot premium spend that continues to average over $100,000 per home. However, on the lower leg of the K, first-time buyers continue to struggle with the challenges of stretched affordability and fear of job loss. Our ability to offer low fixed-rate mortgages and other incentives is certainly helping solve the affordability riddle for some. But this comes at a price, as incentives in the quarter reached 10.9% of gross sales price. Even at this level, I think we have done an excellent job of balancing the need to sell homes, particularly finished spec homes, and turn our inventory, while maintaining higher margins in support of delivering strong returns on invested capital. A critical support to this balance has been our ongoing willingness to adjust our starts pace in alignment with core demand. We again demonstrated such discipline as we started approximately 6,500 homes against orders of 8,000 homes in the quarter. This approach helped us to clear excess inventory, and allowed our communities to more easily sell from a position of strength while still providing sufficient production to achieve expected closing volumes for the full year. While there is uncertainty about how events will develop over the next few quarters, I remain optimistic about long-term housing demand and confident about the strength of our business model. I could draft a long list of our strengths, but would highlight the following three key points. We control approximately 230,000 lots, including 35,000 owned and finished lots, so we have a land pipeline that we believe can meet current sales and accelerate as buyer demand improves going forward. We have a strong market presence across the major markets, and an unmatched ability to serve all buyer groups. We are benefiting currently from having 60% of our business among more affluent Pulte and Del Webb buyers, but we fully appreciate the importance of maintaining the presence of our Sentex brand among first-time buyers. And finally, we have a culture that is committed to delivering superior build quality and buyer experience and to raising that bar every day. Thank you. And let me turn the call over to Jim Ossowski for a review of our first quarter results. Jim? James Ossowski: Thank you, Ryan, and good morning. I look forward to providing a detailed review of PulteGroup, Inc.'s solid first quarter operating and financial results. On a year-over-year basis, first quarter net new orders increased 3% to 8,034 homes with a value of $4.6 billion. Higher net new orders in the period benefited from a 9% increase in average community count to 1,043, while absorption paces decreased by 5% to 2.6 homes per month. I would highlight that the growth in our net new orders was driven by the ongoing strength of our Florida operations. I am pleased to report that orders increased in every Florida market and were up 18% statewide. In addition to gradual improvements in Florida's new and existing home inventories, our strong performance reflects PulteGroup, Inc.'s superior land positions, our ability to serve all buyer groups, and our outstanding leadership teams. Our cancellation rate as a percentage of starting backlog in the quarter was 13% compared with 11% last year. The percentage increase in our cancellation rate reflects the smaller starting backlog we had entering the period, as unit cancellations are actually slightly down in the quarter relative to last year. In the first quarter, net new orders among move-up and active adult buyers were higher by 3% and 14%, respectively, over the first quarter of last year. Net new orders among first-time buyers decreased by less than 1% from Q1 of last year. By buyer group, net new orders in the first quarter consisted of 38% first-time, 39% move-up, and 23% active adult. In 2025, net new orders were 39% first-time, 40% move-up, and 21% active adult. Net new orders benefited from land investments made in prior years as we grew community count across all buyer groups. Home sale revenues in the first quarter were $3.3 billion compared with $3.7 billion last year. Lower home sale revenues for the period were the result of a 7% decrease in closings to 6,102 homes in combination with a 5% decrease in average sales price to $542,000. ASP was down mid-single digits across each buyer group and reflects the generally competitive conditions and elevated incentives that exist in many markets across the country. By buyer group, closings in the first quarter break down as follows: 38% first-time, 39% move-up, and 23% active adult. This compares with a prior-year closing mix of 38% first-time, 41% move-up, and 21% active adult. Based on sales and closings in the period, at the end of Q1, our backlog was 10,427 homes with a value of $6.5 billion. We ended the first quarter with 14,090 homes in production, of which 6,349 were spec homes. As Ryan highlighted, and consistent with our stated objective, we lowered total spec inventory by almost 900 homes from 2025. At quarter end, specs accounted for 45% of homes under construction. Of the specs under production, there were 1,515 finished spec homes, which is a decrease of nearly 500 homes, or 24%, in just the past 90 days. At this level, we are in our target range of having an average of one to 1.5 finished specs per community. Based on the homes under construction and their stage of production, we expect to close between 6,700 and 7,100 homes in Q2 2026. This keeps us on track with our previous guidance on closings, in the range of 28,500 to 29,000 homes for full year 2026. Consistent with the guide we provided on our last earnings call, given land investments made in prior years, we expect year-over-year community count growth of 3% to 5% in each of the remaining months of 2026. Given competitive market conditions and our belief that incentives will remain elevated, we expect the average sales price of second quarter closings to be in the range of $540,000 to $550,000. For full year 2026, we reaffirm our previous guidance of ASP of $550,000 to $560,000 as we expect a higher mix of build-to-order closings in the third and fourth quarters. For the first quarter, we reported gross margin of 24.4%, which is down from 27.5% in 2025. The year-over-year decline in gross margin primarily reflects higher incentives, which were 10.9% of gross sales price in Q1 2026. This is an increase of 290 basis points from last year and is up 100 basis points sequentially from Q4 2025. As we are getting the question more frequently of late, I would note that within our Q1 home sale cost of revenues is approximately $6 million, or 20 basis points, associated with land impairments. Based on quarterly testing, impairments were triggered in two communities and are reflective of today's competitive market dynamics in combination with our ongoing efforts to clear excess spec inventory, particularly finished specs. I am pleased to report that, thanks to a lot of outstanding work by our construction and procurement teams, Q1 house costs were down 5% from the first quarter of last year, to $75 per square foot. Savings were led by lower lumber costs, but we have also achieved savings across a wide array of building products and services. Based on anticipated closing mix and current selling conditions, we expect second quarter gross margin to be in the range of 24.1% to 24.4%. I would note that we expect Q2 gross margins to be the low point for 2026. We are forecasting gross margins to recover in the back half of the year as we benefit from increased closings of higher margin active adult and build-to-order homes. As such, we maintain our guide for full year 2026 gross margin to be in the range of 24.5% to 25%, although likely toward the lower end of the range. First quarter homebuilding SG&A expense of $380 million, or 11.5% of home sale revenues, compared with $393 million, or 10.5%, in Q1 of last year. On a dollar basis, SG&A expense in the quarter was down $13 million from last year, though we lost leverage given fewer home closings and revenues in the period. First quarter SG&A expense was in line with prior guidance, so we are maintaining our guidance for full year 2026 expense to be in the range of 9.5% to 9.7% of home sale revenues. Our Financial Services operations reported first quarter pretax income of $13 million, which is down from pretax income of $36 million in the first quarter of 2025. Financial Services pretax income in the first quarter was impacted by lower homebuilding volumes and reduced capture rate along with lower net gains from the sale of mortgages. Mortgage capture rate in the period was 85%, compared with 86% last year. First quarter pretax income for the Group was $449 million. In the period, we recorded a tax expense of $102 million, or an effective tax rate of 22.8%. Our Q1 tax rate reflects the benefits of stock-based compensation and federal tax credits. Looking out to the remainder of the year, we continue to expect our tax rate to be approximately 24.5%. Our expected tax rate does not take into consideration any discrete period-specific tax events that might occur. PulteGroup, Inc.'s net income for the first quarter was $347 million, or $1.79 per share. In the comparable prior-year period, the company reported net income of $523 million, or $2.57 per share. Earnings per share for the first quarter were calculated based on 193 million diluted shares outstanding, which is down 5% from the prior year. In the first quarter, we repurchased 2.4 million common shares for $308 million, which brings total repurchases for the trailing 12 months to 10.3 million common shares for $1.2 billion. In a separate press release we issued this morning, we announced that our board authorized an additional $1.5 billion for share repurchases, which brings total availability to $2.1 billion. Along with returning capital to shareholders, we continue to prioritize investing in the growth of our operations. In the first quarter, we invested $1.3 billion in land acquisition and development, which was evenly split between the two activities. We ended the first quarter with 229,000 lots under control, which is down approximately 5,000 lots from 2025. We remain focused and disciplined in our land activities, as we look for opportunities to grow our business while achieving acceptable risk-adjusted returns and managing overall portfolio risk. After 24 months of variable housing demand and limited opportunities for price appreciation, land inflation has started to ease. We are seeing land prices stabilize in many parts of the country, and even move lower in individual deals in a handful of markets. Every land deal is different, and A locations are still in demand, but we are finding more opportunities to negotiate improved land terms, be it the price, the timing, or both. In the first quarter, we issued $800 million of senior notes split equally in tranches of five and ten years. We used approximately $600 million of the proceeds to repay existing notes with the remaining $200 million to be used for general corporate purposes. Inclusive of these transactions, we ended the first quarter with a debt to capital ratio of 12.3%. Adjusting for the $1.8 billion of cash we held at quarter end, our net debt to capital ratio was effectively zero. Given current market dynamics, and our expected 3% to 5% growth in community count, we are projecting land acquisition and development spend of $5.4 billion in 2026. Assuming this level of land spend and the expectation that house inventory will increase commensurate with an increasing level of build-to-order home sales, we would expect 2026 cash flow generation to be approximately $1 billion. Overall, it was another very productive quarter for the company. Now let me turn the call back to Ryan. Thanks, Jim. Ryan Marshall: Before opening the call to questions, I will offer a few additional comments on demand conditions in the quarter. Given everything that is happening in the world, demand has actually held up better than might be expected and could certainly improve if global tensions eased and interest rates came back toward 6%. This would be highly consistent with the increased buyer activity we saw developing early in the first quarter when mortgage rates dipped below 6%. Consistent with trends we experienced in 2025, the pockets of home buying demand strength and softness did not change dramatically. Home buying demand in our Northeast, Southeast, and Florida markets generally remained positive. First quarter demand in the Midwest was more variable across the markets than we had been experiencing. That being said, the weather conditions were a bit more extreme, so we will have to see how the trends progress over the next couple of quarters. As I highlighted earlier, our Florida teams continue to operate at a high level as we benefit from a strong land pipeline and experienced leadership teams. Looking out to our Texas and West markets, overall demand trends remain slower relative to the rest of the country, but I would suggest they may be finding more stable footing. Between ongoing pricing actions and incentives, the markets are finding clearing prices where transactions can happen. We still have work to do in clearing some final spec inventory in California and Washington, but I am hopeful we are getting to the end of this tunnel. One final comment I would share on buyer demand: well-positioned communities that offer the right product and a compelling value equation to the consumer are selling homes. From Boston to Naples, and Raleigh to San Jose, consumers are looking for the opportunity to buy homes that work for their state of life and their financial capabilities. Our job is to make sure PulteGroup, Inc. communities meet the requirements. Let me close by thanking the entire PulteGroup, Inc. organization for the great first quarter operating and financial results the company delivered. I also want to recognize our team for their tireless efforts to deliver a superior home buying experience. I am proud to report that our customer surveys are now showing PulteGroup, Inc.'s Net Promoter Score, as measured one full year after the initial delivery of the home, has risen to a score of 65. To put this in perspective, these results place PulteGroup, Inc. among such well-known service leaders as Apple, Google, and Chick-fil-A. It is this type of commitment to our customers and to each other that has PulteGroup, Inc. again ranked among the Fortune 100 Best Companies to Work For. This marks Pulte's sixth year on this prestigious list. Our ranking on this list has never been a goal, but rather an outcome of the tremendous culture we work hard to maintain inside of our organization. Now let me turn the call over to Jim Zeumer. James Zeumer: Great. Thanks, Ryan. We will now open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Kelvin, please open the call to questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As we enter Q&A, we ask that you please limit your input to one question and one follow-up. As a reminder, to ask a question, please press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Your first question comes from the line of John Lovallo of UBS. Please go ahead. John Lovallo: Good morning, guys. Thanks for taking my questions. The first one is, can you just help us with some of the moving pieces in the gross margin walk from roughly 24.4% in the first half to 24.5% to 25% for the full year? I mean, it certainly seems like closing mix is going to be a good guy; sticks and bricks could be a good guy; land may be a little bit better than it had been. Then the incentive load, are you still assuming sort of 10.9% carries throughout the year? Ryan Marshall: Yeah, John. I think you have got all the right pieces there. We are assuming a higher incentive load, but we would expect it to likely come down driven by a couple of factors. One would be more build-to-order and more move-up and active adult business, where we tend to incentivize less. We have also cleared a lot of the finished spec inventory, which we were carrying with a higher incentive load. So, while we would expect the overall environment to remain competitive and the elevated incentive load to stay, the mix of product and consumers that we have coming through could potentially bring the overall number down, which is why we are guiding to the full year staying within our range. You will note that Q2 is going to be a low point for a couple of reasons. One of the big reasons is that a lot of the spec inventory that we sold in Q1 at a higher incentive load are closing—some closed in Q1, and you have got a bunch more that are closing in Q2. John Lovallo: Okay. Yeah. That is really helpful. And, maybe just kind of echoing what you said, Ryan, before. It seems like the spring has actually been reasonably good considering a lot of factors in the market. Most builders have reported orders that are up year over year, indicating a little bit of a better spring despite this background of geopolitical headwinds. The question is, if we do, in fact, get some kind of resolution here to the conflict in the Middle East, do you think we could still have a really good spring selling season and, on top of that, is there a chance that it could get extended a bit maybe into June just given shorter cycle times for many of the builders? Ryan Marshall: Hard to know whether it gets extended or not, John. I think ultimately the consumer will have to decide that. But as I tried to highlight in my prepared remarks, when rates came down to 6%, maybe even a touch below 6%, things were moving along really well. Despite the things that are going on globally, it is still, I think, a very good spring selling season, and we are pretty pleased with what we have delivered and how it has set us up for the full year. I can promise you that we did not have any of the current geopolitical disruption on our bingo card as we laid out our full-year guide and set expectations for how the year would play out. But as we look at the actual numbers for Q1, we are in line with where we wanted to be and where we thought we were going to be, which is the big reason that we are reaffirming our full year. So, all things considered, I am incredibly pleased with how we performed. I am really pleased with how the consumer is behaving. And I think there is bias to the upside. If things can get resolved and rates were to come down a little bit, I think things could get even a little bit better. John Lovallo: That is encouraging. Thank you. Operator: Your next question comes from the line of Alan Ratner of Zelman. Please go ahead. Alan Ratner: Hey, guys. Good morning. Thanks for all the detail, and nice job in a tough market. You know, Ryan, you alluded to this several times, but I was hoping to dig in a little bit deeper on the incentive trends. Specifically, can you talk through the difference in incentives you offer both across price points as well as BTO versus spec? I see they were up sequentially and year over year across the averages, but I am curious if there is any notable difference across those price points or BTO versus spec? Ryan Marshall: Yeah, Alan. There is definitely more incentive on spec broadly. And then there is more incentive as a percentage on first-time spec. I tried to provide some nuance around that in my comments around the K economy. That first-time entry-level buyer is the most challenged by affordability, and that is where we have tried to lean in more in order to solve the affordability equation. I think we have done it pretty effectively. And then when you move into the move-up and the active adult buyers, we are incenting there as well; the types of incentives vary. There is still a fair number of incentives that are going into a forward commitment program that is specifically targeted to dirt sales. So it is not as low as a 30-year fixed-rate mortgage that we would offer on a spec that is complete, but still in the low- to mid-5% range and materially below the current market. And it is locked in for the entire duration of the build cycle. So there is a lot of value that we think is being offered there, and there is a cost to that, but that is factored in the incentive load. So all things considered, we do still expect incentives to remain higher. But given the mix shift in buyers as well as spec to build-to-order, we think the overall incentive load for us as a company will come down. Alan Ratner: Great. Second, I was hoping to ask about your land book. Land banking has become a bit of a hot button topic in the investment community over the last couple of months. You have seen a nice uptick in your share of lots held off-balance sheet, but I know that includes a lot of different things—traditional land options, land banking. Can you quantify for us your exposure to land banking and talk more broadly about how your land banking deals are generally structured? Are you making periodic interest payments? Are they more kind of on the back end in a PIK fashion? Any color you can give would be great. Thank you. Ryan Marshall: Sure, Alan. Happy to go into it. I am going to ask Jim to give you some of the specific details. But before he does, philosophically, the way we have structured our land book for the better part of six or seven years is we want as many lots as we can possibly control with underlying land sellers. And today, that represents well over 50% of our controlled land, controlled with options with underlying land sellers. In our move to go from 50% controlled option to 70%, we knew we were going to need to incorporate some element of land bank, and we have done that. We have maintained a diversified book of land banking partners, which I am very pleased with—the number of partners and the alignment that we have with those partners. And then our overriding focus has been we want risk transfer. So we are looking for the ability to walk away in the event that things go sideways on a single individual transaction. So this overarching belief or idea of risk transfer and risk mitigation is the entire foundation of our land banking portfolio. With that, I will have Jim share a few more details with you. James Ossowski: Sure. Thanks, Ryan. Alan, I will fill you in on a couple of things. As it relates to land banking, of the 229,000 lots that we control, we have about 18,000 with land bankers, so it is about 8% of the book of business. To Ryan's point, what we really want to do is get underlying optionality with land sellers directly. Of the 127,000 lots that we have under option, over 85% of those are with underlying land sellers. So again, it is the vast majority. That is what we task our teams to do—let us go for that first and foremost. If we can supplement it with banking, we will, but we would love to get a deal with people on the ground first. Alan Ratner: Great. That is really helpful. And, Jim, if you have it, of those 18,000 lots with land bankers, can you give a little bit of detail on how those are structured either in terms of average deposit and what the kind of carry is? James Ossowski: Most bankers that are out there today usually request about a 15% deposit on those. And then rates will be in the low double-digit range typically. To give you context, our deposits as a percentage of future purchases is only 7.5% for the whole company, and about $7,000 per unit for the whole company. So the vast majority are at very low deposits with underlying land sellers, but the bankers carry a little bit richer mix. Alan Ratner: Great. Really appreciate the detail, guys. Thanks a lot. Operator: Your next question comes from the line of Stephen Kim of Evercore ISI. Go ahead. Stephen Kim: Thanks very much, guys. Appreciate all that color, particularly on the land side. I wanted to talk a little bit about your free cash flow guide. I believe you said about $1 billion. Now the way I am modeling things, it seems like your net earnings are going to be much higher than that. So I was wondering if you could talk about the free cash flow conversion and what you see as being offset to the net income this year. Is it that you anticipate ending with a meaningfully higher owned land supply than you currently have, or is there something else going on? James Ossowski: Great question, Stephen. There is not an assumption that we have any significant increase in our owned land supply. We have certainly been working down our house inventory in recent quarters as we moved our spec down, but there is an anticipation there will be a little bit more build-to-order that is going to come in the back half of the year as we set ourselves up for 2027. So it is really on the house side, where we see a little bit of an incremental increase. Stephen Kim: I will take that as a real positive, obviously, because it suggests that this is just kind of a temporary thing and the free cash flow conversion should improve once you get over this build of BTO. First, is that in fact the way you see things? And where do you see the BTO mix of, let us say, orders or maybe closings finally reaching your 60% level? Is that something that could be reached by the end of this year, or is this something that is going to take well into next year to accomplish? Ryan Marshall: On the cash flow, the conversion of net income into cash flow is a big focus for us. We believe it is a very meaningful and powerful driver of value for shareholders. I think Jim provided some nice breadcrumbs in terms of where we are going and why it is at a billion. Hopefully there is a slight bias to the upside this year, but as we rebuild that inventory on build-to-order, I agree with you—this is a good thing. It means we are selling homes, and we are selling homes that are dirt. I do think it is a temporary situation. As we move into next year, you would see better, more normal conversion rates from us. As it relates to build-to-order, the target mix is 60/40. We made great progress in Q1. I would expect that to continue as we move through the year. The fact that we were able to reduce so much spec inventory in Q1 is also a powerful driver in that journey. I think it might take a tad longer than the end of this year, but not much beyond Q1 of next year. We will keep you updated as we move. We are going to do this in a measured, balanced way, but we are also not going to drag it out forever. Operator: Your next question comes from the line of Anthony Pettinari of Citi. Please go ahead. Anthony Pettinari: Good morning. You talked about stick and brick costs—I think down 5%—and it sounds like lumber was a good guy there. Lumber has been coming up for the last month and a half. Can you just remind us of the lag in which you would see that? And then related question: with conflict in the Middle East, it seems like we are seeing metal prices and petchem-based building material price hikes out in the market. What would be the lag that you would see some of that in your stick and brick costs? James Ossowski: Great question. First, as you noted, we had a really good first quarter. Our procurement teams have done a great job; house costs were down 5% year over year. As we look out over the balance of the year, we want to reaffirm that our house costs would be flat to slightly down. We still believe that, and that is baked into our guide. On your question on lumber, when will we see that? Usually two quarters out, because the way that we buy the lumber today, those are going to turn into closings two quarters out from now. It inflected higher in recent weeks. The other thing that we are keeping an eye on are fuel costs. We are monitoring that. At this point in time, we have done a good job—when you hear of things like fuel surcharges, we have combated those so far—but in recent weeks, as the cost of fuel started to come down a bit from the highs, we are keeping an eye on it. Again, I will go back to what I said: Q1 was a really great one, and even with some of those headwinds for lumber, we still believe we can be flat to slightly down for the remaining quarters. Ryan Marshall: And, Anthony, in terms of metal and some of the other related costs, we would see that being later in the year before we would see an impact. One of the things that our procurement teams have worked with our suppliers and trade partners on is: let us just take a mock-up of patience here. We are in a conflict. If it continues, there will be real cost increases. But we are not going to overreact to the whipsawing of markets up and markets down based on what is happening on a day-to-day basis from the conflict. Anthony Pettinari: Okay. That is very helpful. Just one quick one on incentives. Without cutting it too finely, were incentive levels fairly steady for the three months of the quarter and maybe the exit rate into April? Or was there any kind of increase or decrease you would call out there? James Ossowski: They were fairly steady across the quarter. It really got down to a community-by-community basis of what we had to offer to move specs, but again, pretty consistent through the quarter. Anthony Pettinari: Okay. That is very helpful. I will turn it over. Operator: Your next question comes from the line of Michael Rehaut of JPMorgan. Please go ahead. Michael Rehaut: Thanks. Good morning, everyone. Thanks for taking my questions. Just a clarification on the incentive question. Jim, when you said kind of stable throughout the quarter, was that on closings or orders? And when we think about a slight dip down in 2Q gross margins, I believe you are saying that is from the fuller impact of the reduction of spec that was transacted three, four, five months ago. I am trying to get a sense of how incentives are still impacting 2Q gross margins from prior conditions and if the comments you just made were more on current market conditions on orders? Ryan Marshall: Mike, no offense, but I think you mixed a few things there. What we talked about is, in Q1, there were spec sales that had elevated incentives. Some of those closed in Q1; some of those are going to close in Q2. It is part of the reason that we are saying that is the low point, which is impacting the guide that we are providing for Q2, and we would expect it to go back into the range that we have guided to for the full year. In terms of whether it was closings or sign-ups, it is probably slicing it a little too thinly. We report the incentives on closings—that is the approach we have been taking, and we are going to stay consistent with that. The incentive load on future backlog and future closings is embedded into our guide. As I have said a couple of times, we are actually optimistic that while the overall environment will stay elevated, we can see incentives come down because of buyer mix and brand mix. Michael Rehaut: Okay. That is great, Ryan. Shifting to the strength that you saw in Florida, I would love to dive into that a little bit. Obviously it was a bright spot for you this quarter. Can you help us understand what is going on in Florida from a broader market perspective in terms of inventory—both on new and existing homes—and how much you think that contributed to the stronger results that you saw this quarter? Ryan Marshall: We are very happy with most of what we are seeing out of Florida, and this has been the third or fourth quarter in a row where we highlighted the strength of the Florida market. If you went back a year ago, I think we were an outlier, outperforming a market that was arguably a little tougher. Florida has continued to get better over the last 12 months, and it is at the best point that we have seen it in a while. In addition to that, the strength and positioning of our communities and the expertise of our teams there have allowed us to outperform what is a pretty healthy market right now. We are happy about Florida. It is not without its challenges. Insurance costs are high. Affordability is stretched there, just like it is in a lot of other places. There have been some recent headlines about affordability in Florida, and I think that is because Florida historically was very affordable. There are some attributes of Florida that are not changing: it is a pro-growth, pro-business state that has a lot of great jobs, a more diversified economy than it has ever had, and no state income tax. So I think there are a lot of reasons why people still want to go to Florida, but I can also understand and appreciate why it is maybe not the best fit for others. Maybe to sum it up: we love our Florida business, and I think this quarter's results are a good demonstration of that. Michael Rehaut: And any comments on the inventory trends across the major markets? That would be very helpful. James Ossowski: We have seen inventory come down in certain locations. Some of the more affordable parts of the state—North Port, Lakeland—are still a little bit elevated, but we have been really pleased that both new and existing have come down in the places where we do business. Operator: Your next question comes from the line of Michael Dahl of RBC Capital Markets. Please go ahead. Michael Dahl: Morning. Thanks for taking my questions. I wanted to first ask about the mix dynamics in the back half of the year. From an order standpoint, we see that mix evolving, with move-up and active adult outperforming first-time. In terms of what you are projecting on the margin in the back half, how much of that do you already have visibility on based on what you have sold over the past handful of months versus an assumption of what is left to sell in the next several months and what that mix is going to look like? James Ossowski: I would tell you it is based on what we are seeing on the sales floors today and what we have out there. Ryan highlighted our Florida business has done really well. Our Northeast and our Southeast businesses, which carry a higher margin profile, as well. So we are looking at what we sold in Q1 and making predictions about what goes out over the balance of the year. There are a lot of parts and pieces that go into it, but the build-to-order mix and the active adult are the two biggest components that will drive the increase. Michael Dahl: Relatedly, we look at starts versus sales and your comments about doing a pretty good job taking down finished spec in the quarter. It sounds like there is a little left to go. In the current environment, if you are within that one to 1.5 per community band on finished spec, are you trying to get down to the lower end right now given what you are seeing in the market and how you think about optimizing profitability? And how does that tie into how we should think about your prospective starts versus order pace? Ryan Marshall: The way I would guide you on that is that we are inside the target range that we want for specs, and we are very comfortable operating at the lower end or the higher end of that range. We want to be inside that range. Beyond that, where we are at in the range will be driven by specific community-level decisions and the type of buyer we are going after and whether it is a true entry-level or more of a move-up type community. That is the reason we give a range on that. We have said we are not going to chase volume. We are going to get our company back to a build-to-order model, which we are doing. We made excellent progress. We have reaffirmed the full-year number. And we are going to be matching starts to sales cadence. So the starts that you saw in Q1 were reflective of the sales that we had in Q4. You will see our starts in Q2 more closely match the sales that we just had in Q1. That is the kind of build that you want to see from us. We are very comfortable with where we are at on what we will start in Q2 and how that sets us up for the full year. I will note a big reason why we have been able to do it this way this year is because we have gotten build times—cycle times—back down to pre-COVID cycle times of less than 100 days. There are a lot of things that are working exactly the way that we have designed our operating model to work. Operator: Your next question comes from the line of Sam Reid of Wells Fargo. Please go ahead. Sam Reid: Thanks, everyone. Wanted to drill down a little bit more on ASP. I believe in the prepared remarks it sounds like ASP was down mid-single digits across all buyer cohorts, which would include move-up and active adult. It also sounds like based on your answer earlier in the Q&A that you might have stepped up some forward rate commitments to those move-up and active adult buyers. Are you also making any surgical price cuts in move-up and active adult as well that we should be mindful of? Ryan Marshall: We look at pricing all the time and make sure that we are competitively priced. Discounts, I think, are an important thing psychologically for buyers today, so we try to have the right relationship between headline price and what incentives are—they are tethered together. There are some communities where we have taken price cuts, and Jim highlighted in his remarks that has been a big driver in the communities where we have had to take impairments. It has typically been the price cuts. Fortunately, it is just two communities, and it was a fairly small number. Hopefully that is indicative that we have made very few top-line major price reductions. Sam Reid: Switching gears to the Financial Services line item. I noticed Financial Services pretax was lower, and I believe one of the reasons you called out was lower gains on mortgage sales. Can you talk about the moving pieces behind that lower gain and whether it is also a function of perhaps a step up in adjustable-rate activity? James Ossowski: Great question. Let me start by saying we are very pleased with the operating performance of our Financial Services organization. They do a great job supporting our homebuilding operations and supporting our customers. On ARMs, they were 9% of all closings in the first quarter versus 7% for all of last year—so a little bit higher, but nothing meaningful. Year over year, a couple of things to point out—and some of this is just timing, and we will expect improvement over the balance of the year. Homebuilding volumes were down. We noted lower net gains on the sale of mortgages as rates ticked up on us; we had lower value ascribed at the time that we do our rate locks. We also had slightly higher expenses as we have invested in people and technology for the year. Again, I think they performed very well in the first quarter, and I would argue it is a little bit of timing, and we will continue to see improvement over the balance of the year. Operator: Your next question comes from the line of Analyst. Please go ahead. Analyst: Good morning, everyone. Thank you for taking the questions. Maybe just to pull on the thread of the build-to-order mix. I think you said from an order perspective, it was maybe 3% higher in Q1 relative to last year. My question is on gross margin. I think you are implying in the second half maybe the gross margin is up 75 basis points, give or take, relative to the first half. It seems the build-to-order closings mix would need to be fairly meaningfully higher if that is the main driver. What exactly is the build-to-order closings mix in the second half, and is there anything else that supports that level of sequential margin improvement? James Ossowski: You will have both the richer mix of build-to-order and, as Ryan highlighted and I said in my prepared comments, as we have gotten more of that finished spec inventory off the books, that will be less influential as you get out to Q3 and Q4. So a little bit of both—build-to-order and then less of these finished specs that came through in Q1 and Q2 for us. Ryan Marshall: It is not as if we have got a gigantic chasm to cross from where we are today to where we are going to be. Q1, we were at 24.4%. We are going to be in that same kind of zip code for Q2 with a heavy load of finished specs that came with heavy discounts. And then to go back to our full-year targeted range of 24.5% to 25%. It is not as if there have to be colossal shifts in margin performance in order to be in the guide that we have given. Analyst: Understood. Thank you. And then secondly, you mentioned easing land prices. How do you think about the timing of what you are seeing in the land market today for when it actually flows through your P&L? And is there a rule of thumb or broad average for Pulte on land costs versus development costs as it pertains to the final lot cost that you ultimately see in your cost basis? Ryan Marshall: The general rule of thumb is 50/50—some markets go 60/40—but a general rule of thumb at 50/50 is pretty good. In terms of timing from when we contract a piece of land to when you start seeing it flow through the P&L, it is typically in the 18- to 24-month range, depending on how lengthy the entitlement process is. So anything that we are contracting today at lower cost, you are well into 2027—late 2027 and beyond—before you are going to see the benefit of the lower land cost. Operator: Due to our limited time, your last question will come from the line of Trevor Allinson of Wolfe Research. Please go ahead. Trevor Allinson: Hi. Good morning. Thank you for taking my questions. First one is on your approach to share repo here. You have got the new authorization out. Your net leverage is close to zero. I think you mentioned earlier that the cash flow headwind from more BTO is somewhat temporary in nature. I want to gauge your appetite for accelerating share repo here, maybe ahead of your cash generation, and then your views overall on leverage versus the roughly 0% you are at currently? Ryan Marshall: Trevor, I would reiterate that we have been incredibly disciplined on capital allocation. Our focus is on investing in our business. That is our number one priority. It is what our shareholders care about. It is what they have entrusted us to do, and that is how we are structuring the business. Then we are paying a dividend, and we are using the share buybacks as a way to return excess cash that is being generated by a really well-running business back to shareholders in a very tax-efficient way. Do we have the ability to do a levered buyback, which I think you are suggesting? Sure, we have got the leverage capacity; you could do it. We do not think it is in the best interest long term of the company. As it relates to leverage—and we have talked about this for the better part of the year—a debt-to-cap ratio will be an outcome as opposed to a targeted goal. We are going to decide the cash needs of the business based on how we are going to grow it: how much land we are going to buy, how much land we are going to develop, how much inventory, etc. We will see how much cash we have, we will see how much debt we need to raise to do that. That is going to be the driver of our debt-to-cap leverage ratios, as opposed to saying we want to be a set number. Trevor Allinson: That makes sense. Thanks for all that color, Ryan. Very helpful. Second one, just on the Midwest. It has been a bright spot for you guys the last couple of years. You mentioned some weather impacts there, maybe also some comp dynamics just given it has been stronger. Are you starting to see any change in relative performance in the Midwest? Ryan Marshall: We are still really happy with our Midwest performance. It has been great and continues to be very good. There were a couple of markets that maybe did not do quite as well as what they had been doing, but it was not widespread across the entire Midwest. For the couple of markets that are maybe a tad slower than what they had been, we are going to keep watching them. The Midwest—and the Northeast, for that matter—actually had a real winter for the first time in a long time. Boston, as an example, I think had snow four or five times. It has probably been at least four or five years since they have had a winter like that. It was a tougher winter season than what we have historically seen. Our Midwest business also tends to be more move-up and active adult, which, as we have highlighted, continues to be one of the stronger consumer groups. Trevor Allinson: Thank you for all the color, and good luck moving forward. Operator: That concludes the Q&A session. With that, I will now turn the call over to James Zeumer for final closing comments. Please go ahead. James Zeumer: Thank you. We appreciate everybody's time this morning. I am sorry we were unable to get through all the questions in the queue, but we will certainly be available for the remainder of the day, and we will look forward to talking to you on our next earnings call. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.
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.
Laurie Goodroe: Good morning, and welcome to Bankinter's First Quarter 2026 Results Presentation. Financial statements were posted with market authorities earlier this morning, and all materials can be found on our corporate website. Please refer to the disclaimer in the presentation and note that this call is being recorded. Today, we welcome our Chief Executive Officer, Gloria Ortiz; and our Chief Financial Officer, Jacobo Diaz. Gloria, over to you. Gloria Portero: Thank you, Laurie. Let me start with the key highlights for the quarter, which confirm the strength of our business model, disciplined volume growth, continued margin improvement, a diversified and resilient income base and best-in-class efficiency and risk metrics. In volatile markets and in an environment of geopolitical uncertainty, that combination is not a nice to have. It is what protects earnings power through the cycle. This quarter, we delivered it once again with growth that is both profitable and controlled, supported by high-quality balance sheet. First, customer volumes increased by 6.5% with customer lending up 5%, retail funds up 1% and assets under management growing by 17%. This is balanced growth. We are growing where we see attractive risk-adjusted returns, and we are doing so without compromising the quality of the franchise. Second, on margins, we continue to demonstrate strong pricing discipline with customer margins at 2.68% and NIM at 1.76%. In other words, we are not buying growth. We are growing selectively with strict pricing discipline. Third, our income sources are increasingly more diversified and resilient. Net interest income grew by 5.5% and net fees by 8%, driving gross operating income growth of 6.5%. Finally, operational excellence and balance sheet strength remain key defining features of Bankinter. We continue to improve our management ratios with the cost-to-income ratio declining towards 35%, NPL ratio below 2% and strong capital levels. All of this translates into profitability and value creation. Net profit reached EUR 291 million, up 7.6% with RoTE at 20%. Let's now go into some detail behind these figures. Customer volumes grew across the franchise, increasing by EUR 14 billion year-on-year. Growth was led by lending and assets under management with deposits stable and improving in mix. Geographically, Spain remains the core growth engine, while Portugal and Ireland continue to add faster momentum off a smaller base. On Page 7, you can see the quality of our core revenue growth. 1/3 of core revenue growth comes from fees, which now represent 26% of core revenues, a clear signal of higher-value client base and a more diversified business model. This is not cyclical growth. It reflects structurally more diversified core revenues and margin management that sustains net interest income even in shifting rate environments. Page 8, key management ratios reinforce the quality of execution behind our results. Improving efficiency, strong asset quality and strengthening capital all confirm that growth is disciplined, risk is tightly controlled and profitability is sustainable through the cycle. Let me now turn to milestones for the first half of the year -- first part of the year. Portugal is a clear success story for Bankinter. Since launching in 2016, we have delivered high-quality growth, doubling our client base, tripling business volumes and transforming efficiency from over 120% to the low 30s. Profitability has scaled strongly on the back of a disciplined and diversified model built on a fully integrated operating platform with strong internal capabilities, reinforced by joint ventures and strategic alliances with partners such as Mapfre, Sonae and Generale. None of this would have been possible without the team. So today, Bankinter Portugal has 884 employees, around 70% of whom have been with us since 2016, complemented by more than 150 new recruits from a younger generation who will help fuel the next phase of growth. Together, they underpin a genuinely scalable and sustainable model supported by digital transformation, applied AI and a clear focus on value creation. On Page 10, earlier this month, we announced 2 complementary and clearly strategic corporate transactions to scale our business in alternative investments. First, we merged our alternative investment fund manager with premium partners to strengthen leadership in direct alternative investments, expand sector expertise and reinforce capabilities. As a second step, we will take a significant economic stake in Access Capital Partners, accelerating our Pan-European expansion through scale, specialization and greater product breadth across investment strategies and geographies. Together, these 2 transactions directly enhance our value proposition while broadening access to alternative products where we already distribute today to more than 15,000 private banking and retail clients across Iberia. Overall, the strategic decision strengthen a high-value capital-light recurring fee franchise, deepening long-term client relationships. And having just reviewed 10 years of growth, delivery and profitable success in Portugal, I have the strong convictions that Bankinter investment is on the same path, building scalable long-term growth and delivering strong value creation for our shareholders. And before handing over to Jacobo, let me briefly frame my view of the current environment. While geopolitical uncertainty has increased in recent weeks, our assessment remains that this will not, in the near term, translate into a contraction in consumption in our core markets. What we are seeing is greater prudence rather than a deterioration in underlying demand supported by solid private sector fundamentals. In this context, our geographic diversification across Spain, Portugal and Ireland continues to provide stability and quality to our earnings profile. And these markets are expected also to be less impacted and to perform better than the European average. So this is all from my part, and it is now over to you, Jacobo. Thank you. Jacobo Díaz: Thank you very much, Gloria, and good morning, everyone. Let me briefly summarize the income statement. Net profit reached EUR 291 million, up 4% quarter-on-quarter and 8% year-on-year, driven by resilient net interest income, solid fees, disciplined cost control and lower provisions. I'll now walk through the key drivers behind each of these lines in more detail on the following pages. Net interest income continues to progress well. NII reached EUR 571 million in the quarter, up 5.5% year-on-year and around 2% quarter-on-quarter on an adjusted day count basis. This is driven by volume growth and improving customer margins and special due to the improvement in deposit cost, which declined by 6 basis points during the quarter, supported by better deposit pricing and mix. On Page 14, let me take a minute to talk about our deposit strategy. Our approach to deposit growth remains disciplined and margin focused. We are actively managing the mix toward higher quality, more stable retail funds while maintaining tight pricing discipline. This focus has meant prioritizing the management of the cost of our deposit base rather than maximizing volumes. During the quarter, we continued to optimize pricing, including actions on digital accounts and a review of deposit spreads for treasury and fixed term deposits. Retail funds declined by EUR 3 million due to a -- EUR 3 billion due to a seasonally softer first quarter as well as active margin management actions. We continue to optimize our funding mix with a lower share of price-sensitive term deposits and a greater share of current accounts supported by our digital strategy. This translates into lower deposit beta, lower funding costs and improved margin resilience through the cycle. Consequently, average retail deposit cost for the quarter continued to decline, reaching 81 basis points. At the same time, digital accounts continue to perform very strongly, increasing by almost EUR 2 billion during the quarter to over EUR 13 billion. This clearly demonstrates that our campaigns remain effective and customer engagement is strong even after the price reductions implemented on digital accounts during this quarter. This is fully consistent with the year-on-year trend shown on the slide, a structurally healthier and more stable retail funding mix with growth in current accounts and a continued reduction in term deposits. On Page 15, turning to fees. This grew 8% year-on-year to EUR 203 million, driven by wealth management activity as well as a strong growth in insurance activity. Q4 '25 included some one-off items, so sequential comparability is not fully like-for-like. Our underlying mix is increasingly value-added and recurring, strengthening revenue resilience. On Page 16, on other operating income and expenses, this also shows solid growth. Equity method, trading and dividend income increased by a combined 18% year-on-year, reflecting the continued diversification of revenues from business such as Bankinter investment, our insurance joint ventures as well as with our partnership with Sonae in Portugal through Universo. Overall, this further reinforces the quality, diversification and resilience of our earnings base. On expenses, Bankinter is well known for its best-in-class efficiency levels, and we want to underline that the improvement we are delivering today is structural, recurring and still has room to improve. Business growth continues to be absorbed without creating structural pressure on the cost base. At the same time, efficiency is not being achieved by underinvesting. We continue to invest in people and technology with applied AI and simplification initiatives already delivering tangible productivity gains. This allow us to grow, invest and keep improving profitability at the same time. And that leads directly to the next slide, which shows how we are maximizing the potential of AI. Our approach is very pragmatic and built on a dual framework. On the one hand, we have toned down CEO-driven priorities, applying AI across software development, commercial process and day-to-day operations. On the other hand, we are pursuing a bottom-up approach, equipping our employees with an increasingly accessible AI tool set embedded in their daily workflows. Together, this supports higher productivity per employee in front and back offices and a lower cost to serve as volumes grow. In short, AI is not a future promise. It is already reinforcing cost efficiency and strengthening the scalability of our operating model and will continue to be a key driver of efficiency improvements in the coming years. Next page on credit costs remains low and well controlled at 32 basis points in the quarter. Other provisions also performing well, down to 7 basis points. Profit before and after tax grew by 8% year-on-year with net profit at EUR 291 million, confirming the resilience of our profitability and our ability to create value through the cycle. Asset quality remains strong and clearly differentiated. NPLs are low, coverage is prudent, and we continue to outperform the sector across all geographies with risk metrics stable, well controlled and with no signs of deterioration. On Page 22, CET1 ratio closed at 12.96%, above our target range and well above minimum requirements. Strong earnings generation comfortably offsets risk-weighted assets growth, giving us flexibility to support organic growth and allocate capital to strategic opportunities like the alternative investment transaction that Gloria referred to in the introduction. Next page. Customer volumes grew by 6%, supporting a 6% increase in gross operating income with well-diversified contribution across geographies. Loan growth remains disciplined and continues to outperform the market, especially in Portugal, Ireland and business banking in Spain. Regarding Spain, Spain continues to see strong revenue growth with pretax profits rising by 10%. While retail volumes softened this quarter due to seasonal effects and tighter mortgage pricing, corporate lending and off-balance sheet wealth management have remained resilient despite market volatility. Regarding Portugal, Portugal marks, as it was mentioned, its 10th anniversary. Growth remains robust. Year-on-year movements in cost of risk largely reflect the one-off gain from an NPL sale last year in the first quarter. Excluding this effect, underlying performance remains solid and well controlled. Ireland also continues to deliver strong growth momentum with volumes up 20%, improving profitability and exceptional asset quality. The NPL ratio remains just at 0.3%. On Page 26, corporate and SME banking continues to grow well above the sector. Lending in Spain is up 8% versus 3% for the market with very strong momentum in international business, where growth reached 17%. In Page 29, in retail banking, our approach remains disciplined and margin focus on both the asset and liability sides of the balance sheet. New account activity continues to be robust with salary and digital account balances growing by close to 50% over the past year, reflecting solid customer acquisition and engagement. New mortgage origination in Spain was lower during the quarter, reflecting pricing discipline in a tight margin environment with compressed risk-adjusted returns. This is consistent with our focus of allocating capital where returns are more attractive, such as in Portugal, where mortgage growth reached 8% and in Ireland, where it grew by 37%. Overall, retail banking continues to prioritize profitability and balance sheet quality over volume at any price. Next page, despite Wealth Management, despite heightened market volatility driven by recent geopolitical tensions, our Wealth Management business continues to prove resilient. Customer wealth increased by EUR 18 billion, up 13% year-on-year, supported by net inflows and a growing high-quality client base. Even in volatile markets, our clients remain invested and continue to allocate savings, reflecting the strength of our franchise and the quality of our customer base with flows that remain resilient through the cycle even in periods of elevated uncertainty. Next page, you can see the same trend with double-digit growth in both AUMs and AUCs, reinforcing the resilient and recurring nature of this business. Finally, let me take a moment to review our ambitions for the year. This first quarter of '26, we have delivered a solid quarter and results fully aligned with our previous guidance, following a disciplined execution with excellent quality of results supported by recurring sources of revenues. The recovery of client margin level to close to 270 bps in Q1 and the improvement of efficiency levels towards our ambitions are the supportive levels of another successful year. Despite the ongoing uncertainty in the market environment, our expectations and guidance for '26 remain broadly unchanged and current levels of profitability are expected to be sustained in coming quarters. We will consider changes to our guidance in the next results presentation with more visibility of our impact on macro scenario of current geopolitical events. We continue to anticipate stable volume growth in line with our initial assumptions while maintaining our disciplined and balanced approach to liquidity and risk. On the lending side, we expect volumes to grow at mid-single-digit rates, supported by a still positive macro environment for all geographies where we operate by a selective origination and a strong focus on risk-adjusted returns. Deposit volumes will be actively managed to preserve comfortable liquidity ratios and balance sheet resilience. Deposit to loan above 100% or loan-to-deposit below 100% are levels that have been committed in the past and will continue to be in the future. Across the group, we expect growth trends to remain broadly consistent with '25 levels and year-on-year for the first quarter, with Portugal and Ireland continued to deliver a strong performance and Spain maintaining solid momentum, particularly in corporate banking. With respect to NII, the continued volatility in interest rates means that visibility over the coming quarters remains still limited. However, current levels of forward curves anticipate potential rate increases that are supportive for NII in coming quarters. We continue to manage customer margin towards the 270 basis points or above. In this context, rather than providing new guidance on NII levels, we remain focused on the levers that we can actively control, which are pricing discipline of the assets and liability, customer margin management and prudent balance sheet optimization. As a result, NII should continue to be driven primarily by volume evolution rather than by changes in pricing or margin assumptions. We expect quarter-on-quarter NII growth during the quarters in 2026. Beyond NII, we remain confident in our ability to deliver high single-digit growth in fee income, supported by our diversified business model and strong customer engagement. Recent corporate transaction on the alternative investment front is a good example of our strategic focus on recurring growth on the wealth management business. At the same time, we remain fully committed to delivering positive operating jaws in 2026 with a cost-to-income ratio expected to decline below 35% for the year, supported by simplification of our business organization and the combination of talent and technological investments. In terms of asset quality, our outlook remains stable. We do not see any signs of deterioration in credit quality, and we expect the cost of risk to remain around current levels. In this quarter, we keep improving our capital position, maintaining strong levels of capital buffers and MREL ratios. And finally, we expect return on tangible equity to remain above 20%, reflecting the underlying strength of our business model and supporting continued attractive value creation for shareholders. Now Gloria, back to you, please. Gloria Portero: Thank you, Jacobo. Well, this final slide captures the essence of this quarter, resilient performance and sustainable value creation. Even in volatile geopolitical and uncertain macro environments, our returns remain high and sustainable, supported by best-in-class efficiency, strong asset quality and solid capital ratios. RoTE stands at 20%. Shareholder value continues to build with dividends up 25% year-on-year. This consistency is not cyclical. It reflects a deliberate way of running the bank, prudent risk management, capital allocation based on risk-adjusted returns and continued investment in efficiency and organic growth. Together, these elements explain why our model delivers consistently and support our confidence in continuing to create sustainable value in 2026 and the years ahead. Well, thank you, and it is back to you, Laurie, so that we can kick off the Q&A. Laurie Goodroe: Thank you both, Jacobo and Gloria. We'll now initiate our live Q&A session. [Operator Instructions] Laurie Goodroe: Our first caller we have is Maks Mishyn from JB Capital. Maksym Mishyn: Two questions from me. The first one is on deposit growth. There was a notable slowdown in the quarter despite several digital campaigns that you've launched. I was wondering what was the reason and how you see the remainder of the year. And the second question is on your expectations for customer spreads for the remainder of the year. If you could just walk us through loan yields and deposit costs for the next quarters, that would be super useful. Gloria Portero: Hello, Maks. I will answer you the first question, and then Jacobo will answer the second one regarding customer spreads. Well, listen, we have very -- the first thing is that we have very comfortable liquidity ratios, as you might have seen in the presentation. I think, in the annex, we have an LCR over 200%. And well, we have a loan-to-deposit ratio below 90%. We have given priority this quarter to actually accelerate the change in mix in our retail funds. You have seen there is quite marked decline in deposits. So we have been reducing the duration of our deposits. And also giving greater weight to more atomized and less sensible deposits. So we feel very comfortable with the liquidity ratios we have. We will continue to work on the cost and sensibility of our deposits in future months. So we will obviously maintain, as Jacobo has said during his presentation, we will maintain our commitment to have a loan-to-deposit ratio below 100% and solid LCR ratios. Jacobo Díaz: Good morning, Maks. Taking your question on the evolution of the customer spread. I guess, first of all, the commitment to reach an average this 270 bps or above client margin spread for the year. And the trends in the lending yields are, I would say, positive in the sense that with the current levels of rates and the expected level of rates, definitely, there is a tailwind in positive repricing. First of all, in our -- in the corporate banking activity that tends to reprice faster. And then, of course, in the mortgage activity in the mortgage book that reprices with a little bit slower, but in a positive way. So in the sense of the lending yield, we should see a slight recovery or a slight growth over the following quarters. In the sense of the customer -- of the -- sorry, of the deposit cost, deposit cost, we've ended the quarter with 80, 81 basis points. We think this is a quite reasonable level where we can be. There might be a little bit room still for reduction, but this volatility in rates might be a little bit challenging for at least the second half of the year. We need to wait and see the evolution of rates. But again, our target is to ensure levels of 270 bps of customer spread. We know that the lending yields are going to be supportive, and then we will manage proactively pricing in the deposit cost to ensure that we achieve this level or even above following or monitoring the current level of rates and the expected rates. Laurie Goodroe: Our next question comes from Francisco Riquel from Alantra. Francisco Riquel Correa: My first question is a follow-up on customer funds. I see that salary and online deposits are up EUR 9 billion year-on-year. Total deposits are up just EUR 1 billion. So that means probably strong outflows in corporate deposits. If you can please comment on the pricing actions, both in retail and in corporates. And also, if you can also comment on net new money flows into wealth management because I don't see that outflows out of term deposits are retained within the bank. And my second question is if you can please elaborate more on the strategy and the return on investment that we should expect from your recent corporate transactions in alternative investments. Gloria Portero: I will answer you the first question because probably it wasn't clear enough. Well, regarding net new money flows, there has been a very strong commercial activity, over EUR 1 billion transformation in -- from deposits to our loans. But obviously, you don't see that movement because the market has detracted more or less the same amount. So this is why there is no movement from December to March. But as I've mentioned, the -- I don't have the exact figure here, but it's between EUR 1 billion and EUR 1.5 billion of net new money in funds in off-balance sheet funds. So -- and with respect, you're right, I mentioned that we are -- what we are doing -- you're right, there has been a drop or outflows in corporate funds because we are prioritizing smaller amount with less sensible to interest rates. So basically, we are growing in payroll accounts. We are growing in SMEs in transactional accounts and also in medium-sized companies in transactional accounts. So we are giving, as I've mentioned, priority to these type of accounts that are transactional and therefore, less sensible to interest rates. But there has been an important outflow as well to off-balance sheet funds of around EUR 1 billion, EUR 1.5 billion. I think -- I hope I've answered. Jacobo Díaz: [ Paco ], taking your second question, I'm not sure if it's -- I took the right way. But basically, I mean, definitely, this business of alternative investment fund is a business that generates a quite high and sustained return on equity. This is a quite attractive business from our perspective. We -- as we had mentioned in the presentation, we want to be the leader of alternative investment in Iberia. Definitely, this will provide sustained high level of fees in the long term. We think there is a huge opportunity in Iberia to progress in the development of these type of products. We provide access to investment of real assets to Spanish and Portuguese people in terms of retail clients. Of course, this is not a product for everybody, but we think there is a huge evolution and a huge potential in this business. Taking these strategic transactions, we are bringing all the know-how from our partners into the company, into the bank, and that provides us the full potential of building and developing new type of investment funds in the short, in the medium and the long term. And I think this is a huge opportunity to bring on board capabilities that the bank doesn't have today and to ensure that we can build and distribute this type of products. We are, as you know, investing in renewables, in infrastructures, in spaces, in everything. And these 2 partners are one of the leaders in Europe in these type of assets, and that's why we are achieving transactions with them. I hope I have answered. If not, I will talk later. Laurie Goodroe: Our next question comes from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: A couple of questions from me, please. Gloria, I think you said at the beginning that you're not expecting an impact on consumption, but you're seeing some prudence. Can you maybe talk us through what you saw -- what we've seen during March and maybe early April. I don't know if it's sort of deposits movements, appetite for loans or fees, maybe what you were referring to around that prudent statement? And then the second question related is when I'm thinking about the potential updates or changes to guidance that you referred to Jacobo in Q2. Are we thinking about sort of fees impact? Or can you give us a sense of in an IFRS 9 world, what the sensitivity could be to provisions if, I don't know, 50 basis points change in GP or something along those lines that gives us a sense of direction. Gloria Portero: Alvaro, when I'm saying prudence, actually, what I refer is that probably the consumption will continue to grow, but not at the same pace it has done. So it will not contribute in the same way to overall economic growth. We are not seeing really any signal in the reduction of the appetite for loans or for lending and not really any changes from last quarter. But when I say prudence is what I see in the streets and what the statistics start to say. So I don't think there is any alarm sign or anything at all. And my prediction is that consumption will grow, but not at the same pace as last year, and therefore, the contribution in GDP growth will be a bit lower than it has been. But GDP growth will still be robust and I think enough, of course, to deliver our targets. Jacobo Díaz: Good morning, Alvaro. Yes, just to clarify, I mean, we think that in 3 months, so many things have happened in terms of volatility in the market that it's probably not very prudent to change our guidance so soon. But my words were oriented to the rate environment and the volatility of rates that we are currently under expectations of potential interest rate rates in the coming months. And that is my comment about. We are not expecting for the time being any changes in fees. I think I've been very clear in terms of efficiency and in terms of cost of risk. And obviously, my comment is related to the NII guidance and the possibility to have more tailwind in coming quarters if rates continue to be high or stay high for longer. Laurie Goodroe: Our next question comes from Marta Sanchez Romero from JPMorgan. Marta Sánchez Romero: So my question is on capital. You're building capital at a faster pace than expected. I understand there will be seasonality in Q2 and Q4. But could you give us a sense of the capital generation you expect after funding growth and a 50% ordinary dividend? And related to this, can you remind us about your capital allocation priorities? You will be spending roughly 20, 25 basis points on the olds acquisition in Q4, but still that leaves you space to do more things, considering that you want to stay at around 2.4%, 2.5% core equity Tier 1. So can you remind us on your priorities, any bolt-ons that you could consider, what areas, businesses, et cetera? And when, if any, time would you consider to repay surplus capital to shareholders? Gloria Portero: Marta, yes, actually, there has been a very strong capital buildup this quarter because, as you know, traditionally, the first quarter has some seasonality in credit. Actually, we have done a much better quarter than we thought we would do taking into account the seasonality in the past. So we have done better in credit. So regarding our -- and you are right, sorry, that we will have to allocate 25 basis points next quarter to this -- well, next quarter or when it is -- when we have the regulatory go ahead, which will be, I think, in the next quarters rather probably next or the other, the following. Where are we allocating capital? We are allocating capital in the geographies where we see there are profitable opportunities like, for instance, in Ireland. As you can see, we continue to grow at double digit at 20%, 23%, 27% in mortgages. And we will continue to grow at that pace. In Portugal, we think we have opportunities to continue to grow also at double digit. And we think we will do better in corporates and enterprises than this quarter. So this means a little bit more capital allocation following quarters. And in Spain, given the situation in mortgages, where we see that the prices continue to be below -- well, below cost, cost of risk and not only cost of credit risk, but also including everything that has to do with maturity mismatches and interest rate risk. We are actually investing heavily in enterprises and corporate banking, where you have seen we are growing at a very -- I mean, at a higher digit than usually. Said that -- so we think that we will be -- we will have a comfortable management buffer. For the moment, we are not changing our dividend policy, which you know it is cash 50% of net profit. But don't forget that we have the main shareholders sitting at the Board of Directors. So if there is excess capital, obviously, we will give it back to our shareholders as we've done in the past. I mean, remember that Linea Directa deal was actually an extraordinary dividend. So well, this is more or less, I think I've answered. So I don't know if you want to add up anything, Jacobo? No. Okay. Jacobo Díaz: I think you've been clear. Laurie Goodroe: Our next question comes from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. So my first question would be on the customer margin versus NIM. We've all been very focused on the customer margin, and we saw a significant improvement this quarter, but the NIM was very flat quarter-on-quarter. So could you just kind of discuss what the delta is and why the NIM didn't improve this quarter and how we should think about the NIM improvement going forward? And related to that, could you also discuss your rate sensitivity and how we should think about kind of higher rate impact on your net interest income, but also on the customer margin and NIM? And then my second question would be on kind of cybersecurity. We have seen headlines about some of these AIs that can kind of penetrate banks very quickly. What are you doing to ensure that your cybersecurity is top notch? Jacobo Díaz: Thank you, Sofie. I'm going to start with your last question in terms of cybersecurity. I know this is a hot topic with latest news about Claude and Mythos. Basically, here, what has fundamentally changed I mean, Mythos does not represent a fundamentally new category of risk, but there an acceleration of existing cyber threats through AI automation. So what really changes is the speed, not the nature of the attack. So the point here is in order to react, it's just basically with the same tools, trying to be much more agile and much more quick in the execution of the responses. So basically, the bank, ourselves or other banks, what they need to do is to move faster in the responses. So from manual responses to automated responses, behavior-based defense to integrate AI into security operations, of course, maintain human side. But basically, this is the type of reaction. And I think also the type of reaction is not just a bank on bank individual type of reaction. I think this topic needs to be faced in a much more global approach in approach of an industry, of a country of an entire Europe because all these threats, all these threats is not just a threat to the banks. It's just to the whole economy. So basically, this AI threat just changed the tempo of the cyber risk, not these fundamentals. And the right response is just basically make sure that there is a coordinated automated defense from all the industries and countries and basically reinforce resilience. So the tool may be a new tool for the attackers, but it's also a new tool for the defenders. So I'm sure that everybody will accelerate this -- the use of this new technology to accelerate the execution of the defense. Okay. So related to the sensitivity. Sensitivity, we are around 3% for an increase of 100 basis points. I think that was your question. And in terms of NIM, it's just basically an activity on -- it's trading activity that has increased the volumes of non-client activity has increased volumes in the asset side and in the liability side, and that has increased a little bit volumes and therefore, maintain the NIM at current levels. But the most important thing for us is that the customer margin has been recovery, that the weight of the client activity in our balance sheet tends to be one of the highest, if not the highest. And for us, that is really, really important. So we -- as I mentioned before, we continue to expect quarter-on-quarter growth in NII for the coming quarters until the end of the year. Thank you. Laurie Goodroe: Our next question comes from Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: I just have 2 questions. One is on Ireland. If you could please give us a bit of an update on your views in the country? And what should be the opportunities that you could see now after the corporate transaction and corporate movement announced by Bawag last week? And also if you could update us on the deposit strategy and the capacity to gather deposits there, when we should see a pickup on deposit growth coming from Ireland. And the second topic, it's on the ALCO. I have seen that you have increased slightly the ALCO in the quarter. If you could just remind us a bit what will be the expected contribution for the year. And also, what would be the capacity to increase that from here onwards? Gloria Portero: Ignacio, I will take your first question. In Ireland, we continue to see a lot of opportunity going forward. Basically, actually, there was very -- as I've always said, the competition, it's not as a competitive market as it is in Spain, let's say it this way. Actually, the margins, for instance, in mortgages are much higher. We are allocating more capital into this business. The recent transaction of Bawag acquiring PTSB actually is another great opportunity in the sense that PTSB needs a very heavy restructuring. And as we have seen in the past here in Spain and many other -- also in Portugal, when a bank is restructuring, clients are not served properly and therefore, the customer attrition is higher. So we will take advantage of that situation in the next months. With regard to deposits, we have been testing deposits since I think it was late 2025. And with existing clients by invitation because we wanted to test because we have a completely new platform overall and obviously, a new product. And we also wanted to test all the marketing processes as well. We launched it to open market in February, I think, but also with very little or almost no, I would say, marketing expense. We have around EUR 50 million in deposits at present. And what we want to test is the system at maturity of the of these deposits before we enter in the market in a mass mode. So this will be in the next -- because most of these deposits have been signed 3 or 6 months, max. So this will be in the coming quarter. We have also -- now we are testing a simple current account, which have already constructed. And we will probably by the summer or maybe probably after the summer because the summer is not the right month to launch these things, we will launch it to the market. When we have current accounts, it is when we will launch a more aggressive deposit-taking value proposition. So for the moment, you will just expect these little amounts to grow by a great percentage, by a low amount because what we're doing is testing our systems and also our marketing processes. Jacobo Díaz: Good morning, Ignacio. Regarding the ALCO portfolio, the ALCO portfolio, as you know, has a volume which is limited to 2.5x our equity. So since our equity keeps growing quarter after quarter, there is an opportunity to grow a little bit the ALCO portfolio. So just -- we don't expect to go far away or above that limit. So whatever increases in the ALCO portfolio, they should be expected to be some sort of limited. The current yield is around 2.5%. Expectation is that we can continue to have this level or even a little bit higher during the coming quarters, but no basic changes in the structure of the type of assets that is in the ALCO portfolio. Laurie Goodroe: Our next question comes from the Cecilia Romero from Barclays. Cecilia Romero Reyes: My first one is on asset quality and credit risk. I mean, SME lending has been an important growth engine for Bankinter. And now as macro uncertainty has increased, how do you see credit risk evolving within the SME book? And are there any particular sectors where you are becoming more cautious? And my second question is on cost. I mean you have highlighted a medium-term ambition to move cost-to-income ratio towards 30% over the next 3 to 4 years, which I don't think is reflected in consensus. Is this still realistic given higher inflation environment? And what -- could you explain us what are the key levers that will get you there? Gloria Portero: Cecilia, thank you for your question. For the moment, we are not seeing any warning signs in asset quality in any of the business segments actually. Nevertheless, the situation is such that, obviously, there could be some economic contraction -- I mean, some economic impact of all these geopolitical events that are happening. And therefore, we are being very cautious, and we've already told you, I think, in past webcast with consumer credit and particularly what we call open market, which is not within our franchise of clients banking there. So there, we are being very, very cautious. We are actually reducing exposure. With respect to SMEs, you're right, it is also one of the weakest parts of the economy. And what we are doing is actually also being very cautious. In SMEs, below EUR 2 million of turnover. And we are focusing our growth in companies above EUR 30 million of turnover and also increasing a little bit our exposure to the public sector because actually, most of -- a lot of the investment in the economy is done by the public sector at present. So just to wrap up, we don't see signs of asset quality deterioration, but we think it is wise to be prudent with consumer credit in open markets and also in smaller SMEs. Jacobo Díaz: Regarding your second question about the cost-to-income ratio and the ambition, we definitely -- this is our ambition. And of course, we do expect that the combination of talent and technology allow us to provide year after year the enough space between the growth of income and the growth of cost to achieve this target. So we keep maintaining our positive jaws during the following years. As you've seen in the P&L that in this quarter, there is more than 3 points of difference between the growth of income and the growth of the cost. So this is something that we believe we can sustain. Of course, investment in technology, but also the organizational simplicity is a key driver of this achievement. Organizational simplicity from a legal perspective, of course, but also the limited number of branches that we have and the enhancing of the digital business also is a great opportunity to achieve this. You mentioned inflation. So we do expect some inflation, as you know, but some temporary inflation. We do not expect inflation to stay at current levels for a long period of time. So we can basically deal with it. And yes, I mean, it's our ambition, and we think it's absolutely achievable. Laurie Goodroe: Moving to our next question from Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: A couple of questions from my side. One of them would be a follow-up on the interest rate sensitivity that you mentioned, so 3% for 100 basis points rise. I was just wondering, this is in a 12- or 24-month period? And maybe if you could give us just some highlights on the assumptions behind those -- that sensitivity. Finally, particularly on deposit costs and all of that. And then the second question on the cost side as well. So this 3% increase that we saw in total cost in the first Q., should we take it as a reference for the full year? Do you think costs might accelerate throughout the year? Just a bit of a view on how you see that evolving? Gloria Portero: With respect to costs, we are targeting lower increases year-on-year in 2020 -- this year. So you should expect a reduction of the pace of growth in costs. And I think you can make a point on your -- the rate sensitivity he's asking. Jacobo Díaz: And regarding the rate sensitivity, yes, good question, just to clarify my comment. So the rate sensitivity is around, as I mentioned, 3% for 100 basis points increase in 12 months. So if we were to measure this in 24 months, it will be close to 7%. Laurie Goodroe: Our next question comes from Borja Ramirez from Citi. Borja Ramirez Segura: I have 2. Firstly, on the deposits. Could you please remind me of the -- regarding your digital account deposits, which were the volumes and the average cost as of March? And also on this point, could you update on the competitive dynamics in the digital deposit market in Spain. So for example, who -- where are you seeing greater push on this side? And then my second question would be on rate sensitivity. If you could kindly provide a bit more details on the floating rate loans because I think you have a greater portion of floating rate loans. And within corporate and SME, I think given the fact that it's more focused on short-term working capital loans, I think it reprices faster than peers. So if you could kindly provide more details. Gloria Portero: Borja, thank you for your question. And I will be answering the one regarding deposits. Well, the digital organization where you have all online deposits, whether they are the ones coming from EVO or the ones that we acquired with the digital organization the last year already has EUR 11.7 billion in deposits. The average cost of all of this EUR 11.7 billion is 1.39% and it's going down. Competitive dynamics. Well, this quarter, we didn't launch a major campaign with high marketing costs. Obviously, we have always ongoing campaigns. So what we see are the higher competitors this quarter have been in the traditional banks, ING and probably, I would say, Sabadell also had a campaign this quarter. Also Openbank from Santander. And then you have the digital banks or the neobanks. But the major -- I would say, our major competition at present, the ones that take or to whom we take deposits are traditional banks. Jacobo Díaz: Regarding the rate sensitivity, you mentioned the floating rates levels in credit in -- or sorry, in SMEs or corporate. Let me just clarify. I mean, of course, working capital facilities tend to be short-term funding or lending that, I mean, in 90 days might change the rates. So that has a faster repricing. But in lending, for example, in SMEs, there is a strong level of real estate guarantees, which tends to be mortgages. So I would say that the corporate banking book has a faster repricing than the SME book. I guess that this is your question. Of course, we have the floating rate mortgages, as you know, and everything related to credits that tends to reprice faster. But for example, in the SME activity, we have at least almost 3/4 of the lending book tends to be guaranteed with real estate positions. And that means these are mortgages, and that means that it takes longer the repricing of the SME book. Laurie Goodroe: Our next question comes from Pablo de la Torre from RBC Capital Markets. Pablo de la Torre Cuevas: The first one would be a bit of a follow-up on the alternative investment transaction. And sorry to go back to the topic, but it would actually be quite useful to understand a bit more of the kind of line-by-line financial impacts of the transaction that you expect in coming years, both on the revenue and the cost side. And then the second one would be a bit of a follow-up as well on some comments that I believe Gloria made last quarter. I think, Gloria, you mentioned you were working with some of your insurance partners to improve or review some of your agreements at that time and see how you could impact -- how could you change your current agreements. So I just wanted to know if there had been any updates on that side of the business on insurance income. Gloria Portero: Yes. I mean, actually, I -- we have signed, I would say, an agreement with Generale in Portugal for non-life insurance, and this will be fueling growth in insurance in Portugal in the next months. So yes, yes, we have made progress there. And we are working in Ireland. That is also one of our strategic lines. For the moment, we are not commercializing insurance, but also to be commercializing insurance to our clients in the future. And in Spain, well, I think that we are doing quite well, growing, most of the growth that you have seen in the presentation, this 8% growth in insurance actually has to do most of it with the Spanish market. Jacobo Díaz: Coming back to your question of alternative investment. We are pretty active on this type of business. So once all -- we get all the authorizations for the transactions that they might be finalized by the end of the year, what we do expect is to start generating around EUR 1 billion of new volumes every year in the future. As I mentioned before, this is a quite good business in terms of the level of fees and the stable level of volumes that we can manage. So this is a great opportunity for us to build up a very good business. In fact, we just launched a new product in Spain called FIL, F-I-L, which is an alternative investment fund to reach retail type of clients that can be switched or moved from fund to fund. So it is a great opportunity. We have similar levels of ambitions with this new product that we've launched. Again, this is a clear message of the focus that we want to put in this type of business in wealth management in general, but in this type of business, we think Bankinter has a great opportunity and plenty of new income to come with a great return on equity. Laurie Goodroe: Thank you. Let's move to our last calls, and we have 3. First is from Ignacio Cerezo from UBS. Ignacio Cerezo Olmos: First one is if you can give us the stock of the treasury deposits at the end of Q1, the one which is embedded within your side deposits that are remunerated. And if we should be expecting additional reductions in coming quarters on this deposit book? And then the second one is a follow-up to Cecilia's question on costs. I mean, how do we need to think about kind of logical evolution of headcount levels alongside the implementation of AI in the bank? Are you expecting a gradual reduction of staff personnel levels? Or do you think actually you're going to have to be replacing people leaving with new hires? Gloria Portero: Ignacio, with respect to treasury accounts, we have around EUR 11 billion. And this quarter, it has gone down by EUR 1 billion. We don't expect major reductions in this line around maybe 10% or something like that because we have already done quite of the work that needs to be done in that portfolio. So -- and with the other thing with respect to headcount. Listen, we are increasing headcount in Ireland, and we are increasing headcount in Portugal. In Portugal, for 2 reasons. We were keeping the same commercial workforce that we had in 2016. So obviously, there is a moment if we want to continue to grow and maintain the quality levels, we need to enforce, we need to reinforce the team, the commercial team. The second in Ireland, it's obvious. We are expanding our activities to be a full-fledged bank. So obviously, we need to increase also the headcount there. We are talking around 30 per country, where we are seeing that the headcount is stagnating is in Spain. We don't foresee reductions of headcount, but we don't see either increases as the business grows. So we think that much of the efficiency will come from -- in the Spanish operations. Laurie Goodroe: Our next question comes from Hugo Cruz from CBW -- KBW, sorry. Hugo Moniz Marques Da Cruz: I was wondering if you could just give a bit more color on your loan growth dynamics by product over the rest of the year. You're growing 5% year-on-year, but with the macro potential, we could see a slowdown even if you keep at mid-single digits. So if you could give a bit more color. Gloria Portero: We keep our commitment to grow this mid-single digit around this 5-ish percent. And we think we still have opportunities to grow in profitable business lines, like I've mentioned, mortgages in Portugal, mortgages in Ireland, but also enterprises in Portugal and a lot in Spain in greater -- for companies over EUR 30 million turnover and also a bit more in the public sector. Laurie Goodroe: And our last question comes from Britta Schmidt from Autonomous Research. Britta Schmidt: Just quickly coming back to the deposits. Could you give us the split of the deposits into corporate and retail where they are now and where they would be, for example, by year-end. And you mentioned that you're changing the mix to more atomized deposits. How do you think that would impact your deposit beta? It peaked at something more than 50%. If we were to see rate rises, do you think the deposit beta would be substantially lower, slightly lower. And even with these changes that we're seeing, do you still prefer to manage your NII sensitivity at around the 3% level for 12 months? Or could we see that improving? Jacobo Díaz: Now regarding the beta, as you know, it depends how you make your calculations. Today, we are around 80 bps with the current level of 2% in ECB rates that gives you a ratio of around 40%. So we do estimate this 40% to keep going down in coming quarters. So whatever increase in rates that might happen, we estimate that no more than 10% of that increase in rate could be -- could potentially impact the cost of deposits. So beta is going to continue to go down over the next quarters. Gloria Portero: With respect to the mix, I don't really have what the mix is between big corporates and because what we call retail includes also SMEs. So I don't have the exact figure. I think, yes... Jacobo Díaz: We'll come... Gloria Portero: We will come back to you later with. But yes, I mean, you can expect a reduction in bigger corporates and you can expect an increase in what we call retail or transactional accounts, which include, obviously, SMEs and also retail. Laurie Goodroe: Thank you. Thank you, everyone. Thank you, Gloria and Jacobo. And that now concludes our session. And on behalf of the entire Bankinter team, we thank you again for your interest and participation in the webcast. Everyone, please have a great day. Jacobo Díaz: Thank you very much. Bye. Gloria Portero: Bye.
Alexander Bergendorf: Good morning, this is the Axfood First Quarter 2026 Telephone Conference. And with me today are Simone Margulies, President and CEO; and Anders Lexmon, CFO. In the Investors section of our website, you will find the presentation material for today's call. We encourage you to have that presentation at hand as you listen to our prepared commentary. After the presentation, we will be taking questions. A recording of this call will be made available on our website. So with that, I will now hand over the word to Simone. So please go to Page 2. Simone Margulies: Thank you, Alex, and good morning, everyone. We summarized the quarter with volume growth, improved efficiency and increased profitability, and that's in a market that is characterized by a high activity level. Through a clear customer focus and collaboration, we continue to create value with our strong and distinctive concepts. Before we start the presentation, I briefly want to comment on the situation in the world around us. It is clear that global uncertainty has increased over the past few months, and it's currently very difficult to assess the long-term effects of the war in the Middle East. In recent years, we have successfully navigated a volatile and uncertain environment, adapting quickly as conditions have changed, and we're carefully monitoring developments. Turning to Page 3. With that very brief introduction, let me now take you through the recent market development and Axfood's first quarter performance. So next page is #4. Market growth amounted to 4.4% during the quarter, a similar level compared to the fourth quarter last year. Stronger volumes contributed to this development as the annual rate of food price inflation came down and amounted to 1.7% according to Statistics Sweden. Inflation decreased gradually during the quarter and particularly in March when the overall price level was unchanged compared to the prior year. This was mainly driven by the dairy category, but prices were also lower in several other categories, including fruits and vegetables. In addition to the improved volume trend, a 0.5% positive calendar effect from Easter also contributed to the market development this quarter. So please go to next slide, #5. As a result of positive volume traffic and high volumes, Axfood retail sales increased 3.8% in the quarter. This was below the market and also lower than what we had hoped for. Excluding City Gross, where sales have been impacted by recent store closures, growth was in line with the market. Over a 2-year period, we continue to clearly outperform with contributions from City Gross. Competition remains intense and in general, market dynamics continue to be characterized by a strong focus on price value. As you all probably know, the VAT on food was halved on April 1 from 12% to 6%, and this measure was implemented just before Easter, which typically is an important holiday for the industry. With this, the overall activity level of the market was particularly high. In Axfood, we worked intensively during the quarter to prepare for and implemented VAT reduction. Through extensive collaboration and focus on execution throughout the organization from stores and support functions to Dagab and Axfood IT, the price points on millions of items were updated in a very short amount of time. We are now on Page 6. Consolidated net sales for Axfood grew 2.6% in the quarter. And as I just mentioned, this was mainly driven by higher volume. We saw growth in all of our segments, except City Gross. And there, as I just mentioned, it is, of course, important to consider that total growth was impacted by store closures. So please go to the next Page #7. We report a strong financial development in the quarter. Group operating profit increased to SEK 806 million, and the operating margin was higher at 3.7%. Operating profit included items affecting comparability of minus SEK 6 million related to City Gross. Last year's items affecting comparability also related to City Gross and then amounted to minus SEK 38 million. Operating profit and margin on an adjusted basis, which excludes items affecting comparability also increased. Adjusted operating profit was SEK 812 million, and the adjusted operating margin amounted to 3.8%. The improved profitability was primarily driven by higher sales volumes and growth in both total and like-for-like sales, a stable gross margin, improved efficiency and also an effective cost control. So now let's turn to Willys on Page 8. Willys continued to demonstrate volume growth in the quarter through an increased number of customer visits and a high ticket -- average ticket value, but total growth was below the rate of the market. Store establishments contributed to growth, although the new stores in the first quarter were established late in March and as such, only contributed to a small extent. In recent months, Willys has temporarily closed 2 stores ahead of relocation and together with ongoing larger store modernizations, this impacted growth negatively in the first quarter. Earnings grew to SEK 498 million, which corresponded to an operating margin of 4.1%. The increase in operating profit was primarily driven by the increased sales volumes and a stable gross margin development. Willys is Sweden's leading discounter and 2 days before the VAT reduction, Willys chose to lead the way by reducing prices corresponding to the lower VAT. This, together with the increased marketing activities, which were largely concentrated to the end of the quarter, negatively impacted sales and profitability. As I mentioned, Willys store expansion progress was also concentrated to the end of the quarter. Even though the expansion pace remains high and based on the chain's strong position among consumers, there is significant potential to increase the market presence. We are now on Slide 9. Hemkop displayed a strong performance in the first quarter and clearly increased its market share, delivering retail sales growth of almost 6%. Growth was primarily driven by an increase in customer traffic and in addition, a higher average ticket value that contributed positively. Like-for-like growth was also strong, contributing to solid earnings performance. With a focus on modernizing stores and enhancing its offering in terms of price value, fresh produce and meal solutions, Hemkop has made excellent progress in recent years. The current growth clearly demonstrates that customers truly appreciate Hemkop. In total, operating profit increased to SEK 114 million, and the operating margin also increased to 5.1%. The increase in operating profit was mainly driven by the increased sales volumes, a stable gross margin development and solid cost control. Earnings in the prior year was impacted by new store establishments. Turning to Page 10. Our efforts to develop City Gross into a long-term competitive hypermarket chain is proceeding according to plan. City Gross continued to deliver a positive performance in the first quarter with healthy like-for-like growth of 3.6% and a positive earnings trend. Our improvement initiatives to develop the customer offering and streamlining operations are clearly yielding results. City Gross' loss for the quarter amounted to minus SEK 48 million on an adjusted basis, corresponding to an operating margin of minus 2.4%. This was an improvement compared to the prior year, which came from the positive like-for-like growth effects from structural measures as well as efforts to streamline operations. Similarly to Willys, City Gross went ahead and reduced prices corresponding to the VAT cut 2 days prior to implementation. And together with increased marketing activities, this negatively impacted sales and profitability. On a reported basis, the operating loss amounted to minus SEK 54 million, which corresponds to an operating margin of minus 2.7%. This included the items affecting comparability I mentioned, which refers to structural measures for stores. We are now on Page 11. Growth for Snabbgross amounted to 1% in the quarter with weak sales development for B2B consumers. The trend in the B2C sales through Snabbgross Club was, however, strong, both in total and like-for-like sales. In terms of the operating profit, Snabbgross managed to offset the weak growth through strict cost control and delivering earnings on par with last year. In total, operating profit amounted to SEK 25 million, corresponding to an operating margin of 2%. Next, Page #12. Dagab's first quarter net sales increased by almost 4%, driven by sales to food retail customers and especially Axfood's own concepts. Operating profit also increased to SEK 298 million, and the operating margin was unchanged at 1.5%. The performance was primarily due to the sales growth and a lower cost level with increased productivity and logistics. Operating profit was, however, negatively impacted by lower gross margin due to market investments. Late in the quarter, Dagab also negatively was impacted by higher fuel costs and weaker Swedish krona. That concludes the first part of the presentation. So now it's time for our CFO, Anders, to take you through the financials. And we are now on Page 13, but please go to the next Page #14. And Anders, please go ahead. Anders Lexmon: Thank you, Simone. During the first quarter, the cash flow was minus SEK 692 million, which was almost SEK 300 million lower compared to last year. The strong operational performance was offset by a negative working capital effect due to inventory build ahead of Easter. This resulted in a somewhat weaker cash flow from operating activities of almost SEK 1.1 billion, SEK 129 million lower compared to last year. The negative cash flow from investment activities of minus SEK 560 million included the initial payment of SEK 185 million for automation in the logistics center in Kungsbacka. Excluding this automation investment, the capital expenditure in the quarter was in line with last year. By the end of Q1, Axfood utilized approximately SEK 3.1 billion of our credit facilities compared to SEK 3.3 billion in Q1 last year and SEK 2.7 billion as year-end 2025. The cash flow from financing activities of SEK 1.2 billion was in line with last year and included the first dividend payment of just below SEK 1 billion. We are now on Page 15. The net debt increased compared to year-end 2025 due to dividend payout. The net debt-to-EBITDA was improved compared to Q1 last year due to a strong EBITDA development despite increased leasehold debt. The equity ratio amounted to 17.3%, which was lower than in December 2025 due to the dividend improved. The Q1 equity ratio was, however, 0.5 percentage points higher compared to Q1 2025. Total investments, excluding leasehold and acquisitions amounted to SEK 561 million in Q1 compared to SEK 371 million last year. During the quarter, we established 4 new group-owned stores, 2 more than last year. Our investments in store establishments have therefore increased during Q1 compared to last year. And as I mentioned before, the investments included the first payment of SEK 185 million connected to automation in the new logistics center in Kungsbacka. And then let's turn to Page 16. When we look at the capital efficiency, we have a stable development in our rolling 12-month net working capital and also in relation to net sales. Capital employed has increased over the last years, mainly due to the acquisitions of Bergendahls Food and City Gross as well as the investments in Balsta. The level of capital employed, however, decreased slightly during Q1 as equity was reduced not only by dividend paid, but also the dividend to be paid in Q3 later this year. The effect was partly offset by higher leasehold debt. Thanks to an improved earnings trend and the reduced capital employed, ROCE improved by 1 percentage points during the first quarter compared to year-end 2025. And by that, Simone, I have come to the end of my presentation and hand over to you again. Simone Margulies: Thank you, Anders. And we are now on Page 17, and it's time for me to give you an update on our strategic agenda and priorities. So let us turn to Page 18. We have a clear house of brand strategy in our group, and this makes us unique in Swedish food retail. We aim to deliver the strongest customer experiences, and we are present in all segments of the market with our different concepts. Please turn to next Page #19. To create the right conditions for our retail concepts to be able to succeed on the market, we leverage our strengths as a group and focus on 6 strategic development areas. We have shown you this before, and I would now like to go through some recent key strategic developments. So please turn to next Page 20. Our ambition is to provide the most attractive assortment on the market with a distinctive offering on branded as well as private label products to meet customers' diverse needs and preferences. During the first quarter, we had a high pace in developing our private label portfolio and launched more than 100 new products. We had product launches across many categories, but I would like to highlight our focus on expanding range of our international assortment. In addition, we expanded the Mevolution brand to strengthen our offering in personal care. Our private labels represent quality and innovation, and we also focus a lot on sustainability and health with a wide selection of sustainability labeled and organic products. In addition, we have a large selection of products with Swedish origin with more than 400 products under the Garant brand. In the space of sustainability and health, we have previously launched several innovative hybrid products. And this quarter, we launched ready-made meatballs made from a combination of minced meat, vegetables and legumes, an exciting launch that really can contribute to better eating habits, not least among younger people. Our private labels, including the Garant and Eldorado brands are a significant competitive edge. And with all the new products, we complement our existing portfolio and improve the offerings within our various concepts. So overall, our private label share of sales increased in the quarter and amounted to just over 32%, driven by high penetration in Hemkop and City Gross. We are now on Page 21. We will continue to develop our attractive store network in the coming years by accelerating the pace of expansion while maintaining a high rate of modernization of existing stores. This work creates new growth opportunities by ensuring that our concepts provide the best possible store experience for their customers. Willys focuses on significantly expanding its presence, but at the same time, the chain gradually rolls out its most recent store concept, 5.0. Hemkop is maintaining a high pace in modernizing the stores and in addition, expands its presence when it sees good potential to do so. For City Gross, focus in the past year has been on closing underperforming stores with 1 store closure in the first quarter this year and 1 planned for the second. This is really about creating a healthy core in City Gross' store base from which the chain can grow from. That said, City Gross has also established a new store recently in February in Norrtalje. Lastly, to create better conditions for both the restaurant trade and the convenience trade to achieve long-term growth with improved profitability, we have made the decision to bring the 2 operations together into a single organization. The convenience trade business, which is currently part of Dagab, will be transferred to Snabbgross as of January next year. The logistics operation will, however, remain in Dagab. With consolidation opportunities are being created to further strengthen the customer meetings and offerings, both for restaurants and convenience trade customers. Moving on to Page 22. We are also improving our competitiveness by maintaining a clear focus on efficiency and productivity. We are enhancing the way we work, increasing use of data and AI in all our processes. More than 100 AI models have been taken into production in recent years, and we focus a lot on developing and empowering employees through AI tools and training and assistance. We are also further optimizing our new logistics structure. And during the quarter, we completed the rollout of a new order and purchasing system that will further strengthen our supply chain. With this new system, we can be more accurate in forecasts and planning and really strengthen how we manage our order flows to balance supply and demand. As previously communicated, we plan to establish a new highly automated logistics center in Kungsbacka that will be completed in 2030 and ensure increased capacity and efficiency for future growth in Southern Sweden. During the first quarter, work continued according to plan with this project, and we will get back to you when the property lease contract is entered into. Now let's turn to Page 23. Sustainability is an integral part of our operations and strategies. We aim to be a positive force in society and to take the lead in promoting a sustainable food system by influencing decision-makers, leading the way through own initiatives and driving industry issues. Last year, we completed the transition to renewable fuels and electricity, both in our own and procured transports, a truly important achievement. And consequently, we have seen a significant decrease in emissions. Using comparable emissions factors, emission from own transport decreased 15% in the first quarter compared to the prior year. In addition to the increased use of renewable fuels, this reduction was due to a higher number of electrical vehicles and route optimization. Diversity and inclusion are also areas that are of great importance to us. And by 2030, we aim to be Sweden's most inclusive food company. During the quarter, we concluded the first work placements under so-called SAO program at Willys and Hemkop. This program aims to help young people in vulnerable areas to strengthen their position in the labor market and motivate them to study. We have been a part of this initiative since the start, and we will be offering more young people jobs in the future as the program is developed and scaled up. Lastly, I want to highlight our efforts to promote sustainable food consumption. Hemkop is the leading -- industry leader with regards on organic products and helps customers to shop more sustainably. Recently, an independent survey showed that Hemkop leads the market in terms of promoting organic food through campaigns. Willys is also doing a lot in this area and came out second in the survey. In a market where price awareness among consumers remains high, campaigns are important. And I think this really shows that we continue to push forward and take our responsibility. Moving on from our strategic agenda, and we are now on Page 24. Our outlook for the year is unchanged, and it covers investments, new store establishments and items affecting comparability. With regards to the new establishments, as Anders talked about, in total, we opened up 4 new group-owned stores in the quarter, of which 2 Willys, 1 Hemkop and the new City Gross store I mentioned earlier. So please now turn to Page 25. And let me sum up. We summarize a quarter with positive customer traffic, volume growth and increased profitability. We are investing in line with our long-term plan to gain further market share and create the conditions for continued profitable growth. And that was all for today. So now please turn to Page 26, and I hand over to the operator to open up the line for questions. Thank you. Operator: [Operator Instructions] The next question comes from Magnus Raman from SB1 Markets. Magnus Raman: I could start off asking about the temporary negative effects on Willys sales growth from major store refurbishment. Can you help quantify in any way the effects here? Is it correct that it's one store that is closed altogether pending the build of replacing store? And then are there other stores that have a significant amount of store space closed for renovation currently? Simone Margulies: No, it is -- as you said, there are some phasing effects, I would say, in the quarter regarding Willys stores. The first thing is that we had a little less new stores and the stores that were opened, opened in the end of the quarter. However, we will have a high pace as we earlier communicated in establishing new Willys stores this year. And the other thing that you said is that we have closed 2 stores for relocating them. So they are closed and they will reopen in new places. And then we also have some large modernizations in large stores that's also affecting the like-for-like growth. So this, in total, have a negative effect in the sales growth in Willys for the quarter. Magnus Raman: Great. And these 2 stores that are temporarily closed altogether, have they been closed sort of for the major of the duration of Q1 for the most of that period? Simone Margulies: Yes, yes. They closed by the end of the last year for relocating them. Magnus Raman: So if these 2 stores would have been in operation, retail sales growth in Willys should have been around 1 percentage point higher. That is fair to assume? Simone Margulies: I would say that the phasing in the stores for the Q1, together with that the marketing investment came in the late of the quarter together have a negative effect and make Willys grow a little bit less than we hoped for. Magnus Raman: Right. And then I also wanted to ask if there's any way to quantify the cost you have been taking here in terms of having the food VAT 2 days in advance in both Willys and in City Gross. Any help there to quantify? I mean, should we do 2 divided by 90 and then a little bit more because those were more trading-intensive days times 5.4%? Or do you think -- could you help us there with any figure... Simone Margulies: The reduction of prices that we made both in Willys and in City Gross and Eurocash 2 days in advance had a negative effect and also increased marketing activities in the quarter -- by the end of the quarter together that we had increased personnel cost since it was a lot of manual work of changing millions of prices in stores. And also, we've had IT development costs during the quarter. And of course, also, as you said, the real effect of reducing the prices. Magnus Raman: But is it fair to say also that the sort of short-term top line strengthening effect of this was maybe less than what you had hoped for? Simone Margulies: Yes. The purpose of doing that was to strengthen the position for Willys as the leading discounter on a long-term effect and by that leading the price reduction. But as you said, we didn't really -- we didn't get the volumes as we had hoped for. So the sales for Easter came as it normally does from -- in the middle of the week until -- and by the end of the week. So we didn't really got the volumes that we had hoped for. Magnus Raman: Understood. So sort of subsidizing the ordinary spending, but not being able to push forward the Easter shopping so to say. Simone Margulies: Yes. However, I mean, one large purpose for us was to strengthen the position as a leading discounter. So -- and that is more on a long-term effect regarding the brand. So I mean, Yes. Magnus Raman: That was mission accomplished. I understand. All right. And then final one from me here. The effects of the war in the Middle East, you mentioned here in the report that the early -- or late into the quarter, the early effects you've seen on fuel costs and then you acknowledge the currency change, the weakening of the Swedish krona. But you have not seen any negative effects on electricity prices. Is that correct? Anders Lexmon: We have seen a little bit higher electricity prices, but we work with hedge -- we hedge the prices. So we have a more sort of long-term effect when it comes to electricity. Magnus Raman: Right. And then when thinking about possible inflationary effect on food commodities, is it, in your opinion, even if this is more for the farmers maybe, is it fair to assume that the price increase and possible supply squeeze as well of fertilizers, i.e., the urea prices, that, that would mainly have an effect on next year's crops rather than this year's crop season? Simone Margulies: It's -- I mean, if you look on the direct effects on the fuel cost, that will have -- it, of course, depends on how the development will be going on forward in the Middle East. Regarding the fertilizers, it also depends a lot on the development going on forward. This summer's crops, of course, are already done, but then you have the autumn crops and also going for next year. So depending on how the development will be, there will be some delays, but there could be effects also in this autumn since we do -- you have crops not only once a year. Operator: The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Just coming back to sort of you start out saying that sort of the recent months have brought increased uncertainty, and we can all sort of acknowledge that and that the focus on value for money is still very high. And I hear you when you say that you didn't get the volumes that you expected when it came to the price cuts that you made a couple of days before the 1st of April. But sort of this uncertainty in itself, wouldn't that sort of have been a tailwind for especially Willys in the quarter since early March that you didn't expect before we went into this conflict in the Middle East? And I was just wondering sort of why are you growing slower than the market? And I hear you in terms of refurbishments and all that, but you do have more stores now than you had last year. And sort of what is the dynamics? What sort of happened in the market in Q1, you think? Or is it just sort of these things that you mentioned in terms of refurbishments and closed -- temporary closed stores? Simone Margulies: Those -- I'll try to give you an answer. I mean if we look upon the first quarter, as the market as a whole, we had a good growth in the market that was primarily coming from volumes since the inflation was low and also we had deflation in March. By that, also, as you said, the activity level in the quarter also increased. And in that environment, we also had the phasing of refurbishments going on, closing down 2 stores. The new stores that we opened up came in late in the quarter, together with the VAT or our price reduction that we made, that together made us go a little bit lower than we had hoped for. So that was all. And then I would say that the cost levels for the customers, it will, of course, depend a lot on what is happening going forward. I mean the increased fuels came later in the quarter and also -- so I mean, there are many things that is happening for the consumers in the quarter, but also in the market. However, I would like to zoom out a little bit and say like Willys has a really strong position. It's one of Sweden's strongest food retailer. They are the most recommended chain. And we will continue to have a high expansion pace for Willys since we see there's a great potential to accelerate our expansions in Willys. Daniel Schmidt: Yes. Okay. But do you see that sort of these issues that we've talked about now, have they corrected themselves as we go into the second quarter of this year and you had the lowering of the VAT and all that is basically behind us now. Are you seeing a better market on the back of the lowering of the VAT? Or is that still too early to call? Simone Margulies: I think it's too early. There is still uncertainties. There are -- the VAT and the initiatives to strengthen the consumers' buying power are, of course, positive. On the other hand, also consumers have high prices for electricity and also fuels, how the increased buying power, how large that will, by the end of the day, become and also how the consumers will use their consumption, it's difficult, and it's a little bit too early to say anything actually about that. Daniel Schmidt: Yes. Okay. And just the last one on the cost for the repricing. Was all that taken in Q1? Or is there anything taken in Q2, early Q2 for Hemkop? Simone Margulies: For Hemkop? Daniel Schmidt: Given that they didn't do the changes 2 days before. Simone Margulies: Yes. Do you mean the cost for personnel and marketing and so on? Daniel Schmidt: Exactly. Exactly [indiscernible] repricing. Simone Margulies: Yes, that was taken for Hemkop -- all the chains were taking in the first quarter. I mean, both marketing, personnel costs, yes. Daniel Schmidt: Okay. And just the fact that you have to reprice the entire assortment, is that sort of -- is that resulting in a number that you want to share in terms of extra staff to just get that done? Simone Margulies: Extra -- could you please... Daniel Schmidt: Staff. Staff. Simone Margulies: Extra staff. Okay. No, we don't give any details about that. But as you say, there were a large cost, of course, for personnel to doing the job and also marketing and also the price reduction by itself. Operator: The next question comes from Erik Sandstedt from Kepler Cheuvreux. Erik Sandstedt: Erik Sandstedt here with Kepler. Three questions, please. The first one is a follow-up on one of the earlier questions here. Because you say that gross margins at Willys were stable in the quarter, right? And given these pre-VAT price reductions, which I assume had a slight negative impact on gross margins. Can you just explain then what sort of supported gross margins to offset that impact? And given that gross margins were stable and the EBIT margin were down, I suppose OpEx to sales then must have driven that margin contraction. I know it's not a big margin decline, but I'm just trying to understand the underlying drivers a bit better here. Simone Margulies: Yes. So the offset was according to, as we said in the report that the marketing investment came in the later part of the quarter. And that also, on the other hand, had marketing cost and cost of personnel that made the margin a little bit softer. Erik Sandstedt: Yes. But there must have been some positive gross margin impacts as well then if the pre-VAT reductions had a negative impact. Simone Margulies: Yes. And that was because that the marketing investment came late in the quarter. Erik Sandstedt: Okay. But marketing, is that -- that's an OpEx, right? Simone Margulies: It could be both. It could be marketing costs, but it could also be price reduction campaigns. Erik Sandstedt: Okay. Okay. You're talking about price campaign. Yes. Okay. That makes sense. Perfect. Then secondly, if input costs now go up on the back of the geopolitical tensions, will it be tougher to pass that sort of underlying price inflation on given the price competition we're seeing in the market presently? Simone Margulies: I mean increasing costs, of course, there are some, how is it time -- there's a [ lead ] time from when they appear until you can see it in the stores. And you haven't seen them in the stores. And also that depends on development going on further. But if the development continues with increased costs, you will, of course -- we are a low-margin industry. And if that will continue, you will see it in the stores also. But it also depends on how the -- yes, how the situation will develop from now. And also, it's difficult to assess what the long-term effect. But I mean, as we wrote the first -- in the end of the quarter, we saw increased costs for fuels. And there also the war affects the fertilizers and that also affects I mean, the entire food industry, it could be both animal production, but also from all the crops. So we will see how that will assess the effect in short and long term. Erik Sandstedt: Yes. But maybe to frame it differently, do you see the market being more price competitive now than, let's say, just a few quarters ago or a couple of years ago? Simone Margulies: Yes. We've seen a high competition in the market. I mean, for the last 18 months, there's been a really, really -- or forever, but I mean, the increased competition for the last 2 years, I would say. And that's also why I'm so happy that we can see that the effects we're doing on cost control, also the efficiency that we're seeing coming from the investments that were made both in Balsta and logistics structure, but also now we have implemented a new buying and forecasting system that will also help us to become more efficient. And also, of course, the help of AI and data helps us to be more efficient and also help improve our customer meetings. Erik Sandstedt: Okay. And then just finally, in terms of joint group costs, they were higher both versus the same period last year as well as versus Q4, but you have done some cost initiatives on that line, I think. So what drove the costs here? And what's a normalized level going forward? Anders Lexmon: Yes. As you mentioned, I mean, it can vary from quarter-to-quarter. We have seen that in the past as well. And now we have, in this quarter, a little bit higher level, and that is due to a couple of projects that we have done in -- for the whole group and that we have taken now. So a little bit high this quarter. And I would say it's more fair to look at the first quarter last year, if you want to have a decent level of the joint group costs. Operator: The next question comes from Fredrik Ivarsson from ABG. Fredrik Ivarsson: Two questions from my side, and sorry if you have to repeat yourself. I came in a bit late in the call. But first, if you could say anything about the consumer behavior since the VAT reductions. Have you seen any changes to, let's call it, shopping patterns so far? Simone Margulies: It's -- yes, it's a little bit early to say that since we have also effects from Easter moving within the month. So it's too early, I would say. There's still -- there's only a couple of weeks going in with the lower VAT. And also there, as we talked a lot about today, there are other -- there's a turbulent environment around our consumers with the war going on in the Middle East and increased cost for fuels and energy. So it's too early to say what effects that will have on the consumers. Will the increased buying power, how large will that be? They are important measures that have been taken with the lowering on the VAT, but how much will that by the end of the day, when the increase of fuels and increase of energy on our consumers have and will they buy more food, will they buy a new sofa or will they save more money? It's really too early actually to say that. We see that the price value is really important and that the focus on price and price worthiness is important for the consumers. And here, we are really well positioned with Willys, who choose to clarify its position by going 2 days in advance with the price reductions and also City Gross that has strengthened its price worthiness and also Hemkop the last couple of years. Fredrik Ivarsson: Okay. And second one, if you could say anything about the monthly performance in Willys, did you see January, February being more in line with the market and then somewhat weaker in March? And where I'm getting at is that historically, we've seen the market leader performing better than the competition during Easter due to, I guess, its locations of its store network and so on. Simone Margulies: I would say that the phasing of the stores that they came lately in the quarter and also that we made the price reduction that had an effect. But as we also know, Willys has a really, really strong position, but we have also had natural a little bit extra positive effects during the years of high inflation. And also last year, in the first 6 months, we had a high inflation. So we got a little bit extra, of course, growth and that when you look upon the comparison figures -- that was difficult to say, comparison figures that also, of course, have an effect in -- if you look on Willys growth for the first quarter. Operator: [Operator Instructions] The next question comes from Rob Joyce from BNP Paribas. Robert Joyce: Just a couple from me. Just the first one, have we seen any changes in your relative price positions since the VAT cut came in? I mean, have any of your competitors gone and cut prices lower or even less? So has there been any change there? And has that marketing spend or noise in the market died down since the beginning of April? That's the first one. Simone Margulies: Yes. We do not comment our pricing strategies and the price gaps. For us, it's always important to be clear with the price position, of course, for Willys as the market leader in discounting. And also, it's important for all our chains to have an attractive price position. I mean -- and since the entire -- the VAT, it was the same for all the -- say, all the actors -- not actors, all the chains in the market. That was -- I mean, that was relatively the same for all the players in the market. Robert Joyce: And in terms of marketing spends that you saw yourself were elevated, I guess, the whole market picked up at the end of the quarter. Has that died down as the second quarter started or is it still high? Simone Margulies: Could you please repeat? I didn't really understand. Robert Joyce: So you pushed marketing spend higher into the end of the quarter behind the new prices. I'm guessing the whole market did as well. Have you -- firstly, have you pulled your spend back since then? And has the market done the same? Or has the market pulled back on spend? Simone Margulies: We only commented, I mean, the first quarter. And as I said, the entire market had a really high activity level in the -- by the end of the quarter regarding to the Easter, but also for the VAT reduction. What we did that we also went ahead with the price reduction 2 days in advance for City Gross Willys and also Eurocash. So we made some extra marketing investments due to that. Robert Joyce: Okay. And I guess the second question I have is just maybe a bit more theoretical, but I guess Hemkop and City Gross, which would be your higher-priced chains seem to have traded better in the quarter on a like-for-like basis as inflation fell. Is there any concern that Willys may see a continuation of the kind of underperformance as prices fall further with the VAT reduction? Simone Margulies: I would say if we start with Hemkop, Hemkop's result is the result of a job that's been made for many years now in modernizing stores. We've had some really good modernization done in the last month. Also a job in improving both the price position, but also improving the assortment and focus on meal solution and fresh produce. So Hemkop is the result of a long-term job that's been made, and we're really happy about the performance they made in the quarter. City Gross is also a result of the job that we made a couple of months -- for a couple of months now since we made the acquisition 1.5 years ago. And so we continue to see a positive growth in City Gross. Willys still have a really strong position and has been growing for many years, no matter what economy we're in, both in good economies and bad economies. But with that said, also, Willys have had some extra push during the high inflation. We had high inflation in 2023. And also last year in the first 6 months, we had high inflation. So I mean, I think, and we see still a high focus on price and price value. I don't think that, that behavior will -- I think that behavior will last. And in that, Willys has a really, really strong position also going forward. And on top, we have a pretty low discounter share in Sweden. So there's a great potential to continue to grow Willys. Operator: There are no more questions at this time. So I hand the conference back to the speakers for closing comments. Simone Margulies: So by that, I would like to thank you all for joining today and all the questions, and I wish you a good end of the day. Thank you very much.
Operator: Hello to all of you. Welcome to Orange Q1 2026 Results Conference. For your information, this conference will be recorded. The call today will be hosted by Christel Heydemann, our CEO; Laurent Martinez, our CFO, with other members of Orange Executive Committee for the Q&A session after the presentation. So let's start with the presentation. Christel Heydemann, the floor is yours. Christel Heydemann: Good morning. Thank you for joining our Q1 results presentation. Before getting into our Q1 results, I would like to mention that last week in France, we announced entering into exclusive negotiation with the Altice France Group for the acquisition of SFR jointly with Bouygues Telecom and the Free-iliad Group. Our joint offer reflects a total enterprise value of EUR 20.35 billion for the Altice France assets under consideration. Orange's share within the split of price and value between buyers would be around 27%. This transaction would help sustain and strengthen the entire digital economy and the telecommunications sector in France. There is no certainty though, that this process will result in an agreement. In parallel, in Spain, we already received the approval of the antitrust authorities, and we are confirming a closing of MASORANGE transaction in Q2. Back to our results. The year 2026 started with the presentation of our new strategic plan, Trust the future. This plan was well received, and we are now fully focused on its execution. In Q1, we reported very strong financial results with group revenues up by plus 3.5% and EBITDAaL up at plus 6.6%. This is fueled by a very robust retail services performance, growing plus 1.1% in France and in Europe and plus 13% in Middle East and Africa. We also accounted for significant positive wholesale nonrecurring items in France. These items were mostly anticipated and therefore, already integrated into our guidance. Excluding these effects, the underlying growth in group revenues is circa plus 2.5% and circa plus 3.5% in EBITDAaL. Based on these solid results, we are upgrading our EBITDAaL group guidance from circa 3% to above 3%, while fully confirming the rest of the '26 guidance. Lastly, I would like to emphasize that in the current volatile environment, Orange remains very solid and highly resilient. We closely monitor conflict situations, particularly in the Middle East, always prioritizing the safety of our employees. Additionally, we are well hedged regarding energy in Europe and benefit from the high level of solar power adoption in Africa and Middle East. As a result, our exposure to the indirect impacts of the crisis is limited. Let's now review our strong Q1 results. Revenues reached EUR 10.1 billion and grew by 3.5%, driven by retail growth across all geographies and the expected positive wholesale nonrecurring items in France. EBITDAaL is up 6.6% this quarter, reflecting growth in retail services, continuous efficiency efforts and the positive effect of wholesale nonrecurring items. We maintained discipline on eCapEx with eCapEx to sales around 15%, in line with our guidance. This solid first quarter gives us strong confidence in achieving our 2026 guidance with an EBITDAaL growth now expected to be above 3%. Q1 was a dynamic quarter marked by the launch of several strategic Trust the future initiatives in our 3 core ambitions. Customer intimacy, innovative growth and excellence at scale. In customer intimacy, we introduced 2 AI assistants in France. Sharlie, a 24/7 conversational assistant dedicated to answering our Sosh clients and my AI assistant, MAIA, an assistant helping Orange sales teams better understand customer needs. We also launched new loyalty programs in France. Regarding innovative growth, we announced more than 10 innovative offers at the Orange Business Summit, including Europe's first anti-drone-as-a-service solution, sovereign collaboration tools and an AI-powered cybersecurity offer. In terms of excellence at scale, Orange Business announced a partnership with Tech Mahindra to accelerate digital transformation for our international customers. And in France, we began decommissioning 2G and copper networks closing 900,000 households while implementing our new organization to boost efficiency. Trust the future is in action. I will now hand over to Laurent for the business review, starting with France on Slide 8. Laurent Martinez: Thank you, Christel. Moving to France. The competitive environment remained generally stable on the high end and slightly improved on the low end. In the first quarter, our efficient commercial strategy led to robust commercial performance. We recorded the lowest churn on fixed broadband and convergence since Q2 2022, and mobile churn improved by more than 1 point. Net adds remained strong with 55,000 in fixed, a record since Q4 2021, 40,000 in mobile and 15,000 in convergence. Convergence ARPU is up by EUR 0.3 year-on-year and fixed broadband ARPU is stable, both sustained by our cross-sell strategy. Mobile-only ARPU is down by EUR 0.8, still reflecting the mix effect related to the competitive landscape over the past year. On the financial slide, revenues reached EUR 4.4 billion, up by 2.3% year-on-year. Retail services, excluding PSTN, increased by 1.1%. The strong performance of fixed broadband and convergence, driven by our focus on our customer loyalty and multiservice approach offset the expected decline in PSTN services this quarter. We increased our NPS to above 34, widening the gap versus the #2 to 11 points while reducing churn across all segments. On the wholesale side, revenues increased by 6%, mainly due to the positive impact of circa EUR 100 million wholesale nonrecurring items, which includes significant cost financing anticipated in our plan. The strong results give us confidence in achieving our target of stable plus EBITDAaL growth in 2026 in France. Turning to Africa and Middle East, which continues to deliver a very strong performance, demonstrating our positive momentum. Revenues increased double digits for the 12th quarter in a row, driven by money, 4G, fixed broadband and B2B. Remarkably, 2/3 of our countries are up double-digit growth in terms of revenues. Looking forward, we are very comfortable on our high single-digit EBITDAaL growth outlook for 2026. Let's continue with Europe. Europe posted a solid start of the year with revenue up 2.2% year-on-year. Services remained strong, fueled by good commercial momentum, balanced between volume and value. Over the quarter, net add remains robust with 66,000 in mobile, 51,000 in FTTH and 21,000 in convergence. Convergence ARPU is up by 4.2% in Q1 in Poland. IT&IS is up by 12%, mainly driven by Belgium and Poland. Wholesale growth was driven notably by low margin activities such as international interconnection. Thanks to this robust result, we confirm the low to mid-single-digit EBITDAaL growth outlook for 2026. Moving to Orange Business. In a market environment that remains very challenging, IT&IS revenue growth was driven by strong equipment sales and sustainable growth within Orange Cyber Defense of more than 9% in the quarter. We announced a new partnership with Tech Mahindra and the launch of 14 new innovative offers at the Orange Business Summit. Overall, we continue to actively drive the transformation of Orange Business, and we confirm our outlook for continued improvement. Turning to MASORANGE. The acquisition process, as you know, is well advanced with the recent clearance by the antitrust authorities, and we are expecting a closing in the second quarter of this year. Total revenues are up by 1.2% year-on-year, driven by B2B equipment sales and wholesale services, offsetting the expected mix impact on the services in a challenging market environment. Over 1 year, total clients is up significantly with over 400,000 mobile lines, with a limited reduction during the first quarter of 2026. Synergies are on track and the 2026 outlook remains confirmed. I will now hand over to Christel for the guidance update. Christel Heydemann: Thank you, Laurent. We are proud of this very strong Q1 results, which mark a very solid start for our new Trust the future plan announced a few weeks ago. Our 2026 guidance, excluding MASORANGE for now, is fully confirmed and is upgraded on EBITDAaL, mainly thanks to a very strong performance of Africa Middle East. The expected impacts of the reconsolidation of MASORANGE on our guidance are confirmed as well. We expect the closing of the MASORANGE operation in Q2 2026 and plan to provide further details alongside our H1 results. Laurent, Jerome and I are now ready for your questions. Operator: [Operator Instructions] So the first question is coming from Ondrej Cabej ek from UBS. Ondrej Cabejšek: Hello, can you hear me? Hello? [Technical Difficulty] Christel Heydemann: Yes, we can hear you. Ondrej Cabejšek: Okay. So 2 questions for me, please. First of all, congratulations on entering exclusive talks. And I was hoping you can give us color on key aspects of the second bid such as whether it is now largely a legal formality and you are confident this new offer will be accepted. What has allowed you to increase the bid by roughly 20%, whether there is any update on the regulatory process and time line and so forth? That would be the first question. Second question, please, is really on the French competitive dynamics where the retail ex PSTN trends have improved sequentially. So if you could please speak as to what is driving this? How sustainable it is? And whether now that there is a deal in place, we can expect maybe continued rationalization in the French market already? Christel Heydemann: Thank you. On the Altice negotiation. As you know, we submitted a revised offer compared to the offer we had submitted in October. And of course, in October, we had very limited information, since then we entered into due diligence in January, February and have been able to submit this revised offer, which has been accepted by the seller given the granted exclusive negotiation. In terms of what's now planned, as you know, we have this exclusive window until mid-May. There is, of course, a lot of usual items to be discussed, legal aspects as well as commercial as usual in this type of transaction. So I won't provide more details. As you know, this is a complex transaction given we are not bidding as Orange. We are bidding as part of a consortium, and we have also agreements within the consortium. But of course, as soon and if we reach an agreement and sign an MOU in the next weeks, we will, of course, provide you with more details. We are -- as we said, our share in the transaction is reflecting the value created and the price, 27%, which is unchanged compared to our offer in October. And then in terms of what has been driving the price evolution, a lot of aspects. Just to give you one item. Back in October, we were considering an asset deal. We are now talking of a share transaction for the acquisition of SFR shares. So that's just one item. And I don't want to go into more details given really at this stage, there is no certainty that this transaction will go to an end. But you know how important this transaction is not just for Orange and France, but at large for the telecom market. We've been very vocal on the need for market consolidation. We believe it's critical to sustain investment on our critical infrastructure. And that's why, of course, we will continue to engage with authorities, country authorities as well as regulatory authorities, but not just us, of course, as a consortium. So difficult to provide you more details at this stage, but stay tuned. And of course, as soon as we have progressed, we will give you more colors. On the French market environment, the Q1 competitive dynamics was less aggressive, especially on the low end. The broadband and the high-end market remains what it was before. Now on one side, you could say Q1 is usually a lower competitive quarter. There's some seasonality effect, even though it's not been like that over the past years, all Q1s. And this is normally the consequence of a very active promotional activity for the Christmas and end-of-year period. But the -- but clearly, lower competitive -- less aggressive. And of course, our performance is also very much driven by the lower churn on all our segments, mobile, broadband, convergence. And this is what we've highlighted in our Trust the future plan. Our focus on churn reduction is, of course, a key enabler of our commercial performance. In terms of what we could expect from a consolidation, let's be very clear. The transaction between the consortium and SFR, I suspect, especially in the current environment where purchasing power is under pressure because of the Middle East crisis. I don't think that if we were convinced that this transaction would drive price increase in the French market, I'm pretty sure the antitrust authorities would not approve it. So this is something that -- on which we are, on one side, very confident on the need for this transaction to happen and consolidation to happen, but also clearly, we know the market will remain competitive no matter what. And we also know that France has -- is one of the cheapest market in Europe as well. Ondrej Cabejšek: I may have one quick follow-up. Can you just confirm that part of the deal could now be share-based? Is that what you said? And if so, how could that possibly look like? Christel Heydemann: Well, this is a technicality, but indeed, the consortium would buy the SFR shares that are part of Altice. In addition, we would also buy other assets. So again, too early to provide you more details. We're not buying the Altice shares, to be clear. But this was just one example of something that changed between October and our latest offer. Operator: So our next question is coming from Andrew Lee from Goldman Sachs. Andrew Lee: Just checking, you can hear me? Operator: Yes, we can hear you well. Andrew Lee: Okay. I have 2 organic questions for you. Just one on France and one on Spain. So useful color from you guys on a slightly less aggressive low end of the market in France. And as you've commented in the past, some of the pricing is coming up by EUR 1 to EUR 2. So kind of a part A and part B question to this one. When can we start seeing that come through in your ARPU trends in mobile in France? And is it enough of an improvement for mobile ARPU to turn positive through the year? The Part B question is Iliad launched some unlimited offers at the end of the quarter. Has that impacted your perception of competitive aggression in France at all? And then just on Spain, you saw an improvement in MASORANGE's growth to 1.2% in the quarter. Are we seeing any signs of an improved outlook for growth there, whether that be MASORANGE's positioning or the market environment? Christel Heydemann: Thank you, Andrew. On the French market, I mean, we don't guide on the mobile ARPU trend, but clearly, what we see is less aggressive offers for the low end of the mobile market, which probably also drives less market dynamic and part of the explanation for churn reduction. The lowest part of the market is very sensitive to price. And so it's difficult to directly reconcile this dynamic with, of course, the future trend. Part of our ARPU drive is really linked to churn reduction and upsell on our base. So -- and again, we don't guide on the mobile ARPU trend. And as you know, our strategy to grow is also convergence. So migrating mobile-only customers to convergence customers. On the Free Max offer, which is the high-end offer from -- announced by Iliad, we -- I mean, this is, of course, their strategy. I'm not going to comment on their strategy. That being said, if we think of high capacity or big package for travelers, we have competitive offers in our portfolio, be it Sosh or Orange that are actually cheaper than this Free Max offer. And EUR 30 a month for mobile is not cheap. So we -- I mean, at least, we have our own strategy. We don't think that this at least will change what we drive. But we've seen a good take-up on all our travel offers as well. And as you know, I mean, Q2 is typically an active quarter for that. So expect more commercials as well from us on this side. But of course, Free is sending a signal in the market that they need higher-end offers compared to their, I would say, brand that has been built on this EUR 2 voice mainly offer. On the Spanish market, the Spanish market remains extremely competitive on the low end. Our performance in Spain is as per plan, and we expect to stabilize. So it's the same recipe as in France, focused on churn reduction, focused on customer value management, and we have been -- we have seen some price increases on the high end of the market. And of course, we play with our different brands, but we definitely forecast an improvement. And actually, Q4, if we compare our Q1 performance in Spain compared to Q4, we have already improved the trends. So this is as per plan. Operator: So the next question is from Akhil Dattani from JPMorgan. Akhil Dattani: Can you hear me? Christel Heydemann: Yes, we can. Akhil Dattani: Great. I've got two as well, please, if I can. The first is just on the anticipated merger review process on the SFR deal. I'd love to get your early thoughts more just around jurisdiction. Bouygues has been talking in the last couple of months around their expectation that the deal will likely not be split between both the French authorities and the EC, but will more likely be led by one party. I just wondered if that is your assessment at this stage. Now we're a bit more advanced in the process. And I guess I'm particularly interested in your thoughts around the press reports last week around the EU's new merger review process draft that was leaked to the Financial Times. It looks like there is a lot more supportive rhetoric around consolidation and a focus away from consumer pricing and more to innovation investments in creating European champion. So would love to just get your understanding of where we are and your engagement with the relevant bodies. So that's the first question. And then the second question is, I guess, a bit of a simple one around the EBITDAaL guidance. Q1 obviously was very strong at 6.6%. Christel, you mentioned underlying it's still 3.5%. If we were to just very simplistically take the 3.5% for the next 3 quarters, you'd obviously get well above 4%. So could you just talk us through when we look through guidance? I know it's obviously very early in the year. But is this just a bit of conservatism in the context of obviously lots of macro unknowns? Or are there specific phasing items we should think about for the next few quarters? Christel Heydemann: Thank you, Akhil. On the merger review process, you're right that, as you know, this would be 3 files, one for each member of the consortium. And we know Bouygues would be led from the French authorities and Iliad would be led by Brussels. And regarding Orange, it would depend linked also to the closing and the time line of our Spanish transaction. That being said, you're right, ultimately, in this type of deal, and same was true when we did the MASORANGE transaction. You would expect one of the authority to take the lead, and this is something that the 2 authorities would agree on. That being said, I think that given the scale of the transaction, the impact this would have on the telecom market in Europe, I'd be surprised that even if the French authorities lead the analysis, and again, this is not for us to decide. It's going to be an agreement between the authorities. I'd be surprised if Brussels does not follow closely and if they don't work together. So of course, it's -- we don't have any signal of any sign. And of course, I can only remind that so far, we don't have an agreement to submit. So it's a bit premature. But of course, we started to discuss with authorities to get them ready because we also know that these antitrust process takes time, and we want to make sure we can help them get up to speed quickly. In terms of what the new draft or at least the leakage we got in the FT article, we follow closely, of course, and we expect to see the revised guidelines of the draft in the coming weeks. We take it as positive. We can recognize from what has been leaked that some of the ask we had are in the leakage. So it's -- I would say it goes in the right direction. As you know, we've been pretty vocal for the past years. And so this is key. Now let's -- we are -- there is a new Head of DG Competition that was recently appointed but we also know the administration will not completely walk away from consumer prices, especially, as I said, in the current environment where I don't think any political leader could easily talk to their -- I mean to citizens and country population and completely discard price impact or purchasing power. So of course, this is something that if we look at the CMA decision in the U.K. was taken into account with some behavioral remedies and some abilities to drive that. And of course, this is something that we are also considering. But again, too early to comment further given we're still actively discussing on how to get an agreement agreed. In terms of the guidance, as we said, we are upgrading above 3%, and we are, I mean, very confident and very -- I mean these are good results, very good results for Q1. As we also said, we will update and provide you more details and the impact of the MASORANGE consolidation in -- with our full H1 results. So I mean I won't give you now a more detailed guidance. But indeed, we are very confident with our guidance. Operator: So we have now a question from Nick Lyall from Berenberg. Nicholas Lyall: I hope you can hear me. Operator: Yes, very well. Nicholas Lyall: There was a couple of questions on France, please. Firstly, I think, Laurent, in your comments, you mentioned the top end of the market is stable, but I just wanted to ask on the convergent ARPUs. It looks as if by next quarter, they could be negative and slipping. So is it possible to give us a bit of an update on what's happening there, please? And then secondly, again, in Orange France, in the revenue line, the other revenue seems to be up by about EUR 30 million as well. Apologies for being a bit of a spotter here, but revenue is up about EUR 30 million. That would account for about 70 basis points of growth. What's in there? Is that a one-off for, say, copper sales or something? Or is there -- is that just a normal underlying number, please? Christel Heydemann: Thank you. On the convergent ARPU, as I said for the mobile ARPU question, we don't guide on the ARPU trend, but there is also a seasonality effect between Q4 and Q1 related to content or roaming, for instance. So -- but again, we don't guide on convergence, but we are comfortable. And of course, we are successfully executing our plan where the growth is driven by churn reduction and our convergent strategy. On the question on others, Laurent? Laurent Martinez: Nick, so on the others, indeed, we are EUR 22 million year-on-year. So it's a small item, but this is related notably to the copper resale phasing in France. This is the main element of this variation. Nicholas Lyall: Okay. That's great. And can I just come back on maybe Akhil's question as well. Is there any difference, Christel, you think in terms of timing between French and EC authorities? Just -- it's probably a very, very difficult one to answer, of course. But is there any sense that the French authorities may be faster if it was a French process? Could you help us on that? Christel Heydemann: Well, I'd love to tell you that it's going to be fast, but my own experience with our different files has been pretty disappointing. And you know, I mean, based on our Spanish experience, if you want to move fast in this type of transaction, of course, you have to be very proactive in terms of remedies. And if I look at our Spanish approval, so you could say, okay, it was in a previous world with a different commission, old guidelines, but still, it took time also because we didn't want to say yes to everything that was required. So -- so there's a thin line between trying to move fast and making sure we build a proper and sustainable environment for the future. So -- but clearly, in order for us to move fast, we are anticipating, preparing, I mean, notification, a lot of work that has to take place. But again, I don't want to -- the French authorities. We know that the authorities will do their best also to move fast. They know they have pressure and political pressure and economic pressure. But there's a lot of work to be done, and we have to respect that. Operator: So next question is from Roshan Ranjit from Deutsche Bank. Roshan Ranjit: Can you hear me now? Operator: Very well. Roshan Ranjit: I've got 2, please. First one, sorry, going back to France and maybe a bit more focused on the fixed ARPU, which, I guess, reversing some of the declines, which we've seen in the previous quarters. Something which you guys have talked about before, which was the perhaps targeted price increases as well as the ongoing upselling. Is it possible to kind of give us a bit more detail around if there was an element of that this quarter in these targeted price increases, and perhaps what percentage of the base that was allocated to? And can we expect some of that going forward? And secondly, Africa Middle East, which I guess we don't get the EBITDAaL split this quarter, but based on the top line, seems to be going very well. I got a sense from the CMD that there is an element of upside through the year maybe. But can you remind us on the energy situation regarding, I think, is it subsidies versus the solar split and how you are not officially hedged on energy, but how you are able to scale that dynamic given the energy situation? Christel Heydemann: Thank you, Roshan. On the fixed market, maybe, I mean, I will let Jerome comment on the impact of our price increases and whether we plan more and Laurent will answer on our energy hedging policy. Jerome Henique: Yes. Thank you, Christel. Well, as mentioned, we are stable year-on-year and quarter-over-quarter on our fixed broadband ARPU. This reflects the success of our upsell and cross-sell strategy first. It's as well fueled by our multiservice activities or new growth engine such as subscription VOD or other packages, helping us to push for high-end mix in our sales which means fixed broadband above EUR 40, which represent now a large share of our sales, thanks to the enrichment of the packages. As far as price increases are concerned, we do a very limited and targeted one. I don't think we do comment on volumes on that. Laurent Martinez: So Roshan, moving to the energy and the MEA situation. Just overall, if I look at Europe, we are 100% hedged on the energy for Europe in '26, more than 90% in 2027, and we are well advanced as well in '28. So very much extremely well covered. On Middle East and Africa, we are covered as well naturally because we have a lot of our sites, which are solar powered. And we continue to expand on this in terms of investments. And of course, we'll have some headwinds related to the fuel price, and there is a lot of mechanism indeed, in terms of subsidies, mitigation. So overall, we are not at all concerned that would put at risk our overall guidance and the positive momentum we have in Middle East and Africa when it comes to the EBITDA. Operator: So we are going now to take a question from Carl Murdock-Smith from Citi. Carl Murdock-Smith: Given the other issues I thought I'd just double check. Can you hear me? Operator: Yes, very well, Carl. Carl Murdock-Smith: That's fantastic. Two questions from me, please, both slightly on kind of prudence in guidance. So firstly, on Africa and the Middle East, following up kind of on Roshan's question. The evidence in Q1 is that it's still growing very well. Laurent, I think you said that you're very comfortable on the EBITDAaL guidance. Is it fair to say that your high single-digit guidance for this year on EBITDA versus 14% last year could be seen as conservative? And are you simply staying prudent given, as you just talked about, the kind of potential impacts from energy prices and geopolitical events? And then secondly, I was reading the universal registration document. And I wanted to ask about the disparity between annual bonus targets and the LTIP. So in your 2025 annual bonus, your organic cash flow beat targets with 23.5% payout versus its 20% weighting. And that follows on from beats in 2023 and 2024 as well. So you've beaten your target in the scorecard in each of the last 3 years. But if I look at the 3-year LTIP over the same time period of 2023 to 2025, you came in below target at just below EUR 10.7 billion versus a target of just above EUR 10.8 billion. So you only got a 94.5% payout on that metric. So I guess I'm asking just what's going on there. Is Orange more prudent when issuing its 1 year targets and guidance and then more stretching in its medium-term budgets? I'm just trying to reconcile that overachievement on 1-year performance versus underperformance on the 3-year. And I suppose I'm asking with one eye on your 2026 guidance, which might be viewed as prudent, but also another eye on the 2028 organic cash flow target of EUR 5.2 billion, and your likely overachievement or underachievement relative to that target? Christel Heydemann: Thank you, Carl. So I mean, as we -- I mean, first, I mean, the guidance is a combination of -- I mean, it's our best estimate from what we see on our group portfolio of activities, and we are rightfully confirming and as you said, I mean, MEA is really outperforming, and it's been like that for actually several quarters. Now we do not underestimate as well the difficulty for the teams to achieve those results in a very complex environment and sometimes volatile environment. But -- and we will reconsolidate MASORANGE in Q2, which has also impact on our overall numbers. So we will provide you more details, especially on the cash flow accretion that this would bring knowing that for the rest of the guidance, the MASORANGE, we reconfirm the guidance. When it comes to how we drive the performance of our teams with annual bonus and LTIP. So the LTIP, of course, is on 3 years. Just so that you know in terms of why the '25 performance and this has been an intense discussion with my Board of Directors. The guidance had been set in the context where initially MASORANGE was not included, and it was revised to include MASORANGE. And so somehow the LTIP was more demanding, I would say, in terms of target than the annual bonus. But this is -- there is no specific intent to be more strict or ambitious in LTIP than in annual bonus. We take the same balance where we were -- we want objectives that are reachable, but we also want to make sure we reward over performance. And all our executives in the company, our top 300, they both have an objective on their division, the business they drive as well as a group objective and the LTIP is a global reward system. So that now we are increasing the volume of LTIP to our top management, and I know this is a comment we had over the years from you to make sure that we aligned objectives from -- on the performance and the shares and investors and top executives. So this goes in the right direction. But I also recognize that our Board of Directors is trying to push us and challenge us by setting ambitious objective. But again, it's always an exercise where it's all about making the objectives ambitious but also reachable. So it's a lot of internal discussion, as you would expect. But there is no specific intent in terms of why '25 was different between the annual bonus and the LTIP. Operator: So next question is from Russell Waller from New Street. Russell Waller: Hope you can hear me. Operator: It's okay. A bit far away, but it's okay. Russell Waller: Okay. Yes, I had a question on the consortium offer. You said that there was a possibility that you were thinking about bidding for the shares rather than the asset. And I just wanted to ask about that, please. What are the implications of that? Does that mean that you then take on some tax liabilities or working capital adjustment? Or are there any other liabilities or assets? And why is it important or relevant? Is this something that the seller has asked for? And why is it important to hear? Christel Heydemann: Thank you. On the -- I mean, this was just one example of something that changed between our revised offer and the first offer in October. But I won't provide you more details, but just the objective of the share transaction for SFR is to be faster in terms of transition and executability of the transaction because if you think of a pure asset deal, that would mean acquiring customers, acquiring IT, acquiring very different type of assets with a risk of execution that was too high. Now I won't comment on tax and liabilities because as you can expect, this is something that in any transaction is reviewed in detail. And I don't think there's any difference whether it's an asset or share deal, I mean, in any case, liabilities and taxes are included. And this is something that we've reviewed. And of course, we would comment in more details if and when we have an agreement. Operator: So next question, this is from St phane Beyazian, ODDO. Stéphane Beyazian: I was wondering with MASORANGE potentially France, obviously, the timing of the 2 transactions are obviously not the same, not the same year. But I was wondering whether you're considering some noncore asset sales, tiny bits that perhaps you could be selling in order to bringing a little bit of cash. And my second question is regarding the copper network shutdown, whether you've made progress there? What color can you give us about this? Christel Heydemann: Thank you. I mean, as you know, we always review our portfolio of assets, and we have been -- we have been exiting or selling several assets, of course, Orange Bank a few years back, our content activities as well. More recently, we announced the sale of Globecast, and we are now in the process of consulting employee representatives. And this is something -- a transaction that would -- that we plan to close later -- I mean, in the next month, later in the year. So there is, of course, a number of assets that we always consider to make sure that they get the proper shareholding structure for their own strategy. But this type of portfolio review is not linked to our balance sheet need. I would say that for the MASORANGE and the considered Altice transaction. As you know, this is something which we took care of, and we have the ability to fund through our cash flow trajectory. But of course, that doesn't preclude us from reviewing on a regular basis, our portfolio of assets. On the copper, Jerome? Copper. Jerome Henique: Yes. Thank you, Christel. Well on our copper network removal and technical shutdown, we successfully passed the Phase 2 last Jan, which was a scaling one as we had a technical shutdown for close to 1 million households. It went very smooth and well indeed. And I think it was underlined by the Arcep regulation authority as such. We as well, commercially speaking, closed 21.5 million households for copper offer sales. So we are rolling out this industrial project as per plan with no issues so far. Stéphane Beyazian: And have you already contracted with -- I think you were planning to launch a tender. Have you done all of that already? Jerome Henique: Yes. It's still in process because the next phases will be, of course, more and more important in terms of scale of removal, and we need to control the end-to-end process, including treatment and resale. RFPs are still going on. Operator: We now have a question from Eric Ravary, CIC. So Eric, we cannot hear you because we see on our device, on our screen that your mic is muted. Okay. Well, in any case, as you know, the team is fully at your disposal after the call to follow up with your question. So Eric was the last question in the list. So we could possibly take a very last one if someone is willing to do so. If not, I will leave the floor to Christel for concluding remarks. So Christel, please. Christel Heydemann: Thank you. Q1 marks an excellent start to our Trust the future plan, and we are very pleased with our very strong results. Based on these achievements and our outlook for the upcoming months, we are slightly raising our group EBITDAaL guidance from circa 3% to above 3%, and we will again provide you with an update on our guidance with H1 results following the closing of the MASORANGE operation. Thank you, and I wish you a pleasant day.
David Mulholland: Good morning, ladies and gentlemen. Welcome to Nokia's First Quarter 2026 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. Today with me is Justin Hotard, our President and CEO; along with Marco Wiren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will mostly be on a constant currency and portfolio basis and other financial items will be relating to our comparable reporting. Please note that our Q1 report and a presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results and reconciliation between the two. In terms of the agenda for today, Justin will go through our key messages for the quarter. Marco will then go through the financial performance, and we'll then move to Q&A. With that, let me hand over to Justin. Justin Hotard: Thank you, David, and good morning, everyone. Our first quarter gave us a solid start to 2026. Net sales grew 4% to EUR 4.5 billion with an operating margin of 6.2%, and we delivered a free cash flow of EUR 629 million in the quarter. Gross profit was EUR 2 billion and gross margin expanded 320 basis points, supported in part by the absence of a onetime charge in mobile infrastructure in the prior year. It also benefited from strong performance in Optical Networks as we began to see the synergy benefits from the Infinera acquisition. Operating profit was EUR 281 million, with operating margin expanding 200 basis points. We saw strong momentum with AI and cloud customers. Net sales grew 49%, and we received EUR 1 billion in new orders, particularly driven by Optical Networks. At the group level, book-to-bill was above 1. And in Network Infrastructure, it was well above 1. I'm proud of Team Nokia's execution in Q1. The focus now is on delivering through the year and maximizing the growth opportunity in front of us. At our Capital Markets Day last November, we outlined our view of the AI super cycle and the market opportunity for Nokia. Since then, demand has accelerated. At the time, expectations were for the largest hyperscalers to spend around $540 billion in CapEx in 2026. Now, those expectations have increased to over $700 billion. This reflects the pace at which our customers are scaling infrastructure for AI. Today, AI-driven traffic is estimated at around 20% of total network traffic, which is roughly 80 exabytes per month and is still primarily human to machine. As we move deeper into agentic AI adoption and ultimately physical AI adoption, machine-to-machine traffic will become the primary driver of traffic, and that will lead to a step change in network traffic. We already see this demand in AI factories, both in data center interconnect and inside the data center in routing and switching. Increasingly, this is also driving demand in transport networks across metro and long haul, and we believe this is a structural shift in the market, which will sustain for multiple years. We now expect our AI and cloud addressable market to grow at a 27% CAGR between 2025 and 2028, up from the 16% we shared in November. This implies the addressable market for network infrastructure growing at a 14% CAGR compared to 9% that we shared in November. This is already benefiting Nokia in orders and in revenue. In March, we introduced several new products at OFC. These launches reflect our focus on accelerating innovation following the Infinera acquisition. The industry is scaling from hundreds to thousands of fibers between data centers. To address this demand, we introduced our next-generation hyperscale multi-rail solution, which will begin shipping later this year. It scales fiber capacity without expanding physical infrastructure, delivers an 8x increase in density and is 25% more dense than competing products announced recently. In addition, we also shared that we're evolving how we bring optical solutions to market. Our road map moves to a building block architecture with 4 optical engines that are embedded in multiple form factors compared to the 2 engines per generation previously. The architecture allows us to bring 13 application-optimized solutions to market. For customers, this means simplified deployment and a reduced total cost of ownership of up to 70%. These products will begin sampling in the first half of 2027 and will ship in volume in the second half. In Q1, we also saw strong growth in our IP networks pipeline as we build deeper engagements with our AI and cloud customers on switching and routing. We were awarded new design wins and continue to build a strong pipeline of further opportunities. We expect this to translate into new orders over the coming quarters. We've also increased our investment in optical networks and our new indium phosphide manufacturing facility in San Jose, California is on track to begin ramping production later this year. As a result, we are increasing our growth assumptions for network infrastructure in 2026. We now expect growth between 12% to 14%, up from the 6% to 8% we communicated in January. For Optical and IP networks combined, we expect growth of 18% to 20%, up from 10% to 12%. Turning now to Mobile Infrastructure. This new segment began operating in January, and the team is focused on aligning our road map to customer needs, streamlining the integrated business to improve productivity and delivering on the KPIs we outlined at our Capital Markets Day. Core software had another strong quarter, growing 5% and gaining market share. In the quarter, we delivered 6 competitive swaps. Our customers are modernizing their platforms with cloud-native solutions, adopting new security features and driving end-to-end automation with a focus on reducing operating expenses. Radio networks also delivered on our expectations. We signed several deals in the quarter, including with Virgin Media O2. At Mobile World Congress, we introduced a new generation of radios that are AI RAN ready. Our Doksuri remote radio heads deliver a 30% improvement in power efficiency and up to a 25% reduction in weight. In addition, we continue to make good progress on AI RAN in partnership with NVIDIA, and we are on track to begin field trials by the end of the year. Technology standards continue to perform well across its markets. The business continues to deliver stability, and we expect largely flat net sales for the full year with improved profit generation year-over-year. With that, I'll hand over to Marco. Marco Wiren: Thank you, Justin, and hello from my side as well. As Justin mentioned, we had a solid start to the year with EUR 4.5 billion in sales, growing 4% with growth in both operating segments. Gross profit was just over EUR 2 billion with a gross margin of 45.5%, a 320 basis points improvement on year-on-year. Operating profit was EUR 281 million, with an operating margin of 6.2%, and this is up 200 basis points compared to the previous year. Free cash flow was EUR 629 million, and the quarter ended with a net cash of EUR 3.8 billion. Network Infrastructure sales grew 6% in quarter 1. Optical Networks had another strong quarter with 20% net sales growth, and this is mainly driven by AI and cloud customers. We also grew in telecom as operators invest to meet increasing demands on transport networks. IP Network sales grew 3% with growth in AI and cloud, offset by softness in other customer segments during the quarter. We expect growth in IP Networks to start to accelerate in quarter 2 as we ramp shipments tied to new design wins with AI and cloud customers. Fixed Networks declined by 13%, reflecting our portfolio strategy to focus on higher-margin products. Sales of our optical line terminal products were largely stable in the quarter. And looking ahead, we expect the sales trend to improve as the year progresses. We see a supportive demand environment, especially in the U.S. with fiber deployments remaining a key investment focus for Tier 1 operators. Gross margin in Network Infrastructure was 43.4%, increasing 150 basis points. The increase was driven by a higher gross margin in Optical Networks, benefiting mainly from Infinera integration synergies and scale. We continue to expect some gross margin headwinds through the year as a result of product mix. Operating margin was 6.7%, a 30 basis points below the previous year as we had a full quarter of Infinera expenses compared to 1 month last year. For the full year, we do expect to slightly increase the Network Infrastructure operating margin. However, our focus this year is on investing to capture the long-term growth opportunity in the market. In Mobile Infrastructure, net sales grew by 3%. Core software sales grew 5%, while Radio Networks sales were flat. Technology Standards sales grew by 10% as a result of signing several deals in consumer electronics and multimedia, which contributed catch-up sales in the quarter. Gross margin increased by 430 basis points to 48.5%, in line with our long-term target for mobile infrastructure gross margins. The increase was mainly related to EUR 120 million contract settlement, which negatively impacted the previous year. We expect Mobile Infrastructure gross margins in the second and third quarters to be somewhat weaker and then much stronger in quarter 4. And this is consistent with the typical seasonality in the business. Operating margin was 8.9% in the quarter, an increase of 380 basis points, reflecting the settlement impact and lower operating expenses supported by the ongoing cost-saving program. If we then turn to look at our sales growth by customer segment, AI and Cloud grew 49%, mainly driven by Optical Networks. Mission-critical Enterprise and Defense grew 19% and Technology licensing grew 10%. These growing markets offset a 2% decline in telecom to deliver 4% growth for the group. The decline among telecom customers was partly related to some of the portfolio decisions we are taking in Fixed Networks. Overall, we continue to see the telecom market as relatively flat. The quarter 1 was a strong quarter for free cash flow generation, which amounted to EUR 629 million. We saw the typical working capital unwind in the first quarter related to the receivables buildup at the end of '25 from a strong quarter 4 sales seasonality. For your models, remember that quarter 2 is typically a seasonally low period for cash as we pay employee cash incentives in that quarter. Finally, to our '26 guidance assumptions. Our group level financial outlook remains unchanged, and we are currently tracking somewhat above the midpoint of the range for comparable operating profit, which is between EUR 2 billion and EUR 2.5 billion. Justin has already mentioned the 2 key assumptions for the full year that have changed. We now target to grow faster in Network Infrastructure this year with 12% to 14% growth, up from the previous assumption of 6% to 8%. And specifically in Optical and IP Networks, we now target 18% to 20% growth, up from the previous 10% to 12% growth. Then regarding quarter 2, we currently assume a 5% to 9% sequential increase in net sales. For operating profit, we expect quarter 2 to account for between 12% and 16% of the full year based on the comment I already made that we are tracking somewhat above the midpoint of the full year range. This would equate to H1 being between 24% and 28% of the full year operating profit, consistent with 2025. And this is mainly due to the growth-related investments we are making to support the long-term opportunities in the business. And with that, let me hand back to David for Q&A. David Mulholland: Thank you, Justin and Marco. As usual, for the Q&A session, as a courtesy to others in the queue, could you please limit yourself to 1 question and a brief follow-up. Sherry, could you please give the instructions? Operator: Yes, sir. Thank you. We will now begin the question and answer session. [Operator Instructions] I will now hand it back to you, Mr. David Mulholland. David Mulholland: Thanks, Sherry. We'll take our first question today from Fredrik Lithell from Handelsbanken. Fredrik Lithell: Congrats, a great report. I would like to step into the world of Optical Networks and ask you your raised assumption for the year. Is that based on that you see more positively on getting better traction on sort of production capacity throughout the year, so earlier than you anticipated before? Or is there something else in there that gives you the opportunity to raise that guidance? Justin Hotard: Yes. Thanks, Fredrik. So I think 2 things I would touch on. I think one is a little bit more confidence on supply. And obviously, the fab is one component. There's also the other -- the components of the optical subsystems, the DSPs, obviously, that's in pluggables. Obviously, as you think about our larger systems, there's multiple different elements to that. So it's a bit more supply confidence on optical from -- obviously, as we said, demand is strong -- demand continues to be strong on optical. And then it's also related to some of the traction we're starting to see in IP networking. And as we've talked about in the past, the IP networking business has been a little bit lumpy as we drive the growth, but we're starting to see more visibility for the year, and that's a part of what's driving the growth. David Mulholland: Did you have a follow-up, Fredrik? Fredrik Lithell: I'm fine with that. David Mulholland: Thanks Fredrik. We'll take our next question from Janardan Menon from Jefferies. Janardan, please go ahead. Janardan Menon: Just wanted to dive into the design wins and the EUR 1 billion that you've reported saying most of that or the bigger portion of that is from Optical. Are these still on the 800 gig side? You had put out a very impressive portfolio of products at the 1.6T, 2.4T, 3.2T at OFC, which you said would be starting to come through by late 2027. So are you already seeing some order intake on those? Or is it too early for those kind of more leading-edge products to be -- or next-generation products we're seeing orders right now? And I have a small followup. Justin Hotard: Yes. First of all, thanks, Janardan. So I think if you look at the demand that we're seeing -- the demand that we're fulfilling, I should say, for this year, I really see that momentum on the back of our 800-gig pluggable and then the associated line systems and the platforms that we have available and shipping today. A key thing that I maybe didn't touch on in my comments, I'll just emphasize is that the road map we launched at OFC, I touched on the fact that it's largely oriented towards 2027. But a key note there is that road map was designed with a real focus on AI and cloud customers and designed in collaboration with some of those customers. So we talk a lot about that customer collaboration. I talked about it at CMD a little bit. We talk about it quite a bit internally, and that's a good example. And then as I would just kind of give you macro broad brush orders, I think what we see in orders generally is some elongation in orders in terms of a desire for a longer-term commitment on orders. And that's, of course -- that's also something we're seeing in terms of our demand back into the supply chain, providing longer-term commitments. And I think that's very normal with the kind of demand expansion we're seeing in the lead times. And I think if you look at other -- our peers or other players in our ecosystem in this space, they're all saying similar things. So I would say that, that's very consistent for us as well. Janardan Menon: Understood. And I know you don't want to talk about growth in Networks and Optical separately, but it's been quite a big increase in -- it's quite a big increase in your guidance from 10% to 12% to 18% to 20%. Is most of that from Optical? Or are you going to see a meaningful acceleration in your IP side from Q2 onwards, which could, say, take you towards the double-digit 10% kind of growth rates there by the end of the year? Justin Hotard: Yes. I would say that the optimism we have on the 18% to 20% is across both sides of the business right now. David Mulholland: We'll take our next question from Artem Beletski from SEB. Artem, please go ahead. Artem Beletski: I would like to ask on AI and cloud-related orders. So I think book-to-bill was around 3 in the quarter. And when do you actually expect some catch-up to be seen in terms of deliveries? And could you maybe talk still about some potential delivery constraints what you have in this area? Justin Hotard: Yes. I think, Artem, first of all, I'd say right now, I'm focused on maximizing the opportunity that we see. And I don't see the book-to-bill is something I need -- we need to catch up to. Our focus right now is on just maximizing the demand. As I said as well, we are starting to see some elongation of the order cycle, which is normal in these. And then in terms of constraints, I mean, I won't get into too much detail, but I think it's -- generally, it's -- there's a fair amount of constraint in the semiconductor ecosystem in general. We don't talk about it, but if you think about the kinds of lead times you hear across the semiconductor manufacturers, the leading players, I think that gives you a pretty good indication of what lead times are, and then obviously, in other areas, at the scale that we're building indium phosphide as an industry, obviously, that's driving demand back into the supply chain that we need to build capacity for. And so we're working on that as well. And that gets a little bit to the point on investment. As you think about investment, I would think about it in optical in a few ways, right? One is investing and scaling the capability and capacity. We're obviously bringing on the second fab, but it's scaling production capability into the supply chain. And then, of course, continuing to invest in the product portfolio to make sure we're maximizing the coverage of the portfolio against the market demand that we see. David Mulholland: Thanks Artem. Did you have a quick follow-up? Artem Beletski: Yes, I had actually. So just relating to fixed networks. So you do highlight some headwind coming from consumer premise fiber business that is not seen strategic. Is it something that should be prevailing throughout this year or how we should think about it? Justin Hotard: Yes. I think it's something that is going to -- we're going to continue to be disciplined throughout the year. And there's probably two things to consider here. One is the macro market on fiber, particularly with what's happening in the U.S., we talked about some of this last year with the CapEx builds of the Tier 1 and Tier 2 operators, obviously, beat us some tailwind. So we feel good about the underlying business, but we want to make sure that we're focused on the right type of business for us long term. And so we expect that we'll have -- continue to have some headwind on the CPE side as we become more disciplined in that space and focus on the areas where it's valued. We also think this is a business that has good long-term prospects in data center. And we launched at OFC. I didn't touch on it, but at OFC, we launched an out-of-band management solution oriented towards data center. So we really like this business and we realized it was a bit of a tough quarter. It's just a situation where we're going through what I think is a very intentional transition to making sure the business has a long-term sustainable growth profile, not just in top line, but more importantly, in gross margin and operating profit. David Mulholland: Thanks Artem. We'll take our next question from Simon Leopold from Raymond James. Simon Leopold: Thank you, David. So the first thing I wanted to touch on was, in the past, you've floated this idea of growing the switching business by on the order of EUR 1 billion into hyperscale opportunities. I'm wondering with -- given sort of the commentary today and the wins you've had, could you update us on really the current opportunities in the sales funnel and longer-term prospects for this business unit? Justin Hotard: Yes. I don't -- Simon, I'm not sure there's much more that we'll say than what we described, but maybe just to kind of break it down a little bit. Good design wins in Q1. Those don't show up meaningfully in orders. They're in pipeline, but they're not in orders in Q1. So we expect to see some of that start to flow in, in Q2. And as you likely know, these businesses are more design win driven. And what I mean by that is it's not a procurement event where you kind of -- you have a procurement, and then if you're awarded that, you win that procurement, then you go to the next procurement. It's more about getting designed into a specific use case and application. And so that means that the sales cycle is a little bit longer, but encouraged by the progress that we're making here, and we'll continue to update you as we see the longer-term forecast. But I'm really pleased with the work that the team is doing and the progress we're making. Simon Leopold: And then as a quick follow-up here. It does seem as if the press release cadence in the mobility business has stepped up a bit. And you didn't talk that much about it today, but I just want to get a better feeling. You mentioned the field trial for the AI RAN. Wondering if there's any movement change in your view on how this particular business unit in mobility RAN might be trending, particularly relative to how you talked about it last quarter. Justin Hotard: Yes. I think, first of all, Simon, a couple of things. One is, and we touched on this a little bit in our -- well our segment performance shows it, and I think we touched on it. Overall, the telecom market is flat. I think what we realize is that strategically, this is a market where we need to find new sources of value, and those can come either from enabling new services for the telcos to monetize or a business that's less CapEx intensive. And I think we fundamentally believe that the future is much more of an evolution and is software-driven. We've talked about that in a number of forums. What I'm very pleased about right now is that the AI-RAN trials and the engagement around a model that will fundamentally be different for the baseband because we'll start to detach software innovation. And what I mean by that is not just features, but actual performance enhancements from the underlying hardware, just like you see model performance gets better in AI with GPUs, but you continue to see model performance improve even over the life of the same GPU. It's one of the benefits of that architecture. We see that same thing coming in this part of the business. And so I'm really pleased that we're seeing such strong interest from the industry. And I think this is a business as we -- as I said at CMD, our focus is not on making the business necessarily a growth business because the underlying market is not growing, but to make it one that's much more profitable and delivers an attractive return on invested capital. And that's our focus. I'm very pleased with the start the team has coming together in MI. Obviously, a lot more work to do and a big milestone later this year with NVIDIA. David Mulholland: Thanks, Simon. We'll take our next question from Rob Sanders at Deutsche Bank. Rob, please go ahead. Robert Sanders: Maybe just a question around profitability in optical. I think originally with the Infinera deal, you were looking at double-digit operating margin. But clearly, you're stepping up your investment. So I was just wondering if you're still sort of on track to hit that target maybe by next year? The second question would just be around hiring and OpEx. Given the opportunity is clearly growing, what is your view around OpEx growth this year? Justin Hotard: Do you want to take those? Marco Wiren: Yes. When it comes to the Optical, just like when we announced the deal in Infinera deal, we said that we aim for double-digit operating margins, and this is something we are still believing in. We've seen a very good synergy work that the teams have been doing, and we are on track or actually ahead of our targets when it comes to synergy captures. So we're very pleased with that work. And also when it comes to -- if you look the combination of these 2 companies, how well they actually complemented each other. And this has been extremely successful among our customers as well. So we have had very good design wins. We were very fast to decide on the road map. And this is one reason why we've seen these good wins on the Optical side. So there's a lot of positive things that we've seen, thanks to that integration and acquisition. Yes. And when it comes to OpEx, we've just said that we invest in capturing these opportunities in Optical side. And just like Justin mentioned earlier, supply is constrained. So we are investing in securing that we get the supply that is needed. So we focus on that. Otherwise, we don't guide any specific OpEx numbers. David Mulholland: Thanks Rob. We'll take our next question from Ulrich Rathe from Bernstein. Ulrich, please go ahead. Ulrich Rathe: I have 2 questions. The first one would be, so you're maintaining the group EBIT outlook with this higher growth in Optical, IP and you're explaining that you want to secure growth with higher investments. Could you talk a little bit more about the mix of these costs? Is this more R&D? Is it more sales and marketing? Is it more into production? Just more color on that cost increase would be helpful. That would be my first one. Justin Hotard: I think, first of all, Ulrich, and I'll let Marco add if he needs to. But just to remind you, we always provide a range, and we give you some direction on the range, right? So we're not changing our guidance, which is the range. What we -- and we said we're slightly above -- we're guiding somewhat above the midpoint, right? So the key thing here for us is as we look at the business, we're making investments, and you touched on a number of them. It's R&D, obviously, sales and marketing and production. And Marco just touched on some of that, right? It's -- there's obviously -- there's CapEx with the work that we're doing around the fab. But there's also investment in OpEx and scaling capability and manufacturing. And if you just think about what's happening in this part of the business, particularly around Optical, we're also going through a massive step function in volume as an industry. And so that means that we actually have to do work to mature the supply chain, mature the production capability as an industry, and we're not immune to that. So we're investing to make sure that we're successful in that and that we can capture the fullness of the opportunity around us. Marco Wiren: I think this is pretty much the same actually, if you look also the whole industry in Optical side. So the whole supply chain is doing the same as well to secure that we actually can capture those demand opportunities. But still, there's more demand than supply. So that's why it's important that we invest in capturing these opportunities. David Mulholland: Did you have a follow-up, Ulrich. Ulrich Rathe: Yes, a quick follow-up maybe. On this guidance upgrades and for the Optical growth, there still seems to be a relative dearth of customer announcements with hyperscalers. Could you talk about the reasons? You talked in the past about that you don't actually care that much, you'd rather care about the business. But is there possibly a hesitation on the side of the hyperscalers to talk about Nokia given Nokia is not a U.S. company? Or are there any other specific reasons why you wouldn't have sort of more meaningful announcement that tell us what you're doing with which hyperscaler and these kinds of questions? Justin Hotard: Yes. I think, Ulrich, you probably have to talk to our customer or perhaps through who they are, but you could ask customers about us. From my perspective, that's not my priority. My priority is making sure we're partnering with them effectively. We're delivering what they need, and we're helping them execute on their strategies. That's my focus. And obviously, we're capturing our share of the opportunity that's out there. So that's where I spend my time. Obviously, I think what's a little bit different about us than some of the U.S. players more broadly is that we also don't have a concentration dynamic because the business is more diversified. And so that may be also something, but there's no indication that I get that there's any kind of geopolitical dynamic to this. David Mulholland: Thanks Ulrich. We'll take our next question from Richard Kramer from Arete. Richard Kramer: Justin, you mentioned the elongation of the order book. Can you tell us how much of that EUR 1 billion of new contract orders is firm, i.e., that you have purchase orders against it versus long-term sort of frame contracts, just to understand the timing of realizing that additional incremental EUR 1 billion of orders. Justin Hotard: Yes. Actually, Richard, this is a great question. So just to clarify, we have -- actually across the business, including with our telco customers, we have multiyear frame agreements. And sometimes we announce some of those. But the only thing you see in orders is firm purchase orders with delivery dates. What we haven't dimensionalized for you is anything kind of above a certain lead time. But we are -- one thing we are seeing is some of that elongation. But I see that as a net positive because I think it's tied to the demand -- the underlying demand for the products, and it helps us with predictability and capacity planning. So for me, it's a positive in terms of how we're managing and scaling the business. David Mulholland: Did you have a quick follow-up, Richard? Richard Kramer: For Marco -- yes, please. A quick one for Marco. Given the working capital buildup, the employee incentives, the EUR 750 million to EUR 850 million of pending CapEx to your EUR 900 million to EUR 1 billion expectation, restructuring and so on, will year-end cash be materially lower than what we see now? It just feels like you have a lot of cash constraints or drains on the business in the next 2 to 3 quarters. Marco Wiren: Yes. Thank you. Yes. Just like you said, we had a very good cash generation in quarter 1 and quarter 2 is lower. But we do generate cash continuously year-by-year as well, and we are also securing that we have a very good cash position to have the freedom to make decisions that we need to do, of course, always allowing us to follow the capital allocation principles that we have in the company, that first priority is on R&D. And then secondly is to find other investments inorganic that could support our growth and then dividend. And if we deem to have excess capital, then we can consider share buybacks as well. But we are quite confident about our cash position. David Mulholland: Thanks Richard. We'll take our next question from Felix Henriksson from Nordea. Felix Henriksson: Congrats for a strong order quarter. Given the unprecedented demand in AI and cloud, and also the supply-constrained market environment across the sector, is pricing something that's contributing to your guidance upgrade in Optical and IP? Are you starting to see support from raising prices for that? Justin Hotard: Yes. Felix, thanks for that. Maybe I'll comment, Marco, you may want to add. But I think in general, what we see is if you look at Optical, you've actually got -- structurally, you've got a cost curve that's probably coming down, which is enabling scaling. And so I would say, in general, we don't see -- is not a contribution on pricing, it's much more unit volume. What I will say is that I think we acknowledge that there are some cases where pricing is going up. I mean memory has been talked about quite a bit as a structural pivot. And that's a place where we have some exposure across the business. And obviously, we're working with customers on that because in our minds, that's something that's structural that we're -- in some cases, we're passing on. In other cases, we're also working on things like redesigning our products, right? But again, those are focuses that we're working on mitigating. And then -- but in general, I would say, if you look at the growth, it's much more volume driven than it is price driven. Marco Wiren: And just building on that, if you think the new launches that we introduced also in the OFC, the main focus is power of the bid. So how can we improve the power of the bid for our customers because that's one of the main KPIs they have, so helping them to improve their cost base. David Mulholland: Did you have a quick follow-up, Felix? Felix Henriksson: Yes. Just a quick one. I'm not sure if I missed it already, but can you just comment on how long the lead times between getting the order to actual revenues in Optical are at the moment? Just trying to get a sense of the EUR 1 billion incremental AI and cloud orders for Q1, whether or not those will already support 2026 or more so for 2027? Justin Hotard: Yes. I don't think we gave you a specific one, Felix. But I think dimensioning probably for this -- for the broader demand that we see is like in this -- in the Optical space is 12 to 18 months. I mean there's -- as you know, there's always exceptions in these things where some things might be sooner depending on the specific product, but that's probably a good way to think about the broader lead times we're seeing today. David Mulholland: Thanks, Felix. We'll take our next question from Sandeep Deshpande from JPMorgan. Sandeep, please go ahead. Sandeep, we can't hear you. Operator: I just find this, perhaps your line in on mute. Sandeep Deshpande: My first question is regarding the switching business of Nokia. You -- on the Optical side, you probably have all the hyperscalers as customers at this point. You announced in the past few quarters wins on switches at multiple hyperscalers. Would you suggest at this point that you have a fairly broad exposure in terms of at least what is the future design win activity or future shipments at all the hyperscalers? Or is it still very limited to 1 or 2 hyperscalers in terms of your switching business? Justin Hotard: I don't know if I'll give you that much dimensioning, Sandeep, but I would say that as you look at the AI and cloud customer base -- the macro AI and cloud customer base, there's quite -- there's a set of different strategies that each one pursues. And I'd say the places where we get traction is where our portfolio fits our strategy is probably the best way to give you the answer. David Mulholland: Did you have a quick follow-up, Sandeep? Sandeep Deshpande: Is it broader today than it was, say, a year ago, the customer base? Justin Hotard: Yes. I think it's -- yes, I guess I don't quite measure it that way. I'm looking more at the design wins in the footprint. And I think that's certainly broader based on what we see today than it was a year ago. Sandeep Deshpande: And I have a quick follow-up on the financials. Marco, I mean, well before your time, I mean, Nokia in the past in terms of merger, M&A has -- in terms of integration has had problems. Clearly, at this point, you have tremendous growth. So that is helping the top line very significantly. But has the company got a structured process in place such that in terms of the integration with Infinera that this underlying doesn't have any issues going in the mid- to long term? And then secondly, given that there is a new fab ramping up as well later this year, are there any risks associated with that later in the year, given typically with semiconductor fab ramp-ups that can have issues? Marco Wiren: Yes. First of all, if you look at the integration, as I mentioned earlier as well that we are tracking extremely well on that compared to our own targets and also what we guided the Street. And we've been actually doing it better than we expected. So the team is extremely focused on securing the integration, and speed is extremely important here. So I understand your comment on the past perhaps, but this is definitely going well, and we're extremely happy with the progress. Do you want to... Justin Hotard: Yes, maybe I'll just add on that. I would just say, Sandeep, two things. One is, I think if you look underneath this, even if you took the growth out, I think you'd see very solid execution on the integration. I think the team has done really well. One of the most important things in integration that's a driver of outcome is cultural. And when you -- one thing that was clear to me when I went to OFC was, I could not -- everybody was Nokia -- was a member of Team Nokia. There wasn't an Infinera Nokia team, it was one team. That's hugely important, right, for being successful. The two other comments I'll make here is one acquisition, as you well know, does not a trend make in terms of successful execution and integration. So we have more work to do before we decide we're effective at this. And it's something that with the focus we put under the Chief Corporate Development Officer, Konstanty, obviously, one is making sure we find the right business for -- the right place for our portfolio businesses. Two is obviously being smart with how we think about capital allocation in terms of M&A where we believe that's accretive to our strategy. And then three is making sure we actually execute the integration. So that's a place where I'm pleased with the work that he and the team are doing, obviously, in close partnership with Marco, with our Chief People Officer, with all the key functions and the business presidents. But there's a journey here. And I think the net here is Infinera has been a good one. We need to get the learnings on that and then make sure we also don't forget the lessons from some of the challenges we've had in the past. Marco Wiren: And then when it comes to the manufacturing, remember that Indium phosphide is quite different compared to silicon manufacturing. So this is, first of all, much lower CapEx needed, but also it's faster. And I think that our team is working extremely well and understanding based on the learnings also from the Fab 1, we are transferring those into the Fap 2 and very good learnings from Fab 1. I don't know, Justin, if you want to say something more. Justin Hotard: Yes. I would just say our guide -- the only thing I would add is I think our guidance is risk balance understanding -- contemplating that ramp. And the reality is Fab 2 is a fraction of the ramp for '26, it's much more material to the longer term. David Mulholland: Thanks Sandeep. We'll take our next question from Jakob Bluestone from BNP Paribas. Jakob, please go ahead. Jakob Bluestone: So I had a question on the sort of margin progression as your IP revenues scale. I mean you've put through a sizable increase in your revenue guidance for some of the components for NI, but it's a sort of more modest change in your language at the group level. So if you can maybe just help us understand for IP in particular, as that business starts to accelerate, is it a bit like what we've seen on Optical, where initially it's perhaps not quite as accretive to margins? And then as that business starts to gain scale, it becomes a lot more margin accretive as well. So just if you can help us sort of understand the drivers there. Justin Hotard: I think the way I think about it, Jakob, is -- I think probably like any business, there's a scaling effect, right? I guess for me, the big focus right now is on capturing the opportunity and making sure it's accretive profit into the company. that's the priority. I don't know, Marco, if you'd add anything. Marco Wiren: No, it's -- always when you're starting with the new products, it takes some time to get the profitability up, and that's why we also mentioned that we see some impact of that in NII for first half of this year. But just like Justin said, that these are definitely accretive to our operating profit, and we see good opportunities there. Jakob Bluestone: As like San Jose... David Mulholland: Thanks Jakob. Go ahead Jakob... Jakob Bluestone: So I just had a quick follow-up. Just on the San Jose fab, can you maybe just help us understand, I don't know if there's any way to quantify whether that will cover your internal needs from the outset or not? Justin Hotard: Yes. I mean I think as we've talked about, San Jose gives us support. Certainly support for the growth that we see and expansion capacity for us as well beyond the portfolio that we have today and the volume that we see in the market. So that doesn't mean that we won't look at ways to accelerate -- further accelerate capacity because as we said, we think long term, this is a structural market, and we're pretty uniquely positioned as one of the few manufacturers with indium phosphide manufacturing capability at scale. But we think that too gives us -- certainly gives us the runway for the near term. David Mulholland: Thanks, Jakob. We'll take our next question from Sébastien Sztabowicz from Kepler. Sébastien, please go ahead. Sébastien Sztabowicz: The main opportunity for Nokia remains get across with optical line system and your pluggable optics. But I'm just curious, have you seen any specific opportunity building up around co-packaged optic or near package optics because the market seems to be quite bullish or there are a lot of demand building up these days. Justin Hotard: Yes. I think on that side, we've not made any announcements there. We've demonstrated -- at OFC, we demonstrated some technology development, but no announcements at this time. Sébastien Sztabowicz: Okay. And a follow-up on Infinera and the synergies. Previously, you were talking about maybe generating the EUR 200 million synergies in 2026 instead of '27. Are you still on track with that? And attached to this question, given the accelerated investment, is it fair to assume still a nice improvement of margin in Optical Networks this year or not? Marco Wiren: Yes. Thank you, Sébastien. Yes, the synergy, as I said earlier, we are tracking very well and a little bit ahead of our schedule. We originally said that it will take 3 years from the closing. And we said that we are tracking somewhat better than that. And we see the impact of synergies already in our quarterly reports as well. Just like in quarter 1, we mentioned that Infinera acquisition synergies are benefiting Optical business, and we will see those throughout the year as well. David Mulholland: Thanks Sébastien. We'll take our next question from Oliver Wong from Bank of America. Oliver, please go ahead. Oliver Wong: I had a question on -- going back to the Q1 AI orders and just your backlog and AI orders in general. I guess, so you mentioned that the lead times in Optical and I think IP are 12 to 18 months currently, but you also significantly increased your growth assumptions for this year for Optical and IP. So I was wondering, are these orders even though the lead times are up to 18 months are -- is much of this still quite kind of near-term loaded? And also in terms of the IP growth expected this year, I presume that most of that is from switch business. But you mentioned kind of big design wins and then that translating into orders starting next quarter. So are a lot of these design wins expected to kind of translate into revenues this year? Justin Hotard: I think as we touched on some of the design wins will start ramping this year. And yes, and I should clarify, we talked a little bit about Optical being 12 to 18 months. I think you've heard other peers in the industry talk or some of the players -- the ecosystem peers talk about being sold out over multiple years. I think that's probably a pretty good indication of where we see the Optical side. IP is a little bit shorter, but I would say there's parts of that supply chain that have constraints. And so obviously, we work closely with customers on forecasting and planning. And as we said, the only thing we register are the actual purchase orders themselves. That's what you'll see translated to orders. David Mulholland: Thanks, Oliver. We'll take our last question this morning from Emil Immonen from DNB Carnegie. Emil, please go ahead. Emil Immonen: So, I have a question on... David Mulholland: We can barely hear you. Your line is very hard to hear. Emil Immonen: Can you hear me now? David Mulholland: Yes, that's a bit better. Emil Immonen: Yes. So the growth you're saying the 27% market growth that you're now seeing instead of 16%. Could you comment on, is that volume or is that price-driven? Justin Hotard: It's volume driven. Emil Immonen: Okay. In that case, given the Fab 2 coming online at the end of this year, does that mean that you're building a third fab maybe? Because I think previously, you said that you were planning your current capacity to the earlier growth you were seeing in demand. Justin Hotard: Yes. I think one thing we've -- maybe just to clarify in case we haven't clarified in the past, Fab 2, when we shared in November, what we talked about was Fab 2 being able to be sufficient to meet the demands of the guidance we provided, and there was additional capacity on top. Obviously, we're not making any announcements about additional manufacturing capacity at this time. But that's the way I would think about it is that in the prior guidance, there was excess capacity and ability to build. I would take the -- if you kind of stitch the conversation together, I'll stitch it together for you. We're making additional investments that probably means that we're -- part of what we're doing there is investing in ramping Fab 2 at scale. And again, it's not just the fab, it's all the components of the supply chain because that fab produces a critical component, which is the optical component, but there's also a DSP, there's other components in our pluggables, and there's also many other components in our subsystems from the ecosystem. So all of that factors into this. David Mulholland: And thank you, ladies and gentlemen, for joining us today. This concludes today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may, therefore, differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Thank you all. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your devices.
Operator: Good day, and thank you for standing by. Welcome to the Hexagon Q1 Report 2026 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anders Svensson, President and CEO of Hexagon. Please go ahead, sir. Anders Svensson: Thank you, operator. Good morning, everyone, and welcome to Hexagon's First Quarter 2026 Conference Call. First, I will direct you to the standout cautionary statement, and then we turn into the next slide. Before I begin, a reminder that the upcoming potential spin-off of Octave, we are now presenting Octave as discontinued operations. We have provided this first bridge here for you to understand the performance of continuing Hexagon, Octave and taking them both together, meaning the former Hexagon Group. Looking at the headline numbers for the first quarter. Hexagon continuing operations delivered a revenue of EUR 964 million, with an organic growth of 8%. EBIT was EUR 251 million, giving us an operating margin of 26%. Octave generated EUR 327 million in revenues, organic growth was 1% and EBIT1 of EUR 83 million, delivering an operating margin of 25%. At the former group level, including Octave, revenues were EUR 1.29 billion, with organic growth of 6% and an operating margin of 26%. During the quarter, we also completed the sale of our Design & Engineering business on the 23rd of February, and the business was deconsolidated as of that date. Today, unless I mention otherwise, I will discuss Hexagon, the continuing operations, excluding Octave and with D&E deconsolidated as of the 23rd of February. Mattias will cover the Octave business separately after Norbert. So turning to the agenda for today on the next slide. So I will start with taking you through Hexagon's performance in the first quarter, and then dive into our business area performance. Norbert Hanke, our interim CFO, will then take you through the Hexagon financial performance. He will then hand over to Mattias Stenberg, CEO of Octave, who will then cover the Octave performance in the quarter. We will then, of course, have time for your questions at the end of the presentation. So next slide. Starting with the first quarter performance then for Hexagon on the highlights of the quarter slide. The first quarter of '26 was a strong start of the year and also a busy one for us at Hexagon. We delivered 8% organic growth with a gross margin of 63% and operating margin of 26% and cash conversion at 77%. Alongside this strong financial performance, we continue to take decisive portfolio actions to sharpen Hexagon's focus on the core precision measurement and positioning opportunities. We completed the Design & Engineering business sale to Cadence for approximately EUR 2.7 billion in cash and stock. And here in April in the second quarter, we announced the agreement to acquire Waygate Technologies from Baker Hughes for approximately $1.45 billion. And this is then expanding Manufacturing Intelligence into the very attractive area of nondestructive testing. And I will cover this more in detail on the next slide. Mattias and Octave team held Investor Day in New York on March 26 with the spin-off expected to become effective on May 22. We also continue to build the new Hexagon executive team. Renée Rädler has been announced as the Chief People Officer on the 1st of April, and Enrique Patrickson, who will join us as Chief Financial Officer on the 24th of April, meaning tomorrow. And I wish Enrique welcome to Hexagon, and both of them welcome to the executive team. And I'm happy to have you on board. Finally, a humanoid robot, AEON, is making excellent progress in the past quarter. AEON successfully completed a pilot at BMW and will be deployed in production at the Leipzig facility. It is a significant milestone in demonstrating the real-world industrial capabilities of AEON. In parallel to this, our pilot at Schaeffler has resulted in an agreement to deploy up to 1,000 AEONs in the next 7 years. This is a big step that we communicated here in April as well. Then we expect commercialization of AEON by the end of 2026. So a very active quarter of delivery. Let me now give you the overview of the Waygate acquisition. So next slide. Acquiring Waygate is a natural next step for us at Hexagon as a market leader in the nondestructive testing, they fit very well into our portfolio focus on precision measurement and positioning technologies. They're completing the measurement chain from surface to the interior of components. The computed tomography hardware combined with our volume graphic software creates a unique value position for customers. And the business also brings exposure to maintenance, repair and operation markets with recurring utilization-driven demand, which boosts our exposure to the growing aerospace markets. Waygate has a portfolio of assets with different growth and margin profiles. This brings a meaningful opportunity for us to create value. RBI is already growing very well at good and healthy margins of about 30% EBIT. Radiography is a strong business where we can leverage our manufacturing and sales footprint to really drive synergies across the business and leverage shareholder value. The ultrasonic testing and imaging solutions are also very good assets. But here, we will assess the position of those assets. They are either challenged by not being market leaders or they have a -- not a perfect strategic fit for us. So we will look at these assets from different perspectives, and we will try to then either through acquisitions make them into market leaders or we will have also the possibility to go through strategic reviews or do turnarounds of these assets. Now turning to our organic growth performance in more detail for the quarter on the next slide. So we delivered a strong organic growth of 8% in the first quarter and that's a significant acceleration from the prior year. This was primarily driven by Autonomous Solutions, which grew 13%; Manufacturing Intelligence, which grew 9%. Both businesses benefited from growth in aerospace and defense. Geosystems grew 2%, while completing the channel destocking program that I talked to you about in the fourth quarter report. Excluding this impact, the underlying growth would have been 4% for Geosystems, which gives us the confidence in that the momentum is again building within Geosystems. Recurring revenues grew 6% driven by continued momentum in construction software subscriptions and also GNSS correction services. You can see the rolling 12-month figures in the chart on the right. For the full transparency, excluding the impact of our Design & Engineering business, software & services account for 44% of sales for the remaining Hexagon corresponding to recurring revenues of around 28%. The new product adoption is also progressing very well, especially if you look at our laser tracker, ATS800, and also our new robotics total station, TS20, and this is, of course, supporting the growth trajectory across our businesses. Turning now to the development by region and industry in the quarter. So on the next slide. Here, you have a snapshot of the development, and I'll start with the geography. The Americas was the strongest region delivering a 15% organic growth with a positive performance across all of our business areas. North America was especially strong, while South America was weaker. EMEA recorded 4% organic growth with broad-based contributions across the portfolio. China reported a decline of 4%. Performance in Manufacturing Intelligence was very solid, but the wider China business was impacted by the weaker Geosystems business and also by the completion of the destocking actions taken within Geosystems in China. Without the destocking initiative of roughly EUR 8 million in the quarter, there was actually also single-digit growth in China as a whole. The rest of Asia delivered 7% organic growth, a solid performance, reflected the good momentum in several of our key markets in this region, and especially a strong India. By industry, if we look at it like that, construction remains our largest vertical, and we recorded a strong growth in Americas with also good growth in Western Europe. General manufacturing, the second largest vertical showed broad-based strength across all the regions. Aerospace and defense continued to perform strongly, while Mining was more mixed with uncertainty impacting the demand in South America. We also had some pull-in of deliveries from the first quarter into the fourth quarter last year, and that had some negative impact for the first quarter. Automotive remained under pressure, particularly in the EMEA, but we also saw signs of weakness in China. Electronics was very strong in the quarter, and this is primarily then in China and rest of Asia. That's where a strong majority of our exposure is, and it was very strong growth. Agriculture, while only being 2% of our sales, still remains weak globally. I now turn into profitability on the next slide, and I'll start with the gross margin. And I want to say first that the Design & Engineering that normally operates with strong margins had a challenged start to the year. So while it was very strong in the first quarter of 2025, which is the reference period, it performed quite badly during the 6, 7 weeks that it was within our business before it was sold on the 23rd of February. There's a lot of reasons for that. But if we exclude the impact of Design & Engineering in both periods, both in the first quarter of '26 and the first quarter of '25, the gross margin was 62%, and in the comparison period, 62.6%. So it's 60 bps down year-on-year. Gross margin was, however, stronger in this quarter than in the last 2 quarters, quarter 4 and quarter 3 of 2025. And you will also be able to see this in the appendix slide attached to this presentation. The ramp-up of new product sales continue to support cost volumes, but this was offset by a full quarter of tariff impact. And in the comparison period, there was very little tariff impact. And we also had input cost inflation and also on freight, and this is driven then by the Middle East conflict primarily. If you look at the currency for the quarter, that also created a significant headwind. Going forward, we will mitigate these pressures through pricing and also freight surcharges, et cetera, and actions are already taken at the end of the quarter. But the full impact of this given our delivery times should be seen in the third quarter. Turning now to operating earnings. During the first quarter, we delivered an operating margin of 26.1% versus 25.9% in 2025. Importantly, excluding also here the full impact of Design & Engineering business in both periods, the operating margin grew 80 basis points versus the previous year. And this, I would say, is a meaningful improvement, driven by the organic growth performance and benefiting from our restructuring program that we communicated in the second quarter report. With some of the contributions also a gain from a sale of a building within the quarter of about EUR 8 million. Offsetting our good performance was, like as mentioned, a weak Design & Engineering performance and tariffs and cost inflation. We also saw the strong currency headwind on EBIT, and that corresponded to a negative 60 basis point performance. Year-on-year reduction in capitalization to amortization gap, which we have talked about before, had an impact of 70 basis points negative. A key driver for the margin improvement was the cost reduction program. We benefited here about EUR 10 million during the quarter, and the program remains on track for a total savings within Hexagon at EUR 74 million at the end of the year. We also had generally good cost control despite the growth, and that also, of course, supported the performance. Now turning to the business area performance. I'll start with Manufacturing Intelligence. MI delivered a revenue of EUR 433 million and an organic growth of 9%. We also had a very strong order intake in the quarter, which is positive for the coming 2 or 3 quarters. If I start with the geography, the Americas was the strongest region, but we also saw growth in EMEA and Asia. By industry, Aerospace & defense continue to perform very strong and the automotive business remained under pressure, particularly in the European markets, but as I mentioned, also in China. Operating margins came in at 23.7%, down from 24.6% in the first quarter of last year. And this reflects the impact of currency headwinds and tariffs and the weak D&E performance in this year, which more than offset the positive operating leverage from higher volumes. Again, if we eliminate D&E as we have divested these parts from both periods, the operating margin improved from 23.1% to 23.6%, so 50 bps up. Looking ahead, we had an agreement to acquire Waygate Technologies, and this is a transformative step for Manufacturing Intelligence, and it expands, as I mentioned, into the adjacent nondestructive testing market and positions us to offer customers a truly end-to-end precision measurement solution from the surface to the interior and through the life cycle of products. And as I mentioned earlier, we did divest D&E on the 23rd of February. If I move then into Geosystems slide. Revenue was EUR 349 million with an organic growth of 2%. And even if -- great to see a return to growth here, I should note again that if we disregard the China destocking program, which now has ended, the actual underlying growth of Geosystems was around 4%, which is a more accurate read of the demand environment within the business. By geography, America was the strongest. EMEA was broadly flat. And we saw solid performance in the Western Europe, offsetting the weakness we saw in Middle East. In Asia, China reflected a destocking that I mentioned, but India performed very well. By end markets, construction software & services delivered double-digit growth, very good to see, and we are seeing also the contribution of the TS20 total station. Operating margins were 26.9% compared to 27.4% in the prior year. The decline primarily reflects currency headwinds, which were partially offset by strong cost discipline and favorable product mix. Turning now to our superstar of the quarter, Autonomous Solutions on the next slide. Revenue was EUR 176 million and organic growth of 13%. By industry, aerospace and defense continues to be a major growth driver with very strong demand. Mining was more mixed in the quarter. Customers remain cautious with capital expenditure, which also softened the demand for equipment investment, but our mining and safety business remained resilient during the quarter. Agriculture, as I mentioned, is subdued globally. We are not worried about the mining business in the midterm. There is a lot of activity. But as I said, a bit of hesitation with high oil prices for capital investments. By geography, both America and EMEA delivered strong double-digit growth, and APAC declined. Within the product portfolio, demand for anti-jamming solutions and GNSS correction services was particularly strong in the quarter, benefiting from the growing need for a secure and reliable positioning in defense, but also in critical infrastructure applications like aerospace. Operating margins expanded to 34.1%, up from 31.6% in the prior year, 250 basis points improvement is strong, and that's driven primarily by the strong operating leverage on the higher volumes and also a favorable product mix. Of course, also here, partially offset by currency headwinds and tariffs. That concludes my overview of the business area performance, and I will now hand over to Norbert, who will take you through the Hexagon continuing operations financials. Go ahead, Norbert. Norbert Hanke: Thanks, Anders. I will take you now through the Q1 performance. Unless stated otherwise, the slides and my comments will relate to continuing operations, so it will exclude Octave. Turning to the next slide, please. Let us begin with the Q1 2026 income statement, taking the sales bridge first. Revenues were EUR 964 million with a reported growth essentially flat year-over-year. Currency had a negative impact of 6%, and there was a 1% negative structural effect from the sale of D&E, resulting in organic growth of 8%. Gross earnings were EUR 606 million with a gross margin of 62.9% compared with 64.4% in Q1 last year. The 150 basis point decline reflects currency headwinds, tariff impacts and cost inflation that Anders discussed earlier. As he also mentioned, excluding the full impact of D&E, the decline would reduce to 60 basis points. EBIT1 was EUR 251 million with an operating margin of 26.1%, up 20 basis points year-on-year or up 80 basis points, excluding D&E. This improvement was supported by the cost restructuring program and organic growth in the quarter, partially offset by a reduction in the R&D gap of 70 basis points and currency. Earnings before taxes grew 4% to EUR 224 million supported by the operating improvements. Earnings per share were at EUR 0.067, up 3%. Next slide, please. Now moving to the bridge. As discussed, net sales were essentially flat on a reported basis with organic growth of 8%, offset by currency headwinds and the structural impact from D&E. On operating earnings, EBIT1 increased to EUR 251 million from EUR 249 million last year. The improvement was driven by the cost restructuring program and the net gain of the sale of the facility, supporting organic performance in the quarter. Currency represented a meaningful headwind with a 35% drop through, primarily reflecting the weaker dollar. On the margin bridge, we expanded 20 basis points to 26.1%, both organic and structural effects were accretive, while currency diluted margins by around 60 basis points. Next slide, please. Turning now to the restructuring program. We are targeting EUR 74 million of annualized savings with the full run rate expected by the end of 2026. In Q1, we delivered EUR 10 million of incremental savings, bringing the annualized run rate to EUR 51 million. We are therefore well on track and progressing towards our targets. As shown on the chart, we expect continued ramp-up through 2026, reaching the full EUR 74 million run rate by year-end. This program continues to be a meaningful contributor, and we remain confident in the delivery. Next slide, please. Turning to cash flow, where we continue to demonstrate strong operational discipline. Adjusted EBITDA was EUR 351 million, up 3% year-on-year, reflecting organic growth and benefits from the restructuring program, partly offset by currency headwinds. Capital expenditure amounted to EUR 76 million, down 38% versus the prior year, partly driven by proceeds from the sale of a building following our footprint rationalization. This resulted in cash flow post investment of EUR 250 million, up 16% year-on-year. Working capital was an outflow of EUR 56 million, reflecting the normal seasonal pattern in Q1 as we see activity ramping up through the quarters. As a result, operating cash flow before tax and interest was EUR 194 million. This translate into a cash conversion of 77%, a significant improvement from 60% in Q1 last year. After taxes of EUR 46 million and net interest of EUR 24 million, cash flow before nonrecurring items was EUR 124 million, up 84% year-on-year. Next slide, please. This slide shows working capital to sales on the new Hexagon base, providing a view of the underlying trend. On this base, Q1 performance is in line with normal seasonal patterns. Net working capital was an outflow of EUR 56 million compared to EUR 68 million in the prior year. The rolling 12 months working capital to sales ratio improved to 11.9%, trending down versus last year. So to conclude, we delivered organic growth of 8% with stable margin despite significant currency headwinds and gross margin pressure on tariffs and input cost inflation. Cash conversion improved to 77% and the restructuring program continues to deliver with EUR 10 million of savings in the quarter and an annualized run rate of EUR 51 million. Looking ahead, currency is expected to remain a headwind, and we remain focused on execution. I will now hand over to Mattias. Next slide, please. Mattias Stenberg: Thank you very much, Norbert. Let's take a look at the first quarter results for Octave. What you're seeing in the numbers this quarter, it's not just a transition to recurring revenue. It truly reflects the early impact of connecting workflows across the asset life cycle, which is where the real value in this business sits. Recurring revenue grew 6% organically compared to the prior year, with SaaS revenue continuing to grow at strong double-digit rates. Reported organic total revenue grew 2%, whereas reported revenue is down year-over-year, driven by currency impact and the disposal of the federal services business that we did last year. If you look at monthly project-driven subscription license revenue, that was roughly flat with the prior year period, while perpetual licenses and professional services revenue declined, reflecting the deliberate shift we are doing towards subscription-based models. The EBIT for the first quarter reflects the lower perpetual license contribution together with lower levels of R&D capitalization and higher related amortization. Excluding these factors, underlying profitability was in line with the prior year period as disciplined cost savings offset incremental public company costs. Cash conversion was a healthy 118% in the quarter. Next slide, please. If we look at our workflow environment in Q1, the trends were consistent with our expectations. In Design, perpetual license sales declined, while monthly subscription licenses continued their sequential improvement. Build delivered strong double-digit growth driven by SaaS adoption in construction and project controls. Operate also saw strong revenue growth across quality management, APM and EAM. And in the Protect area, recurring revenue continued to grow offset by lower perpetual licenses and services revenue. Our advantage, however, is not in a single product. It is in how these workflows connect. Intelligence created in design, build, operate and protect becomes more valuable when it is shared across the life cycle. Next slide, please. To the left here, you can see the monthly subscription licenses. We saw a step down as earlier discussed in the activity level in early 2025. However, since then, we've seen sequential improvement, and that positive trend continued in Q1, and we do expect year-over-year comparisons to get easier as we move through 2026. In the middle chart, you can see that excluding this short-term volatility from project-driven licenses, the underlying trend is, in fact, strong. Recurring revenue continues to grow at a high single-digit rate, reflecting healthy underlying momentum across the portfolio. And on the right, you can see that our quarterly perpetual licenses continue to decline in line with expectations as we shift towards recurring revenue models. We do expect this shift from perpetual to continue to pressure total revenue growth for the remainder of this year. Next slide. If we turn towards some of the information we shared at Octave's first Investor Day in March, and if you haven't watched it yet, you can access the videos and presentations at the Investors page at octave.com. One of the key takeaways that we discussed there was that we expect to accelerate organic recurring revenue growth to 10-plus percent over the medium term. Approximately 2/3 of that ARR growth is expected to come from our existing customer base. What underpins this is that expansion within our installed base is driven by the multi-workflow adoption where we see a clear step-up in ARR as customers move beyond a single workflow. We expect the remaining 1/3 of growth to come from new customers as we invest in growth areas and expand the partner channel to broaden our coverage across geographies as well as customer segments. Next slide, please. Turning to customer highlights in the quarter. We had a number of important wins, both for new logos as well as expansion. And I think these wins really reinforce several of the strategic themes we outlined at our Investor Day in March. If we start with new logos, we added Visa CashApp Racing Bulls for enterprise asset management to handle their logistics and operations in their F1 business through a multiyear SaaS contract. We signed both BNSF Railroad and Spokane 911 on multiyear SaaS deals for our OnCall Dispatch platform. We also landed a leading U.S.-based LLM developer on a design subscription for their facilities infrastructure. And these wins demonstrate 2 things that we emphasized at our Investor Day: the diversity of our addressable market across mission-critical industries and our ability to land new customers on recurring SaaS-based contracts as we accelerate the shift towards recurring revenue. On the expansion side, I want to highlight 2 deals that could not have happened a year ago, frankly, from an organizational perspective as these businesses then sat in separate Hexagon divisions. The first, a global motion and control leader and existing design customer expanded into operate through a 4-year strategic agreement, adding both our EAM and ETQ solutions across their global manufacturing operations. The other one was Kimberly-Clark, who signed a deal that consolidates over 700 of their systems onto our platform in a 5-year SaaS conversion spanning design and operate. And I think this is a great illustration of our -- how our opportunity for ARR per customer expansion where customers adopting 3 or more workflows consistently reach 7-figure ARR levels. And while the 86% of our customer base is still on a single workflow, and that is the expansion runway embedded in this business. We also expanded with a leading European chemical producer displacing a competitor for critical communications across their production plants. This customer now runs on Octave across all 4 workflow environments, design, build, operate and protect, validating both our platform strategy as well as the value customers see in consolidating onto our solutions. And lastly, we cross-sold our build solutions into a long-standing design customer with a major copper mine operator, extending our relationship to include project controls. So to me, what these examples really show is that once we land in one workflow, expansion into adjacent workflows is not theoretical. It is happening, and it materially increases our ARR. So in summary, the Q1 customer activity validates our strategy. We're winning new logos on SaaS, expanding within our base across the workflows and displacing competitors where our integrated life cycle approach gives us a clear right to win. And this is what differentiates us. We are not competing as a point solution. We are competing as a life cycle partner for mission-critical assets where failure is not an option. Next slide, please. So if we turn to our Investor Day outlook, in the nearer term, 2026 is a transition year as we become an independent public company. We're targeting 3% to 4% total revenue growth on the back of 6% to 8% ARR growth with adjusted operating margins stepping down modestly as we absorbed roughly 100 basis points of public company costs and up to 100 basis points from revenue model shift, net of savings. We do expect revenue growth to be second half weighted, reflecting both the recovery in monthly subscriptions and the typical back half seasonality of enterprise software bookings. For the second quarter on a U.S. GAAP basis, we expect organic recurring revenue growth of 6%, so similar to Q1. And we expect organic total revenue growth to be flattish year-over-year due to the declines in perpetual licenses that we have discussed. On a reported basis, which will reflect, again, then the disposal of the federal services business, we expect second quarter total reported revenue to be down approximately 4% over the prior year. Next slide, please. Our medium-term ambitions remain as we laid out in March. ARR growth of 10-plus percent and total organic revenue growth of 6% to 8%. Over time, of course, these growth rates will converge as recurring revenue becomes a larger and larger part of total revenue. We also expect free cash flow margins to expand from today's level of roughly 20% to 23% to 24% of the medium term. Next slide. So I'd like to close by reiterating why we believe Octave is a compelling investment. We operate in a large and growing market. It's $28 billion today, reaching $40 billion by 2029. We have a deeply embedded sticky installed customer base with 97% gross retention and significant room to expand. Our recurring revenue base of $1.1 billion continues to grow as a share of the mix. AI amplifies the value of 3 decades of domain data and context that is very hard for anyone to replicate. We are leaders in our product categories as recognized by basically all the major industry analyst firms. We operate in mission-critical environments where failure is not an option. And as customers connect workflows across the life cycle, value compounds and expansion becomes more predictable. That is the foundation for sustainable growth and profitability as we scale as an independent company. So final slide, please. So as a reminder, on the key dates for the separation. The Hexagon AGM vote is tomorrow, April 24. And assuming approval, the record date and effective date for the distribution is May 22, with Octave SDRs expected to begin trading on Nasdaq Stockholm on May 26, and the Class B shares on Nasdaq New York on May 28. So with that, thank you very much. And I'll hand back to you, Anders. Anders Svensson: Thank you, Mattias. Let me jump forward directly into the Q1 summary slide. So Hexagon delivered a strong financial performance. Our cost restructuring program is clearly on track and delivering. On the portfolio side, we completed the sale of our Design & Engineering business to Cadence, and we also announced here in April an acquisition of Waygate Technologies. As we have heard, the Octave spin is remaining on track. And all these actions are then sharpening Hexagon's future focus on the core positioning measurement technologies, positioning technology and autonomy opportunities. Our full executive team is now in place, as I mentioned, with Enrique and Renée. And looking ahead, we have a solid foundation entering into the second quarter. We had a strong order intake within Manufacturing Intelligence. And with the closure of the Geosystems destocking program, we provided a clean base for growth of Geosystems going forward. We remain, of course, attentive to the macroeconomic situation, particular to the tariffs, currency dynamics and also what's happening in the Middle East situation. We are, however, very confident on the momentum of our different businesses going forward. And as we have just heard from Mattias, Octave generated another very strong quarter of SaaS growth, contributing to recurring revenue growth in the mid-single digits. Before I move forward, I want to take this opportunity to thank you, Norbert Hanke, who has been an excellent interim CFO, covering from the gap in August 2025 when David Mills was stepping down. And now handing over to Enrique Patrickson. Norbert will remain as an Executive Vice President at Hexagon, leading our ventures operations and also strategic projects. And I'm very much looking forward to continue working with you, Norbert, in that capacity. Before we move to the Q&A, I would like to draw your attention to an upcoming event on the next slide. We will be hosting our Capital Markets Day in April, at April 30. That's next week, Thursday, in London. And this will include strategy updates from each of our business areas. And also importantly, we will present the new updated financial targets for Hexagon, reflecting the new portfolio composition that I have spoken about today. So of course, I encourage all of you to join us in London or follow the event via the webcast. And details and registration are available on our Investor Relations website. So with that, we are now happy to open up for questions. And in the room, we have Mattias Stenberg, Norbert Hanke, Ben Maslen, and myself. So please go ahead, operator. Operator: [Operator Instructions] We will now go to your first question, and your first question today comes from the line of Alice Jennings from Barclays. Alice Jennings: I've got a couple. So the first one is just on, I guess, the outlook for Q2. So you've expressed some confidence, but then also recognized a bit of uncertainty. So could you perhaps outline where in the business, like which divisions you have the most visibility or also the most uncertainty? So thinking about divisions, but then also the industries. And then I just have a question on the Waygate acquisition. So I understand that we're expecting to see some revenue synergies from cross-selling. But how long after the deal is closed? Can we expect to start seeing some of these synergies? And how meaningful could these be? Anders Svensson: All right. Thanks, Alice. So I can start a bit and Norbert, you can maybe contribute as well. So if we look at the different businesses and the outlook for Q2, of course, we don't give forecasts on the future. But we have a very strong order intake in our Manufacturing Intelligence business, and that will, of course, benefit us in the coming quarters. And as I mentioned within the Geosystems area, we have completed the destocking initiative. So we don't have -- we don't start every quarter with a negative sort of EUR 8 million to EUR 10 million that is already sort of cleaned, and we have now a clear base to move forward from. And as I said, the underlying growth has now turned positive within Geosystems, and we expect that to continue also going forward. In the Autonomous Solutions, we have a very strong demand in different sectors like aerospace and defense, et cetera. And we don't see any signs of that changing. And we don't see any signs of the weak business of agriculture improving dramatically either. So many of the businesses are expected to remain in a similar level. Mining, perhaps not growing very much in the second quarter because that's related to what I said in the presentation. But more in the midterm, we don't see any risk for our mining business as the activities is still very strong. If you look at electronics, for example, we expect that to continue to be a strong business for us also going forward. Automotive will be challenged in Europe. I think also we have seen now some negative growth for us in automotive in China, and that might remain. But given also the high oil prices, you might come back to more electric cars and that will also benefit our automotive sales in China. So we have to wait and see what happens within that business. General manufacturing is a strong business across all the different businesses, basically, and we expect that to continue on similar levels. So I think that's a summary of what we can say about the outlook. If I then should comment on the Waygate acquisition. So of course, there is a process here that we need to go through until we have actually closed this acquisition. And then there is an integration of the acquisition. And we will start seeing benefits, I think, quite quickly of the synergies because we have similar exposure to customers. We will also complement our offering, and we will go to market with the same people across the different geographies. So I think you will see synergies coming quite quickly after the integration of the business into Manufacturing Intelligence. Operator: Your next question comes from the line of Daniel Djurberg from Handelsbanken. Daniel Djurberg: Congrats to a nice growth profile here. I was wondering, Anders, if you could -- you mentioned some pulls from Q1 into Q4, still strong organic growth, 8%. And my question is, did you experience any prebuys for some reason? And how much of the organic growth was a result of this, if so? And also, if so, would it impact you negatively later on? Anders Svensson: Thanks, Daniel. The pull-in from Q1 to Q4, which I referenced was primarily within deliveries in mining. And I wouldn't say that, that has a significant impact for -- with the performance in the first half year here in 2026. Of course, the first part of the quarter was a bit weaker within mining, of course, due to that. But not any permanent effects in any way. Pre-buys, we actually don't see across the different businesses to any extent that we can recognize that this is a typical prebuys. So we don't see that as a future negative impact for us either. Daniel Djurberg: Super. May I ask you another question on Waygate, obviously, early days, but you mentioned that you will do a strategic review of imaging solution and ultrasonic testing. So my question is, can you already start to plan for this right now? Or do you need to await the full consolidation and then see and plan later on? Or more or less, can you do theoretically a divestment or something at the same time as you do the transaction later in 2026? A little bit hypothetical question, perhaps. Anders Svensson: Yes, I would agree with you, Daniel. I think we are here, first, making sure that we do the acquisition before we do anything else and close the acquisition. Then I didn't say that we will divest these businesses. I will say that we will evaluate them to see if we can make them into a market-leading position, #1 or #2 within those businesses as well. That could be with complementary acquisitions. We will also evaluate if we can do a turnaround of the business to improve the performance and create shareholder value. And then we don't exclude to do strategic reviews of businesses, which we don't exclude for any of our businesses, actually. We are always evaluating our portfolio. Operator: Your next question for today comes from the line of Johan Eliason from SB1 Markets. Johan Eliason: Just two questions from my side, just starting on the cash conversion, obviously, a good improvement, 77% in this quarter and then 60%, I guess, on some sort of comparable basis a year ago. But is -- I think your target has historically been 80% to 90% cash conversion. But considering Octave bringing all the SaaS and subscription prepayments with it. I guess, one should assume that this 80%, 90% target will be more difficult to achieve going forward? Or how do you see it? Norbert Hanke: Yes, Johan, I will take it here. For the time being, yes. I would agree, 77% was a good performance, as we said as well from our point of view. But say, we will have the CMD next Thursday, and I think you will hear quite a bit from Enrique as well going forward, what will be the target and how to achieve this. And I think I would then say, wait until Thursday. Hopefully, you are there. Johan Eliason: Yes, I am. Okay. Just trying. Then another question. On the robotics, you mentioned the Schaeffler, 1,000 robots coming 7 years or so. Are those on commercial terms? So can you sort of indicate what sort of price tags you are targeting for your type of robotics? I remember when you showed us them in September, I think it was -- there was a wide range of assumptions on what price tags robots could fetch from the consumer side to the professional industrial use? So do you have any indications here? And are you sort of satisfied with the returns for your clients, obviously, but with the returns for you as well in the deals you seem to have struck right now? Anders Svensson: Yes. Johan, I think we are not going out with any numbers, as you can see from the release. So we are very happy with this deal. I think the key thing for us here, it proves that this solution with AEON is commercially viable and implementable in an industrial application. And we could also see that with the BMW announcements. We are happy with the outcome for our customer here, and we are also happy with the situation for ourselves in the deal. But we don't comment on anything else regarding the deal. Operator: We will now take our final question for today, and the final question comes from the line of Mikael Laséen from DNB Carnegie. Mikael Laséen: I have a question for Mattias about Octave, and specifically, how we should think about the capitalized software development costs going from 8% to 4% over the medium term? And my question is about the total R&D expenditures. How should you think about stats in '26 and going forward? Mattias Stenberg: Yes. No, thanks, Mikael. I think I'll pass to you, Ben, for the detail. But I mean it is correct that we are stepping down capitalization. But I'll let you take it, Ben. Benjamin Maslen: Yes. Mikael, so as we said at the Analyst Day, there's no plans at the moment to change the gross level of R&D expenditure, which has been about 18% to 19% of revenues the last few years. I think there are areas where as we implement AI, we could get savings, but the priority at the moment is to reinvest in the product and drive growth. That was the message from a few weeks ago. Obviously, we're moving the product development more and more towards SaaS, where you have continuous development cycles, and it doesn't really make sense under the accounting standards to capitalize. So this will be gradual at first, and we'll go from 8% of capitalized software development costs in 2025. It will come down this year. And then we think by in the medium term, it will come down to about 4%, as we said a few weeks ago. Mikael Laséen: Okay. So the cash effect from the R&D activities will essentially then develop in line with sales? Benjamin Maslen: Yes. I think that's probably the best guide at this point, yes. Mikael Laséen: Okay. Can I also follow up with a quick question on the stock-based compensation. That probably is expected to go from 1% to 4%. Will you have a step up now when you have been separated and listed? Or will that be a gradual process? How does it work? Benjamin Maslen: Yes. It will be a gradual process as the new program gets approved and kicks in, and it layers and stacks up kind of year-over-year. So I would say it's fairly linear between the 1% and the 4%. Operator: There are no further questions. I will now hand the call back to Anders for closing remarks. Anders Svensson: Thank you very much, and thank you, everyone, for participating and engaging with questions. Looking forward to seeing you all then on next Thursday in London. And we wish you all a great day from here. Bye. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.