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Operator: Good morning, and welcome to the Agree Realty First Quarter 2026 Conference Call. [Operator Instructions] Note this event is being recorded. At this time, I would like to turn the conference over to Reuben Treatman, Senior Director of Corporate Finance. Please go ahead. Reuben Treatman: Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's First Quarter 2026 Earnings Call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws, including statements related to our updated 2026 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO and pro forma net debt to recurring EBITDA. Reconciliations of our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website and SEC filings. I'll now turn the call over to Joey. Joey Agree: Thank you, Reuben, and thank you all for joining us this morning. I'm extremely pleased with our performance to start the year as we have continued to execute on all fronts. During the quarter, we invested nearly $425 million across our 3 external growth platforms, while further strengthening our market-leading portfolio. The $403 million of acquisitions completed during the period represents our largest quarterly acquisition volume since 2022 as we continue to source superior risk-adjusted opportunities. While the macro backdrop remains highly unpredictable, we have never been better positioned. During the quarter, we raised approximately $660 million of forward equity through our ATM. We now enjoy $2.3 billion of total liquidity and more than $1.6 billion of hedged capital, including a company record $1.4 billion of outstanding forward equity. At quarter end, pro forma net debt to recurring EBITDA was just 3.2x, giving us meaningful flexibility to execute regardless of capital markets volatility. As a reminder, we have no material debt maturities until 2028. We have married this fortress balance sheet with the highest quality retail portfolio in the country that only continues to improve. In a K-shaped economy, our industry-leading tenants stay poised to leverage their scale and value propositions to drive further share gains. We are consistently seeing leading retailers with the balance sheet and operating discipline winning across cycles and expanding their brick-and-mortar footprints. Our pipeline across all 3 external growth platforms is robust, yet our approach remains unchanged. We will stay consistent within our established investment parameters without compromising our underwriting standards. While our investment in earnings guidance remain unchanged, I would note that we have increased our treasury stock method dilution in anticipation of an elevated stock price and as well as the additional forward equity raise during the quarter. We'll continue to provide updates as the year progresses, and Peter will provide additional details on our guidance and input shortly. Turning to our external growth activity. We had an active start to the year, leveraging our unique market positioning and deep relationships with retail partners to uncover opportunities across all 3 platforms. During the first quarter, we invested nearly $425 million in 100 properties across these 3 platforms. Of note, during the quarter, we executed a sale leaseback with Hobby Lobby on their corporately owned stores. As we've discussed on prior earnings calls, Hobby Lobby is privately owned, has a balance sheet and stands as a clear market leader in the craft and hobby space. They are a terrific operator and partner. As a reminder, we do not impute investment-grade or shadow investment-grade ratings in our IG percentage. Additional acquisitions during the quarter included a Home Depot, 5 bound leases in Pennsylvania and Maryland, a portfolio of 11 Sherwin-Williams stores, several Aldis and 3 Walmarts located in Georgia and South Carolina. The acquired properties at a weighted average cap rate of 7.1% and a weighted average lease term of 11.3 years. Nearly 60% of base rents acquired was derived from investment-grade retailers, and we continue to add to our portfolio during the quarter. As previously discussed, we continue to see increased activity across our development and developer funding platform. During the first quarter, we convinced 2 new development or DFP projects with total anticipated cost of approximately $18 million. Construction continued on 9 projects during the quarter with aggregate and anticipated cost of approximately $71 million. We completed 4 projects during the quarter, representing a total investment of approximately $23 million. Our development in DFP pipelines continue to grow significantly, and we expect development in DFP activity to meaningfully ramp in the second and third quarters, including several additional projects that commenced subsequent to quarter end. Moving on to dispositions. We sold 7 properties during the quarter for total gross proceeds of approximately $11 million at a weighted average cap rate of 6.8%. This activity included both the Jiffy Lube and Dutch Brothers that were loaded in the grocery portfolio acquisition last year. We sold these assets approximately 300 basis points inside of where we acquired them less than 1 year ago, highlighting our ability to opportunistically recycle capital and harvest value across our portfolio. Our asset management team continues to do an excellent job proactively addressing upcoming lease maturities. We executed new leases, extensions or options on over 876,000 square feet of gross leasable area during the first quarter with a recapture rate of over 104%. This included a Walmart Supercenter in Whitewater, Wisconsin and a Home Depot in Orange, Connecticut. We remain well positioned for the remainder of the year with just 29 leases or 90 basis points of annualized base rent maturing, which is down 60 basis points quarter-over-quarter and 260 basis points year-over-year. We ended the quarter with pharmacy exposure at 3.5% of annualized base rent, and it now falls outside of our top 10 sectors, a meaningful milestone given that pharmacy once exceeded 40% of our portfolio. Anchored by assets, which is our Walgreens on the corner of the Diag and the University of Michigan campus and our CVS on Granite avenue, we are confident in the real estate and performance of our remaining pharmacy assets. As of quarter end, our best-in-class portfolio comprised 2,756 properties spanning all 50 states. The portfolio included 261 ground leases, comprising over 10% of annualized base rent. Our investment-grade exposure stood at over 65% and occupancy is strong at 99.7%, up 50 basis points year-over-year. Before I hand the call over to Peter, I'd like to thank and complement the tremendous work he and his team did on the creation of our inaugural supplement. We have taken feedback from a number of constituents and created a first-class document that provides investors and analysts with a thorough picture of our portfolio and financials. Peter, thank you, and take it away. Peter Coughenour: Thank you, Joey. Starting with the balance sheet. We were very active in the capital markets during the first quarter, selling 8.7 million shares of forward equity via our ATM program for anticipated net proceeds of approximately $658 million. This represents yet another company record for equity raised in the quarter and underscores our ability to raise equity at scale via our ATM and in a cost-efficient manner. At quarter end, we had approximately 18.4 million shares of outstanding forward equity, which are anticipated to raise net proceeds of approximately $1.4 billion upon settlement. Additionally, during the period, we drew $250 million on our previously announced $350 million delayed draw term loan. As a reminder, we entered into forward starting swaps to fix SOFR through maturity in 2031 and inclusive of those swaps, the term loan bears interest at a fixed rate of 4.02%. We also took further steps to hedge against interest rate volatility, entering into $50 million of forward starting swaps during the quarter. In total, we now have $250 million of forward starting swaps, effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at roughly 4.1%, combined with the approximately $1.4 billion of outstanding forward equity. We have over $1.6 billion of hedge capital, which provides critical visibility into our intermediate cost of capital, particularly amidst recent geopolitical and macro uncertainty. At quarter end, we had liquidity of approximately $2.3 billion, including the aforementioned forward equity availability on our revolving credit facility, term loan and cash on hand. Pro forma for the settlement of all outstanding forward equity, our net debt to recurring EBITDA was approximately 3.2x. Our total debt to enterprise value is under 29%, and our fixed charge coverage ratio, which includes the preferred dividend remains very healthy at 4.2x. Our sole short-term or floating rate exposure was comprised of outstanding commercial paper borrowings at quarter end. And as Joey mentioned, we continue to have no material debt maturities until 2028. Our balance sheet is extremely well positioned to execute on our robust investment activity across all 3 external growth platforms. Moving to earnings. Core FFO per share was $1.13 for the first quarter which represents an 8.1% increase compared to the first quarter of last year. AFFO per share was $1.14 for the quarter, representing a 7.9% year-over-year increase, which is the highest quarterly AFFO per share growth achieved since the second quarter of 2022. As Joey noted, we are reiterating our full year 2026 AFFO per share guidance of $4.54 to $4.58, which implies approximately 5.4% year-over-year growth at the midpoint. We provide parameters on several other inputs in our earnings release, including investment and disposition volume, general and administrative expenses, non-reimbursable real estate expenses as well as income tax and other tax expenses. Our current guidance also includes anticipated treasury stock method dilution related to our outstanding forward equity. Provided that our stock continues to trade around current levels, we anticipate that treasury stock method dilution will have an impact of $0.02 to $0.04 on full year 2026 AFFO per share. This is up from approximately $0.01 in our prior guidance due to both the higher share price and more forward equity outstanding. As always, the impact could be higher or lower if our stock price moved significantly above or below current levels. During the quarter, we recorded approximately $2.4 million of percentage rent, up from $1.6 million in the first quarter of last year. Roughly 1/3 of the increase was driven by strong same-store sales performance across this group of leases as we have actively targeted leases with potential percentage rent upside. The remainder reflects a timing shift as certain tenants that have historically paid percentage rent in Q2 contributed in Q1 of this year. Our growing and well-covered dividend continues to be supported by our consistent and durable earnings growth. During the first quarter, we declared monthly cash dividends of $0.262 per common share for January, February and March. The monthly dividend equates to an annualized dividend of over $3.14 per share and represents a 3.6% year-over-year increase. Our dividend is very well covered with a payout ratio of 69% of AFFO per share for the first quarter. We anticipate having over $140 million in free cash flow after the dividend this year, an increase of over 10% from last year. This provides us another source of cost-efficient capital while maintaining a healthy and growing dividend. Subsequent to quarter end, we announced an increased monthly cash dividend of $0.267 per common share for April. This represents a 4.3% year-over-year increase and equates to an annualized dividend of over $3.20 per share. Our inaugural financial supplement this quarter includes several non-GAAP financial metrics and key performance indicators, including our recapture rate, credit and occupancy loss and same-store rent growth. The enhanced disclosures are intended to provide better visibility into our operations and highlight the high-quality nature of our tenancy and portfolio, reflecting our best-in-class execution. We also hope the supplement serves as a one-stop resource that centralizes the key information needed to understand the performance and drivers of our business. With that, I'd like to turn the call back over to Joey. Joey Agree: Thank you, Peter. Operator, at this time, let's open it up for questions. Operator: [Operator Instructions] We'll take our first question from Jana Galan at Bank of America. Jana Galan: Joey, if you could just follow up on the investment guidance. I know it's already been raised once this year, but with $1.6 billion of hedged capital already raised, just curious if you could kind of expand on the pace or the size of the different pipelines for the platform? Joey Agree: Sure. So our pipeline, as I mentioned in the prepared remarks, across all 3 platforms is very strong. There are 2 things that will determine frankly, our pace into Q2. Number one is just the macro environment here. Obviously, we have a significant amount of uncertainty that seems to change by the hour. And then two, at our election, which transactions we decide to pursue. So we have a number of transactions across all 3 platforms that are under contract or under a letter of intent going through the diligence period but all 3 pipelines are extremely strong. Jana Galan: And maybe just following up on the kind of macro uncertainty, rates moving around, does this cause any kind of delay in your partner's decision-making or wanting to kind of pause on any type of big plans. Joey Agree: No. This is totally unilateral on our side here. We have pipelines that are extensive across all 3 platforms. I just didn't think it was appropriate to raise investment guidance at this time in the midst of a war with JD Vance sitting on the runway. Operator: We'll go next to Michael Goldsmith at UBS Financial. Michael Goldsmith: You now have a record $1.4 billion of forward equity outstanding. Can you walk us through a bit about the timing of physical settlement relative to acquisition funding and how you're thinking about using the forward versus term loans or other forces? Peter Coughenour: Sure. Michael, this is Peter. To your point, we still have $100 million of capacity on our delayed draw term loan. That's at a fixed rate of roughly 4% given the swaps that we entered into. So given the attractive rate there, I think that's likely the first option we look to when we decide to term out some of our short-term variable rate debt. Beyond that, to your point, we have roughly [ 4 million ] shares of outstanding forward equity. As disclosed in our new supplemental, the contract for about 8 million of those shares matures at some point this year. And while we can always extend the contract, if needed, I think there's a good chance that we settle those shares at or prior to maturity given our anticipated uses. So I would expect that those 8 million shares are likely settled at some point in 2026. And then lastly, we have the $250 million of forward starting swaps in place that have effectively fixed the base rate for us on a future 10-year issuance at 4.1%. And so with those swaps in place, we'll evaluate the appropriateness of an issuance later this year. But we're not in a rush to do anything given the term loan we have the capacity there, plus the forward equity. And I think, most importantly, with $2.3 billion of liquidity from multiple sources. We have plenty of flexibility, optionality here. Michael Goldsmith: And then Joey, you talked in the prepared remarks about Hobby Lobby and how you've been partnering with them. Can you just talk a little bit more about what makes this particular tenant attractive? And just how you view the outlook for the craft base going forward? Joey Agree: Sure. Hobby Lobby is clearly the far and away leader in the craft and hobby space out of respect for the Green family and our confidentiality, I won't go into their financials, but they are an extremely strong company here. The Green family as well as Hobby Lobby as an entity literally 0 or no debt -- net debt to EBITDA, net debt basis here. So we're talking about a leading operator here if they pursued a rating would be a high investment-grade operator. They effectively put Joanne out of business. They're a market leader here. They had limited stores on their balance sheet. Most of their assets are leased. They wanted to eliminate the real estate from the balance sheet and the management responsibilities that is entitled and had with owning those assets. And so this was a unique transaction for us. They're a tremendous operator, a tremendous partner. They're extremely methodical in their growth plans, and we are thrilled to complete this transaction with them. Operator: We'll take our next question from Smedes Rose at Citi. Bennett Rose: I guess I wanted to ask you a little bit more. I mean I think the answer is probably no here because you mentioned that you're meaningfully ramping up your development pipeline in the second and third quarters. But I just don't have the knowledge of construction enough, I guess, to know, but you're not seeing any increases in kind of pricing or due to what's going on in the Middle East or any kind of hesitancy on the part of tenants maybe to kind of pause interest at this point given sort of a more fluid macro backdrop? Or I mean it sounds like the answer is no, but I'm just curious as to maybe why. Joey Agree: Yes. No, it's a great question, Smedes. We're seeing absolutely no hesitancy on the part of tenants as world events unfold here. Could that be possible? Sure. But what we're seeing is the exact opposite in the middle of the conflict in the Middle East has not changed the perspective of brick-and-mortar retailers. And as we mentioned on prior calls, if you look at just the announced store openings for the biggest and best retailers in this country, they have all come to the recognition that the store is the hub of an omnichannel world. It is not a spoke and so they are all opening new stores, some at voracious paces here to reduce last mile delivery costs and be efficient. And so we have not seen any slowdown from any of the tenants that we're working with. In fact, we've seen some acceleration. As I mentioned in the prepared remarks, we have commenced several projects subsequent to quarter close, and we will be closing on additional projects later this week and next week. In terms of costs, the projects that we close on have guaranteed maximum price bids. They have GMP contracts in place from general contractors. I'll remind everybody, we're not speculating on land. We're mobilizing and commencing right after close. We aren't speculating on small tenant space here. These are build-to-suit projects or ground lease projects for the leading operators in the country that are signed, stealed and delivered at the time we close. And so we have not seen any material cost creep yet. The team here, the construction team, led by Jeff does a tremendous job budgeting these projects in advance, and then we work with general contractors to the bid process prior to close. Bennett Rose: Okay. And then I wanted to ask you, obviously, we all saw a 7-Eleven announcement to close a bunch of stores, I mean first of all, do you think any of your stores might be impacted? And given some of your leaning into convenience stores in a way, some of the reasons that they're closing some of those stores seems like it's going to support some of your white papers that you guys have written around this space. So just curious, any just near-term concerns around your portfolio specifically and anything it might tell you about kind of where convenience stores are going. Joey Agree: Absolutely 0 concerns. We have no stores closing in our portfolio, and I appreciate you referencing the white paper. I ask everyone to take a look at it on our home page. 7-Eleven is closing the stores that have roller hotdogs and Slurpees. That's the bottom line. The -- and they're constructing and we are developing on their behalf, large-format convenience stores that have food and beverage offerings that are extensive, aligned with where the convenience store space. And so 7-Eleven is just a proxy here for the broader gas station convenience store space. The days of the 1,800 square foot get cigarettes and gum and a couple of coolers and gas are gone. That was the gas station. If you think back 10, 15 years ago, they also had an auto bay. They probably blocked that up to add a little bit more square footage to sell in-store products. Today, the gas station is moving to the convenience store model, whether it's 7-Eleven or Sheets or Wawa, we acquired a number of assets this quarter and led their development entry into the state of Florida over a decade ago. These operators are taking meaningful share across sectors and the evolution of the business is happening before our eyes. And so again, the pump, while it produces significant revenue doesn't produce the EBITDA that the inside source sale does. That is F&B, food and beverage, primarily breakfast and lunch, liquid gold, coffee, and affordable meals and convenience items that also take from the front end of the pharmacy for consumers. And so this is going to be a multiyear evolution, and we're going to continue to see the 2,000 square foot -- 1,200 to 2,000 square foot "gas stations" go away. Michigan, we're at the heart of this right now with Sheets and Quick Trip and 7-Eleven Speedway and operators expanding across the state while the legacy gas stations are frankly put out of business. Now this takes time, like any transition of any retail sector. But effectively, it's sweeping the country. And so it's a tremendous opportunity for us. You see us our activity here through all 3 platforms. But it's truly the evolution of a business model into a highly successful operator that has significant margin in food, beverage and in-store components. Operator: We'll go next to John Kilichowski at Wells Fargo. William John Kilichowski: Joey, that was very helpful on the 7-Eleven breakdown. I guess, if you wouldn't mind, maybe just talking about the rest of the portfolio, what's in guide from a credit loss perspective. And if there's anything else in there that you're looking at that may be has forecasted that you have some expected closures or if all of that is just precautionary? Joey Agree: No, no anticipated closures, all precautionary. We give our guide. We try to narrow it down during the year. The supplement does a great job of bucketing what we call credit loss, whether it's expirations or actual or credit loss at tenant defaulting falling out of -- entering vacancy, rejecting a lease shows that historical trend. We don't anticipate anything material in the portfolio this year. We're watching 1 to 2 -- a couple of assets, but really, that's about it. Peter, anything to add? Peter Coughenour: No, I think you hit it, just to hit on the numbers quickly, John. In the supplement, we disclosed 14 basis points of both credit and occupancy loss during the first quarter. Our AFFO per share guidance for the year still assumes 25 to 50 basis points of credit and occupancy loss. So there is an implied acceleration in Q2 through Q4 there. At this point in the year, we thought it was prudent to leave that range as is. But as Joey said, the portfolio is continuing to perform well. William John Kilichowski: Got it. And then the second one for me is just yields and deployment time line on development DFP, Lider 1Q, I know in opening remarks, you mentioned some scale in 2Q and 3Q. I guess my question is, we've highlighted $250 million as sort of a medium-term target. Is that still a realistic target for this year? And then maybe above and beyond that. Is there the opportunity to scale above that? Like would it be surprising for us to see a number well north of $250 million a year or is there a reason from a risk perspective why your initial remarks sort of capped that target is like a 250 number? Joey Agree: So we said about -- I said about 18 months ago, our intermediate target that was approximately 3 years, was to put $250 million in commencements in the ground per year. There's a chance we hit it this year. Again, Q1 is generally light just because if you get into the northern half of the country, you get weather related, you're not going to commence a project with frost in the ground. Q1 is generally light will be significantly larger and Q3 is shaping up to be along the same lines of Q2. Now these projects are generally subject to entitlements and municipal the government authorities approving approvals there. But we are on track to hit that intermediate goal of $250 million in the ground. The team is doing a tremendous job working with the biggest retailers in the country and the best developers in the country on the DFP side. And we're very excited about our pipeline there. Operator: We'll move next to Upal Rana at KeyBanc Capital Markets. Upal Rana: On the competition and seller behavior side, you mentioned people are not pulling back due to the macro volatility, but are you seeing any change in behavior due to the volatility in the 10-year, just wondering if you're seeing any increased deal flow in the past month or so that could positively impact 2Q investment volumes. Joey Agree: Upal, nothing that I could say is causal. We've said with the 10-year between 4 and 5, it seems like the world has been accustomed to the base rate purportedly for the entire world, the 10-year UST vacillating by 10%, 15%, up and down. We haven't seen anything causal. I'll tell you, we see more and more opportunities. Our funnel is bigger than it's ever been across all 3 platforms. We don't see increased competition. I wouldn't tell you we haven't seen a notable decrease in competition. Really, nothing's changed since coming out of 2024 and our do-nothing scenario. And so the only thing that I can point to is the performance, the size, the scope, the depth and the experience of this team and then our relationships within the market, highlighted in the supplemental just the retailer relationship-driven transaction. Upal Rana: Okay. Great. That was helpful. And then acquisitions of investment-grade-rated tenants has come down again this quarter. I'm just curious, outside of IG credit ratings, is there something else in the lease economics that we should -- that you're acquiring that is a sign of higher quality that we should be considering? Joey Agree: No, let's clarify why investment grade came down this quarter. We don't impute a credit rating to Hobby Lobby, privately held company by the Green family. So that's the biggest piece of this year. We're talking about, again, the largest craft and hobbies retailers, a multibillion dollar revenue operator that is far and away the leader in the crafts and hobby space that is privately owned by one family. So that is the driver. And I'll reiterate, investment grade is an output for us. We have tremendous operators in our portfolio that we don't impute shadow investment-grade ratings, too, but publics Chick-fil-A, ALDI, Wegmans, Hobby Lobby, again, so that is an output. In order for us to call an operator, an investment-grade operator, they have to be rated by a major agency and therefore, have the outstanding debt. Alta is not an investment-grade company, but I believe they don't have any debt, correct, Peter? Peter Coughenour: Correct. Joey Agree: They don't have any outstanding debt. So we have debt free, multibillion-dollar public and private operators in our portfolio. If you want to impute shadow investment-grade ratings, to our portfolio, we'd be at 80%. Then add on the ground lease exposure, which doesn't have any sub-investment grade. And I would tell you the safety of those assets is even greater than investment-grade assets, and we'd probably be at 85%, 87%. So it's an output to what we do. Our focus is on the biggest and best operators, the best real estate opportunities across the country, leveraging all 3 platforms, whether or not they have an investment-grade rated balance sheet or carry any debt is really, again, just a secondary here. Operator: We'll take our next question from Rich Hightower at Barclays. Richard Hightower: Joey, I want to go back to a comment you made in the prepared comments, you sold some grocery store assets with a pretty quick turnaround versus where you bought the assets at a lower cap rate versus the purchase price, so is there any movement specifically in grocery assets versus nongrocery, any sort of bifurcation in cap rate trends? Because obviously, we all saw sort of the headline number didn't really change in terms of what you bought quarter-on-quarter. Just help us understand any movement there. Joey Agree: Yes. Just to clarify, Rich, we did not sell the grocery assets. The grocery portfolio that we bought had outlets that were leased to Jiffy Lube as well as Dutch Brothers that we disposed approximately 300 basis points inside of where we bought the grocery-anchored portfolio, inclusive of those assets. We have no interest in owning 1,000 square foot Dutch brothers that trades in the low 5s or a quick lube that the 1,200 square feet that has no residual value in the [indiscernible] either. So we quickly moved, we closed those in a TRS and then quickly move to recycle those assets, accretive to the overall transaction, and we'll redeploy those proceeds accretively into better real estate and we think better credit. Richard Hightower: Okay. Appreciate the clarification there. I guess, secondly, maybe there's nothing to read into this, but you did mention better percentage rents in the first quarter, part of which, not all of which, but part of which was due to obviously better sales at those particular properties. Is there anything to read into that in terms of strength of the consumer, a particular type of consumer relative to the aggregate just as we see sort of other indicators maybe softening given everything else going on in the world. Joey Agree: It's such a small handful of assets. It's the biggest retailers in the country. We're talking about 5 or 6 properties that contributed -- 2 that contributed the vast majority of that percent rent. I think it's aligned with our thesis and what we're seeing in terms of the K-shaped economy, but I would be hesitant to draw broader conclusions from it, just because of this year of limited number of properties. But we are seeing through non-percentage rent but through anecdotal conversations and also through other data here, and look, you're seeing it as well through the public reporters, the Walmarts and the TJXs of the world are thriving, right? The trade-down effect is real. In the middle-income consumer, the $125,000 median household income, plus/minus is trading down. And we're seeing that through multiple data points, both public and private. I think the percent rent falls in line with it. That's the only conclusion I would rather. Operator: Our next question comes from Linda Tsai at Jefferies. Linda Yu Tsai: Two questions. In your investor deck, you highlight avoiding private equity ownership, do you have a sense of what percentage of your tenants are owned by private equity and how it's trended over time in your portfolio? Peter Coughenour: So Linda, we added some new disclosure to our supplemental that highlights ownership type and I would just call out in that disclosure, 77% based on ABR of our portfolio today is publicly traded. There's -- the remainder of that is private companies, but that is broken down into a few buckets. Those could be privately held companies. We talked about Hobby Lobby owned by David Green, they could be nonprofit companies, ESOPs or some other form of private ownership. So there is a small component of private equity within that private bucket, but it isn't a significant component of the portfolio today for us. Linda Yu Tsai: And then just one for Joey, you always have a clear idea of the state of retail. I guess you said the consumer is trading down and that's been happening for quite some time. But are you seeing sectors where the consumer really is pulling back completely? And then any tenant sectors where you'd be more concerned, just broadly speaking, not necessarily in your portfolio? Joey Agree: Yes, not within our portfolio, but I think if we watch the casual dining space, we're seeing with the some of the quick service restaurants, all the guys that sell bowls for $18, $22, I don't know, I don't get to them very often. It's the discretionary options where people have the ability to trade out and that goes across really all sectors. So whether it's basic goods and services here, basic things like grocery. I mean, I drove by the Costco gas station 2 days ago and the line was about 25 cars deep for fuel. And so we are continuously seeing that trade-down effect now pinched by gasoline prices as well and exacerbated by gasoline prices and prices at the pump. So I think it's across all luxury experience discretionary sectors and then also trading down in the necessity-based stuff for things like groceries. Operator: Next, we'll go to Eric Borden at BMO Capital Markets. Eric Borden: Joey, just curious how cap rates are trending to start the year between investment grade and non-investment grade tenants. Are you seeing any meaningful changes in the spread between the 2, just given the macro uncertainty here? Joey Agree: We haven't seen any change in cap rates in, I would tell you, the past 18 to 20 months. Again, the volatility even with the 10-year treasury really hasn't driven it. We're still nowhere near peak transactional activity coming out of COVID or before COVID. There's still limited 1031 or private buyer competition out there on a relative basis. So we really haven't seen any real material moves in cap rates here. The low price point stuff, the Jiffy Lubes and the Dutch bothers, those trade extremely aggressively. Those are to the 1031 buyers. But if you look at just the inventory out there even for Starbucks and things like that, there's a significant amount of inventory that's stale out there because of the lack of a bid the buyer pool. But we really haven't seen any material change here almost to 2 years. Eric Borden: That's helpful. And then just on the forward equity, just given the increasing dilutive impact in the TSM as your share price rises, would you consider a more balanced approach to equity issuance between forward equity and traditional or do you believe it's more prudent to keep the forward equity book falls given the current macro side or some of that going off? Joey Agree: We'll continue to look at all alternatives. Obviously, our balance sheet is in a fortress position. But I think when we first issued forward equity and came up within the net new space, the goal was to get an intermediate perspective on our cost of capital. So volatility could give us the decision-making real-time basis, whether we do something or not because we liked it in relative to the environment, not because we had to fund it just in time, right? And so inherently, we think the forward equity construct, and I think has adopted now by all or the vast majority of our peers takes a just-in-time financing business and then gives you that intermediate cost of capital to truly operate looking forward months and quarters in advance. Now we'll look at all opportunities to raise and source capital that are efficient and fit within context of our balance sheet and so why wouldn't rule anything out on a go-forward basis. But sitting here with $1.4 billion of forward equity and $2.3 billion of liquidity, it's not something that's top of mind for us. Operator: And we'll move next to Ronald Kamdem at Morgan Stanley. Ronald Kamdem: Great. Two quick ones. Thanks for the disclosure on the supplemental. Just comparing the acquisitions versus the DFP -- developer in the DFP platform, just remind us what the spread on yields are that you're getting on the DFP side developer and the DFP side. And also, I think you mentioned earlier that competition is actually easing on the acquisition front. Maybe can you just talk a little bit more about like which of those platforms is more competitive and you're better positioned? Joey Agree: Ron, so we've always talked about development subject to the timing and scope of the project, whether it's a retrofit or a ground-up development, right, that's going to range anywhere from 9 to 18 months. Those projects being significantly wide 75 to 150 basis points where we can buy a like-kind asset. Developer funding platform is generally ranging from 6 to 12 months. That will be tighter just given the time horizon. Again, we're targeting the same tenant through all 3 external growth platforms. The only difference here is time. And so it is just time and pricing that duration risk. And so that's where we drive that spread from. But we're not targeting different types of assets or credits here. It's all within our sandbox. We're not doing anything on a speculative basis across all 3 platforms. So we're seeing significant activity across all 3 platforms at appropriate spreads, and we're going to continue to build that pipeline and we'll demonstrate it in Q2. Ronald Kamdem: Helpful. And then just a quick one on the -- so I'm looking at the recapture rates and same-store rent growth on the supplement. Is that -- is the $1.6 billion is some of that sort of volatility from quarter-to-quarter. Is that all the percentage rents? Or is there something else going on? There seems to be some seasonality to the same-store rent growth. Peter Coughenour: Yes. In terms of some of the seasonality you see in same-store rent growth, Ron, you're right, that percentage rent is included in Q1. And so that's driving a portion of the seasonality. But if you look at that over a longer time series as well, that seasonality is going to be driven by the underlying lease structure of our portfolio. And we disclosed in the supplemental about 91% of our leases have fixed rental escalators. Those are typically rental escalators taking place every 5 years, ranging from 5% to 10%. And so when those escalators hit, it's going to drive some variability in same-store rent growth. But what we've seen over the trailing 8 quarters, and it's consistent with what we've seen historically is same-store rent growth just north of 1%, with very little falling out, as you can see from our credit loss and occupancy loss disclosure. Operator: And that concludes our Q&A session. I will now turn the conference back over to Joey Agree for closing remarks. Joey Agree: Well, thank you all for joining us this morning, and we look forward to seeing everyone at the upcoming conferences and appreciate your time. Thanks, again. Spenser Allaway: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, everyone, and welcome to GAP's First Quarter 2026 Conference Call. [Operator Instructions] Now it's my pleasure to turn the call over to GAP's Investor Relations team. Please go ahead. Maria Barona: Thank you, and welcome to GAP's First Quarter 2026 Conference Call. Prior to introducing GAP's management team, I'd like to take a few moments to mention the forward-looking statements as described in the financial disclosure statements. Please be advised that any statements made today may not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such, any information discussed is based on several assumptions and factors that could change causing actual results to materially differ from current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued on Monday. Thank you for your attention. Our speakers today from GAP are Mr. Raul Revuelta, Chief Executive Officer; and Mr. Saul Villarreal, Chief Financial Officer. At this time, I'll turn the call over to Mr. Revuelta for his opening remarks. Raul Musalem: Thank you, Maria. Good morning, everyone, and thank you for joining us today. I'm pleased to report that GAP delivered a solid start to the year on results as I discuss the company operational and financial highlights for the first quarter of 2026. Despite the challenging traffic environment, our performance remained strong, supported by the resilience of our aeronautical revenues as well as the continued growth of the non-aeronautical business, which helped to offset the more complex traffic environment. Let me begin by discussing passenger traffic. Total passenger traffic across GAP's 14 airports decreased by 5.5% in the first quarter compared to the same period of 2025. This decrease reflects various factors that impacted the Mexican as well as the Jamaican operations. In the Jamaican operations, we continue to face headwinds from the Hurricane Melissa. Despite this, the recovery of hotel capacity has been better than expected along the main TUA corridor. It is important to note that while as today, passengers volume have not yet reached pre-storm levels. Trends indicate that we will regain this level by the fourth quarter of this year. Traffic declines in Mexico were largely driven by temporary disruptions such as the security incident in Jalisco during the last week of February. This event negatively affected the perception of safety and key leisure destinations in Mexico, such as Puerto Vallarta and Los Cabos, thereby softening demand at these airports. These dynamics to the typical high season month of March affecting the spring break traffic and causing demand to decline. Tijuana was also impacted given its stronger reliance on cross-border travel as roughly 75% of CBX users are U.S.-based passengers accessing domestic flights to Mexican tourist destination. Additionally, global macroeconomic volatility impacted operations. This included geopolitical tension and fuel prices, which pressure airlines operation costs, prompting a realignment of capacity to maintain efficiency, as well as the possibility of economic downturn. Now moving on to the revenues. Total revenues increased by 2.8% compared to the first quarter of 2025. Aeronautical revenues for the group grew by 3.9%, but in Mexico, the increase was 9.3%, primarily driven by the implementation of the maximum tariff for the 2025-2029 regulatory period in Mexico, which are linked to the highest level of the CapEx investments in the history of the company. Aeronautical revenues increased by 6.1%, supported by strong performance in our Mexican operations, reaching 10.7%, particularly in business operated directly by GAP. This includes the bonded warehouse business, which represents around 21% of total non-aeronautical revenues. This performance underscores the resilience of our business model and the continued success of our increasingly diversified revenue base. Cost of service increased by 6.5% compared to the same period last year, mainly due to the higher personnel costs, increased security and maintenance expenses and the expansion of operational areas. We work hard to offset this pressure by maintaining rigorous cost control throughout the organization. As a result, EBITDA increased by 6.4%, reaching MXN 6 billion with an EBITDA margin of 68.3%, reflecting both revenue growth and operational efficiency. This despite the reduction of additional concession fee in Montego Bay Airport due to the decrease in passenger traffic and revenues, which is a temporary effect. Regarding our financial position, GAP maintains a strong liquidity position with a cash and cash equivalents of MXN 23.2 billion during the first quarter of 2026, mainly due to the historic bond issuance of MXN 10.7 billion on March 31. The proceeds we allocate towards our strategic acquisition of 25% of CBX, as well as capital expenditures. Furthermore, during the quarter, we refinanced existing debt, optimizing our balance sheet and strengthening our overall financial flexibility. In terms of CapEx, we continue to advance our investment program under the current Master Development Plan, deploying during the quarter MXN 1.8 billion, focusing on enhancing capacity as well as the passenger experience across all of our airports. I would like to briefly update you on our strategic initiatives. As you know, in December 2025, our shareholder approved the business combination related to the CBX as well as internalization of the technical assistance services. This transaction is still in the process of being formalized. Once completed, it will be consolidated in our financial statements, and we expect the conclusion of this process to take place during the second quarter of this year. We believe this initiative will strengthen our long-term growth platform, specifically by promoting our market cross-border passenger profile as well as unlocking additional commercial opportunities. As we move into the rest of the year, we remain mindful of the macroeconomic environment and short-term traffic volatility. Despite this, we believe structural demand remains strong, supported by the solid fundamentals of our market. We remain confident that our diversified asset portfolio, strong financial position and disciplined execution to strategically position GAP well to navigate near-term challenges while continuing to generate long-term shareholder value. Later today, we will hold our ordinary shareholders' meeting, in which we will propose a dividend payment of MXN 20.8 per outstanding share during the following 12 months, among others. Thank you again for your time. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question over the telephone comes from Rodolfo Ramos of Bradesco BBI. Rodolfo Ramos: My question is on the aeronautical part of the business, perhaps a 2-parter here. After this tariff implementation, can you let us know what your current maximum tariff compliance is? And how should we think about it towards year-end? And secondly, on the traffic outlook that you have, there's a host of domestic global factors at play negatively impacting demand for air travel. Just can you frame it a little bit in terms of your 2% to 6% guidance? I mean, how you think about it? And when do you think we could see a more meaningful recovery there? Raul Musalem: Thank you, Rodolfo. First, related with maximum tariff, we are between 92% and 93% of the fulfillment. We are still having to implement additional passenger fee changes for the summer in 2 of our airports, Vallarta and Cabos. So we're still on the track of what we said originally will be close to 95% for the end of the year. For sure, what is related with maximum tariff, we need to take in account the churn rate that at the end of the day, an important part of that of the revenues are denominated in dollars for the case of passenger tour. The other part related with traffic, I would say that today is difficult to what could happen on the traffic in terms of the Iran war and the fuel prices. I would say that it's difficult to have today a more clear view of what could happen in the coming months and how big could be the decrease or the possible decrease of the adjustment on offer seats in the market. But the other part that at least we are still seeing is a summer that will come at least on the leisure with some additional seats. While we are expecting that on past years during some of this kind of geopolitical crisis, the U.S. passengers tend to fly more over the neighbor in the area of the neighbor could be Cabos or Vallarta rather to go to Europe or other kind of more long-haul travel. So what we are expecting in some way is some additional seats for the summer on those markets. But in general terms, for the moment, we keep without variance what we saw in the pretty first moment as our guidance for the year. we think that some of the temporary effect that could the security could bring in terms of decrease of passengers will be completely behind for the summer. And also, we are seeing better than we expected recovery of Montego Bay hotel capacity. But for sure, for the second quarter, we will review if that is the case, our guidance for the traffic. Operator: Next, we'll move on to Alan Macias of Bank of America. Alan Macias: Just a question on the CBX and TA transaction. What is pending for it to be completed? And I guess, should we expect it to be consolidated in May or in June? Raul Musalem: Thank you, Alan. We are doing our best for consolidating the results during May. So yes, we are just in the middle of that but yes, that will be our target. Operator: Next, we have Guilherme Mendes with JPMorgan. Guilherme Mendes: Two questions, the first one being on the commercial front. First of all, congrats on the strong results during the first quarter of the year. Just wondering what is behind the very strong cargo performance, if there's anything in particular to GWTC or something else? And if we can assume these numbers as sustainable going forward? And the second question is on the capital allocation. So now following the upcoming conclusion of the CBX transaction, I understand the Turks and Caicos was put on hold as well, if there's anything else that you'll be evaluating on the inorganic side of growth opportunities? Raul Musalem: Thank you, Guilherme. I mean related to the results and specific to the bonded warehouse business, is important to have in mind that this business is mainly moved by the cargo. And in the case of Guadalajara and all the central area of Mexico, we are seeing a really important more than 20% increase of cargo of high value on the area related mainly by electronics. Foxconn, for instance, has a really big movement on Guadalajara for additional plant. So what we are seeing for the last year is after the announcement of specific tariffs for China and for some different countries of Asia, we see like a shift on production on some electronic parts from Asia to Guadalajara area mainly. So we are seeing this really important increase in volumes of cargo but on real volumes, but value of the cargo. For this bonded warehouse business, you need to take into account that revenue comes from a mix of volume and value of the cargo that you are moving. So what we are seeing is that at the end of the day, all these change of tariffs bring some or shift some of the production from Asia to the Central Mexico and mainly to Jalisco and Guadalajara area. Saúl García: Hi, Guilherme. In terms of capital allocation, as you know, we are looking for opportunities all the time. So far, we don't have nothing more important or relevant than CBX conclusion and integration to the consolidated financial statements. So for now, we don't have any other project or major projects. We will let know to the market as soon as we have something on the table. For Turks and Caicos, it was canceled by the government so we will not continue on that anymore. And so far, we don't have any other relevant project. Raul Musalem: Yes. But complementing just the answer of Saul, for sure, we have an important focus on the development of new business in our airports. I will say we are working in 2 different projects for hotels in airports of Mexico of our efforts in our net. And for sure, the big focus on continue working on the efficiency of the margins in all of our directly operated by us business. So for sure, we will continue to see and review different kind of opportunities to M&A, but also we have like a big focus on how to increase the efficiency of our directly operated by us business. Operator: From Itau Unibanco, we have Pablo Ricalde. Pablo Ricalde Martinez: I have one question on the cost side. So we saw depreciation expense remained flattish year-over-year. So I just want to understand why despite all the CapEx you made last year, depreciation remains stable year-over-year. Saúl García: Pablo, this is Saul. Well, basically, we are aligned. We don't have any other major projects capitalized and depreciated. Also, as you may know, we have more than 25 years of concession. So the major projects that were capitalized and were depreciated within the last years were interrupted due to the term of the depreciation period. That the net effect of the offset of the increase in depreciation, net of those assets that were already 100% depreciated. Operator: Next, we have Gabriel Himelfarb of Scotiabank. Gabriel Himelfarb Mustri: Two quick questions. First, are you seeing any meaningful capacity movements from airlines, mainly domestic or perhaps low-cost U.S. airlines, given the rise of fuel prices and perhaps what happened in Jalisco in the past months? And my second question is about the CBX. I think it was financed 25% in pesos, Mexican pesos. Why was the logic of being financed in pesos rather than in U.S. dollars? Saúl García: Thank you, Gabriel. First, the size of the seat capacity of airlines, it is important to separate the 2 possible effects. The first one related with the security concerns, I would say that we are not seeing any kind of a structural change on the seat capacity on that area. But related on the fuel cost and what would be the possible reaction of capacity movement of airlines, for sure, it's something that's still on the table in some way. For the moment, we are seeing some decrease in capacity, at least not so relevant today, but we are seeing the cut of some services. For instance, Interjet just announced the cut of some services on Guadalajara. We are seeing some decrease on services on Tijuana, also in Cancun. So I would say that it's early to have a perfect view of what could happen on this level of close to $110 per barrel of oil. I would say that if you see, for instance, the price on 2022, it was just close of the same level, and we don't see at that moment decrease on capacity. What's still happening is the openings of these different routes, for instance, Volaris announced the new routes to Guadalajara to Mazatlan or Guadalajara to Zacatecas, Guadalajara to San Luis. So we are still seeing additional capacity. But for sure, it's the moment of decrease of capacity due to the cost of the fuel is still on the table. We need to, in some way, understand how long could take to, in some way, normalize the price, the price of the fuel and on the other hand, how important could be the resilience and the demand for the pass-through of the price of this peak of fuel into the ticket, to the airfare. So yes, I mean, at least for the moment, we are not seeing an important decrease of capacity. I would say that we are still seeing an increase due to the fact of new routes. Raul Musalem: Related to your second question, we decided to take advantage of the level of the exchange rate. As you may know, we are in the lowest levels in the exchange rate. The appreciation of the peso is playing out in our favor. So the idea is to take a long-term debt and trying to finance these assets in Mexican pesos. That avoids some volatility in our balance sheet in the long-term view. As you may know, the effects of this exchange rate will be affecting our P&L. So in this way, we have a little bit higher interest rate, but we have certainty about our long-term view balance sheet. Operator: From Barclays, we have Pablo Monsivais. Pablo Monsivais: Just one question in terms of the traffic expectations for next year, I know we're very early. But have you had any contact or new information of Viva and Volaris? Any color on that or how the potential merger will shape the domestic travel and especially on the routes they overlap, any intel there or something that you would like to share? Raul Musalem: Thank you, Pablo. I would say in terms of the merger or the group of airlines with Viva and Volaris, for the moment, we are not seeing any particular change. We are still, I mean, in talks with them and having communication, direct communication with both airlines, they still talk about there will be 2 different companies. And for the moment, they are not talking about the overlapping. But once antitrust authorities in Mexico has a specific view about the transaction, we could have more color about how going to be this transaction in some way out. But at least with the communication that we are having with the airlines, at least for the moment, they are not communicating anything related with overlapping and they are just talking about the operations for these 2 different companies as still is today. Operator: And we'll move on to Andres Aguirre of GBM. Andrés Aguirre Campillo: Congrats on the results. We noticed that accounts payable increased sharply to around MXN 2 billion in the cash flow statement. Could you please elaborate on what is driving this increase? Saúl García: Andres, yes, we have a significant increase in the effective cash position because the issuance bond at March 31 that was for the proceeds will be used for the acquisition of 25% of CDX, which will be in cash and additionally for CapEx committed into the MDP. So that's basically why we have this significant increase, it was MXN 10.7 billion more in cash that will be used for the CBX and MDP committed. Operator: And we'll move on to Alberto Valerio of UBS. Alberto Valerio: The first one a follow-up on CapEx. How should we be modeling the CapEx during the year? We know that seasonally, we start a little bit weaker and then increase the CapEx during the year. How should we expect that? And the second one about the jet fuel, anything that concern you guys? We know that different airlines, if I'm not mistaken, have not hedged their fuel. I know that it's not our usual year, but how do you see the supply of seats for Mexico during 2026, which is current price of oil price? Raul Musalem: Alberto, Related with the seats in Mexico, I mean, for sure, as you said, the hedging different routes have different levels of hedging. But I would say the important thing to see what's going to happen is the resilience and the specific demand for the pass-through of the tariffs of the cost of this fuel into the airfare. So that will be the first part. And second is going to be the kilometers that, that specific route could bring. So let me put it this way. I would say that in the first stage, we're going to see some kind of more or additional decrease on seats on some specific routes that have more kilometers when you talk about, for instance, domestic market. This is why we are expecting seeing some kind of effect on Tijuana, for instance, where their shorter flights has like 2.5 hours and their average time in the plane for a Tijuana flight is more around with 3 hours. So on the kind of routes where the demand is not enough resilience to get all the full impact of the fuel cost, we're going to see some decrease of passengers. But in the other hand, there are some specific routes that has like less than 2 hours of flying that could be Los Angeles to Cabo, 2.5 hours; Cabos to Vallarta, Vallarta to Los Angeles, Florida. All the short, really short routes could be Mexico to Guadalajara, Mexico to Vallarta, Mexico to Cabos, that will be interesting on the mix of the demand that we expect to be resilient on the increase on airfares and in some way, short flights or short kilometer -- short in terms of kilometer flight. So the mix of both parks and the expected of additional leisure passengers not flying long haul from the U.S. and flying or switching to Mexico beaches all these effects together make us think that our original guidance is still in place for the year. But for sure, it is difficult today to have like the complete crystal ball of what's going to happen in terms of the fuel. But if in general terms, the conditions on the price of the barrel is still, we could say that we're still seeing the same level of guidance for the end of the year. Saúl García: Alberto, this is Saul. Related to your second or third question, the CapEx will be deployed during the following months. As you may know, our economic cycle in terms of CapEx is more concentrated in the last quarters of the year. In the first months, we are in the process of the bidding process for all these projects. So we are in the middle of that. So we would be more intensive in terms of deployment during the following months. Operator: [Operator Instructions] Next, we have Abraham Fuentes of Santander. Abraham Fuentes Salinas: Recently, we have seen some pressure in terms of traffic in Tijuana. I wonder if you can give us more color about what you expect going forward and maybe the main dynamics behind this expectation. Raul Musalem: I mean in terms of Tijuana, what we are seeing, Abraham, is for sure, we have like a mix of different things happening over there. The first related that we still lack of capacity related of the Pratt & Whitney in Tijuana, mainly from Volaris are still being there. We think that for the summer, we will begin to see more of these planes flying. That is the first part. And second, what is related or what we thought that's going to be completely temporary that was related with all these security matters after the major capture operation that in some way going to be, I mean, in the past and we will, in some way, recover fully for that effect on the summer. In general terms, what we are seeing for Tijuana is that on the summer, we will see a more important revenue and recovery of traffic related for, first, additional seats coming back to the airport. And second, I would say, a softer base of comparison versus last year. But in general terms, I would say that we feel optimistic that Tijuana at the end of the year is going to have a positive result or it will grow in terms of passengers. Operator: There are no further questions at this time. I'll turn the call back over to Mr. Raul Revuelta for closing remarks. Raul Musalem: Thank you once again for joining us today. Before concluding, I would like to invite you all to join us on May 13 for GAP Day 2026. The event will start in San Diego at the CBX facilities and will continue at Tijuana International Airport and will include a series of strategic management presentations followed by a guided tool for our airports and the CBX facilities. We believe this is an excellent opportunity to learn more about our strategy, operations and long-term growth outlook. For registration and further details, please reach out to our Investor Relations team. Thank you, and we look forward to seeing you there. Have a great day. Operator: Thank you. This concludes GAP's conference call for today. Thank you for your participation, and you may disconnect.
Operator: Thank you for standing by, and welcome to the Sonoco First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Roger Schrum, Head of Investor Relations and Global Marketing Communications. You may begin. Roger Schrum: Thank you, Rob, and good morning to everyone. Last evening, we issued a news release and posted an investor presentation that reviews Sonoco's First Quarter 2026 financial results. Both are posted on the Investor Relations section of our website at sonoco.com. A replay of today's conference call will be available on our website later today and we'll post a transcript later this week. If you would turn to Slide 2, I would remind you that during today's call, we will discuss a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additionally, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operation. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures is available under the Investor Relations section of our website. Joining me today are Howard Coker, President and CEO; and Paul Joachimczyk, Chief Financial Officer. For today's call, we will provide prepared remarks, followed by your questions. If you'll turn to Slide 4 in our presentation. I'll now turn the call over to Howard. Robert Coker: Thanks, Roger, and good morning, everyone. During our February Investor Day, we set up a framework for our focused strategy over the next 3 years, which is linked to our 3 priorities of sustainable growth, margin improvement driven by our profitability performance plan and efficient capital allocation, which is focused on investing in our sales, debt reduction and returning value to our shareholders. We made strides in each of these priorities in the first quarter while achieving a solid start to the year despite some significant headwinds. Paul will go through the numbers in more detail, but as shown on Slide 5, our adjusted earnings for the first quarter of $1.20 net our and consensus estimates. This performance was primarily driven by strong productivity savings, favorable price/cost environment and a successful start to our profitability performance plan despite lower volume mix. I was really proud of our team's performance in the first quarter despite severe winter weather, which temporarily closed some of our customers and our operations to fire that destroyed our recycling facility in Greenville, South Carolina and the effects of rapidly changing macroeconomic conditions stemming from the Middle East conflict. Our Consumer Packaging segment exceeded our expectations during the quarter our Industrial Paper Packaging segment managed well through both operational and demand challenges. As I mentioned, severe winter weather disrupted several of our U.S. operations in late January as well as some of our large consumer customers who face for ologies, some lasting over a week. February was a much better month from a volume perspective. But with the onset of the Middle East conflict, we began experiencing rapid input cost inflation in March. And as I mentioned, an unfortunate fire in our Greenville facility on March 24. Thankfully, no one was hurt, but it did lead to a onetime cost of $2 million within the quarter. As you would expect, we're not standing still in the face of these macroeconomic challenges. If you turn to Slide 6, I'll talk further about the steps we're taking to mitigate rising costs and ensure supply for our customers in this challenging inflationary environment. Energy and freight and other petrochemical-related input calls such as resins, coatings and other chemicals represent approximately 10% of our annual sales. While the impact on the first quarter was under a few million dollars. Based on current estimates, we believe this inflation could add between $8 million to $10 million in additional costs in the second quarter. We are leveraging our global sourcing and supply assurance team to do all we can to help offset these rising costs. That said, we must recover this inflation and have implemented a number of necessary price increases, including a $70 per ton uncoated recycled paperboard increase in the U.S. and an EUR 80 per ton increase in Europe, along with other pricing actions. These actions are showing traction in the market. fast markets reported by Friday and an initial $60 per turn increase in U.S. URB prices. Given our current backlogs and solid mill utilization rates entering April, we feel confident about the sustainability of our actions. As shown on Slide 7, we have purposefully shifted our mix to more resilient consumer-focused businesses where today, 2/3 of our sales were generated by our leadership positions in paper and metal cans. We're focused on affordable center of the store safe food categories, which have historically remained resilient during periods of economic for us. I'm happy that our recent portfolio work has substantially reduced our exposure to resin based packaging. In 2023, we used approximately 240 million pounds of petroleum-based resins. While today, we used only about 75 million pounds primarily in our plastics industrial plastics business and our plastic cartridges for adhesives and sealants, where we do have recovery mechanisms in place. As it relates to our growth pillar, we recently opened a new paper can plant in Nong Yai, Thailand. As shown on Slide 8, Paul and I had the opportunity to participate in the grand opening with our team in Asia in March. This highly automated operation is expected to annually produce approximately 200 million units for the growing STACK chip markets in Asia and is one of the reasons we saw a 6% lift in paper can volume in the region in the first quarter. This plant was built to accommodate future capacity expansion, and we believe it could eventually become one of the largest global paper can operations over the next several years. In our industrial business, we are investing $20 million to add a new automated nailed wood, real production line at our Hartselle Alabama, facility. As shown on Slide 9, when this new line opens at the end of the second quarter, we expect it will increase our capacity by 15%, and able us to meet the needs of the fast-growing wire and cable industry. as it supplies the booming power infrastructure demand for AI center broad. I'll add that sales in our reels business were up 13% in the quarter. In addition to funding our growth, our disciplined capital allocation strategy remains focused on reducing debt and returning capital to shareholders. As shown on Slide 10, last week, our Board of Directors authorized the 43rd consecutive annual increase of dividends to shareholders, raising the payout to $2.16 per share which provides an annual yield of about 3.8%. Sonoco is one of only a few public companies that has paid dividends consecutively for more than 100 years. In summary, we had a good start to the year despite challenges, and we remain confident in our portfolio, our strategy and ability to execute through economic cycles. With that, I'll turn it over to Paul. Paul Joachimczyk: Thank you, Howard. I'll walk you through our first quarter financial performance, starting on Slide 11. With our portfolio transformation complete, we're entering the next phase defined by sustainable growth, margin improvement driven by our profitability performance plan and efficient capital allocation, which is focused on investing in ourselves, debt reduction and returning value to our shareholders. Today, I'll cover our first quarter results and our early progress against the profitability performance plan we laid out at Investor Day in February. Before I review the quarter, a quick note on comparability and some nuances related to the accounting treatment for our divestitures in 2025. TFP was divested on April 1, 2025, is reported as discontinued operations in last year's first quarter. ThermoSafe was divested on November 3, 2025, and was included in continuing operations in that same period. In 2026, neither TFP nor ThermoSafe as part of continuing operations. As a result, all year-over-year comparisons I discussed for continuing operations with ThermoSafe included in the 2025 figures, and I'll highlight the differences were applicable. Net sales from continuing operations were $1.7 billion, down 2% year-over-year. Results reflect lower-than-expected volumes, weather impacts as well as macroeconomic and geopolitical pressures win on both our supply chain and our customers. Those headwinds were partially offset by pricing actions and a foreign currency benefit primarily from the Euro. Also in the year-over-year comparison is ThermoSafe, which contributed $55 million of sales in the first quarter of 2025. Excluding ThermoSafe, our sales increased by approximately 1% versus the prior year. Adjusted EBITDA was $277 million, down 4% year-over-year and margin was down approximately 35 basis points. The decline was driven by lower volumes and the absence of operating profit from the divested ThermoSafe business. These impacts were partially offset by productivity initiatives strong pricing realizations, early savings from our multiyear profitability programs and favorable foreign exchange rates. Excluding ThermoSafe, adjusted EBITDA would have been flat reflecting strong cost containment from our profitability programs despite softer volumes. Overall, we're encouraged by how our continuing operations performed following last year's reorganization. On a consistent comparison basis, our key metrics are up year-over-year, reinforcing that we're building a more agile and resilient organization to navigate challenges as they arise. Now moving to Slide 12. Adjusted EBITDA for the quarter was $1.20, flat year-over-year after excluding the impact of discontinued operations. The year-over-year results reflect the balance of a softer volume and the impact of divestitures, offset by productivity gains, pricing, early profitability savings from our 3-year program, a lower effective tax rate and a favorable foreign currency. If we go a little deeper into the bridge here, I'd like to walk you through the components of each bar. We'll start with the discontinued operations adjustment, which is a net impact of $0.18 led by the TFP divestiture, partially offset by interest. The divestiture of ThermoSafe represents a $0.07 decrease. Operational changes are down $0.08 due to the pressures on the top line due to the macroeconomic and geopolitical factors within the quarter, partially offset by operational productivity. Nonoperational changes are up $0.09, led by FX, especially the euro, reduction of our debt and tax benefits which helped to offset several headwinds the business faced within the quarter. Profitability performance drove $0.06 of improvement. I want to underscore the importance of what we're doing to drive margins for the rest of the year, by controlling the controllables. We're maintaining pricing discipline, accelerating productivity, advancing our profitability performance plan and tightening -- tightly managing both our costs and our capital. While the macro environment remains uncertain, we remain committed to executing the long-term financial targets we shared at Investor Day. Turning to cash flow on Slide 13. Operating cash flow in the first quarter was a use of $368 million, consistent with normal seasonal patterns as we build inventories ahead of the canning season. Gross capital investment was $62 million below our expectations. Given the current macro environment, we are actively monitoring capital spending to stay disciplined and meet our targets. The year-over-year decline in cash flows was primarily driven by approximately $140 million of higher tax payments. That includes $103 million related to capital gains from prior period divestitures, which will not repeat. As discussed at Investor Day, we have a clear and disciplined approach to capital allocation. That includes prioritizing high-return projects, continuing to optimize working capital, especially inventory and payables and preserving balance sheet flexibility by paying down debt while still supporting long-term growth initiatives. Turning to Slide 14. Before I go deeper into the segment results, I want to share a brief disclosure related to our consumer segment and a footnote we've included for this discussion. In first quarter of 2025, Consumer segment adjusted EBITDA did not include $18 million of unallocated corporate costs. You can find these details in the earnings release table on Page 20 of our press release dated April 21, 2026. Now let's turn our attention to the 2 segments and overall results. Starting with Consumer. Sales increased 3% year-over-year to $1.1 billion, driven by pricing and favorable foreign currency exchange rates, partially offset by volume and mix softness related to the macroeconomic conditions. Adjusted EBITDA from continuing operations declined 7%, reflecting lower volumes, partially offset by productivity initiatives, pricing actions and early transformation savings. Adjusting for the 2025 unallocated corporate costs I just described, consumer adjusted EBITDA would have been up with margins flat. In Consumer, the team remains focused on price realization and mix discipline across key geographies while driving manufacturing and supply chain productivity. They are also leveraging accelerated transformation savings to improve their margins. Let's move on to our Industrial segment. Sales were $579 million, down year-over-year by 1%, driven by softer volumes, partially offset by favorable pricing and index-based resets with foreign currency benefits. Adjusted EBITDA declined by $7 million to $100 million, a 7% decrease as lower volumes were partially mitigated by pricing resets and productivity improvements. EBITDA margin was lower year-over-year due to unfavorable volume and mix, along with losses attributed to a fire at our recycling facility in Greenville, South Carolina. The Industrial segment is focused on fully on capturing index-based pricing resets as they flow through. Executing it against cost and productivity initiatives already underway, and preserving margin discipline while managing demand variability. We've seen good progress throughout the current one, which supports our confidence as we move into the second quarter. Turning to Slide 15. We are pleased with the early progress of our 3-year profitability performance plan outlined at Investor Day. In the first quarter, we delivered $8 million of savings progressing towards our $150 million to $200 million target. These savings were primarily driven by structural transformation initiatives, which contributed $6 million, along with $2 million from commercial excellence and operational improvement efforts. Importantly, these savings are already flowing through the P&L reinforcing our confidence in the program's execution and durability. And as they annualize, they represent approximately $32 million of recurring savings. Turning to guidance on Slide 16. We are maintaining our full year outlook while recognizing that continued macroeconomic and geopolitical uncertainty, particularly late in our quarter, rates a dynamic operating environment. We will continue to monitor inflation and demand trends closely. With that, let me walk you through our full year expectations. For the full year, we expect sales of $7.25 billion to $7.75 billion, adjusted EBITDA of $1.25 billion to $1.35 billion, adjusted EBITDA of $5.80 to $6.20 with results expected to trend towards the lower end of the range. While we are maintaining our adjusted EBITDA outlook, EPS will not track EBITDA 1 for 1 because of the tighter EPS range of only $0.40. In the current environment, inflationary cost pressures and macro volatility will create a larger impact on EPS rather than EBITDA. Operating cash flow of $700 million to $800 million, inclusive of the $103 million of tax payments related to 2025 divestitures, which were paid in the first quarter. For the remainder of 2026, our mandate is clear. deliver on our 3-year strategy of focus by executing the profitability performance plan, which is delivering $32 million of annualized savings in 2026. We have to offset volume pressures that we experienced in the early 2026, and we are protecting our margins through disciplined pricing and productivity, strengthening our cash flow through working capital and disciplined capital spending. We are more focused and have stronger execution levers than in recent years, building a higher quality earnings base and strengthening cash generation even in a challenging demand environment. Let me turn the call back over to Howard for some closing comments. Robert Coker: Thanks, Paul. Let me close by again thanking our global team for successfully guiding us through these uncertain times during the first part of the year. The year started out fairly strong, but were affected by winter weather in the Americas, losing 2 weeks of production from 2 of our major consumer customers in the Tennessee region. We also had mill and converting downtime by our and our customers throughout the region. We lost the facility to fire and other relatively one-off type issues and, of course, the impact of the Middle East complete. In spite of these, we stayed focused on controls and long-term productivity to deliver well within our expectations. I think it's also important to note -- while uncertainty remains, there is concern how the rest of the year will unfold. However, April has shown thus far some encouraging signs. As we enter the pack season, consumer EMEA has seen early positive signs in the South, the tuna pack has been strong, and while we have not built expectation for a rebound in [indiscernible] this market, too, is showing some promise for improvement and salted snack volumes are increasing, which is typical in a World Cup year. We see necessary index-based price in North America in our industrial business. which will drive full benefit during Q3 with incremental help in Q2 and early but reasonable expectations for URB and converted products and announced prices in Europe. Our focus on our drive for $150 million to $200 million over the next 3 years is on pace and will only build as we go deeper into the year. But the reality is we are in uncertain times. Things are changing on a daily basis. We do have some catch-up to deal with from the quick hit of inflation as we entered into Q2 and thus the cautionary tone in our EPS forecast. Let me close by saying how pleased I am we have made over the past several years, the changes you all have seen. If we had not made the portfolio shift, we'd be living in a vastly different world. Without our simplification efforts, we would not be driving the level of SG&A and other savings noted today. And we would be facing serious supply chain issues at a much larger degree of inflation impact and volume pressure. So again, thanks to our team as we continue to drive through this difficult operating environment and certainly looking forward to any questions that you may have. I'll turn it back over to the operator. Operator: [Operator Instructions] Your first question today comes from the line of George Staphos from Bank of America Securities. George Staphos: I guess I had 3 questions. I'll ask them in sequence and turn it over. Howard, first of all, Paul, could you discuss what the effect of the storms was in the first quarter a percentage of volume standpoint. In other words, if you did not have the storms, what would volumes have been? And what kind of early run rate are you seeing on volumes in consumer and in Industrial for the second quarter? Second point, we appreciate you calling out the inflation effect so far of $8 million to $10 million in 2Q. Is that a sequential impact from 1Q or year-on-year and if costs stay where they're at right now, would that be the effect in 3Q? Or would it be a lesser effect? And then the last question I had for you is, can you talk to us about how you feel on your metal supply chain, both aluminum and steel? Are there any flash points we need to watch out against relative to the Street? Or do you feel like you're pretty well situated as far as you can see for the rest of the year? Robert Coker: Thanks, George. I'm going to let Paul cover. I don't have the direct, Paul does either the full numbers in terms of the impact of the storm. What I would say on the metal side, which I will handle is -- we have no issues, no concerns, not only in terms of supply chain, but we have fixed pricing through the year. Obviously, we've seen tariffs and other things that an impact. But based off of where we sit today, we're in good shape. Paul Joachimczyk: And George, on the first question that you had around the storm effect, we did experience more declines in our consumer business in the Americas, primarily due to the weather that was out there with some of our CPGs being down, 2 of our largest customers being down for over a week, that did create a, I'll call it, a larger impact disproportionately than our international business that are out there. I'll say the early run rate, though, that we're seeing is we're seeing some recovery back in the business, more so on our industrial businesses. We're seeing strengthening in those markets as mills are getting closer back to the 90% effective rates, run rates that are there. We're seeing some lift back in our consumer businesses, but still more focused on the international side. The Americas are still lagging behind, but it did impact the volume pressures there for sure. Moving on to your second... George Staphos: Just -- so I know it's early, but what kind of volume are you seeing up down? Can you put a percentage on it in your key consumer or industrial categories? Paul Joachimczyk: Yes. I would say internationally, say, low single digits that were up there. Industrial in the same ballpark too is March was impacted primarily because of all the uncertainties that are out there, we're starting to see the recovery of those flows coming in early part of the month. And I'll say it's -- right now, if that trend continues, it will be a nice quarter for us in Q2. If I move on to your second question around the inflation impact, the $8 million to $10 million is what we have line of sight to for Q2. And with our recovery mechanisms that we have in place, there is a little bit of a lag. So I'd say right now, our exposure for Q2 is 8% to 10%. Obviously, if there's more macroeconomic effects, if there's something that happens with pricing pressures on our input costs, those could change to be greater in Q3 and Q4. But we do think our recovery mechanisms will help cover and offset this in those future quarters that are there. But we don't have full line of sight to what's going to happen in the macro world that's out there. But today, we feel confident in our exposure for what Q2 is going to bear, say, if everything holds steady, those would not recur and we could recover that by Q3 and Q4. Operator: Your next question comes from the line of John Dunigan from Jefferies. John Dunigan: Thank you, Howard. Thank you, Paul. I really appreciate all the details. I wanted to start back on the cost inflation with the $8 million to $10 million. Can you walk us through some of those key buckets and in particular, nat gas electricity across U.S. and Europe? And how much of that you have hedged across your businesses? And then if we're thinking about the freight surcharges that you called out, is there any kind of lag to putting those through contractually? And maybe you can help us quantify how much of your contracts currently have those surcharge mechanisms contained in them? Paul Joachimczyk: Yes, John, I'll take the first part of that. So the cost inflation, the breakdown of it you go through your freight as your primary driver of that. That was the one that we experienced almost immediately saw rising fuel prices primarily in the diesel aspect, come through. We do have recovery places and mechanisms out there. There is a lag related to those, call it, roughly 3 weeks, 4 weeks of a time period that's out there to get that recovery back. So you're exposed, let's just say, a month to be simplistic out there. As far as all the other inputs that are out there, whether it's the resins, the energy and things like that, I'd say we do have some coverage on our hedging. We haven't gone out with exactly what that coverage is from a hedging -- the $8 million to $9 million is inclusive. It's net of that. So that is an impact of us from already factoring into what we already have hedged and placed into programs. So that's the impact that we'll experience in our P&L. But freight is primarily the largest impact for us. John Dunigan: Great. That's very helpful. And then just on my follow-up, I just wanted to jump over to the cost savings. You called out the $8 million from the initiatives towards the $150 million to $200 million. But productivity in the quarter was pretty impressive. It was up $33 million year-over-year. Can you just walk us through the difference between those 2 figures and how we should think of the cadence through the rest of the year, that would be helpful. Paul Joachimczyk: Yes. And John, that's a great question. And really, what we're trying to do is we're trying to delineate productivity, which really is covering our inflationary impacts, things of that nature versus the profitability performance plan. The profitability performance plan, as we think about it, this is costs that are going to fall right to the bottom line, and they're going to be there every quarter on a go-forward basis. So that's why we did the delineation this quarter more so, and we'll continue that going forward. But we want to assure you that what we are delivering in those savings on that program of the $150 million to $200 million, that is something that you can bank on for us that's going to be there quarter after quarter after quarter, and it's going to be recurring. Operator: Your next question comes from the line of Michael Roxland from Truist Securities. Unknown Analyst: This is Niko [ Pacini ] on for Michael Roxland. Just to clarify on the inflationary impacts, does your current guide assume that $8 million to $10 million is the limit of the impact? Or do you assume current conditions basically persist through the rest of the year rather than kind of improve? And then secondly, what do you think to your customers and consumers' ability is to absorb price? How much in you can push before the manustructure might occur? Robert Coker: Yes. I would say the -- this is what we have visibility at this point in time. I went to extra effort to point out that with the new portfolio, particularly our key raw materials being still on the consumer side, is basically flat, contractually protected through the year. And so we do have the resin exposure I spoke to in my opening comments, that too has recovery mechanisms in it, and it varies from -- within the month within the quarter. But will we see more? It's hard to say. It depends on what happened while we were talking during this call virtually just seems to be changing on an immediate basis. But the point here is that from a key raw materials perspective, we feel really good in terms of the position that we're in at this point in time. And the customer impact, it's hard to say. We're being a staple food. All I can say is what we've seen historically when, obviously, the inflation being felt at retail is also showing up in QSR and other outlets as well, while it's get tight. We historically have seen in our consumer business that volumes are not affected and in fact, in some cases, have improved as people shop in the grocery store, cook at home as opposed to going out. So hard to predict how that's going to go. But certainly would think that while we're talking about the packaging side of things, that there's pressures on all raw materials associated with all food items, really on all items going forward, and it ultimately will we'll see how that fares through the consumer. Unknown Analyst: Got it. Understood. Just a quick follow-up. I think you mentioned a little softer EV volumes in 1Q, but a pickup more recently in April. What do you attribute that pickup to? And can you share where backlog stands right now? Robert Coker: Yes. We don't really track backlogs on URB. But what we're seeing is, as Paul had noted, roughly 90%, 91% operating rate here, which is our largest market and URB in North America. And frankly, there's a couple of things going on. The main is that we told at Investor Day about new products and new markets that we're entering with URB that traditionally have been served by other grades of paper that have been -- some of which has been taken out of the market the mill closures. We've been successful in converting saturated craft. So we've got our first customer and a line of customers in the funnel right now that is really helping us to as we look out into the quarter, go from the low 90s -- well still low 90s, but from 90 to 92, 93 type operating rates as that volume starts flowing through the mill now. Operator: Your next question comes from the line of Hillary Cacanando from Deutsche Bank. Unknown Analyst: Just regarding the softer volumes and inflationary pressures in the first quarter, could you just elaborate on what specific end markets or geographies underperformed expectations or outperformed expectations, most notably. I know you talked a little bit about tuna pack and sardines but if you could give more -- a little more detail on other end markets. Robert Coker: Yes. What I'd say, I'm really just talking to geography. It was -- if you go around the world, all already noted that Consumer EMEA was a very -- well, low single digits off from a volume year-over-year. It was a bigger impact here in North America. And I don't think I want to get into just from a confidentiality with customers. But our 2 largest customers on our paper can business loss 7, 8 days during the winter storm. Now we talked about that in February and what would typically happen is as we see the rush to make up that time and enough time would be held in the quarter. Then, of course, 5, 7 days after our Investor Day, you wake up and find out on February 27, we bombed Iran. So we think they took the opportunity to bring inventories down, and we're starting to see now a bit of a pickup and the expectation is the magnitude of what we saw in the first quarter will not repeat itself. In fact, they should be looking to make some of that up through the year. Unknown Analyst: Got it. Great. And then just a follow-up. As we're 3 weeks into the second quarter, I know you said April picked up, but are you seeing any real discernible change in customer ordering patterns or conversations? Like has anything like really changed? I know you're forecasting weaker volumes. But just wanted to see if any pattern -- like any discernible change in patterns? Paul Joachimczyk: Yes. Hilary, this is Paul. So really no discernible patterns that are out there. We're seeing a slight uptick in the volume that's given us a little bit more confidence in our guide that's out there. But really nothing that's -- I'd say you could lead anything to other than just a recovery from Q1. Operator: Your next question comes from the line of Anthony Pettinari from Citi. Unknown Analyst: Actually this is [ Bradbury ] on for Anthony. Maybe just focusing on consumer a little bit. Volumes were down against a pretty tough comp from last year. Do you think we start to see some improvement in year-on-year volume growth in 2Q and as we start to get into the back half, maybe from easy comps or ramping investments? Just any detail on maybe how that volume trend could develop '26 in consumer? Robert Coker: Yes. Pretty hard to really nail it with the amount of sorting that we have out there. What I would say is probably on our aerosol business here in North America, pretty tough comps coming up here in the summertime and somewhat of a discretionary spend you can do without. But on the other side of that, that would be reflective of a consumer that more of an economic downturn situation. So you could see that being a tougher comp. But at the same time, as I said earlier, you would expect that the food side of the business, on the center of the store, drive to the supermarket as conditions stuff and they would balance that, if not, actually exceed that. So tough to say. I mentioned earlier, in Europe, World Cup, that's kind of the normal thing for us to see that volume start to pick up around that particular event. But kind of a wait and see. I don't know if the consumer is fully, fully, fully felt it to the point, it does appear we're heading in that direction. That could be favorable, frankly, for the most part of the consumer side of the business. Unknown Analyst: Got it. And then maybe just on working capital. I'm not sure if there's any maybe sensitivity to raw material inputs that we should be mindful of, just as the year goes on, trying to be mindful of higher metal prices and then pet chems. I'm not sure if like an earnings sensitivity or just any detail you would want to put on maybe working capital or free cash flow as we think about higher metal? Paul Joachimczyk: Yes. So really, from a working capital perspective, no real concerns there. I'd say one thing to highlight that we are being very disciplined about our spend on capital for the remainder of the year. We want to make sure that we're hitting our guide and our targets that we've committed to the Street. So there will be some products that we'll postpone but we're not cutting back any of our growth or our value adding capital products that are out there, but feel really confident that with our supply chain team and our efforts that they've done to secure are really strong. Supply chain, both around Metalpack and all the other inputs that are there. So really no concerns from this perspective right now. That's what our current environment is, as we said. Operator: Your next question comes from the line of Ghansham Panjabi from Baird. Ghansham Panjabi: Just kind of picking up on some of the last few questions. So obviously, 1Q was impacted from a volume standpoint for all the reasons you kind of went through. 2Q, you gave some parameters as it relates to raw material cost inflation, et cetera, and we know what your full year guidance is. So specific to 2Q, do you expect earnings to grow year-over-year? Or will it be comparable to sort of 1Q just given what you called out as it relates to the price cost headwinds? Paul Joachimczyk: Yes, Ghansham, we do expect earnings to grow in Q2. I will say though, there is that inflationary impact for the raw materials that we talked about with freight and everything else that's there. So that will create a little bit of a margin drag for us. and some of the pressures that are there, but we definitely expect earnings to grow. Ghansham Panjabi: On a year-over-year basis, just to clarify. Paul Joachimczyk: Yes. Robert Coker: Yes. And Ghansham, I do want to reiterate that I know we talked about it over and over, but in the full volume environment, the team really did deliver on the bottom line expectations for the most part. And that is not changing as we see seasonal volumes increase in terms of the levels of productivity and savings, and the programs that we've got in place. So I just want to say, again, hats off to our team in the sole volume environment still being able to drop down within our expectations. Ghansham Panjabi: Yes. For sure. A lot going on. So as it relates to the volume impact of this particular inflation cycle and obviously, customers know that price increases are coming and so on and so forth. Have you seen any sort of preordering or just some sort of order pattern distortions that maybe amplifying some of the volume that you're seeing early part of 2Q in terms of the recovery you called out Robert Coker: No. In fact, it's, again, based off the portfolio. The type of inflation that we're seeing is not really about product inflation. It's how we deliver it's freight, obviously, some energy. But not to your typical, hey, you've got a 5% or 10% price increase coming in the next quarter I need to load off that. Ghansham Panjabi: Okay. And you haven't seen any change in the macro backdrop, just broadly speaking for your industrial business either right? Robert Coker: No. In fact, a little bit of concern about, yes, we had the weather impacts in the first quarter, but we've seen some green shoots here. A lot of it is self-help entering new markets that we've never participated in before. As I mentioned earlier, with saturated craft using I guess the furniture industry. So right now, things are -- you got to put that into the model to say, "Hey, we've got new business coming on that we never participated in before. So that our operating rates, as I said, we've said a couple of times, we're in pretty good shape. Paul Joachimczyk: And Ghansham, we have a realty business, too, that is doing really well in performance for us in Q1, and we expect that to continue into Q2 as well. Operator: Your next question comes from the line of Anojja Shah from UBS. Anojja Shah: So first, I just want to confirm that $8 million to $10 million of inflation that you pull out in 2Q, based on the lag in your pass-through, you're confident that, that should get recovered in the second half? Paul Joachimczyk: Yes. Anojja Shah: I would get, okay. Assuming and if there is additional inflation, then it's about 1/4 you said. Is that right? Paul Joachimczyk: Correct. Yes. Anojja Shah: And then also, you announced a new term loan at the end of March. And in the bridges you gave last quarter, you had a $0.20 to $0.40 nonoperational contribution on EPS. So is that -- is the interest on that new term loan sort of a headwind to that $20 million to $40 million? And is that part of why the EPS guidance is now on the lower end? How is that still filtering through your guidance? Paul Joachimczyk: So the term loan that we announced is really it's a delayed draw term loan to effectively retire our loan that would be due in September later this year. that really does not have -- it's a meaningful or call it, it's not a significant impact to our EPS strain that's out there. It's more of this inflationary impacts in the short term that is driving our EPS down more than anything else. Anojja Shah: Okay. And because of the tight range on EPS, that's why it's impacting EPS and not as much EBITDA, is that correct? Paul Joachimczyk: You got it. Yes, if you think about EBIT -- Anojja Shah: Go ahead. Paul Joachimczyk: I was going to say for the EBITDA range, if we think about it, it's really $100 million that's out there. If you take the taxes out of that, it really becomes a $133 million range and your EPS is only $0.40. So the 2 are disaggregated and disproportionate, almost a 3:1 ratio. So it's your EBIT impact, you can have a $10 million impact in your EBITDA, but it will drive a much larger impact on our EPS change that's out there. Anojja Shah: Right. Got it. And then finally, how are you feeling about your geographic footprint now with your current split between U.S. and Europe? I only ask because some of your peers are reconsidering the benefits that they thought they would get by adding on a European business and they're sort of saying that the large global customers tend to source more regionally. Do you believe that your global platform gives you significant economies of scale that maybe outweigh some of the complexity drawbacks? Robert Coker: Yes. We do -- certainly, economies of scale. We like the way we're situated right now. We're over half North America. I think it's about 40% in total company, both consumer and industrial. In Europe, -- and we've seen that flip back and forth over the last decade or so, more in favorable -- stronger in favor of North America. It just depends on the market, the opportunity -- it's not a conscious type situation, but we're happy with the portfolio. We're happy with the geographies that we participate in. Southeast Asia has on -- particularly on the consumer side, it's becoming even more material. And frankly, as we noted earlier, continues to grow at a nice pace. So we are where we are today, and we do not plan on any future portfolio or inorganic moves, but it wouldn't surprise me if we weren't talking years down the road and there's a different ratio there. Operator: Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Mark Weintraub: I got disconnected, so apologies if there's any repetition in the question here. But I was hoping to focus a little bit more on the volume side. And 2 things. One, maybe a little bit more color possible on some of the growth on some of the potential business wins and some of the expansions. If you could perhaps scale the size of opportunity and what you've seen so far. So for instance, with the new paper can facility in Thailand, how much revenue or opportunity might that provide? And then in Europe, you had been talking about at one point, the possibility of converting some customers who were doing their own accounting, if there's any update there, on progress there. You mentioned on the saturating kraft that was helpful. And then just on the flip side of that, where volume has been disappointing and certainly, there's the macroeconomic bears the weather, et cetera. But there's also the kind of a GLP-1 issue and hopefully, it's not as big a deal for you for some others, but maybe just update us on your thoughts relative to that. Robert Coker: Yes, Mark, good question. And as Paul has said, I do not have a total off of -- we're not going to give out specific plant level type details. But I can't really answer that question. What you did answer in your own question was where we're seeing opportunities, certainly, Thailand is reportedly going to be possibly even the third largest paper can plant that -- well, that we operate globally. So it's in its infancy in terms of -- and we're doing about somewhere around 200 million units right now during the start-up phase. Saturated kraft is really turning out to be quite an interesting market. And we're in with our first customer and I could keep going in terms of investments that we've made across the portfolio. But let's put that down as a homework assignment to aggregate that for you and the rest of the group. But no, we're not going to talk about individual opportunity, but I think it's a fair question from an aggregate perspective. You're right on the GLP side, we feel better about our situation today. If you go back just over a year ago, it just feels good not to be in the type of markets confectionery, cookies, crackers and things like that, that we were pretty heavy in. So the portfolio shift, I think, is more favorable this context. And I would say, but yes, we do participate with salted snacks that what we're seeing there, as we just spoke to in a bit, was that, that growth seems to be -- it is really materializing internationally, where GLPs are just not at the same level as they are here in the United States, particularly in Southeast Asia, that Eastern Europe and even South America, where we've got expansions going on. So feel much better about our situation today from a portfolio perspective to drive through where GLPs will finally settle on that. Paul Joachimczyk: Yes. And Mark, just to give you a little bit more context in the Thailand plant and referring back to a comment that Howard made in his opening statement to that plant will lead to 200 million units on an annual basis for us, and it did contribute a 6% lift in our paper can volume in that region. So it is going to be a significant asset for us and contribution to our overall growth and the strategy for that region. Robert Coker: With a reminder that that's the start-up of the plant. Paul Joachimczyk: You got it. Mark Weintraub: Right. And the point being to start up, a, there's more to come. B, are there also extra costs that you incur during the start-up phase that presumably fade away? Robert Coker: Yes. Always, when you're starting a new operation, yes, you've got a ramp-up curve. But I'll tell you though, we have a heck of a good team -- we do a lot of cans in Southeast Asia, and it's -- you never have a vertical, but you're right. We did see some cost including a grand opening that you saw the picture in the slide was well done by the team. Mark Weintraub: Great. And maybe this is getting a little too detailed. And if so, you either take it offline or whatever, but is it possible sort of to walk us up a little bit to the $8 million to $10 million, and if we annualize it, $32 million to $40 million, you've got $7.5 billion of sales. So we're talking about 4% or 5%, 40 to 50 basis points of increase, which seems kind of low if freight and those other variables are about -- I think you had said about 10% of revenue. So it would seem like not too big an increase? I don't know if you can quickly easily walk us up sort of the big drivers, basically, how much is freight up on a percentage basis if that's the biggest driver? Paul Joachimczyk: Yes. And Mark, we did -- probably when you were disconnected, we did cover this. But freight is the largest component of that. And really, we're the I'll call it as a recovery to go after that is going to be lagged and delayed. So the $8 million to $10 million is net of all of our recovery efforts set out there. So that's I would say -- so it does seem small. And the reason it is small is because we did put the net number out there, not a gross number. Operator: Your next question comes from the line of Gabe Hajde from Wells Fargo Securities. Gabe Hajde: I'm struggling a little bit with maybe just the commentary on the second quarter, and I appreciate there's a lot of uncertainty out there. But specifically, even to growing earnings in Q2, are we talking in EBITDA terms or ETFs because I think just the reduction in interest expense would get you something like $0.15 or so of EPS growth. So just a little bit of clarity there, please? Paul Joachimczyk: Yes. So Gabe, it will be both an EBITDA and EPS. EPS does receive the benefit of interest favorability year-over-year as well, too. So that is part of it. Gabe Hajde: Okay. And then maybe going -- looking backwards and thinking about even the second quarter, I know there's a lot of moving parts, and I apologize if I missed it. But if we think about North America Food, European food cans and then, I guess, maybe global composite cans. You talked about, I think, Europe food being up low single digits in Q1, which would imply maybe down by single digits, 8% or so in North America food or aerosol and then I guess, composite can. And then half of that was off because of weather? Just help us maybe on Q1 volume trends in the 3 different geographies or 3 different businesses as you think about it. Robert Coker: Yes. You're pretty close in your math in terms of low single digits in EMEA and your -- the correlation to how that would have impacted the Americas. I really don't have that full, what does it mean, available to us at this point, and maybe it can be a follow-up that we can give to you. Gabe Hajde: Okay. And then I guess, Paul, when I think about tax rate, you gave us 26% at the beginning of the year, maybe interest tracking around $150 million and D&A was a little light in Q1, $125 million. I think we were kind of thinking about $135 million or so. Is the $125 million a good run rate going forward? I'm just thinking about it again, what the translation between EBITDA and EPS, if I take the low end of EPS, call it $585 or so coming off to like $165 implied EBITDA. So anything that we should be mindful of there? Paul Joachimczyk: No. I'd say your depreciation will probably tick up a little bit as some of our products come online later this year, so you'll see a little bit of an increase. But your range is -- you're right in the same ballpark there. Gabe Hajde: Okay. And last one for me, and I apologize if it's repetitive. But getting to Mark's question, our math on transport as our paper businesses, about $20 a ton of inflation flowing through the system. I think you have 1 million for tonnes in North America, maybe 1 million tonnes in Europe. So that would imply I don't know, something $100 million just on inflation there, maybe I'm overestimating things. And then the 75 million pounds of polyethylene or resin buy that you were talking about, I think that was on a quarterly basis. It's up $0.30 give or take, just between April and March, but that would be implied just a lag on that would be maybe the $10 million? Again, I'm trying -- I'm having a hard time reconciling kind of and I believe you, right, $8 million to $10 million of inflation versus sort of the math that we have come up with independently. So maybe we're over, under estimating? Paul Joachimczyk: Yes, Gabe, I'd say I'm going to give hats off to our supply chain. They have done a phenomenal job negotiating things. We do have in our contracts, too, some delays in the way the pricing gets passed, those surcharges, the things that you're talking about for freight and hit quicker. Also, you think about how we optimize our transportation, we keep our plants close to our customer bases and things like that as well, too. So we -- they've done a phenomenal job, and we feel fairly confident in our numbers around the $8 million to $10 million as being in that number and exposure. So the gross number, you're probably absolutely spot on. It's definitely in that range. But the team has done a phenomenal job of mitigating it. So like I said, I'm very happy with the progress that they've done. Robert Coker: On the resin side of it, it's variable in terms of contracts, some of which are monthly extending out to quarterly. So that's the balance there. And you've got to look at the anticipation of what was coming and the inventories that we were able to build. And so all of the above points to exactly what Paul said, hats off to our procurement organization and how they manage through this. Operator: Your next question comes from the line of Matt Roberts from Raymond James. Matthew Roberts: A couple of questions. They're all on RPC. So I'll just fire them off one by one here. First, what was RPC volume performance in 1Q? I believe that used to be in the slide deck. On April... Robert Coker: Yes, I don't have visibility of that level. So Matt, when we did the reorganization to the 2 segments, we're really talking about consumer in total -- we're not going to break out RPC cans. We're not going to break out Metal pack cans. We'll talk to any major events that happen within the quarter, but we're going to keep that more at a consumer total level. Matthew Roberts: [Technical Difficulty] last couple of quarters. So about later a couple of more lines. I'm all good there. And then if I may, on the April promotional trends, I mean last year, we think because there is a customer on hold for working capital. [indiscernible] Promotional environment changes from that customer now that the deal has closed or has there been broader promotional environment given your customers are seeing cost inflation as well? Robert Coker: You're kind of breaking out, Matt. But I think I understand your question. We're seeing -- it's slowly happening. It's 1 quarter post new owner of that particular brand. and seeing probably more activity on an international perspective than we have seen here in North America, but things are improving. The relationship is rock solid and again, it does appear, if you look over in Europe and Asia, that's really the starting point of focus when the expectation is then we'll start seeing more activity here in North America over time. Matthew Roberts: And then last one, if I may, on RPC. In 2025, how big was frozen juice in that category? And any material headwinds in 2026 we can call out? Robert Coker: Concentrate, gosh, it's been a long time since anybody asked about that. was fill in production here, probably more -- it is more related to the Spirit side of things and mixtures. I guess I can say it is public minute made has discontinued relatively immaterial to us and that the volume had reached such a low level. So it's just really not material at this point or prior to. Operator: Your next question comes from the line of George Staphos from Bank of America Securities. George Staphos: So [indiscernible] just fishing up here. Can you talk about or give us some clarity on the size of the reals business within the portfolio? Or remind us how big that might be for you? Secondly, related to some of the activity that didn't necessarily happen last year on the consumer side with some of your customers. Are there any new products that are now being considered that you may actually get some business on for this year? And if you were in a position, could you size any of that for us in terms of the revenue opportunity later in the year? And then lastly, Howard, kind of longer term, looking at Slide 10, where you've got the dividend, and you do have a very good track record at Sonoco over the years. Certainly, that dividend has been growing more quickly than the organic volume growth rate for the company. You're obviously doing a very, very good job with productivity and mix and all the things that has made Sonoco successful over the years. But how long do you think you can keep growing the dividend at that rate if volume isn't growing at that rate? And when do you think that we will get to a positive on volume in the businesses, consumer and industrial? Is it third quarter, fourth quarter 2027? Any thoughts there would be great. Robert Coker: Sure. George, yes, there's more than a few new products that will be launched through the second half of the year. I can't tell you what the success rate is going to be and what type of volumes that's ultimately going to materialize in but pretty excited about some of what we see in the formula. It's here in North America. It's also on the consumer side. On the rail side of the business, it's doubled in the last couple of years, and it's probably about 10% of our industrial segment at this point in time. But again, continues to grow, and we certainly continue to support with capital. I guess that ties into your comment about dividend. Yes. I mean the good news is, if you look at the dividend payout ratio of where we are today, as we've continued to grow, it continues to go down as opposed to where we were not too many years ago, 6, 7 years ago. But you're right, productivity and other benefits to the P&L has certainly helped to support that dividend and the lowering of the payout ratio. When do we get back to growing? We've got some really exciting things in the funnel. But if you recall, in February, we said, look, we got a lot ahead of us over the next 2 to 3 years in terms of improving the bottom line for the company with the portfolio that we have today. There's incremental growth. We just talked to some of that. But I'm also very excited about some fairly large innovations from a capital perspective, from a market perspective that are in the funnel, that kind of overlap as we, over the next couple of years, continue to drive the SG&A and other savings within the simplified organization that we'll be starting to kick in with some new products that are indeed material in existing markets that we're excited about. So I can't give you timing, I can't give you amounts, but yes, we like the trajectory of the dividend. We also like the trajectory of the payout ratio, and we're going to continue to do what we need to do to improve the bottom line while we work on again, some pretty exciting things that are to come in the future. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Roger Schrum for closing remarks. Roger Schrum: Again, thank you for your time this morning. And as always, if you have any further questions, please don't hesitate to give us a call. Thank you, and you can disconnect. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orrstown Financial Services, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Tom Quinn, President and Chief Executive Officer of Orrstown Financial Services, Inc. and Orrstown Bank, who will begin the conference. Mr. Quinn, please go ahead. Thomas Quinn: Thank you, operator, and good morning. I'd like to thank everyone for participating in Orrstown's First Quarter 2026 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued yesterday afternoon, you may access it along with the financial tables and schedules by going to our website, www.orrstown.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Also, before we start, I would like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in the earnings release, the investor presentation and our SEC filings. The earnings release and investor presentation also include non-GAAP financial measures. The appropriate reconciliations to GAAP are included in those documents. Joining me on the call this morning are Orrstown's Senior Executive Vice President and Chief Operating Officer, Adam Metz; as well as Chief Financial Officer, Neil Kalani; our Chief Revenue Officer, Zach Khuri; Chief Risk Officer, Bob Coradi; and Chief Credit Officer, Dave Chajkowski, will also participate on the call. For our financial highlights, Orrstown achieved another successful quarter, delivering strong results across the board. Net income increased to $21.8 million or $1.12 per diluted share. Return on average equity and return on average assets continued to exceed peer multiples. Fee income of $15.6 million contributed 24.1% of the total operating income. Noninterest expense declined, highlighting our continued commitment to creating efficiencies within the company. Our net interest margin remained near the top of all peers. We started off the year with another profitable quarter and created momentum leading into the rest of the year. I will now turn the call over to Adam Metz, who will speak about our balance sheet. Adam? Adam Metz: Thank you, Tom. Good morning, everyone. Loan growth was steady during the quarter, coming in at 4% on an annualized basis. Loan production was excellent, but overall growth was impacted by unexpected loan prepayments. Growth has occurred across our footprint and our product set, a mix of C&I and CRE. Our pipelines continue to be robust and support our growth targets. On the credit front, we recorded moderate provision expense aligning with the portfolio growth and experienced a reduction in classified loans. We remain prudent in our lending decisions, but we feel that the credit environment remains sound and without significant signs of stress. We are pleased with our meaningful deposit growth during the quarter. Deposits increased by $98.7 million, reflecting increases in interest-bearing demand deposits, noninterest demand deposits, time deposits and money market deposits. This deposit growth accelerated in the second half of the quarter, which enabled us to reduce borrowings at quarter end. This shift from borrowings to deposits reduced our go-forward funding costs, which we expect to become more apparent in the second quarter. Neil will discuss this in more detail during his presentation. Our capital ratios continue to build quickly with our earnings generation, which will create flexibility for us in the future. Capital levels continue to support our growth as well as providing the ability to facilitate other capital allocation opportunities. We maintain a long-term focus on generating earnings and growth to continually build shareholder value. In support of that, the Board declared a quarterly dividend of $0.30 per share payable in May. Neil Kalani, our CFO, will now discuss our quarterly results in more detail. Neil? Neelesh Kalani: Thanks, Adam. Good morning, everyone. We started 2026 off strong with net income of $21.8 million or $1.12 in earnings per diluted share. Return on average assets for the quarter was 1.59%, and return on average equity was 14.76%. As noted on Slide 4 of the earnings deck, the net interest margin was 3.90% in the first quarter, down from 4.00% in the fourth quarter of '25. This was driven by a combination of the impact of the December Fed rate cut on interest income, reduced purchase accounting accretion and temporarily elevated funding costs. We typically experience seasonal deposit outflows at the beginning of the year. This persisted for longer than in prior years, which drove borrowing balances higher for the first half of the quarter. In the second half of the quarter, deposit balances grew substantially, and we implemented some delayed deposit rate reductions. As a result of actions taken during the quarter, cost of funds was still down from the prior quarter but not by as much as previously projected. With a full quarter of impact, I expect funding costs will decline further in the second quarter of '26. The previous guidance for net interest margin in the range of 3.90% to 4.00% for '26 remains with an expectation of the margin increasing from here. Overall, in an extremely competitive environment, we feel good about the first quarter's deposit growth, reduced reliance on borrowings and where our funding costs are settling in. On Slide 5, fee income increased to $15.6 million in the first quarter from $14.4 million in the fourth quarter. In the first quarter, $2.4 million of life insurance proceeds were recognized. The quarter included wealth management income of $5.6 million, down only slightly from the prior quarter despite difficult stock market conditions. Swap fees were very strong at $1.3 million in the quarter. While there is expected volatility in some of the components, I expect normalized noninterest income to be in line with previously reported guidance. Now I'll cover noninterest expenses on Slide 6. Expenses declined by $700,000 this quarter to $36.7 million. Salaries and benefits declined with lower health care costs and some year-end incentive adjustments. Professional services came down substantially as we continue to reduce our reliance on third-party support. And I anticipate our expenses will fall into the lower end of the guidance range unless we choose to make some strategic investments in personnel to drive or support growth. Slide 7 discusses credit quality. Provision expense was $728,000 for the quarter, primarily due to loan growth. We had approximately $900,000 of net charge-offs, which was offset by the impact of favorable economic factors in the allowance calculation. Our allowance coverage ratio was 1.17% at March 31, '26, and we believe it remains adequately aligned with the risk profile of our loan portfolio. Classified loans declined again in the first quarter. Nonaccruals increased by $2 million from the prior quarter, primarily due to 2 relationships. While we experienced some movement into the nonperforming category, we also continue to see payoffs and upgrades out of that bucket, resulting from our focus on achieving the best solutions for the bank. Our earnings and performance metrics are on Slide 8. All metrics remain strong. TCE has increased to 9.2% despite an increase since December 31, '25, of $6.8 million in unrealized losses on investment securities due to changes in market rates. Slide 9 addresses our loan portfolio. Loans again grew by 4% in the quarter. Loan yields declined during the first quarter due to the impact of lower rates on the variable rate loan portfolio. We did have $211 million of loan production during the first quarter and still have a strong pipeline. As noted on Slide 10, deposits grew by $98.7 million or 9% annualized in the first quarter. The loan-to-deposit ratio declined slightly to 88%, leaving us plenty of room to support balance sheet growth. The cost of deposits declined to 1.96% for the first quarter with the timing of rate reductions in the middle of the first quarter and having 86% of the deposit growth being in demand deposits, we expect deposit costs to come down further. Another positive trend for the quarter was the increase in noninterest-bearing deposits of $14 million or 7% annualized. Our sales team remains focused on expanding existing relationships and creating new ones to continue building lower-cost deposit balances. The investment portfolio is covered on Slide 11. There is a little bit of purchase activity during the quarter in order to keep the portfolio flat. The overall portfolio yield declined during the quarter due to the impact of the December Fed rate cut on floating rate investments. We view the investment portfolio as a reliable source for income generation, and we'll continue to facilitate that by taking advantage of any market opportunities that correspond with our balance sheet strategy. As presented on Slide 12, our regulatory capital ratios continue to build at a rapid pace. Capital generation is expected to remain strong going forward based on projected earnings, and we continue to believe we're positioned to take advantage of various capital allocation options. So in summary, we believe the net interest margin has stabilized with the opportunity to grow from here with declining funding costs. Fee income remains a core strength and a differentiator, particularly with wealth management if the market can maintain or improve from current levels. And expense management remains a key focus for us in order to achieve our financial goals. Thank you for your time this morning, and I'll turn it back to Adam Metz for his closing remarks. Adam? Adam Metz: Thank you, Neil. As Tom and Neil has emphasized, it was another highly successful quarter. Having spent nearly a decade at Orrstown, I've seen firsthand the strength of our franchise, the power of our culture and the collective commitment to our clients and community. An incredibly talented team with common alignment to our core principles will continue to build upon the foundation already in place, driving prudent growth, deepening client relationships, thoughtfully expanding fee-based businesses and continuing our unwavering commitment to sound risk management and long-term shareholder value. We would now like to open the call to questions. Before we get started, the operator will briefly review the instructions with you. Operator: [Operator Instructions] Your first question comes from the line of Tim Switzer with KBW. Timothy Switzer: I appreciate the commentary on kind of the puts and takes on the NIM this quarter. And it sounds like the primary driver here was that seasonal deposit runoff at the beginning was maybe a little bit stronger, lasted longer than normal. Was there anything that surprised you on like the loan or security yield side as well? Or is it just primarily the NIM -- sorry, deposits? Neelesh Kalani: No, there's nothing surprising. It is primarily deposits. We -- as I've indicated in the past, since we are a little bit on the asset-sensitive side, we did expect the yields to drop on loans and investments. So it truly is driven by the deposit -- the timing of the deposits. So we are -- as I indicated, we do expect to see improvement in both the funding costs and translating into the reduction on the NIM side. On the asset side, the lending team continues to price well to help us maintain and improve the margin from here. Timothy Switzer: Okay. Got it. And are you able to help -- you said an upward trajectory from here. Are you help us -- can you help us quantify that at all? Like maybe what was the spot NIM at the end of Q1 once those deposits came back, and you're able to run off some of the higher cost borrowings? And any idea on maybe where we would end the year, say, if we get just a 0 rate cut? Neelesh Kalani: So we ended the quarter a few basis points higher than the average for the quarter -- for the reported NIM for the quarter and expect to be able to go up a few basis points from there over the course of the remainder of the year. Timothy Switzer: Okay. Great. That's very helpful. And then one last one, if I can get it on the deposit side. There's been some chatter about increasing deposit competition, but it's more extreme in some markets than others. Have you guys experienced that? I get you still have some room to move downward. But are you starting to see some deposit competition? Is it more competitive in certain markets or deposit categories than others for you? Adam Metz: Yes, Tim, I would say competition remains. It's prevalent, but I would tell you, we challenged the team to reach out to the relationships and drive deposit growth. And the team has absolutely responded to that initiative. And so we're very pleased with the results, and we think that we have a lot of momentum going forward. Operator: That concludes the Q&A portion of the presentation. Mr. Quinn, I turn the call back over to you for concluding remarks. Thomas Quinn: Thank you again, operator, and thank you all for participating today. As always, if we can clarify any of the items discussed on this call or in the earnings release, please contact us. Have a great day. Operator: This concludes the Orrstown Financial Services, Inc. First Quarter 2026 Earnings Conference Call. You may disconnect your lines at this time.
Nathan Ryan: And welcome to the West African Resources Investor Webinar and Conference Call. [Operator Instructions] I'll now hand over to West African Executive Chairman and CEO, Richard Hyde. Thank you, Richard. Richard Hyde: Thanks, Nathan. Good morning, and thanks for joining us for West African Resources March 2026 quarterly call. It was a productive quarter for our gold operations at Sanbrado and Kiaka in Burkina Faso. But before I get into discussing our performance, I want to address the ownership structure changes at Kiaka in regard to the Burkina Faso government. This has been under discussion for a while now. And as we've announced this week, the Burkina government plans to acquire an additional 25% equity interest, in our subsidiary, Kiaka SA, who is the operator of the Kiaka Gold Mine. This will take the government's interest at Kiaka at 40% as it has an existing 15% free-carried stake already. This additional capital share in Kiaka SA has been valued by the government at XOF 70 billion, which roughly equates to AUD 175 million. There has been no discussion with the government regarding the ownership of Sanbrado or Toega and Toega is obviously on track to start producing later this year. And they were not referred to in the decree that was published in regards to Kiaka. We are working with the government to finalize the terms of the acquisition, the Kiaka, and we aim to have that completed by the end of this calendar year. At this stage, we plan to distribute any cash proceeds from the sale of the equity sale of Kiaka SA to our shareholders by way of a special dividend, and we'll keep you updated with any developments regarding this. Regarding our results for Q1, we achieved gold production of 107,728 ounces across both Sanbrado and Kiaka for the quarter at an all-in sustaining cost of USD 1,921 per ounce. We remain on track to achieve our annual production guidance of 430,000 to 490,000 ounces of gold, with all-in staining cost below USD 1,900 an ounce. Gold sales were steady compared with the previous quarter with 104,000, 145,000 ounces sold in the quarter, and we achieved this at a price of USD 4,945 per ounce. This is a strong result given our unhedged exposure to the higher gold prices, and we generated AUD 440 million from our operating activities in Q1. This took our cash balance to a record $847 million with $213 million in unsold gold bullion at the end of the quarter based at current prices. Looking at each operation in more detail. Sanbrado continued its steady performance in Q1 with 42,024 ounces of gold production, which is in line with the planned 2026 annual production profile. Sanbrado will see higher contribution of mine ounces from the M1 South underground over the remaining 3 quarters of 2026 as more stoping areas become available. We achieved Sanbrado's production at site sustaining cost at USD 2,034 per ounce and sold 42,428 ounces, an average realized price of USD 4,978 per ounce. Unsold gold bullion at Sanbrado at the end of the quarter totaled 11,794 ounces, rate at about USD 54 million. The Kiaka production continued to ramp up in the quarter, delivering 97,906 ounces from open pit mining operations, and we produced 65,704 ounces from processing operations. And this represents an 18% increase and 6% increase, respectively, over the previous quarter in mined and processed ounces. Kiaka deliver gold production at a site sustaining cost of USD 1,779 per ounce. We sold 61,717 ounces from Kiaka at an average realized price and USD 4,922 an ounce. With unsold bullion just over 20,000 ounces held at the end of the quarter, which is valued at about USD 92 million at the current gold price. While this production performance was impressive, we also delivered on several other fronts during the quarter. We released our updated Resources Reserves and 10-year Production Plan in the quarter, which demonstrated further increases to Kiaka and Sanbrado's production plan on the back of outstanding results from our 2025 drilling programs. We're now looking at delivering average gold production at 533,000 ounces of gold per year over a 10-year period, with gold production expected to peak in 2030, just short of 600,000 ounces. Sanbrado's mine plan has been extended out to 2036, with this production expected to peak in 2030 at 317,000 ounces. At Kiaka, we've also modeled higher production throughputs based on exceptional performance from the process plant since we started operations. Our unhedged mineral resources now stand at 13.6 million ounces of gold, while ore reserves totaled 7 million ounces. We see potential to improve annual production further through ongoing drilling programs and we plan to drill more than 100,000 meters annually targeting extensions at M5 South Underground and beneath the M5 North Open Pit and also targeting underground potential at Toega. This 10-year plan highlighted just what a strong and sustainable future our company has and our potential to continue generating value for stakeholders and host communities over the next decade and beyond. Speaking of the future, Toega, our development projects continues to progress well with open pit pre-stripping commencing later -- commenced late in the quarter and a total of 621,000 Bcm of material were stripped. Surface grade control drilling was completed during the quarter in preparation for first ore mining, which is on track for -- this quarter Q2 and delivery of that ore up to the Sanbrado process plant is expected to start in early Q3. In terms of exploration, we released impressive results from our in M5 South Underground drilling program, where high-grade gold mineralization was extended by 400 meters below the current mineral resource. Our resource conversion drilling program is also progressing on schedule. We also reported good results from our drilling programs at M5 North, which returned wide intersections and delivered consistent mineralization below the current open pit ore reserve and M1 North where results support potential for a cutback. In addition, 13,500 meter program targeting the Toega underground resource is ongoing. We plan to incorporate results from Sanbrado into an updated resource reserve and 10-year production plan into the coming quarter. With that overview of operational activities. I'll now hand over to Padraig to discuss the financial results. Thanks, Padraig. Padraig O'Donoghue: Thank you, Richard. So the WAF, as Richard mentioned, the strong gold sales, the WAF Group generated AUD 742 million of gold sales revenue combined in the quarter from an average gold price of USD 4,945 per ounce. And we generated AUD 440 million of operating cash flow in Q1 and ended the year with a record high cash balance of AUD 847 million. Looking at the notional net cash, which was calculated as cash plus bullion minus debt, we more than doubled the notional net cash in the quarter and ended the quarter with USD 450 million notional net cash position. Our capital investing activities in Q4 used $90 million cash, which was comprised of $38 million investment into Sanbrado, $23 million into Toega and $29 million at Kiaka. Financing activities in the quarter used $45 million cash in Q4, mainly comprised of $28 million of loan payments and $11 million of interest payments. I now hand back to Richard for his comments. Richard Hyde: Thanks, Padraig. Padraig O'Donoghue: Thanks, Rich. Richard Hyde: So as you can see, it's been another strong quarter for West African on the production front. In terms of our ESG performance, we're also tracking well with environmental activities such as seedling production and for donations giving back to our communities and we continue to invest strongly in areas such as education, health, economic development. We're working with our contractors to enhance these programs, leading to more support for local education facilities. We also supported local schools with donations of bicycles and school supplies during the quarter. Our community relations team coordinated education sessions on the risks associated with artisanal and small-scale mining, school absenteeism, and we handed over storage warehouses to 4 agricultural crops produce run by local residents who have been -- who received help training to help support their local communities. With our operations at Sanbrado and Kiaka performing well, we are pleased to be a positive contributor to the communities in which we operate, as well as Burkina Faso more widely. I'd like to thank our employees and contractors for their efforts as well as we wouldn't be able to achieve these results with the outlook. Thanks again for your interest in West African Resources and for joining the call today. I'll now hand over to Nathan to see if we have any questions. Nathan Ryan: [Operator Instructions] Your first question comes from Paul Howard at Canaccord. Paul Howard: A couple of questions from my end, if you don't mind. How does the Burkina Faso government intend to pay that $175 million? You mentioned any proceeds, cash proceeds perhaps being redistributed as a special divi. But is the government intending to actually hand you physical cash? Richard Hyde: Thanks, Paul. Yes, looking now extensive discussions with them. We've discussed the cash payment. The government's who will be seeing record high revenue from the current gold price from the operations that operating country. And then given the return that the government will get on this investment, it's something that's probably commercially attractive to banks as well. So we're expecting to be paid in cash. Paul Howard: Great. A couple more and perhaps more of Padraig's avenue is, what's the debt repayment schedule? So I was a little more debt expected to pay this quarter, but how should I look at that going forward. Richard Hyde: Padraig? Padraig O'Donoghue: Yes. I can't remember exactly debt repayment schedule, but it's over 3 years remaining, I think, and there's a large bullet at the end. So about $100 million bullet. Yes, in 2028, there's $100 million bullet. So we have fairly low debt repayments until we hit 2028. Paul Howard: Yes. It's the bullet I don't have, which makes sense. Awesome. And while I've got you then, no tax payments this quarter? And indeed, the subsidiary payment, that's normally that 3.9 in your cash flow report? Padraig O'Donoghue: Yes, we paid the tax installment for Sanbrado early. We paid it before the end of the year in 2025. So that's why it doesn't show up in Q1 2024. So Sanbrado installment was paid. Kiaka didn't pay tax installments in 2025 because this is first year of operation. So we have tax settlements coming up, though, in -- at the end of April where we'll larger tax returns and then have to pay the taxes due on those years on the 2025 year. Paul Howard: Right. And then that line in the cash flow, we have 3.9 of subsidiary minority interest profit distribution? Padraig O'Donoghue: Yes. So subsidiary minority distributions have been calculated now, we are looking at around AUD 68 million for both combined Sanbrado and Kiaka to be paid sometime in Q2. And on the income tax, they have been calculated as well. And we have about AUD 120 million that we'll be paying to clear the 2025 taxes payable balances. Paul Howard: Got you. So that's AUD 120 million, right? Padraig O'Donoghue: Yes. Paul Howard: Yes. And then that AUD 68 million you got to pay in April. Is that relating to March quarter? Padraig O'Donoghue: No, this is the priority dividend. So the priority dividend is paid annually. Related to 2025 earnings, but it will be paid, not in April, but sometime over Q2. Nathan Ryan: Your next question comes from Richard Knights at Barrenjoey. Richard Knights: Just hopping on the $175 million again. Just wondering if you have any insight as to how the government came up with that number? And in your opinion, is that within the bounds of the new mining code in Burkina? And I suppose where I'm going with this is, where do you see the risk then that this pops up again for Sanbrado down the line? Richard Hyde: Thanks, Richard. So look, the valuation mechanism used in the 2024 Mining Code is -- it's not an NPV-based calculation. It's government bases that a lot of costs required to sustain operations, so effectively a sustaining capital estimate for the life of mine. So it's unusual, but it's -- that's within the 2024 Mining Code. It still results in a substantial number. It's not 0. Now in our discussions with SOPAMIB, which is a government representative, we've addressed our other operations and they're not being -- for our understanding, they're not being targeted to have the same treatment. And we'll also be addressing that or we'll be looking to address that in our documentation process regarding the 25% equity interest for the government. So we'd like to see no further changes to our other operations and an issue that other fiscal financial terms for our other operations on our drilling. Yes. Richard Knights: Is there a way you can get surety around that or is that or... Richard Hyde: Yes, we're attempt to do that, and then we'll address that in our documentation process. Richard Knights: Okay. 6 Okay, fine. And then in that same announcement, I mean you did -- I think you mentioned in your comment that you're still looking or you held discussions around further collaboration on near mine sorry, near development assets. Is that something that we could potentially see more detail on this year? Richard Hyde: Yes, I think so. It will take a little while because we need to get our people involved and we need to do some technical reviews of what the projects that have been discussed. But there's -- I think it's a good chance that we'll advance that this year. And there are some assets that need a lot of drilling. I think that's -- we see that with a lot of older projects that they're underdrilled and there's definitely good potential and some of them when they're in reasonable locations in Burkina. So that's a process that we'll have to go through technically now and assess them and then pull a view on what we think we can move forward with. Nathan Ryan: Your next question comes from Mike Millikan at Euroz Hartleys. Mike Millikan: Yes. Excellent cash generation for the quarter, Richard, congrats. Just more very quick 1 on the paid consideration, should we expect that to be the day of the decree or when -- actually, when you receive the money, how should we think about that? Richard Hyde: No, under the law is, the benefits received until the shares are paid out. So we expect that, that will be later this year or when we receive payments. Mike Millikan: Yes, got you. So the effective change of ownership only once the funds are received? Richard Hyde: Correct. Mike Millikan: Yes. Obviously, a very quick question on the diesel in country. Obviously, it's regulated. How is your suppliers, stockpiles, should we -- any comments around that? Richard Hyde: Look, I was just in country. So we've typically got across both sides, something like 70 or 80 trucks in circulation, either heading to site or heading from a site to the port. So fuel comes from Benin and Togo, which is in the -- to the southeast of Burkina. We typically keep at least 2 weeks of storage in tanks on site. And then when I was there, there were another week or so of trucks sitting at the mine gate. And then we've also got trucks in circulation. So it's something that we've been aware of for a while. We were addressing this before the current crisis in the Middle East. We've definitely seen a drop off in availability, but I think it's something that we planned for and that we're dealing with. Mike Millikan: Cool. And also your stockpiles seem pretty high both operations, roughly 72,000 ounces at each, which is pretty impressive. Dividend policy, Richard, have you guys thought of one? Or what -- I mean, obviously, there's a lot of cash generation specialty becoming. What is -- is there a bit of a thought on a bit of a policy to publish? Richard Hyde: Look, as far as policy goes at this stage, we're obviously still -- Kiaka is still a new mine, so it's generating a lot of cash, but we've got a fairly big few months in finalizing the 2025 tax payments and dividends to the government. And then we'll be looking to bring as much cash up after that and -- we haven't set a policy at this point. We will pay -- I think what we've said is a substantial dividend. So I mean -- I think it's going to be a meaningful amount. Padraig, would you like to elaborate further? Padraig O'Donoghue: Yes. I mean when we say a meaningful amount, we're talking the hundreds of millions of dollars AUD. We just haven't decided on the amount yet. We'll do our cash projections and we need to forward project all of the government dividends and taxes and working capital needs for expansions, et cetera. We still have the Toega's stripping program going on, et cetera. So we will -- it's a bit early for us to have a dividend policy based on percentage of cash flow or profit at this stage. Mike Millikan: Yes, got you. And maybe a buyback versus paid dividends. Is it -- again, given that you just contemplating while both or either. Richard Hyde: Yes, correct. So look, I think we'd like to have the option to buy back our shares if we see weakness. And we'd like to be a strong dividend-paying company as well. So -- but having all those different tools in the shed would be pretty handy. Mike Millikan: And just finally for me. Just, Richard, you mentioned something -- are you talking another update for War Sanbrado in regards to resource growth. Is that what I heard? Richard Hyde: Well, there will be, yes, we've got a lot of infill drilling going on at M1 South. So while it might not move the needle on ounces overall it will certainly improve the category. It's not as meaningful, I think, as our last update, which was during Q1, in March. Mike Millikan: So mostly focused -- obviously, M5 South Underground some of those good extension was there. Got you. Nathan Ryan: Thank you. There are no further questions at this time. So I'll now hand back to Richard for closing remarks. Richard Hyde: Thanks, Nathan, and thanks to WAF team for another sensational quarter of production. I think it's quite impressive. I can probably say we're just ordinary people achieving extraordinary things, and I'm very proud of the team. And we look forward to another strong quarter for Q2. We've had a great start to Q2 production already, and then delivering on our plans for the rest of the year. So thank you very much for dialing in, and we look forward to keeping the market updated with our progress.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Nathan Rich: Good morning, and welcome to Elevance Health's First Quarter 2026 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimee Dailey, President of our Government Health Benefits business. Gail will open the call by highlighting our first quarter performance and the actions we are taking to advance our strategic priorities. Mark will then discuss our financial results and revised outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Boudreaux: Good morning, and thank you for joining us. Health care is undergoing significant transformation, and it requires us to operate with greater speed, precision and connectivity. Costs are rising, expectations are rising, and both member and care providers want a simpler, more integrated experience. At Elevance Health, our strategy remains clear: lower the cost of health care and simplify how people navigate the system. What is evolving is how we execute. We are operating with greater alignment, accountability and clarity across the enterprise, and that progress is showing up in our results. In the first quarter, our performance exceeded expectations, driven by underlying business strength, along with ACA seasonality and nonrecurring investment income. While it is still early in the year, the trends we are seeing give us increased confidence in the trajectory of the business. That is why we are raising our full year adjusted diluted earnings per share guidance to at least $26.75. Our outlook remains grounded in prudent, achievable assumptions with clear visibility into the key drivers of performance, supported by improving claims experience. We are advancing our strategy in several focused ways. First, we've realigned our leadership structure to strengthen coordination between health benefits and Carelon. We have streamlined accountability, aligned core functions more closely to the business and brought decision-making closer to where the work is done. Those changes are designed to sharpen execution and create greater alignment across the enterprise. Second, we are embedding and scaling AI across clinical, operational and administrative workflows where it can have direct measurable impact, and we are already seeing tangible results. These capabilities are improving how we engage members and how we manage costs. They are enabling earlier, more personalized interventions, strengthening decision-making through predictive analytics and reducing administrative expense through automation. Together, these are driving greater efficiency and supporting more consistent performance over time. Third, we are transforming how care is delivered through Carelon by advancing our integrated whole health approach. By combining CareBridge and our [ Care at Home ] capabilities into a single risk-based solution, we are driving higher engagement and stronger clinical outcomes. These programs have reduced hospital readmission by 20% and generated more than 10% savings on post-acute care, supported by integrated pharmacy, specialty care and behavioral health. We continue to see strong demand for Carelon's capabilities, reinforcing its role as a driver of current performance and long-term growth. Let me turn to our first quarter performance. In Medicaid, we are seeing early evidence that our actions are lowering costs, particularly in behavioral health and specialty pharmacy. That progress is being driven by more targeted, proactive interventions that allow us to engage earlier, coordinate care more effectively and support members in the most appropriate settings. We are addressing rapid growth in ABA therapy through rigorous clinical oversight, and we're using predictive analytics to identify members at risk of substance use disorder before adverse events occur. In Medicare Advantage, the steps we have taken to reposition the business are driving improved performance, and we remain on track to achieve an operating margin of at least 2% in 2026. We were also encouraged to see CMS address a portion of the funding challenges in the final rates for 2027. As we prepare for bid submissions, we will remain disciplined and continue to prioritize plans that deliver long-term value while supporting progress toward our financial objectives. Regarding the notice we received from CMS in February related to historical risk adjustment data, we are engaging constructively with the agency and making steady progress toward resolution. We stand firmly behind the integrity of our risk adjustment program, supported by rigorous oversight and governance. Importantly, this matter does not affect our outlook or how we serve our members, and it does not change how we are managing the business or our expectations for performance. In commercial, we maintained a disciplined pricing approach for 2026 to ensure appropriate returns and our first quarter performance reflects that focus. As we look ahead to 2027 selling season, we are seeing strong employer interest, supported by a robust pipeline and early wins. Our integrated medical and pharmacy capabilities continue to resonate in the market. In Individual ACA, we are seeing modestly stronger retention, particularly in bronze tier plans where affordability remains critical. First quarter results reflect pronounced seasonality given product mix and the business remains on track toward a more sustainable financial profile. In Carelon, our risk-based solutions are delivering measurable value. Using AI and advanced analytics, we are identifying high-risk members earlier and engaging them through coordinated whole-person care. That is driving higher medication adherence, fewer emergency room visits and lower hospital readmissions, and it continues to support strong demand for our capabilities. In summary, we are executing our strategy with discipline and clarity. Our actions are translating into measurable results, improving affordability, simplifying the health care experience and strengthening financial performance. We are building momentum, and we are seeing that translate into more consistent performance across our businesses with strong visibility into the drivers of our results. Elevance Health was recently named to Fortune's 100 Best Companies to Work For list for the sixth consecutive year. We view that as a reflection of the strength of our culture and our people and an important foundation as we improve execution and build greater consistency in our results. As we look ahead, we remain confident in our ability to deliver at least 12% adjusted EPS growth in 2027. Before I close, I want to recognize and thank our associates. Their commitment, resilience and sense of purpose drive our progress, supporting our members, partnering with care providers and advancing our mission every day. With that, I will turn the call over to Mark to review our first quarter financial results and updated outlook. Mark Kaye: Thank you, Gail, and good morning, everyone. Elevance Health reported first quarter adjusted diluted earnings per share of $12.58, which exceeded our expectations. The strength in our operating results reflected favorable claims experience and seasonality in our Individual ACA business. In addition, we recognized approximately $1 per share from nonrecurring valuation adjustments within net investment income. We are raising our full year 2026 adjusted diluted earnings per share guidance to at least $26.75 based on our first quarter results, and we view the assumptions embedded in our outlook as appropriate and supported by current operating trends. Our confidence reflects the actions we are taking to manage cost trend and maintain expense discipline. Further, we are investing to scale AI across our enterprise, which will enable earlier identification of a member's health needs, guide them to more effective and affordable care and reduce administrative complexity, strengthening both outcomes and long-term performance. In 2027, we expect to return to at least 12% adjusted EPS growth off of our revised 2026 earnings baseline of $25.75. Turning to our first quarter results. We ended March with 45.4 million members, an increase of nearly 200,000 from year-end, driven by growth in our commercial fee-based membership and higher enrollment in Individual ACA. This was partly offset by anticipated declines in Medicare Advantage, Employer Group Risk and Medicaid. Operating revenue totaled $49.5 billion, up 1.5% year-over-year as higher premium yields were largely offset by lower health plan membership compared with the prior year. Our consolidated benefit expense ratio was 86.8%. Medical costs were modestly better than we had assumed in our outlook, reflecting both favorable claims experience and the impact from actions we have taken to manage trend. These collectively contributed approximately 2/3 of our operating outperformance in the quarter. The remaining 1/3 reflected seasonality in our Individual ACA business associated with higher membership in our bronze plans, which have benefit designs that typically defer a greater portion of planned costs into the second half of the year. Our adjusted operating expense ratio was 10.5%, an improvement of 20 basis points year-over-year. While we continue to manage costs thoughtfully, the focused investments we're making in artificial intelligence and Carelon's clinical capabilities will improve how we operate, strengthen our earnings power and better position the enterprise for long-term growth. Before discussing our performance in greater detail, I want to briefly highlight 2 items recorded in the quarter that were excluded from adjusted earnings. First, we have initiated steps to submit risk adjustment data related to historical periods to CMS and are following the process established by the agency to bring this matter to resolution. We recorded an accrual of $935 million, representing our current best estimate of the identified potential exposure based on the information available today. While the final amount will be determined through the resolution process, we believe our accrual appropriately reflects this matter. Second, we recorded a $129 million charge related to business optimization. This reflects ongoing actions to simplify organizational structures and support accelerated decision-making. Turning now to our businesses. Medicaid performance was slightly favorable to our expectations, benefiting from progress on the initiatives we have implemented to manage costs. We remain confident in our full year operating margin outlook of approximately negative 1.75% as our guidance maintains a prudent stance towards rate adequacy and trend development over the remainder of the year. In Medicare, results were stronger than we anticipated, reflecting the impact of the portfolio actions we took for 2026. Those actions, including product repositioning and selective market exits, support improved performance, and we remain on track to achieve an operating margin of at least 2% this year. Commercial Group developed as planned, consistent with the pricing discipline we outlined last quarter. As employers focus on lowering health care costs, we are seeing stronger demand for our integrated whole health clinical programs and patient advocacy solutions. Individual ACA membership grew sequentially in the first quarter with a meaningful portion of the growth driven by our 2025 expansion states and more consumers selecting plan options at the bronze [ mental ] level. Our current view of membership effectuation indicates that we are on track to end the second quarter with approximately 1.2 million members ahead of our initial outlook. However, given the unique market dynamics this year and a significant shift in product mix, it is still early to revise our full year outlook to at least 900,000 members. Carelon's first quarter operating gain declined modestly from the prior year, reflecting lower health plan membership and continued investment in the expansion of our risk-based capabilities, partially offset by improvement in specialty pharmacy and CareBridge. These dynamics are consistent with how we are evolving the business, and we remain focused on advancing performance over time. Carelon is an important contributor to our enterprise performance and a key driver of our long-term growth strategy. Now moving to the balance sheet and operating cash flow. Days in claims payable were 46.6 days, an increase of 5.3 days sequentially. Operating cash flow was $4.3 billion in the quarter, and we continue to expect full year operating cash flow of at least $5.5 billion, inclusive of potential cash payments related to the CMS matter. In the quarter, we repurchased 3.7 million shares for $1.1 billion at an average price of just over $300 per share. Our capital deployment priorities reflect confidence in the durability of our business and its long-term earnings power, and we remain on track for at least $2.3 billion of share repurchases in 2026. We are pleased with the strong start to the year and are confident in our full year outlook. Beyond the update to our 2026 earnings per share guidance, the principal operating elements of the framework we provided last quarter remain appropriate. With respect to seasonality, our expectations for the second quarter are largely unchanged, and we anticipate our second quarter earnings per share to be approximately 23% of our revised full year guidance. With that, operator, please open the line for questions. Operator: [Operator Instructions] For our first question, we'll go to the line of A.J. Rice from UBS. Albert Rice: Maybe just we're well into the PBM selling season for 2027. And I guess we're gearing up for the commercial employer market selling season. Are you hearing anything different in terms of the amount of activity that you're seeing out there and the types of priorities that our employers are putting on engaging, anything they're emphasizing given AI, given a little uncertainty in the economy that you would call out that's different this year as we begin to move into the selling season? Gail Boudreaux: Thanks for the question, A.J. And I think it's a great one to start the call. Let me start with the commercial selling season, and then I'll ask Mark to comment on the PBM. But in terms of the national account season, in particular, where we see early, I think, early interest by employers, as I think I shared in my remarks, we're off to a really strong start. We've got some early wins. What we're hearing from our national account employers is they're very focused on affordability. AI is important in terms of the consumer experience. As you know, we've got 2 core goals: reduce the cost of health care for them and improve the experience, and we've been investing heavily in ensuring that those capabilities choke through. So from an employer perspective, we just hosted our national account group, and we had most of our clients in and they shared with us think a lot of satisfaction. We had a very strong '26 selling year. But also '27, we have a very strong pipeline, almost a record level for '27. We're pretty enthusiastic about how our assets are resonating. The other thing that we're starting to see is, again, continued consolidation from clients. We've had a record of taking clients who have multiple carriers and consolidating some single carrier under us. And that theme is continuing. So we're very optimistic. But overall, the season, I would say, very focused on affordability given what's going on in the economy, but also very focused on experience and wanting to ensure simplicity that there's real value pulling through for the commercial group. But let me ask Mark to comment on the PBM side as well. Mark Kaye: Yes. Thanks, A.J. Carelon Rx delivered a strong ASO selling season for 2026. So we had several national account wins. We also had improved win rates across both the middle market and large group. And that performance here really reflects growing demand for a more integrated medical pharmacy model and for some of the differentiated value that Carelon Rx is able to bring to employers and our health plan partners. I'd say sales momentum remains strong. We have seen total sales to date running ahead of plan including 2 marquee national wins. And that really does highlight our ability to compete upmarket successfully for large sophisticated clients. We've also seen good renewal activity, especially as we enter this active phase of some of the client strategy discussions. On the commercial side, good penetration across that book, good cross-selling of pharmacy into our existing fee-based relationships that obviously remains an important lever for us. And the reason this opportunity is real is that it is producing measurable results. And maybe just to give you 2 examples here. We have seen for clients that do have that aligned medical pharmacy benefit savings upwards of $100 per member per month as well as significantly fewer ER visits as well as a reduction in some of the high-cost specialty drug administration. So in short, as we look forward to 2027, our confidence is really grounded in that pipeline momentum and the demonstrated value that we bring. Gail Boudreaux: Yes. Thanks, Mark, and thanks, A.J. I think you heard from both of us, we feel really well positioned in -- for national accounts as well as for employer groups. So next question please. Operator: Next, we'll go to the line of Stephen Baxter from Wells Fargo. Stephen Baxter: I was hoping you could expand a little bit on the cost trend comments. Obviously, it seems like you're seeing some level of moderation in Medicare and are confident enough at this stage to identify that. And then on Medicaid, on the other hand, it seems to be much more consistent with what you've been talking about recently. Maybe help us try to understand the differentiation that you're seeing there and what's driving that at this stage. Gail Boudreaux: Thanks for the question, Stephen. Maybe it would be helpful to sort of take a step back in total because I think, as we said, we're really pleased with the strong start to this year. At a high level, cost trend is tracking in line with the expectations, and that's consistent with the stronger performance that we delivered in the quarter. But I think what's really important as you look through our results, it's not one driver or one single item. What we saw going into this year is solid execution across our entire enterprise, and that's what supports our full year adjusted EPS outlook guide of $26.75. And more importantly, I think it gives us much more confidence into the trajectory, not only this year but into '27. From a cost standpoint, I just want to point out some of the actions that we've taken are beginning to show through. So as you think about earlier using data to find out where the outliers are, utilization management, stronger payment integrity, for example, and an area that I think is really important is better site of care optimization, where we've been very focused on that. So overall, we see the businesses are performing in line. And in some cases, as Mark shared, they're ahead of assumptions. So we've embedded, we think, very prudent assumptions in our outlook, I think, and that speaks to the resilience of the portfolio. But I also want to, I guess, continue to say we're going to stay disciplined in how we view the balance of the year, and we're not relying on different trend environment to support the guide. So we're going to continue to scale what we're doing. But bottom line, I think it's important that our business, we feel, is performing well, and those actions are going to continue to gain traction throughout the year, and that reinforces our confidence. So thanks very much for the question. Next question, please. Operator: Next, we'll go to the line of Justin Lake from Wolfe Research. Justin Lake: Your guidance assumed a conservative view of Medicaid membership declines, I think, in the high single-digit range for the year. And I noticed for the quarter, Medicaid membership looks like it was down about 1.5% ex the growth in Indiana. So I'm curious what you're seeing here in terms of membership mix? Specifically, are you seeing membership declines heavier among lower-utilizing members, potentially pressuring the risk pool? And can you remind us what you've built in for acuity pressure within your Medicaid margin guidance? Gail Boudreaux: Mark? Mark Kaye: Thanks very much for the question, Justin. We remain quite comfortable with our Medicaid membership guidance range that we provided for 2026, which just as a reminder, reflects a high single-digit percentage decline driven by ongoing eligibility reverifications and disenrollment activity. At this point, we do expect to finish the year towards the higher end of that range, and that reflects both the prudence embedded in our original outlook and the way that the state reverification activity has unfolded so far this year. Overall, what we've seen to date has been broadly consistent with our expectations. I would say timing has been modestly more favorable than what we originally assumed. And then finally, I would say our full year guidance does assume that greater membership pressure from reverifications over the balance of the year versus what we saw in the first quarter. And that simply reflects that range of potential state actions, some of the uncertainty around the implementation of the timing of those 6-month eligibility periods and then overall enrollment-related pressures as the year progresses. Gail Boudreaux: Yes. Thanks, Mark. And also just to sort of bring it together for you, Justin, I mean, this is aligning similar to what we put in our guidance. And we do, as we've shared before, I think this is the trough year. And we continue to believe that given what we're seeing in the business. Next question, please. Operator: Next, we'll go to the line of Andrew Mok from Barclays. Andrew Mok: I wanted to follow up on the employer side and the affordability discussion. Can you help us understand what you're seeing in terms of consumer behavior in response to reset deductibles? And relatedly, have you observed any impact from higher gas prices or broader macro pressures on health care utilization? Gail Boudreaux: I'll ask Morgan to share his perspective. Morgan? Morgan Kendrick: Yes, Andrew, thanks for the question. I will tell you the market is completely aligned with our strategy of reducing the cost of health care and improving the experience of the consumer, making it simpler. I think that's the biggest thing that I hear that it's overly complex, burdensome for the consumers to actually seek care, go through treatments, things of that nature. That's where we're working together to solve those. That is exactly where -- and I think that's why, as Gail mentioned earlier, we had such a strong season upmarket, and that also permeates into our down level business as well. So if we think about our local geographies and national, all of this is focused around affordability and simplicity. Beyond that, it's just a little things around the edges are just about [ accentuating ] both of those. That said, we do see a shift in way of funding. So of course, as you go further up, it's all self-funded business. It's a fee-based business. If you look at the down market, it's about 50-50 between risk-based and fee-based. Nonetheless, people want to know that we're focused on the right things. And as Gail mentioned, we listen to the markets and the markets tell us quite carefully and honestly that it's all around affordability. How are we leveraging the unit cost position that we have and then how are we medically managing that to the point that is driving their trends down consistently. Gail Boudreaux: Yes. Thanks, Morgan. Maybe a little bit on the ACA, Mark, just in terms of what we're seeing in consumer behavior there. Mark Kaye: No, absolutely. So I'd say broadly, Andrew, consumer shopping behavior in the ACA market has been in line with our expectations. The biggest difference here versus our initial view is that shift towards bronze plans has been more pronounced and is a positive for us in certain markets. And that dynamic clearly makes sense in the current environment because obviously, subsidies are tied to that benchmark silver plan. And as benchmark premiums move higher in 2026, those bronze options became more affordable on that net of subsidy basis for consumers. So we feel pretty good about our positioning in ACA. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Lisa Gill from JPMorgan. Lisa Gill: I want to ask a question around Carelon and Carelon Rx. When I look at the margin in the quarter, it came in below our expectations. You reiterated the guidance for the year. Can you talk about the progression of getting that margin back when we think about Carelon specifically and then within that Carelon Rx? And then secondly, any comments around recent legislation, whether we think about what's passed on the federal level and any impact to your business on the PBM side or the potential of what's been proposed, for example, in the state of Tennessee, any impact on the PBM business? Mark Kaye: Lisa, thanks very much for the question. Let me start with the performance first in Rx. So I would say performance here was very much in line with our expectations in the quarter. Revenue growth was driven by strong revenue per script and continued momentum in the external business, particularly in the ASO space, and that was partially offset by lower strip volume from the affiliated health plan membership. On margin, to your question, the key point here is that the first quarter performance was very much in line with our expectations, and it's fully consistent with our full year guide for that mid-5% margin range. I'd say the quarter itself reflected very normal seasonality in the PBM business, along with expected mix of growth and the current earnings cadence across the platform. We did see some improvements in specialty and home dispensing. So that obviously helped overall performance in the quarter. But if you step back, I'd say, from an Rx perspective, revenue and margin, very much in line with what we expected. On your point on the regulatory for a minute, I think the direction of travel here is pretty clear. We have seen recent federal actions moving that PBM market towards greater transparency, stronger reporting and I think ultimately closer alignment between PBMs and their clients. And so for Carelon Rx, I would say that direction of travel is fully consistent with the model that we are building. We already offer clients flexibility in how they engage with us, and that includes rebate pass-throughs as well as transparent fee-based arrangements. And more importantly, I'd say our strategy here in Rx is not dependent upon any single economic mechanism. It really is built around that integrated medical and pharmacy management and a focus on total cost of care. Gail Boudreaux: Thank you, Mark. Next question, please. Operator: Next, we'll go to the line of Lance Wilkes from Bernstein. Lance Wilkes: Got a question on employer and in particular, the progress you're making on the second blue bid sort of opportunity out there. Maybe if you could just remind us of the '26 experience you had in sales there. But then if you could just talk a little about the value proposition you're selling, sort of the target clients who are going to be open to this and what pipeline looks like for '27? And as part of that, if there's any detail on the type of Carelon services that some of those people would be picking up more likely? Gail Boudreaux: Thanks, Lance. I'll have Morgan address your questions. Morgan Kendrick: Lance, thanks for the question. Regarding the -- what we're seeing in the national space, with second blue bid, it was quite -- last year, as you know, was the very first year we did it. It was very lucrative for the business. We had less -- we had probably 40 more additional opportunities that came through. And so it was there. We're still seeing that again in year 2, but nonetheless, not quite as high. We've got roughly 2 million members in queue. A couple of those are second blue bid, but the overwhelming majority is just business in the market coming from other places. So it's -- to me, it's -- the assets speak for themselves, and that's exactly what the markets are telling us. The renewal numbers that we've seen in our national business are nearly 100%. It's like 99.3%. So you think about -- these are organizations that don't move very often. They like what they're getting, they like and they keep it. To the point around Carelon, when I think about what they're looking for with Carelon, they're looking for various solutions around medical conditions, MSK, diabetes, things of that nature to work directly in their population where it may be skewed in those areas, and we can solve for it with them. And also, as Mark indicated, pharmacy. Last year was one of the largest years we've had around integrated Rx in the upper end of the market. We do expect that to play in, but it was really, really strong last year, and we expect it to be slightly dampened this year. Gail Boudreaux: Thank you, Morgan. Next question, please. Operator: Next, we'll go to the line of Ann Hynes from Mizuho Securities. Ann Hynes: I know you said Medicaid margins were tracking better than your expectations and what's embedded in guidance. Can you actually tell what Q -- tell us what Q1 results were? And can you also remind us what your rate increases are for 2026 as in guidance? And have there been any positive updates since the last report? Gail Boudreaux: Mark, I'll ask to start and then Felicia to give some more comments. Mark Kaye: Ann, thanks very much for the question. So from a trend perspective, I would say first quarter was slightly ahead of our expectations. That reflected the favorable claims development. That said, underlying cost trend does remain elevated. The first quarter trend is consistent with our full year outlook. And we do continue to contemplate Medicaid trend at the high end of that mid-single-digit guidance range that we provided. So as you think about margins, to your question for the first quarter, certainly, on a sequential basis, we did see an expected deterioration in the first quarter, meaning coming in exactly as we anticipated. And so for the full year, we're continuing to be very comfortable with our guide of minus 1.75% operating margin. Felicia Norwood: Yes, thank you for the question. Ann, thank you for the question. In terms of our Medicaid rates, our Medicaid rates for the first quarter, which means through April, are right in line with our expectations. The rates absolutely are coming in close to the mid-single-digit range. At the end of the day, however, that remains slightly below the trend that we continue to see in the business. So we are going to continue to work very constructively with our state partners around closing that rate to trend gap. Overall, I will tell you that those conversations continue to be very constructive. We provide regular information to our states in terms of our performance, and we look forward to continuing to make the improvements that we expect to see in the Medicaid rates over time. But through the first quarter, certainly right in line with the expectations, and we've already started to work with our states around July rates, although it's still early in terms of a view of July, but the continued progress that we're making is expected to really continue throughout the rest of the year. So thank you very much for the question. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Scott Fidel from Goldman Sachs. Scott Fidel: I was hoping if you could maybe expand on just giving us an update on the risk-based management programs that you've been deploying in Carelon services. Maybe just talk about the overall scope of how those programs have been expanding and basically sort of the actions within the operating model that you have to sort of protect against sort of upside risk on medical cost trend? And then also if you could just talk about the investments that you called out in the quarter also related to that line of business? Mark Kaye: Scott, thanks very much for the question this morning. I think let me start off by saying that we are taking a very disciplined approach to how we manage risk in Carelon services. And specifically, we're very intentional about where we take risk in the business, how we price for it and then ultimately, how we balance that exposure across our Medicare, Medicaid and commercial businesses with a mix of either subcapitated full risk or really fee-based offerings. One of the real advantages in Carelon here is that we can use our affiliated health plan membership as a proving ground to launch and scale capabilities quickly. For example, we started our risk-based oncology solution in commercial. We expanded it into Medicare. And then we plan to move it into Medicaid in the latter half of this year. And we followed a similar path for post-acute and more recently in BH as well. So a lot happening in that space. At the same time, obviously, as we continue to grow the risk-based side of Carelon services, the segment is going to reflect some of that normal mix and timing dynamics. And I think that's the heart of your question. And that really comes with our scaling of these capabilities. Just to point out, low affiliated health plan membership does remain a headwind across several of the offerings this year. And of course, some of the newer risk-based programs will have a different earnings cadence as they progress. And a couple of quick examples here before I leave at least this question. Risk-based oncology program, we started in 2024. We expanded in '25. Post-acute started in Medicare, we've deployed commercial. And then BH is the one that we've recently launched with some serious mental illness in the Medicaid population. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Ryan Langston from TD Cowen. Ryan Langston: I appreciate you sizing the settlement potential CMS. I guess can you give us a sense on how those conversations are progressing? And I'd be interested if you could help us frame sort of how you arrived at that $935 million figure? Gail Boudreaux: Sure. Let me like provide you sort of a comprehensive view of how this works. Let me start with the accrual. First, the $935 million accrual that we recorded in the first quarter reflects our current best estimate of the probable exposure that is associated with this historical matter. And that's based on the information that we have today as well as our engagement with CMS. I think it's important too, as you think about it, this relates to historical payment disputes that involves the interpretation of the risk adjustment policy during that period in question. And actually, really importantly, I think everyone -- to remind everyone, it's not about how we operate the business today, and it doesn't change the confidence, as I shared in my comments, about the integrity of our current risk adjustment practices, our compliance or our governance. But in terms of where we're going, since receiving the notice from CMS in February, we've moved very quickly to engage directly and quite constructively with the agency on this matter. And those discussions have given us much better clarity, both on process and on the path to resolution. So I want to be clear about that. We are working through the process that CMS has outlined to address those issues raised. And CMS has updated because of the compliance time frame, which you want to share and work through -- as we work through that process and under the current time line, we have through July 31 to meet all of those compliance requirements. Certainly, we appreciate the extension of that time frame because it reflects, I think, the complexity of the work required to complete this. That said, based on the steps that CMS has prescribed and the current time line, which I've shared, we believe and expect that if we complete those steps that the sanctions will not go into effect. So I also want to share that. But again, we're working very constructively with the agency and feel that we're moving towards resolution of the issue. So thank you for the question. Next question, please. Operator: Next, we'll go to the line of Elizabeth Anderson from Evercore ISI. Elizabeth Anderson: Just appreciate the comments about the 2/3 of the outperformance is favorable claims and sort of better management of those claims. Could you maybe help us parse out the breakdown of that? I know Mark was helpful in providing some comments about the flu and other 1Q utilization issues. But just anything else, if you could sort of clarify at this point, how you're viewing any weather or flu items in the first quarter? And then secondarily, in terms of some of those better management of claims, I appreciate you said that you're going to sort of flow those through for the rest of the year. Anything we should sort of think about in terms of that ramping up? Or should we think about that as relatively ratable across the rest of 2026? Mark Kaye: Elizabeth, thanks for the question. Let me start by framing the quarter because I think that's the cleanest way to answer your question as well as address sort of the guidance change that we put through. So in the first quarter, EPS did come in ahead of our initial outlook, and that included about $0.45 of core outperformance. About 2/3 of that or roughly $0.30 reflected underlying business favorability and the remaining $0.15 was really driven by seasonality-related timing dynamics. The underlying favorability was concentrated primarily in our health benefits business, and that did reflect better claims experience than we had assumed, including to the point you made, a less severe flu-like season that was embedded in our first quarter outlook, and that accounted for about $0.10-ish of that benefit. And so the remaining outperformance was really timing related. And as we noted in our prepared remarks this morning, primarily came from our ACA business, and that's simply driven by that higher mix of bronze plans, which we expect will defer a portion of planned costs into the back half of the year. So if I turn -- if I brought that all together and I turn to the guidance range, we did increase that full year EPS guide by $1.25 per -- relative to our prior outlook. And I would say of that increased $0.25 reflects that portion of the underlying nonseasonal business favorability we saw in the quarter. And of course, the remaining $1 was a nonrecurring item. And one last point, just from a modeling perspective, that dollar should clearly be excluded from the 2026 earnings baseline. So when you think about us returning to at least 12% EPS growth in 2027, that growth is off of an ending 2026 baseline at this point in time of at least $25.75. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Kevin Fischbeck from Bank of America. Kevin Fischbeck: Can we maybe go back to the exchange commentary. I guess we've been trained to look at better-than-expected enrollment sometimes as a red flag. So I just wanted to see if you could give any color about whether the high enrollment has come with any change in the underlying risk pool that you're seeing? And I guess last year, there was a change in the risk pool in part because there was a group of people coming -- losing Medicaid coverage coming on to the exchanges. Are you seeing any signs that, that's a potential pressure happening this year? Mark Kaye: Thanks for the question. Let me start off by saying we took a fairly prudent view when pricing 2026. And we did that really with the assumption that while much of the impact from the expiration of the enhanced premium subsidies would occur in the first year, it's going to take a little while for the risk pool stabilization to ultimately play out. I'd also note it's still early in the year and more time is going to be needed for those retention patterns or member retention patterns really to settle out and for claims to mature before we have a fully developed view of the morbidity profile of the risk pool this year. That said, one really early indicator that we have seen prior claims experience for renewing members in paid status running moderately higher than for the cancel or nonpayment cohorts. And that did support our view that [ relaxation ] here has increased the morbidity of the remaining pool. But importantly, that dynamic, that is tracking consistent with or even better than how we price the business in 2026. And so sort of to conclude here, I feel very good about our membership mix, and I feel very encouraged by that shift towards bronze, both in our book of business, but also broadly across the market itself. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Dave Windley from Jefferies. David Windley: I wanted to come back to Medicaid. Gail, you reiterated the comment that you think '26 is trough. I wanted to understand the assumptions embedded in that for '27 in terms of your expectations for member attrition from work requirement implementation and things of that sort? And then also ask where your thinking is around stay or leave state by state in situations where rate discussions are perhaps not moving in the direction that you'd like them to? Gail Boudreaux: So let me take the second part of the question first, and then I'll ask Mark to comment on the membership assumptions. We -- so as Felicia shared with you on Medicaid, we're having very constructive discussions with the states. While the rates are still lagging, we've seen, I think, positive movement in states trying to be constructive. And it's not only about the rates, it's also about the actions that we can take on benefits as well as the changes that we're making to our networks and other things. That being said, as I shared, I think, on the last call, where we don't see a sustainable path to profitability in a state, we will exit. I don't think we're at that stage with states. I just want to be clear. But again, we also are taking the view of, look, we need a sustainable path to this business. We do think it's an important business, both between our Medicare and Medicaid business in terms of how we serve our duals. But again, we will take a look to make sure that these rates are sustainable and that the capital we put into it can be returned. So with that, I'll ask Mark to comment just on how we're thinking about membership evolving over this year and next year. Mark Kaye: Thanks for the question here. I think modestly better Medicaid membership at year-end 2026 would not change our view that 2026 is the trough year for Medicaid margins. And if membership comes in somewhat better than we expected, the most likely explanation here is really timing, really that some eligibility-driven attrition would occur later than we had assumed. And that could, in theory, to your question, shift a portion of that membership and acuity pressure into 2027. But we would not expect any incremental pressure to be or we would expect any incremental pressure to be much more measured than what we would have experienced during the [ post-PHE ] period. And the key point here is because it's much more targeted, it's much more concentrated in that expansion population rather than being broad-based across the Medicaid book. And then just as importantly, and you heard this from Gail, that does not change our belief in the setup that we see for 2027. And we do believe 2027 is going to continue to benefit from better rate alignment as states incorporate more of that recent experience into their rate setting cycles. And certainly, while work requirements and community engagement requirements may create some additional pressure over time. I just want to emphasize the point, we do expect that impact to be much more phased and much more manageable than the redetermination cycle historically. Gail Boudreaux: Thank you, Mark. Next question, please. Operator: Next, we'll go to the line of Erin Wright from Morgan Stanley. Erin Wilson Wright: So AI and automation across just managed care in general has been a big question area for investors. I guess, can you talk about some of the proof points today or progress on that front, quantify any of those efficiency gains or maybe your long-term goals as it relates to that? And how are you tracking in terms of the associated incremental investments? How do you see that playing out as well as we head into '27, '28? Any context there would be great. Gail Boudreaux: Great. Well, thanks for the question, Erin. I think it's a great question in terms of how we're thinking about AI. And I think it's important as we talk about AI to step back because fundamentally, we see it and our technology strategy as supporting our overall strategy, which, as I said, is really very simple, make health care more affordable and make it simpler and more personalized for the people we serve. In terms of investments, we're investing more than $1 billion in digital and AI-enabled capabilities to support that strategy. And I think the key point that I really just want to start with is we're not approaching AI as a separate technology element or experimentation. We're looking at things that will scale and support those absolute core things of our business. So to give you some specifics, we're embedding it, I would say, in practical ways, first to help us reduce costs and again, to simplify experiences and then take administrative costs and complexity out for ourselves. So I'll walk in a couple of examples. One, for our members, that's really about making it easier to navigate. Health care is really complicated. When we look at where we've already invested, our AI-enabled virtual assistant, I think, is a really good example. We already have 22 million commercial members on that using it regularly, and it's helping people get answers fast with less friction. And we're seeing that dramatically improve, for example, our consumer effort scores. We're also being more personal. And I think that's another really important part of how we can deploy this technology through [ Sydney ], which is our personalized matching tool, where we help actually using over 500 data points, match people to the right care providers. More than 20% of our members have already connected and are finding the right providers. So not only is that simpler for them, but quite frankly, brings them to our providers that are high-performing providers. And again, that helps drive better medical costs. On the clinical and care operations side, we see AI helping improve things around speed, accuracy, decision-making, strengthening payment integrity. And what that's doing is giving us information much earlier to identify outliers. Again, that feeds into our ability to see trends faster and then take actions with our team around network, around clinical interventions. So over time, we see that as a real opportunity to manage costs. Right now, it's about getting information in our hands a lot faster. And I'll sort of close on a couple of final examples for care providers, it's really about reducing burden. We need to really reduce the friction and simplify workflows. That's a commitment that we've made. HealthOS is an area that we've been investing over. You've heard us talk about it the last several years. And that's really about data sharing, reducing paperwork and accelerating approvals. We're using it right now in our prior authorization commitments. And one of the areas that I know frustrates everyone is this lack of information and denials generally get caused because we don't get the right information. We see this technology and AI reducing those denials by more than almost 70% and it eliminates a lot of the need for follow-up and back and forth. So that's good for the system, and I think good for care providers. Then I'll just close, how else we're thinking about AI. We're leveraging it across our associates. More than 60,000 already have access to it. They're using it in their productivity tools. They're learning it. We have individuals signing up to understand how to use it. We have guardrails around that. We're obviously very cautious about making sure we use it the right way, but we think -- we see it as a productivity tool. So let me just step back. I know that was a lot, but we see it. We're encouraged by technology. It's not just pilots. It's embedded in our capabilities, and you're really going to see it come through in the results we have in the measures, not just in the dollars, but also in our [ admin ]. So thank you very much for the question. Next question, please. Operator: Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Benjamin Hendrix: I wanted to get a little bit more color on the site of care optimization actions you mentioned helping to control your cost trend. Yesterday, we heard your peer mentioned some notable reductions in hospital admissions and skilled nursing transfers through some heightened clinical review. And I'm wondering if you could share some anecdotes either within the Carelon risk-based programs or in the broader benefits business where you're seeing gains from those [ site ] of care efforts specifically? Mark Kaye: Thanks very much for the question this morning. So just as a reminder, CareBridge is our home-based care platform focused on Medicaid and dual-eligible members, especially those with complex needs. And strategically, this is important for us because it extends Carelon's whole health model into the home, where obviously, better coordination can improve outcomes, lower total cost of care and then support stronger health plan performance. We're also very pleased with how CareBridge is ultimately integrating into the broader Carelon ecosystem. I'd say first quarter results are very much in line with our expectations for CareBridge. But we are seeing continued signs of improvement as we scale that platform and drive operational efficiencies across the book. We are also expanding CareBridge in ways that deepen both its reach, [ R-E-A-C-H ], and its value. And intentionally, we have launched additional Medicaid home and community-based support programs in several states, which has deepened our market penetration. And as a result of that, we are seeing early indications of that improved cost of care performance, especially as those capabilities are ultimately embedded into our market. So to your question, when we talk about site of care optimization through CareBridge, it's really about keeping members aligned to the right level of care, reducing unnecessary facility-based utilization and using that home as a more effective and lower cost setting for managing those complex and chronic needs. Gail Boudreaux: Thank you, Mark. I might ask Aimee Dailey, who leads our government business, to also comment on how we're deploying that inside of the health benefits business. Aimee? Unknown Executive: Yes. No, thank you, Gail. Really, one of the greatest things about CareBridge is its ability to engage members in a place that they're comfortable being engaged. And that engagement rate allows better reach, better access for those members to their health care and actually has created a fair amount of ER avoidance and improvement in PCP visits, which allows us then to get quality gaps in care closed and really make sure that these members are getting better outcomes in the long term. And we're really -- very pleased with what we're seeing and the early adoption of our CareBridge model across our duals business. And that dual business is where we see really a high level of need in that engagement. And so very pleased with how we've been able to embrace that CareBridge model. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Sarah James: What's there any takeaways on where you sit versus the industry from the new March [ Wakely ] data? I think they may have provided some context around average premiums or metal tiers. And then on the bronze shift you mentioned, can you quantify how much your mix moved? And just give us an idea of the delta between peak and trough MLR between bronze and silver. Is that just like a couple of hundred basis points? Or is it larger than that? Mark Kaye: Thanks very much for the question here. The early [ Wakely ] report has been a helpful input because it provides additional visibility into market size, [ metal ] mix and enrollment patterns. And importantly, the report from our perspective supports our view that we are seeing a greater shift towards bronze and a greater share of new sales, both of which obviously have implications for our relative risk to the market. And therefore, to an earlier question that was asked around risk adjustment. I'd really caution it's still an early data set from [ Wakely ]. It does not fully capture the impact of retro cancellations, nonpayment behavior or even maturing cohorts. And so I'd say while the report is useful, visibility is going to continue to improve as we get more effectuation data and cohort-based information over the coming months. All in, I think the most important point here is we feel very comfortable with our pricing and how we positioned our products for sustainability in the ACA market this year. And then to your question on specific splits, we are seeing a much more balanced bronze silver mix this year it come through based on the new sales. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Jason Cassorla from Guggenheim. Jason Cassorla: I wanted to ask a little bit more on the return to at least 12% EPS growth in '27. You've got margin expansion opportunity across most of your end markets. You've talked about the early benefits of AI and investment spend. But I guess could you help frame how we should be thinking about the components of that 2027 growth, including how much of that is predicated on pricing and trend that you can control or impact? Or maybe said another way, to the degree that Medicaid margins remain pressured next year, how do you feel about the levers and growth opportunities across your other businesses that could offset to drive that at least 12% growth expectation? Gail Boudreaux: Well, thanks for the question. I think it's important to first start with '26. And I think the headline around '26 is this is all about execution. And as you saw, we upped our guide to at least [ $26.75 ], reflecting that early execution while remaining grounded again in prudent, achievable expectations. Specific to your question, as we think about '27, we're confident in at least 12% adjusted EPS growth off of that earnings baseline, which now stands at $25.75, as Mark shared. Over the past couple of years, and I want to reframe that, we've made targeted investments in portfolio, pricing and operating discipline. And those were all designed to protect our earnings base and position us for the durable growth that we're projecting. We're leveraging the capabilities of our diversified platform, and I think that's really important. And there's 3 things I just want to underscore to your '27 question. First, the key earnings levers are already in motion, and I think that's important. Those are the actions that we put in place in '25 and into '26, and those are across many of the things you said, pricing, care management and portfolio positioning. Second, we're making meaningful investments in 2026. So as those investments mature and we realize returns on those initiatives, we're going to see a clear step-up for 2027. And third, again, the path isn't predicated on any single assumption. And I think that's really important as you think about our portfolio. It's built on many and multiple independent levers, and it's disciplined execution across both health benefits and Carelon. So those are the factors as I think about it, that give us confidence in achieving the earnings growth consistent with the long-term growth algorithm that we talked about through '27. So thank you for the question. And next question, please. This will be our last question. Operator: And for our final question, we'll go to the line of George Hill from Deutsche Bank. George Hill: This one is probably for Mark. Mark, we saw a pretty big step-up in base claims payable, both sequentially and year-over-year. I was wondering 2 things. Number one, might you be able to unpack kind of what drove that for us? Was it membership mix? Was it the exiting of Part D? Was it like legacy claims? And kind of how should we think about how that number trends through the balance of the year? Mark Kaye: George, thanks very much for the question. So DCP ended the quarter at 46.6 days. That was up 5.3 days from year-end, and that was driven mainly by normal first quarter seasonality and higher medical claims inventory across the business. A little bit deeper here. Commercial was affected in part by individual mix dynamics that we've discussed. Medicaid and Medicare really reflect that typical earlier slowdown in claims payment cycle. And really, the main takeaway here is the DCP result was largely a seasonal and mix-related movement. I wouldn't say it reflects any change in our underlying reserve approach. On the prior year development, that was approximately $250 million in the first quarter. And it's really worth noting here around that number is that typically for prior year development, we reestablish that as margins and reserves through the normal process. And so it really doesn't have a material P&L impact. Thanks for the question. Gail Boudreaux: Well, thank you. Thank you for the questions. And thank you, operator, and thanks to everyone on the line. As we move through 2026, our focus remains on operational execution, strengthening our diversified platform and building momentum across the enterprise. We're encouraged by our strong start to the year and the progress we're seeing. Our strategy to improve affordability, simplify the experience for all of our consumers and care providers and deliver better outcomes for the people we serve is what's driving durable financial performance over the long term for us. Thank you for your continued interest in Elevance Health, and have a great rest of the week. Operator: Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 22, 2026. You may access the replay system at any time by dialing (800) 391-9853 and international participants can dial (203) 369-3269. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.
Operator: Good day, and welcome to the First Quarter 2026 Annaly Capital Management Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director Investor Relations. Please go ahead. Sean Kensil: Good morning, and welcome to the First Quarter 2026 Earnings Call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section and our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first quarter 2026 Investor Presentation and First Quarter 2026 financial supplement, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David. David Finkelstein: Thank you, Sean. Good morning, everyone, and thank you for joining us on our first quarter earnings call. I'll open with a brief review of the macro landscape for discussing our performance then I'll provide further detail on each of our three investment strategies and conclude with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro backdrop, January and February saw a continuation of many of the trends seen in the second half of 2025 highlighted by a resilient economy as well as modest stabilization in the labor market. Consequently, fixed income markets initially experienced continued strong investor demand and generally muted volatility, ultimately, however, the war in the Middle East, ruptured the calm as it introduced an energy price shock that may challenge the performance of the U.S. economy as the rest of the year unfolds. Although the U.S. is better insulated from higher commodity prices than most of Europe and Asia, rising oil and food prices risk further squeezing a consumer that is already facing slowing income growth and persistent affordability constraints. The bond market reacted sharply to the Middle East conflict and higher commodity prices as treasury yields sold off meaningfully in March. Short-term rates led to sell-off as investors priced higher near-term inflation, while long-term yields rose on increased term premium. Expectations for monetary policy shifted significantly with markets pricing limited probability of any rate cuts this year compared to roughly 2.5 cuts priced in at the end of February. For the time being, it appears that officials will be best served by waiting to evaluate incoming data for clear signs that inflation pressures are receding, where the labor market is more markedly weakening before further lowering rates. This past quarter also saw the release of the Federal Reserve's reproposed bank capital requirements, which were generally in line with market expectations. The newly proposed capital standards are more market friendly than both the original 2023 Basel Endgame proposal and current standards, providing the potential for deployment of excess capital from banks into fixed income and housing finance. The reproposal also specifically targets the mortgage market as residential mortgage loan RWAs are estimated to decline by 30%. This could accelerate Prime Bank loan growth and lower Agency MBS securitization rates of positive technical for prime loans and Agency MBS. Also the elimination of a provision that deducted mortgage servicing rights above a specific threshold from regulatory capital, may at the margin lead to slightly higher demand to hold MSRs on the part of banks. Now with respect to our portfolio performance in the first quarter, we delivered an economic return of 1.5%, reflecting the strength of our diversified housing finance platform across a volatile market backdrop. Leverage remained conservative at 5.7 turns, and we generated $0.76 of earnings available for distribution per share. Capital markets remained supportive in the first quarter, and we were able to raise approximately $510 million of common equity through our ATM in Q1. The majority of capital raise was deployed in our residential credit and MSR strategies given the tightening experienced in the Agency in January and as such, our aggregate capital allocation to resi and MSR increased from 38% to 44% at the end of the quarter. Now turning to our investment strategies and beginning with Agency. Spreads tightened sharply in early January, following the GSE purchase announcement before ultimately drifting wider, initially simply on tight valuations and later on increased rate volatility following the outbreak of the Iran war. Now despite the wide intra-quarter range, MBS widened only modestly quarter-over-quarter with lower coupons outperforming. For Agency strategies, the story for the first quarter was about our ability to allocate capital dynamically as relative value shifts. Following the January tightening, we redeployed capital away from Agency and into our credit businesses, which exhibited a more attractive return profile. However, the ultimate retracement of MBS spreads back to more reasonable levels later in the quarter left the center in Q2 with a more balanced view of the relative value landscape across our three businesses. The further support for Agency currently is the strong technical backdrop the sector is exhibiting as aside from GSE purchase mandate, weekly flows into fixed income funds are strong and CMO issuance continues to absorb over 30% of gross supply as banks have ramped up buying CMO floaters. Moreover, recent changes to bank capital rules encourage banks to retain more loans, which could lower securitization rates and decrease organic growth in Agency MBS. In our Agency portfolio, specifically, we ended the quarter at $92 billion in market value, a marginal decrease from year-end with Agency representing 56% of the firm's capital. We opportunistically repositioned the portfolio during the late quarter sell-off in rates, rotating down in coupon from 6s into 4.5 TBAs. And notably, 4.5s provide more durable cash flows and improve the portfolio convexity should rates retest recent lows. Also to note, we added modestly to our Agency CMBS portfolio in the quarter. We maintained conservative interest rate exposure throughout Q1 with continued focus on protecting book value and managing risk through disciplined measured hedging. Tightened rate macro volatility led to more active tactical hedge adjustments in the quarter as markets moved quickly in response to geopolitical developments. Despite this activity, the net impact by quarter end was modest with overall hedge levels changing only slightly. We remain comfortable maintaining exposure in swap spreads given the increased clarity around bank capital regulation and the growing presence of mortgage investors who actively hedge using swaps. That said, treasuries have proven to be a more effective hedge in sharp volatility episodes, such as March, which is why they continue to be an important part of our overall hedge composition. Now moving to Residential Credit. Our portfolio ended the first quarter at $10.3 billion in market value, increasing to 23% of the firm's capital, driven largely by continued growth in our whole loan correspondent channel. Residential Credit spreads tightened at the outset of the year as the strong movement in the Agency basis drove a rally across securitized products. However, similar to Agency, credit spreads gave back their tightening in late February and March with AAA non-QM spreads ending the quarter 10 to 15 basis points wider. We acquired $6.7 billion in whole loans on the quarter, approximately 80% sourced via our correspondent channel. Our lock volume was very strong at $7.4 billion, a 16% increase quarter-over-quarter and 41% increase year-over-year. Securitization markets remained healthy with Q1 Residential Credit gross issuance of $79 billion, a 63% increase year-over-year. Our OBX platform settled 8 securitizations for $4.7 billion on the quarter generating $570 million of high-quality proprietary assets for Annaly's balance sheet and our joint venture. And subsequent to quarter end, we priced an additional 4 securitizations and now brought 12 transactions to market totaling $6.6 billion year-to-date. Onslow Bay remains the largest non-bank securitizer of Residential Credit and is well positioned to continue to benefit from the growth of the private label market. And we maintained our tight credit standards as our quarter end locked pipeline is represented by a 764 weighted average FICO, a 67% combined LTV with less than 2% of the portfolio greater than 80 LTV. Now shifting to MSR, our portfolio ended the first quarter at $4.2 billion in market value, and our capital allocation MSR increased 21% of the firm's capital. During the quarter, we committed to purchase $24 billion in principal balance or roughly $388 million in market value of MSR with a weighted average note rate of 3.4%. And these purchases came across 4 bulk packages as well as our flow channels. We were the second largest buyer of conventional MSR in the first quarter, as measured by transfers, and we are now ranked as the fifth largest nonbank conventional servicer. Bulk supply in the first quarter, roughly $80 billion UPB was above Q1 '25, and we expect supply levels to remain ample throughout the balance of the year. And we continue to scale our flow MSR capabilities in order to acquire current coupon MSR when attractive and our active flow partners more than tripled quarter-over-quarter as we purchased $1.9 billion UPB via flow, though still a small share of our overall purchases. Underlying fundamentals within our MSR portfolio remained strong, with prepay speeds muted at 4.2 CPR in Q1, while our credit profile continues to be high quality with serious delinquencies just under 50 basis points. The portfolio's weighted average note rate of 3.3% continues to provide significant prepayment protection and is the lowest note rate among the top 20 largest agency MSR holders. Our MSR valuation multiple increased modestly to a 5.94 multiple primarily driven by the increase in interest rates. And lastly, to touch on our outlook, we believe each of our investment strategies is well positioned to deliver attractive risk-adjusted returns through the remainder of the year, supported by a constructive market and housing finance backdrop. Again, Agency spreads are at a more reasonable level today than earlier in the year, offering perspective new money returns in the mid-teens and as I noted earlier, market technicals are the most favorable they've been since the end of QE. We believe that our portfolio composition continues to be a meaningful differentiator for Annaly, minimizing prepayment risk, while also generating strong carry. Our Residential Credit business continues to see very strong growth, all while maintaining a diligent focus on asset selection and credit quality. While the non-QM and broader Residential Credit market is attracting new forms of institutional capital, our early investment in infrastructure and technology, the expansion of our correspondent partners and the depth of our OBX platform creates competitive advantages that are not easily replicated, and we intend to continue growing our allocated capital Residential Credit. Our MSR portfolio is distinguished from other scaled portfolios in the industry by our significantly out of the money note rate and the high credit quality of our underlying borrowers. This has allowed us to consistently outperform our model projections, providing ample and predictable cash flows. We expect to further add MSR this year with increasing usage of our flow acquisition channels and benefiting from our long-standing synergistic relationships with large originators and servicers. Now overall, Annaly's scaled, diversified housing model has demonstrated our ability to perform across different market environments. And over the last 3 years, Annaly has delivered a double-digit annualized economic return with a lower levered and more efficient platform than peers. The ability to dynamically allocate capital toward the most attractive relative value opportunities is critical in times such as this past quarter, and as we entered the second quarter with a reduced overweight in agency, we see a more balanced opportunity set with each strategy, providing compelling new money returns. And now with that, I'll hand the call over to Serena. Serena Wolfe: Thank you, David. Today, I will briefly review the financial highlights for the quarter ended March 31, 2026. As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics, and my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. This quarter, our portfolio delivered sound performance even as market volatility and geopolitical challenges increased. Our diversified housing finance platform proved resilient, and our proactive hedging strategy protected us against interest rate volatility throughout the quarter. With that context in mind, as of March 31, 2026, our book value per share decreased by 1.9% from the prior quarter to $19.82. After accounting for our $0.70 dividend, we achieved an economic return of 1.5% in Q1. Earnings available for distribution per share increased by $0.02 to $0.76 per share and exceeded our quarterly dividend. We achieved this level of EAD primarily through a 30 basis point improvement in our average repo rate to 3.9% and higher TBA dollar roll income driven by increased specialness. Partly offsetting these benefits were lower levels of swap income due to lower average receive rate on declining SOFR. Net interest margin benefited from the reduction in cost of funds, improving 2 basis points to 1.71% while our net interest spread remains strong, declining modestly to 1.42%. The Residential Credit securitization business achieved another record quarter, issuing $4.7 billion across 8 securitizations, surpassing $50 billion in total issuance since inception. Our economic leverage ratio remained disciplined at 5.7x and our Q1 reported earning repo rate was 3.87%, down 15 basis points. The weighted average repo days to mature at the end of the quarter at 36%, up 1 day. Total warehouse capacity across our Residential Credit and the MSR businesses was $7.6 billion, including $2.8 billion of committed capacity. We have ample available capacity in both businesses with utilization rate at 65% for Residential Credit and 50% for MSR. We ended the first quarter with $7.4 billion in unencumbered assets. This includes $5 billion in cash and unencumbered Agency MBS. We also have roughly $1.6 billion of fair value of MSR pledged to committed warehouse facilities. This amount remains undrawn and can be quickly converted to cash, subject to market advance rates. In total, we have about $9 billion of total assets available for financing, down $300 million from the prior quarter. This represents about 55% of our total capital base and provide significant liquidity and flexibility. Finally, on our OpEx. Our efficiency ratio fell 2 basis points to 1.29% this quarter, continuing our trend of being 1 of the lowest in the mortgage REIT sector despite operating 3 fully scaled businesses on the balance sheet. That concludes our remarks. We will now take questions. Thank you, operator. Operator: [Operator Instructions] The first question comes from Crispin Love with Piper Sandler. Crispin Love: Dave, you mentioned the bank capital rules. Do you think these changes will drive significant changes in bank balance sheets with banks holding more mortgages, mortgages have definitely been moving towards nonbanks for an extended period of time. I think the bank crisis in 2023, you only increased that just given the asset liability mismatches. So I'm curious if you think that these changes could be meaningful could change just on the margin and what that could mean for the broader mortgage industry? David Finkelstein: Sure, Cris. And look, we'll have to see. I think when you look at the estimates in terms of balance sheet capacity for mortgages as a consequence of the rule and it gets a little over $600 billion in balance sheet capacity. And in terms of how we see it evolving, the tiering of LTVs, obviously, is quite favorable, and we think it will reduce agency issuance as banks will retain more loans. We don't know at this point the extent of it. But generally, it's good for the technicals associated with mortgages. And as far as origination, and I'm going to hand it over to Mike momentarily. But as far as the origination market, we don't see banks getting back into origination. That has largely moved outside of the banking system into nonbanks. And the nonbanks have made considerable investments and it will be hard to ultimately compete with them. Banks obviously still engage in origination, but that's typically on behalf of their customers as opposed to a real profit center. And Mike, feel free to add. Michael Fania: Yes. I would just add, Crispin, that in terms of what banks have been focused on, they have been focused on catering to their retail customer. They are not focused on pursuing origination through the correspondent channel. You could see that through Wells Fargo, but there's been a number of other companies that have deemphasized correspondent lending, as a way to acquire the customer. And we do not think that these rules will change that. A lot of it is what David is saying is that the secular trend of nonbanks, that's going to stay in place. They've invested in terms of technology resources, but also the profitability of the mortgage origination market as well is currently challenging. If you look at 2025, the net profit margin for independent mortgage bankers was 21 basis points. So that is historically a low number. So it's not really a conducive environment for banks to come back into the mortgage origination market with a large presence. Crispin Love: Okay. That makes a ton of sense. And then just a second question for me on capital allocation across the businesses. You did lean into Resi Credit and MSRs. Can you just remind us what your long-term goals are for allocation? I believe it was 50% Agency, 30% Resi Credit, 20% MSRs. First, does that still stand? Is that a place that you'd like to get to and just be able to dial up or dial down specific areas? David Finkelstein: Yes, that is correct, and you did identify those metrics accurately. And it is a long-term objective of ours. But as I've always said, we've always said we're very patient about getting there. And this past quarter is an example of our ability to pivot. In January, Agency MBS were very difficult to buy given the valuations and the ability of the other businesses to pick up the slack and add assets, I think, is a testament to the flexibility of the model, but long term, 50%, 30%, 20% is still the target. Operator: Next question comes from Bose George with KBW. Bose George: Actually, can we get an update on your book value quarter-to-date? David Finkelstein: Sure, Bose. As of Friday, we were up 4% in economic terms. Bose George: And that's 4% net of the accrued dividend? David Finkelstein: Inclusive, inclusive of the dividend accrued. Bose George: Okay. Okay. Great. And then on the -- going back to the Basel III question. I mean the MSR risk weighting has remained at 250%. Do you expect that to go down after the comment period? And if so, think that gets the banks a little more active on the MSR side? David Finkelstein: Well, the banks are already active on the MSR side. So we see them as we're bidding for MSR. And look, it's under common, the 250% risk weight, I would expect that the banks are going to be very active at lobbying around that 250% risk weight. And whether they'll be successful or not, we don't know, but they'll certainly be proactive about commenting on it. Operator: The next question comes from Marissa Lobo with UBS. Ameeta Lobo Nelson: On the increased capital allocation to non-agencies in Q1, the presentation states returns of about 12% to 15%. Can you expand on how that looks among the various non-agency subsectors you're active in? David Finkelstein: Sure. Mike, do you want to take it? Michael Fania: Sure, Marissa. So the net increase in the portfolio was $2.3 billion. I would say it's broken down within 3 components. One is third-party securities. So the portfolio was $2.1 billion at the end of the quarter. That was up $435 million. So within third-party securities, we bought $395 million of CRE CLOs. These are AAA assets, points of enhancement or like a 2-year spread duration, they're uncapped floaters, 7 turns of leverage, that gets you kind of to 12%. We also bought BB non-QM bonds. So these are the [indiscernible] ones. We bought those in the kind of the range of 3.35 to 3.40 over. I would say that those are in kind of the 12% to 13% levered ROEs. And then we also bought $55 million of NPL, RPL A2s. So these are unrated securities. We're buying the subordinate bond 15 to 20 points of enhancement and they're in the kind of like the 3.50. So there's kind of the 12% to 13% as well. So the lower end of that 12% to 15%, that is the identification of these third-party securities. The other 2 components of the portfolio is OBX. That was $3.5 billion. That is where you're getting those mid-teens returns. Whole loans were up $1.65 billion on the quarter. I will say when they're sitting on warehouse lines, you're earning kind of in that 11% to 12% range. but that when they're ultimately manufactured into OBX securities, you're earning that 15% on 1 turn of leverage. So that is kind of the breakdown over the quarter. Ameeta Lobo Nelson: I appreciate that detailed answer, Mike. And referencing recent reports from the rating agencies on non-QM delinquencies, particularly newer vintage collateral. And with the rising pressure you referenced on the consumer from inflation? And how is that impacting investor appetite down in credit. Has it impacted your credit enhancement and pricing in your deals in any meaningful way? Michael Fania: Yes. So I would say that what we are experiencing and what we are seeing is that the 2024 and the 2025 vintages up the seasoning curve of the credit card are showing lower delinquencies than what was experienced in 2023. And in 2025 is outperforming 2024. When you look at our portfolio, our serious delinquencies are D90 plus. It's 140 basis points. That has been pretty much in the range over the last year, call it, in the 130 to 145 basis points. So our performance has been very, very consistent. In terms of the deals themselves, what we're seeing broadly is when non-QM gets up the seasoning ramp, 2023 vintage, if you include other third-party non-QM shelves, you're maybe in that kind of 5% to 6% range as a percentage of current. What you are not seeing, however, is realized losses. Realized losses, cumulative losses within non-QM are still a handful of basis points across various vintages. So I would say we have not really had seen any impact from the investor side. I think we're very comfortable with the structures of the deals, the credit enhancement, the performance and ultimately, the fact that these borrowers have equity and they're not realizing losses on those delinquencies and then in terms of the rating agencies, I would say that they have been constructive. They initially were we thought very conservative evaluating these transactions. And CEs, I would say, have actually probably have declined a little bit given the actual performance that we've seen over the last number of years. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: Look, you guys were aggressive in the first quarter, raising capital through the ATM. Stock continues to trade at a premium to book. I am curious in this environment with spreads tightening again how aggressive you might be at these levels and also given deployment into what I would describe as less liquid, more bespoke instruments, whether it's MSR or CRT, is the strategy to raise capital and then deploy it into the core agency book? And then as you see opportunities rotated into the other asset classes, how should we think about deployment and your ability, I guess, how aggressive you will be in raising capital and how you will mitigate the drag as you redeploy capital? David Finkelstein: Sure. Good question, Rick. So just to be clear, in the first quarter, the capital raise was specifically related to Resi Credit and MSR in real time. So in January, Agency obviously got quite tight, as I mentioned. However, we were seeing a lot of supply coming in both MSR and the loan pipeline was picking up. So we felt it was highly productive to raise capital, and we did so. We added nearly $400 million in market value in MSR and obviously, couple of billion in Resi Credit. And so that was the purpose. We weren't just raising capital, putting it in Agency and then redeploying it. It was specifically earmarked. On a go-forward basis, Agency looks better than it did obviously, in January after the GSE announcement. And when we look at that sector, the technicals are as supportive as they've been, as I mentioned in the prepared remarks, since QE. And so while spreads are not as cheap as they were in 2025, it's a very investable sector because we feel like it's safer given the breadth of demand across virtually all market participants. So we wouldn't hesitate to methodically raise capital and invest in Agency. But we don't feel like our footprint is going to be that heavy. We don't need to be that aggressive. It's got to work for us. And obviously, it was accretive last quarter and it still looks to be that way, but we're going to be delicate and we want to be very thoughtful about how we allocate it. And again, Q1 was not about just storing it in Agency and then redeploying it. We have done that from time to time. As I've mentioned, when Agency was cheaper but really, it's a very thoughtful process. We weren't in the market that frequently. In March, when the volatility certainly weren't actively in the market. It had to be right. The stock had to be liquid and with a strong bid associated with it and we didn't have a heavy footprint at all, and we'll maintain that approach. Richard Shane: I'm a little -- our team is a little short handed at the moment, and I'm bouncing around between calls. So the clarification on how opportunistic that issuance in Q1 was really helpful. Operator: The next question comes from Harsh Hemnani with Green Street. Harsh Hemnani: So there were a few securitizations this quarter that included Agency eligible loans. Could you maybe talk a little bit about the dynamic that's incentivizing originators to sell their loans to -- in the non-agency channel over the agencies? And then how you expect that to trend over the coming quarters? Michael Fania: Sure. Thanks, Harsh. This is Mike. So I would say that the Agency eligible investor loans and Agency-eligible second homes has been a continuing sector within the Residential Credit market over the last number of years when the FHFA and the GSEs made changes to their LLPAs. At the higher LTV levels, it is very onerous to deliver those products to the GSEs. So dependent upon where market execution is, a lot of these underlying originators would rather retain those loans, put them on gestation facilities for a period of time and deliver to nonagency aggregators like ourselves relative to delivering to correspondents or the cash window. So there's enough pay up for them to hold that loan, perform due diligence, pay incremental warehouse costs relative to just delivering it to another correspondent or cash window within a handful of days. So that's something that has existed within this market for a number of years, given those LLPAs. A new development, what the market is seeing is that Agency owner-occupied collateral, which does not have the so-called onerous LLPAs. You have seen more and more originators securitize that. So at this point, I think that there's been 3 originators that have come to the market. I think they all have differing objectives in terms of coming to the market. One of them, which is fairly large, I think that they've been very clear that the actual execution of owner-occupied in the PLS market versus the Agency market is breakeven, but they're utilizing it to create credit investments. We did a deal this quarter with the company. It was a partnership transaction. We didn't actually take principal risk, but we are charging for the use of our shelf. We take down [indiscernible] bonds. I think their incentive was they wanted additional capital markets distributions away from the GSE. So we've seen a handful of originators go down the route of owner occupied. At this point, though, we don't think that it's actually that profitable relative to the agency execution. It's more just broadening these originators capital markets distribution, so to speak. Operator: The next question comes from Merrill Ross with Compass Point Research and Trading. Unknown Analyst: You mentioned that there were slight changes in your hedging portfolio despite the shift in your equity allocation. And I'm wondering if the lower periodic income reduces your appetite for hedging with swaps over treasury futures and just how you expect to roll forward your hedge is in the second quarter? David Finkelstein: Sure, Merrill. So I'll just take a big picture approach to your question and talk about swap versus treasuries. Now we've had a couple of changes to the market in the past number of months beginning last fall and the first one being that the Fed ended QT and started reserve management purchases. And that to us, signaled that the Fed is going to stand behind balance sheet in the market. And the difference between swaps and treasuries in terms of the risk is treasuries have balance sheet risk, swaps don't. And so when you add potential for balance sheet on the part of the Fed, it makes swaps a safer hedge. And in addition to that, the second item is we got clarity on bank capital rules, which should free up a little bit of balance sheet. So from that standpoint, our disposition towards hedging with swaps is a little bit more optimistic. Now having said that, the correlation between mortgages and swaps is not as good as the correlation between mortgages and treasuries or hasn't historically been as good. It's a tighter fit to hedge with treasury. So it makes sense to maintain treasuries as a hedge even though the carry isn't as good. However, if you look at some of the evolution over the very recent past, REITs growing and they're hedging the GSEs hedged with swaps, a lot of bank purchases of CMO floaters, which are SOFR based. And so the market is evolving more towards benchmarking mortgages to swaps and as a consequence, you should get better correlations on a go-forward basis. So between both of those developments, I think we're a little bit more comfortable hedging with swaps, and you might see a slight increase in our usage of swaps. However, when you get shock environments like we saw in March and the selloff, treasuries tend to underperform swaps and they end up being a better hedge. So you want to have some element of your hedge portfolio in treasuries to kind of cushion those eventualities. But generally, we're pretty comfortable with around 2/3 hedge ratio between swaps and treasuries. You could see it go up because of the better or the increasingly better fit between mortgages and swaps.. Operator: The next question comes from Jason Weaver with Jones Trading. Jason Weaver: I was hoping to perhaps that maybe you could disaggregate the 190 basis points book value decline by what was driven by HD spread widening versus marks on the Resi Credit and MSR book and if that's materially reversed in April? David Finkelstein: Yes. So I'd say resi performed the best, followed by MSR and Agency obviously lagged. So Agency spreads as well as costs associated with dynamically hedging. We had a 50 basis point variation in 10-year swaps, and that can tend to cost a little bit. And so some of the book value deterioration was as a consequence of just managing the portfolio and hedging. But generally, Agency lagged the other 2 on a little bit of spread widening, maybe had a very slightly negative return and resi did the best, call it, low to mid-single digits and MSR low single digits in terms of economic return. Jason Weaver: Got it. That's helpful. And then given the geopolitical volatility that's been going on since March, has that shifted your outlook for the runway for the Onslow Bay business? Or have you changed your retention target with that strategy? David Finkelstein: You said Onslow Bay specifically? Jason Weaver: Correct. Michael Fania: Jason, this is Mike. I would say if anything, Q1 has actually given us more comfort in terms of ramping up -- residential whole loans ramping up the correspondent business. Similar to what we experienced during Liberation Day and the subsequent fall out there, there's been significant resiliency within the non-agency market. When we look at Q1, David mentioned in his script, over 60% growth year-over-year in Q1. And that is despite spreads at the top part of the capital stack experiencing a 50 basis point -- 50 basis point range. So the market was fully functioning. We obviously priced 8 deals, settled 8 deals, $4.7 billion. We priced 12 deals to date. And right as we sit here today, the cost of funds on a AAA security is probably in the 1.20 range all-in SOFR cost or SOFT plus 1.50 and you're in the low 5% cost of funds. So the market has shown increasing growth, sponsorship and liquidity and I would say we're comforted by despite this volatility, the market continued to operate at a high level. Jason Weaver: Congrats on the quarter. Operator: Next question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: With mortgage rates increasing a decent amount over the last several weeks, can you give us an update on your thinking as to the probability of further efforts from the government to potentially lower mortgage rates and what form do you think that could potentially come in? David Finkelstein: Sure. So look, the affordability issues kind of moved a little bit to the sidelines in light of the conflict in Iran, and just to summarize what's been done thus far. Obviously, the GSE announcement was meaningful for the mortgage basis. But there's been a couple of executive orders, which have been primarily focused on regulation, both building as well as mortgage lending. And those are just around the edges. The ROAD Act is stuck in the house and that has, again, some positive impact for affordability as pilot programs, convert vacant buildings into attainable housing, spur construction through regulatory relief as well. Grants for manufactured housing, et cetera. And also the other efforts within the government to just generally make housing more affordable. But these are not having an impact insofar as at the end of the day, mortgage rates are higher, folks are locked in and home prices are high. And ultimately, we need lower rates to be able to help that. We'll see what else the government can do. But one thing I can tell you that might be a little novel idea, if you want to get mortgage rates lower, is to take a bipartisan approach and focus on reducing spending and raising revenues and get overall level of interest rates down, if you can deal with deficits. And until you really deal with the bigger structural problems in the economy, it's going to be hard to get mortgage rates lower. So -- that's the short of it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks. David Finkelstein: Thank you, operator, and thanks, everybody, for joining today, and we'll talk to you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Community Health Systems First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anton Hie Hi, Vice President of Investor Relations. Please go ahead. Anton Hie: Thank you, Bailey. Good morning, everyone, and thank you, and welcome to Community Health Systems' First Quarter 2026 Conference Call. Joining me on today's call are Kevin Hammons, Chief Executive Officer; and Jason Johnson, Executive Vice President and Chief Financial Officer. Before we begin, I'll remind everyone that this conference call may contain certain forward-looking statements including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation on our website. All calculations we discuss today will exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses and expense from business transformation costs. With that said, I will turn the call over to Kevin Hammons, Chief Executive Officer. Kevin Hammons: Thank you, Anton. Good morning, everyone, and thank you for joining our first quarter 2026 conference call and for your continued interest in CHS. Before we begin, I want to acknowledge our employees, physicians and all of our teammates who have embraced our vision to make the health care experience exceptional for our patients, our communities and each other. As people across our organization share in this commitment, I am confident we will see the benefits of making that health care experience exceptional. And as we do, more patients will choose our health systems and will create an even stronger company. Earlier this week, we announced some significant investments in ambulatory surgery centers in our core markets including the pending acquisition of a majority ownership interest in the Surgical Institute of Alabama, our largest acquisition since 2016. This surgery center performs more than 8,000 cases annually, and is the largest multi-specialty surgery center in Alabama. We expect to close this transaction during the second quarter. During the first quarter, we also purchased a majority interest in South Anchorage Surgery Center in Alaska and opened 2 de novo ASCs in Birmingham and Foley, Alabama. These targeted investments extend CHS' ability to provide outpatient surgical care in the most advantageous way for our patients while delivering excellent outcomes, optimizing the surgical experience for our physician partners and driving future growth for our health systems. Turning to our operating performance for the first quarter of 2026, adjusted EBITDA was on the low end of our internal expectations, declining 17.8% from the prior year period, reflecting our strategic transactions to reduce our debt, macroeconomic disruptions across the country, as well as the investment CHS is making in our future. The quarter's results include an approximate $50 million year-over-year EBITDA drag from recently completed divestitures that went from being positive contributors in the prior year period to negative in the first quarter of 2026. Closing these divestitures will remove the negative EBITDA drag from future quarters. Additionally, while we benefited from some out-of-period revenue related to the Georgia State Directed Payment Program, this tailwind was partially offset by out-of-period provider tax increases related to the Indiana program. Same-store net revenue increased 3.1% year-over-year, driven by 3.7% growth in net revenue per adjusted admission, partly offset by a 0.5% decline in same-store adjusted admissions. We believe volume and payer mix challenges in the first quarter reflect a temporary disruption in demand for health care services in our markets. Largely driven by consumer fears related to geopolitical instability and increased cost of living as well as ongoing aggressive practices used by the managed care companies that drive inefficiency, unnecessarily delayed payment and interfere with the delivery of medical care. I'd like to spend just a minute on our top priorities this year as we work to enhance quality, patient experience, physician experience and employee satisfaction. We are realizing operational improvements at an accelerating pace, and our ability to advance in each of these areas will also ultimately drive enhanced financial performance and long-term value creation for our organization and shareholders. For example, in the area of quality, when the spring 2026 leapfrog safety grades are released next month, we expect as many as 80% of CHS' hospitals to receive a Leapfrog A or B grade, up significantly from just 48% this time a year ago. We also expect 56% of our hospitals to receive a CMS rating of 3 or more stars when those metrics are published next month, up from 45% in the 2025 ratings. These achievements demonstrate our commitment to continuous improvement and our ability to drive stronger performance in this area. We are hyper-focused on improving the experiences of the people working in our organization. especially our physicians and employees. And we have numerous initiatives underway to increase patient satisfaction as well. On the physician experience front, we are currently deploying an ambient listening technology in our clinics and hospitals which will help reduce administrative burdens and optimize the time physicians and other providers spend face-to-face with their patients. Investment CHS has made to expand service lines, add new access points, recruit positions to our markets and improve our quality and experience have us better positioned and prepared to accommodate demand as soon as it returns to normal levels. Before I pass the call over to Jason, I'd also like to discuss the policy backdrop. Similar to our hospital peers and others in the health care industry, we continue to monitor developments related to Medicaid supplemental payment programs in the Rural Health Transformation Fund as well as ACA enhanced premium tax credit expiration and Medicaid work requirements and redeterminations among other changes. It is still very early to gauge the impact of these external factors, while there are a lot of moving pieces, unknown variables and potential consequences. Given CHS' historical and current presence in many rural and underserved markets, we remain actively engaged with policymakers across each of our states to help ensure that programs under the rural health fund are directed towards hospitals and other providers delivering care in these communities, which we believe was the original intent of the fund. We've set up a formal structure with dedicated internal and external resources working to evaluate each state's various programs as details emerge and to apply for any and all funding available to us in order to ensure continued access to quality care in our rural communities. At this point, I will turn the call over to our Chief Financial Officer, Jason Johnson, to review financial results and other information in greater detail. Jason? Jason Johnson: Thank you, Kevin, and good morning, everyone. For the first quarter, CHS delivered financial results toward the low end of expectations. The company continued to execute well on the controllable aspects of our business, demonstrate significant progress on our top priorities and further deleverage the balance sheet. However, volumes and payer mix were below expectations, including noteworthy softness in elective procedures such as hips and knees, which along with negative contribution from recently divested operations led to margin compression. Adjusted EBITDA for the first quarter was $309 million with margin of 10.4%. Recently divested hospitals produced approximately $25 million of negative adjusted EBITDA in the first quarter compared to positive $25 million in the prior year period. A portion of the negative results from the hospitals divested in the first quarter was attributable to impact from winter storm firm. Results included approximately $25 million in contribution from Georgia state directed payment program that was approved in mid-March, approximately 2/3 of which related to prior periods since the program was retroactive to July 1, 2025. As Kevin previously noted, half of this out-of-period benefit was offset by higher operating expense related to out-of-period Indiana provider taxes. Same-store net revenue for the first quarter increased 3.1% year-over-year, again, driven primarily by rate growth as net revenue per adjusted admission was up 3.7% year-over-year, including the benefit from new state-directed payment programs, partly offset by unfavorable payer mix shift. Same-store inpatient admissions declined 1.3% and adjusted admissions were down 0.5% year-over-year. Same-store surgeries declined 2.2% and ED visits were down 2.8%. Labor cost was well managed overall with approximately 2% year-over-year growth in average hourly rate and same-store contract labor spend down 11% from the prior year period. However, salaries and benefits expressed as a percentage of revenue increased 50 basis points year-over-year on a same-store basis due partly to increased physician employment consistent with the investments Kevin highlighted as well as continued in-sourcing, which we believe position the company well to capture share of patients in our markets return to the health care system. Supplies expense remained well controlled, declining 60 basis points year-over-year to 14.9% of net revenue, which largely reflected the decline in surgical volumes along with better procurement and inventory management under our ERP. Medical specialist fees were up approximately 11% year-over-year on a same-store basis. Slightly ahead of our forecast for 5% to 8% growth, but were generally consistent as a percentage of net revenue at 5.5%. Cash flows from operations were a use of $297 million for the first quarter versus positive $120 million in the prior year period. Approximately 1/4 of the year-over-year decline was due to core operating performance, but the remainder primarily attributed to timing of certain items such as Medicaid supplemental payments and provider tax payments that should reverse in future quarters. We also experienced a large buildup of AR related to Medicare Advantage accounts due to delayed payments, which we expect to collect throughout the remainder of the year. As expected, during the quarter, we completed the Clarksville, Tennessee, Pennsylvania and Huntsville, Alabama divestitures, generating more than $1.1 billion in gross proceeds and in early February, used a portion of the proceeds to redeem $223 million of the 2032 notes at 103 via a special call provision. As Kevin previously noted, the company's leverage was down slightly at quarter end to 6.5x versus 6.6x at year-end 2025 and down from 7.4x at year-end 2024. Our next significant maturity is in 2029, and at quarter end, we had no amounts drawn on our ABL. In early March, we announced a definitive agreement to divest four hospitals in Arkansas to Freeman Health Systems for $112 million in cash and the assumption by the buyer of certain real estate leases. The transaction is expected to close in the second quarter of 2026, further enhancing liquidity to continue to reduce net debt and leverage or to fund growth investments. Following the completion of the Arkansas divestiture, our net debt will be approximately $9.3 billion, down from $10.1 billion at year-end 2025 and $11.4 billion at year-end 2024. As Kevin previously noted, earlier this week, we announced several ASC investments in Alabama and Arkansas that are either pending or recently completed with a combined price tag of approximately $85 million. We will continue to evaluate opportunities for growth investments across each of our core markets. Our financial guidance for 2026 remains unchanged. While new developments have emerged relative to the outlook that we provided in February, including the approval of Georgia's State direct repayment program, the pending divestiture of our Arkansas operations and the ASC investment, we believe these are captured within the initial range for adjusted EBITDA of $1.34 billion to $1.49 billion. There are multiple items on the horizon that could affect guidance in the future, most notably the potential approval of new or enhanced state direct repayment programs and potential tailwinds from the rural health transformation program. We don't have sufficient data to adjust the outlook at this early stage in the year. This concludes our prepared remarks. So at this time, we'll turn the call back over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Brian Tanquilut from Jefferies. Meghan Holtz: This is Meghan Holtz on for Brian Tanquilut. I guess it would be helpful if we could start on the payer mix and volume pressures that you saw in the quarter. Is it due to the macro environment? Or are you seeing particular pressures in your markets, particularly as you start to see some green shoots in Q4 around your commercial book? And then how should we be just thinking about volume for the full year as you had been originally guiding to 1.5% to 2.5% of that 5% revenue growth? Should we still be thinking about that as comps get easier in the second half and you guys hopefully recover some volume. Kevin Hammons: Sure, I'll start off and then Jason, feel free to jump in. The volume pressures really saw were across the board. I wouldn't call out any specific markets that were worse than others. So we really do believe that it was a broad pressure on volume. It was also concentrated more so in individuals with commercial and health exchange coverage. So that leads us to believe a couple of things. One, it's macroeconomic issues because those are the individuals with high deductibles and the more aggressive behavior by the managed care companies is we understand, at least anecdotally, that there's kind of been -- they've turned the dial up on denying preauthorizations in more cases. So oftentimes, those patients are not even getting to us because of that. Jason Johnson: Yes. Maybe I would just add as it relates to our guidance, we're assuming low single-digit volume growth for the year. So we're at negative 0.5% adjusted admission for the first quarter. We do think that, that should recover. And I think payer mix was the other piece that came in less than our expectations for the full year. And similar, we think that comes back as the economy continues to improve. Meghan Holtz: Okay. And then as a quick follow-up, operating cash flow looked a little weak in the quarter. We assume it's working capital timing-related headwinds that you'll ultimately recapture. But can you just kind of give us the moving pieces on what was going on in the operating cash flow line in the quarter? Jason Johnson: Sure. I'll take that one. This is Jason. Yes, there are several items that are timing related that we expect to flip through the rest of the year. I'll name a few here. There's about $90 million of Medicaid supplemental payments and provider tax payments timing. In other words, we -- timing difference between when we either recognize the revenue or the expense of the provider taxes versus when we receive those payments or make the tax payments. $50 million to $60 million, I mentioned I referenced this in my comments, that there was a buildup of managed care -- Medicare Advantage accounts, and that's about $50 million to $60 million, which we do expect to collect at the rest of the remainder of the year. We make our bonus payments annually in the first quarter every year, that's about $50 million. So that will continue to flip back the other way as the accrual for this year builds up. There's $25 million to $50 million of AP timing that occurs and usually does kind of happen at year-end versus the first quarter. And then there's -- the final thing I'll mention is about a $15 million initial interest payment on the 2034 notes that were deferred from September 2025 and made this quarter. Those notes were issued in August of last year. And rather than make the initial payment a month or so later, it was deferred until the first quarter. Operator: Our next question comes from Ben Hendrix with RBC. Benjamin Hendrix: Great. I appreciate that it's early in the quarter, but just wanted to talk about kind of the HIX exchange headwind from the ETC expiry that we -- that you are assuming in your guidance. I think in the bridge that we have here, we had about $110 million of revenue, about $25 million of EBITDA assumed. I just wanted to see kind of based on some of the reports that have come out intra-quarter and your experience, just if there's any kind of change to that progression and if you're seeing any kind of regional variation. Jason Johnson: Yes. So we haven't made any changes to our assumptions yet. I don't -- we're still really don't have a lot more data than we had in February. I do know that our hits revenue and adjusted admissions remained between 4% and 5%, both the first quarter of this year and last year. Our revenue actually went up, but we did see about a 3.9% drop in adjusted admissions amongst the exchange plan patients. But that's, I think, similar to what we see with a lot of plans that have the high deductibles at the beginning of the year that we think are staying out of the system. Certainly, there's some portion of those people that may have lost dropped the coverage or moved to another plan or self-pay, we don't really have any new information yet. I think that's still going to be second or third quarter before we get a better feel for that. Benjamin Hendrix: And then just on the core growth that you're anticipating, obviously coming a little bit softer than expected in the first quarter, but -- but how do we think about that phasing through the rest of the year? And I know that you've kind of mentioned some consumer confidence and how do you see that developing as we get closer to the end of the year? Kevin Hammons: Sure. I think we indicated even at the fourth quarter earnings release, we expected this year to be more heavily weighted in the back half. We had anticipated starting off the year a little softer given the consumer confidence coming out of December was muted and low. And then kind of throughout the first quarter, we saw a jobs report come out that was much worse than expected. And then the conflict in the Middle East that transpired in March and the rise of price of oil and gas and price of the pump and so forth. We do believe that we'll see some economic recovery in the back half of the year. Second quarter will be a little bit of an easier comp for us as well. And we think that with the work that we're doing on improving, as I mentioned, improving quality, improving our patient experience as that gets more traction we'll really be positioned well that with this deferred business as people ultimately will come back and have these procedures done, we believe we'll be positioned well to capture that business and maybe uniquely positioned to capture that business in our markets, and that should serve us well. But that is likely not to happen until the back half of the year. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: Maybe first on these acquisitions, the Surgical Institute of Alabama and the Alaska one. I know traditionally, I've tended to think of you guys as doing when it's something like an ASC within your existing markets. I'm not sure whether you describe these as being adjacent to existing hospitals? Or are you pivoting to now maybe looking more at freestanding ASCs as an investment opportunity? And should we think that there'll be some capital devoted to that -- incremental capital devoted to that going forward? Kevin Hammons: Thanks, A.J. Great question. These acquisitions, we would still characterize as being part of our networks of care, extending the care area that we're treating patients from those hospitals but still connected within our markets and just an extension of those networks. So not going into what I would call new markets with just an ASC strategy. Albert Rice: Okay. All right. And just maybe some -- any update on what you're seeing with labor, hourly wages, contract labor and then professional fees as well? Jason Johnson: Yes. The average hourly rate increase was 2.3% during the first quarter versus the prior year. We did make an investment in physicians. We have 30 net physicians added in the first quarter. That's probably about $5 million of salaries, wage and benefits. And we in-sourced anesthesia program in November of 2025, and that's about $2 million, $2.5 million of additional expenses this quarter. Contract labor came down 11%. I think we're continuing to see a return to rate and usage that are more consistent with prior to the pandemic. Kevin Hammons: And maybe if I could just add a little more color. I think Jason absolutely got that right. But as I think about Jason's comments that we added some additional positions during the quarter, part of what we experienced and as we're being intentional about working on physician experience, our physician turnover decreased during the quarter. We were able to continue to hire new positions that the previous pace we have been hiring at, which has allowed us to add net new physicians. That positions -- it's another area that positions us well. It comes at a little bit of a cost right now without the volume, but -- and adding new physicians to the labor cost, but that will position us well in the future that as this business comes back, we'll have more capacity to take on additional patients with the additional physicians. So again, we look at that as a net positive for us, even though it's coming in a little bit of an extra cost this quarter. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Unknown Analyst: This is [ Mitchell ] on for Steve. Can you give us a sense of the financial profile of the four Arkansas hospitals you announced are going to be divested as well as the large ASC investment. Just trying to better understand how that fits into the guidance. Jason Johnson: Yes, Stephen, thanks for the question. The $112 million proceeds, Arkansas, that's about, I think, a 10 to 12 multiple. And that was not reflected in our initial guidance in February. So that will come out for about half a year. But the ASC investments, which are going to -- are largely going to offset that, they're just about a wash. So no effect on our guidance between netting those... Operator: Our next question comes from Andrew Mok with Barclays. Thomas Walsh: This is Thomas Walsh on for Andrew. Can you help us better understand the uncompensated care and self-pay mix shifts in the quarter as ACA exchange disenrollment picked up? What's the most direct driver of higher uncompensated care higher uninsurance or worsening collections from the insured population? Jason Johnson: Yes. Over time, the collections experience does continue to drive a natural trend that we see. I don't think there was anything outsized this quarter. There was an increase in self-pay volumes this quarter. So relative to the overall net revenue, it increased as a percentage of total. I don't know that there's any one thing that we can point to, except for I don't know, part of this could be the behavior of those folks don't have insurance if they continue to come into the health systems regardless of what's happening in the broader macro environment. Kevin Hammons: I do think it's a fair point, and we've taken into consideration the additional risk of collectibility of co-pays and deductibles in that amount and have adjusted accordingly. Thomas Walsh: Great. And following up, there are a number of moving parts inside the pricing 3.7% in the quarter. Could you help us understand the contribution of normal course rate increases, incremental state directed payments and then the payer mix or acuity headwinds? Jason Johnson: Yes. The normal rate increases are, I think, consistent with our guide around 3% of the impact. And then the Medicaid supplemental payments, Georgia, which I mentioned was approved this quarter. That was about $30 million of revenue, $25 million of EBITDA. That's 9 months worth or 3 quarters. So that's worth about $10 million a quarter on revenue and $8 million or $9 million on EBITDA. And then the rest of the decline was volume and payer mix -- or I'm sorry, that netted against those benefits, probably evenly between slight drop in acuity as well, but it's more about payer mix and volume offsetting those total rate increases. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Hammons, Chief Executive Officer, for any closing remarks. Kevin Hammons: Thank you, everyone, for joining the call today. If you have any additional questions, you can always reach us at (615) 465-7000. Have a good day, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to Teledyne's First Quarter Earnings Call. I would now like to introduce our first speaker, Mr. Jason VanWees. Jason, please go ahead. Jason VanWees: Thank you. Good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First Quarter 2026 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, George Bobb; EVP and CFO, Steve Blackwood, and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, George and Steve, we'll ask for your questions. But of course, before we get started, all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release under periodic SEC filings, and of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay via webcast and dial-in, will be available for approximately 1 month. Here is Robert. Robert Mehrabian: Thank you, Jason, and good morning, everyone, and welcome to our conference call. We started 2026 with record first quarter sales, earnings per share and operating margin. Specifically, sales and non-GAAP earnings increased 7.6% and 17.2%, respectively. In addition, despite a 30 basis point increase in R&D expense, non-GAAP operating margin increased 58 basis points year-over-year. And while we acquired DD-Scientific in January and increased our capital expenditures significantly from last year, our leverage ratio declined to the lowest level in 5 years since before the acquisition of FLIR in 2001. Excluding the impact of acquisitions, sales increased 5.3% due in part to the performance of our Digital Imaging segment, while organic growth was 6.9%. Sales of visible light sensors, infrared detectors and specialty semiconductors for space applications, each increased at double-digit rates as did FLIR infrared cameras for unmanned air vehicles as well as our own complete unmanned aerial systems. Also within the Digital Imaging segment, our industrial imaging and x-ray businesses is returned to year-over-year growth, which helped contribute to the strong margin performance in the first quarter. Given stronger sales in the first quarter, but also record orders and backlog with a book-to-bill of 1.16, which is our tenth consecutive quarter of book-to-bill of over 1, we're comfortable in increasing both our expected sales and earnings for 2026. We believe now sales will be in the range of $6.415 billion or 70 basis points higher than we communicated in January. We're also raising our earnings outlook at both the bottom and top of our prior range. to about $24 at midpoint or $0.35 overall in increase. George will now briefly comment on the performance of our 4 business segments. George? George Bobb: Thank you, Robert. In the Digital Imaging segment, first quarter sales increased 7.9% due to well balanced growth throughout the segment, including Teledyne imaging sensors, Delta e2v and Teledyne FLIR. As Robert mentioned, sales of visible and infrared detectors for space-based imaging increased nicely. Sales of infrared subsystems and cameras for our customers' unmanned air systems and unmanned maritime service vehicles also increased. . In addition, revenue from our own complete unmanned air systems increased due to continued growth of the highly differentiated Black Hornet nano drone as well as full rate production deliveries of our Rogue 1 loitering munition. Interest in counter drone activity also remains elevated. And in the first quarter and early Q2, we received orders for infrared cameras and subsystems, totaling in the tens of millions of dollars for counter drone applications. There were also bright spots outside of defense. For example, industrial machine vision cameras and sensors for semiconductor inspection and X-ray products for health care increased year-over-year and sales of micro-electromechanical systems or MEMS, grew over 20%, primarily due to demand for micromirrors used for optical switching and high-speed networking applications. Finally, non-GAAP operating margin in the segment increased 107 basis points to 23.2%, despite a 59 basis point increase in R&D expense within the segment. In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, first quarter sales increased 5.3% versus last year. Overall sales of marine instruments increased 8.3%, primarily due to strong defense-related sales, including unmanned subsea vehicles, which increased more than 20% for applications such as anti-submarine warfare and mine countermeasures as well as sales of interconnects for U.S. Virginia and Columbia class submarines. Interconnects for offshore energy production also continued to grow. However, these were partially offset by reduced sales of marine instruments for hydrography and oceanographic research. Sales of environmental instruments increased 6.7%. This primarily resulted from higher sales for gas safety and ambient air monitoring instrumentation, partially offset by lower sales of laboratory and life sciences instruments. Sales of electronic test and measurement systems decreased 3.7% year-over-year with greater sales of oscilloscopes, offset by lower sales of protocol analyzers. However, we continue to expect full year sales growth as semiconductor suppliers increase their shipments and data centers increasingly adopt devices, utilizing the newest, fastest data transfer protocol. Instrumentation non-GAAP operating margin in the first quarter decreased primarily due to product mix. That is a decline in higher-margin test and measurement, [ first growth ] in autonomous underwater vehicles in marine, which generally carry lower margins. In the Aerospace and Defense Electronics segment, first quarter sales increased 14.4% due to 1 additional month of results from the Qioptiq acquisition and with organic growth of 8.4% across defense electronics, partially offset by slightly lower sales from the commercial aerospace market due to a result of a tough comparison. Non-GAAP segment margin increased nearly 200 basis points year-over-year due to higher sales and corresponding operating leverage, improved margins at companies acquired in 2025 and in this case, a relatively easy comparison. For the Engineered Systems segment, first quarter revenue decreased 2.6%. However, segment operating margin increased 113 basis points. I will now pass the call back to Robert. Robert Mehrabian: Thank you, George. In conclusion, we are excited to begin 2026 with a strong first quarter with continued orders and sales momentum in our backlog-driven businesses, specifically defense where Teledyne has meaningful exposure to low-cost drone, counter drone technologies, space-based sensing, electronic counter measures and maritime surveillance. Furthermore, certain markets such as industrial inspection and health care, which have had headwinds in the past are now inflecting. Finally, with a leverage at a 5-year low, we are actively pursuing a number of acquisitions, but at the same time, we're investing more in R&D and capital expenditures to accelerate our own organic growth. I will now turn the call over to Steve. Stephen Blackwood: Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2026 outlook. In the first quarter, cash flow from operating activities was $234 million compared with $242.6 million in 2025. Free cash flow, that is cash flow from operating activities less capital expenditures was $204.3 million in the first quarter of 2026 compared with $224.6 million in 2025. . Cash flow decreased due to higher inventory purchases, partially offset by greater operating results in the first quarter of 2026 compared with 2025. Capital expenditures were $29.7 million in the first quarter of 2026 compared with $18 million in 2025. Depreciation and amortization expense was $87.2 million in the first quarter of 2026 compared with $80.7 million in 2025. Now turning to our outlook. Management currently believes that GAAP earnings per share in the second quarter of 2026 will be in the range of $4.75 to $4.90 per share with non-GAAP earnings per share in the range of $5.70 to $5.80. And for the full year 2026, we believe that GAAP earnings per share will be in the range of $20.08 to $20.44 and non-GAAP earnings per share in the range of $23.85 to $24.15. I will now pass the call back to Robert. . Robert Mehrabian: Thank you, Steve. Operator, we would like to start the questions. If you're ready to proceed, please go ahead. . Operator: [Operator Instructions] Our first question comes from the line of Greg Konrad with Jefferies. . Greg Konrad: Maybe just to start on the revised revenue guidance of $6.415 billion. Can you maybe just talk about organic versus inorganic? And then if you think about some of the derisking or things that have gotten better since the guidance you gave last quarter, where are you seeing the most outperformance just from a segment basis? Robert Mehrabian: Of course, Greg. First, fundamentally, we're seeing about a 4.9% total growth for the year right now, which is about 70 basis points higher than we had in January. About 4% of [ that solid 4% ] is organic and about 0.9% is from acquisitions, 1 early in 2025 and 1 small one early this year. From a segment perspective, we think the highest growth will probably be in our Digital Imaging and Aerospace and Defense with Aerospace and Defense probably over 6% and Digital Imaging overall about 5% led by really FLIR which we expect will grow about 6.5%. I hope that answers your question. . Greg Konrad: Yes, that's perfect. And you gave a little bit of color on the opening, but just following up on defense. How much was it up overall in the quarter? And then you mentioned FLIR. Can you just maybe give a little bit more color on FLIR defense growth? And then what's kind of driving the outperformance in A&D electronics just given that growth, thinking about that broader portfolio? Robert Mehrabian: Okay. Let me start with FLIR defense I think we're looking at about 9% growth in that area. Pretty much all of our products in the FLIR Defense are growing, specifically drones, nano drones, loitering drones, surveillance systems, you name it. And of course, we do supply both include visible and more importantly, infrared detectors, not only to our own drone manufacturers but also to everyone else across the world that's making drones. From from an A&D perspective, the growth has been again in a variety of our components. As you know, we make everything from lasers to detectors, readouts, semiconductors, switches. All of these are seeing various degrees of growth. And it's -- the business is very healthy, both supplying our own products, but more importantly, supplying products from -- that are required as the various conflicts are increasing both in Europe and the Middle East. Operator: The next question comes from the line of Amit Mehrotra with UBS. Zachary Walljasper: This is a Zach Walljasper on for Amit today. So just 2 questions from me. Can you just help give some color on the order trends between segments? And then the second question for me is just around the full year guide. So high level, the first quarter came in a little above and then raising a little above that. So there's not too much incremental pickup expected, but if you help flesh out the puts and takes for the balance of the year that you're seeing that will be helpful. And then like should the typical earnings seasonality still hold for 2026? Robert Mehrabian: Sure. Let me start with the overall, which I mentioned, the overall book-to-bill right now is 1.16. It is led by digital imaging and specifically, both FLIR as well as DALSA e2v that's where we have probably the highest book-to-bill higher than certainly we talked about in January. Digital Imaging right now is looking like about 1.38 in book-to-bill in instruments, a lot of short-cycle stuff, but it's still holding above 1, just slightly over 1. A&D, which it's a little lumpy because both A&D and Engineered systems are lumpy because we get big orders, then there's a period of quiescence and then we pick up orders. They're just below 1 right now. certainly A&D. But I think what's happened to us is for whatever products that we're able to put out an increased production, there's very strong demand, and that's why we think across our portfolio, we're going to do very well. We would think that we'll have a little more sales in the second half versus the first half. And in January, we were saying the first half would be a little much -- a little lower than we had. So we're kind of guiding our second half maybe at 51% versus first half at 49%. But as in January, we were thinking the first half would be more like 48% than the second half 52% in terms of our revenue. So we remain bullish but also cautious, not to over promise what we can deliver and stay within the framework that we've operated for the last 25 years. Operator: The next question comes from the line of Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: Just wanted to touch on the Q2 guidance. Just that it reflects the point at the midpoint EPS declining sequentially, which is atypical, historically like it's seasonality. I'm wondering where is the biggest pain point. I think my guess is the instrumentation like the test and measurement area being a little weaker than expected in Q1. But wondering, yes, what are the dynamics affecting that Q2 guide? Robert Mehrabian: Let me just put it the big picture is the following. In Q1, we had some good tax benefits year-over-year. Our tax benefits increased because of stock option exercises increased about [ $0.10, $0.11 ] year-over-year. In Q2, where we sit right now, we're not projecting similar tax benefits. Now if our stock were to move up and our people start exercising more options, that would change. But right now, we're not projecting that. So we're taking that part out, we're projecting more like $0.03 rather than having the increase that we have. So primarily, that's it, just to cut through it, everything else I'm comfortable with. Andrew Buscaglia: . Maybe could you comment further then on that instrumentation comment I made earlier, just that was a weak start to the year. What do you think drove that? And how do you see that the cadence of that unleash over the next 9 months? Robert Mehrabian: Well, I'm going to just make 1 short comment and then I want to let George answer that. The different parts through instrumentation, strong marine performance for us, especially under water vehicles. These are vehicles that are used across the world, some of them for mine counter measures, very strong performance, but slightly lower margin than some of our high-margin like test and measurement. I'll let George kind of [indiscernible] a little bit, George? George Bobb: Yes. So I think I will focus on test and measurement, which is where we had the decline in Q1. And there are 2 parts of that business. Really, there's the oscilloscope side of the business, where we saw year-over-year growth and continue to see good demand in high-bandwidth applications power applications, for example, the people who are designing power supplies for data centers and from sales into the in-vehicle networks market. . Protocol sales were down year-over-year, and that was really due to the timing of PCI Express Gen 6 CPUs and GPUs. So we go through on the protocol side, kind of 2 phases. There's a silicon designer phase where we sell silicon designers, and then there's a phase of integration of chips when they come to the market. So what we expect this year is for those chips to come to market in the second half of the year, and we still expect full year growth in the low single digit in test and measurement. So overall, as Robert said, strong performance in marine, strong performance in environmental, test and measurement is a little weaker in Q1, but still expect full year growth in the low single digits. Robert Mehrabian: That's great. George mentioned the various aspects. We still expect instrumentation to grow over 4% for the year. . Operator: And the next question comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti: I know it's probably early yet, but are you seeing signs of potential increases in your defense business just related to the conflict in Iran? Robert Mehrabian: Yes. [indiscernible] first, we are being approached by the government actually, the government is making some investments. We haven't announced it yet, but they're making some investments in getting our capacities increased in certain specific areas, which I can't go into until the releases are approved. Second, we're seeing obviously increased demand for anything that has to do with drones and counter drones. And we're also seeing some demand for underwater vehicles. There are a lot of inquiries right now, some orders, but we expect orders to really start picking up in the next 6 months. James Ricchiuti: Got it. That's helpful, Robert. And just on the M&A pipeline, just given valuation levels, are you still thinking the focus this year is going to be mainly tuck-ins? Or is there the potential for something larger? Robert Mehrabian: I think tuck-ins, first, maybe some midsized acquisitions like we did early in 2025. The larger ones they come not that frequently, and we're looking at some, obviously, but people are willing to pay some outrageous prices to get the revenue, and we'll have to see. But I would say the answer to your question specifically, tuck-ins first; midsized, second; larger, we'll have to wait and see what fits our portfolio. We don't want to go outside our portfolio too much in getting a very large acquisition and then have to do a whole new segment, et cetera. That's not us. So there we are. James Ricchiuti: And mainly in the instrumentation, digital imaging? Or are there still some potential opportunities in A&D? Robert Mehrabian: I would say in all of our segments, probably with the exception of Engineered Systems, where we're not looking at acquisitions because it's a business that's growing and the government is investing in that. So it means almost all of our segments depends on what we get. Operator: The next question comes from the line of Jordan Lyonnais with Bank of America. . Jordan Lyonnais: On the growth that you guys called out for space, can you give us a sense if that is related to Golden Dome? And then two, just for the FY '27 budget request, the $70 billion that they want for drone funding and the [ Dawn ] program. How are you guys thinking about that if that funding gets approved? And for that much funding to come through, can you support those volumes of own systems and as a supplier to everyone? Robert Mehrabian: Yes. Let me start by saying that right now, as Steve mentioned so the George, we're investing in our businesses both from CapEx with increased CapEx, about 35% over last year in the first quarter and expect to keep doing that throughout the year. So we've investing in capacity because we, frankly, our demand is larger than our capacity in certain areas. So we're investing in that. Second, we're also increasing some R&D expenditures. We increased our R&D by $10 million just in the first quarter. That's to us -- to me, that's about $0.14 a share that we added in our investments because we think those are going to be good investments, there's going to be good demand for you. Now having said that, I'll let George talk about Golden Dome. Right now, we're pretty well set on tranche programs, the SDA tranche programs, we've won just about everything with minor exceptions here and there. So I don't expect to get much more than that. But going to the Golden Dome, I'll have George answer that. George Bobb: Sure. So just as a follow-on to that, what I would say is, certainly, on the tranche programs, as Robert mentioned, we've done very well there, and that's what's driven a lot of the growth on the infrared imaging space side of the business. And we think we're very well positioned for Golden Dome as it evolves, given the fact that we've been on all of these [ space development agency ] tranche programs. Robert Mehrabian: We'll see how much budget goes in there in reality, right? Asking for increased budgets is one thing, getting it is another. But eventually, there will obviously be some monies either way, we're ready. But right now, with what we have and what we're seeing in terms of the book-to-bill, we feel we should invest in our own businesses, which is very unusual for us at this point in the year. . Operator: The next question comes from the line of Joe Giordano with TD Cowen. Joseph Giordano: you had previously last quarter talked about your unmanned business, $500 million, growing about 10%. I think the general view is that feels pretty conservative given recent events. Just curious for a bit of an update there. And then if you can maybe talk about the subsea stuff specifically, like where are you positioned on potential like Strait of Hormuz mine sweeping, what types of products would that be for you? Just any sort of color you can give there and how that might materialize over the next couple of quarters here? Robert Mehrabian: Sure. Sure. Okay. Let's start with the unmanned. As you know, we make unmanned systems air, ground and Subsea. I don't know if there are many companies that are able to do all of that, our unmanned air systems is growing very fast. Our Black Hornets, which are the nano drones. Over the last bunch of years, including this year. Just that one drone Black Hornet 3, now Black Hornet 4 will have revenues of about $500 million over that period. We expect -- and we have received already orders for Black Hornet, both in this country and some for Europe. And of course, Middle East conflict is demanding more. Second, we've introduced the our Rogue 1, which is armed drone. We have our first contracts. Those would increase substantially with time. We have other systems coming along the way. And then if we go to subsea, we have different kinds of underwater drones. They're not just any. We have, for example, gliders that can stay on very long periods of time and can go to large distances. And then we also have our [ Gavia ] vehicles, various ranges of it that go to different depths. And those are the ones that are used for detecting mines, and we have some nice orders for that in Europe. Overall, I'd say, I would remain with the $500 million for now for -- but it's -- some of the pockets are growing higher than 10%. So Broadly speaking, I think we're approaching almost $2 billion in revenue between defense, global defense, U.S. defense, drones EW, missiles, munitions, et cetera. That's a big chunk of our revenue for this year. It's about 30% to 35% of the whole company. So when you get a part of your portfolio growing that fast and you're actually investing dollars the way we are, we've always been kind of very cautious with our money that ought to tell you that we're kind of bullish about this area. Operator: Next question comes from the line of Guy Hardwick with Barclays. Guy Drummond Hardwick: I was wondering if you could maybe update us on your margin outlook, particularly in digital imaging, where it seems that you've had a positive mix effect with the industrial scientific cameras picking up? Robert Mehrabian: I think as George mentioned and [indiscernible] mentioned a little bit, for the quarter, our margin went up about 58 basis points. We're projecting that to continue throughout the year. So we think we'll end up the year about 60 basis points above last year, and it will be led by digital imaging at over 100 basis points, 105, 107 basis points, which is something that we've been striving for ever since the acquisition of FLIR. But now FLIR'S doing well and the legacy digital imaging with DALSA e2v is picking up. So the margins overall would grow about 60 basis points, led by Digital Imaging. Aerospace & Defense is not far behind at about 70 basis points. Guy Drummond Hardwick: And just generally talking about your, say, long cycle versus short cycle trends, it sounds like you don't think there's a bump to the order book in the defense side, yes, perhaps in the next 6 months. Does that suggest a pretty good outlook for defense for next year rather than kind of an acceleration this year in terms of revenues? Robert Mehrabian: No, I hope I didn't give the impression that we don't expect acceleration this year. We do because our orders are way up right now in our defense businesses. We expect it to pick up more. I don't mean to be greedy, but we expect it to pick up more in the next 6 months or so because of the use of munitions, the significant use of munitions in the Middle East. Having said that, we are already experiencing very strong defense orders across all of our portfolio from components to systems. Operator: The next question comes from the line of John Godyn with Citi. John Godyn: I wanted to just ask or kick off with a big picture question about M&A and the strategy. A couple of years ago, we saw new issues. IPOs business is being created that really focused on kind of roll-ups and industrial rollups with an aerospace and defense focus. More recently, they've been that plus broader industrials as well. And when you think about the amount of new kind of industrial compounders, industrial roll-ups, companies focused on finding niche highly engineered products, et cetera, it definitely feels a little more crowded today than maybe years ago. You guys started this theme, I mean, decades ago in the history books, you started it, but even just one decade ago, you were ahead of many of the others. I wanted to just sort of take the temperature on the market at large. Are you rubbing up against competitors more? Is it harder to get deals done? Are sellers reshaping the processes in the face of different and maybe more buyers seeking the same opportunities? I just feel like with all the IPO activity, it's worth kind of level setting, recalibrating and taking your temperature. Robert Mehrabian: Yes. I don't know. It's a very kind of difficult question to answer. We've always had competition. Some of the -- let me begin somewhere else. In the last 12 months, 13 months, we've already spent $900 million in acquisitions. In the last 25 years, we've spent $12.8 billion in acquisitions, only $4 billion of it with our stock. So $10.8 billion of it with cash, which we generate. And in the last 12, 13 months, $900 million. So I think our -- and we've made 75 acquisitions in the past 25 years. Yes, it's getting crowded. On the other hand, people that are conglomerates that are putting things together. They also have a tendency to put them together and then take them apart. If you look at various conglomerates, we've been the beneficiary of taking them apart. We've gotten a few businesses from conglomerates that suddenly decide, well, this thing doesn't fit or we want to concentrate. So we have been getting some really nice carve-outs in the recent past. We've always had competition. We always have going forward. That's not what worries me. What worries me is the crazy prices that people have been willing to pay. Fortunately, some of that is switching over to this AI and data center domain and bless them, let them spend their money in that area, and we will stick to the things we know. So I don't really see a lot of competition increases. John Godyn: Okay. That was great color. And if I could just sort of clarify some of the commentary on defense and maybe a little bit on aerospace. But it's very loud and clear that defense demand signals are strong. Bookings are strong. One of the challenges in the past at different times, with Teledyne is that the bookings are strong, but doesn't necessarily translate into the immediate quarters. And there could be some confusion about kind of short versus long cycle exposure. But when we see all these strong demand trends in defense, is that going to translate immediately? Like can you maybe just talk about the short-cycle elements of your portfolio a little bit more? You mentioned munitions. I just want to make sure that we're all kind of hearing that loud and clear, but also translating into the models the right way. Robert Mehrabian: That's a good question. That's a very good question. Let me just say it's mixed. Yes, some of our orders that we get are long 2, 3, 4 years in duration. Some of our orders are yet to come because of the conflicts in the Middle East. And of course, there's European growth in defense, where we're getting some healthy orders. By and large, when we think about part of our portfolio growing 9%, 10% organically, that's very healthy. We haven't had that for a while. On the other hand, I'm not going to be the one standing here and telling people that we're going to grow 20% a year, like I've heard others do. That's not us. It might happen if the munitions that are being used are replaced faster. But the government cycles are tedious even when there's urgent need. So I would balance it to say that we do have the great backlog. We have about $4.6 billion in our backlog right now, and those will translate into revenue. The good thing is that based on what we see, both in the Middle East, but also European defense increases as well as Ukraine conflict as well as what's happening in China and Taiwan, all of these directionally, all of these things favor the portfolio that we've developed both in legacy Teledyne and of course, with Flir acquisition. John Godyn: That's great. If I could slip in just 1 more related question on aerospace. I know your aerospace exposure is very small and your commercial aftermarket exposure is even smaller as a percentage of that. But is there any tea leaf reading there just on the back of what's going on in the Middle East, high oil prices, it's obviously much more topical with the companies that are more kind of aerospace, heavier aerospace pure plays. Robert Mehrabian: I'll let George address that one, please? George Bobb: Yes, you mentioned that it's a relatively smaller part of the business, which it is. It's about 4% of our revenue, give or take. The business actually is split about 1/3 OEM, 2/3 aftermarket. What we've seen in the aftermarket, the aftermarket was healthy in Q1. So I'm not seeing anything in the near term as a result of that conflict. . Operator: The next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: Robert, is it possible to state or quantify what short-cycle industrial revenue growth was in the quarter and what defense revenue growth was in the quarter and then what's in the full year 2026 revenue guidance for each of those? Robert Mehrabian: Right. Let me start with the government, we had a 9% growth in U.S. government. We had in non-U.S. government total, we had another 4% growth. This is organic. Where we grew most also was in international domain. We had a little shrinkage in the U.S. commercial, but we grew significantly internationally. What's happened to us now is our international businesses have become 48% of our portfolio now, 20 years ago, that was less than 15%. So the growth has been international and U.S. government, U.S. government being at 9% and international about 8.5%. I don't know whether I picked up everything you asked. Noah Poponak: And I guess what would -- are you able to quantify what growth was in short-cycle industrial, I guess, as you've defined it, during the downturn you experienced in machine vision, test and measurement, semiconductor. I guess I'm trying to get a sense for how much that recovered in the quarter in the 5% organic total company that you had? Robert Mehrabian: Yes. I think generally, the short cycle grew at about lower single digits, 3% to 4%; defense, high single digits. There's difference between machine vision and semiconductors, they're very healthy. We have good growth there. On the other hand, we have a little shrinkage in test and measurement. So the first quarter, that's where [indiscernible] Noah Poponak: That helps. And I think you've discussed this a little bit, but just the revenue number you're now providing for the full year, I think, would require the organic to slow a bit through the rest of the year. It sounds like defense orders would suggest it can hold or accelerate. Maybe [ 9 ] is just a tough large number starting point. And then it sounds like short-cycle industrial still has room to accelerate? Why would total company organic not accelerate? Robert Mehrabian: Well you got me there. I'm a little conservative. Noah as you know us to be, we expect revenue to keep growing throughout the year. Year-over-year, we had growth in the first quarter. We expect growth in the second quarter in the third and the fourth quarter. So when I look at the rest of the year, in January, we thought the first half of the year would be 48% of the total second half, 52% of the total. We switched that now. We think the second half would be a little less. And the reason for that is, frankly because a little conservatism. And we think we're going to have less benefit in the second half of the year from foreign exchange. We got some nice benefits in the first half of the year. In Q1, we had about 2%. We think that will drop down to maybe 0.6% in Q2 and then we're projecting 0 in the last 2 quarters. Now if that were to flip, so when we look at the year, we're thinking now our foreign exchange is going to be 0.6%, 0.5%. If that shifts, of course, our revenue would increase correspondingly. Some of the conservatism has to do with foreign exchange. Noah Poponak: I understand. Last one for me is just on the instrumentation margin. Maybe you can just maybe just talk about how you see that progressing through the rest of the year. And then I guess that segment had really nice margin expansion in the last 3 or 4 years. Now we have this quarter, what -- how should we think about the right kind of medium term a few years out instrumentation margin? Robert Mehrabian: Let me start by saying, historically, our instrumentation margins have been the healthiest in the company. We think with progression through the year this year, our margins will keep increasing. I think this was our lowest margin quarter and primarily because of test and measurement. We think the margins will go up every quarter, and we should end the year closer to 27.5%. To get there, we're projecting 29% margin in the fourth quarter for that segment. So as George said, our underwater vehicles don't have as great a margin as do our test and measurement. But we're anticipating a comeback in our protocol analyzers. Our oscilloscopes are already doing well. So I think margins will increase as the year goes on. Operator: the next question comes from the line of Rob Jamieson with Vertical Research Partners. Robert Jamieson: Just a couple just on Aerospace and Defense margins. Much better in the quarter than I expected. I was just curious on the better expansion outlook for that quarter or for [indiscernible] segment versus last quarter. Was there anything mix related that we saw in this quarter or that you're expecting through the rest of the year? Or is this more some of the cost efficiencies from the Qioptiq acquisition and integration? Robert Mehrabian: I think I'll let George answer this, but it has to do a lot to do with acquisitions. . George Bobb: Yes, that's right. So I'll answer it maybe a couple of ways. One, on the acquisition side, our playbook is pretty simple. We acquire companies at reasonable valuations and then we work to improve them. And we've really seen over the last year with the Qioptiq acquisition and the [ MicroPact acquisition ], in the Aerospace and Defense Electronics segment, a lot of good work there on margin improvement. Also did benefit a little bit from mix in Q1. We sell, for example, our avionics spares and high reliability semiconductors, things like that, that were somewhat better year-over-year. But fundamentally, I think cost discipline always improving the acquisitions and then, yes, a little bit of benefit from mix. Robert Jamieson: Perfect. And then just quick, can I get an update on just how you're thinking about free cash flow for the full year. And then just with the increase in CapEx investment that you called out as well. How should we think about that kind of in like the 2.5% of sales range for the year? Robert Mehrabian: Let me start with free cash flow. We've been fortunate in the last -- in '24, '25 to generate over $1 billion in free cash flow. We expect that to happen again this year. First half is a little slower than that, but I will pick it up the second half of the year because we're spending more on CapEx this year, we're projecting at about $150 million, which is an increase versus last year. And of course, we're spending a little more on inventory. We're spending a little more on where we have some cautions approach to some of the product or supply chain that comes out of China with the restrictions. So we're investing in some inventory. We're investing in some machining facilities for germanium, et cetera. Having said all of that, [ $115 million ] CapEx, over $1 billion in free cash flow, I hope we'll get to $1.1 billion. Operator: This concludes the question-and-answer session, and I'd like to turn the call back over to management for closing remarks. Robert Mehrabian: Thank you very much. I'll ask Jason to conclude the conference call. . Jason VanWees: Thanks, Robert, and again, thanks to everyone for joining us today. And of course, if you have follow-up questions, please feel free to call me or send me an e-mail. My number is on the earnings release. Thanks all. Bye. . Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to EQT Q1 2026 Quarterly Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Cameron Horwitz, Managing Director, Investor Relations and Strategy. You may begin. Cameron Horwitz: Good morning, and thank you for joining our first quarter 2026 Earnings Results Conference Call. With me today are Toby Rice, President and Chief Executive Officer; and Jeremy Knop, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question-and-answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our website, and we will reference certain slides during today's discussion. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of factors described in yesterday's earnings release, in our investor presentation, the Risk Factors section of our most recent Form 10-K and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward-looking statements. Today's call also contains certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby. Toby Rice: Thanks, Cam, and good morning, everyone. Our historic first quarter results are tangible proof of the differentiated value of EQT's platform. We generated more than $1.8 billion of free cash flow in the first quarter, another record-high for EQT. To put this into perspective, in just 90 days, we generated roughly as much free cash flow as we did during the entirety of 2022, a year when gas prices were over $6. This is a powerful illustration of how we've strategically transformed EQT over the past several years. Our vertical integration through the Equitrans acquisition and our low-cost operating model have fundamentally enhanced the earnings power of this company. That transformation has enabled us to enter this high-price environment largely unhedged, capturing the full upside of market volatility and accelerating our deleveraging plans. With leverage now below 1x net debt to EBITDA and our long-term $5 billion net debt target within reach by year-end, EQT has entered a new chapter, one defined by financial strength, durable free cash flow generation and sustainable growth. Our operational performance remains the bedrock of our financial results. Despite the challenging weather conditions presented by Winter Storm Fern, our teams coordinated seamlessly to achieve production uptime that outperformed our peers by a factor of more than 2x. Given with some minor volume impacts from the storm, production for the quarter came in above the high end of our guidance range. This is a testament to the strong underlying productivity of our asset base, the durability of our infrastructure and the outstanding coordination across our upstream, midstream and marketing teams to ensure our customers had access to reliable energy when they need it at most. Shifting to the macro environment. Recent geopolitical developments once again highlight the strategic importance of U.S. natural gas and energy independence. Recent events in the Middle East have triggered the second global energy shock of this decade. Supply disruptions across the region have pushed global natural gas prices sharply higher. In fact, European natural gas prices nearly doubled following the disruption of Qatari LNG supply and the closure of the Strait of Hormuz. These developments underscore a clear reality. Global energy markets remain highly vulnerable to geopolitical risk. While these challenges are significant, they also reinforce the critical role of American energy and position producers like EQT to help meet the world's growing need for reliable supply. And yet, despite this global volatility, U.S. natural gas prices have remained stable, continuing to provide affordable energy for American consumers. This divergence highlights one of the most important advantages of U.S. natural gas: energy security and affordability. While global markets are experiencing sharp price increases, American citizens and businesses continue to benefit from low-cost domestic supply, thanks to the shale revolution. In fact, in energy equivalent terms, the price of U.S. natural gas today is equal to $16 per barrel of oil, even with record U.S. LNG exports and data center-driven domestic power demand growth. Recent events also reinforced another key takeaway: energy reliability matters. Global buyers are increasingly prioritizing secure and dependable sources of supply, and the United States has emerged as the most reliable LNG supplier in the world. This reliability is becoming increasingly valuable to global customers, and EQT is positioned to benefit from this dynamic. Our LNG contracts position us to be a supplier of choice internationally, providing secure supply to global buyers who increasingly value reliability and energy security, while at the same time providing attractive international market exposure for our investors. In fact, if our LNG portfolio was fully online today, with current TTF and JKM spreads to Henry Hub, our projected 2026 free cash flow would be approximately $6 billion. Positioning the company to materially enhance our free cash flow generation with only 15% of our volumes is a powerful illustration of the value our LNG portfolio could unlock. As global markets continue to prioritize dependable supply, we believe EQT is well positioned to capture demand growth, improve our price realizations and further enhance the durability of our free cash flow generation. This geopolitical landscape reinforces what we've believed for a long time: low-cost, reliable U.S. natural gas is essential for both American consumers and global energy security, and EQT is uniquely positioned at the center of that opportunity. I'll now turn the call over to Jeremy. Jeremy Knop: Thanks, Toby. As Toby mentioned, the company delivered a record first quarter with outperformance across the board. We delivered sales volumes above the high end of guidance into peak winter pricing, while our cash operating expenses and capital costs came in below the low end of guidance due to improved efficiencies. All told, we generated more than $1.8 billion of free cash flow before the effects of $475 million of working capital inflows. As promised, we allocated post-dividend free cash flow to strengthening our balance sheet and retired more than $1.7 billion of senior notes during the quarter. We exited the quarter with net debt of just under $5.7 billion. This accelerated deleveraging has already been recognized by the credit rating agencies, with Fitch upgrading EQT to BBB during the quarter. This milestone further strengthens our brand while mitigating financial risk as we expand our gas sales portfolio. This rapid deleveraging also enhances our capital allocation flexibility. We are well positioned to continue investing in high-return growth projects, build on our track record of base dividend growth, and accumulate cash to aggressively repurchase our shares during times of market weakness. Turning to hedging, the benefits of our opportunistic strategy were on display as we captured nearly 100% of the surge in natural gas prices in the first quarter due to the attractive ceilings on the collars we put in place during periods of price strength in December. As prices have moderated into the spring, we are realizing the benefits with our balance of year hedge book in the money by $180 million. Turning to fundamentals. The global market has tightened meaningfully due to the conflict in the Middle East. Lasting damage to key LNG infrastructure has reduced near-term supply and delayed the timing of Qatar's large-scale expansions. At the same time, Europe is exiting winter with natural gas storage levels at the lowest level since 2022. U.S. LNG exports should be a primary beneficiary in this environment. In the near term, we expect LNG operators will defer maintenance to capture favorable margins, boosting export demand. In the medium term, the risk of an LNG glut in volumes backing up into the U.S. market is effectively gone. This environment also serves as a good case study for our thesis of the asymmetric upside exposure to global natural gas prices that EQT will have through our LNG portfolio. While our LNG contracts are forecasted to generate $500 million in annual free cash flow uplift when they begin in 2030 at the current strip, a repeat of the 2026 level volatility could drive that figure to $2.5 billion. This underscores the significant upside optionality for producers that can access the global markets. Shifting to the U.S. Momentum in natural gas-fired power growth is accelerating beyond prior expectations. Recent announcements and our own discussions suggest upside to our base case power demand growth forecast of 6 Bcf per day, with our initial bull case of 10 Bcf per day looking more like the new base case. This view is informed by the swelling opportunity set in Appalachia with a notable pickup in large-scale power, midstream and data center projects where EQT is positioned as the preferred partner. This backdrop is increasing our confidence in the view that demand pull projects will further improve Appalachian fundamentals through the end of the decade and create substantial high-return upstream and midstream growth optionality for EQT. Turning to the second quarter guidance. After surging production volumes in the peak winter pricing in Q1, we began tactically curtailing volumes this month to optimize price realizations during shoulder season and have embedded 10 to 15 Bcf of curtailments into our second quarter production guidance. Our strategic curtailments act as a form of storage. Keeping gas in the ground brings seasonally low periods of demand and surging volumes above baseline when demand rebounds. This approach allows us to leverage the flexibility of our integrated asset base to maximize value in both peak and trough demand seasons. From a CapEx standpoint, the second quarter represents our peak capital investment period of the year, driven by the timing of growth investments. We expect to see meaningful declines in capital spending into the third and fourth quarters, which should further support free cash flow generation in the back half of the year. In closing, this quarter is a tangible demonstration of the value creation possible through EQT's platform. With an integrated operating model, a peer-leading cost structure and a fortress balance sheet, the transformation of EQT is now complete. Our teams are now busy positioning the business to capture robust and sustainable growth opportunities, which should lock in the next leg of differentiated value creation for shareholders. And with that, we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: I got one macro and one EQT transformation question, just to pick up on Jeremy's comments there. Toby, I'm always interested in your macro view. Sadly, it seems that with LNG full, the U.S. is back to an incremental cost of supply market, a.k.a. the Permian. The punchline is it seems that gas really hasn't benefited from all the resets that we've seen in terms of domestic demand. So my question is, what can you do to improve your realizations? And more specifically, can you accelerate your access to LNG on international markets given your current plan is post 2030? That's my first one. My second one is specifically for Jeremy. The balance sheet you've talked about often, Jeremy, you've talked about the transformation is complete. So given your inventory depth, why are buybacks the right answer for opportunistic cash flow versus offering EQT as a competitive dividend stock? Toby Rice: Yes, Doug, appreciate the questions. I'll tackle the first set. So when it comes to getting better realized pricing, I think there's a couple of things we think about. One, attracting demand to our backyard I think is going to be really important that will have the impact of strengthening basis, which will benefit our business. We're really excited about the progress that we're seeing. I think if you look at the slide we put out on data center demand, there's a lot of activity happening in our backyard. As it relates to LNG, I think this quarter and what's happening right now around the world just really shows why the strategy that we took to position the company to get exposure to LNG, why it matters, because we see the same dynamic that you're seeing. We see prices around the world rising and there's -- we're not seeing that benefit in the U.S. The only way to solve that is to get exposure to international pricing. So for us, we're proud of the decisions we've made. We're excited to start trading with LNG in the 2030 time frame. As far as accelerating that today, we were actually talking about that this morning, but I think getting more exposure to that sooner, you're already taking into account the spreads and you're paying for that. So it's not much of an opportunity in the short term. But we're excited about how we've positioned the company in the long term. Jeremy Knop: Doug, on the second part of your question, look, our base dividend has been and will continue to be a key part of our capital allocation strategy. That is something we intend to grow annually for the foreseeable future. But when we step back and think about what creates the most value in the long term for shareholders and what compounds capital, it's not necessarily the dividend. We see the most value upside certainly on an after-tax basis for shareholders being more so in buybacks, but also bringing back top line growth to the business. And in a capital-intensive business, we need capital to be able to invest and do that. And so what you're seeing us do this year through our midstream growth projects, I think we continue to search for opportunities, and I think we're really finding some phenomenal ones right now. We plan to lean into those in the years ahead. And then I think at some point too there will be an element of upstream growth that I think we bring back as the low-cost producer, some sort of mid to low single-digit level of production growth. But we need to see that sustainable structural demand show up first. And that's what we are working through our midstream strategy to help enable and create and tie into. And I think when you have a growing top line in a business, both hopefully with price structurally over time, but also with production growth, that creates an ideal situation to be buying back the stock along the way and creating outsized returns over the long run. Operator: Your next question comes from the line of Kalei Akamine with Bank of America. Kaleinoheaokealaula Akamine: My first question is about data centers. So more and more projects are getting shovel-ready, they need gas. You were having supply conversations. How would you guys frame up the near-term opportunity set in terms of scale? And also curious if terms are evolving beyond the [indiscernible] deals that we've seen so far? Toby Rice: Yes. So a lot of opportunities in our backyard, as we mentioned on the call on the prepared remarks. When we look high level just what's happening in basin, there's been some big announcements in Pennsylvania, Ohio, West Virginia, Pennsylvania. NextEra has come out and said that they're going to look at putting 10 gigawatts. We've got that big facility in Ohio that just got announced at Portsmouth. That's over 9 gigawatts. And then West Virginia has come out recently with their 50x50 plans, installing 50 gigawatts by 2050 in West Virginia. So these are big plans that are being put out in this area. So we're really excited about how Appalachia is positioned to be the home for a lot of these projects. And then for us, what that translates to EQT specifically, we've got a robust pipeline of these opportunities that are currently being negotiated. I mean we're looking at multiple Bcf a day of supply opportunities. And other opportunities range from gathering to gas supply. The gas supply opportunity, I think it's important for people to know, we are focusing these opportunities around our asset base. So that should set the table for some pretty good returns, while also being able to offer low cost of service to these customers because we're leveraging our existing asset base. So I think all these -- a lot of opportunities in the air right now, I think that they're going to start landing in the second half of this year. And it's a really -- it's a really great setup and we're excited about how we're positioned. Jeremy Knop: Yes, Kalei, I think to put some more numbers to that too, if you look at the projects we've announced so far between our midstream projects and the other data center projects, you're, depending on utilization levels, call it, 2 to 3 Bcf per day of demand growth that we've already partnered with other parties to help underwrite. And then if we look at the other midstream projects that we are in discussions with people about that we think have a reasonable chance to come into fruition, I mean, that number could increase to 8, 10 Bcf a day potentially of additional egress and pull out of Appalachia for gas. Some of that goes more short haul into Ohio, as we talked about, but some of it also more down to the South and Southeast markets. So I think the opportunity for producers, specifically in Southwest Appalachia, what we think of as like the gateway to the basin, is really tremendous. And so going back to Doug's question, as we think about capital allocation, seeing that opportunity potentially coming around the corner and seeing that demand show up in the next 2 to 3 years is a phenomenal opportunity for us to reinvest and potentially grow structurally, sustainably and create a lot of value through that. Kaleinoheaokealaula Akamine: I appreciate that. My second question is on LNG. You guys have gone beyond pure financial exposure here. As you wrap your head around the physical business, are you seeing margin opportunities that maybe have been overlooked by others? And through your conversations, what kind of contract terms are you seeing being favored by buyers at this point? Jeremy Knop: Yes. I mean I think -- so we think of our LNG business and that book being built out similar to how we had the book on our just base domestic gas business where we have some deals under longer term and some under short-term tenors. And then a little bit in the spot market too. I would expect most of that to be index-based. And then there's potential for structure around that. But look, you can also financially hedge that with structure just like we do domestically in the financial market. So I think it will be a combination of all the above. But we really envision that portfolio, I think, geographically being split pretty equally between Asia and Europe. But it's something that we will build out over the coming years, just like we do with our domestic gas book. Toby Rice: Yes. And I'll just follow up with just one point here. I don't think these opportunities are being overlooked by our peers. I just think they're out of reach. And I think you need to have a large-scale, high-quality business like EQT to be able to play in this market and do it in a balanced way. I mean for us to be able to take -- to reach a level of scale to be effective in this market, but still not be betting the farm on LNG, this is still a nice part of a diversified gas portfolio, only companies of our scale, I think, can achieve that. Operator: Your next question comes from the line of Arun Jayaram. Arun Jayaram: Jeremy, maybe for you, I was wondering if you could update us on the progress on some of your large-scale supply deals. I'm thinking Homer City shipping port and the Duke Energy and Southern Company deals, I think it's 2.6 Bcf a day of supply in total. I think we're seeing early construction at Homer City, but would love to get an update on both of those key projects. Jeremy Knop: Yes. Actually, a lot of really great progress on both. I mean the guys at Homer City are putting a lot of steel up and really moving that project forward. So we're pretty optimistic about the timing there. There's been a lot of good progress lately on shipping ports too with the offtake. So we're very positive on that, both in terms of timing and also just the gas supply. But again, those aren't our projects, so we're going to hold off giving like specific updates. I would look towards the developers on both of those for more specifics. But look, we remain a committed partner to anyone trying to develop anything in the region, both to midstream companies, to data center developers or power developers. And I think that's why you're seeing us [ laying ] so many demand projects. As it relates to the in-market like power plants being built down in the Southeast, our understanding is a lot of that will probably come online in like between 2029 and 2031. So I think there will be a ramp post that Southeast supply enhancement project on Transco coming online. It won't immediately be consumed, but it will debottleneck the Appalachian markets and bring [ MVP ] up to full capacity. But like any of these projects, it takes multiple years to get it built. So it can't happen overnight. Unfortunately, some of this has to happen sequentially given the uncertainty of timing for completion of these projects. But everything is moving ahead, we remain opportunistic. And I think the opportunity set for more of these projects to get built is today as big as ever and I think continuing to accelerate. We're feeling that in our day-to-day conversations. And I'd say the other thing too that's really changing, it's less so I think developers and the sort of upstart outfits trying to put these projects together, but it's increasingly really well-capitalized names who you would recognize who are sort of playing catch-up but I think can put real dollars to work and give us a lot more confidence that a lot of this demand ends up showing up. So we're increasingly excited by it. Arun Jayaram: Yes. GEV had some really strong orders though. I know they raised their expectations on inbound 110 gigawatts from 100, so obviously, some good things happening in power. My follow-up, Jeremy and Toby, is just to talk a little bit about your discussions around LNG offtake. You have 6 million tonnes of capacity post 2030. How would you characterize the nature of those discussions post the war in Iran? And would it be your expectation that you could sign some offtake in this calendar year? Toby Rice: Yes. So the reaction with Iran, I think, reinforces the reliability of U.S. supply. And that's certainly going to -- it was valued before, I think it's even more valued now. So we think that the interest in U.S. LNG is only going to continue to grow. We do hope to see that the international community steps up and signs up for what we view as 6 Bcf a day of available offtake from these facilities out on the Gulf Coast area. So there still is opportunity for the market to give more exposure to U.S. LNG. And for us, with the international community, I mean, we're going to be building a portfolio. I think just you're going to see some of those agreements probably be timed closer to when that offtake will become available. So I expect those agreements to be more of a focus sort of in that '28, '29 time frame. Jeremy Knop: Yes. I'd just remind you too, Arun, and I think anyone who's just in the market looking for offtake, the international customers who have signed up for this capacity, whether it's out of Europe or out of Asia, while you see chaos in the global markets, uncertainty over security physical volumes, but also just price uncertainty, those offtakers are buying gas at Henry Hub plus 115% today. So they -- by buying U.S. gas, like they are effectively insulated from what's going on in the world. And so I think the relative attractiveness, both for existing offtakers but also those still looking for offtake, I think the attractiveness of shifting to the U.S. just because you do have that inherent price security, being able to buy effectively at the same price that U.S. consumers are able to buy at, is really unique. And you're not going to find that anywhere else in the world. Operator: Your next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta: We spent a lot of time on the last call just talking about Winter Storm Fern. But now with the clarity of the numbers and how robust the trading and marketing effort was, maybe, Toby and Jeremy, you could just talk about lessons learned and confidence about the ability to replicate this in another period of high volatility. Toby Rice: Yes. This is something that we do believe we are going to replicate because this was very well orchestrated. I'd also -- I mean this all starts with operations. The entire team across the board on the commercial team did a fantastic job. But it starts with operations. The playbooks that we put in place that really the planning on this started in the summertime are things that we're going to be able to put out there and repeat that. It's hard to see that performance is going to get even better, but just look at how our performance versus our peers, I mean, we had basically half the downtime than peers did, but there will be some opportunities. But the big part for us is really just continuing to keep the teams in great collaboration and coordinating across. And this is something where our technology platforms really bring that type of sustainability as we continue to scale this business. So we'll continue to look for ways to streamline communications, and that's a normal part of our business in this large-scale organization. Jeremy Knop: Yes. I think what's also unique this time and seeing the stress in the system is it now that we have the integration with midstream complete, and we have effectively controlling visibility of the molecule from the wellhead through our own systems for 90% of our volumes down to the end markets, it allows us to have a lot more accountability and visibility into like, if something goes down, we can figure out what's happening really quickly. Historically, a lot of our traders would find themselves in situations where all of a sudden volume is lost and volume maybe they presold and they're trying to figure out where the volume is balanced, they're not able to trade and capture arbitrage. They're trying to just minimize imbalances on the system, avoid OFO penalties. So the amount of collaboration this time, the ability to identify issues in the field and get them resolved within hours, and allow the traders to do what they're there to do, and that's trade and create value, I think it was on full display this time. But again, it's not just because the trader is doing well or just because ops are doing well. It's a collective effort of the whole team working really well together, and that's what's important. Neil Mehta: Very clear. Look, you guys got a ton of inventory at this point. And I know that the A&D market, it felt like the bid-ask was pretty wide and it got overheated there for a period of time. Are there opportunities to continue to opportunistically bolt-on stuff? Or is this really just an organic story given all the stuff you guys talked about earlier? Jeremy Knop: Yes. I mean, look, we were intentionally a first mover in M&A. We thought there would be a snowball effect to that and the best assets would go first. I think what's left is of much lower quality. So look, we're always opportunistic. But we see when we look at the opportunity set and where to invest capital right now, it's organically, and gets compared to where the A&D market is, I think our stock is a much better value candidly. And I think the organic reinvestment opportunity set is a significantly higher return on capital than putting cash into an acquisition of, I think, what would be an inferior asset. So again, we're going to remain opportunistic and look around as we always have. But I think the odds of something happening in the A&D space are significantly lower. Operator: Your next question comes from the line of James West with Melius Research. James West: Toby, I wanted to quickly ask about if you're looking at any opportunities outside of Appalachia at this point. There's certainly international shales where you have tons of expertise you could provide, I'm thinking [ Vaca Muerta ] which is probably 10 years on the Permian or so, maybe 7. But any expansion opportunities outside of your current market that you're at least considering at this point? I know you guys have a ton on plate and there's a ton of growth in the domestic market. But just curious how you're thinking about that. Toby Rice: Yes. Our view is pretty simple. We've got a massive asset base here in Appalachia that we believe will give us the ability to connect our gas to premium markets domestically around world. And the key for us to unlocking that asset base is going to be to capturing that demand. So I'm more focused on looking for demand capture opportunities as opposed to supply opportunities. So we're staying focused on what we have right now. And it's just -- it's all the great work we've done over the last 5 years, bolting on and beefing up this asset base, is where our focus is right now. James West: Okay. That's very clear. And then maybe a quick follow-up on the LNG strategy. I think you addressed some of this earlier, but we clearly have a tight end of the market and changing dynamics there. Pricing has moved. Anything you think you would move on earlier than that time period you've already committed to getting into LNG? Jeremy Knop: I mean I think, as Toby said earlier, I mean, if you're going to take out capacity sooner, you're effectively buying it at the current strip in spread. So it's not like you're able to buy it at the same terms. Look, if we have the opportunity, we'd obviously take advantage of it. It would be free money. But I think the odds of that are pretty low. Operator: Your next question comes from the line of Bob Brackett with Bernstein Research. Bob Brackett: I'm curious around your comments of attracting demand to your backyard. And one way to do that is simply commercially you're low-cost operator, you're well plumbed up there. And the other is with some judicious midstream capital. Can you talk about what might be inbounds and out of bounds for the source of capital projects you've put to work to attract that demand? Toby Rice: Yes. I would say what's inbounds right now is our goal is to make sure that we're giving customers the best energy. That's the lowest cost energy, most reliable. And the key for us doing that is leveraging our existing asset base, the over 3,000 miles of pipeline infrastructure we have, and building off of that and extending that to be able to service these new the demand hubs that we're talking about. So I'd say that's really our big focus. And I'd say we'd stay in that zone until we've exhausted all the opportunities and then we could look out more broadly. But right now, just given the opportunity set we have in front of us, the cup is full and now we're just looking to land some of these big opportunities. Operator: Your next question comes from the line of Sam Margolin with Wells Fargo. Sam Margolin: First one is on the shape of the CapEx that you referenced. We're at a peak in 2Q for the growth side. Are there going to be any immediate returns with the start-up of those projects, whether it's in sales mix and realizations or costs that we can expect? Jeremy Knop: No, I wouldn't say it necessarily correlates with that. I think it just depends -- it comes down to the lumpiness of large-scale operations and just the timing of some of our growth capital. Sam Margolin: Okay. Got it. So nothing in second half to point to. And then just on the operational side, within liquids, we got this inbound. There was a little bit of a mix shift from C3 to ethane away from guidance. Was that just market-driven, natural gas price contracts? Or was there anything else to call out that's worth noting? Jeremy Knop: Yes. I mean just slight tweaks based on GPM assumptions we're making. But I wouldn't say there's anything material to read into on that one. Operator: Your next question comes from the line of Lloyd Byrne with Jefferies. Francis Lloyd Byrne: Toby. I just wanted to know if you give me an update on the regulatory standpoint with U.S. infrastructure, whether electricity pricing is finally going to get us over the home there with respect to probably the Northeast? Toby Rice: I hope that perm reform happens, and I think it needs to happen in the near term, so in the next few months. I do think that there's a lot of focus on this. And I think the pressure is only ratcheting up on our leaders to take action and create a win for themselves going into midterms, that they're actually doing something the lower Americans' energy bills that have been up over 40% since 2020. So -- and I think that -- we saw just a couple of days ago, Trump put out the executive determinations that just continue to reinforce the critical need to get energy infrastructure built. So all the signals are there and I think the issues going on around the world, I mean, our energy independence, the value of that is on full display with international prices being up $10 and the natural gas price here in the U.S. not moving. We've insulated Americans, but we can't take that for granted. We need more infrastructure to make sure we can preserve this really valuable opportunity we create for Americans. The American energy advantage is sort of at the end of its rope unless we get more infrastructure built. So I think people are recognizing this, but I hope they act. Francis Lloyd Byrne: Yes. It feels like we're finally making some progress there. Operator: Your next question comes from the line of Phillip Jungwirth with BMO Capital Markets. Phillip Jungwirth: Last quarter, you guys talked about industry having limited Ohio Utica dry gas inventory left than the last month. We saw a 9-gigawatt gas plant announced to power data centers in Southern Ohio. So just as you see projects like this or others in the Midwest announced, how do you see these projects securing gas? And is there an appetite to either expand existing pipelines? Or how much momentum do you think there is around proposed new builds right now? Toby Rice: So we think we do see that as a big source of some of the gas supply opportunities we're looking at. And yes, while our view is the dry gas portion of the Utica play in Ohio may be light, all it takes to get back to deep, high-quality inventory in the Marcellus region in Pennsylvania and West Virginia is a 20-mile pipeline. So that is a very short bridge to build. And these are going to be some opportunities for us to be able to connect to those opportunities. Jeremy Knop: Yes. We see that Ohio market and that Clarington market as one of the greatest opportunities for us. I think there's a lot of low-risk pipe builds of significant size backfilling those Utica dry gas declines. But also I think a lot of the demand maybe that gets built in Ohio or some of the egress that gets built out of that market through both brownfield or also greenfield expansion. So again, I think if you're sitting in Southwest Appalachia with a lot of inventory like EQT is, you're kind of first-row, beachfront real estate, get ready for that theme to really pick up. But that's something, as we said last quarter, we're super excited about based on the conversations we're having. Phillip Jungwirth: Okay. Great. And then one of the things you haven't talked about in the past is distributed power. It's smaller scale than what you've announced to date, but just wondering how you view this demand opportunity. And is it something that EQT could look to partner with or is it just adding another tool to the toolkit? Jeremy Knop: Yes. Look, I think there are so many companies and there's so much capital chasing that right now. I'd say it kind of falls in the same vein as like LNG and some of the other things that are tangential to our business. We looked at it all, we've studied it. And it ultimately comes back to do we as EQT have an edge? Is the need capital? Is it expertise? Is it equipment? I think what we come back to is there's plenty of money to finance it, return is inferior, I think, to what we can generate just being a partner to those projects in our base business, and we can create a lot of value by doing what we do best. So look, we see our position in the market as a partner both to midstream companies to power companies to some of these developers of distributed power, the data center developers. I mean we're really an ally and partner on everybody. We're not really a competitor with anybody. We're just trying to help enable and to facilitate all that gas demand to get built. So I think that's really one of the key reasons we're seeing so much opportunity right now. Operator: Your next question comes from the line of Josh Silverstein with UBS Financial. Joshua Silverstein: For the 2Q guide, you said you have about 10 to 15 Bcf of strategic curtailments and it kind of acts like storage. I was curious what kind of price point drove this decision? Maybe how much more you could curtail? And then potentially if prices go back the other way, how much more could you potentially say bring it out of your synthetic storage? Jeremy Knop: Yes, good question. It changes depending on the season and the shape of the forward curve. We make those decisions really through the lens of a marketer and trader rather than necessarily operations in today's world. And so it's informed by a lot of different factors. We can curtail a lot, a whole lot more than what we are planning to curtail based on the guidance we gave. We just don't see the need for that, at least at this juncture. There's a chance that later this year in the fall, we could choose to shut in a lot more. Economically, it's a lot easier to shut in large quantities right ahead of winter because you have so much contango in the curve, and the value and effectively storing gas in September, October is a whole lot higher versus storing it going into summer where the forward curve for the next 6 to 9 months is flat. So look, we adapt and evolve with the market, but that's kind of the framework through which we think about it. Joshua Silverstein: Got it. Okay, and that kind of goes to the next question I had, because I was curious if you had strategic curtailments planned for the back half of this year. Because the number of TILs is kind of even in kind of the mid-30s number throughout the course of this year, but the production guide is much higher for the first half versus the back half of the year. So are you planning more of these curtailments? And this is kind of the game plan going forward where first half volumes might be higher than second half volumes? Jeremy Knop: I wouldn't say it really comes down to planning for curtailments. I mean our ops plan, we map that out regardless of things like curtailments. Curtailments are what we consider to be an optimization action. I mean even if we were in growth mode, from like a base ops standpoint, we would still choose to curtail based on the factors I mentioned previously. So they're related but also not dependent on each other. . Operator: Your next question comes from the line of Jacob Roberts with TPH. Jacob Roberts: Jeremy, we spent some time on data centers, but I'm just curious, when I look at Slide 16, can you talk about how internally you guys derisk some of those numbers as to what might actually happen? And then you spent quite a bit of time talking about the partner capability of EQT, I'm just you could remind us what the guardrails are on that in terms of the type of counterparty risk you're willing to take or size or scale on the potential project. Jeremy Knop: Yes. I mean, I guess, Slide 16 first, this is data that we bought recently as we're analyzing where these projects are and trying to understand what markets we're seeing the most pull. I mean, look, we don't really see it is our role to sort of derisk this. I think the best thing we can do to help enable these projects to go forward is be a reputable, highly creditworthy, reliable supplier of gas. And the best thing we can do is provide a simple, comprehensive solution, which we, from our platform, see as being one where we can provide midstream if it's needed, we can provide the gas supply, we can manage daily gas volumes and balancing. And we can participate in owning a midstream project. We can let someone else build the midstream and just manage the gas and capacity. It doesn't really matter that much to us. I think for us, it's really about helping enable creating that demand and then tying that back to our operational and production base so that it effectively stimulates growth for our base business in the years ahead. So again, I think taking that approach and being a flexible partner is really, like I said before, what's driving a lot of the inbounds we have right now. Jacob Roberts: I appreciate that. And Toby, I think you briefly mentioned you see the potential for long-haul egress needed out of the Northeast maybe down to the Gulf Coast. And I think we generally agree as we look across the other basins and their staying power in terms of volume growth. So I'm curious if those conversations are happening now. And potentially, if you could opine on whether or not you think the cost of those types could be borne by the end user? Or do we see something similar to in the past where you guys might have to pay for that? Toby Rice: There are conversations right now about some of those pipelines. And then as far as who will bear the shipping rate for those, I think you look at the open season we had with MVP Boost as an indication of the market that we're in. MVP Boost Utility signed up for 100% of that. And it did not require operators to sign up and take on those liabilities. We think that we're in a demand pull for these type of projects. And certainly, the demand that's being created in the Gulf Coast region, people are waking up and looking for where am I going to get the supply and how can we get the infrastructure built to make sure reliable supply is delivered? Operator: Your next question comes from the line of Gabe Daoud with Truist. Gabe Daoud: Maybe just a follow-up on that last question. Maybe from your perspective, what's the latest on the Borealis project? Is there still an open season? Or any kind of update you could share as far as incremental egress side of the basin? Jeremy Knop: Yes. I would just call that one of many projects that is in the works in counterparties who we are in discussions with. In any of these pipes, I think the answer is going to be just it depends on who the shippers are and what EQT's role is. On many of these pipes, I think it's probably reasonable to assume that we probably build back into basin from certain supply hubs and gather the production and deliver it there. And there is a host of other companies either that are looking at projects like the one you mentioned or other brownfield expansions of existing interstate pipes that would probably take care of things from there. But again, it's a lot easier to get those built when you have a business like EQT on the supplying end of those pipes. If you even just look at the Southeast supply enhancement project on Transco expansion that was needed there, that was effectively paired up. I mean the shippers -- the name shippers on that pipe effectively paired those agreements up with the gas supply deals we did with them to enable that to happen. And again, it goes back to what I've said a couple of times already, I mean, our goal is to be a partner of choice, whether that's with utilities, midstream companies, power companies or whoever it might be -- not really a competitor. We're helping trying to play our role in helping this market develop. And I think whether it's Borealis or any of these other pipes in discussion, we're going to continue playing that role the best we can. Gabe Daoud: Got it. That's helpful. And then just a quick follow-up, I think you alluded to this earlier, but just around growth expectations and maybe what governs that. You have some pretty big projects coming on '27 [ and '28] -- when we can get a little bit of that growth wedge materializing in those? Toby Rice: Yes. The midstream -- the growth for -- CapEx growth on midstream, I mean that's in progress right now. And I think we have visibility through '27, '28, where these projects will ultimately come online. The conversations we're having right now, the opportunities we have would allow us to extend that runway in that '28 through '30 time frame. And then that's been the big focus right now on the midstream side, and that will create optionality for us on the upstream side if and when we decide that makes sense. Operator: Your last question comes from the line of Leo Mariani with ROTH. Leo Mariani: I just wanted to follow up a little bit on your guidance here in 2026. So obviously, great start to the year, very, very strong volumes here in 1Q. Also your second quarter guide, while production is down a little bit, also looks very strong. Just relative to kind of your full year guide, certainly starting to make maybe the rest of the year look a bit conservative. You did talk about some more potential shut-ins during the fall to capture that winter premium, but certainly it seems like you guys are trending pretty well versus the guide at this point. So should people think that you might be a little towards the higher end of the range on production here for the year? Jeremy Knop: Yes. Look, I think 2 months after setting our initial guidance, in our view, it's a little early to update something like full year guidance without a material change otherwise. But look, I think the business is humming as evidenced by our Q1 results. I think if there's a reason to update, we'd probably look typically to do that by midyear. But all else equal, yes, I think we're at least at midpoint of guide so far through the year. And as we see how the market develops and the likelihood of curtailments this fall, we'll adjust accordingly if it's merited. Leo Mariani: Appreciate that. And then obviously, I would love a discussion on the macro here. Gas market has been a little bit weaker of late. Liquids markets have been robust. Does EQT see any optionality of trying to maybe shift activity to slightly more liquids-rich areas? Is that something you guys might consider here? Toby Rice: Yes. I mean just so you understand how our operations scheduling works, I mean, we developed the most economic projects first. So if there's opportunity for us to develop more liquids, that's already been taken into account. Just given the size of our asset base, it's going to be hard for us to see -- to materially change our liquids mix in our production portfolio. But it is something that is taken into account in our normal operations. Sorry, operator. Operator: That concludes our Q&A session. I thank you all for joining, and you may now disconnect. Everyone, have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to the M/I Homes First Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, April 22, 2026. I would now like to turn the conference over to Mr. Phil Creek. Please go ahead. Phillip Creek: Thank you for joining us today. On the call is Bob Schottenstein, our CEO and President; Derek Klutch, President of our mortgage company. To address regulation for our disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the company undertakes no obligation to update any forward-looking statements made during this call. I'll now turn the call over to Bob. Robert Schottenstein: Thanks, Phil. Good morning, everyone, and thank you for joining us today. We had a very solid first quarter, highlighted by revenues of $921 million, pretax income of $89 million and a strong pretax income return of 10%. Clearly, during the quarter, new home demand and homebuilding conditions continue to be challenged, challenging and impacted by affordability and even consumer confidence, the conflict in the Middle East and general uncertainty and volatility in the broader economy. Despite this, we were very pleased to increase our first quarter new contracts by 3%, generate gross margins of 22%, and produce a return on equity of 12%. Our sales momentum from late last year continued into January and February, even with the winter storms that had a pretty significant impact on a number of our markets at the beginning of the year. During this period, we saw improved traffic and heightened homebuyer activity as we begin the spring selling season. However, market conditions slightly shifted at the end of February and into March as events in the Middle East pushed mortgage rates up higher, impacted gas prices and contributed to further market uncertainty. In managing all of this, mortgage rate buydowns continue to be an important part of our sales strategy. We continue to successfully balance margins and sales pace at the community level and offer mortgage interest rate buydowns both on spec sales and to-be-built sales as a leading incentive to promote our sales activity. During the quarter, we closed 1,914 homes a 3% decrease compared to a year ago. Our first quarter total revenue decreased 6% to $921 million, and pretax income decreased 39% to $89.2 million. Still, we ended the quarter with a record $3.2 billion in shareholders' equity, and our book value per share is now at a record $125, up 11% from last year. As I mentioned, our sales improved 3% year-over-year. We sold 2,350 homes during the quarter. Our monthly sales pace averaged 3.4 homes per community, consistent with 2025. We continue to see high-quality buyers in terms of creditworthiness with average credit scores of 747 and an average down payment of 15%. Our Smart Series, which is our most affordable line of homes, continues to be an important contributor to our sales performance. During the first quarter, Smart Series sales were about 47% of total sales compared to 53% a year ago. Company-wide, about half of our buyers are first-time homebuyers, while the other half are first, second or third move up. The diversity of our product offering remains an important factor and contributing to our sales performance and overall profitability. We ended the first quarter with 230 communities and are on track to grow our community count in 2026 by an average of about 5% from 2025. Turning to our markets. Our division income contributions in the first quarter were led by Chicago, Columbus, Dallas, Orlando and Raleigh. New contracts for the first quarter in our Northern region decreased by 4%, while new contracts in our Southern region increased by 8% compared to a year ago. Our deliveries in the Northern region decreased 9% compared to last year and represented just under 40% of our company-wide total. Our Southern region deliveries increased by 1% over a year ago and represented the other 60% of our deliveries. We have an excellent land position. Our owned and controlled lot position in the Southern region decreased by 13% compared to last year, and increased by 21% compared to a year ago in our Northern region, 40% of our owned and controlled lots are in the Northern region, the other 60% in the South. Company-wide, we own approximately 24,200 lots, which is slightly less than a 3-year supply. In addition, we control approximately 25,800 lots via option contracts, which results in a total of roughly 50,000 owned and controlled lots equating to about a 5-year supply. Our balance sheet continues to be very strong. As I previously mentioned, we ended the first quarter with an all-time record $3.2 billion of equity, 0 borrowings under our $900 million unsecured revolving credit facility and over $750 million in cash. This resulted in a debt-to-capital ratio of 18%, and a net debt-to-capital ratio of negative 2%. As I conclude, I'll remind everyone that 2026 marks our 50th year in business. We're very proud of our record and look to build on our success in 2026. Given the strength of our balance sheet, the breadth of our geographic footprint and excellent land position and well-located communities along with a diverse product offering, we are well positioned to continue delivering very solid results in 2026. With that, I'll turn the call over to Phil. Phillip Creek: Thanks, Bob. Our new contracts were up 3% when compared to last year. They were up 11% in January, up 7% in February and down 6% in March. Our cancellation rate for the quarter was 8%. Our monthly new contracts increased sequentially throughout the quarter. Last year's March new contracts were the highest month of 2025. 50% of our first quarter sales were the first-time buyers and 70% were inventory homes. Our community count was 230 at the end of the first quarter compared to 226 a year ago. The breakdown by region is 91 in the Northern region and 139 in the Southern region. During the quarter, we opened 22 new communities while closing 24. We delivered 1,914 homes in the first quarter. About 50% of these deliveries came from inventory homes that were both sold and delivered within the quarter. And as of March 31, we had 4,600 homes in the field versus 4,800 homes in the field a year ago. Revenue decreased 6% in the first quarter. Our average closing price for the first quarter was $459,000, a 4% decrease when compared to last year's first quarter average closing price of $476,000. Our first quarter gross margin was 22%, down 390 basis points year-over-year due to higher home buyer incentives and higher lot costs versus the same period a year ago. Our first quarter SG&A expenses were 12.7% of revenue versus 11.5% a year ago, and our first quarter expenses increased 4% versus a year ago. Increased costs were primarily due to increased selling expenses, increased community count and additional headcount. Interest income, net of interest expense for the quarter was $3.1 million. Our interest incurred was $9 million. We had solid returns for the first quarter given the challenges facing our industry. Our pretax income was 10% and our return on equity was 12%. During the quarter, we generated $99 million of EBITDA compared to $154 million a year ago, and our effective tax rate was 24% in the first quarter, same as the prior year first quarter. Our earnings per diluted share for the quarter was $2.55 per share compared to $3.98 last year, and our book value per share is now $125 a share, a $12 per share increase from a year ago. Now Derek Klutch will address our mortgage company results. Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pretax income of $14.1 million, a decrease of 12% from $16.1 million in 2025's first quarter. Revenue decreased 1% from last year to $31.2 million due to slightly lower margins on loans sold and a lower average loan amount, but offset by an increase in loans originated. Average loan to value on our first mortgages for the quarter was 85% compared to 83% in 2025's first quarter, 66% of the loans closed in the quarter were conventional and 34% FHA/VA, compared to 57% and 43%, respectively, for 2025's first quarter. Our average mortgage amount decreased to $401,000 in 2026 this first quarter compared to $406,000 last year. Loans originated increased to 1,579 loans, which was up 3% from last year, while the volume of loans sold increased by 1%. Finally, our mortgage operation captured 96% of our business in the first quarter, up from 92% last year. Now I will turn the call back over to Phil. Phillip Creek: Thanks, Derek. Our financial position continues to be very strong. We ended the first quarter with no borrowings under our $900 million credit facility and had a cash balance of $767 million. We continue to have one of the lowest debt levels of the public homebuilders and are very well positioned. Our bank line matures in 2030 and our public debt matures in 2028 and 2030, and has interest rates below 5%. Our unsold land investment at the end of the quarter was $1.9 billion compared to $1.7 billion a year ago. At March 31, we had $844 million of raw land and land under development, and $1 billion of finished unsold lots. During 2026 first quarter, we spent $79 million on land purchases and $104 million on land development for a total of $183 million. At the end of the quarter, we had 740 completed inventory homes and 2,584 total inventory homes. And of the total inventory, 999 are in the Northern region and 1,585 in the Southern region. At March 31, 2025, we had 686 completed inventory homes and 2,385 total inventory homes. We spent $50 million in the first quarter repurchasing our stock and have $170 million remaining under our Board authorization. In the last 4 years, we have repurchased 18% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments. Operator: Your first question comes from the line of Natalie Kulasekere from Zelman & Associates. Unknown Analyst: I'm just curious, have you received any form of communication regarding any cost increases from your vendors because of fuel prices, maybe it could be a fuel surcharge stacked on top of your existing contracts? And if you have, do you think it's something that you could negotiate with your trade partners? Robert Schottenstein: Thanks, Natalie. The short answer is yes. The issue of increased fuel has come up in several divisions. I don't know if it's come up everywhere. I'm aware of 2 or 3 or 4 instances where it has and it could well be more. So far, there hasn't been much impact. In fact, so far, I think there's been no impact. Having said that, if the conditions were to persist at worse, at some point, we've been in business for 50 years, and one of the things we're most proud about is not only the consistency of our strategy, but the long-standing relationships both at the national level and at the local level that we have with so many of our subcontractors and suppliers, many of whom we've been doing business with for a long, long time. And one of the reasons that we're able to do business with people for a long time is we try to deal very fairly with them both in good time and in bad. You didn't ask maybe this as part of your question. But during the last year, we've gone back to a number of those subcontractors from our point of view and sought to see cost reductions. We had a very, very aggressive, intense internal cost reduction effort that we launched, I think, a little over a year ago, maybe a little more than a year ago in anticipation of the current conditions with declining margins and so forth. And we had quite a bit of success doing that. We know that's a 2-way street, and there's times that they work with us. There's times that we're going to have to work with them. So far on the gasoline and oil situation, though, I'm not aware of any impact, unless you are, Phil. I hope that's helpful. Unknown Analyst: Yes. And I guess I just have one more follow-up. So your ASP within the $470,000 to $480,000 range, if not higher across most quarters since 2022. So is there anything specific that drove this lower this quarter? And if so, how should we look at it going forward? Should it kind of be lower than the $470,000, $480,000 range? Or do you think it's going to -- do you reckon it's going to climb back up to that? Robert Schottenstein: It surprised me that it was -- we knew it would be lower. I didn't think it would be maybe quite this much lower. It's not that much. When you really look at it, $470,000 versus $460,000. Having said that, affordability is the favorite buzzword in our industry today other than maybe rate buydowns as I think about it. But affordability is up there. And really, it began in our company about 5 years ago where we began a very concerted effort to produce more affordable product, particularly attached townhome product. Company-wide, it's probably maybe 20% or 25% of our business, somewhere in there. It moves a little quarter-to-quarter with new communities and so forth and timing of closeouts. And I think it's -- I actually think it's more mix than anything else. I'd expect our average sales price to be at this level, maybe slightly higher, so they bounce around in this -- in the upper 4s for the foreseeable future. Operator: [Operator Instructions] Your next question comes from the line of Kenneth Zener from Seaport Research Partners. Kenneth Zener: I wonder, given your Smart Series, very successful, 47, I'm just going to call it half. And how -- can you talk to that. Are most of your intra-quarter order closings coming from the Smart Series almost by definition because it's like prebuilt? Is that the correct assumption that I'm making? Robert Schottenstein: Not necessarily. We manage our spec levels or inventory home levels on a subdivision-by-subdivision basis. And it's less related to maybe the price point of the community at times than -- I think it's more -- it more relates to the location of the community where we think the buyers are coming from. Clearly, I think there's a few more specs with attached product because you build building by building. And some of that is Smart Series, some of it isn't. I don't think there's really any discernible difference between intra-quarter closings coming from Smart Series spec homes versus the other half of our business. And by the way, not every Smart Series buyer is a first-time homebuyer either. It's just a product line that we've tried to push really hard to take advantage of bringing our price points down. But Phil, do you want to add something? Phillip Creek: Yes. And overall, we feel really good about where our spec levels are. As Bob says, it really varies community to community. This has been a higher percentage, about 50% of the closings occurring within the quarter. Reduced cycle time has helped. It doesn't take us as long to get houses built as it did a year ago. We're also trying to continue to be focused on when we put specs out there, let's make sure we put the right specs out there on the right lots. We're like most builders, we would prefer to have more dirt sales, more to-be-built sales, because, in general, those houses have more upgrades, higher price point, higher margins. But you also have to balance off when you're offering interest rate buydowns when you start getting longer term, it's harder to get those effective rate buydown. So a lot of those things are being balanced off. But overall, we were pretty pleased with the quarter with our closings, but we feel good about our investment level in specs. Robert Schottenstein: The other thing I'll mention just because it gets a lot of attention. For years, the differential in margin between specs and to-be-builts has been an issue in our industry where anywhere from 100 or 200 points -- 100 or 200 basis points of margin erosion occurred between specs and to-be-built, in some cases, 300, 400, 500 points. It sort of moves around market-to-market and period to period. It's that issue has never been lost on us. We've always, always tried to generate more to-be-built than spec sales. Having said all that, we're also trying to successfully balance pace. And we've -- initially, when we first got into rate buy-downs, it was strictly for specs. But for some time now, we've been heavily focused on rate buy-downs for to-be-builts as well because they do generate higher margins. And it should go without saying, but I guess I'll say it anyway, all of that gets poured into the strategy, which we think has helped us generate very strong returns compared to our peers quarter-to-quarter. Kenneth Zener: Yes. And I see that. I wonder if homebuilding doesn't -- the companies in general, you're not unique in this, you don't report the segment data and you have 2 segments, right, with the South Texas and Florida being big inputs there. Given the margin swings that we had over [indiscernible] 18 months where the North is now doing better than the South yet as I look at your new contracts and closings, I see that North is declining in terms of the mix, right, as a percent of the total, just the year-over-year change was down in the North, for example, on deliveries. Can you talk to how much of that, the margin we're seeing is just that the higher-margin North isn't flowing through? And then maybe comment a little bit on the Southern mix. I think in the past, you've talked about, right, Texas being larger than Florida in that southern segment. If you could just give us a little sense of how those different regions are impacting the margins. Robert Schottenstein: Happy to do it. In general, over the last year or so, our margins have held up better in our Midwest markets than in our Florida markets. For a while, our Florida markets had some of the best margins in the company. That's not the case today. We have had very strong margins in Dallas for a long time. They are lower now than they were in that market, like many is off a little bit. But comparatively speaking, and to give good context, we still have very solid margins in Dallas. The percentage of our business, our Texas markets, which really you can't claim newness anymore, they were new for a while, but those markets are really growing a lot for us. And our margins in Charlotte are very strong. We have very solid margins in Raleigh as well. It's sort of market to market. I think I mentioned that our most profitable divisions in the first quarter were Chicago, Columbus, Dallas, Orlando, Raleigh, but I don't want to leave out Charlotte or as I think about Cincinnati, Minneapolis, very solid operations in these markets. Look, I wish all 17 of our markets were performing at a high level. But most are. And we're very encouraged by that. When I say high level, given the conditions holding up quite well, I think right now, if I had to identify any part of our business that is feeling the pinch more than others, it would be the West Coast of Florida, really from Tampa down through Sarasota. That appears to be the most challenging right now. It's not horrible, but it's just nowhere near what it once was, and we're working through it. Phillip Creek: We're really pleased with where we are having the 17 markets, having the diversification. Sure, we all remember a couple of years ago how hot Florida and Texas were, but those markets have come back down. The Midwest [ airline ] has never got quite that hot. And plus, we have a really good presence. We talk about meaningful presence all time. We have a good presence in most of our markets. We're a pretty big player. So having this diversity in markets and also in price points and products. So we do have 50% first-time buyers, but that tends to be the [ 400 or 450 ] type price point as opposed to that kind of down and dirty, which there's a whole lot of competition. So again, we try to react to every market based on what the competitive landscape is, land position and those type of things, we try to really focus on having better locations in better schools, near better shopping, better transportation, again, try to give people a reason to buy, not just price. So that's what we focus on. Operator: Your next question comes from the line of Jay McCanless from Citizens. Jay McCanless: So sticking on kind of the questions on the North. Could you talk about the increase year-on-year in the lots from the North? And is that something that potentially could help gross margins down the road? Robert Schottenstein: I think that the increase in the lot position, some of it's -- what's the right word, episodic. I don't know if that's the right word or not. Sometimes things come on at different times because they're delayed and it skews a quarter. We have a lot of opportunity to grow in Indianapolis, still Chicago, Minneapolis, Columbus, Cincinnati, maybe slightly less so in Detroit. But you take those others, we believe we can grow our operations there 5% to 10% a year for the foreseeable future. In some cases, maybe slightly more. We have a lot of growth opportunities. Having said that, though, in Charlotte and Raleigh, our Raleigh operation has underperformed from a volume standpoint, not profitability, in large part just because of the incredible delays we've experienced in bringing some new deals to market. We're super excited about where we -- as we look out over the next number of quarters, we're very excited about what we have coming on in Raleigh over the next several years. And we still have big plans to grow in Houston and Dallas, maybe slightly less so in Austin, but still -- we still intend to grow in Austin, and we're growing in San Antonio. Big plans for Fort Myers, Naples. We're really just getting started there. We expect that to be a very meaningful contributor to us down the road. Tampa and Orlando, we've had top 5 positions in both those markets for a long, long time and are not going to give up market share in either place. And then Nashville. Nashville has been a slower start for us. I thought we'd be a little further along than we are right now. The only encouraging thing is I don't think we're alone. You tend to see that with other builders as well. But having said that, we're clearly going to grow our operation there this year. It's well, well ahead of where it was a year ago. And all of this should contribute as the markets -- I mean we don't know what's going to happen with the economy. We'll adjust as necessary what will happen to margins down the road. I think that over time -- I mean, I don't know what will happen, but I think over time, we've always pushed very hard to be in the upper tier. And I believe we -- wherever homebuilding margins settle, I think you'll see M/I in the upper tier of margin performance relative to our peers. Our mortgage operation contributes to that as well. We had a 95% plus capture rate in the first quarter given all the activity with rate buy-downs, even though I'm very proud of our mortgage operation. If we weren't at least a 90% capture rate, I think that would require a discussion because it seems like everybody should be going through our mortgage company with all the rate buy-downs that we and our peers are doing. But having said that, M/I Homes capture rates the highest in the industry, and we're very proud of that. And that contributes to profitability as well. Phillip Creek: And also, Jay, this is Phil. Just to add as far as from a land position standpoint, I mean, you know what we try to do, we really focus on what do we own, and we own today about 24,000 lots. A year ago, we owned about 25,000. It's kind of changed a little bit inside. Today, we own almost -- we own 10,000 finished lots. We like to own about a year of supply. And with our run rate, a little less than 10 right now, we're really well positioned there. Our finished lot cost today is up about 5% versus a year ago. Land development costs have kind of settled down a little bit the last couple of quarters. So we feel like we're really in a good situation from a land position standpoint. Bob talked about growth. We do have a few more -- a few less houses in the field than a year ago. But again, when we're building houses faster, we don't need to put the investment out there as fast. So we're trying to be efficient. We're trying to have specs where we need it. So again, we are very focused on trying to continue our growth, but we want it to be profitable growth with solid returns, not just give a bunch of houses away. We think we do have a really good land position. So we are excited about where we are. Jay McCanless: That's great, guys. So the second question I had, if you think about Smart Series, are most of those communities located in the Southern region? Or I guess what's the mix between the Northern and the Southern for the Smart Series communities? Robert Schottenstein: I think it's pretty evenly balanced with a couple of exceptions. San Antonio is almost 90% Smart Series, our communities there. Houston approaching 90% Smart Series, maybe even a little higher. But if you take those out and look at the other 15 markets, it's pretty close to 30% to 50% of our business. They tend to have slightly higher absorptions. So it skews and distorts the actual sales number. But it's somewhere between 1/3 and 1/2. Jay McCanless: That's good to know, Bob. And then if you could, Phil, maybe talk about what the gross margin looks like in backlog at the end of the quarter. Phillip Creek: Sorry, the backlog? Jay McCanless: Yes. Gross margin and the backlog at the end of the quarter. Phillip Creek: It really hasn't changed much, Jay. And of course, the backlog is not that big. We are focused on trying to do more to-be-built houses with higher margins in general and so forth, really hasn't moved much. The thing that's hard is that like this quarter, when half of our closings got sold and closed in the quarter. So it's just really, really hard to predict average sale price, really hard to predict margins because so much stuff goes through. Robert Schottenstein: Yes. I mean I know that you all would love to see us give margin guidance. I think it's a bit of a -- I'll just say it, fools errand. There's just so much uncertainty. During our last conference call, we weren't talking about a war. We weren't talking about $4 gas prices. In 90 days, look how things like that have changed. It's very, very hard to predict what's going to happen. Conditions right now are marked with uncertainty. Having said that, I think housing is holding up pretty damn well. I've seen a whole lot worse, and so has anyone that's been in this business more than a couple of years. We've been in business 50 years, this is going to be 1 of our 5 or 6 best years in company history, and that's pretty damn good. Sign me up. So I think we're very well positioned to deal with the conditions as they are. I think we were encouraged that our first quarter gross margin sequentially were almost the same as they were in the fourth quarter. Does that mean they're leveling off? I guess we'll know when we know. I just know that we'll continue to do everything we can to push profitability. We're very proud in this environment to have a double-digit pretax income percentage of 10%, not easy to do. I know a couple of builders do, but most don't. And I think that it's one thing to say we're focused on profitability. It's another thing to deliver it, and I think we're delivering it. Phillip Creek: And we spend a lot of time, Jay, talking about flow, not just the flow of spec inventory. For instance, at the end of the quarter, as I said, we have about 740 completed specs. At the end of the first quarter of last year, it was 686. We also not only track those getting through, that doesn't mean we fire sell them to move them through. But again, we don't want to get too big on specs. We also keep track very closely at what specs are coming through the system, are they drywall or what's the stage of them. So again, not just throw specs out there, [ willy-nilly ] every subdivision. But what can we work through? What is the demand? What can we settle at a decent margin? And we do the same thing at land. We make sure that when we buy raw land, we get into development. We put the finished lots out there that we need that we can work through. But again, trying to do a better job on managing our investment levels. But again, we think we're in good shape, and we can react to whatever we need to. Robert Schottenstein: The last thing I'll say, and it sounds like we're patting ourselves on the back, maybe we are, never gotten the build-to-rent business, we were the only builder that didn't, don't land bank, we're one of the only builders that doesn't. Our strategy has been pretty damn consistent for as long as I've been here. Focus on our communities, we focus on quality, we strive to deliver the highest levels of customer service that we can. And we try to produce -- build our homes in excellently well-located A communities all the time. There's no issue that distracts us from pace and margin on a community-by-community basis. Nothing gets more attention than that in our company. And we have, within certain of our cities, special rate buy-down programs that are only applicable to certain lots in certain communities. We don't paint with a broad brush. We really try to manage this business on a subdivision-by-subdivision basis even within markets. And that's what we've always done. And that's what our management team is focused on, and it's worked for us. Jay McCanless: Right. That's great. And actually, could you -- any qualitative, not quantitative, but qualitative commentary you can give about traffic or web traffic for April, just again, given some of the uncertainty that's out there? And then also, if you don't mind, Phil, can you repeat what the monthly order cadence was? I missed that part. Robert Schottenstein: The only thing I'll say about traffic is given the market, I've been pleased with our traffic through the first quarter and through April so far. That's -- we'll just leave it at that because we don't -- the month is far from over, and we're optimistic, but we'll see. Phil, do you want to comment on this? Phillip Creek: We're really focused also, I mean, we're opening a lot of stores. Last year, we opened about 80. This year, we plan on opening more than 80. So we're trying to open them the right way. In general, they're at a higher price point where we see a little more steady demand these days. But again, just staying on top of it community by community. Jay McCanless: Right. And Phil, if you could, what was the monthly order cadence again, please? Phillip Creek: During the quarter? Jay McCanless: Yes. Phillip Creek: Yes, the first quarter, let's see, Jay, we were up 11% in January. We were up 7% in February. March was down 6%, but last year's March was the highest month of last year. And we did sell more houses in February than we did in January. We sold more houses than March than we did in February. So overall, we were pretty pleased with our sales. Operator: [Operator Instructions] Your next question comes from the line of Buck Horne from Raymond James. Buck Horne: I kind of want to ask you the questions in slightly different ways. I'm wondering thinking sort of the monthly cadence of -- or just how you responded to March's volatility in terms of incentives, did you have to -- or did you increase or lean into certain incentives more in March to try to offset the mortgage rate volatility or conversely, was there just enough natural seasonal demand where you kind of were able to keep the same strategy in place? I'm just kind of wondering if there's a potential carryforward to second quarter margins just due to the incentives that were provided. Robert Schottenstein: Normally, I wouldn't want to get too specific, even though it's all on our website for our competitors to see. But I'll just say what has worked for us on specs for the most part is even though we've got see people working with the [ 2/1 ] and the [ 3/2/1 ] buydowns, some buyers, some subdivisions, we see some ARM product. But the vast, vast majority of our buyers want one thing, and that's a 30-year fixed rate mortgage. And what we have led with for quite some time now and been pretty consistent with it on homes that can be delivered within roughly 60 days, so call it inventory homes is a [ 4/7/8 ] rate on both FHA/VA as well as conventional. And we've also offered on to-be-builts that has a long-term rate lock a rate in the very, very low 5s. And we have found those 2 things, there are some exceptions, it's probably more than 2 or 3 or 5 exceptions, but we have 200-plus communities. The vast majority of our communities, those programs are what is working for us now and resulted in our 3% year-over-year increase in sales. The cost went up, went down, then it went up during the quarter. It went down before we started bombing Iran. And then afterwards, it went up. And it's been bumping around quite a bit since. We live in a minute to minute news cycle where there's a constant overreaction to good news or not. So all that affects what's happening with rates, and there's been a fair amount of volatility with the 10-year, I mean, between 440 and the low 420s. So when it goes up, it costs us a little more if we're buying it on that day. We look at it, we look at it every day. Derek is sitting right here, his team at M/I Financial is pretty intensely focused on this every single day. Buck Horne: That's very helpful. I think that's pretty clear. I appreciate that extra color there. Secondly, I'm kind of curious thinking through your -- just the way the business is set up right now, you're throwing off quite a bit of positive cash flow. You've dialed back the land spend, your land position seems to be in a really good position already. So I'm just wondering if you think through the possibility of the -- you've been very programmatic about the share repurchase schedule, but you're still building up quite a bit of cash. I'm just wondering if you think that there's a possibility that you'd kind of increase the kind of the schedule of the buybacks that you're penciling in for the remainder of the year and just at some point in the future. Robert Schottenstein: We talk about it with our Board, maybe not every Board meeting, but at least every other. We have a meeting coming up in 2 weeks. We'll probably discuss it at that meeting. I don't really see any change, but it's possible, I guess. I don't know. I think we're going to stay sort of where we are. I don't know if you want to add to that. Phillip Creek: No, I agree. Also, we're not really anticipating the cash to build up that much more. We are a little lower now than we thought we would be internally. I would have a few more spec dollars out there than I have, do a little better job managing that. I did mention we're going to be opening quite a bit more as far as new stores and so forth. So I would still expect to have a pretty strong cash position, would not expect it to be up very much more. And again, spending at the rate of $200 million a year to buy stock back, which we've done for the last few quarters, $50 a quarter, we still think it's pretty good. We bought back almost 20% of the stock the last couple of years. But that's something we'll continue to look at. Buck Horne: Congrats. Appreciate the color. Operator: There are no further questions at this time. Turning over back to Mr. Creek. Phillip Creek: Thank you for joining us. Look forward to speaking to you next quarter. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the program over to your host for today's conference call, Lynne Maxeiner, Vice President of Investor Relations. Lynne Maxeiner: Great. Thank you, [ Jeanie ]. Good morning, and welcome to Vertiv's First Quarter 2026 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Gio Albertazzi; and Chief Financial Officer, Craig Chamberlain. We have 1 hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question. And if you have a follow-up question, please rejoin the queue. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties, that could cause actual results to differ materially from those in the forward-looking statements. We refer to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports, and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we'll also present both GAAP and non-GAAP financial measures. Our GAAP results to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, Dave Cote. David Cote: I'm very pleased with how we started the year. The momentum we're seeing across the business is strong. It's translating into the kind of performance that gives us confidence to [indiscernible] our outlook for the full year. What we're seeing in customer conversations is different than 6 months ago. The urgency has increased. The scale deployment is larger, and the technical complexity is creating opportunities for companies that can solve [indiscernible], which is exactly where we excel. We're seeing broad-based strength, and that tells you something about the depth of demand and our ability to capture it. I like what we're seeing in the industry and the continued evolution of Vertiv. We're still in the early stage of the infrastructure build out for AI. Our competitive advantages are compounding. If you can deliver product systems, integrated solutions and services that scale, you become even more important to your customers' technology road map. We're also managing the challenge as well. Tariffs, supply chain, complexity, labor constraints. These are real. But they're manageable. And additionally, they raised the bar in ways that favors established players like us. Gio and the team are executing very well in this rapid growth environment, balancing aggressive growth and share gain with operational discipline. We're expecting a strong year ahead and strong years in the future. So with that, let me turn it over to Gio to discuss it further. Gio? Giordano Albertazzi: Thank you very much, Dave. Let us go to Slide 3. Well, I'm quite pleased with how we started 2026. Q1 was very strong with organic sales up 23% year-on-year. We reported growth of 30% when we include M&A and FX. From a regional perspective, America was the primary engine with 44% organic growth. APAC was up 12% organically, while EMEA was down 29% organically. In the few slides, you will hear us elaborate on some of the [ encouraging ] dynamics we are seeing in EMEA. Adjusted operating margin came in at 20.8%, up 430 basis points year-on-year, and 180 basis points above our guidance. Margin performance and strong top line growth drove adjusted operating profit of $551 million, up 64% year-on-year. Adjusted diluted EPS of [ $1.17 ] were up 83% versus Q1, '25 and exceeded our guidance by $0.19. Adjusted free cash flow of $653 million was up $147 million versus the prior year, driven by higher operating profit and continued working capital improvement. We are raising our full year guidance, and we now expect adjusted diluted EPS of $6.35, up 51% from 2025. This is supported by raising our adjusted operating profit guidance to $3.2 billion, up 53% from 2025. Adjusted operating margin is now expected to be 23.3% to 190 basis points higher than 2025. And let's go to Slide 4. Let me start with the market environment. Our pipeline momentum continues to be strong. Our pipeline generation is robust and we're still expecting another year of strong orders performance in 2026. We anticipate orders to be up year-over-year, which reflects the sustained demand environment we are seeing across our markets. Americas continues to show remarkable strength. The market momentum is broad-based and robust. Our pipeline in the region continues to expand as we convert opportunities. In EMEA, the spring continues to uncoil. We're seeing improving market sentiment throughout the quarter with momentum building. I know we do not disclose orders but we are very pleased with EMEA's Q1 bookings. We feel good about EMEA returning to year-over-year sales growth in the second half, which you see embedded in our guidance. When it comes to APAC, we see positive market dynamics across the region. Rest of Asia and India are showing convincingly strong pipelines and dynamics with robust momentum building. China is also showing encouraging pipeline movement, and this positions us well as we move through the year. On pricing, we continue to see favorable dynamics. We expect positive price costs in '26, including the impact of tariffs and tariff countermeasures. From a manufacturing and supply chain perspective, we're expanding while continuing to strengthen our resilience. Our regionalized footprint and multi-sourcing strategies are maintaining stability despite evolving dynamic trade dynamics and tensions in the Middle East. We are accelerating our strategic capacity investments to meet the demand we are seeing. We're expanding our global manufacturing service footprint while unlocking latent capacity with VOS driven productivity gains. Our cost management remains disciplined. We expect these investments to position us very well for the current and future demand environment. We manage commodities and components proactively. This, combined with our multisource model and supplier diversification provides a critical buffer in what remains an inflationary environment. Through various countermeasures, we are actively working to mitigate tariff exposures, including recent changes under Section 122 and 232. In this very dynamic environment, growth-wise, geopolitically, et cetera, we stay focused on supply chain resilience, growth, capacity expansion and navigating the tariff environment. A lot going on. But we are focused on execution. And let's go now to Slide 5. We continue to see very robust growth in demand for data centers. And as a result, we are focusing investments on capacity expansion, supply chain and engineering capabilities. We are committed to continue to grow capacity, supporting our customer demand, and we continue to deliver above market growth. Our CapEx in Q1, sustainably higher than in the same quarter last year is a testament to that commitment. We are making significant investments in capacity expansion across both manufacturing and services. On the manufacturing side, we're expanding capacity organically across multiple sites globally and particularly across the Americas, on which you see some details here. These investments are strategic and positions us to meet the accelerating demand. We do this for growth but also to bolster our overall operational resiliency. This capacity expansion is broad-based, power management, thermal management, infrastructure solutions and IT systems across all technologies. We're doing the same with our services capability. Specifically, we are scaling our people and service capacity vigorously and [ convincingly ], across all service technologies and regions. In particular, the acquisition of [indiscernible] significantly strengthens our fluid management and liquid cooling capabilities, enhancing our system-level services offering. This is one of the most technically demanding and financially consequential aspects of modern data center operations. With respect to our supply chain, we have prioritized multi-sourcing strategies to mitigate supplier risk. Strategic acquisitions are further strengthening our supply chain capabilities. And finally, we continue to prioritize investment in our engineering capabilities in multiple directions. Clearly, one is engineering labs, central to development of our technology portfolio. Customer witness test capabilities are another important area of investment. The complexity of data center technologies requires extensive test capacity at the beginning of a delivery. Growing customer test capacity with volume is a growth enabler. We will have an opportunity to continue to elaborate on what capacity expansion means during our upcoming Investor Day. And with that, it's over to you, Craig. Craig Chamberlin: Thanks [indiscernible] Let's start with the first quarter results on Slide 6. As you can see, we had an excellent start to the year. Adjusted diluted EPS was $1.17, up 83% year-over-year and $0.19 above our prior guidance. On the top line, net sales were $2.65 billion, up 30% versus prior year, with organic net sales up 23%, with acquisitions contributing 4% and favorable FX adding 3%. This organic growth was driven by Americas, up 44% and APAC up 12%, partially offset by EMEA down 29% organically. Adjusted operating profit of $551 million increased 64% versus the prior year and came in $56 million higher than our guidance. Our adjusted operating margin of 20.8% expanded by 430 basis points versus last year, showing a great operating performance from the team. The main drivers were strong operational leverage on higher volumes, productivity gains and favorable price cost execution, which was partially offset by ongoing tariff headwinds. On the cash side, we delivered $653 million of adjusted free cash flow. That's up 147% from the prior year first quarter. This was supported by higher operating profit and working capital efficiency, partially offset by higher cash tax and increased net CapEx, as we continue investing in capacity and ER&D to support business growth. We exited the quarter with net leverage of 0.2x, providing us with significant strategic flexibility. Flipping to Slide 7. Let's look at segment performances by region. Americas delivered another outstanding quarter. Net sales were $1.81 billion, up 53%, with 44% organic growth. reflecting strong broad-based momentum across nearly all product lines. Adjusted operating profit was $490 million, with margins benefiting from operational leverage, disciplined execution and partial intensity. Looking at APAC, net sales were $514 million, up 15%, 12% organically. Organic growth came in below quarterly guidance, primarily due to timing. Adjusted operating profit of $67 million was up approximately 48% year-on-year, mainly driven by volume leverage and operating discipline. Turning to EMEA. Net sales were $321 million, down 29% organically. We believe this is a temporary reflection of softer orders that we saw in Q2 and Q3 of 2025. However, we are seeing opportunity generation accelerating, reflecting improved customer demand and supporting a return to sales growth in the back half of 2026. We saw a step down in margins here year-over-year due to operating deleverage. However, our conviction has gotten stronger for a second half recovery in EMEA, which you see embedded in our EMEA full year guidance. On Slide 8, let's discuss our second quarter guidance. We're projecting adjusted diluted EPS at the midpoint of $1.40, which is 47% higher than our second quarter 2025. Net sales at the midpoint are $3.35 billion, which reflects 27% net sales growth versus prior year. Adjusted operating profit at the midpoint of $710 million represents 45% growth versus second quarter 2025. This strong profit growth is supported by robust organic sales growth and continued operating leverage. Adjusted operating margins at the midpoint of 21.2% is up 270 basis points, supported by strong organic sales growth [indiscernible] cost leverage. Additionally, we expect to materially offset unfavorable margin impact from tariffs. This guide reflects our confidence in the strength of our market position and our ability to execute on the significant opportunities ahead of us. Now on to Slide 9. Let's talk about our full year 2026 guidance. We continue to expect another strong year of strong performance across all key metrics. We are raising adjusted diluted EPS guidance by $0.33 to a midpoint of $6.35, which represents 51% growth versus prior year. For net sales, we're updating our guide to $13.75 billion at the midpoint, reflecting 34% net sales growth versus prior year. By region, we expect organic growth rates of high 30s in Americas, mid-20s in APAC, and flat in EMEA. The updated adjusted operating profit is now at a midpoint of $3.2 billion, representing 53% growth versus prior year, and $160 million higher than our prior guidance. This strong profit growth is driven by a combination of robust organic sales growth and continued operational leverage. Finally, on margins, we're guiding to 23.3% adjusted operating margin at the midpoint, an expansion of 290 basis points from 2025, and 80 basis points [ tied ] in our prior guidance. This expansion is supported by 30% organic sales growth and continued operational leverage. We expect to be price/cost positive for the year, inclusive of tariff impact and the countermeasures. With fixed cost leverage, [indiscernible] in growth, ER&D and capacity. For adjusted free cash flow, we're maintaining our guidance $2.2 billion at the midpoint, up 17% versus prior year, primarily due to higher operating profit, partially offset by higher cash tax and net CapEx investments. With that, I'll hand it back to you, Gio. Giordano Albertazzi: Well, thank you, Craig, and let us go to Slide 10. And before I wrap up, I once again want to invite all of you to tune in to our 2026 investor conference that will be held on the 19th and 20th of May in Greenville, South Carolina. This will be an excellent opportunity to gain first-hand insight into Vertiv's visions and strategy from our leadership team. On the first day, the agenda includes a comprehensive market update, a detailed financial overview, and our updated multiyear outlook and Q&A sessions, of course, with the leadership team. The following day, we will have a technology session where you'll hear about how we continue to innovate and drive the industry. This will be followed by a tour of our Pelzer Infrastructure Solutions facility for those who will be joining us in person. It's going to be a great opportunity to see what we're building and where we are headed. And now let's go to Slide 11. Our first quarter results were strong testaments to Vertiv's execution capabilities and the momentum continuing to build in our markets. The demand environment is robust and we are very well positioned to carry that forward. We have received -- we have recently announced two strategic acquisitions that are expected to strengthen our competitive position. [ Thermal Key ], which is anticipated to close in a few months, we'll expand our thermal management portfolio with great heat exchange know-how and a leading range of dry coolers, a capability for the globe, starting in EMEA. Heat rejection is becoming more complex for AI data centers and a portfolio comprising chillers, dry coolers, trim coolers, offers great flexibility and efficiency opportunities for our customers. [ B, market ] structures, which brings custom engineers structural fabrication capabilities that accelerate our ability to deliver manufactured and converged infrastructure solutions at scale. Both are expected to provide capacity and capabilities to better serve our customers while expanding our technology base. We have raised our 2026 guidance, reflecting our confidence in the trajectory of the business and opportunities ahead. EMEA is absolutely part of the AI story. And we're seeing that play out with customer projects like [ Ecodata Center ] in Sweden designed to support the most demanding AI workloads with NVIDIA's latest generation [indiscernible]. [ Vertiv 1 ] core was selected to deliver the full data center solution here, encompassing power, thermal IT white space and services. We are excited about our collaboration with [ C Power Energy ]. Together, we are enabling U.S. data centers to turn their on-site energy assets into grid resources, accelerating speed to power, improving resilience and reducing cost for data centers and their communities. This is the kind of end-to-end thinking that sets Vertiv apart. Our long-standing customer relationships, combined with our partnerships create a significant competitive advantage that is very difficult to replicate. We continue to move further and the market is recognizing it. Achieving investment-grade credit ratings and inclusion in the S&P 500 are meaningful milestones. They reflect the strength of this business, the execution prowess of this team, and the confidence the market has placed in our trajectory. I do not take that lightly. Neither does the rest of the Vertiv team, we hold ourselves to a high standard and will continue to raise the bar. We had a strong quarter. We expect to build on it and we will. And with that, we can begin the Q&A. Operator: [Operator Instructions] And your first question comes from the line of Scott Davis with Melius Research. Scott Davis: Can you talk about the prefab market, like how important this market is? Or is there any way to think about a TAM? You seem to have a lot of content in prefab. I'm just trying to get a sense of how the customers view the importance of that content? Giordano Albertazzi: Thank you for the question, Scott. Multiple dimensions to this. One is we know that speed, or time to token is absolutely essential in the market. Clearly, prefabrication alleviate challenges on site -- the construction site is always a complex system to manage. There is a scarcity of talent trade resources we see, and we certainly are stimulating, if you will, an increasing adoption of prefabrication. But there is way more to it than that. For us, prefabrication is not just prefabrication. It's convergence of our solution into a system like [ one core ], not only [ one core ], but [ one core ] SmartRun. It's systems that are designed, converged and optimized already from the beginning on a given set of [ Lowe's ] and silicon. But -- and it is also a way to make the whole system more efficient and more dense in many respects. So there are multiple reasons why this is being adopted. And there are multiple reasons why we believe we are ahead of the pack here because we're not just an integrator. We provide technology. You were also asking about the TAM for us. Clearly, that is a concentrator of opportunity for us because the prefabrication is, for us, an old Vertiv technology solution. So that help us to capture more of the TAM. Scott Davis: That's helpful, Gio. Excuse my voice, the allergies are [ killing me since ] the last couple of days. You mentioned capacity adds with productivity and I'm kind of intrigued. What kind of productivity levels can you run when you try -- I mean, you're adding capacity, obviously, quickly, you're trying to get a lot of stuff out the door. What kind of levels of productivity can you actually run at just kind of leave it at that? Giordano Albertazzi: Well, my productivity comment was really kind of the manufacturing systems in a factory vis-a-vis having kind of a piece-by-piece assembly going on, on site, that is the traditional way in which the data center business is run. I wouldn't go down the path of exactly comparing. But when we prefabricate them, certainly, we will have an opportunity to have a direct conversation when we look the floor in Pelzer. But we definitely achieved manufacturing productivity levels when we manufacture the systems. Operator: Your next question comes from the line of Amit Daryanani with Evercore. Amit Daryanani: Perfect. I'll try to stick to Lynne's ask for one question. Maybe it's a multipart though. Gio, the calendar '26 guide that you folks have right now, sort of, implies 30% organic growth for the full year, versus I think we've done like 22%, 23% growth in the first half of the year. Can you just help us understand what are the levers that you're seeing? And maybe you can quantify some of these levers that you're seeing that enabled the step-up in growth in the back half versus the first half? Assume EMEA and maybe more capacity in [ Rubin ] are all parts of the story. But I would love to just understand what do you see that gives you confidence that growth can accelerate organically in H2 versus H1? Giordano Albertazzi: Okay. I will start. Certainly Craig will also complement here. But -- but I'd say that it's really 2 things, if you really think about it at a high level. One is capacity. We are adding capacity, we're constantly adding capacity. But you could see from our CapEx profile, and what we mentioned about Q1, we're very, very focused on adding capacity and a lot of that capacity start to hit us in the second half. But the other thing is if you think about our Q4 orders, there certainly is a good load of backlog in that part of the year. If you think about the customer requests lead times that we've been talking quite extensively. So there's more to it, but I would say those are two important element to the equation. Craig Chamberlin: Yes. And Amit, I'll just -- I'll double-click on that a little bit. You're right in terms of APAC and EMEA. When you think of them in terms of the first half versus the second half, there is an accelerated growth in the second half in both of those regions. And we've talked extensively about that in terms of what we look like from -- and what we expect the coil to the uncoiling of EMEA to happen. And how we're seeing that come through. And that's the way it is in the guide as well. Operator: Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: I want to come around to service. Obviously, a very clear acceleration in the last several quarters and actually service growth kind of couplings of product growth in the Americas. We've been waiting for this backlog growth to really come through strongly. It looks like it's happening at this point. But could you maybe just address kind of the field organization, the ability for service to grow at this pace. How the margin complexion of service may or may not be changing, and just how to think about that outlook over the balance of the year? Giordano Albertazzi: Yes. There's certainly multiple angles here, Jeff. And again, I'm sure we'll have an opportunity to further elaborate in May. But at a high level, [indiscernible] satisfied with the trajectory of services, and that's true for both the project services and the life cycle services. To your question about what is our structural organization. We're very, very present in the territory, very, very local. But at the same time, we understand that those -- the big projects that are out today are also sometimes concentrated. So we have developed the ability to move people and have teams of people that are dedicated to addressing the big data center deployment when it comes to project services. But we remain and we continue to nurture and strengthen and grow a very good on the territory type of services presence. We mentioned a couple of times that we are investing heavily. I mentioned it in my script, we are growing our services population, and we will have details in May. And of course, here our strength and tradition and experience in training, e-commerce is absolutely essential, combined with increasingly strong tools that are at the tip of the finger of our engineers. So absolutely multi-faceted. What we like when we talk in general about services is the fact that the installed base that is being created is very, very conducive to our life cycle capture and business over time. Craig Chamberlin: Yes. And Jeff, I'll just double click on that a little bit, too. In terms of on a reported basis, yes, products and services are equal. If you look at organic, you're seeing the feeling or you're feeling the impact to [indiscernible] right there as well. So I just wanted to get to be sure that you kind of understood that. [ Pelzer ] is a big impact for us, but so we like that. Jeffrey Sprague: Yes, I did see that. I wonder, though, if you could also just, maybe, a little bit more color on how to think about margins. I guess the nature of my question is right, labor-related services. We don't think about operating leverage, right? It's man hours or people hours, but there's kind of other more sophisticated services that come into play. So just how should we think about operating leverage in that business as it grows? Craig Chamberlin: No. I mean I think you would probably -- you point to the fact of what we're seeing from our own overall incremental margins when you think about that. So overall incremental margins were always in the neighborhood of 30% to 35%. I would say that would kind of be similar in terms of the way that we would expect services to pull through as well. Operator: Your next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: Just maybe we can talk about the evolution of behind the meter has become a lot more prominent over the past 4, 6 months. What technology avenues does it open to Vertiv? And I'm sort of thinking controls, best controls, sort of UPS transition as part of direct current architecture. But also maybe different chiller technology things like absorption chillers. I'm sure you've thought about the road map over the next 2, 3 years, and I know you'll talk about at the Analyst Day, but seems to be evolving fairly rapidly, how are you positioned? Giordano Albertazzi: Well, I think you've guided pretty much right, Andrew. In terms of -- certainly bring your own power is something that is here to stay, and we see it very, very clearly. We talked about partnerships today. Remember the partnership we have with [ Caterpillar ], with Oklo. So in various shapes and forms, bring your own power is a very important part of the data center equation, especially in the U.S. certainly, we play a role in everything micro-grids [indiscernible] storage systems interfacing and making sure that the entire powertrain be it direct or alternate are consistent and designed for a bring your own power solution. But -- as we -- multiple times -- and we keep saying the data center needs to be looked at as one system. So you're right when you say, hey, this is the implications might have implications also on the thermal side of things, so exactly absorption is one of -- one of the things. Then naturally, people and we think about. So we will have more details in May. But rest assured that we see bring your own power being an integral part of how we design and think a data center. So it is an opportunity for us ultimately because it makes the system more complex and with more -- possibly with more content for us. Operator: Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Can we just double click a little bit on what you're seeing in EMEA. It seems like from the commentary at the beginning of the call that you're gaining conviction in the second half ramp. So could you just talk a little bit more about what you're seeing and hearing from customers there that's driving that higher confidence? Giordano Albertazzi: Well, we see -- well, you're right, exactly as I said, we're very pleased with our Q4 orders. We are very pleased with the Q1 orders and pleased by the -- what we see in the pipeline. So we see the market moving. We see a pipeline acceleration increasing. That is really a signal and to proof of a service [indiscernible] market and a demand that is there, which was natural. That's why we were talking about a coiled spring because there is a shortage of data center capacity, significant shortage of data center capacity, and even more profound shortage of AI-capable data centers in EMEA and in Europe, in particular. So hence, the dynamics that you see. And of course, we are very well positioned in Europe because of historically our strong presence but also because a lot of the players are players here and are players in Europe. So there is a very encouraging opportunity there. Operator: Your next question comes from the line of Patrick Baumann with JPMorgan. Patrick Baumann: Just had a quick one on margins. Just wanted to see if you could give some color on the sequential expectations. So from first quarter reported to the second quarter guidance, looks like the incremental margin is kind of in the low [ 20s ]. And I'm just wondering if you could unpack the moving parts on that, whether it's capacity investments, or tariffs or whatever. Just any color you can give on that. Craig Chamberlin: Yes. And Patrick, I would say, again, when we look at it sequentially or year-over-year, year-over-year, it's in the low 30s, which is what we are expecting in terms of our guide. Quarter-over-quarter, there is a little bit of a headwind as we bring on capacity. This is probably one of our bigger ramps in terms of capacity in the second quarter. So there would be a little bit of a, I'd say, a change in that when you look at it for the first quarter to second quarter. But if you look across the full year, we're still guiding to that between that 30% to 35% for the overall sequential margin. So I'd say it's a bit of a bump from 1Q to 2Q in terms of when we're bringing on capacity and working through all the different various actions that we have to do, offsetting all the tariffs and working through that, the [ 232s ] have now changed. So there's a little bit of a dip there, but I'd say, overall, still feel very strong about the year being in the 30% to 35% range that we've given. Patrick Baumann: Just a quick follow-up on that. The tariffs, I think you said to materially offset it, you thought that would be at the end of first quarter. Is that kind of slipped out to second quarter now because of the changes? Or are you kind of already there at the end of the first quarter? Craig Chamberlin: I'd say we're already there at the end of the first quarter. As 232s have changed, we're continuing to do, I'd say, actions and countermeasures around those. And if you look at it for the year, we feel confident that we'll continue to materially offset those. Operator: Your next question comes from the line of Andrew Kaplowitz Citi. Andrew Kaplowitz: Obviously, you've talked about the Americas continue to be strong, but maybe you could talk about how much of the business is still being driven by hyperscalers in colo versus enterprise. I assume it's still heavily weighted towards the forum. But enterprise markets seem to be picking up a bit given AI needs and usage. When could that impact Vertiv? Is it something you see accelerating in 2027 or not, sort of yet? Giordano Albertazzi: Clearly, we continue to see hyperscale colo, new cloud being the biggest driver of certainly is true in the Americas, but globally pretty much. Certainly, there is -- there is an element of enterprise here. A lot of enterprise will continue to happen through cloud. So not always easy to separate. But we see enterprise started to adopt AI when that will be visible in terms of growth above the levels that we shared with you in the past, that's something that we will certainly elaborate in May, but it's probably a little bit still far away as independent. There is a lot happening at colo level, if that helps. Operator: Your next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about the transition to 800-volt architecture. There's a lot of moving parts, but just wondering what does this mean for Vertiv content? And when does the company expect to start shipping to these 800-volt design facilities. And just specifically interested in liquid cooling and wondering if there could be some TAM expansion with applications beyond just cooling the chips as they're [indiscernible] a higher level of heat presumably running through the facility? Giordano Albertazzi: Chris, thank you for your question. Clearly, we've seen early as a transition -- a wholesale transition to 800 volt. Clearly, 800 volts going to be an important portion of the total market as we go into 2027 and beyond. We are on our on time with our programs. We were talking about second half this year launches of portfolio. We are pleased with where we are in terms of the customer feedback with the prototypes and validation activities that we have ongoing. Shipping will be a little bit further away, but I think it's a little bit premature to elaborate too much where we see it as a 2027, I think this one. When it comes to liquid cooling the influence of 800 volt. I would say that there will be a correlation, [indiscernible] necessarily simply because 800 volt DC is applied for very high density compute. That very high-density compute will see not just liquid cooling for the chip, but for a much bigger array of electronics across the entire IT stack. And of course, that has then influenced the entire powertrain, thermal chain. So we see that as an opportunity for us. We're very excited very excited about -- very pleased with where we are with the 800-volt DC programs, and we're getting ready for it. Operator: Your next question comes from the line of Amit Mehrotra with UBS Financial. Amit Mehrotra: I just wanted to ask a question about the pipeline. I think what was so interesting last quarter is, obviously, you had a big, big order number, but I believe the pipeline also grew double digits sequentially. Maybe you can just talk about the pipeline as it kind of evolved in the first quarter, momentum and quoting activity funnel. Anything you can give within the confines of not talking about orders? Giordano Albertazzi: Yes. Well, thanks for -- thank you for the question. Clearly, we were very vocal about the strength of the pipeline before. And we are as vocal about the strength of the pipeline in -- at the end of Q1. And with that, the pipeline duration, that to us is exactly what you defined as the activity volume of commercial volume of commercial activity. And this growth and this dynamism is broad-based. It's broad-based across our technology range and it's broad-based across our regions. So very pleased and very encouraged, and hence our comment about our overall year orders. Amit Mehrotra: Anything to call out in duration? I know you said most of it is within 12 months, maybe some leading it to 18 months. Any change in complexion on the orders as you come into the first quarter or second quarter in terms of duration or not? Giordano Albertazzi: You're talking pipeline or you're talking orders, just to be clear? Amit Mehrotra: Talking about orders. I'm talking about what's in the backlog right now, the growth? Giordano Albertazzi: What's in the backlog? Could you think about a backlog shape that is, if anything, a little bit more elongated, but not something dramatic to the point that the shape of the backlog is totally different. So there is no distortion of backlog. If anything, it's a backlog, that is a little bit more elongated. That, of course, gives us visibility, good visibility in 2020 -- in 2027. As we said, a lot of the projects in the industry are large projects where customers asked for, call it, [indiscernible] sorry, 12 to 18 month delivery windows. We have seen some occasions the very requested delivery window shorten a little bit. We, of course -- maybe on that 9 to 12 months window. Our average delivery time of which we're capable are shorter than that. But again, you can't really say different product lines. Different dynamics, different dynamics, supply and demand. But in general, despite the fact that, of course, it's everything very dynamic, pretty too much I go back to what I was saying. A backlog that is not dramatically different, if anything, a little bit more elevated. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just to switch tack a little bit to the sort of cash flow and balance sheet. I suppose, just trying to understand the free cash flow dollar guide is unchanged, and I can see the sort of bigger working cap outflow dialed in, but I would think you'd get good customer advances from orders and your working cap was a nice tailwind in Q1. So maybe just talk us through sort of the thinking there and the balance sheet allied to that, extremely unlevered as a result of that good Q1 cash flow? Any highlights you'd give us on sort of capital deployment from here? Craig Chamberlin: And I'll start off and I can pass it to Gio. But I would say in terms of just looking at the working capital over the course of the year, kind of two points on that. One is, yes, we are investing in terms of the ramp. So you see a little bit of a drag from that from an inventory perspective. And when we look at our order book and forecast out the way that we look at customer down payments, or customer advancements, we are a little bit prudent in the way that we look at that in the way that we forecast that. So both of those come into consideration when we look at the guide, Julian. So again, you're feeling a little bit of that and we're we basically would say the same thing is, one, there's a little bit of a ramp in terms of inventory. And two, just some prudence in the way that we look at our order book and the down payments we expect. On number two, on the capital deployment when you think of the [ 0.2 ] leverage, I think we go back to what we've said all along is there's two spaces where we love to invest in on a regular basis, and that's R&D book and the capacity book. And you can see on the flow-through of our cash statement that we're following with that -- that drumbeat that's what we like to do, and that's where you see continue to invest heavily. The other portions of that are capital deployment in terms of M&A, or stock buyback, or increased dividends. I think the biggest area that we had used cash there and that we always look to have some dry powder would be the M&A space. We've done some this quarter, as you saw. I think we'd continue to keep that open and that optionality available for us. Giordano Albertazzi: Yes. No, absolutely. Maybe [indiscernible] comments on the M&A side, you see us having a very dynamic posture in that respect. When we say -- it said and continue to say that our pipeline is -- M&A pipeline is very active. You have seen us do acquisitions that are also on predominantly technologized. We love technology. And our pipeline is well structured and quite convincing. So we'll continue to be focused on this area of capital deployment. Operator: Your next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I wanted to ask about the standard modular liquid cooling products. Just very interested in the level of customer take on this? And what role will this product line play in the rollout to more of the colos and enterprise customers? Giordano Albertazzi: Can you help me a little bit, Deane, because we have a very robust portfolio. I'd say, probably -- without probably, we believe the most robust. Can you help me exactly when you say standard liquid cooling product? Deane Dray: Yes, these were the ones that were talked about and displayed at the last super compute. So you're seeing -- you've heard in references [ lid cooling ] in a box. And it's just for the customer, the colos and enterprise who may not need such a customized system that Vertiv is now has this line, and as are some of your competitors on more of a standard modular design. Giordano Albertazzi: Yes. Let me elaborate on that. And thank you, Deane, for your question. When it comes to the liquid cooling portfolio, we have certainly an ability to provide very optimized liquid cooling solutions on specific [ second ] types, so absolutely optimized. We have a total ability to customize to customer needs when that is required. So it is both an ability to talk to our customers and say, hey, this is what you really need for this type of silicon, but also it is an opportunity for our customers to have exactly their design, depending on very specific in some cases, requirements. But if we go to super compute, the center stage was our smart run solution, which is the entire white space infrastructure comprising everything, white space data hold, power distribution, liquid cooling. So I would say that the integration and the convergence of that solution across multiple technology areas that normally happens on site with great consumption of time and cost is something that we have changed dramatically with a SmartRun. So SmartRun is extremely successful, and I think we have done our part again to change the way the industry works. Deane Dray: Are you expecting more regulation in liquid cooling. There's been a lot of discussion about that and what would the implications be? Giordano Albertazzi: Not necessarily. I think there is a -- the -- this part of the industry is maturing. So there are some of the let's say, way things are done are maturing and stabilizing a little bit in terms of water temperature, et cetera. But that, too, evolves over time as we know. Operator: Your next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: So I want to go back to the strength in free cash flow in 1Q and obviously, you had another very strong quarter of deferred income customer deposit bookings. And I'm just thinking, is this a way to think about backlog growth in the quarter? And I guess my question is, do we typically book the cash from the deposits in the same core as the orders? Or is this a reflection of the strength we saw last quarter? What I'm just waiting to say, is that a way to think about the backlog growth? Craig Chamberlin: I mean I think it depends on the customer, Nigel, in terms of what we get from an advanced payment perspective, or will we get from a downs -- a down payment perspective. And their payment terms in terms of when the actual cash would come in. So again, some of that strength in the first quarter is going to come from payments that were from orders in the fourth quarter. Some of it's going to come from orders that were in the first quarter. And that will continue out through the year. And as I was just mentioning to Julian, as we look at our working capital across the year, we are a little bit prudent in terms of how those payments will come in and when they will actually execute. And how much we would get from a percentage perspective when we look at the order book as well. So it's a combination of all those things. But again, it is a way to look at backlog, but it's not entirely our read through. Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I want to better understand what the mix shift over time towards solutions like SmartRun and [ One Core ] means for your margins? And if there's a meaningful difference in what investors expect for incremental margins as those become a bigger piece of your overall sales mix? Craig Chamberlin: Yes. I mean I don't think in terms of -- as you mix more towards those, you're going to see a margin dilution from a mix perspective. I would say we'd be able to hold relatively on a product basis, margins kind of in line with what we'd expect historically as you mix towards those product lines. So I don't expect a major mix headwind from that. As we look at it becoming a bigger portion of our sales and our outcomes. I would say, again, there's multiple products in there, and there's multiple mixes that we would go across all the different business units. So I wouldn't say it's a significant headwind that we're looking and we're adjusting for. Operator: Your next question comes from the line of Noah Kaye with Oppenheimer & Co. Noah Kaye: I guess just one related question to that. Because Gio, you talked at the start about the convergence, right, of different disciplines, power, cooling, IT. Historically, we saw a lot of procurement of the different components based off of best point solutions. If that's shifting, can you talk a little bit about how it's shifting the conversations? Who you're having conversations? With who's making the decisions among your customers and how that's impacting your sales cycle? Giordano Albertazzi: Well, certainly, convergence is very important. And as I was saying, it's not just prefabrication, but it's an optimized system. That's why having an optimized system with Vertiv technology is a winner. But we shouldn't think about this as replacing the point-to-point, let's say, the product point type of activity. It is a gradual and partial shift. And it really different players have different degrees of adoption. So if you think about power modules. Those are pretty much becoming a standard in the industry. So you'll see that people will start to buy power modules instead of necessarily going into each and every component inside. It's never black and white, but that's a direction. When it comes to the entire converged system, the entire manufacturing system, SmartRun, well, the interfaces might be slightly different. But again, it's not a totally different breed of players, or people you discussed the engineering, or the transaction. But there is also a [indiscernible] different category of people in the industry that might not have, historically, that type of procurement, or engineering -- or engineering staff and experience. Nor do they need it when someone is capable of providing an already fully optimize pre-engineered converged system and solution. So the market is taking multiple going in multiple direction. Some are partially overlapping. Some are different. So we are very happy about our point products and -- to point product, let's say, type of business. As well as we see integration and convergence becoming a bigger part of the market that we serve. Operator: Your next question comes from the line of Andrew Buscaglia with BNP Paribas. . Andrew Buscaglia: I wanted to touch on -- you made some -- a couple of deals in the quarter, [indiscernible] Any way of framing the size of those or what you paid? And then our deals going forward more like kind of like the smaller bolt-ons, or we see more along the lines of like a purge rate if you were to move forward this year with more acquisitions? Craig Chamberlin: Yes. First off, just to answer the question on side. We didn't disclose any of the size of the businesses. So again, we probably wouldn't refer back to that. I mean, in terms of materiality, we did do some press releases on them, but we didn't give any of the sizes, but if they were materially impactful to us, we would have had [indiscernible] Giordano Albertazzi: Can you repeat the question around [indiscernible] I'm not sure I heard you. Andrew Buscaglia: Just more so, you guys indicated interest in M&A deploying capital towards that this year. Will we see more deals along the lines of like a [indiscernible] right spending-wise or more of these like smaller bolt-on niche kind of acquisition? Giordano Albertazzi: Well, exactly. We -- as you saw us with [indiscernible], when -- it's really about what the value of the asset that we have in front of us. So we have now the reticence in cutting bigger checks when that's needed and what's opportune, let's say, as we have demonstrated. And our balance sheet is certainly very, very strong. And when we see value, we offer value. And value is not just per se, there's value in the context of our long-term strategy and our technology and market growth strategy. So rest assured that we have no -- how can I say, no fixed [indiscernible]. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Gio Albertazzi for any closing remarks. Giordano Albertazzi: Well, thank you, [ Jeannie ]. Thank you very much. And thank you all for your questions and the conversation today. I'm quite pleased with what we have accomplished in the first quarter and how we are positioned as we move through 2026. The entire Vertiv team has executed well, and I'm grateful for the strong partnership we have with our customers, suppliers and partners in general. We are making real progress. But as you've come to know, we have never content with where we are. I am pleased, but I'm certainly never satisfied. We'll continue investing ahead of the market, maintaining our leadership in technology and innovation, and executing with our speed and precision our customers expect from us. I'm confident ever about where Vertiv is headed. The trajectory is strong. The opportunities are significant, and we are well positioned to capture them. Thank you all, and I hope you have a wonderful rest of the day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2026 First Quarter Earnings Call. My name is Anna, and I will be your conference operator for today. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations. Emily Gooden: Thank you, Anna, and good morning. We will begin today's call with prepared remarks followed by a question-and-answer session. I would like to remind you that this conference call will contain forward-looking statements, including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, noninterest income, margins, allowance, taxes and noninterest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties and other factors, which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman and CEO, Mr. Tim Laney Tim Laney: Well, thank you, Emily, and good morning, and thank you for joining us as we discuss National Bank Holdings' First Quarter 2026 Financial performance. I'm joined by our President, Aldis Berkonz; our Chief Financial Officer, Nicole Van Denville; and John Steines, our Executive Vice Chair and Executive Managing Director of Strategic Initiatives. The NBH team delivered an outstanding first quarter, and we believe we're well positioned to have a very strong year. In fact, momentum across the organization reinforces our belief in our ability to grow our earnings this year and surpass $1 of earnings per share in the fourth quarter. In the first quarter, we delivered record loan fundings and our net interest margin expanded to 4.06%. We experienced positive trends with all credit metrics, and we believe the NBH team is well positioned to deliver meaningful growth in earnings this year. I want to thank our bankers for their focus on taking market share as well as expanding relationships with existing clients. I also want to thank our teammates who worked diligently behind the scenes to efficiently deliver a great experience for our clients. And on that note, I'll turn the call over to Nicole for greater financial details on the quarter. Nicole? Nicole Van Denabeele: Thank you, Tim, and good morning. This morning, I'll review our first quarter financial results and provide guidance for the remainder of 2026. As a reminder, our guidance does not include any future interest rate policy changes by the Fed. For the first quarter, on an adjusted basis, we reported net income of $32.6 million or $0.72 of earnings per diluted share, 43% higher than the prior quarter. The first quarter's adjusted return on tangible assets was 1.2% and the adjusted return on tangible equity was 11.8%. During the first quarter, we closed the Vista acquisition, generated record quarterly loan originations of $805 million and delivered annualized loan growth of 12.4%. Fully taxable equivalent pre-provision net revenue increased $8.5 million or 21.7% compared to the prior quarter after adjusting for transaction-related expenses. Loan balances increased by $2.2 billion or 29% during the quarter. Our team generated $285 million of organic loan growth on top of $1.9 billion of loans acquired in the Vista acquisition. We entered the second quarter with robust loan pipelines, and we expect to achieve our full year loan growth guidance of approximately 10%. Fully taxable equivalent net interest income for the quarter totaled $111 million, an increase of 25.7% compared to the prior quarter. The linked quarter increase was primarily driven by $2.1 billion of higher average earning assets and the quarter's strong margin. Net interest margin expanded 17 basis points during the first quarter to 4.06%, driven by a 24 basis point increase in earning asset yields. For the remainder of 2026, we expect net interest margin to remain near 4%. Deposit balances increased by $2.2 billion during the quarter on a spot basis, inclusive of Vista balances added at acquisition close. Deposit costs remained low at 1.94% and our loan-to-deposit ratio ended the quarter at 91.9%. Turning to asset quality. Credit quality remains strong. We recorded $4 million of provision expense, primarily to support the quarter's strong loan growth. Net charge-offs were 8 basis points for the quarter or 34 basis points on an annualized basis, and the allowance coverage ratio remained consistent at 1.18%. As of March 31, we continue to hold $24 million of marks against our acquired loan portfolio, which would provide an additional 25 basis points of loan loss coverage if applied across the entire loan book. Noninterest income increased 16.9% year-over-year and totaled $18 million for the quarter. For the remainder of 2026, we project to achieve our full year fee income guidance of $75 million to $80 million. As a reminder, this outlook includes $2 million to $4 million of Unifi revenue, which we expect to be weighted towards the back half of the year. Net interest expense totaled $96.8 million for the quarter and included $15.3 million of acquisition and restructuring costs. Excluding these onetime items, noninterest expense was $81.5 million. We have begun realizing cost efficiencies from the Vista acquisition. We remain on track to achieve our targeted expense synergies, the majority of which are expected to be realized following the third quarter system integration. In addition, we continue to invest in future growth by adding new bankers across our footprint. We have recently added more than 10 new bankers, resulting in approximately $0.5 million of incremental expense during the first quarter and which will add approximately $4 million in annual run rate expense. As previously guided, we project total noninterest expense for the full year 2026 to be in the range of $320 million to $330 million. Our capital levels remain well in excess of well-capitalized regulatory thresholds, even after deploying capital for our most recent acquisition and for share repurchases during the quarter. Common equity Tier 1 ratio ended the quarter at 12.5%, and the total capital ratio was a strong 15.8%. Tangible book value per share was $26, and we expect to outperform our earn-back expectations for the Vista acquisition. Importantly, we are on track to deliver earnings in excess of $1 per share in the fourth quarter of 2026. With that, I will turn the call over to Aldis. Aldis Birkans: All right. Well, thank you, Nicole, and good morning. Our first quarter was highly productive, and I want to thank our team for getting us off to a great start in 2026. The first quarter's performance is consistent with our internal expectations. And as Tim shared, we remain confident in our trajectory towards achieving $1 EPS by the fourth quarter. In terms of the Vista acquisition, the onboarding of new associates and clients has gone well, and our integration efforts remain on track. Turning to our financial performance. The strength of our balance sheet was on full display this quarter. We generated record quarterly new loan fundings of $805 million, which drove an annualized 12% loan growth. I will note that this quarter's loan production was not just strong but also well diversified across asset classes and geographies, reflecting the breadth of our platform. Furthermore, as we move into the second quarter, we are encouraged by our robust pipelines. And as Nicole shared, we are on track to deliver our full year loan growth guidance. The portfolio credit trends are positive, and we are proud of our top quartile performance. We ended the quarter with the lowest levels of criticized loans in 4 years while further reducing both NPAs and NPLs this quarter. This quarter's new loan production came in at an average rate of 6.4%, which remains complementary to our overall loan portfolio yield and contributed to a strong net interest margin of 4.06%. Our ability to maintain margin at these high levels highlights the quality of our deposit franchise and our commitment to relationship-based banking. We offer the best-in-class treasury management capabilities that contribute meaningfully today and position us well to drive sustained deposit growth in the future. I'm also pleased to report that our Trust and Wealth Management business has grown to $1.4 billion in assets under management, more than doubling over the past 3 years since we entered the space. This momentum translates into double-digit fee growth in 2026, reinforcing our noninterest income outlook and highlighting the important role this business plays in our broader noninterest income diversification strategy. Finally, reflecting our confidence in the durability and quality of our earnings, we took steps earlier this year to enhance our shareholder returns. We increased our quarterly dividend by 3% to $0.32 per share and took advantage of the market volatility to restart our stock buyback program with $16 million purchased in Q1. With that, I'll turn it over to John. Unknown Executive: Thank you, Aldis, and good morning, everyone. We appreciate you making the time to be on the call. It's hard to believe it has only been 105 days since we closed our transaction. In that short window, we've already seen real momentum, retaining key talent, attracting new talent and driving meaningful growth across our markets. From the beginning, we believe Vista and NBH were a strong cultural fit, and that conviction has only strengthened as our teams work side by side. Both organizations share the same foundational values, a disciplined credit culture, and unwavering commitment to client service and a people-first philosophy that drives everything we do. That said, I want to thank our legacy Vista teammates for their continued trust, hard work and grit through the first quarter. I would like to thank our new NBH colleagues for the way that you've welcomed us to the team. Together, we are doing great things. We also have made meaningful progress on the operational side, integrating Vista into NBH's broader systems and platform. Successful combinations are built on shared values. They are executed through discipline, hard work and an unwavering commitment to win, and I could not be more proud of our team. As I mentioned last quarter, joining NBH means the opportunity to pair a strong market presence and client relationships with a broader platform, enhanced offerings and a bigger balance sheet. The momentum from this combination is already visible, both internally and externally across all existing markets and to our clients and teammates alike. Since closing, we've added over 10 exceptional bankers to the organization, 4 of whom were sitting presidents at their prior institutions, which is humbling the bank. I've always believed the best clients follow the best bankers and the best bankers follow the best culture. We are seeing that play out with time. Additionally, Texas remains 1 of the most attractive banking markets in the country, with its pro-business environment, diverse account for our company. To meet that demand, we are delivering a broad set of capabilities, such as enhanced treasury management services, wealth and trust services and an expanded mortgage offering. and is built to meet clients across the full life cycle of their needs from day-to-day operations to generational wealth planning. We are energized by the opportunities in front of us. NBH has the right platform, the right markets and most importantly, the right people. To our shareholders, thank you for your continued trust. We could not be more excited about the road ahead. And with that, Tim, I'll turn it back over to you. Tim Laney: Well, thanks, John. Well, as you now know, we have a lot to feel good about with our first quarter results. We also feel great about our momentum as we dive into the second quarter. We've covered the company's core performance, and I want to also provide you with an update on our Camber and 2 Unified businesses. With respect to Unify, the platform has generated over 1,300 user applications year-to-date with weekly application volume accelerating from about 40 per week to most recently, nearly 400 -- while top of the funnel growth and early engagement metrics are strong, we still have work to do to drive higher deposit account openings and loan fundings. Having said this, I believe the team is gaining traction and getting close to a meaningful breakthrough. So more to come. Now in the 3 years that we've operated Camber, we've grown the program over $700 million to greater than $2 billion. Further, the team has continued to increase and diversify its deposit distribution network giving Camber far more pricing power and funds movement flexibility. Our small but mighty Camber team is making an incredibly positive impact. Turning back to our core business. We continue to build market share in attractive U.S. markets and our demonstrated ability to rapidly grow capital translates into a broad set of opportunities for NBH. Our focus remains on supporting our teammates, serving our clients, our communities and, of course, creating greater shareholder value. And we stand on our track record of doing just that. On that note, let's open up the call for questions. Operator: [Operator Instructions] We'll now take a question from Jeff Rulis with D.A. Davidson. Jeff Rulis: Wanted to check in on that sort of that dollar expectation plus of earnings in the fourth quarter. You kind of made that initial expectation margin was at 3.89% and you were coming off a net loan runoff here kind of fast forward to 12% plus organic growth and a 406% margin. I guess, any potential for breach that figure earlier in the third quarter. It seems like certainly your confidence, you doubled down in the release, but I wanted to check on the possibility of what needs to take place potentially if that happens in the third quarter? Tim Laney: Jeff, we had a track record of underpromising and overdelivering. I've got to tell you, having said that, we feel very, very good about our momentum. I feel like we're running on all cylinders at this point, which is quite remarkable when -- just to remind everyone, we closed on the Vista acquisition in the first week of January. So if you think about the time required to assemble organized teams, get alignment and then get focused on clients and markets, it's pretty remarkable what we were able to see our teams do, generating that 12%, 12.4% loan growth. We think it's -- it may very well be the tip of the iceberg. And then beyond that, what we're seeing early on in terms of the opportunity to expand treasury management services, wealth management services, residential banking services in markets like Dallas, get us very excited. Jeff Rulis: And just maybe jump into Nicole or all this on the margin, do you have March average for -- where that was? Kelly Motta: Yes. March came in very much in line with the overall quarter's margin. Jeff Rulis: Okay. And Nicole, I guess as you talk about the outlook for near 4% for the rest of the year, is that suggestive of maybe accretion was a bit higher in the first quarter? It seems a little conservative. I know that Tim just said is under promise over the liver, but I wanted to see if anything 1 timing of 406% margin, why that might lean back towards 4 for the balance? Nicole Van Denabeele: Yes. Yes. Well, Jeff, I'll start by saying that we are very proud of our 4-plus percent margin. The first quarter had about 5 basis points of loan accretion addition from the Vista acquisition. So even without that loan accretion impact, very strong net interest margin and from a loan yield cost of funding perspective, as Aldis mentioned, Q1 loan origination rate 6.4%, very consistent with where our current loan book is and we expect to fund that loan growth with full relationship core deposits, so maintaining our strong cost of deposits under 2%. That gives you right at a 4% margin. Operator: We'll now take our next question from Kelly Motta with KBW. Kelly Motta: Thanks for the question. maybe building on that -- that under promise, over deliver concept of the 10% loan growth. Notably, I mean you came in stronger out of the gate with the noise acquisition with 12% organic loan growth. So 10% seems to imply a slowdown in the remainder of the year. I guess, it does sound like your pipeline and expectations remain quite strong. How are you thinking about the cadence of growth? And what would be the factors, I guess, that would get you to potentially come in over the top of that 10%? Tim Laney: Well, Kelly, as a reminder, we provided the guidance on 10% going into the year. And we don't typically make changes in year-end guidance. And having said that, I think the 12.4% growth in the first quarter, given everything that was going on speaks to the kind of opportunity we're seeing in the market. So I think it's noteworthy that we saw very strong diversified growth across our markets. I really -- I can't complement our banking teams enough for focusing on clients, taking market share, expanding relationships. And we feel very good about our growth prospects this year. Kelly Motta: Got it. Got it. That's really helpful. Turning to expenses. I appreciate the color that you added new bankers over time that helps to drive growth, and it's ahead, which is what we want to see. It does seem like there are some moving parts with the cadence of expenses with hires plus the conversion later in the year. And I'm wondering if there's any way to get kind of a Q4 exit expense run rate, given the noise or how much on a dollar basis, you're expecting the cost saves to be post conversion? Just so we can manage the cadence appropriately coming out of the year for -- as we think through next year. Tim Laney: Yes, it's a great question, Kelly. And first, we really been delighted with the quality of bankers that have been coming to us as we've looked at opportunities to expand in certain targeted markets. And a good example of that is what John has been doing in our resort markets, I mean it's -- we think we're going to get very attractive returns on those investments. I would tell you that we are also very diligent in tracking our expense reductions related to the synergies of the Vista acquisition. It's something we've got strong alignment with, with respect to our incentives and something our Board is very focused on. I am convinced we will not only meet but beat the expense synergies that we modeled in the acquisition and shared with -- the Street. And now I'll throw it to Nicole maybe for a little more detail and answer to your question. Unknown Analyst: Yes. Kelly, you're right. So as we all expected, 2026 is a noisy year on the expense front. I will reiterate that full year guide of $320 million to $330 million. Where possible, we're taking action to realize expense efficiencies ahead of the system conversion, but the bulk of those synergies will come after our systems conversion, which is at the end of July. That, coupled with, as I mentioned, we're continuing to invest in growth. And then a little bit of color, if I think about Q2 on the expense run rate perspective. Q2 does have a couple of additional payroll days. Our merit increases come online. So there wouldn't be surprised if there's an uptick in expense from Q1 to Q2, and then it will trend down throughout the year as those expense synergies come online. Kelly Motta: Got it. That's helpful. Last one, if I can sneak it in, just because we are on the topic of expenses, the expenses related to Unifi that's still about $22 million for the year here? Unknown Analyst: Yes, yes. That is correct. We recognized about 1/4 of that in the first quarter and very much on track to keep at that $22 million, which just as a reminder, is flat compared to where we were last year. The $22 million does have for this year, full year of depreciation expense, which means that we've brought down the cash burn rate meaningfully year-over-year. Tim Laney: To expand on that, if you look at it on a pure cash burn basis, it's about $10 million this year. So that's noteworthy. Operator: Our next question will come from Andrew Terrell with Stephens. Andrew Terrell: I appreciate all the color. I wanted to ask on the dollar per share in the fourth quarter, the guidance there. What kind of provision are you assuming in that dollar per share? And I ask just because it seems somewhat tough if we just take out of the midpoint of the guide for fees and expenses and if the margin stays near kind of a 4% level. I guess it kind of feels tough to get to $1 per share. So I'm trying to figure out where specifically the guide could be conservative on those few points? Or if it's just a difference in provision. Aldis Birkans: This is Aldis. I'll try to answer that one. In terms of -- if you look at kind of breaking down by pieces, right, if we deliver on our loan growth and our promise we deliver type of basis we should be sitting at $1 billion-ish, if not more, of earning assets in fourth quarter than where you sit -- what we did in Q1. If you look at the fee guidance that Nicole provided, that has some upside there as we discussed expenses, certainly a significant step down in expense run rate from Q1 to Q4, as Nicole indicated, due to synergies and while we don't provide specific provision expense, there is plenty of room to provide for new loan growth in Q4 as well in order to deliver $1 EPS. Tim Laney: To be very specific on provision, look, our models will drive provisioning. We use those models as we forecast. It's part of what we rely on as we get to that $1 plus of earnings in the fourth quarter. So there's no -- I would say, Andrew, maybe to answer your question this way, there's nothing unusual. There's no assumption around meaningful, in fact, any reduction in provision. That's not what this is about. This is on the strength of earning assets and fee income as well as realizing the expense synergies in the Vista acquisition. And it's, in our mind, pretty straightforward. Unknown Executive: Yes. Andrew, it's a good question. One thing to also keep in mind is we did invest in some really high-caliber bankers in this first quarter. And I think you're going to see strong results leading into the second half as they come over and execute on those expenses that we like to see as investments. Andrew Terrell: Yes, great point. Okay. I appreciate it. And then on the just 34 basis points of annualized charge-offs this quarter. This is a couple of quarters in a row of a little bit higher charge-offs. Just maybe could you speak to what drove the first quarter charge-offs. And I know some of the commentary in the prepared remarks, just around criticized, classified NPAs coming down a little bit this quarter. It seems like it would suggest that you'd expect kind of a normalization lower in charge-offs. So maybe just want to unpack kind of the credit piece a bit. Tim Laney: Yes. Look, you can't see it yet, but we've had a dramatic reduction in our criticized classified loan ratios this quarter. we are feeling very, very good about the credit quality. There -- as it relates to NPAs being flat, I would just tell you that we've had normal ins and outs. We do expect NPAs to trend down over the course of this year. but we're not apologizing for where we stand right now. Our goal is always to operate in that top quartile of performance. You couple that focus with the fact that we are very excited about what we're seeing in terms of the reductions in Cris and classified and we're feeling good about the year. Operator: We'll take our next question from Matthew Clark with Piper Sandler. Unknown Analyst: Just a follow up on the margin. Was there a special FHLB dividend this quarter? And if so, how much? Unknown Executive: There was no special FHLB dividend this quarter. Unknown Analyst: Okay. Great. And then do you happen to have the spot rate on deposit costs at the end of March 31? Aldis Birkans: Yes, that's right around where we did for the quarter, low 190s. Unknown Analyst: Okay. Great. And then on the the buyback, how many shares we repurchased or at what price either one? Aldis Birkans: I don't think we disclosed the price at which we purchase. But again, as we see markets pull back, we are opportunistic in the market. And I think that's how we operate it on -- we do have a specific price in mind, but if you see a meaningful pullback in our stock, it's -- we jump in opportunistically. Unknown Analyst: Okay. I didn't see the price per share, I just saw the dollars, sorry. Okay. And then just double checking the baseline you're using for the 10% growth guide for loans is $9.3 billion with Vista. Emily Gooden: Yes. Unknown Analyst: Okay. And then on the organic deposit front, excluding Vista this quarter, it looked flattish to down modestly. Just any color there on whether some of that might have been deliberate or chalking it up to seasonality? And what's the [indiscernible]. Aldis Birkans: It's a great question. It's actually a combination of all above. It was there's some seasonality as we pull the books together, there was some remixing of deposits and that's why you're seeing kind of flat. I'll say, Vista was operating at 2.5% cost deposits -- so us keeping deposit costs all on a linked quarter basis almost flat. You can imagine there is a bit of a shuffling around there. Unknown Analyst: Got it. Okay. And last 1 for me. Just -- any update on the progress you're making to execute to unifi partnership and whether or not that we should expect something still this year? Tim Laney: Look, it remains a focus, and there's not much more we can say about it at this point. Operator: We'll now take a follow-up from Jeff Rulis with D.A. Davidson. Jeff Rulis: A little more of a housekeeping question. I guess I'm just trying to map the merger, the costs. I would imagine a lot in other, but were there others sprinkled in the salaries or occupancy or professional fees, just trying to get to where we could remove those going forward. Emily Gooden: Yes, Jeff, I'll take that one. I can give you some color. So for Q1, the majority of those acquisition onetime fit in salary and benefits. So as you can expect, as we work through our expense synergies, a lot of those are people-related items. Jeff Rulis: Yes, I guess not -- I just want to make sure we're clear. The synergies, I get looking at the onetime merger costs of $15 million and the restructuring of $1 million by line item, you're saying a decent portion of the merger, onetime in [indiscernible]? Tim Laney: Yes. Think of severance, I think of other exit-related compensation. Operator: We'll now take a question from Kelly Motta with KBW. Kelly Motta: One of my follow-ups was just taken -- in terms -- I guess the last 1 for me is on the fee outlook here. at least Q1 is annualizing below that range. And I believe there's some to unify expectation in the second half of the year, mapping. Is there anything else that would load that's expected to build in order to get you to that range? I'm just trying to think through kind of the moving parts and how much is to unify versus other kind of core banking fee related uplift of this level? Aldis Birkans: Right. This is Aldis. That's a great question. So yes, you're right, the unified elite fee component really is going to start hitting in the second half. So that's an uplift relatively to what we delivered in the first quarter, you look at the interchange and service charges, those are expected to grow some. And the piece that is always light in first and fourth quarters of the year are mortgage-related gains on sale as we enter in the summer season, we do expect we'll at least plan for some pick up there as well. Tim Laney: Kelly, we very much like what we're seeing in terms of fee income opportunity for this year. We have no hesitation in standing behind our guidance on fee income for '26. Kelly Motta: Got it. Thank you so much for the color. It's all for me, I'll step back. Operator: And I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks. Tim Laney: Well, thank you, Anna. And really, thank you, everyone, for your participation. I'll thank the analysts for their great questions today, and wish everybody a great day and the rest of the week. Goodbye. Operator: And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available in approximately 24 hours, and the link will be on the company's website on the Investor Relations page. Thank you very much, and have a great day. You may now disconnect.
Operator: Greetings. Welcome to Northpointe Bancshares, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brad Howes, Executive Vice President and Chief Financial Officer. Thank you. You may begin. Bradley Howes: Good morning, and welcome to Northpointe's First Quarter 2026 Earnings Call. My name is Brad Howes, and I'm the Chief Financial Officer. With me today are Chuck Williams, our Chairman and CEO; and Kevin Comps, our President. Additional earnings materials, including the presentation slides that we will refer to on today's call, are available on Northpointe's Investor Relations website, ir.northpointe.com. As a reminder, during today's call, we may make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures and encourage you to review the non-GAAP reconciliations provided in both our earnings release and presentation slides. The agenda for today's call will include prepared remarks, followed by a question-and-answer session. With that, I'll turn the call over to Chuck. Charles Williams: Thank you, Brad. Good morning, everyone, and thank you for joining. With 1 quarter completed, we're off to a very good start in 2026. Despite the macroeconomic uncertainty, our business model remains resilient and our exceptional team members continue to perform well. For the quarter, we earned $0.62 per diluted share and with a return on average assets of 1.28% and a return on average tangible common equity of 15.71%. Factoring in the impact of dividends paid, our tangible book value per share increased by over 16% annualized over the prior period. Our first quarter results were anchored by robust growth and continued market share gains in our mortgage purchase program or MPP business, strong performance in our residential lending channel, a modest reduction in our wholesale funding ratio and an improvement in overall asset quality. We've added a new slide, which is on Page 4 of our earnings call presentation, which I think really tells the story well. We're proud to be one of the only entirely mortgage-focused banks in the country. While certain aspects of our financial performance are naturally sensitive to mortgage rates, our diversification across the mortgage space has historically insulated us from dramatic income statement volatility typically associated with the mortgage industry. As outlined in the charts, we've continued to deliver consistent financial performance and grow tangible book value despite a challenging and volatile interest rate environment. One of the biggest drivers of our performance is the success we've achieved in our MPP business. Let me walk through a few highlights. MPP balances ended the quarter at $3.9 billion, an impressive growth rate of 51% annualized over the prior period. Total loans funded through the channel was $11.2 billion for the quarter, which is very strong considering the first quarter is typically slower due to normal seasonality in the mortgage business. By comparison, total loans funded was $6.7 billion for the first quarter of 2025. We have funded $4.6 billion in total loans during March, which is our highest volume month on record. I believe our first quarter results, combined with the momentum we have gained, set us up nicely to meet or exceed our 2026 growth plan. I'd like to now turn the call over to Kevin to provide more details on our business lines. Kevin Comps: Thanks, Chuck, and good morning, everyone. Let's start with our MPP business on Slide 6. Compared to the prior quarter, period ending MPP balances increased by $435.7 million and average balances increased by $59.3 million, with most of the balance growth occurring towards the end of the quarter. As I've discussed on prior calls, these are net of any MPP balances participated out. At March 31, 2026, we had participated $412.7 million to our partner banks, down slightly from the level at December 31, 2025. Let me break down our first quarter 2026 growth a bit further. First, we brought in 8 new clients, which totaled $205 million in additional capacity. Second, we increased facility size for 11 existing clients, which totaled $465 million in additional capacity. And third, the overall utilization of our existing clients remained strong during the quarter, averaging 57%. Average MPP yields were 6.59% and fee adjusted yields were 6.82% during the first quarter of 2026. Our average yield was down 39 basis points from the prior quarter, which is consistent with the decrease in SOFR over that same time period. Turning now to Retail Banking on Slide 7. I'd like to highlight the results of the 3 main businesses within that segment. Starting with residential lending, which includes both our traditional retail and our consumer direct channels, we closed $693.7 million in mortgages during the first quarter, which is down from $762.0 million in the prior quarter. During the first quarter of 2026, saleable volume was $626.6 million. Of that, 39% was in the consumer direct channel and 61% was in the traditional retail channel. This compares to $671.3 million in salable volume during the fourth quarter of 2025, with 35% of the volume in the consumer direct channel and 65% in traditional retail channel. Refinance activity made up 59% of the total salable volume in the first quarter of 2026, up from 51% in the fourth quarter of 2025. In both periods, we saw a drop in mortgage rates, which spurred additional refinance activity. As we've discussed previously, it only takes a 25 to 50 basis point decline in mortgage rates to drive additional refinance activity, and we were able to take advantage of that temporary drop in both of the last 2 quarters. The additional refinance activity helped maintain strong volumes and revenues in what is typically a slower buying season. Mortgage rate lock commitments increased by 12% over the prior quarter, driven by an increase in refinance activity with purchase activity down modestly from the prior quarter. We sold approximately 68% of the saleable mortgages service released in the first quarter of 2026, which is down from 79% in the prior quarter. We continue to look for opportunities to create additional efficiencies using technology and hire new talented lenders within the channel. During the first quarter, we hired 7 new mortgage professionals in 2 new markets to help us continue to grow the channel. In the middle of Slide 7, we highlight our digital deposit banking channel, where we feature our direct customer platform and competitive product suite. We ended the fourth quarter with $5.0 billion in total deposits, an increase from the prior quarter. The breakout of these deposits is detailed in the appendix on Slide 13. The majority of our deposit growth when compared to the prior quarter was driven by normal seasonality in our custodial deposit balances as well as higher levels of brokered network deposits, which had more attractive rates than brokered CDs. On the right side of Slide 7, we highlight our specialty mortgage servicing channel, where we focus on servicing first lien home equity lines tied seamlessly to demand deposit sweep accounts, including what we commonly refer to as AIO loans. Excluding the adjustment for the change in fair value of MSRs, we earned $2.2 million in loan servicing fees for Q1, which is flat from the prior quarter. Including loans we outsourced to a subservicer, we serviced 15,900 loans for others with a total UPB of $5.2 billion as of the first quarter of 2026. Turning lastly to Slide 8. We saw a nice improvement in our overall asset quality metrics during the quarter. Consistent with prior quarters, we are not seeing any systemic credit quality or borrower issues in any of our portfolios. We had net charge-offs of $266,000 in the first quarter of 2026, which is down from $1.2 million in the prior quarter. First quarter charge-offs represented an annualized net charge-off ratio to average loans of 2 basis points, which remains well below long-term historical averages. Let me provide some additional details on our asset quality metrics this quarter. First, total nonperforming assets decreased by $2.0 million from the prior quarter. Second, early-stage delinquent loans improved this quarter with past due loans 31 to 89 days, decreasing by $6.5 million from the fourth quarter of 2025 level. Third, at March 31, 2026, MPP represented 58% of all loans, and we've continued to experience pristine credit quality in that portfolio. Fourth, virtually all of our loan portfolio is backed by residential real estate, which typically carries much lower average loss rates than other asset classes. And fifth, our residential mortgage portfolio is high quality, seasoned and geographically diverse. At March 31, 2026, our average FICO was 752, and our average LTV when you factor in mortgage insurance was 72%. Additionally, our average debt-to-income ratio was 35%. Now I'd like to turn the call over to Brad to cover the financials. Bradley Howes: All right. Thanks, Kevin. As I go through today's slide presentation, I will be incorporating full year 2026 guidance into my commentary. Let's start on Slide 9. As a reminder, our non-GAAP reconciliation on Slide 15 provides details of the calculations and a reconciliation to the comparable GAAP measure for all non-GAAP metrics. For the first quarter of 2026, we had net income to common stockholders of $21.7 million or $0.62 per diluted share. Our performance and profitability metrics, which are laid out on Slide 5, remains strong. Net interest income decreased by $2.21 million from the prior quarter, reflecting a 9 basis point decrease in net interest margin, partially offset by growth in average interest-earning assets of $47.6 million. Our yield on average interest-earning assets was down 17 basis points from the prior quarter, driven primarily by a decrease in loan yields. A significant portion of our MPP facilities are tied to the SOFR index, which was down almost 40 basis points on average on a linked-quarter basis. Our cost of funds decreased by 13 basis points, reflecting a federal funds rate cut of 25 basis points in December of 2025. For full year 2026, I am lowering our expected NIM range slightly to 2.35% to 2.50%. My guidance assumes a continued improvement in the mix of loans within the held-for-investment portfolio and that SOFR and funding costs will remain at or near current levels. I'm also assuming that we do not have any additional Fed funds rate cuts in 2026. Turning to loan growth guidance. For 2026, I expect MPP balances to increase to between $4.1 billion and $4.3 billion by year-end. I'm also still expecting $300 million to $500 million on average will be participated out throughout 2026. As we've reiterated on prior calls, participations remain an important component of our overall MPP strategy, which allows us to manage the balance sheet and optimize capital ratios while driving higher fee income. We will continue to look for opportunities to add and expand participation partners to help drive further growth in the business. I'd also still expect period ending AIO balances to increase to between $900 million and $1.0 billion by year-end. Excluding MPP and AIO loans, I'd expect the rest of the loan portfolio to continue to decrease to between $1.9 billion and $2.1 billion by year-end 2026. This includes loans held for sale, which tends to vary based on the timing of loan sales. None of my loan growth guidance has changed from the prior quarter guidance that I provided. Kevin provided details on the improvement in asset quality trends this quarter with the lower level of charge-offs, the decrease in nonperforming and early-stage delinquent loans and continued runoff of non-AIO and MPP loans, we had a total benefit for credit losses of $445,000 in the first quarter of 2026. With the provision benefit this quarter, I now expect total provision expense of between $2 million and $3 million for 2026. which would be driven by the replenishment of net charge-offs and growth in our MPP and AIO loans. Any additional provision expense or benefit related to the credit migration trends, changes in the economic forecast or other changes to the credit models would not be part of my guidance. Noninterest income increased slightly from the prior quarter, reflecting higher gain on sale revenue, partially offset by larger adjustments to our fair value assets. On the top of Slide 14, we break out 3 of our fair value assets and their associated quarterly increases or decreases. These assets tend to move up or down with interest rates and are not part of my revenue guidance each quarter. On the bottom of Slide 14 and in our earnings release tables, we provide further details on the components of net gain on sale of loans. As you can see on that chart, first quarter net gain on sale of loans included a $1.2 million decrease in fair value of loans held for investment and lender risk account with the Federal Home Loan Bank. Excluding these items, net gain on the sale of loans would have been $17.8 million, which is up from $16.6 million on a comparable basis in the prior quarter. For 2026, I am forecasting total salable mortgage originations of $2.2 billion to $2.4 billion with all-in margins of 2.75% to 3.25% on those mortgage originations. My margin guidance is a blend of margins from our traditional retail and consumer direct channels. As a reminder, the consumer direct channel has lower margins with an offsetting lower mortgage variable comp expense. These estimates do not assume any significant decrease in mortgage rates nor do they assume any change to the current level of mortgage originators within the bank. I'd expect MPP fees to range between $9 million and $11 million for the full year 2026 based on the expected participation balances and continued growth in loans funded. Excluding fair value changes in the MSR, loan servicing fees were $2.2 million for the quarter, flat from the prior quarter. I'd expect that quarterly run rate to continue to increase in 2026 with full year revenue between $9 million and $11 million. Noninterest expense was up $658,000 from the prior quarter, driven primarily by salaries and benefits, mostly related to bonus and incentive compensation, which is tied to company performance. For the full year 2026, I'd expect total noninterest expense to be in the range of $138 million to $142 million, no change from my prior guidance. The expected increase in noninterest expense is more than offset by growth in total revenue based on the positive operating leverage we are able to generate. Turning to the balance sheet on Slide 10. Total assets increased to $7.4 billion at March 31, 2026, based on the strong growth in MPP balances during the quarter. Our wholesale funding ratio was 62.94% at March 31, 2026, which is down from 64.60% in the prior quarter based on the deposit growth Kevin highlighted. Looking forward, we'd expect to continue to fund MPP and AIO growth through a combination of brokered CDs, retail deposits and other sources of nonbrokered deposits where possible. Our effective tax rate was 24.72% for the first quarter of 2026, reflecting additional income tax expense related to nondeductible tax rules for publicly traded companies. I'd expect the 2026 run rate to be in line with that. Lastly, on Slide 11, we outline our regulatory capital ratios, which are estimates pending completion of regulatory reports. Looking forward, I'd expect we will continue to leverage additional capital generated through retained earnings to grow MPP and AIO balances. We previously announced the completion of a private placement of $20 million in aggregate principal amount of fixed to floating rate subordinated notes. We believe this additional capital provides us with flexibility should we see stronger growth throughout 2026 and with respect to our $25 million in Series B preferred stock that we anticipate calling prior to year-end. With that, we are now happy to take questions. Sherry, please open the line for Q&A. Operator: [Operator Instructions] Our first question is from Crispin Love with Piper Sandler. Crispin Love: First, just on the net interest margin trajectory. I heard your update on the guide, I think 2.35% to 2.5% for the year, to 2.42% in the most recent quarter. But can you just discuss the ramp you would expect throughout the remaining 3 quarters of the year to just fit within that range? And then just any puts and takes there? Bradley Howes: Sure. Crispin, this is Brad. What I'd say about the guidance is that if we think about rates, we don't have anything significant changing in our models today where we stand with interest rates. So SOFR funding rates and all that remain relatively flat, no Fed fund cuts. So really, the benefit that comes over the remaining quarters would come from the continued improvement in the mix of loans. If you look at MPP and AIO loans, which are driving the growth in the balance sheet today, as we grow those and as we run off legacy assets, which have lower average yields based on when they were generated, we will see a little bit of a continued improvement in the mix of loans, which drive up margin. That's really the only put and take, I'd say that's embedded in our guidance. We do have a small amount of borrowings that are coming due, $50 million this year. But for the most part, most of the funding costs should remain pretty flat absent any changes in rates. Crispin Love: Okay. Great. That makes sense. And then I have just 2 related questions on MPP. Just first on the loan balances for 2026, did you reaffirm that $4.1 billion to $4.3 billion guide? I just might have missed that. Bradley Howes: We did, Crispin. Yes, no change to prior guidance. Crispin Love: Okay. Perfect. Okay. That's what I thought. I just wanted to make sure. And then just broadly on MPP balances, they've continued to grow meaningfully. They did on the -- on a sequential basis in the first quarter. So can you just discuss some of the drivers of that growth and sustainability of that? And I assume with that guide, I would think that some of the sequential increase should decelerate a bit in the coming quarters. But just curious on that MPP balance growth that you continue to generate. Kevin Comps: This is Kevin. I can start with that, Crispin. So part of the growth was in the commentary was some of it is coming from existing clients expanding their facilities still. That is reasonably expected to continue as we get into the busier cycle of the year, which is typically the summer buying season. That could be a reasonable place also. And then as usual, we do have a pipeline of clients that could potentially come on board. Additionally, we had new ones added during Q1 also. We expect to add some new ones moving forward. The pace of growth of new clients, to your point, will probably not be the same as when we came out of the gate with the IPO a year ago and had a very long backlog of new clients coming on board. So both of those things will still represent growth within the channel going forward though. Operator: Our next question is from Damon DelMonte with KBW. Damon Del Monte: Appreciate all the commentary and detail in the prepared remarks. Just curious on the commentary around capital and the potential for the $25 million of preferred to be called. Is that something that you could do with kind of cash on hand? Or is that something that might require another sub debt issuance? Bradley Howes: No. We believe we can do that and looking at our models with what we have today. That was kind of part of the purpose of the sub debt offering that we did, twofold, one, to be able to generate higher growth throughout the year, should we see it? And then two, to sort of bring that money in now so that we have the funding towards the end of the year and don't need to raise any additional capital and take any variability in what could happen in the markets out of play and have that money. Damon Del Monte: Got it. And can you remind us kind of what your targets are for capital levels? I think total capital was 11.4%. What is your comfort zone in that ratio? Bradley Howes: Sure. Yes. So we look at -- there's 4 regulatory ratios. We look at each of those regulatory ratios at the bank and the holding company. We have a capital plan that has trigger levels that are with a buffer to well capitalized based on what we're comfortable with. Today, as we sit, our most binding capital ratio would be total risk-based at the bank. And we still have, call it, good room from there until we even get to the trigger level. So as we look out for our growth, we continue to lever additional retained earnings to grow our balances and grow our capital levels. And then I would expect those to continue to be consistent throughout the level of 2026. Damon Del Monte: Got it. Okay. Great. And then on the mortgage banking, I think you reaffirmed your expectation for origination activity for the year. What was the gain on sale this quarter? Bradley Howes: So the dollar or the margin? Damon Del Monte: The margin. I think you gave a range of what, 2.75% to 3.25%. So what was the -- did it shake out this year for this quarter? Bradley Howes: Yes. I'd say this quarter, the margin as a percentage was probably closer to the bottom end or a little off the bottom end or a little above the bottom end of that range. We talked about in prior quarters, we are seeing competitive pressures on the conforming business and more entrants into the non-QM space, which you have typically higher margins. So I'd expect our guidance is predicated on that. Depending on what happens throughout the year, we'll still continue to earn in that range that we outlined, but it's probably closer this quarter to the -- towards the bottom end of that range. Operator: [Operator Instructions] Our next question is from Christopher Marinac with Brean Capital Research. Christopher Marinac: I wanted to talk about the progress in the wholesale funding ratio and that reliance inching down. Is the all-in-one progress this year and the further growth itself going to contribute to that? And are there other kind of goals for that ratio going forward? Kevin Comps: Yes. This is Kevin. I'll start with the all-in-one piece of this. So the all-in-one product is tied to real-time sweep features from a checking account. Those checking accounts are 0-dollar balance checking accounts with real-time sweep features to pay down the loan. So that is not driving the decrease in the wholesale funding ratio. Normal swings in our custodial funds related to our servicing MSRs that we own and the other servicing relationships we have on the custodial front, the normal seasonality of those accounts is what the main driver of the reduction in the wholesale funding ratio. And then we're always looking for additional opportunities on the non-brokered side of the house. No material items to speak of for this quarter as we sit, but we always are looking to do something additional there. Christopher Marinac: Understood. Thank you for that background, I appreciate it. And as you are -- have been very productive in the digital channel for a while with the business plan, are those customers behaving any differently when you have a modest backup in rates like we've seen since the end of February? Or does that create any headwind for you in the upcoming quarters? Bradley Howes: You talking from like a beta perspective, [ Crispin ]? Christopher Marinac: Correct. Exactly. Bradley Howes: Yes. I'd say, no, if you look at our cost of interest-bearing -- sorry, our cost of deposits this quarter was down 22 basis points from the prior quarter. We had the Fed funds cut in December. So we behaved, I think, from a beta perspective, very well. 22 of the 25 would be in the deposit side. Where you see, obviously, the funding mix more stable is on the borrowing side, where we have match funded some of our longer-term assets with longer-term liabilities. So we've locked those in over time to maintain the same margin. But when you look at Fed funds rate cuts, obviously, those are -- those remain flat, but we do see a nice benefit from the rate cut, and we really were able to pass along most of that beta in this last rate hike. We haven't seen anything to the contrary so far this quarter. Christopher Marinac: Sounds good. And final question for me just as you continue to build the asset side and kind of pledgeable assets as the balance sheet grows, does that extra liquidity give you any difference in terms of whether it's managing capital like the preferred decision or just sort of how you pursue other initiatives? Bradley Howes: Could you repeat that? You cut out for a second there, Crispin -- Chris. Christopher Marinac: That's okay. I was asking about the growth of the balance sheet and how that impacts liquidity as you have more assets you can pledge for further borrowings in the future and how that impacts sort of the profit build-out for the firm. Bradley Howes: Yes. No, we have a pretty good amount of excess capacity as we stand today. That will slowly grow as we grow the balance sheet. You're absolutely right with MPP being pledgeable to Federal Home Loan Bank, that's one of our largest sources of liquidity. That will continue to grow over time. We haven't had to tap a lot of it because we have sort of a growth path in funding and a growth path in assets that matches each other, and we maintain that level of liquidity. We like to have it just in case. So -- but you're right, that will continue to grow nominally over the course of 2026. Christopher Marinac: So if the environment were to change and become more favorable or margins changed to what you wanted to take advantage of grow faster, you could, and that was really just channel check. Bradley Howes: Yes. From liquidity would not be the constraining factor. That would be more based on our capital ratios. Our growth path kind of has us leveraging all the capital we generate. What I mentioned in our comments, though, and what Chuck and Kevin have reiterated on prior calls is that we would use participations and continue to grow that program if we should see opportunities for further growth this year. That is a vehicle that we could utilize to manage our balance sheet and to grow faster or higher than we originally thought. Operator: There are no further questions at this time. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the América Móvil First Quarter 2026 Conference Call and webcast. [Operator Instructions] I will now turn the call over to Ms. Daniela Lecuona, Head of Investor Relations. Daniela Lecuona: Good morning. Thank you all for joining us today to discuss our first quarter of 2026 financial and operating report. We have today on the line Mr. Daniel Hajj, our CEO; Mr. Oscar Von Hauske, our COO; and Mr. Carlos Jose Moreno, our CFO. Daniel Hajj Aboumrad: Thank you, Daniela. Thank you, everyone, for being in the call. Carlos is going to make a summary of the first quarter results. Carlos? Carlos Jose Garcia Moreno Elizondo: Thank you, Daniel. Good morning, everyone. Well, the downward trend on short-term dollar interest rates following the 25 basis points rate reduction of the policy rate by the Fed in December continued in the beginning of the first quarter as the market became increasingly concerned with a potential slowdown in economic activity in the U.S. The value of the dollar versus other currencies, including those in our region of operations declined throughout the first part of the quarter with the dollar falling 4.3% versus the Mexican peso, 3% versus the Chilean peso and 6.4% versus the Brazilian real by the end of February. With the major exception of the latter, U.S. dollar made up practically all its losses in the weeks after the initiation of the war with Iran. Throughout the period, the differential between short-term rates and 10-year rates widened significantly from 8 basis points to 64 basis points at the close of the quarter with investors eyeing both a slowdown in the pace of economic activity possibly even a recession and higher inflation rates. In this context, in the first quarter, we continue to observe a trend towards an acceleration of both postpaid subscriber growth and that of broadband accesses, as you can see in the slide. The base increased 8.8% and 6%, respectively, vis-a-vis the year earlier quarter. First quarter revenue was up 2.1% in Mexican peso terms to MXN 237 billion, with service revenue up 0.6%, equipment revenue 7.4% and other revenue 108%, including the proceeds of a favorable ruling in Chile on account of a dispute around certain TV rights. EBITDA increased at nearly twice the pace as revenue at 3.8% this year in Mexican peso. The figures cited above reflect the appreciation of Mexican peso versus practically all other currencies in our region of operations, having gained 16% versus the dollar 4.6% versus the euro, 4.5% versus the Brazilian real and 2.5% versus the Colombian peso with respect to the same period of 2025. So major appreciation of the peso first quarter of '26 vis-a-vis first quarter of '25. At constant exchange rates, revenue rose 6.1% on the back of a 4.6% increase in service revenue and 11.3% in equipment revenue, driving an 8% expansion in EBITDA. Adjusted for the extraordinary proceeds of the legal ruling, EBITDA was up 7.0%. The greater operating leverage is allowing for faster EBITDA growth with EBITDA now expanding more rapidly than service revenue and led our consolidated EBITDA margin to reach 40%, one of our highest margins that we've seen. At 6.4% year-on-year, a similar pace over the last several quarters, mobile service revenue growth has remained resilient with postpaid revenue growth at 7.3% and prepaid revenue at 5%, having expanded faster quarter after quarter over the last year. Mobile service revenue growth has been on an upward trend in Mexico and Colombia, as you can see in the slide, on the back of greater prepaid revenue, which has been recovering over the last several quarters. On the fixed line platform, service revenue growth was up 1.7% in the first quarter. Some regions, in particular, Eastern Europe, Central America, Peru and Ecuador registered very rapid growth driven by residential demand. As regards to our operating profit, it came in at MXN 50.5 billion, was up 12% in Mexican peso terms, while our comprehensive financing costs declined 9.9%, reflecting lower net interest expenses. These concepts brought about a 25% increase in our net income to MXN 23.4 billion, which was equivalent to MXN 0.39 per share and $0.44 per ADR. Our financial debt reached MXN 527 billion at the end of March, having increased by MXN 2.5 billion versus the one outstanding at the close of December. But this means that our net debt for the period at the end of March stood at MXN 437 billion and was equivalent to 1.41x EBITDA after leases. Our cash flow in the first quarter allowed us to cover MXN 21.6 billion in CapEx, MXN 1.4 billion in share buybacks, MXN 1.5 billion in labor obligations and further to reduce our net debt by MXN 1 billion, okay? So that you can see here in the slide. So with that, I thank you for listening to the presentation, and I will pass the floor back to Daniel for Q&A. Daniel Hajj Aboumrad: Thank you. Thank you, Carlos, and we can start with the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Leonardo Olmos with UBS. Leonardo Olmos: Congrats on the results. I got a couple of questions here. The first on capital allocation and buybacks. With the reduction of net debt to EBITDA to 1.4, how should we think about the balance between continued deleveraging and a more visible acceleration in buybacks from here? What leverage would you make more comfortable stepping up capital returns? And the second one, still on leverage, but more on the M&A context. If operating trends and FX remain broadly stable, should we expect leverage to continue trending lower from here? And how do you think about M&A activity in that context, which -- how is going to impact your free cash flow concerning, I mean, the actual payments of the M&A? That's it. Daniel Hajj Aboumrad: Thank you, Leonardo. Well, a couple of -- what we need to see and what we want is some space because I think the region is in very good shape, okay? So the region is going to -- we're going to have some opportunities in the region, in Latin America and in Eastern Europe. So both we are growing good, and we're doing very good. So we think that in Eastern Europe and Latin America, there's going to be good opportunities, and we are looking for some of them. We already -- we -- just a few months ago, we closed Azteca, the network of Azteca in Colombia. We just closed Desktop. So there's going to be more opportunities on that. So as you said, we need to have a good balance between buybacks, between deleverage and the opportunities that we have. We are looking for some opportunities. And these opportunities are going to give us a very good competitive position in the places where we are looking. So -- these opportunities are going to make a very good fit and are going to allow us to grow more in -- or faster than where we are. So that's where we are, and that's the balance that we have. Carlos was saying, we want to have the debt to 1.3, more or less is what we want to have. We have more opportunities. And we are also -- we are increasing our -- We're increasing to MXN 10,000 million more to have MXN 21,000 million on the fund. We want to buy. We want to buy back more. We want to take the opportunities, and we want to deleverage, as you are saying, we want to have a good balance on that. Right now, I'm personally seeing good opportunities in some countries that makes very good fit for us, and we are looking and doing that. So that's where we are, Leonardo. Leonardo Olmos: Yes. You answered both of my questions in one answer. Just a quick follow-up. In the past, you used to talk about fiber opportunities in LATAM. Are we still on that? Or are you considering mobile or other type of network complementarity? Daniel Hajj Aboumrad: No, we're considering everything. We're considering fiber. I think there's a lot of fiber companies in the region that makes speed. Instead of putting fiber, they are already with fiber and some customers and also spectrum, you know that we buy last year some spectrum in Puerto Rico. There's a lot of things that you can see what we do in Desktop, the backbone that we do with Azteca, Colombia. And you are going to see all this year good opportunities, Leonardo. So we want to take those -- to have a chance to take those opportunities. Operator: Our next question comes from Marcelo Santos at JPMorgan. Marcelo Santos: I have 2. The first is if you could provide us an update on the CapEx plan for 2026. There was a lot of changes in currencies, the Mexican peso getting stronger. So just wanted to hear what you plan for CapEx this year and maybe the next couple of years? And the second one, you mentioned in the release some operational issues in Argentina. Could you please comment a bit on that? Just give a bit more color on that would be great. Daniel Hajj Aboumrad: Well, as you said, we have been having a lot of movements in the exchange rates. And we have been reviewing carefully what we're going to have in each country for the CapEx. You know that the CapEx is part in dollars, part in local currency. So we're reviewing that. But all overall, what we think and finalizing our CapEx, we think that the CapEx for this year is going to be $7 billion -- around $7 billion, depending to be a little bit more, a little bit less depending on, as we said, the exchange rates. And we think that for the next years will be around that. We are going to have our Investor Day in May, and we can finalize the numbers for the next years. But I can say that we are more or less in that number. And Argentina, I don't know what you are asking on Argentina. Marcelo Santos: I think you mentioned on the fixed line business in Argentina that you said the fixed line market has become more challenging because of the difficulties in assessing clients in the Buenos Aires metropolitan area. So just wanted to better understand. Daniel Hajj Aboumrad: We're doing very good putting fiber in Argentina, very difficult for us to do it in Buenos Aires as the capital city. So that's the only thing is where we're putting fiber, we're growing, we're putting broadband, we're giving TV and doing quad-play. It's been very good for us. We are growing very good in Argentina. And the only place where it has been difficult for us is Buenos Aires because I think we have permission, but there we don't it's difficult because they don't rent us the telephone posts and they don't allow all the competition to go there and difficult to do it underground. To go underground has been very difficult to do it there, but that's the main reason that we have. Where we have fiber, we're growing very good, penetrating the network, doing fiber, doing quad-play, doing excellent. So that's been good for us. With all of that, well, we're going to have a big competitor in Buenos Aires because the market share of our competitor Telecom buying Telefonica is going to be high. So let's see what is going to happen there. Operator: Your next question comes from Andres Coello of Scotiabank. Andres Coello: Daniel, as you know, Starlink said back in December that the direct-to-cell service is already available or could be available in Mexico. Obviously, users will appreciate that. And I'm wondering if América Móvil could work with Starlink? Daniel Hajj Aboumrad: I don't hear you so well. Can you repeat the question, please? Andres Coello: Sure. So Starlink said in December that direct-to- cell service is available in Mexico since December. So they could provide a service in Mexico. And this will be obviously very good for users, especially in remote areas. So I'm wondering if América Móvil could work with Starlink to provide direct-to-cell service. Daniel Hajj Aboumrad: Yes. I think the real direct to sell service, what I understand is going to be on 2027, something like that. They are going to launch a new satellite and that will be the direct to sell. Well, they have been successful selling broadband to the houses in Latin America, I think all around the world. We are open to do anything for them that makes sense for us, of course, and we're talking with them. And I think it's going to be a good technology. So for doing that, you need to have a spectrum. So I don't know if they already have a spectrum in some places. I understand that they buy spectrum in the U.S. and some in Europe, but I don't know if they have a spectrum in Latin America. So -- but we are open. If your question is, we want -- or we can do something with them, of course, we can -- I think it's a service that makes complement with us. And of course, we are open to do something with them. Andres Coello: Okay. As you know, Entel is doing direct to sell in Chile and Peru. And I understand that in Costa Rica, the service will be available soon. So you are saying that you will wait until 2027 for the service to be available in Mexico. Daniel Hajj Aboumrad: No, we're not waiting. We're talking with them, but I think the real and the orbits of satellites for cell is going to be available in 2027. They are doing something today in some countries, of course. But the one that is going to be big and it's going to be directly to sell is going to be -- I think they said -- is what they said is I'm not stating, but what they said is going to be in 2027. Of course, they already have -- the new constellation is going to be in 2027, but they already have a constellation that can do the fixed broadband. But we're not waiting to talk with them. We are talking with them and see what opportunities we can have. Operator: [Operator Instructions] Our next question comes from the line of Luca Brendan at Bank of America. Luca Bernardinelli: I have 2 from my side here. The first one, can you comment a little on how are you seeing the expansion of your partnership with NuCel? And how relevant it has been for the strong expansion we have seen in Brazil mobile this quarter in terms of new net additions? And then the second one, how do you see the potential impact of the recently announced M&A in Mexico Mobile and what the impact that this could have to the market and to América Móvil more specifically? Daniel Hajj Aboumrad: The second question is the announcement in mobile in Mexico, what? Luca Bernardinelli: Yes, the recent M&A that was announced at Telefonica selling their assets. Daniel Hajj Aboumrad: They buy -- the purchase from Telefonica, the sale of Telefonica in Mexico... Luca Bernardinelli: Yes, yes, that's it. Daniel Hajj Aboumrad: Okay. Well, I don't know if in Brazil, we are disclosing the numbers of number portability between what we have and what's NuCel. What I can tell you that we have been doing very well. In number portability, we have been gaining number portability for the last 4 years, 3, 4 years, gaining number portability in all the regions with all our competitors. So we have been doing well. And with NuCel we increased that number portability. So that's nothing that we have been doing bad and then with NuCel change and we're doing good. So we have been gaining in number portability because we have a very good 5G. We have customer care. We do combos with the fixed. So we have a lot of promotions, and we are, I think, in a very good shape in terms of technology, in customer care. We have been investing in Brazil, and that's giving us good results for the last year. So with NuCel, our portability expands. We are growing. I don't know -- I don't have the numbers here how much is in us and how much is in NuCel. I don't know if in Brazil, but if in Brazil, they disclose that, Daniela can give it to you. But it's something on top of what we have been doing very well. I'm not saying that NuCel, now it's doing very well. And we think that we can still grow more in Brazil in number portability. Since October, I think we're gaining more and more, and I hope we can do more, Luca. And well, how I can see in Mexico, I can say that the last years of Telefonica in Mexico has been shrinking a little bit in terms of technology, in terms of infrastructure, in terms of frequencies. So they are -- they start to be like an MVNO of, I think, Altán and the other of AT&T, they are buying that. So there's a good company, a good name, but not investing what they need to invest in Mexico. And I don't know what's going to be the strategy of this new buyers, and I don't know if they are going to still do and manage the company as an MVNO or they are going to put infrastructure and buy spectrum and compete. So let's see. Still right now, I don't know what they are going to do. Operator: Our next question comes from the line of Phani Kanumuri from HSBC. Phani Kumar Kanumuri: My first question is on Mexico Mobile. The growth seems to be accelerating. What are the major drivers behind the growth in Mexico Mobile? And can we expect this growth to continue in 2026? My second question is on working capital. It seems to have increased a bit in 1Q '26 compared to 1Q '25. What are the reasons behind the increase in working capital? Daniel Hajj Aboumrad: Well, on Mexico Mobile, I think we are growing. Part is I think that the economy in Mexico is getting better. The increase in the salaries, the minimum wages increased 12%, I think, and that gives us an increase also in the prepaid side. So as we have been saying, prepaid is very related to the economy. And if the economy is starting to be better, then the people starting to spend a little bit more. And that's what we have been seeing in the prepaid side. In postpaid, people like our promotions. We are increasing ARPU. And it's not new. I think in postpaid, the growth rate has been very good for the last 5 quarters. So our ARPU is growing. And we are growing in new customers and this -- and our actual customers are moving to better plans and consuming more. So that's more or less what you have been seeing. And I hope that will be -- but it's not in this quarter. I think for the last 5 quarters, 6 quarters, 4 quarters, the growth of postpaid has been doing good. And in prepaid, I think last year, we had a little bit of slowdown because of the slowdown of the economy, but I think the economy is getting better and the recovery is doing good. So that's more or less what we have. Carlos Jose Garcia Moreno Elizondo: And on the working capital, I think there's 2 things to note. One is that we are taking in a bit more inventory. We have been more cautious about availability of supply. If you look at equipment revenues, they've been extremely good, extremely solid this quarter and the last one. And if you look across countries, you will see certainly Mexico, Brazil are showing very, very strong sales of equipment. So that's partly reflected in the working capital. And then again, and it's partly linked to this, we are financing very successfully handsets. The consequence in Mexico, for instance, the way we do it is we are basically leasing the handsets and this basically entails some additional working capital. But it's been good sales and very, very successful these methods of selling the equipment. Daniel Hajj Aboumrad: And to add a little bit of what Carlos is saying, we all know that the memory chips has been increasing a lot, the prices. The price of the handsets is starting to increase. So we want to be sure that we have enough handsets to serve our base, our customer base. So that's really the reason why we increase on inventory. So prices are increasing. So -- and we don't know if only prices increasing or we're going to have a lack of handsets. So that's why we are taking that decision to increase a little bit our inventories. Operator: Our next question comes from the line of Emilio Fuentes De Leon from GBM. Emilio Fuentes De Leon: I have 2 questions regarding Mexico on the operating side. First, regarding the disconnections from the initiative from the digital transformation agency, could you give us a little more color on the nature of these clients? Were they mostly unactive lines? And my second question would be on the broadband side. Given that you're reaching 90% of customers connected through fiber, would this mean that we should expect the net adds to decelerate going forward? Daniel Hajj Aboumrad: Well, you know that since January 9, the registry of lines is -- we have to do it by law, we have to register the line and do a lot of things there. So maybe people is starting to activate less and churn less because they don't want to do it. But well, that is going to happen. So I think there's going to be a lot of cleaning the basis of subscribers and subscribers that they are not using at the end of the day, you need to cancel them because they are not going to be registered in the 1st of July. So there's going to be a lot of things. But all overall, it's only number of lines, not money and consumption and -- so for me, I don't know if -- I'm not looking on how many lines or how many new activations because if I activate a lot, but then they churn in the next 3 or 4 months, it's worse because it's cost for me and it's not a revenue for me. So that will make subscribers, the base of subscribers to be more clean and to really understand where we are in number of subscribers with this new register of lines. So let's see. It's been not as fast as all want, the register. All the new ones has to be registered and all the old ones has to be registered until July 1. So let's see what is going to happen there. But all overall, what I'm saying is a lot of people maybe it's not buying a new phone and staying with that because if they buy the new one, then they have to register. But that's going to finish maybe in July. So there's going to be a lot of things. All overall, the important is how many good subscribers and subscribers that are consuming are the ones that the company has, and that you see in the revenues, in the ARPU in all of that. So that's what is going to happen. [Foreign language] The broadband in what way? And what's the reason why the broadband will slow down? What's your second question? Emilio Fuentes De Leon: Yes. My question was regarding the broadband net adds. Should we expect this to slow down as you reach full penetration on your fiber network? Daniel Hajj Aboumrad: Well, still we have -- I don't think that our broadband will slow down because what we're doing is we're moving from copper to fiber. I think... Carlos Jose Garcia Moreno Elizondo: 93%. Daniel Hajj Aboumrad: 93% of our base is in fiber right now. Carlos Jose Garcia Moreno Elizondo: We have very good bundles in the market. We recently increased the speed almost 1/3 with the same price. So we -- I think we will continue with a good level of net adds... Daniel Hajj Aboumrad: We hope they don't slow down, and we can continue with that number. Operator: Our next question comes from David Lopez at New Street Research. David Lopez: Congrats on the results. A couple of questions, please. First one is a follow-up on Mexican broadband. I was wondering if you could comment on the competition recently, if there has been any changes? And if you could expand a bit on the reason why you've increased the speed on all the packages. And with Televisa upgrading to fiber, a large part of its business, does that mean it's going to be harder for your net adds? And the second question on Brazil. I was wondering if you could comment a bit on your plans for price increase this year. Daniel Hajj Aboumrad: Well, I'm going to start with the second question, and I'm going to let Oscar talk a little bit about the broadband in Mexico. Well, in Brazil, we don't have until now a plan of increasing prices at this moment. I don't know if there's going to be a chance to do it in the year. But right now, we don't have any idea on increasing prices in Brazil in anything in mobile, in broadband, in TV. So we don't have plans to increase prices. And on broadband in Mexico? Carlos Jose Garcia Moreno Elizondo: As we mentioned before, we already upgrade the network. We have a very good network. And you mentioned about the business. We want to differentiate ourselves in broadband, adding value to our small business connectivity. So we are bundled with cloud services, cybersecurity, productivity tools for small business. And really we have a team really focused just on small business to really penetrate not only broadband to bring value added to the small business as well on enterprise. So we believe that, that has been working very well, and the product has been very well adopted in the market. So we believe that we will continue with that. Daniel Hajj Aboumrad: And to talk a little bit about -- I want to do some other comments. I think all overall, América Móvil is doing very well in other countries. We're talking about Mexico a lot. We're talking a lot about Brazil. But I think the recovery in Colombia has been very good. We are increasing in broadband. We're doing much better in postpaid. So in Colombia, I think the market is performing well. We are performing well. We are cutting costs and doing a lot of things. So our revenues are growing, our EBITDA are growing... Carlos Jose Garcia Moreno Elizondo: In Peru. Daniel Hajj Aboumrad: No, in Colombia. In Peru, also, things are going okay with us. We have a tough competitor that has a lot of -- sorry, and in Colombia, we advanced in 5G, and we have the best 5G network until now. So we are doing okay. In Peru, also doing very good in broadband, growing our net adds and performing very well in revenue and in EBITDA. So if you see all the Central America has been doing also good. We talk also about Eastern Europe growing a lot, moving a lot. 5 years ago, we only have mobile. Today, we have mobile and fixed and doing a lot of convergence there. So I think the results and in almost all the countries, we are performing very well, cutting costs, digitalizing, that will help us for the future. We are putting a lot of money on the CapEx on digitalizing our processes, digital IT and doing that in also in big businesses, we are putting more and more cloud, selling more services. So all of that has been doing very strong in our region. And as we said, we want to speed up and take more opportunities there. So that's what I want to talk a little bit more on that. Operator: Our next question comes from the line of Ernesto Gonzalez with Morgan Stanley. Ernesto Gonzalez: And I wanted to ask exactly about Colombia, which you were commenting on a moment ago and a few of the other markets where Telefonica has recently left. Could you discuss a little bit of the trends you're seeing? For example, Colombia, we saw an acceleration in revenues. What is driven by your commercial strategy? What is driven by market consolidation? And any color you could give on these moves is greatly appreciated. Daniel Hajj Aboumrad: Well, in Colombia, we have been investing for a long time. We invest in 5G. We have the best 5G network. So our customers are happy. Our traffic is growing well. In terms of broadband, we have been decreased the last year a little bit, but we are increasing this quarter on the broadband side. We have a lot of competition in Colombia with these ISPs there. And consolidation has been also good. But I think consolidation in Latin America is also being good for all the competitors. So you need to invest. You need to take the opportunities. But all overall, we think the markets are looking better. Ernesto Gonzalez: That's really clear. And just one more question on Mexico. Margins improved, and they were the highest level in a long time. You continue expanding really, really well in fixed. What drove the margin improvement? And how sustainable is it? Daniel Hajj Aboumrad: Well, in fixed, what Oscar is saying is we increased the speeds to all of our customers. So we have fiber, and we're using that fiber. So customers are being -- the evaluation of our customers is that they are happy with the network, happy with the service, and we are going to still give what the market is giving. So we want to be very competitive there. And also in prepaid, as we said, prepaid, let's say, I think -- I don't remember exactly the number, but I think first quarter of last year, we have decrease in revenues in prepaid. And this quarter, we are increasing like 4%, 5% there. So economy is doing better. Customers are consuming more. So all overall, is what -- and we are very strict on the cost control, something that nobody see and is giving us a lot of good is the digitalization of all our process. So we are taking -- we are being much more productive, digitalizing all the process, doing better IT, using some AI and some processes that give us more knowledge of our customers. So all of that is helping us to perform better in each country. Operator: We have reached the end of the Q&A session. I will now turn the call over to Mr. Daniel Hajj for final remarks. Daniel Hajj Aboumrad: Daniela wants to. Daniela Lecuona: Just before we end the call, I just want to remind everyone that we're hosting our next Investor Day in New York City. It is on May 27. The save-the-date has been sent out, and that we will be sharing details on the agenda soon. We really hope to see you all there. And please don't hesitate to contact the team if you have any questions or need any help with the registration. Daniel Hajj Aboumrad: And thank you. Thank you very much. Operator: Thank you. This concludes today's conference call. You may now disconnect.
Operator: Thank you for standing by. My name is [ Gail ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Chubb Limited First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Susan Spivak, Senior Vice President, Investor Relations. You may begin. Susan Spivak Bernstein: Thank you, and let me add my welcome to our March 31, 2026 first quarter earnings conference call. Our report today will contain forward-looking statements, including statements relating to the company performance, pricing and business mix, growth opportunities and economic and market conditions, which are subject to risks and uncertainties, and actual results may differ materially. See our recent SEC filings, earnings release and financial supplement, which are all available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings release and financial supplement. Now I'd like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer. Then we'll take your questions. Also with us to assist with your questions are several members of our management team. And now it's my pleasure to turn the call over to Evan. Evan G. Greenberg: Good morning. We had an excellent quarter and start to the year. Our results speak to the strength and resilience of our company in a period of elevated uncertainty. They also speak to our globally diversified business opportunities on the one hand and our disciplined approach underwriting on the other. I want to first start with a few words about the external environment. War in the Middle East raises the specter globally of higher inflation and potentially slower economic growth. To what degree, the timing and the pattern are all unknowable at this time. However, the impact of the war adds a degree of pressure to certain financial, fiscal and economic stresses, such as underlying inflation, fiscal deficits and sovereign debt, global supply chains and financial valuations, including equity and credit and a growing energy shortage to name a few. In times of stress, I like Chubb's position. Given the strength of our balance sheet, earning power and liquidity. Now turning to our results, strong growth in P&C underwriting, investment and life income led to core operating earnings of $2.7 billion or $6.82 per share, both up substantially over the prior year first quarter, which was, of course, impacted by the California wildfires. Adjusting for this, so excluding cat losses, core operating income was up 10.7% and EPS was up 13.5%. And most important, tangible book value per share grew 21.5%. Total company net premiums grew 10.7% for the quarter to more than $14 billion. P&C premiums grew 7.2% and Life grew more than 33%, both benefited from foreign exchange. Our underwriting performance in the quarter was excellent. P&C underwriting income was $1.8 billion with a combined ratio of 84%. And on a current accident year basis, excluding cats, underwriting income grew 9.8% and a combined ratio of 82.1%. On the investment side of our business, adjusted net investment income of $1.8 billion was up more than 10%. Our fixed income portfolio yield was 5.1%, and our current new money rate average was 5.5% as of March 31. Our invested asset now stands at $170 billion, up from $152 billion a year ago. Again, these results, top and bottom line, put a point on the broad-based, diversified nature of the company by geography and product by both commercial and consumer customer segments and by distribution channel. Our annualized core operating return on tangible equity was 20.6% and our core operating ROE was 14%. Peter is going to have more to say about financial items. Turning to growth, pricing and the rate environment. P&C premiums grew 7.2% with consumer up 14.2% and commercial up 4.6%. Overseas General grew 14.4% or 6.1% in constant dollar. Total North America was up 4.1% or 7.8%, excluding large account property both admitted and E&S, which we purposely shrank given what we judge to be inadequate pricing levels in a number of important markets, property and financial lines pricing conditions are soft, with property pricing in those markets softening in a pace that, frankly, I'll only describe as dumb. With that, as a baseline, I'll give you some more color on the quarter by division and region. I'm going to begin, as I did last quarter with our international P&C business. Premiums in our international retail business, which operates in 51 countries and is 90% of overseas general were up more than 15%. Consumer-related premiums, both Accident & Health and personal lines were up over 20% with commercial lines up over 11%. Europe grew 17.5% with consumer and commercial both up double digit. Asia grew more than 12% and Latin America grew almost 18%. In our international retail commercial business, P&C rates were down 2.5%, and financial lines rates were down 7.4%. Our selected loss cost trends and our international retail business was 3.7% or 130 basis points lower than '25%. In our London wholesale business, the market has become highly competitive, particularly but not only in property, and we purposely shrank our open market property business. Premiums in our London wholesale business, which is 10% of international P&C were up almost 8%. Turning to North America. Total premiums again grew 4.1%, including 8.3% growth in personal lines and 2.8% in commercial. excluding large account property, both admitted and E&S, and that's shared and layered property. Total North America commercial premiums rose 7.7%, a very good underlying result. Breaking it down further, premiums in major accounts and Specialty or E&S grew 1.5% or 10.9%, excluding Sheraton layered property, which again, we shrank. Growth was driven by a broad range of casualty, marine, surety and risk management businesses. Premiums in middle market and small grew 3.3% with P&C lines up almost 5.5% and financial lines down 5.7% or flat when adjusting for the impact of just additional reinsurance we chose to purchase. In North America, pricing for commercial property and casualty, excluding fin lines and comp was up 4.6%, with rates up 2.2% and exposure change of 2.3%. Property pricing was down 2.6%, with rates down 6.3% and exposure up 4%. However, going a step further, Property pricing was down 14.3% in shared and layered major and specialty for the business we wrote. Market pricing for the business we gave up or passed on was down between 30% and 40%. The larger the premium, the greater the price discount. On the other hand, in middle market and small commercial, property pricing was up 1.5%. Casualty pricing in North America was up 9.6% with rates up 8.4% and exposure of 1.1%. Work comp pricing was up 4.3%, and fin lines pricing was about flat. Our overall selected loss cost trend in North America commercial was little changed, with no change in casualty at other long-tail lines. On the consumer side of North America, our high net worth personal lines business had a very good quarter with premium growth of 8.3% and renewal retention on an account basis of 92%. Homeowners' pricing was up 7.7% in the quarter. And in our international life insurance business, premiums rose 37%. Premiums in North America Chubb Worksite Benefits business were up almost 16%. Our Life division produced $316 million of pretax income in the quarter, up 8.5%, and adjusted for a few onetime items that benefited last year's first quarter life was up 11.5%. In sum, we're off to a very good start in '26. And we had an excellent first quarter. From a macro perspective, over time, difficult environment, generally advantage, strong companies over weaker ones. Chubb's diversification, market-leading presence and capabilities and operating discipline provide us with resilience when the macro environment is uncertain. We are patient and have many sources of opportunity on both the liability and the asset side of the balance sheet. From what I can see, cats, et cetera, aside, I remain confident and our ability to continue generating strong growth in operating earnings and double-digit growth in EPS and most important tangible book value. I'll turn the call over to Peter, and then we're going to come back and take your questions. Peter Enns: Thank you, Evan. Our first quarter results were strong, and we concluded March in an excellent financial position. Supported by balance sheet strength and liquidity, including record cash and invested assets of nearly $173 billion and $3.8 billion of adjusted operating cash flow. During the quarter, we issued CHF 200 million or approximately $250 million of 6-year debt at a very attractive cost of 1%. We returned $1.5 billion of capital to shareholders, including $1.1 billion in share repurchases at an average price of $325.06 per share and $380 million in dividends. We ended the period with an all-time high in book value of nearly $74 billion or $189.93 per share Book and tangible book value per share, excluding AOCI, grew 12.1% and 16.5% from last year. Our core operating return on tangible equity and core operating ROE in the quarter were 20.6% and 14%. Pretax catastrophe losses were $500 million for the quarter, principally from weather-related events split 87% U.S. and 13% international. Pretax prior period development in the quarter in our active companies was favorable $301 million, comprising $322 million of favorable development in short-tail lines and $21 million of unfavorable development in long tail-lines. Our corporate run-off portfolio had adverse development of $15 million. Our paid-to-incurred ratio for the quarter was 87%, and our net loss reserves increased to nearly $69 billion, representing growth of 5% from first quarter last year. Turning to our investments. Our A-rated portfolio increased about $1.5 billion from strong operating cash flow and positive foreign exchange gains partially offset by $1.6 billion of net unrealized losses from an increase in interest rates and widening of credit spreads. Adjusted net investment income of $1.84 billion was at the top end of our previously guided range, primarily due to the increase in our invested asset base and stronger private equity returns. We expect adjusted net investment income in the second quarter to be between $1.825 billion to $1.85 billion. Our core operating effective tax rate of 19.3% for the quarter was slightly below our previously guided range, primarily due to compensation-related equity awards, which vested in the first quarter. We continue to expect core operating effective tax rate for the full year to be in the range of 19.5% to 20%. I'll now turn the call back over to Susan. Susan Spivak Bernstein: Thank you, Peter. At this point, we're happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Bob Huang of Morgan Stanley. Jian Huang: My first question is on the geopolitical commentaries you had in your opening remarks. Can you maybe help us unpack this concept a little bit? Just -- we're hearing inflationary concerns out of Asia, out of parts of Europe due to the conflict in Iran. Do you see that at some point in time affect pricing expectations in the U.S. market if the conflict kind of drags on longer than expected? Just curious your thoughts on that. Evan G. Greenberg: As I said, the degree, the pattern, the timing is unknowable. However, global supply chains, depends substantially. You mentioned Asia. U.S., we depend on supply chain through Asia. We depend on supply chain through Mexico and other parts of the world. The impact of the Gulf on supply chain availability of commodities and other inputs and the impact to shipping, of course, is going to have an inflationary impact. How that passes through to inflation in the U.S., the degree of it and where it actually shows up is not really knowable at this time. But it isn't going to be 0. That's for sure. And how transient it is, is unknowable also. Longer it goes on, stickier it will be. That's sort of the mental model I have. How it will pass through on insurance, I don't know. I'm not -- it's not something that I'm really ringing my hands about. I'm concerned about. It will likely be short-term transient. We'll see what it is when it shows up, and we will respond to it accordingly. Jian Huang: Got it. Really appreciate the thoughts. My second question is on the small market E&S business and AI. So when we think about Trump's small market E&S business, that has grown fairly well over the past. And as we think about you deploying more AI capabilities either maybe through distribution or just internal capabilities on underwriting. Can you maybe help us to think about the growth trajectory over the next 5 years. Is it fair to say the E&S market for you, specifically the smaller end of that can grow multiple times bigger in 5 years' time? Is that the right way to think about it? Evan G. Greenberg: I think about it a little differently. I think about the small commercial market, retail and E&S I actually think the greater opportunity for growth is in the vast retail end of it versus the E&S. But it's both. And what we have done to transform that business and what we're continuing to do to transform it including with the use of AI and now with what's in front of us with agentics within AI, an evolving large language model capabilities and enterprise software that emerges from that as well. Yes, it is a real growth area for our company over the next 5 years. And by the way, not simply North America, we expect significant growth in various markets internationally that may ultimately -- really. Operator: Your next question comes from the line of Mike Zaremski of BMO Capital Markets. Michael Zaremski: Question regarding some of your commentary around the pricing cycle, specifically in the larger account marketplaces where you called out pricing power is declining, I think, more than you feel makes sense to Chubb. You also called out kind of the London specialty market is getting more competitive. Curious, you've been through lots of -- you and your team have been through lots of cycles. What's causing the competition this time? Is it just simply what you've seen before and folks are getting excited about increasing their top line growth in a softening marketplace? Or is there some other causes this time that you want to call out? Evan G. Greenberg: Yes. And let's step back and put a perspective on it too the market rates, so I gave you, Chubb, I gave you what we lost business for. If I sort of step back and look at overall market rate in Shared and Laird in North America and in London, Pricing overall is off 25% in the quarter, heading to 30%. It's -- you can actually see it's accelerating in that trend. It's -- and by the way, lost cost to put a point on it, loss cost, they're moving at about 4% to 5% in shared and layered property. So you can work out the math there. It's always supply demand. So it's -- the amount of supply, which is capital that is chasing a relatively finite amount of business. And by the way, in a concentrated way, if it's E&S and it's London or it's in the United States, it's boxed up and brought to underwriters. You can access it. It's not like retail business generally. You can -- and it's urban-based. It doesn't take a lot of capability. It takes some balance sheet capital and a couple of underwriters. And you're in the market. So it's a hunger that way, the difference -- and I wrote about it in the shareholder letter, so you can read that. I won't repeat at all. This destructural difference this time is simply how the capital is showing up. And it's showing up a lot of it in a volume-based incentive system. MGAs. The majority of them, it's just volume based. What do they bring? They bring a cheaper price and a higher commission. And it's the reinsurance market, and it's alternative capital. And the number of bites of the apple in the supply chain by taken by intermediation. That is what you are reflecting here. And by the way, the loser at the end of the day is the ultimate risk taker who puts up the capital. this is short-tail business. The report card comes home rather quickly, so stay tuned. Michael Zaremski: That's helpful. And my follow-up is just on Chubb's digital transformation. You gave us an update back in December, but you've been talking about digital transformation for many, many years, probably much longer than peers. Just curious, is there -- has your views changed in recent months given advances in technology on the kind of the pace of the cadence of the digital transformation, front-end loaded, back-end loaded or just pro rata over time? And also just do you feel that your digital transformation goals since they're longer term could change fairly materially over time given the pace of change in technology? Evan G. Greenberg: I haven't changed my view of our goals in the last 3 months, and it is steady, and we are executing and we are on track. The technology is evolving at a rapid pace. And the most interesting in the last number of months that will, frankly, is still emerging. There's a lot of talk about it, but how it actually operationalize is the notion of what agentics now really brings? And the notion of enterprise solutions that some of the developers of frontier large language models are working to actually monetize all that they've spent in development. And I think those trends as they emerge, we'll only accelerate, improve, lower cost, make it easier. So I'll stop right there. It's -- it's an exciting time. And you have to spend and I spend much more time on this subject than I did even 2 years ago or a year ago. You need to have knowledge. You can't just be listening to others. You got to have firsthand knowledge. And otherwise, you yourself start to become irrelevant. So as a leader, all that's on my mind. Operator: Your next question comes from the line of Gregory Peters of Raymond James. Charles Peters: So I'm going to ask a follow-up question to the -- some of your comments you just made. And some of your shareholders have reached out to me. And specifically, there's so much news in the marketplace about the rapid evolution of technology, specifically the new piece of information we're all processing is the Anthropic’s Mythos. And I'm just curious how you view this type of technology and its risks to like the cyber insurance market, how you think it might affect contingent business interruption. And then these tech companies are rolling out this technology. And if it causes problems, I'm sure they're going to face some liability costs. So just trying to come at it from a slightly different angle, but anyways, your views would be appreciated. Evan G. Greenberg: Sure, Greg. And that's not a slightly different angle. That's a different angle, and it's the right question. First, just on mythos and it's the notion of finding vulnerabilities and we've redefined vulnerabilities, the threshold for vulnerability has been lowered. What were minor vulnerabilities can now be aggregated in a much more insightful way. Anthropic is a code generator. So it can read code. So it's -- it shouldn't be shocking that since it can read code, look at another use that has emerged. And then there are others, think Gemini's models. And the company's business model, they go and they do searches for information. That means they know systems, computers. They know how to access the system does. So frankly, it can look at code. Finding vulnerabilities in your -- right now, it's not just -- and just on level setting. It's not just that you can use this to find your own vulnerabilities. But many companies, most companies also use open source in their estate and so third party. And to the degree it's open source that way in the estate, you can find vulnerabilities, maybe even before suppliers do. Doesn't mean the patch has been created. So in a word, the arms race is on. Now it is about hygiene and services to monitor and to support clients and identifying and fixing. And clearly, how diligent are you? Do you identify and patch? And imagine now the tools to patch are more automated and that automation is improving quickly. So you can patch faster. You can identify, you can patch if you choose to, see how faster speed. So that's the defense side of it, while we know the offense side is just around the corner. By the way, from what we can tell so far in AI in cyber attacks using AI. There really is only one instance we're aware of so far where it didn't involve a human. Other than that, humans are in the cockpit when they were using agentics so far. From an underwriter's point of view, obviously, policy conditions and pricing are on our minds. Large account will be much better at hygiene and have much stronger perimeters to get through to penetrate than small companies. Small companies, on the other hand, are less target individually, but create more systemic concern. And then finally, the biggest meat ball there is middle market companies. They're a target. They got more money, and they're less capable at hygiene and focus on it less and defense. And so all of that is on our -- and they have weaker perimeters. All that is on our minds as underwriters. And I give you all this, so you have a sense that we're thoughtful about this. Charles Peters: That's good detail. For my follow-up question, I'm going to -- I'm just going to focus on -- if you look at the PC consolidated operations, you're generating in the first quarter an 84 combined ratio. You're on track to have a heck of a year. How do you think, broadly speaking, about the new business penalty, the fact that writing new business could be dilutive to that 84% combined ratio versus retention. So just walk us through your mental model on some of the points in that. Evan G. Greenberg: Well, we run in our various businesses, call it, 85% and north of retention. large account E&S, the property I talked about is where we're -- well, we shed half the volume. And by the way, that half the volume we shed, most of it was because we walked away. We also purchased additional reinsurance that impacted our premium growth and reduced our exposure. But we always have the new business penalty. So I don't see -- I'm thinking about what you're saying, and I don't really see much of an impact. I don't see any impact, frankly. And when I'm maintaining underwriting discipline in property, if anything, what I'm doing is ameliorating impacts to combined ratio in our minds because we're only shedding business that is woefully inadequately priced if we were to write it. Operator: Your next question comes from the line of Meyer Shields of KBW. Meyer Shields: I guess one modeling question to start with. Obviously, you called out the savings-oriented single premiums in life insurance in terms of written premiums. And we saw a similar, I guess, uptick in policy benefits. Does that stay elevated in future quarters also if the sales of these products normalize or go back what it was before? Evan G. Greenberg: Do you want to take that offline? Do you want to answer? Peter Enns: Yes, I'll just do it real quick. So the savings-oriented products, as you know, are more spread-based than underwriting margin based, and that's how you have to think about it. And so if you will, if we're selling elevated amounts of premium, there'll be a policy benefit that would match it. But over time, the margin comes through the investment product. Evan G. Greenberg: I don't -- just to understand, it's Asia. And first quarter in Asia, classically an agency business, very fast start. I don't expect to see this kind of growth continue in single premium business. Return on capital for it is brilliant. I'm not in love with the margin of it. But I'll tell you what, it's like mutual fund business, you write a lot of it, and you make some money. But I expect more of growth in regular premium on risk-based product as we go forward in the year. Meyer Shields: Okay. Fantastic. That's very helpful. And if I can sort of switch gears back to AI. One of the debates out there right now is whether -- if the insurance brokers collectively use AI to lower their own expenses or expand their margins. Does that provide an opportunity for companies like Chubb to reduce acquisition expenses? Evan G. Greenberg: Pick your moment and at the right moment, it does. I mean, ultimately, I have to tell you, and I have been in this business a long time. And this industry has certain idiosyncrasies about it. And there is a belief that, therefore, these things will be durable like the cost of intermediation. The cost of intermediation in many parts of the industry, and this is not a slam against brokers. There are partners, but the intermediation costs overall in numerous parts of the business are excessive. And in an age of digitalization, in an age of AI and what technology does, one of the hallmarks of that is that it ought to ultimately, and it will, in so many areas, bring down cost. And if you look at the economics of the business and the cost of intermediation, I think in the longer term, it will -- it should decline. Operator: Your next question comes from the line of Tracy Benguigui of Wolfe Research. Tracy Benguigui: My question is for Tim Boroughs. There's been a noticeable change in tone by the market around private credit recently. From your perspective, how that influence how you're thinking about the role of private credit to play in your portfolio going forward? And if you could also touch on the health of the existing book, particularly any trends you may be seeing in underlying borrower performance or early signs of stress? Timothy Boroughs: Yes. Sure. On our private credit, our credit -- our exposure to private credit is less than 4% of total investments and just over 50% of that total is in direct lending consisting of first lien senior secured loans that are at the top of the capital structure. This portfolio is in separately managed accounts. And I think that, that's important, not BDCs, where we have control of deployment and enforce conservative guidelines to our managers. While the direct lending sector has grown rapidly, as you know, in the last few years, we've remained disciplined and have not grown our allocation. Our small group of experienced managers has consistently delivered strong conservative results with a loss experience we estimate to be only 1/3 of the broader direct lending universe. This discipline is further evident in our very modest exposure to software, which at less than $150 million or 4% of the direct lending portfolio is a fraction of the 20% average across the sector and less than 0.25% of our total investment portfolio. Tracy Benguigui: That's super helpful. I'm also love to get your thoughts on how you're thinking about the duration of this soft cycle. Does that steep pace of property pricing decline suggest something shorter-lived, maybe less sustainable? Or do the structural and capital factors you discussed with Mike point to a longer soft cycle? And if you could also touch on if you've seen any deterioration on terms and conditions that may play into the duration of this soft cycle. Timothy Boroughs: Yes. Terms and conditions just on the margin, not 0, but on the margin. And as to duration, well, look, I don't know. What I do know is you underprice business in property, and I haven't noticed that the attritional loss environment. Property premium, property pricing is made up of two things: attritional loss. So you got price to support attritional loss in premium and then you got cat. I haven't noticed a diminution in the attritional loss environment. That's pretty steady, and it has a little volatility to it because of the size of losses, but pretty darn steady. And on the cat side, well, unless you believe that the models are wrong or that somehow the climate environment is going to change or has changed and is going to become something other than what it has been, then -- then we have an adequate pricing and an adequate pricing in property tends to reveal itself pretty quickly. And the only way out for capital providers at that point is to adjust pricing and to ensure they got the right terms and conditions. And so generally, in my mind, you go to a dumb place pretty quick, then the reaction the other way ought to be quicker. But you know what, I don't know with certainty. But that's kind of my mental model. Operator: Your next question comes from the line of David Motemaden of Evercore. David Motemaden: I had another market question for North America Commercial. I noticed that the cash pricing has held in pretty well here and actually accelerated a little bit this quarter. I get that it's nuanced, but as property returns come under pressure, do you expect to see increased competitive behavior shifting into casualty. Are you seeing any early signs of that? Just sort of wondering your outlook there. Evan G. Greenberg: No. The -- so far, the pattern in pricing is about what I observed to you in prior quarters. In the cohorts that need price, you're getting price in excess of loss cost. And where the pricing is adequate, it is generally flat to or in some instances, below loss cost increases. But I see it at this point as I look through the stack as pretty rational, not everywhere, of course. It's a market. But overall, I do. And I even have been surprised in certain areas where the market response has been the correct response and it creates more opportunity where rate adequacy is required and the market is respective though. David Motemaden: Got it. That's encouraging there. Maybe just switching gears, the Chubb worksite benefits the 16% growth there, that's pretty solid, I think, especially after similar growth last year. Could you just talk a little bit about the strategic role of the worksite benefits business within the broader portfolio and how you're thinking about the key building blocks to scale it from here, whether that's distribution product expansion or maybe even potentially M&A? Evan G. Greenberg: Yes. There's no M&A in there on the horizon. As we see, we've built it organically, and we're continuing to -- it's fundamentally part of our Accident & Health strategy. We pursue it in two ways. We have the legacy agency force of combined that we have retooled to not sell individual insurance, but small group, worksite benefits business. And it is predominantly supplemental A&H business that you know us for dread disease, hospital cash, et cetera, to really lower middle income to middle income people and provides a supplemental product to them. It's the same but with a different distribution for merger account, middle market, upper middle market to large jumbo now where we're awarded business. And it works very closely with our P&C distribution and our P&C distribution on the brokers who represent us that way. They have expanded greatly over the years into employee benefits. And the notion that you couldn't cross sell one to the other is an old math. Because, in fact, the relationships on the accounts, we are benefiting from that in the growth of Chubb worksite benefits. And it, again, is a similar product mix, which may be a bit more of term life built into it as well. It's risk-based products. When I look at -- and it's on Life paper. So when you look at the broader story, of our life business and you look at our international Life business, which, as I've told you, is over 2/3 risk-based supplemental A&H type business growing through agency distribution, digital distribution, banks, et cetera, and has as well savings and other protection products within it. It's just part of a coherent story of what we are pursuing between accident and health and life, which both are growth areas for the company. Operator: Your next question comes from the line of Alex Scott of Barclays. Taylor Scott: First one I have is on the Middle East conflict. Can you talk about your involvement in some of the solutions that are being contemplated for marine and trade credit and so forth? And to what degree that could support some growth near term? Evan G. Greenberg: And to what degree, what? Taylor Scott: It could just help with, I guess, the growth opportunity. Evan G. Greenberg: I was approached by our government to put together the program that you have read about that we announced. The government wanted to support shipping through the Gulf and open when they think that the risk environment is such that they can support with military convoys ships that would transit the Gulf and that has yet to occur. The program is to ensure shipping under those conditions and the purchase of our insurance program is a condition to being part of a convoy that the U.S. would run. The U.S. military would run. The program is supported by U.S. insurers taking 50% of the risk and the other half of the risk is taken by an arm of the federal government. We have done it, number one to support our country and to support our military. Number two, to support the global commons and the economy, to the degree that we practicing our craft can provide that service. And it's in place and when conditions are such. If they are, then -- this will obviously generate would potentially generate premium revenue. And stay tuned. Taylor Scott: That's all helpful. Second one I had is on your partnership with KKR and some of the funds that you're putting together. And I just wanted to check in on the timing of it, when some of those newer things you've been working on are going to potentially contribute to NII or if they're already contributing to NII. I just wasn't clear. And I guess related to that, has some of the AI disruption changed anything about timing of all of that and the work you're doing? Evan G. Greenberg: Yes. I think you're missing something. We have disclosed quite clearly, particularly the last at the investor dinner and in quarters before, quite a bit of detail about our alternative assets and the investment activity there, what's our strategy? We -- half of it is in our partnership called Strategic Holdings. And we described what that is about. And by the way, we've been very clear about the income that it is producing and the income we expect it to produce over the next few years that we expect to achieve as we deploy. We've talked about the capital deployment. So that's all out there, but we're happy to separately take it offline and give you detail around it. I think Peter wanted to give you. Peter Enns: No, that's fine, Alex. I can talk to you offline, but it does show up in our adjusted NII, and you can see it on the income statement and income from private equity partnerships. That's a substantial part. Operator: Your next question comes from the line of Matthew Heimermann of Citi. Matthew Heimermann: Just one on reinsurance. I'm just curious, should we think about relative to any softening in pricing relative to how you're thinking about rate adequacy, just more opportunistic reinsurance purchases on a go-forward basis? Or is it just this was so acute, particularly on the property side, you felt compelled to do so? Evan G. Greenberg: Can you just repeat that, Matt? We have something changing. Can you hear me? Matthew Heimermann: I can hear you, and I'm on a headset. Evan G. Greenberg: We just gave ourselves a head fake. But go ahead. Can you repeat? Matthew Heimermann: Just how to think about how likely additional opportunistic reinsurance purchases are? And I don't want to react to what you did in property because the declines were pretty significant. But just how likely -- because I don't view as an arbitrage reinsurance buyer, but obviously it's available. So just trying to think about how your thinking around risk management evolves vis-a-vis the reinsurance pricing spread. And the follow-on really, which I'm really more curious about is like where does this allow you, if anywhere, to take more risk out outside, et cetera? Evan G. Greenberg: Yes. I'm not really going there, except to say to you that axiomatic in here, when pricing becomes marginal or inadequate, we have various tools to manage exposure and our appetite for exposure. It's not about premium. And so reinsurance is simply one of those. Could you hear that answer because we're having some audio problems right here.. Matthew Heimermann: You were clear to me. Willing to add anything with respect to if shrinking risk appetite in places in proper response to market conditions, does that create some flexibility to take more risk asset side? Or are there any things from a complex change in the portfolio that influence that? Evan G. Greenberg: No. No. The way we run a business doesn't think -- we don't think that. We've got plenty of capital, and we maximize the amount of risk we take based on how we judge risk reward, and there's no trade-off one to the other. Operator: Your next question comes from the line of Brian Meredith of UBS. Brian Meredith: Evan, we keep hearing a lot about price, what's happening in the property markets. I wonder if you could talk about terms and conditions. hearing a little bit more about some softening terms and conditions from people. Are you seeing that? And maybe you can maybe dive into that a little bit because that can be kind of scary. Evan G. Greenberg: Welcome to insurance, Brian. It's not scary. It just is what it always turns out to be. No, as I said earlier, we're seeing it only on the margin right now. Other than that, we're not, at this point, seeing changes to terms and conditions. And we're quite mindful and there you go. And by the way, when we look at pricing changes, we value term and condition changes. So we don't just sort of say price goes this. And by the way, change in BI waiting periods, deductibles, CPI, et cetera, that's just off to the side. No, we actually put value on it in pricing. -- we're seeing it very marginally at this point. Brian Meredith: Great. And then the second question is I've heard a little bit from some other companies about admitted markets getting call it, more competitive in taking business back from the E&S or wholesale non-admitted markets. Are you seeing that at this point? Evan G. Greenberg: I am on the margin of it so far. And frankly, it's what's so interesting to me. I look at middle market and small commercial E&S versus admitted. Admitted, much, much more discipline. E&S less so. And that is, again, back to the comments I made about distribution capital and the incentive system for volume. It's, to some degree, terribly illogical to me. I'm seeing some go back towards the admitted. It wouldn't surprise me to see more. It's a classic pattern in softening market. Where I'm seeing it is more on the margin in the property side. retail that will all of a sudden get so excited to write habitational wood frame business in Texas. Okay. Good luck to you. Operator: Thank you. We've run out of time for questions. This concludes today's Q&A session. I'll now pass the conference back over to Susan Spivak for closing remarks. Susan Spivak Bernstein: Thank you, everyone, for joining us today. If you have any follow-up questions, we will be around to take your call enjoy the day, and thanks again. Operator: This concludes today's conference call. You may now disconnect.
Haj Narvaez: Okay. Good afternoon, ladies and gentlemen. Welcome to our earnings call to discuss BPI's results for the first quarter of 2026. I'm Haj Narvaez. I'll be your moderator for this session. We're conducting this briefing in a hybrid manner with our BPI speakers and panelists here in our headquarters at Tower 2 of Ayala Triangle Gardens, Makati City, while the rest of our participants are dialing in remotely. I'm pleased to introduce you to our speakers and panelists this afternoon. TG Limcaoco, our President and CEO; Eric Luchangco, our CFO and CSO. They will be joined in the panel for the Q&A by Tere Marcial, Head of BPI Wealth; Ginbee Go, Head of Consumer Banking; Louie Cruz, Head of Institutional Banking; Jenny Lacerna, Head of Mass Retail Products; Dino Gasmen, Treasurer and Head of Global Markets. We're also joined today by the rest of the BPI leadership team in this call. This afternoon's agenda will begin with opening remarks from our President and CEO, TG Limcaoco, followed by our CFO and CSO, Eric Luchangco, who will walk you through the first quarter performance highlights, and likewise provide updates on our digital platforms and strategic initiatives. The floor will then be open to questions from the audience. Please note, the call is being recorded and legal disclaimers apply. Now let me turn you over to TG for his opening remarks. Jose Teodoro Limcaoco: Thank you very much, Haj, and a nice afternoon to everyone joining us today. I see a lot of familiar faces here, and I'm sure there are a lot of familiar faces on the call. I look forward to a very engaging conversation after Eric's report. But let me start off by making a couple of points that despite the challenging conditions brought about by the Middle East crisis, the bank managed to report net income for the first quarter. That's 1.7% higher than last year and 4.9% higher than last quarter. This was really driven by our continued strong revenues that were up 13.9% despite and hindered by operating expenses that were up 15.8% versus last year. We can go into some of the details why the operating expenses were higher than expected but we continue to expect that they will be back to normal levels by year-end. All this led to pre-operating provisions that are up 12.4%. Due to the Middle East crisis, we increased provisioning to account for the increased risk in the consumer book arising, obviously, from the Middle East crisis, where we saw relatively larger jumps in the NPL in both the SME and the micro finance books. But despite increasing provisioning in our NPL, we saw a decrease -- sorry, despite the increased provisioning in our NPL coverage fell due to really the NPL increase in our corporate loan book, where the increases came from a number of corporate accounts that were substantially covered by collateral. Finally, I will talk a little about how this Middle East crisis is affecting our outlook on loan growth and the way we are provisioning. We are trying to provision ahead of that. But without really spending all of this conversation, all this time in the Middle East crisis, allow me also to talk a little about the progress we're seeing in our other businesses. Eric will go through some of those points. We're very happy to report that our agency banking initiative continues to grow. As of today, we have 1,320 stores where our customers can actually do deposit and withdrawal transactions outside of our branches and outside of our ATM and cash acceptance machines. Ginbee can talk a little about our digital branches and how we continue to roll this out to give a better selling and advisory experience to our customers. And then we'll also make a short presentation about the progress of our digital offerings, where we continue to believe that we have the leading mobile app, we have the leading business platform in BizLink and how we have updated that, and Louie can talk about that and how we've also updated our BPI Trade where we continue to make headways into equity trading for our customers. So with that, I'll turn this over to Eric and then looking forward to a wonderful engaged conversation later. Eric Roberto Luchangco: Thank you, TG, and welcome to everyone joining us on this call, both in-person and virtually as well. And so good afternoon to all, and we'll be presenting our first quarter results. These results showed more moderate growth compared to previous quarters but still reflects strong levels of operational performance that we believe will show continued outperformance versus our peers. The highlights are as follows: On profitability for the quarter, the bank generated net income of PHP 16.92 billion, a 1.7% increase year-on-year, supported by revenue growth despite higher operating expenses and provisions. Return on equity stood at 14.3% and return on assets at 1.9%. The balance sheet continued to expand with loans increasing 13.5% year-on-year and deposits rising 10.4%. The bank's capital position remained strong, supported by earnings generation with the CET1 ratio of 13.9% and CAR of 14.8%. NPL ratio stood at 2.42% with the year-on-year increase mainly driven by the shift in the loan mix and the quarter-on-quarter increase mainly driven by the institutional loan segment. NPL coverage declined to 87.15%, though this remains supported by underlying collateral. Meanwhile, ECL cover expanded to 103.5%. Bank further strengthened its customer franchise, expanding its customer base to 18.7 million. Agency Banking continued to drive scalable growth by extending its reach and deepening market penetration. At the same time, the integration of AI into the digitalization strategy is enhancing the bank's efficiencies and supporting long-term growth. First quarter net income reached PHP 16.92 billion, up 1.7% year-on-year with strong revenue growth moderated by higher operating costs and provisions. Net interest income stood at PHP 39.15 billion, up 13.7% year-on-year on loan growth of 13.5%, coupled with 7 basis points of NIM expansion. Trading and ForEx income rose 19.5%, anchored by a robust 32.6% jump in ForEx income. These combined to drive revenues 13.9% higher to a total of PHP 50.92 billion. Operating expenses rose 15.8% to PHP 23.5 billion, owing to higher business volume related technology and manpower costs. As we'll share shortly, much of the increase can be traced to timing issues related to booking of expenses as well as changes in the regulatory environment in the second half of 2025. Pre-provision income was at PHP 27.42 billion, up 12.4%. Provisions rose 83.3% to PHP 5.5 billion, reflecting normalization of credit costs and base effects as the first quarter of 2025 saw the continued drawdown of prior reserves. Compared to the prior quarter, net income increased 4.9%, driven by higher net interest income and lower operating expenses and provisions. OpEx declined 11.7% as costs normalized following the typical year-end expense build up in the fourth quarter. Provision operating profit expanded by 4.1% to PHP 27.4 billion. Earnings per share stood at PHP 3.2 per share at the end of the first quarter, up 1.5% year-on-year. Profitability remained healthy with an ROE of 14.3% and an ROA of 1.9%. Turning to the balance sheet. Total assets continued to expand, reaching PHP 3.7 trillion, up 13% year-on-year, driven by the expansion of the loan and securities book. Gross loans stood at PHP 2.61 trillion. It was slightly lower quarter-on-quarter, reflecting softer demand and our prudent origination of loans. On a year-on-year basis, however, loans grew 13.5%, with expansion recorded across all segments. Deposits increased to PHP 2.84 trillion, up slightly quarter-on-quarter and 10.4% year-on-year, driven by continued customer flows and a stable funding base. The CASA ratio eased marginally to 41 basis points quarter-on-quarter to 60.29% while the loan-to-deposit ratio climbed year-on-year to 91.95%. Versus last year, gross loans expanded 13.5% year-on-year to PHP 2.61 trillion, noninstitutional loans increased to PHP 829 billion, up 24.9% year-on-year. The increase in noninstitutional loans was led by SME loans, up 96.3% year-on-year. Credit card loans up 33.3%, personal loans up 26.9%. These personal loans include PHP 18 billion of teachers loans, which accounted for -- which increased by 72% year-on-year. Auto loans were up 19.3%. And these auto loans include PHP 5 billion in motorcycle loans, which increased 22% year-on-year. Mortgage loans was up 12.1% and microfinance loans up 16%. The loan mix continues to shift towards the higher-yielding segment with noninstitutional loans rising to 31.7% from 28.8% last year. This shift supported total loans growth of 13.5% year-on-year despite broadly flat quarter-on-quarter loan balances. In the first quarter of this year, NIM stood at 4.57%, remaining broadly stable quarter-on-quarter and improving 7 basis points year-on-year, mainly driven by lower funding costs. We'll delve into our perspective on asset quality in the later slides. But I wanted to show you here that even after accounting for the cost of credit, NIMs are still providing strong profitability to the bank. Adjusting NIMs for risk based on provisions, NIMs widened by 4 basis points to 3.92% quarter-on-quarter. If we look at risk-adjusted NIM based on the net NPL formation, we do see a sharper decline in margins by 42 basis points to 3.39% due to an outsized net NPL formation last quarter, and we'll discuss that a little further -- we'll discuss that further a little later. On the funding side, total funding stood at PHP 3.11 trillion, up 14.4% year-on-year and 1.7% quarter-on-quarter. Year-on-year, total deposits increased 10.4% and continues to be the primary source of funds, even though borrowings rose by 84.6%. CASA meanwhile is up 6.5%, which is faster than last year's pace. Key funding ratios remained stable with a loan-to-deposit ratio of 91.9% and loans to total funding at 84%. We continue to strengthen our deposit franchise, led by the mass market customer segment, which grew 60% year-on-year and continues to deliver the best CASA ratio across our customer segments. Institutional deposits also posted sustained momentum recording growth over the past 3 months in the high teens year-on-year. Fee income stood at PHP 10.54 billion, down 3.1% on the sequential quarter following a seasonally strong fourth quarter and fewer number of days in the current period. Year-on-year, fee income grew 13.9% on strong contributions from cards, wealth management, insurance, transaction banking, retail loans, business banking, corporate loans and investment banking. The Card segment saw a 13.7% increase, driven by higher billings, increased service charges from stronger cross-border fees, improved collections recovery, and higher SIP-related transaction volumes. Wealth management fees were up 11%, driven by a higher volume of assets under management, which rose 18.4% year-on-year and surpassed the PHP 2 trillion milestone to reach PHP 2.03 trillion. Income from insurance up 10%, was mainly driven by higher contributions from BPI AIA and BPI MS. Royalty fees and branch commissions further contributed to the overall increase. Transaction banking was up 26.9% mainly from higher supply chain fees, supported by increased invoice volumes and larger transaction values from our key clients. Securities brokerage and investment banking increased 80.2% attributable to higher deal activity, including the projects -- in the project finance space. These were partially offset by declines in asset sales, down 61.9% due to last year's one-off sale of a large bank property rental, which declined 27.7% at several bank premises and equipment were no longer leased. ATM and digital channels decreased 2.6% as higher fees led to lower transaction volumes and reduced usage. Total operating expenses amounted to PHP 23.5 billion, up PHP 3.2 billion or 15.8% higher year-on-year with increases recorded across all expense categories. Manpower costs reached PHP 8.1 billion, up 8.2% or PHP 621 million, driven mainly by salary adjustments and a higher headcount. Technology expenses reached PHP 4.7 billion, up PHP 660 million or 16.5% year-on-year due to higher spending on IT outsourced services, software subscriptions, and maintenance in line with the bank's digitalization initiatives. Other operating expenses increased to PHP 8.4 billion, up PHP 1.69 billion or 25.2% with volume-related expenses accounting for 41% of the increase. Overall, the key drivers of the year-on-year increase in OpEx were volume-related expenses followed by technology and manpower. As referenced earlier, booking delays relating to tech and other expenses as well as changes in the regulatory environment, particularly with that on digital services led to the sharp increase in cost this year versus last. Adjusting for these factors, operating expense growth would have been more moderate at 13.4% year-on-year. Notwithstanding that, the bank continues to demonstrate strong operating performance with efficiency gains translating to a cost-to-income ratio of 46.2% despite the customer count doubling to 18.7 million since 2022. The cost base has grown to add a considerably more measured pace supported by active headcount management and a pivot towards digital platforms and tech-enabled channels, including agency banking partner stores. CET1 capital stood at PHP 404 billion, up 0.4% from last quarter and 5.9% from last year. While the OCI volatility weighed on the capital in the first quarter, the bank's overall capital position remains solid. The CET1 ratio stood at 13.9% and CAR at 14.8%, both well above internal and regulatory thresholds despite the increase in risk-weighted assets and capital distribution as well as the lower overall other comprehensive income. Turning to asset quality. Nonperforming loans increased quarter-on-quarter to PHP 62.9 billion, with the NPL ratio rising by 24 basis points to 2.42%. Provisions which continue to be guided by ECL declined quarter-on-quarter to PHP 5.5 billion, equivalent to a credit cost of 87 basis points for the first quarter. This brings point-in-time NPL coverage of 87.15% under PFRS 9 and 112.4% when including the surplus reserves for performing loans in accordance with BSP Circular 941. This lower NPL cover is supported by collateral strength, expectations for recovery and risk absorption buffers. Asset quality pressure was mainly driven by institutional loans whose NPL ratio climbed 21 basis points quarter-on-quarter to 1.19%. While the increase in the NPL ratio was relatively small, it had an outsized effect on the overall NPL level and NPL ratio given the segment's high share of the overall book. This new NPL formation centered on a few institutional accounts, one of which we had anticipated to turn NPL and thus had provisioned for -- we had already provisioned for. The combined loss reserves and collateral coverage for this specific loan amount to 1.8x the value of the NPL, mitigating our downside risk. Other significant contributors to the higher NPL ratio were accounts with company-specific issues borne out of operational disruptions and collection challenges. On the flip side, we also have visibility on certain accounts currently classified as NPL that we expect to revert back into current status within the second quarter, which should offset much of the hits that we're taking from this current quarter. SME loans also saw a 98 basis point uptick on a quarter-on-quarter basis in the NPL ratio, driven by higher delinquencies in the 2025 and 2024 vintages. Delinquencies were most pronounced in companies in the wholesale and retail sectors, followed by construction and rental. Microfinance loans warrant some close to our attention as well as the NPL ratio increased 74 basis points with delinquencies observed across products and regions. In context, microfinance remains a relatively small portion of the total loan portfolio. For credit cards, the NPL formation is largely from the same group we had previously identified, which is clients aged 40 years and below, lower income borrowers earning less than PHP 40,000 per month and post-pandemic acquisitions booked between 2022 and 2024. Meanwhile, mortgage, auto and personal loans reported relatively stable or declining NPL ratios. We continue to maintain ECL coverage of at least 100% across all loan segments. This quarter's provisions, coupled with moderate ECL formation, widened the ECL cover quarter-on-quarter to 103.5% from 100.9% to end last year. The corresponding point-in-time NPL coverage levels are shown on the slide as well as the total cover compromising reserves and collateral. NPL remains well covered by a combination of these reserves and collateral with a total collateral coverage of 138%. Institutional, business banking, marketing, auto, credit cards, and credit card loans all post coverage ratios above 100%. Even the least covered segments, which are personal loans and microfinance, maintain a solid coverage of at around 93% even while representing just a small share of the total portfolio. Like in previous quarters, we will walk you through the performance of our lending businesses from the perspective of risk-adjusted revenues and margins. This table summarizes loan-related revenues for the first quarter of 2024, '25 and '26, alongside their corresponding net NPL formation by loan segment over the same period. From the first quarter of '24 to first quarter of 2026, revenues across the loan book increased by PHP 8.67 billion, approximately 6.4x the PHP 1.35 billion increase in net NPL formation. Looking at noninstitutional loans. We delivered strong growth in revenues at PHP 8.3 billion, which comfortably offset the PHP 390 million increase in net NPL formation. Overall, growth in the noninstitutional loans drove a sizable net revenue uplift even after factoring in the asset quality impact. The same dynamics can be observed in the last 2 columns comparing the first quarter of 2025 and first quarter of 2026. This highlights the thinking behind our commitment to growing the contribution of the noninstitutional loans and the benefits of a diversified portfolio in driving better performance. Looking at it from a margin perspective, loan yields for the noninstitutional segment have largely held firm at around 12.74%, providing a comfortable buffer against net NPL formation of 3.35%. Yields for the institutional business have seen a sharper drop versus last year's average as institutional borrower rates adjust in step with the lower BSP policy rates. The uptick in the institutional businesses' net NPL formation to 0.78% in the first quarter of this year due to select NPL accounts as discussed earlier. Aside from delivering wider risk-adjusted margins, the noninstitutional segment has fueled revenue growth given its robust expansion since in 2022. This segment has delivered a CAGR in gross loan ADB of 30.7% from 2022 to the first quarter of 2026. Moving on to our strategic initiatives update. In line with our commitment to digital leadership, the bank continued to enhance our 7 client engagement platforms. Starting from the left, the BPI app, which is our main operating app for retail clients now includes a new pay bills experience, InstaPay, B2B, non-QR billers, real-time payments, Ka-Negosyo Credit Line, eSOA, and partner store deposits, which broadened the roles -- the app's role in facilitating everyday financial transactions. We continue to enhance payments efficiencies through refinements of user interface to improve the overall ease of usage. Next, for our VYBE e-wallet, sign-ups have reached 2.7 million with 78% being VYBE Pro users. The BizLink facility for corporate clients introduced key upgrades such as Transfer to Own, pay bills, pay BPI and payroll to seamlessly migrate clients to the mobile app and provide ease of transaction approval. The BPI BizKo app for SMEs now serves more than 30,000 users, supported by continued enhancement of financial services, which strengthen client retention and drive platform usage. The BanKo app remains central to financial inclusion as it continues to empower our everyday masang Pilipino, C2D earners, and MSME entrepreneurs through accessible, reliable and digital-first financial solutions. For BPI Wealth Online, which serves high net worth client individuals maintained its active user base at 2,800, up 82% year-on-year through sustained activation initiatives. Finally, BPI Trade continues to strengthen engagement among equity investors with a higher transaction count in 2026 as it brings a new funding process with upcoming features on e-deposit and e-reserves, which will widen accessibility. Across all platforms, we continue to expand capabilities in open banking and improve the UI/UX for a more seamless experience. As of March, we have 129 API partners, up from 74 in 2019, supporting over 10,000 brands, up from only 749 in 2019. Contributing to the strong momentum from 2025, we now have 34 agency banking partners, more than 7,000 partner stores, which further strengthened our foothold in Visayas and Mindanao. Total products sold per quarter reached nearly 177,000, up 87% from last year and more than 20x from 2 years ago with deposits and insurance as the primary products sold. 20 agency partners equivalent to 1,320 partner stores are currently capable of deposit and withdrawal transactions, volume of which increased to 88,400 in the first quarter, up 5.2x compared to last year. Transactions are fast and convenient using a barcode-enabled feature on the BPI mobile app. Customers can initiate deposit transactions to a BPI account seamlessly, which are then fulfilled at participating partner stores. This completes a critical piece of the agency banking model, enabling both cash-in and cash-out transactions within retail environments without the need to visit a traditional branch. Moving on to reengineering and process automation initiatives. In the past 3 years, we implemented 149 projects, 82 in 2025 alone. These fall into 3 main types of projects, namely desktop automation tools, approved workflow automation and RPA bots. Moving forward, the projects already implemented will deliver an annual savings of PHP 139 million and reduced the headcount requirement by 181 headcount, helping our business units reallocate resources and reassign people to higher value-added rules. Highlighting some RPA achievements from some of our key business segments. In remittances, we implemented e-mail sending bots for InstaPay, PESONet and even foreign remittances to improve our customer experience, reducing complaints through this more proactive approach and avoiding the hiring of 25 additional manpower. In Agency Banking and BPI Wealth, we've implemented encoding bots to address system booking requirements and investment subscription upon opening for wealth builder, avoiding the hiring of 10 outsourced personnel. Moving forward, we will continue to introduce new RPA initiatives for running the bank, streamlining workflows and reducing operational inefficiencies, bridging the gap between our legacy processes and the demands of a modern digital-first economy. In the case of AI adoption, we take a disciplined use case-driven approach. For fraud, research and marketing, we're looking at AI machine learning-driven systems that will detect potentially fraudulent transactions and assist credit analysts in the review of loan applications to detect risks and malicious intent. We use AI to supplement knowledge gaps for clients with AI scanning for data and references to help craft targeted marketing strategies at various stages of our clients' life journey. AI also assists our marketing teams in developing competitive, relevant and hyperpersonalization campaigns. In operations, we're using intelligent document processing to automate manual, repetitive, low-risk works such as data capture and document review, so our teams can focus on higher-value activities and scale capacity without proportional increase in cost. For BPI customers, we have rolled out the AI in our branches to simplify access to policies and guidance, enabling more consistent high-quality service. Our data science team also builds advanced machine learning models to better understand individual customer needs and behaviors, helping us personalize products and offers in ways that can improve satisfaction and support revenue growth. Finally, beyond mainstream adoption, within IT, we are also evaluating additional AI use cases to further strengthen risk management and governance, enhancing real-time monitoring, improving decision support and helping us respond earlier to emerging risks. In its sustainability efforts, BPI remained busy. In the first quarter of 2026, we issued PHP 50 billion worth of SIGLA social bonds, funding projects with clear social impact under our 2025 Sustainable Funding Framework. We also expanded BPI's branches, offering EV charging stations to 10 branches nationwide. Our fraud awareness program completed 2 engagements in the first quarter of this year, reaching 155 participants. Following BPI's credit cards, which use 100% recycled PVC, BPI debit cards adopted the same innovation. Lastly, in line with our targeted interval of 5 to 6 years, BPI engaged an internal -- an external consultant for the bank's double materiality assessment, which shows the impact of ESG topics on stakeholders and on BPI's financial performance. The endeavor engaged over 7,000 stakeholders to assess and refine BPI's ESG priorities. We remain well recognized for these efforts and as of March this year, BPI has received 9 ESG-focused awards. Beyond just ESG, however, BPI has also been well recognized for its various initiatives and we list here various awards and recognitions received in the first quarter of 2026. In particular, we would like to highlight that in March, BPI led all Philippine companies on TIME and Statista's Asia-Pacific Best Companies of 2026 list, ranking 10th out of 500 companies in the region. BPI also placed seventh and was the only bank included in the top 20 companies recognized as a great place to work in the Philippines. Let me close with a summary. On profitability, our revenue-led net income growth was tempered by higher OpEx and provisions, but we remain to have a strong operational metrics. We continue to maintain a healthy balance sheet with ample liquidity and capital. Overall, asset quality remains within our risk appetite, supported by adequate buffers. And finally, we further strengthened our leadership in digitalization by scaling AI and data science. Thank you, and we will open the floor to questions in a couple of minutes after we get set up. Haj Narvaez: Thank you, Eric. Before we open the floor to your questions, please allow us a minute or 2 to set up at the venue. [Operator Instructions] For those on site, you may use any of the mics available at the floor or you may raise your hand, and we will have someone hand a mic to you. Please identify yourself by your name and company, so we can address you accordingly. For the benefit of everyone attending this call, whether in person or online, we would like to encourage you to ask your questions during the session as we will refrain from taking questions after we end this call. Okay, so just a reminder, joining us here in front with TG and Eric, are our senior leaders Tere Marcial, Head of BPI Wealth; Ginbee Go, Head of Consumer Banking; Louie Cruz, Head of Institutional Banking; Jenny Lacerna, Head of Mass Retail Products; and Dino Gasmen, Treasurer, and Head of Global Markets. So before we take questions from the Zoom link, we wanted to check first if anyone in the audience had questions. Go ahead, Gilbert. Unknown Analyst: I want to ask if you could discuss in greater detail what happened to the institutional book, why there was some asset quality issues? Jose Teodoro Limcaoco: You have to remember that NPL is 90 days. So we knew this was coming. The increase in the NPL in the institutional book versus the fourth quarter -- first quarter versus fourth quarter was really a net increase of about PHP 3.4 billion, driven by several accounts -- several meaning, 6 or 7, if I can remember right. But one of which was more than half of that. All of them with the exception of 2 were fully secured. The 2 have an NPL amount of about PHP 600 million or PHP 700 million, the rest are fully secured. The one big one is, as Eric said, was 1.89. So we think those will be resolved. In fact, we are -- the big one, we know, will be resolved because we think we should be able to take the property and we're in discussions with someone to take over the property. And that means that there is no reason to fully provide for that fully provisioned because you know the collateral. And that's one reason also why the coverage fell, right? So when we look at the coverage of 2.4 -- sorry, 94% versus 87%. We think if we didn't have that NPL growth and the lower coverage for those NPL book. That cost fall of 11%. So we would have fallen from 94% to 83%, I would refer that. So that's the effect of the NPL of the institutional bank is about 11 points. And the effect on the NPL rate is about 13 basis points. And then as Eric said, when we look at going forward, we have 2 accounts that will resolve themselves in the second quarter, totaling about PHP 3.3 billion. And we know because they've already been performing and just need 6 months... Unknown Analyst: Accounts of this sort that could -- for the balance of 2026? Jose Teodoro Limcaoco: Well, obviously, there will be accounts, but none as big as the one, that's large one. And this was unrelated to the economic conditions. Louie, maybe you want to give some color what you think? Unknown Analyst: Are you at liberty to talk about the industry they're in and whether or not they're connected politically? Jose Teodoro Limcaoco: No, they're not -- they're not connected politically. Luis Geminiano Cruz: Everything -- it's not. But for institutional accounts or accounts that we have, as TG mentioned, it will follow based on a certain restructuring. So if it falls 90 days, then it's within 90 days. And if they miss an amortization, then it falls naturally and it becomes NPL. So all these accounts that TG mentioned, we monitor this. This specific account that's quite large in terms of amount. Every time there's an amortization they miss, so we kind of see it. We can actually extend it. But the thing is if there's no clear path of doing a proper restructuring. We just don't do it, right? So that's a difference in terms of institutional accounts, in terms of restructuring. And it's not political. It has nothing to do with the issues that you're seeing. It's really an account that's quite unfortunate that they -- their cash flow is affected. But at the end of the day, you were fully covered. It's more of a timing of when we want to trigger it, right? So in fact, many are looking at it because it's -- this might -- it's perfect for a [ solar play ] there. Haj Narvaez: Thanks for your question, Gilbert. Thank you, TG and Louie. If there's anyone else from the audience who had a question. Rafa, go ahead. Unknown Analyst: I guess more moving forward with all the obviously, beyond the 1Q scope -- are you seeing any stress in SMEs consumers over the last 2 months since the Iran excursion? Jose Teodoro Limcaoco: Rafa, you'll have to expect it. I think you'll have to expect it. And that's why we have provisioned a little more aggressively in the first quarter with our ECL covers higher. And when really, a lot of the provision we did was not for the corporate because we didn't need because of the collateral but really for the consumer side. It's about natural with this crisis with higher fuel costs, people are predicting the food costs may go up, we will see some stress. And even when you look at our ECL models, payment behaviors are beginning to show themselves. So a couple -- 1 or 2 basis point slide in [ ECL ] numbers are indicative that something is coming down the road. So you need to provision that. Unknown Analyst: Are you seeing it more in the consumer or in the SME? Jose Teodoro Limcaoco: I think you'll see it in both sides. Ma Cristina Go: But you're talking about provisioning, right? So generally, provisioning would definitely require a lot more simply because of the model. The model has macroeconomic variables as part of [ PD ]. And so with deterioration in the macroeconomic variables, it's simply math. But certainly, we will remain to be very -- will closely monitor our recoveries. We are stepping up our collections and being very proactive about that, not to mention with the BSP regulations on the memo. It also helps that the BSP is being very proactive. Haj Narvaez: Thanks for that question, Rafa. We have a few questions on the Zoom chat. So I'll start off with that. The question is from Katrine Dolatre, Security Bank. She wanted to ask what do we consider our optimal LDR and she wanted to ask as well for our loan and deposit growth target? Jose Teodoro Limcaoco: I saw the question, Katrine, right? Haj Narvaez: Yes. Jose Teodoro Limcaoco: I think we have said it before, LDR is loan-to-deposit ratio. In modern banking day, given the ability of banks to access BSP borrowing, interbank borrowings and particularly the bond market where there is a substantial cost advantage going to the bond market. The real thing that we should be looking at is our loan to funding mix. And our loan-to-funding mix is about 84% at the end of the quarter. That's very comfortable. The other thing that you need to watch out for, I guess, is your CASA ratio. Our CASA ratio is about 60%. Now that I'll admit we'd like to get it higher because that's something that delivers cheap funding. But the reason we are able to run our loan to total funding at very aggressive levels, it's because BPI is fortunate to be one of the big 3 banks where we have a distinct advantage at being able to raise deposits when we need to. And the reason we don't want to -- sorry, the reason we are able to run high is because when we need to compete for deposits, we're able to price, and we don't really want to price very high in the market and cause our funding rates to be high just so that our loan-to-deposit or loan-to-funding mix will go down. So I think that's the way we should look at it. I don't know, Eric, you might want to give guidance on our loan growth and deposit growth. Eric Roberto Luchangco: So what we're looking at for this year is -- on the loan growth side is we're looking at some moderation from what we had planned on at the beginning of this year, which should come as no surprise given the weaker economic outlook that we have for this year. But we're still looking at something along the lines of kind of the low double-digit range for growth, maybe somewhere in the 10% to 12% range. But obviously, this will be subject to updating in the context of how the current situation evolves, right? I think at this point, nobody really has a crystal ball into how this thing is going to evolve every day, every week, the expectations are changing. So it's hard to really crystallize a new target at this point, but we are looking at some moderation because obviously, what you've seen so far is already putting a dampener on the economy, and we're -- the oil -- higher oil prices should stick around for quite a bit longer, which is going to place a constraint on the growth of the economy. On the deposit side, what we've seen in past situations similar to this, whenever we see a crisis, we tend to see deposits coming back to BPI. So our expectation is that we should -- the availability of deposits should be there. We don't think funding is going to be an issue for us. But of course, we are taking all possibilities under consideration. Haj Narvaez: Thank you, TG and Eric. [indiscernible] did you have a question? Go ahead. Unknown Analyst: Sorry. Just going back to asset quality. In light of the current development and stresses, have you guys run, I guess, scenarios or stress test on what part of the book is more exposed? And anything you can share with us along those lines. Jose Teodoro Limcaoco: Yes, every quarter, we run new economic variables. So we're doing that now for the -- we just finished a quarter. So our -- I guess our April numbers will show it to the Board. You won't see it till end of June. We do stress testing as part of our cap and as I told, Rafa -- as I mentioned to Rafa's question, I guess we'll see a lot of stress on the consumer. Because obviously, we have a substantial growth in our consumer book. And we have people, I guess, we have -- if you want to put it, we've basically gone a little down market relative to what we've always had. So we expect to see some higher ECL there which should eventually translate into NPL going forward, but the margins justify. One of the things that I ran was -- I was telling the team that if you look back at the last 4 years and look at our net interest income growth, our net interest income growth has surpassed or was about 9 to 10 percentage points faster than that of our competitor for the last 4 years. And that translated to approximately about PHP 36 billion in additional revenues over the last 4 years. So if you want us to get back to our provisioning to 100%, I just need PHP 8 billion more. So I think the trade-off has worked out. And I believe that the trade-off continues to work out going forward. Unknown Analyst: Any guidance on provisions this year given this outlook that you shared? Eric Roberto Luchangco: Well, our original projection for the year was somewhere in the 80s, right? So far for this quarter, we are looking at an annualized rate of 87 basis points. I think there is certainly the potential for this to grow, right? I mean, we don't really have a good grasp of how bad the situation gets moving forward. I'm sure if anybody asked you, you would say, can the situation get worse? I'm sure you would all agree that this situation has the potential to get worse. It has the potential also to stay where it is now. I don't think it quickly rebounds. But if it stays where it is, it probably our provisioning levels will probably be similar to where they are now, maybe a little higher. Obviously, if the situation deteriorates, well, we'd have to see how much worse it gets, right? Haj Narvaez: Okay. We have a question in the Zoom chat as well. It's actually from Eric Chan of Buena Vista, and it's probably going to be directed to Louie, perhaps. I noticed the institutional loans NPL is at 1.19%, which is quite similar to the historical average. And given the backdrop with the war and inflation, how are your delinquency buckets in the institutional loan portfolio? Luis Geminiano Cruz: Thank you for that. Thank you, Eric. Okay. How we monitor the institutional banking side. We also follow a certain -- start of the year -- we look at the industry weather [ chart ]. We're identifying clients: high, medium, low, in terms of risk. And with that, with the Middle East crisis now, we try to overlay that and see which clients will have a direct impact will be affected directly and indirectly. So versus -- I just have to mention versus the COVID situation, wherein, you look at the industry or the sector as a whole, now we're looking at it on a per account basis reviewed based on how we monitor the risk in the industry. So having said that, the good thing with the portfolio is quite healthy and very focused on projects. And when you say really project, it's really more cash flow is quite steady and the sponsors are quite reputable. Where we're monitoring is really on how it was structured originally in terms of interest rate. Some are already asking if we can do a little flex on doing a floater versus a fix. That's something that's where we will help given the -- where the crisis is. And the others are some flexibility in terms of prepayment if they have cash. So we will also try to support that. So overall, that's how we manage the portfolio to keep the NPL in the institutional banking within the range of where we are now. Haj Narvaez: Thank you, Louie. Thank you, Eric, for that question. Actually, Eric Chan likewise had another question in relation to the risk -- what we showed earlier, which is the risk-adjusted NIM net of provisions versus the risk-adjusted NIM, net of NPL formation. He's wondering if there's -- are we seeing any, I guess, divergence between the net NPL formation and the overall credit costs? Jose Teodoro Limcaoco: I think the only reason you're seeing that big difference in the last -- in the current -- I'm sorry, in the first quarter is because of the institutional book where -- because the NPL jumped up on the institutional book, and we did not necessarily need to provide for that because of the collateral. And therefore, when we deduct NPL formation, which was the institutional book, it didn't count into the provisioning. So that's the difference. I expect that to come back when the PHP 3.5 billion of the 2 loans in the second quarter that Louie promises may will come back in the second quarter comes back. Yes. Haj Narvaez: Thank you, TG. Jose Teodoro Limcaoco: Yes, the last point I wanted to make was, I think you also have to remember that when Eric shows provisioning as a cost or a deduction to the net interest margin or NPL formation, we're not adding back also the recoveries from ROPA sales. right? So that's something else that we're not considering into that factor. Obviously, when we make provisioning and provision gets eaten up by movements into ROPA, we're not counting the sale of the ROPA when it eventually materializes. Haj Narvaez: Thank you, TG. I wanted to check if anyone from the audience had any questions. Okay. If not, we'll continue. We have a question from [ Melissa Kuang ]. The questions are actually about OpEx. We mentioned that on OpEx, some of the sharper year-on-year growth was -- part of it was related to timing, but also some regulatory changes. Can you share a guidance in terms of what we expect for OpEx year-on-year for the full year of 2026? Eric Roberto Luchangco: Our original projection at the start of the year was that we would see OpEx growth of kind of around the 10%-ish level, right. This year, as the year has developed, we're obviously going to have to update that as we get greater certainty. But in some ways, there will be a need to maybe spend a little more in some areas, but there are also areas in which we can dial back in particular, we can dial back on some of the promotions or some of the marketing that we're doing in order to compensate for any increases that we're seeing in other areas as, for example, obviously, transportation costs, the logistics and logistics costs we incur. We're also subject to the same oil price increases that everybody else is. And so we could potentially see increases there. But again, we would look to manage that with potentially cutting back in certain areas as needed depending on how the year pans out. Haj Narvaez: Thank you, Eric. Actually, we have another question in relation to cost this time on the tech side. It's actually from Priya Ayyar of Consilium. She wanted to ask about what she saw as high digital spend. How soon do we expect cost to return to, I guess, normal growth levels? Or are we seeing a prolonged period of higher costs? Eric Roberto Luchangco: So maybe I can address that by saying, when you talk about the high spend, including on technology, our mindset is that actually, the investments that we've made in technology have allowed us to continue to become more cost efficient over time. And so if you look at where our cost-to-income ratio was in, for example, in 2022 versus where it is today, where we ended last year, where it is today. I think what you'll see is a continuing trend of improvements in the cost-to-income ratio. So when you say, hey, when is it going to come back down to a normalized level? Actually, we've been seeing improvements in this level. And we will continue to invest in areas that we believe will continue to pay dividends for us, not necessarily within the year, but down the road, and that's what we've been doing. And we believe that the investments that we've made in the past years have been critical to helping bring down that cost-to-income ratio over the last few years. Haj Narvaez: Thank you, Eric. I have another question actually from Eric Chan of Buenavista. This time, it relates to the personal loan segment. I think you noticed that if you exclude the teachers' loans, the overall growth of the personal loan portfolio appears slower than the teachers' loans. And given our success with the test portfolios and the drop in the NPL ratio, what explains the slower growth of the personal loans portfolio ex teachers loans? Jenelyn Zaballero Lacerna: Yes. So for teachers loans, it's really growing at about 71% rate. And for personal loan, it's about 10% year-on-year. So still a decent increase over last year. So in issuing loans, personal loans is really classified as a multipurpose loan. But as of late, we have really looked at the portfolio and determine which are really personal loans and which are used for capital. And you would see that the cross section between business banking in personal loans, actually, there are overlaps in customer. And therefore, that's now booked in business banking, which has grown by about close to 90%. And now with teachers loans in the personal loan books, which is really more of a personal loan. It actually is combined. It has a healthy growth. Given that -- sorry, teachers loan is really a lot of potential, now growing at 71% year-on-year. So it's really an alignment of the customer value proposition at this point. Haj Narvaez: Thank you, Jenny. We actually have, I think, some questions from those who dialed in. I think from Danielo Picache of AB Capital. Danielo Picache: Can you hear me okay? Haj Narvaez: Go ahead, Danielo. Danielo Picache: Okay. So yes, I have three questions, if you don't mind. So I know we are barely 2 months into this oil crisis. But are you seeing any changes in early bucket delinquencies say, 30 DPD in both insti and non-insti book. That would be my first question. Jose Teodoro Limcaoco: Let me turn the insti to Louie. And then I think the best one for -- if there's any significant change would be on the cards portfolio in the personal loan because that would be very, I guess, reactive. So maybe Jenny first and then... Jenelyn Zaballero Lacerna: So the answer if there are actually deterioration? Yes, we see deterioration on the ex days, 30 days delinquency buckets. And the score downgrade really is a movement from one stage to another. Having said that, we have tightened our risk acceptance criteria, looking at income, looking at age, looking at profile, looking at industry where they come from. So we've tightened that on the acquisition front. And on the collections front, we have intensified collections already. Pre-delinquency 30 days, be more aggressive in contacting customers prior to moving them to a later bucket. So yes, and I think that is quite expected given the Middle East crisis. So we see that both in personal loans and in credit cards. But we already have placed measures to be able to control those. Luis Geminiano Cruz: Okay. On the institutional side, it's not really a deterioration, but we've seen clients, especially in the middle market requesting for extension prior to the actual amortization itself. So we're seeing some of those. So before we actually do accept the request, we also have to monitor, is it really directly affected by the Middle East conflict? Or is it really a cash flow issue outside of the normal situation. So we look at those situations also. So at 30 days, we get those requests. So definitely, it will not reach the 60, 90 anymore because that's how we monitor to avoid cross because for institutional, if you read 60, that means there's really a missed an interest payment rate in the 30 days. So it's quite early detection of the institutional side. Danielo Picache: Okay. Got it. Just my second question and sort of a follow-up to that. So with the targeted relief measure offered under MB Resolution 296, so we all know that's different from Bayanihan. Can you give us a sense of how this will influence your NPL recognition, write-off policy and provisioning requirement? Jose Teodoro Limcaoco: Well, we're just going to follow the MB. But really what it is, it's discretion to the bank. So we are working on programs now looking at potential borrowers who might request it and seeing whether it is applicable to them. I don't think it will significantly change the way -- obviously, if the MB allows us to defer a payment without making it NPL, that will affect, but I don't think it will be a significant portion of our portfolio. Danielo Picache: Got it. And just my last question. So essentially, how should I think about the steady state credit cost of your non-insti book? And sort of at what point does incremental yield get offset by higher loss rates? Jose Teodoro Limcaoco: I think the guidance that Eric has given is sufficient. It's hard to predict where this war goes. If you can tell me when this war ends, I can tell you what the NPL will be. If you can tell me where oil ends up, we can give you a reasonable guess, but we don't know. And therefore, I believe the margins are still sufficient. The margins are pretty wide. I mean Eric has shown that against NPL formation, which to me is the most aggressive way of measuring it because there you're assuming all NPL is lost, no recovery, right? We're still very healthy. So to be honest, it will take a dramatic end of the world. for us to start losing money on this business. Now granted, it might not be as optimistic as it was when we said it was 2 years ago, but it's still worth the effort that we have done. Haj Narvaez: We now move on to someone who also wants to ask a question. It's Aakash Rawat of UBS. Aakash, go ahead. Aakash Rawat: Great. So TG and Eric, I think you shared some color on the NPL formation earlier. That was very useful. But apart from the big account, you said there were 5 or 6 other smaller accounts as well, which turn into NPLs. Can you share some more color on what industry is they are from? What is the nature of those problems? And is it in any way related to the Middle East contract or completely independent of that? Jose Teodoro Limcaoco: I think it is actually independent from the Middle East conflict, Aakash. I think the big one is just completely failed business, if you will, a failed business or the proponents thought they had something thing. Things just didn't work out over the past couple of years. And I think they're throwing in the towel. We've tried to work with them. It isn't working out. So we're looking at taking the property and then just there are potential buyers for the property. So we will be good on that. The rest are, I mean, small businesses -- I mean, not small because they're consumer businesses. Aakash Rawat: I see. And then you said that based on your current expectations, you're expecting recoveries and the NPL cover to go back up in the second quarter. Is it all the way back up to 95%, which it was pre Q1? Or do you see any risk that it might not happen in Q2, might get further delayed? Eric Roberto Luchangco: Sorry, the question is, if the recoveries come back that we expect to come back in the second quarter, if they come back, then -- I didn't get the rest of the question. Sorry. Aakash Rawat: Do you see the NPL coverage rising back all the way back to 95%? Or do you see there's a risk that this gets delayed to Q3 or Q4? Eric Roberto Luchangco: I think there's a very reasonable expectation for it to come back to about that 95%. Jose Teodoro Limcaoco: Yes. Actually, Aakash, if you take a look at the -- if you take a look -- as Eric, mentioned, if you take a look at the several accounts, corporate accounts that went bad, they went NPL in the first quarter and remove them and remove the provisioning we did on them in the quarter, our cover would be up 11 percentage points from where it is today. So that's 87%, should be at 95%. Aakash Rawat: Okay. Understood. And TG, you mentioned that you're doing this exercise to calculate ECL provisioning because of macroeconomic variables. So again, things are very uncertain, but you also said higher oil prices might persist and you're starting to see some stress on the consumer book already. Based on your best guess, what is that level of provisioning that you might need to make for the macroeconomic variables that might change on the back of this? Is it in the tune of 5 to 10 basis points? Or is it a higher number that we're looking at? Jose Teodoro Limcaoco: At this point, it's more of a guess than anything else, right? But I would see -- again, we would expect it to go up versus our initial projections at the beginning of the year. As I previously mentioned, our expectation for this year was somewhere in the range of the 80s. It could head up into the range of 90s, approaching 100. But the reality is that depending on the situation, it could go beyond that. That's certainly within the realm of possibility. But based on what we see for now something along the lines of in the 90s up to 100, I think, would not -- would be within the range of reasonable expectations. Aakash Rawat: Okay. Last question. Given the slight level of stress that you're seeing in the consumer book and given the uncertainty, are you scaling back this business? Should we expect slower growth in the consumer business in the coming quarters? And what about -- sorry, the same question for institutional business as well. Eric Roberto Luchangco: I think what I did mention is that we are scaling back loan growth expectations. Before the Middle East conflict happened, we were expecting loan growth in kind of the call it, 13% range around that level. And as it stands right now, we certainly think it's going to scale back somewhat. And our current outlook is somewhere in the 10% to 12% range. But again, it remains subject to update as we get more visibility on how things are going to evolve through the course of the year. Jose Teodoro Limcaoco: If I may, Aakash and lend some color to that, right? Obviously, with the crisis ongoing, we've got to realize that there will be stress on the consumer. And therefore, as Ginbee and Jenny have mentioned, we have tightened credit standards that should cause a little slower growth than what we had expected at the start of the year, as Eric has mentioned. The other thing that we need to do is step up the collection efforts, which we've done to make sure that we're proactive. We're calling them before their due dates and working with them to make sure that if anyone's got stress that we manage and work on solutions that allow them to promise to pay and keep those promises. But I think you need to look forward. The consumer business is always cyclical, right? And therefore, -- and that's why you price the high margins into the consumer business because there will be times, when there will be consumer stress where your margins will compress, right? And there will be times when the consumer will be good and your margins will expand. We cannot disappear from the consumer market because when the cycle turns, and it will, we need to be there. We need to be there in front of the consumer, we need to be facing consumer, we need our distribution and our products still front and center with the consumer. Otherwise, it will just always be feast and famine. We just need consistent earnings. We need consistent growth, and we need consistent interaction with the customer. Jenelyn Zaballero Lacerna: The other one that I think you need to consider Aakash, is not just that the bank is tightening credit standards. And I guess that's something that all banks will need to do from a proactive or prudent risk management standpoint, but also demand during crisis for high-ticket items is usually going to be more tepid. We see this in vehicle sales, in the industry other than EV ICE vehicle sales are down. We are still realizing strong growth simply because of EV. On home or housing loans mortgage, we also have seen a softening of real estate sales. And on the financing side, you can expect this because during the COVID years, which is now when most of these projects will be completed. There was hardly any project during that time. And so we'll see really a softening in demand for mortgage financing at this time. But do we see opportunities? Yes. Our branch channel sourced accounts remain to be very strong because of existing to bank clients who look for bargains. So the secondary market is still an existing market. There is still market for that. And most of the EV financing are branch-led sourced accounts. Overall, though these opportunities will not be adequate to compensate for the overall decline in the bigger dealer market or in the bigger broker real estate tie-up market? Haj Narvaez: Thank you, Aakash. We actually have a request -- we actually have [ Gaurav Jangale ] of Fidelity. Gaurav, go ahead with your question, please. Unknown Analyst: Can you hear me? Haj Narvaez: Yes, we can. Unknown Analyst: Yes. So my question was on the number you mentioned on credit costs, so 90 to 100 bps. Can you quantify the underlying assumptions or, say, the GDP growth and oil price based on which say you arrive at 90 to 100. And if the GDP growth is lower than what you're assuming? Oil price is higher than what you're assuming? At what level of those downgrades, then the COC goes above 100 bps. So just numbers on the underlying assumptions. Eric Roberto Luchangco: Sure. That was roughly based on an initial projection done by our Chief Economist, saying that we could see GDP growth fall down to the range of about 4%, just 3.9%, I think was a specific number. I realize that there have been projections there that are lower than that. But you have to base it off something and that was the projection that we got from our Chief Economist and the basis of which I gave that projection. Unknown Analyst: Okay. So do you have like any direction in terms at what level your credit cost goes above 100 bps. How bad it has to get? Eric Roberto Luchangco: I'm sorry, I can't really give you good guidance on that, unfortunately. The worse it gets, the worse the economy gets the higher it goes. And I don't have a strict I guess, client that follows, if GDP goes here, then this is where the credit cost goes. Unfortunately, I don't have that. We don't have that at this time. Haj Narvaez: Thank you, Gaurav. We have a question actually that was typed in from Vinayak Jain of MUFG. He asks, do you have any projection on NPL ratio by the end of the year? And what is the impact of expected write-offs, if any, on our capital position? Jose Teodoro Limcaoco: I would expect the NPL to be actually at about this level or even lower. If you look at where the bump has come from, from the fourth quarter, it's really come from the institutional book where we believe that will come down significantly. We are also looking at doing remedial action on our SME book, which is -- and the personal -- sorry, the micro finance book, which both have seen substantial jumps. And therefore, I would suspect that the NPL ratio should be at this level, if not lower by year-end. As to whether it affects the capital? I don't think it does. What happens is that we provision and that goes straight into earnings already. So if we're at the same level, then the capital really shouldn't be -- should just be a flow-through from our earnings. Haj Narvaez: Thank you, TG. And thank you, Vinayak for your questions. I wanted to check if anyone from the audience has other questions. Rafa, can you just go ahead. Unknown Analyst: Yes, sorry. Speaking of capital, how are you thinking about capital management at this stage? If loan growth slows and is less capital consumption, but do you want to keep building up capital in case of prudential risk, et cetera, et cetera. Eric Roberto Luchangco: So our initial expectation at the beginning of this year or early in this year before Middle East conflict broke out was that we really had the potential to return a little more capital to shareholders. At this point, it is kind of a balance, right? Like you mentioned, from a safety perspective, you would think that we want to maintain a little more capital. But at the same time, if loan growth is going to be weak, then we can afford to return more capital back. I think on balance, there continues to be the belief that this level of 13.9% in terms of our CET1 ratio is still a very comfortable level. We can continue to see it move down from here. If conditions, I think, would have to deteriorate significantly for us to say -- we have to retain all of that 13.9%. And so if we see slight deterioration in economic conditions, I think we can still afford to have a lower than 13.9% capital, but significant deterioration means that we would probably look to conserve a little more of that capital. Haj Narvaez: Thank you, Rafa. I think we have time probably for one more question. Anyone from the audience? I don't see anything else in terms of the Zoom chat box. So that actually concludes the Q&A session. We can -- I wanted to thank everyone, all the participants for your questions. Of course, we at BPI always welcome your feedback and take them into careful consideration. Before we end the call, I'd like to maybe call on TG for some final thoughts. Jose Teodoro Limcaoco: Again, thank you to everyone for joining us today. And I think we spent too much time talking about NPLs and credit costs. And none of you asked any questions about all our other initiatives that we're trying to do, to show, to ensure that the bank continues to grow and continue to serve more customers. I just want to end with the story. Over the weekend, we launched our deposit and our partnership on Boracay Island with Robinsons Supermarket on Boracay Island, and we introduced the ability to open an account, make deposits and do withdrawals at the Robinsons Supermarket in Boracay. And in over those 3 days, we opened 50 new accounts each day at the supermarket in contrast to our branch there, which opens less than 8 a day. So it shows you the power of our ability to show that BPI is everywhere. So our agency banking initiative will complement what we're building in the branches, where we're trying to build the branches to be more service and sales -- sorry, more sales and advisory-oriented and then complementing that with all the digital initiatives that we're doing, moving from wealth, all the way to our mass market and [ BanKo ]. So again, I want to stress that while we are going through some tough times as an economy, thanks to the Middle East crisis -- no thanks to the Middle East crises, the [ BanKo ] continued to be focused on promoting financial inclusion, continue to focus on our strategy, continuing to build our consumer book because the consumer is still a very untapped market in this country. It is a market that has strong potential. And we believe at BPI that we need to be there for the Filipino. We need to be there to ensure that they can continue to improve their lives as the economy turns -- as it will, BPI will be there to continue to help them with their journey. So thank you, everyone, for joining us today and see you next quarter. Haj Narvaez: So thank you, TG, Eric and the rest of the BPI senior leadership. Ladies and gentlemen, that ends today's earnings call. Thank you again for your participation. To those joining us online, you may now disconnect. But for those on site, please do join us for some refreshments. Thank you. Have a great one.
Operator: Hello, and welcome to the Randstad Q1 end 2026 Results Conference Call and Audio Webcast. [Operator Instructions] I will now hand the word over to Sander van 't Noordende, CEO. Mr. van't Noordende. Please go ahead. Alexander van't Noordende: Thank you very much, Barton, for that kind introduction. And good morning, everybody. I'm here with Jorge and our Investor Relations team to share our Q1 2012 results. Let me first say I'm proud of our team's continued execution of our partner for talent strategy, which is delivering a strong foundation for our growth ambitions. And as a result, our growth has broadened with 63% of Randstad now in growth, up from 50% in Q4, which equates to 0.4% growth for the quarter. Overall, volume in contingent work was resilient with strong momentum in the U.S. and Southern Europe, especially, of course, in Randstad operational business. We see further stabilization in industrial markets in Northwest Europe, while the permanent and professional markets remain challenging. APAC remains robust. Together with strong adaptability, this has resulted in a solid performance with revenues of EUR 5.5 billion and an EBITA of EUR 146 million, representing a 2.7% margin. Volume trends in early April have been encouraging. And so far, we have seen very limited impact from the geopolitical situation in the Middle East. As you would expect, we are monitoring the situation vigilantly and are in constant dialogue with our clients to understand the impact they are noticing on their business. However, the current trajectory of our business gives us confidence for the months ahead. As we move further into 2026, we continue to progress well on our partner for talent strategy. Our growth through specialization is fueled by the 10x10x10 initiative, 10 markets with each 10 opportunities of EUR 10 million or more. And [ Jorge ] and the team are doing a fantastic job here and secured over EUR 600 million of new wins in Q1. In operational, we saw an uptick of client activity across our industrial segments, particularly in manufacturing, including skilled trades in markets such as Germany and Italy. We saw strong growth in the logistics sector with increased hiring forecast in key markets such as the U.S., France and the Netherlands. In Professional, we saw momentum improving in engineering in the U.S., Italy and Japan, and we are growing in health care, primarily driven by the Netherlands and Italy. After a slow January in our enterprise business, we expect trends to sequentially improve from here as we secured a number of new clients this quarter across life sciences, semiconductors and energy. The health of our pipeline also bodes well for the rest of the year. We celebrated the rollout of our digital marketplace in the U.K. And once again, Talent loves it. Within 2 hours, we had 77% of the targeted talent on the app. We are now live in 9 markets. In March alone, we managed close to 600,000 self-service shift with around 240,000 monthly active users. We also went live into front and mid-office of our Randstad platform in Italy with our digital marketplace to follow later this year. On AI, 80% of our staff are now AI trained, working smarter and more efficiently is essential to continue driving down indirect cost as a percentage of revenue. So as we enter 2026, I'm proud of our teams as our partner for talent strategy and commercial success provides a strong foundation for our growth ambitions. Because the notes on your minds, let me say a few words about the role of AI in the labor market. Above all, we are AI optimist. In the context of an aging population and persistent labor mismatches, we view AI as a critical enabler for a very welcome productivity boost. And there are a few points I'd like to make here. First, studies show that the base case for the impact of AI is a job loss of 6% to 7% over the next 5 to 10 years, with a particular focus on clerical roles, customer service, marketing and design and software development, where our exposure as Randstad is currently limited. Then it looks like AI is more about task and team augmentation than outright job replacement. So roles will change over time, and we, at Randstad call this the great adaptation of the workforce. Finally, the phenomenon of jobs disappearing and new jobs emerging is of all ages. Of the jobs we cater for today, around 60% to 70% did not exist 65 years ago when we started Randstad. Our first times were mostly executive assistance, which today are a fraction of our business. So what does this all mean for Randstad? First of all, Randstad operational and health care are 2/3 of our business today. These are typically jobs that are human-centric and minimally impacted by AI. Think about maintenance technicians, welders and fabricators, HVAC specialists and, of course, nurses and care workers. Secondly, our strategy is to ensure that we are highly relevant where the future jobs are. That's why we have our 4 specializations, each with its own growth segments such as skilled trade, logistics, engineering, health care. As the Canadian say, we are skating where the puck is going to be. In summary, we're confident by taking the right actions for our partner for talent strategy, we can navigate and benefit from the impact of AI on the labor market over the next 5 to 10 years. I'm going to now hand over to Jorge to say a bit more about our financial results. Jorge? Jorge Vazquez: Thank you, Sander, and good morning, everyone. Let me start by saying that overall, we are happy to see that this quarter mostly came in line with our expectations. The trends are consistent, they are more stable and the changes we are doing are also more structural. We saw sequential improvement in growth rates across most of our markets, and we returned to organic revenue growth. This growth is led by our operational business, as Sander just highlighted, which grew 3% globally, including a strong 8% in the U.S., where our digital marketplace is driving tangible market share gains. But it's also positive to see manufacturing PMIs above 50 in most of our markets for the first time in many, many quarters. While remaining vigilant on geopolitics, we do balance momentum with strength discipline and investments in our road map, not only to protect the bottom line but also in growth to ensure we have the operational gearing ready for the coming quarters. Before we move on to the section in the markets, please a small note, we have simplified the reporting structure by removing the regional subsegments in Europe. Where applicable, the comparative figures are presented to align with this new structure. So let's dive in and let's start with North America on Page 9. In North America, we continue to build throughout the quarter with strong exit rates in our industrial sectors. The U.S. operational grew 8%, significantly outpacing the market and its double-digit profit growth validates our new model of central delivery and the digital marketplace. Professional is down 8% but improving sequentially with forms returning now to growth. Enterprise started slow, as mentioned already at the end of Q4, but ended with stronger exit rates, driven by major new wins and a solid pipeline. Digital faced muted Q1 demand but adapted well. Canada mirrors the U.S. with strong operational growth offsetting a slower enterprise starts. Overall, North American EBITA margin was 3% year-over-year, delivering a 78% recovery ratio. Now moving on to the major European markets on Slide 10. In Europe, momentum is improving across our major markets, though the split between a strong South and the slower North still remains. In the Netherlands, organic revenue returned to growth, driven by continued good performance in health care and solid positioning with large logistics and e-commerce clients. We spent Q1 implementing the new CLA together with our clients and while complex and not finished yet, we progressed well and expect this to be concluded in the next few weeks. Overall, profitability came in at 4.4%. In Germany, we are seeing early signs of recovery, down just 4%, driven by improving PMIs. Industrial pockets are returning to growth, and even automotive was still declining, it is clearly bottoming out. Public infrastructure spending has yet to materialize. In Germany, the transformation we started last year is paying off as the business pushes hard to return to growth at a more sustainable level of profitability. Now in Belgium, we still declined 6% with operations minus 4%. The weakness in the market is mostly around permanent hiring and office jobs. Now moving on to France. It remains still a 2 speed markets. On 1 side, our in-house and larger client portfolio is up 11%. On the other side, SME and skilled perm segments are currently lagging the market. Professionals here also declined 13% year-over-year, with volumes weighed down by the recent health care legislation. Overall profitability came in at 3.9%. Italy. In Italy, growth continued to accelerate on the back of a successful Olympics campaign with operational up 9% and Professional also growing now at 6% as our recent investment over 2025 payoff. Profitability came in at 5.1%, impacted this quarter by an Olympic brand awareness campaign and strategic investments for the platform. Iberia had a fantastic quarter, plus 9%, led by Spain, north of 10%, where we are firing on all cylinders, and we continue to invest in further growth, both in people and capabilities. Let's now move on to the international market slide on Slide 11. International markets are a bit of a mixed bag, as you can see. So let me quickly unpack in more detail. In Europe, we celebrated the go-live RDMP in the U.K., like Sander mentioned, and it's great to see our first talent using the platform over the last 2, 3 weeks. Poland is still growing at 2%; Switzerland 3% continue to grow and offsetting still the subdued Nordics still at minus 11%. In LatAm, we continue to see good momentum, particularly in Brazil. In Asia Pacific, Japan continued its solid growth at plus 5%, and we continue here to invest to capture structural opportunities, particularly in the digital area and in Tokyo. Australia and New Zealand declined 4% with some signs now of stabilization. India, growth accelerated to 16% as we continue to invest in growth segments. Overall, the EBITA margin for the region came at 3.6%, reflecting growth investments. And that concludes the performance of our key geographies. So let me now walk you through our combined financial performance on Slide 13. Looking at the revenue mix, we see the trends of the last few quarters continuing. Operational sees momentum now accelerating and is now growing 3%. Remember, it was flat on Q4. Professional also improved quarter-over-quarter due to strong demand in health care, particularly in the Netherlands and Italy, engineering in U.S. and Japan. Digital and enterprise started the year slowly and tougher comps certainly did not help. Pipeline deal wins and exit rates for enterprise look better as we enter into Q2. Now our gross profit and OpEx were well aligned, but we will talk more about it particularly later. Zooming into EBITA. EBITA margin was 2.7%. Underlying EBITA was EUR 146 million with an adverse steel FX impact this quarter of EUR 6 million, which will start leveling off from here. Integration costs and one-offs this quarter amounted to EUR 23 million, and they were mostly related to basically the Netherlands or Northern and Western Europe as we continue to drive structural change across our organization. Net finance costs are just a regular interest payments albeit lower, reflecting the lower net debt coming down. The effective tax rate for the first 3 months was 31%. We expect '26 ETR towards the higher end of 29% to 31% range, and this all led to an adjusted net income of EUR 91 million for the quarter. But with that, let's indeed now deep dive into the gross margin slides on Slide 14. And a few things about the margins. So gross margin was down 80 basis points to 18.5%. Within that, our temp margin is down 60 basis points and primarily with the points we had highlighted already in the previous quarter. On one hand, operational remains more resilient, if not even now in growth versus professional and digital specializations. Two, we continue to see geographical divergence with Northern Europe below group average and Southern Europe continuing to do better. The adverse FX impact following, let's say, liberation days, it still plays a role. And last but not least, as we mentioned in Q4, there were incidentals between Q4 and Q1 last year, which impacted a little bit the comparisons. Perm contribution was still down 20 basis points, is now somewhat stable at low level as key European perm markets still remain very challenging. In HRS and other, remember, here, we include RPO, outplacement and a lot of other fee businesses, MSP is still flat. Now this is the market at the moment and where the majority of the gross margin pressure is simply a reflection of the continued growth divergence across our portfolio. Albeit most of this pressure starts to annualize as we progress through the quarters ahead. Now let me bring you now in more details into Slide 15 on our OpEx bridge. Underlying operating expenses were EUR 873 million, moving in lockstep with gross profit as we've been doing in the previous quarters. Despite inflationary pressures we lowered core costs, excuse me, OpEx quarter-over-quarter, and we are building clear operational leverage. We're achieving this through delivery excellence, growing volumes in key markets and delivering to the most productive to service models without adding as much headcount. In fact, the correlation between volume and FTE is now at a 6-year low. We also continue to reduce indirect costs as a percentage of revenue through scale and technology. Overall, I think the important point about our OpEx is that the change in the past 3 years proved to be structural with, again, the last 4 quarters, ICR hitting close to 70% at 68%. What this means is that we are improving our ability to offset gross profit declines by reducing OpEx or to convert gross profit into EBITA as growth returns. And with that in mind, let's now move on to Slide 16, which contains our cash flow and balance sheet remarks. First, balance sheet, our underlying free cash flow for the quarter stood at minus EUR 98 million. We typically have the most seasonal negative working capital movements in this quarter such as VAT, wage taxes, commissions and prepayments. In addition, in particular, in Q1 this quarter, we had a delay in invoicing at the beginning of the quarter associated with the Netherlands following the implementation of the new regulatory framework of about EUR 40 million to EUR 50 million. This will obviously normalize now into Q2, and we expect the same cash trajectory for the full year. DSO came in at 57.4 days, up 0.7 days sequentially and reflecting exactly the mix and the delay in invoicing. Net debt decreased EUR 131 million year-over-year, and our leverage ratio stands now at 1.5. And that brings me to the outlook on Slide 17. So looking at the current momentum, we see the positive volume trends in February and March, continuing to April, and that gives us confidence for the months ahead. Now remember, Sander highlighted, we have seen no direct impact from the Middle East, but we remain vigilant. Gross margin in Q2 is expected to be slightly down sequentially, reflecting the normal seasonal step up into volume higher clients, but also the lowest working day quarter of the year. And we continue to still see as we enter ongoing reluctance in hiring or permanent hiring by clients and talent. On the other hand, operating expenses are expected to increase slightly quarter-over-quarter, but always again, with strict operational discipline. So to summarize, by sustaining our growth momentum, continue to drive productivity from how we run our business and structurally reducing the cost to support it, we are inherently building operational leverage into Randstad. And that concludes our prepared remarks, and we look forward now to take our questions. Operator: [Operator Instructions] The first question comes from Andy Grobler from BNPP. Andrew Grobler: Just the first one on the Netherlands, which was much stronger than it had been. And you talked about Zorgwerk impacting that. But I guess, Zorgwerk is relatively small. Can you just talk through the maths of what has changed and how much of that is due to Zorgwerk? How much of it is the rest of the business, please? And I have one follow-up. Just one. I'll go with that one, but I'll follow up later. Alexander van't Noordende: Okay. Well, a good question, Andy. Let me -- I'm going to first say that I think the team in the Netherlands has done an outstanding job in engaging with the clients and managing this -- through this whole situation. So that's phenomenal. We said it was manageable, and it turned out to be manageable. So I think that's very good. So I'm going to ask Jorge to say a few more words about the economics of all this. Jorge Vazquez: Yes. So I would say, Andy, at a very high level, probably the, let's say, step-up from Q4 into Q1, and in this particular in the Netherlands, I'd expect about half of it being connected to the good performance of Zorgwerk health care, I mean, it's not a small company to be clear. And that has also to do, of course, that now this makes part of our organic growth rate. So that's -- as we annualize basically the acquisition of this and the remaining 50% has to do with strong performance in e-commerce and logistics and in general legislation as well, now including the support into Q1. Follow-up question, Andy? Andrew Grobler: Just on a slightly different topic, given the rate environment, what are your expectations for finance costs through the remainder of the year, please? Alexander van't Noordende: Finance costs . Interesting. Jorge Vazquez: To basically continue down. I mean you can see -- we can see we start the year with already a lower [ FIF ] into the year, and we continue to expect trending net debt down year-over-year, especially towards the second half of the year, as we always have the positive side of operating working capital. Andrew Grobler: Okay. So that Q1 number is -- we can expect similar levels through the remainder of the year? Jorge Vazquez: Yes. We can expect similar numbers throughout the remaining of the year. Yes. Operator: The next question comes from Remi Grenu from Morgan Stanley. . Remi Grenu: Yes, my question would be on the momentum productivity, you're tagging that April was in line with March and I guess with the minus 2.4% in January and your organic growth through the quarter. It probably means that the current run rate is north of 1% organic growth in the later part in terms of exit rate in April. So if you could confirm that? And trying to think about how to how to think about the better momentum that you've experienced in the business and the potential negative from the environment. I'm trying to understand what's your -- what's the base case you're working on internally? Would it be like continued improvement in temp and maybe a little bit of weakness in permanent recruitment? Just a discussion around that, that better.. Jorge Vazquez: Thanks, Remi. So first of all, I mean, let me talk about the momentum. I think probably the most important comment is what Sander mentioned in the beginning. The step-up is broader. So it's across -- I think practically all markets have shown a better momentum, if not perhaps Belgium being the exception. The rest all our markets have stepped up. And that -- yes, that sustains our belief, okay. We made a step up. Two, you also see PMIs having improved significantly through -- atleast having been positive in most markets during Q1. So it is, let's say, something that we look at confidence, okay, what is at the basis of IT, at the core of it. If I look in the quarter, indeed, you will remember when we talked about January, we -- our exit rate was approximately minus 0.4% in January. We had a step-up in February, but I think I'll prefer given the amount of working days and the holidays between 2 months, then you should take step, let's say, Feb and March together. And that will probably bring you, let's say, between 0.5% to 1% as an exit rate. Remember, we say April productivities are in line. We are continuing to take that into Q2. There are adverse comp effects, but we also had them in Q1. So for now, basically, we just take it as it comes, but it gives us confidence into Q2. Remi Grenu: Okay. And just to follow up, the discussion on temp versus perm for the outlook. I mean we've heard some of your competitors being a little bit more cautious on permanent recruitment for the next few months. Is it something that you're looking at as well? And any insight from discussion with clients on that side? Alexander van't Noordende: Remi, what you probably have at the moment, if you look at the actual absolute amounts invoiced, they are quite stable. What you see is the critical roles are being replaced. When clients will have more confidence and talent to start changing jobs or organizing work with more permanent jobs, we don't know. We also have in the U.S. some green shoots in terms of permanent recruitment, perm. EU is still very weak. Now what I would argue is it's also a context where typically uncertainty will play out for any seasonal work to be primarily absorbed now by more temp or flexible solutions. And that's what we see at the moment. Operator: The next question comes from Rory McKenzie from UBS. Rory Mckenzie: It's Rory here. I wanted to ask about the digital marketplace, which you said did 1.45 million shifts in Q1. I just want to ask a lot more about the context for that number. So how much -- how many shifts did your business deliver in total in the quarter? And also just what kind of shifts are shifting to this marketplace? Is it more short-term one-off covers or are customers using the DMP to change how they staff entire businesses? And also, can you talk about is it changing your impact on the market in terms of new clients? Or is this about wallet share? Alexander van't Noordende: Yes. Very good questions, Rory. Let me sort of start from the top. Obviously, this is all about making sure that Randstad supplies or delivers what we call immediate talent availability. We -- I always say to the teams, we need to have the talent already there before the client even knows they need it. So that's one. You can only do that with digital technologies. And that means that in our operational business and our biggest example is, of course, in the U.S. in operational, but we also have marketplaces in health care, in France, in the Netherlands, in Australia. In operational, we are starting or have started in a number of countries, think Canada, also Australia, Japan. So this is becoming a widespread phenomenon and an integral part of our strategy as Randstad. So -- and why do we -- why do clients like this? Our clients like this because they get what they need. So the fulfillment is higher. It's easy to do business with. In some clients, we are directly connected to their operational system. So the shifts that they cannot fill, they put immediately onto the marketplace. Those shifts are filled within minutes or hours. Generally, 50% to 60% of the shifts is filled within 1 hour, which gives the client confidence that the people will show up. Another benefit for the client is because people have selected those shifts themselves, the no-show rates have basically gone in half, so have reduced by 50%. So there's all goodness in there for the client. For the talent, there's also goodness in there because talent can now decide when and where they work is one. They can do that at the moment as they like, and that's typically in the evening. They don't have to call one of our consultants to talk to that. They can decide by themselves. So again, the no-show rates increase. So this is clear benefits for clients and talents. Then all those benefits also add up to benefits for Randstad. Higher fill rate is more business. No shows reduced is more business. Fulfill rate up is happier clients, fill rate up is happier talent. Of course, efficiency productivity because there is no human intervention, client types in their own shift, talent selects their own shift. That means 0 marginal cost if there's more demand, meaning ramp-up is a lot easier because we have the talent there. The client decides that they need 10 or 20 people more the next day we put the shifts on the marketplace, it all works. And I'm absolutely convinced that our growth rate in U.S. operational this quarter is driven in part by the fact that we have a digital marketplace because when the market ramps up, you need to be quick. If you have the talent already there, and it's just a matter of filling shifts through the digital marketplace, it's all good. In terms of what does this mean for our business? So we have 15% of our business now on digital marketplaces, roughly EUR 4 billion. EUR 3 billion of that, you have to think about EUR 3 billion of that is operational and EUR 1 billion of that is in our professional space in Randstad Digital in North America. This year is going to be a year of rollout, so where we start in a number of new markets. I mentioned a few of them already. So that next year, we can scale. So by the end of the year, we're looking at 22% of our business through digital marketplaces. And last but not least, the excitement that this is creating within Randstad is quite phenomenal because our people see that they are differentiated in the marketplace. We have more and more clients saying, we want to do business with Randstad, because you have the digital marketplace. That's easy for us, but it also means it is access to talent because talent lives in the digital world, not in a branch or somewhere else. So it's exciting for our people because we have something new. We have something exciting. We're differentiated, and it works very well. So you can guess I'm really excited about all of this and cannot go fast enough as far as I'm concerned. Rory Mckenzie: Yes. That's a lot of detail and just one follow-up, if I can. It maybe to link this DMP to what you talked about on Slide 8. where you talked about AI in the world of work at a broad level, but maybe not about how AI could reshape the channel of connecting labor demand and supply. Do you think and do you hear that clients are engaging with maybe lots of different digital marketplaces for types of labor or channels? And what do you think happens to the kind of landscape of that labor supply as a result? Alexander van't Noordende: Yes, that's a good question. If you add up, Rory, the market share of all digital native companies combined in our space, the numbers that I've seen, they have a combined market share of around 5%, and that's the likes of professional marketplaces, freelance marketplaces and, let's say, operational marketplaces for your waiter or for your nurse. So the digital phenomenon in our industry is still relatively small. And that means there's a massive opportunity for us at Randstad to scale and to take share over time, because not all players will be able to implement a digital marketplace at the scale where we can. First of all, because it's hard work. But secondly, you meet the expertise. But secondly, it's also big investments. And we are fortunate enough to have a strong balance sheet so we can afford those investments. So it's going to be an interesting time in terms of digitizing the industry. Operator: The next question comes from Simon LeChipre from Jefferies. Alexander van't Noordende: Let's take the next one. Simon LeChipre: Can you hear me? Alexander van't Noordende: We were looking for you, but we couldn't hear you. Simon LeChipre: Sorry. First question on the gross margin for temp. I was a bit surprised to see the performance getting incrementally worse despite the better top line. So can you give us a bit more color on the different moving parts? And what does that mean about the drivers of this better top line? Jorge Vazquez: Thank you, Simon. So I think -- I mean, we had spent some time on Q4. We had already highlighted that we should look basically at the 2 quarters, Q4 and Q1 together. So we actually think our -- let's say, gross margin came in well right in the middle of our expectations and the temp margin as well. So I would say in Q4, we had 40 basis points. If you remember, in Q1, we now have 60. We said it was impacted by incidental items last year between Q4 '24 and Q1 '25. So I will take the underlying run between both about approximately 40 basis points. So -- and the good thing is it came within our expectations, and we now see it basically things stabilizing and many of these movements starting to annualize as we go into the later quarters of the year. Simon LeChipre: Okay. And a follow-up on Netherlands and obviously, quite a step-up in top line, but it seems like the drop-through was quite weak with margin declining year-on-year. So can you give us the details behind this performance, please? Jorge Vazquez: Yes. If you look at the 4.4%, that's probably quite the run rate also comparing to the last quarters. I just told as well that we had last year incidentals that were particularly in the Netherlands associated with sickness and now basically, we started normalizing for higher sickness rates over the last 2 to 3 years. So I think if we take that into account, I think things are pretty stable in the Netherlands and definitely even [ although ] versus Q4 is slightly up. Operator: The next question comes from Simon Van Oppen. Simon Van Oppen: Could you give us a little bit more color on your working capital in Q1? We saw free cash flow was a negative EUR 100 million versus EUR 60 million last year. And we understand that H1 is usually seasonally light in terms of cash inflow as staffing companies tend to absorb working capital as they grow. But we noticed that DSO increased year-on-year to 57.4 days versus 55 days last year, which is quite a step up, especially since one might assume you're dealing with broadly similar country mix effects as peers who seem to manage to bring DSO down while growing faster. Any thoughts on what's behind the difference would be helpful. Alexander van't Noordende: Thanks, Simon. So first of all, I mean, indeed, I mean, the fact that it is negative, I think it's been like EUR 218 million to EUR 219 million to probably [ EUR 220 million to EUR 224 million. ] So it is -- the Q1 is always a quarter heavily impacted by working capital typically investments. And that has to do, as I mentioned earlier on, with all wage taxes payments, VAT, but also commissions, bonus payouts and even especially as we have a lot of software licenses, prepayment of a lot of licenses. So that is the normal, let's say, impact. What we did have this year is we had a higher, let's say, a delay on invoicing in the Netherlands. So that especially compared to last year, takes an impact. In January, we were late by approximately EUR 40 million, EUR 50 million in invoicing, and that spills over into next quarter. That has to do with the implementation here in the Netherlands of the new CLA legislation that is sold. So basically, it will normalize now as we go into the year. And then if you ask compared to last year as well, you will remember, we had a quite, let's say, low free cash flow generation in Q4 2024. That came primarily because the week -- the end of the year had finished in the weekend. So we've got a lot of, let's say, payments that were late paid into the first days of January last year. So that plays a little bit the comparison versus last year. I think in terms of trajectory for cash, we remain unchanged throughout the year. Now comparing to our competitors, look, DSO is not an established metric. So everyone is their own definition. At the same time, I think what we do see is, of course, our divergence in mix is quite significant. So yes, if we have Italy and Spain outgrowing and growing more than the market, we will play a role in our DSO. But I mean, we see our overdues continuing to decrease. We see credit losses even at historical low moment. So to be honest, I'm quite confident on the DSO -- on the cash trajectory. Operator: The next question comes from Marc Zwartsenburg from ING. . Marc Zwartsenburg: I would like to ask a question about the margin, regional margins, a couple of regions. So first of all, the Netherlands, you just explained a bit that there is a bit of normalization with sickness rates and that the margin has been lower. But on the other hand, we also have the new regulation in place with better pricing, and we have software doing really well. So maybe a few thoughts on how we should look at the margin going forward for the Netherlands. And if I look then to Region North America, yes, with also weaker enterprise, and the benefits from the digital marketplace, should we expect at some point that you will see quite some positive operational leverage in North America? And then 2 other regions, France and Italy, they are growing very fast, but we don't see a drop-through thing. Maybe explain a bit why that is? Jorge Vazquez: Yes. So first of all, -- if I had a short answer -- good to speak to you, Mark, if I had a short answer, I'll say, yes. So it will be the short one. And what I mean by this is, clearly, I mean, we don't optimize for a quarter. There were a few timing events this quarter. Now as we go from the lowest seasonal quarter of the year into the higher seasonal quarters, Q2, Q3, it's very clear. Countries where we are growing, we're going to deliver operational gearing. That's basically what we can see happening from both, let's say, productivity that Sander alluded to before, plus everything else we've been doing in reducing structural costs. So I'm quite confident, let's say, that we're going to be delivering gearing in the countries where we have growth. On the ones where we're not, we're working hard to basically keep on improving, making them more agile, more resilient and making sure that they may also make a step up. So from that perspective is the short answer. In the Netherlands, I want to be a little bit clear. The regulation, I mean, from a gross margin perspective, might be dilutive as well. So I wouldn't call it -- I mean, there is a lot of additional costs that have to be passed [ through ] That's the end impact in our margin but let's say, the first pressure will be a dilutive pressure in margin. Now we've also been adjusting our cost base in the Netherlands. You saw the one-offs this quarter primarily related to the Netherlands. So we are also starting to see about how to basically step up in profitability. But for now, I would say this level of profit is as going 4% to 5%. Marc Zwartsenburg: Yes. And in Italy and Spain, where you're growing so far, what you... Jorge Vazquez: Good point. Marc Zwartsenburg: So we don't see really operational leverage there. Jorge Vazquez: Yes, I'll say watch this space. So again, I told you there were some timing issues this quarter. In Italy, in particular, we've been investing. We also been -- we had an important marketing campaign this quarter in completing Q1 associated with the Olympics. We've also been investing in our, let's say, the rollout of our platform that Sander just has been describing. In Spain, we can see we continue to add head count year-over-year. So we've been investing and we continue to grow ahead of markets. I'm quite confident these countries will be showing operational gearing throughout the year. Marc Zwartsenburg: That's very clear. And in U.S., is there any benefit at some point that we should see from the marketplace? Jorge Vazquez: U.S., I think the marketplace has some investments, but as we progress into Q2, the same. Partially, there was an impact on enterprise. We started the year somewhat subdued. Again, we talked about -- Sander talked about pipeline. We talked about client implementations. All in all, if I look ahead, it's about also showing operational gearing. Operator: The next question comes from James Rowland Clark from Barclays. James Clark: Two questions, please. On the marketplace that you're just discussing, do you think that's resulting in any new client conversations at this point or simply just better client conversations, more engagement? And then also on a similar topic, can you provide any color as to the profit line benefit from the marketplace at this point in Q1, maybe on an annualized basis, if possible? And then my second question is just on the gross margin that you sort of suggested should ease through the year. I'm just curious as to how you think that plays out because it looks like the lower margin regions in the temp business are set to continue to outperform the higher-margin regions. So just interested in your thoughts there and what it needs -- what you need to see in order for that mix effect to ease substantially? Alexander van't Noordende: Thank you very much, James. On the marketplaces, that's absolutely driving new client conversations. And in fact, I'm personally out there with [ Mickey Chen ] and our commercial team in North America to have those client conversations with some of the big logistics companies, some of the big service companies in catering, et cetera. So -- and they all are interested in hearing about what we call the digital talent supply chain because these clients generally are very much into digitization of their business, of their logistics, of their procurement, of their sales to clients, but the talent supply chain is sort of somewhat behind in terms of digitization, and that's what we offer. That means we talked about it, higher fulfillment, but also a lot more transparency, compliance and I would say, analytics and optimization opportunities in that workforce. So yes, benefits at the high level, and I'll ask Jorge to say a bit more detail, benefits at a high level, higher productivity because we have more employees working per FTE in Randstad. That's definitely one of the major benefits. The other benefit is higher fulfillment because higher fulfillment sooner means more business tomorrow. That's pretty much how that works. I think overall, it's hard to tell at this particular point in time. I will tell you that is a work in progress, and we are -- the team here is working hard on getting more insights into that because we want to start sketching the picture of the new asset, including the economics over the next couple of quarters. Jorge Vazquez: Yes. So James, just putting some numbers to it. I mean you see our fill rate has been, let's say, increasing 1%. This makes a difference in revenue. So it sustains more revenue growth. Our [ EWs per ] FTE, I talked about it at the beginning on my opening, but they are probably now up 6% to 7% year-over-year. We're now starting to prevalidate a lot of, let's say, the talent to talent centers, meaning when our talent advisers need talent, they are faster with clients. There's one point Sander highlight as well that I would like to highlight, if you actually spend time with the teams, redeployment because the beauty of self -- let's say, if you are in the Randstad family and you choose your next shift, your next appointment, your next job, then a lot of the redeployment we consider we have less setup costs in making, let's say, that transition from job to job, which also enables clients to plan better and organize themselves better. So overall, supportive and especially now as we move into the more, yes, seasonally rich quarters. Alexander van't Noordende: Let me break down a little bit because I think it's connected to the question of Simon, your second question, so on the margin. So if I look ahead, we finished Q1, we just talked about it with the temp margin down approximately 60 basis points or delta 80. If we look ahead, we're probably looking more as we can see, 50 basis points year-over-year in Q2. That will mean still 30 to 30 basis points down in Q2. Now remember -- or year-over-year, but remember, it is a seasonal quarter. So clearly, more volume clients trading. It's also a smaller quarter in terms of working days. But I mean, if I compare it to Q1, where I would say it's probably about 45 basis points plus 15 FX. The other impact here is we start analyzing FX. So this should now start stabilizing at 30 to 40 basis points. We still expect 10 basis points negative from HRS. So the volume in RPO is still weak. I mean, not strangely if you look at what's happening in perm, though we are counting on some new clients being activated as well, so to be seen. And perm remains -- I mean, for now, we have 10 basis points, but remains a bit of the wildcard in the equation. So overall, let's say, from the 80 today, we're now looking at 50. And then as we continue throughout the year, what is also obviously some of the bigger shifts we talked about, geographic shifts, client shifts, yes, this basically start annualizing. So basically start reducing throughout the year. Operator: Our next question comes from Virginia Montorsi from Bank of America. Virginia Montorsi: Just a quick one. Is there anything worth flagging in the quarter that has either surprised you or performed in a way that you didn't expect that you think it's worth keeping in mind? Or did everything kind of play out according to your expectations if we think about beginning of the year to where we are now? Alexander van't Noordende: Yes. I'm thinking deeply Virginia, it's a good question, but I'm afraid the answer is no. No. Let's say, we set out -- we said there was going to be a step-up in the quarter in last call, and that's what's happened. Of course, you have always a put and a take here and there, but nothing major to report here. Operator: [Operator Instructions] Our next question comes from Konrad Zomer from ABN AMRO, ODDO BHF. Konrad Zomer: A question on your productivity. You've made good progress over the last few quarters, and you're on the verge of actually capturing some operating leverage again. How much revenue growth do you think you could potentially achieve in the second half of this year if you were to decide to keep your headcount stable? Is that 1% or 2% or maybe 5%, particularly given what you are doing with AI and your digital marketplace? Jorge Vazquez: Konrad, good to speak to you. I'll say, first of all, I mean, second half of the year, you know the 6-week rule. First and foremost, I think we feel confident with the capacity we have now to support already the seasonal next big quarter, which is Q2. So I mean, we don't expect FTE investments to cope with that. And even in terms of investments that we make are more surgical about growth segments where we say we are clearly missing out opportunity if we don't invest in. Looking into Q2, we're quite comfortable in terms of capacity. Now Q3 and Q4 typically hang around the level. I mean, it depends. If growth really accelerates, we may need to look at it. Now what I have basically been saying for a few quarters is if I look at where we are ahead, we're deploying our strategy, both, let's say, on ability to structurally quarter after quarter, adding up another quarter of recovery ratio. So accumulated always 4 quarters close to 60%, 70%. That plays out in decline, but I also clearly see it playing out in scalability and growth. So basically counting on now much more scalability and gearing as we come back to growth. Operator: Thank you. And with that, I will now turn the call back over to Mr. Sander van't Noordende, for any closing remarks. Mr. Sander van't Noordende, go ahead. Alexander van't Noordende: Thank you, Barton, and thank you all for joining the call today. And as we wrap up the call, I mean, our people are doing a fantastic job day in, day out, and I would like to thank our more than 600,000 talent and Randstad team members for their hard work as they are truly the best team in the industry. Thank you. .
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the HCSG 2026 First Quarter Earnings Call. [Operator Instructions] Thank you. The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group, Inc.'s most recent forward-looking statement notice, please refer to the press release issued this morning, which can be found on our website, www.hcsg.com. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of the annual report on Form 10-K and Healthcare Services Group, Inc.'s other SEC filings, and as indicated in our most recent forward-looking statements notice. Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release. I would now like to turn the call over to Ted Wahl, CEO. Please go ahead. Theodore Wahl: Good morning, everyone, and welcome to HCSG's First Quarter 2026 Earnings Call. With me today are Matt McKee, our Chief Communications Officer; and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our fourth (sic) [ first ] quarter results and plan on filing our 10-Q by the end of the week. Today, in my opening remarks, I'll discuss our Q1 highlights, share our perspective on the general business environment and discuss our strategic priorities for Q2. Matt will then provide a more detailed discussion on our Q1 results, and then Vikas will provide an update on our liquidity position and capital allocation progression. We will then open up the call for Q&A. So with that overview, I'd like to now discuss our Q1 highlights. We delivered strong first quarter results across revenue, earnings and cash flow, and we have carried that positive momentum into the second quarter. New client wins and high retention rates drove our year-over-year top line growth and our field-based team's operational excellence led to quality service outcomes and consistent margins. We also returned $24 million of capital through our share repurchase program and ended the quarter with a strong balance sheet and ROIC profile, underscoring our focus on value-creating capital deployment. I'd like to now share our perspective on the general business environment. Industry fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system. In 2026, the first baby boomers will turn 80 years old. And by the year 2030, all 70 million-plus boomers will be over the age of 65, with the oldest being in their mid-80s, the primary age cohort for long-term and post-acute care utilization. We expect that the demand and opportunities for service providers in this space, especially for those with compelling value propositions, durable business models and market-leading positions to only increase in the months and years ahead. The most recent industry operating trends remain positive as well, highlighted by steady occupancy, increasing workforce availability and a stable reimbursement environment. We remain optimistic that the administration will continue to prioritize the rationalization of regulations and policy to better align with the changing and expanding needs of our nation's most vulnerable and the provider communities we service. Beyond our core industry trends, we are closely monitoring the broader macro landscape, including the volatility in global energy and supply markets resulting from ongoing geopolitical conflicts. Our role as financial stewards for our clients remains a nonnegotiable priority and serves as our North Star as we navigate this environment. To that end, while we have not observed direct on-invoice impact from these global events, our purchasing and procurement teams are actively monitoring the landscape and surveying our supply chain to stay ahead of any developing trends. Fundamental to these efforts is the depth of our long-standing vendor partnerships, which provide critical visibility and stability necessary to navigate market volatility with confidence. In the event that specific supplies or food items experience outsized inflationary or cost pressure, we are prepared to pivot our sourcing strategies to mitigate direct exposure. Ultimately, the rigorous work we have done to enhance our contractual frameworks allows us to pass through unavoidable cost increases, ensuring we preserve our margins while continuing to deliver market-leading service. Looking ahead to Q2, our top 3 strategic priorities remain driving growth by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business. Managing cost through field-based operational execution and prudent spend management at the enterprise level and optimizing cash flow with increased customer payment frequency, enhanced contract terms and disciplined working capital management. We are confident that continuing to execute on our strategic priorities, supported by our robust business fundamentals will enable us to drive growth while delivering sustainable, profitable results. So with those introductory comments, I'll turn the call over to Matt. Matthew McKee: Thanks, Ted, and good morning, everyone. Revenue was reported at $462.8 million, a 3.4% increase over the prior year. Segment revenues and margins for Environmental Services were reported at $208.3 million and 12.1%. Segment revenues and margins for dietary services were reported at $254.5 million and 9%. Our 2026 growth plans are oriented around mid-single-digit revenue growth with Q2 revenue in the $465 million to $475 million range and sequential revenue growth in the second half of the year compared to the first half of the year. Cost of services was reported at $386.9 million or 83.6%. Cost of services benefited from strong service execution, workers' comp and general liability efficiencies and lower bad debt expense. Our goal is to manage cost of services in the 86% range. SG&A was reported at $42 million. After adjusting for the $1.6 million decrease in deferred compensation, SG&A was $43.6 million or 9.4%. Our goal is to manage SG&A in the 9.5% to 10.5% range based on investments that we've made and spoken about in previous quarters with the longer-term goal of managing those costs into the 8.5% to 9.5% range. Our effective tax rate was reported at 24.6%. We expect our 2026 effective tax rate to be approximately 25%. Net income and diluted earnings per share were reported at $26.1 million and $0.37 per share. I'd now like to turn the call over to Vikas. Vikas Singh: Thank you, Matt, and good morning, everyone. Starting with our liquidity and cash flows. Our primary sources of liquidity are cash flow from operating activities, cash and cash equivalents and our revolving credit facility. Cash flow from operations was reported at $43.7 million. After adjusting for the $20.3 million increase in the payroll accrual, cash flow from operations was $23.4 million. We wrapped up the first quarter with cash and marketable securities of $214.6 million, and our credit facility of $300 million was undrawn with utilization limited to LCs only. On April 7, we amended our existing credit agreement to extend the maturity of our $300 million revolving credit facility to 2031. In tandem, the SOFR-based pricing grid has been favorably modified and covenant flexibility has been enhanced. Our capital allocation plans remain unchanged from what we outlined last year, and we are on track to execute. Our capital allocation across organic growth, M&A and share repurchases continues to be grounded in discipline and consistency. Our enhanced liquidity provides us the flexibility to pursue all of these priorities without trade-offs. In February 2026, we announced plans to further accelerate the pace of our share buybacks and repurchase $75 million of our common stock over 12 months. In the first quarter, we repurchased $24 million of our common stock. We now have 9.2 million shares remaining under our current share repurchase authorization. With that, we will conclude our opening remarks and open up the call for Q&A. Operator: [Operator Instructions] And your first question comes from the line of Ryan Daniels with William Blair. Matthew Mardula: This is Matthew Mardula on for Ryan. So in your prepared remarks, you touched up on this, but I want to dive deeper into it. So we saw strong results in cost of services as a percentage of revenue being at 83.6% this quarter, better than the guidance. Was there any one-time benefits this quarter? And what exactly drove that strong performance in the first quarter? Also, as we look for the rest of the year, with you reiterating the 86% cost of services as a percentage of revenue, how should we think about the rest of the quarter given the strong Q1 performance? Matthew McKee: Matt, this is Matt McKee. As we've previously discussed, the primary driver of managing cost of services within that targeted range and overall margin consistency for us is really service execution. And the recent positive service execution trends in customer experience, systems adherence, regulatory compliance and budget discipline, all of which are near-term margin drivers carried over into Q1. And the expectation is that, that carries forward throughout 2026 as well. So that's why we remain confident in our ability to continue to manage costs in that 86% range. And it's worth noting, Matt, that service execution is not something that happens on autopilot, right? There are no elements of it that are given. Our field-based management teams are working very diligently to deliver on our expectations, and they deserve a lot of credit for that execution. So that said, there are always going to be some movement month-to-month, quarter-to-quarter and the timing of certain items can have a positive impact, and that was the case in Q1 results as well in that work comp and general liability efficiencies continue to be driven by our focus and commitment to training and safety protocol that we've implemented in the facilities and lower bad debt expense. That's been favorably impacted by our strong cash collection efforts and the scarcity of bankruptcies or reorgs during Q1. Vikas Singh: Yes. And Matt, this is Vikas. If you want to unpack the outperformance in different buckets, what we would say is, look, we've outperformed the 86% by, call it, 2%. Out of that, 1% is coming from workers' comp and general liability. Those efficiencies contributed about $4.7 million to the favorable cost of sales outcome for the quarter. Now while that reflects the ongoing efforts that Matt just talked about, what I would remind you is that this impact can be lumpy. And the fact that we got that number in one quarter may not necessarily lead to similar benefits in subsequent quarters because that benefit is based on the frequency and the size of claims. It's based on the insurance and actuarial model. And while it's indicative of how we've been performing, it does not guarantee similar repeat performances in subsequent quarters. So that's about 1% of that 2% outperformance. I would say the remaining outperformance this quarter, as Matt has already alluded to, came from bad debt and service execution. On the bad debt front, you'll see this number in the Q that we'll file later this week, but that number for the quarter is $3.8 million. That's less than 1% of revenue. If you look at where we've been in the recent past, we've been at 2% plus. If you look at a more normalized historical average, we are between 1% to 1.5%. So it's really those two factors plus the operational excellence that's driving the number this quarter. But that said, we still feel that 86% is the right way to go because these events, while favorable, can be lumpy and are not guaranteed to be repeated in subsequent quarters, although we'll try our best to do what we can. But I think it takes us back to 86% being the goal and the target for us. Matthew Mardula: Great. That's extremely helpful. Now how has the development of managerial candidates trended recently? And with the continued addition of new clients this quarter and with expectations of that continuing in the upcoming quarters, how are you planning to be able to keep pace with having enough managerial candidates? And I know it probably varies by region, but any updates on growth and I'm ensuring you have enough manager candidates would be great to hear about. Matthew McKee: Yes, that's exactly right, Matt. The benefit that we have is that our expectations relative to management development are all grounded in the localized efforts within not only our regions, but more specifically down to the district level, where we have our 12 facility districts and the expectation is that each district will be executing their own management development efforts through their certified training facilities. So the expectation is that the recruiting efforts, the hiring, the training, the development, ultimately, the retention and placement of those management candidates is very much an exercise that's executed within that district structure. So it's very much those bottoms-up ground-up efforts that aggregate to total company top line growth opportunities. And it is that marriage of management development with business development, but again, executed locally that when it's rolled up and executed properly, yields that mid-single-digit growth for the company. Correctly noted as well, Matt, in the way that you asked the question is that, of course, there are regional variabilities, whether that's a market dynamic or it's simply a management issue. Some folks are further ahead of that curve. Others will struggle because, of course, we don't compromise our standards relative to service execution and performance per our previous comments relative to cost of services if there is a local team that's not executing on client satisfaction, delivering that customer experience, adhering to our operational systems, delivering regulatory compliance and, of course, executing with budget discipline as stewards -- financial stewards for our clients, we won't let them grow the business in their area. They have to demonstrate that they're capable of appropriately managing their business in their current portfolio before we'll allow them to grow. So there will always be problem children, and that's the beauty of having invested in that middle management structure is that, number one, we can quickly identify areas of concern and some folks who may need extra attention and then quickly be able to insert those management resources, appropriately reskill, train, develop those managers such that they can get back on track and then reengage into that critical focus for us, which would be management development, very much tied to business development efforts. But when you roll it all up when we look at that landscape right now, Matt, we're very pleased with where we are, and we don't have any limitations or obstacles relative to achieving total company growth objectives in light of the strong environment relative to management development. Operator: Your next question comes from the line of A.J. Rice with UBS. James Kurek: This is James on for A.J. First of all, congrats on the strong start to the year. Could you potentially give us an update on how the campus segment did in terms of year-over-year growth? And then I think you've also expressed interest around potentially exploring more M&A opportunities, particularly potentially in campus. And maybe just an update on the capital deployment as it relates to M&A. Matthew McKee: Yes. James, as we discussed last quarter, the campus business represents over $100 million of annualized revenue in 2025 and still a relatively small base at less than 10% of total company revenues, but we do see continued growth of that base. We're not going to report or call out specific growth in that segment at this point. But we've mentioned the synergies that exist between the environmental offering or the brand that we're executing for environmental services and our dining brand and those offerings. So as we sit here, if you think about the academic calendar, as many, if not most, of our campus clients right now are schools, we're in the selling season, right, as administrators begin to plot out their plans for the end of this academic year, the summer and then thinking ahead to next year's academic year. So from a business development and a pipeline development perspective, those folks are very much in the thick of orienting towards growth objectives from an organic perspective. And perhaps Vikas would make a comment or two just as far as how the inorganic opportunities could potentially supplement that in the campus opportunity. Vikas Singh: Yes. And as we've talked about, we remain focused on building that M&A pipeline. We continue to evaluate incremental opportunities every quarter. And as I said earlier, our approach will continue to be grounded in discipline and consistency. And we are looking for deals that will be small, $20 million, $25 million, $30 million of purchase price such that while they look and feel like inorganic growth on day 1, they serve as an organic growth platform on day 2, so more of a land and expand. So we are busy looking at opportunities and evaluating the right fit that we will move forward with over the course of the year, but that continues to be an ongoing focus area for us. James Kurek: Got it. Appreciate the color there. Maybe just one more on adjusted EBITDA, it was a really strong quarter at almost $39 million. I know you don't guide to that, and I appreciate some of the comments around the benefits you saw the cost of services this quarter. But is there any directional color you can give us with the starting point of $39 million just on seasonality considerations or how to consider or view that from a quarter-to-quarter basis from here? Vikas Singh: Yes. You're right. Look, we've not been getting into projecting out EBITDA. But as we've mentioned in the past, the model remains very consistent and in some ways, easy to understand, which is, from our perspective, 86% cost of sales, SG&A short-term target of 9.5% to 10.5%, so call it 10% at the midpoint. And we've got a 25% tax rate, right? That puts you in the ZIP code of 4% pretax income. Our stock-based compensation and D&A typically runs at about 1.5%. I think that's the best we can do in terms of providing you a sense of where it will be. Now this quarter, EBITDA was strong, as we talked about. The results, cost of sales came out more favorable than the 86%. SG&A came out more favorable than the 10%. That said, that's not what we are projecting as the overall year outcome. So I'll let you project out EBITDA within those metrics, and there will be quarters where we do better than those and maybe not. But I think if you look at how we look at the business on an annual or a 3- to 5-year growth trajectory basis, those are the metrics that we are holding ourselves accountable to. Operator: Your next question comes from the line of Sean Dodge with BMO Capital Markets. Sean Dodge: Maybe just going back to the cost of services, Vikas, you mentioned the benefits in the quarter from workers' comp, general liability, bad debt. I know you've also been working on some initiatives aimed at improving engagement with employees at the hourly level and using that to improve retention and lower turnover. Maybe if you could just share some more on what specifically you're doing there? And then any impact you've seen from that yet on margins and maybe how much runway is left from initiatives like that, that have a little bit more kind of durability over the long term? Matthew McKee: Yes. Sean, I would say, without a doubt, that continues to be an area of focus for us engaging with our employees at every level within the organization, right? It's a newer area of focus for us to identify with and engage with our line staff employees who historically, we would have thought associated more with the facility rather than with Healthcare Services Group. But as we've formalized and really kind of adopted as a North Star, our company's purpose, our vision and our values in order for us to achieve all of those, we have to have high levels of buy-in and engagement with the employees throughout the continuum. And as you can imagine, being a service-based sort of decentralized organization with the bulk of our employees executing those line staff level positions such as housekeepers and pot washers and dishwashers, food service employees, it is rather challenging to communicate with them. They're not users of e-mail, and we have limited opportunities to connect with them. So we have really explored and identified creative ways to connect with them via company intranet, establishing a proprietary app technology through which we can communicate with folks leveraging our time clocks to be able to push messages to our employees and to better understand where they are in their company experience and journey such that we can really connect with them and drive improved connectivity and outcomes. So qualitatively, without a doubt, we are seeing improved connectivity, higher levels of employee satisfaction. And from a quantitative perspective, Sean, harder to pinpoint it running through cost of services explicitly. But without a doubt, we are seeing improvement in employee retention as a result of those levels of engagement and ultimately satisfaction. So obviously, that yields greater operational outcomes by way of the customer experience, having longer-term employees in the facility. It reduces the management's requirement to be out there conducting interviews and trying to hire and replace employees who are turning over. So there's a cascade of benefits that come from that, some of which are qualitative, but without a doubt, quantitatively yielding improved employee retention data. Sean Dodge: Okay. Great. And then on the revenue outlook, your guidance for the first half of the year implies kind of low single-digit year-on-year growth. I guess the mid-singles for the full year means you got to do something kind of like high singles year-over-year for the back half. Just anything on what's driving that? Is it just simply implementing more facilities over the year and those kind of ramping? And then just any more color on how much is coming from new clients on the housekeeping side versus dining cross-sells? Theodore Wahl: Thank you for the question, Sean. Look, I would start with the fact that the demand for our services is stronger than it's ever been. You look at our pipeline, it's robust. It's growing in terms of new business opportunities, each of which are at various stages of development, but we have a highly managed sales -- highly managed and structured sales process from the beginning stages of cultivation all the way through closing. So I think that bodes well for future, not just over the next 6 to 12 months, but beyond. And we continue in the current year to successfully execute on the organic growth strategy by developing management candidates, as Matt highlighted, that fund new business opportunities, all while retaining our base business. To the question you asked, the key drivers for us in delivering mid-single-digit growth at either the higher end of the range like we saw in 2025 or even the lower end of the range like we saw this past quarter is timing. It's the timing of HCSG management capacity and the timing of client start date preference. And I know we've talked about this before, but timing can be fluid quarter-to-quarter, knowing there's always going to be a subset of intra-quarter opportunities that may be pushed out or pulled forward depending on those two key drivers. And to help put that dynamic in perspective or context, the difference between us starting a new opportunity on April 1 as opposed to September 1 is insignificant in the context of the 3- to 5-year growth outlook we put forth, but could be impactful in a given quarter or even in a year depending on the size and scale of the opportunity. So again, our 2026 growth outlook is a range that's based on annual growth expectations, whereas the quarter-to-quarter estimates are really intended to provide additional near-term visibility. In terms of the segment breakdown, our new business pipeline is split fairly evenly between EVS and dietary, although from a revenue contribution perspective, a dietary account is typically 2x or so of that of an EVS account on a same-store basis. So as we're onboarding a comparable number of facilities, dietary and EVS revenue will increase proportionately. And just as a reminder for you and for the group, we're still 50% or so penetrated in dietary services. So you have the remainder of that to pursue relative to our EVS customer base. So that cross-selling of dietary to our existing EVS customer base remains that ultimate low-hanging fruit. Sean Dodge: Okay. And then just last on Genesis. Any updates you can share there? Are you still providing services to them? And then just any better visibility you have at this point into where those facilities end up kind of from an operator standpoint? Theodore Wahl: Yes, continuing to provide services to the Genesis facilities without operational or payment disruption. And we continue to expect that to be the case throughout the duration of the post-petition period. In terms of updates, in January, the bankruptcy court did approve the sale of Genesis to 101 West State Street, which is a group of well-organized, well-known operators in the space who we have a relationship with. From a timing perspective, those revised bid procedures from the second auction called for a late April financing commitment letter. So that process is unfolding as we speak. And then an early summer close, although from a practical standpoint, I think there's a strong belief that, that will likely be pushed out. I know there's an option at either the buyer or the seller, purchaser or the debtor to exercise that option. So we're likely looking at a closing date later in the summer, assuming 101 West State Street can provide that financing commitment. But again, in the meantime, our priority is providing the high-quality services to Genesis, and we don't expect any disruption in operations or payment between now and the sale date. Operator: Your next question comes from the line of Ryan Halsted with RBC Capital Markets. Ryan Halsted: I guess I know you mentioned that the industry fundamentals remain strong. But I was curious if you had seen any shift or any change in the occupancy trends with your SNF customers, especially those with kind of the shorter stay Medicare residents starting in 2026. And I think just the basis of my question is one of the large managed care companies talked about increasing their clinical reviews on SNF admissions. So I was just wondering if you had any comments or visibility on kind of those trends. Theodore Wahl: Ryan, look, overall, and I mentioned it in my opening remarks, the industry fundamentals continue to gain strength and that demographic tailwind really is beginning, at least the early stages of it are working its way into the long-term and post-acute care system. So that fundamentally is a huge positive for today and for the next few decades. It's really that continued interplay that we see at the local level between staffing availability and occupancy that remains the key for any facility success. I think more than any other factor, labor availability is the key to occupancy growth and occupancy growth is the key to consistent financial outcomes. And the most recent occupancy data are positive. They continue to be in and around 80%. And what we're seeing, to your question, is really steady across not just geographies, urban, suburban, rural, but also facility types and population, long-term short stay, et cetera. So from our perspective, we haven't relative to occupancy, seen anything other than stability and generally speaking, upward trend. Ryan Halsted: Got it. That's helpful. And then you made comments about strong momentum carrying over into Q2. And looking at your guidance for the quarter, the midpoint to the low end are for low single-digit growth. Can you maybe just help to square those comments in terms of what is the momentum you're seeing and maybe how that could be swing factors into your guide? Theodore Wahl: Yes. And look, from a momentum perspective, the most significant indicator we look at is pipeline and then obviously assessing the various stages of development of that pipeline. And our pipeline continues to grow. It continues to be robust, meaning strength across all different segments and business lines, inclusive of the campus division. And that's a real positive. And so we feel good about not just the next 6 months, but the next 3 to 5 years. From a variability perspective quarter-to-quarter, I touched on this earlier, Ryan, but it's really the timing. And it's difficult to be able to pinpoint with precision what a specific quarter will look like, not because we don't have fantastic visibility into the pipeline and the stages of development, but because it's that timing of HCSG management capacity and the timing of client start date, which can be fluid up until a scheduled or originally scheduled start date. So that is -- that's always been the case. That's not a new dynamic for HCSG or the industry for that matter. But we have an organization that's built to be highly nimble, to be able to react when we need to, be able to be proactive when we need to in those situations. So it really does come down to timing in terms of what puts us at the higher end or the lower end of that mid-single-digit range in any given quarter or in any given year. Ryan Halsted: Got it. That's very clear. Maybe just last one for me on your capital allocation priorities. You've obviously put forth a strong share repurchase authorization and have been aggressive with that so far. How should we think about how aggressive you expect to be on the repurchases, certainly as your shares further strengthen? Vikas Singh: Yes. So from our perspective, the approach would be to maintain a more uniform cadence. And as you think about the $24 million number, not all of it this quarter falls under the program, right? If you think about the split of that $24 million because we made the announcement of our $75 million program in tandem with our Q4 earnings, that was middle of Feb. Only $15.3 million of these repurchases were made after the new program was announced. So from our perspective, we're trying to spread it out. We are not trying to front-load it. We are not trying to time the market or be selective. We want to be consistent. And I think that's the approach we'll take over the entire duration of the 12-month program. Operator: Your last and final question comes from the line of Rohan Vasudeva with Baird. Rohan Vasudeva: I think most of my questions have been asked, so I'll keep this brief. But I just wanted to confirm that there was no ERC benefit to cost of sales in this quarter, correct? Vikas Singh: That is correct. There were no ERC receipts and no ERC impact to our P&L and financial statements this quarter. Rohan Vasudeva: Okay. And then you briefly touched on it in the last question to keep a consistent cadence for repurchases. It looks like you'll run through your authorization or finish your authorization in about two quarters. Can we expect that you'll re-up your authorization after that? Or would you guys consider another way of returning capital to shareholders? Vikas Singh: Yes. So Rohan, what we were doing, again, just going back to that $24 million number, as I said, $15 million and change, so to be precise, $15.3 million of those repurchases were made after the announcement of the new program in middle of Feb. So if you think about what we spent under the program, it's $15 million. You do an annualization of that, and it is under the $75 million number. The additional numbers within that $24 million were pertaining to the previous program and our regular open market repurchases. So yes, the number of $24 million seems elevated in that context. It's elevated in the context of our total repurchases last year being $61 million, but we are not trying to rush through the program by any stretch. From our perspective, we want to keep it uniform and present over the course of the year. Now if there are any reasons to accelerate down the road, we will be open to that, but that's not the intent and that's not how we will -- we've structured the program at this point of time. So we would rather be consistent than lumpy. Operator: I will now turn the call back over to Ted Wahl for closing remarks. Theodore Wahl: Thank you. As we prepare for the remainder of 2026, our 50th anniversary, the company's underlying fundamentals are more robust than ever. Our leadership and management team, our enhanced value proposition, our business model and visibility we have into that business model, our training and learning platforms, our KPIs and key business trends and our strong balance sheet and ROIC profile. And with the industry at the beginning stages of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value. So on behalf of Matt, Vikas and all of us at Healthcare Services Group, thank you, Rebecca, for hosting the call today, and thank you, everyone, for joining. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Luke Wyse: Good morning. It's 9:30 in Dallas. Thanks for joining us this morning and for the interest in our first quarter results. We're glad you're here. We've all had our coffee, so let's get to business. Aaron's letter last evening outlined a quarter of real progress on the things that matter most. During the slowest quarter of the trucking calendar, we grew Factoring customers and outgrew the general market seasonal decline. Payments demonstrated the revenue growth and continued margin expansion we've been alluding to and LoadPay now exceeds more accounts than we have Factoring clients. The positive momentum is palpable, and you can see the results in Aaron's comments in the letter. That quarterly shareholder letter published last evening and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this call may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. For details, please see the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron? Aaron Graft: Thank you, Luke. Good morning, and thank you all for joining us. For those of you who read the letter before the call, I hope you appreciated the shift in tone. It was intentional because Triumph is now in a different place. We have moved from talking about logos and density and product development pipelines to talking more about revenue and margin. And that shift has shown up in our numbers even with the seasonality Luke talked about. Now the shift in tone does not mean we are done innovating or investing for the future. For example, LoadPay and Intelligence are not yet profitable, and we still continue to invest in them because we see the growth and the opportunity to create long-term value. It's the same vision we had years ago for Factoring and for the Payments Network, both of which have paid off. Speaking of those 2 lines of business, our operating margin in Factoring is 80% better than it was a year ago. And the core Payments network is growing rapidly and is on its way to achieving a 50% EBITDA margin. I believe those are industry-leading numbers. The cascading requirements for being a successful technology company are: first, can you build it? Second, can you distribute it? And third, can you be profitable at scale? We are at the third step of that analysis for a large part of our transportation business, and I believe the results speak for themselves. We grew transportation revenue over the last year by 23%, and that was done in a freight environment that was very difficult. We expect to grow at least 20% again this year. There is a lot of good to celebrate after what has been a very long winter in freight. Speaking of a long winter in freight, I'm not sure outsiders have appreciated how much the freight recession of the last 4 years has tried to throw sand in the gear of what Triumph has been building. It's been a tough slog, but we stayed committed to our vision. And if we get a more normal market from here, we are very well positioned to benefit from it. With that, I'll turn the call over for questions. Operator: [Operator Instructions] Our first question will come from Gary Tenner with D.A. Davidson. Gary Tenner: I had a couple of questions. First, in your shareholder letter, Aaron, you have a lot of kind of updated thoughts around profitability margins, KPIs, et cetera. Where it leads off with the -- sorry, looking for my question here. Where it leads off with the North Star commentary below that first table and talking about if you achieve the revenue growth and margin targets, all else equal, you should generate roughly $1 of incremental earnings annually. What is that relative to? I'm not quite clear in terms of my understanding of kind of what that is relative to what the base is and what you're comparing? Aaron Graft: Sure. What I meant by that is our target was 15% or greater transportation revenue growth annually. If you can do that at the margins at which we currently operate, which are not yet to those final North Star metrics, but at the margins we currently operate at, you're going to generate about $1 per share of earnings if operating income in the bank stays relatively flat, the corporate expense -- the corporate segment stays relatively flat. So that was what we were trying to show. Does that make sense? Gary Tenner: I think so. If I have a follow-up to that, I'll do so. And then I'm curious, and I've had some inbound questions about kind of the yields this quarter. It looks like the yields really in all 3 segments came down, the bank segment, particularly. I'm just curious about noise there, what the drivers were. And frankly, beyond the bank segment, I mean, in the Factoring and Payments segment, I know that, obviously, there's an element of timing of collections that impact the yields, but just curious what the moving parts were there? Todd Ritterbusch: Yes. I'll take the bank segment part of that question. There are really 2 main drivers, one of which impacts our bottom line and one of which actually doesn't impact our bottom line. The one that impacts our bottom line, of course, is the rate environment. So the declining rate environment certainly contributed to lower yields, and that was a significant part of the overall decline you saw. The one that doesn't is related to the additional mortgage warehouse deposits that we brought in, in the quarter and the fact that the way that those are compensated is through loan rebates. So rebates on the yield of the mortgage warehouse loans. Net-net, that benefits us as an enterprise, but it does compress the yields as they're reported. Aaron Graft: Yes. And Gary, in the other segments, I would assume you're also referencing the Factoring segment, which Kim and I can speak to. But I would just say that, that is always going to be driven by mix shift, right, or the mix of large enterprise factoring clients versus smaller clients, which we wrote about in this letter, the difference between having a single fleet with 500 trucks versus 500 owner operators. And then secondly, I just think the industry, technology, a lot of things are working together to make the industry more efficient. And so that yield profile reflects. I mean, while Triumph is getting better, we would be foolish to think we're the only people getting better at being efficient. So I think those would be the 2 largest contributing factors there. Operator: Your next question will come from Timothy Switzer with KBW. Timothy Switzer: I was looking for a little bit more color on the freight environment, Aaron. I really appreciate your comments in the letter. But do you guys believe we can continue to see truckload freight pricing move higher even if this Delilah Law is not passed rather than just pricing stay where it is? And I mean, do you guys have a sense at all for this law passing and the time line for it, given it's a midterm year. we have a war going on, all that can kind of distract Congress a bit. Aaron Graft: Yes. Well, obviously, this is the question that a lot of people have. And I'm going to start, and then I'd love for Kim to follow up on because I think our Factoring business, it tells part of the story and just what we've seen there. Look, there is a whole lot getting written about this in our industry. We agree with the overall sentiment that this is supply side driven. We are seeing a structural change in trucking capacity as a result of multiple regulatory initiatives, some of which are new and some of which are just enforcing laws that are on the books. And we started seeing that last year. The question is, will we see that continue? And I think the answer is yes because I don't even know that you need Delilah's Law to pass to see what's already been in flight from the Department of Transportation and FMCSA. The second big question is what happens if supply stays structurally changed as it now appears to be and you see demand increase throughout the rest of the year. Well, that would create a very tight market. So we think it holds on the supply side. But Kim, I think it would be great to speak about what we're seeing with 8,000 clients in our Factoring business. Kim Fisk: Yes. So right now, we're seeing a pretty solid, healthier pipeline than we saw the previous year. And exiting 2025, we started to see an increase of capacity -- or sorry, a decrease in capacity of carriers leaving the market just with the English proficiency that was coming out, the non-domicile conversations that we're hearing. And so I think that we're seeing the movement in the spot rate continue to improve. Aaron Graft: Yes. Could you -- I think like specifically, like let's talk about what we've seen a year ago now and what we've seen even quarter-to-date. Kim Fisk: Yes. So our average invoice price a year ago was about $1,769 and ending the quarter was $1,897. And today, quarter-to-date, we're seeing $2,011. Timothy Switzer: Wow, interesting. Okay. And on the other side of the outlook here, at what point do higher oil prices begin to offset the higher pricing in the Factoring business, higher invoice levels? Is there an oil price level or length of time where the costs remain elevated that it just fully offsets the benefit from higher invoice prices? Aaron Graft: Well, I mean, you're asking a question there. If you're just talking about the math of an average invoice, then higher diesel prices improves margins, right, because it's going to drive up, especially in the spot market, average invoice prices. But the increase in the spot market has started before oil prices moved materially in March. It really started in December, continued in January, and then it has picked up since March. So really, the test, Tim, is at what price of oil do we start to slow down the overall economy? Because if we slow down the overall economy, then we see demand degradation. What we have seen so far in what should have been our slowest quarter, and I presume will be, is that we have not seen demand fall off. We haven't seen it tick up other than in flatbed, but it's been relatively flat. And so you've seen a structural change from capacity leaving the market and then since March, which doesn't really show up in a lot of our numbers, but will probably show up in Q2, you're seeing the impact of the spot market adjust and the contract market will follow and adjust for higher diesel prices, which is, as Kim alluded to, you're seeing average invoice prices month-to-date in April over $2,000. We're not back to Q1 or Q4 of 2021, Q1 of 2022, which was $2,500 invoice prices. That was a very different market. But you are seeing strengthening despite the supply leaving the system, like demand has hung in there. And so it's just a question of when do higher oil prices hurt demand, and we're not economists. We're not able to answer that question. Timothy Switzer: Got you. Totally understand. I'll jump back in the queue. But I mean, I know you guys have always been hesitant to kind of call the bottom of the freight recession, which I think you proved right on. But it seems like this is maybe the most optimistic scenario you guys have had in front of you in terms of the Factoring business over the last, I don't know, 3 or 4 years. Aaron Graft: I mean I used the term long winter in the opening, and there was a reason that we used that term. And I think, look, our job is to create value for customers, which translates into value for investors. The test, in my view, isn't what it does for Triumph. The real test is can a law-abiding carrier earn their cost of capital. And I would submit to you that since the middle part of 2022 through now, through the present or let's call it, the end of last year, a significant portion of law abiding carriers struggled to earn their cost of capital because of a market that was soft for a variety of reasons, not the least of which was capacity operating within it that was not following all of the laws, rules and regulations. And so we, as a society, have passed those laws because we want safe roadways. And we, as an industry, should want a marketplace where shippers, brokers, carriers, factors, everyone can earn their cost of capital. And what we are seeing right now is dawn may be breaking for what's been a long time. Who knows what will happen? We're in the midst of a war. There's geopolitical risks. There's all sorts of risks. But as we look at it right now, I'm as optimistic as I've been in a very long time. Operator: Your next question will come from Joe Yanchunis with Raymond James. Joseph Yanchunis: It sounds like the groundhog didn't see a shadow. Aaron Graft: We hope not. Joseph Yanchunis: So I was hoping to start with the Supreme Court case over broker liability and the potential impacts to Triumph should the industry lose that case. So I would assume it would be a headwind for your Payments and Factoring segments, but could potentially be beneficial to your Intelligence segment and Insurance division. But I mean, I could be wrong there. Any thoughts on this would be helpful. Aaron Graft: Well, business -- all businesses desire certainty, right? And that's what we've had for many years with understanding that the responsibility for licensing of carriers is a governmental responsibility. I think I can speak for all of Triumph that we would take the position of the industry or of the brokerage industry of where we would land on that Supreme Court case. We don't know how it will play out. I mean, here's what we do know that, number one, the government appears to have woken up to its responsibility with licensing regulation and enforcement and that is most welcome. We really appreciate that. We don't think it is effective for the industry, for industry providers to be tasked with that. That feels like a governmental responsibility. If that Supreme Court case goes the other way, and so there's no longer federal preemption of all the state law tort, negligent entrustment claims, what does it mean? Well, number one, freight is still going to move. And brokers are still going to be very important in freight moving because that's -- the industry is built that way. It's going to change what role insurance would play for sure. And it will likely change how brokers think about tendering freight to certain carriers. I mean brokers pay attention to that already. But of course, you're going to now be thinking through what will it mean in this state? What is precedent in the state. So it's going to create a lot of friction around the business. We need safe roadways. We need clear operating parameters because we deal with a marketplace where there can't be prolonged negotiations over the movement of freight. It has to move quickly. We need a repeatable transactional process. So I don't know that if -- where the Supreme Court lands is really going to have an effect on Triumph's business. I think it will inject volatility, and we generally are in a position that we can weather that or even in some cases, benefit from it. But in our hope for the good of the industry, we think federal preemption is the right answer, coupled with -- so long as it's coupled with proper enforcement of the regulations that are on the books to keep our roadways safe. Joseph Yanchunis: Okay. I appreciate that. All right. So shifting to the outlook. The outlook calls for 20% or at least 20% transportation-related revenue growth in 2026, which as of 4Q assumed a flat freight environment. Well, the freight market seems to be on fire right now. Red hot, C.H. Robinson's in the market calling for spot rate growth of 17% ex fuel. In your shareholder letter, you reiterated that Factoring segment revenue growth would be in the low teens. How do we square that with what we're currently seeing in the market, the recent -- I think you noted that average invoices were over $2,000, recent market share gains. I mean, what type of invoice volume growth and what average invoice size are implied in this low teens growth outlook for Factoring? Aaron Graft: Brad, do you want to take that one? William Voss: Sure. Yes. So Joe, as we look at the Factoring portfolio specifically, just look at what has happened over the last year. Our number of invoices purchased in the first quarter of this year was about 12% higher than it was in the first quarter of last year. So that low teens growth, we were approaching that in the year that we just followed. I think that we should be able to continue that. Anything that we get on top of that from invoice price growth would certainly be welcome. We're not counting on it, but we would certainly appreciate the tailwind. Aaron Graft: Yes. And we're not going to recast. I mean, when we gave you those projections and even in the North Star metrics, the metrics that matter most, those are not forecasts. They were guidelines. And I can appreciate that investors will. Is that a distinction without a difference? If you run the business, it's a very important distinction. We weren't trying to forecast what was going to happen in the market. What we were trying to do is for Kim and Todd and Don and David and the people who lead our businesses, what do we need to do to position ourselves to grow revenue, and we will not make any assumptions about what the market might do because that's not our job as operators. I mean, of course, we pay attention to it. And when I look at take Factoring, for example, I mean, and what Kim and the team have done there to be positioned to organically grow, which we have not done in several years and to do that while improving back-office efficiency, I'm thrilled with that. If we, in addition to that, catch a tailwind, then maybe those mid-teen numbers change, but we're going to stick to the guidelines we gave of -- because that's how we're running the business. But we acknowledge we operate in a business where the environment changes every day. And right now, it's been very positive changes. What it will be a quarter from now, we have no idea, but we certainly are appreciative of where things are now. Joseph Yanchunis: Got it. So it sounds like it could potentially be conservative outlook for '26 if trends currently stay. And I was going to save this for a follow-up question, but because you touched on it, I'm going to hop in here, if you don't mind. So kind of with that AI theme and improved efficiency, by my math in 1Q, you purchased roughly 7,200 invoices per FTE in factoring, which was a massive increase from the 5,600 in the prior year, underscoring that narrative. I know AI can be a moving target given its rapid improvement. But by your estimation, what inning are we in for the use of AI and automation for improving fraud detection and providing analytics to some of your Payments clients? Kim Fisk: Yes. We have a lot on our road map right now to improve automation through AI and large language models. And so I think we're just in the beginning innings, to be honest, operationally. So I think you're going to see an improvement with volume of invoices versus our full-time headcount. Todd Ritterbusch: And within the Payments business, our application of AI is actually aimed more at delivering a better client experience. So as we use AI to improve our audit product, for example, that means that we're having to refer fewer invoices back to the brokers for adjudication. We're handling them ourselves. That's real value for the client. It's not just creating cost efficiencies. There are other opportunities for us to apply AI for the purpose of cost efficiencies. But right now, our focus is primarily on a better client experience. Operator: Your next question will come from Matt Olney with Stephens. Matt Olney: We talked in the past about the invoice pricing, how the exposure had predominantly been on the spot rates, but also now has some exposure to the contract market. And Aaron, as you said, the contract market could lag the spot market. So just remind us of the exposure of the company within Factoring and Payments and how much currently is spot versus contract and how that could change? Kim Fisk: Yes, it's difficult to put an actual number on the amount of contract. We see a higher average invoice price on the Factoring portfolio because of the diverse commodities that our carriers are hauling and the different size that we see. And I know we've said in the past, we have about 30% of our portfolio that's directly to shipper. So you see more contract and dedicated lanes through that. So that's probably the closest I can give you as far as the potential contract and dedicated lane number. Matt Olney: Okay. That's helpful. And I know it seems like we're a lot more focused on the transportation growth on this call, but it looks like the challenge in the first quarter was within that banking segment that's still half the company revenue. And I think Todd addressed the question around the loan yields, but it sounds like the bank loan balances will be down this year. So help us think about the drag that we could see on banking revenue in '26. If I just look at year-over-year 1Q '26 versus 1Q '25, it looked like core banking revenue was down 12%. So is that level of drag likely to continue throughout the year? Aaron Graft: Do you want to take that, Brad, or do you want to... William Voss: Yes, Matt, I don't think you're going to see a lot of degradation from here. I think our intent is to hold things flat. I would remind you though that we are a bit asset sensitive. So as rates have declined in the overall economy, that would account for a good portion of what you saw relative to the first quarter of last year in addition to things like our ABL and liquid credit portfolios running to a smaller level, which will likely continue over the course of this year. But our mandate to those teams is to keep it in the fairway, keep credit quality clean and keep the balance sheet pretty stable. Operator: And our next question will come from Eric Bedell with Bloomberg Intelligence. Eric Bedell: I'm curious a bit on the Factoring invoice purchase volume. What should we expect in terms of how much you're going to pick up over the next few quarters? I know we touched on it a bit. But just curious to see if we're going to see similar levels to 2Q '25. Kim Fisk: Yes. In Q1, you'll normally see a seasonality drop, although because we saw some additional client count in the first quarter, we only dropped by about a little over 3%. So I think quarter-over-quarter, you'll see that increase, especially when we see such a solid pipeline coming in. Aaron Graft: Yes. We've answered this, Eric, in the past is, if it's hard to it's not a perfect comparison because what you have is client growth, right? And when we start growing clients, which we're now doing and then that the -- you can't compare period-to-period Factoring numbers and say, well, that's what the industry did. And that's why we encourage you in the letter to look at what the Payments business spoke to, although, frankly, it's growing as well. So you have to interpret our organic growth. But the 3 things we've always thought about, number one, client growth, which we've talked about, we're growing. The pipeline is really interesting. Number two is utilization per carrier, which Kim can speak to, but that's going to be tied to seasonal factors like are these carriers -- what percentage utilization are they at? And then number three, what's the average invoice price? And I would just point out that Triumph Factoring's average invoice price at over $2,000 currently is materially higher than probably what you're going to see with any other Factoring business. If you want to see where the average invoice price for all freight, which I don't know that the average tells you a lot because there's such a variability, but you should look at our payments numbers, which is going to be more like $1,200 or $1,300. And that's because a significant portion of our Factoring portfolio is with larger carriers who are doing things for shippers that generate either longer length of haul or a different type of freight. So I think that there are directional signals for what you're looking for in our Factoring business and in our Payments business, but don't overlook the fact that we're organically growing it. And so it never gives you a perfect period-over-period comparison. Eric Bedell: That's helpful. And I was wondering if we could just shift to the payment side. I appreciate seeing the revenue per invoice and the increases there. Is there a target level that you have for dollars per invoice into the end of the year? Todd Ritterbusch: We don't have an aggregate target for dollars per invoice. We've shared in the past that our price on a per customer basis should be $1.25 for the core Payment service and then audit on top of that generally adds about $1 per invoice. So you could put those together and say $2.25 would be the target on a customer level. We won't achieve that for the entire portfolio, but that would be an aspiration for every client. Eric Bedell: And just the repricings on those, how long does that take to come through? Should we expect that on a 12-month basis? Todd Ritterbusch: The pricing ramps for clients that are beginning to pay us now are generally about a 3- to 4-quarter ramp period. And so what you'll see in the second quarter is a lot of brokers that began paying us just a little bit on January 1 are now going to be paying us significantly more, and we're bringing a whole new slug of clients on board to begin paying us. So those 2 things will have a nice additive effect to our overall pricing. Aaron Graft: I would just say, Eric, on that, the migration from where the Payments network was to where the Payments network is today, we have -- I think over the last 4 or 5 years, we've had a lot of investors ask about why aren't you pricing faster? And our belief, and we wrote it in the letter and our belief for the whole world to see our customers to see is value-based pricing. And so we want to make sure we are delivering more value than we are asking for, for our customer because that's the only way to make this sustainable. So we've given you in the letter like the pricing ramps that are coming. That's only because they're tied to value ramps that came before. And we take that very, very seriously. So I just know that I'm sure others could go faster in pushing pricing, but Triumph's focus is can we go to our customers and show them the value of the network, not just audit and payment in isolation, but the value of the network, which is becoming more real every day. And I think there's a lot of exciting things to come from the value it creates and distributes back to not just the people making the payments, but the people receiving the payments. And that's what we try to do with networks. Eric Bedell: That's helpful. And I just had one last one on the LoadPay account growth. What are you doing to kind of convert those new accounts into the active accounts? And what's that relationship like? Is there any churn yet? Just curious to hear some more color. David Vielehr: Yes. So we're really excited about the growth that we saw in the first quarter, right? It shows the amount of demand that's out there. And one of the features at Triumph is our ability to have wide distribution to the carrier network from the work that we've done historically within Factoring across our Payments business. As Aaron just mentioned, right, we're about creating additional value and some of the feature sets that we enriched in the first quarter started to show why we -- with an uptick in those number of active accounts. And we'll have another set of material upgrades in the second quarter, and we'll see that level of active accounts grow. And what we're already seeing is more and more of a carrier's total workflow is now being done within the LoadPay application. And so someone who logged in on December 1 versus logging in on April 1 is getting a much richer experience in order to successfully run their business and be a profitable carrier. Operator: [Operator Instructions] And we'll return to Joe Yanchunis with Raymond James. Joseph Yanchunis: Hey, thanks for bringing me back on here. So I was hoping we could talk a little more about expenses. So how much of the 2Q $97 million guide is fixed versus variable? How much should professional fees and salaries trend from here? And then if you could provide some more color on your tech spend over the past couple of years and when we could expect to see that start to moderate, which would materially impact your operating leverage going forward? I'm just trying to ask what needs to happen for you to get your quarterly expenses back to, say, the $80 million range? William Voss: Well, I think $80 million a quarter is very aspirational given our growth plans in our transportation businesses. That's not what we're trying to do. We're trying to keep our expenses really from growing in a material way. We're happy to do things like pay commissions and bonuses when we're able to grow our business. But the tech spend that we've had over the last few years, specifically to that question, most of what we need is in place. You shouldn't see a huge amount of growth there. We're always looking for ways to become more efficient. We're looking for ways to become more efficient in our operating businesses as well. So if you look over the next couple of years, what I would expect is the corporate expenses, the fixed overhead type of expenses to be -- grow at inflation at the most and hopefully decline a little bit. And in our operating businesses, you should see our expenses grow materially slower than revenue, and that's what we're trying to do. Aaron Graft: Yes. Joe, I appreciate the question, but it's -- I don't think it's conceivable for us to grow transportation revenue 15% or 20% out into the future and cut expenses 20% at the same time. I mean I just -- I think we've pulled $30 million of expense out of the business. There's churn underneath that. There's probably more expense coming out. We told you we'd finish at $96.5 million. And I just return to the North Star metrics because I get it. There are investors who look at us that come at it from a bank lens. Some of them come at it from a payments lens, some of them come at it from a fintech lens. And that's why we wrote the metrics the way they are. Number one, revenue growth over 20%. We've already told you, I don't call it a North Star metric, but we've already told you that we're going to hold expenses relatively flat. So if you get 20% transportation revenue growth, the bank stays flat and expenses stay flat, you're creating operating leverage. Number two, inside of that revenue, we're telling you that the operating margin in our Factoring business is going to exit the year around 40% operating margin, which is materially higher than any sort of commercial finance business that I'm aware of. We're telling you that the EBITDA margin in our payments network is growing towards 50%. Where do we finish this year? I don't know. I mean I think we're progressing towards 40%. And then we're telling you that the Intelligence gross margin, which already lives where it lives, will stay there while we're growing revenue materially. So if investors are looking for us, I just want to be frank, if investors are looking for us to reduce quarterly expenses to $80 million, you're looking in the wrong place. What we're telling you is we're going to grow transportation revenue 20% off the expense base we largely have in place now. And doing so, going back to the opening of what we wrote in the letter and what Gary asked about, doing so, if I told you we're exiting last year at roughly $1 of earnings run rate, right, in Q4, which is generally one of our better quarters from market -- where the market is. And then we come into Q1 and we stayed at roughly $1 a share, right? You can make whatever adjustments you want to make. It means we grew through the seasonality we should have expected. And I want to emphasize this, like normally, we would see a 7% to 9% falloff in transportation revenue. We stayed flat, which I think is a material win from Q4 to Q1. If you go and repeat what we did last year and we hit those margin targets we're giving you, you're going to double earnings, right? If you just use one and we told you we would add $1 and maybe we do worse than that, maybe we do better, but we're trying to call our shot there. But I just -- I need everyone to understand because I don't want to disappoint anyone, and I want to be truthful with everyone, cutting it back to $80 million a quarter is not the play. Play is holding it where it is and growing revenue from here. Joseph Yanchunis: That was crystal clear. So a couple more from me here. Shifting over to your Intelligence product, how would you characterize current demand for that offering? And similar to your Payments division, do you expect you'll try to build density before increasing pricing? Dawn Salvucci-Favier: Yes. In the Intelligence business, the demand is strong. We've actually -- in the past 2 quarters, we've brought on about 50 net new logos, right? Demand is very strong. The top of the funnel pipeline is very strong. Deals are taking a little bit longer to materialize in the P&L just because of, to Aaron's point, showing customer value through proofs of concept. It's been a year, right? It's been a year since Triumph acquired Greenscreens and ISO to form Intelligence. We have now integrated 3 teams, 2 products and the data of the Triumph network. And Triumph made that acquisition to really monetize the data. We are now there and working through the market, voice of the customer to find the best fit products for each segment of the market. And again, pipeline is strong. Net new bookings have been really strong for the past 2 consecutive quarters. So we're really happy with where we are right now. Joseph Yanchunis: Appreciate that. And then last one for me here. So how quickly will you be able to wind down your ABL and liquid credit portfolios? And assuming they're all completely gone, what impact would that have on your provision? Todd Ritterbusch: Yes. In response to your question about how long it will take, we will have the ABL credits that we're exiting off the books probably within the next 2 to 3 quarters. We may choose to keep one on through the next renewal, which could take a bit longer, but you're going to see that, by and large, wound down by the end of this year. And I'm sorry, what was the second part of your question? Joseph Yanchunis: Yes, the impact of the provision from reducing balances here. I mean I would think that the provision could kind of grind lower. Is that accurate? Todd Ritterbusch: Yes. Yes. The way the math works, provision will grind lower. William Voss: Yes. Joe, I think that you could anticipate looking at the provision on those 2 lines of business just as a percentage of loan balances is going to be higher than our overall average. Operator: There are no more raised hands at this time. I'd now like to turn the call over to management for closing remarks. Aaron Graft: Thank you all for joining us. Have a great day.