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Ilkka Ottoila: Good morning, and welcome to Nordea's first quarter 2026 results. I'm Ilkka Ottoila, Head of Investor Relations. As usual, we'll start with the presentation by Group CEO, Frank Vang-Jensen, followed by a Q&A session with Frank and Group CFO, Ian Smith. Please remember to dial in to the teleconference to ask questions. With that, Frank, please go ahead. Frank Vang-Jensen: Good morning. Today, we have published our results for the first quarter of 2026. It has been an unsettled start to the year once again. The conflict in the Middle East that escalated in March has created further geopolitical uncertainty and is driving volatility in the financial markets. It also has implications for short-term energy supply and inflation. Sustained disruption to global energy markets may dampen economic activity, including in the Nordic countries. While the situation continues to evolve, it's something we are monitoring closely. Fortunately, the Nordic countries have a strong track record in navigating uncertainty. The stability, fiscal strength and global competitiveness of our home markets make them some of the world's best places to live and do business. This is something I have talked about a lot in recent quarters. It is, in addition, worth noting that our region is also structurally well positioned in terms of energy resilience. This is due to its substantial renewable capacity and Norway's role as a major energy exporter. We clearly saw the benefits of that stability during the last energy crisis in 2022. As for Nordea itself, we are uniquely diversified across these attractive Nordic markets. Years of relentless strategy execution have made us stronger and more resilient than ever and leave us very well placed to support customers. That strength showed again in our first quarter performance with solid growth in business volumes and high profitability. Return on equity for Q1 was 15.4%. The implementation of our 2030 strategy has started well. One of our key strategic priorities is growth. And here, our agenda is focused on 6 distinct growth areas. We are seeing -- we are seeing good early momentum in Private Bank, Life & Pension, small businesses and cross-sales. We're also encouraged by the steady progress we are making in Sweden and Norway. Our two other strategic priorities are to strengthen our customer offering and make more effective use of our Nordic scale. And execution on these is likewise off to a good start. During the quarter, we launched a unified Nordic corporate credit and lending platform. We also took further steps in our deployment of a more scalable and resilient payments platform, all part of our drive to enable outstanding customer experiences and superior efficiency. Let's now take a look at the first quarter and some of the financial highlights. Our return on equity was strong at 15.4%. Earnings per share were EUR 0.36, up from EUR 0.35. We were especially active in our corporate customers, with our corporate customers increasing lending by 11%. Corporate deposits went up 2%. Households were active too though to a lesser extent. Mortgage lending was up 2% and retail deposits were up 5%. Asset under management increased by 9% to EUR 464 billion. Net fee and commission income was strong, up 6%, driven by growth across fee types. Net fair value result was down due to lower market making income. That followed the sharp increase in interest rate expectations during March as the Middle East conflict intensified, which led to exceptional losses across certain desks. Total income was resilient with a 2% decrease primarily reflecting lower net interest income due to policy rate reductions and lower market making income. We continue to manage cost with discipline. First quarter operating expenses were flat before foreign exchange effects. Our credit quality remains very strong. This quarter, we fully deployed the remaining portion of the management judgment buffer we created during the COVID-19 pandemic. We reallocated EUR 116 million to further strengthen our modeled provisions, and we released the remaining balance of EUR 160 million, which was deemed surplus provisioning. Excluding the release, net loan losses and similar net result for the quarter totaled EUR 61 million or 6 basis points. Our strong capital generation continued and our CET1 ratio was 15.7% at the end of the quarter, which is 1.9 percentage points above the current regulatory requirements. With a solid start to the year and despite the increase in uncertainty in the latter part of the quarter, our full year 2026 outlook is unchanged. We expect a return on equity of greater than 15% and a cost-to-income ratio of around 45%. Our Q1 net interest income was lower, as expected, reflecting the policy rate reductions and lower lending margins. Importantly, we moved beyond the low point in daily NII and returned to growth during the first quarter. This was supported by both higher business volumes and our deposit hedge. Among corporates, we increased lending by 11% year-on-year, with all countries contributing. This was the first time we have had double-digit year-on-year growth in any quarter since 2022, and it underlines how Nordic businesses are very adaptable to the changing environment and are showing willingness to invest. Corporate deposits were up 2%. That's modest growth, which we likewise interpret as a sign of increased risk appetite. Household customers also increased their activity with mortgage volumes up 2% from still muted levels. The housing market is picking up, though only gradually. As in previous quarters, households have been more focused on strengthening their savings and investments. Retail deposits were up 5%. The deposit hedge meanwhile, continued to provide support to our income year-on-year, improving NII by EUR 55 million. Our net interest margin for the quarter was 1.57%, unchanged from Q4. Net fee and commission income was up 6% year-on-year driven by growth across different fee types. The higher savings fee income was driven by the higher average assets under management and the positive net flows in investment products of EUR 1 billion, even with nearly EUR 2 billion of outflow related to dividend payments. In our Nordic channels, we continued to see very good customer intake in private banking with solid net flows. In our international channels, we delivered positive net flows again despite increased investor caution. Brokerage and advisory fee income increased, supported by stronger debt capital markets activity, and strong income growth, 11% from our secondary equities business. Higher customer activity also drove growth in payment and lending fee income, and we were particularly pleased to have driven good performance in the strategically important cash management area. After a strong start to the quarter, March brought extremely volatile market conditions driven in particular by the developments in the Middle East, the resulting sharp increase in interest rate expectations resulted in losses in our market making operations in March, undoing the strong start to the year. Consequently, net fair value result was down 22% year-on-year, reflecting the impact from those March market making losses, which we consider to be an isolated one-off. Customer activity was strong through most of the quarter, particularly in FX and interest rate hedging as clients actively manage risk. Activity in equities and securities financing also held up well. Cost development in line with our plan and were flat year-on-year, excluding foreign exchange effects. Our strategic investment spend was stable and we are managing costs with our usual disciplined approach, taking the market environment into account. Including FX, costs were up 2% year-on-year. The first quarter cost-to-income ratio was 45.5%, which was slightly higher than planned due to the exceptional market making losses in March. The underlying cost-to-income ratio was below 45%, and there is no change in our guidance that we expect to be around 45% for the full year. During Q1, as part of our 2030 strategy, we announced restructuring initiatives to change the composition of our workforce. With our Nordic scale and with the impact of AI and process optimization, we expect to have fewer employees in the future than today. The restructuring initiatives are set to affect around 1,500 employees across the group during '26 and '27 and from 2028 should deliver annual cost reductions of at least EUR 150 million. This is a part of our 2030 strategy and is in line with the target we communicated at our Capital Markets Day to deliver structural gross cost reductions of EUR 600 million by 2030. In connection with these initiatives, we booked restructuring costs amounting to EUR 190 million this quarter. This has been reported as an item affecting comparability and is excluded from our 2026 financial outlook. Our credit quality continues to be very strong. This quarter, we fully deployed the remaining portion of the management judgment buffer we established 6 years ago during the COVID-19 pandemic. Over this period, the buffer has been continuously assessed in light of the macroeconomic conditions and in the knowledge that our loan portfolio performance has been consistently strong. Risk has been assessed to be largely reflected in our modeled provisions without the need for additional management overlays. As a result, the buffer has been gradually reduced and is now fully deployed. On the remaining balance, we reallocated EUR 160 million in the quarter to further strengthen our modeled provisions, while EUR 160 million was deemed surplus and was released. Consequently, net loan losses and similar net results amounted to a reversal of EUR 99 million. Excluding the release, net loan losses and similar net result for the quarter totaled EUR 61 million or 6 basis points. We continue to have a strong capital position. At the end of the quarter, our CET1 ratio was 15.7%, 1.9 percentage points above the current regulatory requirements. Our strong capital position and continued robust capital generation support lending growth and continued shareholder distribution. During the quarter, our AGM approved a dividend of EUR 0.96 per share for 2025, which was paid to shareholders in early April. Additionally, the AGM granted the Board authorization to decide on the distribution of a midyear dividend in 2026, which would correspond to approximately 50% of the net profit for the first half of 2026. Turning to our business areas and starting with Personal Banking, where we maintained solid business volume momentum and customer activity. Despite the market volatility, customer savings and investment activity remained at high levels and household prioritized, strengthened their financial positions. As a result, deposits increased by 5% during the quarter. Net flows were EUR 0.2 billion, still positive despite the market turbulence, though lower than in the previous quarters. Housing market activity continues to gradually pick up but remains slow. Even in this environment, we increased mortgage lending by 2% year-on-year. In Sweden, we further strengthened our position in the quarter, capturing mortgage market growth well above our own back book market share. Customer engagement with our digital services continued to increase supported by our expanded offering of self services features in our mobile app and online. App users and log-ins were up 4% and 6% year-on-year. And we are also seeing a growing share of savings and investment activity through digital channels. One of the areas we are targeting for growth is cross-sales. And we are seeing good traction, supported by successful product launches in savings and by more automated processes for account opening and onboarding. Net fee and commission income increased by 6% driven by higher payment cards and savings income and net insurance result increased by 46%. Total income decreased by 5% year-on-year, driven by lower net interest income and the lower policy rate environment. Return on allocated equity with amortized resolution fees was 16%, and the cost-to-income ratio was 53%. In Asset & Wealth Management, we maintained solid business momentum and delivered a resilient investment performance in difficult markets. Customer acquisition remains strong, reaching record highs in both Denmark and Finland and supporting net flows of EUR 1 billion in Private Banking. In our international channels, we recorded positive net flows again in the first quarter despite increased investor caution due to the Middle East conflict. The wholesale distribution business has shown resilience since the middle of 2025 and positive flows in the current environment testify to the attractiveness of our product offering. Net flows in Life & Pension were EUR 1.7 billion. We maintained good momentum across our 4 markets and further reinforced our position as the Nordics' second largest player. Gross written premiums in the quarter amount to EUR 4 billion, up from EUR 3.7 billion a year ago. Assets under management increased by 10% year-on-year to EUR 185 billion. This was driven by market performance and the positive flows despite the sharp decrease in investor confidence in March. We continue to progress with our strategic ambition to offer an outstanding savings and investment experience across the region. Among other enhancements made in Q1, we are now using AI to provide timely and relevant information to our customers about their investments they hold. Total income was up 1% year-on-year, with net fee and commission income rising in line with the higher asset under management. Return on allocated equity with amortized resolution fees was 38%. The cost-to-income ratio improved by 1 percentage points to 43%. In Business Banking, we maintained good business momentum and drove strong volume growth. Lending volumes increased by 8% in local currencies year-on-year, led by continued growth in Sweden and Norway and stronger activity in Denmark. Deposit volumes also grew by 8% with all markets contributing. We continue to strengthen our digital offering across the Nordics, a key enabler of our growth ambition in the small business segment. In Q1, we launched a digital onboarding platform in Denmark and Norway, making it faster and easier for customers to get started with Nordea. A wider Nordic expansion is planned for the coming quarters. We also kicked off the Nordic rollout of our new Business Insights service, which helps small businesses manage liquidity and cash flows more effectively. In Sweden, this was fully launched in Q1. The launch was well received, and the service will next be rolled out in Finland and eventually to all countries. Total income was unchanged year-on-year, as higher volumes and ancillary income were offset by lower deposit income. Return on allocated equity was 18%. The cost-to-income ratio was 45%. In large corporates and institutions, we drove strong business volumes as we supported our customers in the volatile market environment. It was a solid quarter on most income lines, but extreme market volatility in March negatively impacted our market making result, driven by the unexpected sharp increase in interest rate expectations. That impact, which we consider to be an isolated one-off, led to a lower net result from items at fair value year-on-year, even though customer activity in advisory and risk management was otherwise strong. Lending was up 14% year-on-year with all markets contributing. Strong demand from our secondary equities offering and higher lending fees and bond issuance activity supported 14% increase in net fee and commission income. Deposit volumes decreased by 5% year-on-year, but increased by 2% compared with the previous quarter. Debt capital markets activity remained high despite the market volatility and we maintained our #1 position for Nordic bonds and Nordic loans year-to-date. We have arranged more than 190 debt capital markets transaction so far this year, so off to a strong start. Primary equity market activity remains subdued, but our secondary equities business grew by 11% year-on-year. Total income was down 9% year-on-year, driven by lower net interest income and the decrease in net fair value result. Return on allocated equity was 15%. The cost-to-income ratio was 41%. In summary, this was a solid start to the year despite challenging financial markets later in the quarter. While there is uncertainty around global growth, confidence among Nordic businesses has not wavered, underlining the resilience of our region. Resilience is a critical asset and one that Nordea also demonstrates. As a large and well-established group, we are continually investing in capabilities that makes us even stronger, including in digital services, technology, security and risk management. We're also very well equipped to support customers and all stakeholders, thanks to our unique market position and presence, leading offering and strong balance sheet. The higher business volumes in both lending and deposits are likewise encouraging and will support our income. Our outlook for the full year 2026 is unchanged. We expect to deliver a return on equity of greater than 15% and expect our cost-to-income ratio to be around 45%. Our vision is to become the undisputed best performing financial services group in the Nordics. Thank you. Ilkka Ottoila: Operator, we are now ready to take questions. Operator: [Operator Instructions] The next question comes from Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: So on NII, if we assume that Q1 marks the trough for NII, could you walk us through how do you expect the trajectory to evolve from here, particularly in a scenario where the rate hikes materialize, and the key drivers between the hedge contribution pricing and the volume growth? That's the first question. Ian Smith: Gulnara, thank you for the question. So let's set aside potential rate hikes for the moment. What we -- what's driven the, I guess, the -- moving on from the trough in NII is that we've been able to add volumes. And how we proceed from here for the rest of the year is really a question of volume development and margins. And we're pretty confident that we'll continue to add volumes over the course of the year and that's going to help move NII forward. Margins are a bit more difficult. We continue to see pressure on the margin side, particularly on household, and as we've said consistently, a return to confidence that drives higher volumes is most likely the answer to that. So we're pretty constructive on NII continuing to improve. I think the outlook for the full year is kind of in line, maybe slightly better than 2025. Now rate hikes, first of all, they've got to happen. So we need to see policy rates actually move before we see that impact our NII. So let's see if that happens. our latest market expectations are that these are going to impact the second half of the year rather than anything in Q2. And then in terms of hedge, let's -- we'll work that through in terms of the timing and extent of rate hikes, not expected to see anything dramatic in terms of impact in 2026. So overall, provided we don't see something untoward on the margin side, you can expect to see a gradual improvement in our NII. Gulnara Saitkulova: And a related question on the volumes. As we move through Q1 into Q2, have you observed any meaningful changes in the customer sentiment, particularly in the light of the geopolitical tensions in the Middle East? And given the current backdrop, how are you thinking about the loan and deposit growth across your markets into 2026? Frank Vang-Jensen: This is Frank speaking. So I think our customers in the Nordics and across the countries has -- they have acted quite calmly, pushed through the deals. They have been active. There might have been a couple of weeks where it was a bit surrealistic what happened and how the rate changes and so how dramatic it went. But there has been no change in behavior. And I would say that now we're talking about the, of course, the first quarter, but the end of the quarter and the beginning of Q2 has showed good activity. I think we have -- and we have been speaking about it quite a long time that there comes a point of time where you just have to accept as a business leader that we are living in times where we will have to cope with a lot of volatility and uncertainty and unpredictability, but we cannot wait for -- continue waiting for the perfect moment. We have to push now for growth our investments in the different strategic parts and whatnot. So I think that's what you see now. We -- of course, we are not forecasting 11% growth year-on-year on corporates rest of the year. But there's no indications that it will slow down significantly right now. Operator: The next question comes from Magnus Andersson from ABG SC. Magnus Andersson: Just a follow-up there on the -- I think the corporate lending growth is what is striking all of us. I mean, in Business Banking, adjusted for currencies, you grow by more quarter-on-quarter than the market is growing year-on-year. And on the large corporate side, I guess, the numbers are not -- it's actually not adjusted for FX, but still, I mean, Sweden is super strong. So could you say anything about sustainability of these growth rates on a quarterly basis. And also, I mean, you mentioned the new onboarding platform. It is Norway and Sweden growing, which you talked about at the CMD, but just the quarterly trajectory looks quite stunning. And my second question is just on capital and share buybacks. You didn't launch a new program now. Is it because the previous program, which was just finalized, was expected to run until the 8th of May. And therefore, we will have to wait until mid-May before potentially you launch another program. Frank Vang-Jensen: Thank you, Magnus. Let me take the first one and then Ian, the second one. So yes, of course, the growth rates of 11% within corporates is a high number, and I don't want to commit to that number each quarter going forward. But let me say in the following way. So when growth is higher than expected and when we have larger credits, I get an overview on who they are and what is the purpose. And it looks very stable, honestly. It's super strong names. It's customers that we have been working with for a long time. And then it can be -- you're just waiting for the opportunity to enter or we have agreed about doing something more together and so there's not really any silver bullet or any single deal that has pushed it very high. So that's one. The second one, which is very positive, is that in a more broad based business banking. It's actually 3 out of 4 countries that are growing quite significantly. And it's a lot of different deals. I think what we do see now as well is that we start to see some of the proof points of our Nordic scale. So we have implemented, as you alluded to, the credit platform. We are making progress on our global payment platform as well. These initiatives help in the speed, for example, on onboarding, and onboarding for the customers, especially the smaller ones on the corporate side, is super important. That is helpful. So we actually also have a data point we have not talked much about, but we have a data point now on our small businesses. We have, for years, struggled with some outflow. Last year, we turned it and this year has actually increased quite nicely. And so I think the momentum is good. There is no silver bullet. 11% is a high number. So don't put 11% in year-on-year or quarter-on-quarter all the time, but I cannot see why we should not continue to show nice growth within the corporate side this year with the information we have right now. Ian? Magnus Andersson: Yes. And you're not feeling that you're sacrificing anything in terms of margins to achieve this growth? Frank Vang-Jensen: I think that we are well positioned to continue to delivering greater than 15% return, and that goes for the corporate business as well, and we are not accepting any deviation to our return targets. And of course, the business knows that. So I guess, I'm answering -- I'm happy with what I see right now. Ian Smith: Magnus, it's Ian here. So you're all familiar with how we think about buybacks, and there's absolutely no change. And as I look at the market expectations for 2026 in terms of buybacks, they look -- it looks like a pretty sensible estimate versus how we're thinking about it. So no interruption to the progress there. You're right, the EUR 500 million program we launched before Christmas, which is -- we hand over the control of that to the broker in terms of levels of execution and things finished a little earlier than planned. Q1 was an interesting quarter from a capital perspective. As you see from our disclosures, we generated capital as normal, as you'd expect Nordea to do. And quite a lot of that was deployed into growth. And we saw a little bit of elevated market risk capital requirements, as you can imagine, emerging from what happened in March. So it's one of the first times where we've seen those dynamics where we've deployed the capital generated into growth. We're still really comfortable with our plans for the rest of the year in terms of capital return to shareholders, and I say, I think the market's got that right. We still see opportunities for growth out there. And so we'll work through Q2 and make our decision on the right time to do another buyback. And that's really when we've got excess capital that we're prepared to trim. So things are proceeding as normal. I don't expect anything in the very short term but you can expect us to continue with our regular, consistent buybacks during the rest of '26. Operator: The next question comes from Andreas Hakansson from SEB. Andreas Hakansson: Well, I really want to talk about capital, but since Magnus covered that, we could move on. I think it's quite refreshing that we are talking about growth rather than just capital distribution. But Ian, you mentioned that retail is still a bit tough on the margin side. Could you quickly because we -- in Q4, we were a bit worried about the NII in Norway and then we were a bit worried about retail asset quality in Finland. Could you just briefly go through the 4 countries, what you see in terms of volumes, margins and asset quality in each of the countries, please? Ian Smith: So let me start with -- and Andreas, let me start with asset quality, take that one off the table. No issues or concerns there at all. And so we can set that aside. I think the growth picture in each of our markets is, as always, a little bit different. We still -- as you see from the publicly available information, we're still the market leader in Sweden in terms of capturing front book share. And in our other countries, things are a little bit slow. We do see underlying growth in Norway, particularly towards the end of the quarter. So -- and this is really a function of the market and its slowness. Frank referred earlier in the conversation to the still reticent consumer, I guess. We had -- our economist certainly had high hopes towards the end of last year that, that consumer confidence would increase and that would lead to higher investment and consumption. We've had an unsettling end to the first quarter that I think holds that back a little bit. And then in terms of what we're seeing on margins, still intense competition for those smaller volumes throughout. So we're having to be very much on our game in terms of managing our pricing. We've seen some positive price moves in Sweden, but we will have to see if that feeds through into margin improvements. And then very competitive in Norway, particularly among the savings banks. And so it's tough to increase margins in there. When it comes to the Danish market, you'll have seen some of our pricing moves, which is in response to the competition there. I think we see a good response from customers. And we're hopeful that feeds through into the numbers and the performance, and then Finland, as market leaders there, we really want to see the market move a bit more in order to see whether we can improve our NII. So that's on the lending side. Deposit is going well. Deposit margins are stronger than we had planned for and deposit volumes are good, and that's a really helpful contributor to NII. But there's no doubt that it's a tough market on the retail side and people are fighting for every, I was going to say, penny, but we don't have those in this market, every krona. Andreas Hakansson: And I mean... Frank Vang-Jensen: Sorry, but the sentiment in Q1 is better than it was in Q3 and Q4. So it's going slower than we would hope, but it is building somewhat and there's -- we sense there's more activity across the board. But it's different, as Ian mentioned, between the countries. Andreas Hakansson: And even if we don't see central banks hiking across the board until maybe late in the year and next year, we've seen that the IBOR rates in all markets have moved up quite sharply. To what degree is that helpful for your NII in the near term? Ian Smith: So it helps a little bit on the treasury side. And I can imagine that it might encourage all of us to look at pricing because essentially that's what drives a big chunk of the cost of funds for us. So I can see that it might encourage a slightly positive development, but we really have to see the policy rate changes come through for it to start to move NII meaningfully. Operator: The next question comes from Martin Ekstedt from Handelsbanken. Martin Ekstedt: So first question, the staff reduction program that you've announced in Q1. So once implemented, this will deliver around EUR 150 million of annual cost savings, right, which is about 25% of the EUR 600 million of gross cost takeout that you mentioned that you see in November. So as such, I was just wondering, should we expect 3 more cost reduction programs of roughly the same size in the years leading up to 2030, i.e., the end of your CMD plan? Or will other parts of the EUR 600 million of gross cost takeout be less lumpy, say, and less noticeable and come from other areas? That's my first question. Ian Smith: Yes. Martin, thanks for the question. No, we're pretty clear that we don't expect to launch another restructuring program. We tested ourselves pretty hard before launching this one about whether it was the right thing to do, both in terms of the way we manage our workforce and other factors. The reality is that we will need to reshape the workforce, particularly in technology. And that's where the focus of the restructuring has been. And everywhere else, our cost reductions are expected to come from sort of regular management of FTE because we will see FTE come down, but that's not going to come through large restructuring programs and other initiatives such as infrastructure simplification and AI. And of course, the restructuring is big. It's a very important contributor. And those EUR 150 million of cost savings, yes, they're 25% of the EUR 600 million gross, but we think of it as almost 40% of the EUR 350 million net that we're committed to. So that's a long way of saying what I said at the beginning. No further cost restructuring programs. Frank Vang-Jensen: And for the remaining part -- Martin, it's Frank. So for the remaining part, of course, there are firm plans owned by a DLT member for each stream that will lead to these cost reductions needed to deliver on our promise of EUR 600 million gross, EUR 350 million net. So of course, there is an execution risk, but we know what to do, when to do it, how to do it, and we'll follow that development very, very thoroughly. Martin Ekstedt: Okay. Very clear. And then my second question then around the release of the management overlay buffer in full. That surprised at least me a little bit that you released it in full already in Q1 against the backdrop of increased geopolitical uncertainty. So could you tell us a bit more about how your thoughts went around provisioning in front of Q1? And what scenarios, if any, could prompt you then to start building up that buffer again? And additionally, perhaps, if I may, in what sectors or segments was collected provisioning strengthened by that portion of the management overlay that was used now rather than released? Ian Smith: Yes, it's an important question, Martin. So first of all, we wouldn't be releasing if we thought we had any prospect of having to restore it at any point. The key thing is having looked at what remained of a provision that was established for COVID 6.5 years or 6 years ago, we concluded that there was a portion that was clearly surplus. And clearly surplus, not just in respect of its original purpose, both from a thorough review of the portfolio, looking at stress scenarios, looking at our estimate of the impact of the energy prices caused by the escalated conflict in the Middle East. So we've looked at this from every angle exactly as you'd expect. And each time we came up with of those EUR 276 million of provisions, we would keep EUR 116 million and deploying those into our IFRS 9 model. So no longer a sort of separately categorized provision and that EUR 160 million was clearly surplus. And then in those circumstances we released. Now releasing provisions, we've been pretty clear, I think, that in 2026, we would take action on the management judgment buffer. We think it's now the right time to move on and we maintain healthy provision levels, good coverage and have addressed any small areas of concern in the portfolio but these have been small in terms of how we deployed that EUR 116 million. Martin Ekstedt: Okay. So the EUR 116 million was not earmarked for any particular part of the portfolio? Ian Smith: It has a number of different components. My point is that it's not -- the bulk of it is not targeted at anything specific. It was really a granular EUR 10 million here, EUR 15 million here, that kind of thing. So... Operator: The next question comes from Markus Sandgren from Kepler Cheuvreux. Markus Sandgren: So we've been talking a bit about cost savings. I was just curious, now it seems like there is new AI tools for cyber criminals. Is that something that you have -- that is changing your view on cost development? Or is that already taken care of, so to speak, in your program for IT development? And secondly, I was thinking about also credit losses, as Martin was alluding to. Now with the strengthening of the provisions, the 10 basis points that you have in your business plan, is that just a conservative number? Or is that what you actually think you will have in the coming years? Frank Vang-Jensen: This is Frank. Thank you for the question, Markus. So the first one regarding cyber. I would say there's nothing new here. It would be wrong to say that we fully understood the Anthropic question and understood what it will create. But we have been all the time, very clear about that AI will grow and it will accelerate the growth when it comes to quality, and also what it would be able to do for us, for our customers, for our efficiency, for our shareholders. And so -- but of course, misused, it can also be used again against any company, any organization, any country you want. And I think that what we see here is an example of that. That tool was not built for criminals, but it can be misused by criminals. And in wrong hands, it appears to be quite strong. We have always planned for that. And the way we see it is that you have to continuously improve and strengthen your skills and your defense within cybersecurity, information security, you have to believe that the counterparts or the criminals will have the same capabilities or even better than yourselves, which means that you have to continuously invest significantly and that is what we have in our plan. So I think no big change. I think it's just not a proof point how fast AI is developing and you must embrace it, you must deploy it. Doing so, you will get a tool that can be helpful for different purposes, and it can be defense, of course, as well. That's the best I can say. Ian, over to you. Ian Smith: Yes. Markus, so the way we think about credit losses is we have guided as 10 basis points as the, I guess, long-term expectation. I'll come back to what expectation means in a moment, but of the portfolio loan loss levels. Of course, within that, you have our household loan losses, which are much, much lower than that. And the corporate loan losses that from time to time are double digit, so between sort of 10 and 15 basis points. The reality is, over the last 6 years, we've always been well within our 10 basis points, which says that the portfolio has been performing well and largely due to much lower levels than normal of corporate losses. So the corporate portfolio has been extremely robust. At the Capital Markets Day last year in November, I said that despite that experience, I don't think I can stand here and say that we would always expect to see such low levels of losses and so renewed our guidance for 10 basis points. But we'll always strive to keep it well within that. So 10 basis points is the guidance. It's a composite for the full portfolio performance but our track record is much better than that. Operator: The next question comes from Shrey Srivastava from Citi. Shrey Srivastava: My first is if we do see 1 or 2 rate hikes materialize this year, how would you expect pass-through behavior would be to deposit customers relative to the much larger hiking cycle that we had a few years ago. And my second one is, we obviously saw the news about Avanza's Danish expansion citing 5 years to be profitable. Is this something you factored in to your business plan? And if not, how does it affect your outlook? Ian Smith: Shrey, it's hard to prejudge what banks will do when faced with rate hikes, but I know you're asking for my opinion rather than a prediction. I can't see why -- I mean, particularly at these levels where we've looked at what we saw in the last rate hiking cycle, there was a reasonably high level of pass-through on rates at these levels. When they were getting much higher sort of north of 350, that kind of thing, a much different story because I think you end up creating an unsustainable position. So I think it's reasonable to assume a fairly high level of pass-through at these levels. But we'll have to see when they actually happen. Frank Vang-Jensen: And in regard to Avanza, fully as expected, no surprises. We have been planning for more of the platform players coming, and we are investing heavily in that area already and will continue to do so. So I'd say that, no, and it doesn't really make any difference to us. Operator: The next question comes from Namita Samtani from Barclays. Namita Samtani: The first one, just on net interest income. Can you help me think about it beyond 2026, please? Because the rate sensitivity for 2027 on Slide 19 looks flat based on the first quarter, and consensus has net interest income going up 5% in 2027. So do you think the volume growth can more than offset margin pressure and the negative impact from the hedge? And my second question, I read this article in Borsen about Nordea's own employees opting out of having a pension with Nordea in Denmark citing IT issues related to integrating the acquisition of Topdanmark a few years ago. I just wondered what's being done to fix this? And why is the pension side in Denmark not as slick as what we can see, for example, in Sweden? Frank Vang-Jensen: Let me take the first question about the paper that you read in -- apparently in Copenhagen. So our acquisition of Topdanmark's Life & Pension business is fully aligned with our plan. That business is an SME business, and we wanted to be an SME business. It has taken some time to get it separated from the seller, which we knew, but it has been difficult from the seller to separate it as it should be delivered on its own legs and not integrated as the seller's systems. That was delivered, as I remember, 12 months ago, and since has the job been about integrating it fully into our systems, and raising the quality and, of course, of the interface, so it meets the Nordea standards. And they are high, much higher than what this company came from on digital capabilities, which we knew. So no change. Then there are some that are, for example, brokers that would like to see that we were attacking and more and more active on large corporates in Denmark. But that's not our focus, and it has never been our focus with this -- our intention with this company right now. So we're actually very happy with the acquisition, and it progressed well. It has taken longer due to the seller's problems by separating the company, but we have full control now and are working with the plan to get it up to the standard that you should expect from Nordea. Then it might be that we one day will go to the large corporate sector as well, is very competitive, profitability is low. It might be we will go there. And when we will potentially go there, of course, we should offer our own employees to be -- to put the pension scheme, which is a group scheme for Danish employees to that company. But it has been fine with the current company for many, many years. So -- and we are not going to change anything for the sake of our own pension scheme as we are happy with that. So that's the facts around that acquisition. I think it was -- it came out a little bit different in this paper. Ian, over to you. Ian Smith: Yes. Namita, so on 2027 NII, we're not ready to actively plan for NII improvements and rate hikes at the moment. So I think it remains a scenario. And I think our Slide 19 is a good way to model the impact of that scenario. We've always been, I think, fairly consistent in showing those, the impact in both the first 12 months and then beyond of a 50 basis points movement. So our guidance has always been based on how we thought about things at Capital Markets Day last year, which is that the drivers of net interest income will be volumes and margins. We were planning for volume growth, both on the asset and liability side and margin stability. So we weren't baking in improvements in margin and a fairly neutral position on the hedge. I think that's still the right way to look at it. We do see, as I talked about earlier, some quite sort of tough margin pressure on the household side and we're absorbing that at the moment. But I think when we look out to 2027, growth in volumes on both sides of the balance sheet and margin stability is probably the right way to think about it. Ilkka Ottoila: And operator, we'll take the last question now. Operator: The next question comes from Nicolas McBeath from DNB Carnegie. Nicolas McBeath: So I was wondering, given the more positive view on productivity improvements that you mentioned through Q1 from AI, I guess, in particular, in software development, do you see potential to speed up the Nordic scale initiatives for these processes that you talked about in lending and payments, for instance, as we went through at the CMD last year? And do you see potential then to reach the cost-to-income target for 2030 before the time line given that you seem to become more bullish on this technology? Frank Vang-Jensen: So it's a good question, right? So -- and I cannot give you a firm answer. But what I can say is that the quality of AI is increasing fast. And what also increased very fast is, I think, most companies understanding of where they can apply AI -- deploy AI. And when you look at the use cases we have as a foundation for delivering on our Nordic scale benefits, they are on -- we are on plan and we will keep being on plan. But I do think that we can do even more. It's very difficult not to conclude with what we see when it comes to quality and also different use cases we continue to learn more about. It's very difficult to conclude that we don't have more optionality than we had previously. So then the question is how fast can you deploy it and how fast can you take out the cost. That's still up to be concluded, I would say. But it clearly looks even more positive when I look at it and we look at it right now compared to just half a year ago. So we are leaning in. We also have to ensure that we understand the risks, and we are not taking too much risks, but we're leaning in and we are pushing now. And I think when I get questions about it, how I see it, my advice is embrace it, understand the risk, cope with the risk, but embrace it because it is quite impressive what it actually can do for you nowadays. Nicolas McBeath: All right. I appreciate that. And then just a quick final question, if I may. Given the improved market conditions so far you've seen in Q2 and the decline in interest rates, would you expect much of the market making losses that you mentioned in March to be reversed in the second quarter? Frank Vang-Jensen: Ian? Ian Smith: Yes. So Nicolas, what happened in March was very much a sort of isolated performance matter on a couple of specific bits of our market business. So we talked about desks in the euro and SEK area. We sort of closed out positions where we needed to and moved on. So I think the real question is are we back to normal levels of performance in our markets business following that pretty disruptive market incident, and the short answer is yes. So we're back to performing normally. Ilkka Ottoila: All right. Thank you all for participating. As usual, just come back to us if there's anything that we can do for you. So thank you. Have a nice day.
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.
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.
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: Welcome to the Metropolitan Commercial Bank First Quarter 2026 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Daniel Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. During today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin. Mark DeFazio: Thank you, Angela. Good morning, and thank you all for joining our call. We ended the year with momentum, meaningful visibility into our growth outlook. A substantial portion of our expected loan and deposit growth is already in the pipeline and expected to be realized in the first half of the year, with the balance building steadily into the back half. The visibility reflects signed client commitments, active onboarding activity and long-standing relationships rather than speculative assumptions. Our iGaming payments and HUD [Audio Gap] platforms are no longer conceptual. They are in integration stage. We have a line of sight into implementation time lines and client onboarding activity, which will allow us to provide increasingly specific guidance around when these initiatives will translate into meaningful balance sheet growth, fee income and a broader client engagement. With new investors joining us following the successful capital raise, this is an important moment to restate what defines the MCB business model. This is not a new strategy or a pivot. This is a continuation and acceleration of a long-standing plan that has been executed consistently over many years. MCB is led by an experienced management team with a demonstrated track record of delivering on growth initiatives. Our performance reflects disciplined execution, not opportunistic expansion, and our results speak to the depth and experience across the organization. Our growth profile is unmatched among peers, both within the New York City market and nationally. This outperformance is not limited to a single cycle or initiative. It is evident across multiple years of economic environments, underscoring the durability of our model. The initiatives driving our growth today were developed over many years and required extensive upfront investments, particularly in technology, infrastructure and risk management. Those investments are now largely complete. As a result, today's growth reflects execution on a well-planned strategy, not aggressive stretch targets or growth for the sake of growth. The magnitude of our growth opportunity is a direct result of the investment we've made in technology and talent, which are now fully embedded in the organization. MCB is positioned to comfortably support a substantially larger balance sheet while continuing to meet the evolving needs of a sophisticated commercial client. I would like to express my sincere appreciation to our employees, directors and clients for their continued dedication and contributions. Their commitment to excellence has been instrumental to MCB's sustained performance and will remain a key driver of our success in the years ahead. I will now turn our call over to our CFO, Daniel Dougherty. Daniel Dougherty: Thanks, Mark. Good morning, everyone, and thanks for joining the call. The press release does a good job summarizing the highlights of the quarter, but I would like to take a moment to emphasize the impressive ROATCE print of 15.6% and the successful follow-on equity raise, which was executed in March under challenging market conditions, thanks to everyone that participated. With that said, let's begin with a few comments on the evolution of the balance sheet during the first quarter. The loan book increased by about $235 million. The pace of loan growth is in line with our guidance of $1 billion in net growth for 2026. First quarter total originations and draws of approximately $524 million were printed at a weighted average coupon net of fees of about 7.24%. Payoffs and paydowns totaled approximately $287 million at a WAC of 7.37%. Our current loan spread guidance continues to drive new volume coupons well above 7%. Looking forward, our current loan pipelines remain very strong, with loan opportunities at various stages of underwriting totaling more than $1.2 billion. To add some additional context, the portion of the current pipeline represented by signed term sheets totals to more than $700 million. On the deposit side, our deposit growth continues to outpace our loan growth. In the first quarter, we grew deposits by about $363 million or approximately 5%. Over the course of the first quarter, our cost of deposits dropped by 15 basis points. The decline was primarily driven by the 2 late 2025 rate cuts made by the FOMC. The deposit verticals driving the bulk of the increase in deposits in the quarter were municipals, EB-5 and HOAs. The outlook for continued deposit growth in our existing verticals remain strong and our intent to continue funding all 2026 loan growth with deposits remains unchanged. As a normal course of business, we continuously seek new deposit opportunities. We currently have a couple of programs, namely our payments and HUD initiatives that are currently in the execution phase. Both of these initiatives are expected to become meaningful contributors to our deposit funding platform soon. Our net interest margin was 4.08% in the first quarter, down 2 basis points from the prior quarter. However, on a normalized basis, quarter-over-quarter, the NIM increased by about 10 basis points, a performance very much aligned with our recent guidance that each 25 basis point reduction in the Fed funds target rate should drive about 5 basis points of NIM expansion. Specifically, as discussed on the fourth quarter earnings call, the fourth quarter NIM of 4.10% was influenced higher by late year loan prepayments that drove above normal prepayment penalty and deferred fee income, resulting in a normalized NIM of about 4.02%. Looking at this quarter, we carried a cash balance well above normal. This was a result of deposit growth in excess of loan growth, the previously mentioned year-end 2025 loan prepayments and the capital raise. After conservatively adjusting for the outsized cash position, the first quarter normalized NIM print was about 4.12%. Now let's move on to some high-level comments on our income statement. Our first quarter interest income was down by about $2.5 million compared to the prior quarter. There were 3 primary drivers of this result. The first being the day count decline quarter-over-quarter, the elevated December loan payoffs, as previously mentioned, and to a lesser extent, the impact of rate resets that occurred late in the fourth quarter on floating rate loans. Importantly, on the other side of the ledger, interest expense was down by about $3 million, resulting in a flattish top line performance overall. Going forward, it is our expectation that top line growth will resume according to plan with at least 20% net interest income growth for the full year. We expect that the NIM will press higher over the course of the year toward 4.15% to 4.20% as the year progresses. Importantly, our expanding NIM forecast is not reliant on rate cuts. In fact, we have removed all rate cut assumptions from our current 2026 forecast model. On the allowance for credit losses, a confluence of events drove the reduction in the allowance in Q1. The primary drivers of the change were the charge-off of 3 loans totaling $12.3 million, a provision release of $2.6 million as we made enhancements to our ACL framework and improvements in the forecast for certain underlying macroeconomic variables. The 3 loans charged off this quarter included 2 unsecured personal lines and 1 out-of-market CRE loan. Using all channels available to us, we are actively seeking recoveries on each of these loans. We continue to work diligently toward the resolution of the credits that make up our NPL portfolio. Our core noninterest income continues to be relatively flat. However, we remain optimistic that our new initiatives related to payments and HUD activity will drive a meaningful uplift in fee income beginning in the back half of this year. Noninterest expense was $46.4 million, up $2 million versus the prior quarter. The major movements in operating expenses quarter-over-quarter were an increase of $3.8 million in comp and benefits, primarily related to an increase in the bonus accrual and restricted stock expense of about $3 million and seasonal increases in FICA and other payroll-related expenses of about $1.1 million. As well, we saw a $1.8 million decrease in technology costs. The primary driver of this decrease was related to a delay in the completion of the digital transformation project. In total, for the first quarter, digital project costs were about $1 million. With the Modern Banking in Motion conversion now expected to take place in May, we have penciled in about $2 million of related expenses to be recognized in the second quarter. I will now turn the call back to our operator for Q&A. Operator: [Operator Instructions] Our first question comes from Timur Braziler with UBS. Timur Braziler: Looking at the deposit growth, pretty impressive this quarter. Maybe just give us a little bit more color to the drivers there and the accelerating growth rates more recently. Is this the deposit engine kind of catching up to some of the lending activities? Is this something else? And just maybe give us a little bit of color on what's been driving that growth? And as you look through the rest of the year, kind of the projection on the deposit side? Mark DeFazio: Yes. So when you look at -- Timur, this is Mark DeFazio. When you look at the slide in our investor deck showing you all the different deposit verticals, we differentiate the deposits that are coming in from commercial clients or our retail platform versus specialty deposits. So this year, as Dan mentioned, HOAs, EB-5 and munis sit in our specialty deposit opportunities. So they're not driven by loan or commercial activity. They're driven by a very focused team of SMEs who are very experienced in these markets, and they continue to drive opportunity for the bank. And we continue to expand into different geographies, allowing us to better serve HOAs and municipalities as well. Timur Braziler: Great. And then maybe looking at the payment side, I know you had said that those are no longer conceptual lifts. Can you just maybe provide us an update on how some of those initial use cases are playing out? And then just remind us again of the type of cadence that we should expect from the increase in payment-related revenues as you go through this year and maybe next? Mark DeFazio: Yes. So this is Mark again. I'll work backwards on that. I'll be in a better position to give you some good financial guidance perhaps in the next quarter. But we are in integration, which means that our technology is being developed and being integrated into the bank's platform in order to service iGaming clients. So we expect to be in testing. We will be inviting 3 operators. We haven't decided what operators we're going to approach yet. Hopefully, in June through September time frame to come in and do testing, perform testing on transactions. We hope to be live in the end of the third, fourth quarter. But I'll be able to give you better guidance on its contribution toward the second half of the year. We believe it to be meaningful. The HUD, we have our HUD underwriter on staff. We are actively meeting with all of our nursing home operators. We expect to start to report this quarter the pipeline of HUD-related applications, and then we'll be able to give you some guidance on the fee income and the deposit opportunities that come along with that as well. Timur Braziler: Great. And then just last for me. The quarterly charge-offs, were those all driven by the loans identified last year? And maybe a similar line of questioning, just the linked quarter decline in the reserve, the specific reserves that were tied to the loans charged off? Mark DeFazio: Yes and no. There was a total of 3 loans. We have discussed 1 particular loan, which was roughly $4.5 million in the past. Well, actually 2 out of the 3 loans we talked about in the past. One, the out-of-state commercial real estate loan we have not talked about in the past. Out of the $12 million, I'm fairly confident that we'll recover $7 million to $8 million in this year. We are actively discussing a resolution with all 3 of these and I expect a good outcome, and I consider a $7 million to $8 million recovery a good outcome on these unsecured facilities. Operator: And our next question comes from Feddie Strickland with Hovde. Feddie Strickland: Just sticking with credit to start off here. Just to clarify, that loan from the third quarter of '25, you're still working through that one, right? These are separate loans from that particular relationship, correct? Mark DeFazio: That's correct. And we expect that relationship to get resolved as well very soon. We're getting through a legal proceeding in Mission, Kansas. We're highly engaged with a buyer for the property and the sponsor. We expect to have a full recovery not only with principal, but interest at the regular rate and all legal fees there. So we're optimistic there. We'll get that resolved hopefully in the third quarter -- second to third quarter. Feddie Strickland: Okay. Great. And just bigger picture then, I mean, it seems like you're on track for a pretty significant improvement in credit this year. Is there anything else on the horizon that's may be coming up for resolution that could push NPA to assets even lower? Mark DeFazio: No, no, no. We are going to go back to our normal trends of criticized and classified loans, which historically over 27 years have been extremely low. We had a little bit of a speed bump with, I would say, on the inside of 5 credits that we've been talking about for the last 1.5 years. The system workouts are inefficient, costly and timely, but I'm a patient person. I'm not looking and rushing to have an unsuccessful settlement. So they do linger a bit. But no, these are the same 5 credits that we've been working on, and we will get to the final resolution of them this year for sure. And Feddie, I just want to make another point, which I'm sure you know about. We feel that we are adequately reserved for those loans at this time as well. So going forward with the resolution, we'll either resolve these loans and get paid off or have a recovery. But we do not expect any further reserves associated with those legacy loans. I just thought that was important to mention. Feddie Strickland: Appreciate that, Mark. And just switching gears to the margin, it sounds like you guys still expect a pretty good lift in the margin this year even without rate cuts. Could you talk a little bit about the dynamics between maybe how much loan yields versus deposit costs are playing into that? It sounds like on the yield side, you got a little bit of a lift from cash going into loans. But I guess more specifically, what is the ability to lower deposit costs just as this mix shift over the course of the year? Daniel Dougherty: Feddie, this is Dan. The primary driver of the margin expansion is going to be repricing of the back book. This quarter, the maturing loan -- the paid-off loans had a pretty high coupon. We've got just a couple of tranches over the course of the next couple of quarters that are lower coupon paper. So as we replace that or renew that, we'll price it at higher coupons. Our ability to continue to reprice on the deposit side is going to be dependent on mix. So to the extent EB-5 continues its momentum, that will help drive down the cost of deposits. Of late, most of the -- 2 of the big contributors have been HOAs and governmental munis. Those tend to be at the higher end of the coupon stack, if you will. But again, if the mix kind of persists with EB-5 generating a noticeable contribution, that could help to drive down the cost of deposits as well. Mark DeFazio: And Feddie, I'd add as well, looking into '27, I think the deposits that we expect coming from HUD and iGaming will definitely bring down our cost of funds immediately. Daniel Dougherty: That's a significant opportunity. Feddie Strickland: Understood. That's helpful. And just one last one for me, just on expenses. It sounds like it's fair to assume the expense growth quarter-over-quarter probably slows here a bit just given your opening comments, Dan, and the $189 million and $191 million guide. Daniel Dougherty: Yes, we can stick to that guidance, Feddie. Operator: Our final question comes from David Konrad with KBW. David Konrad: A couple of quick questions, just to follow on from everyone else. On the funding side, as we move through and you've got the $1 billion loan growth guide, how should we think about the cash on the balance sheet largely from the capital raise working down throughout the year? So like how much of the $1 billion might be funded by the cash? Or is that kind of a 2-year outlook? But how should we work down the cash? Daniel Dougherty: We should see the cash working down in parallel with loan growth. So if you look at the average balance sheet, I think my average -- I carried about on average about $600 million of cash. It is my goal and my expectation that we'll work that down through loan growth towards a normal cash position, which is closer to $200 million for this bank. And when I made the NIM adjustment, I was really conservative. I only adjusted for $100 million. I'm well north of that in excess cash right now. So again, as loan growth continues, we'll work down that cash balance. As we sit here today, I've got second quarter growth fully funded with cash for sure. And I've got a good start on quarters 3 and 4 as well. David Konrad: And I guess, qualitatively, with that cash, your unique deposit channels, that should keep pressure off of other segments of deposits given that you have all this cash to fund loan growth? Daniel Dougherty: Well, we're not sitting on our laurels. We -- I am happy to carry an excess -- large cash position, and I've got no problem with that. So far this quarter, the trend continues. Deposits are coming in faster than loan growth. I expect that to normalize a little this quarter because my pipeline on the loan side is significant, signed term sheets totaling more than $700 million right now. So the pull-through on that is TBD, obviously, but again, the deposit growth continues a pace at a pace in excess of the loan growth. And I have no intention of slowing that down. I think the teams are -- intent to get out there and drive business. David Konrad: And then the last one for me might be a little bit trickier in a way. But in the Investor Day, we talked about maybe a target of 115 loan-to-reserve ratio. I think you're at 116 now, but you also made some methodology changes and economic changes. So maybe refresh the update of where we think, all else equal, obviously, credit quality could change, but all else, what you're thinking about a target reserve ratio? Daniel Dougherty: I think in the long run, the 115 is okay. It's going to take us a while to -- once we work our way through all the remaining NPLs are out there with reserves, that could come down a little bit. But through time, management's view on the reserve is that 100 to 115 basis points kind of makes sense for a commercial banking franchise such as ours that's growing at the pace we're growing. Operator: This concludes the allotted time for questions. I would now like to turn the call over to Mark DeFazio for any additional or closing remarks. Mark DeFazio: Thank you. I'd just like to say, once again, thank you to all of the investors that came in and invested in the more recent capital raise. And also, again, as I said many times, we don't take that commitment on your part lightly, and I'd like to thank all of our existing investors for their continued support, and look forward to meeting all of the investors as the years go on at different road shows. Thank you very much. Operator: This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time, and have a wonderful day.
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.
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 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.
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 day, and welcome to the WesBanco 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 John Iannone, Senior Vice President of Investor Relations. Please go ahead. John H. Iannone: Thank you. Good morning, and welcome to WesBanco, Inc.'s First Quarter 2026 Earnings Conference Call. Leading the call today are Jeff Jackson, President and Chief Executive Officer; and Dan Weiss, Senior Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for 1 year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of April 22, 2026, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Jeff. Jeffrey Jackson: Thanks, John, and good morning, everyone. Today, we'll walk you through our first quarter performance and share our current outlook for the rest of 2026. There are 3 key takeaways from the quarter. We delivered solid year-over-year financial results. We exceeded our year 1 financial targets for the Premier acquisition. And we stay disciplined in executing our strategy to position WesBanco for long-term success. Overall, it was a solid start to the year. Turning to our financials. For the quarter ended March 31, 2026, we reported net income available to common shareholders of $87 million, excluding merger and restructuring charges. That translated to diluted earnings per share of $0.91, up 38% from a year ago. On a similar basis, we reported pretax pre-provision earnings of $114 [ million ] an increase of 44% year-over-year. The strength of our first quarter financial performance was reflected in our returns on average assets and tangible common equity of 1.3% and 17.4%, respectively. Our capital position also remained solid with a CET1 ratio of 10.7%. That gives us flexibility to support growth and navigate the operating environment ahead. As we mentioned last quarter, developers continue to seek permanent financing or the sale of properties. During the first quarter, that drove elevated commercial real estate project payoffs which totaled $340 million during the first quarter and created a 1.4% headwind to our year-over-year loan growth. In fact, we have incurred a significant CRE payoff headwind of $1 billion during the last 9 months. Despite that headwind, our teams continue to execute at a high level. Loan growth was largely funded by deposit growth and our commercial pipeline has reached all-time record levels. Adjusting for the payoff activity, total loans grew 3.6% year-over-year. The commercial pipeline has increased 35% since year-end to a record $1.6 billion. And in the few weeks since quarter end, the pipeline has grown another $200 million to $1.8 billion. About 45% of that pipeline is coming from existing loan production offices and the former Premier footprint. Impressively, this pipeline does not yet reflect the benefit of our recently announced South Florida expansion. That team has hit the ground running and built an initial $400 million pipeline just in a few weeks. They are on pace to grow that pipeline by a significant amount as the year progresses. Even with elevated CRE payoffs during the first half of the year, and the potential of influence of geopolitical events, we continue to expect mid-single-digit year-over-year loan growth for 2026. Supported by our record pipeline and early momentum from our South Florida markets. A little over a year ago, we completed our transformative acquisition of Premier Financial. An acquisition that placed WesBanco among the 50 largest publicly traded banks in the U.S. When we announced the Premier acquisition in July 2024, we laid out clear financial targets for the first year including 40% earnings per share growth, a 1.3% return on average assets and a CET1 ratio of 9.6%, along with a tangible book value earn back in under 3 years. I'm pleased to say we delivered and, in many cases, exceeded our targets. Over the last 12 months, core EPS growth reached 49%. And [ ROAA ] was 1.3%. We also exceeded the pro forma CET1 ratio by more than a percentage point and shave more than a year off the dilution [ earn ] back, as our first quarter tangible book value per share of $22.45 is well above the June 2024 figure and nearly at the year-end 2024 level. In addition, we have been making other strategic investments that demonstrate our commitment to long-term sustainable growth. We continuously invest in digital capabilities and products like WesBanco One account and treasury management services to ensure we serve our customers how, when and where they want. At the same time, we continue to optimize our physical branch network. Over the past 4 years, we've closed 64 locations with limited customer traffic, including 10 of them in Northern Ohio that will close next month. We're selectively opening new financial centers in key markets and consolidating others into more central and higher-demand locations. Our loan production office strategy continues to perform well. We've opened LPOs in high-growth markets, including Chattanooga, Indianapolis, Knoxville, Nashville and Northern Virginia. We're seeing strong results as these teams deepen relationships and bring on new commercial clients. As these offices achieve scale, we add product capabilities locally as well as financial centers to better serve our growing client base. Chattanooga is a great example. We opened that LPO less than 3 years ago, and it has generated strong relationship-driven growth. That momentum supports the opening of our first Tennessee Financial Center this week. We anticipate that several other of our LPOs will follow this pattern within the next couple of years. I'm very excited about our recent expansion into Florida, which is a thoughtful extension of our long stated southeastern expansion strategy. Last month, we announced the launch of our commercial banking business across key high-growth South Florida markets, starting with Palm Beach and [ Broward ] counties. We brought on a seasoned team of nearly 20 professionals, including market leaders, commercial makers, credit underwriting and a client relationship support as well as a treasury management leader. These are attractive high-growth markets and ones I have come to know well during my banking career. I've worked with many of these bankers before and they consistently delivered top performance while maintaining strong credit discipline. Just as importantly, their client focus aligns well with our relationship-led approach, our Florida expansion also provides meaningful organic growth opportunities for our strong health care banking vertical. As the regional business, which is primarily focused on C&I lending develops, we will evaluate additional services and solutions, including retail financial centers, treasury, wealth management and mortgage offerings to deliver even a greater value to our clients. I would now like to turn the call over to Dan to walk through the financials and outlook in more detail. Dan? Daniel Weiss: Thanks, Jeff, and good morning. For the first quarter, we reported GAAP net income [ available ] common shareholders of $84 million or $0.88 per share. And when excluding restructuring and merger-related expenses, first quarter net income was $87 million or $0.91 per share. To highlight a few of the first quarter's year-over-year accomplishments, we generated strong pretax pre-provision core earnings growth of 44% grew core earnings per share by 38% and improved the net interest margin by 22 basis points and reduced the efficiency ratio by nearly 4 percentage points to 52.5%. Total assets of $27.5 billion include total portfolio loans of $19.1 billion in securities of $4.4 billion, Total portfolio loans increased 2.2% year-over-year, driven by commercial real estate and home equity lending and declined slightly on a sequential quarter basis due to elevated payoffs. We expect CRE payoffs to remain slightly elevated during the second quarter, but at a lower level than the first quarter before returning to a more normal historical level during the back half of the year, totaling $700 million to $900 million for the year. While very small, we ended our indirect auto program, [ as ] it's not core to our organic growth strategy, and at quarter end, it represented about half of the $325 million of consumer loan portfolio and anticipate that, that portfolio will run off over the next 3 to 5 years. Deposits increased 2% year-over-year to $21.7 billion in organic growth. We continue to be successful in remixing higher-cost certificates deposits into interest-bearing demand and [ of our ] remaining $2.7 billion CD portfolio approximately [ 1 billion ] matures in each of the next 2 quarters with an average rate of 3.48% and 3.2%, respectively. Our current 7-month CD rollover rate is 3.25%. Further, we started the year with $100 million in broker deposits, $50 million paid off early in the quarter, while the last of our broker deposits paid off on April 1. Credit quality continues to remain stable as key metrics have remained low from a historical perspective and favorable to all banks with assets between $20 billion and $50 billion over the last 5 quarters. [ Criticized ] and classified loans as a percentage of total portfolio loans decreased $49 million or 24 basis points from the sequential quarter to 2.9%, and while nonperforming loans increased $53 million sequentially, primarily due to 3 CRE loans across different markets and property types, none of which were office. The allowance for credit losses, the total portfolio loans at the end of the first quarter was 1.1% of total loans or $210 million. The decrease from the fourth quarter was primarily due to lower loan balances faster prepayment speeds and macroeconomic factors. The first quarter margin of 3.57% improved 22 basis points year-over-year through a combination of lower funding costs and higher security yields but declined 4 basis points sequentially. This decrease resulted primarily from lower net loan growth as well as modestly higher seasonal deposit contraction in the first 2 months of the quarter, which fully recovered by the end of March. Total deposit funding costs, including noninterest-bearing deposits declined 11 basis points year-over-year and 7 basis points quarter-over-quarter to 177 basis points. The first quarter noninterest income of $41.8 million increased $7.2 million or 21% year-over-year due primarily to the acquisition of Premier combined with organic growth. Service charges on deposit and digital banking fees improved due to increased general spending and higher transaction volumes from our larger customer base as well as organic growth from treasury management, which generated revenue of $2.5 million in the first quarter, representing an 82% increase year-over-year, reflecting record asset levels, which totaled $10.4 billion combined trust fees and net securities brokerage revenue increased due to the addition of Premier Wealth clients market value appreciation and organic growth. Noninterest expense, excluding restructuring and merger-related costs for the first quarter of 2026 was $143 million, a 25% increase year-over-year due to the addition of the Premier expense base which was only in the WesBanco expense base for 1 month in the prior year period. Higher core deposit intangible asset amortization from the acquisition and higher FDIC insurance expense due to our larger asset size. On a similar basis, operating expenses were down slightly from the sequential quarter, reflecting our focus on managing discretionary expenses and some onetime credits approximating $2 million. Please note that the first quarter does not fully reflect our strategic expansion into South Florida as the hiring occurred late in the quarter. If we turn to capital, all of our key ratios improved quarter-over-quarter. Our CET1 ratio, as of March 31, was 10.7%, which increased more than anticipated due to lower risk-weighted assets during the quarter. Based on the strategic investment that we're making in the Southeast Florida and other markets, we anticipate CET1 to [ now ] build 5 to 10 basis points per quarter for the remainder of the year, putting us on pace for 11% and CET1 target by year-end. Turning to the outlook. Our current outlook for 2026 includes our Southeast Florida expansion, which currently totals nearly 20 individuals and is expected to achieve positive operating leverage within 12 to 15 months and be additive to our long-term financial outlook. We've removed our previous rate cuts from our modeling and currently do not anticipate any cuts or increases during the remainder of 2026. We anticipate our second quarter net interest margin to rebound into the low 360s and then continue to improve into the mid- to high 360s during the second half of the year. This assumes, among other things, that the competition for loans and deposits remain stable, loan growth is fully funded by deposits and an upward sloping yield curve. Generally speaking, there are no meaningful changes to our fee income outlook for the last -- from the last quarter. [ Trust fees ] and securities brokerage revenue should benefit modestly from organic growth and be influenced by equity and fixed income markets. And as a reminder, first quarter trust fees are seasonally higher due to tax preparation fees. Mortgage banking should grow modestly over 2025 beginning in the spring, driven by recent hiring initiatives Total treasury management revenue should see increases from 2025 as the compounding effect of our services continue to expand and gross commercial swap fee income, excluding market adjustments, should be in the $8 million to $10 million range. Overall, we currently anticipate our quarterly fee income to grow in the 3% to 5% range year-over-year during the remainder of 2026. While we remain focused on delivering disciplined expense management, we are making strategic investments to drive long-term value for our shareholders. We're closing 10 financial centers during May and anticipate the annual savings of approximately $2 million to begin to be realized midway through the second quarter. Salaries and wages will increase, reflecting the South Florida expansion and the annual midyear merit increases, which take effect midway through the second quarter. Occupancy expense should be flat to slightly down compared to 2025 due to our branch optimization efforts slightly offset by our branch expansion initiatives in our new and existing markets, while equipment and software expenses are expected to increase somewhat as compared to 2025 as we continue to invest in products services and technology to improve the customer experience and drive revenue growth. In support of our organic loan and deposit growth model and our commercial lending expansion efforts, marketing is expected to increase to approximately $4 million per quarter. And based on what we know today, we expect our expense run rate during the second quarter to approach $150 million and then to increase a couple of percentage points in the third quarter from a full quarter of midyear merit increases. The provision for credit losses will depend on changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds and future loan growth. And finally, we anticipate our full year effective tax rate to be between 20% and 21%. This concludes my remarks. Operator, we're now [ ready ] to take questions. Operator: [Operator Instructions] And your first question today comes from Manuel Navas with Piper Sandler. Manuel Navas: I appreciate having us [ off for ] the comments. What are the funding expectations around the South Florida commercial lending team? And can you dive a little bit more into your ties to the area and the potential to add to that team? Jeffrey Jackson: Yes, sure. My -- I'll start with the [ tide ] in South Florida. As you may or may not know, I worked as a regional president in South Florida, when First Horizon bought Capital Bank, and really built out that team. And so work down there back in 2018 through essentially 2020, 2021. They're a very top-performing team, and so when the opportunity came around to bring them over to WesBanco, it just seemed like a perfect partnership. As I mentioned before, I kind of put together that team back at my previous employer. And so when you when you look at what they can do and where they're headed, I think it's going to be one of our big growth drivers for this year and future years. We are opening up 2 offices, as mentioned, Palm Beach and Broward. We would also follow up with 2 branches as well. So when you look at the funding piece, we are expecting them to provide a significant piece of funding their own loan growth and that will be followed up with 2 branch locations, which would -- we'd hopefully have opened by the end of the year. And -- but overall, we feel like it's a great growth market. And I think your other piece of that question was more expansion. We are looking at other markets there in Florida, as my previous history, I had the whole state of Florida. So we will be looking to add additional people when the right people come along, but I do believe, and as I mentioned in my prepared remarks, they have a current pipeline of about $400 million, and I feel like the loan growth and the revenue opportunities there will help propel us into the future. Manuel Navas: I appreciate that. Diving a little bit back into more deeply into the NIM outlook. Can you speak to more of the components there that should drive kind of the improvement across the -- from here? Can you have deposit declines beyond CDs what kind of current pricing levels on the loan book? Just kind of if you could walk through some of the wildcards there [ on the name ]. Daniel Weiss: Yes, sure, Manuel, I'll take that one. So we talked about kind of 3 to 5 basis points of NIM improvement here in the second quarter. A lot of that is really the repricing of the back book for both loans as well as securities and then kind of an assumption that we're going to fund the majority of the deposit or the loan growth with deposits in the second quarter. As you know and as you heard in my prepared remarks, we did see a little bit of outflow here in the first quarter in deposits, which is seasonally expected. It was just a little heavier than anticipated. And we also saw about $150 million of noninterest-bearing migrate into interest-bearing. So those 2 things kind of combined with the loan growth. You've kind of provided that headwind to first quarter margin. But if we think towards that 3 to 5 basis points when I talk to repricing, we do have about $400 million of fixed rate commercial loans, weighted average rate of about 4.25% that will mature in the next 12 months. Those will be repricing up almost 200 basis points into the low 6s, we've also got another $400 million of variable rate loans. These are those that would be repricing 48 to 60 months, roughly, that would be coming due in the next 12 months weighted average rate there is about 3.75. So that's going to provide some nice tailwind as well. And if we just think about other sources, securities cash flow that's beginning to tick up a little. We're kind of projecting around $275 million in security cash flows per quarter. And so that's going to reprice upward from kind of, call it, 3.3% up to about 4.75% to 5% depending on where rates are. So that's another nice pickup of about 150 basis points or so. And then, of course, as I mentioned in the prepared commentary, we do have a continued downward repricing of the CD book. So particularly that $1 billion of first quarter CDs that repriced down about 40 to 50 basis points, that's going to benefit the second quarter quite a bit. Similarly, the $1 billion in the second quarter of CDs that are maturing, those are going to reprice down about 25 basis points. That will begin to benefit second quarter and really kind of fully benefit third quarter. But I think those are probably the major items that I mentioned again in the prepared commentary that we did pay down the remainder of our broker deposits. So we had $100 million in brokered on the books at the beginning of the year, $50 million of those paid down kind of early in the first quarter, the other $50 million on April 1. So that also would provide I believe, some nice tailwind towards that 3 to 5 basis points of margin expansion here in the second quarter. Manuel Navas: I appreciate that commentary. If there is rate cuts, what would that impact this progression, if at all? Daniel Weiss: Yes. So we're pretty neutral. So I would say there's not a whole lot of movement one way or the other with rate cuts. Certainly, our commercial loan portfolio is 50% of that is variable rate, reprices within 3 months. But we'd also be able to reprice downward our deposits. Our FHLB borrowings are all mostly 1 month advances. And so we think that in a rate cut scenario or a rate hike scenario, which is now potentially on the table, we would be in a great spot. Operator: Your next question comes from Jake Civiello with D.A. Davidson. Jacob Civiello: Wanted to touch on the uptick in NPAs. So obviously, you mentioned that the 3 non-office credits were the driver? Can you provide a little bit more details in terms of what actually those credits were? Jeffrey Jackson: Yes, I can. They were -- as I mentioned, legacy Premier credits, they are all in 3 different markets, 2 are multifamily, and I would tell you that we feel like we're very well collateralized there and well reserved for those 3 and feel like that we will be working out of those. Once again, there were 3 credits. I think the other piece I would highlight is the [ C&C ] did tick down back to our kind of our normal range, sub-3%, which is top in our peer group. But we are looking at those NPAs. And do you still feel very good about working through those 3 credits. Daniel Weiss: It's also worth like kind of recognizing that those NPAs are nonaccrual loans are included in the [ C&C ] total. So that 24 basis point reduction in [ C&C ], that includes these as well. So continue to see positive momentum on the credit front. Operator: And your next question comes from Karl Shepard with RBC Capital Markets. Karl Shepard: Congrats on getting the Florida team in place. I wanted to start there. You highlighted the pipeline, I think, around $400 million. Can you help us understand maybe your expectations for how much of that you would think can close? And is that over the rest of the year? Or is there a little bit longer time line? Jeffrey Jackson: Yes. We -- I think that they will close their first deal this month. I would hope that by the end of the quarter, they would have anywhere from, this is a guess, but $100 million closed this quarter. And I would hope by the end of the year, anywhere from $300 million to $500 million closed could be more depending on the number of bankers we continue to add there. And that's just not loans. I mean, we're bringing -- we will be bringing over full relationships. Once again, we hope to have a couple of depository branches open soon. And this would also include fees and treasury management services and all those other things. I think it's going to be a heavy driver for us this year. And just while we're talking about it, just to bring up I think our overall pipeline, if I look back and compare it to last year this time, I think our pipeline last year was about $1.2 billion. Today, we said it nearly [ $2.3 billion, $2.4 billion ]. So if I look at that and then I also look at pay off is what we see today for the quarter. Today, we see about $100 million plus less payoffs than we saw in first quarter. So when I combined a much higher pipeline less payoffs that we see today, I feel very good about where we stand from a loan growth perspective for the rest of the year. Karl Shepard: Okay. That's helpful. And then I guess just on the payoff piece, I think you just said it, but I just want to clear it up too because I know the scenario is concerned. But I think last quarter, you thought [ $600 million to $800 million ] for the full year. I think you said $700 million to $900 million today. So the first quarter was maybe just a little bit of pull forward of stuff you thought was going to pay off. Is that a fair way to see it? There's really not much of a change in your expectation? And obviously, the pipelines are strong and the production looks solid as well. Jeffrey Jackson: Yes, 100%. Some of the payoffs moved to first quarter. As I mentioned, we see this current quarter less payoffs in the first quarter of over $100 million. And no, I think that's a perfect way to see it. The other thing I would add, just the first quarter is we had a couple of [ DFI ] loans that we decided we were not going to be in that business. And just to point out that we have a very, very, very small exposure, I think, less than $50 million to [ DFIs ]. And so we chose not to do a couple of those deals in the first quarter that could have given us some more loan growth. And then we did have a couple of deals really slide from first quarter to second quarter. So some of this is really just a timing issue with the loan growth. Operator: Next question comes from Russell Gunther with Stephens. Russell Elliott Gunther: Just following up on the pipeline discussion here. It would be helpful to get a sense of the mix and the yield, and then just in general, how you guys are thinking about pull-through rates relative to historical levels. Jeffrey Jackson: Yes, I think the mix, if I was to look at it, I would say it's probably 60-40 CRE to C&I would be my guess. And then the yields, I'm going to guess, the low to mid-6s from a loan yield perspective. Once again, I would also highlight that everything we do is a full relationship that has some level of deposits and treasury management services. As far as the pull-through, I don't see it being any different than what we've seen in the past from adding and closing business. Obviously, the new markets will have to measure that with Florida coming on. But once again, we feel very good about where we're at. And some of this loan growth is a timing thing, and I do believe we will see strong loan growth for the rest of the year. Russell Elliott Gunther: That's helpful, Jeff. And then switching gears from my second question here would be to capital. So CET1, roughly 10.7% today. You guys have a preliminary sense for the impact of the Basel III proposal on RWAs and CET1? And then would there be any shift in your appetite to consider repurchases? Daniel Weiss: Yes. Russell, I'll take that one. And great question. I think we're still obviously evaluating the impact there. But preliminary estimates kind of indicate that we would see a benefit to CET1 of about 5% to 6%. And so on a 10.7% ratio today, that's worth about 55 to 65 basis points. So that frees up about, call it, around $120 million or so in capital. And that certainly would provide opportunity to deploy whether that be through buyback or additional growth. But I think that certainly would accelerate the buyback view. So like I said in my prepared commentary, we are building -- we've built capital back very quickly here in the first quarter up to 10.7%. We were kind of projecting that to be closer to 10.5%. And of course, lower risk-weighted assets is what drove that extra kind of 20 basis points of CET1 here in the first quarter. But with the growth that we're anticipating from all of the things that Jeff has discussed, we expect that to slow down a little, the growth in CET1. But like I said, all of that being said, we do have today, 900,000 shares available for repurchase. I think that we're -- now that we're above 10.5%, that's kind of our target. I think that it offers us more flexibility to evaluate how we can deploy that capital. But as Jeff said, with the growth opportunity we have organically we're going to continue to evaluate there. Operator: [Operator Instructions] Your next question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Yes. Maybe just a clarification, Dan, for you on the expense guide. So I think you said approaching $150 million in the second quarter, and then a couple of percent growth, just so we were clear on that. So we should be looking for roughly $153 million or so or just below that in the third quarter. And then how -- is that kind of the normal run rate, including all the new hires at that point? I know it's an ongoing thing, but just trying to get a sense for maybe where we're going to end the year? Daniel Weiss: Yes. I'd say that $152 million to $153 million is probably a pretty good estimate for third quarter, as you said. But it is going to be dependent on the commercial hiring and the investments that we're making here throughout -- the market expansion. So today, that's where we're at. But if we end up taking any higher, that would be certainly very accretive to long-term earnings per share in that, we'd be hiring revenue producers to be putting on loans and fee income [ trader million service ], et cetera, into '26 through and begin to benefit us in '27. Daniel Tamayo: Okay. And I'm sorry if you guys talked about this, but are there any noncompetes that we need to be aware of for the new hires? Jeffrey Jackson: Yes. It's kind of they all have standard nonsolicitation agreements that we work through, that's pretty standard in our industry, and we are 100% behind working through that, making sure they comply with all those different nonsolicitation. There is no -- as far as the more noncompetes. Daniel Tamayo: Got it. Is there a time frame that we can think about that maybe starts to ramp after a certain period? Jeffrey Jackson: I would think that we would have significant progress from a ramping of business towards the end of the year for the Southeast Florida team. I would -- once again, we think that they would close anywhere from $300 million to $500 million in new loans between now and the end of the year, and it could be higher than that based on some deals we're looking at. So I think by third quarter, we'll have a very good feel in the third quarter where this team stands, but I have very, very high expectations of this team because I have worked with most of them in the past. And feel like they will be delivering a really great return for our bank. Daniel Tamayo: Great. And then maybe 1 more clarification for you, Dan. On the 3 loans that drove the increase in the NPLs. Were there reserve -- I guess overall reserves came down in the quarter or at least as a percentage of loans. Were there reserves -- incremental reserves taken on those 3 loans that were moved into NPL. And I know you said they're you're comfortable with where they stand now? I'm just trying to get a sense for coverage of those loans as we look forward. Daniel Weiss: Yes. No, there were not incremental reserves taken on them. As I said, they're as Jeff said, rather, they were generally well secured, well collateralized and certainly evaluated discussed, but nothing additional. Daniel Tamayo: Okay. Appreciate it. Jeffrey Jackson: Yes. Thanks, Dan. And the one other thing I'll mention is we have started hiring another team in Nashville, and they have just started as well. So there'll be more to come on that in future calls. Operator: And your next question comes from [ Hannah Wynn ] with KBW. Unknown Analyst: [ Hannah Wynn ] stepping in for Catherine Mealor. I just had a quick question on deposits. I know you mentioned your deposits were going to fund your loan growth. and deposits were flat for this quarter. So wondering where you see those trending for the rest of the year? Jeffrey Jackson: Yes. Typically, they're pretty seasonal in the first quarter where they drop and they come back to kind of flat in the second quarter, we start trying to build the deposit piece with most of our deposits historically been coming in the third and fourth quarters. So we do continue to see them. We are opening up a branch this week in Chattanooga, Tennessee, First Tennessee branch that goes along with our LPO strategy but that is really critical. We have also increased incentives on driving deposits and feel like we expect to fund our loan growth, the majority of it with deposit growth and as we have done in the last 2 years. Dan, I don't know if you want to comment any more on deposit growth. Daniel Weiss: No, I think you nailed it. I think one of the keys to is just you're getting those branches in the Southeast Florida market up and [ running ] take deposits. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Jackson for any closing remarks. Jeffrey Jackson: Thank you. And to wrap up, we remain focused on appropriate investments and disciplined execution of our long-term organic growth strategy. The successful integration of Premier, our continued expansion through loan production offices and targeted investments in high-growth markets have positioned the company well to continue delivering value for our customers and our stakeholders. Thank you for joining us today. We appreciate your continued interest in WesBanco and look forward to speaking with you at one of our upcoming investor events. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. [Operator Instructions] Before proceeding, we would like to mention that this presentation may contain forward-looking information about the TrustCo Bank Corp New York that is intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance or achievements could differ materially from those expressed or implied by such statements due to various risks, uncertainties and other factors. More detailed information about these and other factors can be found in our press release that preceded this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-K as updated by our quarterly reports on Form 10-Q. The forward-looking statements made on this call are valid only as date hereof, and the company disclaims any obligation to update this information to reflect events or developments after the date of this call, except as may be required by applicable law. During today's call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP. A reconciliation of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please also note that today's event is being recorded. A replay of this call will be available for 30 days, and an audio webcast will be available for 1 year as described in our earnings press release. At this time, I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead. Robert McCormick: Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, the President of TrustCo Bank Corp. I'm joined today, as usual, by Mike Ozimek, our CFO, who will go through the numbers; and Kevin Curley, our Chief Banking Officer, who will talk about lending. We're pleased to report that 2026 is off to a great start with net income of over $16 million, improving margin, positive return metrics and building momentum in our share buyback program. Net income improved in part because of strategic pricing of our time deposit products, which had the effect of reducing our cost of funds. Also, contributing to this growth was noninterest income generated by our wealth management department, which increased 9% quarter-over-quarter. The most meaningful part of the story and a matter of significant shareholder interest is that the loan portfolio is, as expected, repricing as loans booked at lower rates over the past few years are replaced by higher earning loans. As the loan portfolio reaches another all-time high this quarter, the positive effect of repricing is becoming more pronounced and is having a meaningful impact on our financials. The great results announced yesterday are further bolstered by our stock buyback program. As investors will recall, we repurchased 1 million shares during 2025 and have received authorization to buy another 2 million shares this year. In the first quarter of 2026, we purchased over 500,000 shares, putting us on pace to fully execute. We continue to believe that the best acquisition we can make is TrustCo Bank, and we expect that share repurchase will remain the centerpiece of our capital deployment strategy. Each of these pieces of our company strategy over the quarter generated significant improvement in our return metrics, highlighting our profitability, efficiency and capital leverage. Year-over-year, we saw return on average assets increased 10% to 1.02%. Return on average equity grew 14% to 9.66%. Our efficiency ratio was lower by 6% to 54%. Now Mike will get into the details. Mike? Michael Ozimek: Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for the first quarter '26. As we noted in the press release, the company continued to see strong financial results for the first quarter of 2026, marked by increases in both net income and net interest income of the bank during the first quarter compared to the first quarter of 2025. This performance is underscored by rising net interest income, continued margin expansion and sustained loan and deposit growth across key portfolios. This resulted in first quarter net income of $16.3 million, an increase of 14.1% over the prior year quarter, which yielded a return on average assets and average equity of 1.02% and 9.66%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.31% for the first quarter of '26 compared to 10.85% in the first quarter of '25. Book value per share at March 31, '26 was $38.32, up 6% compared to $36.16 a year earlier. During the first quarter of 2026, TrustCo repurchased 522,000 shares of common stock or 2.9% of TrustCo's outstanding common stock under its previously announced repurchase program that allows the company to repurchase up to 2 million shares or 11.1% of TrustCo common stock in 2026. We remain committed to returning value to shareholders through a disciplined share repurchase program, which reflects our confidence in the long-term strength of the franchise and our focus on capital optimization. Credit quality continues to be consistent as we saw nonperforming loans modestly increased to $21.5 million in the first quarter of '26 from $18.8 million in the first quarter of '25. Nonperforming loans to total loans increased to 41 basis points in the first quarter of '26 from 37 basis points in the first quarter of '25. Nonperforming assets to total assets was 35 basis points, up from 33 basis points in the first quarter of '25. Our continued focus on solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively in the current environment. Average loans for the first quarter of '26 grew 3.1% or $158.9 million to $5.3 billion from the first quarter of '25, an all-time high. Consequently, overall loan growth has continued to increase and leading the charge was the home equity lines of credit portfolio, which increased $50.8 million or 12.3% in the first quarter of '26 over the same period in '25 and the residential real estate portfolio, which increased $93.2 million or 2.1%. Average commercial loans also increased $17.1 million or 5.8%. This uptick continues to reflect our local -- very strong local economy and increased demand for debt. For the first quarter of '26, the provision for credit losses was $950,000. Retaining deposits has also been a key focus as we begin '26. Total deposits ended the quarter at $5.7 billion and was up $156 million compared to the prior year quarter. We believe the increase in these deposits compared to the same period in '25 continues to indicate strong customer confidence in the bank's competitive deposit offerings. The bank's continued emphasis on relationship banking, combined with competitive product offerings and digital capabilities has contributed to a stable deposit base that supports ongoing loan growth and expansion. Net interest income was $44.7 million for the first quarter of '26, an increase of $4.3 million or 10.7% compared to the prior year quarter. The net interest margin for the first quarter of '25 was 2.84%, up 20 basis points from the prior year quarter. Yield on interest-earning assets increased to 4.23%, up 10 basis points from the prior year quarter, and the cost of interest-bearing liabilities decreased to 1.79% in the first quarter of '26 from 1.92% in the first quarter of '25. The bank is well positioned to continue delivering strong net interest income performance even as the Federal Reserve contemplates whether or not to make rate changes in the months ahead. The bank remains committed to maintaining competitive deposit offerings while ensuring financial stability and continued support for our community banking needs. Our Wealth Management division continues to be a significant recurring source of noninterest income. It had approximately about $1.26 billion of assets under management as of March 31, 2026. Noninterest income attributable to wealth management and financial services fees represent 44.1% of noninterest income. The majority of this fee income is recurring, supported by long-term advisory relationships and a growing base of managed assets. Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $26.9 million, up $631,000 from the prior year quarter. ORE expense net came in at an expense of $50,000 for the quarter as compared to $28,000 in the prior year quarter. We're going to continue to hold the anticipated level of expense not to exceed $250,000 per quarter. All the other categories of noninterest expense were in line with our expectations for the first quarter. We would expect 2026 total recurring noninterest expense net of ORE expense to be in the range of $26.7 million to $27.3 million. Now Kevin will review the loan portfolio and nonperforming loans. Kevin Curley: Thanks, Mike, and good morning to everyone. Our average loans grew by $158.9 million or 3.1% year-over-year. This is an improvement over last quarter's report of year-over-year growth of $126.8 million. The growth was centered in our residential loan portfolio with our first mortgage segment growing by $93.2 million or 2.1% and our home equity loans growing $50.8 million or 12.3% over last year. In addition, our commercial loans grew by $17.1 million or 5.8% over last year. For the first quarter, actual loans increased by $37.7 million compared to the fourth quarter. Purchased mortgage loans, including refinances and home equity loans grew by $35.3 million and commercial loans were up by $3.3 million for the quarter. Our mortgage origination activity showed solid improvement during the quarter and year-over-year. Purchase loan volume was steady throughout the quarter. Refinance activity picked up earlier in the period with lower rates, then eased as market rates moved higher during the second half of the quarter. In all of our markets, rates were lower in the beginning of the quarter, decreased closer to 6.75% and have recently receded to 6% to 6.25% range. We continue to offer highly competitive mortgage rates with our 30-year fixed rate at 5.99%. In addition, our home equity products continue to offer customers lower cost alternatives to other forms of credit. Overall, we are positive about our loan growth in the quarter and remain focused on driving stronger results moving forward. Now on to asset quality. As a portfolio lender, we originate loans to hold for the full term, reinforcing our disciplined underwriting standards. Asset quality at the bank remains very strong. Our early-stage delinquencies for our portfolio continue to remain stable. Charge-offs for the quarter amounted to a net recovery of $39,000, which follows a net recovery of $14,000 in the fourth quarter and a total of $238,000 in recoveries over the past year. Nonperforming loans were $21.5 million at this quarter end, $20.7 million last quarter and $18.8 million a year ago. Nonperforming loans to total loans was 0.41% at this quarter end compared to 0.39% last quarter and 0.37% a year ago. Nonperforming assets were $22.8 million at quarter end versus $22.1 million last quarter and $20.9 million a year ago. At quarter end, our allowance for credit losses remained solid at $53 million with a coverage ratio of 247% compared to $52.2 million with a coverage ratio of 253% at year-end and $50.6 million with a coverage ratio of 270% a year ago. Rob, that's our story. We're happy to answer any questions you may have. Operator: [Operator Instructions] And our first question comes from the line of Ian Lapey with Gabelli Funds. John Lapey: Congratulations. Just a couple. So the provision more than tripled compared to a year ago despite really solid metrics in terms of your portfolio, and you mentioned stable early-stage delinquencies. So are you still -- you mentioned in the release a more cautious economic outlook. Are you still using the baseline Moody's forecast or are you doing something else? Michael Ozimek: Yes. So we are still using the baseline Moody's forecast. And I mean, what's really driving that increase in the provision, I mean, about half of it is loan growth and about half of it is that forward-looking component of the Moody's forecast that does have some of the economic factors looking slightly negative on the go forward. So that's what drives that calculation. John Lapey: Okay. And then the release mentions competitive pressure on deposit pricing. Can you just talk about is anything new, any new entrants or anything changing there? And what's your -- it seems like you're doing quite well in... Robert McCormick: I don't think there's anything new, Ian, but it's the same old, same old. A lot of the consumers are pushing for obviously higher CD rates. I think more than I've ever never seen before in my career anyway. Consumers have a magic number in their mind that they're pushing for. And you also have the natural competitors from the credit unions that we compete against. So they're tough competitors from a rate perspective. They don't have the same motivation and same issues that we have. So nothing really new, just those 2 popping up. John Lapey: Okay. And then lastly, on capital, what was the Tier 1 common equity ratio? And as you continue to repurchase shares, -- where -- what's your comfort level in terms of where you'd like to see -- where you'd be comfortable with that settling out? I know it was 18.4% at year-end. Robert McCormick: Yes. The share repurchase, we're taking it kind of one bite at a time and slower. Mike can comment on this if he wants. But we're taking it as we possibly can. We are fully committed and believe in the share repurchase, but we're certainly not going to jeopardize our capital position or our liquidity position to repurchase shares. We've always been known, you know, you've seen the way we run the place. We've always been known as well capitalized and very liquid by all measures, and we certainly wouldn't want to do anything to disrupt that. John Lapey: Okay. Good. And then do you have the CET1 ratio? I know it will be in the queue. Michael Ozimek: We haven't disclosed it yet, but I mean it's trending down the same way that the leverage ratio is trending. So we're putting that capital to work. John Lapey: Okay, great and congrats again. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Robert McCormick for any closing remarks. Robert McCormick: Thank you for your interest in our company, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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 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: [Audio Gap] Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Please go ahead. Dennis Shaffer: Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our first quarter 2026 earnings call. I'm joined today by Chuck Parcher, EVP of the company and President of the bank; Rich Dutton, SVP of the company and Chief Operating Officer; Ian Whinnem, SVP of the company and Chief Financial Officer; and other members of our executive team. This morning, we reported net income for the first quarter of $15 million or $0.72 per diluted share, which represents a $4.8 million or 47% increase over our first quarter of 2025 and a $2.7 million or 22% increase over our linked quarter. This also represented an increase in pre-provision net revenue of $3.8 million or 29% over our first quarter in 2025 and a $3.2 million or 3.8% increase over our linked quarter. Our first quarter highlights include the successful completion of the core system conversion of the Farmers Savings Bank that we acquired during the fourth quarter of 2025. As a result, our first quarter earnings include what should be the last expenses associated with the acquisition. These onetime expenses impacted our first quarter net income by approximately $400,000 or $0.02 per common share. For the quarter, core deposit funding increased organically by over $60 million. This allowed us to reduce brokered deposits by $25 million. This represents the sixth consecutive quarter in which we reduced the brokered funding. Our net interest margin expanded by 16 basis points to 3.85% as we continued our disciplined approach to managing our asset pricing and funding costs. Our earning asset yield for the quarter increased by 5 basis points over our linked quarter to 5.66%. Our cost of funds was 1.96% for the quarter, down 35 basis points from the first quarter of 2025 and 12 basis points from the linked quarter, while our cost of deposits was 1.81%, down 19 basis points year-over-year and 11 basis points sequentially. Our decline in funding cost was largely attributable to $125 million of brokered CDs that matured in late December that carried a weighted average rate of 4.23%. And we were able to replace and reduce these mature and brokered CDs with $100 million in brokered CDs with a weighted average rate of 3.87%, representing a savings of 36 basis points in addition to reducing the amount of brokered funding. Net interest income for the quarter was $37.8 million, which represents an increase of $5.1 million or 15% compared to the first quarter of 2025 and an increase of $1.4 million or 4% compared to our linked quarter. Despite loan balances being down, we had strong loan production across our footprint during the quarter that was offset by significant payoffs. Our lending teams generated $214 million of new loan production during the quarter that was offset by $83 million in early payoffs in addition to normal principal pay down. Our ROA for the quarter was 1.41%. Our ROE for the quarter improved to 10.97%, and our tangible book value per share improved to $19.70. Our continued strong financial performance and ability to consistently create capital gives us options as we think about the best ways to deploy our capital. Earlier this week, we announced a quarterly dividend of $0.18 per share, which is consistent with our prior dividend and the renewal of our stock repurchase program authorizing management to repurchase up to $25 million in outstanding common shares. During the quarter, noninterest income declined by $453,000 or 4.6% from our linked quarter and increased $1.6 million or 20% over the first quarter of 2025. The primary driver of the decline from our linked quarter was a $336,000 decline in card fees due to the typical elevated spending that comes during the holiday. The primary drivers of the increase in noninterest income over the prior year were a $190,000 increase in service charges, a $1 million increase in net gains on loan and lease sales and a $444,000 increase in other income related to reserves that have been established at our insurance subsidiary for claims that subsequently never materialized. Noninterest expense declined by $1.1 million or 3.6% from our linked quarter and decreased -- or increased $2.7 million or 10% over the prior year. The decline from our linked quarter was a result of a commission accrual adjustment in the fourth quarter of 2025. Our actual commission expense was $1.4 million lower than what had been accrued and was adjusted in the fourth quarter. We are now adjusting all accruals at least quarterly. The primary driver of the increase in noninterest expense over the prior year was a $2.2 million increase in compensation expense associated with increased salaries, commissions and medical expenses. In addition to annual increases, our average FTE employees increased from 520 in the first quarter of last year to 535 in the first quarter of 2026. Much of the increase in FTEs came from the employees that joined us through our recent Farmers acquisition. We also had $400,000 in other expenses that we believe will be the last significant expenses related to the acquisition. Our efficiency ratio for the quarter improved to 60.1% compared to 64.9% for the prior year first quarter. Our effective tax rate was 16.8% for the quarter. Turning our focus to the balance sheet. Strong loan production across our footprint was offset by significant payoffs during the quarter. Our lending teams generated $214 million of new loan production during the quarter that was offset by $83 million in payoffs in addition to normal principal pay down. This compares to the prior year's first quarter, when we originated $181 million in new loans and we experienced $21 million in loan payoffs. We consider these good payoffs, as they were successful real estate projects that were sold or taken to the permanent market. We also had a few loans to operating companies that were sold during the quarter and paid off their loans. Loan production grew with each month's production during the quarter from $49 million in January to $59 million in February to $106 million in March. During the quarter, new and renewed commercial loans were originated at an average rate of 6.52%, and leases were originated at an average rate of 9.03%. Additionally, our undrawn construction lines were $175 million at quarter-end compared to $161 million at year-end. We ended the quarter with a loan-to-deposit ratio of 92%. Loans secured by office buildings make up only 4.7% of our total loan portfolio. As we have stated previously, these loans are not secured by high rise metro office buildings, rather, they are predominantly secured by single or 2-story offices located outside of central business districts. We also have very little exposure to non-deposit financial institutions. As a commercial real estate lending bank, we are mindful of our non-owner occupied CRE concentration and continue to diversify our loan portfolio. At March 31, 2026, our CRE to risk-based capital ratio was 261%. While we experienced a reduction in total loans during the quarter, loan demand remains solid in each of our markets, and our pipelines continue to grow. At March 31, 2026, our residential mortgage loan pipeline was up 25%, and our commercial loan pipeline was up 102% over the prior year. We anticipate growing the loan portfolio at a mid-single-digit rate over the balance of the year. On the funding side, total deposits increased $35.4 million or an annualized growth rate of 4%. However, if we back out the brokered deposits, our core deposit balances grew by $60.4 million or 8% for the quarter. This represents 6 of the last 7 quarters in which we have grown our core deposit balances while reducing our cost of funds. Much of this growth came in interest-bearing demand accounts and in our savings and money market accounts. This increase in lower rate deposits, combined with our continued shift from brokered deposits to more core deposit funding, contributed to an 11 basis point decline in our cost of deposits from the linked quarter. Our deposit base remains fairly granular, with our average deposit count, excluding CDs, approximately $28,000. Other than the $523 million of public funds, which are primarily operating accounts with various municipalities across our footprint, we had no deposit concentrations at quarter-end. Our commercial bankers, treasury management officers, private bankers and retail staff continue to have success gathering additional deposits from our commercial, small business and retail customers, as evidenced by our organic deposit growth. We believe our low-cost deposit franchise continues to be one of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our securities portfolio as a significant source of liquidity. At quarter-end, our securities portfolio totaled $682 million, which represented 16% of our balance sheet, and when combined with our cash balances, represents 22% of our total deposits. Our securities are classified as available for sale and had $49 million or approximately 7% of unrealized losses associated with them. Civista's strong earnings continue to create capital, and our overall goal remains to maintain our capital at a level that supports organic growth and allows for prudent investment into our company. Earlier this week, we announced an $0.18 per share dividend based on the quarter-end market close of $22.79. This represents an annualized yield of 3.16% and a payout ratio of 25%. We view this as a sign of confidence management and our Board of Directors have in Civista's ability to continue generating strong earnings. Additionally, Civista's Board of Directors increased and renewed a $25 million common share repurchase authorization earlier this week. While we have not repurchased any shares over the past several quarters, our regulatory capital and tangible common equity ratios are strong and continue to grow. We continue to believe our stock is a value, and we'll continue to evaluate repurchase opportunities. During the quarter, we made a $768,000 credit to our provision and had net charge-offs of $716,000. The credit to our provision was attributable to lower expected losses due to lower outstanding loans and our continued strong credit metrics. Our ratio of the allowance for credit losses to total loans is 1.26% at March 31, 2026, which is consistent with the 1.28% at December 31, 2025. Similarly, our ratio of allowance to nonperforming loans of 135% was virtually unchanged when comparing the same periods. Other than the general concern over the impact of macroeconomic uncertainties, the economy across Ohio and Southeastern Indiana is showing no sign of deterioration, and our credit quality remains strong. In summary, we are very pleased with the continued expansion in our net interest margin, our ability to generate noninterest income from diversified revenue streams and to control our noninterest expense. We're also very pleased with our team's success in attracting more lower cost funding, which allowed us to continue reducing our dependency on brokered funding and anticipate mid-single-digit deposit and loan growth for the balance of 2026. Overall, 2026 is off to a good start, and our focus continues to be on creating shareholder value. Thank you for your attention this afternoon and in your investment. And now we'll be happy to address any questions you may have. Operator: [Operator Instructions] Our first question comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on the loan growth outlook. I totally get the moving pieces this quarter. I mean, it sounds like origination activity is quite strong, but the payoffs were a significant headwind for this quarter. I guess just as you look ahead, what gives you confidence that payoff levels will decline such that you can get back to that mid-single-digit pace of growth? Charles Parcher: We watch those closely. This is Chuck. We watch those closely. We've got a couple of other large ones we know that we're going to look at here in the second quarter, but we still think we're going to see some growth in the second quarter. And we feel like that mid-single-digit outlook is pretty good looking forward. I've got confidence in -- as Dennis mentioned in his comments, our pipeline today is twice as large as it was in the pipeline at the same time last year. And we just got to get those to the closing table. And our -- just based on the production we had in the first quarter, as Dennis also alluded to, our undrawn construction funds are $14 million higher at the end of this quarter than they were at the end of the year. So we feel good about kind of [ prognosticating ] out that mid-single digits. Dennis Shaffer: And first quarter typically is slower for us, too, Brendan, just because we do some construction-type commercial construction loans and stuff. And as Chuck alluded to, I think we put on a lot of balances there towards the end of the first quarter, and some of those were construction projects that we think those funds will draw up. Brendan Nosal: Okay. Okay. Maybe pivoting to the net interest margin. Heck of a lot of margin expansion this quarter, certainly more than I was expecting. Just as we look ahead, if we're in an environment where we don't get any more Fed rate cuts this year, how do you see the margin trending from this quarter's 3.85% level? Ian Whinnem: Brendan, this is Ian. So second quarter, we expect flat to maybe a little bit of expansion, 1 to 2 basis points. And then likely putting that in the mid- to upper 3.80s and then leveling out in the high 3.80s in Q3 and beyond. That's with no rate cuts being planned. If there is a rate cut, we expect that to be maybe 1 to 2 basis points lower. If there's a rate increase at the end of the year, it could be 1 to 2 basis points higher. Dennis Shaffer: And Brendan, we do have about $60 million of loans repricing in the second quarter and I think about $140 million after that for the remainder of the year. So a couple of hundred million dollars of loans will reprice from the 4.75% range to -- reprice today in the 6s. Operator: Our next question comes from the line of Jeff Rulis from D.A. Davidson. Jeff Rulis: Late last year, we had discussions of kind of the bank putting up $0.75 in quarterly earnings towards the end of '26, implying a $3 annual run rate. It kind of seems like you pulled that forward 9 to 12 months, you're basically at that -- at the core level. I guess as you think about where you reorient with kind of the outlook from here, not to put you on the spot of earnings, but I guess, how do you met that opportunity with also as you talked about the buyback? Ian Whinnem: I would say, Jeff, the part of the earnings lift this time was that provision. We didn't have to fund any loan growth. That's going to cost us a couple of cents every quarter, on top of the couple of cents reduction that we got this quarter. So from a normalized basis, that $0.72 is probably more in the mid-60s. So not quite into that run rate of $0.75 yet, but we do still anticipate getting there towards the end of this year, maybe into the first quarter next year. Jeff Rulis: Got it. Appreciate that. And then I guess on the expense run rate, I think we talked previously that as merit increases kind of kick in, in the second quarter, offset by maybe some -- the conversions complete. So just trying to walk through the quarterly progression, do you see sort of flat linked quarter on a core basis and then maybe in -- a little -- some savings? Or how do you see the outlook on run rate? Ian Whinnem: So excluding the nonrecurring items, we're at $29.4 million for the first quarter. So that would include some of the, I'll call them, duplicative operating expenses, pre-conversion, having 2 cores and some staff that's no longer with Civista. So we've also done reinvestment back into the company by hiring some revenue-generating colleagues, some marketing spend and some tech improvements. So with that, we're anticipating second quarter being $29.5 million to $30 million, and then probably a little bit of an expansion maybe to $30 million, $30.7 million in the third quarter and fourth quarter. Dennis Shaffer: But we have merit increases that took effect in the -- took effect April 1. So that's in those expense numbers that Ian's [indiscernible]. Jeff Rulis: Okay. And so any sort of cost saves kind of offset by investment kind of getting to that run rate that you outlined? Ian Whinnem: Yes, that's correct. Yes. It's helping to fund some of those cost investments or spend investments that were just mentioned. Operator: Your next question comes from the line of Adam Kroll from Piper Sandler. Adam Kroll: Yes. Maybe just starting on deposits, some really impressive core deposit growth during the quarter. And just given some of the recent investments you made on the tech side, I was just curious, how large of a contributor was the digital channel to that growth and maybe just overall prospects within that segment? Dennis Shaffer: Well, we think it's helping some. Most of our investments are aimed at making it easier to do business with us. So it is helping that some. We have all set up to do online account opening now with our digital apps and stuff. So we are getting that. The bigger thing that's helping us in some of the deposit growth, at least the organic stuff, is just some of the recent disruption within our marketplace. Ohio has had quite a bit of disruption. And we think by one of the investments we made in the technology and making it easier to do business with us. And then just that disruption, it -- we think we're very well positioned, I think, to attract new clients to the bank and to expand existing relationships. So our teams are doing a fantastic job with their calling efforts. We're being really collaborative, and we're going to market as a team. And I think through their efforts and making -- just making it easier to do business with us and that disruption, that's the reason behind a lot of that deposit growth. Adam Kroll: Got it. I really appreciate the color there. Sticking on the funding side, deposit costs came down quite nicely during the quarter. I was just curious, are you still seeing opportunities to reduce funding costs on both the maturity and non-maturity side if the Fed were to remain on hold? Ian Whinnem: So right now -- this is Ian -- if rates stay flat on the CDs that are maturing, we're renewing those or picking up these fees at about the same. Staying with those brokers, we're not going to see that significant increase that we saw from the Q4 maturities into Q1. So we have some wiggle room on some of our non-maturities. For the most part, I think most of that's passed and we will be staying about the same. Adam Kroll: Got it. And last one for me. Ian, I was wondering if you had the purchase accounting accretion number for the quarter? Ian Whinnem: I will have to follow up with you on that. Operator: Your next question comes from the line of Tim Switzer from KBW. Timothy Switzer: Well, first off, congrats on the retirement announcement, Dennis, and for Chuck on becoming CEO on the exciting news. Dennis Shaffer: Thank you. Charles Parcher: Thank you. Timothy Switzer: Most of my questions have been asked already, but the first one I had is on deposit competition. There's been some chatter about it picking up a little bit. Can you talk about what you guys are seeing in your markets and if there's any specific geographies or deposit categories where it's been a little bit more intense? Charles Parcher: I would tell you -- this is Chuck. I think it's almost equally intense across almost all of our -- at least our major metro markets. Obviously, the most banked of all the cities is Columbus, so we're probably seeing a little bit more pressure there from the rate side. But we've held our own pretty well, as you can tell by the deposit growth that we've had. And we feel like we're priced properly to continue to retain our clients and grow at that mid-single-digit pace. So it is very competitive. We're still seeing some banks with some 4 handles, and we're kind of in the high 3s right now, but we feel good about where we're positioned. Dennis Shaffer: We're really just focused on relationships, growing relationships and providing value and providing solutions for our clients. And again, I think attacking the market from a team perspective by bringing different business lines into meeting a lot of our business customers, I think it's been working for us, and that's really going to be our focus. And with that disruption, I think it gives us opportunity there. Charles Parcher: Yes. To Dennis' point, the disruption, some of the bigger players in our market, Huntington's, Fifth Third's, Park's, First Financial's are all working on acquisitions, not just in Ohio, but in other regions. I feel like their eye is off the ball a little bit on Ohio. Our biggest competition is coming from really, some of the smaller institutions. From a rate perspective, not from a, I guess, competitive perspective, but from a rate perspective. Timothy Switzer: Got it. Very helpful. And then the last question I had was in terms of credit. Any areas that have caused you guys to want to pull back at all, or any levels of concern? And do you have exposure to any end market that could maybe be exposed by the higher oil prices? Charles Parcher: Go ahead, Mike. Michael Mulford: This is Mike. No, we're not seeing anything that's market-specific or industry-specific right now that's causing us any concerns, especially to pull back on any areas. Operator: Your next question comes from the line of Matthew Breese from Stephens. Matthew Breese: I wanted to just touch on the NIM a little bit. I know you didn't have a accretable yield at your fingertips, but maybe you could help me out. To what extent the prepayment fees play a role this quarter in loan yields and the NIM? Was that a factor? And is that a factor in kind of your more stable guide in the back half of the year? Ian Whinnem: This is Ian. No, the payoffs really didn't impact the NIM that way. We got a little bit of fee income on those, just breakage fees, but nothing in the NIM. And as Dennis mentioned earlier, we have a lot of loans that are just going to be repricing in the remainder of the year. So they're going to be moving from these mid 4s into the low 6s. So that's the stuff that we saw come across the first quarter. And we'll continue to see for the remainder of the year, just some NIM lift coming from that. Dennis Shaffer: Yes. The biggest NIM lift again, was the repricing of that brokered CD and the reduction of it. So we reduced to $25 million, then we repriced $100 million and picked up 36 basis points. That was -- that contributed more. And then on the fee income side, it was just really -- most of those fees were generated by our residential mortgage teams and our leasing group, who both had much better production results than we had a year ago. So that's where a lot of the fees came from. Matthew Breese: Understood. You had mentioned just some of the fixed asset repricing. So outside of loans that are pure floating priced off of prime or SOFR, what is kind of the cash flow schedule and maturity schedule for fixed rate and adjustable rate loans for the rest of the year? And new origination yields I'm assuming are kind of in the mid- to high 6s. Is that accurate there? Dennis Shaffer: That's correct. On what's -- the repricing, we're somewhere in that 6.5% range as far as new loans going on and things that would adjust. Most of them are -- the real estate loans are written on 5-year adjustables, and the average margin on those are probably 2.75% over a 5-year treasury or so. Which will take us a little bit, maybe 6.5%, 6.6% today. And we're looking for your -- what was your other question? Matthew Breese: Just the loans that are either fixed rate or adjustable, kind of quarterly maturities or quarterly cash flows. You had mentioned that what's maturing is going from a 4 handle to a 6 handle. I just want to get some sense for how much is going to mature this year. Charles Parcher: I would tell you, over the next 12 months, we got a little over $200 million. Richard Dutton: Yes. $60 million of that -- this is Rich. $60 million of that will happen in the next quarter, in Q2. The balance of it is the rest of the year. Charles Parcher: Right. Matthew Breese: Got it. Okay. And then you had mentioned brokered being a big area of deposit cost pickup. How much of that is maturing over the next 3 quarters? And what are the rates -- or what is the estimated rate on the stuff that's maturing? Ian Whinnem: Yes. So we have some that's maturing in April or is maturing this month. That was at 3.70%, repricing a little bit under 4%. Then we have about another [ $125 million ] maturing still this quarter outside of April. That's in that 3.80% range. And then a little bit in September. Dennis Shaffer: We would stay relatively short on all of that. So it's going to reprice pretty close to where it's at, maybe a little bit higher. But again, our plan is to continue to gather deposits and reduce brokered. That helps offset some of that, too. Matthew Breese: Got it. Okay. Last one for me is just on [ Reg E ] production that you keep for yourselves and put on the balance sheet versus pursue the secondary market and gain on sale. What is kind of the breakdown of that? And did it shift more towards gain on sale this quarter? Just seasonality-wise, I would expect gain on sale to be down this quarter, but you were up modestly. I'm just curious, how that breakdown was? Charles Parcher: Our breakdown by number is usually -- or has been here for the last couple of quarters is about 60% sold, 40% portfolio. And I would tell you that from a balance perspective, that probably runs close to 50-50, just because the stuff that we have to hold on the balance sheet is usually some of our private banking, what I call physician loans and some of the higher balance things, higher balance construction. So dollar volume, 50-50, number, 60-40. And we feel like it's going to probably continue to trend that way. If we get any kind of blip downward in interest rates, we'll see a little bit more refinance action. And that refinance action is normally much more 80-20-ish that would be sold versus held. But that's kind of the run rate we've had here over the last couple of quarters. Operator: Your next question comes from the line of Adam Kroll from Piper Sandler. Adam Kroll: Just a follow-up for me. A pretty strong start to the year on the core fee income side. And I know leasing can kind of jump around, but I'm just curious, how you're thinking about core fee income growth for the remainder of the year? Ian Whinnem: Yes. So for the noninterest income, so as you mentioned, strong first quarter, had a good recovery on the mortgage and CLF when compared to this time last year. We did have a captive reinsurance reserve release that occurred in the first quarter that would be nonrecurring and only a small amount of security gains. So when we adjust for the seasonality of gain on sale, thinking that Q2 comes in between $9.1 million and $9.5 million and then maybe increasing another $0.25 million in the third quarter just due to seasonality on gain on sale. Operator: Your next question comes from the line of Daniel Cardenas from Brean Capital. Daniel Cardenas: Just a quick question. Given the market disruption that we've seen in Ohio, what kind of opportunities is that presenting for you on the talent addition side? Charles Parcher: It's been really good for us, to be honest with you, Dan. I mean, we've had a lot of -- not moving as far as lenders moving out, but we've reassigned some people, people got promoted, et cetera. And we've done a really good job of picking up talent from those institutions that have had some M&A activities with them. The one we still benefit from, even though it's probably the farthest one away, is the whole WesBanco/Premier piece. We've continued to get some talent from that area, but it's probably the one that we've probably got the most talent from in our entire organization. But it's been good. And everybody is sitting around our table right now is continuing to get calls from some of those institutions to see if they got -- if we've got opportunities here. Probably our most recent acquisition came from the Westfield deal that got sold. We just -- our new Treasurer just came over and started a month ago from their institution. So it's been really good for us to be able to upgrade talent. Daniel Cardenas: Excellent. And then I know you just completed the FSB deal, but as you look at future acquisitions, I mean geographically, where do you see yourself targeting? Charles Parcher: You want to take -- I mean, I think we're going to be very similar. Our thoughts are still very similar to what they always have been. Ohio and the adjoining states is probably as far as we would look right now. And obviously, if it's fill in, it would be a little bit more preferable than to an add-on in some of those locations. But I think that we're not going to jump to Tennessee or to South Carolina or whatever. We're going to kind of stick to our knitting and stay within our marketplace right now in Ohio and the adjoining states. Dennis Shaffer: Yes. And I would just say, Dan, that our first priority really is on organic initiatives that create sustainable value for the company. We made -- as I mentioned, those -- we've made a lot of investments in technology that makes it easier to do business with us. And with all that disruption, we think we're really well positioned to attract new clients and deepen those relationships. We continue to maintain pretty good dialogue with a lot of the banks within our footprint here. But anything we would do, I think will need to create great strategic value for us and be financially compelling. But the first -- our main focus really right now is on building capacity from within and prioritizing just some of that organic development. Operator: There are no further questions at this time. I will now turn the call over to Mr. Shaffer. Please continue. Dennis Shaffer: Okay. Well, in closing, I just want to thank everyone for their investment in Civista and for joining today's call. Our first quarter results, I think, were due in large part to the hard work and discipline of our team. I'm very pleased with this quarter's accomplishments, our strong financial results and just the disciplined approach that we have here in managing Civista. And I remain very confident that we are well positioned for long-term future success. So I look forward to talking to you all again in a few months to share our second quarter results. Thank you for your time today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day and thank you for standing by. Welcome to the Goosehead Insurance, Inc first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Maddie Middleton, Senior Director of Investor Relations. Maddie Middleton: Thank you, and good afternoon. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on expectations, estimates, and projections of management as of today. Forward-looking statements in our discussions are subject to various assumptions, risks, and uncertainties that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore, reliance should not be placed on them. We refer all of you to our recent SEC filings for a more detailed discussion of risks and uncertainties that could impact future operating results and financial condition of Goosehead Insurance, Inc. We disclaim any intention or obligation to update or revise any forward-looking statements except to the extent required by applicable law. I would also like to point out that during this call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons period to period by including potential differences caused by variations in capital structure, tax position, depreciation, amortization, and certain other items that we believe are not representative of our core business. For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast, and an archived version will be made available shortly after the call ends on the Investor Relations portion of the company's website at fusehead.com. Now I would like to turn the call over to our CEO, Mark Miller. Mark Miller: Thanks, Maddie, and good afternoon, everyone. Thank you for joining us today for our first quarter 2026 earnings call. I would like to begin by welcoming John Martin as our new Chief Financial Officer, succeeding Mark Jones Jr., who has been promoted to President and COO. John brings a strong combination of financial expertise, operational discipline, and a background rooted in technology and e-commerce, which aligns well with our focus on execution and our high-performance culture. The team is excited to welcome John and I know he looks forward to engaging with our investors and analysts in the quarters ahead. We are equally thrilled to see Mark expand his leadership responsibilities. John will report to Mark, and I will work closely with both of them, continuing my role as CEO. These leadership announcements are evidence of our commitment to a comprehensive succession plan and our focus on ensuring Goosehead Insurance, Inc has the right leaders for today and well into the future. Let me start by reinforcing something we have said consistently: Goosehead Insurance, Inc is a compounding business designed to drive long-term growth in policies in force, revenue, earnings, and ultimately, cash flow. We achieve that by operating a highly scalable distribution platform supported by world-class service. For the first quarter, we delivered strong and consistent financial results, with revenue growing 23% to $93 million, core revenue growing 15% to $79 million, and adjusted EBITDA of $24.4 million. Last quarter, we spent a significant amount of time discussing investments we are making in our digital agent platform and AI initiatives. We have been very intentional in prioritizing long-term value creation while managing to strong and sustainable margins in order to maximize shareholder returns. Today, I want to focus on the strong start to the year and how the investments we have been making are beginning to translate into tangible business results. Goosehead Insurance, Inc has always been a technology-forward distribution business, but over the past several years, technology has become even more deeply embedded in every part of how we operate. What is in front of us today is what I believe is the single largest opportunity our business and the broader personal lines industry has ever seen. In nearly every industry, customers have the ability to choose how they want to interact and transact. That has not existed in the independent personal lines insurance space—until now. Choice has always been part of Goosehead Insurance, Inc’s DNA. Historically, that choice has been centered around access to a broad set of carrier partners. We have proven that we are a market leader, providing clients coast to coast with access to over 200 underwriting partners. But today, we are expanding that definition of choice. We are now giving clients a choice in how they prefer to actually transact. For the first time in the United States, clients can shop, quote, and buy insurance through a true choice model—whether that is fully digital, partially digital, or entirely human-driven. During our last earnings call, we announced we went live with this capability with multiple auto carriers in Texas, including partners like Progressive, Liberty Mutual, Mercury, and Root. Today, we are excited to announce that clients can now digitally buy multiple homeowners products in Texas with carriers such as SageSure and Mercury. This is an important milestone in building a large-scale digital marketplace, which is now that much more achievable because of the real demand that now exists with our carrier partners. Carriers want this capability, and they want it specifically with Goosehead Insurance, Inc because of the trusted relationships we have built over decades, our access to large amounts of integrated data that drive better underwriting outcomes, and our differentiated go-to-market strategy executed through highly curated client acquisition channels. At the same time, the broader insurance shopping experience—particularly online—remains fragmented and often broken. You may see advertising across social media for AI insurance agencies that claim they can bind and service autonomously or headlines that declare instant best rates. Those false claims end up generating terrible experiences for the end user. Customers are frequently routed through lead aggregators and data resellers, creating the illusion of choice but ultimately leading to confusion, lack of transparency, and in many cases, poor coverage decisions. Goosehead Insurance, Inc’s digital agent platform is solving these pain points. We are delivering real choice, not just in product offering, but now in purchasing experience. And by implementing this platform with a targeted audience through our partnerships, we remain the trusted adviser our clients and carrier partners rely on. In the area of AI, we are now seeing tangible benefits as we roll out multiple use cases across our service organization. “Lily,” our AI-powered virtual phone assistant, is now fully resolving approximately 19% of all inbound calls without requiring transfer to a live agent. This improves speed to resolution for our clients and allows our service teams to focus on more complex and consultative interactions. In addition, we have deployed tools behind the scenes in areas such as intelligent case routing, which has allowed us to reinvest roughly 40 full-time service team members toward more complex and value-added interactions. These tools are driving real-time efficiency gains, while also adding scalability to what has historically been the most complex and labor-intensive part of our business. All of this progress is occurring alongside a rapidly improving product market. Our carrier partners are increasingly leaning into growth across both home and auto products nationwide. As pricing stabilizes and product availability expands, we are seeing consistent improvement in many of our key operating metrics. For example, our client retention continues to climb at a steady pace, and we expect to achieve 86% client retention during the year. Bind rates and package rates are increasing, supporting higher agent productivity. Given these strong market conditions, we believe the time is right to more aggressively expand our offensive capability with more agents and more geographies. When we spoke to you in February, I commented that we had fundamentally reset the corporate agent footprint. At that time, we had expanded into new geographies like Tempe, Arizona and Nashville, Tennessee. We are continuing to make excellent progress on this initiative. During the quarter, we opened three additional corporate offices in Seattle, the Washington, D.C. area, and Minneapolis, and we had a fourth opening in April in Indianapolis. As of the end of the first quarter, we now have more than half of our corporate agents outside of Texas. These three offices are outperforming our expectations, but even more importantly, these offices serve a strategic purpose that far exceeds the short-term production they generate. They are quickly diversifying our agent base, making Goosehead Insurance, Inc an even more attractive partner for our major national carriers. And these offices are talent incubators for future franchise ownership. Since the beginning of the year, we have launched 12 new franchises out of our corporate offices, all of which are outperforming the average franchises we have launched from outside of our ecosystem. In just their second month live, these 12 launches contributed new business production that was nearly 2.5 times the average franchise. Our existing franchise base also continues to lean into growth, with 133 franchises hiring at least one producer during the quarter, generating nearly 50% increase in gross producer adds year over year. As agencies continue to focus on hiring and driving productivity, they are reaching new highs with 208 franchises hitting monthly production records during the quarter. On top of that momentum, our enterprise sales and partnerships are rapidly gaining scale. What was a start-up inside the organization just two years ago is now meaningfully contributing to total revenue. When we step back, we are building more than an insurance agency. We are building a technology-enabled distribution platform that delivers real choice, frictionless experience, and better outcomes for clients and carrier partners. I want to recognize and thank our teammates. This quarter's performance is a direct result of their discipline, execution, and commitment to delivering a world-class client experience. I will now turn the call over to Mark Jones Jr., our President and COO. Mark Jones Jr.: And good afternoon to everyone joining us. I want to echo Mark's sentiment in welcoming John as our new CFO. I look forward to working closely with him in the future. What an exciting time it is here at Goosehead Insurance, Inc. We have now built the country's first choice online shopping experience in the history of personal lines insurance with our Digital Agent 2.0. As we enter into a new world for insurance distribution, it is important that we take a step back and fully understand what that means for clients, carrier partners, strategic partners, and agents alike. As Mark Miller discussed, for clients, you now have choice—not only in what underwriter you have access to, but how you engage and transact. Why did this never exist before? Because there has never been a personal lines agency like Goosehead Insurance, Inc. Selling and servicing multiple product lines across 50 states with over 200 carriers is a challenge no other company has been bold enough to tackle. A frictionless choice shopping model has many hurdles in development that cannot easily be solved by throwing money at the problem. It takes deep domain expertise across regulators, product knowledge, client behavior, and the inner workings of fragmented technology solutions across the industry. Each regulator has different requirements, each carrier has bespoke underwriting criteria and a differing technology stack with degrees of sophistication, and each client segment has unique needs and preferences. How are we able to solve this? We have been very intentional about our location in the value chain and distribution. We built strong and lasting relationships with our carrier partners to make sure our goals are aligned and we can deliver a differentiated experience to them. We have been thoughtful about geographic expansion so we understand the specific nuance of each critical state. We have spent 20 years and hundreds of millions of dollars in our history investing in technology to drive the industry forward. And we have always placed the client at the center of our universe, so we have a clear understanding of what matters not just at the initial sale, but throughout that client's entire life cycle. I am incredibly proud of our team for what we have delivered so far, but we are just getting started. In the coming quarters, we plan to continue to expand our offering with new carrier partners, roll out to additional states, and add features and functionality that improve the client experience and conversion rates to maximize the economic returns. As exciting as the rollout of our Digital Agent 2.0 is, I am equally excited about the direction of our corporate, franchise, and enterprise teams. As Mark Miller mentioned, we launched three new corporate offices in the quarter, including Seattle, the D.C. area, and Minneapolis, all of which are hitting the ground running. As we have discussed, we are highly intentional with where we grow our presence for the benefit of our teammates, our clients, and our carrier partners. Productivity in our corporate channel continues to improve, supported by increased lead flow and better conversion from a combination of the improving product market, expansion into untapped geographies, and investments in our management infrastructure. The enterprise sales team, which is fueled by our partnership efforts, continued its rapid growth in the first quarter, generating new business growth of over 70% and contributing approximately 20% of the production of new business commissions and agency fees. The partnerships that feed that team now include 2.3 million potential clients across mortgage origination and servicing, as well as 4 million potential clients from other home and financial services organizations. While there may be some overlap across our partner client base, that improves our likelihood of conversion as we increase the number of touch points we have with potential clients. The momentum we are seeing across our corporate and enterprise sales teams generated a new business commissions growth rate of 29%, the fastest pace of growth we have seen in nearly five years. The franchise business also saw strong acceleration in the first quarter, growing new business royalties by 14%. Our Agency Staffing Program, which we call ASP, continues to be a highly strategic asset, aiding our franchises in faster growth and expansion. Sourcing from the ASP program grew 53% over the prior-year quarter. Our average producers per franchise expanded to 2.3 from 1.9 a year ago. Total franchise producers at quarter end were 2,150, up 3% year over year. Turning to our financial results for the quarter, total revenues were $93.1 million, up 23% over the previous-year quarter, with core revenues growing 15% to $79.5 million. As we look towards the second quarter, we expect a similar growth rate in core revenues when adjusting for the $4 million of previously unpaid renewal commissions and royalty fees that we recovered from a carrier partner in 2025. Throughout 2026, we expect improvements in client retention from our strategic initiatives and the improving product market to begin to outpace the impact of slower year-over-year pricing in our book of business. We expect that to result in faster core revenue growth when combined with continued strong new business generation. Ancillary revenues, which are largely comprised of contingent commissions, were $11.9 million for the quarter, growing 141% year over year. Our outlook for contingent commissions on the year remains unchanged, at 60 to 85 basis points of total written premiums. We will provide more updates as underwriting performance advances throughout the year. Cost recovery revenue for the quarter was $1.7 million. During the quarter, we launched 20 new franchise locations across 10 different states. We also had 10 agencies exit the system and 63 agencies consolidate into another larger franchise. Total written premiums for the quarter were $1.1 billion, growing 13% over the previous-year quarter. Policies in force grew 14% for the quarter to 2 million. We expect the growth rate in policies in force to accelerate during the year as client retention continues to improve and we drive strong growth in new business production. Adjusted EBITDA for the quarter was $24.4 million, growing 57% and delivering an adjusted EBITDA margin of 26%. During the quarter, we demonstrated strong cash generation, with $22.9 million of cash flow from operations. Utilizing our excess cash, combined with drawing $26 million on our existing revolving credit facility, we repurchased and retired 985 thousand of our Class A shares, representing $49.8 million. We believe there is a significant market dislocation in our stock price, and retiring these shares will generate excess shareholder return. As of the end of the quarter, we now have fewer shares outstanding than we did at the time of our IPO. We plan to continue to be opportunistic with our remaining $148 million on our existing share repurchase authorization. We ended the quarter with $26 million of cash and cash equivalents and had total debt outstanding of $324 million. We remain committed to conservative balance sheet management and do not expect to add leverage outside of our historical precedent of 3 to 4 times trailing twelve-month adjusted EBITDA. We are reiterating our guidance for the full year 2026. Total revenues are expected to grow organically between 10% and 19%. Total written premiums are expected to grow organically between 12% and 20%. I am incredibly excited about the position our business is in. Our business is healthy and delivering strong growth, and because we have been prudent stewards of our capital, we are able to invest in new and exciting technology that we believe will change the industry to our advantage. Thank you to our teammates, partners, franchises, and shareholders for your continued trust. We are just getting started. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Andrew Andersen with Jefferies. You may proceed. Andrew Andersen: Hey, good afternoon. How should we think about the 2026 PIF acceleration? Do you view this as more renewal retention-driven or new business-driven? And could you also help us think about seasonality in Q2 and Q3? Mark Jones Jr.: Yeah. Hey, Andrew. Thanks for the question. If you think about how big our book is, pretty clearly retention is what is going to aid in PIF acceleration more than what new business will, just given so much of the book is in the renewal base. We expect to see continued improvements in client retention. We mentioned in the prepared remarks that we expect to get to at least 86% during this year. That said, we are seeing really strong new business momentum, which is super fun to watch. You see the new business commissions line growing 29% in the first quarter. That is the fastest growth rate in the last five years. So it is a combination of both things, but the renewal side has a bigger impact on PIF. From a seasonality perspective, generation of new business will likely follow the normal seasonality trend, which would mean the second and third quarter typically contribute more than the first and the fourth quarter. I am not expecting that trend to change. Andrew Andersen: Thanks. In the past, you have addressed why AI is not a disintermediation risk at policy inception. But how do you ensure that increased digital convenience does not create a greater disintermediation risk at renewal over time? Mark Jones Jr.: I think the hurdles on the renewal side are even bigger than they are in new business generation—and that is not to downplay how challenging the new business generation aspect is. There is so much in terms of competitive moat that goes into our ability to actually put policies in force. But there is a lot of manual labor that cannot easily be automated on the back end to make sure policies continue to retain and that clients get all of their service needs met. I do not think people fully understand how much work goes into that. It would not be very easy to automate a lot of what we do. We have been able to take big chunks of work and automate it, but that is going to be a really long tail of stuff. And as you know, all of the economics in this business are in the renewal. So if you try to automate as much as you can, but you leave off some portion of it, you are not going to be able to actually generate profitability over the longer term. Operator: Our next question comes from Brian Meredith with UBS. You may proceed. Brian Meredith: A couple of quick questions here. First, just quickly on the Digital Agent, are the economics there the same as your other business from the perspective of commission rates that you are receiving from the carriers? Mark Miller: From the carriers? Yeah. Mark Jones Jr.: So it is a really interesting development, Brian. Because our go-to-market strategy with the Digital Agent is largely to integrate it into partners where we have good information about who the clients are, and we can make sure that we are providing carriers with really high-quality business. There has been increased demand to have outsized compensation in that partner and Digital Agent channel. That was not really something that we contemplated when we started this process, but it has been a positive development that carriers have indicated they may be willing to pay more for policies distributed that way. Brian Meredith: Interesting. And then what is the pipeline of potential new carriers on the platform, particularly for the auto insurance side? Mark Miller: Yeah, Brian. We have four auto carriers now already on the platform, which gives us really good coverage. As you know, auto is not as specific to region as home is. We have pretty good coverage and a couple more to be added in the next two months. It has been interesting to watch—initially there were a lot of hurdles for us to jump over to explain how this product will work, how we are able to safeguard underwriters and clients from making poor decisions through digital distribution. As we have had more and more conversations and explained why it will work so well with us, demand from new carriers wanting to get in line to get on the platform has been really fun to watch as well. There are people now saying, “How do we get involved because we feel like we missed the first wave?” We are focused on where our partners have client needs. We have been very focused on rolling it out in Texas and working on our conversion. It is kind of a new muscle for us—once you get them into the funnel, how do you get them to actually buy? So we are really focused on Texas, then we will roll out to the next biggest state and the carriers that we need to fill those states out. Brian Meredith: Great. Thanks. And then one quick numbers question. Commission rates that you are seeing across your book—are we starting to see them lift? Mark Jones Jr.: Yeah. The aggregate commission rate is now up year over year, which is great to see. The communication with carriers has all been around how we incentivize more growth, and if you want to incentivize more growth, compensation is a tool that you can use. In pockets of the country where there was maybe higher E&S usage in previous years, you can see that in the renewal commission rates, but I do not expect that to be a long-term thing. I am happy to see the aggregate commission rate now going up. Operator: Our next question comes from Thomas Patrick McJoynt-Griffith with KBW. Good evening. You may proceed. Thomas Patrick McJoynt-Griffith: A couple of questions around your Digital Agent. First off, is that experience really entirely targeted through your enterprise partnerships, or are you also advertising the Digital Agent as a full comparison and appearing in top-of-funnel search results? Mark Jones Jr.: We are not really trying to drive eyeballs to goosehead.com. What we want to do is put it in a place where it is going to drive the maximum value for everybody across the value chain, which we believe is through the partner channel. I think there is going to be stumble-upon business—we have stumble-upon business of people buying auto and home insurance directly through the website—but we have been really clear with our carrier partners about what the go-to-market strategy is, just so we can make sure everybody is having a good experience. So it is largely going to be with partners. Over time, that may evolve as the brand gets a little bit bigger, but we are not necessarily going to deploy a bunch of capital to try and draw eyeballs. It is not an efficient use of money. Thomas Patrick McJoynt-Griffith: Okay. Got it. And then my other question on Digital Agent. How do you balance the responsibility to the customer that is searching for insurance to the extent that they are using Digital Agent and there are only a couple carriers available for homeowners quotes, versus if they were to use a human Goosehead Insurance, Inc agent they might be able to see a lot more quotes with perhaps better coverage or better pricing? Mark Jones Jr.: What we have tried to do is make sure the areas we are bringing to the platform initially are the ones that do a disproportionate amount of the business in the geography that we roll it out in. We have got really strong coverage in both our home and auto carriers that are on the platform now. So it is not like you are getting a random one-off carrier that should not necessarily be writing a ton of business in your area. We also are able to build into the platform safeguards and kickouts that basically would say, you may be eligible for a certain carrier, but that is not probably the right spot for you to be. You should talk to an agent. That helps us prevent carriers from getting business that they should not get and from clients choosing options that they probably should not choose. Thomas Patrick McJoynt-Griffith: Got it. And last one if I could sneak it in. On the new business commissions, you said 20% of the new business is coming through—was that the partnership channel or was that through Digital Agent? Can you clarify what that number was? Mark Jones Jr.: That is coming from the enterprise sales team, which is largely the partnership channel. The Digital Agent is not today generating significant revenue, nor did we expect it to be generating significant revenue yet. We expect those contributions to start to begin really in the second half of the year as it gets more deeply integrated into our partnership base. But the enterprise sales team—which is the human fulfillment of our partner engine, which has only really existed now for about two and a half years—is growing really nicely and making meaningful contributions to the revenue growth rates. Operator: Our next question comes from Analyst with BMO Capital Markets. You may proceed. Analyst: Hi. Thanks. Maybe just on the new corporate state entries that you called out and the progress with Nashville and Arizona. Can you update us on how much of your premium was in Texas this quarter, and how you expect the evolving state mix to impact premium per policy as we move throughout the year? Mark Jones Jr.: For the first quarter, 37% of the premium was in Texas, down from 39% as of the end of the fourth quarter. So we are continuing to diversify the book, which is a really good thing. Each individual state has different puts and takes on the economics of their own policies. Where you usually see lower premium per policy, typically you get better bind rates and better package rates. So it all kind of comes out in the wash in terms of productivity. We were really strategic in the locations that we picked. They are areas that have good demand from our carrier partners—they want us to go sell new business there. They have got growing metropolitan areas. It is a good place to recruit from. It is the right kind of cost of living. I am really happy with where we have planted flags so far, and those offices are off to phenomenal starts. Analyst: Thanks. And then maybe just one on the guidance. The contingent commission number was really strong this quarter, but you did not bring up the lower end of your guidance for total revenue. Can you walk us through your thinking and how you are thinking about the cadence of revenue as we go through the year? Mark Jones Jr.: It was a strong contingency quarter, but like we have talked about in the past, the first quarter always includes some true-ups from the fourth quarter where we did not have enough information to record revenue or there was too much uncertainty on whether you would actually earn the commission. So we had an outsized number in the first quarter relative to history. That does not necessarily change our outlook on what contingency should be for the full year. It did not feel like there was a good rationale to update the guidance number given we still do not know if there is going to be big hail or hurricanes or fires. We will continue to keep an eye on that throughout the year. Analyst: Just as a follow-up, nothing has changed on your view on core revenue and the cadence there, correct? Mark Jones Jr.: Correct. We are still expecting acceleration in the second half of the year as the improvements in client retention begin to outpace the offset of the pricing impacts on year-over-year premium changes, as well as contribution from strong new business production across all three sales channels, really driven by agent productivity and adding a few more heads here and there. Operator: Our next question comes from Andrew Scott Kligerman with TD Cowen. You may proceed. Andrew Scott Kligerman: I am curious on the franchise producers. It looks like you were up quite a bit year over year on less-than-a-year producers, but those that have been with the company for more than a year declined to 1,525 from 1,577. Could you give a little color on why the more experienced producers came off? Mark Jones Jr.: Andrew, that is really the consolidation that has been going on in the franchise community, which as we have talked about in the past is really a good thing and done very intentionally in the business to create larger, more successful franchises. We continue to see that as super healthy. So that is largely going to be taken out of people that have been in the system for multiple years. What I like to see is that the agencies continue to reinvest that capital and hire more. We had really strong gross adds in the first quarter. I was really pleased with that. And we are seeing good productivity of those producers. It feels like the franchise community right now is probably healthier than it has been in many years. Andrew Scott Kligerman: And the producers per franchise— is that number up materially year over year? Mark Jones Jr.: Yeah. It is up something like 18% year over year. It is up to 2.2 to 2.3 versus 1.9 last year this time. It is moving exactly like we want it to. I still believe we can get to about five producers per franchise in a reasonable time frame. That is where you start to get a real scale business that operates a lot more efficiently than a sole proprietorship. Andrew Scott Kligerman: Got it, Mark. And then for those producers at the firms more than a year, the franchise productivity was up remarkably—from 30.6 to 37.4. Can you provide a little color on that sharp productivity increase? Mark Jones Jr.: That productivity number is on the per-franchise basis, not at the producer level. As more tenured agencies keep hiring, that is going to help drive total productivity per location. The individual producers underneath them are also getting more productive. That is a function of those producers ending up in franchises that are more in the top half of the community—the ones that have scaled infrastructure, good management practices, and demand high levels of productivity. We are continuing to push agencies to join that club: invest in your business, invest in your management infrastructure, and hold people accountable. That message is being well received. Andrew Scott Kligerman: One last one. The mortgage originators and other home and financial services operations where you are embedding your enterprise product—what is the moat that keeps Goosehead Insurance, Inc with these partners and keeps out the competition? Mark Jones Jr.: There are a lot of elements that generate a significant moat. We have the national scale and local expertise of our 2,500 agents across the entire country, which means we know how to handle your house in Miami, your house in L.A. on stilts, the one in the flats in Nebraska. We can handle everything that happens in your portfolio. We have the ability to route leads appropriately so you are getting to the best agent at the best time. We have the service function on the back end, which I believe is really differentiated in the industry and can deliver strong levels of retention, which is where all of the actual profitability in this business is. We have a better product offering than most other organizations with over 200 different underwriters. The technology to bind in the human world is, we think, much better than what other people have, and now we have the ability to bind fully digitally in a single location through a choice shopping model. To our knowledge, nobody else has that ability. That is a huge competitive moat. Operator: Our next question comes from Analyst with Cantor Fitzgerald. You may proceed. Analyst: Hi. Going back to retention, you mentioned expecting to get closer to 86% for 2026, and you are posting 85%. Can you provide some granularity around why it is taking longer for retention to improve than anticipated? Mark Jones Jr.: I would not say it is taking longer than anticipated. If you go back, we were at 84% for five straight quarters. We have now been at 85% for three. I am anticipating us to click up to 86% during this year. I am really pleased with the direction of the client retention number. It is continuing to grind upward. We have specific initiatives to try and accelerate the pace of that improvement, and the product market being in a really healthy spot now is super helpful for that. Analyst: Do you think the reason it is not as high as it once was is maybe agents are more focused on new business, while the servicing aspect does not have the training to deal with the big increases on the existing business? Can you give more detail there, at least on the programs you are trying to initiate? Mark Jones Jr.: Our agents’ job has always been to capture new business and deliver excellent service when they are talking to clients, but their main focus should be capturing new business. Our service function’s main focus should be retaining the existing business and delivering outstanding service. We have made a ton of structural and foundational improvements to our service function in the last couple of years. We feel like we are delivering an excellent value proposition to our clients. I think what is happening is people are frustrated that pricing got so expensive over the last several years. I do not know if that means consumer behavior has fundamentally changed and they feel like they need to shop more frequently. If they do, that actually benefits us because they will be shopping in an area where we provide the most options with the best service. If you are coming from a different agency, we should be able to provide differentiated value to you. Analyst: Thanks. And last question—looking sequentially at your Net Promoter Score, it has been declining since late 2024. Can you dig into what is going on there and if you have any further details? Mark Miller: This is Mark. I think we have said it before: the NPS score is more of an industry sentiment score, the way we use it. Steep price increases over the last three years, particularly in our biggest market in Texas, have been pretty steep. NPS is a 12-month rolling average, and we have talked about expecting it to come down over time, and that is what it is doing—it is behaving like we expected. We think we deliver an outstanding client experience, and NPS is kind of dislocated from retention rates at this point. Mark just talked about retention rates continuing to climb. We also do client surveys—those scores are extremely strong. So we think we are delivering a really good client experience. Operator: Our next question comes from Analyst with Truist. You may proceed. Analyst: Hi. Thank you. I am calling in for Mark Hughes. Your premium retention has been fairly steady lately, as you have mentioned, but doing a little math, the corporate retention has gotten substantially better over these last few quarters while franchise retention has dropped off just a bit. What is your experience in each channel that you think may be driving the difference here? And how many franchise locations were onboarded in the quarter? Mark Jones Jr.: One thing I would point to is the diversity of the franchise book versus the corporate book. The franchise book has more exposure to places like Florida and California where there was more commission rate pressure over the last several years. As you write more new business into the excess and surplus lines or even the state-run plans, as those become a larger portion of the book, it can drag down your revenue retention rates. I am not anticipating that continuing to be an issue. I am expecting client retention to outpace that in the second half of the year. The corporate team is much more in places like Texas and Illinois, where there is much more admitted product versus the excess and surplus lines. We onboarded 20 new franchise locations in the quarter—20 new agencies, 12 of which were launches from the corporate team. Those are performing at about 2.5 times the average external launch. That strategy continues to be really important and strategically hard to replicate. Operator: Our next question comes from Pablo Singzon with JPMorgan. You may proceed. Pablo Singzon: Hi. Good afternoon. I wanted to ask about the growth in enterprise. I think you had quoted 70% growth year over year. How much of that was headcount versus productivity? And how are you thinking about that channel as it scales up? Mark Jones Jr.: Enterprise right now—growth is coming from nice, stable, strong productivity, and we are adding more heads into the system. We have built out a strong partner base and have an awesome pipeline of potential new partners. We can meter the lead flow to make sure we do not get over our skis and cannot deliver on the service we are supposed to deliver. We are adding heads now to the point where we feel like we can continue to execute on 100% of the lead flow. We just want to load-balance that appropriately. Tenure on that team is still pretty low because it has only existed for a couple of years, but you are seeing at the top end of the tenure curve the people who have been with us for a while now perform equal, if not better, than the average corporate or franchise agent. Over time, it is still a three-pronged approach: we want the enterprise team to operate at speed and deliver for our partners; we want the corporate team to be the talent incubator for the entire organization, to demonstrate best practice and show how high productivity can be; and we want the franchise team to be the growth engine that can get to every place in the country without a massive infrastructure. Operator: Our next question comes from Analyst with RBC Capital Markets. You may proceed. Analyst: Hi. Good evening. Last quarter, you talked about EBITDA margins being flat to down a little this year, and I was wondering if this quarter changes that expectation. Mark Jones Jr.: If you look ex-item, the expense base was slightly lower than what we were initially planning for in the first quarter. That was really just a function of timing of hires. If you look at compensation expense in Q1, I think it only grew 5%. I would not expect that trend to continue throughout the rest of the year as we onboard more talent to deliver Digital Agent integration into partners, marketing conversion-type roles, additional sales headcount, and then some more service headcount to handle the additional workload that comes throughout the year as we continue to sell new policies. On the G&A side, it was a big G&A first quarter because we had our conference with the top end of our franchise community in Q1 this year, which was in Q2 last year. That was approximately about $1.5 million of expense in Q1 that was not in Q1 last year. If you round all that out, timing of compensation was a little bit delayed relative to initial Q1 expectations, so you should think of that as maybe high-teens to low-20% growth rates throughout the remainder of the year. G&A was higher in Q1 than it will likely be throughout the rest of the year, but that does not necessarily change our margin outlook for the full year. We still have some Digital Agent investments to make and we want to be leaning into growth right now. Operator: Our next question comes from Katie Sakys with Autonomous Research. You may proceed. Katie Sakys: Thanks. I just wanted to circle back on core revenue growth. I think you previously framed first half as coming in closer to low double digits when we heard from you in February. Clearly, 1Q outperformed that. Do you expect 2Q to also trend higher than those initial low double-digit expectations before it further accelerates into the back half of the year? And then on an annual basis, you previously suggested about 10% of corporate agents launch their own franchises. Is that still the right run-rate? Mark Jones Jr.: Katie, I would just make sure you are tracking the $4 million from the second quarter of last year—that is a year-over-year comparison challenge. We talked about low double-digit first half, not necessarily in each individual quarter. In our prepared remarks, we said core revenue growth rate, when you adjust for that $4 million comparison challenge, will look similar to the first-quarter number. From that point, you should expect to see the renewal book begin to improve its performance, driving faster core revenue growth rates. On the corporate-to-franchise launch rate, that is certainly the right rate to be thinking about over time. In the last twelve months, we have launched 30 corporate agents into their own franchises, which is ballpark 10%, and, as a close adjacency, we have also seeded about 10 corporate agents into existing larger agencies or embedded partner franchises when it is a good fit. That is completely aligned with the strategy—we want the corporate team to be the talent incubator where we grow the best of the best. Operator: I am not showing any further questions at this time. I would now like to turn the call back over to Mark Miller for any closing remarks. Mark Miller: I just want to thank everybody for joining us today. It is an exciting time to be part of the Goosehead Insurance, Inc business, and we look forward to talking to everybody again in July for our second quarter call. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to the Royal Vopak First Quarter 2026 Results Update. [Operator Instructions] This call is being recorded. I'm pleased to present, Fatjona Topciu, Head of Investor Relations. Please go ahead with your meeting. Fatjona Topciu: Good morning, everyone, and welcome to our Q1 2026 Results Analyst Call. My name is Fatjona Topciu, Head of IR. Our CEO, Dick Richelle; and CFO, Michiel Gilsing, will guide you through our latest results. We will refer to the Q1 2026 analyst presentation, which you can follow on screen and download from our website. After the presentation, we will have the opportunity for Q&A. A replay of the webcast will be made available on our website as well. Before we start, I would like to refer you to the disclaimer content of the forward-looking statements, which you are familiar with. I would like to remind you that we may make forward-looking statements during the presentation, which involve certain risks and uncertainties. Accordingly, this is applicable to the entire call, including the answers provided to questions during the Q&A. And with that, I would like to hand over the call to Dick. D.J.M. Richelle: Thank you very much, Fatjona, and good morning to all of you joining us in the call this morning. I would like to start with the key highlights of the year so far. We've had a strong start of the year, where we saw a healthy demand for our services, which is reflected by our continuously high occupancy rate of 91%. Our financial performance remains strong. Proportional EBITDA grew by 4.1% compared to Q1 2025, and that is the result adjusted for negative currency translation and divestment impact. Importantly, we were able to convert 76% of this EBITDA into operating free cash flow, resulting in an operating cash return of 16.6%. We also made good progress on executing our growth strategy. In West Canada, the construction of our REEF LPG project export terminal is progressing well. And in the Netherlands, approximately 90% of the 4th tank construction at Gate terminal has been completed. The project is on track to be commissioned within budget and on time at the end of Q3 2026. In addition, we took an investment decision in the Netherlands to repurpose capacity at our Europoort terminal for the storage of pyrolysis oil and another FID in Spain to expand the capacity in Tarragona. Finally, despite the increased volatility in the market related to the Middle East conflict, we are confirming our full year 2026 outlook, subject to ongoing market uncertainties and currency exchange movements. As per our current assessment, we anticipate the financial impact of the ongoing conflict will be absorbed by our strong underlying business performance and is within the range of our full year 2026 outlook. However, we do see that the uncertainty has increased, which is what I will talk about in more detail in the following slides. First, look at the market dynamics. Before diving into the results, I'd like to provide some context on the conflict in the Middle East. It has caused a historic supply side shock across global energy and manufacturing markets. This presents a major challenge for some of our customers. Broadly speaking, supply-side substitution has not been sufficient to offset the loss of physical products normally sourced from the Gulf countries. This has triggered significant commodity price volatility and forced a redirection of energy flows, domestic and -- towards domestic and transportation sectors, further impacting industrial demand. As a result, we see cautious customer sentiment and increased uncertainty. Let's take a closer look at how this impacts our business, starting off with our exposure to the region. We own and operate 4 storage terminals across the Middle East, with strategic locations in Saudi Arabia and the United Arab Emirates. In terms of financial exposure, around 5% of our proportional EBITDA is generated by these terminals, and they represent around 4% of our capital employed. Our terminals in Saudi Arabia are linked to industrial clusters, while our Fujairah terminal in the Emirates located outside the Strait of Hormuz, functions as an oil hub. The conflict has had severe impact on the industrial activity in the Gulf countries because of physical damage to the production facility and production halts. As a result of the closure of the Strait of Hormuz, Fujairah, despite its strategic location, faces reduced product flows. In terms of indirect exposure, to substitute for the loss of product volume from the Middle East, we see a rebalancing of trade routes emerging. While our infrastructure facilities facilitate the rebalancing of global trade flows, throughput levels are impacted by reduced products in the market. We do see that this presents a major challenge for some of our customers impacting their business continuity. While with our well-diversified portfolio of terminals, we've proven to be resilient against geopolitical tensions as well as energy market volatility and disruptions in the past. Our diversification is a structural strength, allowing our network to serve the evolving supply chain and energy security needs of our customers and partners. In addition, with the shift of our portfolio towards gas and industrial terminals, the duration of our contracts has increased significantly, reducing our exposure to short-term volatility. However, we are resilient, but we're not immune. The conflict in the Middle East introduces variables from shifts in global trade routes to heightened security risks and regional price shocks that we are not insulated from. We continue to monitor these developments to protect our operations and our customers' interest. Now let's take a closer look at our results for the different terminal types we operate. We see an overall strong performance with higher results compared to Q1 of last year when adjusting for the impact of currency translation and divestments. It's important to highlight that Q1 results had limited impact from the Middle East conflict. We saw a strong performance of our chemicals and oil terminals, which was primarily driven by increased throughput combined with strong contribution from growth projects. Our industrial terminals performed broadly stable year-on-year. However, due to the contribution of growth projects, we saw a slight increase compared to Q1 2025. For our gas terminals, we saw a slight decline year-over-year, which is primarily related to disruptive gas supply from the Middle East conflict. All in all, this has led to a proportional EBITDA of EUR 295 million and a strong operating cash return of 16.6%. Notwithstanding the volatility and uncertainty on the market during Q1, we continued to execute on our growth strategy. In the United States, at our Deer Park terminal, we commissioned repurposed capacity for biofuels. And in Spain, our Terquimsa joint venture with FID to expand its capacity to address market needs as well as further solidify its leadership position. Last but not least, we've taken a final investment decision to repurpose capacity at our Europoort terminal in the Netherlands for the storage of pyrolysis oil. This is an important step in our continued commitment to the energy transition and is strengthening and further integrating our industrial partnership at the Europoort. Since 2022, we've committed around EUR 1.9 billion to grow our base in gas and industrial terminals and to accelerate the energy transition. Around EUR 650 million of this is already commissioned and is contributing to the financial results. Around EUR 1.3 billion is still under construction. We expect to commission around EUR 775 million near year-end related to mainly Gate, the 4th tank and the LPG export terminal in Canada. In the period 2027, 2028, we expect to commission around EUR 325 million and around EUR 175 million in 2029 and beyond. This is based on the FIDs that we've taken so far. The already commissioned growth projects as well as the growth CapEx under construction will further reinforce our long-term stable return profile and diversify our revenues. Looking ahead, we remain well positioned to achieve our long-term ambitions. We've shown strong business performance in recent years and the market indicators for storage demand remain firm, supporting the delivery of growth projects and the resilient performance of our existing business. This is reflected in our long-term ambition. We have an operating cash return ambition for an annual range of between 13% to 17% and are well on track to invest EUR 4 billion growth CapEx through 2030. Also, as announced during our full year 2025 results, we are distributing around EUR 1.7 billion to our shareholders through year-end 2030 via a progressive dividend and a multiyear share buyback program. With that, I'd like to hand it over to Michiel to give more details on the Q1 2026 results. Michiel Gilsing: Thank you, Dick, and also from my side, good morning to all of you. As Dick mentioned already, we have had a very strong start of the year. We reported a healthy occupancy rate, increased our EBITDA and further improved our free cash flow generation. These results highlight the strength of our well-diversified portfolio, particularly in times of increased uncertainty and volatility. Simultaneously, we continue to invest in attractive and accretive growth projects while returning value to our shareholders. Let's take a closer look at the performance of the portfolio. Our operating cash return was broadly stable at 16.6%, compared to the 16.8% in Q1 2025, driven primarily by the negative effect of currency translation in our free cash flow. On an autonomous basis, excluding currency and divestments, our proportional operating free cash flow per share increased 7.1% versus Q1 2025. Demand for our services remained healthy, reflected in a proportional occupancy rate of 91%. Adjusted for currency movements and divestments, proportional EBITDA increased by 4.2% which we will detail further in the next slide. Moving on to our business unit performance overview. Excluding negative currency exchange effects of EUR 15 million and EUR 2 million divestment impact, our proportional EBITDA increased by 4.2% compared to Q1 2025. A large part of this growth can be explained by the strong EBITDA contribution of EUR 9 million from our growth projects, particularly in the U.S. and India. The performance across the network was relatively stable as regional headwinds are balanced by robust activities at our major oil hubs in the Netherlands and Singapore. We are continuously focused on generating predictable growing cash flows to create value for our shareholders. Compared to Q1 2025, we have seen our proportional operating free cash flow grow by 7.1%, adjusted for currency translation and divestment impact. This is primarily driven by the autonomous improvement of our proportional EBITDA and the reduced share count following our share buyback programs. Moving from the cash flows to our financial position. Our proportional leverage, which reflects the economic share of our joint venture debt remained stable at 2.6x. If we exclude the impact of assets under construction, which do not contribute yet to the EBITDA, the proportional leverage is at 1.99x, which is the lowest level in over 5 years. Our ambition for the proportional leverage range is between 2.5 and 3x. To facilitate the development of growth opportunities that enhance our operating cash return, Vopak's proportional leverage may temporarily fluctuate between 3 and 3.5 during the construction period, which can last 2 to 3 years. This is all in line with our disciplined capital allocation framework. Our capital allocation framework consists of 4 distinct pillars aiming to maintain a robust balance sheet, distribute value to shareholders, invest in attractive growth projects and yearly evaluate the share buyback program. As announced during our full year results, we are distributing around EUR 1.7 billion to our shareholders through year-end 2030 via a progressive dividend and a multiyear share buyback program. In addition, we have the ambition to invest EUR 4 billion on a proportional basis by 2030 to grow our base in gas and industrial terminals and to accelerate towards energy transition infrastructure. That brings me to the outlook for full year 2026. As mentioned by Dick, the market indicators for storage demand remain firm, supporting the delivery of growth projects and the resilient performance of our existing business. However, we do acknowledge that the market has become significantly more volatile following the conflict in the Middle East. For now, we expect that the financial impact of the ongoing situation is absorbed by our strong underlying business performance and growth project contribution. This gives us the confidence to reaffirm our full year 2026 outlook with the proportional operating free cash flow projected at around EUR 800 million and a proportional EBITDA expected to range between EUR 1.15 billion and EUR 1.2 billion. Bringing it all together in this slide, we are off to a strong start of the year with solid cash generation. Our portfolio remains well positioned to cater for increased volatility in the market. And last but not least, we continue investing in attractive growth opportunities while returning value to our shareholders. And with that, I hand over back to you, Dick. D.J.M. Richelle: Thank you, Michiel. And with that, I'd like to ask the operator to please open the line for questions and answers. Operator: [Operator Instructions] And now we're going to take our first question, and that question comes from the line of Kristof Samoy from KBC Securities. Kristof Samoy: First of all, congratulations with the results. I have 2 questions to start with. If we look at the ongoing conflict in the Middle East, there are, let's say, 2 factors at play there, which impact your business. First of all, positively, you have the rush for energy molecules, so energy security. On the other hand, you have uncertainty, which impacts the FID process that you are undergoing for certain projects. So my first question would be, how is the process looking for Australia right now? Has FID become less likely? Or although more likely given the fact that Australia can simply import oil from its own -- from another region in their country. And secondly, if you could comment on EemsEnergyTerminal and the potential extension there because we have seen the news that Exmar is progressing with the vessel conversion. And then the second question, we know that throughput rather than guaranteed offtake is more of a key driver for revenues in India. If we look at the drop in proportional occupancy rates in the Middle East and India, could we say that this drop is still mainly linked to the Middle East and that the drop linked to throughput in India has yet to be reflected in the numbers? D.J.M. Richelle: Kristof, thanks for the questions. Yes, maybe on your first question related to Australia and EET and then specifically on the timing of them, I think for Australia LNG project, the way we would look at it is and what we can see at this point in time, the need for that project is set by the local Victoria state for gas, and that's just for electricity generation. So that is a need that is almost independent of what happens in the rest of the world. They have a very strong need to find substitution for current gas supply offshore that is depleting. So there's no indication at this point in time that there is a fundamental change in -- that there is a fundamental change in the time line of that project. So we still expect to get back with more information towards the end of this year. I think that's around VVET. So that's the Australia energy project and maybe to EET. So EemsEnergy, the extension over there process is still ongoing. Yes, we've seen Exmar making the announcement. We are not there yet to make any announcement. As you know, we run an open season on the recontracting of the capacity post the end of the current contract by fourth quarter next year. And that is a moment that we are still working through or a process that we are still working through. And once we have news to share, we will come back to the market and share that. I think then maybe to the lower occupancy rate, it has more to do with the fact that the Fujairah capacity in the first quarter was lower in terms of also out-of-service capacity. Then had a direct impact of what's happening in India. I think still, if you look at Q1, it's a bit early to see the effect of any of the disruptions from the Middle East directly in our business in India. But indeed, the flows of LPG that flow to India have a lot to do with the source of origin, and that's the Middle East. Kristof Samoy: Okay. But for EemsEnergy, you do not experience a change of attitude with your partners in terms of the run-up to the FID being taken given everything that's going on in the Middle East. D.J.M. Richelle: No, I think many parties take for processing like this, a long-term approach. They know that the capacity is available in 2028. As you know, a lot of the flow that was coming from Qatar is taken out. That has a massive impact, but it is also expected to have a massive impact for, as they call it, a bit of extra supply that was expected to come in towards the end of this decade. So you could almost argue that with all the repair and restoration that is going on, it pushes out that supply -- extra supply a little bit further out in time, and it doesn't necessarily have an immediate impact on, for instance, product that needs to leave the U.S. and needs to find a home in Europe. So I think it's a bit of a long answer to say, for now, we do not see a material different approach of potential customers towards EemsEnergy. Operator: Now we're going to take our next question. And the question comes from the line of Thijs Berkelder from ODDO. Thijs Berkelder: Congrats with the strong Q1 performance, especially in chemicals. Can you maybe further explain why chemicals was so strong? And related to that, can you explain what you now see happening in your Deer Park and European chemical operations given recent Middle East events? Second question relates to the strong performance in Rest of World. Can you explain where that is coming from? D.J.M. Richelle: Thanks for that. I think on the Chemical side, I would say, overall, Deer Park has done quite well in the first quarter, and the same goes for Vlaardingen specifically that actually participated and contributed quite strongly to the results in the first quarter. When it gets to the conflict and the impact of chemicals as such for our network, I think Deer Park, although we do not see it yet fundamentally, but Deer Park or the U.S. in general, you would expect that they will benefit a bit from the fact that the U.S. as a chemical producer has quite a competitive -- a strong competitive position in the current global landscape. So we expect that, that will result in at least continued healthy demand for our services, especially Deer Park. I think that's one. So I would say strong performance there. I would say if you change that to Europe, particularly, I would say, Belgium, it's still hard to see, but quite a lot of the flows that are moving into Belgium are flows that come from the Middle East. It's a very strong market for Middle Eastern producers to sell product in Europe. That is subject to the disruptions as a result of the conflict. And what you see over there is, obviously, there's a lot of people that are trying to take positions, traders that try to take positions in that market to try to supply the demand for the end product that continues to be there. So it remains to be seen how that effect is going to balance out. Too early to tell in that sense for Belgium. If you look at it overall for the rest of the portfolio, I think what we said, it's still healthy demand on the main oil hubs, in the first quarter, Singapore Strait, strong, Rotterdam, high occupancy, high activity, so pretty strong over there and fuel distribution, quite healthy across the board in the first quarter. So I think we are pleased if we look back at the first quarter. And I think as we said, the outlook for the rest of the year given everything that's going on is within the range of what we said already in the first -- in February when we announced the 2025 results. Michiel Gilsing: We also had a few growth project contributions in the U.S. and India, which also helped on the Chemical side. So that has led to an increase versus Q4 2025 as well. Thijs Berkelder: Yes. And rest of the world primarily driven by Belgium then? D.J.M. Richelle: Not necessarily. No, not Belgium, I would say. I think if any, Belgium is a bit under pressure first quarter. I think rest of the world, just healthy across the board, not a particular region, I would say that jumps out. As I said, oil stable and relatively strong and just a positive good start of the year. China, quite well. So nothing particular that jumps out, Thijs, in a extreme way. Operator: Now, we're going to take our next question. And the question comes from the line of Philip Ngotho from Kepler Cheuvreux. Philip Ngotho: I have 3 questions, if I may. The first question is on China and North Asia. If I look at the consolidated numbers, I see the occupancy rates. It was already low last year, but it actually dropped further to 55%. So I assume it has to do with the Chinese terminals that are just generating or have low occupancy rate. I was wondering if you could share any -- because in the past, I think you also mentioned that the chemical market in China has been weak, and it seems that occupancy rate continues to drop further there. Do you have any -- what are the projections for those assets there? And could we be thinking of anything if it remains structurally weak to -- that you might take some portfolio actions there? The other thing that I'm wondering about is what portions of earnings is really dependent on throughput levels rather than really take-or-pay contracts? And the last question I have is if a client would declare force majeure and you have a take-or-pay contract with that client or client is impacted by force majeure and with the take-or-pay contract, what happens to that take-or-pay contract? Do you actually -- can you still incur revenues on that? Those are my 3 questions. Michiel Gilsing: Philip, maybe start on the China side. Yes, if you look at the consolidated occupancy, effectively, that's only one terminal. So we have a portfolio of 8 terminals in China. So that doesn't give you a very representative picture of China. Dick already mentioned, the China results were actually quite good and slightly above our own expectations. Indeed, that terminal is the Zhangjiagang terminal, which then has a relatively low occupancy because it's in a very competitive market, and it's one of the distribution terminals. Most of the terminals we have in China are industrial terminals. So basically backed by long-term take-or-pay type of contracts. So you see that the overall portfolio is quite healthy. We don't have any immediate portfolio actions, we're going to take in China. To the contrary, we commissioned last year a new terminal in China. So that is an add-on to our portfolio. We still see quite a few growth opportunities in industrial terminal locations. And overall, the returns in China, if you compare it to the rest of the portfolio is quite healthy, and we're quite capable of distributing our dividends from China back to the Netherlands. So that's maybe on the China side. On the earnings side, yes, there is always a component of throughput income. So even in contracts which -- where people buy, let's say, effectively the capacity, we still have an opportunity that if throughputs are at a higher level than expected that we will charge additionally for excess throughputs. So approximately 10% of the earnings are throughput related in some locations, more throughput related than in others. For example, location like Belgium is much more activity related than in another location. And some of the locations like I just mentioned, some of the industrial or some of the gas contracts are very low in terms of throughput dynamics. So that's maybe only a portion of the earnings, which is throughput related. And Dick, on the first, force majeure? D.J.M. Richelle: Yes. So force majeure, Philip, what we see happening is that some of our customers are declaring force majeure, but they are declaring it in all those cases towards their customers. So an inability sometimes to get product out of a region in order to deliver it to a customer that is further away that is not necessarily related to the type of services that they -- or obligations that they have towards us in the storage contract and arrangements that we have. So we obviously have to follow this case by case and understand very clearly what some of the situations of our customers are in this respect. And as was indicated, I think, in the presentation already before, we need to kind of like be prepared for those discussions because if that customers are under serious stress and under duress, we have to sit down and understand what we can do to support them. But legally speaking, the force majeure, there's very clear guidelines of what and how that applies in the contract obligations and responsibilities between the storage provider and our customers. Philip Ngotho: Okay. Very clear. Just one follow-up. So far, have you had any clients where you already had to sit down and renegotiate terms? Or given that they were just faced with difficulties or challenges? D.J.M. Richelle: It's no comment on that. And the reason for saying it, I don't want to go into individual discussions and official, it's -- I think it's a bit of a gray area where there is -- obviously, there are customers that say we're under a lot of stress, can we talk versus how official that is and how official those negotiations are. I think this is part and partial of what we've seen in previous crises. We are confident that we can manage through that. We're close to our customers and see where and when we can support them while at the same time, respecting and safeguarding the interest of Vopak, which is we made investment in certain infrastructure to support our customers in good times and in bad times. So no details. Operator: Now we'll go and take our next question. And the next question comes from the line of Quirijn Mulder from ING. Quirijn Mulder: On the whole situation in the Middle East. Can you give me an idea about, let me say, the first panic in the first week of March compared to what the situation is now? Are the customers still scrambling for products and has its impact on your throughput in, let me say, mainly in the Far East? So can you give me a view on what's in reality happening and what is -- you take a cautious stance on the second quarter. And it looks like that, okay, the March was not the issue, but maybe April is more an issue than March. Can you give any feeling on what's the current situation for many customers and also the impact on your business? D.J.M. Richelle: Yes. Quirijn, thank you for that question. I think first and foremost, as we already said, key priority for us is to make sure that people are safe and have been safe throughout the course of the conflict. The noncritical staff we leave away from the facility. We take noncritical staff not with a permanent resident in that region, take them out and move them back to their countries of origin. That has all been done. We monitor obviously the situation very closely, purely from a safety and security point of view and do whatever we can to support our partners and our people over there. I think that's in the first -- that's the first instance and first priority. If you look at it, what's happening at the moment, I think a few things to mention here. The amount of information that comes out of the region is limited. That's -- so what the exact damage is outside and far outside of the perimeter of the facilities that we operate is not publicly known, and it's also not always known to us. I think the second element is if you look at it physically what's going on, people would like to remove product in a safe manner, if that's possible as soon as possible in some instances, as we particularly have seen in Fujairah, while at the same time, making sure that now that the cease fire is in place, increased activities are happening to make sure that as much as possible, business continues as possible, as usual, with demand for fuel oil, demand for some of the products that need to be moved in and out, and that is, I wouldn't say all back to normal of how it was before because that would be too strong a statement simply because the product is not always available. The product that comes out of the region is hampered and is limited and restricted. But slowly but surely, as we speak now, things are -- people are trying to get back to normal and resume as much as possible, normal operations with a cautious view and a clear view on the uncertainty that's happening in the region, as you can imagine. Quirijn Mulder: Yes. And that's in the region, but there's a ripple effect, let me say, elsewhere in the Far East. So let me say, the situation in Australia and Sydney, et cetera. And let me say, for example, in South Africa, as you mentioned, in Pakistan. Is there anything you can update us on that -- on the development there? D.J.M. Richelle: Yes. So we continue -- what you see, Quirijn, is that things literally move quite volatile and hectically kind of like almost from week to week. So let's take South Africa, maybe as an example, dependent very much on imports from the Middle East. So in the first weeks of the conflict, you see product on the water still finding a home in South Africa. So first 2 weeks, it was almost business as usual. Then you have a period where there's no new supply coming simply because the supply was choked coming out of the Middle East. So then there's actually a bit of panic in the local market, what's happening and how can we supply new product. And then after a week, 2 weeks, you see that there's alternative supply coming into the market from different parts of the world. And for instance, West Africa is then becoming one of the suppliers of South Africa, which is then supporting. Over time, it obviously needs to work out what it does to total volumes once things start to settle down. But the challenge is it's never clear of when things really start to settle down. And I think that's what we are working through. So it's -- I think that's the best way to characterize it. And I realize you maybe want to have maybe sustainable longer-term view of where this is trending to. That's simply too hard to say at this point in time, and we continue to support where possible. And I think if I can take it one notch up, the general confidence that we have in the fact that we operate these critical assets at strategic locations that support the primary needs in local economies continues to give us a lot of confidence on the medium- to longer-term outlook for our network, but we have to navigate through the current circumstances. Quirijn Mulder: But I understand, let me say, if I look at the second quarter and especially in the month of April, then thus far -- okay, there's a lot of uncertainty, but it's not very concrete impact there, if I understand. There's not that you see, let me say, really impact from, let me say, the business happening on your -- the business happening on your business, in fact. Is that correct? D.J.M. Richelle: I think it's -- what we are saying is that with a lot of uncertainty and volatility in the market, we are certainly not immune for the supply shocks that are currently happening, Quirijn. This is not a relative easy exercise between brackets, easy exercise of rebalancing the remainder of the flows to the world. There's simply also a shortage of product in some regions, and that will have effect on the flows that are coming through some of our terminals, while at the same time, there's, in some instances, a rush for a particular storage position for a particular product because product is trapped and you need to find an intermediate source of storage. So I think it's too early still to tell. We haven't closed April yet. It's way too early to tell what the impact then will be. The assessment that we made is the assessment for the full year 2026, which is reflected in our outlook. And there, we think that we are capable of absorbing the negative impact of the conflict in the outlook that we've already presented. Michiel Gilsing: Yes. Because on outlook -- you may assume on the outlook that obviously -- well, the first quarter was relatively strong. So if you compare it to the outlook we have given, it's at the higher end of the outlook, if you would have 4 of these quarters, but then we still have some growth coming on stream and some positive currency exchange compared to Q1. So yes -- and that will compensate for the potential impact of the conflict, what we feel could be the potential impact of the conflict today because it's very hard to make an assessment. We don't know, let's say, how long this is going to last, how severe this is going to be. But we feel that where we are today and what we know today, that those compensating factors are sufficient to absorb, let's say, the impact of the Middle East. Operator: Now we're going to take our next question. And the question comes from the line of David Kerstens from Jefferies. David Kerstens: I have 2 questions also about the conflict in the Middle East. And maybe specifically on Fujairah, can you give an indication how occupancy trended in the month of March? And given that this is a hub location, do you see any impact from reduced product flows in Fujairah elsewhere, for example, going to Asia into Singapore, will there be a knock-on effect on occupancy levels there as well? And Dick, I heard you say you will see global trade flows rebalancing, I think in response to the former question, you talked about new supply coming out of West Africa. And also, you have a very well-balanced portfolio. Does that mean that you also see terminals that are seeing positive effects from the current conflict in the Middle East? D.J.M. Richelle: Yes. So I think individual occupancy level for particular months, let's refrain a little bit from that or we want to refrain from that. I think VHFL, as we said, total occupancy has gone down quite a bit in -- towards the end of the first quarter. And we see that around 8% of that capacity in Fujairah is out of service simply as a result of some of the damage that we've seen in Fujairah. So that is something that we have to repair and get back into service. The impact that, that has for the rest of the network, it's not necessarily that the immediate flows from Fujairah are moving to all other terminals throughout the network. So I think Singapore has its own dynamic, and it is impacted by the fact that there's products not flowing from the Middle East to Singapore, but that has different sources than to potentially repair that with. And we haven't seen up until now a big impact in, for instance, Singapore for the demand for oil storage. If there are positive elements in the outlook for some of our terminals, I think we mentioned already the effect in Deer Park. We see increased -- quite some increased activity in the Europoort as well. But I think you have to also understand this particular case, it's very relatively straightforward sometimes to assess what is not going well and what the direct impact is, it will take time for us to assess where we see some of the upsides coming from. I think it's simply also harder to predict that at this point in time. Operator: Now we'll go and take our next question. And the question comes from the line of Jeremy Kincaid from Van Lanschot Kempen. Jeremy Kincaid: I just have one question on your guidance. You obviously reconfirmed it today. But within that, there was -- it seems like there's some positives and negatives. On the negative side, clearly, there's the disruption from Strait of Hormuz. But on the positive side, you talked to FX. And I think the other key thing was some growth projects coming in. I assume this doesn't refer to the Europoort terminal or the Spanish development that you're working on because those seem to be -- will be operational in 2027. So can you just talk to what those growth projects are and what's changed from when you last gave the guidance? Michiel Gilsing: Well, definitely that, in the growth projects are not these projects you mentioned indeed. So the growth project, the major one, which will come on stream this year is tank #4 here of the LNG import facility, the Gate terminal here in Rotterdam. So that is still within budget, but also within its original schedule. So we would be able to commission it on time. That is the latest outlook we can give. So that's going to be the major positive contribution. There's a few other projects, but these are relatively smaller compared to the tank #4. Indeed, foreign exchange is a positive element. And then, effectively, what happened is the underlying business performed a bit better in Q1 than we expected. So as a result, if we wouldn't have had the Middle East impact, then obviously, there was -- there could have been a likelihood to basically adjust the outlook upward. But yes, the Middle East conflict basically brings the outlook to the level we have given to the market for both free cash flow as well as the EBITDA. Free cash flow is still healthy. So if you look at where we were last year and where we anticipate to be this year, we should still be able to report a strong cash flow, and that's obviously the main driver for value creation. So yes, basically, I hope that answers the question, Jeremy. Operator: Dear speakers, there are no further questions for today. Dear analysts, thank you very much for all your questions. And that does conclude our conference for today, and have a nice day. Fatjona Topciu: Thank you. D.J.M. Richelle: Thank you very much. Good day. Bye-bye.
Operator: Welcome to Evolution Q1 Report 2026 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Martin Carlesund; and CFO, Joakim Andersson. Please go ahead. Martin Carlesund: Good morning, everyone. Welcome to the presentation of interim report for the first quarter of 2026. My name is Martin Carlesund, and I'm the CEO of Evolution. With me, I have our CFO, Joakim Andersson. As always, I will start with some comments on our performance and then hand over to Joakim for a closer look at our financials. After that, I will conclude an outlook, and then we will open up for your questions. Next slide, please. So let's start with the financial and operational highlights in the quarter. Net revenues were EUR 513 million, corresponding to a year-on-year decline of 1.5%. EBITDA came in at EUR 335.3 million, corresponding to a margin of 65.4%. The regional development was somewhat mixed in the quarter. Europe is not performing well at the moment, whereas LatAm is having a great momentum. North America continues its steady growth at a slightly higher pace than in Q4. In Asia, we made some further progress on combating cybercrime. Live revenue was hurt by the development in Europe and declined 3.1% on a year-on-year basis. RNG took a step forward with higher growth than what we have seen in the past quarters, up 8.1% year-on-year. During the quarter, we have continued to expand our studio network with new additions in Latvia, the U.S. and Argentina. We have also started to deliver on our amazing product road map for 2026. I will talk more about that later in the presentation. Next slide, please. If we then move to our operational KPIs, first, consisting of Headcount and then Game Rounds index. On Headcount, we are growing by 2.9% year-on-year and 1.7% on a quarter-on-quarter basis. We are on a good path with expansion, and we will continue to optimize the distribution and cost mix throughout 2026. The Game Rounds index can be seen as a general indicator of activity throughout our network over time. For an individual quarter, it can vary quite a lot and does not always correlate with revenue development. The long-term trend should be an increase in Game Rounds as game sessions in general gets faster and with smaller bets. I'm satisfied with the development in Q1, especially with the backdrop of the development in Europe. Next slide, please. In the last report, we introduced a real breakdown of revenues based on our customers location where Europe is dominant. Compared to the fourth quarter, North America and Latin America have grown their respective share of the total revenue, which reflects the overall development in the first quarter. As we require all our customers to carry a license in regulated jurisdictions, all our revenues are regulated. You also see a revenue split based on our customers and their players, our customers' customer, which is an estimation based on the IP number of players received from our customers and purchased by a third-party geo information. This is the breakdown of the revenues we have included for several years. See from that perspective that all our customers are regulated, our revenue is regulated to 100%. If instead looking at the estimation of the geo position and approximation of revenue based on our customers', customers' players' IP address, about 48% of the estimated revenue is regulated. Next slide, please. I will now give you a few comments on each of the major regions based on the estimation of revenue based on our customers' customers' IP number. As already mentioned, Europe did not do well and continued to decline quarter-on-quarter, largely due to regulatory volatility and subjectivity, which hurt our player activity. It has now also been almost a year since we introduced our extensive ring-fencing measures, which ensure that the players can only reach Evolution content from licensed operators within their respective markets. It was the right thing to do. And in the world of perfect regulation, it would not have caused any issues. However, due to that regulation in some markets fails to strike the right balance between player protection and entertainment, players continue to access unregulated operators and channelization is decreasing fast and significantly. This harms the total business and the most vulnerable players lose the player protection of playing of regulated operators and search by products from Evolution. Looking at the operational side, we have opened a second studio in Riga in the quarter. It is currently the home of our Always 6 Blackjack tables. But later this year, it will host both game shows, Game Night and Monopoly Filthy Rich. Looking at Asia, this is now the second quarter in a row with a quarter-on-quarter growth. This is, of course, a positive signal. We are in a better place right now than a year ago. However, as the challenge has been somewhat of a cat and mouse game, we remain cautious. Next slide, please. Both North America and LatAm reported yet another all-time high revenues. Growth rate in North America improved compared to the fourth quarter. It looks somewhat soft in our reporting currency, euro, but in U.S. dollars, year-on-year growth was roughly 21% compared to 19% in Q4. In the quarter, we launched several Monopoly theme titles, which have been off to a great start. Last week, we also launched Monopoly Live in Connecticut, which is an important milestone as we know that the Monopoly franchise is particularly strong in the U.S. market. It will be rolled out in additional states going forward. We have also completed the construction of the second studio in Michigan, located in Grand Rapids. It's a milestone as well. It's now going through inspections and regulatory approvals, and we are expecting to launch it in the next few months, hopefully earlier. Looking at the regulation, we note 2 positive developments. In the U.S., the main governor has now signed the iGaming bill into law. In Canada, Alberta will regulate its iGaming market in July. We have had presence in the program since 2021, serving the only available online gaming service run by the local government with live casino games. Now the market will open up for more operators. Last note on North America is the ongoing process to acquire Galaxy Gaming, where we are still working on the necessary approvals before the 17th of July deadline. We don't have any new information to share today more than that the process is ongoing. Latin America is doing really well at the moment. A highlight from the quarter is that we have completed the acquisition of a live studio in Argentina from a competitor who has decided to withdraw from the market. The studio will form the base for further growth in Argentina, and we are now adapting to evolution standard. In Brazil, we continue to perform well after regulation, which was about a year ago. We have launched a localized version of Crazy Time that is sure to attract a lot of new players in Brazil. LatAm truly is exciting. We're in full expansion mode. In addition to Argentina, we continue to expand our presence in Brazil and in Colombia to fully leverage the big market potential. With that, we don't have a specific chart for other markets, which mainly comprise of Africa. It continues to grow from a small base. Fresh games are widely popular in the region, and our recently launched Red Baron has so far exceeded expectations. Also, our RMG offering is starting to gain traction. To conclude this slide, the U.S. and LatAm are where we will invest the most in 2026. Both regions have high potential with life still being in early days. Next slide, please. As you are aware of, we have a spectacular road map for 2026, where we will take fun and entertainment to yet another level. Over the past month, we have made some initial releases like Always 6 Blackjack and Dragon Dragon, but the big splash is still ahead of us. Based on our exclusive partnership with Hasbro, we will continue to expand our portfolio of Monopoly games and closest in time for release of Monopoly Roulette and Monopoly Roll 'Em. Monopoly is an extremely strong franchise that is continuously gaining more popularity. And I think that it will be an important piece of the puzzle one -- continue to push the boundaries for entertainment. Another exciting development is the introduction of a new feature that we call SciPlay. It will allow players to enjoy slots alongside the live game attraction. With just a click, you will be able to activate selected slots from our RNG brands such as Nolimit City and NetEnt. Within the live interface, a mini lobby will make personalized recommendation to keep content relevant and engaging. I think this is a great feature as it brings together live casino and slots in one streamlined view, the best of 2 worlds and yet another feature and advantage of OSS, One Stop Shop. Since Evolution was founded 20 years ago, we've been obsessed with the end user satisfaction and the entertainment factor. And delivering the satisfaction is not just about innovation, it's about getting the fundaments right, every single day, top-notch gameplay, a flawless lobby, world-class studios, a game integrity that set the global benchmark. We often highlight what's new each quarter because innovation is exciting, but I want to be crystal clear. These basics are absolutely crystal -- critical for the experience because if the fundament slips, end user notice immediately. So with that said, 2026 is going to be another great year of innovation, while we also continue to enhance overall experience with playing our games. The combination of the two will ensure that we will bring the most entertaining experiences to the players and increase the gap to competition more than ever before. With that, I will hand over to Joakim for a closer look at our financials. Next slide, please. Joakim Andersson: Thank you, Martin. As usual, I have a few slides that will focus on the key highlights as we go through them. Starting with this slide, Slide 8, which shows our revenue and EBITDA development over time. If you look at the data on the far right, we can again see the Q1 revenue of EUR 513 million, represented by the blue bar, EBITDA of EUR 335.3 million in the gray bar and our EBITDA margin of 65.4% shown by the line above. Let's go to the next slide. And here we have a more detailed look of our profit and loss statement. As before, I have highlighted the key takeaways on this slide, and I will talk you through them one by one. First, the net revenues, of course, amounted to EUR 513 million, which is down 1.5% year-on-year, but practically flat quarter-on-quarter. Second, total operating expenses were EUR 220 million, which is 1.3% higher than Q1 last year and up 2.5% quarter-on-quarter. Personnel expenses increased by 4% quarter-on-quarter. However, on a rolling 12-month basis, we continue to see a deceleration in the growth rate each quarter. Third, profit for the period amounted to EUR 251.9 million. And as the fourth highlight, our earnings per share after dilution amounted to EUR 1.26. Let's move on to the next slide, where I show you the development of our cash flow. First, on the left-hand side, we show our operating cash flow after investments. This amounted to EUR 311 million for the quarter, representing a solid improvement compared with Q4, partly driven by a recovery in working capital. The last 12 months cash conversion remains strong and stays around the long-term trend with 81% in the quarter. Turning to the chart on the right, which shows our capital expenditures. Total CapEx related to tangible and intangible assets amounted to EUR 34.6 million for the quarter. This remains stable as a share of net revenues as illustrated by the black line. Next slide, please. Turning to our financial position. And as you can see on this slide, there are no major changes compared to recent quarters. We continue to be in a very strong position with total cash of EUR 1.2 billion, including our bond portfolio and total equity of EUR 4.3 billion. With that, I'll conclude my remarks for this quarter. And overall, it was a fairly uneventful quarter from a financial standpoint. I'll now hand it back to you, Martin, to wrap things up. Martin Carlesund: Thank you very much. So let's summarize and then move to the Q&A. If we look beyond Europe, 2026 has started really good. We grow across all regions. We maintain the margin, and we have started to deliver on the amazing product road map. I'm a little bit frustrated that the majority of our showcase games will be launched during the second half of the year, but they will be worth the wait. Europe is the main headache right now, but the long-term positive view is intact. I've talked about it many times before. Regulation changes over time. And right now, the balance is not where it should be. But as channelization continues to decrease, regulators will eventually have to adopt -- adapt to protect the players and not by force, but by some regulation, get them back into the regulated part of the market. We're doing what we can to mitigate the current development, working smarter and harder, releasing the best games, pulling the players back. As highlighted, we will continue to invest mostly in U.S.A. and LatAm alongside our internal focus on product innovation. Some further expansion in Europe will also be needed, but we are naturally more cautious in the short term. I don't want the U.S. litigation against a competitor to take focus from the results, but when a competitor sets aside all rules and deliberately try to hurt us, we must take action to protect our shareholder value. They have stated that they stand behind the defamatory report. But please remember that they paid enormous amounts of money during 4 years to not be exposed as the commissioner of that said report. Please also remember that the report was based on a success fee structure where the report producer was being paid based on how severely they could hurt our shareholder value. Evolution works hard. We are methodic. We are patient, and we are very disciplined. We believe in right and have strong and good culture based on morale and solid ethics. And as a last note in the quarter, the Board has proposed that no dividend will be distributed for 2025 as it has assessed that the cash dividend currently is not the best way to create long-term shareholder value. The Board has not made further decisions on the capital allocation for 2026 yet. It's not dramatic, rather refreshing. When further decisions are made, we will let you know about it. So with that, we thank you for listening so far, and now we open up for questions. Operator: [Operator Instructions] The next question comes from Pravin Gondhale from Barclays. Pravin Gondhale: Firstly, on capital allocation, I appreciate that Board of Directors have not decided to propose any dividends. Could you explain what are the reasons behind those decisions? And when can we expect any further communication in this regards? And secondly, on Europe, what are the key countries in Europe where you flagged that channelization is decreasing at faster pace? Has that materially accelerated in Q1? And when do you expect that to stabilize? Martin Carlesund: On the capital allocation, the Board is responsible for that, and they will take a decision that is creating the most shareholder value, and they are thoroughly and taking this question serious and looking at it. And as a result, they cancel the dividend for 2026. As soon as they have made their analyze, taking the decisions, they will get back and we will communicate what to do with our excess cash. I cannot, at the moment, give any more clarification on that. When it comes to channelization in Europe, and if we split this in two, channelization in Europe in a number of countries are not really known. The ones that make some of the investigations and estimations of that could be U.K. They have a low channelization. It's dropped significantly over the years. Netherlands, the same, but there are also others such as maybe even Sweden. It's quite hard to get those figures in total as the market -- the unregulated market is growing and not clear. So that's the comment on that. There are also other countries taking other regulatory measures or governmental measures that affect the situation in Europe as well. So that's the background or backdrop to Europe. Pravin Gondhale: And if I sort of follow up on that, could you just elaborate on what is the subjectivity part of the impact, which is impacting the player activity in Europe and in which countries? Martin Carlesund: I think that -- I will briefly comment on it, but I think that the regulation in many countries stays the same, but the subjective evaluation or the implementation of the regulations have changed. So even though the regulatory framework stays the same, suddenly, it's applied in a different way. That's what I mean with subjectivity. Operator: The next question comes from Georg Attling from Pareto Securities. Georg Attling: Martin and Joakim, I have a couple of questions, starting with Asia. So another quarter of sequential growth. And also when I look at the player data here in April, it looks very strong for Baccarat. So I'm just wondering what makes you reluctant to calling the trend shift here in Asia for the rest of the year. Martin Carlesund: I think that we need to be cautious. We need to be also prepared for that as I write in that it's a little bit of a cat and mouse game. And we methodically, systematically work on the situation, as you can see, and we're very happy with the 2 quarters in a row where we grow, but we're just a little bit cautious in our communication. Georg Attling: On Europe, another question. You alluded to it earlier, but just wondering, is this a broad-based decline across most countries or focused on a few countries where large declines? Martin Carlesund: I think you would say that it's a little bit of both. I mean there are war, oil price situation in the world, and it affects, I think, Europe quite a lot. You can also see that it affects the dollar and other. And there are specific countries taking measures and it's a little bit of mix. Georg Attling: Okay. Just a follow-up on that. What do you view is really in your hands when it comes to Europe because there's only so much you can do with the channelization and I assume you're quite keen to stop this negative trend in the region. Martin Carlesund: End user satisfaction, desire to play Evolution games, strengthen and higher entertainment value. That's the key for us. We are even looking at it like if we do even better games, higher entertainment, we will pull players back into the regulated environment, even though the hurdle has been created, which make them go away. So our core focus, as always, see to that we deliver the best games that the players desire, position them with the operator or the future operators, see to that we always are on top. That's the only thing that will matter in the long run. Georg Attling: That's clear. Just a final question on LatAm, where growth is accelerating quite nicely. Just wondering what do you view as the drivers to this acceleration? Is it market growth, studio expansion, larger game portfolio or something else? Martin Carlesund: Great games again, end user desire to play our games, studio expansion, market growth situation and so on. It's a good environment to be in. But if we didn't have the games to supply to the market, we would be nothing. So it's a combination. Operator: The next question comes from Nikola Kalanoski from ABG Sundal Collier. Nikola Kalanoski: I'm a bit curious on game shows. And so from an outside-in perspective, game shows seem to be growing quite nicely with respect to player count and the category seems to be becoming a larger and larger share of the player count. Are you generally seeing a less volatile revenue profile from game shows compared to some of the other game categories? Martin Carlesund: No. Nikola Kalanoski: Short and sweet. And then a short question on Ice Fishing. Are there any regions in which this game is particularly popular? Or would you say it's equally popular all over the world? Martin Carlesund: Ice Fishing is a super success, a great game, gaining traction all over the world. Actually, a loved game, one of the best we've made. Operator: The next question comes from Ben Shelley from UBS. Benjamin Shelley: I've got 3 questions. Question one, do you think margins can remain stable year-on-year given Europe and Asia are still declining and you are expanding capacity in Latin America? Martin Carlesund: I think that the incremental margin and the scalability of our business model is for sure proven this quarter. I think that in spite of the situation in Europe, we delivered good cash flow, fantastic margins, and it shows that the investments that we do are really, really well placed. So my view is yes. Benjamin Shelley: And given channelization issues in Europe, how do you see the outlook for the U.K. amid material iGaming tax hikes? And is there anything interesting you are seeing from operators in the market already? Martin Carlesund: I think that -- I will answer it in general terms. Everyone in the online gaming sector in one way or the other, if you're an operator or a supplier or even something else, you would know that if you have a tax level that is like somewhere around 25%, 20%, but even 15% is great and 20% works and 25%. But as soon as you hit like the 30% bracket, it starts to be really difficult and you open up for lowering channelization and unregulated play. When you put taxes on 40% level and a lot of other hurdles, you make it so difficult and not nice for the player experience that players in quite a large amount seeks play -- gameplay outside. I think that, that will slowly come into play. Right now, regulators talk only about what they do as repressive measures, but they don't talk about what happens to the players that are outside the regulated remit. And I think that, that needs to come into focus and you need to find that balance. I look forward to see that balance coming back. Benjamin Shelley: And then just lastly, on competitive intensity in the live casino industry. Are you experiencing any pricing pressures, any loss of share? Martin Carlesund: We have experienced that all along. I mean, I've been in the company for quite a long time. I think that the only difference is that there are different names related to the competitors. Some during one period it's one name and the second period is another name and so on. The pricing pressure from competition, not able to cover the gaps that we increase all along with the innovation and the game shows we do is always compact. It's always there. Operator: The next question comes from Martin Arnell from DNB Carnegie. Martin Arnell: My first question is on Europe and this discussion what's in your own hands and what you can do to improve. How important do you think the new game releases will be for Europe in order to come back to growth? Martin Carlesund: I have a positive view on Europe going forward. And I think the game releases that we are going to do and also even the games that we already have will have an impact and is super important. I think that some of the games that we do are the creator of gameplay and entertainment and people, persons and end users search those games. So the more of those games that we have, the more pull into the regulated environment we will have. Martin Arnell: And many of them are tilted to second half, but you have a few -- is it correct that you have 2 new Monopoly games scheduled for Q2? Correct. Martin Carlesund: Yes, that's correct. Yes. But the major ones are in the second half. And that's -- I always said it's a little bit frustrating for me, but it takes time. The big game, Game Night, it's a huge game, hundreds and hundreds of square meters of game show and different environment, studios, you go in and you follow the player in those, and it takes time to build. It's not -- it's a really, really complex world that we are creating. Martin Arnell: Interesting to look forward to that. And on the -- just also a question on like orders from your clients on new dedicated tables. Has that changed anything dramatically? Or is it stable? Or how do you... Martin Carlesund: We don't guide on that. I would say that we are continuously doing well. Martin Arnell: On dedicated tables orders, okay. And final question would be on this game show discussion, the product mix when it comes to game shows, are the new game shows more lucrative for you than the old ones in terms of like player activity, bet size, et cetera? Martin Carlesund: I don't -- I'm sorry, I don't guide on profitability per game or new game or old games. I think that the type of games that we do now with the type of Monopoly and Hasbro content is, of course, highly valuable for everyone, us and the operator and the player. Operator: The next question comes from Ed Young from Morgan Stanley. Edward Young: My first question on Europe, please. You've talked through the channelization angle and the subjectivity part of it. But if I look at your disclosure, the regulated mix is up despite the European decline and some Asia growth. So is it fair to say that this is primarily a decline in your European jurisdictions that are not locally regulated in the quarter rather than the channelization issue, which has obviously been ongoing. The second question... Joakim Andersson: Okay, let's take one question at a time... Edward Young: Sorry, let's -- sure. Martin Carlesund: Otherwise, I will -- due to my lack of memory, probably not answer. You have to look at -- we're growing nicely. everything more or less in LatAm is regulated. We're growing nicely in U.S., adding money there as well, adding a little bit of money in Asia. There is a percentage point here and there and there are decimals to that. So I wouldn't necessarily draw that conclusion to a point. There are other regulations in Europe that are not regulated that are suffering and there are regulated jurisdiction in Europe that are suffering. Edward Young: Second, you obviously added Playtech to your legal complaint. Can you just maybe give your reflection on where you are now in terms of what you're aiming for through the legal process and on what time line we should expect to get an idea of damages, including punitive damages that you're seeking? Martin Carlesund: We have had an opponent in this legal debacle that has been ongoing for 4 years, and we have systematically been progressing and winning in court. That's taken 4 years. It will take a very long time. And the opponent that we have is also taking a lot of measures to delay everything, which we have seen in the past, and we expect that in the future as well. So think about years, probably many years. Edward Young: And then finally, there's been some confusion in some of the questions we've had this morning. So perhaps you could help clear this up. In terms of the Argentina studio acquisition, just to be clear, you've acquired the studio, i.e., the building of a competitor's departed? Or have you acquired a competitor in some of their revenues in Argentina that have contributed to the quarter? Martin Carlesund: Studio. Operator: The next question comes from Karan Puri from JPMorgan. Karan Puri: Thank you for taking my questions, most of them. Martin Carlesund: Good morning. Karan Puri: Most of them have already been answered, but just quickly on the Argentina point, I just want to clarify, is there any inorganic revenue contribution coming from that acquisition for LatAm or not? That's... Martin Carlesund: No, no. Karan Puri: That's -- got it. And the second question, actually, I just wanted to check on the U.K., do you see any further discussions with the regulator on this front? Any idea when this might be resolved? Martin Carlesund: I have no idea when it will be resolved. Nothing -- no progress to report. Karan Puri: Just one quick one, if I can squeeze that one in. One on the RNG performance. It seems like it came in much stronger than anticipated, at least on a year-over-year basis. Maybe can you provide some incremental color on this, please? Martin Carlesund: I think we're doing great in RNG right now, fantastic games on Nolimit. We're gaining traction. We are on our way. We systematically methodically work with it, and I think that we're doing better and better. Operator: The next question comes from Andrew Tam from Rothschild & Co Redburn. Andrew Tam: Just one for me. We just heard from some of the operators out there about some of the headwinds in terms of the Turkish market. To what extent, just curious, did Turkish weakness contribute to the weak European result? Martin Carlesund: I won't quantify market specifics in Europe, but that also contributes to the decline in Europe, yes. Operator: The next question comes from Rasmus Engberg from Kepler Cheuvreux. Rasmus Engberg: Good morning. Joakim Andersson: Good morning. Martin Carlesund: I took a sleep of comfort, that's why I was a bit slow. That's why I was a bit slow. Rasmus Engberg: In the Americas, both North and LatAm, which business is growing faster? Is it RNG or is it live? Martin Carlesund: Live is growing faster. Rasmus Engberg: In both? Martin Carlesund: In LatAm in total, I don't want to go down to a specific number. We're doing a little bit better and better on RNG in total. And it's -- yes, but live is the main show. Rasmus Engberg: Okay. And second question, your rate of expansion with new studios this year compared to last year? Is it higher or lower or roughly the same? Martin Carlesund: Good question. The decisions we will take during 2026 will be a little bit more forward leaning and expansion will be maybe in actual terms about the same, but we are doing more for 2026, 2027, 2028 this year than we actually did 2025. I look forward to that. Rasmus Engberg: And I don't know if you can answer this, but are you -- is Evolution going to have a Board meeting after the AGM or in conjunction with the AGM? Martin Carlesund: I actually don't want to answer that to avoid any speculation. Joakim Andersson: So it's a constituent Board meeting in connection with the AGM. That's correct. Yes. Rasmus Engberg: Thank you. Martin Carlesund: Thank you, interesting question. Operator: The next question comes from Ben Shelley from UBS. Benjamin Shelley: I just wanted to ask on accounts receivables and compared to your quarterly revenues, they remain elevated year-on-year and broadly stable quarter-on-quarter. Are there any comments or any updates on your Q4 comments here? Joakim Andersson: Yes, I can pick that up. No, I mean, yes, you said any updates from Q4. Yes, Q4 was definitely on an elevated basis, and we are constantly looking into it, constantly reminding customers, constantly chasing overdues. When we review, there's nothing alarming in there. So we are now kind of more methodological -- whatever that word is, thoroughly doing this work and with a higher discipline than before. So we saw a roughly EUR 10 million reduction during this quarter, and I expect that to continue. Operator: The next question comes from Jamie Bass from Citi. James Bass: Just one question from me or 2 parts to one question, I guess. So firstly, are you feeling relatively confident that a solution will be found for Galaxy Gaming before the deadline? And if not, is the deadline you've got now, is that a hard deadline? Or can that be extended again? Martin Carlesund: I can't -- I don't want to guide on it. Of course, we are working hard to solve everything outstanding, and it's progressing. And right now, the deadline is hard. So then that comes down to, is there any possibility with some to postpone it. Right now, the deadline is hard. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Martin Carlesund: Thank you very much for participating, listening to us here today and looking forward to see you in a quarter again. Thank you. Bye-bye.
Operator: Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's First Quarter 2026 Earnings Conference Call. My name is Ashia, and I'll be your coordinator for today. [Operator Instructions] Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead. Georgia Lo: Thank you, Ashia and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer; and Mr. Al Wang, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the speakers on this call may make forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially. . These results and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2025, at Item 1A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time. As such, we caution you not to place undue reliance on such forward-looking statements. Any forward-looking statement speaks only as of the date on which is made and except as required by law, we undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments or events or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its first quarter 2026 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at cathaygeneralbancorp.com. After comments on management today, we will open up this call for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu. Chang Liu: Thank you, Georgia. Good afternoon, and thank you for joining us today. I will begin on Slide 3. We delivered solid financial performance in the first quarter. Reporting net income of $86.9 million and diluted earnings per share of $1.29. We also delivered another quarter of net interest margin expansion, driven by disciplined deposit cost management in a competitive environment. Our results reflect 2 noteworthy items that largely offset each other. The first was a $17.3 million valuation gain on equity securities and the other was a $15.7 million impairment on AFS debt securities from balance sheet repositioning. We sold lower yielding securities and reinvested at current market rates, a move that supports margin expansion and accelerate tangible book value recovery. Excluding these items, diluted EPS would have been $0.02 lower. Credit quality was stable overall this quarter. We saw improvement in nonperforming loans in net charge-offs, while criticized and classified levels remain steady, reflecting continued credit discipline across the portfolio. We remain focused on maintaining a prudent risk profile given the broader economic and geopolitical backdrop. We continue to generate positive operating leverage. Our efficiency ratio improved to 40.4%, down 100 basis points from the prior quarter, supported by ongoing expense management and steady core performance. On an adjusted basis, our efficiency ratio decreased by 1.5% to 36.9% from last quarter. Capital management remains a priority. During the quarter, we increased our quarterly cash dividend to $0.38 per share, reflecting an 11.8% increase. We also completed the $150 million share repurchase program announced in June 2025 by repurchasing 244,000 shares at an average cost of $51.31. In addition, our Board approved a new $150 million share repurchase program, subject to regulatory approval, underscoring our commitment to returning capital to shareholders in a balanced and controlled way. Loan growth was softer than we anticipated, but this reflects our disciplined underwriting approach. Our focus remains on supporting our loyal customers and deepening long-standing relationships rather than pursuing volume that will require taking on additional credit risk in this unpredictable economic environment. This relationship-driven strategy has served us well through many cycles and positions us well going forward. I will now turn the call over to Mr. Al Wang to walk through our first quarter results in more detail. I'll provide some closing comments before we open the call up to Q&A. Albert Wang: Thank you, Chang. I'll start with our balance sheet on Slide 4. We decreased our on balance sheet cash and short-term investments by $219 million to stay aligned with shifts in our funding profile. Period-end loans of $20.2 billion grew 0.2% linked quarter, reflecting our focus on relationship lending. Period-end deposits of $20.7 billion declined by 1% linked quarter, led by $71 million in broker deposits. Capital levels remained in excess of regulatory well-capitalized thresholds and our internal limits. And we continue to grow book value per share by 2% linked quarter and 9% year-over-year. Slide 5 breaks down our loan and deposit mix. Average loan balances increased 1% on an annualized basis linked quarter while the composition remains stable and well diversified. CRE concentration of 278% declined by 9 points and continue to stay below regulatory guidelines. In addition, our exposure to private credit is minimal with NDFI loans making up less than 2% of total loans. Average deposits decreased 3% linked quarter on an annualized basis, driven by the decline in brokered deposits. Core deposit outflows were largely seasonal and reflected normal cash management activity by our commercial customers. Our uninsured deposit ratio stayed consistent at 45%. Slide 6 is a new slide to illustrate the strong liquidity, credit and interest rate risk profile of our available-for-sale investment portfolio. In Q1, we recognized a $15.7 million impairment loss on our AFS securities portfolio as part of a securities repositioning initiative. During the first week of April, we sold $210 million of lower-yielding mortgage-backed securities and reinvested $197 million into similar duration securities at significantly higher yields. This trade carried an earn back under 3 years while keeping our overall duration and credit profile essentially unchanged. We keep the overall portfolio short and high quality. Duration is just under 2 years, and nearly 2/3 of the cash flows will come back this year. Unrealized losses have been improving as rates move and over 90% of the portfolio is U.S. government backed with the rest in investment-grade securities. Slide 7 highlights our income statement. Net income of $86.9 million decreased 4% linked quarter due to lower noninterest income, offset by lower noninterest expense, which I will discuss in more detail on the following slides. Slide 8 summarizes our yield and funding costs. Net interest income of $194 million declined $0.8 million compared to last quarter due to day count, offset by margin expansion. Net interest margin of 3.43% grew 7 basis points compared to last quarter as deposit costs decreased, offset by a decline in loan yields driven by the Federal Reserve's latest interest rate cuts in the fourth quarter. Slide 9 highlights noninterest income. Noninterest income decreased $7.1 million linked quarter, driven by the notable items Chang mentioned previously. Specifically, we recognized $17.3 million in valuation gains in our equity securities portfolio, offset by the $15.7 million AFS securities impairment repositioning loss. Adjusting for these items, including the gain on equity securities in both periods, noninterest income would have been $19.1 million compared to $18.1 million in the prior quarter reflected an increase of 5.52%. Moving to Slide 10. Noninterest expense decreased from $92.2 million to $86.7 million this quarter, this decline was driven by $4.5 million of lower amortization expense on our low-income housing and alternative energy partnerships, along with lower compensation and benefit costs. It's worth noting that most peer banks record the amortization of tax credit investments and income tax expense under the proportional amortization method rather than in noninterest expense as we do. When adjusting for this difference and other noncore items, adjusted noninterest expense would have been $78.7 million, which is [ $3 million ] lower than last quarter. On the same basis, our adjusted efficiency ratio improved to 36.9% compared to 38.4% in the prior quarter. On Slide 11, you'll see that our asset quality stayed solid. We increased our allowance by $13 million to $209 million, which puts coverage at 1.03% or 1.30% excluding residential mortgages. That increase was driven by model updates, including a slight softening in the macroeconomic outlook. Net charge-offs improved dropping from $5.4 million last quarter to $2.1 million this quarter Classified loans were up $39 million, while special mentioned loans came down $55 million. And importantly, our nonperforming asset ratio continued to trend in the right direction, improving from 59 to 51 basis points. Turning to Slide 12. Capital levels remain strong and well above well-catalyzed regulatory thresholds with a modest increase from last quarter. I'll wrap up on Slide 13 with our outlook. We continue to expect full year loan growth in the 3.5% to 4.5% range and deposit growth of 4% to 5%. Adjusted noninterest expense is still expected to increase between 3.5% to 4.5% for the year. Our NIM and NII outlook no longer assumes any rate cuts in 2026. But even with that change, we remain confident in achieving our NIM target of 340% to 350%. We expect an effective tax rate of roughly 21%. And with that, I'll turn the call back over to Chang. Chang Liu: Thank you, Al. Overall, we feel very good about how we started the year, notwithstanding geopolitical tensions and uncertainty in the macro environment. We delivered solid financial performance by growing tangible book value per share to $30.95, expanding NIM by 7 basis points and continuing to manage capital prudently to expand the buyback capacity and dividend increases. Looking ahead, we are entering the second quarter with good momentum. Similar to last year, we saw a slower start to the first quarter, but activity strengthened meaningfully as the year progressed, and we expect a similar pattern as we move through 2026. Finally, I want to thank our team members for everything they do for our company, our communities and our clients. With that, we can now open it up for questions. Operator: [Operator Instructions] Your first question comes from David Chiaverini with Jefferies. David Chiaverini: I wanted to start on the net interest margin. So it was very strong in the quarter. Can you talk about -- and you reiterated the guide. So I'm curious about the outlook kind of sequentially from here? And then to your point about rate cuts being eliminated from your assumptions, whether that would take us either to the high end or the low end or if you're still kind of thinking the midpoint of that range. Can you talk about that? Albert Wang: Yes. Obviously, the -- without any cuts forecasted in, that's obviously going to put pressure and point us down slightly. But remember, we did the securities reposition, so that should help by a few basis points for the year. And when I look at kind of our loan portfolio, right? So we -- our yield was $6.01 for the quarter. But when I take a look at kind of the origination rates for the commercial real estate book in the first quarter and kind of the origination rates in mortgage. Those came in at like 6.15% and 6.12% respectively. So higher than kind of the NIM. So I think, obviously, there is more pressure on C&I. But I think with the mortgage and CRE kind of repricing and kind of what we're repricing on, I think that will support. So I think if the loan yield -- I don't -- we don't expect it to drop off very much, if at all. So I think that's going to help support. On the deposit side, we still have room to run also. I mean we had a $2.96 cost for interest-bearing this past quarter. But if you think about it, we've got -- that was -- a lot of the expansion was that I think we said last quarter that we had almost $4 billion of CDs rolling off at a 3.80 weighted average rate. So obviously, that -- those came on favorably this quarter. And if I look at next quarter, for example, we've got close to $3 billion with the 362 handle or kind of weighted average rate -- so we think that there's definitely -- I think, most of the benefits from the lower rate environment and the cuts are kind of behind us. But we still think there's still some room there to manage those costs down slightly. So between the 2, I think we still feel comfortable with the overall kind of guide for the year. We do acknowledge that if I look at brokered rates, for example, at the beginning of the year, it was like in the $3.60 to $3.70 for CDs for large CDs. Today, that's 4% to 4.05%. So there's definitely a lot more pressure and competition with deposits. But -- but right now, when we look at kind of the profile, we think that there's still a little bit of room for expansion through this year. Obviously, depending on -- if rates are cut, and there actually are cuts later in the year, that will be beneficial to us. But for now, I think we're good for the year for our guidance. David Chiaverini: Very helpful color on that. And on that securities repositioning, held in isolation, can you estimate how much that should contribute to NIM. You gave the sizing of it. Maybe you can help us with how much -- what the yield was that rolled off or was sold and what the yield was that came on? Albert Wang: Yes. It was -- I think about $245 was the yield that we sold, and we put on -- they were -- the coupon was like 5.5% and they were mostly kind of long-dated mortgage-backed securities. I think the effective yield on that is like 5.33 or something around that range. So a little over $5.5 million annually. So if you think about for 2026, we take -- the trade happened early in the quarter. So will take 3 quarters of that amount into this year. So probably about 2 to 3 basis points or 2 to 2.5 basis points to NIM. And then for the year and then maybe $4 million, let's call it, of additional boost to NII. Operator: Next question comes from Matthew Clark with Piper Sandler. Matthew Clark: Just want to get the amount of prepay and any interest recoveries in net interest income, I think it was around $3 million last quarter. Chang Liu: Yes. So it was about 3.5% this quarter, which was about 6 basis points. So we -- for the quarter, our reported NIM was $343 million. It would have been $337 million for those items. We also had a small FHLB dividend -- special dividend as well included in that number. Matthew Clark: Within that $3.5 million? Chang Liu: Yes. Matthew Clark: Okay. Okay. And then the low-income housing tax credit amortization came down more so relative to your guide coming into the year. Just want to get your updated thoughts on that run rate for the balance of the year. . Albert Wang: Yes. It's -- I mean, that's a fluid number. Obviously, it depends on kind of the timing of tax credits and the performance of the projects in the portfolio. We think that it's probably going to be in the $7 million to $8 million range for the next few quarters throughout the year. Matthew Clark: Okay. Good. And then just on the loan growth commentary in your prepared remarks and I think in the release that has just been a little more cautious, but sticking to the guide for the year. Is that -- is it because you're seeing the pipeline building? Or is it because you're a little -- you feel like at this point, you're a little more open or not as cautious as maybe you were during the first quarter? Just wanted to get some thoughts there. Chang Liu: Yes. So for us, on the loan growth side, we saw some sort of some increased paydowns in our construction loan portfolio. So some of our customers took advantage of some of the refinancing opportunities with the life companies and the Fannies that have much better competitive longer-term rates than we had. Our originations were healthy, but not enough to offset the timing of the paydowns. But today, our pipelines are still healthy and strong and the customer engagement has improved. So we expect the growth to be sort of more weighted towards the middle and the back end of the half. . Operator: The next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: I just wanted to follow up a little bit on the funding side of the equation. I appreciate the color on the second quarter CD maturities. Can you give us an idea of where the first quarter ones that rolled off at 380 where they were renewed? Albert Wang: Yes. So as you know, we had a literally a new year promotion at I think 365 for 6 months and 350 for 12. So I think we extended that program by a couple of weeks -- and then like I said in my commentary, we had -- you can see there's been a lot more pressure, especially since kind of February and even since the war started the pressure on rates has been kind of pushing upwards. So we think it's around kind of the mid-350s is kind of in the first quarter of what we kind of put on. Gary Tenner: Okay. And so that would suggest that the [ $360 million ] rolling off in the second quarter, even without the specials, probably not too much of a benefit. Is that fair... Albert Wang: Yes, we think there'll be a marginal benefit from that. Again, it's probably around [ $350 million ] with the rate that we put on last quarter. Gary Tenner: Okay. Appreciate that. So -- in terms of the -- and you talked about that in a little bit. I appreciate the color there. I guess just to encapsulate it. I mean with no cuts, pretty flat in bias ex the securities repositioning? I mean, is that kind of in a nutshell, what you think about it? Albert Wang: Yes. Yes, that's right. Again, I think the lending side, we shouldn't see much degradation in terms of the yields on that side. Again, we have some -- we have mortgages, for example, that we put on 5 years ago in a lower rate environment, for example, 5-plus years ago. So when those come back and get booked back on, that will help support kind of our NIM. Gary Tenner: Okay. Great. If I could ask 1 more. Just on the asset quality front. I mean, the metrics overall were good and you increased the allowance by 6 basis points, and you kind of commented about model recalibration and deterioration and macro conditions. Can you change weightings in your model in terms of building the allowance? Or maybe just kind of give us a sense of how you were thinking about that. Albert Wang: Yes. The biggest move was just kind of a recalibration of 1 of the inputs in the model. And in terms of the weightings, I would say, for the overall book, we kept the weightings the same, but we did change the weightings for certain portfolios within the book that pushed the reserves up for those particular portfolios and obviously, overall as a result. Gary Tenner: Can you comment just which portfolios you increased or changed the weightings on. Albert Wang: Yes. So we so basically -- yes, so the way we thought about it is, in our models, we use kind of a national kind of economic forecasts. But obviously, as you know, we're very coastal, right? We've got a lot of motor portfolio in kind of California and New York. So we look specifically at kind of the office portfolio and said, Hey, we have a lot of office kind of on the coast. And I don't know if the national forecast kind of are doing those portfolios justice. So we kind of stress those portfolios a little bit more. Operator: [Operator Instructions] The next question comes from Andrew Terrell with Stephens. Andrew Terrell: I just wanted to start on the operating expenses. It looks like holding the amortization side relatively flat quarter-on-quarter. We annualize the first quarter kind of tracks to low end of your adjusted expense growth guide for '26. I'm just curious if any seasonality impacts in the first quarter? Do you grow off this operating expense base throughout the year? Just any kind of expectation around expense run rate would be helpful. Albert Wang: Yes. I think the first quarter was slightly lower on the comp and benefit, especially compared to year-end. Year-end, we had a little bit more in kind of the incentive compensation accruals. So that's kind of what's driving the why it's lower versus fourth quarter, for example. So we think kind of where we are now, the run rate is pretty good. We do -- we are projecting in kind of headcount, open positions, things like that. But yes, I think it's -- I think our current kind of where we ended Q3 with the growth rates that we are projecting. That's kind of our expectation right now. Andrew Terrell: Yes. Okay. And then I wanted to ask around -- I know it's just proposed, but any thoughts behind the Fed's proposed capital rules any kind of benefit that could provide to you guys in terms of CET1 or risk-weighted release? Albert Wang: Yes. I mean we think it's -- it would be a huge win for us, obviously. We've got a decently sized mortgage portfolio with very low LTVs. So I think we'll get an upsized benefit from that. So it could be in the low kind of double-digit in terms of the reduction in risk-weighted assets for us. And anywhere from, let's call it, $150 to $175 million kind of boost to our capital ratios depending on the ratio. Andrew Terrell: No. Okay. Great. Yes, that's pretty solid. If I could just ask lastly, 1 of your competitors commented maybe around M&A recently. Just would love to hear kind of your thoughts on the M&A landscape today. And how you see it fitting into the puzzle for Cathay? Chang Liu: Yes. So for us, we're always going to kind of think about looking at things more opportunistically just based on what's presented to us. we're always going to focus more on just our organic growth and executing the business plan. If there's a candidate out there that makes sense for us. But it's not the top priority at this point. We want to just make sure we strengthen our franchise and make strategic decisions and meet the financial plan that we laid out to our investors. Operator: The next question comes from Kelly Motta with KBW. Kelly Motta: Thanks for the question. Turning to fees, excluding the noise of the securities repositioning and that the other gains Core fee income still came in pretty strong. And I think in your prepared remarks, you hit on that being in part tribute 12th management. Just wondering if you could talk a bit about that business and what you're seeing more broadly on the fee income side is this, call it, $19 million core operating run rate is a good line that could hold or if there's kind of puts and takes there. Chang Liu: Kelly, our core strength in the fee income is really the sort of the wealth business that drives that income. We're obviously trying to find other ancillary fee income as well. There's things such as foreign exchange, international fee some of our swapping fee income, but that kind of sporadic based on the rate environment as well. The treasury management functions also drive some of the fee income as well, but the bulk of it is really from the wealth side of the business. . Kelly Motta: Got it. And is this 19 million units that it's a step up. It's an approximate $1 million step up from the back half of last year. Is this a good level to kind of hold here? Or was this particularly strong. Just trying to parse out how to... Albert Wang: Yes. I mean we think so. I mean, we do have some new leadership in Wilton. So we think that with -- we've gotten a decent amount of referrals as well. So we're optimistic that wealth is going to hold in there kind of and how it performed in Q1. Kelly Motta: Okay. Great. Most of mine have otherwise been after an answer. So thanks for the time. . Operator: Thank you for your participation. I will now turn the call back over to Cathay Bancorp's management for closing remarks. Chang Liu: I want to thank everyone for joining us and your interest in Cathay. We look forward to speaking with you on our next quarterly earnings release call. . Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.